Good morning. Welcome to Boston Properties' First Quarter 2019 Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At this time, I'd like to turn the conference over to Ms. Sara Buda, VP Investor Relations for Boston Properties. Please go ahead.
Great. Thank you, operator. Good morning, everybody. Welcome to Boston Properties' first quarter 2019 earnings conference call. The press release and supplemental packages were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the investor relations section of our website at bostonproperties.com. An audio webcast of this call will be available for 12 months in the investor relations section of our website. At this time, we'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. 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. I would now like to turn the call over to Owen Thomas for his formal remarks.
Okay. Thank you, Sara. Good morning, everyone. We had another strong quarter of performance and are successfully executing on our strategy for continued revenue and income growth. Highlights for this quarter include we grew our FFO per share 15% over the first quarter of 2018, which was also $0.05 above the midpoint of our guidance for the quarter and $0.06 above street consensus. We raised our full year 2019 FFO per share guidance by $0.05 at the midpoint, which would result in 11% FFO growth above 2018. We completed 1.5 million square feet of leasing for in-service properties, which is well above our long-term quarterly average for the period. We increased the occupancy for our in-service office and retail portfolio 150 basis points from last quarter to 92.9%. This also marks a 240 basis point increase from a year ago.
This past month, we completed an early renewal and expansion of our lease with Bank of America at 100 Federal Street in Boston for 545,000 sq ft. We obtained construction financing for the Marriott headquarters development on favorable terms, and we issued our 2018 sustainability report and were selected as a 2019 ENERGY STAR Partner of the Year, the highest recognition possible from the EPA for distinguished corporate energy management programs. Moving to the economy. Overall economic conditions continue to be stable and overall favorable for Boston Properties. Initial U.S. GDP growth estimates for the first quarter were 3.2%, well surpassing prior estimates. Job creation remains steady with 540,000 jobs created in the first quarter, and unemployment continues to be low at 3.8%. The Fed has turned accommodative, has indicated it will not raise interest rates for the foreseeable future and intends to pause quantitative tightening by year-end.
The 10-year U.S. Treasury has been steady so far this year, dropping around 20 basis points to 2.5%. This economic landscape is not exclusively rosy, with GDP growth in Europe and China declining and prospects for escalating trade tensions. In our business, we're experiencing confidence and fundamentally strong leasing activity with our customers in our core markets, with the exception of the Washington, D.C., central business district. Rents continue to escalate markedly in Boston and San Francisco, driven by strong demand and minimal new supply. Given this backdrop and the broader set of economic signals, we do not anticipate a near-term economic correction. That said, we continue to keep our aggregate debt levels low and ensure our developments are appropriately pre-leased before launch. As we know, an economic turn is inevitable and difficult to precisely predict.
As a result, we are well positioned to take advantage of ongoing economic growth and to weather a contraction with durable cash flows. The private real estate market for our assets in our core markets remains strong and liquid. In terms of the data, significant office transaction volume ended the first quarter at $17.5 billion, down 31% from the fourth quarter of last year and down 21% from first quarter 2018. Though volumes are lower, anecdotally, we are finding our pursuit of new investments to be highly competitive both for buildings and sites. Animal spirits seem alive and well as financing costs are lower than 2018, and most investors are not overly concerned about a near-term correction.
Yet again, there were numerous significant asset transactions in our markets this past quarter. Starting in the Boston financial district, 75 State Street is under agreement to be recapitalized for $635 million, which is $755 a sq ft at a 4.4% cap rate. This is an 840,000 sq ft property. It's 98% leased, and it's being recapitalized with a joint venture of offshore capital and fund managers. In New York, a 38-story, 1.5 million sq ft single-tenant office condo at 30 Hudson Yards sold for $2.2 billion, or $1,500 a sq ft and a 5% stabilized cap rate. The condominium interest is 100% leased to Time Warner for 15 more years and was sold to a developer fund manager backed by institutional investors.
In San Francisco, a 49% interest in 200 Howard Street, better known as the Park Tower building, is under agreement to sell at an imputed value of $1.1 billion, or $1,445 a square foot, and a low-to-mid 4% cap rate. The recently constructed building is 762,000 square feet, it's fully leased, and is being sold to a developer fund manager backed by sovereign wealth funds. Finally, in West L.A., Wilshire Courtyard is under agreement to sell for $625 million, or $627 a foot, and a cap rate of 2.5%, though that is artificially low because the asset's not stabilized. The building comprises just under 1 million feet and is 60% leased and being sold to a North American developer investor. Moving to our capital activities, development continues to be our primary strategy for creating value for shareholders, our pipeline of current and future developments remains robust.
Our current development pipeline stands at 11 office and residential developments and redevelopments comprising 5.3 million sq ft And $2.7 billion of investment for our share. Most of the pipeline is well underway, we have $1.6 billion of total capital remaining to fund. The commercial component of this portfolio is 78% pre-leased and aggregate projected cash yields are approximately 7%. In 2019, we expect to commence 2100 Pennsylvania Avenue, which is a 469,000 sq ft Class A office building located in the Central Business District of Washington, D.C. The building is 66% pre-leased and will be an estimated $360 million investment. We will also start the redevelopment of 325 Main Street in Kendall Center in Cambridge following the long-term lease agreement we signed with Google this past quarter.
The current 115,000 sq ft building will be demolished and replaced with a new 400,000 sq ft office tower, the office component of which will be fully occupied by Google. As part of the agreement, Google will extend their current leases for an additional 15 years in two of our other buildings in Kendall Center, comprising 450,000 sq ft . As a result, we will have an over 800,000 square foot long-term relationship with Google at Kendall Center. Total project cost is $450 million plus the value of the existing building. As part of the local zoning, we are required to develop a residential building of at least 200,000 sq ft at Kendall Center, with 25% of the units reserved as affordable. The office project will commence in 2019, the residential project is currently moving through its design approval process.
In San Jose, we are completing pre-development work for our recently completed land investment at Platform 16 . We have made presentations to multiple potential large users and are in discussions with a capital partner to invest with us in the project. On dispositions, we are targeting approximately $300 million in asset sales this year. We recently entered a binding agreement to sell One Tower Center, a 410,000 sq ft office building located in East Brunswick, New Jersey, for $38 million. The property is 39% leased and in a challenging location, far from the stronger demand dynamics we experience in Princeton at Carnegie Center. This decision is in line with our strategy of disposing select non-core assets. Although the sale resulted in an impairment charge, there's no substantial loss of income, our company-wide portfolio occupancy will increase by approximately 50 basis points.
We also put on the market this quarter 540 Madison Avenue, located in Midtown Manhattan. Our 40% joint venture partners in this 284,000 sq ft asset wanted to sell their interest. After reviewing expected sale outcomes with our advisor and understanding a sale of 100% interest in the property would likely yield better pricing, we decided it was in the best interest of our shareholders to sell our position as well. There has been substantial interest in the asset to date from prospective buyers. Lastly, we have recently been asked by many of you about the ramifications and potential cost to landlords of the Climate Mobilization Act passed by the New York City Council last month. The goal of the bill is to reduce city carbon emissions 40% by 2030 and 80% by 2050.
Boston Properties supports greenhouse gas reduction policies, has already established its own public greenhouse gas reduction targets, and has actually reduced the greenhouse gas emissions intensity of our buildings by 39% over the last 10 years through investments in new energy-efficient systems and utilizing more sustainable energy supplies. Details of all this are available in our annual sustainability report, which we released last month. We started down this important road many years ago, given the business case for investment in energy efficiency, the contribution of the built environment to global emissions, and in anticipation of local regulations such as the recently passed Climate Mobilization Act in New York that will likely continue to strengthen over time in our other core markets.
Specifically related to New York, we think our portfolio already substantially meets the 2024 emission targets set by the new regulations and have plenty of time to make additional enhancements, probably by acquiring more sustainable energy sources by 2030, when the second phase of emission targets take effect. Given our shared mission on climate with our communities and our leadership role in sustainability, we hope to work cooperatively with New York and our other city partners to create logical and effective legislation to accomplish reduced greenhouse gas emissions. In conclusion, Boston Properties is off to a strong start in 2019. We completed another quarter of successful execution with 15% year-over-year FFO per share growth. We increased full-year guidance for 2019 to 11% year-over-year growth at the midpoint. Economic conditions remain favorable, tenant demand remains strong, and we continue to lay the foundation for continued company growth beyond 2019.
As I look at Boston Properties today, I'm delighted with our progress. We continue to outperform our sector in terms of FFO growth with an attractive pipeline of pre-lease development, healthy same-store NOI growth, a new and refreshed portfolio, and modest leverage with capacity to support additional investments. Let me turn over the call to Doug.
Thanks, Owen. Good morning, everybody. We are seeing the constructive macro environment that Owen described in his remarks really reflected in the actions of our customers, our tenants. When I dissect the activity that we're seeing in Boston, CBD, the Cambridge market, suburban Boston, San Francisco, the Silicon Valley, L.A., it's really driven by the growth from the technology and the life science, media, financial services, and professional services firms that make up the demand markets. In Midtown Manhattan, we have service providers like law firms that are continuing to expand, although the rebuilding of more efficient space has moderated their growth somewhat. And the successful financial firms are growing, while the challenging results from hedge funds have created some space reductions in that market as well.
In Northern Virginia, there are a number of tech titans that have identified the D.C. metro employment base as a fertile area for incremental expansion, Amazon aside. And the increase in defense spending has led to expansion by those organizations that service that sector of the government or homeland security. It's the supply that is regulating whether a market or sub-market is strong and landlord-favorable or weak and tenant-friendly. In the office business, where we have long leases, our average lease length today is over seven years. Spot market conditions don't immediately show up in our results. Last quarter, I described Salesforce Tower, where we signed our first lease in April of 2014. We achieve our fully occupied run rate in October of 2019, and based on the last few deals done in inferior buildings, the rent's about 40% below market today.
This quarter, we signed our lease with Google to build the new 325 Main Street. We started that lease negotiation in 2017, along with the extension for 450,000 sq ft that Owen described. And the cash contractual extension rent increase on that 450,000 sq ft , which commences in 2025, is 27% higher. And because rents have moved so quickly, that number in 2025 is 25% below today's market rent. Let's talk about the markets, our expectations, and what's going on in our portfolio. I'll begin with Boston. Over the last few quarters, you've heard me describe the extraordinary demand which Boston and Cambridge have seen, along with a very limited supply pipeline. The new buildings being delivered are not 2 million sq ft towers, but rather 400,000 sq ft-500,000 sq ft mid-rise buildings, and they have all found either pre-leases or pre-delivery lead tenants with very little aggregate speculative space.
Existing inventory is full, and contiguous full floors are hard to find. In our portfolio, this has led to tenant-inspired early renewals. Last week, we completed a 545,000 sq ft , 15-year lease extension with B of A at 100 Federal Street, starting in 2022. The net rent is increasing by more than 37%. At 200 Clarendon Street, we've completed 45,000 sq ft of early renewals and are documenting another 89,000 sq ft of leases expiring in 2022, with an average increase of over 30% on a net basis. In the realm of no good deed goes unpunished, because we're going from gross to net leases at 200 Clarendon Street, it's actually going to result, believe it or not, in a reduction in our short-term GAAP income until the new lease structures kick in in 2022.
In addition to our Google transaction in Cambridge, with no available direct space in our portfolio, we were still able to complete 35,000 sq ft of additional 2022 tenant-requested extensions. Here, the increase is only 100% on a net basis. You should note a large decline in our occupancy at 325 Main Street. We terminated all the retail leases, 47,000 sq ft this quarter, and we will complete the vacation of the building, total loss of about $4 million per year on an annualized basis, by the end of the second quarter. This will impact our results in 2019, 2020, and 2021. Given the increased demand by life science tenants in Greater Boston, we are converting a number of buildings from straight office to office lab use in our suburban portfolio. The first such building lease was signed this quarter at 33 Hayden Avenue in Lexington.
Because of previous investments by the vacating tenant, we're only investing about $35 a sq ft in base building upgrades, the net rent is moving up by 86%. We intend to convert 200 West Street in Waltham to a similar facility. You'll see a drop in occupancy as we vacate 50% of this building to enable the lab conversion. In this case, we're investing about $130 per sq ft on the applicable square footage, and we'll have a similar pickup in rent expectation. Lab rents are about $50 triple net in the Waltham, Lexington market. We expect a double-digit incremental return on the incremental investment. As we permit and design all of our new suburban product, it is being positioned as lab-ready. 180 CityPoint, our next development site in Waltham, is a 300,000 sq ft building that fits this bill.
We did have a few leasing disappointments during the quarter involving our development assets. We had a lease out for execution canceled for the remainder of our 100 Causeway tower when the customer was sold in an M&A transaction. We had a life science company ready to sign 50,000 sq ft at 20 CityPoint, its product had a disappointing trial, so that lease was canceled as well. We expect we will replace these tenants with higher rents and lower concessions. Rents in Boston and Cambridge and Waltham, Lexington had great increases in 2018, along with a decline in concessions, we expect the same in 2019. In New York City, we made a lot of news last quarter with our leasing transactions at 399 Park. The New York City leasing dynamics have not changed in the last 90 days.
All the known deliveries on the Far West Side are happening. We haven't seen rents suddenly increase, we haven't seen concessions change. Our portfolio focus today is at the General Motors building and our 97,000 sq ft block of available space at 399 Park Avenue. At the moment, we have one high-rise floor available at GM, 40,000 sq ft , by the end of the first quarter of 2020, we have additional known move-outs of about 170,000 sq ft . This space contributes about $13 million for 2019. Combining this 210,000 sq ft with the 97,000 sq ft that's available at 399 Park Avenue, this portfolio of space should ultimately contribute revenue of about $27 million as we sign leases and commence revenue in 2020 and 2021.
More than 50% of the space will be leased under $105 a sq ft , and the rest should demand rents in excess of $130 a sq ft . The financial markets in the latter part of 2018 and the beginning of 2019 were not kind to the hedge fund community, which, along with private equity shops and boutique financial advisors, make up a significant portion of the high-end demand in this market, rents in excess of $120 a sq ft . As I've described previously, the leasing in this Manhattan sub-market is not about the incremental price or concession package. It's simply a matter of a smaller demand pool, and at the moment, that segment of demand is somewhat light. Construction at Dock 72 is progressing. We expect WeWork will be open by September 1st, and we expect to open the amenity space by early October.
Tenant interest is picking up, and we received our first full-floor proposal from a technology company last week. The ferry should be operational in May, and we will be able to begin to showcase what Dock 72 has to offer. It's a pretty great tour, and you should all go over and take a look. You should note that we have extended our stabilization projection to the third quarter of 2021, and this, along with some base building cost increases, has resulted in the increase in the project budget that you see in our supplemental information. The challenging supply conditions, along with the more challenging demand pool in the Washington, D.C. CBD market, continue to pressure the spot leasing market there. We don't believe there's 150,000 sq ft law firm with an expiration prior to 2023 active in the market.
The GSA has very aggressive pricing requirements, all but eliminating their ability to lease higher quality available space. There is significant new availability, and the competition is fierce for more granular near-term demand. In the CBD, the flexible office providers continue to be a positive, as that segment of the market continues to absorb medium space blocks of space, and they are truly aggregating demand that we would never accommodate. While face rents on leases are stable, it's all about concessions and, more importantly, rent commencement dates. The good news is that we are reasonably well leased in the District with modest near-term exposure, and we have sold down our position significantly over the last few years. Almost 10% of the company NOI resonates from Northern Virginia, where the demand picture is much more robust.
We have known future availability in 2020 approaching 500,000 sq ft , with the biggest block stemming from our delivery to Leidos in March of 2020 and the departure of tenants whose growth we could not accommodate in 2017 and 2018. We are in active discussions with two existing tenants that are looking to expand their 50,000 sq ft installations, three new tenants looking for a minimum of 75,000 sq ft each, and a number of 7,000 sq ft to 10,000 sq ft users that are focused on this amenity-rich environment. While the Reston Town Center ecosystem will win the day for many of these users, there will be some interruption in income as we re-tenant the space. The 2020 reduction in revenue from the known expirations was about $17 million.
Moving west in L.A., while Colorado Center is 100% leased, we are actively marketing the 140,000 sq ft block that HBO will vacate on 12/31/2020, as well as our 2021 lease expirations. At the Santa Monica Business Park, we are also working about getting ahead of our late 2020 expirations. The West L.A. market had an active 2018, and the beginning of 2019 was active as well, as a number of major technology and media companies expanded their footprints in the area. Rental rates continue to rise at a moderate rate. There are limited big block availabilities. In San Francisco, the CEQA litigation involving Central SoMa and the new questions on how Prop M should be allocated have heightened the focus on the lack of availability in the CBD for the foreseeable future. We don't believe there's going to be a quick resolution to these issues.
The vacancy rate is at its lowest level since this last cycle began after the great financial crisis. You will be hard-pressed to find an existing 100,000 sq ft block of contiguous space in the market direct for sublease. The only new construction, the First and Mission development, has an uncertain delivery date, and it won't deliver before 2023. 633 Folsom, the only large addition major renovation, has already been leased. There continues to be significant demand in the market with tenants like Pinterest and Salesforce committing to unentitled developments. In our portfolio, Salesforce Tower, 535 Mission, 680 and 690 Folsom, and 50 Hawthorne are all 100% leased. At Embarcadero Center, we ended the quarter at 93.2% occupied, up 200 basis points from the last quarter and completed 235,000 sq ft of full or multi-floor leasing.
The percentage increase in rents from those floors was over 50%, with an average new starting rent of $85 a sq ft gross. Similar to Boston, tenants are requesting early renewal proposals. We currently have another 175,000 sq ft under negotiation that could be completed during the second quarter of 2019. If a tenant wants a full floor at Embarcadero Center, it has one option prior to July of 2020. In the Silicon Valley, we continue to release or renew space at Mountain View Research Park at rents in excess of $60 triple net. This quarter, we completed a 47,000 sq ft lease with a 60% roll-up. Over the last two weeks, we did two renewals totaling 91,000 sq ft and had an average increase of 80%.
At Platform 16, as Owen described, we are enabling the site, preparing it for construction, and we're making presentations to tenants who are looking for 400,000 sq ft or more. There are a number of them. I'm going to conclude my remarks this morning with some comments about the same-property leasing stats for the quarter. You'll note a big jump in transaction costs. The statistics include 1 million sq ft of 10-year or longer deals in New York City and San Francisco. This includes about 90,000 sq ft of pre-built suites or turnkey floors that we did. We've been describing those over the last few years where the improvements are in excess of $150 a sq ft. Obviously, there's a trade-off with accelerated occupancy, which is never reflected in the transaction cost numbers.
Saving six months of downtime on a $100 rent offsets the transaction cost of a deal by $50. Remember, we include the entire TI package and commission into our statistics when we commence revenue recognition, while the actual outlay of cash will occur over many quarters. In conclusion, competition for talent remains top of mind for our customers, and they continue to seek premium Class A space that reflects their brand and values. 2019 is progressing as we expected, and we continue to be well-positioned to grow our FFO in the coming years. I'll stop here. Mike?
Great. Thanks, Doug. Good morning. As Owen described, we had a strong quarter and raised our full-year FFO guidance again and are now projecting 11% year-over-year FFO growth at the midpoint. Before I get into the details of the quarter, I do want to start with a couple of housekeeping items. First, you will notice that we've adopted the new lease accounting standard that was required this quarter, which adds right-of-use operating lease assets and operating lease liabilities to our balance sheet. On our income statement, rental income, operating expense recoveries, and service fee income are now required to be reported together as lease income. For clarity, we will continue to provide the breakout of these items in our supplemental report.
The requirement to include service fee income and lease revenue is creating geographic movement on our income statement, as we had previously included service fee income in our development and management services income. This change also impacts the components of our 2019 FFO guidance assumptions. We've relocated approximately $8 million from development and management services income into our share of same-property NOI. This shift increases our assumption for growth and our share of same-property NOI by 50 basis points in 2019 from our guidance last quarter. I apologize for the accounting minutia, I wanted to make sure everybody understands these changes. Let's get into the details for the quarter.
Q1 marked another strong quarter with 15% year-over-year FFO increase, driven primarily by a 10% increase in our revenues from gains in portfolio occupancy, higher replacement rents on new and renewal leasing, and incremental revenue recognition from our development deliveries. This quarter, the roll-up in rents from our second-generation leasing was 9.4% on a net basis. Our in-service portfolio occupancy improved by 150 basis points to 92.9%, primarily from gains at 399 Park Avenue in New York City and Salesforce Tower and Embarcadero Center in San Francisco. We anticipate that occupancy will range between 92.5% and 93.5% for the year. Part of this is due to faster-than-projected lease-up, and part is due to the anticipated sale of One Tower Center and removing 325 Main Street in Cambridge from service for the Google redevelopment. The removal of these two properties would increase our occupancy by 60 basis points.
In the debt markets, we just closed a $255 million construction loan to provide funding for the Marriott headquarters development. The loan is priced very attractively at LIBOR plus 125 basis points and reflects the quality of the project and the long-term lease with Marriott Corporation. This property is in a joint venture, so our share of the loan is 50%. Our active development pipeline represents $2.7 billion of new investment and remaining cost to fund our $1.3 billion net of the in-place construction financing. We expect to raise another $200 million of construction financing for our share of the Hub on Causeway office project later this year, and the remaining costs will be funded with operating cash flow, retained proceeds from asset sales, and our line of credit. At the end of the quarter, we had $1.5 billion available on our line of credit and cash of $360 million.
As Owen described, we decided this quarter to sell One Tower Center in East Brunswick, New Jersey, and have an executed purchase and sale contract. Our decision caused us to shorten our hold period for the building, resulting in an impairment on the property to its fair market value. We booked the $24 million impairment this quarter. Similar to gains or losses on sales, property impairments are part of our net income but are excluded from FFO pursuant to Nareit's definition. The sale is actually accretive to us because at 39% occupancy, the property provides minimal NOI, and we will earn interest income or reduce our future borrowing with the cash from the sale. Looking at first quarter results versus our guidance, our FFO of $1.72 per share is $0.05 per share above the midpoint of our guidance range.
Approximately $0.03 per share of this was related to the timing of expenses, where we came in below our budget this quarter, but we expect to incur these expenses later in 2019. This portion will not increase our full-year FFO. The other $0.02 per share was due to portfolio performance. You should really look at this as $0.02 of outperformance for the quarter. The $0.02 were split between higher than projected service fee income and higher rental revenues from leasing space faster. This leasing was in our budgets for later in the year, so it does not result in a comparable step-up in our quarterly run rate for the full year. Growth in our share of same-property NOI for the quarter was strong and up over last year by 7.7% on a GAAP basis and 9.2% on a cash basis.
We project our same-property NOI to show consistent growth for the remainder of the year. However, the growth rate over 2018 will slow in the back half of the year due to the comparable periods in 2018 being higher. For the full year 2019, our current assumptions include growth in our share of same-property NOI of 5.5%-6.75% over 2018. Net of moving $8 million of service fee income into the calculation, this represents an increase of 38 basis points at the midpoint from last quarter. On a cash basis, we assume same-property cash NOI growth of 5%-6.5% over 2018. We've also modified our assumption for development and management services income to $32 million-$36 million, and that reflects the reduction of $8 million from moving service fees into lease revenue.
Given the more dovish outlook for interest rates in the past quarter, we've adjusted our assumption for rates. That has had a positive impact on our future financing costs in 2019. This, in combination with changes in our funding timing and additional asset sales, has resulted in our lowering our assumption for net interest expense for 2019 by $5 million to $405 million-$420 million for the full year. The result of these changes are that we're increasing our guidance for 2019 FFO to a new range of $6.95-$7.02 per share, representing an increase of $0.05 per share at the midpoint, with the increase from $0.02 per share of improved portfolio NOI and $0.03 per share of lower interest expense. As you start to think about 2020, there are a few things to keep in mind.
We continue to expect the portfolio NOI to grow from both our developments and our same-property portfolio. We expect to deliver approximately $1.4 billion of our development pipeline between mid-2019 and the end of 2020. As is typical every year, we do expect some negative impact from temporary downtime related to our lease rollover exposure. Doug described our more meaningful 2020 lease rollouts, which are at the GM Building and in Reston Town Center. In addition, we will have $10 million of our share of non-cash fair value lease revenue rolling off next year, with much of this at the GM Building, where we will see incremental vacancy. Finally, we expect to continue to utilize debt as the primary funding vehicle for our new developments.
Although we capitalize interest on new developments, the delivery of $1.4 billion of our current pipeline will result in a reduction of our capitalized interest and consequently higher total interest expense in 2020. In summary, we had a good quarter with stronger than expected portfolio performance. We increased our FFO guidance for the year. We now project 2019 FFO growth of 11% at the midpoint over 2018, which is among the highest in our sector. The demand environment remains strong based on favorable economic trends in the vast majority of our markets. We continue to execute on the growth strategy we've outlined for the company. That completes our remarks. Operator, I'd appreciate it if you could open up the line for questions.
At this time, I would like to remind everyone, if you would like to ask a question, press star one on your telephone keypad. If you are using a speakerphone, please pick up the handset before asking your question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Yulico with Scotiabank.
Thanks. I know Doug talked a little bit about the tenant improvement spend this quarter being heightened and why that was the case. Mike, I wanted to see if you could give us maybe a feel for what a full-year number would look like for TIs and leasing commissions, and then, in terms of how we should think about FAD growth this year, if that would be similar to the 10% FFO growth in your guidance.
Sure. No problem. Q1 is obviously, as you mentioned, it was a high year for lease transaction costs. As Doug mentioned, we had some long-term leases, and we also just had a tremendous amount of absorption. We had 150 basis points of absorption to bring the portfolio up to 93%, almost. That kind of all drops into the quarter. We do not expect every quarter this year to be identical to that. Our occupancy projection for the year, as I mentioned, is that it's basically going to be stable, if you pull out the asset sales and taking the Google building out of service. We expect occupancy to actually drop a little bit in the second quarter and then come back up in the third and the fourth quarters. Although the rental rates should be higher in our rollover.
If you look at our full-year projection for what our AFFO will be and our lease transaction costs, we expect lease transaction costs to total somewhere in the $210 million to $225 million range. A big chunk of this has already been experienced. If you look at our rollover for the rest of the year, it's just not that big. The amount of leasing that we have to get into place to keep the occupancy is not that significant. Most of the leasing that we're doing for the quarter is really going into the future years. That stuff is going into 2020 and 2021. Other pieces of our AFFO to think about include our straight line rents, which are $100 million to $120 million. Our CapEx is going to be lower.
Our recurring CapEx, we think is going to be somewhere in the $75 million to $90 million range. That's about $10 million or $15 million below last year. Stock comp is around $40 million, and then other non-cash items is $20 million to $25 million. If you pull all that stuff together, you get to an AFFO that is somewhere in the $4.80 to $5 a share, versus $4.43 in 2018. That's pretty significant growth, which is kind of a combination of cash same-store growth and lower CapEx.
Thank you. That's very helpful, Mike. Second question is, if I think about the commentary that Doug gave on New York, it was less positive than other markets except Washington, D.C. If we think about a lot of the leasing demand right now that you are targeting, let's say in your development portfolio, which feels like it's a lot of tech, or even when you're talking about increasingly life science. Should we think about you guys maybe looking to sell even more of your New York City portfolio besides 540 Madison? Perhaps assets like 399 Park, which is mostly stabilized, or developments that you did this cycle?
No. I wouldn't assume we're going to shrink our New York portfolio further. Again, we're always open if we get approached by someone with, we think, an extraordinary result for shareholders. We're open-minded about it. I don't think you should assume we're going to sell down our New York portfolio further.
Okay. Yeah, I guess I'm just trying to reconcile the commentary on New York, which just seems like you think the market's not doing as well as some of your other markets. If that's the case, why still have as big of a presence in New York?
Yeah. We've been saying this for years. We think New York is healthy. The aggregate leasing demand has been at high levels. Last year, it was a multi-year record for gross leasing. We think market demand is healthy in New York and it's a healthy market. The issue has been supply. The Hudson Yards, we have described as a secular event in the New York City real estate market. Until the Hudson Yards gets fully absorbed, there will be more than typical supply in New York, and that is muting our ability to push rents up. We certainly believe in New York in the long term and intend to maintain a very significant presence there.
Yeah. Contextually, Nick, if you think about the demand picture in New York City, if you were to go look at the VC investments across the country now, there's actually more money being invested into New York City than there is in the Boston marketplace. That follows the Silicon Valley and San Francisco. The tech media, fintech world is very alive and vibrant in New York City. As Owen said, there's a supply problem, which is sort of what my point was at the outset. In those marketplaces where there's not a supply problem, we're feeling really, really strong about our opportunity set in terms of the pushing rents. In those markets where there's a supply problem, namely New York City, modest supply problem in Washington, D.C., CBD, a significant supply problem. We're not in a position where we can do that.
Net-net, we've actually reduced our exposure in New York City, not necessarily by selling assets per se, but by selling interest in assets, which we did over the last, call it four or five years ago. Then we've grown so much more in Boston and in San Francisco. Naturally, the contribution from New York City has diminished in a significant way. I think we've positioned the portfolio in a really thoughtful way, on a going-forward basis.
New York City will always be part of our portfolio, and we hope that there'll be a point in time in the relevant near future where the supply picture will have cut off and the technology, the media, the fintech businesses will have grown to a sufficient population of embedded demand, that we're going to see the kind of strength that we're seeing in Boston and in San Francisco in that market as well. It's not going to happen in 2019, 2020, or 2021.
Okay. Thank you, Doug and Owen.
Yep.
Your next question comes from the line of Manny Korchman with Citi.
Hey. Good morning, everyone. Doug, you spoke a lot about early renewals and how successful you've been with that. Can you just help us with how you think about those early renewals, especially in a case like Google, where you pointed out that even given the early renewal, you think that they will end up being below sort of market at the time the renewal starts, if I understood that correctly? So how do you weigh that?
Yeah, they're below market now.
What's that?
They're below market now, so they'll be even more below market when the renewal starts. The logic we've had, Manny, is that something that I think is grounded in us for the 40 years that Boston Properties has been around, which is that we're not market timers. We believe in leasing space to customers who want to lease space when they want to lease a space, and we take our chances that doing long-term leases will serve us well, and that we'll have opportunities to get the incremental growth upon rollovers and at the spot market by bringing new product online at those times. I don't think we're going to change that profile. The most interesting thing about what I was just trying to describe, was that our cash rent increases in 2021 and 2022 are being driven by our transactions today.
There's going to be significant cash flow growth from the company's perspective on a going-forward basis, and it's all going to be below market, assuming the markets remain as healthy as they are today.
Yeah. Also, I would just add, I think Doug's point was we don't do early renewals below market, the markets are moving up rapidly. When these transactions were agreed to, the market was at those levels, the market has elevated since then. The examples that Doug gave were Google and the Salesforce lease at Salesforce Tower.
Got it, thanks. Mike, an easy one for you, the expenses that are getting delayed later into the year, can you be more specific as to when those will hit, just for modeling purposes?
The repair and maintenance stuff I would guess will hit in the second and third quarter if I had to guess. That is the majority of it. There was a little bit of G&A because our healthcare costs came in a lot lower than we would expect, and I anticipate that that will occur through the year. I would guess that it'll be in second and third and not fourth. At least repair and maintenance items, it depends when the capital goes out, right? Those are the stronger quarters where we do most of that work because of the weather related to in the locations that we are in.
One last one for me. The 540 Madison sale, will that have any impact on how you think about acquisitions, I guess, forcing your hand to acquire something to offset that?
It won't have an impact on acquisitions. We will, as we always do, if we have a gain, we'll attempt to do a like-kind exchange. We won't be more tempted to buy something because of that. If it works out in the flow of the business that we want to do based on the deals that we see that make sense for shareholders, we'll do the exchange. We're not going to go out and quote, "Look for an exchange deal".
Thanks, everyone.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
Hey, good morning, guys. Maybe taking the sales question from another angle. I know, Mike, you said most of the development near term is going to be funded with debt. As you look at kind of the pricing that they got on Park Tower and the below-market rents you have at Salesforce, is it tempting at all to maybe look to joint venture that now that you bought in the 5% interest?
No, it's not. We think the Salesforce Tower is certainly one of the premier properties in our portfolio. It's a premier property in San Francisco, which is one of the strongest office markets in the country, if not the world, and it's not something that we want to joint venture. What we have been saying in terms of our sources of capital, I didn't review that this quarter, let me just kind of go back through that. Obviously, we generate cash flow from the company after we pay dividends. That is a first stop, first source of capital. The second would be, as you're suggesting, asset sales. We have been selling $200 million-$400 million or so of non-core assets each year, and that has been a source of funding for us.
Last year, it was a little bit larger because of the TSA deal that we engaged in. The third stop is debt. As we've been talking about, we are very focused on maintaining the leverage at current levels. The developments that we've been delivering have given us increased debt capacity, which has created capital for the developments and for new investment, there are limits to that. We do certainly use financing to do it. The next place we have been going is joint venture partners. We brought in a joint venture partner on the Santa Monica Business Park investment that we made last year. I described in my remarks that we're talking to a capital partner about Platform 16. At the bottom of the list is issuing common equity.
The other thing that we've mentioned is many of our assets, certainly the more significant ones, have a tax basis that's well below their market value. They're not efficient from a capital-raising perspective because of the special dividend requirement.
Salesforce Tower in particular.
Yeah
It would have a massive gain associated.
Yeah
With a JV of that asset that we would just have to distribute out, and we wouldn't necessarily be able to retain that.
Just on Platform 16, I know you guys said you're talking with a partner, from a timing perspective, would you want to get an anchor lease before you go ahead with the joint venture, or does that factor into your thinking at all?
It doesn't factor into our thinking today. When we agreed to purchase that asset, I think we recognized that bringing in a joint venture partner was part of the equation. The joint venture partner is quite aware of the leasing activity and the conversations we're having. There's no "threshold" about doing a lease to do that deal. While, I guess in theory, we could wait to get a lease and then do a joint venture at a different pricing model, we felt that that was not the appropriate way to structure the capital of this particular asset.
That makes sense. Just one more quick one from Mike. You mentioned the burn-off of cap interest next year. I know you guys have a lot of potential developments on your plates, the spending at the outset just can't keep up with what's burning off, there's no way to backfill that decline?
Yeah, we're continuing to obviously add to our development pipeline. Owen talked about 2100 Pennsylvania Avenue and 325 Main Street. We are continuing to add to that. There's just a lot that is being completed. If you look at our development pipeline, you look in the supplemental and the dates of when that stuff is coming in. In 2020, we do not expect it to keep up. We do expect there to be materially lower capitalized interest next year than there is this year.
Great. Thank you.
Your next question comes from the line of John Kim with BMO Capital Markets.
Thank you. In San Francisco, can you provide an update on the likelihood of 4th and Harrison getting its Prop M allocation this year? If you're interested, are you looking at the Oceanwide Development, given it's a pretty valuable site?
I'll give you a succinct answer on 4th and Harrison . The CEQA lawsuits are ongoing. We don't anticipate the CEQA lawsuits to be resolved in calendar year 2019, and we don't know how long they will take. There's a real question about how Prop M is going to be allocated. A lot of discourse and questions about that. In our mind, it's unlikely that any of the projects will go forward that are currently part of Central SoMa in 2019. With regards to there's a developer who's building First and Mission. The project has got some timing issues. Lots of people are trying to understand how they might be helpful in that situation.
Are you one of those parties?
We don't comment on things that we might or might not be doing.
Okay. Doug, you mentioned Midtown Manhattan tenant demand being light. Do you think there's going to be additional sublease space coming to the market? You also were positive on demand from tech and media companies, but that's really more focused on Midtown South, and I'm wondering if you're hearing any discussions of any of these companies moving to Midtown.
Yeah. I guess I want to reiterate what I said. I said that I felt that the demand at the very high end was lighter this quarter and last quarter than it has been. The high end I define as over $130 a sq ft . Those are the people who would be going into the very expensive space. I think the market itself is actually very healthy. If you have $85-$100 space, I think there are lots of people that you're talking to, and there are lots of opportunities from the demand side to fill space. John, did you want to talk about the tech demand going in Midtown?
No, I think you have it. Demand is very good here. The issue that's holding the prices flat is the supply coming onto the market. The good news is there's a lot of people looking at this supply.
One last question on Dock 72. Can you just discuss the increase in construction costs and the stabilization date being moved out?
Yeah. We've found some things that were either unforeseen conditions when we were doing the site work and/or coordination issues between the contractors and the A&E professionals that have just led to some cost increases. More importantly, given how long it's taken us to get to stabilization of the construction, which is now clearly going to happen in September, we pushed out our lease-up, and so we're carrying the full project cost for an extended period of time. I think it's almost a year than we had previously had. I will tell you that relative to 90 days ago, the tenant activity has picked up at Dock 72, and if you go over there, it feels like a pretty unique, interesting opportunity for tenants to lease space with fabulous outdoor spaces, with an amenity center that's going to be bar second to none.
There was an announcement yesterday about the new Wegmans that's going in and the other property that's under construction. Dock 72 is really shaping up, and unfortunately for us, it was more of a show me as opposed to a show me the plans, and then we'll make a lease, but actually show me what it looks like, and I want to see and touch it before I can really get a sense of it. We're encouraged by what we're seeing right now. John, any other comments on that?
The ferry's starting May 24th. That's a big plus. The shuttles are all running on time and on an app, and people like it a lot. We're getting a lot more action, as I've said on this call a number of times, this is an asset where people, as Doug said, they're going to have to, when WeWork moves in in September and the amenities open in October, people can go over and really experience it, and they can take the ferry to get there.
I think that I just want to clarify that a big piece of this increase is equity carry. It's a non-cash concept. It's something we always put in our budgets, which is the carry cost that we charge ourselves for our own equity. That obviously impacts the job as you extend out the lease-out.
Thank you.
Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.
Great. Thanks, and good morning. I wanted to start with L.A. and Santa Monica. Can you talk more about the spaces you're getting back and what the interest pipeline looks like, given we have seen a pickup in demand in some of the other kind of media-focused sub-markets, Hollywood, Burbank, some of the others. Just curious what your leasing prospects look like.
Yeah. Let me make a quick comment, and then I'll have Ray pick it up. The only space that we know that we're getting back is the space that is currently occupied by HBO at Colorado Center, and they've made a decision to relocate to Culver Crossing. That's going to happen 12/31/2020. Everything else that we're working on in both the Santa Monica Business Park and Colorado Center is that space and then doing early renewals with our existing tenants in tow, which include technology and media companies. We're encouraged by their interest in staying in the property. Clearly, they may have some other opportunities to go outside of Santa Monica, but in Santa Monica, we're sort of the only game in town. Ray?
Yeah. Thanks, Doug. Specifically at Colorado Center, we had discussions with Hulu regarding their future growth. HBO was kind of in the path of that growth, so while we are sad to see HBO move on, it was strategically more important to have that block to accommodate the larger tenant. What's really interesting is while we're in intense discussions with our existing tenant, other tenants in the project are already calling us up about that space and others, so that the demand in Santa Monica is just as strong as it was when we acquired the building three and a half years ago, and we see nothing in the horizon that does not have Santa Monica being a main demand driver. We are seeing some exiting to some of the other markets, if only to find larger blocks at lower prices.
We still are exceedingly excited about Colorado Center and the Santa Monica Business Park.
All right. Thank you. Then what's your appetite to expand there? I know there's some buildings that are being marketed.
Well, go ahead, OT.
I was just going to say, and I'll turn it over to Ray. Our appetite remains strong. We want to grow L.A. into a significant region for Boston Properties, just like all our other regions. However, we're going to do it in a disciplined fashion, and the way we've been describing it to ourselves and to all of you is we want to do a deal a year, if that's a way to think about it. It has been challenging this year. There have been a number of assets that have traded at prices that we didn't want to pay, and we're also looking at a number of development sites as well.
Well, listen, we came there three years ago. We're now up to 2.5 million sq ft. Current occupancy levels are in the high 90s. We've come in second on three or four different other opportunities in L.A., but we've held onto our discipline and didn't overreach for those, and we are actively considering three or four more opportunities right now. We are all in in L.A., for sure. I'd like to introduce Jon Lange, our L.A. regional manager, who's also on the call. Jon, anything else you want to add?
No, I would just add to it, to Owen's comment. There's been a lot of opportunities here in this past quarter, some of which have traded for pretty healthy pricing. We're aggressive, and we're seeking opportunities, both the marketed and the non-marketed development and existing asset acquisitions. We want to remain disciplined with our path to growth.
I would just like to add that while we're very excited about the acquisitions of the real estate we have in that market, we're really excited about having Jon join our team. He's only been with us over a year and has already made a tremendous difference in our presence in the L.A. market, and we're extremely grateful to have him.
Great. Now that you've been there a while, how would you say BXP can differentiate itself in the market? What do you bring fresh to the market?
Are you asking me or Jon?
Whoever would like to answer.
Okay. I would answer, and Jon could comment, that I think our outreach to the existing tenants in our portfolio, our outreach to community leaders, our ability to develop close relationships with brokers has distinguished us from the traditional development and landlord community in L.A., and I think we're a little bit of a breath of fresh air to the L.A. market. Jon, would you care to comment on that?
Yeah, I would reiterate all of those things. Jamie, for you and a couple other folks that have recently been to Colorado Center, we're taking a very hands-on approach, not just with our relationships with our customers and our tenants, but with our physical improvements. We just rolled out the new public plaza here at Colorado Center. We've got a new best-in-class food hall experience that's going to be opening here shortly. I think we're putting in the strategic capital here that's a little more thoughtful and a little more strategic with what the tenants in today's world are demanding. Colorado Center is a great example of that. With Ray's help and with our kind of cross-country collaboration and making sure that we are leveraging everyone's collective resources across our regions, Colorado Center quickly went to 100% leased in about two years since acquisition.
That was before all of the capital was deployed here, and you can actually feel and see the improvements. I think that's a great success story, and we're on the right path to do that at the Santa Monica Business Park as well, and just take a little bit more of a hands-on approach compared to some of the other owner and operators here.
Okay, great. That's all very helpful. Switching gears to Mike, are you able to quantify some of the drags on earnings you mentioned rolling into 2020? Like, assuming your share count stays the same, maybe like pennies per share or some other way to think about it?
I think Doug described some of the numbers. I think Doug said, GM was $13 million and Reston was $17 million. Those are kind of the big moves. We still believe we're going to be able to demonstrate growth in the same-store portfolio. Every year we've got roll-outs, right? We try to explain them to them, what's renewing and what's rolling out. A lot of the stuff that is on the expiration table, we're in the process of renewing, and we're working on those kinds of things. There are some where we know the tenants are going to leave. These are the ones that are more sizable, where we know they're going to leave, to give you some sense to help you, I guess, along the way. I can't tell you what our guidance is right now. It's honestly just too early.
We still think it'll be positive. We just think there's a couple of things in there that'll hamper a stronger growth profile.
Okay.
I'd like to give you sort of the following sort of framework, which is, if you think about our year-to-year projections, what we've described is we are, if not 100%, really close to 100% occupied, both Boston and in San Francisco. There's very limited rollover in those marketplaces. We're seeing very significant, as I described, mark-to-mark lease increases, and therefore increases in either our FFO, if there's a modest amount of build-out time and/or cash rents. We have our biggest exposures in 2020, the reason I brought it up is because we've been asked the question every single time we've had a one-on-one meeting with anybody, and we've done a number of NDRs over the last quarter, are the General Motors building in New York City and the Reston Town Center market in Northern Virginia.
That's the vast majority of our quote-unquote, exposure. I tried to articulate what that exposure was. We believe that the power of San Francisco and the power of Boston are going to continue to overwhelm the other issues, but that there is some degree of pull-down from that particular exposure because that property is currently leased today. We have a few other negatives in terms of the properties that we're taking out of service, including, as we described, the 325 Main Street, which is pulling $4 million out in 2020 and 2021. We tried to sort of give you a good roadmap for how you might think about your modeling of our portfolio on the revenue side as you think about 2020 and 2021.
Okay. Those are revenue numbers, not NOI numbers?
Yeah. Revenue numbers.
GM and rest.
Yep.
Okay. All right. Thank you.
Your next question comes from the line of Jason Green with Evercore.
Good morning. Just a quick question on the Boston market. The Boston Seaport is kind of the only major Boston sub-market you're not in currently. Is that a sub-market we could see you enter, or does it not necessarily fit the profile of what you guys look for in assets?
We continue to look at it just like every other market that's part of our core market. It's definitely part of the Boston core market. It's just a matter of finding the right opportunity. I would comment, to echo what Doug's been talking about with tenant-inspired play on renewals, the Seaport's interesting. If you take one specific asset out that is caught on the edge of where everything's happening, it's like a 2.3% vacancy, which is incredibly low. Then in that greater call it Boston market, we're looking at everything, sub-markets in the 6% range. It's really interesting that each of these markets is firing on all cylinders right now. A lot of it has to do with echoing what Doug and OT talked about was, we've got incredible discipline right now, at least for the time being, in terms of development coming on with significant pre-leasing.
That still bodes well as we look at the forecast for the next couple of years. As we look at the developable sites, all of them have significant pre-lease play on them.
Got it. Maybe just switching over to Reston. As the government continues to talk about housing reform and potentially some changes to Freddie and Fannie , is there any risk to the lease at Reston Town Center and, given the company moving into what might be viewed as relatively expensive space, might not be perceived the right way?
You're talking about risk relative to the credit of the tenant, right?
The legal risk. There's no legal risk.
We have a binding lease with the agency or the NGO or NGA. Our understanding of all the discussions that are going on in Washington, D.C., have to do with the future of how mortgages are securitized. I believe that the bonds that have been issued by both Freddie and Fannie go well beyond the lease that we have at Reston, which is I think 12 years starting in 2022. We're not concerned on a cash basis in terms of receiving our rent from the tenant. What happens to that organization and how that organization is ultimately changed relative to the way the private mortgage market works, I think that's anybody's guess. In 2035, it could be an issue.
Got it. Thank you.
We have time for one final question. That question comes from Alexander Goldfarb with Sandler O'Neill.
Oh, yes. Hi, thanks for taking my question. Mike, just quickly going back to some of the items that you mentioned for next year. You mentioned the $13 million coming out of the GM Building. The $10 million in FAS, is that in addition to the $13 million? In effect, it's a $23 million impact to 2020 from the GM Building coming out?
Yes, that's in addition to the $13 million. That's non-cash rent.
Okay. The 540 Madison is in guidance, or that's not in guidance, or it closes so late in the year that it's really immaterial to this year?
The 540 Madison Avenue is not in guidance because we don't have any kind of agreement on it. It's just on the market at this point. The only sale is the Tower Center sale that we announced that is in the guidance.
Okay. Just finally, just thinking about funding for your pipeline, you were clear that equity issuance is last in your list, but it seems like between free cash flow, the $200 million-$400 million of dispos that you guys think about, and then JV-ing on sort of new projects, it seems like you guys have found a pretty good balance for funding developments going forward. The big dispositions that would sort of dilute growth in the past, it seems like you guys have now gotten your funding model to a pretty good way, where you don't sort of have that anymore. Is that a fair way to look at it?
I think that's true, Alex. Our selling program that we have been going through the last five years, raising capital is a nice outcome, but the real reason is we're selling assets that are non-core to the company going forward. We still will have some of those in future years. I agree with what you're saying. I think that we have, between our own resources and the resources of a growing list of capital partners, we are not capital constrained in terms of making new investments.
The other thing that we focus on, Alex, is our leverage. Right now our leverage is at 6.5 x. It's conservative. We don't want to be north of seven. If you look at the pipeline we have today, and you pro forma it, we're below six. There's a lot of room there for us to work, which is why we're comfortable using a good amount of debt for some of this. We bring in partners on some of this to just lengthen that capability of that existing balance sheet to continue to work.
Okay. Listen, thank you.
Sure. Operator, are we all set? That's the end of the questions?
Yes, I will now turn the call back over to you guys for closing remarks.
Okay, thank you very much for all of your interest in Boston Properties. That concludes the questions and our remarks. Thank you very much.
This concludes today's Boston Properties conference call. Thank you again for attending, and have a good day.