BXP, Inc. (BXP) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Boston Properties Second Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

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 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 to differ materially from those expressed or implied by forward-looking statements were detailed in Monday'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 statement. Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well. I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Good morning, everybody. Thank you for joining us. We are still in a rather weak overall economic environment, an environment that we have been sort of anticipating and being concerned about for the better part of the last 5 years. I'm going to just indicate the number that has continued to be the one that is most distressing, which is the employment numbers or more specifically, the unemployment numbers, which the unemployment rate climbed up to 8.3% from 8.2%. But the other measure of the job market, which includes people who have only part-time work when they would like -- they're called involuntary part-time workers, that's at 15% and the only reason why the numbers went up in the last month is because the Bureau of Labor Statistics added 377,000 jobs on the basis of seasonal adjustment, the largest such adjustment in July over the past decade. So these numbers in a sense still leave us with some degree of concern over the general direction of the economy. But in that context, I must say that Boston Properties had a very, very good quarter, and I think that we are very comfortable with our anticipation of the way the business is going to go for the next while. Just to give you some of the highlights, our operations, the FFO or funds from operation, for the quarter which just ended was $1.38 or $206.8 million compared to $1.37 -- pardon me, $1.24 for the comparable quarter of last year. And the net income available for common shareholders for the quarter was $119.1 million compared to $60.2 million for the quarter ended June 30, 2011. And the net income available on an EPS basis was $0.79 compared to $0.41 for the second quarter of 2011. So we've had a very strong quarter. And that was due to a whole number of things. I'm just going to highlight a couple of major events, then I'm going to ask Doug to give a much more comprehensive view of it. But I'd like to mention the fact that we did complete a public offering of $1 billion in aggregate principal amount of senior unsecured notes. They were 10.5 years and the interest rate was 3.85% with all-in costs, if you include financing fees, goes to 3.95% to maturity. So we are very -- frankly, we are proud to have such a very good reception in the bond market and on such solid terms. We have in mind, of course, investment of those funds in additional assets, either development assets or acquisition. We, for example, did have an agreement now to basically involve ourselves in a joint venture in something called Fountain Square in Reston, Virginia, which is an approximately 811,000 net rentable square foot office and retail complex. What is critical for us is it's adjacent to the company's other critical Reston property. This will actually be a two-stage venture in which the joint venture partner will contribute property valued at approximately $385 million and related mortgage indebtedness for a 50% joint venture -- or in the joint venture, rather. We will contribute about $87 million in cash for our 50% interest, which will be distributed to the joint venture partner and we'll be able to consolidate this joint venture. But we also will have the right to acquire the partner's 50% interest as they will have the right to force us to acquire that interest on January 4, 2016, at a fixed price, totaling approximately $102 million in cash. This is a project that we believe will not only be a wonderful project standing on its own, but will really reinforce and enhance a large commitment and investment in that whole Reston complex. Doug Linde did a terrific job in making this an off-market transaction because of the relationship that he and Boston Properties have had with Beacon for a long period of time. And I think it just describes and reflects the kind of confidence that we have been able to generate within the industry and within the financial community. Looking forward, we still think that we are in the best market, in the markets that still have done relatively well in a very weak economic environment. And we are constantly on the lookout for additional assets to develop and acquire. We're very cautious under these current economic conditions, but we are not so cautious that we don't think that they will be in a very sort of flexible or shall we say unpredictable economic environment. Nobody is quite sure where it's going to go because we are in an unprecedented kind of macroeconomic environment, which is now described as the great recession. It is a very long-standing recession that has really reflected a huge deleveraging, A, on the part of the consumer and the part of the public in large part because of what's happened in the housing growth. The average family has lost over 40% of their net worth from 2007 until today, which is a stunning collapse of the household net worth and it's going to have a big effect on the economy going forward. And frankly, nobody knows exactly how this is going to work out. We've had the biggest or the most stimulative fiscal and monetary policy in our history, and here we are, 3 or 4 years later, and we've run up deficits of close to $5 trillion and it has not taken the economy out of the very weak status. It's still in many ways declining and not growing and nobody is quite sure what to do or how to do it. And the other part of it is that we are in a time of political gridlock and governmental dysfunction, which doesn't help business confidence and there's a lot of hostility to the business community that is an attempt on the other part of politicians to channel the anger in the country over the economy to the business world instead of to the people who are running the country at the governmental level, both at the congressional level and at the national level. So we still feel we will have some good activity going forward. We are, as I said, on the lookout and because we have both credibility and financial strength to make additional acquisitions, we're looking for those opportunities. They're not going to be easy to come by, but over time, they generally do. We have 1 or 2 other projects, which we believe we might very well tie up within the next short while, and we will be on the lookout for additional growth opportunities. And in the meantime, we are working very hard to lease up our space, and frankly, have done very well, by and large, in that process. When you think of how this whole economy is being affected by the fundamental economic trends, we feel very comfortable about the progress we have made and the progress we think we will continue to make. With that, I will ask Doug to come in and fill in everything that you might want to know about, and I thank you for your attention.

Good morning, everybody. Thanks, Mort. So I thought I'd just sort of start off this morning and just sort of take a real macro perspective real quickly just to sort of reiterate some of the things that Mort not only said today but has been saying over the, I guess, the last 5 years, which is sort of shocking to me. We keep talking about unemployment, and last summer, we were talking about the U.S. debt ceiling and the deficit reduction issues, and gosh, for the better part of 3 or 4 years, we've been talking about European sovereign, balance sheet solvencies and the banking system, and now we have this national election. And I think the most telling thing is that time really hasn't yielded much in the way of discernible improvement. So this is the environment that we feel like we're going to be in for a period of time. And as we talk about what our portfolio is doing, I think you should gain some comfort that we are in a rather challenging economic backdrop doing as well as we are doing it. But I think there are reasons why we're doing well, and I hope that we're going to be able to demonstrate and continue to show the progress that we have shown since back quite frankly in 2008 when this whole disaster started from a financial perspective. I think the one thing that's a little bit different than where we were a year ago is that last year, when we were talking, we were still pretty ebullient about the corporate American business improvements and top line sale increases and margin improvements, and I think it's fair to say that, that amount of air in the system has started to leak out and top line sales are coming down and margins probably don't have much in the way to go up. And I think that we are, while we're seeing great balance sheets, we still don't see much in the way of a large-scale macro across-the-board business hiring, which obviously is going to be the most critical thing to our business which is the office leasing business and we need bodies to occupy space. The growth in our markets, which are thankfully characterized by supply limitations, have really been driven by increases in demand from the technology in the life science users, but they have been offset by employment reductions and productivity enhancements with regards to the use of space coming from what we refer to as the traditional financial services and professional services firms. And when I use the word technology, it's somewhat broad, but it includes industries like software and the hardware industry, but also now digital content and social media, e-commerce, mobile applications, digital marketing and cyber security. That's -- the technology world is starting to feel bigger and involve more and more people. New enterprises are being formed and one of the things that we like to watch every quarter is the flow of capital running into the venture businesses, just to sort of get a sense of new business formation on a small scale. And it's interesting, venture investing has been running at a level of between $6 billion and $8 billion per quarter for the last year or so. Just to give you a perspective of how that is relative to where it was at its height. Back in 2000, there was $22 billion per quarter. That was the height of the telecom, the dot-com world. So we're -- we've got a ways to go, but it's been pretty consistent. And not surprisingly, the Silicon Valley in San Francisco, Boston and New York City are the places that are winning the share of those investments. In fact, if you look at San Francisco, more than 70% of the transactions in the San Francisco CBD this year have been technology related and technology companies now occupy 20% of the CBD market. That's both north of market, south of market and sort of the other areas that have -- that has been popping up. The strongest market in the Boston area is Cambridge. And we now have 6 new buildings under construction totaling almost 1.8 million square feet for growing life science organizations. The Boston CBD is starting to experience some migration of tech companies into traditional financial services-centric assets. So we had PayPal this quarter recently commit to International Place. That's one of the large towers that's on the greenway, and they joined Brightcove and Communispace, which have located recently at Atlantic Wharf, which is our project that we're -- in the financial area. For technology companies and entrepreneurs, it's finding capable talent that really has become critical. And New York City, which is so desirable for its quality of life especially for a young workforce, has really become a great place to find employees and is really seeing a shift in the makeup of its workforce. Engineers and entrepreneurs and venture capitalists have all really become a very important element in the New York City business community. And at the same time all this is happening, we are seeing businesses become much more efficient users of office space. So as leases expire, professional service and financial firms are downsizing their footprint, not necessarily their headcounts, interestingly, but they are downsizing their footprints. And the market is getting additional supply, which obviously is serving to dampen any recovery. We've been discussing this for a number of quarters, so every time a law firm renews its lease, it's probably reducing its square footage by 15% or more, and it's also similarly occurring with some of the large financial institutions that are restructuring and downsizing their businesses as a result of the new regulatory environment, and I think there is in fact in some industries a real reduction in headcount as well, the financial services industry being the most significant example of that. But productivity enhancements are nothing new. I mean, it's always happening, it's always going on. We actually embrace it. And with the way we design our space is important as we think about that. And we think it actually is going to result in companies having the financial capacity to upgrade their premises and look for better located, more desirable real estate, which again, fits right into our sweet spot. We can't minimize enough that in a low-growth environment, Boston Properties really can increase its market share, its revenue and its cash flows. During our Investor Day last fall, we did a case study on Reston Town Center and we sort of described our success in the face of a 25% availability rate on the Toll Road market, where not only do we dramatically outperform the market from an occupancy perspective, today I think we're at 95%, but we've been able to create this environment where tenants are really willing to pay a dramatic premium versus the market for commodity office space. And as Mort said, with our pending purchase of Fountain Square in the Reston urban core, which we're going to talk about a little more detail in a few minute, we really hope to expand our success in this rather unique market. Overall leasing activity across the markets during the second quarter was pretty sluggish, and I'm talking about the markets, not Boston Properties. And as we move into the summer, it's been basically the same. But in spite of a slowing market, we had an incredible great, great quarter with approximately 1.5 million square feet of transactions, which is way above our historical average over the last 7 years. Our second-generation statistics were right in line with our expectations. The rolldown in San Francisco is very much what we expected and we have offset that with gains in Boston and New York. This is a perspective. The average expiring rent in San Francisco was $78, the new rent was $50 and those leases were all done about a year ago, and if we were to mark-to-market all the San Francisco leases today, we'd be about $10 or 20% higher than where we're showing you in our statistics. That market has obviously changed dramatically and it's changed quickly. Now while San Francisco and the Silicon Valley still have remained the strongest markets in our portfolio, things have slowed down there too. There has been a dropoff of activity versus the last 2 quarters, and statistically, interestingly enough, if you were to read the brokerage reports, you'd actually think things were declining because there was some slight negative absorption, but I think really that's a timing issue. Large transactions and growth in California are still happening. So in the Valley, LinkedIn and Lab 126 have each committed to 530,000 and 350,000 square feet and just in the last week those 2 requirements are about 50% growth. And Autodesk and Yelp and Amazon have all leased incremental space in the traditional CBD San Francisco assets during the quarter. On the peninsula, there really is a dearth of quality space in the Palo Alto and Mountain View and Cupertino markets, and we are seeing speculative development. Given that there is speculative development, we do expect that there's going to be a reduction in the growth rate in market rents and that things are going to slow down. In the CBD, our availability of EC is about 4%. We completed 15 transactions during the quarter, but it only totaled 60,000 square feet, for the most part renewals, and we have another 100,000 square feet that are in active negotiations, again, predominantly renewals, given our availability. When we spoke to you in April about New York City, I described that one of the brokers that we deal with and said that his comments were, things were gray, that there wasn't much upward pressure on rent, but the pessimists weren't winning the day. So last week I actually called him and said, "So this is what you told me last quarter. Would you change your view?" And he said, "Well, rents are creeping up a little bit but so is availability and there are a few more pessimists in the market." Well, we had a really great second quarter in New York City. So let's start with 250 West 55th Street. Morrison & Foerster exercised an expansion right and leased an additional 24,000 square feet, but the big news is that we are negotiating a lease with a second law firm for an additional 266,000 square feet in the low rise of the building, which will mean that 250 West 55th will be just under 48% leased with all of the remaining space concentrated on floors 25 to 38, the top of the tower. This is obviously subject to them signing a lease, but we're cautiously optimistic that things are going to move in the right direction. As Mort said, we've completed additional leasing at 510 Madison and we are now at least 55% leased and we have a number of active discussions on both smaller suite and full floors again. Last Tuesday, we got back 150,000 square feet of space at 399 Park and we've signed 3 leases totaling 112,000 square feet and are negotiating a fourth that will bring our commitments to 136. These are all 10 to 15 year leases. They were cut at starting rents in the low 90s with between $65 and $75 in tenant improvement allowance. In 2012, just to give you a perspective, there've been 34 high-end midtown leasing deals and we define high-end as deals that are over $90 per square foot and they totaled 752,000 square feet, and that includes renewals and expansions and some relocations. In all of 2011, there were 54 deals totaling 880,000 square feet. So things still are feeling pretty good at the high end, but it is a small market. Finally, we also signed a 468,000 square foot lease extension with Citibank through 2026 for the low rise of 601. We mentioned that last quarter but the lease was signed during the second quarter. That lease was expected to expire in 2016. They are consolidating from some of their other spaces in midtown, rebuilding their space as we speak. And the rent in 2016 is going to be about equal to what the GAAP rent is today. There was one major announcement on our press release regarding a termination income. And I did want to give a little bit of color on that. CBS hasshut down their morning show studio at the GM Building and they wanted to get out of the lease. As of July 1, their remaining obligation was $39 million. So we negotiated the deal for them, giving us the space back as of July 1, they paid us $28 million or 71% of the obligation. So we did basically fast-forwarded the rental obligation. And we did this because we made the determination that controlling the space and then trying to lease it put us in a better position of being successful than going out and looking for a tenant and then trying to work out a termination deal with CBS. Moving down to Boston. We're off to Boston.Activity in Cambridge continues to lead the Boston region. The technology and the life science tenants continue to expand and the market is continuing to tighten. As I mentioned, there are now 6 new buildings under construction, which are committed to Pfizer, Biogen, Takeda Pharmaceuticals, the Broad Institute and Novartis. There's also one speculative building that's going up for about 125,000 square feet. The vacancy rate in East Cambridge is under 10%. You're going to note in our development page of our supplemental that we've added the Google connector building in Cambridge to our statistics. As we mentioned before, the city approved a 43,000 square foot expansion at Cambridge Center in conjunction with the major lease expansion with Google. Google now occupies 144,000 square feet and they've agreed to take another 106,000, including that 43,000 square foot connector. The lease is going to run through the end of 2025. We expect that Google will be fully occupied and the connector will be in service by the third quarter of 2013. So we're now 99% committed in Cambridge on our 1.6 million square foot portfolio, 17 Cambridge Center is topped out ahead of schedule and should be in service in the third quarter of 2013. What are we doing in Cambridge? Well, we're working with both a tenant and the City of Cambridge to find additional ways to increase the density at Cambridge Center. And so there will be more to talk about hopefully on that in the next few quarters. In Boston, the CBD had another sort of okay quarter. A little positive absorption, but not much is going to change in the short term because quite frankly, there aren't a lot of 2012 and 2013 tenants in the market and we are in still a lease expiration driven market for the most part in the Boston area. We are negotiating leases on all of the remaining space at Atlantic Wharf, 52,000 square feet, and those leases will commence in '13 and '14. In the Back Bay, we have very limited short-term availability and we continue to do forward leasing. So this quarter, we signed 120,000 square feet of forward extensions in the Hancock Tower and we're working on 1 more that will bring us to the year to about 150,000 square feet. And over the last 12 months, in total, we'll have done about 244,000 square feet of forward leasing in the Hancock Tower. We've also signed a letter of intent with Blue Cross Blue Shield to lease 330,000 square feet at 101 Huntington Avenue. That lease is going to commence in '15 when the existing tenants, which are Manulife, Arnold Communications and First American, have their leases expire at the end of '14 or in the middle of '14. We have another 90,000 square feet of pending renewals and expansions under negotiation in our Back Bay portfolio and we continue to work on additional forward leasing opportunities. That's what the name of the game is in Boston right now. Our integration of 100 Federal Street is going as planned and we are negotiating our first full floor lease on one of the 3 currently vacant floors there. In the Boston suburban market, there still is a pretty good pace of organic growth from these tech companies and some of these life science companies. We completed 100,000 square foot lease with New York Life, so there are still some traditional users in the market, to backfill our vacancy in the Waltham portfolio. And we're working with 150,000 square foot user right now on a plan to expand into another 100,000 square feet in one of our new buildings over the next 2 years as other leases expire. There were 2 other 100-plus thousand square foot expansion requirements in the market, and we are talking to tenants about some build-to-suits at our Waltham property. Our renovation of our first building at Bay Colony is complete, and the building is really being well received, now 87% leased and we're on to the second building. The one market in our portfolio that is really feeling the impact of the election, but also the budgetary issues is obviously Washington, D.C. The unknown impact of the deficit reductions and spending changes, and as well as the presidential election have really created a pretty soft demand environment. I think the one thing people talk about but don't like to sort of mention too loudly is the hypothetical impact of sequestration, which is the automatic budget cuts on the federal jobs because we don't really know what it means, but we know that it would have a severe negative impact on the D.C. economy, but I think there's consensus that we're not hopefully going to get to that point. In the district, we really just don't see the government expanding in 2012 or 2013. Interestingly, for the first time since 1999, there wasn't much in the way of big leasing in the city, nothing in excess of 100,000 square feet. So the uncertainty is really impacting the GSA world. We continue to struggle with the GSA with our final building at Patriot Park where you saw the last tenant move out during the quarter. We actually have a tenant ready to go, we believe. They're in holdover in their current location. The building is close to in move-in condition, and we're just trying to get the GSA and the government to make a legal decision to move into the building. But we're confident it's going to happen. Over the last few quarters, we've been discussing the market dynamics in D.C. where the next round of large leases are really not coming out on the private sector paces until 2015 and 2016. Well, there are 2 of those major tenants in the market right now with '15 and '16 expirations. And one of them has been reported to have committed to a new development at City Center, that's the property just across from our property at 901 New York. And the second is talking to us in exclusive discussions about our 478,000 square foot development at Mass Ave. And they are looking at about 320,000 square feet. So if we have a pre-lease commitment, we will start this building towards the end of '13 and we'll hopefully be able to put those -- that tenant into occupancy by the middle to end of 2015. Today, our D.C. portfolio is 97% leased, 83,000 square feet of expirations that are uncovered in 2012. In the short term, we're very, very comfortable with our portfolio. In the long term, we're very comfortable with D.C., and we're very optimistic about what we're seeing happening at 601 next. Northern Virginia is really where our activity in the short term is, and Reston continues to be the outlier with the consistent activity that Mort alluded to and rents that are in the mid-$40s in the urban core. Our availability is now limited to very smaller blocks of space and we continue to see pretty good activity on that. Now you do have to realize that Reston, while it has its share of defense-related contractors, the makeup of Town Center is actually weighted towards technology companies and engineering companies and professional services companies and educational users, College Board being the largest of those. And we continue to complete deals at One Freedom Square with starting rents in the mid to high $40s while Toll Road deals are being done low $30s with free rent. As Mort suggested, we've been able to make a second off-market transaction this year and we reached an agreement with Beacon Capital to purchase Fountain Square. Those are the remaining commercial buildings in Reston. We're going to be purchasing the 2 office buildings, which are 540,000 square feet and 270,000 square feet of retail space plus 2 parking structures. Average rents in the portfolio are about $40 a square foot, which is I'd say somewhere between 10% and 20% below market, depending on where they are in the buildings. And the average rent on the retail space is $34 triple net and retail rents average from anywhere in the mid-$30s to as much as $70 or $85 per square foot for some of the smaller spaces. The office tenancy is very diversified. It's actually much smaller than the average tenant size that we have in the rest of our urban core portfolio. Retail sales are pretty strong, excluding the Apple Store. They average about $540 per square foot. But there are lots of operating synergies to be accomplished over time, and clearly, owning more highly desirable space in a very concentrated submarket should create a really great opportunity for us to continue to be very successful in the Reston Town Center. We've outlined the projected pro forma returns, which are 6% on a GAAP basis and 5.6% on a cash basis, but the returns don't reflect the impact of any savings on the other 2.5 million square feet of space that we own in Town Center or the future opportunities we have with regards to parking income. We continue to believe there is lots of future potential growth and we're very optimistic about the impact that Metro will have on urban core when the station is delivered in a few years. As Mort alluded to, we are working on additional acquisitions, some of them are off market and some of them are being widely marketed. We also are thinking about some selective dispositions and do have some things both on the market and that will be in the market relatively soon, and we will continue to provide you details as these things progress. We're not going to comment on where they are or how big they are as part of our remarks today. And with that, I'll turn the call over to Mike.

Great. Thanks, Doug. Good morning, everybody. I just want to start by quickly going over the activity that we've had in the capital markets. As Mort indicated, in June, we raised $1 billion of senior unsecured bonds. They will mature in February 2023 and they're priced at an all-in yield of 3.95%. We also issued 1.3 million shares, raising $138 million of net proceeds under our equity ATM program in the second quarter. Our capital raising activity restored our cash balances to $1.7 billion. This is after acquiring 100 Federal Street in Boston for $615 million and paying off $780 million of debt in the first half of the year. We've elected to redeem the remaining $225 million of bonds that expire in January of 2013. These bonds have a coupon of 6.25%, and we've notified the trustee that we will repay them on August 24 using the make-whole provision and documents. This will accelerate the remaining interest payments that are discounted at Treasuries plus 35 basis points into the third quarter of 2012 and reduce our interest expense thereafter. We also expect to prepay a $23 million mortgage on our Sumner Square property in Washington, D.C. On September 1, the prepayment penalty reduces from a yield maintenance penalty to a flat 1% fee. So that's advantageous to us, especially given the high 7.35% coupon that this mortgage carries. So we have no expiring debt for the remainder of 2012 and after these repayments, we will have about $590 million of maturities in 2013. Our liquidity position provides us with great flexibility to both aggressively seek new opportunities on the investment side and utilize cash to pay off our 2013 expiring debt. Despite all of the economic uncertainties that Mort mentioned, the debt markets have really continued to improve, especially in the last 60 days. Credit spreads in the REIT market have compressed by over 50 basis points, and with the Treasury market hovering at historically low levels, borrowing costs remain incredibly attractive. Our 10-year bond spreads are now trading in the high 100s, which indicates new issue pricing for 10-year bonds in the 3.25% to 3.5% range. The mortgage market is a little bit slower to react but many of the larger life insurance companies are willing to break the 4% coupon barrier for 10-year loans that they like. And in the CMBS market, origination spreads are relatively unchanged, but as Treasuries have come down, the resulting coupons have really narrowed the pricing gap from more traditional lenders, making the CMBS market also more competitive today. As Doug discussed, we signed an agreement to acquire a 50% interest in Fountain Square in Reston Town Center. The structure of the transaction includes putting call rights in the future that provides us with the right and also potentially the obligation to acquire the remaining interest in the property in 2016. The accounting associated with the structure provides that we will consolidate the property on our financial statements. The debt associated with Fountain Square totals $211 million and with a coupon of 5.71%, it is significantly above market. We expect that the non-cash fair value debt adjustment will reduce the interest expense by over $6 million annually. Turning to our second quarter results. Last night, we reported funds from operation of $1.37 per share, which is $22 million or $0.13 per share above the midpoint of our guidance range. $15 million of this was due to larger-than-normal termination income, $9 million was additional property and fee income, offset by $2 million of higher interest expense from our $1 billion bond offering that we closed on June 11. The most significant variance to our budget emanated from the execution of the termination agreement with CBS, a 36,000 square foot retail tenant in the GM Building that Doug mentioned. Our joint venture will receive $28 million and after accounting for our 60% share of the building, and the write off of the straight line rent balance, we have an $11 million positive variance to our budget. The full amount of the termination income was booked in the second quarter, so this transaction will reduce our income going forward until the space is relet. The other unusual item for the quarter was a termination income of $3.6 million from a settlement that we received related to a former tenant bankruptcy. The tenant rejected our lease back in 2009 and we have since released all of the space to other tenants. The portfolio exceeded our budget by about $5.5 million. The majority of the outperformance is due to savings in operating expenses of $4 million. $3 million of the savings relates to repair and maintenance items that we believe will be completed later in the year, so we'll actually be decreasing our guidance for the remainder of 2012 by this amount. Other improvements in the portfolio came from leasing and parking revenue primarily in Boston and in San Francisco. At the Hancock Tower in Boston, we completed a full floor expansion into previously vacant space and a full floor early renewal that had a 53% increase in rent, demonstrating the potential for rent growth at Hancock Tower. Our fee income exceeded expectations by $2.6 million, with about $1 million in higher than projected tenant service income and the rest associated with the receipt of contingent development fee income. The contribution from our joint ventures exceeded our budget by $12 million. As I noted, the biggest piece is the $11 million variance from termination income at the GM Building, but we also had an additional $1 million contribution from expense savings and higher than projected percentage rent. The only other significant change for the quarter was in our interest expense, where the impact of our bond issuance in mid-June added $1.9 million of interest expense that we had not budgeted. In May, we closed on the sale of Bedford Business Park, which we had announced was under contract last quarter. The sale was anticipated, so it had no impact on our budget, but it did result on a gain on sale of $36.9 million that is reflected in our net earnings but is not part of FFO. We structured the transaction as a 1031 lifetime exchange with the acquisition of 2440 West El Camino Real in San Francisco that we closed last -- late last year. So the gain will not have an impact on our dividend distribution requirements. As we look forward to the rest of 2012, the most significant change we have to our guidance is from the impact of the interest expense associated with our bond offering that adds $20 million to our interest expense. This is partially offset by the improvement in leasing at the John Hancock Tower, 399 Park Avenue and the pending acquisition of Fountain Square. As we've discussed in prior calls, we expect our full year 2012 same-store NOI to be down from 2011 due to the rollover we experienced in Embarcadero Center and Gateway Center in San Francisco, Patriots Park in Reston and 399 Park Avenue in New York City. Now as Doug noted, the demand for space at 399 Park Avenue has been really strong and we now have commitments on nearly all of the available space, which is reducing our downtime projections. We also completed earlier-than-projected leasing at the Hancock Tower in Boston and at One and Two Freedom Square in Reston. The result of this leasing is improvement in our projected same-store GAAP NOI for 2012 and we now project a decline of only 0.5% to 1% from 2011. This is a 75 basis point improvement from last quarter. As most of this leasing contains free-rent periods, our 2012 cash same-store NOI projections are relatively unchanged, at negative 1% to negative 1.5% from 2011. As we expected, our occupancy declined slightly to 91.6% with the move out of 186,000 square feet in Three Patriots Park by Lockheed Martin and bringing 510 Madison Avenue fully into service at just over 50% occupied. We expect our occupancy to remain relatively stable between 91% and 92% through the end of 2012. The 2012 projected NOI contribution from our developments is slightly better than our budget last quarter at $68 million to $72 million with better-than-projected rental revenue coming from the Residences on The Avenue in Washington, D.C., and lower expenses at 510 Madison Avenue. These numbers include both 2200 Pennsylvania Avenue and Atlantic Wharf as they will not be in the same-store portfolio until next year. We expect that our straight line rents and fair value lease revenue for the consolidated portfolio, including our development, will total $90 million to $94 million for 2012. This is higher than last quarter due to our success in backfilling the expiring space at 399 Park Avenue and the additional leasing I mentioned at the Hancock Tower. Our Cambridge Center Hotel had another solid quarter. RevPAR is up 11% year-to-date over last year. Our projections are in line with where we were last quarter and we anticipate the hotel will contribute between $9 million and $10 million to our 2012 FFO. The contribution from our JV portfolio beat our projections in the second quarter by $12 million, due primarily to termination income. We are not projecting replacing the lost CBS rental income for the rest of 2012, so we will give back a portion of the second quarter outperformance. For the full-year 2012, we are projecting joint venture FFO contribution to be $135 million to $140 million, which is up about $10 million from our projection last quarter. The joint venture projections include $54 million of fair value lease revenue and $6 million to $10 million straight-line rent. Our 2012 projection for development and management services income is $30 million to $34 million, it's up $2.5 million to -- better than projected second quarter fee income. Our G&A expenses are right in line with last quarter, we project between $85 million and $87 million for the year. Net interest expense will be higher than our prior projection due primarily to our recent bond offering that adds $20 million to the full year net of interest income. For the full year 2012, we expect our net interest expense to be $408 million to $412 million with capitalized interest for the year projected to be $42 million to $45 million. We anticipate that the acquisition of Fountain Square will close by the end of the third quarter. We've disclosed the anticipated returns in our press release and based upon our 50% share, we project it to contribute just over a penny per share to our 2012 FFO. So if you take all of these assumptions into account, we are modifying our 2012 FFO guidance range to $4.85 to $4.91 per share. At the midpoint, this is in line with our previous projection despite the increase in net interest expense of approximately $0.12 per share and dilution from the issuance of equity under our ATM program of $0.02 per share. The offsetting positives are the improvements in the portfolio, additional fee income, the termination income from the second quarter and the acquisition of Fountain Square. For the third quarter, we project FFO of $1.13 to $1.15 per share. The third quarter is impacted by seasonality, which results in higher utility expenses plus the deferral of repair and maintenance items from the second quarter, which in aggregate is projected to increase our expenses by about $6 million from the second quarter. In addition, the redemption of $225 million of unsecured bonds will result in the acceleration of $3.5 million of interest expense into the third quarter with no expense for these bonds in the fourth quarter. Now we won't be providing specific guidance for 2013 until next quarter, but I would like to mention the impact that our leasing success over the past few quarters will have on our 2013 cash NOI. We have a number of large leases that are in free rent periods during 2012, including at Embarcadero Center, at 111 Huntington Avenue, Cambridge Center, Reston Overlook and 399 Park Avenue, in addition to leasing in our recent development deliveries, where we will see free rent convert to cash rent by 2013. Just in this handful of properties, we project approximately $45 million of cash NOI improvement next year. That completes our formal remarks. Operator, if you want to open the line for questions, that will be great.

[Operator Instructions] And your first call comes in the line of Michael Knott.

Hey guys, I was curious if you can talk a little bit about your lease roll in '13. It looks fairly manageable, any thoughts on mark-to-market there and then also '14 roll picks up a little bit more, just any thoughts on any possibilities there or potential mark-to-market opportunities in that bunch?

This is Doug, Michael. I think the mark-to-market that we have is clearly on the positive slope at this point. We are probably somewhere in the "mid-40s" on an average rent going forward in 2013, and I wouldn't be surprised to think that, that portfolio is probably somewhere between $0.07 to $0.10 below market because all of the drag we've had over the last few quarters has been in San Francisco. So the good news is that we are now below market in San Francisco in total on a going-forward basis. So I think that '14 and '15 is really Back Bay-centric. And the goal we have is to get in front of that leasing as quickly and as expeditiously as we possibly can in the context of making sure that we're not leaving money on the table. And we've -- as I think I've suggested, we've been pretty successful with that portfolio, and that's really the space that we've described in 101 Huntington Avenue and at the John Hancock Tower. Most of our suburban exposure in that same period of time is in Waltham, and we're actively working on that as well. So we feel pretty good about the manageability of where we have the vacancy upcoming and our expectations of being able to do something with that tenancy prior to those leases actually turning over.

Michael, you're right in that it's relatively low. I mean, it's 4.7% of the portfolio. Our typical -- if you think about our average lease rate, it would typically be between 9% and 10%. But obviously, as we get closer, we're doing forward leasing all the time, so it tends to reduce down as we get closer to the year. So again, as Doug said, if you look at 2014 right now, it's 10%. By the time we get there, it's going to be less than 10% because we're doing allot of that leasing now.

All right. That makes sense. And then just on your comments on '13 cash same-store NOI growth, so the $45 million number might be just throughout -- that's kind of just a base starting line for when we think about what '13 probably looks like. It's not going to be limited to just that, I would think. Is that a fair assumption?

Yes, that's fair. I mean, we've -- like I said, we're not going to give 2013 projections on this call, but I did want to give a sense. Because we've talked about the fact that 2012 was a transition year, the fact that we had a lot of leasing that we did and we had a lot of free rent this year, so I wanted to demonstrate just in kind of 5 or 6 properties, there's a significant amount of change for '13.

On a percentage basis, that's what, 4% or 5% right offhand?

That sounds about right.

Okay. And then just last question, Doug, you talked about your confidence in Boston Properties continuing to fare well in sort of a low-job-growth, low-demand environment. Do you guys feel confident that you can [Audio Gap] historical occupancy rates of, call it, 95%, I think, is prior peak kind of levels. Do you feel like you can get back to that in the next couple of years?

I do. I can tell you that if you look at our availability today, the bulk of that availability is in 2 places. The first is in suburban Boston, and we are, in fact, seeing a pretty, pretty consistent organic growth of technology and biotech companies out there. These are not household names from a public market cap perspective, but they probably are household names in the venture world. And I think the other area where we have large vacancy is in the suburban San Francisco portfolio, from a total square footage perspective, and we're encouraged by the ability to lease space in Silicon Valley on a going-forward basis because there really just isn't a lot of high-quality space there to be leased. So those 2 areas, I think, are probably the largest numbers. I think picking up 183,000 square feet in Reston, hopefully next quarter, will go a long way to basically putting us in a position where those are really 2 of the major exposures. And then, obviously, 510 Madison, we have 130,000 square feet of leasing that we're going to get done there, which I think will, again, impact our occupancy numbers in a very positive way.

Your next question is from the line of Jordan Sadler.

I wanted to just talk a little bit about investment opportunity. I know we're just about passing the fourth anniversary of your acquisition of the GM Building and 540 and 125. And I was curious if there's been any news or anything you can enlighten us on the opportunity to sort of increase the stake vis-à-vis your joint venture partner's interest there.

I don't think we have any -- this is Mort. I don't think we have any indication of any change in their interest, but I can tell you that if there is any change, we will probably be one of the first to talk to them about it.

Okay. So you'd expect them to be long-term holders there?

Well, not necessarily. I mean, I don't have any way of adjusting, and I think one of the particular investors might very well be interested in reviewing their position here. But we haven't heard anything about that for quite a number of months, and we haven't seen anything happening there. So we just don't know where they are. But I can tell you, we are very bullish about these assets, and I'm sure that so are they. They're not going to have too many opportunities to invest in real estate of that quality.

Okay. So on the GM Building, the CBS space, could you just give us a sense of what the rent was for that space and maybe what the opportunity might look like? I know, Mike, you said in your comments you're not assuming anything in 2012 in terms of backfilling it. But what might a re-leasing opportunity look like for that space?

So let me answer the first question, Jordan, which is -- so we told you what the total remaining obligation was and how long the lease was going. It was going through, I believe, middle of '15. And I think we told you what the square footage was. It was 39,000 square feet. So you can get a sense of -- you can figure out what the rent was. The space is in 2 pieces. There's a concourse level space, and then there's space that's in the -- on the first floor of the building. And there are users who are looking for one of those 2 pieces, and there are users who are looking for -- who would consider taking some mezzanine space or some concourse space, as well as some first floor space. We're encouraged by the type of interest we have in the space. We're not expecting to announce a deal in the next 6 weeks and have rent commencement in 2012. It's an important space. It's an expensive space, so it's for the right client at the right time, but we're encouraged by the demand we've had. We had a very seriously interested tenant a few weeks ago that continues to talk to us, and there are others who are now aware that the space is available. We are doing some work to improve the visibility of the space. You can then imagine that CBS and their use of the space was not a traditional use, given the fact that there was a studio. So in order to sort of explain and expose the space to the market, we have to do some work to improve its visibility, and in order to do that, we had to get the space back. So we think we're going to be successful with this space. I can't tell you why.

No, that's helpful. Last, a little more administrative. I noticed that 510 went up in terms of the size of the building. I assume remeasurement. Can you maybe just describe what went on there? I mean, it looks like you did a little bit -- when you sort of back in to the remeasuring, maybe the leasing there in the quarter was a little bit more than we would've expected on the surface.

The square footage did increase a little bit. We had not included the fitness center space in the square footage before. So that's really the increase in the square footage. And what is the second part of your question? Sorry, Jordan.

That doesn't affect the volume of leasing that's been done there essentially, right?

No.

Okay. You're just -- the denominator is bigger, but the volume of leasing is just the same number?

Yes.

Your next question is from Rob Stevenson.

Can you -- Doug or Mike, can you talk a little bit about the San Francisco portfolio and when the year-over-year comps for you guys normalize and it stops being such a negative impact on the NOI?

Well, it's already stopped being a negative impact on the NOI. It's only a negative impact on our same-store leasing statistics because as the spaces are already been let, and so all we're doing is we're doing the comparison from where the rents were to where the rents are. So there is no negative impact on our numbers, and it's not going down. It's actually going up because as we burn off free rent, as Mike suggested, and we're doing build-out, we're gaining both occupancy as well as revenue recognition. But as each of the leases commence, from an economic perspective, we're explaining to the world what the previous rent was versus that rent. And again, that's why there's that statistical impact. But I think we've been explaining this now ad nauseum for the better part of 2.5 years. And we are now positive mark-to-market in a big way in San Francisco.

Okay. And you guys are showing 90.6% leased on Embarcadero 4 in the supplemental. Where is that on a committed basis today?

96%, Rob. It's Mike Walsh. On your earlier question, once we get to the fourth quarter, you'll start to see the same store flatten out because of the 200,000 square feet of leasing that we've talked about over the -- as Doug said, over the past 2 or 3 years.

Okay. And then Doug or Mort, are you seeing more of your typical high-quality assets that you guys target coming to market as we move to the fall here? Seems to have been a big lull in transactions in most of your markets at the high end over the last 3 to 6 months. And is there any real importance from guys that you talk to these days in getting deals done under the current tax code and perspective changes as we move into '13? And has that affected the decision-making process?

I'll answer that part. We haven't seen very much in the way of an increase in available assets to be purchased. There is always some, and we're sort of always in that game. I do think that the financial strength and resources that we have will give us a comparative advantage as well as the ability to move quickly. But as you know, these things are -- each one of them is a one-off transaction and we are always in the flow of them. And sometimes they go through and sometimes they don't for various reasons. But there is not a great supply of the kind of assets that we would like to buy.

Okay. And then one quick for Mike. Where are you guys sitting in terms of the taxable earnings in the dividend today? I mean, you guys have a fairly low payout. Is it going to be -- the upward pressure here, you said that the gains didn't do anything to that. But is the pushup in just overall earnings growth, as you see in '12 and '13, likely to force your guys' hand on the dividend as we rotate in the beginning of the year?

I mean, I would expect our taxable income to continue to go up. It went up in 2011. It went up to a point in 2011 when -- that we decided that it was the right thing to do, at the end of '11, to increase the dividend. With some of the acquisition activity that we're having, it's going up in '12 as well. We're going to be reviewing our dividend projections with our board next quarter and talking a little about -- further about what we're to do going forward into '13. Taxable income is also impacted by cash. So as the free rent becomes cash rent, it has an impact on taxable income as well. So that is something that we're going to be looking -- we look at it on a quarterly basis, so we're going to be looking at it in a much more formal way heading into the third and fourth quarters of this year.

Yes, Rob, I'll just mention one thing. I guess I'd suggest that the word force is not the right word. We're encouraged that our income and our taxable income, because our earnings are going up, is going to increase. And if that results in a requirement by the REIT statute to increase our dividend, that's not a bad thing. So we're not being forced to do it, we're happy to earn our way into a higher dividend.

Next question is from Alexander Goldfarb. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: First question is for Mort or for Doug. Just given that the election is coming up, sort of curious with New York office, the tenants being on hold through the election and certainly similar in D.C., what do you think happens the day after the election if Romney wins or if Obama wins again? Do you think suddenly that changes leasing decisions one way or the other or the crisis of confidence that business leaders are facing means that it's going to take more than just the election?

Well, it's Mort, I'm going to take a crack at that. I do think that there is the widest range of unease in the business and financial community that I've ever witnessed in relation to a particular government. I've expressed it in the following way. Generally speaking, in America, we boo the loser. But this is an administration that boos the winner. I think people are very, very uncomfortable about that, and they don't know exactly where it goes or where it's going to take this administration. But in any event, they don't like it. So my general view is that, and not only in terms of the personalities, but also in terms of the general policies, that a Romney election would be better received by the overall business community and would, I think, give a lot more confidence going forward to the business community because 4 years is an awfully long time on top of what has been 4 of the weakest years in our economy since the 1930s. So I do think that's going to have a serious effect on the economy. Another thing that is going to be really critical is this so-called fiscal cliff. I mean, here we have an economy that's growing somewhere, if it's growing at all, it's not growing more than, on an annualized basis, more than 1%, 1.5%. If you hit that fiscal cliff and nothing is done about it because of a lack of leadership or because of dysfunctional government or a level of partisanship that makes everything impossible, you are looking at a major, major effect on the economy probably in the range of 4% of GDP, and that means you would almost guarantee a real slowdown in the economy next year. We just don't know how this is all going to play out. You always would like to think that there is a certain level of maturity in our national leadership, both in the Congress and in the executive branch. But I must say, a lot of people are disappointed with that expectation, and I just don't know how this is going to play out. But those are the issues that are at risk as we sit here and look at the election. I have long believed that this election is going to be determined by the economy, but particularly by the unemployment numbers, and the unemployment numbers are much worse than the headline numbers, so we're just going to have to see how that plays out because the real campaign has not started. It will start only after Romney accepts the nomination at his party convention and the country begins to really focus in on this, which typical [ph] September and October. And that's when we'll get a feel for where it is and whether or not there's going to be any new proposals, economic proposals, given what might be happening in the economy. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: But if Obama wins, do you think that business -- that the leasing decisions, those leaders will stay on hold? Or ultimately, because of restocking and efficiency of space, they'll have to get on with it and start actively looking at taking new space or committing to new buildings?

I do think that an Obama election will undoubtedly suppress some of the willingness of American business to invest, to renew, to add space. I absolutely do think that, that is a part of it. I'm astonished, frankly. I've never gotten -- never seen anything like what we are going through now, where there is such a void of confidence in the financial and economic leadership of the country. I say this, by the way, as somebody who voted for and supported Obama in the last election, but I do think that this is a very serious issue that, at least, I have never witnessed anything close to what exists today. And the conversations and the public measurement of confidence on the part of the business world in the economy, it's very, very shaky, in part because the economy has been so weak for so long and in part because there's a feeling that the macroeconomic policies, as compared to the monetary policies, have really not worked. We've really had a failure of policy, which, I have to say, was reasonably predictable. And whether or not you have another level of political gridlock going into the next couple of years, it's going to be really important for the business community because, in a sense, a lot of what we're going to be looking for is going to have to come out of Washington in terms of starting up energy in the economy. And particular, as we know, the animal spirits, as we -- phrase that we use in America to describe the economy, is very important. It really does reflect confidence, and I don't think anybody will deny that diminution of confidence in the business world that has taken place over the last 3 or 4 years over what's happened in Washington. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then the second question is just looking at assets, especially with the propensity of the tech tenants to like older industrial assets. Can you just talk about if you guys are sort of evolving, in which case you would start to look at some of these older industrial-style assets that may be attractive to tech? And then also, we heard that you guys have a site, maybe it's under option, on the far west side of New York. If you could just comment on that.

I'm going to -- let me start on that one. So I guess I would respectfully disagree with your view that they are looking for older industrial properties. If you go down to the Silicon Valley, you won't find any older industrial properties. You'll find campuses that have been created over the last 25 years, which are made up of suburban office buildings of between 3 and 6 stories, with floor plates between 35,000 and 50,000 square feet, which have more amenities than you can shake a stick at, and either parking fields and/or parking structures and the hope of public transportation. And that's the heart of the technology business in California. As companies have come into the city, they have -- small companies have sort of looked at some of this, what we refer to as brick-and-beam older rehab building construction. But many of the buildings that are being occupied by technology companies in the city of San Francisco are traditional office buildings with modern HVAC electrical distribution systems, good-quality floor plates, good light and air. And the way they're using the space is different than what a traditional law firm might be using that space. If you go to Cambridge, Massachusetts, all of the products have been built since the late '70s, early '80s, and they are 3-story, 5-story, 7-story, 11-story, 15-story office buildings. They are brick for the most part. Some of them are curtain wall, and they are occupied by Google and EMC and Microsoft and VMware and Akamai and all the sort of brand-name companies, as well as a number of smaller companies, whose names we haven't heard of. And again, very traditional space. Now there are locations like Midtown South where -- that have developed, where companies have been looking for inexpensive space, traditionally, and they have migrated to what I would refer to as non-A buildings. And that seems to be a trend that is important down there. But I -- we believe that as those tenants become more sophisticated and they grow and they become larger, they will struggle to want to locate in those types of environments. That's not to say that there won't be a new generation of up-and-coming venture capital and entrepreneurial companies that won't want that space, but the companies that are growing and being successful will have to find and migrate into what I would refer to as more traditional space. So while there is clearly an interest in that type of space, we believe that there is just as much of an interest and a need for great, traditional, new construction buildings that were built in locations and have amenities packages and transportation networks and demographics that are attractive to buildings that we earn -- that we own today.

Next question comes from Jeff Spector.

Just following up on New York City, Doug. I thought it was interesting when we discussed the theory -- the fact that in San Francisco, you're seeing -- you always see new media and tech companies expand, but you're not seeing that in New York City. Any change there? Anything to do with those tenants in New York?

I didn't catch the drift? What kind of tenants?

The new media and tech tenants. In San Francisco, you had commented you're constantly seeing those tenants look to expand, that they're hiring for more space. But in New York City, you haven't really seen that. Any change there?

I would, I guess -- we don't -- we're not in the midst of what's going on in Midtown South. But tenants like Google are, in fact, expanding, and tenants like Microsoft are, in fact, expanding and Oracle and companies like that because, quite frankly, they need to improve their employment base because they're looking for the most qualified interesting types of folks to work in those organizations. And so they are expanding in sort of modest ways in New York City. And then you do have a number of technology companies that are in the either social media or the digital media or the media content business that are -- that we are aware of that are growing in Midtown South and other places. So there is expansion. I think my point was and this is -- for people who weren't part of the conversation, the discussion was: At what point will, if at all, those larger companies start to look at some of the buildings in places like Sixth Avenue, which have very large floor plates and are very significant assets as a viable location for those types of enterprises? And there are some that are looking today, but they are the more traditional, what we would refer to as mature companies and not that sort of new-of-breed companies. But time will tell.

Okay. And then one follow-up question on the acquisition. I guess it's hard to tell if Mort was more optimistic that you might see more acquisitions in the next couple of years, but it ties into what some of our broker contacts have been saying. It seems that some families, let's say in New York City, there's a little bit more talk today than in the past of possibly selling over the next couple of years, I'm not talking about this year given the tax issue, but just over the next couple of years versus years ago there really wasn't that buzz. Is that an accurate statement? Or do you feel like it's really -- there's always buzz?

I'll try my hand at that. No, there always is buzz, but I do think there is more buzz, if I can say that, these days. Look, everybody's very nervous just about the future of the economy and how it would affect every market, but it also is going to affect New York. New York has had also extraordinary fiscal and political leadership over the last 20 years between Giuliani and Bloomberg, and nobody knows who the next mayor is going to be and what effect that will have on the general business environment. So I do think there's more chatter. But a lot of these things, as you know, there are a lot of families in New York that own a lot of real estate. When they move, they move slowly at first and then very quickly. Our whole effort will be to be around and be a part of those discussions when they move. And we just can't be any more specific about predictions than that.

And then -- this is Jamie Feldman, here with Jeff. I just have a quick follow-up. On San Francisco, I mean, we're hearing that some of the wind was kind of taken off the sales in that market with the Facebook IPO. Some of the tech companies have been a little bit below expectations, and then we have some new developments coming online. I mean, can you guys talk about your multiyear view here and kind of where we are in the phase of the recovery in the [indiscernible] and then also in the valley?

I think, Jamie, our multiyear view is that if you're looking for the formation of wealth and knowledge-based companies, the greater San Francisco area has -- is the dominant cluster of where those businesses want to locate and where the really intellectually capable employees migrate to when they're looking to find fame and fortune, I'm not being facetious, in the U.S. economy. And so we continue to see that as being a critically important part of the growth of the country's economic prosperity, and therefore, we think it's a great place to own real estate if we can find it and it's well priced and well located. As I said, things clearly have slowed down in San Francisco, but they were going at such a rapid pace, that -- I mean, when you see a 500 basis points reduction in the availability rate in a major market in a little less than a year, that's a pretty extraordinary phenomenon, and it can't stay up that way forever. And San Francisco has always been a volatile market. And I wouldn't be surprised if some of these companies actually don't survive. I mean, it's not like every IPO technology company is going to survive for the next 25 years and become the next Microsoft or the next Apple, so we're going to see failures. But I think out of those same companies, there are going to be lots of great employees who can find other places to work and other things to do, which will be a great bench for the growth of that particular marketplace. So I think you're going to see the ups and downs of that market. But in the sort of big picture, I think, you're going to see a lot of progress and a lot of opportunity there because that's, quite frankly, where wealth accretion is occurring.

Okay. And then if I could just ask one more on D.C. I mean, sentiment, including yours, every other we've spoken to is pretty negative. What's kind of the best-case scenario for the office markets in D.C. over the next 12 or 18 months?

Mr. Ritchey, do you want to take that one?

That's -- I'm happy to give it a shot, let's just say. It's -- we talk about the presidential election, but I think even more important is going to be the congressional flavor coming out of the election as well. They're the ones who really set the agenda relative to dealing with GSA. Clearly, I'm not so concerned about GSA because they have expirations and -- which they have to address. What I'm much more concerned about is the defense contractors and the sequestration that Doug addressed has really had these organizations on the sidelines. And what has to come out in early '13 is a clear direction of what the Congress and the national budget is going to have to do relative to defense. And specifically, not necessarily cutting a carrier base out of [indiscernible] but what does it mean for cyber security, what does it mean for the support of the CIA and other intelligence organizations, and everybody is just sitting on the sidelines until there's a clear direction and the Congress has to come out with a clear direction on the defense budget very early in 2013 for this to turn around.

Your next question is from John Guinee. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Doug, congratulations, and Ray, congratulations on Fountain Square. It looks to me as if the all-in's probably $400 million when you exercise your option on the second part of buying out Beacon. And then you'll probably end at about $500 a foot, which, on one hand, seems like a high number; but on the other hand, roughly 1/3 of the space is retail. Can you bifurcate sort of on a price per pound what you think you pay for the office versus what you're paying for the retail at Fountain Square? And then second, when you control all this retail, control all the parking, how does it change how you operate that oasis?

Ray, why don't you and Peter talk about how it changes the operation of the environment there and what we're -- what we will do over time. And Michael can do some calculations and try to answer John's technical question.

Peter, why don't you give it a shot on the operational side.

Sure. The point going forward for us is Metro, as everyone is aware, is going to be arriving in Reston in late 2016 or early 2017. Between the urban core properties that we'll control, with the addition of Beacon parking spaces and then the ones that we built along the toll road, you're probably talking somewhere plus or minus 10,000 to 12,000 parking spaces. Metro, right now, at a typical Metro garage, you're looking at anywhere from $5 to $6 a day for someone to park there. Unlike all of the other locations for that rail system going out the toll road to Reston Town Center station, no municipal-driven parking decks are going to be built. So if you think about Reston really running from the toll road north all the way to the north boundary of the urban core at New Dominion, we're effectively going to be controlling all of the public parking, I would say. There are some commercial apartment and residential buildings that are not open to the public. So our leases are written as are -- from what we've seen, Beacon's leases the ability to, over time, charge for parking on renewals, if it's a part of what a market rate would be. So we think the upside operationally there is excellent. We're already in the process of putting gate arms in as a transition, which is to say getting our customer base and the retail customers used to the prospect of coming in to a controlled environment as a precursor to being able to charge for parking.

Let me just talk a little bit about the leasing as well. Beacon did a great job in re-leasing and stabilizing this asset. I mean, it's -- we're buying an asset that's 98% leased and less than 10% rollover over the next 3 years, about 3% per year for the next 3 years. The average tenant size in there is 9,800 square feet, as opposed to on our side, which is 42,000 square feet. So what we're seeing with the smaller tenants, they're much less price-sensitive than the larger tenants, and we view this as a perfect complement to our existing portfolio and to control 2 million-plus square feet in a market where there is extraordinary barriers to entry. You talk about replacement costs, well this is a market where it's almost impossible to replace an asset comparable to Reston Town Center. So if we sound enthusiastic about this acquisition, it's because we definitely are. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then I guess on the square foot, maybe we'll talk about that later.

Yes. John, just to get on the -- talk to you a little bit about the valuations. I mean, the way we look at the retail, as Doug mentioned, the run rates in the retail range anywhere from the high $30s to the $80 range on a market basis. And today, it's in the mid $30s triple net. We think that, that retail is worth somewhere between $650 to $700 a square foot probably, given the higher net income from that, NOI from that. The office space is about $40 on a gross basis, which is a little under $30 on a net basis. Again, we think it's a little bit below market, as Doug mentioned. So if you had to do a split, you might do a split of $450-or-so for the office and $650 to $700 for the retail, something like that. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Great. And then a follow-up question. One thing that always interests me is that south San Francisco market tends to be in a world of its own relative to the continuum from San Francisco down to Silicon Valley. Can you talk about how you look at the south San Francisco relative to the rest of the peninsula?

Bob, you want to take that?

Sure. I mean, clearly, it's a biotech-driven market and Genentech being the biggest player there. As the market gets tighter, we have seen people transition up from the mid-peninsula towards south San Francisco. The [indiscernible] activity overall right now remains very static. We hope that Genentech continues to expand. But barring that, we think activity is going to remain slow there for this foreseeable future.

Your next question is from the Chris Caton.

I wanted to come back on the leasing results or -- and the leasing plan for the rest of the year. You've done -- you've executed around 2, 2.5 million square feet against, I'd say, 5 million last year. With about 1/3 of that, I think, over 2 leases this year. How is the leasing pipeline shaping up for the rest of the year? Is it active? Is it -- or can you give us a little more color there?

I would say that it is active, but it is clearly slower than it was last year largely due to the fact that we don't have nearly as many renewal opportunities in the portfolio as we otherwise would have had. And I think we've made this point clear in previous discussions. Most tenants, when they're looking for larger requirements, get out in front of their availability by certainly 12 months plus. And so to the extent that something is not leased today and we're not working on it, it's not going to hit our statistics for the third or the fourth quarter. And we have good activity. We've got a bunch of larger transactions that are in place. Will we get to where we were last year? I don't think we can. I mean, we just don't have the square footage to lease.

I don't think we need to, Doug. That's the point.

No, I mean, I think, that as Doug mentioned, a lot of the leasing we're doing is forward leasing. It's for '13 and '14 and '15. For '12, we just -- we don't have that much coming due. If you kind of look at what we indicated our occupancy projection would be and you look at what our rollover is, we're really talking about doing 1 million, 1.2 million square feet that will kind of affect 2012. Now we're going to do a lot more leasing than that, but it's going to be for '13 and '14. And we do have quite a few larger deals that we're working on, but again, that's for later in the year. But if you think about what happens with '12, it's really looking at our occupancy and where rollover is.

Last question for me would be on PayPal and Boston. I think they're moving maybe from North Beach, so maybe they were always going to go into the CBD. But I wonder did they contemplate other submarkets and if you have any color on how they thought about leasing the space. If you do, that would be helpful.

Bryan?

This is Bryan. What we're finding from tech companies, as Doug mentioned, there's, call it larger expansion of what is a tech company, and they would fit into it, is that we are seeing greater, call it variability in the type of product that they're looking at, and they're really focusing on what we're calling -- let's call it the big 3, which is the focus on where can they get their talent, where can they project their brand and their culture, and where can they be connected. And what we're finding is that we are seeing an increase in these tech companies looking into CBD because it is, as Doug mentioned, really great quality space. They haven't traditionally, call it, looked at it, but they're finding good bargains there. So it's fitting a lot of things like the essentials of transportation. And it really didn't surprise us when we heard about the deal being finalized at International Place. It's a great building, and you look at that location, it's very attractive for the things that these types of companies are looking to do. And I think I'd just echo Doug's comments on, it isn't just, call it, the brick and beam that's attractive to these tech companies. They want to fulfill getting talent, and these are spots that are going to become really attractive. We're finding it in 100 Fed. Our lower floors of that building, the balds [ph] floors as we call it, have suddenly become attractive to several companies like that. We're in discussions with clients like that.

Your next question comes from Josh Attie.

It's Michael Bilerman with Josh. Doug, when you think about this $1.7 billion of cash, that basically takes care of the bond redemption, all the cash for Fountain, takes care of all equity funding for the development pipeline that you currently have underway and takes care of all the bond maturities for next year. The $1.7 billion in total. So I'm just curious, as you think about, I think Mort talked in his opening comments about 2 projects in the next short while, I don't know if that was in reference to developments like Mass Ave or if that was acquisitions. How quickly would you want to replenish or gain more capacity, especially now with where bond yields are, being able to do a 10-year in the low-3s or continued ATM issuance? I'm just curious how you think about the capacity side of it.

The way we think about it, and this is probably not going to be a very satisfying answer to you, so I apologize in advance, is that we think about what our opportunity set might in terms of use of capital, what our liquidity looks like in a short-term and a medium-term basis and at what point do we feel that the markets are changing in a way that could impact that decision-making. The point being that, yes, we have $600,000 -- $600 million of expirations in the middle of 2013 on the bond side, but we're not really thinking about prefunding that in the next 6 months but -- sorry, next 60 days. But our anticipation is we will prefund that at some point. And the question is: Will we have used our cash or not used our cash? If we have found things to invest in that are both value-accretive and earnings-accretive and opportunities to improve the growth of the company, we will do that, and we'll figure out how to capitalize those opportunities based upon what the capital structure of those assets may be. So for example, if we're buying an asset that is 80% leverage, probably doesn't make a lot of sense to necessarily use debt financing to purchase that asset. On the other hand, if we're buying an asset that is 100% unencumbered, having a mix of equity and a mix of debt and selling some assets or raising equity or doing a bond issuance or doing a convertible or doing some preferred, perpetual preferred, which is certainly an option to us now. All those things are on the table.

When you talked in your opening comments about having some dispositions that were on the market and some that you're going to bring to market, what does that sort of represent in terms of dues in those assets? Has the growth profile changed? Or has your view of the growth profile changed? Is it submarkets that you want to exit? Is it how the market is going to price those assets that's making it enticing? And you think back to '06 when you obviously did some very large sales at some very low cap rates, can you sort of compare and contrast sort of this disposition activity that you're embarking on and that?

I think all the things that you said were accurate, and it was a well spoken sort of explanation of what I'm going to say. I'd say the thing that's changing is that there are probably a few more, what I would refer to as not core assets that we are sort of moving out of, aka the Bedford Research Park, which was a $63 million asset. There are a number of those that we are looking at in addition to getting out of some high-quality core assets that we think somebody else's view of what the potential of those assets are versus what ours is may be higher, and therefore, we're going to get paid very well to exit those assets and be able to redeploy the capital into something else.

Okay. And then just to clarify Mort's comment at the beginning in terms of the 2 projects. That was related to 2 potential development starts or that represented acquisitions?

I'll let Mort clarify.

Acquisitions.

This is Josh. Can you quantify what some of the initial cost synergies might be at Fountain Square with what you already own in Reston? It looks like the operating margins on what you bought are around 64%. How does that compare with what you already own?

I'm going to be honest with you, Josh. You're being far more inquisitive than we are yet ready to answer. I will say this that we think we're going to be able to reduce the cost that Beacon is expending to operate the buildings, not insignificantly, in the order of $7,500 a square foot. And in addition, adding the math and reorganizing how we manage the property and start to bid out with larger square footage on certain types of enterprises, like landscaping and security and all those sort of things, should reduce our costs on our existing buildings. And the question is: What does it mean for our tenants? And what does it mean for us? To the extent that we have triple net leases, it just means the tenants have a lower cost of occupancy, which is a great thing. And to the extent we have gross leases, it means that there's obviously more income coming in the door than there otherwise would have been. But that will play itself out over time.

The next question is from David Harris [ph].

I wonder if you could just talk about your appetite for the joint ventures. And I'd like you to comment both on your appetite and third parties'. Would you be able to distinguish between the third-party interest domestically and from overseas sources?

Could you -- I just -- David, could you just explain that again? I'm confused as to what you're referring to.

Yes, just talk about your appetite for further JVs and what the interest from third parties might be. And as an adjunct to that, could you distinguish between the appetite from third parties that are based domestically and those that are perhaps from overseas sources?

Well, let me give one part of that, okay? I think there is still a lot of sources from outside the United States who want to invest in high-quality real estate here in the United States. We are equal opportunity partners that we're happy to work with them, and we're happy to work with other institutions here in the United States. But I think a lot of the people feel -- people who are managing funds in Europe and indeed, in Asia are really much more confident about the American economy than they are in their own economies. The European economy is in very, very serious shape, and everything depends there, in the short run, on the central bank; but over the intermediate term, on whether or not they can get their economies moving again. And the same thing is true of a lot of the countries in Asia. And they still have a lot of funds to put out, and I think frankly, we probably have good access to these investors who are really contacting us on a regular basis and have been for years. But the real issue from our point of view is: Can we find the kind of assets that we want to buy? This is not an easy question to answer because we really have very high standards, and those standards are not just a measure of social standards. We have had a long experience in terms of what we think not only works in good times, but most particularly, we have a very -- and always have had, a very real concern on the assets that would do well in difficult times, which is why we always say we try and buy A assets in A locations and quite simply it's because those are the assets that do relatively better in difficult times, not -- you don't only compare them to good times, and that's what a lot of investors are looking for. Those assets do not come along every day, every week or every month, and we just are in that flow. And if we can find those assets, we will be very active in trying to acquire them on reasonable terms, and at some point, we might very well involve ourselves to a greater degree than we have in the past, in partnership with some of these international or foreign funds that are certainly all around the real estate market. They like real estate because it is a real asset. They're very worried about assets where there could be a decline in value. If you have real estate assets, which are reasonably well leased, even though the yields are relatively low compared to historical numbers at which you can acquire these assets, the fact is that they are relatively a safer investment in the short term and a more attractive investment in the longer term, which is the way we feel as well, I have to tell you, just about our own investment. So I think there is a lot of pent-up demand among financial institutions to go into real state. You've read a lot about this, I'm sure, and it's been all over the press. And I think they're for the reasons that I'm describing, it makes a lot of sense for those investors to get out of the relatively weak economies that they are in, both in Asia and in Europe, to get into the relatively stronger economy, even though the yields are lower than they used to be comparatively, in terms of both the security of the principal and the longer-term possibility of depreciation. They are very attractive investments for foreign funds.

Would you include developments as a possibility within a joint venture structure? Or would you envisage continuing to do that purely on balance sheet?

I think, frankly, we would probably focus more on investment properties with partners. But we would -- depending on the kind of an investment it was, we would be open to a partnership even on developments. But that's a much more difficult thing to explain and to assess and to evaluate. We -- that's what we've done for so many years, I mean, how many decades have we been in it. And that's something we're more comfortable with. They are, by and large, more comfortable in investment properties where there have -- there's a lot easier challenge to figuring out what they think the income would be in the shorter term, the medium term and longer term.

Okay. Doug, can I come to you -- I think I picked out the word -- you used sluggish space demand in some of your prepared remarks. I just wonder what your outlook is for leasing CapEx. Do you think we can hold at these levels in your market? Or do you think we’re going to come under some pressure in that regard?

I think that, for the most part, if you want to increase velocity or shall I say, if we want to increase velocity, what we have found is that we have to invest more capital into our spaces earlier. And so you are seeing us with a preponderance of investments into some of these pre-billed suite opportunities and buildings like 510 Madison and 599 Lex and 540 Madison, soon to be as SAC moves out of the base of that building. And I think that involves more capital than you would be putting in on a "negotiated lease basis." So if a turnkey installation on a small fleet is $85 a square foot, that's $20 -- $10 or $20 a square foot more. The reason that we do that is we make a decision that we thing we're going to improve the velocity of the leasing significantly, and so instead of having to wait 12 months, we only have to wait 3 months because we've taken care of the build-out time and we've only had to put $10 or $20 a square foot more into the space. That's the type of, I'd say, increase in capital expenditures we are seeing on the leasing side. We are not seeing a weakness in the market, whereby there is a significant increase in the overall availability of space in any of our markets, which are leading landlords to provide much greater concession packages than they would have 6 months or 9 months ago.

And by definition, I suppose there are far fewer people who are -- have got such access to capital that can compete with you in putting so much capital upfront in deals.

It would be nice to believe that. I think there continue to be some significantly well-capitalized competitors of ours in our markets that are prepared to do similar types of transactions, although, they may be more reluctant to do it than we are, and therefore, that's why we're having as much success as we're having.

At this time, I'd like to turn the call back to management for any additional remarks.

I think that ends our comments. We thank you for being patient and holding your summer plans until this week. We wish you all a happy and enjoyable couple of weeks until we get back in September. We will, I promise you, not be all going on summer vacation. We'll still be leasing space and looking for acquisitions and trying to get developments going even as the...

He doesn't mean to say that we're going to be doing that while you're all on vacation.

But we will talk to you again in the early fall. Thanks.

Thank you all.

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