BXP
#So to answer your question, and I've talked about this over the last couple of calls, yes, I think given the slowness in the economy, we have raised the bar so to speak in the level of preleasing that we require on new development.
Everyone always asks for a number on this and that's not possible to provide because it depends on the size of the building, the activity level in the market, the speed to delivery, every circumstance is different, where is the tenant coming from, our existing portfolio or from outside.
But there's no question, as we evaluate new developments and we have a lot to evaluate even in our own Company because of the large landholdings that we have, preleasing is an absolute requirement and our desire to have it be larger in the portfolio is there.
So that is definitely happening.
However, I think we still see projects, and I described a couple of them, particularly ---+ several of the projects that we are looking at right now are actually 100% preleased, and those are the kinds of projects that we want to be doing and will create value for shareholders, even if we are later in the economic cycle.
As it relates to Dock 72 leasing, we are just too far away from delivery to expect much significant preletting.
We are clearly in the market, speaking with potential tenants, marketing the asset, but I think it's too early to expect ---+ for us to expect to have significant preletting.
No.
We are full systems go with WeWork at the Brooklyn Navy Yard and at the other two properties where we have leases.
Let me comment that as we have ---+ in our discussions with WeWork, all evidence that we have points to the fact that the facilities that they have open are very successful.
They are fully let and they are creating an attractive margin to WeWork.
And we are seeing it in the projects where they are open with us.
Particularly 535 Mission has been very successful.
So a lot of the press that you are describing is more about WeWork as a company, and again from reading the same press, a reduction in the projections that they are projecting for their overall company, but as it relates to the performance of the individual installations, our evidence suggests that they are doing well.
Yes, if I could just add one comment.
We are very actively engaged with them at the Navy Yard.
We are driving piles, so, as <UNK> said, it's early on ---+ it will be more exciting in the fall when the steel goes up, but we are in weekly communication with WeWork.
They have submitted their buildout plans, we are adjusting their buildout plans.
We are co-working with them on the amenity space.
They are very, very excited about the project.
I think the answer is yes to both.
So I'm not being tongue-in-cheek about it.
We are comfortable with the rent that we pro-formaed for UnderArmour and based upon what's available, we think will do a little bit better.
No, there was 68,000 square feet of space.
Some of it might have been ---+ as <UNK> suggested, it was on four levels, so there was second-floor space, there were two stories of first-floor space because the level on Madison Avenue and the level on Fifth Avenue are on slightly different planes.
And then there was some subgrade space or concourse space and sub-concourse space.
So there's a plethora of levels there and it was about 68,000 square feet.
And those levels can connect differently.
We could put the second floor level connected to the Madison.
We can take part of the sub-concourse and put it with the bank if the bank doesn't stay that's on Madison.
So it's fairly complicated, but we worked it out I think with UnderArmour.
They are committed to the block of space, the square footage that <UNK> mentioned.
I think that we will do some construction financing on some of the joint venture development projects that we have, so we are in the market for both the Brooklyn Navy Yard and for the Hub on Causeway.
So we are going to do some construction financings on those projects.
For the remaining cost for the wholly-owned developments, I would expect that we would use cash on hand and at some point we would do some long-term financing at rates that we feel are very, very attractive to lock in and make sure that we lock in as low a rate as we plan.
So we will be evaluating that.
And just as a surrogate, right, a construction loan today is probably LIBOR plus 200 at the lowest level and 300 and you can do a 10-year financing at 3%.
So the value of a construction loan from a rate perspective is de minimis.
That's an excellent point.
Sure.
<UNK>, do you want to take that one.
Sure.
First off, we are underwriting at rents that are approximately 25% to 30% less than San Francisco.
It's going to take several years to get it entitled and we don't anticipate delivering that building until probably 2019, 2020.
So we are quite a ways off based on current market conditions from a standpoint of is the market softening right now, which we are seeing in San Francisco.
And, <UNK>, you might just want to describe the Temescal area and the Rock Ridge area and what that is because it's not downtown Oakland.
This site is right adjacent to the MacArthur BART station.
This is an area that has become very popular for restaurants, shops.
It's one of, for lack of a better term, one of the hipper neighborhoods in the Oakland-Berkeley market.
And it's one that is gentrifying quite rapidly, so we see it as a very good location long term.
So, look, the deals that we have in the works right now add up to about eight floors, so if we are able to do half of them, we probably will get five or six of those floors done and I think that our expectation is that we are going to continue to go at that type of a pace so that as we get closer to people actually being able to go into the building and go to their floor and to experience the spectacular configuration, views, curtainwall, airflow, ceiling height, that that will ramp up the activity and we anticipate that will be happening towards the end of this calendar year where we will actually do those tours on finished floors.
And so I will let <UNK> be the spokesperson because he's already made a commitment for the Company, but we continue to be very encouraged by the leasing there.
<UNK>.
I think Donald Trump would refer to the building as something really, really special.
It's the A-1 location in San Francisco.
It's going to be the biggest and the best building that's in the marketplace and I'm very confident that it's going to lease up rapidly.
I think that larger tenants are not necessarily more cautious.
I think larger tenants are fully committed to lease expiration-driven decisions that allow them to build out space.
So anybody who is looking for hundreds of thousands of square feet of space is doing that because across the broad markets that we are in because they have a lease expiration and I don't think anyone is looking at the market and saying, well, we think things are going to get worse and therefore we are going to hold off.
I think people feel relatively good about the position that the markets are in.
On the smaller side where there's a lot more flexibility I think the volatility that <UNK> described and the issues associated with the world at large are creating uncertainty, and uncertainty just doesn't drive significant capital decisions.
And so we are seeing a lot more reticence to making decisions on new space for smaller companies.
I think there is really three things that we have.
One is developments that are occurring and leasing up, which is part of that.
We will have a couple of tenants at 888 that will take occupancy later this year that have a benefit to the Company.
Also interest expense.
We talked about the fact that we don't have any early refinancing in our guidance, but we do have the Embarcadero Center (technical difficulty) and it's a 7% loan, so there is an assumption in our guidance so there's going to be much lower interest expense when we refinance that in the fourth quarter.
The other thing I would mention would be operating expenses, which are cyclically highest in the third quarter and lower in the fourth quarter, primarily due to utilities where the HVAC is obviously a little more expensive in the hotter times of the year that we are sitting in right now actually.
So those are most of the drivers and there's some positives that we've talked about in terms of leasing activity later in the year that we are guiding later in the year, things like continued activity at Embarcadero Center where we've got renewals that we are working on that we are trying to sign that will have a blend and extend where we will get some GAAP lift later in the year.
So it's those kinds of things.
We have provided some information as to the timing of that.
I can't give you exact numbers.
I would say that somewhere between $15 million and $20 million is in today because that was, if you look at our slide, that was 535 Mission and 250 West lease-up was in there and that is done.
A good chunk of I would say half of the Embarcadero Center stuff will be in late this year and next year and then the Prudential Center stuff will be in next year, but not this year.
And then there's some big pieces that I think will be later.
We are going to get some of the lease-up at 200 Clarendon Street and perhaps a floor at 120 St.
James that will hit sometime in 2017, but the majority of that I see as being later because most of that space is ---+ we have to wait until the tenant occupies to recognize revenue on that space.
And then we've talked about UnderArmour and the timing of that.
And then 100 Federal Street, which is another big piece of it, the lease is fully signed, but right now we are relocating another tenant to create the floors.
We are not going to be able to deliver those floors until sometime in the middle of 2017, so some of that will be into 2017 and then into 2018.
So I didn't give you the numbers, but that's hopefully helpful with some guidance on the timing.
So most of the technology-oriented companies in the biotech and the pharma and life sciences companies are concentrated in the Cambridge market and then in the suburban markets, although there's been some migration into the city.
So I would tell you that on a ranking, Cambridge is the strongest market.
The Waltham-Lexington market is the second strongest and then the CBD downtown markets are below that.
And I think our view is that the markets are very strong at the lower level of buildings, but that there's a little less activity at the top of buildings and largely that's because the tenants that are driving demand at the top of the buildings traditionally are professional services and financial services companies and there's just less growth there.
We've seen really an incredible stat.
The P2 quarter as we call it between the Mass.
Turnpike and Route 2 at the Lexington site to the north along Interstate 95, the competitive set of buildings that we follow, 32 buildings, are now at 4.25% vacancy.
It's the lowest I've seen in my career there.
And I think it's indicative of your question, which was we do have good strong demand from the pharma biotech sector that's looking and as <UNK> mentioned, solid companies, not particularly huge companies, but companies that have growth in financial statements, so we are really encouraged about that corridor in particular.
Yes, it's very preliminary as far as them looking in the market.
It's been rumored that they are interested in the Central SOMA area.
The Central SOMA plan is not approved and won't be approved probably until the end of this year or early next year, so I think as far as them expanding into San Francisco unless they go to an existing building is going to be quite some time off.
So on the special dividend, as you know, that's driven by asset sales.
I described three deals that we are working on.
There a couple of other little smaller things.
And I said in my remarks that the sales could be as high as $350 million.
I would assume that's the highest they would be.
All those deals may not happen.
We don't know where they are priced.
The original direction on asset sales was $200 million to $250 million.
So we don't know yet exactly what the asset sales are going to be, so it's difficult for us to predict what the gains and so forth are going to be associated with that.
So we will clearly look at that and we're working with our Board later in the year to determine what if any special dividend we would pay.
And then as it relates to the recurring dividend, as you know, we mirror that to net income and as you point out, net income will be rising.
So again, with our Board, as we get into later this year, we will be evaluating the ongoing dividend to determine whether and how much we could increase it.
I don't have that number for you here.
I think that I can say that our taxable income is fairly close in line with where our dividend is.
I think that concludes our questions and concludes our formal remarks.
Thank you for your time, attention and interest in Boston Properties.
