Boston Properties Inc

NYSE:BXP

Earnings Call Transcript 2019-Q1

[Operator]

Good morning and welcome to Boston Properties’ First Quarter 2019 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. Sara Buda, VP, Investor Relations for Boston Properties. Please go ahead.

[Sara Buda, Vice President-Investor Relations]

Great. Thank you, operator, and good morning everybody and welcome to Boston Properties first quarter 2019 earnings conference call. The press release and supplemental packages 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, these documents are available in the Investor Relations section of our website at 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 yesterday’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.

I’d like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions.

And I would now like to turn the call over to Owen Thomas for his formal remarks.

[Owen Thomas, Chief Executive Officer]

Okay. Thank you, Sara, and good morning everyone. We had another strong quarter of performance and are successfully executing on our strategy for continued revenue and income growth. Highlights for this quarter include, we grew our FFO per share 15% over the first quarter of 2018, which was also $0.05 above the midpoint of our guidance for the quarter and $0.06 above street consensus.

We raised our full-year 2019 FFO per share guidance by $0.05 at the midpoint, which would result in a 11% FFO growth above 2018. We completed one 1.5 million square feet of leasing for in-service properties, which is well above our long-term quarterly average for the period and we increased the occupancy for our in-service office and retail portfolio 150 basis points from the last quarter to 92.9%. this also marked 240 basis point increase from a year ago. Also this past month, we completed an early renewal and expansion of our lease with Bank of America at a 100 Federal Street in Boston for 545,000 square feet.

We obtained construction financing for the Marriott headquarters development on favorable terms, and we issued our 2018 sustainability report and were selected as a 2019 ENERGY STAR Partner of the Year, the highest recognition possible from the EPA for distinguished corporate energy management programs.

Moving to the economy. Overall economic conditions continue to be stable and overall favorable for Boston Properties. Initial U.S. GDP growth estimates for the first quarter were 3.2% will surpass in prior estimates. Job creation remains steady with 540,000 jobs created in the first quarter and unemployment continues to be low at 3.8%. The Fed has turned accommodative, as indicated, it will not raise interest rates for the foreseeable future and intends to pause quantitative tightening by year-end. As a result, the 10-year U.S. Treasury has been steady so far this year dropping around 20 basis points to 2.5%. This economic landscape is not exclusively rosy with GDP growth in Europe and China declining and prospects for escalating trade tension.

In our business, we’re experiencing confidence and fundamentally strong leasing activity with our customers and our core markets. With the exception of the Washington DC’s Central Business District. Rents continue to escalate markedly in Boston and San Francisco, driven by strong demand and minimal new supply. Given this backdrop and the broader set of economic signals, we do not anticipate a near-term economic correction.

That said, we continue to keep our aggregate debt levels low and ensure our developments are appropriately pre-leased before launch. As we know, an economic turn is inevitable and difficult to precisely predict. So as a result, we are well positioned to take advantage of ongoing economic growth and to whether a contraction with durable cash flows.

The private real estate market for our assets and our core markets remained strong and liquid. In terms of the data, significant office transaction volume ended the first quarter at $17.5 billion, down 31% from the fourth quarter of last year and down 21% from first quarter of 2018. The volumes are lower; anecdotally, we are finding our pursuit of new investments to be highly competitive both for buildings and sites. Animal spirits seem alive and well as financing costs are lower than 2018 and most investors are not overly concerned about a near-term production.

Yet again, there were numerous significant asset transactions in our markets this past quarter. Starting in the Boston, Financial District, 75 State Street is under agreement to be recapitalized for $635 million, which is $755 a square foot and a 4.4% cap rate. This is an 840,000 square foot property. It’s 98% leased and it’s being recapitalized with a joint venture of offshore capital and fund managers.

In New York, a 38-story, 1.5 million square foot single tenant office condo at 30 Hudson Yards sold for $2.2 billion or $1,500 a square foot and a 5% stabilized cap rate. The condominium interest is 100% leased to Time Warner for 15 more years and was sold to a developer fund manager backed by institutional investors.

In San Francisco, a 49% interest in 200 Howard Street, better known as the Park Tower building is under agreement to sell at an imputed value of $1.1 billion or $1,445 of square foot and a low to mid-4% cap rate. The recently constructed building is 762,000 square feet is fully leased and is being sold to a developer fund manager backed by Sovereign Wealth Fund.

And finally, in West LA, Wilshire Courtyard is under agreement to sell for $625 million or $627 a foot and a cap rate of 2.5% although that is artificially low, because the assets not stabilized. The building comprises just under a million feet in a 60% leased and being sold to a North American developer investor.

So, moving to our capital activities. Development continues to be our primary strategy for creating value for shareholders and our pipeline of current and future developments remains robust. Our current development pipeline stands at 11 office and residential developments, and redevelopments comprising 5.3 million square feet and $2.7 billion of investment for our share. Most of the pipeline is well underway and we have $1.6 billion of total capital remaining to fund. The commercial component of this portfolio is 78% pre-leased and aggregate projected cash yields are approximately 7%.

In 2019, we expect to commence 2100 Pennsylvania Avenue, which is a 469,000 square foot Class A office building located in the Central Business District of Washington DC. The building is 66% pre-leased and will be an estimated $360 million investment. We will also start the redevelopment of 325 Main Street, in Kendall Center in Cambridge following the long-term lease agreement we signed with Google this past quarter.

The current 115,000 square foot building will be demolished and replaced with a new 400,000 square foot office tower, the office component of which will be fully occupied by Google. As part of the agreement, Google will extend their current leases for an additional 15 years and two of our other buildings in Kendall Center comprising 450,000 square feet. As a result, we will have an over 800,000 square foot long-term relationship with Google at Kendall Center.

Total project cost is $450 million plus the value of the existing building. As part of the local zoning, we are required to develop a residential building of at least 200,000 square feet at Kendall Center with 25% of the units reserved as affordable. The office project will commence in 2019 and the residential project is currently moving through its design approval process.

In San Jose, we are completing predevelopment work for our recently completed land investment at Platform 16. We have made presentations to multiple potential large users and are in discussions with a capital partner to invest with us in the project. On dispositions, we are targeting approximately $300 million in asset sales this year. We recently entered a binding agreement to sell One Tower Center, a 410,000 square foot office building located in East Brunswick, New Jersey for $38 million. The property is 39% leased and in a challenging location far from the stronger demand dynamics we experience in Princeton at Carnegie Center. So, this decision is in line with our strategy of disposing select non-core assets.

Although the sale resulted in an impairment charge, there’s no substantial loss of income and our companywide portfolio occupancy will increase by approximately 50 basis points. We also put on the market this quarter 540 Madison Avenue located in Midtown Manhattan. Our 40% joint-venture partners in this 284,000 square foot asset wanted to sell their interest. After reviewing expected sale outcomes with our advisor and understanding a sale of 100% interest in the property would likely yield better pricing. We decided it was in the best interest of our shareholders to sell our position as well. The marketing process is underway and there has been substantial interest in the asset to date from prospective buyers.

Lastly, we have recently been asked by many of you about the ramifications and potential cost to landlords of the Climate Mobilization Act passed by the New York City Council last month. The goal of the bill is to reduce city carbon emissions 40% by 2030, and 80% by 2050. Boston Properties supports greenhouse gas reduction policies, has already established its own public greenhouse gas reduction targets and has actually reduced the greenhouse gas emissions intensity of our buildings by 39% over the last 10 years through investments in new energy efficient systems and utilizing more sustainable energy supplies. Details of all this are available in our annual sustainability report, which we released last month.

We started down this important road many years ago given the business case for investment in energy efficiency, the contribution of the built environment to global emissions and – and in anticipation of local regulations such as the recently passed Climate Mobilization Act in New York that will likely continue to strengthen over time in our other core markets.

Specifically, related to New York, we think our portfolio already substantially meets the 2024 emission targets set by the new regulations and have plenty of time to make additional enhancements, probably by acquiring more sustainable energy sources by 2030 when the second phase of emission targets take effect. Given our shared mission on climate with our communities and our leadership role in sustainability, we hope to work cooperatively with New York and our other city partners to create logical and effective legislation to accomplish reduced greenhouse gas emissions.

So, in conclusion, Boston properties is off to a strong start in 2019. We completed another quarter of successful execution with 15% year-over-year FFO per share growth. We increased full-year guidance for 2019 to 11% year-over-year growth at the midpoint. Economic conditions remain favorable. Tenant demand remains strong. And we continue to lay the foundation for continued company growth beyond 2019. As I look at Boston Properties today, I’m delighted with our progress. We continue to outperform our sector in terms of FFO growth with an attractive pipeline of pre-leased development, healthy same-store NOI growth, a new and refreshed portfolio and modest leverage with capacity to support additional investments.

Let me turn over the call to Doug.

[Doug Linde, President]

Thanks, Owen, and good morning everybody. So, we are seeing the constructive macro environment that Owen described in his remarks really reflected in the actions of our customers, our tenants. When I dissect the activity that we’re seeing in Boston, CBD, the Cambridge markets, suburban Boston, San Francisco, the Silicon Valley, LA, it’s really driven by the growth from the technology and the life science and media, financial services and professional services firms that are that make up the demand markets.

In midtown Manhattan, we have service providers like law firms that are continuing to expand, although the rebuilding of more efficient spaces moderated their growth somewhat and the successful financial firms are growing while the challenging results from hedge funds have created some space reductions in that market as well.

In Northern Virginia, there are a number of tech titans that I’ve identified, the DC metro employment base as a fertile area for incremental expansion, Amazon aside and the increase in defense spending has led to expansion by those organizations that service that sector of the government or homeland security. It’s the supply that is regulating whether a market or submarket is strong and landlord favorable or week and tenant friendly. In the office business, where we have long leases, our average lease length today is over seven years. Spot market conditions don’t immediately show up in our results.

Last quarter, I described Salesforce Tower, where we signed our first lease in April of 2014, we achieve our fully occupied run rate in October of 2019 and based on the last few deals done in inferior building, some rents about 40% below market today. This quarter, we signed our lease with Google to build the new 325 Main Street. We started that least negotiation in 2017 along with the extension for 450,000 square feet that Owen described. And the cash contractual extension rent increase on that 450,000 square feet, which commences in 2025, is 27% higher and because rents have moved so quickly, that number in 25 is 25% below today’s market rent.

Let’s talk about the markets. Our expectations in what’s going on in our portfolio. I’ll begin with Boston. Over the last few quarters, you’ve heard me describe the extraordinary demand, which Boston and Cambridge have seen along with a very limited supply pipeline. The new buildings being delivered are not two million square foot towers, but rather 400,000 to 500,000 square foot mid-rise buildings, they have all found either pre-releases or pre-delivery lead tenants with a very little aggregate speculative space.

Existing inventory is full and contiguous full floors are hard to find. In our portfolio, this is led to tenant inspired early renewals. Last week, we completed a 545,000 square foot, 15-year lease extension with BOA at 100 Federal Street starting in 2022. The net rent is increasing by more than 37%.

At 200 Clarendon Street, we’ve completed 45,000 square feet of early renewal and our documenting another 89,000 square feet of leases expiring in 2022 with an average increase of over 30% on a net basis. In the realm of no good deed goes unpunished, because we’re going from gross to net leases at 200 Clarendon Street, it’s actually going to result, believe it or not, in a reduction in our short-term GAAP income until the new lease structure is kicking in 2022.

In addition to our Google transaction in Cambridge with no available direct space in our portfolio, we were still able to complete a 35,000 square foot – feet of additional 2022 tenant requested extensions and here, the increase is only a 100% on a net basis. You should know to large decline in our occupancy at 325 Main Street. We terminated all of the retail leases, 47,000 square feet this quarter and we will complete the vacation of the building total loss of about $4 million per year on an annualized basis by the end of the second quarter, and this will impact our results in 2019, 2020 and 2021.

Given the increased demand by life science tenants in Greater Boston, we’re converting a number of buildings from straight office to office lab used in our suburban portfolio.

The first such building lease was signed this quarter at 33 Hayden Avenue in Lexington, because of previous investments by the vacating tenant. We’re only investing about $35 a square foot in base building upgrades and the net rent is moving up by 86%. We intend to convert 200 West Street in Waltham to a similar facility. You’ll see a drop in occupancy as we vacate 50% of this building to enable the lab conversion. In this case, we’re investing about a $130 per square foot on the apical square footage and we’ll have a similar pickup in rent expectation. Lab rents are about $50 triple net in the Waltham, Lexington market. We expected double-digit incremental return on the incremental investment, and as we permanent design all of our new suburban products, it is being positioned as lab ready. 180 City Point, our next development site in Waltham is a 300,000 square foot building that fits this bill.

We did have a few leasing disappointments during the quarter involving our development assets. We had a lease out for execution canceled for the remainder of our 100 Causeway Tower when the customer was sold in an M&A transaction and we had a life science company ready to sign 50,000 square feet at 20 City Point and its product had a disappointing trial and so that lease was canceled as well. We expect, we will replace these tenants with higher rents and lower concessions, rents in Boston and Cambridge and Waltham, Lexington have great increases in 2018 along with the decline of concessions and we expect the same in 2019.

In New York City, we made a lot of news last quarter with our leasing transactions at 399 park. The New York City leasing dynamics have not changed in the last 90 days. All the known deliveries in the far west side are happening. We haven’t seen rents suddenly increased and we haven’t seen concessions change. Our portfolio focus today is at the General Motors building and our 97,000 square foot block of available space at 399 Park Avenue.

At the moment, we have one high-rise floor available at GM 40,000 square feet, but by the end of the first quarter of 2020, we’ll have an – we have additional known move out of about 170,000 square feet. This space contributes about $13 million for 2019. Combining this, 210,000 square feet with the 97,000 square feet that’s available at 399 Park Avenue. This portfolio of space should ultimately contribute revenue of about $27 million as we sign leases and commence revenue in 2020 and 2021, more than 50% of the space will be leased under $105 a square foot and the rest should demand rent in excess of $130 a square foot.

The financial markets in the latter part of 2018 and the beginning of 2019 were not kind to the hedge fund community, which along with private equity shops and boutique financial advisors; make up a significant portion of the high-end demand in this market, rents in excess of $127 a square foot. As I’ve described previously, the leasing in this Manhattan submarket is not about the incremental price or concession package. It’s simply a matter of a smaller demand pool and at the moment, that segment of demand is somewhat light.

Construction at Dock 72 is progressing. We expect rework will be open by September 1 and we expect to open the amenity space by early October. Tenant interest is picking up and we received our first full floor proposal from a technology company last week. The fairy should be operational in May and we will be able to begin to showcase what dock 72 has to offer. It’s a pretty great tour and you should all go over and take a look. You should note that we have extended our stabilization projection to the third quarter of 21 and this, along with some base building costs, increases has resulted in the increase in the project budget that you see in our supplemental information.

The challenging supply conditions along with the more challenging demand pool in the Washington DC CBD market continued to pressure at the spot leasing market there. We don’t believe there’s 150,000 square foot law firm with an expiration prior to 2023 active in the market. The GSA has very aggressive pricing requirements all about eliminating their ability to lease higher quality available space. There were significant new availability and the competition is fierce from more granual near-term demand. In the CBD, the flexible office providers continue to be a positive as that segment of the market continues to absorb medium space blocks of space and they are truly aggregating demand that we would never accommodate. While face rent on leases are stable, it’s all about concessions and more importantly, rent commencement dates. The good news is that we are reasonably well at least in the district with modest near-term exposure and we have sold down our position significantly over the last few years.

Almost 10% of the company NOI resonated from northern Virginia, where the demand picture is much more robust. We have known future availability in 2020 approaching 500,000 square feet with the biggest block stemming from our delivery to Leidos in March of 2020 and the departure of tenant, whose growth we will not be – we could not accommodate in 2017 and 2018. We are in active discussions with two existing tenants that are looking to expand their 50,000 square foot installations, three new tenants looking for a minimum of 75,000 square feet each in a number of 7,000 to 10,000 square foot users that are focused on this amenity rich environment. While the Reston Town Center ecosystem will win the day for many of these users, there will be some interruption in income as we retained at the space, the 2020 reduction in revenue from the known expirations, there’s about $17 million.

Moving west, in LA, while Colorado Center has 100% leased that we were actively marketing the 140,000 square foot block that HBO will vacate on 12/31/20 as well as our 2021 lease expirations. At the Santa Monica Business Park, we are also working about getting ahead of our late 2020 expirations. The West LA market had an active 2018 and the beginning of 2019 was active as well as a number of major technology and media companies expanded their footprints in the area.

Rental rates continue to rise in a moderate rate and there are limited big block availabilities. In San Francisco, the sequel litigation involving Central SoMa and the new questions on how Prop M should be allocated, have heightened the focus on the lack of availability in the CBD for the foreseeable future. We don’t believe there’s going to be a quick resolution to these issues. The vacancy rate is at its lowest level since this last cycle begin after the great financial crisis. You would be hard pressed to find an existing 100,000 square foot block of continuous space in the market, direct or sublease.

The only new construction, the first admission development has an uncertain delivery days and it won’t deliver before 2023. 633 Folsom, the only large addition major renovation has already been leased. There continued to be significant demand in the market with tenants like Pinterest and Salesforce committing to unentitled developments. In our portfolio, Salesforce Tower, 535 Mission, 680 and 690 Folsom, 50 Hawthorne are all 100% leased.

In Embarcadero center, we ended the quarter at 93.2% occupied, up 200 basis points from the last quarter and completed 235,000 square feet of full or multi-floor leasing. The percentage increase in rents from those floors was over 50% with an average new starting rate of $85 a square foot growth. Similar to Boston, tenants are requesting early renewal proposals.

We currently have another 175,000 square feet under negotiation that could be completed during the second quarter of 2019. If a tenant wants a full floor at Embarcadero center, it has one option prior to July of 2020. In the Silicon Valley, we continue to release our renew space at Mountain View Research at rents in excess of $60 triple net. This quarter, we completed a 47,000 square foot lease with a 60% roll up. And over the last two weeks, we did two renewals, totaling 91,000 square feet and have it – had an average increase of 80%. At platform 16 as Owen described, we are enabling the site preparing it for construction and we’re making presentations to tenants, who are looking for 400,000 square feet or more and there are a number of them.

I’m going to conclude my remarks this morning with some comments about the same property leasing steps for the quarter. You’ll note a big jump in transaction costs. The statistics include one million square feet of 10-year or longer deals in New York City and San Francisco. This includes about 90,000 square feet of prebuilt suites or turnkey floors that we did. And we’ve been describing those over in the last few years, where the improvements are in excess of $150 a square foot. Obviously, there’s a tradeoff with accelerated occupancy, which is never reflected in the transaction cost numbers. Saving six months of downtime on a $100 rent, offsets the transaction costs of a deal by $50. And remember, we include the entire TI Package and commission into our statistics when we commence revenue recognition while the actual outlay of cash will occur over many quarters.

So, in conclusion, competition for talent remains top of mind for our customers and they continue to seek premium Class A space that reflects their brand and values. 2019 is progressing as we expected and we continue to be well positioned to grow our FFO in the coming years.

I’ll stop here, Mike?

[Mike LaBelle, Chief Financial Officer]

Great. Thanks, Doug. Good morning. As Owen described, we had a strong quarter and raised our full-year FFO guidance again, and are now projecting 11% year-over-year FFO growth at the midpoint. Before I get into the details of the quarter, I do want to start with a couple of housekeeping items.

First, you will notice that we’ve adopted the new lease accounting standard that was required this quarter, which adds right of use, operating lease assets and operating lease liabilities to our balance sheet. And on our income statement, rental income, operating expense recoveries and service fee income are now required to be reported together as lease income. For clarity, we will continue to provide the breakout of these items in our supplemental report. The requirement to include service fee income and lease revenue is creating geographic movement on our income statement as we had previously included service fee income in our development and management services income.

This change also impacts the components of our 2019 FFO guidance assumptions and we’ve relocated approximately $8 million from development and management services income into our share of same property NOI. This shift increases our assumption for growth and our share of same property NOI by 50 basis points in 2019 from our guidance last quarter. I apologize for the accounting minutia, but I wanted to make sure everybody understands these changes.

Now, let’s get into the details for the quarter. Q1 marked another strong quarter with 15% year-over-year FFO increase driven primarily by a 10% increase in our revenues from gains in portfolio occupancy, higher replacement rents on new and renewal leasing, and incremental revenue recognition from our development deliveries. This quarter, the roll up and rents from our second generation leasing was 9.4% on a net basis.

Our in-service portfolio occupancy improved by 150 basis points to 92.9%, primarily from gains at 399 Park Avenue in New York City and Salesforce Tower and Embarcadero Center in San Francisco. We anticipate that occupancy will range between 92.5% and 93.5% for the year. A part of this is due to faster than projected lease up and part is due to the anticipated sale of One Tower Center and removing 325 Main Street in Cambridge from service for the Google redevelopment. The removal of these two properties would increase our occupancy by 60 basis points.

In the debt markets, we just closed a $255 million construction loan to provide funding for the Marriott headquarters development. The loan is priced very attractively at LIBOR plus 125 basis points and reflects the quality of the project and the long-term lease with Marriott Corporation. This property is in a joint venture. So, our share of the loan is 50%.

Our active development pipeline represents $2.7 billion of new investment and remaining cost to fund our $1.3 billion net of the in-place construction financing. We expect to raise another $200 million of construction financing for our share of The Hub on Causeway office project later this year and the remaining costs will be funded with operating cash flow retained proceeds from asset sales and our line of credit. At the end of the quarter, we had $1.5 billion available on our line of credit and cash of $360 million.

As Owen described, we decided this quarter to sell One Tower Center in New Brunswick, New Jersey, and have an executed purchase and sale contract. Our decision caused us to shorten our hold period for the building resulting in an impairment on the property to its fair market value. We booked the $24 million impairment this quarter similar to gains or losses on sales. Property impairments are part of our net income, but are excluded from FFO pursuant NAREIT’s definition. The sale is actually accretive to us, because at 39% occupancy, the property provides minimal NOI and we will earn an interest income or reduce our future borrowing with the cash from the sale.

Looking at first quarter results versus our guidance, our FFO of a $1.72 per share is $0.05 per share above the midpoint of our guidance range. Approximately $0.03 per share of this was related to the timing of expenses, where we came in below our budget this quarter, but we expect to incur these expenses later in 2019. So, this portion will not increase our full-year FFO. The other $0.02 per share was due to portfolio performance. So, you should really look at this as $0.02 of outperformance for the quarter. The $0.02 were split between higher than projected service fee income and higher rental revenues from leasing space faster. This leasing was in our budgets for later in the year, so it does not result in a comparable step-up in our quarterly run rate for the full year.

Growth in our share of same property NOI for the quarter was strong and up over the last year by 7.7% on a GAAP basis and 9.2% on a cash basis. We project our same property NOI to show consistent growth for the remainder of the year. However, the growth rate over 2018 will slow in the back half of the year due to the comparable period in 2018 being higher. For the full year 2019, our current assumptions include growth in our share of same property NOI of 5.5% to 6.75% over 2018.

Net of moving $8 million of service fee income into the calculation, this represents an increase of 38 basis points at the midpoint from the last quarter. On a cash basis, we assume same property cash NOI growth of 5% to 6.5% over 2018. We’ve also modified our assumption for development and management services income to $32 million to $36 million and that reflects the reduction of $8 million for moving service fees into lease revenue.

Given the more dovish outlook for interest rates in the past quarter, we’ve adjusted our assumption for rates that has had a positive impact on our future financing costs in 2019. This, in combination with changes in our funding timing and additional asset sales, has resulted in our lowering our assumption for net interest expense for 2019, but $5 million to $405 million to $420 million for the full year. The result of these changes are that we’re increasing our guidance for 2019 FFO to a new range of $6.95 to $7.02 per share representing an increase of $0.05 per share at the midpoint with the increase from $0.02 per share of improved portfolio NOI and $0.03 per share of lower interest expense.

As you start to think about 2020, there are a few things to keep in mind. We continue to expect the portfolio NOI to grow from both our development and our same property portfolio. We expect to deliver approximately $1.4 billion of our development pipeline between mid-2019 and the end of 2020. As is typical every year, we do expect some negative impact from temporary downtime related to our lease rollover exposure. Doug described our more meaningful 2020 lease rollouts, which are the GM Building and in Reston Town Center. In addition, we will have $10 million of our share of non-cash fair value lease revenue rolling off next year with much of this at the GM Building, where we see – where we will see incremental vacancy.

And finally, we expect to continue to utilize debt as the primary funding vehicle for our new developments. Although we capitalized interest on new developments, the delivery of $1.4 billion of our current pipeline, will result in a reduction of our capitalized interest and consequently higher total interest expense in 2020.

So, in summary, we had a good quarter with stronger than expected portfolio performance. We increased our FFO guidance for the year. We now project 2019 FFO growth of 11% at the midpoint over 2018, which is among the highest in our sector and the demand environment remains strong based on favorable economic trends in the vast majority of our markets. And we continue to execute on the growth strategy we’ve outlined for the company.

That completes our remarks. Operator, I’d appreciate if you could open up the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Nick Yulico with Scotiabank.

[Nick Yulico, Scotiabank]

Thanks. I know Doug talked a little bit about the tenant improvement spend this quarter being heightened and why that was the case. Mike, I wanted to see if you could give us maybe a feel for what a full-year number would look like for a TIs and leasing commissions, and then in terms of how we should think about Fed growth this year, if that would be similar to the 10% FFO growth in your guidance.

[Mike LaBelle, Chief Financial Officer]

Sure. Nick. No problem. So, Q1 is obviously as you mentioned, it was a high year for lease transaction costs. As Doug mentioned, we had some long-term leases and we also just had a tremendous amount of absorption, all right. So, we had 150 basis points of absorption to bring the portfolio up to 93% almost, which is – with that, that’s kind of all drops into the quarter.

So, we do not expect every quarter this year to be identical to that. I mean our occupancy projection for the year, as I mentioned is that it’s basically going to be stable if you kind of pull out the asset sales and taking the Google building out of service. So, we expect occupancy to actually drop a little bit in the second quarter and then come back up in the third and the fourth quarters although the rental rates should be higher in our rollover.

So, if you look at our full-year projection for what our AFFO will be in our lease transaction costs, we expect the lease transaction cost of total somewhere in the $210 million to $225 million range. So, a big chunk of this has already been experienced. And if you look at our roll over for the rest of the year, I mean, it’s just not that big. So, the amount of leasing that we have to kind of get into place to keep the occupancy is not that significant. Most of the leasing that we’re doing for the quarter is really going into the future years, right? So, that stuff is going into 2020 and 2021. Other pieces of our AFFO to think about include our straight line rents, which are $100 million to $120 million.

Our CapEx is going to be lower. So, our recurring CapEx we think is going to be somewhere in the $75 million to $90 million range. That’s about $10 million or $15 million below last year. Stock comp is around $40 million and then other non-cash items is $20 million to $25 million. So, we kind of pull all that stuff together. You get to an AFFO that is somewhere in the $4.80 to $5 a share versus $4.43 in 2018. So that’s pretty significant growth, which is kind of a combination of cash same-store growth and lower CapEx.

[Nick Yulico, Scotiabank]

Thank you. That’s very helpful, Mike. Just second question is, if I think about the commentary that Doug gave on New York, it was less positive in other markets except Washington DC. So, I guess, I mean, if we think about a lot of the leasing demand right now that you are targeting, let’s say in your development portfolio, which feels like it’s a lot of tech, I mean you’re talking about a increasingly life science, should we think about you guys may be looking to sell even more of your New York City portfolio besides 540 Madison, perhaps assets like 399 park, which is mostly stabilized or developments that you did this cycle.

[Doug Linde, President]

No, I wouldn’t assume we’re going to shrink our New York portfolio further. I mean, again, we’re always open if we get approached by someone with we think an extraordinary results for shareholders, we’re open-minded about it, but I don’t think you should assume we’re going to sell down our New York portfolio further.

[Nick Yulico, Scotiabank]

Okay. I guess if you’re just trying to reconcile the commentary on New York, which just seems like, you think the market’s not doing as well as some of your other markets. And so then if that’s the case, why still have the – as big of a presence in New York.

[Owen Thomas, Chief Executive Officer]

We think, we’ve been saying this for years. We think New York is healthy. There’s the aggregate, leasing demand has been at high level. Last year, it was a multiyear record for growth leasing. So, we think the market demand is healthy in New York and it’s a healthy market. The issue has been supply. The Hudson Yards we have described as a secular event in the New York City real estate market and until the Hudson Yards gets fully absorbed, there will be more than typical supply in New York. And that is muting our ability to push rents up. But we certainly believe in New York in the long-term and intend to maintain a very significant presence there.

[Doug Linde, President]

Yes. Contextually, Nick, if you think about the demand picture in New York City, and actually, if you were to go look at the VC investments across the country now, there’s actually more money being invested into New York City than there is in the Boston marketplace. And that follows the Silicon Valley in San Francisco. So, the tech, media, fintech world is very alive and vibrant in New York City. but as Owen said, there’s a supply problem, which is sort of what my point was at the outset and those marketplaces, where there’s not a supply problem, we’re feeling really, really strong about our opportunity set in terms of the pushing rents, in those markets where there’s a supply problem, namely New York City, modest supply problem in Washington DC, CBD, a significant supply problem.

We’re not in a position, where we can do that. And net-net, we’ve actually reduced our exposure in New York City, not necessarily by selling assets per se, but by selling interest in assets, which we did over the last, call it four or five years ago. And then we’ve grown so much more in Boston and in San Francisco. Naturally, the contribution from New York City has diminished in a significant way.

So, I think we’ve positioned the portfolio in a really thoughtful way, on a going-forward basis. And New York City will always be part of our portfolio and we hope that, there’ll be a point in time in the relative near future, where the supply picture will have cut off and the technology, the media, the fintech businesses will have grown to a sufficient population of embedded demand that we’re going to see the kind of strength that we’re seeing in Boston and in San Francisco in those markets – in that market as well. But it’s not going to happen in 2019, 2020 or 2021.

[Nick Yulico, Scotiabank]

Okay. Thank you, Doug and Owen.

[Owen Thomas, Chief Executive Officer]

Yes.

[Operator]

Your next question comes from the line of Manny Korchman with Citi.

[Manny Korchman, Citi]

Hey, good morning everyone. Doug, you spoke a lot about early renewals and how successful we’ve been with that. Can you just help us with how you think about those early renewals, especially in the case like Google, where you pointed out that even given the early renewal, you think that they will end up being below sort of market at the time the renewal starts if I understood that correctly.

[Doug Linde, President]

Yes, they’re below…

[Manny Korchman, Citi]

What’s that?

[Doug Linde, President]

They’re below market now. So, there’ll be even more below market when the renewal starts. And so the logically Manny is something that I think is grounded is us for the 40 years of Boston Properties has been around, which is that, we’re not market timers. We believe in leasing space to customers, who wanted to – who want to lease space when they want to lease the space. And we take our chances that doing long-term leases will serve us well and that we’ll have opportunities to get the incremental growth upon rollovers and at the spot market by bringing new product online at those times. And I don’t think we’re going to change that profile. The most interesting thing about what I was just trying to describe was that our cash rent increases in 2021 and 2022 are being driven by our transactions today. And so there’s going to be significant cash flow growth from the company’s perspective on a going-forward basis and it’s all going to be below market assuming the markets remain as healthy as they are today.

[Owen Thomas, Chief Executive Officer]

Yes. And also I would just add, I think Doug’s point was we don’t do early renewals below market. But the markets are moving up rapidly. So when these transactions were agreed to the market was at those levels. But the market is elevated since then. And the example that Doug gave were Google and the Salesforce now.

[Manny Korchman, Citi]

Got it. Thanks. Mike, an easy one for you. The expenses that are getting delayed later into the year, can you be more specific as to when those will hit just for modeling purposes?

[Mike LaBelle, Chief Financial Officer]

The repair and maintenance stuff I would guess will hit in the second and third quarter if I had to guess. And that is the majority of it. There was a little bit of G&A, because our healthcare costs came in a lot lower than we would expect and I anticipate that that will occur through the year. So, I would guess that it will be in second and third, and not fourth. But at least repair and maintenance item is it depends when the capital goes out, right? So, those are the stronger – those are the quarters, where we do most of that work, because of the weather related to – in the locations that we are in.

[Manny Korchman, Citi]

And one last one for me, the 540 Madison sale. Will that have any impact on how you think about acquisitions? I guess forcing your hands acquire something to offset that.

[Mike LaBelle, Chief Financial Officer]

It won’t have an impact on acquisitions. I mean, if we will – as we always do, if we have a gain, we’ll attempt to do like on exchange, but we won’t be more tempted to buy something, because of that. If it works out in the flow of the business that we want to do based on the deals that we see that makes sense for shareholders will do the exchange, but we’re not going to go out and “look” for an exchange deal.

[Manny Korchman, Citi]

Thanks everyone.

[Operator]

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

[Craig Mailman, KeyBanc Capital Markets]

Hey, good morning guys. Maybe taking the sales question from another angle. I know Mike; you said most of the development near terms going to be funded with debt. but as you look at kind of the pricing that they got on Park Tower and the below market rents you have at Salesforce, I mean, is it tempting at all to maybe look to joint venture that now that you bought in the 5% interest?

[Mike LaBelle, Chief Financial Officer]

No, it’s not. We think the salesforce tower is one of the premiere – certainly one of the premiere properties in our portfolio, it’s a premiere port property in San Francisco, which is one of the strongest office markets in the country, if not the world. And it’s not something that we want to joint venture. So, what we have been saying in terms of our sources of capital and we didn’t – I didn’t review that this quarter, but let me just kind of go back through that.

Obviously, we generate cash flow from the company after we pay dividends. So that is a first stop for source of capital. The second would be as you’re suggesting assets sales and we have been selling $200 million to $400 million or so of non-core assets each year. And that has been a source of funding for us. Last year, it was a little bit larger, because of the TSA deal that we engaged in. The third stop is debt and we – as we’ve been talking about we are very focused on maintaining the leverage at current levels. So, the developments that we’ve been delivering have given us increased debt capacity, which has created capital for the developments and for new investment. But there are limits to that. But we do certainly use financing to do it.

The next place we would have been going is joint venture partners. So, we brought in a joint venture partner on the Santa Monica Business Park investment that we made last year. I described in my remarks that we’re talking to a capital partner of platform 16. And at the bottom of the list is, issuing common equity. So, the other thing that we’ve mentioned is, many of our assets, certainly, the more significant ones have a tax basis that’s well below their market value. So, they’re not efficient from a capital raising perspective, because of the special dividend requirement.

[Doug Linde, President]

And salesforce tower in particular, yes.

[Owen Thomas, Chief Executive Officer]

Yes.

[Doug Linde, President]

It would have a massive gain associated with a JV of that asset that we would just have to distribute out and we wouldn’t necessarily be able to retain that. So…

[Craig Mailman, KeyBanc Capital Markets]

That’s helpful. And just on Platform 16, I know you guys said you’re talking with a partner, but from a timing perspective, would you want to get an anchor lease before you go ahead with the joint venture or does that factor into your thinking at all?

[Owen Thomas, Chief Executive Officer]

It doesn’t factor into our thing today. We – when we agreed to purchase that asset we – I think, we recognize that bringing in a joint venture partner was part of the equation and the joint venture partners quite aware of the leasing activity and the conversations we’re having and it’s not, there’s no “threshold” about doing a lease to do that deal and while we – I guess in theory we could wait, get a lease and then do a joint venture at a different pricing model. We just – we felt that that was not the appropriate way to structure the capital of this particular asset.

[Craig Mailman, KeyBanc Capital Markets]

Okay. That makes sense. Just one more quick one for Mike, you mentioned the burn off of cap interest next year, is it just, I know you guys have a lot of potential developments on your plays, just the spending at the outset just can’t keep up with what’s burning off. So, there’s no way to kind of backfill that decline.

[Mike LaBelle, Chief Financial Officer]

Yes. I mean we’re continuing to obviously add to our development pipeline and I wouldn’t talk to about 2100 Pennsylvania Avenue and 325 Main Street. So, we are continuing to add to that, but there’s just a lot that is being completed if you look at our development pipeline and you look in the supplemental and the dates of when that stuff is coming in. So in 2020, we do not expect it to keep up. So, we do expect there to be materially lower capitalized interest next year than it was this year.

[Craig Mailman, KeyBanc Capital Markets]

Great. Thank you.

[Operator]

Your next question comes from the line of John Kim with BMO Capital Markets.

[John Kim, BMO Capital Markets]

Thank you. In San Francisco, can you provide an update on the likelihood of Fort Harrison, getting its Prop M allocation this year? And also if you’re interested or you’re looking at the Ocean White developments, given it’s a pretty valuable site.

[Owen Thomas, Chief Executive Officer]

So, I’ll give you a succinct answer on Fort Harrison. The sequel lawsuits are ongoing. We don’t anticipate the sequel lawsuits to be resolved in calendar year 2019 and we don’t know how long they will take. There’s a real question about how Prop M is going to be allocated. A lot of discourse and questions about that. So in our mind, it’s unlikely that any of the projects will go forward that are currently part of Central SoMa in 2019 with regards to, there’s a developer, who’s building first admission. The project has got some – I think some timing issues, lots of people are trying to understand how they might be helpful in that situation.

[John Kim, BMO Capital Markets]

And are you one of those parties?

[Owen Thomas, Chief Executive Officer]

We don’t comment on things that were – that we might or might not be doing.

[John Kim, BMO Capital Markets]

Okay. And then, Doug, you mentioned midtown Manhattan demand – kind of the demand being liked. Do you think there’s going to be additional sublease space coming into the market? And you also were positive on demand from tech and media companies, but that’s really more focused on Midtown South. And I’m wondering if you’re hearing any discussions with any of these companies moving to Midtown?

[Doug Linde, President]

Yes. So, I just want to – I guess I want to reiterate what I said. I said that I felt that the demand at the very high end was lighter this quarter and last quarter than it has been. In the high end, I define as over $130 a square foot, which is those are the people, who would be going into the very expensive space. I think the market itself is actually very healthy. So, if you have $85 to $100 space, I think there are lots of people that you’re talking to and there are lots of opportunities from the demand side to fill space. John, did you want to talk about the tech demand going in midtown?

[John Powers, Executive Vice President-New York Region]

No, I think that, you’d have it. The demand is very good here. The issue that’s holding the prices flat is the supply coming onto the market. The good news is there’s a lot of people looking at the supply.

[John Kim, BMO Capital Markets]

One last question on dock 72. Can you just discuss the increase in construction costs and the stabilization date being moved out?

[Owen Thomas, Chief Executive Officer]

Yes. So, we’ve found some things that were either in an unforeseen conditions when we were doing the site work and/or coordination issues between the contractors and the A&E professionals that have just led to some cost increases. But more importantly, given how long it’s taken us to get to stabilization of the construction, which is now clearly going to happen in September. We pushed out our lease up and so we’re carrying the full project cost for an extended period of time. I think it’s almost a year than when we previously had. I will tell you that relative 90 days ago, the tenant activity has picked up at dock 72. And if you go over there, it feels like a pretty unique interesting opportunity for tenants to lease space with fabulous outdoor spaces with an amenity center that’s going to be bar in the second to none when there was an announcement yesterday about, the new Wegmans that’s going in and the other property that’s under construction. Dock 72 is really shaping up. And unfortunately for us, it was more of a show me as opposed to – show me the plans but – and then we’ll make a lease, but actually show me what it looks like, and I want to feel it, see it, touch it before I can really get a sense of it. And we’re encouraged by what we’re seeing right now. John, any other comments on that?

[John Powers, Executive Vice President-New York Region]

The ferries starting May 24th, that’s a big plus. The shuttles are all running on time and on an app and people like it a lot. So, we’re getting a lot more action. But as I’ve said in this call, a number of times, this is an asset, where people, as Doug said, they’re going to have to, when we work moves in September and the amenities opening in October, people can rover over and really experience it and they can take the ferry to get there.

[Owen Thomas, Chief Executive Officer]

I think that I just want to clarify that a big piece of the increase is equity carry. So, it’s a non-cash concept, it’s something we always put on our budgets, which is the carry cost that we charge ourselves for our own equity and that obviously, impacts the job as you extend out the lease up.

[John Kim, BMO Capital Markets]

Thank you.

[Operator]

Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

[Jamie Feldman, Bank of America Merrill Lynch]

Great. Thanks and good morning. So, I wanted to start with LA and Santa Monica, can you talk more about the spaces you’re getting back and what the interest pipeline looks like given we have seen a pickup in demand in some of the other kind of media focus submarkets Hollywood, Burbank some of the others, just curious what you’re leasing prospects look like?

[Doug Linde, President]

Yes. Let me make a quick comment then I’ll have Ray, Ray pick it up. So, the only space that we know that we’re getting back is the space that is currently occupied by HBO at Colorado Center and they’ve made a decision to relocate to Culver Crossing, and that’s going to happen 12/31/2020. So, everything else that we’re working on in both the Santa Monica Business Park and Colorado Center is that space and then doing early renewals with our existing tenants in tow, which include technology and media companies, and we’re encouraged by their interest in staying in the property and really, they may have some other opportunities to go outside of Santa Monica. But in Santa Monica, we’re sort of the only game in town. Ray?

[Ray Ritchey, Senior Executive Vice President]

Yes. Thanks, Doug. So, specifically, at Colorado Center, we have a – we had discussions with Hulu regarding their future growth. HBO was kind of in the path of that growth. So, while we were sad to see HBO be one, it was strategically more important to have that block to accommodate the larger tenant. What’s really interesting is while there are intense discussions with our existing tenant. Other tenants in the project are already calling us up about that space and others so that the demand in Santa Monica is just as strong as it was when we acquired the building 3.5 years ago and we see nothing in the horizon that does not have Santa Monica being a main demand driver. We are seeing some exiting to some of the other markets if it only defined larger blocks at lower prices, but we still are exceedingly excited about the Colorado Center in Santa Monica Business Park.

[Jamie Feldman, Bank of America Merrill Lynch]

Hi. Thank you. And then what’s your appetite to expand there? I know there’s some buildings that have – that are being marketed?

[Ray Ritchey, Senior Executive Vice President]

Well, we are – go ahead Doherty.

[Robert Doherty, Vice President-Greater Boston Area]

Yes. I was just going to say, and I’ll turn it over to Ray. Our appetite remains strong. We want to grow LA into significant region for Boston Properties, just like all our other regions. However, we’re going to do it in a disciplined fashion. And the way we’ve been describing it to ourselves and to all of you is we want to do a deal a year that’s a way to think about it. But it has been challenging this year, there have been a number of assets that have traded at prices that we didn’t want to pay and we’re also looking at a number of development sites as well. Ray?

[Ray Ritchey, Senior Executive Vice President]

Hey, listen, we came here at three years ago and we’re now up to 2.5 million square feet. Current occupancy levels are in the high 90s. We’ve come in second on three or four different other opportunities in LA. But we held on to our discipline and didn’t overreach for those and we are actively considering three or four more opportunities right now. So, we are all in an LA for sure. And I’d like to introduce John Lang, our LA Regional Manager, who is also on the call and John, anything else you want to add?

[John Lang, Regional Manager-Los Angeles]

No, I would just add to it. To Owen’s comment, there’s been a lot of opportunities here in this past quarter, some of which are traded for pretty healthy pricing, but we’re aggressive and we’re seeking opportunities both the marketed and the non-marketed development and existing asset acquisitions, but we want to remain disciplined with our path to growth.

[Doug Linde, President]

And I would just like to add that while we’re very excited about the acquisitions of the real estate we have in that market. We’re really excited about having John joined our team. He’s only been with us over a year and he’s already made a tremendous difference in our presence in the LA market and we’re extremely grateful to have him.

[Jamie Feldman, Bank of America Merrill Lynch]

Great. How would you say, now that you’ve been there a while, how would you say, be it speak and differentiate itself in the market? What do you bring fresh to the market?

[Doug Linde, President]

You’re asking me or John?

[Jamie Feldman, Bank of America Merrill Lynch]

Whoever would like to answer.

[Doug Linde, President]

Okay. I would answer and John could comment that I think our outreach to the existing tenants in our portfolio, our outreach to community leaders, our ability to develop close relationships with brokers has distinguished us from the traditional development and landlord community in LA. And I think we’re a little bit of a breath of fresh air to the LA market. John, would you care to comment on that?

[John Lang, Regional Manager-Los Angeles]

Yes. I would reiterate all of those things. And Jamie, for you and a couple other folks that have recently been to Colorado Center. We’re taking a very hands-on approach, not just with our relationships with our customers and our tenants, but with our physical improvements. So, we just rolled out the new public plaza here at Colorado Center. We’ve got a new best-in-class food hall experience that’s going to be opening here shortly. So, I think we’re putting in the strategic capital here that’s a little more thoughtful, and a little more strategic with what the tenants in today’s world are demanding. So, Colorado Centers are great example of that and with Ray’s help and with our kind of Cross Country collaboration and making sure that we are leveraging everyone’s collective resources across our regions.

Colorado center quickly went to 100% leased, in about two years since the acquisition and that was before all of the capital was deployed here and you can actually feel and see the improvements. So, I think that’s a great success story and we’re on the right path to do that at the Santa Monica Business Park as well. And just take a little bit more of a hands-on approach compared to some of the other owner and operators here.

[Jamie Feldman, Bank of America Merrill Lynch]

Okay, great. That’s a very helpful. Switching gears to Mike, can you – are you able to quantify some of the drags on earnings you mentioned rolling into 2020, like assuming your share count stays the same, maybe like pennies per share or some other way to think about it?

[Mike LaBelle, Chief Financial Officer]

Well, I think Doug described some of the numbers. So, I think, Doug said, GM was $13 million and Reston was $17 million. So, those are kind of the big moves and we still believe we’re going to be able to demonstrate growth in the same-store portfolio. Every year, we’ve got rollouts, right? And then we try to explain them to them, what’s renewing and what’s rolling out? So, a lot of the stuff that is on the expiration table. We’re in the process of renewing and we’re working on those kinds of things. There are some where we know the tenants are going to leave. So these are the ones that are more sizable where we know they’re going to leave to give you some sense for – to help you I guess, along the way. I can’t tell you what our guidance is right now. It’s honestly just too early. We still think it’ll be positive. We just think there’s a couple of things in there that will hamper a stronger growth profile.

[Jamie Feldman, Bank of America Merrill Lynch]

Okay.

[Doug Linde, President]

Okay. I just want to – I’d like to give you sort of the following sort of framework, which is if you think about our year-to-year projections. What we’ve described is, we are – it’s not 100%, really close to 100% occupied both Boston and in San Francisco. And there’s very limited rollover in those marketplaces and we’re seeing very significant as I described, mark-to-mark least increases and therefore, increases in either our FFO, if there is a modest amount of build out time in our cash rents. We have our biggest exposures in 2020, which – and the reason I brought it up is, because we’ve asked – been asked the question every single time we’ve had a one-on-one meeting with anybody and we’ve done a number of NDRs over the last quarter are the General Motors building in New York City and the Reston Town Center Market in Northern Virginia. That’s the vast majority of our “exposure” and I tried to articulate what that exposure was.

We believe that the power of San Francisco and the power of Boston are going to continue to overwhelm the other issues, but that there is some degree of pull down from that particular exposure, because that property is currently leased today. And then we have a few other negatives in terms of the properties that we’re taking out of service, including as soon as we described the 325 Main Street, which is pulling $4 million out in 2020 and 2021. So, we tried to sort of give you a good roadmap for how you might think about your modeling of our portfolio on the revenue side, did you think about 2020 and 2021.

[Jamie Feldman, Bank of America Merrill Lynch]

Okay. And those are revenue numbers, not NOI numbers?

[Doug Linde, President]

Yes, revenue number.

[Jamie Feldman, Bank of America Merrill Lynch]

GM investment?

[Doug Linde, President]

Yes.

[Jamie Feldman, Bank of America Merrill Lynch]

Okay. All right. Thank you.

[Operator]

Your next question comes from the line of Jason Green with Evercore.

[Jason Green, Evercore]

Good morning. Just a quick question on the Boston market. The Boston Seaport is kind of the only major Boston submarket, you’re not in currently. Is that a submarket we could see you enter or does it not necessarily fit the profile what you guys look for in assets?

[Mike LaBelle, Chief Financial Officer]

We continue to look at it just like every other market is part of our core markets, it’s definitely part of the Boston core market. It’s just a matter of finding the right opportunity. I would comment to echo what Doug’s been talking about with tenant inspired play on renewals. The seaports interesting, if you take one specific asset out that is caught on the edge of worse things happening, it’s like a 2.3% vacancy, which is incredibly low. And then in that greater call at Boston market, we’re looking at everything, submarkets in the 6% range. So, it’s really interesting that each of these markets is a firing on all cylinders right now. And a lot of it has to do with echoing what Doug and OT talked about was incredible discipline right now at least for the time being in terms of development coming on with significant pre-leasing and that still bodes well as we look at the forecast for the next couple of years, as we look at the developable sites, all of them have significant pre-leased play on them.

[Jason Green, Evercore]

Got it. And then maybe just switching over to Reston, as the government continues to talk about housing reform and potentially some changes to Fannie Mae, is there any risk to the lease at Reston Town Center and given the company moving into what might be viewed as relatively expensive space might not be perceived the right way?

[Ray Ritchey, Senior Executive Vice President]

You’re talking about risk relative to the credit of the tenant, right?

[Doug Linde, President]

It was a legal risk – it’s a legal risk.

[Ray Ritchey, Senior Executive Vice President]

So, we have a binding lease with the agency or the NGO or NGA. And our understanding of all the discussions that are going on in Washington DC have to do with the future of how mortgages are securitized. I believe that the bonds that have been issued by both Freddie and Fannie go well beyond the least that we have at Reston, which is, I think 12 years starting in 2022.

So, we are not concerned on a cash basis in terms of receiving our rent from the tenant. What happens to that organization and how that organization is ultimately changed relative to the way the private mortgage market works. I think that’s anybody’s guess and in 2035, it could be an issue.

[Jason Green, Evercore]

Got it. Thank you.

[Operator]

And we have time for one final question, and that question comes from Alexander Goldfarb with Sandler O’Neill.

[Alexander Goldfarb, Sandler O’Neill]

Yes. Hi, thanks for taking my question. Mike, just quickly going back to some of the items that you mentioned for next year. You mentioned that $13 million coming out of the GM Building, if $10 million in size, is that in addition to the $13 million? So in effect it’s a $23 impact of 2020 from the GM Building coming out?

[Mike LaBelle, Chief Financial Officer]

Yes. That’s in addition to the $13 million, that’s a non-cash front.

[Alexander Goldfarb, Sandler O’Neill]

Okay. Okay. And then the 540 Madison is in guidance or that’s not in guidance or it closes so late in the year that it’s really immaterial to the share.

[Mike LaBelle, Chief Financial Officer]

The 540 Madison Avenue was not in guidance, because we don’t have any kind of agreement on it. It’s picked on the market at this point. So, the only sale is the Tower Center sale that we announced that is in the guidance.

[Alexander Goldfarb, Sandler O’Neill]

Okay. And then just finally, just thinking about funding for your pipeline, you were clear that equity issuances is last in your list, but it seems like between free cash flow that $200 million to $400 million of dispose that you guys think about. And then Jay being on new – on sort of new projects, it seems like you guys have found a pretty good balance for funding developments going forward. So, the big dispositions that would sort of the loop growth in the past, it seems like you guys have now gotten your funding model to a pretty good way, where you don’t sort of have that anymore. Is that a fair way to look at it?

[Mike LaBelle, Chief Financial Officer]

I think that’s true, Alex, our selling program that we have been going through the last five years. I mean raising capital is a nice outcome, but the real reason is we’re selling assets that are non-core to the company going forward. So, we still – we’ll have some of those in future years. But I agree with what you’re saying. I think that we have between our own resources and the resources of a growing list of capital partners, we will – we are not capital constrained in terms of making new investments.

[Owen Thomas, Chief Executive Officer]

And the other thing that we focused on Alex is our leverage. So right now, our leverage is at six and a half times, since conservative are – we don’t want to be north of seven. If you look at the pipeline we have today and new pro forma were below six. So, there’s a lot of room there for us to work, which is why we’re comfortable using a good amount of debt for some of this. And then we bring in partners on some of this, just linked in that capability of that existing balance sheet to continue to work.

[Alexander Goldfarb, Sandler O’Neill]

Okay, okay. Thank you.

[Owen Thomas, Chief Executive Officer]

Okay, sure. Operator, are we all set, that’s the end of the question?

[Operator]

Yes. I will now turn the call back over to you guys for closing remarks.

[Owen Thomas, Chief Executive Officer]

Okay. Thank you very much for all of your interest in Boston Properties. That includes the questions and our remarks. Thank you very much.

[Operator]

This concludes today’s Boston Properties conference call. Thank you again for attending and have a good day.