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

Good morning and welcome to Boston Properties fourth quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In this 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 of these documents, they 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 would like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Arista. Good morning, everyone. We have been very active over the last few months winning important new business and in the process delivered another strong quarter which I would summarize as follows. Delivered FFO per share $0.04 above street consensus and $0.04 above our prior forecast excluding the impact of the financing we did last quarter due to operational improvements, increase in midpoint of our full-year 2018 guidance by $0.07 after an adjustment for recent property sale. Increased our quarterly dividend by $0.05 or 7%, leased 2.4 million square feet which is significantly above our long-term quarterly average for the period, increased office portfolio occupancy by 50 basis points to 90.7%, completed an $850 million unsecured refinancing on very favorable terms, signed enhancement lease commitment and development of 20 CityPoint. Commenced development of the Hub on Causeway residential project, signed an anchor lease commitment for 66% of the office space in our 2100 Pennsylvania Avenue development. And in January, signed a lease with Leidos to develop our new headquarters at 1750 President, the last remaining site in the core of Reston Town Center. Clearly we have been having a busy and productive period. Let me first move to the macro environment. The prospects for global and U.S. growth are healthy and stable. The global economy outperformed consensus forecast last year with growth projected to be just over 3% in 2018. Though U.S. economic growth slowed in the fourth quarter of 2017 to 2.6% growth is projected to remain at a comparable level for 2018. And we believe recent federal Tax Reform will likely provide a boost and prolong our economic recovery. Job creation also remains steady and favorable with nearly 150,000 jobs created in December and unemployment is at 4.1% at lowest level since well before the global…

Thanks Owen, good morning everybody, happy new year. I want to pick up on Owen’s economic commentary as it relates to office demand in our markets. As evidenced by their actions our primary customers which are larger real estate users, the public, the private, the start up and the established are exhibiting renewed confidence by making the decision to either upgrade and consolidate their space and in some cases expand. As Owen suggested, as we begin 2018 we are as busy as we have ever been with new development investments on a pre-leased office portfolio. We also have three residential projects, Owen described the most recent and two of those are opening this year. In fact one of them is opened as we speak and we are taking leasing in Reston. 20 CityPoint was leased to an engineering firm 1750 in Reston Town Center is leased to Leidos a science engineering and technology government contractor, also called the defense contractor. They are currently in 170,000 square feet and two of our other buildings in Reston Town Center and is part of the consolidation they are taking 100% to 175,000 square feet of this new building. While we continue to see the bulk of new incremental office demand from technology and life science businesses, here is also robust demand for new space but not necessarily growth from traditional industries. For example, if you look at the leasing activity in Manhattan in 2017 the finance, insurance and the real estate sectors led the way. I think there are some articles recently about two banks that look like they were expanding and/or consolidating in Midtown and there are a number of recent law firms announcements that will be coming to take new space in Midtown Manhattan. One of the topics that we are…

Thank you, Doug. Good morning. I’m going to start by describing our activity in the bond market last quarter. We actively monitor the market and we saw window late in the quarter where the bond market was feeling very strong combined with a relatively stable rate environment. This was an opportunity for us to take some financing risk off the table, lock in future interest savings and refinance our 2018 debt maturities. So in December we elected to redeem $850 million of unsecured bonds that carried a 3.85% all-in interest rate and they were scheduled to mature in November of 2018. We funded the redemption with a new seven year deal, also $850 million with an all-in yield 3.35%. We recorded a charge on the early redemption of $13.9 million or $0.08 per share that was not included in our prior earnings guidance. We also locked in approximately 50 basis points of interest savings or about $0.03 per share through 2018. Given the recent sell off in treasury it looks like a good decision today, but we will have to wait until late 2018 to know for sure. Turning to our earnings, our fourth quarter funds from operations came in at $1.49 per share excluding the impact of our debt redemption. Our FFO exceeded our guidance from last quarter by about $7 million or $0.04 per share. The majority of the increase came from higher than projected NOI from the portfolio that beat our budget by about $5 million. Largest contributors were expansion by existing tenants in New York City and in Boston that occurred earlier than anticipated. And about half the improvement was due to operating expenses coming in lower than our budget. Lastly we recorded approximately $2 million of higher than projected fee income across the portfolio. Overall…

[Operator Instructions]. And your first question comes from Manny Korchman with Citi.

It’s Michael Bilerman here with Manny. Owen in your opening remarks you talked about the increase in development that you are seeing driven a lot by the tenants and build-to-suit opportunities that you are not aggressively going out and seeking additional risk. And I’m just curious if you flip the coin over and you think the amount of tenants that are seeking new space either in existing development that have come out of the ground or in these built-to-suit opportunities, how does that position the existing stock of office buildings in you core markets that may need substantial CapEx to keep them relevant for tenants? I know you have certainly spent a lot of capital last couple of years in your buildings, but how do you sort of think about the trajectory going forward of that existing stock and are you more likely to try to buy some of these buildings and put the CapEx in and use your skill set or are you more likely to look at your portfolio and sell into it and sell off that capital need?

Well I think Michael that if you go through the development activity that we are doing, it’s a combination of factors that our customers are seeking new space. I mean obviously some of it is relocation, some of its consolidation from multiple locations and some of it is actual growth. So it’s not all zero sum. So it’s baked out at the offset. And then second as it relates to our existing portfolio, we clearly spend a lot of time assessing each of our buildings and keeping a close watch on those buildings that we think are the most competitive and the least competitive. And as we went through on our investor conference last year, we selected quite a few of our existing assets and we have embarked upon pretty significant refreshment projects, not sure I will go through all those on this call right now, but whether be it 53rd in the Lex, what we have done in the suburbs of Boston, there have been a number of assets that we think are long-term viable and interesting to customers. I mean Doug talked about the work we are doing at 53rd in Lex and the leasing activity that we are seeing at 399 and 159 is very, very active. So yes we are making those investments on assets that we think are long-term competitive, we are seeing good results from that. And then lastly we have been selectively taking assets that we don't think are going to be as competitive for the long-term and we have been pruning them. This has been a smaller activity over the last few years, but I think we fairly consistently sold between $100 million and $300 million of assets over the last two or three years.

So Michael, if you look at the four markets that we are in, in the significant way and we hopefully will be significantly in Los Angeles at some point in the near future. The Boston market has primarily driven by tenants coming into the market from outside of the market so there has been very “little” sort of musical chair that’s going on which has just driven the majority of the new construction, a lot of it is from the suburb. I mean San Francisco as you are aware, the vast majority of the new construction has been taken up by growing technology tenants and so again there has been very little inventory that’s been leftover. In Washington DC there is a problem, Owen and I have referred to it as the muffin top issue which is there are a lot of people who are building new buildings and they are leasing the tops of these building for law firms and they are struggling and struggle with the rest of their phase and then that is a much more of musical chairs market. And then you are well aware some of your conversations with other public REITs about the issues associated with the supply in Manhattan and the issues that those buildings that are not recapitalizing themselves are going to have a real issues and there is going to be a significant demarcation in the availability of space in those buildings versus new constructions and building that have made the leaper phase and put new capital in. 1271 is a best example of a really tired building that said they get the bullet and they put $300 million of new capital in literally redoing the [indiscernible] systems in addition to lobby and they are being very successful leasing space. So I think you are seeing what is actually going on in real time in these various markets.

Manny had a question too.

Hey guys. Doug if you could help clarify on Leidos just to understand correctly, how much space are they coming out of in your existing assets and when is that going to happen?

So they are coming out of 170,000 square feet, they are in two separate buildings. One of the problems just in their own prediction in Reston is that they were not all consolidated in one building and then they also did a major acquisition. And so they are going into 275,000 square feet and it will happen in probably the second quarter of 2020.

Okay. Thank you.

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

Hey guys congratulations on a busy leasing quarter. You talked about the renewed confidence from tenants and obviously reported a lot of activity past quarter. I mean would you describe there it as being a really a noticeable shift in tenant activity just in this last quarter from Tax Reform changes and other maybe sort of optimism from other areas? And then based on what you are seeing on the ground do you believe that net absorption of rent growth could accelerate in your markets in the next year or two?

I think Jim, maybe I will take the first part and Doug can take the second part. I think it’s a combination of factors, I don’t think a switch got slipped when Tax Reform came out and all of a sudden you know the leasing activity went up. But I do think it’s a positive boost, companies that pay taxes being more profitable and therefore more willing to invest. I think that is clearly a plus. I think the one thing that also is shifting is the breadth of the leasing activity. We have talked for quarter-after-quarter about the importance of technology and life sciences and that clearly still is growing and is important, but we are also announcing growth and net absorption activity from financials, even law firms are moving-in in some cases taking more space. I think the breadth of the demand has also been very helpful.

And regarding where we think rental rates are going to go, again the challenge in these markets is that it’s a supply problem not a demand problem. And so, to the extent that there is continued supply, I think you are going to see pressure on the economics of the existing inventory. I don’t think you are going to see pressure on the economics of the new supply. And what is going on is that there is a big premium associated with the new supply relative to where tenants are moving out. And the confidence is what I think is driving them to be in a position where they are prepared to make those decisions. So the best example in our portfolio most recently has been that this firm that they took the space at 20 CityPoint. I mean that’s firm an engineering company that was located in the market. They were in a tertiary building, a not traditional high quality office building. And based upon their business and quite frankly overall employment trends in these marketplaces and the desire and the needs to recruit and retain power, they said it’s time for us to step it up and go into a different kind of a facility. And so they are paying significantly different kind of a rent than they were paying in their previous premises. And I think that story is going on, and on, and on in all of this new construction that’s occurring across our markets predominantly with these traditionally tenants. We are not necessarily looking at this as simply a growth opportunity, but really a change in the way they are managing their businesses from a real estate facilities perspective.

So you don’t see the growth and concession that you referred to, you don’t see that abating anytime soon either?

I don’t, I think that as part of the new construction and the higher rent, the market has been conditioned to a higher concession level and I think that’s across the board, across the country. I mean even on the last couple of spaces we have a Salesforce Tower, I mean I think we literally have 30,000 square feet, we are still prepared to give a $100 a square foot on a 10 to 15 year deal. But the rent has gone up a lot, I mean the rent when we originally performed at the top of that building was in high 60s to low 70s and then high 80s to low 90s now. And the [indiscernible] increase was 2% to 2.5% and now it’s 3% plus. So we’re getting paid for it.

Thanks, and then separately one other question. A few of your peers have been buying back stock recently and just curious to get your latest thought on that strategy for BXP versus development and may be other uses of capital?

We think development is more accretive for shareholders. As I mentioned, we are launching these projects, our existing development portfolio is generating about a 7% cash yield. And depending on how you look at it, we think our stock is trading in the low-5s on cap rate basis. So we clearly think it trades at discount to NAV but they yield is very different from where the dollars are that we are investing in development.

Okay. Thank you guys.

And your next question comes from John Guinee with Stifel.

Thank you. Turning a little bit, you guys have been pretty active in the multifamily development business a very different business for you, low on releasing cost, low on CapEx on the second generation. How much do you like that business going forward and do you think that’s going to become a more important integral part of your business?

John we like it. We started in the business as you know by developing on a mix used sites where we would acquire the site and/or entitle the site and it would have a multifamily component and I think in the far past history of Boston Properties these sites were generally sold. But we started developing them ourselves. We were successful. We have made money on it, not just on paper we sold the Avenue in Washington DC for a very significant profits for Boston Property’s shareholders. So I think we demonstrated the ability to do it and as we run across and we come across sites most of the time they are going to be in some way associated with our office development, but not always. And if it is a site that we believe and we think we can generate the kinds of yields that we have been talking about we are going to continue to grow it.

And then a question for you Doug, Boston I think you talked by immigration which is helping grow demand if I have got that right. What industries are coming to Boston and from where are they coming?

So for the most part it’s both the what I referred was life science companies and they are coming from out of state as well as the suburbs. And then there are some technology companies and they are coming predominantly from the suburban locations. And those are locations in the greater 128 area. So Lexington and Waltham and [indiscernible] and places like that. But interestingly, there are other growing tenants in those same submarkets they are grabbing the space that’s coming available. So there is incremental net organic demand and new business activity in the suburb of Boston, the deal where you were starting that is absorbing the state as these other tenants are moving into the city.

Great. Thank you.

Your next question comes from Craig Mailman from KeyBanc.

Hi guys. Owen maybe just going back to your commentary about the ability to fund new development with data at this point not really impact leverage. I'm just curious at this point in the cycle maybe what is the high end of your towers range on debt-to-EBITDA versus looking to accelerate asset sales or [indiscernible] at the joint ventures?

I will answer that Craig just so can an answer something. So right now our debt-to-EBITDA is in the mid-6s and our [indiscernible] are desired targeted range, its somewhere plus or minus seven, based upon the delivery of the development that we have going on and when the NOI comes on its going to reduce our net debt-to-EBITDA to six times or even maybe below six times. So as we look out at this development that we have planned plus adding some more that might happen. We feel very comfortable that we can stay below seven the entire time. There may be blips like for example in the first quarter of 2018 we are likely to blip above seven, because we are not going get any income from Salesforce Tower and all the money is going to be out. But then it’s going to come right back down through 2018. So we think that we have the ability to use debt to fund the foreseeable pipeline that we have without needing to raise any equity.

Okay. That’s helpful. And then Doug your commentary on kind of where higher price deals in New York could go. Just curious, do you think there could be enough activity coming back to the east side to kind of change the narrative about the center of Manhattan shifting west.

I’m going to be honest with you, I think it’s already happening. There were two institutions on the financial side, two banks that took additional space and what I refer to a traditional midtown not the far west side. And there are three or four major other transactions that we expect will happen in the first quarter. And people will say “jeez I guess the east side hasn’t quite lost its cluster.” I mean quite frankly the fact of the matter is that there is no real estates in the Hudson Yard any longer, it’s all new construction. The next building are coming online, until 2022 plus there is available space downtown in the buildings that are currently under construction or recently completed. And I think people are feeling really good still about midtown Manhattan and there is significant amount of traditional tenancy that still values the grand central station and the east side amenity. And so we are pretty confident and again the amount of activity that we have seen in the last quarter or so at 399 now that we are showing a finished product predominantly and 159 where the skin is on and people can walk around and they can feel what we are doing and they are seeing what the likely common areas are going to look like. We are getting a great reaction and people are encouraged and a lot of this is growth.

Great. Thanks.

Your next question comes from Rob Simone with Evercore ISI.

Good morning. Thanks for taking the question. Owen in your opening remarks and then Doug later on, both made reference to obviously smartly expanding your presence in LA. And Doug you used the term near future. I was just wondering if you guys could elaborate on that. Is there anything specific that you are working on? And then I have a quick follow-up if there is time.

Yes, we are always working on new business in LA. Jon Lange is on the phone as well and we are thrilled to have Jon in the Company, he has really helped us to have some boots on the ground and highs in years on the ground. So we have ambition, but I have said many times we are going to do it in a profitable manner. We are not going to grow for the sake of growth. We have we think a nice profit in the Colorado Center acquisition and we are going to similarly seek to make profitable investments in LA. We are looking at some development things. We are looking at some existing acquisitions. It’s not an easy time to do this. I talked about a deal that’s sold in El Segundo for a mid to high-4s cap rate and nearly $600 a square foot. So it’s not an easy time to buy existing products, but we are hopeful through development and perhaps repositioning that we will continue to grow in LA.

Great, thanks Owen. And then on the follow-up for just kind of shifting a little bit to 399 Park. This might be kind of hard question to answer. But in your guy’s internal planning, what probability do you guys or what timing do you guys describe to either all or more likely some subset of the proposal that are currently changing hands. And if those leases hit your targets, when should investors think about cash NOI or cash rents starting to hit your P&L?

The third or fourth quarter of 2019 for when the cash is going to hit the majority of it, and then our full run rate basis obviously 2020, right, so because you are going to get part partial year. And we feel really good about our prospect. I don’t like to sort of give a probability number out there, but we are in lease discussions, actively lease discussions which means that we have letters of intent that are being pushed back and forth multiple times. We have lots of interest in the building, there are literally more than two or three tours a week on the low rise of that space and we could have lightning in a bottle and have a hand shake with somebody in two days or it could take us to two months. I just can't give a good approximation on that.

Yes, this is Jon. The building is looking really good now, the side work is about 80% done, the storefronts done, we are going to finish off the entrance in the next month or two, the city is out, we demolished some of the floors so there is a reason why it's all happening now.

Got it. Thanks guys.

Thank you.

And your next question comes from Jamie Feldman with Bank of America.

Great, thank. I'm just hoping to get your latest thoughts on consolidation and just space per employee where do you think we are in that part of the cycle as you are seeing REIT leasing pickup in your market?

This is going to sound like a little bit of cant answer. It depends on the industry group. We continue to see on a marginal basis major law firms who haven't had a lease that was “struck” in the last decade, continue to reduce their square footage, I mean the lease that we signed in 2100 Pennsylvania Avenue is a significant reduction in the overall footprint of the tenants that’s moving into that building. So those things are going to continue to occur. On the technology and the life science side, I would say that the densities have gotten about as low as they are going to get. People are starting to sort of push back on that. We have described sort of the issues that there our major tenants in San Francisco salesforce.com thinks about in terms of how they are building out their space. They are exceedingly focused on collaboration areas which means that there are more areas that are devoted to gathering and left the areas that we devoted to “either” a desktop or on office or tabletop. So we don’t think there is much in the way of compression that is going to be going on in those locations. And then businesses are expanding, they are hiring new people, you look at the unemployment rates across our major markets and you see a dearth of available labor and so people are clearly grabbing every employee that’s around. And so that means that they expanding which means that they are taking additional space.

Okay if I could just ask a follow-up on the comment you just made in terms of its just hard to find people. When we read about where that’s the biggest challenge it does seem to be in your markets. Can you just talk about your thoughts on long-term job growth in kind of your coastal markets and I think that might impact.

Yes, I will give it a shot. Well this is crystal ball time. I'm not sure how valuable this will be. Look, this is related to economic growth, the job creation is going to be related to GDP growth and there are lots of experts out there that predict whenever sessions going to occur I'm not sure we are exactly able to do that. I did provide some data at the Investor Conference last year that showed we are long in this cycle from a timing standpoint, but we are not long in this cycle from a net job creation standpoint. And then also I talked in my remarks about the Tax Reform and what impact that will have on the economy. So Jamie I wish I could be more specific with you, I don’t think we know exactly when the next recession is going to occur. We don’t think it’s near-term and I think job creation will follow that. And in the markets that are in we believe magnets for employment. So when younger people, graduate from a university there with a PhD or a masters or a BA they are going to markets where there are the most opportunities for jobs and job growth, and those happen to be the markets that we are in and the universities are trying to make sure that they are providing the right skill sets for these types of workers. I mean clearly I’m surprised no one has asked about it, but I will bring it up. I mean Amazon is saying that they are going to go to a new city and hire 50,000 people over a 10 year period of time. That’s a lot of people. And when you have a 2% or 2.5% or 3% unemployment rate, you wonder where those people are going to come form and presumably they are going to come from certain companies that are no longer viable, that are going to have an exit. And then migration from other parts of the country into those markets where the jobs are most plentiful. And that’s I think we’re seeing happening in the markets like San Francisco.

Okay. I appreciate your thoughts. Thank you.

And your next question comes from Nick Yulico from UBS.

Hi, thanks. I was just hoping to get an update on the NOI bridge, how far along are you now on a leased percentage and where might you end 2018?

So this is like a torture question, right. I purposely didn’t bring up to that word because I was hoping that we would never have to talk about it again. So big picture if you really care. So the numbers are $155 million, there is $86 million that’s signed, there is $10 million that’s pretty close, the incremental contribution from 399 is between $40 million and $45 million. The rest of it’s from EC, Gateway, General Motors building and Colorado Center and that gets you to a $155 million. And all of it is going to show up in our same-store result and our occupancy and that’s hopefully the way we’re going to sort of address it on a going forward basis.

Okay. So you are not going to give where you are on the leased percentage right now?

I can’t tell you on a square footage basis because we never sort of think about that way, we think about it on a revenue basis. I mean you can ask me the question every quarter and if I have the numbers and I’m happy to give them to you, but we are moving into sort of saying okay we have given you an 2018 number we have given you a 2019 number. We told you when all this stuff is going to come online. And you will know when we do a lease at 399 because we’ll tell you I promise. And that will be the biggest contribution to getting us really close to the ultimate objective.

Okay, alright. Fair enough. Just one another question. Mike going back to the guidance, you mentioned $5 million of higher straight line rents. Wanted to be clear, is that just free rent related to leases already signed and then what is the potential for seeing additional straight line rent benefit in 2018 if you get more leasing done. Based on our vacancies, is there any space that could be delivered to a tenant this year and commence free rent?

I think that’s how we get to the high end of the guidance range. There certainly is projections that we have of things that hopefully will happen, where we will sign leases for either its starting phase or vacant space and we will get started and we will have a free rent period. Certainly the increase in the guidance is associated with leasing activity that we have or believe we are definitely going to get that has free rent period. So the vast majority of all of the straight line, is free rent.

And I guess I want to make one other point about free rent. So there are different kinds of free rent. There is free rent which is a conception to a tenant where once they start their actual occupancy in the space that they have a period of time when they are not paying. And that’s Washington DC free rent. Free rent in New York City and free rent in the Boston market are we sign a lease, we deliver the space, the tenant is building out the space over a period of time and during that period of time we are recognizing revenue because of the condition of the space. So there is a subtlety there that’s important to understand.

That’s helpful, I guess it is on 399 Park, is there any other space that would fit that potential to get if you got more lease signings done, it had more free rent this year?

I think I talked about that before and it’s a good point just to bring up which is the fact that we won't have that at 399 because of the condition of the space. So Jon described that we're getting a really great look and the reason we are getting a great look from the tenants is because we are demolishing the space and when you demolish a space whereby it’s really not “ready” for its intended use. I'm kind of jogging here. You can't straight line it. You basically have to wait unit this space is actually delivered which means interestingly we are at the win to the extent that tenant is delayed and they are building out the space in order when we can recognize that revenue even though we may actually have rent commitment. Which again is the situation we have on our new construction in San Francisco, where we are actually receiving cash rents from salesforce.com on a lot of their space that we are not recognizing revenue because the space isn’t build out yet.

Okay. Thank you Doug.

And your next question comes from Alexander Goldfarb from Sandler O'Neill.

Hi good morning. Just two quick questions. First, for Michael about on the dispositions that you guys talked about which includes the one that already closed in DC the 200 million of 300 million. Does that mean there is roughly sort of another $0.05 of loss on annualized basis that’s not in guidance or is there some sort of adjustment already reflected in guidance for what Owen outlined?

I mean we don’t have anything else in our guidance for assumed sales. And we haven’t determine what assets they are, some of them might be land, and we do have some excess land that we already have kind of under agreement where it might be being re-entitled or some other things might be happening that we expect to close this year. So that would have almost no impact on our FFO other than the carrying cost of insurance and taxes which is nominal. And there might be a couple of non-core suburban type of assets as well that might have a moderate impact. But at this point we haven't identified and we are still working on kind of determining what assets those might be. So it’s too early to kind of say what the impact might be.

We do get cash money for those sales you know.

I know that. the second question. As we heard this morning cash flow is good. Just second question is Owen you mentioned that year end you expect to get to 92, it sounds like if you got all the city space backfill that’s another 100 basis points that gets you to 93…

We have time for one final question and that question comes from [indiscernible].

What is going on. I'm sorry operator we still have the question going on.

Alex, if you want to start over on the question?

Yes, can you hear me?

Yes, we got you.

Okay, great. So on the occupancy side, Owen, I think you said you expect to get to year end 92% if you backfill City that gets you another 100 basis points next year to 93%. Do you think that you guys could get towards 95% or there are structural things about the portfolio meaning tenants always moving in moving out that probably like that 93-ish may be sort of your max versus getting closer to 95% given all the demand in the market right now?

I think that we should be able to get to 94% to 95% on a run rate basis and most of that is the availability we have in Manhattan. So that you add a 200,000 square feet we have at 159 and you add 500,000 plus square feet we have at 399 which should be leased on a long-term basis. But overall, expiration schedule that we are looking at for - and I showed you just when we did our Investor Conference, so if you look at those slides you can see it, for 2019 through 2020 it’s pretty light. So we should get there by the end of next year.

Thank you.

Your next question comes from Vincent Chao from Deutsche Bank.

Hey. Good morning, Owen. Just going back to development conversation, obviously a lot of success on leasing there, adding few more projects. But I was just curious and we’re hearing a lot about labor shortages as well as rising construction costs, I haven’t heard you guys really change your development yield expectations recently. So I’m just curious I guess the implications that rent growth is keeping up with construction, but curious if you can comment on what kind of construction cost increases you have seen over the past year and then also what you are seeing from just availability of labor on the construction side?

So I think I made a comment earlier on one of the reasons the tenant improvements are going up is because it’s just costing a lot more to build out space, which is I think a statement that we see significant inflation in the construction industry. When we do our base buildings, when we are making a bid on a project, sometimes we are actually bid it on the formula basis, so the tenants paying a percentage of a factor on what the actual costs are, so it sort of moves. But in most cases, when we bid a building and we provide a rent to somebody, what we have done is we have built in cost escalation into our construction component in our development budget. And over the last call it three or four years, we have been building in anywhere 3% and 6% depending upon the marketplace on annual basis for that component of the project cost.

Okay. And then in terms of just overall availability, are you running into issues finding enough labor?

Yes so honestly that’s the reason for the escalation for the most part is labor shortages. And so you have contractors who are working with subcontractors who are bidding to lose in fact we are saying well we will do the job by. And I think one of the advantages that Boston Properties has is that we are a perpetual user of labor in our markets with our contractors and with our subcontractors, and we have an impeccable reputation with regards to making payments on time, treating our subcontractors well, dealing with changed orders appropriately. And because of that I don’t want to say we get preferential pricing, but we certainly get preferential access to the subs who want to do work and know that if they do work with us in a good market they are also going to be able to do work with us in a bad market. So we have not had a procurement problem on any of our jobs.

Okay, got it. And then I know you guys have been pretty clear that you are not going to use equity to fund any of the development needs here, but just curious in 2018 I know the development pipeline shows 1.4 billion of remaining funding needs but that obviously goes up with some of these projects that you have recently added or will be added shortly. Curious what the total CapEx budget is for 2018, how much do you actually think you will spend in 2018?

So this is capital on the existing portfolio as oppose to development spend?

No, no development spend specifically.

2018 something around $800.

800 million. Okay and then just maybe one last one. Owen you mentioned you are not concerned about a material increase in rates in 2018. But I guess what you consider material increase? I mean I guess is 3% still within that limit or how much - can you provide some color on that?

Yes. Predicting rates is obviously parallel, but I think material would be something significantly over 3%.

Significantly over 3%. Okay, thank you.

That’s where I would say it would be material.

Right.

Okay, thank you for your time and attention and interest in Boston Properties. That concludes the call.

Thanks everyone.

Thank you.

This does conclude today's conference call. You may now disconnect.