The operator introduces the BXP Fourth Quarter and Full Year 2023 Earnings Conference Call and informs participants that the call will be recorded. Helen Han, Vice President of Investor Relations, welcomes everyone and provides information about accessing the press release and supplemental package. She also mentions that certain statements made during the call may constitute forward-looking statements and reminds participants to refer to BXP's filings with the SEC for potential risks. The CEO, President, and CFO are also introduced.

BXP's Senior Executive Vice President and regional management teams will be available for Q&A during the call. Participants are asked to limit themselves to one question and can rejoin the queue for follow-ups. The call will be turned over to Owen Thomas, who will discuss the company's performance in the fourth quarter and for all of 2023. Despite negative market sentiment for the commercial real estate sector, BXP had a strong performance and exceeded market consensus for FFO per share. Leasing activity remained steady, with over 1.5 million square feet leased in the fourth quarter and 4.2 million square feet leased for the whole year. BXP also raised over $4 billion in new capital through various markets.

In the fourth quarter, the company completed a new mortgage financing and asset-specific equity capital raise, as well as three new equity investments. These activities, along with the sale of a 45% interest in two life science developments to a partner, have reduced the company's development funding requirement and improved its leverage. The company also purchased interests in three currently owned assets from joint venture partners.

BXP made two joint venture transactions to purchase the remaining interests in two office buildings, 901 New York Avenue and Santa Monica Business Park, at attractive and accretive returns. They completed a long-term lease extension with Finnegan Henderson and a lease renewal with Snap, the anchor clients in the respective buildings. BXP also modified the loans for both properties and purchased a 29% interest in 360 Park Avenue South.

BXP has fully redeveloped a 450,000 square foot office building in Midtown South, which was encumbered by a $220 million mortgage. They purchased the building using OP units and introduced two financial joint venture partners who funded the required redevelopment capital expenditures. BXP only invested $48 million upfront and expects to receive high returns and FFO per share accretion from the investments. Despite lenders reducing exposure to office real estate, there has been an increase in office sales volume and more confidence in forecast cost of capital due to the Fed's announcement of interest rate hikes being unlikely in the near future.

The company had a few comparable transactions last quarter, but their main focus for 2024 is to preserve and increase FFO per share. They have advantages such as their commitment to the office asset class, strong balance sheet, and high-quality portfolio. Their main priorities for 2024 are leasing and new investment activity, as many office owners are facing risks and institutional owners want to diversify. The company intends to focus on premier workplaces, life science assets, and residential development in their core markets.

During the last market downturn, BXP was able to acquire premier workplaces at attractive prices and is currently focusing on new development opportunities. They have several projects underway and are also trying to re-entitle some sites and buildings for near-term use. BXP plans to be opportunistic with dispositions in 2024 and has executed well in 2023 despite negative market sentiment.

The company showed resilience in 2020 with stable occupancy and a higher FFO per share. Despite challenges in the leasing market, they are well positioned to gain market share. The retirement of Bob Pester, who has been with the company for over 25 years, was also announced. In 2023, the company expected flat occupancy, but ended the year with 500,000 more square feet leased. They maintained a 88.4% occupancy rate in their 49 million square foot portfolio. In 2024, there are large lease expirations at 680 Folsom, 7 Times Square, and Carnegie Center.

The company is actively discussing lease modifications with WeWork and expects to reach agreements resulting in a smaller overall footprint and a reduction in rent. They are unsure about the market for 2024 due to slow job growth and a lack of office-using jobs. They plan to rely on their operating prowess to gain new clients and maintain occupancy.

The demand for office space on the East Coast and West Coast is very different, with the West Coast being heavily dependent on technology employers. However, traditional technology demand is weak and many clients are reducing their lease premises. Despite this, there is still leasing excitement in the West Coast, particularly in San Francisco where there has been positive absorption from AI organizations. However, these organizations are mostly small and not at the same scale as larger companies like OpenAI or Anthropic. In Seattle, there is very little active demand other than lease explorations. The vacancy in Seattle increased due to WeWorks termination and a technology company reducing their space in a lease extension.

The entertainment industry is experiencing positive union contract settlements in West L.A., but there is still pressure from streaming profitability and job reduction in gaming and media. The strongest demand for office space comes from asset managers, such as private equity and venture capital firms, who want premier workplaces. This demand is seen in Midtown Manhattan, Back Bay Boston, Reston Town Center, and Embarcadero Center in San Francisco. In the quarter, there were 74 leases signed, including renewals and new tenants, with a net reduction of 100,000 square feet. However, excluding Snap, the net reduction was only 40,000 square feet.

In the last quarter, most of the real estate transactions and expansions were on the West Coast and in New York City. New York had the highest leasing volume, followed by Los Angeles, San Francisco, Boston, and the greater Washington, DC area. Two notable leases were signed, one by Pratt Institute and the other by DoorDash. The mark-to-market of the leases that started this quarter was flat, but the overall mark-to-market of starting cash rents on leases was down 1.8%. Leases signed on second-generation spaces saw an increase in Boston, while remaining flat in New York and decreasing in DC and on the West Coast. There are currently 750,000 square feet of signed leases that have yet to commence, with 625,000 square feet expected to start in 2024. The pipeline of active leases under negotiation is just under 1 million square feet, with only one transaction over 70,000 square feet. Compared to last quarter, there has been an increase in the number of active deals, but the size is smaller. For 2024, leasing activity is expected to be around 3.5 million square feet. As of January 1st, 2022, there were 3.5 million square feet of expirations for 2024.

In 2024, the company has 2.7 million square feet of expected expirations, and if they renew 25% of those, they will have renewed 43% of their expiring square footage, which is in line with their historical averages. They have executed leases on 625,000 square feet of vacant space, but need to execute on 1.4 million square feet to maintain a flat occupancy. They expect to have a sticky occupancy of 20 basis points plus or minus 120 basis points by the end of 2024, which includes some tenant defaults. There will also be property additions and subtractions to the portfolio, but these are not included in the current occupancy guidance. Life science leasing activity has been light, with only one known exploration of a lease in Waltham and no new leases signed in South San Francisco. There is some tour activity in Waltham, but potential clients are not feeling a sense of urgency to make a quick decision.

Doug makes a comment about the cost of potential new developments and how there is more competitive pricing in tenant improvement projects. He also mentions that there is less work, resulting in lower pricing from subcontractors. He hopes that escalation will no longer be a factor in new base building construction costs. However, there are still infrastructure projects and institutional construction filling the void from lower commercial construction. Doug also mentions that construction financing is still expensive and a drag on new construction starts. Mike then discusses the details of the fourth quarter and full year 2023 performance, but focuses mainly on the 2024 initial earnings guidance in the press release.

In 2023, the company reported full year FFO of $7.28 per share, exceeding their guidance and Street consensus. This was due to strong leasing activity and lower net interest expense, partially offset by transaction expenses and higher G&A costs. The portfolio NOI performed as expected, but there was a shift from same property income to termination income due to a large termination from WeWork. This resulted in slightly negative same-property growth for the quarter.

The company's same-property performance would have been flat without the impact of termination income. The 2024 guidance includes projected growth from development and acquisitions, a decrease in same-property portfolio NOI, higher net interest expense, and lower development and management services fee income. The acquisitions of partner interests in Santa Monica Business Park and 901 New York Avenue are expected to be highly accretive, adding $25 million to 2024 FFO. The breakdown of guidance assumptions includes an increase in property NOI, offset by higher interest expense and loss of fee income. The company will now consolidate results from these properties, resulting in an increase in consolidated NOI and interest expense and a decrease in FFO from unconsolidated joint ventures and fee income. The 2024 guidance is also impacted by the disposition of Metropolitan Square in Washington, D.C.

In 2024, the company expects to see a reduction in property NOI and an increase in interest expense due to a neutral transaction from the previous year. They also have $550 million in developments that will contribute to growth in 2024 and an additional $665 million in developments that will have a larger impact in 2025. The company expects a negative 1% to negative 3% growth in same-property NOI from 2023, with a portion of this decrease attributed to modifications in leases with WeWork. Interest expense is also expected to be higher in 2024 due to the current high interest rate environment.

The company expects floating rates to decrease in the latter half of the year and is anticipating 75 basis points of Fed cuts. Their current floating rate debt is only 5% of their total debt and they have strong liquidity with cash balances of $1.5 billion and a $1.8 billion line of credit. They will use $700 million of cash to redeem a maturing bond and have no significant debt maturities in 2024. They project an increase in net interest expense of $72 million at the midpoint, including a drop in interest income. The consolidation of certain properties will result in a lower interest expense in their joint venture portfolio. Overall, they expect a $54 million increase in total interest expense compared to the previous year.

The company is expecting a positive impact on FFO from the consolidation of Santa Monica Business Park. They also expect a decrease in development fees due to the completion of joint venture projects. As a result, their guidance for fee income in 2024 is lower. Taking all factors into account, the company is providing an initial FFO guidance range for 2024 and expects a modest decline from 2023. However, they remain optimistic about gaining market share and executing on accretive investments to create shareholder value. The call is now open for questions.

The speaker, Douglas Linde, is unable to give a precise answer to when the company will hit its leasing target for the year. They currently have 1 million square feet of space under negotiation, and about 500,000 of that is expected to be "in place" for revenue in 2024. However, it is difficult to predict when that revenue will actually hit due to the variable of how the lease comes together. This will also affect the company's same-store number, which is managed by Mike.

The speaker believes that the company is being conservative and not taking any risks due to uncertainty. The next question is about the timing of joint venture acquisitions, which were centered around major lease extensions. The speaker explains that the timing was related to the partners' exit, as they no longer wanted to fund future capital expenses. The speaker also mentions that other assets have future capital requirements as well.

The speaker is congratulating Bob Pester on his retirement and looking forward to Rod's leadership.

The speaker responds to a question about the debt side of the equation and the JV buyouts. They mention that they primarily finance with unsecured financing and have access to the market. They also mention that the JV partners' decisions to not extend their investments may be due to a change in strategy rather than a lack of enthusiasm for the returns. The speaker also notes that the two partners involved in the buyouts have different positions and one has been a long-term investor in the project.

The decision to reinvest in Santa Monica Business Park may have been a change in strategy due to the company's long period of involvement and potential for redevelopment. The company is excited about the asset and believes it will be accretive in the long term. In terms of the Snap renewal, specific details were not disclosed, but the company's West Coast leases were down 3% while San Francisco was up 9%.

The speaker discusses the potential for opportunities in the coming year and how they will be funded. They mention using third-party capital and their own balance sheet for joint ventures. They also mention receiving inquiries and looking at potential deals. The speaker emphasizes the importance of being capital-light and mentions recent transactions that have had a minimal impact on leverage.

The speaker discusses the current state of the technology market in San Francisco and Seattle, noting that there have been layoffs and a lack of growth in the real estate space. They mention recent positive absorption and potential for future growth in the AI sector, but also acknowledge uncertainty about the market's future.

The speaker is hopeful that positive changes will occur in the office market in 2024, but does not believe it will be a year of significant space absorption. The next question asks about competition for office deals and the speaker notes that there are more transactions in the fourth quarter, with distressed buyers and family offices purchasing assets at low prices. However, the speaker's company is looking for premier workplaces and is not interested in these types of deals.

The speaker discusses the challenges and opportunities of leasing a property that may not be fully leased. They mention the potential for larger tenants and the need for financing. They also address a question about the same-store NOI guidance and mention larger expirations and leasing activity in the life science market. The speaker expects some decline in occupancy in the first half of the year but anticipates it will increase throughout the year.

The paragraph discusses the boundaries of the year-end occupancy range provided by Doug and how it is built. It also mentions the current state of life science activity in the San Francisco and Waltham markets, with smaller tenants showing some activity but larger users remaining hesitant. Overall, there were 360 tours last year.

The speaker discusses their surprise at the high demand for office space despite a negative attitude towards it. They mention clients spending more time with them and looking for new strategies, such as having a main headquarters in the city and a secondary location closer to the suburbs. The speaker also mentions two successful executions of this strategy and a lot of interest in it. A question is then asked about Google's recent office optimization charges, but the speaker reassures that it will not affect their properties. They also mention that tenant defaults are included in their guidance and there is no indication of any changes in Google's portfolio with BXP.

The company has had defaults in the life science and start-up tech sectors, mostly in the form of small spaces in suburban markets. They attribute this to the current state of the economy and capital formation. They have 6 projects scheduled to be stabilized in 2025, but only one has secured a tenant so far. These developments represent a portion of their active leasing pipeline.

The speaker is discussing the progress of their leasing efforts for a property in Midtown South, which is expected to be completed in early 2025. They mention that they have one lease signed and are close to finalizing another, but they need to do more leasing in order to stabilize the building. They also mention other residential properties that are expected to be completed in 2024, but they do not expect significant revenue from these until 2025. They also mention some potential deals for retail and office space in one of the properties.

The flight to quality trend is still evident in the office market, with most leasing and net absorption taking place at high-quality buildings with high rents. However, recent media reports have questioned whether this trend is still ongoing, but the company's data shows that the trend is continuing. The company's most active buildings are in the CBD and there have been no changes in the economics of the market for premier workplace buildings. In Manhattan, there has been consistent growth in occupancy and rental rates for premier workplace buildings since 2019.

The vacancy rate for Premier Workplaces in Midtown Manhattan is currently around 10%, which is considered stable. There is high demand for high-quality space in Midtown, as evidenced by the limited availability of large spaces. This drives pricing and is expected to continue to improve. In Washington, D.C., there is a significant outperformance of trophy buildings and repositioned assets, with high leasing velocity and traffic. The same trend is seen in Boston.

The D.C. market is currently strong, with a low vacancy rate and high demand for office space. This is partly due to the lack of available options for large tenants in existing buildings and the inability to start new construction. BXP's recent lease transaction with Finnegan Henderson was a result of this market dynamic, as well as their ability to provide TI capital and reposition buildings to compete with newer, high-end buildings.

The speakers discuss the success of their recent transactions at 901 New York Avenue and Reston Town Center, highlighting the responsiveness of their company to clients and the positive reception to their repositioning efforts. They also note the scarcity of premier office opportunities in the Washington, D.C. market and the strong performance of Reston Town Center, with positive absorption and high rental rates.

Peter Abramowitz asks about the early termination option for part of the Snap extension at Santa Monica Business Park and how it will affect conversations with the lender before the loan maturity in 2025. Douglas Linde clarifies that there is no termination option on the recently signed lease, but Snap has the option to terminate 140,000 square feet at the end of 2024. The remaining 467,000 square feet is leased for 10 years starting in 2026. Michael LaBelle explains that the loan is with a syndicate of banks and they are confident in extending it until the purchase of the ground lease in 2028. After that, they may do a longer-term refinancing or focus on a potential mixed-use redevelopment. Now that they have full ownership of the joint venture, they have more financing options available.

During a recent earnings call, Owen Thomas, CEO of Boston Properties, addressed a question from Dylan Burzinski of Green Street about potential acquisition opportunities in the future. Thomas stated that while some co-investment partners are reallocating away from office properties, others are interested in co-investing, seeing the opportunity in the premier workplace segment. He noted that pricing has changed, as demonstrated by recent deals, and that cap rates in key markets such as New York, San Francisco, Boston, D.C., and L.A. have likely increased by 200 basis points in the past 18-24 months. The stabilization of cap rates in these markets remains to be seen.

In paragraph 39, Owen Thomas responds to a question about cap rates and explains why it is difficult to answer. He mentions that the company tries to provide comparable market deals each quarter but was unable to do so this quarter. He also mentions some data on partner buyouts and the look through cap rate for BXP. Thomas concludes by thanking the participants for their interest in BXP.

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