Helen Han:

Good morning, and welcome to BXP's second quarter 2024 earnings conference call. The press release and supplemental package were distributed last night, we furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that 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 BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President, and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to only one question. If you have an additional clarity or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks, Owen, I really enjoy celebrating my birthday with all of you on the call every two years, one of the highlights. So as we described during our NAREIT June meetings and the webcast that we did, the trend line of BXP's leasing activity in the second quarter of '24 picked up materially relative to what we executed in the first quarter and what we discussed on our last call, all really good stuff. As of June 30, we've completed 2.2 million square feet of leasing for '24. When we spoke to you during our May call, we stated our pipeline of leases under negotiation at that time, May 1, was 875,000 square feet. And as Owen highlighted, we signed leases for 1.32 million square feet between April 1 and June 30, a lot more. And our active pipeline of leases under documentation today has grown to 1.39 million square feet. So if we complete this pool of transactions, we will have leased 3.59 million square feet of space, exclusive of our leases and documentation. We have an additional set of transactions under discussion totaling about 850,000 square feet. So if we execute 50% of those transactions, we will more than achieve our leasing guidance of 4 million square feet for the year. This quarter, we completed 73 transactions, 37 lease renewals for 830,000 square feet, 36 new leases encompassing 500,000 square feet. 12 clients expanded into 228,000 square feet of additional square footage, while we had 4 contractions totaling 63,000 square feet. 45% of our absorption was growth from our existing client pool. As a point of comparison, last quarter, we completed 61 transactions with 29 renewals, encompassing about 400,000 square feet and 32 leases for 494,000 square feet, and we had only 3 expansions for 18,000 square feet, and we had 4 contractions totaling 44,000 square feet. So again, really big improvements. Q2 activity was concentrated in our East Coast markets with 445,000 square feet in New York, 343,000 square feet in Boston and 351,000 square feet in Northern Virginia. These 3 markets made up 1.14 million square feet or 86% of the activity. Our West Coast activity was almost exclusively in San Francisco with 146,000 square feet. The majority of our client expansion came from Manhattan this quarter. The only significant contraction in the portfolio came from a tech company downsizing in Reston. We had 3 transactions over 100,000 square feet, one each in Boston, New York and Reston. Expansions or new clients made up 42% of the activity in New York, 40% in Boston, 37% on the West Coast and 16% in D.C. As reported in our supplemental, the mark-to-market of leases that commenced this quarter, which is about a 375,000 square foot base, was up 6% and transaction costs averaged $11 per square foot per year. The overall mark-to-market of the [ restarting ] cash rent on leases executed this quarter, which was a 1.15 million square feet pool relative to the previous in-place cash rent was about flat. The starting rents on leases we signed during the second quarter were up about 8% in Boston, really flat in New York, down 6% in D.C. and down 7% on the West Coast. Now I want to spend a minute on our occupancy change during the quarter, which seemed to have been a focus of many of the analyst reports that we saw this morning and last night. As we stated in February and May, we have 2 large known expirations, one in April, 200,000 square feet at 680 Folsom, which is in the second quarter figures and one in July, 200,000 square feet at Times Square Tower. That's a JV asset, so our percentage share is 110, but we report the 200. This quarter, we also vacated 148,000 square feet of occupied but non-revenue-producing spaces. What do I mean? Well, we had some tenants in default where we had stopped recognizing revenue yet they were still in possession and we were in legal proceedings to vacate the space. In addition, we took back 60,000 square feet from WeWork at Dock 72, but there, the absolute rent that we were receiving remains the same. It's just on a lower square footage. Finally, we terminated a 33,000 square foot lease in Waltham that was simultaneously released but won't be delivered into next quarter. Those movements account for 92% of the reduction in our occupancy in the second quarter from the first quarter. As of June 30, we have approximately one million square feet of signed leases that have not commenced. Hence, the 200 basis points difference between occupied space and leased space. In the first quarter, our leasing included 383,000 square feet of vacant space leasing. This quarter, that same vacant space leasing was 362,000 square feet. These leases are all part of our leased square footage percentage. Our pipeline of leases in negotiation includes an additional 635,000 square feet of currently vacant space, which if signed will contribute another 130 basis points to our leased square footage. In addition to the known 200,000 square feet expiration at Times Square Tower in Q3, our 2 Waltham life science developments will be added into our in-service portfolio in the third and fourth quarters, 180 CityPoint and 103 Fourth Avenue, respectively. There are combined 32% occupied, which will reduce our in-service occupancy. These additions will result in about a 50 basis point reduction at the year-end. For those of you that are focused on the next quarter, we expect us to be lower by about 40 basis points with a recovery in the fourth quarter where most of the leases that have been signed start to commence where we project occupied space to be between 87% and 87.5%, inclusive of the addition to the in-service portfolio. In previous quarters, we have not been including the additions to in-service portfolio, but we're doing that now because it's a quarter away. Our leased space will continue to be above 89%. BXP continues to lease space. In Manhattan, almost all of our demand continues to originate from financial institutions, alternative asset managers, professional service organizations and law firms. In many circumstances, these clients are expanding. Concessions are flat and taking market rents have risen double digits in 2024. The sub 8% availability in the Park Avenue submarket is a direct reflection of these users growing and competing for limited blocks of space. In one of our assets, we have 3 tenants that would like more space, and we have no immediate availability. We had more than 130,000 square feet of expansions at the General Motors Building and at 601 Lexington Avenue this quarter. Our strongest tour activity in New York City continues to be in the submarket. At the same time, technology demand across the city continues to be light. We completed a single floor lease at 360 Park Avenue South with a digital media firm this quarter, but Midtown South is a tech branded submarket in the city, where transactions over 20,000 square feet have been very limited in 2024. In Princeton, we completed 10 transactions totaling 150,000 square feet during the quarter, including an extension and expansion with a foreign pharma company. In the Back Bay and the Financial District of Boston, we completed 195,000 square feet of leasing this quarter. The majority of this activity was in our Back Bay portfolio and the clients were alternative asset managers and professional services firms. The Back Bay continues to outperform the financial district, which continues to have to digest the new construction pipeline. Our remaining activity was in our Waltham urban edge portfolio, where we completed just over 110,000 square feet and 90% of those transactions were on either existing or near-term vacancy, not renewals. Here, the demand came from a consumer products company, a homebuilder and a few pharma life science companies with office requirements. We've execute one 25,000 square foot life science lab lease. The life science lab demand in Greater Boston continues to be lackluster, with tenants displaying a little urgency around any potential new requirements or relocations. To date, this year, there have been 8 nonrenewal lab deals in Waltham, Lexington, Watertown and West Cambridge that didn't involve a sublet. Only one was greater than 25,000 square feet. Our Reston portfolio was responsible, as I said, for virtually all of our executed leases this quarter in the D.C. region. Leasing activity and tenant demand growth is coming primarily from 2 industries, cybersecurity and defense contracting. We had just over 30,000 square feet of expansion from existing tenants but we also experienced, as I said, a 50,000 square foot contraction from a traditional tech company. The vibrant residential and retail environment continues to be a natural location for small businesses in the financial services and legal industry as well, and we did do 6 leases at 5,000 square feet or less in the Town Center as well as a handful of retail deals. The District of Columbia office market is becoming more and more bifurcated. The private sector tenant demand is dominated by the legal industry in D.C., but in almost every case law firm renewal or relocations are resulting in smaller requirements which is leading to negative absorption as we have all read and seen. It doesn't look like the government leasing or usage is going to help with this problem. However, with the either existing or near-term high vacancy, there are many buildings with overleveraged capital structures unwilling to provide capital for new transactions, and therefore, they have very little client interest. When clients do want space, they prefer to be on the top of refurbished, amenity-rich, well-capitalized buildings. There appears to be limited opportunities in the market that meet these clients' demand so our availability at 2200 Penn and 901 New York Avenue should fare well over the next few quarters. On a comparative basis, the West Coast markets, particularly San Francisco, are seeing more demand in '24 than '23. However, additional sublet availability and technology company lease downsizing upon lease expirations continue to mute the positive demand emanating from the AI organizations that continue to look for space. Tech growth away from AI has yet to emerge. The San Francisco CBD also continues to act as a financial center of the West Coast with its own set of asset managers, including private equity firms and venture firms, some hedge funds a few specialized fund managers and obviously, their financial and legal advisers. This is the source of the bulk of the transactional activity in the market. And while the brokers correctly report a pickup and tenants in the market. If you look more closely, very little of that demand represents net growth from those tenants. Our San Francisco activity continues to center on traditional non-tech demands at Embarcadero Center. This quarter, we completed an 80,000 square foot law firm renewal with no change in square footage and five smaller deals, all 12,000 square feet or less with new tenants on currently vacant space. We continue to see many of the professional services in law firm continuing to downsize, which is in stark contrast to the activities of those same tenants in New York and Boston. We are seeing a steady flow of potential tenants 12,000 square feet or less, which is about a full floor at our 535 Mission property. But this is in contrast to 680 Folsom whose location is less desirable for non-tech demand and where the potential tech clients continue to have inexpensive furnished sublet options. Tenant activity is improving in our Mountain View research R&D buildings, where we have about 215,000 square feet of availability and uniquely attractive products. These buildings are designed for companies that are making some sort of device, be it a car sensor, a photovoltaic panel or a medical device. They don't compete with the large multistory office product that has flooded the market. We saw activity come to a halt when the SVB imploded last year. The entrepreneurial device maker companies still exist, and they are now slowly making capital commitments once again and looking at leasing space. The lab market story in South San Francisco is not dissimilar to Greater Boston. There were only a handful of new leases completed during the first six months of the year that didn't involve a renewal or sublease though there have been about 100,000 square feet of new deals completed in the last 30 days. Overall, we are experiencing an improving operating environment. Leasing available space is primarily driven by gaining market share from competitive landlords and/or lower quality building, but not net new market demand growth. While the markets need consistent incremental absorption to show a macro recovery, we have started to see pockets of strength where low availability is driving constructive client behavior, the Back Bay of Boston and the Park Avenue submarket of New York are the obvious examples. As clients choose premier properties and sound financial condition operated by best property management team, we will continue to be successful in capturing demand, leasing space and increasing our occupancy. And with that, I'll turn it over to Mike.

Douglas Linde:

Thank you.

Operator:

Thank you, sir. [Operator Instructions]. And I show our first question comes from the line of Nick Yulico with Scotiabank. Please go ahead.

Douglas Linde:

So Nick, this is Doug. So I think that Owen's comment was 100% accurate, which is our occupancy is going to increase. Mike would also tell you that we have a cycle with regards to particularly our CBD leasing, which by the way, we're in the mid-90s on an occupancy level right now. Where those leases take some time to go from lease to occupied, right? So we have a 200,000 square foot piece of space that's available in a particular building, and we sign a lease for it, but we may not see actual occupancy for 12 to 16 months because the tenant has to actually physically build out the space. And so it's a little hard for us to give you a tight projection on when our occupancy number will actually start to materially increase. The trajectory is -- there's no question it's going up. And if we end the year again with this new adjusted in-service portfolio with the availability that we have in these life science buildings, in the mid 87s, we will -- my guess is, be in the 88 in 2025, and we could get lucky relative to delivering some space where the tenant takes it in and as condition. And suddenly, we get a big pickup in "occupied", and therefore, we can start recognizing revenue. Those are the kind of things that would make a material difference, but we're not counting on those.

Steve Sakwa:

Thanks. You guys talked about maybe pursuing some new apartment developments. I'm just curious if you sort of look at pricing today for materials and kind of current rents, what sort of yields do you get on un-trended rents today? And it sounds like you might bring in JV partners, but how would you just sort of think about funding those? And what percentage of those deals would you likely keep?

Douglas Linde:

Yes. And Steve, this is Doug. I will just make the following additional comment, which is this stuff works with stick frame. So the things that we are looking at in our Suburban I'd say, non-office likely potential properties in the Greater Waltham market as well as in Northern Virginia are the places where you will probably see us being able to start things sooner rather than later. CBD construction and CBD rents are much harder to pencil right now. And all of our teams are looking at it and studying it, but we don't -- we're not sure that 2025 will be a position from -- an economic start on that stuff.

Michael Griffin:

Great, thanks. Owen, I want to go back to your comments around expectation for forward earnings growth and kind of how that translates to leasing. Should we take it as the fact that there is a pivot to earnings growth improves the outlook versus maybe the magnitude of what corporate earnings growth is expected to be maybe relative to history? And then I imagine that a lot of that growth is coming from tech companies, just given the fact that they've been more hesitant to lease space as we've seen over the past couple of years, how does that maybe factor into using that metric as a good forward indicator of leasing demand?

Operator:

Thank you. And our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Douglas Linde:

So John, I think that the stabilization dates assume a 85% occupied square footage of the building. So that's sort of how that works. So presumably, the leasing would be done in the 12 to 18 months prior to that date occurring and we would be building out space and generating revenue when those tenants actually moved in. And I'll let Mike talk about our capitalization method.

Douglas Linde:

And again, unfortunately, it's just geography, but we throw all of these development assets 12 months after we've completed base building into our in-service portfolio wherever they are leased. And so they have a muting effect on our occupancy, even though they're not really apples-to-apples part of the in-service portfolio that we're describing on a sort of quarter-by-quarter basis.

Blaine Heck:

Great, thanks. Good morning. Owen, conversations about the potential impacts of the election are ramping up. So I wanted to get your thoughts on whether you see any possible changes in regulations or the overall economic or political environment that would be impactful to your business under either party?

Operator:

Thank you. And I'm showing our next question, comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Michael LaBelle:

So our maintenance CapEx, I would suggest it's going to run somewhere between $80 million and $100 million this year, which is in line with, I would say, historical type of averages, maybe a little bit lower. We do have some repositioning CapEx that is more meaningful this year than it was last year, primarily at 200 Clarendon Street, where we're putting in a pretty significant amenity center that is going to result in tenant retention and higher rents in that asset. So you may have noticed this quarter, there was a little bit more of repositioning capital. On the leasing side, this quarter was lower because we just didn't have that many leases commenced this quarter. It was just a little bit bulky, obviously, quarter-to-quarter on our leases commenced. And I think that a run rate -- annual run rate is $200 million to $240 million of lease transaction costs that would be part of our AFFO calculation.

Connor Mitchell:

Hey, good morning. Thanks for taking my questions. Kind of following along with Mike's answer there and providing some CapEx on adding some amenities. I was just wondering, with the leasing coming back, you guys had a good quarter of leasing volume and building out the pipeline some more, do you feel it's time to really reengage in building amenity upgrades in existing buildings? Or are you still looking for a little bit more of a push from the demand side?

Rodney Diehl:

Yes. So as Doug mentioned, we are in the process of doing an amenity center at Embarcadero Center. And this is -- we have always had a conference facility. And what we've done now is basically we're decommissioning that conference facility and we're building a brand-new both conference and amenity center over three Embarcadero. So that is under construction, and it's got both indoor and outdoor space. It's going to be available primarily to our tenants, but it will be available to the general public as well. And we're excited about it. And it's an absolute must. I mean we are making those same improvements, similar in concept anyway at our other projects, and it's demanded by the tenants. So very excited about getting this one done.

Peter Otteni:

Hey, good morning. This is Pete Otteni in D.C. So I would say we've been, as Doug said, through several major projects here in the D.C. market. We just opened Wisconsin Place in the Chevy Chase Maryland market here recently to great fanfare and we're optimistic that, that's going to translate as Rod was just describing, and Doug did into both increased demand and retention at the property. We're under construction at Sumner Square, and that will be done later this year. That's the result of some leasing that we have -- Jake and his team have mostly already done, and that was demanded by some of those tenants through part of their renewal. And then upcoming is at 901 New York Avenue as part of our lease renewal with Finnegan late last year and early this year. we're doing a pretty major renovation of both that lobby, the existing lobbies and the replacement of the amenity center on the lower level. So I would say we are mostly through that in the D.C. market. There's no major ones on the horizon, and I'll see if Jake has anything to add.

Douglas Linde:

Bryan, do you want to just sort of talk about 200 Clarendon Street?

Operator:

Thank you. And our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.

Douglas Linde:

Sure. So Camille [ph], this is Doug. So on the tech side, I actually don't think it's about downsizing much anymore, Caitlin, it's really at this point about whether they want to make high value-added investments in their real estate relative to their current platform of human beings and where their spaces are. So as an example, you may see some tech companies, large tech companies making incremental expansions in particular cities because that's where they think talent is. But on the margin, those companies are not growing quickly. We are starting to see dollars, right? And you're seeing this both on the life science side as well as the venture side being raised by companies that will be the next group of organizations that are doing something that to create value for the world at large, the business community, the improvement in the human condition from the perspective of life science and elongating the value of people's lives. That pipeline of money, it takes time to move into the organizations and those organizations to really create for new opportunities for growth from an office perspective. It's been going on. We're hoping that we'll start to pick up, but I'm not smart enough to know when that's going to happen, but we know it will happen. And as we think about our cities and our portfolio, we have a view that there will be more creation of new jobs and new economic activity in life science and in technology broadly thinking, then there will be in traditional financial services to asset management, professional and administrative services. So we're banking on that happening. It's just a question of when, and it's really hard to be able to sort of give you a time frame for that.

Operator:

Thank you. And our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.

Douglas Linde:

Owen, do you want to take the first question?

Douglas Linde:

And Vikram, on your question about sort of renewal versus new. So I -- one of the things I provided in my remarks were the amount of vacant space that we leased in each quarter and what's going forward. And so that number is coming out to somewhere around 40% of our leasing is those types of added occupancy generators, and the rest of it are renewals. And generally, when we're doing renewals, the majority of it is forward, but some of it is relatively broadly speaking sort of in the contractual expiration period of the given year. So we do have a bunch of leasing that we're doing for 2024 expirations, but the majority of that is for 2025 and 2026.

Floris van Dijkum:

Good morning guys. Thanks for taking my question. Owen, you mentioned something in your comments about potentially transaction activity in the office market maybe starting to pick up and some of the pipeline as we think about it, the foreclosures maybe starting to transact, could you maybe talk a little bit more about that part of the market, what percentage of those assets could be premium or the ones that you would target? And maybe also talk about the disconnect between buyers and sellers? And what does that mean for your -- are people closer to your cost of capital? Or are they -- or expectations on the seller and on the lenders still too high?

Operator:

Thank you. And I show our next question, comes from the line of Reny Pire from Green Street. Please go ahead.

Douglas Linde:

So I'm not entirely sure of what you want to use as your from when-to-when point. But I can tell you that net effective rents in our Park Avenue submarket of Manhattan and I'll let Hilary comment are higher today than they were six months ago, and they're higher today than they were a year ago. I can say the same thing definitively about the Back Bay submarket of Boston, but it's going to take a long time for that to occur in markets where there is a significantly larger availability rate because of the nature of having to basically steal market share from existing embedded occupancy. And Hilary, you can maybe comment on sort of transaction costs and what's going on with the rents in Manhattan because it's obviously the clearest example of what's going on from an NER perspective.

Operator:

Thank you. And our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.

Michael LaBelle:

I actually think our operating expenses were less than we expected them to be. So I think maybe they increased a little bit because there's a little more utilities expenses in the second quarter and repair and maintenance in the second quarter versus the first quarter. We generally get started a little bit slower at the beginning of the year on some of those items. And I think the third quarter is generally higher than the second quarter seasonally as well because of weather conditions again utilities. And I would expect R&M to be a little bit higher too, and that's kind of in line with where our budget is and that it would be probably a little lower in the fourth quarter.

Omotayo Okusanya:

Hi, yes. Good morning. Thanks for taking my call. A quick question on leverage. Again, our math picked up again a little bit this quarter. You do have kind of debt that matures next year, that'll probably refinance to a higher rate. Just curious how we should kind of think about the trajectory for leverage over the next six to 12 months and also, if the rising leverage is causing any issues, concerns, if I may use those words, with credit rating agencies?

Operator:

Thank you. And our next question comes from the line of Upal Rana from KeyBanc Capital Markets. Please go ahead.

Michael LaBelle:

So the terminations -- not all of them have occurred. The one that you mentioned was in the media. And one of them -- that one was a pure termination. The square footage in the media was inaccurate, however, it only impacts 20,000 square feet of our occupancy in the near term. The other two, one is the tenant that we're downsizing and relocating within our portfolio. They're staying with us. And we've got another tenant that is 4, 5x their size that is going to be coming in and taking their space as well as other vacant space that is in that building. So that deal is not signed yet, but it's something that we're working on, and we're confident in. And then the last one is a tenant at the Prudential Center, where we have a tenant whose business plan has changed. They've been looking to vacate their space and we have somebody else that wants it. So that tenant is going to be coming in. But the exiting tenant will be leaving in either the third or maybe the beginning of the fourth quarter, probably the third quarter, but the new tenants is not going to be coming until the first quarter of '25. And so that's really the situation we're dealing with on these is the exiting tenants are leaving in 2024, and the new tenants aren't coming until 2025. We also had a similar situation in the New York City market at 601 Lex, where we have an expanding tenant that's looking for space, and we found somebody that would exit. And so that tenant has exited, but the expanding tenant will not be going in until mid-'25. So it's just an example, if you add up all that square footage, it's 100,000 square feet of occupancy that's hurting us this year, where we're really -- it's really a good thing because we're bringing in a client that's a growing client who wants to sign a long-term lease with a client who's closer to their expiration date, maybe their plans have changed. In the case of New York, the client had already signed a lease in another building a couple of years ago because they needed space and so they were able to just consolidate into that building. So every situation is a little bit different. It's all case-by-case. But this is kind of what we do. We try to manage these buildings and work these buildings so we can limit downtime, increase rents and cover exposure.

Ronald Kamdem:

Hey, just a quick one for me. Look, if I think about this year on the same-store NOI front, some expirations that you guys have been able to backfill quite nicely, but still sort of end up being a headwind to the same-store NOI. So as we roll into next year, maybe can you talk about whether it's commencements or sort of larger exploration, sort of those two aspects, how should we think about as you're rolling into next year sort of potential headwind tailwinds, either from commencements or expiration? Thanks so much.

Operator:

Thank you. And this concludes our Q&A session. At this time, I would like to turn it back over to Owen Thomas for closing remarks.

Operator:

And this concludes today's conference call. Thank you for participating. You may now disconnect.

Owen Thomas:

Thank you, Helen, and good morning, everyone. BXP's performance in the first quarter continued to defy the negative market sentiment for the commercial office sector. Our FFO per share was in line with our forecast and market consensus for the first quarter.

Operator:

[Operator Instructions]

Nicholas Yulico:

Yes, I guess just a bigger picture question maybe for Owen. How you're thinking about all the different opportunities out there? You mentioned that there could be some acquisition opportunities. You did just launch 121 Broadway, which is a substantial capital commitment. You have a stock price, I'm sure maybe you're not happy about.

Owen Thomas:

Yes. So Nick, a couple of things I would say. First, let me start with 121 Broadway. It's a fantastic new building -- residential building that we're building in Cambridge but it was also launched as part of the requirements to achieve 1 million square feet of commercial entitlements in Cambridge. It was a requirement of that of receiving those entitlements.

Steve Sakwa:

Doug, I guess I wanted to just maybe follow up on your positive commentary on leasing and just maybe get a sense for how much of this is for the existing portfolio? How much of this is for the development pipeline? And I realize we're getting sort of close to the middle of the year. So any of the leases being signed are probably really more of a '25 beneficiary than they are going to be at '24.

Douglas Linde:

Yes. Thanks, Steve. So of the activity that we have in our pipeline, and I'm going to give you 2 different sort of pipeline numbers. So the 875,000 square feet of stuff that we have going on, about 20,000 square feet of that is development and the rest of it, the other 865,000 square feet -- 855,000 square feet are all existing portfolio deals and the majority of it is on available existing space.

Hilary Spann:

Sure. Thanks, Doug. Steve, in terms of the leasing activity in Midtown South, I think we saw a slowdown in the first part of this year. I will say that we are starting to see more activity as 360 Park Avenue South has come online and clients can actually see the very high quality of the finishes and the lobbies and the common areas and the amenities that we've put in place. And so we are starting to see a pickup in our activity there.

Anthony Paolone:

I guess my question is, you mentioned earlier some demand from the AI space. And at the same time, just tech companies having overexpanded and shedding some space. Just wondering if you could put some more dimensions around how that nets out. Exactly how big is the AI demand and maybe perhaps, how much more is there to go before the rest of tech is rightsized?

John Kim:

You've been making a very compelling case between -- the bifurcation between premier workspace and commodity office in the CBD portfolio, which really benefits BXP. But that same bifurcation exists in your portfolio between CBD and suburban, where it's a 15 percentage point occupancy gap. So I'm wondering, just given that performance difference, does that make you reconsider your commitment to the suburbs?

Hilary Spann:

Sure. Thanks, Doug. As Doug said, we've seen an incredible pickup in leasing activity in the Princeton market in the first and second quarters while -- and that includes signed leases, but also leasing activity that continues now and we expect to be executed in the second and third quarters.

Bryan Koop:

This is Bryan Koop for Waltham. I'll continue to echo what Doug talked about, and we intentionally call it an Urban Edge market because it is less than 10 miles from downtown Boston, and that's an attribute that shouldn't be taken lightly in terms of the commute and also the density of the population surrounding that Waltham market.

Operator:

And so our next question comes from the line of Blaine Heck from Wells Fargo.

Operator:

And I show our next question comes from the line of Michael Goldsmith from UBS.

Douglas Linde:

Well, let's let Mike answer the commercial paper question, and then I want to answer the question on our return expectations for multifam.

Ronald Kamdem:

Just a quick 2-parter. So the first is on the occupancy expectations for a pickup in the back half of the year. You talked about sort of the strength in Back Bay and Park Avenue, but those markets are -- have relatively higher occupancy versus the rest of the portfolio. So I guess I'm trying to understand where is the biggest sort of occupancy gains, expectations in the back half? Is it the stronger markets? Or is it other parts of the portfolio like suburban? That's part one.

Douglas Linde:

So the answer to your first question is it's pretty what I would refer to as granular. It includes occupancy pickups in buildings like the General Motors building, where we are in active conversations with tenants right now to take some space pretty quickly in 2024. It's in Princeton, where as Hilary described, we have a pipeline of activity, and we believe some of those transactions will happen in 2024. It's in the greater Metropolitan Washington, D.C. market, primarily in Western Virginia, where we have a significant pipeline of active smaller deals that are going to occur in 2024.

Bryan Koop:

So in the Waltham market, which is the only spot we have vacancy, we don't have any in Cambridge. I'd say it's the same as it was in the previous quarter, but maybe a little bit more encouraging. Where we are encouraged is, as you noted, was yes, there is more funding coming back into the life science sector. But also when we talk to clients, we are encouraged by the fact that they are, call it, producing the things that they said they were going to do to their investors, and there is encouragement in terms of the possibility of products down the pipeline.

Rodney Diehl:

Yes. Just in South San Francisco, our one project is the 651 Gateway building, and that is the -- it's basically a converted office building 16 stories. And that building is completed, and we've done 3 deals in there, 3, 4 floor deals, and those tenants are in various stages of moving in.

Operator:

And I show our next question comes from the line of Richard Anderson from Wedbush Securities.

Douglas Linde:

And Rich, just from a sort of macro thesis perspective, I think what is a 100% clear is that new construction is not part of the vernacular in 2024, 2025, which means unlikely you're going to see buildings delivered that aren't already under construction and there is such stuff under construction, but you're not going to be seeing new buildings delivered in any of these metropolitan areas for the next 5-plus years, right? That's how long it takes to build the building.

Jake Stroman:

Yes. I would just maybe second what Doug just noted that we are seeing really great activity across all of the buildings in our D.C. and Northern Virginia portfolio. The weight of the troubled assets and the dislocation in our region is really kind of playing to our favor.

Operator:

And so our next question comes from the line of Caitlin Burrows from Goldman Sachs.

Douglas Linde:

Sure, Cait. I'll make a brief comment and let Rod describe it. So WeWork actually is in negotiation to remain in all the space that we have with them at that building. And we have an expiration with Zillow. It's truly a flash Zillow, their fact consolidation which occurred earlier and that's where the majority of the availability is. And Rod, you can describe sort of leasing prospects there and how things are looking in our portfolio in South market?

Vikram Malhotra:

Just 2 quick ones. One, just -- I guess, Mike, I just want to clarify in the -- what you outlined for the guidance adjustment, do you mean just sort of where the curve has shifted overall? Or were you actually baking in some sort of rate cuts in your guidance?

Michael LaBelle:

So on the interest rate expectations, we have included an additional a rate cut in our expectations late in the year. And I think if that rate cut does not occur, it won't have a meaningful impact on what our guidance range is because of when it is within the year.

Operator:

And our next question comes from the line of Omotayo Okusanya from Deutsche Bank.

Michael LaBelle:

So Omotayo, there's really 3, I think, impacts that are going to help us in the third and fourth quarter. The first is we expect NOI from the portfolio to be up, and we expect that to occur because the occupancy improvement that we have talked about. So I would expect that both third and fourth quarter will show higher portfolio NOI than what we have in the first and second quarter.

Operator:

And I show our next question comes from the line of Michael Griffin from Citi.

Michael LaBelle:

So this is Mike. I'll respond to this and the rest of the team can add on. Lenders in general are not getting payoffs. So typically, they have volume requirements that are pretty significant because they're constantly getting paid off and they need to replace and hopefully grow that.

Owen Thomas:

Yes. Just to add to that, on your question on development yields. So let's divide this between office, life science versus residential. So on office, life science, our targets when rates were very low, we're in the 6% to 7% range. And I'd say those have gone up at least 200 basis points.

Operator:

And I show our next question comes from the line of Dylan Burzinski from Green Street.

Alexander Goldfarb:

Owen or Doug or whoever wants to take it. So I'm going to ask a 2-parter, but it's all related to the same. As you guys think about investment -- future investment to grow the company, a multipart, whether your landholdings in Northern Virginia still have any potential for data centers. If there's any office to resi conversion because of the new laws that may present opportunities to you whether it's existing assets or to invest in an asset that would be convertible?

Owen Thomas:

Well, there's a lot there. You violated Helen's rule of one question. That's okay, Alex. We'll still answer them all. So anyway, I'll just start. Lexington Avenue is doing well. I mean where we are at 53rd Street, it's right where the subway station is and 601 and is fully leased or very close to it and 599 is well on its way. So and 399 -- I mean on Park Avenue, but it's back end is on the lag, right, at the same location and those buildings are performing extremely well.

Douglas Linde:

Yes. And just to put a little bit of meat on the sort of carcass of that on the residential conversion side for us. So it's 17 Hartwell Avenue. In Lexington, we have a 30,000 square foot office building that we will demolish and that we are getting entitlements to build 350 plus or minus residential units.

Operator:

And our next question comes from the line of Upal Rana from KeyBanc Capital Markets.

Douglas Linde:

Why don't I let -- I mean, I think, Rod, you mentioned 680 Folsom before, but you can reiterate that. And then Hilary, you can talk about 7 Times Square.

Operator:

And I show our last question in the queue comes from Camille Bonnel from Bank of America.

Douglas Linde:

So let me take a stab at that, and I'll let Bryan provide his perspective as well. We don't think passing expenses on to tenants is a good way to treat our clients. And we do everything we possibly can to reduce our operating expense escalations every single year, and we spend hours and hours finding ways to change the things that we're doing, so that we do not have to have dramatic increases.

Operator:

This concludes our Q&A session. At this time, I'll turn the call back over to Owen Thomas for closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Helen Han:

Good morning, and welcome to BXP's fourth quarter and full year 2023 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. The webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes that 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 BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks, Owen. Good morning, everybody. After a moment of silence to Bob, I'm going to start. In early 2023, we established our baseline leasing expectations for our portfolio of about 3 million square feet in flat occupancy. As Owen commented, we ended the year with 4.2 million square feet and the fourth quarter included our 467,000 square foot early renewal with Snap at Santa Monica Business Park. We executed about 500,000 square feet more than we expected in 2023 and it was primarily pulling forward some 2024 transactions. The Snap lease was part of our baseline expectations and interestingly, it was only 1 of 2 leases in excess of 130,000 square feet that we executed in the portfolio during the year. On 12/31/22, so over -- just over a year ago, our in-service occupancy was 88.6% and we finished the year, 12/31/23, at 88.4%, essentially flat. Our in-service portfolio is 49 million square feet, so 20 basis points amounts to 98,000 square feet sort of a rounding era. Maintaining portfolio occupancy in the current environment is an accomplishment in its own right. Our large lease expirations in 2024 are 200,000 square feet at 680 Folsom, 230,000 square feet at 7 Times Square, where we own 55% and 230,000 square feet at Carnegie Center and they all occur in the first half of the year. A few comments on WeWork. We are actively engaged in lease modification discussions at our 4 units, Dock 72 in Brooklyn and our 3 sites in San Francisco. Our occupancy expectations assume, we reach agreements that result in a smaller overall footprint and a reduction to the $33 million of rent they are currently paying. It is obvious that WeWork emerges from bankruptcy as an operating business that is positioned for success. Mike will discuss the impacts in his same-store property performance for 2024. In '23, the U.S. office [ph] markets experienced negative leasing absorption. This included the BXP coastal cities, as well as the major Sunbelt and Midwest markets, basically everywhere. How are we thinking about the broad market for '24? If you look at the most recent labor statistics, while the U.S. added 216,000 jobs in December, only 5% were categorized as professional and business services, a.k.a. true office using jobs. The pace of job reductions related to the slowdown in the business economy has slowed, but we continue to see employee layoff announcements across a wide variety of industries, particularly technology. The U.S. economy may not enter a technical recession, but no one should assume that the soft landing is going to stimulate a pickup in office-using employment. Operating in this macro environment, it's hard to envision any dramatic pickup in market leasing absorption in '24. We think overall earnings growth for our clients and potential clients will improve and are optimistic it will lead to employment and space additions just not right away. However, we're not counting on a market recovery to maintain BXP's occupancy. Our leasing, construction and property management teams will lean in on our operating prowess to gain new clients and market share, as clients choose premier properties that are in sound financial conditions for their workplaces. This is how we release known explorations and cover vacant space. The bifurcation of client demand between the East Coast and the West Coast continues to be very wide. San Francisco, West L.A. and Seattle are dependent on technology employers. Traditional technology demand growth continues to be weak and more times than not renewing technology clients are reducing their lease premises. Snap is a case in point. We were successful in executing a forward-starting 10-year lease extension commencing in '26 for 467,000 square feet. However, the transaction does include an early termination of 140,000 square feet at 12/31 24. We can't require clients to lease more space, but we can meet their workplace needs. The leasing excitement on the West Coast in '23 was all about growth from AI organizations in the city of San Francisco, where we saw over 1 million square feet of positive absorption from the industry in the San Francisco CBD in '23. There have been billions of dollars of recent investment in this growing ecosystem, and there are additional clients in the market, but let's acknowledge that, these other AI organizations are predominantly seed or early round funded entities and not at the same scale as an OpenAI or an Anthropic. Their leasing is focused on small footprint built opportunities that are available at significantly discounted terms relative to rents being achieved in Premier. However, all demand is good demand in San Francisco if it translates into absorption. The Seattle CBD continues to have very little active demand other than lease exploration-driven exploration. Our vacancy in Seattle increased by about 100,000 square feet in the second half of '23, due to WeWorks termination, as well as the give back of a floor from a technology company as part of a 5-floor lease extension at Madison Center again, technology-company staying with us in our portfolio, but reducing some space. The entertainment industry, union contract settlements are clearly a positive for West L.A., but there continues to be pressure from streaming profitability, industry consolidation and job reduction in the gaming and media space that is impacting overall demand growth. The concentration of the strongest user demand, which will be the source of occupancy pickup, is still broadly speaking, asset managers, including private equity, venture hedge funds and specialized fund managers and their financial and legal advisers. These organizations are the heart and soul of our New York City activity and are an important sector of the Boston and San Francisco CBD demand as well. In some instances, these clients are growing their teams and capital under management, but in many cases or in all cases, they want to occupy premier workplaces. To illustrate the point, during the quarter, we completed a 25,000 square expansion for an investment bank in Manhattan, a 17,000 square foot lease with a foreign bank that's relocating to one of our other properties in Manhattan, a 10,000 square foot lease with a venture capital firm that's relocating to Embarcadero Center, a 30,000 square foot renewal with a private equity firm at Embarcadero Center, a 74,000 square foot renewal with a law firm in Embarcadero Center and a 15,000 square foot renewal with a long-only manager in Boston. This is where the demand is going to come from. Our strongest activity remains in our Midtown Manhattan portfolio, the Back Bay of Boston, the urban cores of Reston Town Center in Northern Virginia and our Embarcadero Center assets in San Francisco. This quarter, we executed leases of about 74 transactions. We signed 37 lease renewals, 37 leases with new tenants. There were 8 contractions and 9 expansions among our existing clients, with a net reduction of about 100,000 square feet across those 17 transactions. If you exclude Snap, the number is actually a positive 40,000 square feet. The bulk of the transactions were on the West Coast and the majority of the expansions were in New York City. Total leasing volume this quarter was led by New York at 567,000 square feet, then 468,000 in L.A., 198,000 in San Francisco, 153,000 in Boston and 140,000 square feet in the greater Washington, DC area. I would highlight two leases that were executed this quarter. First, the Pratt Institute entered into a long-term lease for 63,000 square feet at Dock 72, a real accomplishment for the New York team and DoorDash executed 115,000 square foot lease, including 57,000 square feet of expansion at 200 Fifth Avenue, again, in Manhattan. The mark-to-market of the leases that commenced this quarter, meaning they hit our revenue, was flat as reported in our supplemental. The overall mark-to-market of the starting cash rents on leases executed this quarter, relative to the previous in-place cash rents was down 1.8%. The starting cash rents on leases we signed this quarter on second-generation space were up 7.5% in Boston, flat in New York, down 15% in D.C. and overall on the West Coast down 3%, but the San Francisco CBD was still up 9%. At the end of the quarter, we had signed leases that had yet to commence on our in-service vacancy, totalling approximately 750,000 square feet, with 625,000 square feet anticipated to commence in '24. Our pipeline of active leases under negotiation sits at just under 1 million square feet today. We have only one transaction currently in negotiation over 70,000 square feet. Comparing this to last quarter, we were at 1.2 million square feet of active discussions at the same time and included the 467,000 square foot Snapdeal. We've seen an uptick in the number of active deals, but the size is smaller. For modelling purposes, our 2024 leasing activity is anticipated to be about 3.5 million square feet. As of January 1st, 2022, so going back two years, our total expirations for '24 totalled 3.5 million square feet. On January 1st, 2024, we have 2.7 million square feet of current expected expirations. If we renew 25% of the remaining 2024 expirations or 675,000 square feet, it means we will have renewed about 43% of our expiring square footage, which is sort of in line with our historical averages. We have executed leases on 625,000 square feet of vacant space commencing in '24. So effectively, we need about 1.4 million square feet of leases that we have yet to execute on 2024 vacant space to have a rent commencement during the year to maintain a flat occupancy. That's what is built into the model and into Mike's same-store. As we look forward into the year 2024, we expect to have sticky occupancy defined as 20 basis points plus to minus 120 basis points negative at the year, and that also factors in some tenant defaults in addition to contractual expirations. During the year, we will have property additions and subtractions to the portfolio. These are not included in the current portfolio occupancy guidance. As an example, in the fourth quarter of '24, the two Waltham Life Science developments will join the in-service portfolio. Their 32% leased and include 300,000 square feet of vacant space that will hit the reported vacancy, that's not part of our projections. We're just looking at our intra-service portfolio as of today. And as long as we're on the topic of life science leasing, new life science activity across our two markets as well as our entire portfolio, continues to be light. During the quarter, we actually had 137,000 square foot known exploration of a life science lease in our Waltham portfolio, which impacted our sequential occupancy and there were no new leases signed in South San Francisco at 651 Gateway. In Waltham, we are seeing some tour activity and have made some proposals, but potential clients don't feel a sense of urgency to make a quick decision. Before Mike discusses our 2024 guidance, I want to make one additional comment around the cost of potential new developments that Owen described. We are seeing more competitive pricing in tenant improvement projects. We've not experienced deflation in material prices or labor, but it's true that there is less work, and we believe that this has resulted in lower pricing from the various subcontractors, who want to maintain a certain size of business. As we think about new base building construction costs, we're hopeful that escalation is no longer part of the conversation and that the same pressures will result in bids that allow us to consider moving forward. However, there are lots of infrastructure projects as well as institutional construction that is filling a portion of the void from lower commercial construction in our markets. Capital costs still haven't received. Construction financing requires a significant capital charge for lenders and obviously results in a higher margin on top of the underlying SOFR. Everyone has a view on the timing and depth of Fed Red rate cuts, but if SOFR goes to 4%, construction financing, if you can arrange it, it's still going to be very expensive and a significant drag on new construction starts. Current market rents and concessions associated with available existing space don't support office -- new office development. To a potential client that requests a proposal for new construction understands it will involve appropriate lease economics to justify the new capital requirements. So Mike, it's time to talk about the quarter and guidance for '24.

Operator:

Thank you, sir. [Operator Instructions]. And I show our first question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Douglas Linde:

So that's, unfortunately, the technical question that keeps everybody up at night here at BXP, which is what will the actual condition of the space fee that we're leasing and what will our requirements be to either modify or change the space relative to simply handing the space over to the tenant? And I wish I could give you a precise answer to that, Steve. Right now, of the -- just over 1 million square feet of space that we are currently under negotiation with, about 500,000 of that is covering what I would refer to as pure vacancy. And I think there is a good probability that 50-plus percent of that will be "in place" from a revenue perspective in 2024 -- but it's -- that's the really hard question for us to gauge, which is, I'm comfortable that we're going to get the leasing done and that when we are also showing our "occupancy", including signed leases, that it will illustrate that we have had a very successful year from a leasing perspective. It's really hard to know when that revenue is going to hit. And so that's the variable that we can't control because it's really a question of how the lease comes together. And all of that is embroiled into Mike's same-store number. So that's why I think, to be fair, we are being, I think, conservative but they're conservative, not trying to -- we're not standing backing anything here because we just don't know.

Operator:

And so our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Owen Thomas:

Yes. Yes, as I said in my remarks, the lease extensions did spark the acquisitions that we made. And it's for the reasons that you outlined. So with each of these extensions came a capital requirement for tenant work, leasing commissions and, in some cases, building upgrades. And the two partners had a shift in strategy to disinvest or reallocate away from office. And that basically sparked the acquisitions. The other thing I would point out, other assets had future capital requirements as well. So in the case of Santa Monica Business Park, we have the Snap renewal, but also we have a fee purchase option coming up in 2028. That could -- if we elect to purchase the fee, that will have a capital requirement. And those 360 Park Avenue South, there was not an anchor lease renewal because that project is under redevelopment. It's in the middle of the redevelopment. So the partner basically sold out their position in the middle of funding that development. So it also had a future funding requirements. So those are really the drivers.

Owen Thomas:

Yes. And just lastly, John, to the second question that you asked, never say never. There might be other opportunities to acquire interest in properties that we own, but I certainly don't think the volume would be anything like what we experienced in the last quarter. For example, today, our largest joint venture partner is Norges. And in the last quarter, they actually increased their number of joint ventures with us because we did these two major JVs in Cambridge. And obviously, they have a different strategy from the JV partners that we acquired interest from. So it could be more, but I don't think it will be anything close to the volume that we experienced last quarter.

Operator:

And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.

Owen Thomas:

Yes. I think the -- Alex, to answer your question on the debt side, Mike should answer. But in general, as you know, we primarily finance with unsecured financing, and we have great access to that market and have been accessing it and we think it's very attractive. And in most cases, we've been able to extend or refinance existing mortgages that we have on our joint ventures. Look, I think in terms of the answer to your question, the JV partners would have to answer it in terms of how they thought about the returns that they were forecasting from the extensions that we committed to. But when we do our own math, and we shared some of it with you on this call, we think it's very attractive and it's very accretive to our company, and we think it makes a lot of sense. So our suspicion, as a result, is that these decisions that they made were more related to a change in strategy as opposed to a lack of enthusiasm for the return. I'd also just make an additional point on this. These are two different partners, and they come from a little bit different position. So the partner on 901 has been a long-term investor in that project, and they have been in it, and they have made a good return and has been very successful for them. So maybe it was a change in strategy, but it also might have been, look, we've been in this for a very long period of time. We've done fine. Maybe this would be a good time to exit. I think on the partner on the other two deals, Santa Monica Business Park and 360, definitely, they were newer to the JVs, and I think that clearly was more of a change in strategy.

Nicholas Yulico:

Thank you. I was hoping to just get a little bit more feel for the decision to reinvest in Santa Monica Business Park. Why you think it's still an attractive long-term opportunity? And secondly, if you could just give us any feel for -- in terms of the Snap renewal, how the mark-to-market worked on that plus the level of TIs and free rent if you had to give there?

Douglas Linde:

Yes. And Nick, this is Doug. On your answer to the other question. Without -- we're not going to get into the specifics of a particular tenants economics. As I said in my remarks, our West Coast leases that were signed this quarter -- executed this quarter was down 3%, but San Francisco was up 9%. So you can go through the statistics and sort of decide yourself how you think that might have played out. And relative to transaction costs in free rent, it was actually a very low transaction costs and low free rent early renewals. So those economics were built into the lease rate.

Anthony Paolone:

Thanks, good morning. You talked about playing offense and it sounds like you'll use some third-party capital as you've done in the past. But just for BXP's portion of deals and playing offense, where do you think we see capital come from for you all?

Michael LaBelle:

And I would just add that a lot of what we're looking at is doing things more on a capital-light basis, and taking a lower percentage interest percentage potentially or entering assets in a different way and kind of similar to these transactions that we did, and this didn't require a lot of incremental capital. We took on a little bit, obviously, their share of the debt, but the overall impact on our leverage was very, very small with these transactions. And in fact, we've kind of delevered overall because we brought in the equity from the Cambridge transaction. Overall, we deleverage. We're -- we don't expect that we're going to increase our leverage significantly. And our goal is to kind of maintain it in a range that is pretty close to where we are. So I think that when we think about investments, we keep that in mind.

Michael Goldsmith:

Good morning. Thanks a lot for taking my questions. We've talked a little bit about San Francisco, and there's some clear differences in the markets. Do you think we're kind of hitting the bottom in these tech markets that are lagging in their portfolio? And just any visibility from the demand from AI or other sources that are providing some near-term excitement for a rebound in San Francisco and Seattle?

Operator:

And I show our next question comes from the line of Michael Griffin from Citi. Please go ahead.

Owen Thomas:

Yes. So Nick. Good morning, so there have been more office transactions in the fourth quarter. In my remarks, I gave some stats, and it was kind of interesting to me the percentage of the commercial real estate transactions that are going on from office increased materially in the fourth quarter to the third. So what's happening? I think there are more distressed players that are out there, buying assets at very low per square foot prices. Some of these assets are challenged physically, most of them are not very well leased. And I think those buyers are family offices, for example, they're smaller deals that don't need leverage. Because again, getting a secured mortgage for an office building is virtually impossible. And I think these buyers are just saying, look at this per square foot price, we think the market will ultimately recover, and we're in at a good basis. So I think that's the kind of market that's out there. Those aren't the kind of deals that we want to do. I mean we're looking for premier workplaces. We're looking for assets. They may not be fully leased. Maybe there are some challenges with it or an asset that we can make a premier workplace, and they're going to be larger and they're going to probably require funding from the financing market in some way. And I think there's much less competition for anything like that. And I think, hence, that's BXP's opportunity.

Ronald Kamdem:

Hopefully, you can hear me. Just one, 2-parter, one on the same-store NOI guidance of down 2%. Just hoping a little bit more color. You talked about WeWork being a 45 basis point headwind. Just could you talk through maybe what some of the larger expirations that you're expecting in the first half the impact will be and what you're assuming at the top and bottom end of the guidance range? And the second part, if I could sneak it in, is just on the life science market, as you sit here today versus 3 to 6 months ago, can you just characterize what the leasing activity is like for the larger versus the sort of mid and smaller tenants? Thanks.

Douglas Linde:

Yes. And let me add on Rod deal go first on life science activity in the San Francisco -- South San Francisco, North Peninsula market and then Bryan can talk about life science activity in our Waltham portfolio, which is where obviously where our availability is. Rod, do you want to start?

Bryan Koop:

Boston, this is Bryan Koop. It really reflects the same thing. The second half of last year was far different than the first, and activity picked up on life science tours. But let's say, from summer beginning, smaller users out there still questioning, is it time to make a commitment or not? A lot of questions about their funding, etcetera. And then fourth quarter, we did see a couple of, let's say, the life science titans come out and emerge. And they were all caught let's say, potential clients that are in the market already in Cambridge that were, let's say, looking, sourcing the Waltham market for what could be available. In general, we just had a summary with Doug and Owen yesterday about last year's performance. And we were quite surprised. We have 360 tours last year. So you're averaging 7 a week, which was surprising, given how dismal the attitude about office was. Two comments. One is that the clients are spending far more time with us and aggressively looking for what their strategy is going forward. And we have also seen verification of possible spoke plays, where you have a large headquarters in the CBD district and then looking for a spoke location further closer to the suburbs to people's homes. And we've had 2 great executions of that and there's been a lot of interest in that.

Caitlin Burrows:

Hi, everyone. Maybe just a question. Google announced last night meaningful office optimization charges, 1.2 billion in the quarter. So given your 2.8% exposure to the tenant, will this impact any of your properties? And I guess, more broadly, I think you mentioned that tenant defaults are included in your guidance. So what's your watch list like or outlook for early exits by tenants this year?

Operator:

Thank you. Our next question comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Douglas Linde:

So Mike is pulling out which ones theoretically are...

Douglas Linde:

So the developments that we have, I believe that you're referring to are 290 Binney Street, which is the 2026. That's AstraZeneca, that's 100% list [ph] 103 Fourth Avenue, which we don't have any leasing velocity on. 180 CityPoint, where we have about 140,000 square feet of available space. Those 2 are coming online in '24 in terms of when they're going to be in service. And we need to find some clients to lease those buildings in order for them to be stabilized in 2025. At 651 Gateway, it's a similar conversation, in that we've started doing leasing. We will be through 12 months of the lease-up in early 2025, and we need to do more leasing in order to get that one going in the 360 Park Avenue South, which -- where the building construction is complete and Hilary and her team in New York are aggressively pursuing anybody who wants premier space in the Midtown South market, where we've done one lease, and we have another lease that we're close to having a letter of intent on for a floor plus. And then there's other interest in the building. And that one also we need to do additional leasing in order for it to be stabilized in 2025. The rest of the -- I believe the rest of the stuff is residential, and that's obviously a question of when those buildings start and how long the ramp-up is in terms of turning over the units and I think when Skymark opens, which is the Reston property in the third quarter of 2024, we have probably a 15- to 18-month lease-up. I know you can correct me if I'm wrong, in or for that one to be stabilized.

Michael LaBelle:

So Camille, that was really in my notes, I kind of described that the deliveries in '24 are these deliveries we're talking about. And we don't expect '24 to have a really significant impact from those, but we do expect to have some leasing momentum in '24, with income starting in '25. So our expectation is that that's when we will start to see more revenue come from these buildings.

Blaine Heck:

Great, thanks. So it seems like we're still seeing the flight to quality trend play out with most net absorption and leasing activity taking place at high-quality buildings with high rents. But recent media reports have tried to kind of poke holes and even the top of the office market. So just wanted to get your thoughts on whether anything has changed with respect to leasing activity or rents at the top of the market and whether you've noticed that tenants have maybe become more cost conscious and less likely to lease at those highest quality spaces?

Douglas Linde:

And I would tell you that the most activity that we are having on a building-by-building basis is, in fact, in our CBD most premier assets. And in no case, are we seeing changes in the economics of what the market or we are asking for and ultimately achieving in those client conversations. I'm not sure where that information that was in the article in the Wall Street Journal came from, but it's just -- and I'll let Hilary describe what's going on in Manhattan in terms of our activity level, which I think is sort of the poster trial for Premier. And she can sort of give you a perspective on why I think that article is just not -- it doesn't hold water for us.

Douglas Linde:

And then just -- Jake, you might comment on the phenomenon you're seeing at the high end -- in the premier buildings where, I guess, what we would refer to in Washington, D.C. as the trophy buildings in terms of both the demand and the economics there.

Douglas Linde:

We're seeing the same thing in Boston. And as noted in our discussions internally this last week, for our Boston portfolio, we're at 4.4% vacancy and Cambridge is 2.5, which is just phenomenal. We are seeing -- I wouldn't say that this is outstanding trend, but we are seeing users that normally would not be in our office building, where they want more square footage in, let's say, a Class B or C building, looking to us for reaching up with smaller square footage just used more efficiently.

Upal Rana:

Hi, good morning. The D.C. market seems to be a bright spot, given the JV acquisition of 901 and the lease extension as well as the increase in occupancy there. Do you see the strength that is sustainable? Or could you provide your thoughts on the D.C. market in general? Thanks.

Jake Stroman:

Yes, sure. I can just -- Doug, to that point, if we look at 901 New York Avenue as an example, in the last 30 months, we've done 140,000 square feet, plus or minus, of transactions at that asset. And we've had great activity. And I think a lot of that is because we've been incredibly responsive to the clients in the market. And I think people have been responsive to our sponsorship at the asset. So we feel really comfortable with the plus or minus 100,000 square feet of vacancy at the asset, given the repositioning program that we're going to undergo. And so we're really excited because these repositioned assets and investing this new capital into remonetizing the ground floor plane of the building and sort of really repositioning the lobby experiences, it really drives the activity of that asset, and it really becomes a new building in the market. And so there are fewer and fewer of those opportunities available in downtown Washington. And ever since news of the transaction that Doug noted was completed, we've seen great activity already and continue to at 901. And it's just representative of the fact that there aren't a lot of great opportunities in Washington, D.C. that exist today for premier office or repositioned office.

Operator:

Thank you. And I show our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.

Douglas Linde:

This is Doug. There is no termination option on the lease that we just signed. As part of the lease, we allowed them to terminate on 140,000 square feet at the end of 2024. The remaining 467,000 square feet is going out for 10 years starting in 2026 to 2036. So Mike can describe any conversations that we've had with the lender, but we're very comfortable with the refinancing opportunity associated with that building and how that will play out, relative to both the new leasing that we hope to do as well as the potential purchase of the ground, which is -- can occur in 2028.

Douglas Linde:

And now that it's effectively a wholly owned joint venture, we have no partner. We don't need to use third-party financing. We can choose to use unsecured financing. So I mean there are lots of options.

Dylan Burzinski:

Hi, guys. Thanks for taking my question. I guess just appreciate the comments on potential acquisition opportunities in the future. But could you just talk about sort of how maybe your co-investment partners are viewing office today and sort of the return threshold needed for them to deploy capital to the sector?

Operator:

Thank you. And I show our last question comes from the line of Floris Van Dijkum from Compass Point LLC. Please go ahead.

Owen Thomas:

Floris, you're asking a very good but unanswerable question, and I'll explain why. We tried. I try every quarter to give all of you comparable market deals. So we all understand together what pricing is. And this quarter, I could not come up with one. The only one was the deal in West L.A., but it had a lease buyout, and I'm not sure it was per se, a comparable deal. We gave you some data on partner buyouts that we did. Each one of those deals have different facts. For example, the Santa Monica deal was an unlevered fee simple cap rate. Well, that's got an assumption in there about Land Valley. So how accurate and how usable is that cap rate, I don't know. But we did just give you 3 cap rates on deals in New York, West L.A. and Washington, D.C. on partners that we bought out. So that is some data. And then lastly, in terms of what would be interesting to us, we pay attention to what is the look through cap rate for BXP and what would be accretive to us. And today, I think that number is around 7.5%. And we need to -- if we're going to do things that need to accrete our earnings. And so we're going to be focused on that, look through cap rate as a guidepost for what we do.

Owen Thomas:

I can't imagine you all want to hear any more remarks from us. So I thank you for your patience. This is a complicated quarter. We got through a lot of data. And again, thank you for your time and interest in BXP.

Helen Han:

Good morning, and welcome to BXP third quarter 2023 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes that 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 BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President; and our regional management teams will be available to address any questions. [Operator Instructions]. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde :

Thanks, Owen. Good morning, everybody. Client demand across our portfolio has remained pretty stable over the last quarter but final leasing decisions are taking longer not pretty consistent with what Owen’s talking about relative to challenges with regards to the profitability of corporations. Our buildings continue to see the most activity from financial services, professional services, law firms, administrative services and asset management. Traditional technology demand continues to be absent from our markets and more times than not renewing technology clients are reducing their leased premises. This is most prevalent in our West Coast properties. Pretty much the same picture that I painted last quarter. Growth from the AI organizations in the city of San Francisco is real. More than 700,000 square feet of leasing has occurred in the past few weeks. And there have been billions of dollars of recent investment into this growing ecosystem. For now, that leasing is focused on large well-built opportunities that are available at significant discounted terms relative to the rents being achieved in premier buildings. Reducing availability is a positive for the broader San Francisco market, but it's not going to impact leasing and Embarcadero center in 2024. The concentration of strongest user demand, often with growth for our assets, is still broadly speaking alternative asset managers, private equity venture, hedge funds specialized fund managers, these companies are growing their teams and capital under management. This pool of clients typically wants to occupy premier workplaces to illustrate the point. During the third quarter, we completed a 15,000 square foot expansion for a hedge fund in Manhattan. And a 52,000 square foot multi floor lease with a private equity firm growing in our portfolio in Manhattan. A 70,000 square foot asset manager is growing in our portfolio in Manhattan, and an expansion for a 21,000 square foot private equity firm in DC. Our strongest activity remains in our Midtown Manhattan portfolio, 200 Clarendon and the Prudential Center in Boston, the urban core of Reston Town Center in Northern Virginia, and our Embarcadero center assets in San Francisco. We don't have direct availability at Salesforce tower, but we hear through the market that Salesforce has interest in their 150,000 square foot sublet opportunity. Law firms are also an active portion of our portfolio and important clients for BXP. We are in active lease negotiations or LOI discussions with seven distinct law firms in Manhattan, DC and San Francisco. Owen highlighted that just over one million square foot have signed leases during the third quarter. Last October, we provided the leasing expectations embedded in our ‘23 guidance between 500 to a million square feet per quarter, aka 750,000 square feet on average, or 3 million for 2023. Through the first half of the year, we were at 1.56 million. So to date, we're at 2.7 million square feet. We currently have an additional 1.2 million square feet of transactions and active lease documentation. I would say we have a high confidence that we will be beating our leasing target embedded in our 2023 guidance of 3 million square feet. This quarter the executed leases included 52 transactions 32 renewals 20 new tenants, there were five contractions and five expansions among our existing clients with a net reduction in that pool of about 33,000 square feet. There were no particular patterns relative to industry or size, given who is expanding and contracting, bringing the volume down by market we did about 439,000 in Boston, 240,000 square feet in New York, 100,000 square feet in DC and 278,000 square feet in the West Coast market. The mark-to-market of the leases that commenced this quarter was down 3% as reported in their supplemental, the mark-to-market of leases executed this quarter was positive 4%. The starting cash rents on leases we signed this quarter on second generation space were up 60% in Boston, about 1% in New York and then down 13 in DC, nine in San Francisco, 14% in LA and 6% in Seattle. We ended the third quarter with an in-service occupancy of 88.8% compared to 88.3% last quarter. As Owen said during the third quarter 140 Kendrick Street and six 751 Gateway were added to the portfolio and Met Square was taken out. If you remove Met Square from the second quarter that comparative period occupancy went from 88.7 to 88.8. So again, modest, relevant increase. I would also note that we terminated WeWork and 44,000 square feet in the third quarter. We expect to have additional portfolio vacancy stemming from WeWork defaults as we move through the fourth quarter and into 2024. Just to remind everyone, we work leases 493,000 square feet as of 10, 01,’23, the BXP share of 2023 annualized revenue is $33 million. We don't expect we work to exit all the assets, nor do we expect them to remain in place in their current footprint. This will be a drag on 24 occupancy and same store contribution. The development portfolio now sits at 2.8 million square feet and it's 52% leased. We've recently signed a 70,000 square foot office lease with an asset manager at 360 Park Avenue South, bringing it to 18% leased and another floor except 651 Gateway that is now 21% leased to 100% leased assets totaling 335,000 square feet were removed and put into service, which accounts for the change in our total lease and the supplemental. At the end of the quarter, we had signed leases that have yet to commence on our in-service vacancy totaling approximately 750,000 square feet was about 425,000 square feet anticipated to commence in the fourth quarter of ‘23. For the remainder of ’23 we have about 925,000 square feet of expirations. Much of this is uncovered. So we expect a drop of a few basis points of occupancy at year end. In ‘24, we have a very manageable 5.7% of our total portfolio expiration or 2.7 million square feet. We believe our occupancy will be stable and ‘24 defined as up or down 1% quarter-to-quarter, where we end the -- as relative to where we're going to end the year in 2023. We will provide a leasing of volume outlook for ‘24 along with guidance next quarter. From a broad market perspective, the office supply picture didn't really improve much in the third quarter, with almost every market continuing to experience net negative absorption, Manhattan being the one place where there was some positive. The city specific office brokerage report are starting to characterize the markets in ways that acknowledged the bifurcation between the haves and the have nots and the distinctive trends for premier assets. But they are not publishing their data broadly. The availability in the premier building that Owen described is depicting a more constructive picture and BXP relevant view of office supply. What's clear is that new speculative construction, which presumably would be premiere is non-existent in the marketplace today. Any new construction starts are going to require economic rents, rent and concessions that are vastly different from the current transactions. The major inputs to a new building or construction hard costs, capital costs and leasing velocity. Construction costs started dramatic increases over the past five years with annual increases in the high single digits. We've seen the rate of increase is slowing down but we have not seen any reduction of costs. Construction financing could be found, it's SOFR plus 200 and SOFR was 25 basis points to 50 basis points. Today construction financing for office space is simply not available from traditional lenders. SOFR it's a five and a quarter. And non-traditional lenders might and I used to word might lend at double digit current interest rates with additional points upfront and lower loan to cost caps. Speculative leasing assumptions also assume a longer lease up. You put all this into a development pro forma. And you need rents that are materially higher than what is supported by current market rents in every one of our cities. This quarter, we completed a 313,000 square foot 10-year renewal in the Back Bay of Boston four years prior to expiration, and a rent level that both parties found attractive. Our client is using all their space, believes it's a critical component of their overall business strategy. And when they looked out into the market did not believe that any new construction was likely to be built on a speculative basis. This meant they would need to pay replacement cost rents and sign a lease now, using all the inputs I just outlined to be a new construction in the Back Bay in four years. And there are no 300,000 square foot blocks of high-rise space available in premier buildings and Back Bay today. New life science activity in the portfolio continues to be like during the quarter we completed our third lease at 651 Gateway for another floor. The property will open in ‘24 and two days each lease requires our partnership to complete turnkey spaces in Waltham, where we have our other life science new development availability, we are seeing some tour activity but there is no urgency for these requirements. There are a few large requirements that are touring but as I have discussed previously, the bulk of immediate demand is from small private companies that are looking for fully built space. BXPs legal teams continue to lease space and outperform the market because our portfolio is fundamentally comprised of premier workplaces. The majority of the demand new and existing clients in the market want to be in these types of properties. And we're investing capital and are building infrastructures, amenities and client’s spaces, which allow our teams to meet client needs. We are all seeing the stress that many buildings are feeling due to their current capital structure and the reality of the supply and demand fundamentals reflected in the leasing market activity. The transition or recapitalization or re-equitization of these buildings is going to take an extended period of time. Many of these assets are not in a position to commit capital to existing or new tenants, which greatly impacts the leasing brokers interested in considering them for their clients, and offers us with the opportunity to further increase our market share. I'll stop here and turn things over to Mike.

Operator:

[Operator Instructions] And I show our first question, comes from the line of Blaine Heck from Wells Fargo. Please go ahead.

Owen Thomas:

Yeah. It's Owen, I'll take a crack at that. I think that, as I mentioned in my remarks, I think buyers are concerned about two things. One, how do they underwrite lease-up and lease growth given some of the economic uncertainty that our clients face, as I discussed. And then second, what's their cost of capital, particularly their financing and can they get financing? So a lot of the deals that are happening right now, as I described, are small, private investors, probably not using much, if any, debt financing, things like that. So I think for -- so first of all, I think there's a tremendous amount of restructuring activity that's going on in the market generally. It may not all be reported, but it's definitely happening because there are over leveraged loans that are coming due all the time. And borrowers are in discussions with their lenders on what to do. So, there are lots of those things going on right now. And then I think second, for buyers to get more active, there has to be more visibility on the two uncertainties that I mentioned. I do think some of the interest rate behavior this morning might actually be somewhat helpful to that, because I do think a stabilization of interest rates would be very helpful for buyers to get more comfortable to do transactions. In terms of how much the price has to drop, I think for the space that we're interested in, which are obviously a higher quality building, it's hard to say, because there's not a lot of transactions that you can look at and say, what is the pricing today? But I just don't think, I think our general view at the moment is, all of the negative perspective out there on office is, in our view at least irrationally spilling over into premier workplaces, which will create opportunities for BXP.

Nicholas Yulico:

Thanks. I was hoping we can maybe get a feel for in terms of the impairments that were done to the JVs, if there's any sense on how much the unlevered asset values may have changed in that impairment analysis?

Nicholas Yulico:

Thank you.

John Kim:

Thank you. Doug, in your prepared remarks, you talked about occupancy basically remaining stable next year despite another year of a very favorable backdrop, 2.7 million square feet expiring, your pipeline is 1.2 million square feet. That happens to be your quarterly average. So, I was wondering what known move-outs are there that you see next year? And anything else -- any other tenants besides WeWork, that will be a headwind to breaking out of that 88% to 89% occupancy range?

Operator:

Thank you. And I show our next question, comes from the line of Alexander Goldfarb from Piper. Mr. Goldfarb your line is open.

Douglas Linde:

Yeah. So Alex, this is Doug. I'm going to let Hilary give you the most detail on this. I would just make the following comment, which is, we don't think one is a winner versus the other. I think it's clear that the timing opportunities associated with one are probably shorter than the other in terms of when we might actually get something going. But I'll let Hilary describe the demand for space in new buildings and also the challenges associated with getting those deals going. Hilary?

Operator:

Thank you. And I show our next question, comes from the line of Michael Griffin from Citi. Please go ahead.

Owen Thomas:

Well, I think it varies, Michael, widely, depending on the quality and location of the asset, the leasing status of the asset, the walls of the asset. I think borrowing cost today with the 10-year, I guess it's dropped a little bit today, but pushing 7%, I think for the highest quality assets, you're definitely above that. And for an asset that has a lot of leasing and other risks associated with it. I think you're looking at double-digit return.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. Owen, you mentioned in the prepared remarks about how BXP's tenants are more cautious in the space commitments on many of the traditional macro indicators may not accurately reflect what's going on in your business. So, recognizing that different cycles have different drivers. What metrics do you think might more accurately reflect the business now, and are the ones that you're monitoring so that we can follow along at home? Thanks.

Douglas Linde:

And Michael, this is Doug. I would just say that the best measure of corporate activity as it relates to the business that we are in, is job growth. And job growth typically is a little bit murkier. You can look at the employment numbers, but you really have to get into the specific industry categories, right? So government and hospitality are not going to be favorable to office, but financial services or technology or life sciences are going to be. And as you start to see the job listings start to perk up a bit, as you start to see hiring announcements by many of the larger technology companies and some of the financial institutions, which do in fact, broadly talk about those things, you will clearly see a more, I would say, conducive environment for office leasing on a going forward basis.

Jason Wayne:

Good morning. You said in your prepared remarks, you don't expect WeWork to exit all of their assets. So, just wondering where you expect them to stay. And then you previously said that WeWork security deposits average eight months of rent. Is that a good number to think about when looking at termination income moving forward?

Michael LaBelle:

Yeah. I think on -- I mean you're correct on the security deposit because we said that before, that we have about eight months of security. And if the tenant defaults, we try to -- we sent out a lease termination. We execute that lease termination with the client. And if there's a security deposit, we get that, and we booked that all on the day that we get it. If the client is going to stay in the space for another 90 days or six months. We might have to amortize that over that period of time. The one thing I would add is that in the fourth quarter termination income guidance, there's two pieces to the termination income. One is, determination income we're going to be collecting that I described. But also at Madison Center in Seattle, their lease is way below market. So, there's what is called a fair value adjustment to the rent. And in order to take that off our balance sheet, we book that as income. So, about half of that termination income is this fair value that's kind of a noncash concept. And the concept is that once we get that space back either at termination or at natural maturity, we will be able to re-lease that space at a higher market rent. So, hopefully, we will be able to do that.

Steve Sakwa:

Yeah, thanks. I just wanted to circle back, Owen, on the distressed opportunities. I guess I'm just trying to get a sense from you as to kind of where you would need to peg stabilized yields in order to deploy new BXP capital given your trading 10 times cash flow and north of an 8% implied cap rate. And then just from a market perspective, could any of those opportunities take you to any new markets like, say, a San Diego or Austin to be, in addition to the existing markets?

Operator:

Thank you. And I show our next question, comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.

Michael LaBelle:

Yeah. So, this is Mike. Look, we evaluated all the different markets when we decide how we're going to do a refinancing, and the credit spreads in the secured markets for very high-quality assets with long lease terms, we found is better than what the credit spread we can get from the bond market. So, our bond spreads right now for 10 years is about 285 for five years, it's probably 270-kind of area. So we're saving a lot in credit spread. The other opportunity, I think, we have is we're doing a floating rate deal. We haven't fixed it. We do have the opportunity to fix it via swap. And we're going to evaluate when and if we do that. As we kind of look at what's going on with interest rates over the next period of months. And if it becomes evident that SOFR is going to be dropping significantly by the FED in 2024 and 2025, we may keep the floating. If we see an opportunity to fix it because there's some sort of dislocation between the swap markets, we may fix that for a period of time. So I think it provides some flexibility that way. And it’s also a floating rate mortgage is prepayable. So if the market gets better for long-term debt two years from now, we can prepay this into a long-term fixed rate deal at that time. So, it does have some advantages that we looked at when we decided to do this bank financing.

Upal Rana:

Great, thank you. Doug, you went through some of the supply and sublease space availability in your prepared remarks. Given the elevated levels of supply and some of these spacing your markets, potential tenants have a lot more to look at today. Do you have a sense of how much of the available space is in direct competition with your buildings? And even though some of them may not be premier buildings, your potential tenants may be looking at them. I'm trying to get a sense of why tenants maybe, deciding to choose between your building versus others in today's environment? And if they're being more price sensitive today versus, or it could be something else?

Rodney Diehl:

Yeah. Hello everybody. So, there's definitely sublease space, a lot of it as everybody knows, in San Francisco. And some of it is higher end space. In fact, that's where a lot of the bigger deals over these last two years have actually happened. Some of them have been in our own buildings. 680 Folsom, for example, macys.com had roughly 240,000 feet available. And they leased all of it during the pandemic subleases. So, at the good space that has been out there has attracted some attention. But by and large, there's so much more that is not high quality and has either got no term left on it or it's got poor sponsorship with weak sublessors. So, those spaces are very difficult, and they're not going to compete with. We're not going to compete with them for sure. If tenant that's interested in those types of spaces is not going to go to any premier building.

Operator:

Thank you. And I show our next question, comes from the line of Dylan Burzinski from Green Street. Please go ahead.

Owen Thomas:

The way we think about this is, we set, top down a parameter, which we have, which is our six markets. And in terms of specific investments, that is a bottoms-up process and a more opportunistic process. So, we're open for business everywhere, and it just depends on the opportunity, and we want to allocate capital to the best opportunities. That all being said, as you've heard from our remarks and you see in our results. It's easier to underwrite leasing activity in our East Coast markets, particularly in New York and Boston, than it is in our West Coast market. So, the assumptions that we would use in underwriting deals would obviously be more challenging on the West Coast given the market behavior.

Hilary Spann:

Sure. Thanks, Doug. So as Doug mentioned, there are a number of high-quality assets in really desirable submarkets, the Park Avenue corridor, really all the way up to where the General Motors Building is that, or underwater on their financing and are having difficulty rationalizing, putting capital into the buildings to support leasing opportunities. And so we're really getting a lot of inbounds from the perspective of -- clients know that we have a strong balance sheet. They know that we're not over levered. They know that we can commit capital to leasing. So that's interesting to our benefit. And we're watching those situations where capital stacks are upside down, which may potentially present an opportunity for us. But again, to the point that Owen and Doug have raised, we would only really be interested in the highest quality assets that are premier workplace is consistent with what we already own. I would tell you, there's at least a handful of those situations in Midtown that we're tracking.

Peter Abramowitz:

Yes. Thank you. One or two of your peers have mentioned just potentially some pressure on operating margins going forward, as return to office mandates have more of an effect than more people are in the office. Just wondering if you could talk about that, potentially, how we should think about that for your portfolio moving forward?

Operator:

Thank you. And I show our next question, comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Michael LaBelle:

Thanks, Camille. I'll take that one. So, you're right. I mean, our FFO has held up really well. In fact, I anticipate that it's going to be somewhere between 5% and 10% higher than it was last year. And the primary reason for that is two things. One, we had a lot of free rent that burned off last year with some large leasing that we had done. And that became cash rent this year. So, that really helped our FFO. And then our leasing expirations in 2023 were lower. So we actually had to do less leasing to maintain the occupancy that we had. So our lease transaction costs are also a little bit lower. I think in the fourth quarter, we will see some incremental CapEx, if you look at the first three quarters of CapEx, it's not really where we would have a typical run rate for CapEx. So, I think our teams out there are trying to get everything done. So I do think that our CapEx will be a little bit higher in the fourth quarter. But overall, I mean, if you -- the guidance for FFO would be something like $5 and $5.20 is what we're looking at, which I think is pretty solid. So, the run rate is a little bit lower in the fourth quarter than it has been, basically due to kind of catching up on the CapEx items that we've planned, but haven't quite been completed yet.

Ronald Kamdem:

Hey just wanted to zoom in on the life sciences segment. If you could talk about what activity or the pipeline is looking like? And if you can comment on large tenants versus middle and smaller users would be helpful. Thanks.

Bryan Koop:

Yes, for Boston, Doug's description is spot on in terms of the underwriting of what we're seeing. I would add, over the last two weeks, we have seen some encouraging amount of tour uptick. And in size as well, not huge but midsized 30,000 to 60,000 feet, a couple. And then also, we've been encouraged by the quality, as Doug mentioned, of these clients.

Omotayo Okusanya:

Hi, yes. Good morning, everyone. Just if you could make any quick comments just about your outlook on life sciences. Is this an area you think you might dive into more as we go into 2024, fundamentals still somewhat uncertain, and it's an area where you may not do as much in. Any commentary would be appreciated. Thank you.

Operator:

Thank you. And I show, we have a question from the line of Jamie Feldman from Wells Fargo. Please go ahead.

Owen Thomas:

Yeah. So, Jamie, I'll take a crack at it. Definitely, the Bay Area, and actually, I'd just say the West Coast, Seattle, it's true in L.A. as well, the turnstile activity is slower, I think that is primarily driven by the behavior and policies of the technology client base. They have been less forceful and less prescriptive about having workers come back to the office. That all being said, the activity is increasing, and I think it's going to continue to increase just more slowly. So what was the second part of your question -- was private equity. So look, there is -- I would say, certainly much more limited interest in the private equity industry today generally for office. That's why you're not seeing much transaction activity. As I mentioned in my remarks, most of it is being driven by smaller investors, family offices groups that are seeing the deep discounts that are being offered in the market and are not needing debt financing. That all being said, I do think that sophisticated private equity investors understand the difference between premier workplace and a typical office asset. And I do think for the right asset at the right price, there will be institutional interest in those kinds of assets.

Operator:

And I show our next question, comes from the line of Richard Anderson from Wedbush Securities. Please go ahead.

Douglas Linde:

Four if you want.

Owen Thomas:

Yeah. I'm not going to rule anything out, but I do think the reason that BXP has 94% of its portfolio in premier workplaces as the portfolio has been curated one asset at a time, either through acquisition, development also through our disposition activity. So, I think single asset activity is more likely. And I think it's difficult to put a dollar value on what we're looking at. I mean, we are -- our job is to be in dialogue with owners of assets that we're interested in, and the lenders to assets that we're interested in and these dialogues are fluid. And I think it's really hard to put a number on.

Owen Thomas:

Thank you. We have no more formal remarks. I want to thank everybody for their time, attention and interest in BXP.

Helen Han:

Good morning, and welcome to BXP Second Quarter 2023 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes that 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 BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President; and our regional management teams will be available to address any questions. [Operator Instructions]. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks, Owen. So during our June NAREIT meetings, the most frequent topic of conversation was our leasing activity since it obviously drives occupancy, top line revenue on our net operating income. So I'm going to focus my remarks here this morning. Owen highlighted the volume of signed leases during the second quarter. Just to remind everybody, during the last 9 months, we've been providing the leasing expectations embedded into our 2023 earnings guidance between 0.5 million and 1 million square feet per quarter which translates to 750,000 square feet on average or 3 million square feet for year 2023. So during the first quarter, we signed 660. As of the end of the first half of '23, we've completed 1.56 million square feet, pretty much on target. This quarter, the 930,000 square feet of time leases included 63 transactions, 37 renewals, 26 new tenants. There were 7 contractions and 5 expansions. Three of the expansions were law firms, although we also had two law firm contractions along with the nonprofit and a government agency. Breaking the volume down by market, 320,000 square feet in Boston, 280,000 square feet in New York, 235,000 square feet in D.C. and a 100,000 square feet in San Francisco. We ended the second quarter with an in-service occupancy of 88.3% compared to 88.6% last quarter. But as Owen said, we added 2100 Pennsylvania Avenue to the in-service portfolio. The building is 91% leased but only 61% occupied for purposes of revenue recognition, which is how we calculate our occupancy statistics. So if you exclude the additional property, our occupancy actually remains flat for that quarter. As we sit here today, we have signed leases that have yet to commence on our in-service vacancy, totaling approximately 1 million square feet with 800,000 square feet anticipated to commence in 2023. That does not include the development portfolio, which is 3.1 million square feet and 54% leased. We currently have 44 leases in negotiation totaling 1.17 million square feet as compared to about 900,000 square feet as we entered the second quarter, so a slight acceleration. The one difference in this pool of transactions is that there is one large renewal, over 300,000 square feet versus the largest active negotiation last quarter also renewal was just over 100,000 square feet. We also have a current pipeline of additional active proposals totaling over 1.7 million square feet. So if we complete 95% of the leases in negotiation and 1/3 of the 1.7 million square feet of proposals. We currently would have about 1.7 million square feet of additional leases we hope to execute during the second half of '23, which will bring our total leasing for 2023 to just over 3 million square feet, again, going back to our original embedded expectations right on target. Our remaining 2023 expiration are 1.3 million square feet. We have 800,000 square feet of signed leases with an anticipated 2023 commencement. We'll be delivering 140 Kendrick Street, 104,000 square feet into the in-service portfolio in the third quarter and 751 Gateway, 100% leased 231,000 square feet in the fourth quarter. We will have additional 2023 activity across the portfolio, which will get our occupancy up slightly by year-end. But as we get further into calendar year 2023, additional lease executions will impact occupancy after 2023. The New York regions, second-generation leasing statistics jump out this quarter and need a little bit of explanation. The deals commencing included a floor that was previously leased to an existing tenant at a below-market rent as they were rebuilding their space elsewhere in the building. We subsequently relet the space under a long-term lease to a new tenant and the impact is hitting this quarter. If you strip out that transaction, New York would be down 9.2% on a gross basis and 15% on a net basis. As I said before, in general, we continue to have roll-ups in Boston and San Francisco, roll downs in D.C. and Northern Virginia, while New York is very building and lease-specific. The leases we signed in this quarter on second-generation space were up 8% in Boston, 10% in San Francisco, down 11% in New York and down 13.5% in D.C. The New York leases signed this quarter included a 120,000 square foot renewal in Princeton that was down 28% on a cash basis. The sentiment of our own office is worse than the reality, as Owen said. To illustrate the point in our portfolio, we continue to see an incremental pickup in daily activity as we look at the month-to-month trend lines. We measure the unique client employees coming into our building every day against a number of workstation/office desks in our CBD buildings today. Using this methodology, we are seeing weekly usage of 80% in New York City, 75% in Boston and 70% in San Francisco, and this excludes Salesforce.com and WeWork because they don't use our access card system. When we look at individual firms, there is a wide discrepancy in utilization. We have clients that are close to 90% of their daily high that they had pre-pandemic. While we have a few insurance companies back office that are as low as 35% sort of making Owen's point on the type of work that's being done. The frequency at work in the office is about three days per week across our markets where we track the data, and this includes San Francisco. So that people are coming back to work, 3-plus days a week. Fridays continues to be a real outlier for our clients. Contrary to popular sentiment our clients are using their space. From a broad perspective, the office supply picture didn't improve in the second quarter. The third-party industry reports all noted negative modest absorption across all of the major markets in the United States, all of them. And you'll clearly read about high headline availability very scintillating in every market for -- in the U.S. for some time. However, continuing the theme that the sentiment is worse in the reality, the New York City brokers reports also indicate that the Class A inventory in the Park Avenue submarket has an availability rate of 11% and that net effective rents are rising with higher face rates and flat or lower concessions. And while it's not reported, the availability in the premier buildings is even tighter. Away from the Midtown market in the BXP portfolio, we are now in negotiations with our first multi-floor client at 360 Park Avenue South. Tenant demand in the San Francisco CBD has increased more than 50% since the fourth quarter of 2022, with new technology demand responsible for much of the increase. There are a significant number of AI companies actively considering space and the requirements will all create net absorption. Given their potential growth at these organizations, we would expect this demand to center on the well-built tech sublet space that is readily available in the market, not direct vacancy. Global investment in the AI field is rapidly increasing and it's going to result in job growth. San Francisco is the leading labor market for AI jobs, followed by Seattle and New York and new venture capital investment in AI is concentrated in San Francisco CBD, New York and Boston, with CBRE research reporting at San Francisco is receiving more than 50% of the total invested money during the third quarter. These are encouraging facts that can only be constructive in the eventual recovery of the San Francisco CBD office market. The concentration of user demand strength with growth still is broadly speaking, alternative asset managers, private equity, venture, hedge funds, specialized fund managers. These companies are growing their teams and capital under management. This pool of clients typically wants to occupy premier workplaces. To illustrate this point, during the quarter, we did a multi-floor 10-year renewal with our private equity firm in Boston and a 15-year renewal for a full floor with an investment manager in New York City. In general, our strongest activity as at the General Motors Building in Manhattan, 200 [indiscernible] in the Prudential Center properties in Boston, 2200 and 2100 Pennsylvania Avenue in D.C., the urban core of Reston Town Center in Northern Virginia and our Embarcadero Center assets in San Francisco. We don't have availability of Salesforce Tower ourselves directly. The loss firms are also active in our portfolio and important clients for BXP. This quarter, we completed three law firm leases in New York, one in Boston and three in our D.C. portfolio. We also have a number of active loss from transactions in the proposal stage at Embarcadero Center. In general, however, outside of Manhattan, the law firms are reducing their footprint. During the quarter, we completed three life science leases, a 55,000 square foot extension in Lexington, Massachusetts. We relet the 12,000 square foot suite at 880 Winter Street where we had a pharma biotech company shut down its operations in March. We did it on an as-is basis and the rent that was 9% higher than the prior rent. And we completed our second full floor lease at 651 Gateway in South San Francisco. We are also negotiating a third full for lease at 651 Gateway, and we intend to complete a speculative turnkey installation on an additional floor. The property will open in '24 and to date, each lease at 651 Gateway requires our partnership to complete turnkey build-outs. Activity in the life science market continues to be moderate across both Boston and South San Francisco, and there is new unleased supply being added to the market. There are a few large requirements that are touring. But as I have previously said, the bulk of the demand is from small private companies that are looking for fully built space. Our new client at 80 Winter fits this profile. I also want to note that we are seeing costs decreasing this inflation on our tenant improvement work relative to jobs completed in 2022, largely due to the falloff in transactions in our markets. The numbers are slightly different by market by market, but we are seeing a reduction in TIs that we are budgeting. BXP's portfolio is going to gain occupancy. We will continue to lease available space because our portfolio is fundamentally comprised of premier workplaces. The majority of the demand new and existing clients in the market wants to be in these types of properties and we are investing capital in our building infrastructure, amenities and tenant spaces. We are all seeing the stress that many buildings are feeling due to their current capital structure. The transition or recapitalization of these buildings is going to take an extended time. While this is happening, many of these assets are not in a position to commit capital to existing or new tenants, which greatly impacts the leasing brokers interest in considering them for their clients. And so returning to the theme of the sentiment is worse than the reality for BXP, much of the available space in our markets is not competitive with our assets and some buildings are not in a position to compete due to their owners unwillingness to invest capital while their capitalization is in the restructure mode. Our clients are using our space. Medium and small financial and professional service clients will make up the bulk of the leasing we completed in 2023. We completed 57 leases during the first quarter, 63 during the second. We have had only two leases above 100,000 square feet this year and each was a renewal. Occupancy gains will be captured slowly through lots of small- and medium-sized new leases and renewals. I'll stop here and turn the call over to Mike.

Operator:

[Operator Instructions]. So our first question comes from the line of John Kim from BMO Capital Markets.

Douglas Linde:

So let me answer the first three parts of your question, and then we'll let Hilary answer the fourth. So we're designing the building. The building hasn't been designed yet. We are not in a position to discuss the economics of the development or the returns. Clearly, the capital markets are different than they were, so the return thresholds necessary to rationalize putting capital into building are going to be higher than they would have been in 2019 or 2020. I will let Hilary talk about the demand side.

Owen Thomas:

And John, it's Owen. And lastly, we are honoring our partner's request for confidentiality.

Michael Griffin:

Owen, I appreciate your comments kind of about the transaction activity and potential acquisition opportunities out there. I was wondering if you could give some color on kind of what the IRRs on those potential opportunities could be and kind of how you weigh that relative to maybe potential share buybacks.

Operator:

And our next question comes from the line of Blaine Heck from Wells Fargo.

Owen Thomas:

Well, I mentioned in my remarks that we're looking at dispositions and joint ventures with our residential assets and also our leased development properties. And I think those two asset categories would probably represent the least impacted in our portfolio in terms of increasing cost of capital and cap rates. So I think the residential asset segment today is more liquid than office. There are no premier workplaces selling, but it's certainly more liquid in office. So we're going to evaluate those opportunities. And we're also evaluating opportunities in our leased development pipeline.

Operator:

And I show our next question comes from the line of Steve Sakwa from Evercore ISI.

Douglas Linde:

So Steve, this is Doug. So the answer at the moment is we haven't focused on not building the project that we currently have. And the project we currently have is three commercial premier workplace buildings. Clearly, we have a platform in a parking structure that is going to be able to hold three large suburban office buildings on it. So the platform would allow for something other than that. But at this point, we believe in the location, we believe in the rationalization of transportation through the Caltrain, which is why we easily picked this location in the first place. We believe in what eventually the user who owns most of the land around there will build. And so we're not pushing towards doing something different at this moment. But fundamentally, we looked at the market and said, 2024 is pretty quickly coming and owning a building that's going to deliver in that marketplace probably given the availability of other buildings around there is not going to be the best use of our capital today. So we're just going to hold off and let the market recover some more and deliver at the appropriate time. And that's the fundamentally the decision that we made today. Rod or Bob, I don't know if you'd like to add into that.

Operator:

And I show our next question comes from the line of Michael Goldsmith from UBS.

Owen Thomas:

Yes. So -- it's Owen. Most of the balance of what we have is leased. So the big projects are the ones that we have in East Cambridge and one is fully leased faster. The other is fully leased by road. 360 Park Avenue South and other one, we're actually having some very constructive dialogues on that property and have a letter of intent with a client for part of the building. So I think the Platform 16 was rather unique circumstances given the amount of sublease space that's been put on the market in the Silicon Valley/San Jose area made us feel that -- and it was a completely speculative project with no pre-leasing. That brought us to the decision that Doug described.

Operator:

And I show our next question comes from the line of Caitlin Burrows from Goldman Sachs.

Douglas Linde:

Yes. So welcome back, Caitlin. So the -- when we had our call during the first quarter, we had about 900,000 square feet of what I referred to as our leases in negotiation. And so as we enter the third quarter, that number was over 1.1 million square feet. So I'd say, as I said, a modest acceleration in that. And we are comfortable with our embedded expectations of somewhere just over 3 million square feet for the year. So I would say quarter to quarter to quarter, it's going to be really what we anticipated. And I'm guessing the third quarter will be slightly better than the second quarter and the fourth quarter will depend upon how many early renewal conversations occur for 2024, 2025 lease expirations because again, as we get closer and closer to the end of the year, the leasing activity is generated from those types of conversations with our clients. So we're constructive. I mean, as Owen said, the tech demand particularly on the West Coast, has not really started to materialize. And so -- and that was a big volume generator for all of the companies that are in our product mix. We don't anticipate that changing in 2023, probably not in 2024. So our comparisons to the prior years, we think, will be muted because as Owen said, we are -- we believe we are in an office recession relative to our clients. And so there's not likely to be a massive acceleration in leasing activity. Again, we're going to capture market share because of our asset quality and our teams and their propensity to be creative about figuring out how to solve client problems, which will add to our occupancy, but the general market is not going to be what it was in 2022.

Operator:

And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler.

Owen Thomas:

I think Alex, I'll take a shot at that. I'd say, first of all, the tech companies trajectory of income growth has flattened out. So I think there's more focus on cost, which has an impact on space demand. And as new technologies are created and the advertising cycle changes and the growth continues, then I think there'll be more space demand. I think that's part of it. I think there definitely could have been an overinvestment period where there were lots of employees hired and also space that was taken in anticipation of growth that hasn't materialized. So I think there's a digestion aspect of this. And lastly, I think the technology companies as well as the Federal government, by the way, have been behind the rest of corporate America in return to office. And I think as those policies are rolled out with the tech companies. And we're seeing it happen. Amazon came back to the office on May 1. There are other technology companies that have come back to the office. Others are suggesting things like I said in my remarks, about evaluating performance and paying people based on their office attendance. These policies are rolling out now, and I think that will also increase the demand for space. And it's going to take some time. Doug, Rod, anybody else have other views on this?

Operator:

And I show our next question comes from the line of Nick Yulico from Scotiabank.

Douglas Linde:

So I'll answer the second question first. Yes, it's going to be modest, but it's yes. I'm not sure what you mean by lease rate. If you're talking about the amount of leasing that we are doing on a quarter-by-quarter basis compared to the previous years, it's going to be down for every quarter in 2023 relative to 2022. And that's why we -- I mean, again, we did build-to-suits in 2022 that we're not doing in 2023, including almost 1 million square feet just in Cambridge with AstraZeneca and the . So again, the -- we're doing a lot more leases in terms of numerical number of transactions, but the check size is obviously smaller because of the nature of what the demand is coming from and which is small professional services and law firms and the financial services firms that I described before. So I -- we feel good about our pipeline of activity on a relative basis, first quarter, second quarter to third quarter to fourth quarter of 2023. And again, it's going to be within the construct of the embedded earnings projections that we provided, which is somewhere in the neighborhood of 3-plus million square feet space.

Vikram Malhotra:

So just maybe building on uses of capital, you talked about the balance sheet. Your ability to fund what you have so far. But I'm just wondering, stepping back given what we know about the transaction market or [indiscernible]. Today, how do you view sort of your implied value given the run-up in office or the little run-up in office, we've seen relative to perceived NAV. And related to that, just uses of capital is the premier workspace trend is sustainable over, say, a 5, 7, 10 year period, is this a unique opportunity for you to do something more strategic in the premier space.

Operator:

And I show our next question comes from the line of Camille Bonnel from Bank of America.

Douglas Linde:

So with regards to the Boston suburban market, depending upon how you define things, we have Cambridge, which is where the bulk of our value is and we have no available space there either, including the new developments that we're doing, which are 100 facilities. And then we have this group of assets that were once the sort of the perfect solution for a growing technology company on 128, which was called Technologies Highway that were created in the '80s, '90s, 2000. And those locations are fabulous locations still and what we have been doing over time as we've been converting some of those buildings from office locations to life science locations. And so if you look at our development pipeline, the bulk of our available opportunity set is in Waltham, Massachusetts. It's in life science. And that is, I'd say, our focus for growth because we see more likely growth over time with life science demand in the greater Boston market than we necessarily do with traditional technology office demand. It doesn't mean there isn't demand out there because we are actually doing leases, both renewals and new deals in the Greater Waltham, Lexington market on the office side. But I will tell you that in general, the suburban Boston office demand market is slower than the CBD market by a material amount right now. And so we are well positioned to capture incremental demand as the life science market recovers. And as we've said, time and time again. We're not going to simply build for the sake of building. We're going to wait for the demand to come to us and for the market to tighten to the point where it makes economic sense to do this, and we have such a low basis in these buildings because we have effectively free land or buildings that were purchased for $150 or $250 a square foot, where we can rationalize incremental investment and get a strong return when the market is a "stable" market from a life science perspective. So I would say that the demand in general for traditional office space in the greater Boston suburban market is light. But it's -- there is some there, and we are capturing it because we happen to have the best -- absolutely the best properties in the best locations in what Bryan has sort of turned our urban edge locations. It's no longer viewed as suburban. And Bryan, I don't know if you want to make any additional comments?

Operator:

And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley.

Douglas Linde:

So I'm going to try and truncate the -- my answer to this. I'm not going to talk about all the things that and [indiscernible] talk about on their calls relative to sort of overall large-scale demand in life science and particularly biotech relative to gene therapy and all sorts of new discoveries that are going on. If you simply look at where the money is going and where it was, the amount of capital that was put into the life science market from a VC perspective had an enormous spike in 2019, '20 and '21, and it was way outsized. And if you look at what's going on in 2023, it's pretty normalized and slightly higher than where it was in, call it, 2014 to 2019. And so I would say that there is lots of available capital, but the capital is being very thoughtful, and it's taking advantage, quite frankly, of dramatic drops in valuations for companies that were funded by people who probably shouldn't have given them capital and gave it to the valuations that were not appropriate for whatever the discovery was in the stage of those businesses. So we believe -- and we believe we will see this, what I refer to as sort of small life science demand continue in the marketplace, the issue is that there are not a lot of big demand drivers other than some 1 or 2 consolidations that are occurring with some pharma companies that have acquired some medicinal biotech companies over the last few years and are starting to put those requirements together in both South Francisco and in the greater Boston marketplace. But you hit on the sort of the issue, which is there's more supply. And when that money was going into the sector, lots and lots of people who had property said, "Aha. This is the perfect way for me to solve the problem of lack of demand in the office side. I'm going to take this building and convert it or I'm going to take this land and build a new building." And we're going to have to deal with the rather a large amount of supply that's going to be in the marketplace for the next couple of years. And it is clear that there are winner locations and there are loser locations, and these ecosystems matter a lot. And so we think that we are really well positioned with our particular assets in terms of their locations both in South San Francisco at 651 Gateway as well as the two Waltham properties that we have under development on the Totten Pond Road interchange which is where the sort of cluster of the larger life science requirements have gone to over the past 3 or 4 years. And so we believe we'll lease these things up. Are the economics going to be what we had hoped, they're not. And I said this before, we're going to have to do more turnkey installations for these companies as supposed to give them an allowance and then putting their own money in. But we will deal with that. And we have the capital to do that, which again, many of I believe, are competitors with product may or may not have the desire or the capability of doing. So we're going to get these buildings leased as the demand comes. The demand is going to get better, not worse. And we just -- it's going to take a little bit of time. I can't give you a projection of whether it's 12 or 24 months, but that's the way we're thinking about it.

Dylan Burzinski:

I guess just looking at BXP's portfolio in terms of office concentration, are there certain markets where you see you guys sell adding incremental capital to or possibly even reducing your concentration to over time?

Operator:

And I show our last question in the queue comes from Anthony Powell from Barclays.

Michael LaBelle:

I mean I think we're doing pretty well on parking. We are -- overall, I would say, on parking, if you kind of exclude the fact that we removed a parking garage in Cambridge from service earlier this year, we're actually where we were before. I do think there's still opportunity to grow that because we're better than where we were before because we have increased rents. We have had occupancy come back into these buildings and into these cities. So I do think there's still room there. But for parking, we're already there. The increase that we had in this quarter for parking was modest. As I said, the kind of the revenue beat was a little bit across the board. It was a little bit in a bunch of different places. On the retail side, I'd say every place, but San Francisco, we're back. The San Francisco retail contribution before the pandemic was a few million dollars. So hopefully, that will come back at some point. But at this point, I'd say it's still difficult, and we're helping our retailers along. We do have some retail still returning, for example, in Boston, where we close down the Lord & Taylor and we're putting in a fixed sporting goods that's going to open next year. I mean that's going to be additive to us from a retail perspective. And then the hotel still a couple of million dollars below where it was. So I don't know where that's going to stabilize that. I mean it's doing pretty well. But hopefully, it will continue to improve over time and get back to where it was and above where it was.

Owen Thomas:

That concludes our remarks. Thank you all for your interest and attention for BXP. Thank you.

Helen Han:

Good morning and welcome to BXP’s first quarter 2023 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP 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 BXP’s filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks, Owen. Good morning, everybody. So I think it's fair to say that we are operating in a challenging real estate supply and demand environment. And as Owen stated, businesses continue to make pronouncements about the importance of in-person work, but office job reductions related to the economy have impacted both supply and demand. In our portfolio, we continue to see incremental pickup in daily activity as we look at the month-to-month trend lines, and we see weekly patterns emerging based upon industry. The legal professions got a different perspective than asset management, which is different than private equity. People using their spaces at different times. The frequency of work, however, in the office is really about 3 days per week across our markets where we track the data, and this includes San Francisco, obviously, our portfolio being primarily professional services and financial services. No city is back to the levels of urban work activity that existed in 2019. We are aware of isolated instances where an organization has required all their employees to work in their existing office most of the week and they don't have enough space, but that's just not the norm. The pendulum could swing back to where organizations find themselves short on space for their existing and future workforce, but it's not the way they're planning today. The most dynamic and expanding reservoirs of demand over the last decade, technology and life science users are focused on profitability, cost reduction and capital preservation. This doesn't lead to near-term positive absorption. There's a lot of variability with the financial services and professional services firms space needs. Those that are reducing headcount through layoffs are replanning their facilities with less space. It's evident that some law firms in the market are signing leases with smaller footprints as they move to a more uniform office module, while a few are actually taking additional space. The concentration of user demand strength in 2023 is broadly speaking, alternative asset managers, private equity, venture, hedge funds, specialized fund managers. These companies are growing their teams and their capital under management. This pool of clients typically wants to occupy premier workplaces and it's not surprising that BXP's strongest activity is at the General Motors Building in Manhattan, 200 Clarion and the Prudential Center in Boston, 2,200 and 2100 Pennsylvania Avenue in D.C., the urban core Reston Town Center in Northern Virginia and our Embarcadero Center assets in San Francisco. By the way, we just don't have any space available at Salesforce Tower, which is why it's not on the list. The challenging office supply picture is not a New York or a San Francisco story. There is high headline availability in virtually every market across the U.S. Availability rates are at or above 20% in coastal and Sun Belt markets. These availability rates published by the brokerage firms and reported as headlines track all of the space in every pocket of each market. We spent the last 2 years redefining our business as being developers and operators of premier workplaces and explaining why these headline numbers hold much less relevant. Owen gave the most recent data which demonstrates the dramatic bifurcation between premier workplaces and general office space. Availability and premier assets matters and the location and the specific attributes of those buildings matter. The client looking at 399 Park Avenue is not considering space on Third Avenue, Midtown South or downtown. If a 20,000 square foot client wants to be in a premier building in the Back Bay of Boston on a single floor with primarily exterior office configurations, there are limited availabilities. If a 40,000 square foot tenant the client wants to be in view space north of 42nd Street and South of 59th Street between Fifth Avenue and Lexington, there are limited availabilities. This is why we could recapture a 30,000 square foot floor at 200 Clarin in this quarter and released the space as is with immediate occupancy to a new client. This is why we can lease the floor with a mid-2024 expiration at 399 Park Avenue this quarter with no downtime to a growing client at the building. Last quarter, I described the 50,000 square foot client in San Francisco, the lease space at Embarcadero Center, and had 2 alternatives outside of a renewal. The headline information that was reported by the brokerage committee, it's true, it's factual but it's just not nearly as relevant as people think in our business. BXP's regional teams are leasing space. We completed 660,000 square feet of transactions during the first quarter. On our last call, we gave an expectation of 3 million square feet for the year, which translates to about 750,000 square feet per quarter on average. We have reaffirmed this at the Citi conference in March in our public webcast. There were 57 leases across our markets. 29 leases were with new or growing tenants, 410,000 square feet and 28 renewals totaling 250,000 square feet. We had 10 expansions and 3 contraction. As we sit here today, we have signed leases that have yet to commence on our in-service vacancy, totaling approximately 1.3 million square feet and 1.2 million square feet of that space is anticipated to commence in 2023. This quarter, we added a secondary occupancy statistic that shows the effect of these signed leases on our quarterly occupancy. Our headline in-service occupancy stands at 88.6% and with leases signed but not commenced, it rises to 91%. This portfolio includes our in-service properties and it does not include the development portfolio, which is up to 4 million square feet and is 52% leased. We currently have leases in negotiation totaling 900,000 square feet, and we have a current pipeline of additional active proposals totaling over 1.5 million square feet. I would expect us to sign 95% of the leases in negotiation and more than 50% of the 1.5 million square feet of proposals. So to summarize, we have active dialogue on 1.65 million square feet of space as we end the first quarter of '23. If 40% of these leases are in vacant space or 223 expirations. It should add about 660,000 square feet of space to our occupancy. We have 1.2 million square feet of signed leases with an anticipated 2023 commencement. Together with the leasing pipeline, this adds 1.86 million square feet to our occupancy. Our remaining 2023 expirations are 2.2 million square feet. We have additional activity across the portfolio and still expect to lease 3 million square feet this calendar year. The mark-to-market on the leases in the supplemental, show we were down about 3% overall and D.C. was down 47%, which was a little bit shocking. This is due to our restructuring of a 70,000 square foot Regal cinema lease in Springfield, Virginia. If you exclude the Regal cinema lease, the portfolio was up 2.5% and D.C. was down 10%. We were up 21% in Boston, down 9% in New York City and up 6% in San Francisco. The leases we signed this quarter on second-generation space were essentially flat across the company, with Boston up and the other markets slightly down. During the quarter, we experienced on life science default on 12,000 square feet at 880 Winter Street where a forum biotech company shut down its U.S. operations. This was one of the spaces we built on a speculative basis in 2022. We are negotiating a new lease on the space as is with a rent that's 9% higher than the prior rent. To provide some perspective on our life science credit exposure, our total annual revenue from in-service life science clients is about $226 million or 8% of our total revenue. 70% comes from public companies with equity market values over $1 billion. The other 30%, $68 million is made up of 66 clients, 20 public and 46 privately funded. We've also signed leases that have yet to commence with total annual revenue of $128 million, 90% is with Roche Genentech, AstraZeneca and the Broad Institute. Activity in the life science market continues to be slow across both Greater Boston and South San Francisco, and there is new unleased space being added to the market. There are a few large requirements that are touring, but as I have previously discussed, the bulk of the demand is from small private companies that are looking for fully built space. Our new client at 880 Water Street fits this profile. We are also negotiating 3 additional leases at the development project at 651 Gateway in South San Francisco totaling 57,000 square feet. The property will open in 2024, and each lease requires our partnership to complete turnkey spaces. BXP will outperform the market, and we will continue to lease the available space because our portfolio was fundamentally comprised of premier workplaces and the majority of the demand new and existing clients in the market want to be in these types of properties. Medium and small financial and professional service clients will make up the bulk of the leasing we completed in '23. We completed 57 leases during the first quarter. We had 4 leases over 30,000 square feet and only 1 above 50,000 square feet. Occupancy cans will be captured through lots of small- and medium-sized leases and renewals. We will have some contractions and we will also have some expansions. Tour activity continues to be strongest in the Boston CBD New York City Plaza District and San Francisco, where the concentration of small professional sirs and financial firms are concentrated. I'll stop here and turn the call over to Mike.

Operator:

[Operator Instructions] And I show our first question comes from the line of Steve Sakwa from Evercore ISI.

Douglas Linde:

Sure. So the pipeline of unleased property, Steve, is pretty bulky, right? So it's primarily in 2 places. It's in Platform 16 in San Jose, which won't deliver until the beginning of 2025. And as you probably can surmise, there's not a lot of technology demand in the market today. So there are no conversations going on there. And the other large bulk you want is 360 Park Avenue South. And we are starting to have conversations with smaller-sized tenants, so 1 to 4 floors. Hilary, I'll let you sort of comment in a second on that. But the overall -- and you'll notice are an increase in our costs on some of our development assets because we have pushed out the leasing time frames and therefore, we're carrying those properties for a longer period of time, and obviously, interest expense is meaningfully higher than when we started these projects, and that's impacting that. So the returns on our development assets will be slightly lower. I -- it will depend on the leasing success that we have, Steve. So I can't give you a comment on how many basis points they're going to be. But Hilary, if you want to comment on Park Avenue South. Hilary?

John Kim:

You discussed extending some of your maturities on your JV mortgage debt and debt market overall, the mortgage market being inside bond pricing currently, which really goes against the grain of the issues we're hearing with the regional banks. I was wondering if you could just elaborate on how healthy that market is and who's willing to put more capital into office assets today.

Douglas Linde:

John, this is Doug. I'll just give another perspective. So we have a lot of what I would refer to as highly financeable assets with long-term credit leases and where we would likely go and finance, for example, a 15-year Google lease for fivce years or a 12-year Microsoft lease for 5 years, right? And we're not doing these 75% LTVs. We're looking for a modest amount of leverage. So those types of assets, we believe are highly marketable to the various counterparties in the lending community, be they insurance companies, be they domestic or foreign banks, be they the CMBS market. So that's sort of where we're looking for additional capital. And then as Mike suggested, we have a maturity in a relatively small-sized asset, a $100 million asset in Washington, D.C., and we had a number of term sheets from secured lenders on that. And so we are seeing evidence that our portfolio is as being receptive to additional secured initial.

Camille Bonnel:

Following up on the leasing pipeline, can you please comment on how you classified deals in the active proposal pipeline? And how this pipeline compared to last quarter or even a year ago?

Operator:

And I show our next question comes from the line of Anthony Paolone from JPMorgan.

Owen Thomas:

It's Owen. A couple of things I would say. One -- first thing would be, what is it? So we're not going to go out and buy a cheap office building in the hopes that we can make it less cheap over time. We're going to focus on premier workplaces in the office segment. We're going to continue to focus on our life science portfolio, and we're also going to focus on residential development, probably more as a merchant builder as opposed to a long-term owner. So I think perimeter is very important. Look, in terms of overall -- yes, in terms of overall cost and what we're going to be looking for. One, it's certainly gone up. Number two, it would depend a lot on the risk profile of the asset. But then number three, what's always on our mind is our stock is currently trading at a look through cap rate of 9%. And that's got to be a guidance post as we think about putting out new capital.

Alexander Goldfarb:

So Owen, along those lines, in prior cycles, you guys have bought some buildings 399, 510 Fed, you bought those in prior opportunistic times. But given the capital markets today, given Mike's comments about assessing the dividend if the disposition market doesn't open up. Are you guys more keen and confident to buy assets, let's say, around Park Avenue, Grand Central or other transit hubs? Or is the company's focus more on capital preservation and therefore only stick to the current pipeline and really limit incremental opportunistic existing asset purchases.

Operator:

And I show our next question comes from the line of Nick Yulico from Scotiabank.

Douglas Linde:

So this is Doug. I don't want to get into a conversation about other people's assets. So from our perspective, obviously, we don't have anything maturing anytime soon in our Manhattan portfolio. And we do have two large CMBS transactions that were done. There were SAS deals but they've got long duration associated with them. I would expect that the markets will heal and that there will be capital available at a different kind, as Mike described, a different kind of a leverage point and are a different kind of a pricing parameter. So there is going to be equity that's required in these assets to appropriately refinance them with a capital structure that makes sense for the large loan marketplace. And there's going to be, obviously, some degree of time before we get there. I mean there are obviously a lot of, I guess, sort of kick the cans or workouts or other conversations going on right now. But I believe with enough equity, you will be able to raise $1 billion financing in the market, but they're going to be done at different kind of leverage points.

Blaine Heck:

Doug, your commentary around the most activ tenant groups in the market was really helpful. Can you guys just talk about how you're taking advantage of that activity amongst medium and small financial and professional services companies. Are you breaking down any of your vacant spaces into smaller spec suites or doing anything else to accommodate that demand from small tenants?

Robert Pester:

Sure. We have a program of doing spec suites at Embarcadero Center on the smaller spaces, and we have several that are in the works right now. And some of them are designed where they can be combined with other suites that we need larger space. And typically, when we do these turnkey, we might have to put a little bit of TI in after the fact when we find a tenant. But we've had great success with these smaller suites so far.

Peter Otteni:

Sure. So this is Pete Otteni from D.C. The -- yes, it was not too many years ago that the rest and town center market was not one where we had done spec suites very often, but in the intervening 24 to 48 months, we've done quite a few of those. I don't have the exact number off the top of my head. But it's in the high the number of -- the number of spec suites that we've done out there and all with great success, many leased prior to or at delivery. And then all of them that have been delivered are leased at this point, and we have activity on the balance of them. We did a full floor of spec suite at RTC Next in addition to the spec suites in the urban core Town Center. And it's been a very successful program out there, capitalizing on exactly this type of tenant that's being discussed. And obviously, we have done them in D.C. for many years. that's a little bit more of a competitive market, but we think in the right buildings, for instance, after some good success on the leasing front at 2100 Penn, we're likely to have some space left there where we think spec suites will be very, very sought after due to the quality of the building and the quality of the spec suites that we'll build there.

Caitlin Burrows:

Maybe just another one on leasing. In the quarter, you did 660,000 square feet of leasing and have talked about now an expectation for about $750 million square feet per quarter the rest of the year. So I was just wondering, are you seeing activity that specifically points to an increase in leasing activity in 2Q and beyond? And if so, what and kind of where is that? Or is it more of a general expectation at this point?

Operator:

Our next question comes from the line of Michael Griffin from Citi.

Douglas Linde:

Sure. Bob, do you want to take that one?

Operator:

And I show our next question comes from the line of Vikram Malhotra from Mizuho.

Robert Pester:

Let me answer your second question first. So your second question on CapEx is that BXP typically spends somewhere between $2 and $2.50 a square foot per year on its overall, what I would refer to as ordinary course of business CapEx. And that is defined as base building and what I would say sort of modest refreshes on our portfolio. It doesn't include if we're going to build a new amend center at the General Motors building or we're going to do a new amenity center and a market or a center or we're going to totally got and redo 1 of our lobbies. So it doesn't include those types of expenses, which would be outside of that. With regard to WeWork, WeWork is client of ours, WeWork is clearly reducing the number of units that they have. We've negotiated some reductions from WeWork in our portfolio and WeWork is not likely to be in the same relative position in terms of the amount of space that they take from BXP when we get to the next quarter.

Ronald Kamdem:

Just one quick one and a follow-up. Just on the asking the leasing question in a different way. So I thought the expectation before was for occupancy to potentially be down in the first quarter, first half. So it sounds like there was probably more leasing than expected. Maybe you could just comment on that. And I'd also love to hear sort of your comments on occupancy for the portfolio by market, specifically in the West Coast versus the East Coast. And a follow-up -- yes, the quick follow-up was just on -- there's been a lot of sort of news about Salesforce in the market subleasing space. And I'm wondering how you guys are thinking about that. for Salesforce Tower? And if any other tenants potentially could be subleasing space?

Owen Thomas:

I would just add, we have -- Bob should comment on this. We have market inquiries relatively frequently for the Salesforce Tower, and it's completely full. And one of the reasons Salesforce is putting floors in the tower on the market is because it's actually the easiest space they have sublease given the attractiveness of the asset.

Operator:

And I show our next question comes from the line of Dylan Bazinsky from Green Street.

Owen Thomas:

Well, we think that our stock represents a very uniquely interesting investment, particularly at this point in time. Most of the inquiries we've been getting recently, and that's the reason why Mike and I spent so much time on it in our remarks is our access to capital and how are we dealing with upcoming debt maturities and things like that. So in this kind of environment, buybacks are not a priority for us. And we also -- we have found interesting uses for the capital. We just put on our development pipeline this quarter. The 290 Binney Street development that's 100% leased to AstraZeneca and also the 300 Binney Street asset conversion.

Tayo Okusanya:

Just a quick one on office to resi conversion. Again, a lot of these buildings don't compete with your assets. So just curious how you guys think about that for movement? Is it something that you're excited about? Do you think it helps BXP longer term? Or just because it's not competitive product doesn't really matter to you guys?

Douglas Linde:

Yes. And this is Doug. I would just add that World Gate is sort of an illustrative example of what we think may happen in certain instances in certain cities where the buildings have no intrinsic value as a repositioned conversion, and therefore, the land is really where the value is, and it probably has a higher and better use as residential. And so there are buildings probably that will be taken down and the sites will be then readapted as residential sites even though they're currently commercial office buildings.

Hilary Spann:

Thanks, Helen. Can you guys hear me now? Okay. It's Hilary Spann. I just wanted to add a little bit of color to the leasing activity in Midtown South at 360 in addition to what Doug has already described with regards to the pipeline that's either out for signature or in negotiation. Last quarter, I told everyone that we thought that we would be seeing more demand from 50,000 to 75,000 square foot tenants leading into this year, and that largely proved itself to be correct. We are currently in discussions with five tenants that range from 25,000 square feet to 75,000 square feet at the building. But I think what is more interesting, and this is really just sort of a check on the spot market for leasing in Midtown South is that recently, we have toured 2 150,000 square foot tenant and one 200,000 square foot tenant for 360 Park Avenue South. And we also toward just yesterday at Tenet that lumped to start at 30,000 square feet and potentially has growth to 100,000 square feet. So it seems that the demand profile is shifting a little bit again toward larger tenancy in the submarket. Obviously, that will take some time to play out as these tenants decide where they're going to go and document transactions. But I think overall, it's a positive signal for the market. And if I looked at all of that combined with what we're trading paper and the tours that are in the market, that represents about 715,000 square feet of tenants that are in the market right now. So just wanted to share that in additional detail with you.

Owen Thomas:

Just want to thank everyone for your time, attention and interest in BXP. That concludes the call.

Helen Han:

Good morning and welcome to BXP’s fourth quarter and full year 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP 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 BXP’s filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks Owen. Good morning everybody. So Owen really spent some time describing the totality of what's going on at BXP. I'm going to be a little bit more concentrated today and talk about demand. Every day seems to bring another announcement of staff reduction from some large or medium sized employer. And while the cons -- these announcements have been concentrated in the technology industries, as Owen described, primarily big tech, we're also seeing them in the finance industry, the legal industry, and broader corporate America. Now I can point to examples of companies in our portfolio that are growing, but we are the first to acknowledge that the pool of clients overall demand that we serve is unlikely to be growing their overall footprint in 2023, aka hard to see much in the way of positive absorption. If there's a silver lining in the job reductions that are being announced, it's an improvement in the labor availability is manifesting itself in encouraging ways. Fewer job listings being offered for remote work. Forms of hybrid work seem to be sticky, but the power dynamic between employers and employees is shifting. Companies are stepping up the days that workers are asked, required, cajoled to come into the office. In our portfolio, we're seeing a steady increase in the number of unique occupants that are in the office each week. We measure the unique number of card swipes on a daily basis where we have turnstiles. These numbers vary day-to-day and if I compare the best day in March of 2022, which is after the last sort of COVID omicron surge versus the best day in January, so a week ago, across the BXP portfolio volume is up almost 40%. I don't know how others measure their usage. BXP measures against the number of seats we have in our spaces. On a daily basis utilization ranges from between 34% in San Francisco, 48% in Boston, and 58% in New York City. And if we look at the number of unique users coming into our buildings on a weekly basis relative to the number of seats, we're currently seeing as much as 82% in New York City, 76% in Boston, and 70% in San Francisco. Our clients are using their space, they're just not coming to the office every day. As Owen said, we've spent a better part of 18 months redefining our business with you as being developers and operators of premier workplaces. As Owen described in his comments, the bifurcation between premier product and general office space continues to widen. The availability rates published by the brokerage firms and reported as headlines in business publications and newspapers, track all of the space. A meaningful amount of the existing office inventory may have a higher and a better use as an alternative product and it's not relevant to users searching for space today. Conversions will happen and we are studying non-BXP buildings in our markets, but this process is going to take years. So the published statistics are going to be sticky even though much of the availability is not attractive to users at any price. In fact, it's hard to see a potential client looking at a BXP offering that would consider many of the buildings captured in the broad market surveys. Again, we have to acknowledge that there continues to be additions to of new sublet or soon to be direct opportunities in premier space from technology companies, 181 Fremont Street in San Francisco being the latest example. Availability in premier space matters, but other issues matter even more. The floor plate size matters. The build out configuration matters. Amenities matter. In markets like Boston or San Francisco, parking availability matters, and the specific location matters. As we explained in our press release last night, while our reported in-service occupancy has declined in the quarter as we said it would on our last call and in our Nareit meetings in November, it is simply due to the addition of new in-service buildings that have leases that have not commenced and are reported as vacant. This includes Reston Next that is 69% occupied and 90% leased and 880 Winter Street that's 85% occupied and 97% leased.

Michael LaBelle:

Great, thanks Doug. Good morning everybody. I plan to cover the details of our fourth quarter performance and the changes to our 2023 earnings guidance. However, I would like to start with a summary of our recent capital raising activities. We've been very busy in the capital markets and have substantially bolstered our liquidity heading into 2023. In the last 120 days, we've executed on three transactions in three different markets. We sold one of our residential buildings in Reston Town Center for $141 million and a 4.3% cap rate. We issued $750 million of five-year unsecured green bonds, and in January we extended and upsized our corporate unsecured term loan to $1.2 billion, an increase of $470 million. In aggregate, the net proceeds raised from these deals is $1.35 billion and we now have liquidity of $2.6 billion, which puts us in an extremely strong position to complete our development pipeline, including our recently commenced 570,000 square foot fully pre-leased, 290 Binney Street Life science project, as well as provide additional capital for other opportunities that may arise. We've also reduced our 2023 loan maturity exposure to $930 million, which is comprised of $500 million of senior unsecured notes that expired in September and five expiring mortgages totaling $430 million at our share. The majority of these mortgages have embedded extension options and we anticipate renewing or refinancing all of these facilities. Given the challenging state of the current debt markets, particularly with respect to the mortgage markets, we are very well positioned. Now I'd like to turn to our fourth quarter earnings results. We reported fourth quarter FFO of $1.86 per diluted share and full year 2022 FFO of $7.53 per diluted share. This is a penny ahead of the midpoint of our guidance and $0.02 cents ahead of street consensus. The improvement was primarily from better performance in our portfolio with our NOI of about $4 million or $0.02 per share ahead of our forecast. The outperformance was a mix of higher lease revenue, stronger results from our hotel in Cambridge and higher building service income, especially in New York City where we see the highest space utilization. The portfolio outperformance was partially offset by a penny of higher net interest expense related to our $750 million green bond offering that was not part of our original guidance. Although not part of FFO I do want to describe that we took a $51 million or $0.29 per share non-cash impairment charge in the quarter, reducing the book value of our equity interest in our Dock 72 property located in Brooklyn, New York. This building is owned in a joint venture where we hold 50%. The building has suffered from weekly leasing conditions in Brooklyn and last quarter the primary client contracted by two floors. It's currently just 25% occupied, although it is 42% leased, including leases that have not yet commenced. Overall, we had a strong year in 2022. We increased revenue by 8% and our FFO by 15% over 2021. Our growth came from our same property portfolio as well as our developments and our acquisitions. Our same property NOI increased 4% over 2021, which was the high end of our range, and on a cash basis it was even stronger with cash NOI growth in our same property portfolio of 6.5% over 2021. Our development deliveries added $0.24 per share to our 2022 earnings and our acquisitions net of our dispositions added $0.10 per share. Now I'd like to turn to an update to our 2023 guidance. As we detailed in our press release, the two most significant changes to our 2023 FFO guidance are the impact of commencing our 290 Binney Street development and the interest expense associated with our new financings. We did not incorporate 290 Binney in our guidance last quarter due to several significant contingencies we needed to clear prior to starting the projects that were outside of our control. Our team successfully closed out these items late in the fourth quarter and we were able to start the project in January. The development plan includes closing and demolishing the existing Binney Street garage. That garage produced $8.6 million of NOI in 2022, and we will lose this income in 2023 and going forward until the completion of the development, which will include a new underground parking facility. As Owen described, the project is projected to be highly accretive to our future FFO, and by the way, all the lost garage income is incorporated into those development returns. We are also required by GAAP to expense the garage demolition costs of approximately $3.2 million. We expect to incur the demolition expense in the first and second quarters of 2023 with no impact thereafter as the demolition will be complete. These two items related to 290 Binney Street will result in $11.8 million of lower FFO in 2023 or $0.07 per share. With respect to our financing activity, we disclosed in our press release in November that our $750 million green bond offering would add $0.08 per share to our 2023 net interest expense and reduce our FFO guidance. As a result, we expect the aggregate impact of starting 290 Binney and issuing incremental debt capital will reduce our 2023 FFO by $0.15 per share. Despite this, our new guidance range for diluted FFO of $7.8, to $7.18 per share is a reduction of only $0.09 per share at the midpoint from our guidance last quarter. That means we've increased the projected contribution to FFO from other areas. Also, we previously communicated the impact of our bond offering, so the reduction is really only a penny per share from our November adjusted guidance. The projected increases come from three places; first, excluding 290 Binney Street, our assumption for incremental contribution to NOI from acquisitions and development is up $0.02 per share. The increase is from higher contribution from our 205th Avenue acquisition and better than projected leasing in our development pipeline. Doug described the increased leasing this quarter in the pipeline and some of that will generate revenues in 2023. Second our revised assumption for net interest expenses are lower by $0.03 per share net of the impact of the bond offering, and this improvement is primarily from higher earnings on our cash balances and higher capitalized interest from changes in our development spend and higher interest capitalization rate. And last, we've increased our guidance for development and management services income by $2 million or a penny per share, reflecting higher projected construction management fees. So to summarize, we've modified our 2023 guidance range for diluted FFO to $7.8, to $7.18 per share, a decline of $0.09 per share at the midpoint. The changes are the result of costs from starting 290 Binney Street of $0.07 and higher interest expense from our bond offering of $0.08. And these reductions are partially offset by higher contributions to NOI from acquisitions and developments of $0.02 cents, higher interest income and capitalized interest of $0.03 and higher fee income of a penny. Our 2023 forecast result in a projected reduction in FFO of 5% from last year after growing 15% in 2022. The reduction is wholly due to the significant increase in interest rates as our portfolio NOI continues to grow and we have a significant pipeline of accretive developments that are delivering over the next few years. As Owen described, it appears that we are close to the end of the Fed's tightening cycle, so interest rates should not be the same headwind going forward. The last thing I would like to mention is that we intend to change the timing of our initial issuance of annual guidance starting next year. We plan to provide guidance for 2024 with our fourth quarter earnings release similar to the other companies in our sector. That completes all of our formal remarks. Operator, can you open up the lines for questions?

Camille Bonnel:

Hi, good morning. Your guidance mentioned higher contributions from acquisitions and development activities, but it looks like a few initial occupancy dates for offices and life science projects got pushed back a quarter into next year. Can you just provide a bit of color on what's contributing to this outlook and any comments specifically on how the leasing pipeline is going for your construction properties would be very helpful? Thank you.

Douglas Linde:

Yes, I think in my comments I described sort of where we are, which is big picture we're about 50% leased on our, the totality of our development assets one. And by the way we'll be including next quarter 300 Binney and 290 Binney on our CIP schedule. The leasing is slow at 360 Park Avenue South. The leasing picked up as Mike said at 2100 Pennsylvania Avenue. We're very well leased at the other assets that that got brought on this quarter. So relative to 2023, I don’t think you’re going to see much in the way of changes.

John Kim:

Thanks. Good morning. You spent a lot of time at your Investor Day talking about the occupancy upside potential given your near-term expirations. And I know a lot has changed since then, but you have leased 1.1 million square feet in the fourth quarter. And my question is, how does that compare versus your expectations at the time? And as you sit here today, is 1.1 million square feet, is that a good run rate for the rest of the year?

Michael LaBelle:

Yes, John, and just to add, I mean, we’ve maintained our guidance for our same property portfolio and for our occupancy. So our kind of outlook is similar to what it was when we gave guidance last quarter. I think that our occupancy in the first quarter, so three months from now will likely be lower or flat than what it is today. But we’ve got a lot of leases that are already signed that Doug described, the 1.5 million square feet that are coming into play. And I think that’s starting in the second quarter we're going to see our occupancy grow from there through the rest of the year. And a lot of this occupancy is in coming in some of the major markets like New York City, we've got a number of leases that are signed that we’ll be starting in the second quarter. Doug described a deal in Boston that we did just in December, and that deal is going to start in the second quarter. And we also have some deals in Reston starting. So I think that we feel we’ve been conservative in our approach to our guidance based upon what we see future leasing activity as, but we feel good about the guidance that we provided.

Operator:

And I show our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Douglas Linde:

So let me ask Hilary Spann to talk about 360 Park Avenue South, and I’ll ask Bob Pester to comment on Platform 16.

Steve Sakwa:

Bob, thank you.

Operator:

Thank you. And I show our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.

Douglas Linde:

So Blaine, I am -- and I’ll let Owen make a comment as well. I hope that my comments were both honest and thoughtful regarding what I think we think the demand picture is, which is there is less overall demand in the market today due to the nature of the business economies changes. And we don’t think there’s going to be much of any positive absorption occurring. We think we will lease more space than our peers because we have premier work places that are geared towards the tenants that are in the market and then that are making decisions. And I don’t actually believe that the tenants that are looking for space are concerned about making long-term decisions. They are, in fact for the most part, making long-term decisions, and we are still doing longer-term leases in all of the leasing that we’ve been doing in the last couple of quarters, some of it hasn’t hit the lines yet in terms of our occupancy numbers. But so, I can’t tell you how long the economy is going to be where it is, but as the economy recovers, traditionally jobs and/occupancy are second derivative events associated with that, and so it will be a period of time before tenants are "growing" again. But Owen, maybe you have some other ideas?

Operator:

Thank you. And I show our next question. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.

Raymond Ritchey:

Well, first of all, Happy New Year, Alex. Thanks for the question. It’s living here in the district, it’s really kind of frustrating to see the federal workforce not fully engaged in the return to work. The real estate roundtable has been very effective in reaching out to Mayor Bowser and really stressing to her the importance for the federal workforce return not only just in terms of consumption of office space, but the social fabric of the city is completely deteriorating with the workers not coming and we’re also very concerned about the impact upon metro. Before the pandemic, there was almost 800,000 riders a day on the metro. Now there’s less than $300,000. And that will have an impact on the public transportation system here. As it relates to Reston, specifically, we have a very large portion of our tenants who are engaged in government contracting support to the federal government. And the policy of the federal government not to return to work also is impacting occupancy in Reston. And while many of them have the requirement to be in the office because of the security nature of their work, it still impacts the more traditional office support tenants for the federal government contractors. So it’s impacting Reston from presidents of the retail, it impacts things like the fitness center and other support activities we have in the building. So even though we’re a diverse tenant base there, the lack of the federal government coming to work is still impactful. We're really assisting to the leadership in the district, the importance for the federal government to return to their offices.

Michael Griffin:

Great, thanks. It seems like relative to your East Coast peers as West Coast markets continue to lag, I guess what sort of concern do you have for the long-term viability of a market like San Francisco? And if there were a bid, would you look to maybe allocate capital out of there? And then, Doug, one thing I wanted to clarify real quickly on your leasing comment. I think you said 39% of the leases this quarter came from renewals, some of which took the same amount of space versus some amount that downsized? What percentage of the same space versus downsized? Thank you.

Owen Thomas:

And then it's Owen, to answer your question about West Coast and capital allocation, you are right. The West Coast is lagging from a return to office perspective and also from a leasing perspective, is driven by the fact that there’s a much higher percentage of technology users in those markets and those users are not using their office to the same extent that their industries are. And so far, they’ve led other industries in terms of layoffs, which impacts space use as we’ve described. Look, we’re going through a cycle and word cycle means it goes down and it comes back up. This has happened before. Every cycle is different, but they all look somewhat the same. And I’m convinced this is a cycle as well and we will have a recovery. And I think the technology industries, the institutions that exist in California are not going to go away, but we are going to have to work ourselves through the recovery that we see ahead.

Operator:

Thank you. And I show our next question comes from the line of Rich Anderson from SMBC. Please go ahead.

Owen Thomas:

Yes. No, I certainly understand the logic of your question. I’d answer it simply that history has not shown that to be the case. Higher quality buildings have outperformed in recessions in the past. And I think this recession is different because of the work from home and the flexibility that technology is providing for workers. And therefore, I think this flight to quality and change of how we describe our business from office to premier workplace is more important. I think the market share that the premier workplaces are getting in this downturn is actually much higher than it has been in previous downturns. And it’s important when you look at our business to not look at the overall market statistics but to focus on the premier workplaces because that’s actually the market that we’re competing in.

Operator:

Thank you. And I show our next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.

Douglas Linde:

Yes, we have assets that we would like to dispose of non-core assets. But as I mentioned in my remarks, the capital markets are very liquid just generally, but also, I’d say, for office assets. And therefore, we didn’t put out a guidance on what we thought dispositions were for this year because we don’t -- the market is not cooperating at the moment. Hopefully, that will change, but we can’t forecast that right now.

Operator:

Thank you. And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead.

Owen Thomas:

So while Mike looks at his numbers, I’ll let Bryan Koop just describe sort of where we are with our plans from a marketing perspective on the Observatory in Boston. And we haven’t officially announced the date yet. So...

Michael LaBelle:

So Ronald, on the first quarter, you’re right, it’s obviously down because it’s seasonal. We have a hotel that is seasonal that because it’s located in Massachusetts it has very few people that come to it during the winter. So it actually loses money in the first quarter and that it has profit to the other three quarters of the year. And then our G&A expense is front-loaded because of vesting and payroll tax issues. And then obviously, we borrowed more money in the fourth quarter. So we expect our interest expense to be higher in the first quarter than it was in the fourth quarter. The portfolio itself is actually -- we expect it to be up slightly. And then going out for the following quarters because if we started $1.67, right and our guidance is much higher than that for the full year. Obviously we see pretty significant increases in the following quarters. And as I mentioned, we expect our occupancy to start to move up in the second quarter. Bryan just talked about View Boston, we expect that to open up in the second quarter. So there are several things that are occurring in the second and third quarters that are going to push the FFO up later in the year.

Dylan Burzinski:

Hey guys. Thanks for taking the question. Just curious, I think the story thus far has been that office landlords have been able to hold base rents and they’re giving up more on the concession side of things. But just curious, Doug, given your comments about not expecting positive absorption in 2023, is this the year that we start to see landlords sort of deal up on the face rent side of things?

Operator:

Thank you. And I show our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.

Douglas Linde:

Yes. So I’ll just make a comment, and then I’ll turn it over to Bob. So we have one building, which has a long-term lease with Salesforce.com, which is Salesforce Tower, which is to some degree, their preeminent building and is the preeminent building in San Francisco. And Bob, why don’t you comment on any conversations we’ve had with Salesforce regarding their utilization of space?

Operator:

Thank you. And I show our next question comes from the line of Anthony Powell from Barclays. Please go ahead.

Owen Thomas:

So as I mentioned at the outset, we have the capital in the balance sheet to make additional acquisitions but we are in -- the market is repricing. And so, yes we are going to be very focused on valuation for any acquisitions that we would look at in the coming year.

Douglas Linde:

Yes. And I would just add the following, which is if we’re looking at an existing asset, they’re obviously, if we can’t make it a premier workplace, we’re not going to spend time on it. If we think we could, then it’s going to be a question of what our views are on how long it will take us to lease up the space. And I would say that we’re constructive about our markets, but we are realistic as I think all of our comments this morning were about the overall absorption of space in the marketplace. And so, I’m not sure our underwriting is necessarily going to match with the seller’s expectations for what they think their buildings are. We will look at stuff. We will be thoughtful about it. We will make offers. But whether there’s inability ability for there to be a meeting of the minds, I would say we’re skeptical that will happen in 2023.

Nicholas Yulico:

Thanks. A question for, I guess Owen or Doug, I was hoping to get a feel for -- as you’re having conversations with your JV partners, pension funds or other potential institutional partners, what is their attitude right now towards office space, particularly in relation to investing incremental capital into buildings? What types buildings are still possible, what aren’t? And ultimately, how you think this is all going to affect office building values?

Douglas Linde:

I also think the other thing to think about here too is the -- we talked about the institutional investment world as its some homogenous group of investors. Well, it’s not. They all come from different geographic locations. They all have different funding sources. They all have different funding obligations, and so they don’t operate in a unified fashion. So my comments are not targeted to any one group, but I would just point that out.

Owen Thomas:

Yes, thank you all for your time, attention and interest in BXP. Have a good day. Thank you.

Helen Han:

Good morning and welcome to BXP’s third quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP 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 BXP’s filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Raymond A. Ritchey, Senior Executive Vice President and our Regional Management team will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you wanted to add an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Doug Linde:

Thanks, Owen and good morning, everybody. So I’m going to pivot the discussion this morning to our 2023 earnings guidance. We expected and saw a number of notes last night. So obviously this is a critical importance to everybody. And I think we outlined a bunch of the critical variables in the press release and Mike is going to provide some commentary on the most significant components in his remarks. I am going to focus my remarks on our in-service operating portfolio, which is really driving our same property expectations. But I’m going to start with what happened in the third quarter, because I think the trends that I’m describing are going to be relatively relevant to our forward assumptions as we think about 2023. So the third quarter was another you know really good leasing quarter for BXP. It’s now the sixth straight quarter of strong overall leasing activity in the portfolio. Just to remind everybody, beginning in the second quarter of ‘21, we signed 1.2 million, 1.4 million, 1.8 million, 1.2 million, 1.9 million and this quarter, 1.4 million square feet of leases. So that’s about 6.3 million over the last 12 months. Obviously, it’s a deceleration between the second – the third quarter from the second quarter. We have successfully executed leases with clients in the midst of the delta variant, the Omicron variant, remote work fits and starts, significant labor market headwinds and now what is surely a pullback in business activity. The Boston CBD activity this quarter with about 260,000 square feet of leases, including some renewals expansions and the addition of new clients into the portfolio. The mark-to-market on the previously leased space and again, I’m giving you data on the leases that were signed this quarter, not leases that are in our supplemental, which may have happened you know two or three or four years ago, but the mark-to-market on the spaces this quarter was 15% positive. The lease of 300 Binney Street dominated our Cambridge activity this quarter, and because we are moving from a 2011 office lease to a 2024 lab lease, the markup is over 250%. So it’s a very, very significant increase. The Suburban 128 workspace market remains slow with all of our leasing under 10,000 square feet other than a 55,000 square foot renewal that we did, there the markup was about 3%. This was also an unusually busy quarter for our retail space, including the 118,000 square feet at 750 Boylston, we completed 181,000 square feet of retail leasing in the Boston region this quarter. We didn’t complete any new life science leasing in the Waltham, Lexington portfolio, where we have our buildings under construction. The life science market has seen a significant slowdown. We have available space of both of these developments that we are you know aggressively marketing. As we discussed at our Investor Day, there are a number of other suburban buildings that we have been vacating in order to be in a position to redevelop them as lab buildings. These buildings are not yet under development, so they reduced the portfolio occupancy that we’re showing. At the present time, we have not made any commitments to begin any additional developments with these assets but we are vacating these buildings intentionally. In New York City, we completed 250,000 square feet of leasing, much like Boston, in Manhattan, we saw a number of renewals, expansions and new clients join the portfolio. The mark-to-market on the second-generation space that was recently occupied was down about 4%. New activity in New York City was off in September, but we have seen a meaningful pickup during the month of October. As a case in point, on September 30th, we had no active discussions on our 120,000 square foot block of space at 599 Lexington Avenue. Today, we have three active proposals covering over 70,000 square feet of that space. We completed another lease at Dock 72 this quarter, but WeWork relinquished space on October 1st that will mute the contribution to occupancy as you look at it next quarter. In Princeton, we completed six transactions with professional and financial firms, totaling 40,000 square feet with an increase of rent of 3.5%. In DC, we completed four leases for about 100,000 square feet. This is in CBD including one lease renewal with a markdown of about 12%. Now remember in DC, the lease structure has 2% to 3% annual increases for leases that are generally 10 years to 15 years. So in virtually every renewal, the last year of a 10-year to 15-year lease with a 2.5% to 3% increase is less than the starting rent of the new lease. So that’s typically what we see all the time there. Small financial and professional service firms made up the activity in Northern Virginia, where we saw about 50,000 square feet of activity and the largest lease was only 15,000 square feet. The markdown was about 3.5% on that portfolio. We continue to make progress at 2100 Penn, where we have 90,000 square feet of leases under negotiation that will bring that asset to 80% leased. Finally, in San Francisco, the story is the same as the other markets, though the lack of technology demand is more impactful on overall market segments. We completed eight CBD leases all under 11,000 square feet with professional services and financial clients. The markup was flat with an average starting rent of about $100 a square foot. Down in the Valley, we did 92,000 square feet with three renewals and added one client. The 60 basis points of occupancy loss this quarter was in line with our comments and expectations from last quarter. These three assets were removed from the portfolio. 601 Mass Ave, obviously, which was sold and a 100% leased, 140 Kendrick Street Building A, which is a 100% leased is in redevelopment and our large box at the Prudential Center, 760 Boylston, which is a 100% leased and in redevelopment. [Shearson] [ph], 350,000 square foot 20-year lease renewal at 599 Lex commenced this quarter, and they relinquished 120,000 square feet, the block I was describing. Biogen moved out of the first portion of 300 Binney Street, which will eventually grow by 40,000 square feet when it’s converted to lab and is fully pre-leased. The partial termination is reflected in our statistics not the new lease. Biogen will vacate the rest of this 195,000 square foot building in the first quarter of 2023. So we’re going to lose occupancy on that as we redevelop it for the long-term addition of a lab building. At Santa Monica Business Park, we had a post-movie operation that completed their use of space this quarter and they moved out. Our second-generation leasing this is for the quarter, if you look at our FAD in particular, include the Shearman’s transaction at 599 Lex. They converted a bunch of their free rent to TI and the entire cost for that 20-year, 350,000 square foot lease is in the FAD this quarter, which is why the FAD looks so unusual. The global central bank tightening has resulted in softened demand in all the markets, while tours continue and leases under construction move forward and the negotiation move forward, there is less urgency from clients to make new commitments. We have conversations with potential clients during space tours who acknowledge that economic uncertainty is impacting space decisions. As we consider our expectations for leasing completions in ‘23, we’re factoring an impact of a materially slower economy, softer business performance and reduced demand for space. We expect the bulk of our leasing will continue to come from small-sized and medium-sized professional and financial services firms. So as we think about ‘23, let’s start with what we know. We have signed leases on more than 886,000 square feet of in-service on vacant space that are not in our occupancy figures. Approximately 700,000 will commence in 2023, the remainder in ‘24. At the end of the third quarter, we had active leases under negotiation in the in-service portfolio of about 800,000 square feet, 270,000 of that would currently – cover currently vacant space that will go into service in 2023. The rest is on our near-term expirations. In sum, we have visibility on about 1 million square feet of currently vacant space and about 500,000 square feet of expiring leases. The remainder of ‘22 and ‘23 totals about 3 million square feet of expirations. This would mean we need to lease about 1.8 million square with 2023 commencements to remain flat. We typically leased more than 1 million square feet on a quarterly basis. Obviously, I described what happened over the last six quarters where the lowest was about 1.2 million. The issue is the timing of these commitments on vacant space, that’s the big wildcard. We just don’t know if we sign a lease, whether the space is going to be in a shell condition or an as-is condition and whether that lease is going to commence in 2023 or 2024. What we said last quarter remains true. We will see a slight decline over the next few quarters as we wait for all signed leases to commence, but in spite of our less robust leasing expectations, we still anticipate an improvement as we move into 2024. Tour activity continues to be strongest in the Boston CBD and New York City markets where the concentration of technology users is the least pronounced and the weighting of market occupancy leads more heavily towards financial and professional services firms. Consistent with my earlier remarks on the third quarter, small-sized and medium-sized financial and professional services firms continue to be the most active portion of our portfolio as those tenants – clients look for premier workspaces. These users are also active, though to a lesser extent, in DC, San Francisco and Reston. We have all seen the announcements regarding higher increases, job reductions through attrition and explicit job cuts that are occurring on a consistent basis from many of the large technology employers. In some cases, these announcements coincide with decisions to put space on sublet market. It’s hard to envision much technology-related demand growth in 2023. Owen described the stark divergence between premier workplaces and everything else. When clients do make space decisions, we expect them to gravitate to premier workplaces that we have at BXP. I want to make a few more points about the same property portfolio before I hand the speaker over to Mike. The elimination of income from 300 Binney Street as we have redeveloped this fully leased building into a lab building is about $10 million in 2023 relative to ‘22. The reduction in income from the Boston Suburban assets as well as a building in Carnegie Center and Shady Grove properties in Maryland that we are now enabling for life science constitutes a reduction of about $10 million in 2023 from 2022. This positions us to add life science portfolio properties over time. We expect our parking income to be about 90% of the 2019 level and up about 6% from ‘22 estimates. Our retail portfolio has come back in Boston, New York City and DC, where we have a significant number of new spaces under construction with 23 openings. The West Coast continues to be a laggard. We expect little change in contribution from retail in San Francisco in ‘23. The daily traffic in our West Coast portfolio continues to be dramatically lower than the East Coast. We continue to provide extensive subsidies to many of our retail tenants in San Francisco. In spite of the challenges with the new lease at 760 Boylston, we expect the overall contribution from retail to return to 2019 levels by the middle of ‘24 when the lease of 760 commences. In summary, we have reduced our total leasing expectations in ‘23 due to the issues stemming from the aggressive battle against inflation and the ensuing slowdown in the economy. We still expect occupancy improvement in ‘23, though at a reduced rate. Our flat same-store guidance is based on these variables. Mike, take it away.

Operator:

Thank you, sir. [Operator Instructions] I show our first question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Doug Linde:

Sure. So I’m going to – I’ll back up. So that was a three-part but I’m going to give you credit for it all being at least you know consistent with each other. So, the lease terminations are not included in our occupancy. Things are definitely feeling slower in the fourth quarter than they did in the third quarter of 2022. And again, we believe that our occupancy will be higher at the end of ‘23 than it will be at the end of 2022, because we have visibility on a significant amount of leases that have already been signed and we’re covering a significant amount of our existing portfolio vacancy today.

Steve Sakwa:

Thanks. Good morning. Owen or Doug, could you just comment on how you guys are adjusting your return hurdles on development? And maybe just speak to the acquisition of 200 Fifth you know in this environment, you know I guess why pursue acquisitions?

Operator:

Thank you. And I show our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

Owen Thomas:

I think the answer to your question is a little bit industry-specific. You know I certainly think amongst the financial service clients that we have, I think the slowdown in business conditions has, I think put some more urgency on in-person work, and we’re clearly seeing that in the traffic, particularly in Boston and New York. I also – you know I think – I’m not sure it’s that big an impact yet on the technology sector, where the return to in-person work has been certainly lagging the other industries. And I do think there’s an offset a bit as well in terms of what Doug described of you know a recession, delaying leasing decisions by businesses because there are you know significant capital events. And you know in this kind of environment, businesses try to create optionality on doing those kinds of things. But yes, I do think slower business conditions are leading to more in-person work behavior.

Operator:

Thank you. And I show our next question comes from the line of Nick Yulico from Scotiabank. Please go ahead.

Owen Thomas:

Okay. I think that was a three-part question, but I won’t stick Helen on you. So, first of all, JVs, we absolutely want to continue to do joint ventures and we absolutely want to continue to sell assets. But it’s going to be subject to market conditions. As I mentioned, there are many institutional investors who are more cautious on the market, some have withdrawn for the market for the reasons I mentioned in my remarks, denominator effect or a view that perhaps the market will get more interesting from a pricing perspective in the future. But again, subject to market conditions, that’s absolutely what we want to do. Going to your comparison of 200 Fifth to 1330 Avenue of the Americas, humbly, I would say, I think 200 Fifth is a higher-quality asset and warrants a lower cap rate. I do think that below-market debt does have some impact on how to think about pricing for the asset, because clearly an asset to have such a below-market debt on the building. And to your point with debt cost rising, I absolutely believe that there is some increase in cap rates. I think it is probably less in the office sector, because I think office buildings have been trading at higher cap rates than some of the other real estate sectors. But I do think it has had some increase on where market cap rates are.

Blaine Heck:

Great, thanks. Good morning. So the tone on the call and in the press release sounds a lot less optimistic than at your Investor Day. I wanted Doug, you guys did touch on this, so you guys did in the prepared remarks, but can you just expand on the main kind of factors driving that change in tone, especially in such a short period of time?

Operator:

Thank you. And I show our next question comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Owen Thomas:

So the answer to your question is, yes, the Avant sale is reflected in the ‘23 guidance. And with – as it relates to sales, we – Mike and I both mentioned a figure of $864 million for ‘22, which assumes the Avant is sold, it’s only under contract right now. And then we will – and I mentioned one of the strategic priorities for BXP is to continue to recycle capital and upgrade our portfolio into 2023. So our goal is to sell more assets since we don’t know what those are, those are not reflected in the ‘23 guidance and it’s going to be subject to market conditions. You know we have specific assets that we are looking at to sell, but it’s – again, we are going to execute on those sales subject to receiving attractive pricing.

Nick Joseph:

Thanks. It’s Nick Joseph here with Michael. I appreciate the color on the competitive rising rates on the business and guidance. But just going back to the financing market for office assets today Broad lease. You know what are you seeing the differences in terms of lender appetite, LTVs, rates terms on premier versus other assets?

Operator:

Thank you. And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.

Owen Thomas:

So Alex, good morning. No, the Amazon moves in Bellevue were not part of our initial underwriting, because it was not known. We remain confident in Seattle for the long-term. We think we have two – we have one very high-quality asset and one asset that we’re going to make very high-quality that we’ve already performed some leasing in. We have confidence in those assets. But as Doug described in his remarks, you know the technology industry is retrenching to some degree. You know there have been layoffs announced. There have been space moves announced that you described. And you know we don’t see this as a big provider of growth in the near-term. But I think over the long-term, these companies you know have technologies that will grow and they will be successful, but it’s going to take a while to work through the environment that we’re currently dealing with.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. FFO per share expectations for 2023 is down 4% from what you’re anticipating for 2022. And this is primarily driven by pressure from interest expense as well as some other puts and takes, not asking for guidance, but I guess like what needs to happen in order for BXP to return to earnings growth in the coming years? Can you get there with just the maturity of the development or will it require a combination of more favorable interest rates and stronger fundamental demand? I’m just trying to get at the cadence of what needs to happen in order to get the company back on this path to earnings growth.

Owen Thomas:

I would just add to Mike’s remarks, First of all, on the development deliveries, as I mentioned, that’s $200 million of NOI over the next five years, and that number excludes contributions from 300 Binney Street, which are material, which comes in the next couple of years. So that’s the quantification of that. Mike talked a little bit about the interest rate opportunity. And then the last piece is portfolio occupancy. Again, Doug went through a lot of math on how to think about that and the timing for it. But we’re going through a business cycle. You know I said this at the Investor Conference, it called a cycle for a reason. It doesn’t last forever. And this will turn at some point. And you know when you looked at BXP before the pandemic, we were at 93%. So again, we’re not giving any forecast on what the timing for that is, but that’s clearly a growth opportunity for the company is to increase the occupancy of our portfolio.

Vikram Malhotra:

Thanks so much. I just you know wanted to go back to sort of the occupancy trajectory and comments. Maybe just if you can unpack it a bit more for us, because you know I came away from the Investor Day definitely thinking there’s upside to occupancy even if you trend sort of lower on the leasing front, and you kind of gave some numbers at multiple presentations. So maybe you can just unpack this a little bit more by maybe the risk to market? Were there more risk? Were there upside? How do we think about just timing-wise or trajectory? And you know just again what’s changed in the last month? It’s a bit unclear just based on what you talked about a month ago.

Operator:

Thank you. And I show our next question comes from the line of David Rodgers from Baird. Please go ahead.

Doug Linde:

So all the numbers I used at the Investor Conference were as of June 30th of 2022. So everything was sort of a quarter delayed and lots of things happened during the third quarter that are now reflected in the numbers, both in terms of leases that we signed that pushed out occupancy and leases that we signed that have yet to commence and leases that we’ve got on vacant spaces that have already commenced that are sort of baked into the numbers. So the numbers that I provided earlier is sort of how I’m looking – we’re looking at things on a going-forward basis. So instead of the 1 million square feet of leases, for example, that we had that were 1.2 million if that was number of leases that were signed that had yet to commence. Right now, it’s about 1 million square feet or 885,000 square feet, of which 700,000 of that are 2023 commencements in the rest of our buildings that will have a lease commencement in 2024, right. So that’s sort of how I would sort of look at the numbers. So what I gave you earlier today were the numbers as of 9/30/2022.

Operator:

Thank you. And I show our next question comes from the line of Tayo Okusanya from Credit Suisse. Please go ahead.

Owen Thomas:

Yeah. So I’ll jump in. Doug may have some comments as well. We have a lot of confidence in the long-term growth prospects in life science. We think there is tremendous capital that is prepared to invest in that space, and there’s also tremendous unresearched science, and it has very strong prospects. I think the other thing that’s important about life science is the importance of location that is critically important and Kendall Center where we’re making most of our investments today is absolutely a key critical, it’s one of the best locations for life science in the world. And I look at all the demand we generated and the deals that we’ve announced. You know we talked about the AstraZeneca lease at 290 Binney Street, the Broad lease that we did at 300 Binney. So you know we’re demonstrating very strong demand at that location. So I do think there’s been more of a slowdown in Waltham. And therefore, we’ve slowed down a little bit of our new deliveries to be responsive to that. But again, you know given my prior remarks, we have confidence that, that will return.

Bryan Koop:

Doug, I’d add – this is Bryan Koop from Boston Region. I think the prototype is 880 Winter Street for what Doug is talking about. We’ve got – we’re positioning other buildings for the same thing. But as we said at the Analyst Day event, we can turn on and off this positive supply with a moment’s notice. And we’re in a great position on our speculative side with 180 already having pre-leasing on it, good activity, not as strong as it was, but good activity. And then 880 is a 100% leased. And we want to have another building just like 880 ready to go when the time is right.

Anthony Powell:

Hi, good morning. A question about the mark-to-market. I think outside of Boston was just strong. I think you’re seeing basically flat to down 4% or 5% in most of our other geographies, where do you think that goes in the next year or so? And are you seeing any changes in tenant lease terms or length of leases given kind of falling rent here?

Operator:

Thank you. [Operator Instructions] And I show our next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.

Mike LaBelle:

The leverage right now is 7.5 times, which is basically in line with where our target is. And you know I would expect next year that you know it’s likely to tick up a little bit before it comes down. And then as our development pipeline delivers later next year and then into the following year, you know it would start to come down. And then the dependence is what kind of new investment activity do we have, right. And if we have significant new investment activity, we’ve got to figure out how to capitalize that. But if we don’t have that activity, I think that’s kind of the trajectory. So you may still see it increase a little bit and then start to come down.

Jamie Feldman:

Hey, guys. Great. Thank you. I’m here with Blaine. So I guess just sticking with that last response, Mike, your response, you know thinking about the fact that you know BXP, clearly, the interest rate outlook for the company and impact on earnings to the market off guard probably surprised you guys even where you sit today versus where you thought you’d be a couple of years ago. And what does that mean for the competitive landscape? I’m sure there’s a bunch of you know private operators or even public out there that you know having – you guys have always run your balance sheet particularly well and more conservative and locked in debt costs better than most. You know are you starting to see a lot of distress? And do you expect to see a lot of distress? I know you had mentioned you know wanting to grow more in residential and life science. Will this open up opportunities? And will this stuff be in scale if it’s out there? And if so, how would you capitalize it based on where your balance sheet sits today?

Mike LaBelle:

And I think that – look, we’ve got a lot of cash flow that’s coming online from these developments over the next few years. You know 70% of the debt capital has already been raised that is funding this. So we’ve got a lot of follow kind of capital out there on these properties where income hasn’t started. So yes, we expect our leverage to tick up a little bit as we kind of go through the development process over the next few quarters. But if we don’t do anything else, and we just let this stuff come in our leverage is going to be down into the, you know low 6s. And that’s below our target range. So there’s still capacity on our balance sheet to do things if we find those opportunities. And then it’s a question of how we fund it, right. And I think that in order to continue to lengthen our balance sheet, that’s why we’ve been using private capital to help us fund some of these new opportunities. And I would expect that we would continue to kind of look at that as a vehicle to help us do that, because we’re not going to be raising public equity at the kind of prices that we’re at right now.

Daniel Ismail:

Great, thank you. I might be sounding a bit like a broken record here, but I’m just curious, given on our numbers, BXP is trading at some of the widest discounts on the history on a variety of metrics, implied cap rates, discount to NAV. I’m just curious what would cause any sort of incremental capital to be redirected into share repurchases versus external growth? What are sort of the triggers or is it a duration of these discounts persisting to see more capital go into – to see capital go into share repurchases? Or what would put that back on the table?

Mike LaBelle:

And I think Owen described, right. I mean we’re going to – we’re picky about what we’re going to be investing in. The bar has got to be higher, but we have some opportunities like the ones we’ve talked about in Kendall Square that are you know once in a lifetime kind of opportunities and these are great transactions that are going to grow the value of this company. So investing in our capital and those kinds of opportunities, we believe will be very accretive to our shareholders over time.

Owen Thomas:

Thank you. We have no more formal remarks. Thank you for your interest in BXP.

Helen Han :

Good morning, and welcome to BXP's Second Quarter 2022 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP 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 BXP's filings with the SEC. BXP 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 Q&A portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. [Operator Instructions] I would now like to turn the call over to Owen Thomas for his formal remarks.

Doug Linde :

Thanks, Owen. Good morning, everybody. So our last conference call was on May 3. And over the last 86 days, the conversations on the demand side of our business have really shifted from, as Owen described, return to work and space utilization to the pace of job growth and job reductions as the impacts of the Fed's actions moved their way through the economy. While leasing activity has slowed some across every market, new lease transactions that have been in documentation during the first half of the year across all of our markets and not just with our tenants continue to move towards completion. In our portfolio, none of our active lease negotiations have been scrapped. And I think that's important relative to how we have seen other dramatic slowdowns occur, where people and companies have become much more cautious about what they're doing. There is, however, less urgency with clients to make new commitments. As we consider our expectations for leasing completions in the back half of '22 and '23, we are obviously factoring in the impact of the slowdown in the macroeconomic activity, business performance and reduced overall demand for space. The availability rate defined by third-party brokers that look at the entirety of the markets continues to appear to be very elevated across virtually every office market in the country, and our markets are no exception. Last quarter, we described the work that CBRE Econometric did on the availability in the premier assets in the urban markets. Availability of space is at lower levels among premier buildings. These assets continue to get more than their proportionate share of market demand. And there are still premier building micro markets like the Back Bay in Boston or View Space in Class A buildings in San Francisco that are still performing really well, meaning rents and concessions are equal to, if not better than, pre pandemic. We have moved away from looking at the percentage of card access swipes relative to February of 2020. It seems to be talked about in the Wall Street Journal every day and are now measuring the daily and weekly utilization of seats. We've got pretty good data on daily utilization in our Boston Back Bay and New York City assets where the customer makeup is dominated by traditional financial services and professional services firms, i.e., very few technology companies. Here, we're seeing about 70% of the is being used on a weekly basis with about 50% of the employees using the space 3, 4 or 5 days a week. Now when we compare utilization from 2020 pre pandemic, the striking difference is the daily difference, where we saw 80% of the employees coming in 3 or more days a week in early 2020, 2019. There was a ramp-up, as Owen said, between March and June, but it really has plateaued as we began the summer. Some business leaders, including a few renowned technology CEOs, are becoming sterner in their message to employees regarding the importance of in-person daily activities in traditional office space. This may lead to greater daily utilization as we end the summer holiday season. We'll be able to tell you about that as we look at our September data when we talk to you in October. In the last week, we've seen announcements from some of the tech titans, Amazon, Meta, that acknowledge that they're trying to figure out how they're going to match their human capital with the utilization of physical space. Changes in the labor market supply are also going to impact these decisions. And as I said last quarter, I think this is going to be a journey when any industry expert could tell you they know how business is going to use their space or what they even think remote or hybrid work actually means in 2024 is grossly overestimating their expertise. Getting to our performance. The second quarter was a great leasing quarter for BXP. This is now the fourth straight quarter of strong overall leasing activity in our portfolio. To remind everybody, beginning with the third quarter of '21, we signed 1.4 million, 1.8 million, 1.2 million and this quarter, 1.9 million square feet of leases. So that's 6.3 million square feet of signed leases in the last 12 months. This activity has occurred in the midst of the Delta variant, the Omicron variant, remote work fits and starts and most importantly, significant labor market headwinds. As we speak to you this morning, we have signed leases on more than 975,000 square feet of in-service baked-in space that are not yet in our occupancy figures. About 50% is going to commence in '22 and the remainder in '23. At the end of the second quarter, after completing the 1.9 million square feet of active leasing, we have an additional active lease portfolio in negotiation in the in-service portfolio of 1.3 million square feet. 640,000 square feet would cover currently vacant space, so most will go into service in '23 and the other 660,000 involves currently leased space, so aka renewals or replacement tenants. Known expirations for the remainder of '22 total under 1.7 million square feet. Over the last 4 quarters, our occupancy has improved by 90 basis points and stands at 89.5% as of June 30. We expect to see a slight decline over the next few quarters as we wait for all of these signed leases to commence, but in spite of even our less robust leasing expectations, we should see occupancy pick up slightly in 2023 from today's level. The development portfolio includes 1.1 million square feet of signed leases that have yet to commence, and that excludes the lease of 290 Street. And these buildings are not included in our occupancy figures this quarter. Reston Next will be included in the in-service portfolio of '22 without the 200,000 square feet signed Volkswagen lease that won't commence until '23. We are going to see an increase in contribution from these assets even though they will show a reduction in our reported in-service occupancy. A good portion of the vacancy in our Boston suburban portfolio is now comprised of space in buildings we have actually vacated as we plan our next group of future life science conversions. When we commence redevelopment, these assets will be taken out of service. So let's talk about sort of my ranking of the markets. It goes into sort of 3 tranches. The Boston CBD stands out as the most active of our portfolio, and it is by itself in the trough tranche. And by CBD, I'm really referring to the Back Bay because that's where we have the majority of our portfolio. The New York City, Reston, Virginia really leases under 25,000 square feet; San Francisco, again, smaller tenants, leases under 25,000 square feet; and Washington, D.C. CBD make up sort of the second tranche. And then suburban Boston, South San Francisco, Mountain View, Princeton and West L.A. make up the third. Activity on the East Coast is stronger than activity on our West Coast portfolio. I think this is a function of the composition of customer demand, which has a much heavier weighting of market occupancy from traditional financial services and professional services firms on the East Coast versus technology and media companies on the West Coast. I think the big changes from the last quarter in our portfolio are the increased level of leases we're actually working on in our D.C. CBD portfolio and then the slowdown we have seen in the Boston suburbs. Now to be fair, we completed over 220,000 square feet of suburban office leasing in the suburban Boston in-service portfolio during the second quarter, where the average market rent on second-generation space was up 34%. In addition, all of the life science leases we were negotiating at 88 Winter Street were executed this quarter. We signed 3 separate leases totaling 72,000 square feet in that building, and it's now 97% leased with expected occupancy in September for the first tenant. We also signed 2 leases at 180 CityPoint, our next life science delivery totaling 140,000 square feet. So if you include the 570,000 square feet on Binney Street, we actually executed over 775,000 square feet of life science leases during the quarter in our Boston portfolio. 2021 was an extraordinary leasing year for life science, and the slowdown we are now seeing in the office leasing activity is also being felt in the life science market in our suburban Boston, suburban San Francisco and suburban Montgomery County portfolio. The biotech index, IBX, is down significantly from a year ago and fewer private companies are getting funded, which translates into a drop in active requirements relative to last year. I would note that the big pharma companies continue to have an appetite for new space in our markets. Early-stage life science tenants and their investors with an eye to slowing down their capital outflows are also pushing more of the capital spend needed to fit out space to the landlord in the form of higher TI demand. In the Boston CBD, we completed 253,000 square feet of leases. The markup on that portfolio was 18%. More than 450,000 square feet of our leases in negotiation are in the Boston CBD portfolio and that includes 200,000 square feet of retail space that has been vacant. In the San Francisco CBD, there have been a few more large tech tenants that have completed leases in sublease space, but the bulk of the activity on a direct basis has been north of market and it continues to be concentrated in the premier buildings with professional services and financial services firms. This quarter, we did 9 leases totaling 96,000 square feet in the CBD portfolio, and the leases had a second-generation increase of 37%. We also completed 2 transactions in Mountain View with an uptick of only 3%. In other positive news on the West Coast, we completed a 60,000-square-foot lease for the top 3 floors that are vacant at Safeco Plaza in Seattle. When we purchased the asset in '21, our plan included a major repositioning of the public and amenity spaces at the Fourth Avenue and Third Avenue Street plans. We have begun to introduce our repositioning plans for the building. And this, combined with our proven track record in creating great places and spaces, allowed us to win over a current BXP West Coast client to Safeco Plaza. Activity in the D.C. region was pretty light during the second quarter with the 8 office transactions totaling only 43,000 square feet and 8 retail transactions totaling 39,000. But as we look forward, we're negotiating over 270,000 square feet of leases for the in-service portfolio and 95,000 square feet of leases at 2100 Pennsylvania Avenue, our newest development in D.C. In the New York region during the quarter, the most significant transaction was a 125,000-square-foot extension at General Motors building that got signed in early April and I described last quarter. In addition, we completed another 168,000 square foot of leases across the portfolio. There were some ups and downs in the lease-to-lease rent comparison, but together, the portfolio had a slightly positive under 1% mark-to-market on the leases executed during the second quarter. We have multi-floor lease negotiations underway at 399 Park Avenue, 601 Lex, and last week, we signed a 71,000-square-foot 2-floor lease at Dock 72. Total active leases in the New York City portfolio as of July 1 was in excess of 260,000 square feet. We have had 4 consecutive strong quarters of office leasing. We have incremental development deliveries hitting in '22 that will be at their run rate in '23. We still expect occupancy improvement in '23, though at a reduced rate based on the slowdown in the economy. We continue, as Owen said, to feel really good about our portfolio position in each market. And our lack of meaningful lease expirations in '23, just over 2 million square feet, puts us in a great position entering the year. We have a strong balance sheet with low floating rate exposure and near-term maturities, so debt financing costs are going to be higher in '23. In addition to his commentary on the second quarter performance, Mike will discuss our internal interest rate expectations and our financing plans. Mike?

Operator:

[Operator Instructions] I show our first question comes from the line of John Kim from BMO Capital Markets.

Doug Linde:

Sure. So again, as I described, the high-end premier space is really where the market has held up very, very well. And those tenants are, I would describe as, smaller to midsize professional services, asset management, legal, financial services companies, so hedge funds, money managers, private equity firms, law firms, consultants, et cetera. And none of those tenants are looking at a sublet of a floor at 50 Fremont, which is the building you're describing that Salesforce is -- actually put. It's actually not a sublet space because they own that building. That's actually direct space in the market.

Jamie Feldman:

I guess just thinking big picture, your comments about some markets seem like they might be coming back faster. You just -- you're growing in Seattle. Just as you think about the future, are there certain markets where you're much more cautious about putting incremental capital to work and some that you are more aggressive putting capital to work here as you just think about how return to the office will work out and space usage will work out and kind of all the changes we're seeing in the market today?

Operator:

I show our next question comes from the line of Alexander Goldfarb from Piper Sandler.

Doug Linde:

So let me talk about the in-service portfolio, and then I'll let Mike and Owen describe sort of the other components. So on the in-service portfolio, Alex, I think it would be fair to say that we have a constructive but a moderating view on the leasing that we will do between now and the beginning of 2023. And we're assuming the economy is going to continue to be less strong than it is today. That doesn't mean that we will see any meaningful change in our portfolio outcome. We have some leases that are rolling over that are higher, and we have some leases that are rolling over there are lower. And then we'll -- the real question will be, as we always talk about, whether there are incremental pieces of downtime on spaces that we have leased where we haven't started revenue. So net-net, we feel -- I would say that next year and this year relative to our same-store portfolio, are going to be pretty consistent. Mike, you may want to talk about expense development.

Owen Thomas:

Yes. So Alex, kind of pulling all this together, what you're hearing from us is that we are in a less certain economic environment today than we certainly were last quarter. 2023 is a long time from now, and given the uncertainty, it's very hard to predict. So what we're trying to provide is what are all the trade-offs here, what could be up, what could be down. And we don't know the magnitudes of those yet. It's dependent on market forces. So Doug described the leasing. Clearly, the slowdown in economic activity is a headwind to leasing. Absolutely, we believe that our premium assets will get more than their fair share, so that trend continues. Capital costs will be higher. How much? I don't know. It depends on what your assumption is for interest rate. And clearly, the developments will add to our results.

Derek Johnston :

So the newly formed JV, can we get some more details on the 39-story new development tower in NoVA? And specifically on the JV structure, so really hoping for a private market read-through. So I guess the question would be, are you seeing deep interest from potential JV partners like sovereigns, pensions, other institutional capital? Does it seem ready and willing here to partner up on Class A office? And how deep is this pool versus previous cycles and maybe markets as well as assets?

Operator:

And I show our next question comes from the line of Steve Sakwa from Evercore ISI.

Doug Linde:

Yes. So Steve, you ask an interesting question because if I actually parse down where our availability is, other than Northern Virginia, where we actually have operating assets with vacant floors that would likely be what I would refer to as sort of techy because it's either cybersecurity companies or web services companies or defense contracting companies which have a technology bend to them, the vast majority of our portfolio is really, in terms of our availability, is in our CBD assets, which are not primarily geared towards technology tenants aka Embarcadero Center is a very different asset than, as an example, Salesforce Tower or 680 Folsom Street. So we are not really, I would say, from a portfolio perspective, very focused on what's going on from a technology perspective relative to what we think we can achieve in 2023. But what I'm not saying is that we're not immune to the fact that the technology sector has been a meaningful contributor to the growth in office absorption in every one of our markets. And so it's hard to see the markets improving in any peculiar way without there being a meaningful change in technology companies' desire to take additional office space. So I think that we can surf above the fray relative to occupancy, but we're going to be impacted by the overall market dynamics that are going to be intrinsic to lack of additional absorption because those tenants are just simply not aggressively looking for space today.

Michael Bilerman:

It's Michael Bilerman here with Michael Griffin. Owen, Doug, I don't know who wanted to take this one. I'm just thinking about sort of strategic direction of the company just from a property type perspective. And as I think about the company is obviously over-indexed to office as what you are, as your primary property type, in the most high-quality buildings, in the most core urban coastal markets. The company has had great success over the years of developing and selling and sometimes retaining, whether it's residential or hotel or retail and obviously, all the life science stuff that's been core to the company for decades. How are you thinking about, given this economic environment that we're in today, and if you look at the residential reports or the retail reports or even the hotel reports that are coming out, there's not as much of a negative drag or uncertainty to which you're talking a little bit about from an office perspective? So is there any thought to perhaps going deeper from a mixed-use or alternate property type relative to office, whether that be through development, which you're already starting to do, or maybe through acquisitions? And just how are you and the Board sort of thinking about the next chapter of BXP and could that be different than from where we are today?

Doug Linde:

And Michael, I would just add a couple of things. So the first is that we continue to and have moved away from what I would refer to as greenfield ownership of assets, meaning we've looked at our Boston suburban portfolio and said, which of these buildings can we convert to life science because there's a lot more life science demand, we believe, going forward, than there will be office demand in suburban locations. You just saw us sell our VA 95 assets. And I would say that we will likely have a larger overall sales portfolio in 2022 and 2023 than we had in 2018, 2019 and 2020. And that will, to some degree, continue to sort of position the portfolio to be even more select about what it owns and where it owns it and what we believe the characteristics of those buildings are. So we may get slightly smaller relative to the kinds of assets that we own today versus what we will own as we move into the next number of years. And I would say that, that's a conversation that the Board has every single time we get together.

Ronald Kamdem:

I just wanted to zoom in on the spreads this quarter, given sort of there was a big bifurcation by markets, Boston, L.A., Seattle, San Francisco doing 20%-plus versus New York and D.C. sort of in the 17% and 16%. Can you provide sort of any color of what's going on there? What's happening in the market? And how should we think about that going forward in terms of the lease roll, call it, over the next 6 to 12 months?

Operator:

And I show our next question comes from the line of Blaine Heck from Wells Fargo.

Owen Thomas:

Well, as I mentioned, there is definitely liquidity for office real estate. Financing buyers being able to arrange financing or buildings that have existing financing on them, I think, are critical for success. And we are at various points along in the execution of the sales of the assets that we are attempting in D.C. And we are encouraged by our progress. Clearly, we're not going to sell for any price. We don't need to sell these assets. We'd like to and reallocate the capital from D.C. to Seattle. But again, I do think there is good demand for higher-quality buildings and financing can be arranged.

Operator:

And I show our next question comes from the line of Nick Yulico from Scotiabank.

Doug Linde:

I think that your first comment was the accurate one, which is we are, I would say, slightly less exuberant about leasing activity for the remainder of the year. And so if you look at the data that I provided, I basically said, look, we have 1.7-plus million square feet, actually slightly less than 1.7 million square feet of leases expiring. And I gave you visibility on almost that much leasing that's been done. The issue is some of it's in 2022 and some of it's in 2023. And then I said, by the way, that's what we have active. I will tell you that my active portfolio is not going to simply be all that we do between now and the end of the year or what we do at the beginning of 2023. There are things that will happen that I don't know about right now. We're a big company that does millions of square feet of leasing from every year. And there are transactions that will pop up that will also be part of the calculus here. Again, I don't know likely when those rents will commence from an occupancy perspective. So that's why I would say we're being -- I don't think we're being overly conservative. I think we're being realistic relative to sort of not having as much visibility on the rate of increase as we had as we were looking at the volumes when we talked to you 86 days ago, where there was a lot more going on in the markets in general and in our portfolio.

Operator:

And I show our next question comes from the line of Michael Goldsmith from UBS.

Doug Linde:

So I guess I'll describe it in the following way. So first and foremost, we have a great portfolio of buildings that generally, as I said earlier and Owen sort of reiterated, get more than their fair share of market demand. However, as I also said, we are not immune to what's going on in the market. And so we have to be more competitive, in certain cases, because the market is desiring more in the way of concessions on particular transactions. And so where we have to do that, we're doing that. And we're -- our goal is to utilize our capital as best we can to get occupancy in our buildings with great tenants on a long-term basis, where we think we're going to be in a position where we're going to stabilize the amount of occupancy that we have, hopefully, at that sort of 93% to 94% level as opposed to the 89% to 90% level, which is where we are today. And that's fundamentally where I think we hope to get to with our portfolio. And we're going to do that through active management with our operating teams who are the best in the business in their respective markets and work really, really hard to understand what our customers' and clients' needs are and fulfil them in ways that get traction and allow us to create additional occupancy.

Omotayo Okusanya :

Just wanted to go back to some of the thoughts around interest expense in '23 and just the amount of variable rate debt that will be outstanding, especially with the new term loan on Madison. Curious, how much of that do you expect to kind of fix probably over the next 12 months? And does it make a difference whether it is via you guys raising kind of fixed unsecured to take out the term loan or putting swaps, whether that can make a really big difference 1 way or another in regards to the impact on interest expense going forward?

Operator:

And I show our next question comes from the line of Daniel Ismail from Green Street.

Owen Thomas:

Danny, it's Owen. We have needs for our capital. We have exciting investment opportunities in development and in some cases, acquisitions and feel that's a better allocation of our capital than repurchasing shares. And we care about the level of leverage of the company, particularly given the economic slowdown that we've described. So that's our priority.

Vikram Malhotra:

Just 2 clarifications. One, I think I heard you say something around the stabilized or same-store portfolio into ‘23 being steady. Without giving us a number, could you just – does that mean same-store is likely to be flat on an absolute basis or actually see some sort of growth? And then could you just clarify on life sciences, somewhat contrast to your peers, one of your peers who reported, just specifically around the view on mark-to-market and leasing velocity near term?

Doug Linde:

And I’m a little unsure your question on life science. We have very little in the way of what you refer to as life science rollover in our portfolio because the vast majority of the life science stuff that we’ve done are leases that have either recently or are about to commence. We have 1 building that’s going to – has a lease expiration in November, which is a building that we acquired about a year ago on Second Avenue, and there’s a material mark-to-market on that when we’re able to re-lease that building. But we just don’t – we don’t have much in the way of exposure to expirations in the life science business.

Owen Thomas :

Thank you for all of your time and attention this morning, and we hope to see all of you at our investor conference in September. Thank you very much.

Helen Han:

Good morning, and welcome to BXP's first quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and 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. If you did not receive a copy, these documents are available in the Investor Relations section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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 statement. I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President; and our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to 1 question. If you have an additional query or a follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Douglas Linde:

Thanks, Owen. Good morning, everybody. So we're sitting here on May 3, pretty late for us to have a call, but obviously, we had a lot of news to report, and we wanted to make sure our own schedules worked out there. Most employers have begun their journey to discover how they're going to match their human capital with their utilization of physical space. It's clear that the census on public transportation and in our office buildings continues to be below levels in 2019. There are going to be organizations that make few, if any, changes to their space configuration, location or allocation of space per employee those clients will be and are in the market making long-term leasing commitments based on their growth and as Owen said, a lot of companies grew in their lease expiration schedules. There will be businesses that experiment with different models. These companies could sublet space, they could commit to more or less short-term space or they could simply watch how their business responds to their new in-office cadence and do nothing until their lease gets closer to its natural exploration. It's also true that the availability rate of space, defined by third-party brokers that look at the entirety of the market, and as Owen described, there are lots of ways to cut it. But in general, it's -- it still continues to be elevated in our urban markets. But as Owen pointed out, if you start to analyze the activity, the best buildings are getting more than their proportionate share of market demand. Despite these headwinds, on demand and supply the BXP portfolio had its third consecutive sequential strong leasing quarter. Our total activity was again spread amongst Boston, New York, San Francisco and the Metropolitan Washington region. Last quarter, we showed an occupancy gain of 40 basis points, and this quarter, we picked up another 30 basis points. As we sit here today, we have signed leases for our in-service portfolio on vacant space that has yet to commence, so it's not in our occupancy figures of more than 975,000 square feet, which is up from 925,000 square feet last quarter. This will represent an additional 220 basis points of occupancy. We began 2022 with over 1.4 million square feet of leases in negotiation on space in the in-service portfolio. At the end of the first quarter, after completing the 1.2 million square feet I mentioned, we have active lease negotiations underway in the in-service portfolio and about 1.3 million square feet, and we had over 750,000 square feet in our development pipeline. During the month of April, so the last 30 days, we've signed in excess of 1.1 million square feet of space. We are moving quickly and confidently to lease up our portfolio. While our portfolio is comprised of the highest quality buildings in their submarkets, we have another advantage, which is our operational platform. We are in constant contact with our clients as we look for ways to create opportunities in the portfolio for our customers where a leasing transaction may not be readily apparent. Let me illustrate as I begin my regional comments in Boston. Life Science is the clear driver of new demand in the suburban Boston market, but our traditional Route 128 office leasing is also extremely busy. This quarter, we agreed to recapture and release 73,000 square feet at 77 CityPoint. We were aware of a large tech company that was seeking to establish a presence inside of 128 when we were finalizing the recapture and release of 1265 Main Street late last year, this tenant expressed interest, but we were too far along with our transaction to accommodate them. Our tenant at 77 CityPoint had a lease that expires December 31, '24 and had listed its space on the sublet market beginning in 2019, pre-pandemic related. Instead of simply waiting for the lease to expire we negotiated an early termination of recapture and signed a new 7.5-year lease, which also resulted in a [15%] net increase in the rent. Let me give you another example. We have a relationship with Wellington, the prime tenant at Atlantic Wharf. Our team was aware of Wellington's strong desire to improve their carbon footprint in any new real estate commitments. Working in partnership with Wellington as well as the local energy provider Eversource and a solar developer, we were able to find a way to reposition the mechanical systems at our 140 Kendrick Street project and make a net zero commitment. This resulted in a 105,000 square foot lease for space scheduled to expire in November 22. In addition, we signed leases with 2 other tenants for the remaining 80,000 square feet in this project, and leases for that space were also scheduled to expire in November 22, all with rent roll-ups of about 40%. By just looking at the performance of the [XBI] on your stock screen, it's pretty clear that the equity markets have not been kind to public biotech companies. However, there continues to be significant demand for life science tenants in the Boston market. Many of which continue to be funded with private capital and have strong science working in their favor. Over the last 2 weeks, we've signed another 45,000 square feet of leases at 880 Winter Street and are in final lease negotiations on the remaining space. And we signed a 140,000 square foot lease at 180 CityPoint, the new 329,000 square foot building under construction. Steel erection is underway, and we're hoping to deliver that space in the fourth quarter of '23. And obviously, we are excited to have AstraZeneca as a new client in Kendall Center and look forward to getting that building under construction in early '23. Our CBD Boston activity this quarter was primarily small transactions. We completed 7 deals for 47,000 square feet. Average markup was 17% on a cash basis. At the moment, we are in lease negotiations on more than 300,000 square feet of leases in the CBD of Boston with 4 transactions over 40,000 square feet. The New York regional second-generation statistics this quarter merits some explanation. In early 2020, Perella Weinberg made the decision to relocate out of the GM building. COVID hit, they paused their plans to move and they asked for a short-term renewal. We accommodated that request at an as-is market rent that was below their expiring rent with the hope that we could use this time to convince them to reconsider their decision and entertain a long-term renewal at the GM. What you see in our statistics this quarter is the impact of that short-term deal. Fast forward to April 1, 2022, our operating team was able to work with PWP to provide a long-term solution and they have signed 125,000 square foot lease renewal at GM that will keep them as our client until 2040. The mark-to-market on this new lease involved the relocation to lower [contiguous] floors. On the floors there, that the remaining part of the premises, the rents are down about 7%. In New York City during the quarter, the most significant leasing transaction was a 330,000 square foot extension and expansion at 601 Lexington Avenue. This lease involved the client expanding into a direct vacant floor as well as floors that are expiring in the second half of '22 totaling 180,000 square feet. The rent on this block is down about 7.5%. And we also completed a 70,000 square foot renewal at 510 Madison, where the cash rent is down about 10% and 5 small transactions totaling 24,000 square feet. Our current activity in New York continues to be strong. We have multi-floor lease negotiations underway at 399 Park Avenue at Dock 72 and another full floor lease at the General Motors building as well as a number of smaller leases at 250 West 55th, Times Square Tower and 510 Madison. Total activity is in excess of 400,000 square feet. Construction is underway at 360 Park Avenue South, and we are actively touring the building every week and trading proposals for 2023 lease commencements. Our Boston CBD, Cambridge and Waltham markets as well as Midtown New York are significantly busier than San Francisco, Northern Virginia, D.C. and L.A. In the San Francisco CBD, there have been a handful of large tech tenants in the market, and those deals have gravitated towards the well-built sublease space at assets like 350 Mission and 680 Folsom, our property with a Macy's sublet. The bulk of the activity on a direct basis has been in the financial district, and it continues to be concentrated at the better buildings with professional service firms and financial firms. We completed 10 leases totaling 104,000 square feet in the CBD this quarter, our cash rents increased by 25%. As we sit here this morning, we're working on another 110,000 square feet, including 3 full floors in Embarcadero Center. And we completed over 50,000 square feet in our Mountain View portfolio on currently vacant space. Our venture with ARE, as Owen said, has commenced construction at 651 Gateway, and we are making full floor and multi-floor proposals with anticipated occupancy in late '23, early '24. The venture did about 45,000 square feet of non-lab leasing at 601 and 611 Gateway this quarter. I'll finish my remarks with -- around Northern Virginia and D.C. During the first quarter, activity in Reston was concentrated on partial floor deals, i.e., small deals. We completed 6 totaling 20,000 square feet and are actively negotiating another 5 in the in-service portfolio. We have 1 full floor lease negotiation at their next phase of the Reston Town Center project, but large tenant activity in the Reston submarket has been slow as we started 2022. Rents have held up. They're in the low 50s with a 2.5% annual bump to the low 60s with similar bumps for RTC Next. In the district, we signed our second non-anchored deal at 2100 Penn and are in lease discussions now with a multi-floor office tenant and a retail tenant that would bring the leasing at 2100 Penn to over 80%. Activity at the Street plain, retail in Boston and in Reston in New York City has picked up significantly. Parking revenue in Boston and San Francisco continued to improve, while activity in parking in D.C., L.A. and Seattle is still restrained. The first quarter parking revenue, excluding Seattle, was 77% of it was 2019 and we expect a meaningful bump in the second quarter as we moved away from Omicron. We have had 3 consecutive strong quarters of office leasing and a great April 2022. Employers continue to search for new employees Businesses are leasing space, and we are capturing incremental portfolio occupancy. To circle back to Owen's comments about quality, employers want to use their physical space to encourage their teams to be together. The availability rate in the best buildings is lower, and there is significant relative rental rate outperformance. We create great places in spaces, so our customers can use space as a tool to attract and retain their talent. While not at 2019 levels, employees are spending more and more time in the office and is even more critical to have the right place and space. Mike?

Operator:

[Operator Instructions]. Your first question comes from the line of John Kim from BMO Capital Markets.

Douglas Linde:

So thanks for the question, John. So I would say that there's been no real direct impact on inflation. The organizations that we are talking to are steadfast in their desire to have really high quality, great space. And they're obviously looking at the market and depending upon the particular submarket that they're in, they're able to cut whatever deal they can. And in some cases, that means that the rent that they're currently paying is going to be higher than what they're going to -- what they will be paying in the future, which is obviously a good thing for them. Our escalators are really pretty much market condition oriented. So in a market like New York, the increases are generally on a fixed rate basis every 5 years, and there really hasn't been any change and the escalators in our other markets typically are between 2.5%, although mostly around 3%. And again, to be quite frank, there's not enough pricing power in the office markets for us to dictate additional terms. So we're just being competitive with the market conditions that we compete against within each individual submarket.

James Feldman:

Doug, I thought your comment on the Boston life science market comparing demand there to the biotech index was pretty interesting. When you shift -- when you think about the Bay Area, can you talk about whether it's on the tech side, small and large companies -- small and large tenants, and on the Life Science side, how are you guys thinking about? And what are you seeing in terms of either a pullback in leasing demand because of what's happening in either the public markets or even in the BC market or maybe you're not seeing a pullback at all. It would just be great to get more color on those 2 sectors, specifically.

Operator:

Your next question comes from the line of Alexander Goldfarb from Piper Sandler.

Douglas Linde:

Alex, Yes, I think the -- as I mentioned, the developments that we launched quarter, we're above 6%, not at 7%. So that's -- it's not across the board. We still have some that are above 7%, but there is some pressure, I think, on development yields. I do think that customers have -- the markets where we've been developing have been very strong and rents have been rising. So it has been keeping up. But I agree, over the longer term, if inflation stays at these elevated levels, it will make development more challenging from a yield perspective. And Alex, if you look at where we started and what we're doing right now on our development pipeline, -- we are -- so we have a residential project that we're moving forward with in Reston. And we're moving forward with life science in the greater Boston market and obviously, with our venture with Alexandria and South San Francisco. But you don't see other than our San Jose Platform 16, us announcing major office developments at the moment. And that's largely because the supply of space doesn't allow us to get the rents that are necessary to take care of the rather significant escalation in costs that we're seeing across every single market. I mean we're generally seeing 1 plus or minus percent monthly escalation right now in construction costs. The reserves making some changes. We do think that there's going to be a meaningful pullback. We do believe that we're going to start to see the pressure on the supply chain in the construction industry start to alleviate. We do believe that the challenges associated with labor are going to alleviate in the trades. So we're optimistic that things will start to come back. But in 2022, where we just started a project we would be assuming a pretty significant amount of escalation in our cost structure going forward.

Operator:

Your next question comes from the line of Michael Goldsmith from UBS.

Douglas Linde:

I would just say, as a general matter, we meet the market and our buildings to be full. Our income is how the company is valued, we want to create income. And if you go back historically, we have never tried to time the market. We take what the market will give us. And as you -- I think you look at our lease expiration schedules, we really try and get ahead of expirations wherever possible. And so we bring down our near-term exposure. And so in a "challenging market” we don't have that much in the way of expirations that we're dealing with on an annual basis. I mean, Mike, you tell me we're in the sort of 6% to 7% for the next 2 to 3 years.

Douglas Linde:

5% for the next 2 years. And so -- and then if we can, we will develop when the markets are better -- and there's -- we have less “rollover” in our portfolio, but we take what the markets will give us, and we are -- we believe in meeting the market. Obviously, we look for a premium because we have premium projects we have premium assets, and there are occasionally times when we have more than 1 customer looking at a particular piece of space, and we have a little bit of pricing leverage. And obviously, we take advantage of that whenever possible.

Richard Anderson:

So when we think about the long-term viability of the office business, I get the point about flight to quality in your case. But if we were to get back to full -- to pre-pandemic demand for space. Does that just happen kind of broadly or do you as a landlord or the REITs as landlords have to adjust their tenant exposure pie charts. So I'm looking at your slide -- your Page 24, your supplemental and you lay out all the different industries that you have exposure to. Does it require Boston Properties to change this road map for you to get back to sort of full demand whenever that day comes for office space? Or do you think legal services will come all the way back and real estate insurance, whatever the case may be. I'm curious if you -- it requires you to be proactive to get back to that full demand profile.