Good morning and welcome to Boston Properties Second Quarter Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At this time, I’d like to turn the conference over to Ms. Sara Buda, Vice President of Investor Relations for Boston Properties. Please go ahead.

Thank you. Good morning and welcome to Boston Properties second quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes that expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday’s press release and from time-to-time in the Company’s filings with the SEC. The Company does not undertake a duty to update any forward-looking statements. Having said that, I’d like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer to the call. During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President and our regional management teams will also be available to address any questions. And now, I’d like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sara, and welcome to Boston Properties. Sara joined us last week as Vice President and Head of Investor Relations and comes with a wealth of experience in the field. We are delighted that you are here. Good morning, everyone. Second quarter marked another strong period of wins in leasing and new investments, and we continue to complete major steps towards achieving our growth goals. In this last quarter, we generated FFO per share which is $0.04 above our guidance, $0.02 above street consensus and increased the midpoint of our full-year 2018 FFO guidance by $0.07. We leased 1.7 million square feet, which is well above our long-term quarterly average for the period. This brings us to almost 4 million square feet leased in the first half of the year, and we achieved several important leasing wins on key in-service assets, which Doug will review. And just this past July, we secured Verizon as anchor tenant to develop a 627,000 square-foot office tower in Boston as the last phase of our Hub on Causeway project with Delaware North. We closed the acquisition of Santa Monica Business Park in West LA with CPPIB as a capital partner, and we closed a joint venture with the Moinian Group for the future development of 3 Hudson Boulevard, a large-scale office property in the Hudson Yards. So, overall, Q2 was a strong quarter for Boston Properties with activity in leasing, development and acquisitions continuing in July. We continue to experience a positive environment for commercial real estate, including high-quality office assets in gateway cities which is our focus with several economic and market tailwinds. First, overall economic conditions continue to be quite favorable and have if anything improved since last quarter. Though impacted by timing of new trade tariffs, second quarter U.S. GDP…

Thank you, Owen. Good morning, everybody. Last quarter, I began my comments by saying that we were as busy as we’ve ever been. We are actually busier today. Owen’s comments focused on a string of additional investments that we have moved from pursuit into the active pipeline. We’ve been communicating these opportunities for a number of quarters. And in the case of 100 Causeway Street, which will be an immediate development start, once again, we found another anchor customer that matches with our fundamental strategy of creating great places where tenants can best attract and retain talent. You can’t lose track of the labor availability, employment picture in our market. The unemployment rate for people with a degree from a college, BS or BA is about 2% across the board. Finding an engaged, high-quality workforce is a critical issue for our tenants, and we believe our new and rejuvenated portfolio is a huge advantage. This is our value proposition. Last October, we had our investor conference in Boston and we described our development activities, the major capital refreshment that was underway, our vacancy and our leasing exposure in ‘18 and ‘19. The conclusion was that the portfolio was in a really good shape, with the exception of 159 East 53rd St. and 399 Park Avenue where we had a lot a row to hoe. Those two assets with the combined availability of over 700,000 square feet have the potential to contribute $55 million of annualized first year revenue. Remember, we only own 55% of 159 East 53rd. We explicitly stated that it was the most important operational challenge we had in front of us in ‘18. And I’m pleased to report that we’ve made a lot of progress. We had 480,000 square feet of availability last October at 399 Park…

Thanks, Doug. Good morning, everybody. With all the transactions we completed this quarter, Owen and Doug had a lot of ground to cover. I’m going to try to describe the financial impact and talk about the quarter. So, we had a solid second quarter as we exceeded our earnings guidance and we are raising our full-year 2018 estimates. Our second quarter funds from operations came in at a $1.58 per share that’s $0.04 per share above the midpoint and $0.02 per share above the high-end of our prior guidance range. Our portfolio exceeded our estimate by $4 million, about $0.02 per share and it was primarily related to lower operating expenses for the quarter. The majority of these expenses were repair and maintenance items that now will be incurred later this year and will not represent savings to the full-year. Our development fee income also exceeded our budget for the quarter by about a penny or $1.5 million. The majority of the increase is from earning leasing commissions from our joint venture portfolio that included deals closed at Colorado Center, Metropolitan Square and the Hub on Causeway. And lastly, our interest expense was slightly lower than our assumption due to higher capitalized interest on our development pipeline and major capital projects. As you can see in our supplemental report, our second quarter same-property NOI was down 3.3% on a cash basis compared to the second quarter of 2017. This performance was as we expected and it was in line with our prior same-property guidance and it’s primarily due to the move-outs at 399 Park Avenue in the third quarter of 2017 that we have discussed. We project our cash same-property results will improve in the back half of the year as the income from this space is fully out of…

[Operator Instructions] Your first question comes from the line of Manny Korchman with Citi.

Hey. Good morning, everyone. I wondered, Doug, you discussed two sort of potential big projects in New York, one on Madison and the other in Hudson Yards, both of which required big preleasing before you go vertical. Can you tell us about the discussions with tenants on both those projects, maybe the type of tenants and their desire to be at one or the other and how those projects will differ?

Yes. Manny, good morning. It’s Owen. So, first of all, the projects are on a very different time schedule. So, the 3 Hudson Boulevard is entitled and ready to go. We’re actually working on the foundation to try to improve our speed to market. 343 Madison is in the entitlement process and will not be ready for any kind of new development or tenant conversations for some time. So, I think that’s the first point. And the second point is, we are in the market with 3 Hudson Boulevard. We are -- as I mentioned in my remarks, we certainly are seeking a very significant tenant to launch the project. We have JLL engaged that’s working on our behalf to help us with this. And we are engaged -- we have been engaged and are engaging in those dialogues. John, is there anything more you would like to say about that? John Powers who is one phone. John? We didn’t hear you.

Sorry. So, the MTA site is in the future, as you said, that has to go through the unit [ph] process. And we have some issues between the city and the state regarding the taxes that have to get sorted out first. So, as you said, that’s very much in the future. And we just signed up 3 Hudson Boulevard, and we are very excited with JLL and we’re starting to meet with people now.

Great. And then, switching to the West Coast, I think it’s new to us that you’re buying out -- the Hines, Salesforce Tower. Can you tell us is there a contractual deal there or why you sort of try to buy that small stake in the building?

Sure. So, when we set the deal up originally, we gave Hines, the ability to effectively sell their interest upon stabilization. And they’ve indicated that that’s something that they would like us to consider doing. And so, we are entering into a thoughtful dialogue with them about what the value of their interest is, and they haven’t promoted position based upon performance of the property. And we will come to some sort of a successful conclusion hopefully in the next couple of months.

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

Just curious on 3 Hudson. You gave the comp at 10 Hudson. I’m just curious where you think your all-in costs and development return comes in 3 Hudson relative to kind of the stabilized value at 10 Hudson?

Okay. I don’t know a thing about what the stabilized value is for 10 Hudson other than what the purchase price was. So, it’s hard to comment on that. We believe…

Forecast...

So, we believe that at the appropriate time with the appropriate tenant, we are going to be able to generate a return somewhere near what we’ve been executing on all of our other developments. The amount of space that we have to lease and the amount of speculative risk that we have to take will be obviously a key determinant in what goes on there. And we are in a position where we are -- we believe it will cost somewhere between $1,300 and $1,400 a square-foot to build that building based upon the sort of market comps for our cost for construction, for TIs, for interest carry. When we start the building and what the escalation of those costs are going to be will obviously impact those numbers. Where rents will be will impact those numbers. So, we’re not in a position today to say the cost is going to be x dollars per square foot and the return is going to be x percent because there are too many unknowns from a timing perspective.

And given how far along you guys are on the foundation, what do you think, if you guys were to get a significant prelease kind of the delivery time would be from here?

So, the schedule that we have right now on is somewhere between 36 and 40 months from the construction go date, once the foundation has completed to having a tenant physically in the building.

And then, just last one for me. Just curious your updated thoughts here on WeWork and exposure to kind of coworking in general as this tenant in particular kind of branches out into other areas of the real estate spectrum. Does that at all change your view on more exposure to this tenant or kind of how do you look at them as a tenant versus competitor at this point?

WeWork is an important customer of Boston Properties. In the supplemental, you’ll see they’re 14th on the sheet now in terms of their size, they’re about 0.9% of income. And we are selectively talking to them about additional stores that they would put in our buildings. As Doug described, we’re getting pretty full. So, there are less of those opportunities today. But, we -- for the right building and for the right situation, we would certainly consider expanding our relationship with WeWork.

Your next question comes from the line of John Guinee with Stifel.

Owen, nice quarter. You mentioned twice conserving public equity capital. Does that mean that you would not issue equity at any price because it just increases denominator too much and makes it too difficult to move the needle or that there is a price that you would rather issue commons and do -- use JV equity?

John, given where the stock price is trading, which is we think a very material discount to the value of the underlying assets and at a rough breakeven yield in the low-5, we don’t think that’s an attractive market to raise capital at this juncture. And much better way to do it -- the best way to do it right now for us is debt financing because we are creating debt capacity with all the developments that we’re delivering, and that the cost of the debt is much -- certainly much lower than issuing public equity. Now, I think the other point I would make is if we get pushed in terms -- we don’t want to increase the leverage of the company and if we require more capital, we would certainly continue to access the private equity market for real estate. We just demonstrated with the Santa Monica deal that we have great access to that and have another great capital partner in one of our buildings. So, that’s the way we’re thinking about it. Public equity is at the bottom of our list in terms of where we want to go raise capital.

Great, okay. And then, Mike LaBelle, your midpoint for 3Q is about a $1.62, your implied midpoint for 4Q is about a $1.70. Can you talk about how you get from $1.62 to $1.70? And then second. Is $1.70 a good floor when I think about quarter by quarter for 2019.

One thing to think about is there is some one-time leasing commissions, one time kind development fees that are in the back half of this year. So, I’m not sure that we’re going to be able to have the same level of kind of development fee income and leasing commissions next year. So, that’s something that may not recur. With regard to kind of our -- as we move through, our development will continue to kind of add incremental every quarter. So, we’re gaining occupancy at Salesforce Tower every quarter and it’s going to move in, occupy their space, and then suddenly we can recognize revenue. Even though we’ve -- in many of these cases, we’ve been getting cash from these tenants for months and months and months, we can’t recognize the revenue until they finish their space. And then, obviously, we have the two residential properties that are coming in as well. The other kind of difference between the third and the fourth quarter is the summer months have higher expenses where we operate, so utilities in particular are higher. And so, in the fourth quarter, you will see some benefit from that in the fourth quarter.

And then, last question, if I may. You said something very interesting, Owen. You said, your land at 2 Hudson -- or 3 Hudson was $360 per FAR, but significantly less on a net rentable square foot basis. Can you give a quick tutorial on the difference between FAR and net rentable square foot for a building like that?

John, it’s related to the ratio between the rentable square foot -- square feet and the usable square feet and how the ultimate configuration of the building is. And the latter part of that is yet to be determined. But, the price per rentable square foot is lower than $360.

Your next question comes from the line of Alexander Goldfarb with Sandler O’Neill.

Just two questions. First, Mike LaBelle, as we look to 2019, I just want to get clarification on two items. One, it sounded like the sale -- well, you guys have discussed it before and now it sounds like the sale of 1333 New Hampshire is something new that we want to incorporate into our models for next year? And then, second is, based on all the leasing that Doug described at 399 and 159, and the fact that you guys I think expect this all to really hit in the fourth quarter of next year. Is that consistent with what you guys have previously laid out at the Investor Day and earlier in the year at NAREIT or has some of that timing from revenue recognition been pushed back?

The timing with regard to the New York City leasing is in line with what we have expected and what we’ve kind of talked about before. We feel like we are meeting exactly what our plan is with regard to the deals that we’re working on and when those deals will come into the revenue picture. I mean, the vast majority of the space has been demolished. So, it has to be rebuilt. And these tenants will take anywhere between 9 and 12 months to kind of get into that space. And some of these tenants obviously have a lease expiry. So, they may not be in a tremendous rush. So, they signed a lease in the third quarter of 2018, but their lease expiration is until the end of 2019. They may be able to build out that space. But they may move fairly slowly, because they really don’t need to be in that space until closer to their lease expiration. So, we are right in line with what our expectations have been on that. And then, with -- and also with the development pipeline by the way. We’ve provided guidance as to kind of what the development pipeline is going to be delivering in the next couple of years. And we are in line with our expectations in terms of delivering those spaces and getting that rent started. So, I don’t think there’s really any change to that. On 1333, we’ve talked about it before that we would consider selling it. It’s now on the market and we’re talking to potential buyers. So, I would say, it’s much more likely that we will be successful in selling that asset than it would have been last quarter. So, that is a change. We have not included in our guidance yet because we just don’t do it until it’s done. But that’s why I wanted to point out because I do think it’s more likely than not that that’s going to happen.

And then, the second question is for Ray Ritchey. Ray, just speaking to some brokers down in DC recently, mentioned about a pending uptick in government leasing, whether it’s possibly something with the FBI but just sort of some pent-up demand from government for leasing. So, could you just comment on what you’re hearing and seeing in the DC market, just given that it’s been a tough -- it’s been a great development market but a tough landlords market?

Yes. Thanks, Alex. I think, the FBI is still very much in question about whether they go forward or not. Our President has made it one of his personal agendas. And given everything else he faces, I don’t think it’s like number one on his target [ph] to get started. In terms of GSA leasing in general, when you have something along the lines of 26 million square feet of lease expirations the next three to four years, something’s got to be done. However, it is still priced at a point that makes new development very, very challenging. So, we tend to see I think a lot of renewals, a lot of short-term extensions to keep the government in place with no major moves, I think on the GSA side, but certainly not the downturn we’ve seen in past cycles.

Your next question comes from the line of Blaine Heck with Wells Fargo.

Doug, great to hear about all the activity at 399 and 159. So, can you just frame out about how much of that $55 million incremental NOI is under contract versus under negotiation or LOI? And maybe handicap the possibility of any of those leases that are outside walking away at this point?

So, there is 700,000 square feet, 140,000 of it is signed. I expect that there is another 200,000 that will get signed before Friday. So, that will get to that 340,000 square feet or just about half of it. And the other two major leases are actively being negotiated. And I think our expectation is they are going to get done.

Mike, same-store NOI guidance implies around 5% in the back half of the year, assuming there’s not a lot of noise in the same-store pool. So, can you just talk about how we should think about that sequentially? Is it going to ramp up through the end of the year or kind of jump in the third quarter and stay elevated?

I think, it’s going to move up but it’s mostly going to be in the fourth quarter. The 399 space was not all out of the portfolio until midway through the third quarter, I guess last year. So that’s still going to be in there for a part of next quarter. So, I think that it will be better than it was this quarter, and then the fourth quarter will be even better than that to achieve within the range that we provided in our supplemental.

And then, last one for me. On 3 Hudson, just coming back to that one. Can you guys just give any specifics or a range around the preleasing hurdle you guys might have there, given the supply picture on the West Side? And maybe a little more color on how you guys are viewing demand for additional new construction in Manhattan at this point in the cycle?

Let me try to answer this. Owen’s tried [ph] and maybe you didn’t find it satisfactory. So, I’ll try a different tact, which it’s all going to depend on who the tenant is, how long the lease is, what they are doing in the building, where they are in the building and how much they are paying. So, there is no number. I can’t -- we can’t tell you that if a 650,000 square-foot tenant showed up, we would do the deal; and I can’t tell you if a 1 million square-foot tenant show, we wouldn’t do the deal. So, we’re not in a position because we just don’t know the facts around leases. But, it’s going to be a big number. And we are -- I think Owen has described in previous quarters that as we move on in the cycle, we have toned down our risk tolerance for speculative space. And so, that I think -- those are the things that we’re judging as we think about what we need to lease the building, but there is no number.

And the only thing I would add to what Doug said is in terms of the marketplace, look, it is a thin market to find a tenant of the scale that Doug is describing. There are tenants out there that are interested in new construction that our of scale. The good news is, there is not that many options for such a tenant. And we do think that this is one of the absolute best large tenant sites in New York. So, we will be accessing that demand as the market evolves in the coming quarters.

Okay, appreciate the color. That’s very satisfactory at this point.

Your next question comes from the line of Rob Simone with Evercore ISI.

Just a follow-up on the same-store guidance question from earlier. And I know, you guys obviously aren’t talking about ‘19 yet. But just kind like of piecing that question together with the fact that most of the cash revenues isn’t going to starting hitting your P&L until the fourth quarter of next year. Is there any reason to assume, are there any kind of like one-timers or large leases that could result in whatever you guys print in the fourth quarter on a same-store basis, kind of being not being the run rate through the majority of ‘19?

We’ve done a number of early renewals over the last couple of years in San Francisco, in Cambridge, in Boston. And those were deals that were expiring in ‘18, ‘19, ‘20. We’ve got some embedded kind of casting growth that is going to come out of that stuff, in addition to the increase that we’ll get when we refill and get cash started at 399.

Got it. So, it could -- it sounds -- like based upon that, it sounds like it could be higher potentially versus Q4, just trying to read the tea leaves there.

We can’t really give guidance right now for what it’s going to be in 2019. But, I do feel like we’ve got some embedded growth that we’ve talked about that is coming and that our AFFO will be better in 2019 than it is in 2018.

Okay. Thanks, Mike. And just a quick follow-up. It sounds like -- and you guys have been pretty clear about this. Interest expense being a pretty significant swing factor for next year. And I was just wondering, you mentioned in your prepared remarks. That it sounds like there’s lower net interest expense for the back half of the year of about $0.02. Is that all attributable to the loan you guys originated on 3 Hudson or is there something else kind of in there that’s moving it around.

It’s a little more capitalized interest, and we had a little bit more cash than we expected. So, it’s kind of on the margin. But, for next year, I think, it is important for people to understand that Salesforce Tower I think right now is 28% in service or something like that. So, there’s still 72% capitalized interest on $1 billion project. And it goes away on 12/31/18. And again, the income is going to be coming in throughout ‘19. But there’s kind of a mismatch there that I’m not sure people fully understand. Typically, you kind of model that -- the capitalized interest goes away, as the income goes away and there’s kind of a match there. But gap rules require us to cut it off 12 months from the date that the building is delivered. And that’s great, if you have a 300,000 square-foot building that you’re delivering, because you can deliver 300,000 square foot with the space and build it out within 12 months. But when you’re building a 1.4 million square foot building, even though it’s 98% leased, it just takes longer to get all those tenants built. So, for these very, very large buildings, there tends to be kind of a mismatch. So, I think that’s an impact that we have. And then, the other thing is that we are going to be using, as you move into ‘19, we are going to be using debt for nearly all of the new development funding that we do. So, that debt is going to be roughly equal to what we’re capitalizing. So, we’re going to kind of lose what we deliver this year. So, that does have a pretty significant impact on the interest expense. The other item that also affects ‘19 and I mentioned it last quarter, I didn’t mention it this quarter, but it’s these -- the counting change for the leasing costs. So, as I mentioned last quarter, that’s $0.04 to $0.06 negative to us in ‘19 versus ‘18. So, that’s another thing to just keep in mind.

Your next question comes from the line of Rich Anderson with Mizuho Securities.

Doug, you mentioned the obvious that you can’t control the build out timing of the space and speaking specifically at 399. I’m wondering, as you’re going through the kind of these -- just buttoning up this leasing process there. If you’re paying attention to the individual circumstances, I’m sure you are of incoming potential tenants in terms of where they’re at now, what their sense of urgency would be to build out the space, so that you don’t have a situation where you’re waiting to recognize revenue because they’re taking longer than you had hoped to get into the space?

We are absolutely are cognizant of those issues. And in some cases, we hope the tenants are actually in a rush to build out their space, and in fact one of the cases, they are. Still going to take them 12 plus months to start their design, get their construction permits, bid it and then build it out. So, the timeframes are not going to be significantly different than what we anticipate. But, we are clearly cognizant of that and we know when their lease expirations are. And so, we know how much “time they have between the leases”. The other issue is that in certain cases, because these are financial services companies for the most part, there’s a commissioning of the space that also needs to occur with all their systems, because they’re -- they can’t simply shut down on a Friday and moving on Monday by moving their computers. They actually have to rebuild and basically start up. And so, the good news is that will hopefully drive them to be more cognizant of getting in their space a little earlier than they would otherwise.

Do you have some negotiating leverage, if they’re like literally taking way too long, where at some point they just -- you just get to start recognizing revenue, if it lags on to too far into the future?

At some point, it’s deemed that they’re already paying cash rent and it’s deemed that they’re not going to be building out anytime soon. We can start to make the argument that we should be able to turn revenue on. Because obviously it doesn’t make sense to wait until the last day of the lease and suddenly recognize 10 years worth of lease in one day. So, yes, those situations -- they have occurred. There’s people that kind of take space protectively and they don’t build it out right away. And we have to make some judgment decisions in those.

Second question is a larger picture. A lot of talk about being in later part of this real estate cycle. And I always get the question why should I own REITs, if that’s the case. And I’m curious how you might respond to that question. And are you feeling some added pressure to button some of these leases up before the music stops, be it economically or what have you that might influence a slowing down of this current nine-year cycle?

On your question a couple of reactions. I mean, first of all, are we in the ninth inning of whatever of this economic cycle…

We are in the ninth year, so not to use the baseball analogy.

Yes. I don’t have a clear crystal ball on this. I even mentioned in my remarks that we don’t see a downturn at imminent. We are clearly -- our instinct is we are closer to the end and the beginning but there are lots of positive things going on in the market. And I think there are some lags. So, that’s one reaction. The second is, when I think about at least our company and some extent is true with other companies, a lot of the growth that we’ve been talking about on this call and in previous calls is not as economically sensitive as a typical corporation. So, a lot of the growth that we are going to experience as a company next year is delivering the Salesforce Tower which is 98% leased, and it’s coming on our book. And I’m not suggesting that an economic downturn wouldn’t have some impact on our outcomes. But again, a lot of our growth is in developments that are leased in the 80s on percent basis. And our average lease term for the existing plan is over seven years. So, I think we are -- in terms of growth and results, less economically sensitive than a typical corporation. Also, certainly true of our company and others in our space, we think the stock is on sale relative to the value of the underlying assets. So, that should provide some kind of cushion. And as also described earlier, in recognition of this lack of having a clear crystal ball, we are keeping our leverage low. We are not leveraging up the company and taking more risk by doing that. We are keeping the leverage low, which should allow us to weather any storms that might be out there and frankly take advantage of anything that comes up. In terms of pressure to do things. I mean, look, we always feel pressure to have our buildings flow and generate income. So, I wouldn’t say we’ve accelerated any leasing plans because of some downturn that we see as imminent. Doug and I have described over the last year or so that we have bumped our pre-letting requirements for development. And that is the way that we are expressing that we are later in the cycle and prepared to take a little bit less risk. So, I hope that helps you with the conversations you’re having.

Your next question comes from the line of John Kim with BMO Capital Markets.

One of your neighbors in San Francisco cited litigation expense this quarter in relation to Millennium Tower. And I didn’t hear you guys really talk about this. But, are you involved in this case at all and experiencing similar costs?

We are absolutely involved in the case. I think, the TJPA, 350 Mission, every contractor who has put a shovel in the ground in and around that site over the last seven or eight years, every design professional is part of this. We are not going to comment on the litigation other than to say, we don’t expect any material liability or we would have disclosed in our K and our Qs. And our legal expenses are being capitalized into Salesforce Tower at the moment. So, that’s why you don’t see any “disclosure” of what were spending.

And as far as the resolution or the proposed resolution of fixing the problem, do you foresee any potential business interruption at Salesforce Tower?

All I can tell you is that we don’t expect any material liability associated with this.

Okay. At Santa Monica Business Park, could you enter acquiring this asset with CPP [ph] in mind as a partner? And if not, can you discuss what demand was like from other potential partners for this asset?

Yes. We did decide early in the process that we -- we thought we should bring in a capital partner in this particular acquisition for the reasons that we described which is to preserve our public equity capital. So, I think the decision to bring in a partner was made prior to us committing to the deal. And we talked about that on the last call. There was interest, certainly about CPP, but also about other potential partners in that particular investment. And as I mentioned earlier in my remarks, I think the private equity capital market for real estate is quite healthy and there are multiple investors that are underfunded in real estate and want more exposure.

My final question is at Signature at Reston, it’s now fully placed in service as far as multifamily, retail. You’ve done some leasing progress there. But how are the effective rents and lease-up periods compared to your underwriting, just given the amount of supply and do you potential market in multifamily?

So, John, I guess, I tried to describe what I think is going on, by basically saying that the existing apartment building across the street is actually at 95% occupied with an increase in rents year to year when the Signature was not open. My implication to that was that we are well in line with our pro forma rents. The leasing is progressing. I would say if you put a lie detector on me, I would say that we would have liked been slightly higher leased. But the fact of the matter is that we just opened up the retail at the base of the building. And when we started the building and did our pro forma, we didn’t anticipate having signed a lease with [indiscernible] for 270,000 building across the street where there is a whole on the ground in a little bit of noise and construction activities. So, there is a little bit of self-inflicted slowdown in the lease-up that we had to get through, but we’re actively moving through it.

I would just additional, just like the office market, the residential multifamily in the Town Center itself dramatically outperforms the general Northern Virginia market.

Your next question comes from Jamie Feldman with Bank of America Merrill Lynch.

I just want to go back to Ray for a moment. I appreciate your thoughts on GSA. But, can you talk about the defense budget and the increase in spending and what you’re seeing so far in terms of that translating into office demand? And what you think will happen going forward, given we’re getting closer and closer to the end of the fiscal year?

Yes. I think that we’ve been under a contracting environment on the defense side for so long that even just a stay put on the budget or a modest increase would trigger demand. All these users have gotten down to an efficiency level that I don’t think is sustainable. And we’re seeing it Reston where we’re receiving a lot of our defense contractors or people that are doing business with the government, major engineering companies are coming to us with some growth that is quite welcome related to what we’ve seen over the last 7 or 8 years. So, yes, we’re very positive about future demand. Very little spec space is being built, certainly the Dallas Corridor. So, as it relates to Reston, we think there’s good signals ahead for increasing demand.

And is the type of buildings these tenants are looking for different from prior cycles? I know Reston fits in well as high-amenity type location, like, it is different this time or do you think will go back to similar buildings?

Yes. Just as, there is demand for talent in all of our markets, there is tremendous demand for talent in the Dallas Corridor. So, the concept of going to a Greenfield office park with no amenities to recruit and retain the best and brightest is not the right way to go in the Dallas Corridor. So, the same demand we’re just seeing from corporate users, we’re seeing from the defense. They want the amenity base we have in Reston town center.

Okay. Thank you. And then, just the last question for me. Owen, to your comment about not raising leverage, do you -- are you thinking more about asset sales, might we see more dilution going forward from larger asset sales than we’ve seen in the last couple of quarters?

Only non-core assets. As I mentioned, we are having a pretty active year selling non-core assets. So, I think we’ll exceed the $300 million target. But, as I mentioned in my remarks, the selling of our -- most of our core assets involve a significant gain and a special dividend and a dilution to FFO.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Just on sort of the leasing progress for some of the other assets apart from 399, which you see pretty well on track there. Can you just -- maybe 70 million or 80 million of incremental, can you talk about at some of the other properties, 611 Gateway, Colorado Center, Embarcadero, just what’s the sense of timing of lease-up for those assets?

Yes. So, I will try and reiterate what I said. So, I’ll start with a simple one. So, we’ve already leased Colorado Center. And the revenue in Colorado Center is part of our slight increase for this year. So, we’re 98% leased. So, there’s not much to do there. At Embarcadero Center, I talked about the bank consulting space which is the one block that we had when the one tenant from the portfolio left to go to Salesforce Tower. There’s a little bit of musical chairs going on because the tenant is taking spaces and existing and coming tenant, but we have another tenant outside of the project that’s looking at that space. And we have -- again, we have these four floors at Embarcadero Center 4 that we are in two cases converting to, what I would refer to as more tech oriented space creative office. And so, we think we’re going to be very successful in leasing that up and that construction is going to begin prior to the end of this year and hopefully be done before the end of the first quarter of 2019, which is where our major availability is there. In Boston, I think, I described that we’re 95% leased. So, there’s not a lot to do there. 611 Gateway, we’re leasing about 50,000 square feet a year right now. We actually have, probably get the 80,000 square feet in 2018, still leaves about 40,000 or 50,000 square feet of space that’s going to be rented at $42 a square foot plus or minus, so $4 million or $1.6 million. So, it’s not a lot of revenue. So that -- I think the rest of the portfolio is doing very well. We do have a few other pieces of high value space in New York City at the General Motors building. We actually have a lease out on the majority of one of the floors which we hope to sign in this calendar quarter. And that will likely have a revenue recognition sometime in late 2019 as well, and that’s high revenue space. So, the rest of the portfolio is doing very well. If you force me to go back to 2016 and talk about our “revenue bridge”, we are within spitting distance of having everything done on that “$160 million” of revenue.

And then, just in New York, I guess, you referred to firming up or maybe stabilization in things like TIs et cetera. I’m just sort of wondering, some of your peers have been optimistic about overall Midtown rents turning positive and maybe trending upward over the next six to nine months. Do you share that view and anything to share on your sense of where New York fundamentals would be over the next 6 to 12 months?

I think the house view -- and I’ll let John give you his perspective, is that lease transaction economics in the form of pre-rent in TIs [ph] has stabilized. They are not coming down per se. And rents are flat and they are largely due to the fact that there continues to be a significant amount of new construction that’s occurring. There are places where tenants can go. The better space is being leased and the better built space in those buildings that have gone through on major capital refreshment are the haves, and there are a bunch of have-nots out there. So, we think it’s sort of steady as she goes. There is not going to be significant, if any rental rate expansion over the next few years. John, any other thought?

No. I would say leasing activity is very strong. We had a very, very good first half of the year, but the development has added supply to the market. So, that’s kept the availability rate from dropping with the leasing activity. And as a the result of that -- net result of that is what Doug says, it’s a pretty flat market, although a very active one.

Your next question comes from the line of Jed Reagan with Green Street Advisors.

Just going back to an earlier question about Santa Monica Business Park. That seems like an attractive addition to the portfolio and it’s consistent with the strategy of growing in LA. Just given that, I wonder how you thought through the decision to partner on that asset rather than doing it a 100% on your own and kind of maximizing your LA presence, and why raising capital through that asset made more sense than just selling an incremental non-core asset? I know you touched briefly on that on the last call but if you could just expand on that a little bit.

Yes. When we sell a non-core -- when we sell a core asset, almost all of our core assets have a significant tax gain in them, so that creates a special dividend which we -- dividend to shareholders. We don’t keep the money. So, we can’t use that capital to make a new acquisition. So, it’s extremely inefficient source of capital, in that if you look at it that way. So, in the case of Santa Monica, we thought it was a good opportunity to bring in a partner that -- we think the yield is attractive, it is lower on a stabilized basis than the developments than we are doing. So that was part of the decision. And we have a -- it’s very active development pipeline and we want to keep our leverage at the current levels. And so, we thought it was an appropriate area to raise equity capital in the private market.

How about contrasting it to a non-core asset or lower growth asset where maybe you’ve got sort of a stabilized cash flow versus potentially good upside for this asset?

Jed, the other point is, we have a partner in our other deal in Santa Monica as well. We didn’t bring that one in, we inherited that because we bought a half interest. So, actually both our deals in Santa Monica are 50-50. So, again, I’d kind of go back to the first answer, the first question the, the sell on asset to raise money, given the tax basis in most of our assets we can’t, if we did it, even if we get a great price, if we did it that we can’t use most -- or a lot of the capital if not most of the capital to make new investments, that’s not a source of funding for this kind of activity.

Okay, thanks. And there was a recent measure passed in San Francisco Prop C that would introduce 3.5% gross receipts tax on office landlords in town. Just curious to get your take on whether you think that measure is going to stand up ultimately. And if so, how much of the tax burden you think get passed along to tenants in the long run?

So, I’ll answer the question on the economics and I’m going to not be able to give you my sense or our sense on the weather it will be repealed. It was a 51-49 vote for. It’s unclear whether or not that will withstand both legal litigation as well as a revote if they were to do that. Our leases, we have structured, allow us to recover these types of increases in the costs associated with what I refer to as taxes. So, on the margin, we have vacant space. And so in those cases, there may be some revenue that we -- depending upon way all the leases are structured that would be pushed to the landlord, but vast majority of this is reimbursed.

And how about when the lease expires five years down the road?

The new lease will have language in it that we believe will allow us to pass along this, pass probably in a more precise way.

Okay. And then maybe just a last one I think and related to that. There has been talk of getting new Prop M allocations added back to the Q and San Francisco to account for office buildings that have been converted to resi or other uses, maybe 1.5 million order of magnitude. Give me visibility into that process and the chances that it goes through and maybe how it could affect your plans?

Sure. Bob, do you want to just describe what you -- what your understanding is and sort of where that “legislation” may be.

Yes. Legislation has been submitted by supervisor Peskin, and we think it will pass. As far as our plans, I don’t think it’s going to have any material impact because I think the city’s going to divvy up the Prop M allocation amongst all the Central SoMa sites.

We have time for one final question and that question comes from John Guinee with Stifel.

Hey, Ray Ritchey, you and -- I guess, you and LeBron James are active in LA now. Now that you’ve been out there, west of the 405 Beverly Hills, Westwood, is it or is it not possible to do the new build?

Well, that’s -- of course Owen could comment on this as well. It’s one of the reasons we’re picking up sites like the Santa Monica Business Park. The barriers to entry in West LA are the strongest of any market we see in the country. And so, when we get a chance to acquire 40 some acres in Santa Monica and we will certainly jump on it. And given the success we’ve had at Colorado Center where almost exactly two years ago, we bought it a 65% leased, we’re effectively 100% today, just validates both the scarcity of sites and the unbelievable amount of tech demand in that marketplace. So, any chance we get to acquire any asset, be it a development site or a new acquisition, we’re going to take advantage of it. But, the answer to your question specifically John, it’s the tightest market in terms of developable sites we’ve ever seen.

But, is it impossible or possible to up-zone, et cetera or is it just will we never see another square foot?

The city Santa Monica, I’d say it’s virtually impossible to up-zone. OT, do you have any comment on that?

These things are hard to define, John. There’s no question that what Ray described is accurate. And it’s one of the attractiveness -- we think one of the attractive features of the investments that we’ve made is there’s a lot of protection in new supply. But, with time, you never know how these things are going to evolve and how the local community’s posture toward these issues will evolve.

Thank you.

I’m impressed you got back in the queue, John. How did you do that?

I don’t know. It’s divine, I think.

All right. Very good. I think that concludes all the questions for today, and thank all of you for your interest in Boston Properties.

This concludes today’s Boston Properties conference call. Thank you again for attending, and have a good day.