Original Source: FD (FAIR DISCLOSURE) WIRE
. Marilynn Meek, Boston Properties, Inc., Financial Relations Board
. Doug Linde, Boston Properties, Inc., President . Mike LaBelle, Boston Properties, Inc., CFO . Ed Linde, Boston Properties, Inc., CEO . Mort Zuckerman, Boston Properties, Inc., Chairman of the Board
. Jordan Sadler, KeyBanc Capital Markets, Analyst . David Harris, Lehman Brothers, Analyst . Jay Habermann, Goldman Sachs, Analyst
. Ray Ritchey, Boston Properties, Inc., EVP and National Director,
Acquisitions and Development . Michael Bilerman, Citigroup, Analyst
. Jamie Feldman, UBS, Analyst . Mitch Germain, Banc of America Securities, Analyst . Lou Taylor, Deutsche Bank, Analyst . Ian Weissman, Merrill Lynch, Analyst . Robert Selsam, Boston Properties, Inc., SVP . Michael Knott, Green Street Advisors, Analyst . David Cohen, Morgan Stanley, Analyst . John Guinee, Stifel Nicolaus, Analyst
Co. reported full-year 2007 FFO of $4.64 and 4Q07 FFO per share of $1.22. For 2008, FFO is expected to be $4.55-4.65. For 1Q08, FFO guidance is $1.09-1.10.
A. Key Data From Call 1. Full-year 2007 FFO = $4.64. 2. 4Q07 FFO per share = $1.22. 3. 2008 FFO guidance = $4.55-4.65. 4. 1Q08 FFO guidance = $1.09-1.10.
S1. 4Q07 Operational Review (D.L.) 1. History: 1. Feb. of last year, Co. closed its sale of 5 Times Square. 1. Buyer financed $1.28b purchase with $1.9b ten-year interest-only CMBS financing at less than 6%. 2. In Feb., Blackstone completed the sale of a number of those EOP portfolios to people like the [Macklowe] organization. 2. Highlights: 1. Overall demand is still healthy.
2. Rents still seem to be rising albeit at a slower pace. 3. Capital markets are anything but robust. 4. To date, the effects on Co.'s business have manifested themselves in reduced availability and higher cost of capital. 1. Not yet had any discernible impact on operations. 2. Impacted building valuations and stock price.
3. CMBS: 1. Large loan commercial mortgage-backed securities market for all intents and purposes today is closed, hopefully
temporarily. 1. While an owner maybe able to get a conduit quote on $50m loan, the lack of any meaningful secondary trading of CMBS paper: 1. Has led to extraordinary spread widening for that thinly traded paper that it does move. 2. Has prevented the investment banks from taking down any large loans that they might be required to warehouse for extended period of times, given the changes in interest rate spreads they're just not prepared to take those
risks. 2. This is a pretty critical issue for the office building
business particularly for large buildings. 3. The life insurance and pension fund companies are unlikely to completely fill that breach and lend more than $100m or so per participant on any one asset. 1. Finding two or three insurance companies to finance every large office building in every city is going to be very difficult.
2. Five years ago, made a decision to supplement use of the
secured insurance and pension fund market in the CMBS market
with the investment grade bond market. 1. Continues to be an active borrower in that market along with the commercial banks, which: 1. Have been the source of a numerous numbers of construction
loans. 2. Actually are probably the group or the place where the
largest void from the CMBS breach is currently being filled.
2. As a result, BXP has access to capital. 3. Cost of the financing is fluid. 1. Credit spreads continue to widen in the various markets. 2. Volatility and the underlying treasury spread has been striking. 4. 10-year: 1. Last Thursday, 10-year opened at 3.43% and closed at 3.71%. 1. In Nov., satisfied to complete a five-month hedging program where Co. locked in $525m of underlying 10-year treasuries at an avg. rate of about 4.63%. 2. Did not anticipate the turmoil and the resulting rally in bonds or the 100-plus BP reduction in short-term rates by the Fed that has occurred over the last 60 days. 3. Hindsight is a wonderful but not particularly effective tool. 5. Other Metrics: 1. Expects to see an increase in unemployment, continuation of near-term headcount reductions from Wall Street and other financial intermediaries and in all likelihood a slowdown in overall job growth. 1. Confesses uncertainty in predicting the significance or timing of these factors on markets. 6. Manhattan: 1. The Midtown Manhattan vacancy rate is still under 5%. 2. Availability rate, which includes space that will be available in the next 12 months is under 8%. 3. Market rents, up about 4% from last qtr. and over 25% in 2007. 4. Rents remain firm. 1. Concessions have not increased. 5. During the last week in Dec., recaptured a combination of units leased by Citigroup in both Citigroup Center and 399 Park totaling about 130,000 sq. ft. 1. Released space at rents that were $35 a sq. ft. higher than the rent that Citibank was paying on spaces. 2. Spaces had been on the market for the past 12 months and the availability was not related to the issues that Citi has
faced since June. 6. Just before the New Year, signed first lease at 250 West 55th Street with a law firm that will be expanding from 170,000 sq. ft. at 200 Park Avenue into 222,000 sq. ft. at the top of new tower in 2010 when that building is delivered.
1. Excavation has begun which is the first step towards the delivery in late 2010. 7. Having a space requirement in excess of 150,000 sq. ft. in Manhattan, one is typically in the market 2-3 years ahead of actual need. 1. Co. is in active discussions with other tenants, all these [exploration] driven that could effectively fill the remaining space at 250 West 55th Street. 8. New additions to the inventory in Midtown Manhattan are limited to Co.'s building:
1. A tower across from the Port Authority at 42nd and 8th.
2. The Bank of America building on 6th Avenue. 3. Macklowe organization's small floor planned 350,000 sq. ft. 30-story tower on Madison and 53rd. 9. Without a dramatic increase and blocks of sublet space there is unlikely to be a change in the operating fundamentals in Midtown Manhattan. 7. Boston & San Francisco:
1. Thinking about the demand underpinning Boston and San Francisco, where BXP has the bulk of the Co. albeit limited exposure in 2008 and 2009, Co. has similar situations. 2. Neither CBD has seen any new construction for a number of years. 3. While each city lost significant headquarters financial services tenants from the consolidation that occurred during the last decade the reduction has been offset by: 1. Asset management.
2. Technology. 3. Biotech and life sciences. 4. Professional service firms that surround those industries. 4. Each city has seen properties once owned by equity office properties in the control of an owner with a much more hard-nosed approach to leasing space. 8. Boston: 1. Vacancy rate is about 6%. 1. Moves to about 8% including sublet space. 2. In Cambridge, the vacancy and availability rate are slightly higher at 7%.
1. In Kendall Square, where Co. has 1.8m sq. ft. Cambridge Center portfolio, the vacancy rate is under 5%. 3. After the over exuberance of tenants from 1999 to 2001 in that [dot-com] era, tenants in Boston were reluctant to take additional space until they had immediate needs for those employees. 1. All of the sublet space that the Greater Boston market has seen over the past two years has been caused by M&A activity. 2. Overall vacancy has declined even as Co. digested the BofA-Fleet merger, the Manulife-Hancock merger, and the P&G-Gillette merger with the resulting reduction in overall vacancy rate. 1. Today, Co. is working through the last of these, the State Street-Investors Bank & Trust merger. 4. Expansion continues albeit in a much more granular manner throughout the market although Co. still has some dynamic growing asset management firms and professional services firms. 1. Two of them at the Prudential Center with Bain Capital and Ropes & Gray, who made that commitment last qtr. to expand into the Prudential Tower in 2010. 5. Cambridge has seen a dramatic resurgence of technology
companies that have a high space utilization requirement with
Google, Akamai, EMC, VMware and Microsoft, all taking significant space in the latter stages of 2007 each with expansion expectations. 1. Still has a very vibrant biotech and research user base at MIT and Harvard. 6. Out in the suburbs of Boston in Waltham and Lexington, continues to be strong activity although there is modest new construction, but it is serving a group of growing technology tenants. 1. Many of those tenants have not been impacted by the financial turmoil since their funding does not rely on access to debt capital markets. 2. Negotiating a lease for example with a technology tenant at 77 CityPoint. 1. Tenant's lease requirement has grown from [150,000] to 165,000 sq. ft. over the past few months. 2. Will be taking all of the remaining space at 77 CityPoint and looking for additional expansion opportunities in other CityPoint assets. 9. San Francisco: 1. Overall vacancy rate still stands at about 7.5%. 2. Rental rates have risen 30% in the last 12 months. 1. Trend again is probably going to moderate in 2008. 3. Downturn market dominated by: 1. Asset management.
2. Law firms. 3. Management consulting firms. 4. Venture capital. 5. Few technology companies. 4. Current activity at Embarcadero Center is pretty consistent with what Co. was seeing in Jan. of last year. 1. With an expectation from the tenant side that rents will not dramatically increase in 2008, the need to lock in rent early is not driving tenants to make decisions quickly. 5. While tenants are cautious about the direction of the economy, there has been little publicly announced reductions in the workforce. 1. Yahoo! is probably the only one that's out there in the Greater Silicon Valley marketplace. 2. No noticeable increases in high-quality (indiscernible) space. 6. Silicon Valley continues to show good new activity with consistent rental rate growth and again the Class A vacancy rate is under 10%. 7. Vast majority of the tenants in the Mountain View area are established technology tenants like: 1. Google.
2. Apple. 3. eBay. 4. Nvidia. 5. Adobe. 6. …