Boston Properties Inc (BXP) Q3 2018 Earnings Conference Call Transcript

Boston Properties Inc  (BXP 1.28%)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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 -- Vice President, Investor Relations

Great. Thank you, operator and good morning and welcome to the 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'd 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

Okay. 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 11:00 this morning. So I'll do my best to keep all the Red Sox fans around the table in their seats after 11. 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 have made over the past few years in new development are positioning us for growth. With a high level of pre-leasing 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 toward achieving our annual and long-term goals. 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 have 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 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 point 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 GRESB 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 continue -- conditions remained very positive with third quarter U.S. GDP growth recently reported a 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 of 3.7%.

Notwithstanding the strength of the U.S. economy, capital markets became volatile over the last month. The Fed increased rates 25 basis points in September, is signalling at least for now, an additional increase before the end of the year and multiple increases in 2019. The 10-year U.S. Treasury increased rapidly earlier this month to over 3.2%, and it's currently trailing 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 mid-term elections and the extended duration of the U.S. economic recovery, have led to materially increase volatility in the equity markets and for REIT. We remained constructive on the market environment, not withstanding the volatility. The positive impacts of economic growth to our leasing results far outweigh any negative of the modest interest rate increases we have experienced so far.

Further the current level of long-term interest rates is favorable relative to historical norms and the returns we are 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 and that we are not funding our new investment for 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 acquisitions and the inferred cap rate in 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 sell select non-core assets, which raises capital on the margin. The sale of larger core assets is a less efficient funding source, given significant embedded tax gains and the result in 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 U.S. 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 2018 and 3% year-to-date over 2017.

Investor appetite remained 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 and the Seaport District is under agreement to sell for $1,129 per square foot and a 4.6% cap rate. This property comprises 400,000 square feet and it's 100% leased and is being purchased by sovereign wealth investor.

In Los Angeles, Campus Playa Vista is selling for a 4.5% cap rate and $1,031 square-foot to real estate pension advisor. This property is 325,000 square feet and is 99% leased. And lastly moving to San 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 activities. Development continues to be our primary strategy for creating value. We remain very active, pursuing both new preleased projects and sites for future projects. Since our last earnings call, we continue to progress our development pipeline activities. 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-foot Reston Gateway project for Fannie 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 mixed use expansion of Reston Town Center, on land we own and we have now -- and have now resumed. This project alone will provide Boston Property a significant future growth opportunities.

We commenced active development of our 100 Causeway Office Tower development after securing a 440,000 square-foot lease with Verizon Communications to anchor the 630,000 square-foot, 31-storey building. This is the last phase of our mixed-use Hub on 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 145 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 under way and we have $1.9 billion remaining to fund. The commercial component of this portfolio is 85% preleased and aggregate projected cash yields are estimated to continue to be approximately 7%. These figures exclude the $360 million 2100 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 activities 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 Quorum Office Park in Chelmsford, Mass, to the major tenant in the park for $35 million. And as a result have completed $185 million in dispositions year-to-date.

1333 New Hampshire Avenue in Washington D.C. is under contract for sale to close before year-end for $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 could 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.

Douglas Linde -- President and Director

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 of employees who are our customers and employee base, space plays an important role in the evaluation 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 in the sense of place, that we're bringing to our developments 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 rents.

In Boston, go see how we have transformed the 100 Federal Street, and you have 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 Lexington, 599, 601 and 399, you're 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 in Embarcadero Center. We have owned the property since 1998, I think it will be 20 years next week or the week after, and this is the first major architectural and place making projects we have undertaken at the property. We are reinventing the lobbies now, ongoing it's about $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 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 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 overturn, it won't manifest itself into new deliveries until the end of 2021 at best or later. The large blocks of contiguous available sublet space coming from tenants who are moving to new construction have disappeared. While transaction costs have not decreased, rent growth is up high single digits. And more importantly leases now include annual escalations are between 2% and 3%.

If you're doing a $90, 10-year deal, your average rents over $104 and it ends up in a $120 a square-foot. So I started to think about the roll-downs the people are going to be talking about in 2028 or 2029. Our availability in the city is all in Embarcadero Center. This quarter we completed 73,000 square feet of office leasing at D.C., including a 60,000 square foot, three floor tenant relocating to Embarcadero Center from outside with just a 45% roll-up in gross rent. There are currently seven available floors, four floors in 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. For those renewals, and we are in lease on the 165,000 square-foot block that PWC will vacate in July of 2020, with the roll-up will probably be in excess of 50%. The Silicon Valley has also seen up a pickup of an 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 have already had conversations with a number of Silicon Valley tech companies about the project.

In Mountain View, this quarter we 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-storey product. And that includes a 180,000 square-foot relocation from a tenant that's consolidating into a new third-party development that's going to deliver sometime in 2020, interesting that their lease does expires in 2019, and we'll see how that will plays out, well after the lease expires.

Our average expiry in place rent on this phase is $36 triple net and the markets is about $54 triple net, that's about 50% increase. The Westside L.A. market remained steady with a number of large leases on the precipice of signing, rent continue to be in the low to mid-five, slightly higher than our initial underwriting at the Santa Monica 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 block 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 are simulating the Santa Monica Business Park into our operations and have hired a dedicated leasing Director in L.A. 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 are stable, meaning availability study 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 square-foot at a pace pretty consistent with last year, where about 1.5 million square feet of relocations were assigned, though the space is 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 25,000 square feet which was at our building at 767 Fifth Avenue and 20,000 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 70,000 square-foot tenant walk away at lease execution in September, after our call, but we are already negotiating our replacement lease for that space. In addition we completed an early recapture of 75,000 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 rents.

As we mentioned during our last call we have signed the lease for 100% of the office space at One Five Nine East 53rd Street and we expect that to commence at the end of 2019.

Moving on to DC. 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 still there are communities with lots of associations and start-ups 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 escalation 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 163,000 square-foot expansion and extension with the technology company and we continue to have over 400,000 square feet of additional leases in negotiations.

Rented Reston remains from the mid-40s to mid-50s for existing product 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 Reston Gateway as well as 1.9 million square feet of residential. And the site has a direct bridge over Sunset Hills 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 in 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 rent both in absolute terms, low-teens year-to-year increases and rents from the high 50s to an excess of $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 the 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 are in discussions with two tenants for the remainder of 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 involve the early recapture, because we don't have any available space, a 58,000 square feet at 200 Clarendon 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 exploration 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 markets.

This quarter we completed our second deal at 20 CityPoint, so it's now 63% leased, from with a tenant in our portfolio that's relocating, but we're negotiating a lease to backfill, a 100% of their space with another growing tenant in the portfolio. New construction office rents in this market are about $38 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 life science tenants to convert these buildings to lab office use with investments of about $100 square-foot on the base building and expect to achieve rents in the high-40s on a triple-net basis.

So if it takes us 12 months to do the work with the downtime, we're generating around a 15% to 20% incremental return on that dollar. Before I finish, 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 103,000 square feet. It includes a large piece of mezzanine space that we got back from Citibank under the original 2003 lease, where Citi leased all of the space in the building at the same rent, in the mid-90s. We relet the space which is not access through the elevator lobby at a 75% decline in net rents.

Eliminating net lease, result in the growth rent decline moving from 31% to 13%, a really big difference. Now on the transaction costs side, there are a number of specs lease 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 year is artificially high. In addition, we leased a 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 a large TI allowance equivalent to a year's rent, 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 economics 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 some of the vacant space at 399 Avenue in 2019 is partially driving our guidance which Mike will discuss in his remarks. Mike?

Michael LaBelle -- Executive Vice President & 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 same property NOI improved, it was up 2.5% over the same quarter last year. Third quarter funds from operations came in at $1.64 per share. As Owen mentioned that's $0.02 per share or 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 developments like the Hub on Causeway office tower, we do benefit from enhanced 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 developments 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 expense, as 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 $1.68 to $1.70 per share which is an increase of $0.05 per share at the midpoint over our Q3 performance. We provided a detailed guidance for 2019, last night in our supplemental report, 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 a 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 is 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 square feet at a 100 Federal Street and nearly all of the remaining space had 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 a 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 a 175,000 square feet of lease rollover next year at 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 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 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 D.C. and it's primarily at Metropolitan Square in 901 New York Avenue, each of which has a sizable law firm vacating next year. Both of these buildings are held in joint ventures, so the economic impact to us is less.

With our expected occupancy gain, combined with continued roll up in rents, 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 increases occurring in 2019. We expect non-cash straight line and fair value rents of $75 million to $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 expertise that were 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, it does not impact our earnings, but 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 this 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 delivery, we project incremental NOI growth in 2019 of $80 million to $90 million. This projection also includes our shared NOI after interest expense from a full year of owning Santa Monica Business Park. I'm quoting this net of interest expense because the result of Santa Monica Business Park flow into our income from joint venture lines, 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 the remaining space, all of the space is subject to signed leases now and the property will reach 100% occupancy by the end of the third quarter of 2019. We also are projecting growth from the lease up of our two residential projects, that we delivered earlier this year and Hub on Causeway podium and 20 CityPoint both of which delivered in the third quarter of 2019, and are substantially leased.

Our developments at One Five Nine East 53rd Street in 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 there will 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 sales, plus 1333 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 projections. So 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 excess 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 and be 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 stopping capitalized interest on Salesforce Tower. We anticipate that we will term-out the projected outstandings under our line of credit, sometime in mid-2019 with a long-term financing. We also have a $700 million 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 into late 2018. If we elect to do this, we would encourage charge to our earnings in 2018, but we would be locking in current low rates and reducing our interest expense going forward. We have 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 us to expense internal wages 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 $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, results 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 -- or 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 adjust for the impact of our asset sales, net of reimbursement and the new lease accounting rule of 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. While we aren't going to give 2020 guidance today, looking further ahead we expect 2020 to 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 of developments delivering between 2021 and 2022, that are 82% preleased. So as you can see, we have a strong pipeline of preleased development, that we expect to drive earnings growth over the next several years.

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

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Manny Korchman with Citi.

Manny Korchman -- Citigroup Global Markets -- Analyst

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

Owen Thomas -- Chief Executive Officer

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 if ever got into 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 negotiations and the status of the lease that is being drafted right now. But John, you should comment on your view.

Yeah. Well, I'm just going to jump and I'm not sure where John is. I think, I know if John were on the call he would express what Doug did, which is high degree of confidence in us accomplishing the lease that we're currently working on.

Manny Korchman -- Citigroup Global Markets -- Analyst

And then just turning to the comments you made on the retail space at GM, could you elaborate as to the timing of that lease commencing? And what the income levels might be? I know you expressed a big markup to the lines there.

Owen Thomas -- Chief Executive Officer

Yes. So I don't feel comfortable talking about what a particular tenant is going to pay, Manny. The rent has 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 expect that, that tenant will actually be physically in occupancy, selling goods sometime in third or fourth quarter of 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 rent would have been three or four years ago.

Manny Korchman -- Citigroup Global Markets -- Analyst

Alright. 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

Yes, we got you John.

John Powers -- Executive Vice President, New York Region

Yeah, sorry, I don't know what happened. There was a question on 399, it's really understanding the tenants, because you're dealing with in the situations where they're coming out 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 -- Citigroup Global Markets -- Analyst

Thanks everyone.

Operator

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

Nick Yulico -- Deutsche Bank -- Analyst

Yeah, hi. Just going back to 399 Park, can we get, you mentioned that most of the 400,000 square feet of vacancies can actually commence by the end of next year. Is it possible to get what the NOI benefit for that building is going to be from an incremental leasing in 2019?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

So I cannot give you an explicit -- exact number, I can tell you that the 400,000 square feet of space has 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 we'll be commencing in 2019 from a revenue recognition perspective.

Nick Yulico -- Deutsche Bank -- Analyst

Okay. It's helpful. And then Owen, I just wanted to go back to the commentary you gave earlier about how the balance sheets position really well. You don't need to pursue much in the way of additional asset sales to fund development. And I guess, appreciate all that but at the same time that's why 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 are you thinking about that? And historically you have -- you have done the right thing and sold assets as a company, given some capital back to shareholders at times like this. So how are you weighing that against what you said is already a good balance sheet, but might be a right time that to point 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 the mid-5s on a cap rate basis. So we think a better use of the capital is in development. And 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's 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 them, they are performing well, a lot of them have 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 a dilution in our FFO per share in resultant growth. So we don't anticipate significant core asset sales.

John Powers -- Executive Vice President, New York Region

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

Nick Yulico -- Deutsche Bank -- Analyst

Okay. Thanks everyone.

Operator

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

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Just focusing on the guidance for a moment. Mike, just to clarify you'd mentioned a couple of potential refinancings 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 front?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

So what I talked about is that we're looking at our bond issuance is coming due, and we're having conversations internally about whether we should try to do something this year with that or not. And there will be a prepayment charge associated with doing that and our interest savings next year. And that is not in our guidance. We do anticipate that we're going to continue to use our line to fund our development outflows, that I described. So I would anticipate that our line would 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 expectations on our line for next year is that LIBOR is going to go up four times during the next five (ph) quarters, and that will -- we will also see long-term rates continue to go up. So that, if we're doing a deal in mid-2019 it's going to be at a higher rate than a deal that we do today. So we do have some kind of interest -- creep to built-up in those projections, is that help?

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Sure. So you're saying the charge is not in the guidance. What about, then you also mentioned potentially a larger rates at the end of the year that's not in the number?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then turning to development and where we on the cycle. Just can you get, you talked about decent amount of conversations out there and certainly looks 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

Yeah. As you know our preleasing requirements have gone up and our significant development pipeline is under way, is 85% preleased which we think is terrific. So 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 preleasing requirements.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then just final question on development. Are you looking at any opportunities on 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 Properties.

Okay. Alright. Thank you.

Operator

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

Steve Sakwa -- Evercore ISI -- Analyst

Thanks, good morning. I guess, Doug, I wanted to pick up on the comment you talked about having the portfolio 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 LEED certification issues. How do you sort of look at the overall portfolio holistically, as you think about obsolescence? And how much more of the portfolio longer-term do you think could be subject to sale?

Douglas Linde -- President and Director

Well, I would say that the conversation about obsolescence and sales don't necessarily have anything to do with each other. We don't believe that any of our CBD properties having now been repositioned 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 -- 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's a sort of 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 1980s, so 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 when we're -- what our views are on selling assets. And at the moment we don't really have any quote unquote core asset sales, potentially likely in the short to medium term. Doesn't mean that we won't look at that differently if the markets were changing and the valuations are different, but right now it's not part of the conversation.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then secondly on development, I know you got a very active pipeline and you've also got lots of land. I'm just curious as you sort of look out where do you think the next sort of opportunities may surface? There is 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?

Douglas Linde -- President and Director

So the buildings that we are -- close to our conversation, the first one obviously is in Cambridge. And that's I mean, it's been in the public press that we're talking to competent about expanding a building, ripping down a 100,000-plus square-foot building and building a 435,000 square-foot building in its place. That base station is a real viable location transit oriented development and it's -- we've got our entitlements completed and we're working diligently on those plans.

There are other pieces of land in Boston that we're looking at, we would certainly, not necessarily start anything on a speculative basis but could be part of the conversation. And I described the potential opportunity we may have in San Jose, with transit oriented development there and then there is the Fourth and Harrison site, in San Francisco which again is everything, we've to go right, we maybe in a position where we would have permits, toward the middle to end of 2019 and we'll deliver the building in 2021 or 2022 and there is sufficient tenant demand there, that we feel comfortable, -- that's the building that has a legitimate opportunity to get started relatively soon.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks very much.

Operator

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

John Guinee -- Stifel, Nicolaus & Company -- Analyst

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

Michael LaBelle -- Executive Vice President & Chief Financial Officer

So right now our net debt to EBITDA is about 6.7 times. And obviously we've got EBITDA coming in from developments, where the money is already spent, and we've got money going out for our developments that we've announced or have under way. 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 sixes, kind of area -- may be around seven. And then, as we deliver the stuff, it's going to come down. And pro forma for the delivery of the development, it will be down substantially from where it is today. So we feel again our tolerance level right on -- kind of steady state basis is somewhere in the low sevens, so we still have comfort and room as we look at pro forma for our developments being well below that. So we feel very good.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

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

Michael LaBelle -- Executive Vice President & Chief Financial Officer

No. It's not an offset to G&A.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

But is it a gross number there?

Michael LaBelle -- Executive Vice President & 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 it.

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Okay, alright. Then to real estate questions, what's going on at Annapolis Junction that building has been sitting there vacant for a couple of years now. And then the second is, I looked at your Reston development deals and 1750 Presidents looks like it's coming in at about 518 a square-foot which isn't surprising, but Reston Gateway looks like it's coming in at about $670 a foot which seems a bit high.

Owen Thomas -- Chief Executive Officer

Peter, do you want to answer the questions on the developments and then may you or Ray can talk about Annapolis Junction.

Peter Johnston -- Executive Vice President, Washington, DC Region

Sure. The part of that differential, John, has to do with the fact that the Gateway site as Doug indicated the silver line rail and there are number of profits [ph] and cost associated with that. The other thing, as you know in the Town Center, the footprint of the site associated with the 1750 deal is just basically to the curve line, because it's a very urban development. Whereby if you think about all of the infrastructure and streetscape that the Town Center has, then what will be replicating down there, that's a much bigger, just footprint, that has to accommodate and allocate those costs over it. So that's the bulk of the differential plus we're buying the building probably 15 months less, so you would normally factor in 3% to 5% escalation in those costs anyway.

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

Raymond Ritchey -- Senior Executive Vice President

The other thing in that project, John, again that's a 50:50 with the goals. And I think that the total cost to date is $24 million something along those lines, so our total exposure there is $12 million. So --

Peter Johnston -- Executive Vice President, Washington, DC Region

Well, it's actually less, it's actually less, Ray, because the TI dollars have been invested either. It's just a (inaudible).

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Got you. Wonderful job. Thank you.

Owen Thomas -- Chief Executive Officer

Thank you.

Operator

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

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks. Good morning. I wanted to touch on acquisitions in L.A. 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 supplier, 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 sub-markets outside of Santa Monica that you guys would target in particular?

Owen Thomas -- Chief Executive Officer

Yeah, 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 was one of their last deal, so I think that's the driver. That being said, there's still plenty of things to look at and we're looking at them. We've had a big year so far, obviously with the Santa Monica purchase, we're thrilled with our footprint. It's very material at Santa Monica and we've had good financial performance, particularly with Colorado Center which we've owned for several years.

I think the nature of the deals are also different in some ways more interesting. There is clearly the broadly offered types of deals that we will look at from time to time, but there are also off-market transactions with owners, that are also interesting.

With that I want to turn it over to Ray or John for additional color.

Raymond Ritchey -- Senior Executive Vice President

Go ahead, John, back to you.

John Powers -- Executive Vice President, New York Region

Yeah, I would 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.

Raymond Ritchey -- Senior Executive Vice President

But, you know, realize that we have all been in the market for two years, we're now the largest landlord in Santa Monica and we are through John's effort reaching out aggressively to off-market deals that -- and what we're trying to import the same formula in 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 Securities -- Analyst

Alright, very helpful. And then maybe sticking with Ray or Doug, we noticed a pretty substantial increase in the office explorations next year in D.C., and it looks like another 300,000 to 350,000 square feet added to 2019 explorations, with the 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? And detail there would be helpful.

Douglas Linde -- President and Director

Yes. So those are in our JV properties on the -- there is two law firms they're exploring in 901 New York Avenue and in 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 are the 20% owner, that's the Met Square and then we're 50:50 partner in 901. So relatively speaking they don't have much of an economic impact.

Raymond Ritchey -- Senior Executive Vice President

And they also -- that also include Akin Gump.

Douglas Linde -- President and Director

Let's look and say, Ray, go ahead.

Raymond Ritchey -- Senior Executive Vice President

Yeah, I mean, that also includes Akin Gump, which is a building we have under contract to sell, so we have already mitigated that issue.

Blaine Heck -- Wells Fargo Securities -- Analyst

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 it's on, 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?

Douglas Linde -- President and Director

Yeah. So I tried to sort of sprinkle that through my prepared remarks and I still just refresh that. So in the Boston market place we actually think transaction costs are going to start to moderate, meaning the TI concessions that were provided a year ago are going to be less in 2019. And the free rent is the minimus. In San Francisco where I would say that we're pretty comfortable that the transaction costs are going to remain flat, largely because the cost of installations there and this is across the Board, are going up at such a high rates that the tenants are being enforced to spend a lot more money. So to get a tenant to agree to move, is not an easy decision in itself. But the rental rates that we're getting in these marketplaces are escalating in such high numbers, that we are comfortable with the overall economic package.

In New York City things are very flat, the big TI concessions and the big free rent concessions that were part of the market in 2016 and early 2017 are long gone. I would say, your concessions are static at, call it $100 to $120 square-foot on a 15-year lease-in, about a month of free rent with a cap of probably 12 to 13 months. And in Washington D.C. market, I think that's the weakest market from a concession perspective. I don't think things are going up dramatically, but there's some desperation out there with regards to getting some of these larger blocks of space filled and so people are providing $140 or $150 a square-foot tenant improvement allowance in excess of a year or plus of free rent. And that's again the weaker the market -- and the suburban market the concessions are significantly lower.

In a market like Reston we're talking about $5 to $7 a year and probably half a month or year of free rent. In the Boston market we're talking about concessions of probably close to $5 a square-foot in TIs and very little on the way of free rent. And then in the quote unquote, Silicon Valley on the concession packages are de minimis. For a project like Mountain View which is single-storey, we're talking about providing market ready improvements which will begin at $20 to $25 a square-foot.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great. 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 & Partners -- Analyst

Good morning. Just a few questions for me. First Mike, just going back to the guidance and Jamie's question earlier. So if you guys do early bond refinancing at the end of 2018. You said that interest savings is not in your 2019 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 is the dispositions -- could that disposition loss to NOI be a bigger number?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

I can't tell, obviously they offset each other, if we engage in both activities. So I don't think that the savings and interest expense would likely, not be -- not actually would be -- I don't think it will be quite as high as the disposition activity is the same as it is this year. So if we had similar disposition activity next year as this year, I think it would be -- there would be a little more dilution from the sale then 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 number, I would say.

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

Okay, that's helpful. And then the second question is on WeWork it's certainly a recurring topic. Recently they hired Wendy Silverstein, they seem to be bulking up on owning property directly. There have been articles about some landlords doing participation rents. So how do you guys view WeWork as far as your exposure to them and how their 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 space? Or do you view that more of the WeWork type coworking space is going to be more in B and C office rather than in A office?

Owen Thomas -- Chief Executive Officer

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

Bryan Koop -- Executive Vice President, Boston Region

Yeah, so we opened up FLEX by BXP in a distinction versus coworking is that, this product is specifically targeted toward 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 BXPs that we've already have obtained in terms of declines is one the corporate user who has a specific project length for our project. The other would be a start-up company that several -- call it series into their investments, and there still is a risk on the length of the term that they'd like to have. Those two customers have already proven out to be great customers for us and 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 a 100 Federal. We also think that this product is really good for our larger towers where you can place us between some of our larger users, and as Doug has referred to it in the past, almost like a shock absorber 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 in the enterprise zone has been a 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 it's really interesting 33 of them are less than two years in length. So this customers are already been out there and we think there's still significant opportunity for us to satisfy the needs of those customers and then have it planned 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 just to summarize it all, WeWork is an important customer as I mentioned, we have other coworking operators in several of our buildings. And we are as Bryan described experimenting with it ourselves in a couple of installations. When you add it all up, it's about 1% of our revenue.

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

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 -- Analyst

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

Owen Thomas -- Chief Executive Officer

No updates on the lease. As you probably aware, if you have been to New York City recently, we're getting really close to delivering the dramatically changed plaza at 767 Fifth Avenue, the General Motors Building with the new Apple cube and the extraordinary store that Apple is doing. In the meantime they have been using the Under Armour space as their temporary store, and without much in the way of a drop of sales interestingly and yeah, they're going to double the size of the Apple Store when the Apple Store opens. And we expect that in early 2020 we'll be delivering the space to Under Armor and will start to be able to recognize revenue and they will be in a position to open their store based upon whatever their current construction timeframes are.

Vikram Malhotra -- Morgan Stanley -- Analyst

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

Douglas Linde -- President and Director

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

John Powers -- Executive Vice President, New York Region

It's not very different Doug. We think the market has been 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 a velocity side. But the availability rate hasn't dropped because we have new supply coming on. So when you balance those two things, it's flat market place. It's a good market place but it's a flat marketplace.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, so flat rents into 2019. And then just last question on your life science portfolio, a larger healthcare REIT just transacted a lot billion dollar campus, I'm estimating a low three cap. Just sort of wondering any thoughts on where pricing is for your portfolio in the Cambridge area?

Douglas Linde -- President and Director

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

Great. Thanks guys.

Operator

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

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hi guys. Doug, may be going back to one of your comments in the prepared remarks, sounds a little sarcastic about the, they started to think about rent roll-downs in San Francisco 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 you get positive mark-to-markets at the end of some of these leases the big escalators, if the split role goes through. And what you think that could do to rent growth in the market?

Douglas Linde -- President and Director

So I think it's a really interesting question, Craig. Because the split roll has an economic impact which we can define based upon the contractual leases that we have i.e. if you have triple-net lease it doesn't matter, and if you have a gross lease it sort of matters and it rolls in overtime, right. But I think you asked a right question which is, at 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 leaving a lot of that space are extraordinary.

So I'm 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 increases and so it will sort of become part of the market place. I think the real question is some of the sort of quote unquote 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, so you 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 I think 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 where it all shakes out.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. 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 rents in the building what you guys are trying to lease up?

Douglas Linde -- President and Director

So I'll answer that. We do not typically include what we call storage space in our portfolio square footages. And this space which is a 399 Park was always part of the big Citibank lease that we acquired with the building in 2002. And they used 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 could lease it for, we determined that we can't lease it for anything other than storage space.

So we determined the right thing for us to do, would be to reclassify like all of the other storage space, that we have in the portfolio which is not in the portfolio square footage. And if you get any rent-off -- we do get a rent-off our storage space obviously at a discounted rent, it goes into kind of other rental income. So we may be lease some of it overtime. And then we may be able to figure out the 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 of the portfolio and putting it into storage space which is the same way we handle all of the storage space of the company.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. So it's separate from the 400,000 you guys have left to lease?

Douglas Linde -- President and Director

Oh, yeah.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. Okay. And then just last one, Mike on the mid-year kind of size of that bond offerings should we think kind of $700 million range?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

No. I think that's fair. I mean we have $1.5 million line. So I don't think we want to get it to the point where it's over $1 billion outstanding, because as you start to get to that level it just kind of limit your ability to do other things, potentially that might happen quickly. So my expectation is once it kind of gets approaching that level, that we would think it's the 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 to third quarter of the year, that outstanding is going to start to get up there. So that was our thought process.

Great. Thanks guys.

Operator

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

Daniel Ismail -- Green Street Advisors -- Analyst

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

Owen Thomas -- Chief Executive Officer

We have a schedule. Asking next question we'll come back to you.

Daniel Ismail -- Green Street Advisors -- Analyst

It sounds like core asset pricing remains pretty stable for office properties. For the non-core dispositions, have you guys found a similar trend and bidding trends or after pricing?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

Daniel Ismail -- Green Street Advisors -- Analyst

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

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

Daniel Ismail -- Green Street Advisors -- Analyst

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

Owen Thomas -- Chief Executive Officer

Yes. 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 there in suburban locations, 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.

Michael LaBelle -- Executive Vice President & Chief Financial Officer

And the largest one was, that we closed was on 500-D, and I think we were slightly above where we expected to be there. And then 1333 New Hampshire Avenue we exceeded our initial price expectation by a mark-to-market, less than 5%. So pretty consistent where we thought we would be.

Daniel Ismail -- Green Street Advisors -- Analyst

Okay. And last one for me, it looks like our cost increased a little bit on Dock72. Can you explain based on the reasons why that it impacts the economics of that 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 the sort of challenges of the labor at Dock72 from a construction perspective, and the timing associated with getting the building completed. And so we've extended our lease up.

Great. Thanks.

Operator

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

Michael Bilerman -- Citigroup Global Markets -- Analyst

It's Michael Bilerman, just two quick ones. Just one on your -- can you give us an update on prospecting, at Hudson Boulevard, and also sort of the prospecting your Dock72 specially given the increase cost and the timing delays that you are talking about from a recent perspective?

Owen Thomas -- Chief Executive Officer

John, you want to cover that?

John Powers -- Executive Vice President, New York Region

Sure. We've had a couple of meetings on 3 Hudson Boulevard. I think the redesign building has been well received. These are long-term discussions for tenants with lease expirations probably in the future. We have another one this week later this week. So we go forward with that process, where we're still redesigning the building, getting our pricing and et cetera. On Dock72, Doug mentioned that the construction process has been delayed, also WeWork 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 an important one this year we are trading no paper at this time.

Michael Bilerman -- Citigroup Global Markets -- Analyst

How do you feel, John about timing on Hudson Boulevard? You feel more confident of that potentially lending someone?

John Powers -- Executive Vice President, New York Region

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

Michael Bilerman -- Citigroup Global Markets -- Analyst

That's great. I hope (multiple speakers)

John Powers -- Executive Vice President, New York Region

Comfortable with that range, look we have to 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 is other competition, right in the neighborhood, as you know with 66 and 50 and also our Brookfields building, Manhattan West. So everyone is kicking the tyres and now we're in for the meetings.

Michael Bilerman -- Citigroup Global Markets -- Analyst

Right. And then Doug just on Embarcadero retail on the $80 million that you're planned to spend. How should we think about the timing of that $80 million, whether there's any sort of drag from an income perspective like there's been at some of these other larger repositionings that you've done? And then when does the potential upside come as that space gets redelivered?

Douglas Linde -- President and Director

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 plaza level at Embarcadero Center to enhance the overall office environment. We are achieving historical rent right now in Embarcadero Center. So in the short term I could tell you that there is absolutely no revenue correlation with what we're doing. But I would tell you that, 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 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 and sort of the next, call it 12 months, because it is so strong and it is so hot and rents have moved up so fast, and there is so little space. Tenants are -- almost do take any space they can. I mean it's that tight in San Francisco.

Michael Bilerman -- Citigroup Global Markets -- Analyst

Great. And 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 -- Analyst

Thank you. Apple entered your Top 20 list of diverse tenants. Does this represent the new lease that they're taking space for the GM Building or is that the temporary space? And can you also remind us when that impacts your cash same store results?

Michael LaBelle -- Executive Vice President & Chief Financial Officer

It represents some increases that we have gotten in the existing lease. And that 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 their 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 and their catchments that we're getting today.

John Kim -- BMO Capital Markets -- Analyst

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 rent rather than the tenant.

Michael LaBelle -- Executive Vice President & Chief Financial Officer

Yeah. We don't include termination income in on the same-store. We've never done that because it's lumpy, and it hasn't impact the next year -- the same year. So we pull it out. So in these situations when we've got three relatively large ones, that we're working on the portfolio, where we want to move a tenant out, that doesn't want all of the space necessarily but we had 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 in costs and bring the new tenant in. So it has an impact on our same property and it 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 -- Analyst

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 movements tenure?

Michael LaBelle -- Executive Vice President & 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 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 it 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 on our taxable operating income which is growing, is going to be there in 2019. So we kind of would've done it anyway in effect, that's the way we kind of looked at it.

Owen Thomas -- Chief Executive Officer

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

Michael LaBelle -- Executive Vice President & Chief Financial Officer

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

That makes 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.

Duration: 92 minutes

Call participants:

Sara Buda -- Vice President, Investor Relations

Owen Thomas -- Chief Executive Officer

Douglas Linde -- President and Director

Michael LaBelle -- Executive Vice President & Chief Financial Officer

Manny Korchman -- Citigroup Global Markets -- Analyst

John Powers -- Executive Vice President, New York Region

Nick Yulico -- Deutsche Bank -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Peter Johnston -- Executive Vice President, Washington, DC Region

Raymond Ritchey -- Senior Executive Vice President

Blaine Heck -- Wells Fargo Securities -- Analyst

Alexander Goldfarb -- Sandler O'Neill & Partners -- Analyst

Bryan Koop -- Executive Vice President, Boston Region

Vikram Malhotra -- Morgan Stanley -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Michael Bilerman -- Citigroup Global Markets -- Analyst

John Kim -- BMO Capital Markets -- Analyst

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