The operator welcomes participants to the Q3 2023 BXP earnings conference call and introduces Helen Han, Vice President of Investor Relations. Han provides information about the distribution of the press release and supplemental package, as well as the availability of a webcast. She also reminds listeners of the potential for forward-looking statements and the risks involved. Thomas, Linde, and LaBelle are introduced as speakers, with other members of the management team available for the Q&A portion. The call is then turned over to Thomas for his formal remarks.

In the second paragraph, Owen Thomas discusses BXP's strong performance in the third quarter, with FFO per share exceeding expectations and increased portfolio occupancy. He also mentions the completion of multiple financing activities and the overall positive economic outlook, despite some market challenges for BXP's clients. However, he notes that the strong headline statistics do not accurately reflect the operating environment for many of their clients, who are facing negative earnings growth and are actively managing their expenses.

The slower leasing activity in 2023 is primarily due to economic conditions, but there is optimism for a rebound in leasing when earnings growth returns. Despite remote work, there has been a return to office trend, with turnstile data showing 95% of pre-pandemic activity in New York City buildings and improving space utilization in all markets. Premier workplace buildings, which make up 18% of the total space in the five CBDs where BXP operates, have a lower vacancy rate (12.4%) compared to the rest of the market (17%). This shows that not all office buildings are the same and the premier workplace segment is performing better.

In the third quarter, net absorption for the premiere workplace segment was positive, with 8.1 million square feet absorbed in the last 11 quarters. Asking rents for premiere workplaces were 44% higher and 94% of BXP's CBD space is in buildings rated as premier workplaces. Office transaction volume in the US was low due to uncertainties in office demand and the cost and availability of debt financing. No sales were completed in BXP's core markets, with the exception of three office transactions in Boston and one in Santa Monica. These transactions were for reasonably well-leased assets and sold for $290 to $690 per square foot and 6.7% to 8.4% cap rates.

The paragraph discusses the current state of the non-premier office sales market, citing examples of recent sales in New York City and San Francisco. It also mentions BXP's capital market activity, specifically their restructuring of their investment in a Washington, DC office building. BXP now owns a 20% interest in a new mezzanine loan for the property, which will provide funding for future expenses and potentially earn them a return and incentive fees.

BXP has experienced a $36 million gain from a recent transaction and believes there will be opportunities to expand their portfolio in the premier workplace segment due to negative sentiment in the office industry. They have a strong balance sheet and access to capital, and have been positioning themselves to take advantage of market distress. They are focusing on their core markets and continue to pursue joint ventures and asset sales. Their development portfolio is creating FFO growth, with a recently completed project achieving net zero carbon performance and generating a high yield. BXP has a history of successful acquisitions during downturns and will continue to pursue opportunities.

In the last quarter, BXP had a successful quarter with financial performance and leasing exceeding expectations. They delivered a 231,000 square foot lab building and have a significant development pipeline underway. Despite challenges in the market, BXP remains well positioned due to their strong balance sheet and potential for market share growth. Client demand has remained stable, with the most activity coming from financial services, professional services, and law firms. However, traditional technology demand is absent and renewing technology clients are reducing their leased premises. Growth from AI organizations in San Francisco is a positive factor.

In the past few weeks, there has been a significant amount of leasing and investment in the growing ecosystem, with a focus on large well-built opportunities at discounted terms. This has had a positive impact on the San Francisco market, but will not affect leasing at Embarcadero center in 2024. The strongest demand for these assets comes from alternative asset managers, private equity firms, venture capitalists, and specialized fund managers. The company has seen strong activity in their Midtown Manhattan, Boston, Northern Virginia, and San Francisco portfolios. While they do not have direct availability at Salesforce tower, they have heard that Salesforce is interested in their sublet opportunity. Law firms are also important clients for the company, with active negotiations and discussions with seven firms in various locations. In the third quarter, over one million square feet have been leased.

The company has exceeded its leasing expectations for the first half of the year, with 2.7 million square feet leased to date and an additional 1.2 million in active transactions. They are confident in beating their 2023 leasing target of 3 million square feet. The quarter saw a mix of renewals, new tenants, expansions, and contractions, with a net reduction of 33,000 square feet. Leasing activity was strong in Boston, New York, and the West Coast markets. The mark-to-market for leases that commenced this quarter was down 3%, while the mark-to-market for executed leases was positive 4%. Starting cash rents on second generation spaces were up in Boston and down in other markets. Overall, the company's in-service occupancy increased modestly to 88.8%. They also terminated a lease with WeWork for 44,000 square feet in the third quarter.

The company expects to have more vacant properties due to WeWork defaults in the coming years. They have a development portfolio of 2.8 million square feet, with 52% leased. They recently signed a 70,000 square foot lease and have 335,000 square feet of leased assets ready to be put into service. They have signed leases for 750,000 square feet that have yet to commence and anticipate 425,000 square feet to commence in the fourth quarter of 2023. In 2024, they have 5.7% of their portfolio expiring, but they believe their occupancy will remain stable. The office supply picture did not improve in the third quarter, with most markets experiencing net negative absorption, except for Manhattan which had some positive absorption.

The city-specific office brokerage reports are acknowledging the differences between premier and non-premier assets, but are not widely available. The availability of premier buildings is showing a positive trend for office supply. However, new speculative construction is currently non-existent and any new projects will require significantly higher costs and longer lease-up periods. Construction costs have been increasing, and financing for office space is not readily available from traditional lenders. This quarter, a 313,000 square foot 10-year renewal was completed in Boston at a mutually beneficial rent level.

The company is facing challenges in finding new construction in the Back Bay area and is instead focusing on leasing existing space. They have completed a lease for a new life science property and are seeing some tour activity for their other life science developments. The company's legal team is performing well due to their portfolio of premier properties. Many buildings are struggling due to their current capital structure, providing an opportunity for the company to increase their market share.

In the third quarter, the company has been active in the debt markets, refinancing and extending mortgage facilities, expanding their corporate line of credit, and closing on a new $600 million mortgage loan. This has increased their liquidity and helped them manage their upcoming bond maturity in February 2023. The company is satisfied with the timing of their recent bond deals and has no more financing needs for 2023.

In 2024, the company has $1.2 billion in term loans and $400 million in floating rate mortgages maturing. They have swapped SOFR to be fixed at 4.64% through May of 2024 and plan to exercise one year extension options. The company is also refinancing $1.2 billion in bonds with a higher interest rate of 7%. They expect a decrease in interest income due to a lower average cash balance. In the third quarter, the company reported higher-than-expected funds from operations due to better portfolio net operating income. They also recorded non-cash impairment charges related to four unconsolidated joint ventures.

The charges are related to several properties including Platform 16, 360 Park Avenue South, 200 Fifth Avenue, and Safeco Plaza. The company expects the value of these assets to recover in the future and plans to hold onto them. The guidance for the rest of 2023 has been narrowed to $7.25 to $7.27 per share, with the midpoint remaining at $7.26 per share. The company anticipates higher termination income in the fourth quarter and higher net interest expense due to lower projected capitalized interest and closing a new mortgage financing earlier than expected. The rest of the assumptions for portfolio performance remain unchanged.

Owen Thomas, in response to a question about the acquisition and investment environment, states that buyers are hesitant due to uncertainty surrounding lease-up and lease growth, as well as concerns about financing. He also mentions that pricing needs to adjust further to make investment opportunities more attractive.

The speaker discusses the current state of the market and mentions that there is a lot of restructuring activity happening due to overleveraged loans. They also mention that buyers are hesitant to make deals due to uncertainties, but the recent stabilization of interest rates may help. When asked about impairments in the joint ventures, the speaker refers to the information in the supplemental document for details on changes in net equity values.

The speaker discusses an accounting adjustment made for consolidated joint ventures, stating that it does not reflect a significant change in the prospects of the assets. They also mention that occupancy is expected to remain stable next year despite a large number of expirations, with only a few known move-outs and potential headwinds from tenants like WeWork.

The majority of tenants moving out are not doing so due to financial difficulties, with the exception of WeWork and a few smaller tenants. The upcoming expirations in the portfolio are not significant, with only a few large ones in the West Coast and New York City. The company has already covered a portion of the expiration at their joint venture property. There are three types of leasing, with build-out periods being extended in the current market, leading to an increase in the "leased but not yet in service" statistic. This is expected to continue in 2024.

The company's leasing strategy includes signing new leases, renewing existing leases, and securing leases for future years. Leasing volumes are expected to remain strong in the current economic climate, but occupancy may not increase significantly in the short term. The company sees opportunities for growth in its West Coast portfolio, particularly with larger blocks of available space. The company is treading water with occupancy levels around 88% to 89%, but expects marginal improvements and occasional degradation due to tenant movements. The company's views for 2024 include potential for enhanced occupancy. A question was asked about development.

The speaker, Douglas Linde, responds to a question about the company's plans for two potential projects, 3 Hudson Boulevard and 343 Madison Avenue. He notes that while the timing opportunities for the two projects may differ, they do not see one as a clear winner over the other. Hilary Spann adds that the two buildings have different sizes and therefore cater to different types of demand in the market. She mentions that some tenants looking for 1 million square feet of space would require a larger building than what can be constructed at 343 Madison Avenue.

The speaker discusses the potential for building a new building at 343 Madison and the challenges of finding clients willing to pay the necessary rent. They also mention that they are considering selling some assets and that the expected returns vary depending on the quality and location of the asset.

Owen Thomas, in response to a question about how BXP's tenants are being cautious in their space commitments, explains that traditional macro indicators may not accurately reflect the current state of their business. He notes that while economic indicators like GDP growth and employment statistics look favorable, they are mostly related to consumption and not office-using jobs. Additionally, companies are being negatively impacted by rising rates and economic uncertainty, which is reflected in their negative earnings. Thomas believes that lower rates and an increase in earnings will help improve leasing activity.

The speaker believes that job growth is the best measure of corporate activity for their business. They mention specific industries that could impact office leasing and believe that as job listings and hiring announcements increase, it will create a better environment for office leasing. They do not want to speculate on where WeWork will keep their assets, but mention that they have stopped paying rent on two locations and have three others with them. The decision on what WeWork will do will take time and the speaker will have to decide if they are comfortable with their proposal or taking the space back.

Steve Sakwa is asking about Boston Properties' potential for investing in distressed opportunities and where they would need to see stabilized yields in order to deploy capital. He also asks if these opportunities could take them to new markets such as San Diego or Austin.

Owen Thomas, CEO of BXP, answers questions about the company's expansion plans and potential returns on investments. He explains that they do not see a need to expand beyond their current footprint and will focus on the premier segment of the market. The company plans to acquire un-stabilized assets with a total return requirement of pushing double-digit returns. During a conference call, Caitlin Burrows from Goldman Sachs asks about the decision to repay $700 million of unsecured debt with secured floating rate debt collateralized by Cambridge properties at SOFR plus 225. Mike LaBelle responds that they evaluated all options and found that the credit spreads in the secured markets for high-quality assets with long lease terms were better than what they could get from the bond market.

The speaker discusses the current bond spreads and opportunities for a floating rate deal. They also mention the flexibility of being able to fix the rate or prepay the mortgage in the future. In response to a question about competition from available space in the market, the speaker mentions that they are aware of the supply and sublease space, but are confident in their premier buildings and believe tenants may be more price sensitive in the current environment.

The speaker discusses the availability of office space in different regions, emphasizing that not all spaces are the same and there are many buildings that are not part of the conversation. They mention specific examples, such as Park Avenue in New York and the CBD in Washington DC, and state that the universe of opportunities may be small. The speaker then allows regional team members to talk about their specific areas, with one mentioning the abundance of sublease space in San Francisco but noting that much of it is low quality and difficult to compete with. The other team member echoes this sentiment and mentions a recent brokerage dinner they had.

The speaker discusses the concerns of top-end clients and premier clients regarding the lack of available locations for review and the reluctance to sublease space. They also mention the first-time occurrence of tenant rep people underwriting the landlord's capability to fund TIs. When asked about acquisition opportunities, the speaker explains that they are open to investing in all markets but have an easier time underwriting deals in their East Coast markets due to market behavior.

The Park Avenue District of New York is currently the strongest market in the country for real estate demand, but there are still challenges in the market due to high levels of debt on many buildings. This could potentially create opportunities for companies with strong balance sheets, like the speaker's company, to acquire properties at a discount. The speaker's colleague, Hilary, also mentions that they are receiving a lot of interest from clients due to their strong financial position and ability to invest in leasing opportunities. They are closely monitoring situations where buildings have upside-down capital stacks, which could present potential opportunities for their company.

The speaker responds to a question about potential pressure on operating margins in the future due to return to office mandates. They dismiss the idea, stating that their company operates their buildings differently and has been expecting full occupancy for years. They mention other factors that may impact margins, such as labor rates, insurance markets, and municipal taxes. However, they believe these will not have a significant impact on margins in the long run.

The speaker explains that the company's FFO has remained strong and is expected to be 5-10% higher than last year, primarily due to the conversion of free rent to cash rent and lower leasing expirations. However, there may be some increased CapEx in the fourth quarter.

The company expects their CapEx to be higher in the fourth quarter, but they are still projecting solid FFO of $5-5.20. The life sciences segment has seen activity from small tenants looking for turnkey buildouts, and there is consistent tour activity at their two buildings in the Greater Boston marketplace. However, the tours are mostly from potential tenants who are still shopping around.

The speaker discusses the potential opportunities for drug discovery in the life sciences industry, which could lead to added capital and the ability to hire more people. However, tenants in this industry are being cautious and the demand is not as explosive as it was in previous years. The company has seen some encouraging tour uptick in the last two weeks, with midsized clients showing interest. The speaker also mentions that they may not repeat their previous comments on the topic.

The speaker states that they are not planning on starting any new life science activities in their marketplaces, but they have opportunities to build on land at a cost advantage. They will consider putting infrastructure in existing office installations to accommodate life science demand if the tenant has good credit. In terms of San Francisco, they are at 45% of pre-pandemic turnstile activity and it is unclear how it will play out over time. Partners are interested in conversion activity in the office sector.

The Bay Area and West Coast are seeing slower activity in the office market, likely due to technology companies being less forceful about returning to the office. Private equity interest in office assets is limited, with most activity being driven by smaller investors. However, there may still be institutional interest in premier workplace assets at the right price. Currently, the capital interested in office is focused on trading rather than long-term investment.

The speaker discusses the difficulty of finding desirable opportunities in the current market, but mentions that they are having constructive conversations with potential partners and considering individual assets as well as smaller portfolios or companies. The focus is on single asset activity, as the portfolio has been curated one asset at a time.

The speaker believes it is difficult to assign a monetary value to their current discussions with asset owners and lenders. They are constantly in dialogue with these parties and the discussions are ongoing and unpredictable. The speaker thanks everyone for their participation in the call.

This summary was generated with AI and may contain some inaccuracies.