Boston Q4 2009 Earnings Call Transcript

123jump.com Staff
01 Feb, 2010
New York City

Revenues fell 3% to $377.9 million and net income was $53.3 million or 38 cents per diluted share. The company has strong capital position with cash balances of $1.4 billion and a comfortable leverage position. core operating performance exceeded our budget by $0.025 per share.

Boston Properties, Inc. ((BXP))
Q4 2009 Earnings Call Transcript
January 27, 2010 10:00 a.m. ET

Executive

Arista Joyner – Investor Relations, Manager
Mortimer B. Zuckerman – Chairman and Chief Executive Officer
Douglas T. Linde – President
Michael E. LaBelle – Chief Financial Officer
Michael R. Walsh – Senior Vice President, Finance
Peter Johnston – Senior Vice President, Regional Manager

Analysts

John Guinee – Stifel Nicolaus
Alexander Goldfarb – UBS
Jay Habermann – Goldman Sachs
Josh Attie – Citigroup
Jordan Sadler – KeyBanc Capital Markets
Jamie Feldman – Bank of America/Merrill Lynch
Shane Buckner – Analyst
Michael Knott – Green Street Advisors
Mitch Germain – JMP Securities
Sara Lewis – Analyst
Michael O''''Dell – Analyst
David Harris – Analyst
Chris Caton – Morgan Stanley

Presentation

Operator

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''''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 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 of these documents, they''''re available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday''''s press release and from time-to-time in the company''''s filings with the SEC. The company does not undertake a duty to update any forward-looking statements.

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

I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Mortimer B. Zuckerman

Good morning, everybody. Thank you for joining us. Let me begin just by acknowledging with sadness the passing of Ed Linde who -- the Chief Executive Officer for many, many years and was for 41 years my close friend and colleague. We started the company together and had a wonderful fit of personalities and abilities and is somebody whom I shall miss enormously. It''''s hard really to imagine the void that he leaves after all these many years. We will all try and make up for the work which he did with the company, expanding our various duties, Doug, myself and a number of others. But he was truly a remarkable man and a remarkable businessman and a remarkable friend and a remarkable colleague.

So with that I''''ll just, if I may say, just one or two things about the company and the environment in which we work. I think we had a very difficult patch as an industry over the last several years. All of you I know are familiar with what''''s been going on. I must say that I think we in a sense have had for a very long time a basic strategy that I think demonstrated its relevance and viability in the past 18 months in particular. And that is we have stayed in by and large, supply constrained markets. And we have concentrated on the very upper end of those markets. And I think we found this was perhaps more particularly illustrative in New York City, where this is a perfect sort of illustration of this, how it works.

We have been very successful, I might say, in leasing all of the space which we had available mostly because of bankruptcies, Lehman Brothers and Heller Ehrman and General Motors, et cetera. And the reason is implicit in the thinking that went into this strategy which is that, these kinds of buildings, we feel do better in good markets but much better relatively in difficult markets. And the reason is that in difficult markets when rents go down and they have gone down and we are not immune to that. A lot of people who want to be in the best buildings take advantage of these lower rents and move into them and that''''s exactly what we have found.

So I think we will be in a position to have remarkable high occupancy rates compared to the overall market in New York, compared to other cities, in part because we have found that tenants really are anxious to go into the buildings that we have. This is particularly true of buildings like 399 Park Avenue, the General Motors Building, 601 Lexington, the formerly, what we used to call the Citigroup Building.

We''''ve really had a very, very good experience in terms of filling up those buildings to the extent that we had vacancies. And not at the rents that as they used to be, but the rents have been fairly good and they have been firming up. So, we think the strategy that we have does give us some protection against the kind of headwinds that the commercial office building market has encountered in many, many areas of the country.

So, I think we go into this coming period, the next year, frankly feeling fairly good about the business. I don''''t want to underestimate the fact that, many of you probably know from what I''''ve said and what I''''ve written, that I have been a bull over the last two years, but have been much more bearish than most. And I have to say that it is the pessimists who have been proven right.

And I still think we are facing headwinds on the employment front. Nevertheless, in the financial area of the office market, I think there has been a major turnaround. That industry has stabilized and has grown. The intense freeze up of various aspects of the financial markets have become thawed for all kinds of reasons, not the least of which is the actions of the Federal Reserve Board.

And if I ever have any advise to any of you who want to express political opinions, believe me, support Ben Bernanke for the Chairman of the Federal Reserve. Because he came up with some of the most innovative programs to make sure that the financial system has liquidity and credit, when the normal ways of feeding the channels just got all blocked up by the fact that the major banks and the minor banks had such incredibly difficult loan books and credit losses that they were looking at.

So anyways, whatever was the mix, I think the mood has changed, there is more confidence in the operations of the financial world. I''''m not saying there''''s necessarily unanimity in terms of the views of the economy, I still think that most people are a little bit more bullish than am I, but I hope they''''re right and I hope I''''m wrong. But I think most people within the financial world feel that the real crisis in the financial world is pretty much behind us. And we reflect some of that in terms of the tenants that we have in our various markets. It feeds us well into the legal world, which is another big source of tenancy for firms like ours.

But I''''ll give you sort of another demonstration of why I think this is the case. Most of the people in the financial world cannot do without their Bloombergs. And I can tell you that Bloomberg has been leasing a lot more machines as a lot of people have spun out of the larger financial firms or have-- and started up new firms, or other people have gone into the financial world because they feel that there is an opportunity.

So, I think we in that regard are benefiting from the fact that we have these very high-quality buildings in some very good markets. The Washington market itself is strong and some of our other markets are still strong. And some of them are weaker, particularly those out in the suburbs. But I''''ll leave that to others to comment on.

And with that, I''''ll end my comments and ask Doug to take over the description to you of Boston Properties and its progress in the last year and its prospects for the next year. Doug?

Douglas T. Linde

Thanks, Mort. Good morning, everybody. Personally and on behalf of my family and in the Boston Property family, I want just to express my thanks for all the calls and letters that we''''ve received over the past few days. Listening to people speak, or read of the messages they''''ve left and reading what people have written about how my father made an impact on their lives and just the unique personal connection he was able to make with so many people, has really been a really wonderful tribute to him.

His presence is going to be missed, but the values that he instilled, his approach to running our business and the example he set for how everybody at Boston Properties should conduct themselves and interact with their tenants, our contractors, our vendors, public officials, industry colleagues, lenders, analysts and investors is really the foundation of everything we are and everything we do at Boston Properties.

Ed was incredibly proud of the organization that he and Mort founded more than 40 years ago. The opportunities that came when we transitioned to a public company back in 1997, really allowed Boston Properties to capitalize on its expertise and to grow and then most importantly, strengthen its Management team and provide an enduring platform.

Ray Ritchey, Mitch Norville, Peter Johnson, Robert Selsam, Bob Pester, Bryan Koop, Mickey Landis and Mike LaBelle all have unique skills and talents, but they all also have the opportunity and good fortune to be led and mentored by Ed for many years, ensuring that his legacy is going to live on. So we have a lot to look forward to and a lot to be thankful for.

Let me get to the real estate markets now. In some ways, the markets really have come a long way over the past 12 months. Leasing activity was largely nonexistent when we were talking to you last year at this time. But we ended 2009 with significantly more activity than anybody predicted, including ourselves, particularly in New York City, as Mort had suggested, where we actually leased one million square feet in 2009.

The leasing activity has also become more consistent than our other markets, as tenants have begun to act on the new level of lease economics and they appear much less constrained about investing capital in their premises. During the fourth quarter, we completed 573,000 square feet of leases in Washington DC, 400,000 square feet in Boston, 290,000 square feet in New York, 125,000 square feet in San Francisco for a total of 1.4 million.

So our total portfolio leasing in 2009 was 3.6 million square feet and that was after just 250,000 square feet of leasing in the first quarter. And as a point of comparison, in 2007 and 2008, we completed about 4.6 million square feet. So things really feel like they have come back and there is velocity.

A year ago, we had-- there was basically no capital for real estate assets. Yet today, equity capital is readily available from the public REITs who have all been capitalized. Foreign sources that are actively trying to invest equity in U.S. properties and from private equity groups that have either uncommitted closed funds or believe they have the financial partners that will write big checks.

Appropriately structured secured debt is being offered to well-regarded operators at attractive pricing levels, from life insurance companies and commercial banks, be they foreign and domestic and even the investment banks are starting to aggregate loans again with an expectation of completing securitized, scared that I''''m going to say this, CMBS deals. And Mike''''s going to discuss the success we are having at rolling over our JV property secured debt in his remarks.

Now, this is all balanced by the measure of rent levels and concessions, vacancy and absorption and the fact that the office markets do continue to struggle. Our second generation leasing transactions this quarter were down 13% and they are a pretty good indicator of the decline over the last year in rental rate economics in our market.

The data this quarter represents 98 leases, the majority were negotiated in 2009 and it does include 114,000 square feet of the former Lehman space that Mort discussed where the rent was just about $100 a square foot. Now if you look at Washington DC, you''''ll sort of see that the exception to the rule where we actually had a positive mark-to-market and that was really led by a 200,000 square foot renewal we did with a GSA at 1301 New York Avenue.

The availability of space -- excuse me, in conjunction with the absence of meaningful new tenant expansions has clearly led to a significant change in lease economics. Rents have declined and transaction costs have increased. Now every transaction is different and tenants may be looking for a higher landlord contribution or no contribution, so the overall level of rents can vary greatly.

Tenant improvement costs and I want to spend a minute on sort of giving you a sense of where they are, for new long-term deals in high-quality CBD assets are in the 60s in Boston, New York and San Francisco and they''''re probably 10% to 15% higher in Washington DC, which is probably one of the reasons why the rent levels have held up better there.

Suburban costs for TIs are more variable since lease lengths tend to be shorter and can run anywhere from $10 to as much as $50 a square foot in a market like suburban Virginia. Historically, our blended transaction costs have been close to $30 a square foot given that we do, do a number of renewals each quarter. And that''''s particularly the case when we have lots of activity in New York City.

This quarter we were lower, we were $25 a square foot. And our average of lease length this quarter for the leases that we signed was 6.3 years. The market rents we use when we compute our mark-to-market are always based on long-term deals with a full market transaction cost package. And let me just give you a sense of where we see market rents and there''''s some variability here, but I''''ll give you the ranges.

In New York City, gross rents today probably are from the low $60s to the mid $80s in our portfolio. Now the exceptions, there are 2 Grand Central, which -- where rents are a little bit lower, they probably start in the low $50s. And then again in the General Motors building where things are much higher, rents at the bottom of the building are in the high $80s and can reach over $140 a square foot at the top.

In Boston, in our CBD, the rents are between the mid $40s and the high $50s. Again and these rents are all gross. In San Francisco, between the high $30s and mid $50s and in DC between the mid $30s and the high $50s, but those are on a net basis. And operating expenses for a high-quality building in DC are somewhere between $20 and $22 a square foot.

The greater Waltham suburban market is in the mid $20s to low $30s, again gross. Cambridge in the high $30s to the mid $40s. Reston Town Center, where we have a pretty significant presence, low $30s to the low $40''''s, suburban Maryland from the low $30s in Rockville to the low $50s in Chevy Chase. And in Princeton rents are pretty constant in the low $30s.

So this leads to a mark-to-market, including our share of our JV''''s, of a negative $1.74 per square foot today. In 2010, our average expiring lease is $39.68 and using these figures that I just described, our market rent is about $36.85. And in 2011, the average expiring rent is a lot higher, it''''s $45.81versus a market rent of $39.03. And again I think I said this before, but it really is, it''''s about San Francisco in 2011 where we have a couple hundred thousand square feet of space rolling over at close to $100 a square foot.

Overall, our peak rents were in the second quarter 2008 and since then, they''''ve come down across our entire portfolio of about 20% on a gross basis with New York City being down the most, because they were the highest there, about 35% and they were pretty flat in DC.

Mort published his macro perspective in the journal last week and I''''m sure there''''ll be some questions about that in our Q&A and it''''s a pretty good reminder that while there are signs that economic conditions are improving, but the labor markets to in fact remain challenged. And it''''s pretty hard to predict any improvement in real estate economics over the next 12 months.

But this doesn''''t mean we''''re not going to either renew our expiring leases or fill our vacant space. As Mort described, in 2009, we experienced some pretty significant tenant defaults in our New York City portfolio and today we have leased 87% of that space. And that includes three out of the four floors at the Citigroup Center, 601 Lexington Avenue that General Motors gave back.

Transaction velocity continues at a very strong clip. New York City is clearly where it''''s most strong and that''''s where we derive 42% of our net operating income. We have negotiations ongoing on the remaining 50,000 square feet at 399, the last available floor at 599 Lex. As I said, we''''ve leased three out of the four floors that were left vacant by GM at 601 and there -- that''''s to an expanding tenant by the way.

We are in an active discussion for all our available space in all of our 2010 expirations at the General Motors building where, as reported, we did complete a lease at the top of the building at economics that reflected the quality of the space and the building. It was a big number and we are in dialogue with prospective tenants on much of our 2012 roll-over at 125 West 55th Street.

While many of the larger financial institutions are still rationalizing their space needs, the recovery of the financial services industry has clearly led to the formation of new companies, as Mort described. And there is new demand and we are seeing this first hand in our leasing transactions.

Our near term exposure in New York City is really limited. We have about 100,000 square feet at 601 Lex and 187,000 square feet at 2 Grand Central Tower. And that includes 80,000 square feet at the bottom of that building that we''''re going to get back because the U.S. Mission to the UN is moving to an owned building in the middle of August.

Statistically, the East End market in Washington DC is our strongest market. And they have a direct vacancy of about 9.3%, but that''''s up from 6% three years ago. So even Washington DC is feeling the challenges of the labor markets. This is probably the highest vacancy we''''ve seen in decades there in the District.

The other challenge in Washington DC continues to be the availability of the space in those secondary markets, North Capital, which is really Southeast, Southwest and the Ball Park/Waterfront areas. Practically speaking, the only tenants for those buildings are the GSA or our government users and given the significant availability, there''''s actually about 4 million square feet of fully completed vacant new product in that market, gross rents are only in the high $30s, gross rents with CPI escalations and full tenant improvement allowances.

And since the government is the primary expanding user in the District, clearly slower than anybody I think anticipated, as the GSA completes existing lease expirations, it is becoming a little bit less inclined to take prime locations, which it might have done in the past. And so that''''s having some issues on the overall economics in DC. But our portfolio is 99 % leased and we have 285,000 square feet of expiration in 2010 and 2011 combined.

We were able to complete a 120,000 square foot lease and extension expansion with one of our major tenants at Market Square North this quarter. That covered a major portion of our near-term roll over. We continue to make progress at 2200 Pennsylvania Avenue and we are now negotiating our second large lease in that building. Our efforts in suburban DC continue to be focused on early renewals.

We documented the first of the many leases we have with the GSA or their direct contractors that have expired and yet the users are all in the space and have every intention of remaining. We have about 750,000 square feet of similar expired leases in our Northern Virginia portfolio that are included in our 2010 expiration schedule, where we expect to complete leases of between two and five years, extensions with either the GSA or the GSA contractor.

In Reston, we are actively working on our 2011 and 2012 roll over. We completed our first extension this last quarter, an 80,000 lease at One Discovery Square and we are in active dialogue on all the remaining roll over at Two Discovery, One Overlook and One Freedom Square.

In San Francisco, which is probably our slowest market, leasing activity was slower than the other places, yet we still completed the two floor re-location and expansion with an existing law firm. They''''ve actually been adding partners as other firms have been disbanding and we are in lease negotiations with a replacement tenant to backfill their space, which is a full floor in one of the other buildings, when it comes vacant in April.

In addition, we did completed 13 other smaller transactions at Embarcadero Center, which is really where the market seems to be most focused today, small 5,000 to 10,000 square foot deals. The Silicon Valley is probably the weakest market that we are in the country, availability is over 20%. And just to give you a perspective, this 46 million square feet of available space and about 15 million square feet of that space is class A space and that includes 3 million square feet that was delivered in 2009.

So the Silicon Valley has quite a long way to go before things start to feel even poor. Our single story Mountain View product continues to have somewhat good activity and we completed another 17,000 square foot deal this quarter, bringing our total activity in 2009 to about 92,000 square feet, that''''s a 600,000 square foot property. In the Western Boston suburbs, we are continuing to see a pretty consistent flow of small, medium and some large requirements. And I would define large as a tenant over 30,000 square feet. And there continues to be a handful of expanding technology and pharmaceutical tenants that are taking advantage of the recent pull back to upgrade their premises.

But there also have been a number of mergers and there has been some additional space delivered, which has led to an increase in available space in suburban Boston. And unfortunately, as we''''ve previously discussed, our largest uncovered exposure next year is really in the greater Waltham market, where we have about 525,000 square feet of available space, some of it currently vacant and some of it is known vacancy.

The good news is our 350,000 square foot fully leased development in Weston, is going to be put into service in the second quarter, fully leased and give a major boost to our suburban revenues. There continues to be a little bit of optimism in Cambridge as it''''s clearly become the critical R&D location for many of the leading technology and biotech companies. And we are actually in discussions with two office technology companies that are considering meaningful expansions.

The Boston CBD has seen an increase in activity this quarter, but that''''s really lease expiration, not growth. Active law firm renewals seem to be accompanied by a reduction in leased area and there are a number of 2011 and 2012 and 2013 expiration law firm tenancies that are currently in the market.

We did complete a 12 year 188,000 square foot renewal with our largest law firm at 111 Huntington Avenue this quarter but as part of that, they gave back two floors. We also completed a 40,000 square foot extension with another law firm and that one had no concessions.

We continue to focus on renewing our tenants with 2011 lease expirations at the Pru and we have begun to actively market the remaining space to be delivered at the base of Atlantic Wharf, which was recently re-permitted as office space and Michael talked a little bit about that.

I would summarize our outlook as follows. Rents have declined but leasing velocity is becoming much more consistent. In markets where ownership is stable, lease economics are firming and tenants are taking advantage of the re-pricing of high-quality space. In addition to lease expiration-driven transactions, there are pockets of tenant expansion both in our portfolio and in the market which require incremental real estate. So there are some signs of life.

I am not suggesting we''''re going to see positive absorption, but the expansion activity is certainly not absent. Expanding tenants care about the future and they also care about underwriting ownership, which I think really bodes well for Boston Properties. Our strategy has been to own and operate the highest quality assets in our markets. Again, reiterating what Mort started out the conversation with, to design buildings and tenant spaces suited to our customer''''s needs and to continue and most importantly, invest and upgrade these assets. Our assets are not going to be capital starved.

This will give us an advantage as we fight and we will be fighting for tenants in a challenging market. For all the headlines about the burden of problem real estate assets, lender led foreclosures or discounted note sales, they have really been the exception not the rule today. There is very little office product on the market today.

It''''s unclear whether the various parties involved in upside down real estate properties with either confused, absentee or unmotivated ownership have an appreciation for the current level of lease economics, tenant demand and the significant capital necessary to operate office properties.

Operating a partially leased building, judging how long it will take to stabilize, developing the right plan to position it in the market place, including making speculative capital investments and then executing is challenging and management intensive. We believe we are in an era in the office building business where investors are going to have to operate assets and not trade assets and that over time this is going to provide us with opportunities to make acquisitions.

A critical component will be our judgment of the underwriting real estate fundamentals and we eat the cooking everyday. It''''s hard to predict when we''''re going to be able to deploy our capital for productive growth, but we are staying in touch with the market and we are actively seeking out opportunities. And it''''s just as importance as keeping our portfolio leased and managing our financial requirements.

And with that I''''ll turn the call over to Mike.

Michael E. LaBelle

Thank you, Doug. Good morning, everybody. I want to start with a little bit of a discussion about what''''s going on in the debt capital markets. We''''re working on several sizable mortgage refinancings now and we''''re continuing to see positive momentum in this market. Overall, we have a strong capital position with cash balances of $1.4 billion and a comfortable leverage position.

So we are not necessarily seeking to raise additional funds now, but simply replacing existing debt. However, if we see opportunities, we are confident that we could successfully raise significant new capital at attractive long-term rates.

The unsecured markets have continued their tightening trend with our spreads in another 100 basis points in the last several weeks. Today, we could raise 10 year senior unsecured debt in the mid 5% range, 30 to 50 basis points lower than the 5.88% coupon from our $700 million October offering.

REIT spreads continue to be wide of other comparable corporates pointing to the potential for further improvement. We are also tracking the convertible debt markets which have come back to life after a near death experience less than 12 months ago. We are now seeing convert pricing with sub 2% coupons for five years and a 20% to 25% premium.

We''''re currently in the market with three opportunities to refinance expiring mortgages on our joint venture assets. These three buildings, consisting of 125 West 55th Street, Two Grand Central Tower and Metropolitan Square are high-quality CBD buildings in New York City and Washington DC and we have found considerable interest from traditional life insurance, bank and pension fund lenders that are willing to underwrite loans in the $150 million to $200 million size range.

We have executed a commitment on one of these deals and have attractive term sheets on the others. As we''''ve mentioned before, we expect to make a pay down on the two New York City properties, albeit a smaller one, at $40 million than our prior expectation, reflecting the improvement in this market. We anticipate borrowing additional proceeds at Metropolitan Square, so the three financings will be close to cash neutral for us.

Coupons in the secured mortgage markets have come in by 150 to 200 basis points and are now in the low 6% range on a long-term fixed rate basis. During 2010, we expect to pay off our other pending maturities including our loans on several buildings at our Carnegie Center project in Princeton and at 8 Cambridge Center, which have a total outstanding balance of approximately $80 million.

We also have several inexpensive LIBOR-based construction loans expiring at the end of the year, where we have short-term extension options that we may exercise. These consist of loans on South of Market, Democracy Tower and our share of Annapolis Junction that total $267 million. Although the market has substantially improved, underwriting standards and particularly available leverage continues to be front and center for lenders.

Valuations are very conservative and the ability to use junior financing is highly discouraged, if not completely prohibited. We believe that currently overleveraged assets in the markets will still be forced to inject significant equity to obtain refinancing otherwise there will continue to be a standoff between lenders and borrowers. These situations may still garner short-term extensions but only if the cash flow of the buildings support debt service payments.

Turning to our earnings for the fourth quarter, we reported fourth quarter funds from operation of $1.04 per share and full year FFO of $4.59 per share, both within our guidance range. Our core operating performance exceeded our budget by $0.025 per share. There were no real significant individual drivers of our portfolio outperformance but a lot of small items that added up including on the expense side of the ledger, where our expense reduction programs initiated over the last couple of quarters are starting to flow through and positively impact our earnings.

In total, we realized savings of $500,000 in net operating expenses this quarter. We produced about $1.7 million of unbudgeted rental revenue, a good piece of which came in New York City where we executed another new lease at 399 Park Avenue for 60,000 square feet that commenced straight line rental revenue in the quarter.

As with most of our leasing in New York City, the tenants are completing their own tenant improvement work so they have free rent periods of 6 to12 months. This will show up in our 2010 revenue where our straight line rent will be higher than typical. Our hotel exceeded its projections for the second consecutive quarter by $575,000 with RevPAR up by 5% due to higher than expected occupancy.

Pressure on room rates however remains a factor as is reflected by a year-over-year decline of 14% in our average daily room rate. Outflows of temporary costs related to the suspension of our work at 250 West 55th Street were delayed. Because temporary costs have no long-term value for the project, they are expensed as incurred and the delay resulted in $700,000 of savings for the fourth quarter. These costs will roll into and be incurred in the first quarter of 2010.

We did complete all of the permanent work related to the suspension in the fourth quarter and as of December 1st, 2009 we have ceased the capitalization of interest and wages for the project. As we mentioned before, this will result in a $25 million incremental increase in our interest expense until we restart the project.

We also re-categorized this project from construction in progress into land which is the reason our land investment on our balance sheet increased this quarter. Our G&A was in line with our projections. On a year-over-year basis, G&A was higher than the fourth quarter of 2008. But this was due to the impact of our voluntary deferred compensation plan which incurred losses endemic to the equity markets last fall, while this year we''''ve experienced gains.

These gains and losses run through our G&A line but they have no impact on our bottom line as they are offset in gains and losses in investments as our plan is fully funded. On the non-operating side of our P&L, we are taking a $6.2 million non-cash impairment charge to our carrying value for the California assets held in our value added fund.

As Doug mentioned, the market in the Silicon Valley and the San Francisco Peninsula has been negatively impacted by both an increase in speculative supply of space and a weakness in demand. The bulk of the impairment is associated with our Circle Star buildings in San Carlos, of which we own a 25% interest. At Circle Star, which will be fully vacant in February, leasing activity continues to be challenging and rents have declined significantly.

Our carrying value is now below the amount of our non-recourse mortgage loan on the property. GAAP accounting requires that we separately evaluate the building for impairment and record any reductions independent of financing. The loan expires in 2013 and has cash escrows in place to fund the interest expense and carrying costs through mid-2010. We are currently in discussions with the lender to modify this loan, but if we are unable to work out a modification we could record a gain offsetting a portion of this impairment charge. Our remaining equity value in the value added fund is $12 million.

Now, I want to spend a few minutes on our projections for 2010. As we discussed in detail last quarter, there are several non-operating items that impact our FFO in 2010 and are important for you to understand. We raised both debt and equity capital in 2009 to put us in an advantageous position to quickly act on new opportunities. The majority of this new capital remains in cash and is currently dilutive as it is invested in low-yielding, short-term liquid investments.

The impact of the increased share count from our equity offering is a reduction in 2010 FFO of $0.22 a share. And the interest expense associated with our bond offering adds an incremental interest expense of $31 million, reducing our FFO by $0.17 per share net of interest earning. This puts us $0.39 per share behind our 2009 results off the bat. We have not projected any new acquisitions in our forecast, so our guidance assumes that our cash remains dilutive for the full year.

Looking at the portfolio, on a same-store basis, we continue to expect moderate declines due to the impact of negative leasing spreads from expiring leases over the next few years based on current market rents combined with generally flat occupancy rates. Our current occupancy at 92.4% is up from last quarter, which reflects the positive leasing activity in New York City. We are now back above 95% leased in Midtown, up nearly 400 basis points since June.

While our supplemental accurately defines our 400,000 square feet of immediately available space and just over 400,000 square feet of rollover exposure in 2010, as Doug discussed, we are in active dialogue on much of this space. Our 2010 rollover has in place rents of $73 a foot, in alignment with the market rents that Doug spoke of. And as such we expect any roll down on this space that we experience to be more muted in 2010.

In Washington DC, we have minimal vacancy other than our Maryland portfolio where we have 160,000 square feet available, net of a 56,000 square foot tenant that took occupancy in January. And in Reston, Virginia we have 100,000 square feet. We now have only 50,000 square feet left in our South of Market development where we''''ve signed an additional 15,000 square feet of leases this past quarter.

In San Francisco, we had positive absorption in the fourth quarter, but we''''re really cautious about our ability to gain any meaningful improvement in our 460,000 square feet of current vacancy, a little less than half of which is at Embarcadero Center. Our largest exposure in 2010 is at our Zanker Road Business Park project where a 544,000 square foot lease expires on the last day of the year. This is a relatively low rent building, mid-teens per square foot and we currently expect a renewal in 50% of the space, but there will be no impact in 2010. Other than at Zanker Road, our rollover exposure is pretty light in 2010 with only 188,000 square feet or 5.6% of our leases expiring in Embarcadero Center.

In Boston, as we have mentioned on previous calls, the expected increase in our vacancy has occurred and we lost over 100 basis points of occupancy, almost all of it in the suburbs and in the fourth quarter. We have some high-quality available space including close to 300,000 square feet at 200 West Street, Waltham Weston Corporate Center, CityPoint and Reservoir Place.

Additionally, our 2010 rollover in Boston is nearly 700,000 square feet, with 430,000 square feet in the suburbs, 125,000 square feet in Cambridge, which includes 80,000 square feet when Biogen relocates to Weston in the second quarter and 130,000 square feet at the Pru. Given the overall market supply and demand, we are not expecting any meaningful additional revenue in 2010 and may end up losing occupancy this year in the Boston region.

Our lease termination income was a relatively large component of our 2009 portfolio revenue at $17.5 million. We traditionally see substantially lower amounts and are projecting $4 million for 2010.

Overall and as I touched on a minute ago, we expect our same-store results to be moderately down with GAAP same-store NOI down 1 to 2% and cash same-store NOI down 3.5 to 4.5%. These ranges exclude the impact of termination income due to the change its run rate from year-to-year. On a GAAP basis, this is an improvement from our view last quarter owing to our stronger leasing velocity.

Straight line rents for our in service portfolio will be up from last year and we project 60 million to $70 million in straight line rents in 2010, this is up from $46 million last year. The major drivers behind the difference, which is also a key factor in our projected same-store cash NOI decline, are the free rent periods contained within the almost 500,000 square feet of leases that we completed at 399 Park Avenue and 601 Lexington Avenue in addition to the 485,000 square foot Ropes & Gray lease at the Prudential Tower that commences this month but has a 12 month free rent period to provide time to build out this large space.

Our development properties will add an incremental 18 million to $20 million in 2010 with the full year impact of our 2009 pipeline including Democracy Tower, 701 Carnegie Center and Wisconsin Place, which are collectively 96% leased, as well as the delivery this summer of Weston Corporate Center, which is 100% leased to Biogen.

At our Atlantic Wharf development, we''''ve received final approval to convert a portion of the Residence leased zone space to office. With the conversion, we have increased the office square footage by 200,000 square feet. With the denominator factor resulting in a decrease in our leasing percentage to 58%, although there''''s no actual change in leasing at the project.

We have also increased our budget by $50 million to reflect the tenant improvement in leasing commission cost necessary to lease this space, as well as the cost to build out the residential interior for the 70,000 square feet of remaining residential space. The conversion is not expected to materially change our overall return expectations for the project.

We expect our joint ventures to contribute 130 to $140 million to our FFO in 2010. The overall contribution is down from 2009 due to the burn off of $15 million of non-cash FASB 141 income. Our 2010 JV contribution is better than we discussed last quarter due to the leasing we''''ve completed at the GM building combined with additional activity we are seeing in Washington DC.

Our hotel is showing signs of stabilizing, but we are still projecting it to be down by roughly $1 million to a projected contribution of approximately 6 to $6.5 million in 2010.

Our development and management services fee income is projected to also be lower than in 2009 with the roll off of several large development projects, including the completion of 20F Street in the first quarter and Wisconsin Place in mid-2009. We earned approximately $7.5 million on these projects in 2009 that will not recur in 2010. We have had some success in obtaining additional fee work but not at a scale that will approach our activity in 2009. We''''re currently projecting 24 to $27 million in fee income for 2010.

Our G&A expense is projected to be 81 to $83 million. This is up from 2009 primarily due to $4.5 million of incremental investing-- incremental vesting of non-cash stock compensation. Also impacting our G&A is a significant reduction in our capitalized wages, down 22% or $2.5 million. For 2010, we continue to have $5 million in non-cash expense related to our OPP plan.

Our net interest expense is expected to be 355 to $365 million, consistent with our prior guidance. This is $46 million higher than 2009 due to the incremental expense associated with our October bond offering, I mentioned earlier and a reduction in capitalized interest associated with the suspension of our 250 West 55th Street. These negative items are offset by slightly higher interest income on our cash balances, the additional capitalized interest associated with projected spending at Atlantic Wharf, 2200 Pennsylvania Avenue and Weston Corporate Center and the $80 million in debt repayments that I discussed earlier.

As detailed in our press release, we have reached a settlement agreement of the lease termination related to our 250 West 55th Street project. We had accrued $20 million for this cost in the second quarter of 2009 and have now settled for 12.8 million. We will recognize this previously unbudgeted $7.2 million difference as FFO in the first quarter of 2010. Taking all of these assumptions into account results in our increasing our full year 2010 FFO guidance range to $4.10 to $4.25 per share.

For the first quarter, we project funds from operations of $1.02 to $1.04 per share. Our first quarter FFO is positively impacted by the 7.2 million non-recurring lease termination settlement at 250 West 55th Street. This is offset by a similarly sized one-time increase to our G&A that relates to the acceleration of vesting of long-term compensation associated with the passing of Ed.

Our first quarter FFO run rate is lower than last quarter due to the seasonality of our hotel, which is down $0.02 per share and the additional two months this quarter where we are not capitalizing interest on 250 West 55th Street, equating to a $0.03 per share reduction.

Overall, we''''re pleased with the improvement in our leasing velocity although we still have a long way to go to reach a landlord friendly leasing environment. Despite one of the most challenging economic periods with widespread market weakness and rental rate declines, we are able to project a stable portfolio NOI for 2010, net of the changes in termination income and non-cash FASB 141 amortization.

Not only does this point to the quality of our assets, our team and the length of our lease terms, but is due to the quality of our leasing and property management teams who have aggressively achieved positive leasing in New York City and maintained our occupancy levels in Washington DC and San Francisco. We also have the benefit of our development pipeline that has consistently delivered well-leased strong-yielding projects such as Weston Corporate Center, which delivers this summer in our Boston region providing a double-digit unleveraged return with no leasing risk.

As I mentioned at the beginning of my comments, we continue to hold $1.4 billion invested in short-term cash investments that is dilutive to our earnings. The incremental FFO that we can achieve, if we''''re successful investing this capital into income producing real estate, can be substantial and have a meaningful impact on our earnings. That''''s all of our prepared remarks. So I believe we''''re ready to open up the line for questions.

Douglas T. Linde

Okay. Operator?

Question-and-Answer Session

Operator

At this time if you would like to ask a question, please press star one. And your first question is from John Guinee.

John Guinee - Stifel Nicolaus

Thank you. Doug, can you walk through a little bit on how you''''re underwriting vacant assets and assets with a lot of lease up? For example, it''''s pretty easy to take the purchase price, the deferred CapEx, the TIs and leasing commission. How are you dealing with all of the OpEx carry and an imputed cost of capital in order to arrive at your basis and a stabilized return on cost?

Douglas T. Linde

Well, obviously it depends on where the asset is and how much risk there is in the asset. I will tell you and I think we in general are in agreement on this although it varies, that we are looking to invest capital that will allow us to generate leverage returns in the low to mid-teens.

And whether or not we get that up front in cash flow or appreciation in the form of increases in rents over time is really very much dependent on the particular assets and that obviously includes a cost of capital sort of factor as well. So that''''s sort of big picture how we''''re thinking about it.

We also look at, if we''''re putting our money in at a rate of return, where we would be on a basis when the building is """"""""fully stabilized"""""""" and how do we feel about that basis relative to where market rents are and where market rents might be going or a reasonable period of time is because you may feel more comfortable in a market where you think there is a lot of opportunity for growth to be at a higher relative basis, which will allow you to have a higher cost of capital imputed in that. I mean those are sort of the ways we think about.

John Guinee - Stifel Nicolaus

Are you specifically putting in numbers for an imputed cost of carry during a lease up, whether it be debt, equity or operating expenses?

Douglas T. Linde

Absolutely. Yes. I mean it''''s inferred in an IRR. And as I said when we look at what our total cost on a total dollars value basis and what our return is at the end of the day that is a factor. And as I said, depending upon our views on the asset and where the asset is and what the risk of the asset is, that that number is different. So it''''s not the same for a CBD building in Midtown Manhattan and available, a vacant building in the Silicon Valley.

John Guinee - Stifel Nicolaus

Great, thank you very much.

Operator

And your next question comes from Alexander Goldfarb.

Alexander Goldfarb - UBS

Good morning. Mort, just following up from your lunch yesterday, what was the take away as far as the populist tone? Is it a sense that Washington wants to make New York the next Detroit, or is there a sense of, yes there''''s some populist talk but in reality they want New York and the financial industry to thrive to create jobs for the New York metro area?

Mortimer B. Zuckerman

I''''m in an awkward position here. They did release the names of the people who attended, for those of you who don''''t know what we''''re referring to… There was a luncheon yesterday with the President with about four or five folks. I happened to be one of them. But they have also asked us to keep the content of that conversation off the record and confidential. So I''''m just not in a position to take any questions on it. If I were, I can assure you I would even write about it.

Alexander Goldfarb - UBS

Well then I guess we''''ll have to wait sometime to read another editorial. Then a second question would be just on the financing side. As you guys look to use different parts of the capital stack, you talked about converts. I didn''''t hear you mention 30 year offerings, which Simon did the other week. Given some of the converts that have come back to companies, so it ended up being really just short-term financing, how do you weigh not being in a position where the paper may come back sooner than you want versus taking advantage of the low rates now and maybe locking in 30 year? How much demand do you think there is of the REIT unsecured buyers for that duration bond?

Douglas T. Linde

Well let me answer. I''''m going to answer first part of your question and I''''ll let Mike answer the second part. When we think about convertible debt, I will be honest with you, we look at it as a debt instrument that is going to have to be refinanced when it matures. We don''''t look at it as permanent capital. And we look at it as, hey you know what, if we''''re lucky enough to have our stock price rise to the point where the convertible debt is actually in the money and people want to convert, that''''s a wonderful result, but it''''s not something that we are expecting when we actually go out there and issue the paper from a liability perspective. I''''ll let Mike comment on the market for long-term paper.

Michael E. LaBelle

I think that we obviously look at that full maturity spectrum and look at where interest rates are and where we think interest rates will be. And in the current interest rate environment, longer dated debt is very, very attractive to us. Whether you need to go 30 years or not, I think it''''s something we talk about and we consider and at this point we haven''''t deemed it necessary to pay the additional spread to go to 30 years.

I do think that there would be demand from investors for that paper and I think that was proven by Simon who successfully was able to raise a certain amount of that capital. But if you look at ten to 12 years, that''''s a long maturity debt as well. So we really think about all of those things when we consider it.

Alexander Goldfarb - UBS

Thank you.

Operator

And your next question is from Jay Haberman.

Jay Habermann - Goldman Sachs

Good morning, everyone. I''''m here with Sloan as well. Doug, you''''d mentioned in the past looking at possibly investing in debt. I know the recent 510 Madison deal that SL Green announced, but are those types of opportunities out there and I guess just to take it a bit further, obviously you mentioned California being weak. In the past you''''ve mentioned New York City and Midtown as a focus for acquisitions but how much of an opportunity do you think California could become?

Douglas T. Linde

Well, I''''ll answer your first question first. Which is - We are, I think, realistic about the fact that the way that one might be able to involve themselves in an additional piece of real estate may in fact be through a portion of the debt stack. Because quite frankly, we think that waiting for assets to be sold on the open market with a broker trying to garner the highest price is going to be a very, very long wait. And the people who are controlling the various pieces of the capital stack may in fact find it less objectionable to simply get rid of their investment in the form that they currently have in it and we will go through the brain damage and the negotiation hopefully in a cooperative way with the parties who are involved in those real estate transactions.

So, I do think that as an organization we are geared up for and prepared to make investments in the various capital structures that would make sense for us in order to garner ownership over a reasonable amount of time. Clearly Midtown Manhattan has been a market where we have both demonstrated a proclivity to buy the best assets and to really know how to operate. And so I think we have a very strong focus there.

I think the Silicon Valley is an opportunity. It''''s a -- I guess, I''''m not an investor, so I don''''t know what the right word, a very, very high beta market. And the issue that you have in Silicon Valley is not whether or not there''''s going to be a company that''''s going to grow, it''''s the sheer volume of the overhang of high-quality space and the challenges that that state is having from an economic perspective. And whether or not you can make a rational underwriting of how long and at what overall rental structure you can make an investment in a Silicon Valley type of a real estate property because it''''s a really tough one to underwrite today.

Jay Habermann - Goldman Sachs

Great. Sorry and the second question, can you give us an update just on I guess the DC 2200 Pennsylvania at this point? You mentioned a second large tenant. How close are you in terms of a signing? And I guess also stepping back to Russia Wharf, do you anticipate any change at all in the yield given the change from residential to the additional office space?

Douglas T. Linde

Let me answer the first question and Peter will feel free to chime in. As Ed always used to say, a lease isn''''t signed until it''''s signed. And so predicting whether or not a lease is going to get signed and when it gets signed is sort of a fool''''s errand. I will tell you that we are in deep negotiation exchanging pieces of paper with another large tenant. We have additional proposals that we have received. We have received economic responses from other tenants and they''''re transactions that we may or may not choose to go forward on. But the overall level of activity is actually pretty consistent for that building in DC. But I don''''t know, Peter, if you have any other comments on that one?

Peter D. Johnston

I would say that the referenced lease we are, I''''d like to think within the next two to four weeks, we''''ll have that executed. And the activity has been very, very good considering the pricing of the asset, which is at the top of the market.

Douglas T. Linde

With regards to Atlantic Wharf, not Russia Wharf, I mean the overall yield we don''''t anticipate to really be affected. I think we''''re probably taking a little risk off the table, because the ability to lease another 190,000 square feet of residential units many of which we''''re going to have somewhat challenged layouts, is probably less than the opportunity than I think we have.

We have a better chance of leasing that as office space. But in terms of where we thought the economics were going to be, I think we''''re in a pretty similar position.

Jay Habermann - Goldman Sachs

Okay. Thank you.

Operator

And your next question comes from Michael Bilerman.

Josh Attie - Citigroup

Hi, it''''s Josh Attie with Michael. Could you walk through the change to the 2010 FFO guidance? It''''s up $0.08 at the midpoint. It seems like $0.04 of that is related to West 55th. But if that $0.04 is offset by higher G&A, can we assume that all of the $0.08 is due to better fourth quarter leasing?

Michael R. Walsh

The G&A numbers that we gave last quarter and the G&A numbers we gave this quarter are very similar. So you could look at it that the $7.2 million of one-time income from the settlement that 250 West 55th is one component and the remainder is spread throughout the portfolio, most of it attributable to the leasing that Mike La Belle talked about.

Josh Attie - Citigroup

Okay. And how much of the $1.4 million of leasing done in the fourth quarter was for 2010, 2011 and 2012 expirations? And is that now reflected in the supplemental? Because it seems like the 2009 lease roll actually went up this quarter versus last quarter.

Michael R. Walsh

I think there was the push-off of a few expirations that were scheduled for 2010 that we did short-term renewals that are now in 2011. I mean excuse me, 2009 to 2010, I apologize.

Douglas T. Linde

I mean. As I described, we have the 750,000 square feet of space that''''s expired. And it''''s very hard to sort of say that the lease expired in 2009 and not push it out to 2010 because in fact the tenant is still in occupancy. And so until we actually have a legal document with those tenants, we''''re sort of stuck with sort of basically looking at them as month-to-month rollover and so they sort of, they''''ll kick into the year in which we are at.

Josh Attie - Citigroup

Okay. Thank you.

Operator

And your next question comes from Jordan Sadler.

Jordan Sadler - KeyBanc Capital Markets

Thanks, good morning. You again this quarter referred to investors having to operate assets as a possible source of future opportunity where sort of the rubber meets the road. How long of a period do you expect this to play out over, number one? And second, do you think these opportunities will play out in the high-quality segment of the market that you guys target?

Douglas T. Linde

I think we''''ve all been disappointed at the inability of the various parties to reach accommodations with regards to capital structures that are clearly either underwater or overleveraged. However you want to describe it. And for various institutions just sort of as people have said that, to sort of kick the can down the road. As I''''ve said in the past, Jordan, the issue we think is going, the rubber is going to meet the road, when capital is in fact required to be invested in these buildings, because the lender is not going to invest capital unless they know they have an ownership interest. And the equity owner is not going to invest capital unless they''''ve done a workout with the lender to at least perfect a priority for any additional capital that''''s put into the asset.

And guess what, tenants aren''''t going to wait around. And so there is a natural evolution of change that is going to have to occur. And we are seeing it in what I guess people would refer to as some pretty high-quality suburban assets in both the Washington DC and the Boston portfolio areas right now and a little bit in Silicon Valley. In terms of there sort of being a point in time where there''''s going to have to be a resolution. I think with some of the CBD assets, I think it''''s going to be a little bit more challenging for the timing of those assets. And so our approach may be to be more of a, the white knight in a situation as opposed to grab a piece of the debt structure and rattle a sword and try and just sort of grab control of something.

Jordan Sadler - KeyBanc Capital Markets

Would it be fair to expect you guys maybe to play in the suburban markets a little bit, in those higher quality assets?

Douglas T. Linde

In the markets that we are in, we are going to be actively engaged in looking at the assets. Seventy five percent of our portfolio is in the CBD. I think, we''''d like to make sure that we are maintaining a similar proportion of our assets in the CBD but if the opportunities are in the suburbs first then we''''ll look at the suburban opportunities first. But they''''re going to have to be pretty compelling. We''''re not doing this just to get bigger. We''''re doing this because we want to make money.

Jordan Sadler - KeyBanc Capital Markets

Okay. Thank you. Lastly, one on DC and I guess Northern Virginia. Maybe could you speak to the potential impact of a discretionary spending freeze that we may see in the region for three years?

Douglas T. Linde

Well with regard to Northern Virginia, I think the good news about Northern Virginia is that the bulk of the occupancy is in the… I don''''t want to, I guess in general terms, the defense industry. Either defense, homeland security, intelligence agencies and my sense is that that''''s not an area where there was going to be a freeze on spending. So for Northern Virginia I don''''t think that that will have much of an impact. Peter you can describe what your views are on the overall Federal budget and its effects on overall market in Washington, DC.

Peter D. Johnston

Well up until the recent announcement about the freeze, the projection for 2010 job growth in the region was about 24,000, which obviously makes us unique across the country. As Doug, I think correctly points out, the bulk, particularly in Northern Virginia of the tenancy is really defense and in particular, intelligence driven. And from what the announcement was, that it doesn''''t seem like those things are going to be impacted by the projected freeze.

Jordan Sadler - KeyBanc Capital Markets

Okay. So just at the margin maybe. Thank you.

Douglas T. Linde

I think so. That''''s what I would suggest. Maybe the larger agencies that are more social service oriented unfortunately, are going to feel an impact. But those are not really where the bulk of the growth has been in the last, from an employment perspective over the last couple years.

Jordan Sadler - KeyBanc Capital Markets

Thanks.

Operator

And your next question comes from Jana Galan.

Jamie Feldman - Bank of America/Merrill Lynch

Thank you. This is Jamie Feldman from BofA Merrill with Jana. Two questions. First of all, we''''ve been hearing lately that even though there''''s a lot of capital looking a trophy or CBD assets, some of the expectations for the money that''''s been raised so far are too high. Can you comment on what you''''re seeing in terms of competitive capital that may be looking at similar type deals?

Douglas T. Linde

Is your question, does the money have a higher return expectation than what sellers are looking for?

Jamie Feldman - Bank of America/Merrill Lynch

Well, both sellers looking for and then also what you would be willing to take a lower return as a stabilized long-term owner as opposed to some of the opportunistic funds we''''ve seen raised over the last couple years, last year or so.

Douglas T. Linde

Well, I''''ll say what I said before. And I think I said this in both casual conversations as well as on these types of phone calls. We don''''t think that there are opportunities to put money to work at 18% leverage returns. I don''''t, we don''''t see it. There''''s too much capital out there and we just haven''''t, you can''''t put enough leverage on the asset to provide yourself with a large enough spread on whatever you think the overall return on a cash-on-cash basis is going to be to get yourself there.

So anybody who has that type of expectation in our mind is looking at very tertiary type of real estate and tertiary types of product. They''''re not looking at high-quality CBD buildings in Washington DC, San Francisco, New York City or Boston. I mean that''''s just not what they''''re - that those things don''''t seem to go together, at least in our opinion. To date, the capital that is interested in pursuing those types of assets I think is trying to find an asset or two to bid on in which to determine whether or not they''''re prepared to make the investment. And there just hasn''''t been any product of any consequence in the markets to sort of really determine where those numbers are going to come out.

As I said before, my view is that if a high-quality, well-leased New York City office building were on the market and the leases were at market, current market terms or modestly