Boston Properties (BXP)

Q4 2010 Earnings Call

January 26, 2011 10:00 am ET

Executives

Mortimer Zuckerman - Co-Founder, Chairman, Chief Executive Officer, Head of Office of the Chairman and Member of Significant Transactions Committee

Douglas Linde - President of Boston Properties Inc and Director of Boston Properties Inc

Arista Joyner - Investor Relations Manager

Michael LaBelle - Chief Financial Officer, Senior Vice President and Treasurer

Raymond Ritchey - Executive Vice President, National Director of Acquisitions & Development and Member of Office of the Chairman

Analysts

Steven Benyik - Jefferies & Company, Inc.

Chris Caton

Michael Knott - Green Street Advisors

Sheila McGrath - KBW

James Feldman - UBS

John Eade - Argus Research Company

Suzanne Kim - Credit Suisse

Ross Nussbaum - UBS Investment Bank

Alexander David Goldfarb

Jay Habermann - Goldman Sachs

Jordan Sadler - KeyBanc Capital Markets Inc.

David Harris - Gleacher & Company, Inc.

Robert Stevenson - Macquarie Research

Erin Aslakson - Stifel Nicolaus

Presentation

Operator

Good morning, and Welcome to Boston Properties Fourth Quarter Earnings Call. [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.

Arista Joyner

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 the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirement. 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 we detailed in Tuesday's press release, and from time to time in the company's filings with the SEC. The company does not undertake any duty to update any forward-looking statement.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be able to answer questions as well.

I would now like to turn the call over to Doug Linde for his formal remarks.

Douglas Linde

Good morning, everybody. We're going to change things up a little bit this quarter. Mort is going to I think do that cleanup for us but thanks for joining us.

When we spoke to you last quarter, our focus was on describing the investments and the thesis behind 510 Madison and the Hancock Tower and Bay Colony. Today, I'm going to focus my comments on the operating fundamentals in our markets, our leasing successes and our expectations for 2011 from an operating perspective.

But as a quick update, we close the Hancock Tower on the 29th of December. We have signed documents, and knock on wood, we expect to close Bay Colony in the next few days. And we did complete one other investment prior to year end, which was a swap of a $24 million cash payment in our five percentage was in the retail component that would contemplate for the 33% interest in the office building, which is about 300,000 square feet that we at already own. The project is located on top of the Friendship Heights Metro Stations, Chevy Chase. And if you want to talk about it, it's a really supply constrained market. This is one of them. It took more than a decade for New England development who was the original sponsor to get permits, and we joined them in 2004 and the building stabilized in 2009.

The purchase price equates to a valuation on an incremental basis of $525 per square foot for the office building and $25,000 per stall for the parking garage, which is a pretty diversed parking garage which gets income from the office tenants in our building, 325,000 square feet of retail space and 432 apartments, along with transient income from the neighborhood.

For 2011, NOI yield on incremental investment is about 6.3% and the contribution on a GAAP basis is about 6.8%. The property is unencumbered and it's 97% leased.

Over the last few weeks, the sell side analysts have all hosted conference calls by the major real estate service providers, detailing the macro views of the national office markets and overviews of submarkets and reviews of the current trends in 2010. Most of the markets, I'd say, had a focus on CBD. And this is sort of -- here is sort of my perspective on that, which is as a saying, I like about the men who had drowned crossing the stream with an average depth to six inches.

It's becoming harder and harder to act on broad generalizations or to expect that you can extrapolate market data to every submarket in every individual building. We are not seeing the rising tide lift of all boats. In fact, we think the bifurcation within individual sub is becoming even more pronounced, and I'm going to talk about this later.

Even in the depth submarkets, the individual characteristics of the location in the building, sponsorship, commitment to investing capital not just to make things look pretty but to really keep the building going, attention to building operations and focusing on what your customers really need today, all have to be put together to be successful.

For us, 2010 was a really, really strong year if you look at leasing activity. We finished the year with almost 6.5 million square feet of leases, 2.25 million square feet in the fourth quarter. Just to give you a perspective, this is 1.5 million square feet more than our previous high, which is back in 2007. The activity was dominated by Boston and Washington D.C., each was about 2.4 million square feet. The New York City portfolio followed the others simply because we didn't have vacancy or near-term expiration, so we couldn't lease space.

This quarter, we completed over 100 separate transactions compared to a quarterly average of about 75 during the first three quarters of the year. So things accelerated in the year. And our quarterly second-generation leasing stats are pretty much in line with what we've been foreshadowing about with a 15% mark-to-market. If you look at it on an annual basis interestingly, 2010 was actually up 11%. I think the one thing to note this quarter is that concessions were significantly lower, about $12.5 per square foot. So on a base of 1 million square feet of leasing that came into service this quarter, that's about $12.5 million. And if you amortize that over the average length of the lease of, let's say, 8%, the actual rental rate will be about $2.42 higher. So a net decline would be closer to 7% on a net-to-net basis.

The reason for decline this quarter is that we had a whole bunch of leasing that occur in the Reston submarket, where we had leases that were done in 2001 and 2002, which have their 2.5% or 3% escalators, and those rents just got ahead and where current market conditions are. So there was a natural road down when we re-leased that space.

The market rents we used for the mark-to-market, again, are based on long-term deals with market transaction costs. And I'm sort of give you some perspective on where we think the market rents are in our portfolio. In New York City, we think rents are in the high 60s or the low 90s with the exception of two Grand Central are in the low 50s, and at the General Motors building, where rents are about $100 per square foot and can go up to about $140. And if I can add, which I'm sure we'll talk about later, where rents range from the high 80s to base to over $130 per square foot at the top.

In the Boston CBD, rates are between the mid-40s and the mid-60s. In San Francisco, the high 30s and the mid-50s is at top of the better building. In D.C., on a net basis, CBD rents are in the mid-30s to the high 50s. In the suburban side, the Greater Waltham suburban market is mid-20s to the low 30s, Cambridge is in the high 30s to the low 50s, Reston Town Center is in the mid-30s to the low 40s. Suburban Maryland is in the low 30s and Rockville is in the low 50s in Chevy Chase, and Princeton rents are in the low 30s.

We added the Hancock Tower towards staff this quarter and the Hancock Tower has an embedded growth of about $7.5 a square foot. And I know Mike is going to talk about sort of the accounting coordinations of that. But when you combine the improvements that we saw over the year and New York City and in Waltham, in Cambridge and the Northern Virginia versus where we were at the beginning year where we had expiring lease, also, during the year that were a little bit on higher side, our actual overall portfolio rent right now is pretty much at market. So there really isn't on a growth spaces any mark-to-market down or up as we look at things right now.

Midtown Manhattan. Leasing activity ended 2010 was significantly more activity as anyone predicted. There's sublet spaces begun to disappear from the market. And the availability rate as we begin 2011 is probably under 12.5%, and about 3% of that is sublet space. We have seen a gradual improvement to the new buildings, and obviously, a much stronger rebound in rents than I think anyone expected at the Premiere Plaza district assets.

High-end tenants, hedge funds, opportunity funds, private equity firms and debenture firms have seen a rebound in their business prospects. The changes that are occurring in the large financial institutions are clearly leading to the growth and formation boutiques smaller firms. And in addition, there were a significant number of big tenants in the market that look to lock-in current rents, and are still out there today, and certainly are looking for a large contiguous blocks in big town.

Read the rest of this transcript for free on seekingalpha.com