Boston Properties Conference Call to discuss the acquisition of the General Motors Building - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Boston Properties conference call.

(Operator Instructions). This conference is being recorded today, Thursday, June 12, 2008.

I would like to turn the conference over to Arista Joyner, Investor Relations Manager. Please go ahead, ma'am.

ARISTA JOYNER, IR MANAGER, BOSTON PROPERTIES, INC.: Good morning and welcome to Boston Properties' conference call.

Our press release announcing the close of the acquisition of the General Motors Building was issued Tuesday afternoon and is available on our Web site. In the release, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. An audio Webcast of this call will be available for 12 months in the investor relations section of our Web site.

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 meanings of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statement 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 statement.

Having said that, I would like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; and Doug Linde, President; and Mike LaBelle, Chief Financial Officer. I would now like to turn the call over to Mort Zuckerman for his formal remarks.

MORT ZUCKERMAN, CO-FOUNDER, CHAIRMAN, BOSTON PROPERTIES, INC.: Good morning. We are very happy to be able to have this conference call with you all to discuss the General Motors Building acquisition and three other buildings, if for no other reason than it means that the negotiations for those buildings is behind us instead of ahead of us. It was a very long and very difficult, very challenging negotiation.

The General Motors Building was the real prize in this particular grouping of four buildings, although the others are also very fine buildings in Midtown New York. I want to focus primarily on the General Motors Building because that was a $2.8 billion acquisition. It is, I would say, the most prestigious building in New York City. It is of the highest quality. It is in a great location. Every one of the floors of that building uniquely has views of Central Park. It has become a destination point in New York in part because of the remarkable Apple Store that is really in the lower level space, but with its famous cube has really become one of the most well-trafficked stores in the world.

Now, Boston Properties has had a philosophy of seeking to build and to acquire the highest quality properties, really Class A properties, Class A-plus properties, and really hold them for long-term development. This isn't an ironclad rule because, if we do feel, as we felt last year, that the property market was very heated and had gotten to levels that we sort of thought were better levels to sell into than to buy into, we were prepared to take advantage of those markets. In fact, we did over the last year and the year before and a couple of years, we sold roughly $4.5 billion worth of assets. So we are not always buyers.

We are buyers, however, when we could find a property like the General Motors Building which fits into the whole ethic and culture of Boston Properties, which is to accumulate the highest quality, highest level buildings in various markets which are supply constrained. New York in particular is uniquely supply constrained because of the inability to assemble good sites in the Midtown area, particularly in New York, and the Midtown area is really the most desirable location for the office sector of New York.

New York is -- when I say New York, really we are talking about Manhattan. When I say Manhattan, we are really talking about Midtown Manhattan. In almost all cases, we are talking about the East Side of Midtown Manhattan, where basically all of our buildings are location located, with the exception of Times Square. Now, the Times Square building we developed. We had two of them there, but we have, as you know, Citigroup Center, 399 Park, 599 Lexington Avenue, and we are building two buildings on 8th Avenue. The reason why we are building two buildings on 8th Avenue is because the virtual inability to assemble sites in most of the traditional areas of development in New York City. That is one of the reasons why the General Motors Building is so unique and so attractive to us. It is a great long-term asset because of the values that we are recognizing here in physical replacement terms where the physical replacement of this building would come in at costs significantly higher per square foot than what we paid. It is a great long-term investment because of the ratio of the current leases to the current market and what we believe the yields will be as we hold the building over the long-term and roll over some of these leases.

It is a large building. It is 2 million square feet of space. It has great retail at the ground level. It is a unique property in the sense that it is a whole block between 58th and 59th, between Madison and 5th Avenue, with every single floor having great views of Central Park.

So we see here not only premier views, we see a building that is literally world-renowned. The news of the sale of the General Motors Building made it to the newspapers a virtually every major city around the world. We received copies of it, and it is just really an astounding degree of recognition of this address.

It is an exceptional location and it has the kind of long-term appreciation that is reflected in the embedded growth in the cash flow. By that, I mean the rents. Doug will cover this in greater detail. The rents, the actual rents, in relation to the market rents, give us a tremendous amount of appreciation as these rents roll over. Some of the leases are longer-term; about 800,000 square feet are longer-term leases. But many of them are shorter than mat, and the 1.200 million square feet, particularly the retail space, is going to give us a chance to capture some of this embedded growth over the next few years.

So we believe we have a tremendous economic investment. We believe we have a building that has a remarkable cachet, particularly for the financial industry, but a remarkable cachet in New York City, and will attract tenants for a long time for that reason, as well as for its competitiveness in the marketplace.

Now, the timing of the acquisition was the following. These were buildings that were sort of being sold of necessity. The macro organization, for various reasons, had to realize a considerable amount of funds to meet certain other of their obligations. The General Motors Building and these other three buildings, which were there three best office buildings they had of the seven, were in a sense in almost an obligatory sale in order to meet other financial commitments.

The building had certain remarkable financial benefits, too. It was subject to $1.6 billion of existing financing that went to approximately nine years with an average debt service of 5.97%, which of course is a very attractive financing in today's world. We also have the ability to place an additional $294 million of financing. This came about as a result of buying in some of the mezz financing on it on what we thought were attractive terms, in the range of 8%-plus between the discounts on the yield and the discounts on the capital. But it also reflects the fact that this building has very little turnover in the short run in the office sector of the building, which from our point of view is in a sense helpful, given the fact that there is some potential softness in the office market. I say potential because the office market, like the residential market, has to be divided up.

The upper tier of the residential market in New York is very, very strong. If you take those buildings which have great views and great locations, the residential buildings, those properties have still been going up in the year in the face of a residential decline in prices in most of the country.

The same thing is true in office space. Class A buildings, the absolute top-of-the-line buildings have been doing very well. We have 5.5 million feet of space in New York. All of it would be described I think as Class A buildings. Our vacancy is in the range of 1% of this 5.5 million square feet. When we have had space that turns over, as you always have, we have done very well on the lease roll-overs and we have been able to leave out the space that we have that comes due or for one reason or another a tenant which is to sublease, we have done very well on that subleasing. So we are very comfortable with the distinction between the Class A buildings, office buildings in New York and, the rest of the more commodity space as we refer to it, and particularly between the space on the East Side of New York and the Upper East Side of New York versus the Downtown part of New York. They are two different markets.

What is more, if you look at the competitive space coming on the market, there is really very little space. You may read a lot about it, but I can tell you that there are a lot of difficulties in bringing this new space on the market. We are starting a building on 54th to 55th and 8th Avenue. We have already -- that 1 million square feet. We have already signed one lease for 221,000 square feet and we are in the process, we believe, of bringing another lease to closure within a fairly short period of time, by which I would say at the most of 60 days, which will be in excess of 500,000 square feet. So there is a building that, as we are coming out of the ground, will have roughly 750,000 square feet leased. A part of the reason for that is the unavailability of these kinds of blocks of space that people can predictably rely upon three and four years hence, which is the way major tenants have to plan. They can't leave themselves six months or a year to go when they have to move; they really have to plan that far in advance. There's only one other building in Times Square that essentially is coming onto the market. So the availability of choices is really quite limited. That is one of the reasons why we are still bullish about the General Motors Building.

The other buildings that I would say have been talked about, the World Trade Center, the Freedom Tower, the Moynihan Station, the Hudson rail yards, the Hotel Pennsylvania, etc., these are buildings, frankly, that are talked about, but will not be on the market for quite a number of years.

Now, let me just say, just to give you an example, as I said, we were able to sell two office buildings in New York last year within the 12 months of last year. We sold them at a 3. -- the 280 Park we sold at a 3.76% yield, and we assume the NOI could double in about 11 or 12 years on that.

In Times Square, we sold a building which had I think 17 years to go on a lease for virtually the entire building. We sold that at roughly a 4.5% yield for the next five years with no bump until year six.

When Doug explains the economics of the General Motors Building, you'll see why we thought it was such a unique economic opportunity as well as a building that would fit in directly …