Q3 2019 Earnings Call

Morning, and welcome to Boston properties third quarter 2019 earnings call.

This call is being recorded.

All audience lines are currently in a listen only mode.

Our speakers will address your questions. After the formal remarks during the question and answer session.

This time I'd like to turn the conference over to Ms., Sara Buda VP Investor Relations for Boston properties. Please go ahead.

Thank you good morning, and welcome to Boston properties third quarter 2019 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 is reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reggie requirements.

If you did not receive a copy these documents are available in the Investor Relations section of our web site at the X P. Dot com an audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this like at this time, we'd 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 security litigation.

Litigation Reform Act.

Although Boston properties believes the 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 could differ materially from those expressed or implied by forward. Looking statements. We are detailed in yesterday's press release and from time to time in the company's filings with the FCC.

The company does not undertake no duty to update any forward looking statements.

I'd like to welcome Owen Thomas Chief Executive Officer, Doug Lindy, President and Mike Labelle, Chief Financial Officer. During the question and answer portion of our call Ray Ritchey Senior Executive Vice President and or regional management teams will be available to address questions and now I'd like to turn the call over to Owen Thomas first formal remarks.

Thank you Sarah and good morning, everyone Q3 marked another strong quarter results for Boston properties.

Macro market trends of job growth urbanization and office usage remain favorable demand in our major markets continues to be strong.

And we continue to execute successfully on our revenue and earnings growth strategy.

In terms of our key financial highlights for the quarter, we continue to outperform our sector with strong AFFO growth in 2019.

The third quarter, our AFFO per share was four cents above our guidance at the midpoint when adjusting for the refinancing transaction completed in the quarter and was two cents above market consensus.

We also raised our full year 2019, AFFO per share guidance by 10 cents at the midpoint net of the refinancing transaction, we're now projecting a 11% AFFO growth year over year in 2019, even after accounting for the refinancing which is one of our strongest FFO growth years in raw.

Recent history.

Looking ahead to 2020, we're demonstrating the sustainability of our positive growth momentum with initial guidance at 8% AFFO per share growth at the midpoint again likely well above the peer average.

In terms of operational highlights we had a busy and productive third quarter, we completed 2 million feet of leasing which is well above our long term quarterly average for the period, bringing our total leasing to 5.9 million square feet year to date.

We were once again recognize for sustainability performance and leadership by earning an eighth consecutive Green star recognition from the grasp assessment on ranking among the top 4% of almost 1000 worldwide participant.

We acquired 880 and 890 Winter Street, two office buildings in suburban Waltham.

We entered into a joint venture agreement with Canada pension plan investment board for a 45% interest in our platform 16 development in San Jose.

And we completed 700 million in 10 year unsecured a refinancing on attractive terms.

Now moving to business conditions, our leasing activity remains healthy as evidenced by the well above average leasing volumes, we have been reporting throughout 2019.

That being said most of the reported economic data, we follow such as you U.S. GDP growth job creation and unemployment indicate healthy but moderating conditions.

Economic growth outside the U.S. looks like even less favorable with China reporting its weakest numbers in three decades, and Germany, possibly already in recession.

While GM geopolitical issues, such as the U.S., China Trade War do not directly impact our business. These risks are clearly not constructed for the broader economy.

As a result, the U.S. Federal reserve and most central banks in the developed world haven't accommodative posture.

Significant drop in yield on long term rates has held in the U.S. this past quarter and long term rates actually remain negative and many developed economies such as Japan and Germany.

In terms of impacts on Boston properties, we do not anticipate a recession near term, though recession risks continue to rise.

Despite slower economic growth lower interest rates provide a tailwind for financing costs than real estate valuation.

We maintain a hedged capital allocation posture in that we continue to invest in new projects driven by Tech and life science demand, but at the same time, we're protecting the downside, but keeping leverage low preleasing most of our developments and keeping our buildings fall with creditworthy tenants and increasingly long term.

From leases.

The private real estate capital market for assets in our core markets remains healthy.

Significant office transaction volume in the U.S. ended the third quarter down 18% from last quarter and down 7% from a year ago, we're still seeing reasonably strong investment demand and most of our market.

The private capital market for office product is becoming more discerning with a preference for tech oriented market locations and minimal lease exposure for assets located in other markets. Yet again, there were numerous significant asset transactions in our markets this past quarter.

Starting in Boston Hundred Summer Street in the financial District sold for 806 million $722, a foot and a 4.2% cap rate. This 1.1 million square foot office properties, 87% leased and sold to a real estate advisory firm.

In West L.A. 5900, Wilshire Boulevard is under agreement to sell for $315 million nearly $700, a square foot and a 4.3% cap rate.

This 450000 square foot office building is 86% percent leased and will be sold to a real estate advisory firm.

In San Francisco, a 50% interest in 525 market Street in the financial District is under agreement to sell at a gross valuation of $1.2 billion.

For nearly $1200, a square foot and a 3.5% cap rate.

This 1 million square foot office building is 97% leased and will be sold to a real estate investment manager.

And finally in Washington, D.C., 16, 25, I Street in the northwest quarter sold for $259 million $640, a square foot and a 3.5% cap rate.

This 405000 square for building, a 65% leased and sold to a real estate advisory firm.

So to summarize our completed an expected capital activities for 2019.

We sold in whole or part five assets for 398 million in gross proceeds versartis versus our goal of 300 million sales.

Several small transactions remained under agreement and could close by year end.

We completed three acquisition, so far for $336 million.

We launched three new developments comprising a million square feet that are 65% preleased with an expected cost of 822 million and projected initial cash yield upon delivery of approximately 7.7%.

And we have delivered or expected deliver into service by year end two projects, comprising 675000 feet costing $508 million at forecast deals.

Development continues to be our primary strategy correct for creating value for shareholders and our pipeline of current and future developments remains robust. This quarter. We commenced our 2100, Pennsylvania Avenue development property in Washington DC.

This office building located near our 2200, Pennsylvania Avenue asset will comprise 480000 square feet is 61% pre leased a wilmerhale and has an expected total investment of 356 million.

We also commenced our 200 West Street development redevelopment in Waltham mass.

We are converting 126000 square feet of this suburban office property to life Science lab ready space and anticipate investing 48 million into the redevelopment project at double digit incremental cash yield.

With these additions our current development pipeline stands at 14 office and residential developments and Redevelopments, comprising 6.3 million aggregate square feet and 3.6 billion of total investment for our share the commercial component of this portfolio was 78% pre lease an aggregate projected cash.

Yields are approximately 7%.

Most of the development pipeline is well underway and we have 1.6 billion of equity capital remaining to fund.

Given selective asset sales the schedule delivery of our current development pipeline and forecast and NOI growth from our in service portfolio, we anticipate being able to fund the current development pipeline without either accessing the public equity markets or exceeding our leverage targets.

As we pursue and add additional new investment opportunities to the pipeline, we will be increasingly accessing private equity partners to extend the use of our equity capital and enhance our returns.

To that end this quarter, we entered into a joint venture agreement with CPP IB to sell a 45% interest in our platform 16 future development project.

This anticipated 1.1 million square foot class a urban office campus in downtown San Jose is adjacent to Googles planned 8 million square foot transit village and the dared on station transit hub with this joint venture we were able to the to extend the use of our equity capital diversify our risk and enhance our.

Returned to shareholders through property level fees and a carried interest arrangement.

We're very pleased and honored to enter into the second significant joint venture with CPP I'd be a leading global institutional investor.

Lastly, this quarter.

Boston properties acquired 880, and 890 Winter Street in Waltham for $106 million or $270 a square foot.

This to building 392000 square foot office campus, which is currently 82% leased is located adjacent to our 1 million square foot Bay colony property with this acquisition, we increased our presence in Waltham to around 404 million square feet further increasing our position as the largest owner in manager of key.

Class a office space in this vibrant market.

We plan to invest approximately 20 million of capital to refresh the building and upon lease up and rolling existing rents to market expect to receive an excess of 7% unleveraged cash return within five years.

This is a good example of our acquisition strategy, where we use our market presence and knowledge and real estate skills to create value.

Before I conclude as a major office market participant I wanted to provide Boston properties perspective on we work and co working given the intense media attention on the situation.

We believe the shared workspace business, which provides flexible term turnkey space at a premium price isn't innovation that has aggregated user demand has been a positive for the office market and will remain an important procurement option for certain occupier requirement.

To put all this in perspective shared workspace represents only 1% 1.6% of office space in the U.S. and as high as 3.6% in New York and San Francisco.

Its share of gross leasing activity, a net absorption has been materially higher.

So we believe the shared workspace market has growth potential we anticipate a pause given recent capital rate raising challenges in the industry.

We work has built an important market position in the industry and has the potential for future for further growth assuming it execute well with the proceeds from its recent recapitalization.

Regarding the potential impact of Boston properties. The revenue reroutes, we receive from we work from five leases in Boston properties hole and partially owned assets is about 1% of our total revenue.

And all we work facilities and our portfolio that have been opened for more than a year or substantially fall.

And lastly, we also have relationships with other shared workspace operators and our own offering called flex by be XP.

So to summarize BXP performance in the third quarter a year ago. We told you we were at the inflection point of strong and sustainable growth. We've delivered on that commitment and are on track to exceed the growth targets, we outlined for 2019 a year ago.

We're also delighted with our forecast trajectory for 2020 with estimated FFO per share growth of 8% at the midpoint.

Once again, we are delivering that growth through a balance of solid same property growth pre leased development coming into service and smart allocation of capital on expense control.

We continue to outperform our sector along most key metrics greater scale strongest credit rating strongest FFO per share growth greater geographic diversity across both west coast and these east coast markets, a newer and higher quality portfolio of assets that we've either recently developed or modern.

And then unwavering focus on customer satisfaction, making be XP the developer in landlord of choice.

Let me turn the call over there for more detail, thanks, and good morning, everybody.

So this is the time of the year that we introduced our prospective annual guidance would you all saw in our press release last night.

My market commentary. This morning is going to focus on the opportunities in our portfolio as they relate to that guidance Mike's going to provide you with a range for our same store growth in 2020, and you should think about my remarks is the backdrop for the upper and lower edges of that band.

We have completed a significant amount of forward leasing over the past few years, which has had the effect of creating an extremely durable revenue stream and provided good clarity on the range of expected outcome going forward, especially for 2020.

I will start in the Bay area.

San Francisco has a vacancy rate in the low single digits, and then availability rate in the mid single digits 2019 leasing activity has slowed simply to to the lack of available space. It's anyone's guess when the first in mission project. The only speculative building under construction will actually deliver but it sure.

Really not before 2023.

CBR re put out a report a few days ago that indicated that large available blocks over 30000 square feet, even if they're at the base of buildings have asking rents on average over $100 gross.

In October .

The prop M Bank received its annual allocation of 875000 square feet, bringing the total available availability of prop M. About 900000 square feet. We are scheduled to go before the planning Commission in December to receive our Lpa and the prop M allocation for 505000 square feet.

A partial allocation for fourth and Harrison our current plan allows for a phase development, a 505000 square foot building and a 265000 square for building. We believe we could start the project as early as the fourth quarter of 2020 and deliver occupied space at the end of 2022.

So still a pretty long way out.

Our San Francisco CBD portfolio ended the quarter at 96.8% occupied and 98.7% committed.

To date in 2019, we've completed 490000 square feet of space leasing with an average gross rent increase of about 34%.

In 2020, we have five full floor expirations in our entire 5.6 million square foot CBD portfolio.

We have a lease out on one floor, we are taking one floor for our own office growth and we're dedicating one floor to small enterprise users.

This leaves a single Buildout floor at 535 mission, where the asking rent is over $80 triple net compared to an experiment of about $60 Triple net and a single floor at three.

We have one multi floor exploration prior to the end of 2021 in the entire portfolio in the CBD and that tenant has requested a renewal proposal.

Last year at this time, we had seven available full floors.

In the Silicon Valley, we have a large portfolio of development opportunities. This market continues to experience strong growth led by Google, who recently purchased the former Yahoo campus from rising almost 1 million square feet. Verizon in turn has leased 650000 square feet in close proximity to the Caltrans Steve.

And in Santa Clara Gruber. This quarter has taken another 300000 square feet in Sunnyvale in close proximity to Caltrans and we're aware of other San Francisco headquartered companies that are looking in the valley for large blocks of space as well as valley companies that continue to grow.

Platform 16, and San Jose, we are enabling the site and making presentations to tenants that are looking for large blocks of space gets next to caltrans.

In our existing mountain view portfolio, we continue to release or renew space rents in excess of 55 Triple net that's single storey product.

In 2020, our most significant opportunity in the Bay area is in this mountain view portfolio, where we will soon have a 150000 square feet of availability.

Turning to the east coast, neither our views on Manhattan, nor the market conditions have changed demand in Manhattan remains robust who were announced their deal completed their transaction and at this moment. There are technology tenants in active discussions on 300000 square feet to 1.5 million square feet requirements that represent.

Significant growth.

There are a dozen other tenants law firm banks media companies insurance companies and more technology companies with requirements in excess of 300000 square feet that are seriously considering our relocation to either new construction or renovated project.

There will still be significant existing supply from known relocations.

Much of it in older assets that will need substantial capital. So while we are optimistic about the shrinking availability of newly constructed space. We continue to have a cautious view on transaction economics over the next few years.

This quarter, we completed a 20 year renewal and 599 lacks with our anchor law firm starting in 2022 for a minimum of 330000 square feet.

Let's pause here for a minute we have now extended every major lease expiration in our portfolio above 140000 square feet that was due to expire through 2024, we started that back in 2014.

And we re let the city space at 399 Park Avenue and six one Lex in its entirety.

As a note.

The transaction cost disclosed in our supplemental are elevated this quarter due to the 340000 square foot early renewal, we completed in 2014 with Weil Gotshal at the General Motors building that commenced this quarter.

Moving that lease transaction cost, we dropped to $43 in total were $5.33 a year. There was no free rent in that transaction, but in lieu, we provided a higher T.I. concessions.

Our portfolio focused in New York remains the four floors 97000 square foot block at 399 Park Avenue in the General Motors building. We are in lease negotiations today for three of the four floors that Threenine Park Avenue and are in discussions with an existing tenants as interested in expanding into the final four.

We expect this currently vacant space will provide revenue during the fourth quarter of 2020.

As a general Motors building since the completion of the Plaza work and the opening of the Apple Cube last month, we have commenced lease negotiations for a full floor vacancy at the top.

Reached agreement to extend to additional full floor expired Ics floors that are expiring in 2020 and have activity activity on a number of the smaller spaces in the building.

Activity is meaningfully up though revenue on shelf space is won't commence until the end of 2020.

We still have some work to do with three full floors that will be available during the second quarter of 2020.

But we have great progress.

I also want to note that at one Fivenine 50, Threerd Street, we will begin collecting cash rent in two days on the entire hundred 95000 square feet. However, our incoming tenant has yet to begin their improvement construction, which means this will push out our GAAP recognition of revenue into late 2020.

Dock 72 opened in September we for we work and we expect to open the amended space later this quarter along with the rude and organization. We're doing everything we can to market. The project the real estate and tenant community two weeks ago. We hosted a two days C. R Tech conference and had over 1700 real estate Tech participant.

Experienced the project Wegmans opened last week, adding another amended to the Navy yard we continue to have tens discussion, but there is no imminent lease signing in our sites and hence no expectation for additional revenue contribution in 2020.

Moving on to DC, Northern Virginia, where almost 10% of the company NOI originates has the largest opportunity for improved occupancy in 2020.

The tech tenants that have identified the DC metro employment base as a fertile area for workforce expansion are continuing to grow and that growth is going to be in northern Virginia.

In addition, the contractors that service the defense and Homeland security businesses are also expanding.

Last week, the Pentagon awarded the $10 billion, Jed I cloud computing contract a pretty big deal.

We expect this initiative will create significant office demand in northern Virginia.

There is still vacancy in northern Virginia, but the urban core unrest in continues to outperform market with a vacancy rate under 9% and starting rents in the high fortys to low fiftys.

This quarter, we completed a 15 year renewal with the GSK for 492000 square feet and our new Dominion project and 90000 square feet of renewals in the rest in urban core and two weeks ago, we executed a 75000 square foot lease with Facebook on three available floors and the rest in urban core.

We are an active lease negotiations with two large tenants totaling 450000 square feet.

We still have 500000 square feet of known availability in 2020, but there are a number of active requirements. A few in excess of 100000 square feet and we expect to make some of these deals rate probably expects to make all of them.

As we sit here in late 2019.

Space is expected to be bacon during portions of 2020.

Finally, let's touch on the Boston market, where current conditions are as good as we have seen them in our company's history, while similar to San Francisco to the extent, there's very little available space in large blocks in the Boston CBD. There are some buildings under construction, which will deliver in late 2022 in 2023 with current availability.

And there are active plans for new construction, which will create supply in 2023 and beyond.

Currently however, there are more than 20 active requirements in the market between 50000 250000 square feet.

Our CBD portfolio is 99% occupied today and we continue to complete forward leasing transactions during the quarter. We completed almost 200000 square feet of early renewals and expansions with an average increase in rent of about 30% in the CBD.

Much of that expansion at least the other tenants. So we won't realize that revenue until the existing leases expire.

In 2020, we have one full floor expiring in the entire Boston CBD portfolio, and we have a lease out on that space for doublet delivery upon expiration of the existing lease.

We leased an additional 112000 square feet at 100 Causeway Street tower, bringing that building under development to 87% leased in Cambridge, we have no availability, but our did new development 145 Broadway. The 800, sorry, the 485000 square foot building leased entirely to Akamai is opening this week on Friday.

There continues to be significant demand in the Waltham, Lexington, Submarket, which is where we have our greatest availability in the region approximately 500000 square feet, including 75000 square feet at the recently acquired 80 90 assets.

I wanted described our plans for 200 west. So we have extend expanded our potential tenant universe in Waltham to now include lab requirements 195, West Reef is an adjacent 63000 square foot building that became vacant during the third quarter. It may also be converted to life science use, but we're holding off until we have better leasing visibility.

At 200 West Street.

The 88 90 buildings were added to the Waltham inventory at the end of August our ownership along with the knowledge that we intend to invest into buildings as we have at Bay colony has already paid off with signed leases or active negotiations on half of the vacant space at rents in the low to mid Fortys, new construction office rents in this market around the mid Fiftys.

Our office and lab rents are pushing $60 triple net.

To conclude tenant demand for high quality workspace remains strong and the fight for talent continues to be a primary focus for our customers. We are seeing very strong mark to markets in San Francisco in the Boston CBD assets have opportunities for incremental occupancy related revenue pickup in our mountain view and Waltham suburban submarkets.

Our activity 399 Park Avenue should deliver some late 2020 revenue revenue improvements and we're having good success with our high end product that the general Motors building finally in Reston, we have good lease negotiations on some near term expirations.

We still need to bringing some new requirement to absorb the 2020 vacancy, but take stroman and ray ritchey and the team Washington's going to deliver that.

Michael now translate this operating activity into our 2020 earnings guidance.

Great. Thanks, Doug Hello, everybody.

So, let's say, we released our 2019 in 2020.

FFO guidance, we expect 2019 AFFO growth of 11% and our initial guidance for 2020 AFFO growth is 8% at the midpoint of our range.

Our growth is being driven by a combination of strong fundamental operating performance in our portfolio and delivering accretive new developments before I jump into the details I want to touch on our recent financing activities because we were quite busy this quarter.

First we closed a 400 million dollar construction loan to fund the remaining cost to complete our 100 Causeway office tower at the hub and cause we development in Boston the financing is attractively priced at LIBOR, plus 150 basis points.

Turning to the strength of the project that is now 87% Preleased and we'll start to be delivered in the second quarter of 2021.

Second we issued $700 million of new 10 year unsecured bonds at a 2.9% coupon.

We used the proceeds to early redeem a $700 million existing bond that had a 5.6% coupon which was due to expire in November of 2020.

As a result of this we incurred a charge on debt extinguishment of $28 million, which is the redemption premium to prepay the old bonds. The charge totaling 16 cents per share is reflected in our FFO results for the third quarter and our guidance for the full year 2019.

Although we don't expect interest rates to increase in the near term credit spreads are potentially more volatile and are also near all time lows. We view this as an opportunistic trade and it significantly reduced our borrowing cost on $700 billion by 270 basis points the impact on our interest expense going forward as a result.

Action of approximately $18 million per year or 11 cents per share.

Turning to our earnings results, we had a strong third quarter with our revenues up 8% and our FFO up 10% over last year after adjusting for the debt extinguishment charge.

We had strong same property performance as well with our share of same property NOI up 7.1% and our share of same property NOI on a cash basis up 5.2% over last year. As we've described on prior calls our same property NOI growth is moderating in the back half of 2019 as we track against higher.

Comps.

We expect our cash same property performance will be flat to slightly negative in the fourth quarter of 2019.

This is due to the recently executed 20 year lease extension with a large tenant in New York City that included three rent at the end of 2019, we expect our cash same property performance to turn back to positive in the first quarter of 2020 and for all of 2020.

For the third quarter, we reported funds from operations of $1.64 per share that was four cents per share or approximately $7 million higher than the midpoint of our updated guidance. The increases from two cents per share of higher than projected portfolio in Hawaii, and two cents per share a better than projected management and service fee income.

The outperformance in the portfolio came primarily from earlier than projected leasing at higher rents and lower operating expenses that we expect will fit in the fourth quarter for fee income weird leasing commissions on the new leasing this quarter at our hub and causeway developments and higher service fee income.

For the full year 2019, we're updating our FFO guidance range to 6098 cents to $7 per share. This equates to an increase of 10 cents per share at the midpoint versus our recent guidance.

The increases from growth in our same property NOI that exceeded our assumptions by 25 basis points, adding two cents per share.

Improvement and the contribution of our non same properties, including the acquisition of 80 and 890 Winter Street in Waltham of two cents per share higher fee income of two cents per share. We also project lower net interest expense of four cents per share primarily from the benefit of our lower borrowing rates.

We provided detailed initial guidance for 2020 FFO last night in our supplemental report that's on our website.

As we look ahead to 2020, we expect to continue our strong FFO growth trend our growth will be driven by higher in Hawaii from our same property portfolio for both occupancy gains and higher rents as well as the delivery of new developments.

In the in service portfolio, we anticipate ending this year at an occupancy rate of 92.5% for 2020, we expect to increase occupancy 100 basis points ending the year around 93.5%.

In the Boston market, our urban portfolio in Boston in Cambridge is highly occupied so our focus is on early renewals, where we expect a role in place rents up to significantly higher market rents in the suburban Boston portfolio, We lost 170000 square feet of occupancy from expiring leases this quarter as Doug described the activity.

In Waltham is robust and we anticipate gaining occupancy back in 2020.

In New York City, we have approximately 570000 square feet of vacant space at the GM building 3 million on Park Avenue in times Square Tower three.

360000 square feet of this or more than 60% has signed leases that will commence by mid 2020.

We have good leasing activity on the remaining space and expected a portion will be leased with revenue recognition by the end of 2020 overall, we expect occupancy to be higher next year in the New York City portfolio.

In Los Angeles, we're currently 97% leased with below market rents, we have the opportunity to increase our revenue through completing renewals at higher rents on most of the approximately 750000 square feet of leases that expire at the end of 2020 through 2021.

As Doug detailed were also highly occupied in San Francisco, though we continue to have the opportunity to opportunity to gain revenue on a rollover that has a strong positive mark to market in both the city and in Mountain view next years earnings will also benefit from the full year of stabilized income at Salesforce tower that reached 99.

10% occupancy this quarter.

Doug also described in detail the rollover exposure that we haven't rest and where we will have we will have temporary downtime impacting both our occupancy at our revenues in 2020.

In the district, the majority of our rollover exposure is behind US having occurred in 2019, and our 2020 exposure is limited.

Our guidance assumes strong growth in same property NOI and cash same property NOI of 3% to foreign three quarters person in 2020 led by revenue growth in Boston and San Francisco.

We are assuming noncash rents to be 102 $130 million with the vast majority being three rent that will convert to cash rent.

Fair value rents now contribute only $9 million of non cash rent. That's a decrease from approximately $10 million from 2019. So our 2020 same property NOI growth would have been 50 basis points higher if you exclude the negative impact of the burn off of this noncash fair value rent.

We will also see growth in 2020 from the delivery of several key development properties and the acquisition. This quarter of 88 90 Winter Street, our assumption of incremental growth and then unwind from development and acquisitions is $60 million to $70 million in 2020.

The most significant of these is our 475000 square foot 145 broadly development in Cambridge, and other key development deliveries contributing to our growth includes 17 50, President Street in Reston 20 City point in Waltham, and the podium office and retail phases as well as the 440 unit residential phase of the hub.

On causeway in Boston.

Our 2019 in early 2020 deliveries totaled 2.3 million square feet and $1.1 billion of new investment.

We expect termination income in 2020 to declined by approximately $10 million or six cents per share from 2019. This primarily relates to several lease terminations in 2019 instigated by us to accommodate new or relocating clients that we assume will not recur.

We also expect our management and services fee income to decline in 2020.

We're completing several large fee development projects. These include Ducs 72, the first two phases of the hub on causeway and the development of the TSA headquarters project in Springfield, Virginia that we are managing for third party.

Our assumption for 2020 fee income is $25 million to $32 million and represent the decline of $10 million or six cents per share at the midpoint from 2019.

Our assumption for debt interest expenses in 2020 is 410 million to $430 million. In addition, we expect $9 million of incremental interest expense associated with our unconsolidated joint ventures that is contained in the income from joint ventures line of our income statement.

In aggregate this equates to a modest $3 million increase in interest expense for 2020 at the midpoint.

The end the interest expense savings, we've created by reducing our borrowing costs with our recent debt refinancing is offset by incremental interest expense from EUR $850 million June 2019 notes offering higher expected line of credit usage from funding development costs and the cessation of capitalized interest from delivering development.

So to summarize.

We are initiating our 2020 FFO guidance with a range of $7.45 to $7.65 per share at the midpoint. This represents an increase of 56 cents per share over the midpoint of our 2019 guidance.

The increase is comprised of 38 cents per share of NOI growth in our same property portfolio and 37 cents per share from development deliveries in acquisitions.

That is partially offset by a 12 cents per share decline and termination and management service fee income two cents per share of higher net interest expense.

A three cents per share increase in DNA expense and two cents per share of lost income from asset sales.

So in 2019, we're anticipating a sector, leading a 11% FFO growth and we're following it up with guidance for 8% FFO growth in 2020, using the midpoint of our range another strong growth year.

We continue to demonstrate terrific growth both internally through increased pricing in occupancy in our same property portfolio and externally by delivering substantial new development investments that are primarily preleased and generating very attractive investment returns.

And looking further ahead, we have another $2.4 billion of development scheduled to come online between late 2020 in 2022, the commercial space. In these projects is 83% preleased to a roster of high quality companies. They include the new Marriott headquarters in Bethesda, a newbuilding in Cambridge.

At least to Google 100 cars, we in Boston leased to Verizon 159, East 50, Threerd Street in New York City leased to end why you rest in gateway leased to Fannie Mae and 2100, Pennsylvania Avenue anchored by Wilmerhale.

These developments and others that we are working to add to the pipeline will contribute meaningfully to our continuing growth over the next several years.

That completes our formal remarks.

Operator can you open up the line for questions.

At this time I would like to remind everyone. If you would like to ask your question. Please press star one on your telephone keypad.

If you are using a speakerphone please pick up the handset before asking your question well pause for just a moment to come topic you any roster.

Your first question comes from the line of Nick Yulico with Scotia Bank.

Thanks, I guess first off Mike in terms of the guidance for next year can you quantify.

What is the negative impact to same store NOI growth next year from GM.

Less than any other kind of known move outs and then what are some of the other major move ins that are benefiting next year.

So we talked on our last call about the rest and move outs, which I think was $17 million approximately and GM was about the same.

Miller recovering a little bit of the GM, because we've actually been successful in renewing a couple of tenants.

So as Doug pointed out so eloquently, we've had good activity and GM and we've done better there than we expected.

Other than that we're seeing strong activity in Boston, we have a lot of early renewals that we're doing at 200 Clarendon Street and at the Prudential Center.

100 said, we'll get a full year of the renewal that we did with the bank of America.

In Cambridge continues to be an opportunity. Although there is no vacancy the little bit of rollover. We have is going to have a big roll up.

And we'll continue to work on some early renewal activity.

Marketer of center is significant.

We've been building that.

For a couple of years.

We had a big four floor tenant expiring in the middle of 2020, all of that lease although thats faces basically leased.

We will commence with big roll ups when it comes available to us and in New York City were also growing year over year.

So our anyone from that portfolio will grow in the GM building is growing all the retail we expect to be leased.

And generating revenue in 2020 and as Doug described we've had some success in the office tower.

I guess.

I just sort of say the following which is that so the low end of our range assumes everything that we've got going debt and all the things we've already gyn and the high end of our range assumes that we have a little bit more success with some of the opportunities in front of us in the portfolio vacancy that I described.

Okay. That's helpful. Thanks, and then just second question is on platform 16.

Can you give us steel for when that project may start and how should we think about the cost.

Back to the yield.

And I'm, assuming you're not going to go specs, but there is not that much spec construction in that market right now feels like there is alive demand we heard from brokers in the market you're targeting something like 60 $570 net ran so how should we just think about.

Opportunity here and one is what's going to begin thanks.

So.

Okay.

Just to talk a little bit about the marketplace I think you're right. We are ahead of the other projects that are seeking entitlement and finalizing a development plans.

Google just made some progress on their entitlement for the project that they are building next to the dared on station, which is a positive.

Much of the development that goes on in this area is not preleased.

We are actively speaking with potential customers now and hope.

To acquire an anchor tenant for this project.

We are incrementally investing in it today, we are clearing the site.

Repairing drawings I would anticipate that this project would commence next year and we will leg into it based on.

The physical requirements of the site and the market condition.

Forecast yields for the project based on our expected costs and the expected rents are in excess of 7% and you should you should think of this is Doug you should think about this is a phase project right. So there are three buildings to be built here.

At the largest is just under 500000 square feet and so so if we were to do something we would do something with one of the buildings not all three of the buildings at the same.

All right thanks, everyone.

Your next question comes from the line Emmanuel Korchman with Citi.

Hey, good morning, everyone.

You talked about bringing in additional private equity sources.

Especially your JV developments.

Can you just.

Sure what's your thoughts on developing within the jvs, rather than selling stabilized assets, especially ones in more stabilized rather than growth markets.

That are getting up maybe some of the development upside.

Yes.

So many it though and it's a balance as I mentioned.

We are bringing in joint venture partners because of the robust.

Pipeline of opportunities that we have in front of US we are not intending to issue equity at our current share price and we certainly don't want to exceed our leverage target. So thats. The governor we look prospectively at what our leverage levels are in the capital needs from our development pipeline than we make a decision as to whether we want.

Two or need to bring in a JV partner on a specific deal.

I would say also indicates a platform 16, it's also a risk mitigation decision as well because it's the site and is not released and.

There are definitely rewards from the investment, but they're also risks and so we are diversifying our risks as well in terms of asset sales. We continue to sell assets I described nearly 400 million of sales that we conducted this year that is material will keep doing that.

But as I've described before selling major assets for us isn't in his inefficient way of raising capital.

For the development developments because most of our major assets have a significant embedded gain and with the sale comes a requirement to make a special dividends that we can't retain that capital to invest in the developments and it brings down our forecast FFO growth.

So thats, how we think about.

Thank you guys want to it.

Doug you had talked about the wildcard shall lease that sort of froze off stats.

Is there anyway that you guys could or have maps for us sort of any of those big chunky leases that have happened in the past are starting to roll into numbers now.

Hi, there impacting earnings or other steps.

Hi.

We can certainly try and think of a way to provide.

You some information I think the our hesitation is that on appropriate for us to describe the economics of our particular tenant and because they're so lumpy in terms of when they occur, giving giving you explicit information.

I think not be appropriate the I mean, I can tell you that there was a significant roll up in the in the in the gross rent with that tenant and we provided them with a IDTI allowance that was that included the value of free rent in the form of capital, which skewed the capital numbers, but they didn't get any free rent. So those are the kinds of.

Things are happening in these transactions, which by the way.

Make it a little bit more challenging to describe the cortical capital intensity of leases across and office portfolio. Because so much of this stuff is a part of a negotiation and.

It is true that we earning in capital intensive business and from a transaction cost perspective, but we sometimes we trade free rent and increased revenue in the short term for additional capital. So I'm not I'm not sure. We can think about it and come back to you and and and if you have specific questions were more than happy to.

Try and give you as much clarity as we can.

Great and I don't want Mike to feel left out so I've got one for him to.

You talked about the same store.

Decline in Four Q1 9 ship can you quantify how much of a lift that then provides in 2020. If you were just isolate that event.

Well I think what I can tell you is that I think the first quarter 2020 should be a strong quarter.

Same store growth and then in the second and third quarter of 2020, we're going to experience rollout in Reston.

So the second and third quarter will be dampened because of those rollouts and then the.

Towards the end of the year should increase again and Thats the best way to respond to your question.

Thanks, everyone.

Yeah.

Your next question comes from the line of John Kim with BMO capital markets.

Thank you I just wanted to follow up Mike on that.

Fourth quarter swing into negative territory, you mentioned that was partially driven by free rent on a major leased in New York when does that frequent period burn off next year.

It will be burned off before next year.

September through December of 2019 was the fear epic.

Got it okay.

Doug a couple of questions on New York and your prepared remarks, you mentioned strong demand for new build product how would you characterize the leasing market for.

Older assets like the GM building and also you mentioned that you're cautious on transaction economics and the ongoing I was wondering if that was commentary on cap rate.

So I'll I'll answer the first two questions I'll, let own answer the third question.

So all the leasing activity in New York City on on buildings that have recapitalize or reposition themselves very strong and there is there a significant amounts of demand for buildings.

Both on sixth Avenue or.

On Park Avenue or in the Plaza District.

That are not quote unquote, new construction that have.

Taken the thought in energy of how to recapitalize and reposition those assets and for US that that's both 399 Park Avenue six a one Lexington Avenue in General Motors building with with specifically with with regards to the GM building I think I was pretty explicit that we've got a lot of activity going on that six months ago.

So did not exist so the activity in that building, which while you made.

Describe it as an older building in terms of when it was built has had a strong dramatic amount of new capital put into it and so and if you go there it's a pretty spectacular entry experience now after a really tough sell for the last two or three years because of the construction.

And we are we have a full floor lease out on the top of the building and we have to.

Tenants that are going to renew on on two other floors that are renewing in 2020, and we have other good activity in the building. So we feel on a relative basis, a lot better today than we did six months ago.

And then to answer your question on the capital market for New York.

I think its bifurcated I think the market has softened up a little bit in New York for specific classes of assets. So let me explain so we just sold 540 Madison in Midtown last quarter and had great execution on that in terms of cap rate.

That as I mentioned last quarter was a smaller asset I was just over $300 million. So I think for what I'd call bite size single assets in New York I think there's still a very strong market as we demonstrated last quarter I think the market is also very robust for buildings that are in tech oriented areas of New York.

Mark and for newer buildings and I think the market has softened up a bit for more commodity like buildings, and certainly billings that including buildings that have some significant nearer term rollover.

Okay last question if I may.

On South San Francisco, it's a very tight market. There is increased spillover effect tenants moving into that Submarket is there anything you can do it six and one in six lemon gateway to capture some of this demand.

The answer is yes, we think there are things that we can do we are we're thinking real hard about how in fact those buildings might be repositioned.

So that they can accommodate some of the.

Non traditional office space aka lab use and I think we'll have where we're in the process of thinking about that and we'll have more to discuss in coming quarters.

Thank you.

Your next question comes from the line of Craig Melman with Keybanc capital markets.

Hey, guys.

Doug you mentioned that things are getting a lot that are GM and I. Appreciate your your previous commentary is there anything you can isolate that was an inflection that all the sudden.

They are more showings or you get 10 mystery renew that you thought maybe it flight risk anything specifically so John powers why don't you want to you try to answer that question, because you're closer to it than I am.

Well certainly opening the fabulous new Apple stores, the number one as Doug mentioned, we've been three plus years without a front door.

Having our attendance and the showings go around two.

For the Lexington outside or through the Apple store all kinds of configuration. So I would say that that is one huge difference and if you haven't been there you go because it's pretty spectacular.

I said secondly.

I think some of this is just timing in the market where tenants are now.

Active and looking and we have space that matches up with can needs in the marketplace. We had a number showings before but was there was some somewhat of a dish mismatch between the sizes people were looking for and what we had available.

That's helpful. Then.

Oh and going back to your earlier comments when we work in the co working space I know you guys now have the flex offering but I'm just curious the one thing. It seems like we were proved out was that enterprise to its we're willing to pay up for flexibility. So I'm just curious.

What you guys see me over the next.

One to three years of maybe changing mindset from landlords and how kind of office space could be or should be leased to potentially.

Capture the premium rents people, we have to pay for flexibility.

So now it's good good question.

Look I think that.

What we are seeing in the market is that major corporate users.

Continue to want to have their own.

Headquarters and controlled spaces that are unique and and it provides them ability to express their brand and compete for talent and these.

Facilities are going to be secured on a very long term basis, because that's how they want them and if you look at our development pipeline. We're building a number of these corporate either corporate headquarters or regional headquarters for these companies.

That all being said.

The needs of AG.

Company.

For its square footage the personnel needs of a company.

Often are more volatile than the timeframe required to procure space on a long term basis. So we do think that there are many companies out there that large users that if they could per if they could procure.

Some of their space on the margin and again, it's hard to say exactly what that percentages is at 5% as a 10% who knows but theres clearly a value to those corporate customers to be able to procure some space on the margin on a flexible basis.

And we work.

The other operators and now ourselves with flex by BXP are tapping into that I think one thing that is.

Being figured out in the marketplace today is how should that space be priced because.

You are leasing it on a short term basis and how as the owner of the building should you be rewarded for that and what should the rental premium be obviously on a short term basis, you're taking more vacancy risk and if you own the space like we do.

Flex our.

Hi costs are higher.

So.

Thats, how the market is evolving and I would just just talk for the following which is.

For the most part and I I've used this word in previous conversations about this topic. This is shock absorber space, meaning typically companies are trying to do something either Ics internally with their their particular quote unquote platform aka.

Ill give you. An example, we have a tenant that that's agreed to take.

A piece of the space that we're building in Boston for nine months, because they're going to do a major renovation of their own place and the need someplace to send their people while this bases being renovated because they don't have swing space in the building.

So thats I consider that shock absorbers based or tenants that are growing in a significant way in the building that they may have you know under construction for themselves may not be done yet, but they still need to hire people or they are thinking about in new business opportunity and they're not sure. If it's going to be permanent or not I mean, there are there are lots of those types of situations that we.

I have seen across the portfolio, where we see these types of tenants trying to tape that take that kind of space and then our quote unquote flex by BXP space is primarily driven towards small enterprise users. So we're building out floors, not hundreds of floors, but a floor or.

Segments of space meeting 3000, 5000, 7000, 10000 square feet and putting it in a particular placed in the building and that type of configuration, where it can be easily.

You know changed for the particular needs of attendant without much in the way of additional cost and for that we are charging a significant premium.

Right.

Yes, this decline Q, what we're finding.

Evidenced out as Doug said is that it's a perfect complement for our existing client base and especially in these larger projects like the Prudential center of the hub.

We're finding that predominantly the flex user is our existing customers for their short term needs and it continues to be something that they have strong interest in and we're having daily dialogue with our primary customers. So it's not as much they'll call it the freelance market.

Although we do have those customers influx, it's been predominantly our existing enterprise users.

That's helpful and one quick one for Mike do you have anything in guidance related to be pulling forward. The 2021 unsecured given kind of across the company has just got off the.

Assumptions are going.

We don't so well in 2021 mid year, we have them I think is $800 million at 4.5% roughly that is coming due and we're obviously looking at in thinking about it but theres nothing in guidance for pulling those forward and paying them up early.

Thank you.

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

Great. Thank you I was hoping ray or team can talk more about the comments on the Jed I project and what you think that might mean for office demand in northern Virginia, and actually office and datacenter and maybe if you could talk about.

Land availability and given how thats been gobbled up by the data center sector.

Jamie its ray obviously.

Hi is great news for the entire DC region, most specifically stores Virginia.

The vast majority of cloud challenges in the Dallas corridor.

And with the exposure both data centers and the headquarters for major cyber focus government agencies in Reston Herndon you all the three letter agencies and 80% of the Internet traffic going through Logan County clearly.

As we focus on northern Virginia.

And as the dominant landlord in that quarter, we expect to get a lot of demand and owning the best office product, we expect to be the recipient along that demand, but we're not in a position to make any comments on specific deals or request for space at this point in time.

I could just say the general demand for from the Tech community in the Dulles corner and specifically Reston Town Center has never been stronger and we talk about the vacancy in Reston.

It's important to note to the large sector that they can see as a relocation of why dose item one building doubling in size to the Newbuilding incident in 50. So the biggest you there is not bad news, it's great news. So we're meeting the demand of our existing tenants, but I guess the Jed I.

To do you see is almost important as a natural win Tonight. So we're basically hopeful in both.

Okay.

And then is there any thought on how long it takes to actually translate into real demand.

I think the demand is going to be almost immediately.

Okay.

And then switching gears to Silicon Valley I mean, we saw the stripe announcement, there moving from CBD, San Francisco to South San Francisco.

Can you just talked generally about some of the headquarters are not going headquarters, but some of the moves either from the city down the peninsula and Silicon Valley.

And just kind of how people should be thinking about or how you're thinking about the submarkets that are going to matter. Most in the types of products that are going to matter. Most certainly see a shift. So this is Doug. So a couple of things first of all there is no available big block space in San Francisco, So anybody who is looking to grow significantly in the city is going to have a really hard time between now and.

Thousand 20, something when a newbuilding gets built and you saw interest and salesforce commit to at the time on in Unentitled sites.

And one of them is still unentitled.

The workforce is also important and so to the extent that it becomes more challenging to move around the silicon Valley. Some of the large silicon valley headquartered CBD sorry, headquartered CBD companies are looking at the Silicon Valley as a fertile place for them to.

Put a a location so they can absorb some additional talent that's not necessarily in the city and so I assume that is why Hooper for example went down there and there are two or three others that we're aware of they're looking for additional space right now in Silicon Valley being close to public transit is critical.

And so the closer you get to the cow trend and more importantly to the bullet stops on the countering the better off you were going to be with regards to south San Francisco and you know the move from stripe.

There are a number of companies that are in the payments business square moved to Oakland.

Visa has I think made it clear that they're not going to grow in the city San Francisco Theres, a gross receipts tax that is not hospitable to companies that are in the payment transaction business.

And so my my assumption is that those types of companies will be less likely to grow in the city and more likely to grow outside of the city.

But the again the the fact of the matter is that there are so few opportunities in that this in the city itself to make a large splash and grow its naturally causing tenants to look elsewhere and they are most importantly, looking for places that are in close close proximity to public transportation.

Okay. Thanks, and then last are there any development starts are funding development starts included in the 20 guidance.

There are no there is not nothing new I mean again, we're continuing to do.

Some work to prepare platform 16 to start, but we're not including the cost of.

Starting that development.

Nor is fourth in Harrison assumed in there and anything that we start those costs, obviously will be capitalized.

So the you know the interest costs associated with funding those cost, which would come off of our line of credit or otherwise would be capitalized.

Okay alright, thank you.

Your next question comes from this comes from the line of C. Steve Sakwa with Evercore ISI.

Thanks, Good morning, I guess I Wonder Doug could you maybe just talk about the sort of divergence, we're seeing kind of in financial services. You know the announcements of JP Morgan recently, potentially moving kind of jobs out versus kind of big tech coming into the city and how you sort of think that dynamic kind of plays out over the next couple of years and its impact on.

Overall net absorption so I'll make a I'll make a general comment and auto and describe what's going on the city.

Others pays respective so in general Steve on there has not been a lot of what you would refer to as as job growth in the financial services sector for quite some time there has been job growth in the financial services technology business. So.

When the markets. The you know the new bank that Goldman Sachs is operating.

Is being created presumably there are lot of tech jobs, because it's an online bank on than we've seen JP Morgan and others, taking what we refer to as tech kind of space for their technology oriented businesses.

But but by and large or has there is not that a lot of quote unquote growth in the in the general online or or in person consumer oriented or investment banking oriented personnel associated with the financial.

Services businesses and there has been relatively little in the way of new hedge fund growth.

There's been a lot of private equity growth and there's been a lot of alternative asset management growth.

Numerically those are not a lot of bodies.

You've seen tremendous amounts of technology businesses growing in these cities because the labor, but the labor forces are there and we've said this on.

Repeatedly for that last four or five years is that we clearly are in the in the business of trying to put ourselves in a position to take advantage of the growing customers that are in our marketplaces and those happened to be technology into the case of Boston in a place like South San Francisco Life Science companies and so it's very NAV.

Well for us to see up continuation of that and we're seeing the same group of kinds of customers that are they are growing at San Francisco and now in L.A. and now in Boston and now in New York, having similar.

Name associated with them, which is those are the I guess effectively the the largest tech tightens in the country. These days and they have significant plans for expansion.

Steve My own view of it is that.

We we read what you read we're not experts on JP Morgan strategy with respect to its personnel. However, I would say the following JP Morgan as well as all the major banks in New York always our outsourcing some of their workforce to other cities around the country and so I don't think has any quote new news in that.

I would to say, it's probably the 2019 2020 version of that trend that's been going on for years.

So I still think of the banks are concluding that New York the place they need to.

The headquartered for a variety of talent and client reasons.

In terms of the broader picture.

What we believe is going on is that many traditional businesses like banking are using technologies and are able to grow their businesses with fewer people and most of the job growth that we're seeing in the us today or is being is in the whole technology areas. Because these companies are creating all of the innovations that are making.

Some of the traditional.

Industries more efficient and so if you look at the job growth figures for the United States. This cycle.

Tech and life Science has been very large and a lot of the legacy industries like financial services have been pretty flat and therefore, if you take that into office demand, though no one prints these figures.

I've said.

Before on this call and certainly publicly that I think most of it's not all of net absorption. This cycle in the office business has come from technology life Science and share workspace operators.

Okay. Thanks, and I guess, just kind of going back to some of the questions on guidance, maybe for Mike or for Doug just in terms of whats.

Sort appealing that onion back on the same store.

Just trying to get a better sense for.

I guess it sounded like Doug Theres, a little bit of speculative, maybe leasing or or things to come at the high end of the range and I'm, just trying to sort of figure out roughly how much or what the wiggle room is you know to either get to the low end or the high end I realize you gave a lot of detail on different markets in different tenants, but.

How much sort of speculative stuff needs to occur to get to the high end.

So I don't know how you define speculative Steve so if it's not signed I guess it speculative right. So we have we have a high degree of comfort with the range that we provided.

And the low end of the range is the stuff that we have much more clarity on and the high end of the range has stuff that we don't have quite as much clarity on and there is a little bit of expectation on you know on is as Ray and his team in Washington, DC moved towards completion, completing the transaction, they're working on but more importantly, getting some of the avail.

Well space absorbed and similarly, we have other transactions like that as I described in mountain view and in Waltham, which are clearly more speculative and I think I did a pretty good job of describing where those those.

Footages on a on a relative basis.

Our our grounded and you can put a rent number to those square footages and come up with a percentage of what you think is going to get done in the year and you can sort of get to the top end of our range, which is how we got their ourselves and Steve There's always speculative components of our guidance I mean, we always have to make these assumptions every year and every quarter when we give guidance about what might get.

And what could get done and how we build that so I wouldnt say that the process or the analytics that we've done through this time is any different from what we do obviously the.

The set of opportunities we have is different every quarter and every year, but.

The process, we go through to come up with that is similar.

Yes, I wasn't trying to imply that there was something sort of inaccurate or gas work on the guidance just trying to get a sense for how much is already kind of baked in and then how much is sort of on the calm, but we can circle back I guess, just lastly, when as it relates to kind of three Hudson Boulevard and maybe for Ray just 2100, Pennsylvania.

I know 2100, Pennsylvania is well leased but the prospects for the balance of that space and then just sort of the discussions on three Hudson Boulevard.

Well.

Go ahead.

Go ahead, and 2100 Pan and we don't delivered for another two and half years, we have more requests.

For proposals for the space than we have space.

And we haven't even take into the market yet the demand for first class brand new space in the best locations in the city is.

Strong as I've ever seen it.

As you kind of belies the overall image of have worsened in the market, but it's too at 21 underpinning. We just wish we had three or four miles <unk> more of them.

John Powers, why don't I turn to you three Hudson Boulevard.

Three had some boulevard, we're still underway with the foundations.

We had a couple of delays with that but we expect to have that Don.

Sometime probably early in the second quarter, we're about 95, we're about 95% Cds now.

We have lobby finishes and whatever the unknown.

Finally selected but the but the actual building is pretty much designed.

We've had I don't know a dozen probably.

Isn't stations to users all over 300000 feet.

Building has been very very well received were very very proud of goods are excited about it.

Were later than some of the development that they are now we're probably a year and a half two years behind the development. If we went forward, which we have not committed to do but we're optimistic enough at this point that we.

We're probably putting a steel order in for the first nine floors to give us a little quicker time to market when we do though.

Okay. Thanks, let me just add a little bit so so the amount of speculative new construction that was in the New York City sort of.

Vocabulary a year ago is dramatically reduced so their first deal was hit at at the next building.

At Brookfield project. There is strong view that much of 50 Hudson Boulevard is going to be committed there are additional deals and loose lease negotiation at.

Spire building. So so the opportunity set is much more constricted today than it was a year ago, which I think gives us a lot more.

Comfort that there is going to be somebody who is going to be legitimately serious about taking a slug of space from three Hudson Boulevard, whether that's in 2020 year 2021, I don't know I'm terms when they make their commitment, but we feel a lot better about the opportunity set in front of us to get the next large requirement that is out there now there.

Our some other buildings that were going to be competing with.

We think that we have a unique kind of product that John has described before but we're clearly waiting for that anchor tenant before we make any kind of commitment to move forward and I would just to add to that in addition to the supply side, which Doug talked about.

John mentioned, all the pitches that we've already made we also see a strong pipeline of prospective new customers that are going to be coming into the market over the next couple of years. So timing is uncertain, but we're certainly confident in the project.

Got it thanks, that's it for me.

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

Hey, Thanks, good morning.

Just I know you touched on dock 72 and.

And everything that's going on there with wegmans and all that but.

It's been sitting at the we were 33% pre leased.

For for Forever.

And I'm wondering.

Your level of concern there in terms of attracting new tenancy in the face of the we were problems.

Is there an indirect issue to be concerned about is there a direct issue about we work to sort of backing away to some degree would you be willing to bring in flex by Boston properties to supplement some of that I'd, just just any kind of moving part type of commentary would be interesting. Thanks.

So on dock 72.

Clearly the lease up of this property has been slower than we expected.

That being said is an incredibly high quality offering and building.

And we haven't fully completed yet the buildings opened we work is taking occupancy, but all the amenities in the project or not even completed yet so it's a great show head grade views. It's got every amenity you can imagine it's got a ferry at the end of the dock.

And I think it's an emerging office location, so Doug talked about the wegmans opening.

The Navy yard people have done a wonderful job on all of their Placemaking and we're confident in this project for the longer term in terms of we work. They have opened their facility and they started to sell desks and they're off to a good star.

And then I talk more specifically about we work in my comments.

Okay.

Yes.

Mike the six for debt to EBITDA number.

You know Thats I know, it's your comfort zone, but it is turner to higher than the read average is that sort of designed to go lower as developments go operation on the.

Denominator goes up.

Or are you comfortable in that six ish kind of range for for the long term.

I think we are comfortable for the long term with the range. We're in right now I also think that and we've talked about this before if we were to not do any new investment and we just let everything gets built and leased and stabilized our debt to EBITDA will be below six.

So we look at prospective we lived in existing net debt to EBITDA and prospective net debt EBITDA, when we kind of think about our balance sheet capacity.

And we believe the because of the quality of our asset the length of our cash flows the company can support.

Leverage ratio between six and seven times.

We're very very comfortable with our credit ratings.

With our leverage in those ranges.

So I would not anticipate us longer term.

Certainly operating in a different zone and Rick just to be clear about what Owen said before the reason we are doing these joint ventures on some of our new developments in some of our new asset acquisitions is explicitly because we're thoughtful and we want to want to want to be prudent about what our overall leverage ratio was on a long.

Term going forward basis, and so we just so we feel like we feel like if the prudent thing for us to be doing is to be managing those levels.

Fair enough and then last from me.

If we're looking at 8% FFO growth next year.

What would that translate to at the AFFO line would it be and maybe you could just answered higher or lower than 8%.

I mean, I think on get into it a little bit more than.

Okay.

Yeah.

Were three quarters of the way through 2019, and so we've got pretty good visibility.

There are 2019 is as we look at the fourth quarter and we think about with the leasing costs are going to be in with the capital is so I would suggest that the in for 2019, we're going to be somewhere in the 450 to 460 a share range for AFFO and then if you think about what we told you.

About.

In 2019, just to digress, we gained.

That 130 basis points of occupancy during the year, which is a pretty significant occupancy gain so the leasing transaction costs that we incurred to both.

Keep the portfolio at same place deal with the rollover and increased occupancy was more significant than it might normally be because of that occupancy gain.

In 2020, I've told you that our occupancy gain is expected to be 100 basis points. So slightly less so I would anticipate that the leasing costs in 2020.

Could be less than 2019.

Moderately less.

As we think about Capex.

Our capex this year compared to our Capex next year I think there will be similar.

Honestly.

Somewhere around $100 million, maybe $110 million for Capex.

If you think about non cash rents I've given you guidance for that so year to year non cash rents are basically flat theyre pretty similar so if you kind of think about those three things and then you think about our FFO growth that basically all dropped at the though.

So our FFO growth.

56 cents, so anything that was at the midpoint is almost $100 million.

And so on my anticipation is that we would get most of that to drop into our AFFO line and so view compute that we could be $5, maybe a little bit higher $5 next year on an AFFO basis.

Great Great color, thanks, very much no problem.

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

Great.

Doug you mentioned something interesting about.

Hi dollars and free rent dollars. So if you look big picture and you say what it cost to move a class 810 at into building.

And yet you add T.I.s FF Annie architectural engineering fees technology costs.

And I don't know if that's a 200 bucks a foot $300 a foot, but but you can tell us and then how much of that cost is covered by either that ti allowance or the free rent.

And what I'm curious about is whether whether the tenants coming out of pocket for when it's all said and done zero percent of the cost or 50% the overall cost to get that relocated.

So John you ask am a complicated question that it will be hard for me to answer any.

Blurb. So so let me just give you the following thoughts so number one is that.

Every one of these markets is different and the markets that are stronger have a very different tenant improvement allowance and free rent.

Construct in the markets that are that are less strong. So as an example, I'm in.

Boston CBD today.

For any existing building with vacancy.

We might only be giving five to $7 a square foot of T. I have for a 10 year term and we're giving no free rent.

And depending upon.

When that when the lease expires, we may be giving some amount of buildout time for that period of time. So if it's costing 200, plus dollars a square foot and we're giving 70 Bucks and we're simply giving you the time to build out your space. The tenant is paying for a significant portion of that okay juxtaposing that to the weakest market from a from a transaction cost perspective, which is Washington DC.

Were in the CBD for a tenant going into a a piece of space, they're getting an allowance of 120 to $140 a square foot and they're also getting free rent of 12 to 15 months I'm.

On top of their build out time, so in that marketplace significant portion so if the rent.

On a newbuilding is call it $70 on a on a gross basis and we're giving them 140 than its 200 2010 Bucks a square foot in there probably covering a significant portion.

For a 15 year term.

In a building in Washington, D.C., we just sort of the norm. So I think it varies significantly, but not by and large in San Francisco in New York City and in Boston, Both CBD and suburban free rent is not really part of the equation.

For those transactions in terms of quote unquote covering the costs.

In Washington, D.C., it's it's more of a mark phenomenon.

Great answer thank you.

Your next question comes from the line of Alexander Goldfarb with Sandler Oneill.

Hey, good morning.

Just just a quick two quick questions here, one I think you touched on earlier.

So your general thoughts on continuing the L.A. investments, but to the extent that you would look at developments out there.

Do you think that you would have projects that would be sort of the typical Boston size call. It over 500000 square feet or this stuff that you're seeing would be more of a boutique nature smaller building size as you look to expand your presence in that market.

Hey, Alex so again.

Certainly like to do the larger projects if possible if not not easy we would look at something smaller if we felt like it would lead us into a broader program whether associated with the property or the the groups that were working with so we would consider both.

And we've taken a hard run to run it both both larger.

Large scale projects and one off for two boutique type projects as well.

Okay, and then re while I have you there your comments on DC are obviously, you guys always do while they're on leasing.

New building and certainly at Reston Town center, but just thinking of the overall market. It always seems like musical chairs are.

Are you seeing in DC similar to like New York, where T.I.s and they landlord concessions that theyre offering to retain tenants are increasing or is it just that as tenants come up.

We believe Reston town center side, they just want new construction and therefore, no matter what an existing landlord is going to offer.

Those those tenants will seek to go to new construction.

I think it's a very bifurcated market and even our own portfolio I think it's important to note that.

We have six buildings that we own 100% of that is 98% leased and these are newer or recently renovated first class buildings and.

Those buildings are doing exceedingly well, we also have in our portfolio three buildings that we owned in joint ventures with others that are struggling.

So even with our own portfolio, we have the best in class of leases at the highest rents and maintain the highest will occupancy and the more commodity plays we're struggling and.

I think is clearly a tale of two cities.

On both the the new construction and existing there is a need and demand for higher tenant improvements.

But we tend to get the rates form when we give those higher.

Concessions on the face rents so again two markets.

The commodity space, a little more challenge the top tier space is doing exceedingly well.

Thank you.

Your next question comes from the line of Tayo Okusanya with Mizuho.

Hi, good morning, everyone.

Just wanted to talk about kind of the outlook beyond 2020, I mean, great details in regards to guidance, what 2020, but specifically on the development side when I look at deliveries in 20, 122, I think the deliver the development.

Disclosure is pretty good then lot of those assets filled up but how do we kind of start thinking about potential new development spend and 2020. That's a result in additional deliveries.

In kind of like 2022, just kind of given the strong demand you're seeing in most of the market.

This is Doug So Owen described the new assets that would that I think went into our supplemental right this quarter and we and we provide dates for those.

We have a pretty healthy pipeline of other opportunities that we are looking at.

Across all of our portfolios and we have a.

A number of quote unquote.

Land positions that we hope to translate into developments I think most of that stuff. If we started in 2020 would have a 2022 to 2023 I'm delivery, but I'll give you. Some examples so the fourth and Harrison site, which is would be 500000 square feet.

In San Francisco, the platform 16 site in San Jose, which would be somewhere just under 500000 square feet on the back base station side that we currently can you know we're working on permitting in Boston is almost 700000 square foot piece of space.

The next phase of development in Reston.

I would probably be residential but there is a 500000 square foot potential building to build their three Hudson Boulevard is a 2 million square foot piece of space that would be a 2024.

Kind of a delivery. So there is a lot of stock just and that's in land that we currently control you would not be surprised to hear me say that there are other things that the organization is working on in all of our sub markets to get additional pieces of development potential that we could get going.

There sooner or later on and they are there are millions of square feet of space that are currently being discussed internally.

In northern Virginia in greater wallet them in San Francisco Submarket in New York City that are are all important components to even more growth clearly none of it would would come online before 2022 or 2023 at the earliest.

Great. Thank you.

Okay, I think that concludes all the questions and certainly concludes managements remarks. Thank you all for your attention and your interest in Boston properties. Thank you.

This concludes today's conference call you may now disconnect.

And thank you for attending and have a good day.