Boston Properties Inc

NYSE:BXP

Earnings Call Transcript 2018-Q3

[Operator]

Good morning and welcome to Boston Properties Third Quarter Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

At this time, I’d like to turn the conference over to Ms. Sara Buda, Vice President Investor Relations for Boston Properties. Please go ahead.

[Sara Buda, Investor Relations]

Great. Thank you, operator. Good morning and welcome to Boston Properties third quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in 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. Also 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 now I'd like to turn the call over to Owen Thomas for his formal remarks.

[Owen Thomas, Chief Executive Officer]

Thank you Sara, and good morning everyone. Just wanted to give everyone a heads up that we have the Red Sox victory parade coming down Boylston Street at 11 o'clock this morning, so I'll do my best to keep all the Red Sox fans around the table in their seats after 11:00.

Before I get into the details of the quarter let me take a step back and review the macro environment we're experiencing and why it is an exciting time to be part of Boston Properties. The markets where we operate continue to display strong economic performance. Unemployment is at record lows and our tenants continue to seek high quality Class A properties to attract and retain their most precious asset which is talent and the urbanization trend continues as companies and their employees seek the opportunity, community and amenities of urban locations.

Boston Properties is in the middle of and benefiting from these macro trends and the investments we've made over the past few years and new development are positioning us for growth with a high level of preleasing and new developments and a long average lease term in the existing portfolio, our growth is durable and much less sensitive to where we might be in the business cycle.

And finally our tenant base is diversified across market sectors and our assets across geographies which insulates us in the event of a market shift within a sector or geography. Our strategy of developing and owning Class A office properties in top tier gateway cities continues to serve us well and provides a long term competitive advantage in creating value for shareholders.

Now let's get into the details of the third quarter which was another strong one for us as we made additional progress towards achieving our annual and long term goal. Specifically this quarter we generated FFO per share $0.02 above the midpoint of our prior forecast and $0.01 above Street consensus. On a year over year basis FFO per share grew 4% in the third quarter. We also increased our full year guidance for 2018 by $0.02.

We also increased our regular quarterly cash dividend by 19% to $0.95 per share. The largest dividend increase in the history of Boston Properties.

And finally we provided a strong outlook for 2019, forecasting FFO per share growth of 7% at the midpoint of our range. We've been describing for some time our inflection point of growth based on our strong development pipeline and in-service portfolio performance. With our FFO momentum this quarter and strong outlook for 2019 that inflection point is now evident.

Moving to business highlights in the quarter, we leased a 1.5 million square feet bringing us to 5.4 million square feet leased in the first three quarters well above our historical averages. We increased our in-service portfolio occupancy 70 basis points from last quarter to 91.1%. And we continue to lead in sustainability performance having been recently ranked in the top 8% of all property companies globally by [indiscernible] and we earned LEED Platinum certification for the Salesforce Tower in San Francisco.

Overall it was a strong quarter and I am pleased with our ongoing financial performance and the underlying strength of the business as we approach 2019.

Now let's discuss the market environment and trends impacting the business. Overall economic conditions remain very positive, with third quarter US GDP growth recently reported at 3.5% which is still quite strong but down from 4.2% in the second quarter. 134,000 jobs were created in September which is also healthy, but below the monthly average over the past year. And the unemployment rate dropped to a 50 year low at 3.7%. Notwithstanding the strength of the US economy capital markets became volatile over the last month. The Fed increased rates 25 basis points in September. It's signaling at least for now an additional increase before the end of the year and multiple increases in 2019. The ten year US treasury increased rapidly earlier this year to over 3.2% and it's currently trading a little above 3.1%, up only 10 basis points since our last earnings call and about 60 basis points since the beginning of the year.

A combination of interest rate increases both realized and forecast, slowing economic growth, concerns about trade wars, uncertainty around the upcoming midterm elections and the extended duration of the US economic recovery have led to materially increased volatility in the equity markets and for REIT. We've remain constructive on the market environment notwithstanding the volatility. The positive impacts of the economic growth to our leasing results far outweigh any negative of the modest interest rate increases we have experienced so far. Further current level of long term interest rate is favorable relative to historical norms and the returns we were experiencing at our new investments.

While we are disappointed with the movements of our share price relative to our dividend increase and forecast growth it does not impact our capital strategy in that we are not funding our new investments with public equity. Our best use of capital today is launching new preleased developments and making select value added acquisitions for which the yields are higher than both stabilized property acquisition and the incurred cap rate and repurchasing our shares notwithstanding their material discount to NAV. Our best and cheapest source of capital is debt financing which we can utilize without materially changing our credit profile due to the new debt capacity provided by the income from our development deliveries. We have and will continue to sale select non-core assets which raises capital on the margin. The sale of the larger core asset is a less sufficient funding source given significant embedded tax gains in the result of special dividend requirements. We can accomplish our growth plan without accessing public equity capital given the debt capacity and deliver developments and if needed access to plentiful private equity capital.

In the private real estate market, transaction volume growth remains healthy. Specifically US large asset transaction volume in the third quarter increased almost 3% from the second quarter and 10% over the third quarter of 2017. Office represented 36% of the transaction volume for the quarter and increased 5% from the second quarter of '18 and 3% year-to-date over 2017. Investor appetite remains strong with multiple significant office transactions agreed once again in our core markets at sub-5% cap rates. Examples of this include in Boston, the office and parking components of 121 Seaport in the Seaport District is under agreement to sell for $1129 per square foot and a 4.6% cap rate. This property comprises 400,000 square feet and is 100% leased and being purchased by Sovereign Wealth Investor.

In Los Angeles, Campus at Playa Vista is selling for 4.5% cap rate and a $1031 a square foot to Real Estate Pension Advisor. This property is 325,000 square feet and is 99% leased.

And lastly moving to St. Francisco, 301 Howard in the Soma District sold to a pension fund advisor for $919 a square foot and a cap rate in the high 4% range. This property is 319,000 square feet and fully leased.

Now, moving to our capital activity, development continues to be our primary strategy for creating value. We remain very active pursuing both new prelease projects and sites for future projects. Since our last earnings call, we continue to progress our development pipeline activity. We delivered into service our 280 unit proto residential project in Kendall Center and have leased approximately 49% of the residential units on track with our initial pro forma. We commenced active development of our 1.1 million square feet Western Gateway project for Fanny Mae. This two tower office complex is adjacent to the future Reston Town Center metro station and is the first phase of our proposed 4.2 million square foot expansion of Reston Town Center on land we owned and we have now – and have now rezoned. This project alone will provide Boston Property significant future growth opportunities.

We commenced active development of our 100 cause way officer tower development after securing our 440,000 square foot lease with Verizon Communication to anchor the 630,000 square foot, 31 story building. This is the last phase of our mix use [indiscernible] Causeway project in Boston, we are in discussions with an existing tenant at Kendall Center in Cambridge to redevelop 325 Main Street for their expansion, we hope to announce this investment by year-end and receive community approval in early 2019. As part of the proposed plan, we would also develop a residential tower on the same city block as our 1445 Broadway office property currently under development. Our current development and redevelopment pipeline stands at 14 office and residential projects comprising 7.6 million square feet and 4.1 billion of investment for our share. Most of the pipeline is well underway and we have 1.9 billion remaining to fund. The commercial component of this portfolio is 85% prelease and aggregate projected cash yield are estimated to continue to be approximately 7%. These figures exclude the $360 million, 2,100 Pennsylvania Avenue development in Washington D.C. which we expect to commence next year and the 325 Main Street Redevelopment discussed earlier.

And lastly on capital activity, we are having an active year selling non core assets and will most likely exceed our $300 million disposition target this year. We recently closed the sale of core office park in Chelmsford, Mass, to the major tenant in the park for $35 million and as a result have completed $185 million in disposition year-to-date. 1,333 New Hampshire Avenue in Washington D.C is under contract for sale to close before year end for a $136 million or $430 a square foot. Recall this asset will be vacated by Akin Gump in 2019 and then as is releasing of the building does not fit our current operating strategy. We continue to pursue recapitalization options for the 634,000 square foot build to suit for the TSA currently under construction in Springfield Virginia in order to free up capital for our growing development pipeline. This transaction can close this quarter or next.

Lastly we are in the market to sell 2600 Tower Oaks a 179,000 square foot office building located in Rockville Maryland and the last asset in our preserve at Tower Oaks Business Park. This transaction can close by year end or early 2019.

So in summary we had a strong third quarter, delivered FFO per share ahead of expectations, increased our 2018 outlook and materially increased our dividend. And finally our growth plan for 2019 is now sharply in focus and looking forward significant growth for 2020 and 2021 should continue with our new investment wins and healthy leasing activity.

Let me turn it over to Doug.

[Doug Linde, President]

Thanks Owen. Good morning everybody. Before I get to the markets and make some comments on our leasing progress I want to make an observation about capital and the Office business. Our customers need to engage their employees to achieve great business outcomes and access to talent remains their top priority. When you're operating in a labor market where the unemployment rate is at historical lows particularly for college or higher degree level employees who are our customers' employee base space plays an important role in the valuation chain of the employee as they take that job.

A year ago we had our investor conference and we reviewed in detail, all the work we had done to rejuvenate our older assets. I think I went through about 20 million square feet of projects that we had completed since 2000 largely in our CBD properties and then we presented the new designs and the sense of place that we're bringing to our development which encompass 15 million square feet delivered since 2000 and the 7.6 million square feet that Owen just described is under development. When we do this work right we get premium rent. In Boston go see how we have transformed a 100 Central Street and you've all been to the Prudential Center retail makeover which has made a dramatic difference here.

The public spaces at Colorado Center are going to be completed in the second quarter of next year and by the summer when you visit our campus at 53rd in Lexington 599-601 and 399 you are going to see a major transformation of the public spaces. These are generational investments that we're making.

The one significant capital project remaining across our portfolio is the public space at Embarcadero Center. We’ve owned the property since 1998 I think it will be 20 years next week or the week after. This is the first major architectural and place making project we have undertaken at the Property. We are reinventing the lobbies now ongoing about a $60 million three year project and then we're planning another $80 million common new area and place making investments over this 3.5 million square foot complex. So that's about $40 a square foot.

We will continue to spend $1.50 to $2 a square foot per year on traditional CapEx across the portfolio year in and year out but our portfolio has been fundamentally reinvented or is new.

So let me start in San Francisco on our market comments. With all the recent deliveries of 100% leased buildings the market absorption is at historical highs. One research firm calculated that the vacancy rate in CBD buildings built since 2000 is under 1%. There continues to be in more than a dozen 100,000 square foot office requirements in the market searching for space. We're going to do an event at Nareit next week where we will focus on the supply challenges in the area that are the result of the Prop M and the delays in the central SoMa plan. Even if there is a little legislative relief and no one is expecting Prop M to be overturned it won't manifest itself into new deliveries until the end of 2021 at best or later. The large block of contiguous available sublease space coming from tenants that are moving to new construction have disappeared. While transaction cost have not decreased. Rent growth is up high-single digits and more importantly leases now include annual escalations of between 2% and 3%. If you're doing a $90 ten year deal your average rent is over $104 and it ends up in a $120 per square foot rate. So I shudder to think about the roll downs, people are going to be talking about in 2028 or 2029. Our availability in this city is all in Embarcadero Center. This quarter we completed 73,000 square feet of office leasing in DC including a 60,000 square foot 3-floor tenant relocating into Embarcadero center from outside with just a 45% roll up in gross rent. There are currently seven available floors, four floors at Embarcadero Center available and we are negotiating leases or LOIs on every one of them.

In addition, we're in negotiations on 200,000 square feet of late 2019 and 2020 renewals to those renewal. And we are in lease on the 165,000 square foot block that PWC will vacate in July of 2020 where the roll up will probably be in excess of 50%.

The Silicon Valley is also seen a pickup in activity. Transit oriented projects are the preferred alternative and we have commenced the reentitlement efforts on our Plaza at Almaden Project, which is just under a mile from the Diridon Transit Station adjacent to the plain Google Village. We hope to deliver up to 1.5 million square feet. And we've already have conversations with the number of Silicon Valley tech companies about the project. And not a new, this quarter we captured we've recaptured 40,000 square feet and released the space at a 40% net increase in rent. We have some expected rollover by 260,000 square feet at the very end of 2019 in our single story product. And that includes a 180,000 square foot relocated from the tenants that consolidating into a new third party development that's going to deliver sometime in 2020 interesting that their lease does expires in '19 and we'll see how that all plays out well after the lease expires.

Our average expiring in place rent on this space is $36 triple net and market is about $54 triple net. That's about a 50% increase. The Westside LA market remains steady with the number of large leases on the precipice of signing. Rents continue to be in the low to mid five where we've hired in our initial underwriting at Santa Monaca business Park to the low 6s. These are obviously monthly rents at Colorado Center where concessions have been pretty consistent for the past few quarters. There are limited large lock options west of the 405 and as everyone knows building new and large is a real challenge.

At Colorado Center, we completed a 58,000 square foot lease with the Scooter Rental Organization. And we are in discussions for our last remaining 14,000 square feet that would get us to 100% leased. We're assimilating the Santa Monaca Business Park into our operations and have hired a dedicated leasing director in LA to handle our day-to-day activities at both properties.

Switching to New York City. Overall leasing activity in the market continues to be strong and conditions in midtown is stable. Meaning availability is steady with flat concessions and flat rental growth. Buildings that have invested capital have healthy activity. Transactions are being completed in the high-end market i.e. over $100 a square foot at a pace pretty consistent with last year where about 1.5 million square feet of relocations were signed. Those spaces still relatively moderate. In other words in the third quarter, there were about 290,000 square feet of deals above $100 a square foot over 16 transactions. And the third and the fourth largest were 25000 square feet which was at our building at 767 Fifth Avenue and 20000 square feet.

Last quarter I described our activity at 399 Park. The picture remains the same. We are negotiating leases for the block on 7 8 9 and 10, 250,000 square feet as well as the three of the four floors on 18 through 21. We did have a 70000 square foot tenant walk away at lease execution in September after our call. But we are already negotiating a replacement lease for that space.

In addition, we completed an early recapture of 75000 square feet that was leased through October of 2021 in a simultaneous lease with a new tenant that runs through 2035 at an 18% increase in gross rent. As we mentioned during our last call, we have signed a lease for 100% of the office space at One Side 90-50 Third Street and we expect that to commence at the end of 2019.

Moving now to D.C. Activity in the District of Columbia continues to be restrained. The good news is that the shared office operators continue to lease direct space and more importantly fill their communities with lots of associations and startups and individuals and even some educational organizations aggregating demand that we would not otherwise serve.

However, space reductions and consolidations from the GSA the significant amount of repositioned assets, new supply and the long lead forward leasing continue to be headwinds on the market in the city. Concessions continue to be at historically high levels while rents and annual escalations have remained steady.

Once again our activity is concentrated in Reston where unlike the CBD we continue to see strong growing demand from our incumbent technology and defense industry tenants.

This quarter we completed 163000 square foot expansion and extension with a technology company. And we continue to have over 400,000 square feet of additional leases in negotiations. Rents in Reston range from the mid 40s to the mid 50s for existing products and we expect them to remain flat for 2019. Concessions have remained stable. Owen mentioned the new entitlements in Reston. This encompasses 1.6 million square feet of office space including the 1.1 million square feet we’ve commenced at the Reston Gateway as well as 1.9 million square feet of residential and the site has a direct bridge over Sunset Hill Road to the new metro station which is being built on property, we dedicated to the Metropolitan Washington Airport Authority. That's about as close to adjacent as you can get.

Our tightest portfolio continues to be in Boston where we're 95% leased. There is very little available space and large blocks in the Boston CBD market and there continues to be strong demand which has led to a tightening of concessions and an increase in rents both in absolute terms, low teens year to year increases and rents from the high 50s to an excess $85 on a gross basis in the CBD along with annual escalations which is a new trend.

The absorption and large leasing use this quarter is a result of deliveries of fully leased new product the leases that were done in previous quarters. The 100 Causeway Tower is 70% leased but we're in discussions with two tenants for the remainder about 180,000 square feet of this building which would get us to 100% committed. Other than the 440,000 square foot Verizon lease, our largest transaction in Boston this quarter involved the early recapture and we don't have any available space of 58000 square feet at 200 Claritin which was expiring in 2022 and a release of that space through 2035. Our largest negotiation in the region now involves another multi floor tenant with an expiration in 2022.

In Cambridge, we completed an expansion with an existing tenant for 83,000 square feet at 90 Broadway Cambridge office rents are now in the mid 70s triple net. Even as many tenants are attracted to the city center of Boston and Cambridge there continues to be significant demand in the Waltham Lexington suburban market. This quarter we completed our second deal at 20 city point so it's now 53% leased from -- with a tenant in our portfolio that’s relocating but we’re negotiating a lease that back build a 100% of their space with another growing tenant in the portfolio. New construction office rents in this market are about $30 triple net.

Growing life science demand continues to impact the market, we have a few suburban properties in Waltham and Lexington, leased to office tenants where the current net rents are currently in the low 20s. We’re now working with the life science tenants to convert these building to lab office use with investments of about $100 per square foot on the base building and expect to achieve the rents in the high 40s on a triple net basis. So, it takes us 12 months to do the work with the downtime we’re generating around 15% to 20% incremental return on net dollars.

Before I finished, I want to provide some color on the same property leasing statistics for the New York City region this quarter and our companywide releasing capital cost. The pool of deals in the second generation New York City portfolio totaled a 103,000 square feet. It includes a large piece of mezzanine space that we got back from Citi Bank, under the original 2003 lease where Citi leased all of the space in the building at the same rent in the mid 90s. We re-let the space which is not accessed through the elevator lobby at the 75% decline in net rents, eliminating that lease results in the gross rent decline moving from the 31% to 13% a really big difference.

Now on the transaction cost side, there are number of [indiscernible] that are part of the transaction cost this quarter and since the first lease is only three to five years the average transaction cost per lease here is artificially high. In addition, we leased the 6,000 square foot piece of retail space on Madison Avenue at the General Motors building for 16 years at a very, very healthy rent and we provided the large TI allowance equivalent to year rents plus a commission which obviously impacted our concession packages this quarter in our staff.

So to conclude, tenant demand for high quality workspace remains strong as the fight for talent continues to be a primary focus for our customers. Leasing economic are very favorable in San Francisco and Boston. Our activity at 399 Park Avenue is on track and improvement in our expectations of delivery timing of the some of the vacant space at 399 Avenue in 2019 is partially driving our guidance which Mike will discuss in his remarks. Mike?

[Mike LaBelle, Chief Financial Officer]

Excellent. Thank you Doug. We had a great quarter, strong quarter in the third quarter if you look at our share of total revenues they were up nearly 5%, our portfolio occupancy was up 70 basis points from last quarter and our cash in property NOI improved it was up 2.5% over the same quarter last year. Third quarter funds from operation came in at $1.64 per share as Owen mentioned that $0.02 per share about $3 million ahead of the midpoint of our guidance range. The primary driver of the improvement was stronger development and management services fee income mostly from our joint ventures. As this joint venture portfolio grows with acquisitions like Santa Monica Business Park and new development like the Hub on Causeway on office tower, we do benefit from enhance opportunities to drive higher fee income. For the remainder of 2018, we project portfolio NOI growth with occupancy gains driving higher quarter-over-quarter same property portfolio results plus incremental income from our development as additional square footage at Salesforce tower is placed into service. Our run-rate for fee income should moderate due to $6 million of leasing commissions we earned in the third quarter that will likely not recur. And as we mentioned before, we expect higher interest expenses. We will stop capitalizing interest on our investment in Salesforce Tower on December 1 of 2018. And we also expect higher usage on our line of credit.

Overall, we are increasing our guidance for full year 2018 funds from operations to $6.39 to $6.41 per share. We project our fourth quarter FFO to be a $1.68 to a $1.70 per share which is an increase of $0.05 per share at the midpoint over our Q3 performance.

We provided detailed guidance for 2019 last night in our supplemental reports that's available on our website. And as we look ahead to 2019, we are projecting accelerating FFO from increases in occupancy and revenue increases on our lease role, additional income from the delivery and stabilization of our developments, partially offset by an increase of interest expense as we discontinue capitalized interest on those same developments.

In the portfolio, we project gaining occupancy during 2019 and should average between 91.5% and 93%, up 150 basis points from this year. We project ending 2019 just shy of 93% occupancy so we are on track to meet our commitment of 93% occupancy by 2020.

Our Boston portfolio was currently 95% leased, and we've already leased the majority of our available space in the CBD though occupancy and revenue recognition will not occur until 2019. This includes 50,000 square feet of 111 Huntington, 50,000 of 100 Federal Street and nearly all of the remaining space at 888 Boylston Street. We expect Cambridge which is currently 98% leased to be back to 100% by midyear and our suburban portfolio will also improve as we have 75,000 square feet of vacancy at Reservoir Place North that will be filled with the signed lease taking occupancy in the first quarter of 2019.

In San Francisco, Doug described the level of activity that we have on our 260,000 square feet of office vacancy at Embarcadero Center. And we expect positive absorption of roughly two thirds of this space next year. We also have 175,000 square feet of lease rollover next year in Embarcadero Center where the current rents are significantly below market.

In New York City, we're making additional progress leasing 399 Park Avenue and by the year-end 2019, we anticipate recognizing revenue on most of the 440,000 square feet of currently vacant space. As Doug mentioned, we have either signed leases or leases in negotiation on all of the 25,000 square feet of this space.

In Reston Town Center we have minimal rollover next year and expect to increase occupancy from 92% to near 97%. The only place where we anticipate losing occupancy is in Washington DC and it's primarily at Metropolitan Square and 901, New York Avenue, each of which has sizable law firm vacating next year. Both of these buildings are held in joint venture. So the economic impact to us is less.

With our expected occupancy gains, combined with continued rollup in rent primarily in Boston and San Francisco, our guidance assumes that our share of same property portfolio NOI increases by 3.5% to 5.5% on a GAAP basis and by 4.5% to 6.5% on a cash basis from 2018. Our cash NOI is increasing faster than GAAP partially due to previous early renewal activity where the rental rate increases have already been blended into our GAAP rents. And the cash increase is occurring in 2019. We expect non cash straight line and fair value rent of $75 million to a $100 million in 2019 and the fair value rent component of this is only $18 million. Our projected same property growth would actually be even higher if not for three lease terminations that we are working on where we have near term expiries that we’re pulling forward into 2019 to accommodate new or expanding tenants. This is moving approximately $10 million of our same property income into the termination income bucket, this is just geography and it does not impact our earnings, it will reduce our near term rollover exposure, reduce downtime and capture higher rents sooner on each space.

Our guidance for 2019 assumes termination income of $10 million to $15 million versus $6 million at the midpoint in 2018. Our 2019 projected same property NOI growth would be 70 basis points higher if we were proactively creating the termination income to enhance long-term value. We’re projecting our income from development and management services to decline modestly in 2019 and range from $37 million to $42 million. This decline is due to leasing commissions earned during 2018 due to higher occupancy in our unconsolidated joint venture portfolio we don’t expect these commissions to recur at the same level in 2019. In our non- same portfolio which is primarily our development deliveries, we project incremental NOI growth in 2019 of $80 million to $90 million, this projection also includes our share of NOI after interest expense from a full year of owning Santa Monica Business Park. I’m quoting this net of the interest expense because the result of Santa Monica Business Park flow into our income from joint venture line so they do not impact interest expense.

Over half of this incremental NOI growth is from Salesforce Tower where we expect to commence revenue on all of the remaining space, all of the space is subject to signed leases now and the property will reach a 100% occupancy by the end of third quarter of 2019. We also projecting growth from the lease up of our two residential projects that we delivered earlier this year and Hub on Causeway Podium and 20 City Point both of which deliver in the third quarter of 2019 and are substantially leased. Our developments at 159, East 53rd Street in the New York City and 145 Broadway in Cambridge delivered at the tail end of 2019, so they will have a modest impact to the year, but both properties are preleased so we expect that they would be at their full run rate in 2020.

We are funding a portion of our development pipeline with asset sales. We expect dispositions of approximately $370 million this year, these dispositions include year-to-date plus 1,333 New Hampshire and a land parcel in Maryland both of which are under contract with non refundable deposits. We project the incremental NOI loss to 2019 from our disposition activity to be approximately $12 million. We have not included any additional dispositions in our projection that we are considering the sale of additional non core assets. We are also raising additional debt to fund our pipeline, we project our development spend through 2019 to be approximately $250 million per quarter and it will be funded by access cash flow proceeds from the aforementioned asset sales and our line of credit. We also expect to buyout the remaining 5% interest in Salesforce Tower in early 2019. As a result of these funding needs, we project our net interest expense to grow between $418 million and $433 million for 2019. We project our capitalized interest to be between $45 million and $55 million approximately $15 million less than 2018, primarily from the impact of staffing capitalized interest on Salesforce Tower.

We anticipate that we will term out of the projected outstandings under our line of credit sometime in mid 2019 with a long term financing. We also have a $700 million dollar bond issuance that carries an interest rate of 5 and 7/8% that matures in October of next year. We believe that we can replace this bond with a 10 year new issue and reduce the interest rate by approximately 150 basis points.

Based on our capital needs and our desire to lock-in a lower rate for our bond refinancing, we may pull forward the $700 million refinancing until late 2018. If we elect to do this we would incur a charge to our earnings in 2018 but we'll be locking in current low rates and reducing our interest expense going forward. We've not included the impact of a potential refinancing in our earnings guidance.

As I described in the last two quarters, starting in 2019 the new lease accounting rules will require to expense internal wages both for our leasing professionals and outside legal costs that were previously capitalized. This does not impact our cash flow as we've always made these payments but it will increase our G&A expense under GAAP. In 2019 we project that our G&A expense will total $134 million to a $140 million. And that reflects an approximate 3% increase in our current G&A load plus $10 million for the change in lease accounting.

So combining all of our assumptions together result in our initial guidance range for 2019 funds from operation of $6.75 to $6.92 per share - an increase of $0.44 per share over the midpoint of our 2018 guidance. The primary drivers are projected growth from an increase at the midpoint of $0.40 per share of NOI from our same property portfolio, $0.50 per share from acquisitions and development deliveries and $0.03 per share from other income. These gains are projected to be partially offset by the dilution from $0.33 per share of higher interest expense $0.09 per share of higher G&A expense and $0.07 per share of lost NOI from asset sales also at the midpoint.

At the midpoint of our guidance range, we're projecting 2019 FFO growth of 6.8%. If you adjusted the impact of our asset sales and net of reinvestment and the new lease accounting rule approximately $0.08 a share this growth would have been 8% on a comparable basis.

Again our growth is coming from our share of higher revenues and property NOI, where we're projecting to add $140 million of incremental NOI at the midpoint in 2019. If you incorporate our 2018 projections our NOI is projected to grow over $200 million from 2017 an increase of 14% over two years which includes the dilution from our dispositions. Well we aren't going to give 2020 guidance today. Looking further ahead, we expect 2020 is a benefit from a full year of stabilized income at Salesforce Tower as well as the delivery of an additional $1.5 billion of 2019 and 2020 development deliveries that are 79% preleased. And beyond that, we have another $1.5 billion dollars of developments delivering between 2021 and 2022 that are 82% preleased.

So as you can see, we have a strong pipeline of preleased developments that we expect to drive earnings growth over the next several years.

That completes our formal remarks. I appreciate if the operator could open things up for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Manny Korchman with Citi.

[Manny Korchman, Citi]

Sorry about that. Good morning guys. Just thinking about the confidence levels that 399 that's been a project where deals have fallen out seemingly last minute to us maybe not you. What inspires the confidence now to sort of expect that to close where you wanted to now?

[Doug Linde, President]

So let me just make a quick comment and I'll let John Powers provide more color. The lease that we lost we were surprised at. And we've rarely have ever gotten to a lease execution at 399 Park Avenue where we have had a lease disappear. So I think that is the exception not the rule. Our confidence level from my perspective has to do with the level of negotiation and status of the lease that is being drafted right now. But John, you should comment on your view.

[Owen Thomas, Chief Executive Officer]

Hi, it's Owen, I'm just going to jump in I'm not sure where John is. I think I know if John were on the call he'd express what Doug did which is a highly great confidence in us accomplishing the leases that we're currently working on.

[Manny Korchman, Citi]

And then just turning to the comments you made on the retail space at GM. Could you elaborate sort of the timing of that lease commencing and what the income levels might be? I know you expressed a big markup to the line up there.

[Owen Thomas, Chief Executive Officer]

So I don't feel comfortable talking about what a particular tenant's going to pay, Manny. The rent is already commenced, we've already delivered the space. They are in their build out period right now. There is about a year or plus of free rent associated with that. So we expected that tenant will be actually be physically in occupancy selling goods sometimes in the third quarter or fourth quarter in 2019. And it's a very healthy rent. I would tell you that Madison Avenue rents on the lower portion of Madison and the leasing there has gotten better. And so it's pretty consistent where the rents would have been three or four years ago.

[Manny Korchman, Citi]

Thanks guys.

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

Hi this is John. Can you hear me now, Owen?

[Owen Thomas, Chief Executive Officer]

Yeah we got you John.

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

Yeah sorry, I don't know what happened. There is a question on 399. It's really understanding the tenants that you dealing with in the situations where they coming out of and where you are in the process. So I have a very high confidence level that we're going to close the deals that we spoke about.

[Manny Korchman, Citi]

Thanks everyone.

[Operator]

Your next question comes from the line of Nick Yulico with Deutsche Bank.

[Nick Yulico, Deutsche Bank]

Hi. Just going to back 399 Park. Can we get, you mentioned that most of the 400,000 square feet of vacancy is going to actually commence by the end of next year. So possible to get what the NOI benefit for that building is going to be from that incremental leasing in 2019?

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

So I cannot give you an explicit exact number. I can tell you that the 400,000 square feet of space have a rent of approximately $100 a square foot slightly higher. So that's $40 million. And our view is that more than 50% of it obviously will be commencing in – we hope could be commencing in 2019 from a revenue recognition perspective.

[Nick Yulico, Deutsche Bank]

Okay. That’s helpful. And then Owen I just wanted to go back the commentary you gave earlier about how the balance sheet is positioned really well, you don’t need to pursue much in the way of additional assets sales to fund development. And I guess appreciate all that, but at the same time does show there is disconnect between where private market values are and where particularly office REIT stock values are. And so I guess I’m just wondering how you thinking about that and historically you have done the right thing and sold assets as a company, given some capital back to shareholders at times like this. So, how you’re weighing that against what you said there is already a good balance sheet but what might be a right time to prune the portfolio a bit more?

[Owen Thomas, Chief Executive Officer]

Yeah. So, a couple of things I would say first of all, in terms of new investments so as I mentioned the development pipeline that we have and the new investments that we’re pursuing we’re targeting a 7% initial cash yield for those and our stock even at the current trading level is more in a mid 5 on a cap rate basis. So, I think the better use of the capital is in development. Then in terms of funding and with asset sales, I mean look we are doing we’re not selling large core assets, but Mike described $370 million of non-core assets that we’re selling this year that clearly helpful in funding our capital needs. In terms of doing, selling some of the larger core assets one, as Doug described we have a lot of confidence in that and they’re performing well a lot of them been reconditioned, have additional amenities, we’re not sure they’re great sales candidates. And then from a financial perspective they all have a significantly lower basis than their market value and so selling them would require a material special dividend and dilution in our FFO per share and resulted growth. So, we don’t anticipate significant core assets sales.

And then the other thing I would add is that given where we are in the overall economic cycle and where we are relevant to the questions about volatility, I think we’re taking a more defensive perspective with regard to our overall balance sheet. And so we want to put ourselves in a position where we’re not in a situation where we 'over leverage' ourselves and selling assets and paying out dividends would put more pressure on where our leverage ratios are.

[Nick Yulico, Deutsche Bank]

Okay. Thanks everyone.

[Operator]

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

[Jamie Feldman, Bank of America]

Great. Thank you. Just focusing on the guidance for a moment. Mike, just to clarify you have mentioned a couple of potential refinancing and I think at the end you said those were not included in the guidance. Can you just clarify what is and what’s not on the refinancing side?

[Mike LaBelle, Chief Financial Officer]

So, what I talked about is that we’re looking at our bond issuances coming having conversions internally about whether try to do something next year with that or not. And there will be prepayment charges associated with doing that and our interest savings next year and that is not in our guidance. We do anticipate that there we’re going to continue to use our line to fund our development outflows that I described. So, I would anticipate that our line we'd be getting to a point where we probably want to term it out sometime in mid 2019. So, that’s within our guidance based upon where we think rates are going to be. Our rate our rate expectations on our line for next year is that LIBOR is going to go up you know four times during the next quarters and that we’ll we will also see long term rates continue to go up so that you know if we're doing a deal in mid 2019 it's going to be at a higher rate than we do today. So we do have some kind of interest you know creep builds up in those projections. Does that help?

[Jamie Feldman, Bank of America]

Sure, so you saying the charge is not in the guidance. What about, then you also mentioned potentially a larger rate at the end of the year. That's not in the number?

[Mike LaBelle, Chief Financial Officer]

I mentioned that we would not a raise, that we would term out any outstandings on our line of credit likely sometime in mid 2019. So it's really just a replacement. Now we're doing a 10 year financing versus what our line is there might be a 50 to a 100 basis point increase in the rate that gets put on that financing in midyear.

[Jamie Feldman, Bank of America]

All right. That's helpful. And then how do you think about based on the guidance the distribution coverage for next year or maybe what AFFO could look like?

[Mike LaBelle, Chief Financial Officer]

Well I think the dividend coverage you know we anticipate by you know certainly by mid the end of next year should be basically where it is today. I mean kind of an FAD coverage ratio. I think that you know our tax income will continue to grow throughout the year. So I expect that fourth quarter of this year and first quarter next year it'll be a little bit higher than it is today. But then it'll come back down and improve. And again part of that is you know the asset sale income in 2018 is not included in our FAD it's excluded from our FAD. So the if you includes that our coverage will be very strong in 2018. This is not part we don't include that as part of FAD.

[Jamie Feldman, Bank of America]

Okay. And then turning to development and where we are in the cycle just can you get. You talked about you know decent amount of conversations out there and certainly with like the Reston Town Center land just a lot of opportunities where you could keep building. Can you talk about your thoughts on being preleased versus or just kind of what level of preleasing you'd want to see given where we are in the cycle versus the opportunities you're seeing?

[Owen Thomas, Chief Executive Officer]

As you know our preleasing requirements have gone up and our significant development pipeline is underway is 85% preleased which we think is terrific. So you know we don't have a specific number. It's dependent on the market and the scale of the building and those types of things. But given your comments about where we might be in the cycle we have been elevating those pre leasing requirements.

[Jamie Feldman, Bank of America]

Okay. And then just final question on development. Are you looking at any opportunity zone development potential or potential investments?

[Owen Thomas, Chief Executive Officer]

We're studying the program and the locations of the opportunity zones and the specifics of the new regulations that have just come out. But I would suspect that we will not conclude that will be a big opportunity for Boston Property.

[Jamie Feldman, Bank of America]

Thank you.

[Operator]

Your next question comes from the line of Steve Sakwa with Evercore ISI.

[Steve Sakwa, Evercore ISI]

Thanks, good morning. I guess Doug I wanted to pick up on the comment you talked about, about having the portfolio you know largely refresh maybe with the exception of the easy retail. But as you guys sort of think about the types of building tenants want, the lead certification issues you know how do you sort of look at the overall portfolio holistically as you think about obsolescence and you know how much more of the portfolio longer term do you think could be subject to sale?

[Mike LaBelle, Chief Financial Officer]

Well I would say the conversation about obsolescence and sale don't necessarily have anything to do with each other. We don't believe that any of our CBD properties having now been respositioned and refreshed are in any type of obsolescence category at all whatsoever. And if you look at the older buildings that we have and the lease commitments that we're getting, I think we feel really good about the positioning that we've done and the market's reaction to those. And that includes I mean the Prudential Tower in Boston was built in 1967 and it's a 100% leased. And we have growing tenants who are moving in from all across the city. And it sort of to speaks to if you do it right you can keep one of these buildings going for a long long time. And I would just comment on Embarcadero Center, that those buildings were built between 1970 and 1980 that we're talking 50 plus years to 40 plus years. And so it's the right time to do the kind of work that we're going to be doing.

I think Owen answered the question relative to what our views on selling assets. And at the moment we don't really have any 'core asset sales' potentially likely in the short to medium term. It doesn't mean that we won't look at that differently if the markets are changing and the valuations are different, but right now it's not part of the conversation.

[Steve Sakwa, Evercore ISI]

Okay and then secondly on development. I know you've got a very active pipeline and you've also got lots of land. I'm just curious as you sort of look at where do you think the next sort of opportunities may surface. And there has been some stories in the press about you potentially doing a large project in Cambridge. And I know you won't specifically speak to the tenant at hand. But just where do you think the next few opportunities might come up on the development front?

[Owen Thomas, Chief Executive Officer]

So the buildings that are in closer conversation on, the first one obviously is in Cambridge. And that's, it's been in the public press that we're talk to any company tenant about expanding the building. Ripping down hundred plus thousand for the building and building a 435,000 square foot building in display. That base station is a real viable location transit oriented development. And it's, we've got our entitlement completed and we're working diligently on those plans. There are other pieces of land in Boston that we are looking at. We would certainly not necessarily start anything on a speculative basis that could be part of the conversation. And I described the potential opportunity we have in San Jose with Transit Oriented development there and there is the Portland Harrison site in San Francisco which again everything were to go right. We may be in a position where we would have permits towards the middle to end of 2019 and be able to deliver a building in 2021 or 2022 and there is sufficient tenant demand there that we feel comfortable that that's a building that that has a legitimate opportunity to get started relatively soon.

[Steve Sakwa, Evercore ISI]

Okay. Thanks very much.

[Operator]

Your next question comes from the line of John Guinee with Stifel.

[John Guinee, Stifel]

Great. Couple of miscellaneous questions. First looks like you're going to run 2019 without accessing the equity markets. Mike what's that do to your net debt to EBITDA by year-end?

[Mike LaBelle, Chief Financial Officer]

So now our net debt to EBITDA is about 6.7 times. And obviously we've got EBITDA coming in from development where the money is already spent and we've got money going out for development that we've announced or have underway. So my expectation is that our net debt to EBITDA over the next year or so is going to remain in kind of that high-6s kind of area maybe around 7. And then as we deliver this stuff it's going to come down and pro forma for the delivery of the development it would be down substantially from where it is today. So, we feel again our tolerance level rests on a kind of steady state basis is somewhere in the low 7s. So, we still have comfort and room as we look at pro forma for our development to being well below that. So, we feel very good.

[John Guinee, Stifel]

And then looking at your development management service revenue let's say its $40 million next year. Is that a gross number or a net number said another ways should we look at that as an offset to G&A?

[Mike LaBelle, Chief Financial Officer]

No. It’s not an offset to G&A.

[John Guinee, Stifel]

But, is it a gross number there?

[Mike LaBelle, Chief Financial Officer]

Yeah. It’s a gross number.

[Owen Thomas, Chief Executive Officer]

It’s a gross number and we use our G&A to fund this.

[Owen Thomas, Chief Executive Officer]

Yes. The people are, in our G&A already that are doing that work.

[John Guinee, Stifel]

Okay. All right. Then two real estate questions, what’s going on at the Napolis Junction that building been sitting there vacant for a couple of years now. And then the second, as I look at your Reston development deals and 17/50 President looks like it’s coming in at about 518 a square foot which isn't surprising, the Reston Gateway looks like it’s coming in at about 670 a foot, which seems a bit high.

[Owen Thomas, Chief Executive Officer]

Peter, you want to comment answer the questions on the developments and then you and Ranking talk about Minneapolis junction?

[Peter Johnston, Executive Vice President, Washington, DC Region]

Sure. Part of that differential John has to do with the fact that the gateway side abuts as Doug indicated, the silver line rail and there are a number of profits and cost associated with that. The other thing as you know in the Town Center, the footprint of the site associated with the 17/50 deal is just basically the curve line, because it’s a urban development whereby if you think about all of the infrastructure and the streetscape that the Town Center has and what will be replicating down there, that’s a much bigger just footprint that has to accommodate and allocate those cost over it. So, that’s the bulk of the differential plus we’re buying the building probably 15 months less or you would normally factor in 3% to 5% escalation in those costs anyway.

As far as and I hope that answer your question. As far as an Napolis Junction building eight I think the one you’re referring too, which we did build with our partners speculatively based on what we hope were contracts coming out hasn’t obviously leased and we actually are touring people through that multiple firms that all competing for the same contract which is pretty typical for that marketplace. So, we’re hopeful that we’re going to be able to strike a deal with somebody in the near future.

[Owen Thomas, Chief Executive Officer]

The other thing I want to add on project John again that’s a 50-50 with the goals and I think that the total cost today $24 million something on those lines. So, our total exposure there is $12 million.

[Mike LaBelle, Chief Financial Officer]

Well, thank you. It’s actually less rate, the TI dollars have been invested either. It’s just the tail.

[John Guinee, Stifel]

Got you. Wonderful job. Thank you.

[Operator]

Your next question comes from the line of Blaine Heck with Wells Fargo.

[Blaine Heck, Wells Fargo]

Thanks. Good morning. Wanted to touch on acquisition in LA in particular. It seems like this year has been slower from a transaction volume standpoint in general out there, but there seem to be more deals coming to the market recently, Owen you mentioned Campus at Playa but I'm just wondering if you guys can talk about your comfort with your current footprint out there whether you're pursuing anything out there at this point and whether there are any submarkets outside of Santa Monica that you guys would target in particular.

[Owen Thomas, Chief Executive Officer]

I'll start and then turn it over to Ray and John who's also on the phone. The volumes in L.A. have gone down because basically Blackstone worked through their EOP portfolio and they were a big driver of the volumes and I think Santa Monica Business Park is one of their last deals. So I think that's the driver.

That being said there's still plenty things to look at and we're looking at them. You know we've had a big year so far obviously with the Santa Monica purchase. We're thrilled with our footprint. It's very material in Santa Monica and we've had good financial performance particularly Colorado Center which we've owned for several years. You know I think the nature of the deals are you know also different and in some ways more interesting. There's clearly the broadly offered types of deals that we will look at from time to time but they're also you know off market transactions with owners that are also interesting.

With that, why don't I it turn it over to Ray or John for additional color?

Go ahead John, back to you.

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

I want to reiterate what Owen said there that we continue to pursue both the marketed opportunities and the off market opportunities. I think everybody knows that the West Coast has been particularly attractive both for domestic capital and international capital so we're very cognizant of the competition here. But we remain hungry to find the right deals. And with that we're looking in different submarkets outside of Santa Monica across West Los Angeles and across the L.A. MSA.

[Owen Thomas, Chief Executive Officer]

But you know realizing we've been in the market for two years. We're now the largest landlord in Santa Monica and we are due to John's effort, reaching out aggressively to off market deals. And what we're trying is employ the same formula in L.A., L.A. we have done in all four markets which is creating value through the development process which is incredibly difficult in L.A. but we're trying hard

[Blaine Heck, Wells Fargo]

Very helpful. And then maybe sticking with Ray or Doug, we noticed a pretty substantial increase in the office expirations next year in D.C. Looks like another 300,000 to 350,000 square feet added to 19 expirations with a higher rent per square foot. Just wanted to see if we can get any color on whether that was a short term lease or maybe one of the leases you mentioned you pulled forward to 2019. Any detail there would be helpful.

[Doug Linde, President]

Yes so those are in our J.B. properties on that there are two law firms that are expiring in 901 New York Avenue and Metropolitan Square and those are leases that we've known we're going to be vacating for the better part of two plus years. And so those are, one of them is an 80% JV, where we're the 20% owner that's in that Med Square and then we're a 50/50 partner in 901. So relatively speaking they don't have much of an economic impact.

[Unidentified Company Representative]

That also include Akin Gump -.

[Unidentified Company Representative]

That Doug can say Ray. Go ahead.

[Doug Linde, President]

Yeah I mean it also includes Akin Gump which is a building we have under contract to sell. So we've already mitigated that issue.

[Blaine Heck, Wells Fargo]

Got it that's helpful. And then Doug thanks for the color on the drivers of the higher CapEx during the quarter. But that's somewhat backwards looking as that’s commence leases not what's executed so hoping we can get a little bit more color on general trends on the ground with respect to TIs at free rent whether there are any markets you expect further increases or even tight markets that you could see concessions decrease.

[Owen Thomas, Chief Executive Officer]

So I tried that I tried to you know sort of sprinkle that in my prepared remarks and I saw I'll just refresh that. So in the Boston marketplace we actually think transaction costs are going to start to moderate meaning you know the TI concessions that we’ve provided a year ago are going to be less in 2019. And there the free rent deminimus. In San Francisco where I would say that we're pretty comfortable that the transaction cost are going to remain flat largely because the positive installation there and this is across the board are going up at such high rates that the tenants are being forced to spend a lot more money so we can get a tenant to agree to move is not a easy decision in in itself. But the rental rates that we're getting at these marketplaces are escalating at such high numbers that we're comfortable with the overall economic package. In New York City, things are very flat. The big TI concessions in the big free rent concessions that were part of the market in 2016 and early 2017 are long gone. Now I would say your concessions are static at call it a $100 to $120 a square foot on a 15 year lease and about a month of free rent with the capital probably 12 to 13 months. And in the Washington DC market, I think that's the weakest market from a concession perspective. I don't think things are going up dramatically. But there are something some other desperation out there with regards to getting some of these larger blocks and space there. And so people are providing $140 to $150 a square foot in improvement allowance in excess of the year plus of free rent. And that's again the weaker the market.

In the suburban market the concessions are significantly lower in a market like Reston we're talking about $5 to $7 a year. And probably a half a month a year free rent in the Boston market, we're talking about concessions probably closer to $5 a square foot at TIs and very little in the way of free rent. And then in the 'Silicon Valley' the concession pattern are diminimus. For project like Mountain View which is a single story, we're talking about providing market ready improvements which are $20 to $25 a square foot.

[Blaine Heck, Wells Fargo]

Thanks guys. Enjoy the parade.

[Operator]

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

[Alexander Goldfarb, Sandler O'Neill]

Good morning. Just a few questions for me. First, Mike. Just going back to the guidance and Jamie's question earlier. So would you guys do a bond, early bond refinancing at the end of '18. You said that that instant saving is not in your '19 guidance. But you also mentioned the potential for dispositions next year which I assume would be similar to this year. So nothing large scale but maybe some smaller ones. Is it your view that any interest rate savings would be offset by NOI loss by dispositions or as the dispositions could that disposition loss NOI be a bigger number?

[Mike LaBelle, Chief Financial Officer]

Obviously they offset each other as we engage in both activities. So I don't think that the savings in interest expense would likely not be not actually will be I don't think will be as quite as high as the disposition activity is the same as it is this year. So we had similar disposition activity next year and this year. I think it would be there will be a little more dilution from the sales and there is the gain from the interest expense. Although both items, you're not talking about $0.10 to $0.20 you're talking about $0.05 to $0.08 type of numbers I would say.

[Alexander Goldfarb, Sandler O'Neill]

Okay that's helpful. And then the second question is on WeWork it's certainly a recurring topic. Recently hired Wendy -- they seem to be bulking up on owning property directly, they've been articles about some landlords doing participation rents. So how do you guys view WeWork as far as your exposure to them and how they're coworking tenants. And are you thinking about launching. I don't know if you have your own coworking platform or not, but how do you view the growth in this base or do you view that more that WeWork type coworking space is going to be more in B and C office rather than the A office?

[Owen Thomas, Chief Executive Officer]

Yeah. So, Alex we view, WeWork as an important customer, they're our 16 largest tenant and they currently represent about 0.8% of our income stream. And we would in places that makes sense we would be open to expanding the relationship further. The facts are our portfolio as you’ve been hearing us describe on this call, is getting pretty full and I think there are fewer and fewer opportunities to work with WeWork in and other co-working operators. We are also selectively opening our own types of spaces in handful of situation I might turn it over to Bryan to talk about that.

[Bryan Koop, Executive Vice President, Boston Region]

Yeah. So, we opened up flex by BXP and the distinction versus co-working is that this product is specifically targeted towards the enterprise user. Let me explain two enterprise users that provide greater clarification because this whole zone is getting misuse of terms. So, an enterprise user for us in our flex by BXP that we’ve already obtained in terms of clients is one the corporate user who has specific project link for a project. The other would be a start-up company that several call it series into their investments and there is still as risk on the length of the term that they would like to have. Those two customers have already proven out to be great customers for us in flex by BXP at the Prudential Center and we announced last week that we’re going to kick off another 40,000 feet in the CBD at the 100 federal. We also think that this is product is really good for our larger towers where you can place this between some of our larger users and as Doug refer to it in the past almost like a shock observer for us for growth for those clients.

The length of term can be month-to-month but what we’re finding is that the user and the enterprise zone has been year to two years. The evidence of the size of the enterprise user is already there and as an example within our 14 million square foot portfolio in Boston, we have roughly 101 subleases, of those subleases which really interesting 33 of them are less than two years in length. So, these customers are already been out there and we think there is still a significant opportunity for us to satisfy the needs of those customers and then have it blend really well with our long and strong leases that are such a big and important part of our portfolio.

[Owen Thomas, Chief Executive Officer]

So Alex to summarize it all. WeWork is an important customers as I mentioned, we have other co-working operators in several of our buildings and we are as Brian described experimenting with it ourselves in a couple of installation. When you add it all up it’s about 1% of our revenue.

[Alexander Goldfarb, Sandler O'Neill]

Okay. Thank you, Owen. Thank you, Bryan.

[Operator]

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

[Vikram Malhotra, Morgan Stanley]

Thanks for taking the questions. Just a couple of quick ones. Any update on the lease with Under Armor given some of the recent restructuring plans timing wise and any updates on the lease?

[Owen Thomas, Chief Executive Officer]

There are no update on the lease. So, we are as you probably aware here, if you’ve been to New York City recently we’re getting really, really close to delivering the dramatically changed Plaza at 757 Fifth Avenue the General Motors building with the new Apple Cube and the extraordinary store that Apple is doing. In the mean time they have been using the Under Armor space as their temporary store without much in the way of a drop of sales interestingly. Yes and they're going to double the size of the Apple store when the Apple store opens. And we expect that you know in early 2020 we will be delivering the space to Under Armor and we'll start to be able to recognize revenue and they will be in a position to open a store you know based upon whatever their current conception time frames are.

[Vikram Malhotra, Morgan Stanley]

Okay. And then some of your peers have opined that you know rent growth in midtown, you know while it's been under pressure this year. Sector rents have been down now for a year and a half maybe more. They view sort of rents inflecting upwards and over the next six to nine months. I'm wondering if you share that view or is there any nuances or the thoughts you may have on rent growth into next year?

[Doug Linde, President]

I provided my perspective you know in my comments which what I think things are going to be flat. But I'll let John Powers provide his view that maybe it's slightly different.

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

No, it's not very different Doug. We think that the market is pretty flat, we certainly have a lot of velocity here and that's really good. Manhattan overall is going to have a strong year on the velocity side. But availability rate hasn't dropped because we have new supply coming on. So when you balance those two things it's a flat marketplace it's a good marketplace but it's a flat marketplace.

[Vikram Malhotra, Morgan Stanley]

Okay, so flat rents into 2019 and then just last question on your life science portfolio a larger healthcare REIT just transacted a large billion dollar campus. So I'm estimating a low recap just sort of wondering any thoughts on where pricing is for us for your portfolio in the Cambridge area.

[Doug Linde, President]

So our Cambridge portfolio for the most part is actually office space not lab space. We only have one dedicated lab building in Cambridge and it's only you know 60,000 square feet. The -- I will tell you that we've seen some extraordinary sales life science buildings there's a new building that was just you know purchased in Watertown Massachusetts which is you know it's close to Cambridge but it is not a transit oriented you know facilities anywhere close to it other than bus people stops and it traded for over $900 a square foot. And then there are a couple of buildings in the suburban market in Waltham with a lot significant vacancy that traded or trading in excess of $700 a square foot so there is a very strong life science demand and because of that demand there is an expectation for a significant rental rate growth. And there's a lot of investor demand for it.

[Vikram Malhotra, Morgan Stanley]

Great, thanks guys.

[Operator]

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

[Q –Craig Mailman]

Hey guys. Doug maybe going back to one of your comments in the prepared remarks sounds a little sarcastic about the shudder to think about rent roll downs and just go given the increase in bumps. But I just wanted to get your thoughts on that market longer term and the ability to push rents in with or get positive mark to market at the end of some of these leases are big escalators if the split roles goes through than what you think that could to do to rent growths in the market.

[Doug Linde, President]

So I think it's a really interesting question Craig, because the split roll has a you know a economic impact which we can define based upon the contractual leases that we have i.e. if you have a triple net lease it doesn't matter if you have a gross lease its sort of matter then it rolled in over time. Right. But I think you asked the right question which is what point does the pricing get so expensive that these tenants start to change their habits in terms of their real estate which is a fair question.

Relative to other parts of the world the rents in San Francisco still look very cheap including by the way the new construction in Midtown Manhattan. And the profitability of the companies that are leasing a lot of that space are extraordinary. So I am pretty bullish on the vibrancy of the tenant demand that we are seeing in a market like San Francisco and the strength of those companies and their ability to absorb those types of increase. And so it will sort of become part of the marketplace. I think the real question is some of the sort of 'service providers' and the other companies that are not quite as profitable as a Salesforce.com or Amazon.com or a Microsoft, LinkedIn or a Google or potentially AirBnB and Uber. I mean those have different types of companies. And so I do think that there will be a set of companies that will have a different perspective on that. But we're hopeful that first of all this is not going to play out until 2020 to 2021. So there is going to be a lot of conversation a lot of politicking a lot of lobbying that goes on. And we'll have to see sort of see where it all shakes out.

[Craig Mailman, KeyBanc Capital Markets]

That's helpful. And then just on the reclassification of the 120,000 square feet at 399 Park. Is that on, could you just give a little bit color about what that was? And is that going to have any effect on kind of rents and building what you guys are trying to lease up?

[Owen Thomas, Chief Executive Officer]

So I'll answer that. We do not typically include what we called storage space in our portfolio square footages. And this space, which is at 399 Park was always part of the big Citibank lease that we acquired with the building in 2002. And they use that space for kind of back office cafeteria, payroll and stuff like that. When we got that space back and started looking at what we can lease it for, we determined that we can't lease it anything other than storage space. So we determined the right thing for us to do would be to reclassify it like all of the other storage space that we have in the portfolio which is not in the portfolio square footage. And if we get any rental up we do get rent up our storage space obviously at a discounted rent, it goes into kind of other rental income. So we may be able to lease some of it overtime. And then we maybe able to figure out a way to reutilize it and use it for something totally different some kind of amenity or something like that. I know the team in New York is thinking about those ideas. But that was the driver behind pulling it out in the portfolio and putting it into the storage space which is the -- the same way we handle all of the storage space of the company.

[Craig Mailman, KeyBanc Capital Markets]

So it's separate from the 400,000 that you guys have leased.

[Doug Linde, President]

Yes.

[Craig Mailman, KeyBanc Capital Markets]

Okay. And then last one Mike on the midyear kind of size of that bond offering. Should we think kind of in the $700 million range?

[Mike LaBelle, Chief Financial Officer]

No, I think that's fair, we have a $1.5 line. So I don't think we want to get it to the point where it's over $1 billion outstanding. Because we start to get to that level it's just kind of limits your ability to do other things potentially that might happen quickly. So my expectation is once we kind of get approaching that level that we would think it's a right time to term it out. And as I mentioned our expectation is that we will have $250 million of development outflows every quarter. So as you kind of think about that, when you get kind of into the mid-third quarter of the year that outstanding is going to start to get up there. So that's our top process.

[Craig Mailman, KeyBanc Capital Markets]

Great. Thanks guys.

[Mike LaBelle, Chief Financial Officer]

Yeah.

[Operator]

Your next question comes from the line of Daniel Ismail with Green Street Advisors.

[Daniel Ismail, Green Street Advisors]

Hey guys. Just had a few quick ones for me. Can you provide an update on where in place rents sit relative to market for the entire portfolio now?

[Doug Linde, President]

We have a schedule ask your next question we’ll come back to you.

[Daniel Ismail, Green Street Advisors]

Sure. It sounds like core asset pricing remains pretty stable for office properties so the non core dispositions I mean you guys found similar trends in bidding trends or asset pricing?

[Mike LaBelle, Chief Financial Officer]

What was, I’m sorry could you mentioned the preamble again there was some papers rusting I didn't hear it.

[Daniel Ismail, Green Street Advisors]

Sure. No problem. I was asking about in place rents relative to market?

[Mike LaBelle, Chief Financial Officer]

So, the first question of, we have our answer, right now on a pure mark-to-market basis the whole portfolio it’s about $6 per square foot or 9% positive.

[Daniel Ismail, Green Street Advisors]

Great. Thanks. And then for the non core asset, non core sales you guys have been doing this year. Have you found our pricing coming in at your original underwriting and how is the appetite for the market for those types of assets?

[Doug Linde, President]

Yeah. Absolutely, we’ve been getting the pricing that we expected to get when we made the decision to put the asset in the market. That being said, we are selling non core assets which generally means they're in suburban locations or the cap rates are higher than what our core assets we sell for. But, we are and we are generally getting multiple bids and having active processes.

[Owen Thomas, Chief Executive Officer]

And the largest one, that we closed was 580 and I think we were slightly above where we expected to be there. And then 1,333 New Hampshire Avenue we exceeded our initial price expectation by a mark-to-market less than 5%. So, pretty consistent to where we thought we would be.

[Daniel Ismail, Green Street Advisors]

And then last one for me, it looks like a cost increase a little bit on Dark 72. Can you explain maybe some of the reasons why and that impacts the economics about the development at all?

[Owen Thomas, Chief Executive Officer]

Yeah. It’s really simple, it’s a dry out of the lease up schedule due to just sort of the challenges of the labor and Dark that you see from a construction perspective and the timing associated with getting the building completed. And so we expanded our lease up.

[Daniel Ismail, Green Street Advisors]

Great. Thanks.

[Operator]

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

[Michael Bilerman, Citi]

Hi. It’s Michael Bilerman. Just two quick ones, just one on New York just give an update on cost expecting at Hudson Boulevard. And also sort of the prospecting Dark 72 especially given the increased cost and the timing delays you’re talking about from a leasing perspective?

[Owen Thomas, Chief Executive Officer]

John, you want to cover that?

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

Sure. We have a couple of meetings on 3 Hudson Boulevard. I think the redesigned building has been well received these are long-term discussions with tenants with lease expirations far in the future. And we have another one this week later this week. So, we’re hopeful with that process where we’re still redesigning the building getting our pricing and et cetera. On Dark 72, Doug mentioned that the construction process has been delayed also WeWorks construction process for other reasons has been delayed. So, we expect to open late in the first quarter, next year 2019. We have had a couple of tours, we have a important one this week, we are trading no paper at this time.

[Michael Bilerman, Citi]

Okay. How do you feel John about timing on Hudson Boulevard or do you feel more confident of that potentially landing someone?

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

Well, I said to a group of analyst that there we would start tenant work, I think between 2022 and 2052.

[Michael Bilerman, Citi]

That’s great.

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

Comfortable with that range. We have to you know we have find the right tenant or potentially two tenants to start this in this environment. It's a great site, we like the site, we like it's a full acre, avenues on three sides, transportation et cetera. There's other competition right in the neighborhoods as you know with 66 and 50 and also Brookfields building, Manhattan West. So everyone's kicking the tires and now we're in for the meetings.

[Michael Bilerman, Citi]

Doug just on Embarcadero retail $80 million at year plan spend. How should we think about the timing of that 80, whether there's any sort of drag from an income perspective. Like there's been that some of these other large repositioning that you've done and then when does the potential upside come as that space gets redelivered.

[Doug Linde, President]

So I would describe the work that I'm describing as follows. It's not about the retail from a retail income perspective it's about the space on the ground level and on the plaza level at Embarcadero Center to enhance the overall office environment. We are achieving historical rents right now in Embarcadero Center. So in the short term I can tell you that there is absolutely no revenue correlation with what we're doing. But I will tell you that you know we're in a time of plenty and there probably will be times when things will be more challenging and we should do this because it's the right thing for the property and so on a net basis we will we will be able to have higher retention and achieve higher rents in a down market because of the work that we're doing. I don't personally believe it's going to impact this market in sort of the next call it 12 month because it is so strong and it is so hot and rents have moved up so fast and there's so little space. Tenants will almost do take any space they can. I mean it's that tight in San Francisco.

[Michael Bilerman, Citi]

Sorry for taking the call longer but I'm pretty sure I heard Yankees Suck a few times in the background.

[Operator]

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

[John Kim, BMO Capital Markets]

Thank you. Apple entered your top 20 list, the first tenant. Does this represent the new lease that there taking space that the GM building or is that the temporary space and can you also remind us when that impacts your cash same-store result?

[Owen Thomas, Chief Executive Officer]

It represents some increases that we have gotten in the existing lease and we expect them to vacate that premises sometime first quarter or second quarter, early second quarter next year and move into the new premises and the total contribution that they will provide will actually go down slightly when they do that. So that may change their position in the top 20 at that point but because the project is taken a little bit longer, we had provisions in the lease where we got increases in rents as the redevelopment of the existing store took longer.

And we are now obtaining those in their cash rents that we're getting today.

[John Kim, BMO Capital Markets]

Okay, and Mike can you just explain once again the termination income increase for next year. It sounds like it's just an allocation of rents rather than a tenants' determination fee.

[Mike LaBelle, Chief Financial Officer]

Yeah, we don't include termination income in our same store. We've never done that because it's lumpy and it hasn't the impact you know the next year in the same year. So we pull it out. So in these situations where we've got three relatively large ones that will work on the portfolio where we wanted move a tenant out that doesn't want all the states necessary. But we have another client that wants it. So we are in a good position where we can negotiate a termination payment that is attractive to us covers all of our kind of downtime and cost. And bring the new tenant in. So it has an impact on our same property and then basically just moves that income from the same property pool to the termination income pool. So I wanted to describe it because if you look at our overall guidance increase you have to have the same store pool plus the termination income in there.

[John Kim, BMO Capital Markets]

One last if I may.

[Doug Linde, President]

Yes.

[John Kim, BMO Capital Markets]

One last one if I may. The 19% dividend increase. Was that purely based on your taxable income growth or was it partially influenced by the movement tenure?

[Mike LaBelle, Chief Financial Officer]

So we talked about this I guess when we did the dividend increase. For 2018, the gains on asset sales the tax gains on the asset sales are driving our taxable income higher. As we look at 2019, our taxable income is increasing because of operating cash flow going up. So we felt that appropriate rather than doing a special dividend to cover the tax gains on the sales from on the asset sales that we would do a regular dividend in the third quarter of 2018 and feel confident that our cash flow and our taxable operating income which is growing is going to be there in 2019. So we've kind of would done it anyway in effect that's the way we kind of look at it.

[Owen Thomas, Chief Executive Officer]

Yeah dividend increase is driven by internal factors, net income, not external factors like interest rate.

[Mike LaBelle, Chief Financial Officer]

Yeah. That's all about our taxable income and how much we have to pay out.

[John Kim, BMO Capital Markets]

That make sense. Thank you.

[Operator]

And there are no further questions at this time.

[Owen Thomas, Chief Executive Officer]

Okay terrific. That concludes all the questions. Thank you for your interest in Boston Properties. We'll see many of you at Nareit next week. And we're going to go hit the parade. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.