BXP, Inc. (BXP) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to Boston Properties’ First 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 First 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 statements. Having said that, I’d like to welcome 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 Owen Thomas for his formal remarks.

Thanks Arista, good morning, everyone. I’m joined here in Boston by Doug, Mike and our local team. This morning I’ll provide an update on how we’re viewing the economy and its impacts on our markets and business. I’ll discuss our result and capital allocation approach and progress. And lastly we’ll provide some high level remarks on the quarter. Doug will provide an overview of our operation including leasing market conditions and activity as well as progress on our developments and then Mike will wrap up with a more detailed financial summary of the quarter. So, starting with the economy, we continue to experience a very hospitable environment for real-estate investment with support of capital and property market conditions. On the capital markets side, as you know, interest rates have been stable over the last quarter as measured by the 10-Year U.S. Treasury which decreased only slightly over the quarter about 20 basis points. Though the Fed’s fund rate is extraordinarily low relative to the level of economic growth and unemployment in the U.S. There are headwinds for interest rate increases by the fed driven by very low interest rate environment outside the U.S., the prospect of a further rise in the dollar and somewhat tepid economic indicators. That being said we and market consensus would expect the fed to increase rates later this year. However, we’re not convinced such a move will have an immediate negative effect on real-estate fund flows and values. Long-term rates or the 10-Year U.S. Treasury is a more important proxy for real-estate capital markets. And it has not historically moved up in direct correlation with Fed funds rate increases. Further, today there is a healthy spread between cap rates and long-term interest rates versus historical averages. These factors plus the likely rent increases associated with an improving economy should help cushion the impact of short-term interest rate increases. Now, private investor enthusiasm for real-estate remains at elevated levels particularly for high quality office assets in our core markets. Significant transactions were completed or announced in the U.S. in U.S. real-estate in the first quarter involving investors from Europe, Canada, Asia and Australia. The yield gap between the fixed income markets and real-estate is driving increasing capital flows into our asset class and when we do not yet see declining oil prices or an appreciated dollar diminishing offshore demand for U.S. real-estate. Now moving to economic growth and the property markets, as you know, the economy grew 2.4% last year and is predicted to be relatively weak in the first quarter. The unemployment rate has decreased to 5.5% as of the end of March. Job creation has been relatively strong over the past year averaging around 260,000 jobs per month though the figures for March were less than 50% of preceding year’s average. Though these top line numbers demonstrate relative economic strength growth appears to us as reflected through our lands of tenant demand to continue to be concentrated among technology, Life Sciences and other creative tenant. As a result, our location is best positioned for this demand continues to outperform namely San Francisco and parts of Boston. One additional area of strength is from smaller asset management and financial advisory firms in New York City given heavier regulation of the financial segment, there appears to be some deconstruction of larger firms occurring, creating new tenant demand for high quality space in good locations. Oil prices have remained low over the quarter but this has had no direct impact on our activities given we do not operate in energy driven markets. The appreciated dollar though headwind for international corporate earnings has also not yet had a direct impact on our activities. So, in summary on the environment we believe capital values are more advanced in the cycle of an underlying fundamentals in all our core markets, prices per square-foot per office buildings are at all-time highs while rents have not returned to 2000 levels though it is certainly as close in San Francisco. We’re seeing an upside driven by operating fundamentals and further cap rate compression, so logically we’re more actively investing our capital in new developments rather than existing asset acquisitions. Further, we’re taking advantage of private market pricing by funding this activity through targeted asset sales. Now, moving to the specifics on capital strategy for the quarter, the pursuit of acquisitions remains for us active but challenging. New investments considered in existing buildings must have some type of competitive angle for us such as providing tax protection to the use of our operating partnership unit as consideration or potentially working with the financial partner. We are spending more time looking at new investments and development sites or buildings requiring repositioning both of which leverage our development and operating skill. We continue to be active with dispositions. As you know so far this year, we’ve completed the sale of the avenue in Washington DC and our land parcel in suburban Maryland for a total value of $205 million. We continue to evaluate disposition candidates that involve buildings in locations that are no longer strategic to us and/or buildings or we can achieve attractive pricing relative to the cash flow characteristics of the asset. Given our transaction pipeline currently under consideration, we continue to estimate dispositions could total $750 million in 2015 likely comprised more of individual building sales rather than large scale joint ventures. As mentioned, 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. Our existing development pipeline consists of 11 projects representing 3.3 million square feet with a total projected cost of $2.1 billion. We forecast these projects would generate over 7% cash NOI yield upon completion over the next three years. We have all the capital required to complete these developments with $1.1 billion in unrestricted cash currently on our balance sheet. The pre-leasing of our development pipeline has increased to 61% due primarily to excellent progress in the leasing of 888 Boylston Street in Boston. In addition, we have a very significant portfolio of pre-development opportunities in all our core markets consisting of either sites, options on sites or existing asset redevelopment. Though this pipeline consists of opportunities available to us for many years in the future, in 2015, we estimate we could move approximately $1 billion in pre-development projects into our active development pipeline. These potential projects include the first and podium phase of North Station consisting of 360,000 square feet of retail and law space, law office space located adjacent to the TD Garden in Boston, 160,000 square-foot residential development located in our Kendall Center project in Cambridge, a 600,000 square-foot residential and retail development located in our Reston Town Center project. Three different potential office build-to-suit opportunities in the Washington DC region representing in the aggregate over 1.3 million square feet, two possible suburban office developments in the Waltham Market totaling over 300,000 feet, a new development in New York City, which we are unable to comment on in detail at this point in time. Significant improvement projects at 601 Lexington Avenue in New York and 100 Federal Street in Boston both of, which were enhanced and add high value retail amenities to the building. Before launching any of these projects, we need to complete the entitlement and planning process and in most cases some level of pre-leasing. This next wave of development will include a significant allocation to multi-family projects where we anticipate the initial yields to be closer to 6% than the 7% initial cash NOI yield we’ve been able to achieve on our office project. Lastly, moving to results for the first quarter, we continue to perform well and made strong progress towards executing our goals. As you know, diluted FFO for the first quarter was $1.30 per share, which is well above our forecast and consensus. However, significant portion if not all of, the beat was due to lease termination income. We’re also increasing our full-year guidance and Mike will take you through the details. We had an active quarter in leasing having completed 91 deals representing 1.5 million square feet with Washington DC representing 40% of the activity by square-footage. Notwithstanding the vibrant leasing activity, the occupancy of our in-service properties dropped to 90.3% from 91.7% due to the previously communicated move-out of Manulife and State Street at the Hancock Tower. So, let me turn the discussion over to Doug for a further review.

Thanks Owen, good morning everybody. I’m going to focus my comments this morning on the operating additions in our market and our portfolio, and that includes our existing development assets. I’m also going to say a few things sort of sprinkled throughout my comments about some specific property investment and leasing decisions that we are making in the operating portfolio. And they have some impacts on our future results, so I just sort of want to give you a little foreshadowing of some of those things as well. So, as Owen said, overall leasing in the quarter was 1.5 million square feet which is actually pretty similar to where it was in 2014. But it’s actually pretty high on a relative basis, the last 10 years our average was about 1.1 million square feet. I wanted to spend a couple of minutes talking about the leasing statistics that I did notice a few things in the notes about them. If you think back to what we discussed last year, we talked a lot about the major law-firm lease expirations primarily in New York City. And you may recall that we explain that in some cases, the leases had a very significant roll-up at the General Motors building with Weil and at 601 Lexington with Kirkland & Ellis. But that at 599 Lexington Avenue, Reed Smith and K&L Gates, were also renewals that we did but there was a roll-down. Well, the two renewals at the 599 Lexington Avenue, this property 250,000 square feet are actually in the first quarter 2015 leasing statistics leading to that reduction in the mark-to-market in that particular place. If you look forward at our New York City lease expirations over the next few years, based on current market rents, the overall mark-to-market is basically flat to slightly positive. And the majority of the rollover is at 399 and at 601 where Citibank is going to be doing their consolidation from to their properties out in Greenwich Street. In Boston and in San Francisco, as you can see from our leasing stats and the supplemental, the improvement in market conditions is reflected in the mark-to-market, we were up 14% in Boston and 37% at San Francisco and that’s running through the portfolio. In DC, the statistics are biased by a flat as is renewal on a 260,000 square-foot lease with the GSA in Northern Virginia but they still are pretty fair reflection of overall market conditions, not a lot of movement in DC. Now let’s turn to the actual markets themselves. So, in DC, there have been a number of re-analyst market events in the last couple of weeks. And I assume many of you have either seeing first hand what’s been going on down there or read the summaries. But simply put, the DC market predominantly the CVD continues to be very competitive since, there isn’t lot of significant increases in demand. We are competing for and winning market share, on our vacated law-firm based on our JV properties, so at Market Square North, where we’re getting 90,000 square feet back, we’ve already released 60,000 square feet. We are getting this space back in July of ‘15, but as with all the new long-term deals in DC, there is free rent so, there is going to be very little income recognition from that space into late in 2016. We also completed another 38,000 square feet of extensions in that building. At 901 New York Avenue, we talked about the 250,000 square-foot Finnegan lease renewal last quarter but as part of that deal, we are providing 40,000 square feet of currently rented space as free swing space as the concession to the tenant. It’s going to begin in August and they’re going to have that space free for the duration of 2016. We also got back 90,000 square feet from another firm and we’ve completed 34,000 square feet of leases there most of those have already started. And our availability is down to 45,000 square feet in a 556,000 square-foot building. And then finally in our JVs, at Net Square, we have about 200,000 square feet expiring at the end of 2015 including 122,000 square feet at the top of the building and this space continues to be some of the best space in the city. The one wholly owned building where we have some near term exposure, law-firm expiration is at 1330 Connecticut Avenue and we’re actively engaged in conversations there to retain that major tenant. There does continue to be additional supply coming into the DC market in the formerly the personally let buildings for lead tenants, the space there vacating as well as stacking the construction in the CBD and NOMA and in Southwest. Our development at 601 Mass is scheduled to open in five months, the building is 83% leased and it’s income contribution is going to ramp up in 2016. Reston Town Center continues to be the best performing market in the DC region, it’s the combination of walk-able retail, high quality new multifamily community programming and improving access to metro, all continue to draw new tenants to that market. Small tenant demand is strong, technology tenants are expanding, we have Google and FireEye and Appian who all have expanded in the last quarter. And Bechtel which moved to Reston Overlook in July of 2012 now leases 290,000 square feet from us. And we continue to try and relocate other tenants that they can bring they are relocating to the Town Center. Earlier this month, we negotiated the recapture of 55,000 square feet at our Overlook property in order to provide expansion to Bechtel and we’re working on another two floors in that same building for 2016. Our design and permitting on blocks four and five in the urban core for an additional 520 residential units and 275,000square-foot office building is progressing. And we are working towards an early 2016 commencement the apartment component. The Avant, which is the apartment building that we have now completed in Reston finished the first quarter at 95% leased, 15 months after its initial November 2013 opening. And as Owen said, we continue to chase a large GSA consolidation requirement in Springfield Virginia, we’re actively making proposals on 1001 Fifth Street and we have to build the suites that we’re chasing in Reston as well. The market with the most significant pick-up activity is clearly New York City this quarter for us. It’s been a really good market but with 10% availability and lots of uncommitted new construction, rental increases are pretty moderate still. During our last call, we talked about early loss from renewals. This quarter, we find ourselves in a position of having multiple tenants looking for expansion space with limited availability on our portfolio. At 601 Lexington Avenue, we have leased the first floor of our 2016 City expiration. This resulted in a termination payment and a reduction in our remaining 2015 revenue. We’re in discussions on two additional floors and have 200,000 square feet tenant looking for additional space in the building. With virtually no vacancy, our New York team is actively looking at ways we can control currently leased space for the benefit of these growing users. We’re also in the planning stages on major repositioning of the retail and the low rise of 601, that’s 138,000 square feet on floors three through six. And hope to be able to share those plans in the coming quarter. At 599 Lexington Avenue, in order to speed up the rebuilding process for our recent law-firm renewals and get that space back on to the market quicker, this quarter we negotiated a full floor recapture with a payment from the tenant to allow us to provide three swing space and from mid 2016. As further evidence of good activity in Manhattan, a year ago we had 95,000 square feet of availability and expirations at 540 Madison. In the past 12 months, we’ve done 12 deals on 80,000 square feet including six deals and 53,000 square feet since the beginning of 2015. And today, we’re sitting on 15,000 square feet of availability and we have actions on 10,000 of that right now. At 250 West 55th Street, we are in lease discussions with 11 separate tenants ranging from 5,000 square feet pre-built suite to two-floor users for over 145,000 square feet of the 188,000 square feet of available space, that’s lease discussions not tours. The bulk of our available space today is on floors 30 through 35 and our rents range from the low $90s to well over $100 per square-foot for the top of the building. Our taking rents are very consistent with the forward-looking pro forma expectations when we restarted the building in 2011 though our concessions are higher. A lot has been written about the values and the rents associated with high-end retail space, specifically on Fifth Avenue, where we’re coming up on the lease expiration of FAO Schwarz at the end of 2016. The FAO space is over 60,000 square feet includes 14,000 square feet on the ground, 34,000 square feet on the second floor which has 20-foot slab-to-slab ceiling and 11,000 square feet of concord space. On the one hand, the front door for this space is 125 feet off of Fifth Avenue front and the other were told 4.6 million people visit the Apple store on an annual basis. The FAO Schwarz space is going to go through a major renovation and downtime as part of any re-leasing and if possible that we may be able to work with FAO to expedite this transition sooner than the expiration of their lease. Princeton continues to outperform the New Jersey markets. During the quarter, we completed 260,000 square feet of leasing and we continue to see expansion from the far end pharmaceutical tenants. Our suburban New York team engineered a very creative recapture with a tenant payment again and relocation in order to secure a 10-year commitment from Solvay a global chemical company for 110,000 square feet and a new addition to Carnegie Center. Switching over to Boston, the Kendall Square market of Cambridge continues to dramatically outperform the rest of the urban Boston market with asking rents well over $70 per square-foot. Our Cambridge portfolio is essentially 100% leased and we have no short-term availability. What we do have our existing tenants that want to expand. There are a number of large expansion requirements in the market. We are working with the city on the up-toning of our Kendall Square project up to 600,000 square feet of office space. And the Volpe transportation site continues to be a potential expansion for the market. But the marketing process there has been delayed. Our residential project as Owen said, adjacent to Kendall Center has received its entitlement during the quarter. And we hope to commence construction in 2015. In the Back Bay, we’re underway with our repositioning and re-branding at 120 St. James, the Hancock Tower low-rise where we have 170,000 square feet of availability. Our asking rents on the low-rise base at the Hancock Tower are lower than the rents across the river in Cambridge. The base building work will be completed in the third quarter. Our 150,000 square feet block at the top of the tower is still under lease until the middle of the summer. While it is certainly available to show, the space, 20 years old won’t be in a market ready condition until the end of the year. Realistically, we are not likely to have rent recognition or commencement on these blocks until the back half of ‘16. However, when fully leased, the available space at the Hancock Tower should generate close to 40% increase over expiring rents. At 888 Boylston Street we signed leases for four additional floors bringing our committed space to 232,000 square feet of the 350,000 square feet of office space. The historically difficult weather we experienced January through March did impact our construction spend during the first quarter but we still anticipate having tenants in the space during the third quarter of 2016. We are having extensive conversations with retailers for the 65,000 square feet of retail space at 888, the prudential flagship expansion which is well underway as well as our major food court renovation repositioning. We hope to have a number of signed leases to report over the next few months or days. Our predevelopment activity at North Station in the Back Bay Garage which involved designing and permitting are ongoing. The Waltham Metro West market continues to get stronger driven by expansion by life science and tech companies. While there were tenants that are relocating to urban locations, there continues to be urban growth on 128. We have limited current vacancy in our suburban portfolio. The harsh weather had minimal impact on our two Waltham developments and we expect to deliver our stack retail building which is now 100% committed in October of this year, and 10 City Point 74% leased is on schedule for rent commencement in mid 2016. In the phase of lots of growing tech demand, we’re working with the owners of 1265 Main Street, that’s the former pulled away property adjacent to City Point to complete a 50-50 joint venture and 119,000 square-foot lease with a global shoe company. This development would commence construction next quarter. This project is part of a larger master-plan that could allow for over an additional 1 square feet of office and retail development in the future. Finally going to San Francisco, San Francisco continues to have the strongest overall demand in the country. And as we’ve discussed in the past, with the expected [indiscernible] restrictions coming into play it’s only going to be facing more and more supply challenges. Other than new development, there is perhaps one block of 150,000 square feet of available contiguous space in the City. And unlike in the first quarter of ‘13 to ‘14, there have been no big deals this quarter other than 200,000 square-foot Uber deal [indiscernible] market, likely the lack of available supply maybe a factor. Overall activity in the market while down from the first quarter of ‘14 when you had the Salesforce and the Twitter and the Dropbox deals or large deals get done, actively continues to be very strong. During the quarter, we completed four single or multi-floor office lease renewals at EC totaling 174,000 square feet. The mark-to-market on a growth space was between 35% and 70%. None of these transactions are in our same-store statistics for the quarter. These deals had starting rents between $65 and $73 per square-foot. We are actively engaged with additional full floor tenants with 2016 and 2017 leased expirations. There were significant opportunities for rental increases in all of our transactions in Embarcadero Center. I do want to mention though, one trend that we are seeing is San Francisco particularly in high-rise space. There has been significant compression in the market between the less expensive and the premium space. During the last cycle, the range of starting rents we thought EC was from the low $40s to close to $90 a square-foot. Today, the range is more like the low $60s to the mid-$80s. At 535 Mission, we’ve now completed leases with four tenants and have two more leases out for signature which will bring us the 240,000 square feet or 79% of lease. We have a number of active full floor proposals under discussion on the remaining four floors and our acting rents are in the high 70s about 10% higher than our original pro forma. Construction at Salesforce Tower continues to progress. We were overly aggressive with our spending schedule for 2015 and our contractor has allocated a heavier spend to 2016. With the mid-2017 delivery for space at the top of the building, we’re still not yet in the window for much in the way of leased expiration driven leasing under our 100,000 square feet. However, our marketing team continues to actively market the building across the bay area, and there is a continuous flow of users that have expressed interest in the building. Over the last quarter, we had 12 preliminary presentations for users in excess of 50,000 square feet. That was a lot of information I went quickly. But I’ll turn it over to Mike to jump into the financials.

Okay, thanks Doug. Good morning everybody. I’m not going to spend too much time talking about the debt markets today because we really don’t have any significant debt maturities this year. We also continue to have meaningful cash balances in excess of $1.6 billion which does include $534 million of currently restricted cash that has held for a possible 1031 exchange. We are focused however on our loan maturities in late 2016 and ‘17 which primarily consists of six mortgage loans with our share of the outstanding balance totaling $2.9 billion. These loans have weighted average interest rate of 5.8% which provides a great opportunity to reduce our interest expense by 2017. Assuming the current 10-year treasury rate, we maybe - the current forward 10-year treasury rate, we may be able to reduce the coupon on this borrowing by almost 200 basis points which could result in more than $55 million of possible annual interest savings in the future. Now, these loans have yield maintenance, pre-payment premiums. And they were looking at a variety of strategies to pre-pay them early. We see it as relatively expensive today. What we’ve done is we started to layer in some forward starting swaps to hedge the index rate on a portion of the refinancing opportunity. And today we’ve locked in $300 million at a forward starting swap rate in September of 2016 at 2.45%. The average forward premium is 33 basis points and the swap spread is 12 basis points. So we’ve locked in based on an average current 10-year treasure rate of about 2%. Our strategy will likely be a combination of early refinancing, possibly in 2015 and hedging the interest rate risk for financings in 2016 and 2017. Our hedging program has no impact on our 2015 earnings and our guidance does not include any refinancing activity in 2015. So, turning to our earnings for the quarter, we reported diluted funds from operation of $1.30 per share which is $0.07 per share above the midpoint of our guidance range. The majority of the variance is due to termination income which totaled $14 million for the quarter and was $12 million or $0.07 per share higher than we had projected. One piece of our termination income was a distribution we received from our claim against the bankrupt Lehman Brothers at State of $4.5 million. We continue to hold the claim against Lehman related to the termination of its lease at 399 Park Avenue in 2009. And we believe the remaining claim value to be roughly $5 million. We’ve not projected income from any additional possible distributions in 2015. As Doug mentioned, we orchestrated three significant lease terminations in our New York region this quarter. The earnings impact is the acceleration of income into the first quarter and a reduction of revenue from these spaces during the remainder of 2015 and in some cases in 2016. If you exclude the terminations, the performance of our portfolio exceeded our expectations by about $2 million or $0.01 per share. All of this was in rental revenue as we completed several early renewals with nice rent up-ticks in New York City and in San Francisco and completed new leasing both in Embarcadero and in our Gateway project in San Francisco ahead of our projections. The rental increases on our early renewal activity does not show up in our leasing statistics this quarter as the new cash rental rates will not take effect until the natural lease expirations in 2016. And lastly our interest expense was higher than our projection by $0.01 per share due to lower capitalized interest than we projected. Looking at the rest of 2015, and our guidance for the year, our out-performance in the first quarter was mostly termination income. As I mentioned, we would be losing the rental income projected for these spaces for the rest of 2015. We project the income loss for these deals to the remainder of ‘15 to be approximately $0.02 per share. So the net increase you should expect in our guidance from the first quarter out-performance is $0.05 per share. Our occupancy dropped to 90.3% as we forecasted due primarily to the loss of 350,000 square feet of occupancy in Boston at the Hancock Tower. For the rest of the year, we anticipate average occupancy of, just under 91%. As we’ve discussed in our prior calls, our same-store growth will be negatively impacted in 2015 but the anticipated reduction in our average same store occupancy from 2014. Offsetting this however is the positive impact of the projected roll-up in rents in our leasing activity. This quarter, we completed several early renewals with rental rate increases and in San Francisco we’re actively working on several more early renewals of leases that expire in 2016. Deals could improve our 2015 GAAP rental income as future rental increases are straight-lined into 2015. As a result of the leasing activity we see, we expect our GAAP same-store NOI to be relatively flat in ‘15 versus ‘14 and expect growth of negative 0.5% to positive 0.5%. This represents an improvement of 25 basis points over our same-store guidance last quarter. On a cash basis, we also expect relatively flat same-store growth of 0% to 0.5%, which is down slightly from last quarter due to a couple of the terminations in New York City happening earlier than we projected. As you know, we exclude termination income from our same-store specifics. The lease-up of our development pipeline is consistent with our projections last quarter. The projects that impact 2015 and are not part of our same-store include 250 West 55th Street, 680 and 690 Folsom, 535 Mission, 99 Third Avenue, 601 Mass Avenue and the Avant and are in aggregate projected to add an incremental $54 million to $60 million of NOI in 2015. Our non-cash straight-line and fair-value lease revenue is projected to be $85 million to $95 million in 2015. And it includes only our share of our joint venture properties. We project our hotel to generate $12 million to $14 million of NOI in 2015. For our development and management services fee income, we’re projecting $17 million to $22 million for 2015, that’s in-line with our guidance last quarter. We project our G&A expense to be $96 million to $100 million in 2015 also in-line with our projection last quarter. As Doug mentioned, we experienced weather related impacts on our development projects in Boston in the first quarter would float our developments then. And we’ve also re-projected the timing of our development spend at Salesforce Tower. None of these changes are expected to impact our completion schedule but they do have an impact on our capitalized interest projections. The result is an increase to our 2015 forecasted interest expense to $423 million to $433 million for the full year. We project our capitalized interest to be $30 million to $40 million. Our forecast for non-controlling interest and property partnerships is unchanged from last quarter. For the full year 2015, we project the FFO deduction for non-controlling interest and property partnerships to be $135 million to $145 million. So, when we combine all of our assumptions and results in our projected 2015 guidance range for funds from operation of $5.35 to $5.45 per share. This is an increase in our guidance range of $0.04 per share at the mid-point and includes $0.07 from the first quarter performance, $0.02 of projected improvement in our same-store portfolio offset by the loss of $0.05 per share due to lower capitalized interest. Although Owen mentioned the possibility of additional asset sales, we have not included any additional asset sales in our updated guidance for 2015. For the second quarter 2015, we project funds from operation of $1.32 to $1.34 per share. Our development pipeline continues to be a meaningful growth vehicle for us. And in 2015, it is projected to provide 6% to 7% FFO growth to the company. This in combination with lower interest expense from reducing our debt load, is projected to add $86 million to our 2015 FFO at the mid-point versus 2014. As I mentioned, our same-store portfolio is relatively flat this year due to a temporary dip in our occupancy. In addition, the impact of our sales program in the past year has resulted in the loss of $72 million of FFO from 2014 to 2015. Despite these two headwinds, we are still projecting to generate between 2% and 4% FFO growth year-over-year. That completes our formal remarks. I’d appreciate if the operate would open the lines up for questions.

Your first call is from Gabriel Hilmoe from Evercore ISI. Your line is open.

Thanks. Doug, just on the Volpe site in Cambridge, I know you mentioned it was delayed, but just anymore details you can provide there on the process and how that’s progressing?

The GSA is obviously, works on their own schedule and they just, they were in expectation that they were going to put an RFP out in the first quarter of 2015 and lo and behold it hasn’t happened yet. Right now, the rumors on the street are that there is going to be something that comes out before the end of the year. But again no one really knows.

Okay. And then just on 1016 in DC, you mentioned some active proposals there, but any more color you can provide there just in terms of the depth of the pipeline? I’m just trying to get a sense of what activity has been like with some of the larger users in DC recently?

I’ll have a couple of comments and then I’ll let Ray to pick up. But basically it’s a 500,000 plus or minus square-foot building. So, the users that we’re talking to are really users who are in excess of 300,000 square feet. We made two or three proposals wherein, I’d say the latter stages of from discussions, with some tenants that are looking at us as well as other potential build-to-suites and I’ll let Ray give some commentary on that.

Well, I think you hit the nail in the head there Doug with this, this is a situation where clearly we’re not going to go spec. And there is a careful balance between how much of pre-lease we have to make to justify going forward. But I mean the great thing about that building that side is a terrific site for the demographics that we’re trying to attract to the building. And our price basis there is extremely competitive relative to other new options. So, I think we’re very competitive with the people we’re talking to. And should we go forward, we’re very confident in a lease, and lease very strong referring.

Thank you.

Your next question comes from the line of Michael Bilerman from Citigroup. Your line is open.

Yes, good morning. Owen, you talked about this $1 billion of potential pre-development projects moving into starts or into the development pipeline this year. And you rattled off a long list of projects which likely exceed well over multi-billions of dollars of spend even at your share. So I’m just curious, the $1 billion doesn’t seem like a big hurdle to get over. And what would be the most likely scenario, maybe sort of goalpost of what it could be in terms of new development coming on into the pipeline this year?

I did, Michael as you say, I did go through a number of different projects because I wanted you and shareholders to know what the breadth of our pipeline was. In that list that I gave does exceed $1 billion but we probably won’t launch all those projects. There are contingent obviously on entitlement, on full planning but also many of them contingent on pre-leasing. So if we can do more than $1 billion that would be terrific, we’re certainly working hard to achieve that. But when we looked at the pipeline and we estimate what we think we’ll be able to launch this year, we put the estimate more at $1 billion.

And then on the at FAO Schwarz space at the GM building, if you look at the lease roll schedule, I’m not sure if that rent is there. I think, Doug, you said it was the end of 2016.

Yes, it actually fills up in ‘17. So that’s where the number is, and if you look it in our supplemental.

Right. So that’s like $260 a foot. Grade level rents in that location are thousands of dollars, well over $4,000 that grade. So just maybe you can walk through a little bit of the potential amount of capital that you think you’re going to have to invest and effectively the targeted NOI effective upside because that could be a game changer, something going from $250 well into the thousands?

Well, I can only make some cursory comments and I’ll let John Powers continue on. So, I, there seems to be a euphoria about what potential rents might be on Fifth Avenue locations and while we are very strong believers in the value of our real-estate. The ground floor is where the people are getting those big numbers not on all of the space, right. So, we have 14,000 square feet of ground floor space and it’s deeper than a typical floor would be. But we don’t know what the up or the appropriate level of rent will be, the market won’t let us know. Then we have some space that is below grade then we have sizeable amount of space on the second floor. So, as you think about the overall value that we might be able to achieve from that 64,000 square-foot piece of space if this kind of sort of categorize it appropriately. With regards to improvements, for the most part, tenants are putting the work in themselves. There will likely be some work that’s done to a plaza and Apple has talked about maybe doing some things to their store. But well, I’ll stop there and let John continue on.

Well, I think Carnegie has done very well. And I think we’re very optimistic about that but there are a lot of moving parts right now. And as Doug said, a lot of the space is not right on Fifth Avenue and is not on grade. Although there are a lot of people visiting the Apple Store so we’re pretty optimistic but there are a lot of moving parts.

Okay. And just last question for LaBelle, the $534 million that is sitting for 1031, what is the timing of that? Is there any sort of, anything in the pipe? And if you can’t identify something, how should we think about the distribution or any taxing of that?

So, basically we have a policy of - we’re always setting up these 1031s whenever we sell assets, just in case we find some opportunity. And then we have 45 days to identify and six months to close. So, within the next six months we have to either find something to buy that fits or that money comes out of the escrow arrangement. At this point, obviously we’re actively looking at opportunities but as Owen described and we’ve described for quite a while, it’s challenging to find things that are going to fit what we’re looking for. So the likelihood of us being able to do that is, I mean, it’s uncertain but it could be low. If it comes out of the escrow it doesn’t mean that there is some sort of special distribution associated with it. We have indicated in our supplemental that the gains associated with the assets that we sold thus far are about $95 million. So, that would be the number that approximates what the tax gain would be for those sales. And presuming we’re right in line with our taxable income where our regular dividend is right now, that would drive potentially a special dividend. Obviously that depends on what the ultimate taxable income is for the company this year. But the $534 million is not something that would be part of the distribution, that would actually come into the company now than as unrestricted cash and be funded for our development pipeline.

Right, and then obviously depending on the other $700 million or the gross $700 million of sales that Owen referenced, it could create some other taxable gains or a need for 1031 in a special?

It could, yes.

I mean, honestly Michael, I think it’s fair to say that if we’re successful in selling $1 billion worth of properties, it is unlikely that we will be able to reinvest that asset and all of the assets. And there will be some additional special dividend in calendar year 2015 not similar to us having one in calendar year ‘13 and calendar year ‘14.

Great, thank you.

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

Good morning guys. It looks like same-store operating expenses and real estate taxes increased last quarter at a faster clip than it has recently. I just wonder if you can comment on what’s driving that and whether we could expect that to continue for the rest of the year?

I think that when we look at our margins Jed and I think our margins, have been generally stable between the mid 65% to mid 66% range. So I expect us to continue to be operating in that range. I mean, we do we have seen some tax increases obviously in New York City. And we did for the first quarter, we saw some utility increases and we also saw snow related increases honestly that had a pretty significant impact in the Boston marketplace. We will recover some of that. But that recovery comes over the remainder of the year effectively, some portion of it comes in the first quarter, but the rest kind of is accrued through the rest of the year. So, I do think that expenses were a little bit higher in the first quarter but generally our margins are in line with where we expect.

Okay, thanks. And you guys offered some pretty upbeat comments on the Manhattan fundamentals market. I’m just curious if you’re seeing big banks and law-firms in Midtown starting to bake growth plans into their space needs more now or is it still mostly contraction mode for those sectors?

John, you want to try that one?

Well, in our portfolio we took care of most of the law-firm expirations that were out before 2020 last year. So, those contractions, they are rebuilding the space now and all their plans were locked in last year, are locked in now. Clearly, the market is doing well but as tenants move, the resize, Skadden of course will make a major move. And our recon on that is that they will have some right-sizing in their portfolio. So I think that trend will be going on for a long time. It really only, the only opportunity that the firm has is to right-size is when they rebuild.

So, just to give you a little more color on that. I would say that we are seeing the mid-size financials firms, in some law-firms expanding, not expanding significantly but expanding. So as I suggested, at 601 Lexington Avenue, we have two tenants, one is a law-firm and one of them is a financial firm and they are both looking for more space in that building. They are not looking for going from 100 to 150 they’re looking going from 100 to 120 or from 100 to 130 that sort of the range. And I would expect that some of the demand is being driven at 250 West 55th Street is both the efficiency associated with being a brand new building and all that brings to it, but a modest amount of growth, I mean, modest meaning 5% to 10% kind of growth. You may speak to those larger financial institutions, I haven’t seen much in the way there.

No, I think on the large financials, financial employment growth has been weak in New York. And I don’t see, we haven’t seen certainly expansion by large scale financials. I do think some of the contractions have stabilized.

Okay, great.

This is John Powers. My comment was regarding only the law-firms, certainly on the smaller financials we’ve had pretty robust growth in the last quarter.

Okay, that is helpful. Thanks, all.

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

Great. Thank you, good morning. So I guess my first question, I appreciate your color on the investment sales market. How should we be thinking about how much more of the portfolio you would be willing to sell or JV given where current prices and demand are?

Jamie, its Owen, as I mentioned our - we sold little over $200 million so far this year. We’re evaluating some additional asset sales are estimates for 2015 would be approximately $750 million in sales. As you know, that’s less than what we saw in the last couple of years. And the other piece of it is I do think the execution this year at least as we see the pipeline right now are centered more around individual targeted asset sales as opposed to large scale joint ventures.

Okay, but I guess longer-term as you guys think about the, I mean you certainly have some core assets you have had in the company for a long time. Do you feel like you have kind of dug into or already done most of the transactions you would be willing to do and at this point the legacy assets will remain 100% owned? And what’s the strategy behind, what’s the thinking behind that?

I think as we move forward beyond 2015, we’ll have to evaluate one market conditions to our capital needs and what the best way to raise capital is. And I think we’ll continue to have very selectively non-core assets that we want to sell from time to time.

Okay. And then moving on to the future development pipeline, I know you had said you had cash on hand to finance the existing pipeline. How should we think about financing for future projects?

Well, I mentioned approximately $1 billion of new developments that could be added this year. Mike talked a little bit about the restricted cash that we currently have on our balance sheet that could be made available. Certainly the $750 million of additional asset sales for this year, even net of tax gains would provide some additional proceeds to fund that development pipeline. In many of the developments, the larger developments that we’re doing are developments that have a joint venture partner. So, as an example, 1001 in DC, we have a 50-50 partner with the Stewart family at North Station, we have a 50-50 partner with Delaware North. And that means that we will be getting construction loans which we haven’t done on a number of our most recent financings for development projects we’ve been using cash. And we already own the land in these ventures. So, when you look at what we actually have to raise from an equity perspective, it’s a pretty small number if we finance 60% to 65% of these assets on a project secured financing basis.

Okay, that’s very helpful. And then finally, just focusing back on New York City, what are you guys seeing in terms of actual rent growth across the sub markets or at least the submarkets where you guys operate?

John, I’ll wager my own opinion and you can contradict if you want. We are seeing that in our development property at 250 West 55th Street we’re actually hitting our pro forma. And that’s a pro forma that we put in place in 2011. And we assume that the market would grow. In our existing assets, I think that the Plaza District asset it’s very much a question of where it is in the building and what floor it’s on. And we’re trying to achieve the best rents we can for our shareholders and for the building. But then we’re probably seeing 4% to 5% growth year-to-year in “market rent” assumptions might be from one building to another.

Okay. And then finally, you had mentioned in New York some tenants there need additional space in your buildings. Is there a risk that you may lose some of those tenants if you don’t have the expansion space?

Well, the good news is most of these tenants are under relatively long-term leases. And so, to the extent that we can’t accommodate their growth, they probably would need to sublet their space in to find satellite locations. We are, like we’re pretty creative about finding space. And as I suggested, what we did down in Princeton where we basically took a tenant, who didn’t have a lease to expire in for seven years and we figured out a way to relocate him and bring a new tenant in and then have them path to do that. We’re going to do everything we can to accommodate the tenants that we have.

Okay, great. Thank you.

Yours next question comes from the line of Alexander Goldfarb from Sandler O’Neill. Your line is open.

Good morning, just a few questions here. First, can you just remind us what the triggers are for the Lehman estate to release the lease term fees? Just help us understand how that works?

Obviously it’s up to the trustee and the bankruptcy court to approve these things. And they’re trying, I think they’re trying to when they have liquidity that is built up from selling assets, they try to distribute them as soon as they can. But they don’t provide any kind of forecast or views on when it’s going to be, how much it’s going to be or anything like that. And I do want to point out that these are with a couple of notes on this, that we believe the value of the remaining claim is $5 million. Our claim is $33 million left based upon what they actually owed us. But the value is closer to $5 million.

Okay, so it almost sounds like you guys are sort of in line with a bunch of other creditors at sort of a similar level and as the estate - hurdles or whatever then all those creditors within a certain level are paid off, is that how it works?

Yes, I mean, they’ll pay-off whatever they have. Obviously it’s liquidating entirely, right. So, they’re trying to liquidate the assets they have and they have to conserve money to pay for the cost to kind of the legal cost to manage the estate, the trustee cost, all of those costs over time. And when they feel they have excess liquidity, they make a distribution but I just don’t know if it’s going to be in ‘15 or if it’s in going to be five years from now, we don’t know. And there is still litigation out there with Barclays that has an impact on what we actually may get. So, it could be zero, we just don’t know.

We think there will be a long tail.

Okay, okay. And then, Ray, down at the - what used to be the K Street site, can you just talk a little bit about how the effort is in DC to try and get more of the tech tenants? And if it’s more homegrown or if this is more, if you guys or the market sees more growth in lobbyists for the tech firms? Just a little bit more color on that part of the market.

Sure, Alex. The District of Columbia government is really trying to provide appropriate incentives to get homegrown tech tenants from Virginia down to downtown. And they have kind of made 1001 Sixth Street kind of the poster child for the tech tenants because of its geographic location and the quality of the building we are building and the nature of the building we have built. But we’re not going to be confused with Palo Alto or Cambridge for sure. And so it is going to be a long struggle, but every tech tenant we bring by the site falls in love with the demographics of the site and falls in love with the building. So we’re cautiously optimistic that if there will be a tech boom in DC, we’re going to be leading the charge. The same thing is true with our Met Square building, the space we’re getting back there we’re specifically targeting tech tenants to come into that outstanding location with some of the best public spaces in the district. So we’re just a two-pronged attack both Met Square and 1001 Sixth Street.

And Ray, are you optimistic that materially tech will increase this part of the tenancy or is it like, or do you or others in the market think that this is going to be a tough slot to try and get more tech to the DC market?

Well, it sort of reminds me of Wal-Mart. Wal-Mart demands all of its vendors to come to Bienville. The United States government is the largest consumer of tech services in the world. So I think the United States government needs to start demanding these tech tenants come to DC and lease basing us. But we’re focusing on both home-grown and this summer working with Owen and Doug, we’re going to do a outreach to many of the major tech tenants throughout the United States, alerting them not only of the availability of great tech opportunities in Reston and DC, but in all of our core markets. And we’re going to take the show in the road to them to get them excited about coming not only to Cambridge or San Francisco but all other markets as well.

Okay, and then just finally, Owen, on the New York development I know that you don’t want to really disclose anything, but can you at least let us know if it’s Manhattan or Brooklyn, can you at least give us that color?

Well, I’ve said what I can say. But thank you for your interest.

Well then, we’ll leave it to the news articles. Thank you.

Thank you.

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

Great, okay, thank you very much. A couple quick questions, probably one for Ray and one for Doug. First, Ray, it seems to me the apartment business is a pretty good business as is the retail business. Talk about why you decided to sell the backside of 2200 Pennsylvania. I know there is ground lease, etcetera. And if you can also talk about pricing on that asset it would be great, maybe bifurcating on, a per unit and a per square-foot between the apartment and the retail? And then for, I think for Doug, you said something very interesting in that the bottom side of San Francisco has escalated up maybe 50% but the top side of the market is relatively flat. Can you talk about where your tenants are willing to pay without much pushback and then where the air gets very thin? For example, is the price where the tenants are willing to pay at Reston Town Center in the $40 to $45 range and then it gets thin after that, etcetera-etcetera.?

So, I’ll take a shot at the Avenue first I guess. John, it’s a great asset in a great location, and we’re very proud of what we achieved there. But with a ground lease that is slowly ticking down that is hurtful both in terms of just the long-term ownership and also the REIT accounting coupled with the fact that it’s a pretty management intensive apartment with a lot of student housing. We just felt coupled with the cap rates we’re seeing for well located DC apartments we decided now the time is right. The allocation between the retail and the apartments themselves, hard to say how the buyer underwrote the respective cap rates of each, but there is no stronger retail in Washington than that ground floor. So I’m sure they did, they’re going to do very well there. Maybe Mike LaBelle could comment on the allocation on the price per units after the adjustment for the retail. But it was a great opportunity for us to harvest tremendous value on an asset that is not core to our presence here in DC.

And John, this is Doug. Basically look, we had a ground lease property that we found a buyer to purchase for just over 4% forward looking cash-on-cash return. And we looked at the DC market and the amount of property that was coming online in the greater DC area, on the rent side and felt that the rents were going to be pretty flat for the next few years. And so, we said, this is probably a place where we can better allocate our capital to other investments, aka the new development pipeline that we’ve been talking about for the better part of two years. And so, it was a strategic decision that there was no synergy for us to hold on to that residential property in that particular location. With regard to your second question, I think that we can, you can leave space all day long in San Francisco at $73 to $75 a square-foot in high quality buildings across the city. And there is massive tenants who are prepared to pay that number. When you start acting $85 to $90 a square-foot, it becomes thinner and the size of those tenants become smaller. And the real question that we and that the market I think is asking is, as the supply picture gets worse and worse for the tenant, are the new development, new construction economics are going to start pushing that upper end to a point where those numbers become more aggressive from the landlord’s perspective and easier to achieve. To date, almost all of the new construction that has occurred has been in that sort of high $60s to low $70s level. But given what people are now paying for ground, and the costs of construction going up on 4% to 6% range on annual basis. We believe that with that the timing is right for the top-end to by necessity start being able to achieve a wider growth of tenant looking on that space that we’ll have to pay those numbers. Bob, I don’t know if you have any other comments on that?

Yes, I would just add that San Francisco is cheap by comparison to other major cities where tech tenants are located such as London and Paris. And I think if you look at someone like a Salesforce for example, they’re paying a lot more in London than they’re paying here. And we continue to see these tenants pay up because they’re not going to have a choice, there is just not going to be space for them to go to unless they pay the rate.

Just a quick follow-up, Doug, that’s great. Is there a, is that $73 to $75 number similar in New York City, Kendall Square, Back Bay of Boston, Washington DC, CBD or is it more or less?

It’s different in every market John. I mean, in Kendall Square, I think that if you’re looking for more than 25,000 or 30,000 square feet of space and you want to be in Kendall Square in particular, you’re going to be paying somewhere in excess of $75 a square-foot with dollar bumps. But if you’re in the financial district, you’re not going to be paying more than $65 a square-foot. I mean, if you’re in the low-rise of a building like 120 St. James, the number is probably close to $60 a square-foot. So there is a much wider growth in terms of the differentials. In Reston Virginia, the top-end of the market is $55 a square-foot. And I think the low-end of the market in our portfolio in Reston is I don’t know, $46, $47 a square-foot, so it’s a very, very tight range given the kind of property and the relative lack of differentiation between sort of being in the middle and the top of the building. And then in New York City, I mean, their tenants are going to pay over $200 a square-foot to be at the top of the General Motors building, 767 Fifth Avenue. And someone may pay somewhere in the low $70s to be in 540 Madison Avenue. So, again there is still a wide variety of where the rents are depending upon the building in a particular location.

Great, thank you very much.

Yes, this is John. And obviously we count square-footage different in New York than they do anywhere in the country. So you can add a good premium on to the New York numbers.

20%?

That’s a good number.

Great, thank you.

Your next question comes from the line of Craig Mailman from KeyBanc. Your line is open.

Good morning, guys. Owen, maybe I could ask about, you talked about where we are in the cycle from asset values maybe later, but then you also said you guys are looking at additional land and redevelopment sites. So I’m just curious kind of where you guys think we are in the valuations for land and vacancy relative to operating assets. And how you guys are looking at returns on some of these potential future sites you guys are working on?

Well, in terms of the cycle, as I mentioned in my remarks, I think we do see the capital market cycle being more advanced than the property market cycle. And relating that now the property values, I do think that the values of buildings advanced sooner as, normal than land values. But that being said, land values are also rising around the country. And we are looking at many sites in our core markets, it’s not easy today to find deals that completely pencil and we are being cautiously careful. I do think land probably to some extent does lag the building value, so we still see opportunity selectively. And I talked about the yields that we at least see in our current book and the developments that we intend to add this year, those being around 7% for on the office side and closer to 6% for the residential.

Okay, that is helpful. Then maybe turning to San Francisco, I think we all know CBD is doing well and clearly some of the better markets down the peninsula. Just curious as you look in your portfolios, Zanker Road in Mountain View, still about 20% leased kind of what’s the update there and the prospects?

So, we are in active conversations with tenants on Zanker Road. The Silicon Valley is a pretty bifurcated market. So, what’s going on in Mountain View and Palo Alto are different than what’s going in North San Jose and in Santa Clara and to some degrees in Sunnyvale, where it’s not quite as frothy. The rental rate differentiation is enormous, and you’re talking about rents of $2.5 to $3 a square-foot for brand new property in North San Jose, Sunnyvale, Santa Clara and you’re talking about $7 or $8 a square-foot for new property in downtown Mountain View and even more than in Palo Alto. So, again it’s not as quite as frothy. I think what is happening is that the large tech tightens as we like to refer them and down the valley that the two largest have been Google and Apple have made a dramatic, dramatic impact on the availability of existing inventory and blocks of space. And so, things are getting more and more competitive. And that the users that we are seeing for Zanker Road are looking at it as a campus. And so, we’ve been less interested in talking to tenants that are looking for 150,000 square feet because it’s much more competitive there, but the tenants we’re looking for a multi-building campus and we have the ability if someone is prepared to pay for it, to build additional buildings on Zanker Road, so we can increase the density from 550,000 square feet to in excess of 1 million square feet. So that’s what we’re targeting the demand. And I would say that there is an active conversation that’s going on with those buildings on a continual basis. But we have not truthfully gotten anyone to say yes to what our economic desires are. And we’ve been the bridesmaid a couple of times with some of these larger requirements as well. But the market clearly has improved and I would say we feel better today about our chances than we did 12 months ago.

Is this a candidate at some point - I know a lot of users have been buying up assets down there. Is this a candidate for that or for one reason or another it is better to lease for you guys?

We would prefer to lease, the business that we’re in is the lease space. But we have been approached by users about either options to purchase or outright purchase decisions as opposed to these decisions. And we have encouraged them to tell us what they want to do and that we will respond to them regardless of what their requirement was.

Great, thank you.

Your next question comes from the line of Tom Lesnick from Capital One Securities. Your line is open.

Good morning. Thanks for taking my questions. I’ll be brief since most of them have already been answered. But just touching on 901 New York real quick, was that promote already assumed in your first-quarter guidance? And what, if any, other promotes are coming up in the next few years?

That was assumed in our guidance. And we do not have expectations for any other significant events like that in our portfolio. We don’t have a lot of these JVs that have kind of promote features in them. This was more of a unique situation that occurred. And I would call, kind of a one-time event that affected our earnings and our FFO this quarter. And the future run-rate on 901 New York Avenue will likely go back to closer to what it was in the prior quarter.

Okay, thanks for the clarification. Appreciate it.

Your next question comes from the line of Brendan Maiorana from Wells Fargo. Your line is open.

Thanks, good morning. In San Francisco, I think you guys have stated this and some other landlords have as well, one thing to look out for is maybe some sublet space that would come back to the market. And there has been some sublet space that has come back to the market in the first quarter, albeit from very low levels prior to that. But is that anything to look out for in terms of maybe some users or some of the velocity in the market slowing down or some of the users that were looking to take on aggressive levels and space maybe slowing down a bit at the margin?

I’ll make a brief comment and then I’ll let Bob Pester give some color on it. So, the only major block of sublease space that we’re aware of that impact of the market was 200,000 square feet of 555 Market Street which was on Omnicon sublease and as soon as Omnicon got out of it, Uber took the entire block of space. And every other major large block of space that we’re aware of has got scooped up. However, there are a lot of technology companies and private equities funded entrepreneurial organizations that don’t work and they don’t make it. And that there, so there is a lots of churn that goes on in a market like San Francisco. But again, it’s at the sort of smaller size range, it’s the 20,000 to 30,000 square feet. But I’ll let Bob provide more color on that.

Yes. I would use the example of 680 Folsom where we had slack and about 11,000 square feet. They just expanded in are taking 40,000 square feet and now they’re building and that space has been on the market less than 30 days and it’s already been taken by another tenant. Salesforce has some space available at 1 California and 123 Mission. And when we were with Ford at Salesforce the other day, he said they have a great activity on that. So, when you take the total amount of square-footage that’s available on sublease which is about 650,000 to 675,000 square feet. It’s really just a blip down in the market.

Okay, great, that’s helpful. And then just, Owen, point of clarification. I think you mentioned all the development projects and then the projects which could come into the development pipeline this year, the $1 billion or so depending on how those break down. Is the yield on the future development projects is that also 7% for office and 6% for retail? Or was the blend 6% on kind of everything that would come into the pipeline this year on the newer projects?

Yes, we continue to target 7% for office and 6% for the residential for the pre-development projects that we would bring into the development pipeline in 2015.

And just to clarify, because I think different organizations talk about this differently. When we provide you a number like that, we’re including a fully baked asset with a return on capital equity and debt included in that return - in that budget. So to the extent that someone else is doing this without a cost of capital associated with it and a number of different, we have a cost of capital on our debt and our equity.

Okay, great. Thanks for the clarification.

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

Sorry to keep things going. Just quickly, Doug, you mentioned a lot of different stuff in your opening remarks. And I’m curious if you said not to request 2016 guidance, but when you think about CapEx and downtime and free rent and rent roll up and all that goes into that recipe, do you think that the rent recognition kind of really plays a meaningful role next year? Is it more of a 2017 event in your mind when you think of it all together?

You mean, are you saying the ramp-up in our occupancy?

Yes, like Hancock and GM and everything that’s going on, I’m just trying to kind of aggregate the impact to your cash flow to a better degree. And it sounded like in the case of Hancock it’s a back half of 2016 rent recognition. I’m just wondering if that is kind of par for the course for the entire process and you think it’s more of a 2017 event where you really see the fruits of your labor?

So, let me give you an example. So, the 145,000 square feet of deals that we’re talking at 250 West 55th Street, I would expect if knock on wood, things go well most of those leases are going to get signed in the second quarter of 2015. We will not have rent recognition on most of those leases until the back half of 2016 because when you do a 10 or 15-year lease in New York City, you’re giving somebody 12-months a build-out time. And in particular, when you’re doing it on first generation space, there is no such thing as straight line rent, right. So, we’re not delivering this space tomorrow and then saying, we’re going to start rent recognition day one, we’re actually having to wait until the tenant actually has taken the space, built out that space and are in occupancy effectively. So there is a lag associated with all of these things that we’re talking about which is sort of my point in my comments. So, as an example, when we take a space back to for the build-out of the law-firm installations that are going on at 599, that floor is effectively occupied but there is no rent recognition on it until we’re done with that and we won’t get done with that build-out until the end of ‘16. So, there is a lot of stuff like that that’s going on within the portfolio but you just have to sort of recognize as your thinking about your projections on a going forward basis.

Okay, great. And then if you can quickly just rattle off for me, you mentioned 4% to 5% market rent growth in New York. What would that be for San Francisco, Boston, Cambridge, DC, Reston, do you have that just like a quick number for each of those?

I would tell you that rental rates in Cambridge are probably up 15% year-over-year. I would say rents in suburban Boston are probably up in high single-digits. Rents in the financial district of Boston are pretty flat. But rents in the Back Bay of Boston are probably up 7% to 10%. And there is a premium associated with the high-end space in the Back Bay. In Reston, I think things are locked up to 2% to 3% maybe, and in the district they’re very flat. And out in San Francisco we’ve probably seen somewhere close to 10% to 12% increases year-over-year in our rental rate assumptions overall, although again it’s been higher at the low end of buildings and less at the high-end of buildings.

Perfect, thanks very much.

Your next question comes from the line of Vance Edelson from Morgan Stanley. Your line is open.

Thanks, good morning. On the Salesforce.com tower, I know a variety of floor designs are possible, but bigger picture, just given the lack of large blocks available in the financial district and beyond, do you envision tenants taking multiple 25,000 square-foot floors and connecting them via staircase? Would that be your preference to rent more in bulk or do you picture more single floor or even partial floor tenants filling the rest of the building?

Bob, you want to take that one?

Yes, well, first off there is already three stairwells on each floor connecting the various floors, so it’s doubtful someone would add an additional stairwell. We’ve got a variety of users that we’ve been making presentations to, tech tenants, financial tenants and law-firms. So I would see a combination of single floor tenants and then some much larger users as well. Obviously, if someone like a Google came along and wanted a big block of space for 400,000 to 500,000 square feet, we do that type of transaction we are talking to single floor tenants right now as well.

Okay, got it. And then sticking with Salesforce, are you getting any clarity on rents per square-foot as you speak with prospective tenants? There are some buildings just a matter of blocks away that are already asking $100 a square-foot for the best floors. You’ve got the preeminent new construction with the views and the connection to Trans Bay. Is it realistic that we’ll be hearing about triple-digit rents?

Well, we’re not asking triple-digit rents on our floors right now. But I think as far as rents in the high $80s to low $90s on a net basis, are realistic.

Okay, fair enough. And then on the FAO Schwarz space, just given the relatively large size, has any thought been given to whether that could be split up for multiple tenants or does it have to be a single tenant given the relatively limited frontage facing Fifth?

John?

It clearly doesn’t have to be one tenant. It would be unique opportunity for single tenants that could use that much space. But we have a number of scenarios that we’re looking at as to how to divide that up with Fifth Avenue with on the street are also likely to. So, there is a number of possibilities with the upstairs, with the downstairs, with the main floor, really lots of flexibility in how we do that.

Okay, perfect. Thank you.

Your next question comes from the line of Michael Bilerman from Citigroup. Your line is open.

Hey, guys, Manny Korchman here. We’ve been hearing a little bit of construction delays at Salesforce due to sort of the ground being softer than you expected. Is there any truth to those rumors?

My comment in my prepared remarks was that our spend is up, and our spend is up because we’re spending more time in the foundation work and in the shearing and the shoring. And we have yet to start the major concrete and seal work. Our expectation is that the building will be open for Salesforce with the TCO in the first quarter of 2017 or end of the first quarter of 2017. And that our spend is going to pick up and so this year we’re going to spend less and we’ll spend more in 2016.

Great, thanks.

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

I think that concludes our remarks. Thank you very much for your interest and attention.

This concludes today’s Boston Properties Conference Call. Thank you again for attending and have a great day.