BXP, Inc. (BXP) Q3 2014 Earnings Report, Transcript and Summary

Arista Joyner - Investor Relations Manager Mortimer B. Zuckerman - Co-Founder and Executive Chairman Owen D. Thomas - Chief Executive Officer and Director Douglas T. Linde - Director and President Michael R. Walsh - Senior Vice President of Finance Michael E. LaBelle - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer Robert E. Pester - Senior Vice President and Regional Manager of San Francisco office John Francis Powers - Senior Vice President and Regional Manager of New York Office

Steve Sakwa - ISI Group Inc., Research Division Vincent Chao - Deutsche Bank AG, Research Division Emmanuel Korchman - Citigroup Inc, Research Division Jed Reagan - Green Street Advisors, Inc., Research Division James C. Feldman - BofA Merrill Lynch, Research Division David Toti - Cantor Fitzgerald & Co., Research Division Brendan Maiorana - Wells Fargo Securities, LLC, Research Division Jordan Sadler - KeyBanc Capital Markets Inc., Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Vance H. Edelson - Morgan Stanley, Research Division

Good morning, and welcome to Boston Properties' Third Quarter Earnings Call. This call is being recorded. [Operator Instructions]. At this time, I'd 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 Third 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 Tuesday's press release and, from time to time, in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I'd like to welcome Mort Zuckerman, Executive Chairman; Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our Executive Vice President of Acquisitions and Development, and our regional management teams will be available to address any questions. I would now like to turn the call over to Mort Zuckerman for his remarks.

Good morning, everybody. We are in the midst of a kind of a strange overall economy that is puzzling in terms of where it's going and how strong it'll be. J.P. Morgan Chase came out with a fairly bearish assessment of the economy this year and in future years looking forward. They called it the 1% economy because their projecting the rate of GDP growth over these years will be in the order of 1% or 1.25%. The good news, from our point of view, however, is that in the markets that we are in, we are seeing something a little bit stronger than that. This doesn't mean we aren't affected by the overall mood of the economy, because certainly it is not -- it is uncertain at best and pessimistic at worst. But in the markets that we are in, frankly, we're still finding a good deal of activity, particularly in the projects that we have, a good deal of activity in the buildings that we have. And in the developments that we have, we're still seeing action, all of which we will be covering in this call. Nevertheless, I think we all have to be aware of an overall economic environment that is not the most positive. There's a great deal of uncertainty in the business community because of the anxiety over the national leadership, I would say, is one dimension of it. But the real thing is that American business, I think, has slowed down and its capital spending. Employment growth has been much weaker than a lot of people expected. GDP growth has been a lot weaker than lot of people expected. So we just don't know for sure where this is going, but there's a lot of uncertainty in it. Nevertheless, as I say, in the markets that we're in, which if I could put it in colloquial terms, these are the 1% of the markets, these are the best markets in the country, at least as far as we know. We're still seeing a fair amount of action and a fair amount tenant demand and a reasonable solidity of the balance of demand and supply. We will be covering this during this call, but in general, I think we are modestly comfortable with where we are, although a little bit anxious about how the overall economy can affect the markets that we are in. So far it's had some effect but nothing to the point where we are kind of discouraged about it. With that, I will stop and turn it over to my colleagues.

Okay. Thank you, Mort. Good morning, everyone, this is Owen Thomas. I'll touch briefly on the operating environment, our third quarter performance and capital strategy. But Doug and I want to leave substantial time for Mike this morning, to discuss our 2015 forecast, which, in addition to our earnings, is a primary new information we're communicating to you this quarter. Further as you know, we hosted a well-attended investor conference in Boston on September 23, which involved a very thorough review of all of our current activities and showcased a broad group of our professionals. And I'd I just like to remind everyone that these presentations and a webcast are still available on our website. So, starting with the environment, Mort touched on this, maybe I'll put a few numbers to Mort's remarks. The U.S. GDP growth snapped back in the second quarter, to about 4.6%. However, most forecasters, today, are forecasting growth to settle in the low 2% range over the next few quarters and for the year 2014. Growth is positive, but it's certainly not robust. The unemployment rate has also improved, marginally, to 5.9%. As we've been describing in prior quarters, economic growth continues to be uneven across our markets, as San Francisco, Boston and parts of New York are experiencing strong growth, driven by technology and other creative tenancy. While more traditional markets like downtown Washington, D.C., which are driven by government, financials and law firms, are experiencing much more difficult leasing conditions. I'd also like to touch on the recent market volatility. Given recent disappointing global economic growth numbers, particularly in Europe, political unrest in various points around the globe and other factors, the financial markets experienced highly elevated levels of volatility over the last month. And the 10-year U.S. Treasury rate has dropped another 20 to 30 basis points to around 2.25%. This increased volatility has not had any impact on our operations or leasing activities. Though perhaps a little early to call, given sales transactions recently announced and discussed, it would appear the real estate capital markets remain active and aggressive. In fact, we believe we could experience even more enhanced asset pricing in the market place given lower interest rates. Moving to our results for the third quarter, we performed well and made good progress in the execution of our business. As you know, FFO for the third quarter was $1.46 per share, which is $0.09 above consensus forecast, though there are some nonrecurring components that Michael discussed. We completed 89 leases in the third quarter, representing 1.9 million square feet space, with the Boston and New York regions being the largest contributor. This level of leasing activity, at 1.9 million square feet, is roughly 50% higher than our quarterly averages, and is being driven by new activities as well as early renewals of several significant law firm tenants. Our in-service properties in the aggregate are 92% leased, down 1% from the end of the second quarter. However, our occupancy is flat and in line with expectations if you exclude 250 West 55th Street, which was placed in service this quarter. Lastly, we made significant progress executing our assets monetization plan and development pipeline, which I'll discuss in greater detail. Moving to capital strategy, our capital strategy remains consistent with what we've communicated at our Investor Conference and in prior quarters. Given that prime assets in our core markets are trading at higher prices per square foot and lower yields than where we can develop, we have recently been net sellers of real estate while reinvesting raised capital into new development. The pursuit of acquisitions remains active but challenging. New investments considered today usually have some type of competitive angle for us, such as providing tax protection through the use of operating partnership, even if it's consideration; working with a financial partner or involving properties with a development or redevelopment component where we add value to our expertise. We made very significant progress in our disposition activities in the third quarter. As you know, in September, we announced the sale, to Norges Bank, of a 45% interest in each of 601 Lexington Avenue in New York and Atlantic Wharf and 100th Federal Street in Boston, for an aggregate sale price of $1.8 billion. The pricing represents a 3.8% cap rate on 2015 NOI, $1,073 per square foot, and a total return on invested capital to Boston Properties of 15.5%. The transaction will raise $1.5 billion in proceeds and is expected to close later this week. Combining this transaction with the Times Square Tower joint venture, we completed last year, we now have our $5.5 billion of assets in joint venture with Norges Bank, one of the largest sovereign wealth funds and most active real estate investors globally. We also completed, this last quarter, the planned sale of Patriots Park in Reston, Virginia, for $321 million, which represents a 5.2% cap rate, $455 a square foot and a total unleveraged return to shareholders of 11.5% over 16 years. With these 2 transactions along with the sale of 5 additional smaller assets, we will have sold $2.3 billion of real estate in 2014 versus a target of in excess of $1 billion. These 7 transactions were executed at an average cap rate of 4.25% and will raise $1.9 billion in proceeds to be used for investment in our robust development pipeline where we are forecasting initial returns in the 7% range, as well as a to-be-determined special dividend. We do not anticipate any additional significant dispositions in 2014, but we'll consider further sale activity in 2015. Depending, of course, on capital needs and market conditions. We continue to emphasize development for our new investment activities given the opportunity we see to recycle capital from the sale of our older buildings into new projects with higher returns. In the third quarter, we delivered into service 250 West 55th Street in New York, which is 77% leased, and 680 Folsom Street in San Francisco, which is 98% leased. Our active development pipeline now consists of 10 projects representing 3.3 million square feet with a total projected cost of $2.1 billion, down from $3.6 billion at the end of the second quarter. Our development pipeline is, in the aggregate, 54% pre-leased. Though no new projects were added to the active pipeline in this past quarter, we continue to be in a pre-development stage on another set of projects with strong potential in all our markets, most significantly our North Station project in Boston. In the aggregate, our share of these project represents an additional future pipeline of over $1.2 billion in gross development cost. Let me turn it over to Doug for a review of our markets and operating performance.

Thank you, Owen. Good morning, everybody. I also want to add my thanks to everyone that made the effort to come to Boston and/or listen to our webcast last month. That conference every 3 years, and our objectives are pretty simple. First, we obviously want to provide you guys with an update on our activities in our market conditions, but what that conference really does is it allows us to showcase the depth of our regional management teams, and it provides you with some visibility on the people who are actually doing all the heavy lifting on a daily basis. And I hope, visually, when you see some of those projects, a.k.a. the things that we did out in Bay Colony or when we took over Cambridge. It really illustrates how we create and protect value. The emphasis was obviously on the Boston region this time, but it's what we do throughout our organization. It really is true that identifying the opportunities and challenges inherent in the individual assets; and creating the right plan to position them; and making speculative capital investments, those are the hard decisions, but it's what we do all the time; and it's our execution that really is key to outperforming the market. So we just hope you came away with a much better understanding how we have developed both our brand and our approach to managing, leasing, developing and when acquire -- acquiring assets. Given that I provided a pretty up -- rigorous update on the market conditions during the conference, this morning my remarks are going to be focused on the backdrop to Mike's forecast for 2015. So we're seeing another good quarter from an earnings perspective. Corporate America's balance sheets are very strong. When we look at venture capital investing, interestingly, if you look at what happened in the first 3 quarters of 2014, we've already surpassed the annual amount of venture capital investments for the last 10 annual years. So we've done, in 3 quarters, what we have done over the last 10 years on an annual basis. The Silicon Valley, New York City and Boston markets continue to obtain the largest share of those investments, a.k.a. those are the 3 markets that we talk about where there's the most activity and the strongest amount of overall demand growth. Big picture. Since last month, we really haven't seen any changes in our operating markets. So things still feel pretty good. During the first 3 quarters of '14, we've leased 5.6 million square feet of space, which already exceeds our annual leasing in 8 of the last 9 years. As you can see from our leasing stats that are in the supplemental, we're seeing strong mark-to-market on our recent transactions in San Francisco, Boston and New York, up 37%, 27% and 25%, respectively. While Washington D.C. remains weak, we are making good headway on our near-term lease expirations. As we begin our view of 2015 versus '14, I thought it would make some sense to provide you some color on the major factors impacting the year-to-year comparison as we experience major rollover in a few key assets and some visibility on where we hope to be when we get through these transactions. These are activities that we have forecasted over the past few quarters. So we'll start in Boston. At The Prudential Center, we are underway with 888 Boylston Street, and we expect to commence a 14,000 square foot addition to The Prudential retail, as well as a total renovation of The Prudential food court. Beginning in August of 2014, we began to terminate leases in the retail, and year-over-year we anticipate a $3.5 million to $4 million reduction in net operating income from that space. As we reopen the space beginning of early 2016, and finishing by the end of the that year, we expect to create an incremental -- so on top of the $3.5 million to $4 million, an incremental $4 million of annual NOI. At the Hancock Tower, our leases with State Street and Manulife will be expiring at the end of 2014, leaving us with about 414,000 square feet of availability beginning in the early parts of the year. In average, the in-place rent is about $43 per square foot, gross, for a loss of $18 million of NOI on an annual basis from the Hancock Tower in 2015. Our askoobing rent on this remaining block of space range from the low 50s to the mid-70s. So when fully leased, this space should generate annual revenues of about $25 million or a 39% increase. As a reminder, since the acquisition, we've completed more than 700,000 square feet of leases at the Hancock Tower, with an average markup of about 20%. We're also going to be going back 50,000 square feet of space at The Pru tower and another 52,000 square feet from Bank of America at 100 Federal Street. Offsetting this backup space will be the commencement of our 308,000 square foot lease with Blue Cross Blue Shield at 101 Huntington Avenue in April. In May of 2015, they have a staggered start. We also expect Bay Colony to move from 79% occupancy at the end of the year, or today, to about 93% by September of 2015. We don't have any vacancy in Cambridge, but nevertheless, we've already leased another 53,000 square feet of our 2015 expirations and 73,000 square feet of our 2017 expirations, at rents that are almost 25% above the in-place rents, but they're not going to show up at our numbers until the end of '15 and into 2017. We've been -- foreshadowing early renewals with our law firm clients in New York City. Our transaction with Weil was completed at the end of the third quarter. We will be taking back 3 full floors. The first in December of 2014 and the other 2 in December of 2016, where the current fully-escalated rent is about $90 a square foot. Our asking rent for these floors is over $150 a square foot, and we are in negotiations for the floor expiring at the end of the year. As is typical on a long-term lease commitment, the tenant will receive a period of time to build out the space, which will push revenue recognition into late 2015. Our second transaction is at 599 Lexington Avenue, again, another law firm, and we're going to be taking back 4 floors. We've leased 1 floor already and we'll be providing the bulk of the remaining space to another law firm tenant as free swing space for 12 months beginning January 1, 2015, limiting any revenues for the year. As we've discussed in the past, Citi has exercised their termination right on 173,000 square feet at 601 Lex in 2016. Well, we are already in discussions to lease up to 90,000 square feet of this space, and we're working with Citi on an early termination. This will accelerate the vacancy for 1 or more floors in 2015. Our newest assets in New York City, 510 Madison and 250 West 55th Street will contribute significant incremental revenue in 2015. 510 Madison is now 91% leased and 250 West 55th Street will see the lease commencement of 2 additional multi-floor tenants in March of 2015. The incremental NOI contribution from these assets will be about $36 million in 2015, based on current executed leases. We currently sit with 195,000 square feet of available space, with asking rents over $90 a square foot at 225 West 55th Street. We expect to finish most of the leasing in '15, but we won't see revenue until the very end of '15 or early 2016. In Washington, known GSA compression and law firm expirations will have an impact on our occupancy primarily in our joint venture properties. Overall, the D.C. CBD occupancy will end 2014 at about 96% and average 94% during 2015. In Reston, we have an unplanned vacancy due to the bankruptcy of NII Holdings in the Town Center. While they leased a 180,000 square feet, the net exposure, after taking into consideration subtenants and a reduction of their occupancy, will be about 63,000 square feet on January 1. The current rent is about $52 a square foot. We anticipate The Avant, our apartment building, currently 70% leased, should reach it's full stabilization by the end of March, with an incremental year-over-year contribution of about $6 million. In the Bay Area. 2015 will be very similar to '14 with very limited rollover. We're actively engaged with a host of full floor tenets with 2016 and 2017 lease expirations. Some of these renewals will be with law firms that are shedding modest space, but where we see significant opportunities for rental increases for both the renewal and the recapture space. We expect to end 2014 with about 6% vacancy at EC and to be flat at the end of 2015. The mark-to-market on our EC office portfolio stands at about 20% for all of the leased expiring in 2015 and 2016. We are close to 100% leased in our Mountain View assets, and with last week's announcement that Google had taken on an additional 2.9 million square feet of space through leases and purchases, we are optimistic with our ability to lease the 437,000 square feet of vacancy at Innovation Place, our Zanker Road project in North San Jose. When leased, this will drive an incremental $12 million of income. 535 Mission has received its certificate of occupancy and truly is expected to occupy their space in the next few weeks. We are in negotiations with other tenants for over 100,000 square feet, which should bring us to 67% leased before the end of calendar year 2014, with lease commencement early 2015. We would expect to achieve revenue on all of the space by June and are optimistic we can lease the bulk of the remaining space at 535, prior to the year end, with full commencement by the middle of 2016. All of the items I have discussed, however, are dwarfed by the impact of our 2014 sales transactions. Mike's going to discuss the earning impact of those transactions along with the geography of where it all appears in our future earnings. As we sit today, we would anticipate a sizable special dividend. The gain on sale from the sales activities is slightly over a $1 billion, but we are still working through some of the possible 1031 opportunities, and are finding our 2014 taxable income, which should impact the payout. We will be meeting with our board and will provide guidance on the dividend as soon as we have some clarity. Mike will now go through our results and our '15 guidance.

Thanks, Doug. Good morning, everybody. I'm going to start with a quick recap of our performance for the third quarter. As we been guiding you all year, our same-store performance continues to be positive. This quarter was strong, with same-store NOI up 3.8% on a GAAP basis and 5.9% on a cash basis over the third quarter last year. Our same-store occupancy was up about 20 basis points, though much of the better NOI performance came from higher rents and free rent periods burning off. As Doug detailed, we experienced large rent roll-ups in all of our markets this quarter, except D.C. Our lease transaction cost were also a little bit higher this quarter, they totaled about $46 per square foot, which is $6.50 per lease year versus our run rate, over the last few quarters, of about $30 a square foot. This was impacted by the large volume of deals in New York City which are longer-term but also carry higher brokerage cost. For the quarter, we reported funds from operations of $1.46 per share, that's $15 million or $0.09 per share above the midpoint of our guidance range. A big piece of the out-performance was nonrecurring items that totaled about $8 million or $0.05 per share. We received a $7.7 million distribution from the Lehman Brothers estate that related to our pre-financial crisis lease at 399 Park Avenue, which was terminated in bankruptcy and which we classified as termination income. We still have a remaining claim that has a value estimate of around $9 million, though the timing and the likelihood of collection of it is uncertain. We also recorded $1.7 million of termination income at Metropolitan Square in our joint venture portfolio, we negotiated the take-back of a floor from one of our law firms and immediately leased the floor, plus another vacant floor, to a new tenant. And the last item was $1.4 million in transaction costs we booked this quarter, related to our asset sales activity. The performance of our core operations was higher than our budget by approximately $7 million or $0.04 per share for the quarter. Our portfolio NOI was up $6 million and management services income up just over $1 million. The portfolio performance stems from the sale of Patriots Park, which occurred later than we expected and added $1.3 million, better-than-projected rental income spread across our regions of $1.7 million and lower-than-anticipated operating expenses of about $3 million. We expect half of our expense variance to hit in the fourth quarter, increasing our fourth quarter operating expenses. As we look at the rest of 2014, there are 2 key changes to our projection that will impact our full year guidance. The first is the impact of the sale to Norges of a 45% interest in 100 Federal Street, Atlantic Wharf and 601 Lexington Avenue. As we discussed at our investor call last -- investor conference last month, we entered into an agreement to sell a joint venture interest in the 3 buildings for $1.8 billion, which equates to a total valuation of $4.06 billion. As Owen mentioned we're on track to close later this week and the lost FFO for 2 months is $10 million or $0.06 per share. As a reminder, these assets will remain consolidated in our financial results. And the impact to our earnings will be reflected through an increase in noncontrolling interest. The second item is the anticipated redemption of $550 million of unsecured bonds that are expiring in 2015. We expect to notify the trustee, under our bonded venture, that we intend to redeem the bonds using our make-whole rights. The make-whole provides a 35 basis point discount compared to paying all of the remaining interest payments. This will accelerate the interest expense on the bonds from 2015 into 2014 and add $10 million to our 2014 interest expense projection or $0.06 per share. We now project our full year 2014 net interest expense to be $456 million to $459 million. The most significant change in our operating portfolio performance relates to our long-term renewal with Weil, Gotshal at the GM building. Weil, who currently occupies 485,000 square feet, is renewing in 390,000 square feet and will give back 3 floors in the upper third of the building. One floor on December 31, 2014, which Doug noted is under letter of intent, although the build-out time will take revenue recognition through to the end of 2015, and 2 floors at the end of the 2016. As you recall, the in-place rents at the GM building are significantly below market, so we will see an uptick in noncash straight line rents immediately, with the increase in cash rent commencing at their natural expiration in 2019. We also will accelerate the existing noncash fair value lease balance into income over the remaining shorter-term for the give-back floors. Particularly, with respect to the floor coming back in 2014, this has a significant impact and our noncash rent for the building will be $5 million higher in 2014 than our prior protection. We expect our occupancy to remain stable for the rest of 2014, the impact of the Weil renewal and the performance in the third quarter will show up in our 2014 same-store NOI projection. We expect same-store NOI growth of 3% to 3.25% over 2013 on a GAAP basis, which is up 75 basis points from last quarter. On a cash basis, we project 2014 same-store NOI growth up 5.5% to 5.75% over 2013, also better than our projection last quarter. Our noncash rents are projected to be $108 million to $110 million for the full year 2014. Our other projections for 2014, including for developments coming online, unconsolidated joint ventures, hotel and development and management services income result in no guidance changes from last quarter. We do expect to come in near the low end of our range for G&A expense and now project $100 million to $102 million in G&A expense for the full year 2014. So in summary, our out-performance in the third quarter of $0.09 per share, combined with improvement in our same-store projections, nearly offsets the loss of $0.06 of FFO from asset sales and $0.06 of higher interest expense from prepaying our 2015 debt maturities. We are tightening our guidance range for 2014 projected FFO to $5.24 to $5.26 per share, and we project fourth quarter funds from operations to be $1.23 per share to $1.25 per share. This is the time of the year that we start to talk about 2015 and provide formal guidance for 2015. And as you recall, last quarter we discussed a few items that would have a significant impact on next year. These include the dilution from our 2014 asset sales program and transition in our Boston CBD portfolio. Offsetting this is the full year impact of our 2014 development deliveries, which provides significant FFO growth. The asset sales have the most meaningful impact to 2015. In 2014, we expect to complete dispositions totaling $2.3 billion at a weighted average cap rate of 4.25%. The annualized FFO loss associated with these assets is $84 million or $0.49 per share. Now, a portion of the FFO loss occurs in 2014. So as you think about 2015, the sales will reduce our 2015 funds from operations by $65 million or $0.38 of a per share reduction in FFO year-over-year. As you think about our same-store guidance for 2015, we anticipate that our overall occupancy will decline early next year, due to the Boston move-outs, to near 90%. But then improve and average between 91% or 92% for the full year. 100 basis point of occupancy in our portfolio was approximately 420,000 square feet. The biggest impact to our 2015 same-store performance is in Boston. Where, as Doug noted, we have 516,000 square feet of expiring leases where we expect vacancy during 2015. Doug also mentioned the impact from the renovation of The Pru Center retail. The loss of occupancy is partially offset by the anticipated positive absorption in the suburban portfolio and also with Blue Cross Blue Shield moving into 300,000 square feet at 101 Huntington Avenue. In total, we project the NOI contribution from the Boston portfolio to be down by between $14 million and $18 million in 2015, which meets our same-store NOI growth in 2015 for the portfolio as a whole. We're projecting NOI growth in New York City, both from gains in occupancy at 250 West 55th Street, 510 Madison Avenue and 540 Madison Avenue, as well as from the roll-up on rental rates on some of our key lease renewal activity. In San Francisco, we project NOI growth from both occupancy gains and continued strong positive roll-up in our leasing. Given that we are 96% leased in the city and have just 260,000 square feet of leases expiring, our growth opportunities is somewhat limited in 2015. As Doug detailed, we are actively working on several of our 2016 expirations, where we have 900,000 square feet expiring at an average in-place rent of under $50 per square foot. In Washington D.C., we project losing about 200,000 square feet of average occupancy next year, resulting in lower same-store NOI. The market weakness in D.C. primarily impacts our joint ventures, as much of our D.C. portfolio is in our unconsolidated joint ventures. We also recorded termination income of $1.7 million this quarter at our Met Square joint venture that we do not expect will recur. So the 2015 FFO contribution from our unconsolidated joint venture portfolio is projected to decline in 2015 and total $22 million to $27 million. Overall, we project our 2015 same-store NOI, on a GAAP basis, to be relatively flat between negative 1% and positive 0.5% compared to 2014. On a cash basis, we project 2015 same-store NOI growth of between 0.5% and 1.5% over 2014. As Doug described our pending vacancy in Boston is highly marketable space, and once we re-lease it at market rents, we will see a nice increase in our same-store. In 2014, in our developments, we delivered 250 West 55th Street, 680 Folsom Street and The Avant, each of which has been in lease-up during the year. We're also delivery 535 Mission Street in San Francisco this month and 601 Mass Avenue in Washington, D.C. in the fourth quarter of 2015. These developments have a meaningful impact on our 2015 results, and are projected to add between $50 million and $60 million of incremental NOI to 2015. Our noncash straight line and fair value lease revenue is projected to be $80 million to $95 million in 2015, and we project our hotel to generate $12 million to $14 million in NOI in 2015. We completed a couple of large third-party development fee projects in 2014, including the Broad Center expansion in Cambridge and the George Washington University science center project in D.C. The completion of these jobs is factored into our 2015 projection for development and management services income of $15 million to $20 million for the year. This represents a significant decline in our third-party development fee income from the past few years, and as we illustrated during our investor conference, we have a robust development pipeline and we've been more focused on using resources to deliver our new projects than on third-party fee assignments. We will be generating management fees associated with our Norges joint ventures that are not included in this number. Since these joint ventures will be consolidated on our books, the management fees show up in our earnings through the computation of noncontrolling interests and are not included in fee income. We project our G&A expense to be relatively flat compared to 2014 and project expense of $100 million to $104 million. With the early redemption of our 2015 bond expiration, that have an average coupon of 5.34%, we anticipate that our interest expense will be lower next year. Given the large cash balances we'll be holding from our asset sales, we are not projecting additional financing in 2015. It's always possible that we may see an opportune window to hit the debt market. But at this point our cash balances are sufficient to fund our forecasted development needs for the next 2 years and we have no additional material debt maturities until the fourth quarter of 2016. Of course, we're constantly looking for new opportunities, including expanding our development pipeline that could accelerate our capital needs. For 2015, we project our net interest expense to be $415 million to $425 million. We project capitalized interest to be $40 million to $50 million in 2015, which is lower than 2014 due to our stopping capitalized interest associated with our deliveries of 250 West 55th Street and 680 Folsom this year. If you combine all of our assumptions, we project 2015 funds from operation of $5.22 to $5.42 per share. This represents an increase of $0.07 per share from 2014 FFO, at the midpoint, despite the loss of $0.38 per share of FFO from asset sales. If we had not elected to sell assets in 2014, our projected FFO midpoint would be $5.70 per share, equating to projected FFO growth of nearly 9% over 2014, which is driven primarily by NOI from our development pipeline and lower interest expense. That completes our formal remarks. I would appreciate if the operator would open up the lines for questions.

[Operator Instructions] Your first question comes from Steve Sakwa with ISI Group.

Mike, if you sort of try and look at the quarterly progression of the way earnings are going to unfold -- and I realize it's a little early to even ask about 2016, but how would you kind of guesstimate the quarterly progression of FFO looks? And I guess, what I'm really trying to get to is, where do you think the run rate of the company is at the end of next year kind of positioning you for 2016?

Well, obviously, it's going to be lower at the beginning. Because that's when we're seeing our significant rollover in Boston, with 400,000 square feet of space. And our occupancy going down from where it is today by about 100 basis points, 150 basis points at the beginning of the year. And then we anticipate that we're going to continue to lease up that space through the year. I don't have the exact quarterly number in front of me but we're going to gain somewhere between 100 and 200 basis points of occupancy on our portfolio, which is -- our same-store portfolio is about 42 million square feet and the supplemental provides what the average rents on that are. Obviously our development, also, will have a significant impact on the growth during the year because a run rate today, on 250, where we got 50% of the occupancy that is revenue commencing. And we're going to get up to 78% based on existing signed leases by the end of the second quarter of 2015. And then we will continue to lease up the remaining 200,000-plus square feet, as Doug mentioned through the year, with the hope that we'll get revenue started on some of that stuff. Some of it is prebuilt during '15. And then there's 535 Mission, which, as well, is -- again, in lease-up, it is going to help us. So if you look at those developments, you will see an increase, through the year, of the contribution from those developments.

Okay. My guess it might just be something you want to think about trying to provide because I think there's a lot of lumpiness here. But it feels like the business is good and it's a timing issue and your exit the year on a much stronger footing.

Steve, I think that's a fair characterization. The business feels really good, particularly in Boston and in San Francisco, and in -- honestly, in New York City. Maybe not as much of a rental rate growth with respect to New York City. And we've got really high value-added vacancy that we've known about and we've been forecasting for the past number of quarters. And we will get it leased up and will probably get it up leased up at rents that are higher than what we are currently budgeting. I can't give you a crystal ball on the timing of it. We leased 2.5 million square feet of space in Boston -- or we will have leased 2.5 million square space in Boston calendar year 2014. And I would not be surprised if our leasing folks in Boston were highly successful at getting the 500,000 square feet of high-value space leased by the end of the year. Revenue recognition, different question, right? Is it going to be fourth quarter of '15? Is that going to be third quarter of '16? It's going to depend on the situation.

Okay. And then I guess just the other question, for either you or for Owen maybe. Just as you think about asset sales and pricing in the market place today, how do you guys just think about potentially selling more assets, ala the Norges JV, as you look into 2015? I know you don't put in the guidance, but just kind of what are the drivers as you guys think about. Is it just the unsolicited offers and you make the buy/sell decision at that point, looking at kind of an un-levered IRR calculation? Or what prompts you to decide to sell those?

So, Steve, as I mentioned earlier, we don't anticipate anything further for '14, so your question really relates to '15. We put asset sales into 2 categories. One is assets we consider non-core, those transactions have probably been more in number, but certainly lower in terms of capital raised. And then the other are assets where we've been achieving, we think, pretty interesting pricing relative to the cash flow growth in the asset. So we have not -- and are certainly are not prepared at this point, to give you a forecast for '15, in terms of additional asset sales. But we clearly want to continue to work on our non-core portfolio. We have assets, again, that are non-core to the ongoing business. And to the extent that we can sell some of those for attractive prices similar to some of the deals that we've done in the suburbs, in Boston and in Maryland, over the last year. We're want to do that. And then we're going to continue to assess the capital market for the second category of buildings and our capital needs. Mike talked about the fact that we have a significant amount of capital to address our current pipeline of opportunities for the next 2 years, to the extent new opportunities are identified and there's more of a need for capital, that'll be another factor that we'll consider as we look at this. So I think the second category -- again, it's harder to predict and it'll depend on, again, capital needs and what's going on in the capital market and does this aggressive pricing continue to accelerate in the marketplace.

Your next question comes from Emmanuel Korchman with Citi.

If you look at the comment that you made in the earnings release on 415 Main Street in that purchase option. Can you just help us think about the dilution aspect of that in 2016? Given the high rents in that building. And I realize some of those related to amortization, but what's going to be sort of the '16 drag?

Sure. So, just to give you the history, so the transaction that you're talking about is a building that was once called 7 Cambridge Center, now our marketing folks have decided to call it 415 Main Street. It's a building that was built for the Broad Institute. It is a building that is leased to the Massachusetts Institute of Technology. As part of that lease back in 2004, when it was negotiated, they were dogmatic about the need to own this real estate at some point in the future. And so, we entered into an agreement where we would do 2 things. We would amortize all of their costs from the tenant-proven perspective, over the term of the lease, at 8%. And we would give them the right of purchase building at -- basically almost doubling our money over the 10-year period of time. So effectively, we built the building for about $60 million and we're selling it for $106 million. I believe, Mike, correct me if I'm wrong, the rent on the office space was about $31 a square foot. And then rent on the lab, which is effectively the TI loan, was about $29 a square foot. So, net-net, it's about $70 or $60 a square foot that we will be losing in contribution starting in February of 2016. And it's it's a 230,000 square foot building.

Got it. And then turning back to future dispositions for a second. How much are you weighing the need for capital in doing disposition versus selling an asset because of favorable pricing and then doing something like a special dividend?

Well, I'll give you the first answer. I think it's pretty clear that we are not, in any way, shape or form, doing things because we are in "need of capital". We sit on -- at the end of these sales we'll have $2.5 million of cash and we will have $1 billion under our line and we will also have reduced our debt, significantly, over the last few years. So from a balance sheet perspective, we are highly liquid and have great ability to raise capital.

Maybe I'll rephrase that and say use of capital rather than need for capital.

No, I think -- it's Owen again. Both are a factor. Again, going back to the question a moment ago, more broadly about asset sales. The first category, the non-core, we want to continue to do that. We think, given the current capital market environment, its an opportunity for us to exit certain non-core assets if we can get appropriate pricing. And I think your question really relates to the second category, which are these larger transactions that we've been executing at what we think are very favorable terms. And we're going weigh both of those factors as we consider additional asset sales. What is the opportunity? What are the cash flow characteristics of the building that we would sell or joint venture and what would our potential capital needs be. And as Doug and Mike have pointed out. Right now, we don't have a significant near-term capital need given the sales activities that we conducted this past year.

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

Your cash re-leasing spreads jumped up pretty significantly in the third quarter. I was just curious if you think that's representative of the kind of spread you'll see in 4Q and 2015 or if you think that was more of a one-off. And maybe just, in general, if you could highlight where your portfolio in-place rents stand relative to market today.

So I think that the direction that you saw in the third quarter was consistent with the direction that you will see in the fourth quarter and in early 2015. I think, overall, we would anticipate that the mark-to-market on most of our assets in San Francisco and in Boston are in the sort of 20, plus or minus, percent increases. The New York stuff is lumpier. As I have described before, we some of these larger scale re-leasing transactions that we're working on, where the rents are sort of flat. We have a couple of where there's a market increase in the rent, a.k.a. the wild got-you-alls of the world. And then there are a couple that, on a mark-to-market basis, are negative. I mean we have, for example, a couple of the floors that we're taking back this quarter from one of the tenants, the tenant was paying $130 a square foot on, and then the market rent is probably $95 to $100 a square foot. So net-net, New York City is somewhat muted. And so I think, depending upon the timing of those transactions, there'll probably be more variability in the New York City leasing than there will be in the Boston or the stuff that's going on in San Francisco. And then Washington, D.C., it's really interesting. The funny thing about Washington D.C. is it's not all in the leasing spreads. The rents, net-net, are not going down. They're not going up a lot but they're not going down. So you have 2 factors. You have the fact that Washington, D.C. leases traditionally have 1.5%, 2.5%, 2.75% annual escalations. So a rent was, at one point, $35 or $36 a square footage suddenly in the mid-40s, and the rent today is probably in the low 40s. So there is, potentially, a little bit of a muted impact on that. And then, where the weakness is really translated in Washington D.C. is on the concession packages. A new transaction in Washington, D.C., for our major law firm over 100,000 square feet, you're talking in excess of $100 worth of tenant improvement money and you're probably talking about 9 to 12 months of free rent. And those 2 things don't get factored into the rental rate. And so it gets somewhat muted there.

Got it. Okay, that's helpful. And you guys had talked, at the Investor Day, about an interesting New York City development opportunity, potentially in an area outside the midtown. Just wondering if there is an updates to share on that.

It's still really interesting and it's still outside of midtown and it's, unfortunately, not at the point where it's something we can talk about publicly.

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

I'm hoping you could talk a little bit about leasing progress at Salesforce Tower and just your latest thoughts on San Francisco.

Sure. Bob Pester, do you want to take that one?

Sure. We are making several presentations in the last couple of weeks. They range from anywhere from 1 floor to a user up to 250,000 square feet. We think the activity is very good, based on the status of the project right now, where we are just digging the hole. And we're optimistic that we will continue to lease space during the course of construction. Whether or not we'll have most of it leased or just some of at leased at completion remains to be seen. But we're very optimistic on the activity.

Okay. And have you seen any change in demand or change in sentiment given some of the earning issues we've seen from some of the tech companies the last couple of weeks?

No, not at all. Not at all. In fact if you look, Uber, Yelp, several of the large tenants that have been in the market continued to take space. I mean, Uber just took another 80,000 square feet on top of the 400,000 that they announced last month. So we're very optimistic as far as the activity that we're seeing.

Okay. And then I guess a question for Mike. I don't know if you know the numbers or run the numbers. But if you were to back out the Boston transitional vacancy, do you know what your same-store would look like next year?

Well, I mean as I -- the same-store is about $1.4 billion. So we're losing $14 million to $18 million. So it's a 1% rough difference to 1.5% rough difference if that was not there. And then as Doug mentioned, you lease it up to the market, right, you're going to add another 40%. So another $8 million or something like that to that income. I would add, just to your question on San Francisco, it's interesting on some of the tech company earnings announcements. Most of them are expense related because they plan on hiring more people. I think that bodes, actually, well for San Francisco.

Okay, all right. And then one last question. Hotel multi family same-store was down year-over-year. Can you talk a little bit about what's going on there?

I think the hotel was up a little bit. It had better rate than we anticipated. And the residential market was primarily due to The Avenue, which, from 2013 to 2014, has seen a reduction in the rental rate that we can get. And you can see in the supplemental, it'll show you what the rates are from period to period. And that's really what's driving that decline.

And do you see that turning?

I think that our projections are that it's going to be stable in 2015. We're not projecting significant decline. But there's a lot of product that has come online in that marketplace.

Jamie, I mean, we are far from expert at where the Washington, D.C. market is with 1 property. I think our view, based upon our conversations with the folks who are doing the leasing, are that rates going to basically remain firm and we, hopefully, will pick up some occupancy. I'd say our occupancy went down more than we would have been anticipated during the move-out or around the end of the school year at G.W. And so we've done some things to sort of change the approach how we deal with that transition. And there is basically a total net-net neutral decision on where we're pricing the unit. But we are not a good barometer of the residential market in Washington, D.C. If you call in a half hour I'll probably do a better job for you there.

Your next question comes from David Toti with Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: Just a couple of questions on concessions and leasing commissions for the quarter. They bumped up. Is that really a function of the mix or is there 1 specific lease, that you might have done, that was the driver of those numbers?

Yes, it is clear mix. It's, a, we did longer deals. And so, clearly, with a longer lease you have a higher commission. And then there's a majority of deals that were weighted towards New York City. And the New York City Leasing Commission has given that the New York City rents are also higher, pushing the number significantly.

Several of those deals in New York City were 20-year leases. So they have a pretty significant impact. David Toti - Cantor Fitzgerald & Co., Research Division: Given the fact there's increasing pricing power across most of your markets. When do you think we can start to expect to see some of those absolute numbers start to tick down?

I think that, net-net, we are not seeing a lot of pushback on concessions in any of the markets that we operate in. Because there is still a bid for either new construction or there are landlords who are prepared to provide additional concessions with a higher rent. So there's been less pressure on that. Interestingly, in San Francisco, most of the transactions, from a concession perspective, are not too dissimilar from where they were 2 or 3 years ago, but the rents are 25% higher. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. And then just one last question, I'm not sure who wants to answer this. But given the sort of reversal of the 10-year, RMG has moved up pretty substantially, indicative of a readthrough to further compression in cap rates. I guess, number one, are you seeing any evidence of that or is it too soon? And number two, are you underwriting even tighter cap rates in most of your markets for future transactions?

Well, it's Owen. There was a transaction announced in Washington, D.C. this week, the PNC Plaza, and it was an all-time record of 1,000, I think 1,075 -- if Ray is on, he could confirm -- 1,075 a square foot. So that is some tangible evidence, to us, that we have this volatile period and the market is continuing to move forward. And anecdotally, given that we're in the marketplace, we hear about other deals that are continuing to progress at pretty aggressive numbers. So I don't think it -- David, I don't think it necessarily changes our underwriting. But as I said in my remarks, on the acquisitions side, we're focused on deals where we have some kind of unique angle to Boston Properties. Whether it be using our partnership units or something that's got a value-added component. I guess, the good news is that maybe we sold the portfolio to Norges too cheap, but we retain 55% of it, so it should come through on our NAV right?

Your next question comes from Brendan Maiorana with Wells Fargo.

I wanted a follow up just a little bit on San Francisco. I think it was mentioned in prepared remarks that VC funding was very high this year, higher first three quarters than it had been the past few years. And then I think you also mentioned that part of the improved leasing activity was the companies that are expanding their hiring expectations. Are you guys seeing any change in terms of tenants taking down growth space, such that the leasing that's occurring there now, has got a little bit more shadow space or growth space baked into it than what we've seen so far this cycle?

So let me answer the question in the following manner. Traditionally, in San Francisco, post the dotcom meltdown, technology companies had the luxury of being able to basically do just-in-time demand for their real estate offerings. So if they needed 50,000 square feet of space, they wait until 6 months before they needed it. They hire the people and the they would lease -- the space would be plentiful and it would be there. And I would say that was the situation that you were seeing in San Francisco until about 2 years ago. And 2 years ago, everyone sort of woke up at the same time and said, there are not a lot of blocks of suites available. And so technology companies, the Salesforces of the world, the Dropboxes of the world, the Ubers of the world, the LinkedIns of the world, the Googles of the world, all said, if we're going to be able to continue to grow, we have to be become more corporate and long ranging in our views on how we go about acquiring sites and making sure that we have the real estate facilities necessary to allow our growth and our new employees and existing employees to move into, as we sort of get there. So I would tell you that there is absolutely no question that a lot of what is going on today are tenants that are taking down space in expectation of growing their organizations. But these are all organizations, and Mike has, ad nauseam, talked about this in the past, that have tremendous operating fundamentals that have clear profitability indicators in either EBITDA or cash flow growth or top line revenue growth. And so you can see the logic behind their need for additional employees, juxtaposing it to, back in 2000, 1999, when there were a tremendous number of non-publicly traded or publicly traded and recently funded organizations that were based upon a business plan without any revenues, without any income, without any sort of track record. And it all sort of suddenly fell into the ocean in 2001. It's a really different kind of a class of customers that are doing what I'm describing. And I think that's what changing. But it is absolutely true that they are looking at real estate a couple of years before they need it because they don't have a choice, at this point, other than to do that. David Toti - Cantor Fitzgerald & Co., Research Division: Okay, that's very helpful. Just one other just kind of follow-up question. Mike LaBelle, just on a very high level basis, it sort of seems like 2015, as you've highlighted, is a transition year from a same-store growth perspective. Is it kind of similar to, I think, what was 2012 or that appeared like it was a bit of a transition year. And then you posted very strong growth last year and this year on a same-store basis. Is that sort of how we should think about the years, maybe the couple of years after '15, that you're kind of priming the pump pretty good same-store growth thereafter?

I will agree with you that I think there's a good opportunity for us to have faster same-store growth beyond 2015, assuming that we are successful in leasing up the space that we have in Boston, which again is at The Pru Tower and the Hancock Tower and The Pru shops, which we're going to see strong growth on. And then if you look at San Francisco, and you look at 250,000 square feet EC expiring to the end of '15. But the 900,000 square feet expiring during 2016 at rates of under $50 a square foot, we should be able to lease that space today in the mid-60s to 70. So again, to the extent that we're successful in being able to kind of renew those and lease-up any space we get back, which I think we should be, we should see some benefit from both of those. So I do think that we are well-positioned heading into 2016 given that dynamic.

Your next question comes from Jordan Sadler with KeyBanc Capital.

I just wanted to follow-up on the likelihood of potential 1031 Exchange and maybe if you could dovetail into that some of the opportunities you are seeing on the investment front and whether or not it's possible to potentially 1031 into development?

Okay. Let's see, I'll let Owen describe sort of the pipeline of things that we're looking at. Conceptually, it is virtually impossible to 1031 into development in a meaningful way because the dollars to be put out the door within 6 months. And the fact of the matter is you have to do it on a property by property basis and there's just not enough capital on a current basis going out in any of these assets to make a meaningful dent on that.

And then on the new investment opportunities, I would put them in a couple of different categories. Although I think probably the most significant category is looking at new developments, so particularly new sites. So if you look at markets, particularly I would say in San Francisco and in New York City, we have a number of projects that we're actively working on, where we would acquire a new site and it would be a new development. We do look at the acquisition of existing assets in all of our markets. We're very active in that. But as we've talked about, from a pricing perspective, we've had a very difficult time making the figures work for those kinds of acquisition. So, again, going back. I think the focus for us to be competitive in this market is, is there a development or redevelopment angle, where we can our development and operating expertise to create value or is it something where there is a tax protection we can provide through our unit. That would be another category of things that we'd be looking at.

Okay. And just following up on on-development, as a look at San Francisco and there have been a number of questions surrounding sort of the strength and how long it will continue. What's sort of the appetite to invest incrementally in new development there given the existing exposure to Salesforce Tower et all?

I think it's a very fair question, Jordan, and that the good news is that, from a timing perspective, none of the things that we are currently looking at are "likely this sort of cycle development," in other words they're not going to be started in the next 6 months and be competing with the completion of Salesforce Tower, which is going to occur in the first quarter of 2017, knock on wood. So that most of them are -- as everyone knows, there's been a lot of talk about Prop M and the inability for the city, at the moment, to approve new development much more than what has currently been discussed, which is another a couple of million square feet, which is already sort of "spoken for". Most of that the stuff, the things that we're looking at, are projects that will be a 3- to 4-year permitting exercise. Working with the city, getting in line, doing what's necessary to procure the rights and get our Prop M allocation, and then be in a position to start the development at that point. So net-net, given our current exposure, I think I would hope and expect that our current exposure will have been long put to bed prior to the commencement of these other developments. So maybe we will get involved in something else in the interim. That's sort of in the process because it make sense for us from a capital perspective and there's an opportunity that we see. But most of the things that we're working on really have a more longer timeframe associated with it, which really will not be competitive with the Salesforce Tower.

And just one thing I would add to what Doug said. If you think about our portfolio -- and we talked about this a lot, the investor conference, in Boston, and to some extent Washington, particularly in Reston, we have somewhat of an embedded long-term development pipeline. Because we have sites on our existing assets. We have the North Station project, which you're going to be hearing more and more about. Whereas in New York and San Francisco, we don't. And so that deals that Doug is describing is really setting is up for continued longer-term development investment in those 2 markets.

This is Mort. Let me make a comment about the Salesforce Tower, because that building is being leased, 50% of it's being leased, but it's the bottom 50%. The upper 50% is unique in San Francisco. There's just going to be nothing like it. So I think it's just going to have an unusually strong competitive position, no matter what other buildings come on stream in the San Francisco market. We're talking about the tallest building, by far, in San Francisco. And we're looking at the top 40 floors, give or take a little bit. And those floors are going to have unparalleled views and will have an identity that will be just remarkable.

Your next question comes from Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Two questions for me. The first question is -- if you could just comment on the dialogue with tenants, especially the bigger tenants -- are you seeing the tenants engage proactively in lease negotiations earlier, trying to get a jump on playing off the, whether its development or availability of space or are you seeing landlords being ever more proactive, reaching out for tenants sooner, to try and ensure that tenants don't even get a whiff of what else may be out there?

So obviously, it depends upon the size of the tenant. I would tell you that -- and I'll let John Powers chime in here, I would tell you that almost every major tenant, and if you define a major tenant as more than a couple of hundred thousand square feet, is very sophisticated about what's going on in the market place as are we. And so it is a natural conversation for an organization to be having with it's landlord or for it's landlord to be engaging with its customer about what its long-term opportunities might be, how it might be able to reuse and reutilize its space more efficiently and what the choices might be in its existing portfolio versus going outside the portfolio and looking at -- either subsidize new development, which is what the issue is and in the case of a place like New York City, with the Hudson Yards and the step down in the World Trade Center area or new just sites that has been permitted and where building potentially available in a market like Washington D.C. But John, do you want to comment on that?

Well, I think you're 100% right. But I add on to that, depends upon the situation of the tenant and their business. Are they long space, like Weil was? Are they short space? Do they need additional space today? Is their business -- need to be reconfigured? So we can do have a look at the macro conditions in the market that Doug spoke about. But every tenant has its own deal and its own story and its own structure, specially if they're more than 150,000 feet. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's helpful. And then the second question is for Mike LaBelle. As you guys contemplate -- right now, you spoke of not needing to recycle any capital. You guys are sufficiently funded. But when you, presumably, get around to the next round of potential asset sales or JVs, as far as JVs goes, how much of an impact is it with regards to the rating agencies, as to which assets you choose versus you've ample capacity regardless, within the rating covenants, that you can be looking at unencumbered assets to JV just as easily as encumbered assets to JV?

We have plenty of room and we had specific conversations with the rating agencies around the Norges joint venture because a couple of these assets are unencumbered. And our expectations, in the near term, is they will remain unencumbered. We do, however, have rights to encumber these assets, up to certain levels that are fully within our rights, and our partner is fine with that. So, to the extent that there was a situation where we wanted to encumber them to improve our pool, we could do that. However, in our conversations with the rating agencies, there's not a lot of concern from them related to that issue. There are many other companies that also have JVs like this, that have strong ratings. And my view is that it has minimal, if any, impact on where our rating is today.

And your final question comes from Vance Edelson with Morgan Stanley.

Maybe, first, just an update on traditional versus nontraditional tenants in Manhattan. In recent quarters you've referred to the traditional tenants in Midtown, and downtown D.C. for that matter, being weaker as the economy continued to slowly improve. Do you feeling any sort of strength emerging or is it's still largely limited to tech and the less traditional verticals?

John, do you want to cover that?

Well, tech is strong in New York. It has been -- clearly that's the case, but that's a small percentage of the market. The high-end financials are doing well and I think the law firms are rightsizing. In our portfolio we've talked about looking with -- I've mentioned we're dealing with 7 law firms, Weil was -- it took less space, but some of them are expanding. So I think that the traditional sector is doing well. Tech Is doing very well. And I think there's a lot of interest, now, in moving to the future. People are looking at solving their business needs and getting their business situation correct, looking longer term. I think that's a lot of interest in Hudson Yards and also Brookfield's project. A big tenant looking at that. So I think the New York market is in more in a growth mode overall. But certainly, tech is the hottest.

Okay, that's helpful. And then on 535 Mission, it's coming on in about 1 year. Could you provide a progress update on the pre-leasing strategy? It doesn't look like anyone signed on during the quarter. So how are you balancing the desire to quickly fill the building versus holding out for potentially stronger rents down the road?

So 535 Mission actually got it's TCO a week ago. And the first tenant will be in occupancy, and working in the space, within the next couple of weeks. We have signed our second lease at the top of the building this quarter -- I mean, in the fourth quarter in October. And we are close to execution on another lease that will bring us to about 65% committed and leased. And we expect the remaining portion of the building to be leased before the end of calendar year 2015, with rent commencement either in '15 or by no later than the middle of 2016. And we are we have seen about a 15% increase in rents from the first transaction that we did, which was probably negotiated 8 months ago, to the rents that we are asking today.

Great. And last question. I appreciate that you can't forecast 2015 asset sales right now because there are some unknowns. But if, for example, market liquidity remains similar to today's environment and given that you don't need capital, would you be encouraged to sell core assets just based on market pricing versus the fundamental outlook? I'm trying to get a feel for just how attractive the pricing is right now in your mind.

Well, Vance, as I mentioned, we have non-core assets that we're going to continue to sell, subject to the pricing that we're able to receive for those assets. And then on the second category, which is more return-oriented, we're going to have to weigh those factors as we get in 2015. What's the pricing for the asset? What are the assets? What's the structure? What our capital needs? And it'll be a confluence of all those factors.

Thank you. At this time, I would like to turn the call back over to management for any additional remarks.

Okay. Let me just conclude by reminding everyone that we had a strong quarter financially, and hopefully we've been able to demonstrate that we continue to make terrific progress executing our plan. And thank you for all your attention and we'll see you all in 2 days. That's right, down at Atlanta, yes.

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