The operator welcomes participants to the BXP first quarter 2024 earnings conference call and introduces the first speaker, Helen Han. She provides information about the distribution of the press release and supplemental package and mentions that non-GAAP financial measures have been reconciled. She also mentions that certain statements made during the call may be forward-looking and that BXP cannot guarantee their accuracy. The speakers for the call are introduced as Owen Thomas, Doug Linde, and Mike LaBelle.

BXP's first quarter performance was strong, with FFO per share meeting expectations and 35% more leasing activity than the first quarter of 2023. The company also closed a joint venture to mitigate development funding. Long-term interest rates and corporate earnings are key external factors that could impact BXP's performance. Lower interest rates could improve the company's cost of capital and spark more investment opportunities.

The article discusses the potential impact of interest rates on office space demand and the current state of the economy. It also mentions the growth of S&P 500 earnings and how it may affect leasing activity. The technology sector is currently experiencing a digestion process, but it is expected to bounce back in the long term. Premier workplaces, which make up a small percentage of total space, continue to outperform the broader market in terms of vacancy rates, net absorption, and asking rents. The majority of BXP's NOI comes from assets in CBDs that are considered premier workplaces.

In the first quarter, the office sales volume in the real estate private equity capital markets was down 3% from the previous quarter but up 32% from a year ago. BXP's main goals are to preserve and increase FFO per share, and they have several competitive advantages such as their commitment to the office asset class, a strong balance sheet, and a high-quality portfolio. The company's priorities for 2024 include leasing space, new investments, and development. They have had a good start to the year and are actively pursuing opportunities in their core markets and asset types. However, there has been limited market transaction activity for high-quality office assets.

The article discusses the current state of the commercial real estate market, with a focus on lenders and development projects. Lenders are being cautious and selective in their investments, while institutional owners are not willing to sell their high-quality assets at lower prices. The company expects an increase in investment activity in the coming months due to maturing financings, lower institutional portfolio values, and higher interest rates. They also have several residential and office development projects in the works, including a 37-story residential tower in Cambridge and a new store in Boston. The company is also in talks with potential clients to anchor development projects in their core markets.

The article discusses the challenges faced by anchor clients in paying a premium for market rent due to rising labor and capital costs. This has led to a slowdown in new office development, but BXP remains optimistic about the future and is exploring asset sales to raise capital. The company also has a significant development pipeline and is well-positioned to gain market share during this time of market dislocation. The prospect of lower interest rates and stronger corporate earnings provides a potential for growth.

The speaker is optimistic about the company's leasing activity and revenue despite the slow growth in office-using jobs and high interest rates. They have seen an increase in leasing activity and improvement in overall earnings for clients, which they believe will lead to more job creation and demand for office space. While there are still some areas with high availability, there are also pockets of supply-constrained submarkets where they are seeing competition for space and better economics. The company has seen a 7% increase in mark-to-market of leases this quarter and lower transaction costs. The starting cash rents on leases signed this quarter were up in Boston and on the West Coast, but down in Manhattan and D.C. due to a tenant default. Overall, the company completed 61 transactions this quarter, including new leases and renewals.

The company experienced a mix of expansions and contractions in their leasing activity, with new clients making up a significant portion of the volume. The majority of the activity was spread across the company's portfolio, with notable deals in Boston, New York, the West Coast, and D.C. The company's pipeline for future leases is also strong, with over 875,000 square feet currently under negotiation.

The company has had successful leasing transactions, including expansions and renewals by various types of companies in different locations. They have signed leases for a significant amount of space that has yet to be occupied, and have seen an increase in demand from asset managers and their advisors. The East Coast portfolio has more demand than the West Coast, but there are positive trends across the entire portfolio.

The company has been able to increase taking rents and has a high demand for space in their Urban Edge Waltham portfolio. They have completed multiple leases and are negotiating more, all of which were not in their pipeline at the end of the previous year. In the District of Columbia and Northern Virginia, there is little client interest due to overleveraged capital structures. However, interest in available space at 901 New York Avenue has increased due to a lease extension and planned enhancements. Reston is a hub for many large companies, including technology companies.

The Town Center is a popular location for small businesses in the financial and legal industries due to its convenient amenities. There has been an increase in leasing activity, particularly with technology and law firms, and demand for view-spaced north of market in San Francisco. In Seattle, there has been a significant increase in tenant tours and leasing activity, while West L.A. has seen less activity. Century City is experiencing high demand and strong rents from businesses moving from downtown, but demand for low-rise buildings in Santa Monica is still low.

The pressure from streaming profitability, industry consolidation, and job reduction in the gaming and media industry is impacting demand growth in West L.A. The company's occupancies declined slightly in the last quarter due to known lease expirations, but they have signed new deals and expect occupancy to recover later in the year. The company's interest expense outlook has also changed due to inflation. While there is no deflation in base building costs, escalation assumptions have normalized and new starts are challenging due to changes in building and energy codes. However, costs for tenant improvement jobs have decreased due to reduced demand from contractors and subcontractors.

The paragraph discusses the current state of the real estate market and how it is affecting new high-rise tower construction costs. It also mentions the success of the company, BXP, in leasing premier properties. The focus then shifts to the company's first quarter performance and updates to their 2024 guidance. The company has also made changes to their debt structure, paying off $700 million of unsecured notes and entering into a $500 million unsecured commercial paper program. The proceeds from this program were used to pay down a term loan and increase their corporate line of credit. These changes are expected to reduce borrowing costs and benefit the company in the long run.

Despite challenging real estate conditions and stagnant job growth, BXP's portfolio remains stable and strong. Revenues and share of portfolio NOI have increased, but high interest rates pose a challenge. First quarter FFO was in line with expectations and portfolio NOI exceeded expectations. Full year guidance has been adjusted due to finalized assumptions for in-place debt and interest rate swaps on recent acquisitions.

The company has made changes to their assumptions for interest rates and other expenses, resulting in a reduction of $0.06 per share at the midpoint for their 2024 full year guidance for FFO. Other factors, such as portfolio occupancy and same-store NOI, remain relatively unchanged from their previous forecast. The company is also reducing their assumption for G&A expense and fee income projection.

Owen Thomas, the speaker, discusses the primary reasons for reductions in expenses, including higher noncash fair value interest expense and higher short-term interest rates. He also mentions the company's recently published 2023 sustainability and impact report and invites listeners to a webcast on the topic. During the Q&A portion, he is asked about the company's investment focus and potential funding sources, and he mentions the recent launch of a new residential building and the company's goal of achieving 1 million square feet of commercial entitlements in Cambridge.

The speaker states that receiving entitlements allowed them to start a development project and they still have room for more commercial buildings. They believe there will be opportunities to acquire office assets due to the current market conditions. They are focused on increasing earnings and managing leverage. The speaker is positive about leasing activity for both the existing portfolio and the development pipeline, with some leases benefiting in 2025. They are focused on filling vacancies in both the existing portfolio and the development pipeline.

The company has 875,000 square feet of activity in their pipeline, with 20,000 square feet being development and the rest being existing portfolio deals. The majority of this activity is focused on available existing space. The company also has a tracking list of 1.7 million square feet of potential deals, mostly on the in-service portfolio. The development pipeline consists of 360 Park Avenue South, Waltham life science buildings, and a joint venture in South San Francisco, but the majority of activity is focused on maintaining and slowly increasing occupancy in the existing portfolio. In Midtown South, there was a slowdown in leasing activity in the first part of the year.

The speaker discusses the recent increase in activity at 360 Park Avenue South and how the high quality of the building is attracting a variety of businesses, not just tech and media companies. They also mention that while leasing activity is picking up, it is uncertain how many leases will actually be executed. In addition, there is a demand for AI space, but overall, tech companies are shedding space and taking less when renewing leases on the East Coast. A more detailed explanation will be provided by another speaker.

The speaker, Doug, discusses the differences in technology absorption on the West Coast, particularly in the San Francisco market, where AI companies are taking the place of traditional technology companies. Rodney adds that last year was a big year for AI in San Francisco, with two large leases making up a significant portion of leasing activity. He also mentions that AI companies are also present in the Silicon Valley, particularly in the automotive industry. The next question is about the bifurcation between premier workspace and commodity office in BXP's CBD and suburban portfolios, and whether the performance difference makes them reconsider their commitment to the suburbs.

The company has a lot of availability in suburban areas due to their decision to convert some buildings into life science facilities. They have chosen not to lease this space to office companies and are waiting for the right tenant and economic model. The Princeton portfolio is seeing a lot of activity from pharmaceutical and life science companies, while the Waltham market is not as active.

The speakers discuss the increase in leasing activity in the Princeton market, with a diverse range of reasons for expansion including consolidation of business units and return to office. They also note that the market is highly concentrated with pharmaceutical companies, particularly foreign ones. In the Waltham market, they highlight the benefits of being an "Urban Edge" market, with a short commute to downtown Boston and a dense population. There is also a difference in demand between the east and west sides of I-95, with the east side having more urban attributes and potential for future improvements.

The speaker discusses the weaknesses in assets like Bay Colony, which are similar to suburban office buildings but located in an urban edge market. They believe that the market will continue to grow slowly and steadily, with projections to be flat by the end of 2024. They also mention their manageable exploration schedules and the need to lease space and gain market share.

The company is facing challenges in increasing occupancy due to competition from technology companies, but they expect it to improve in the future. They have recently entered a commercial paper program to access cheaper floating rate debt and plan to make it a consistent part of their debt structure. They have had positive experiences with the program so far and are building an investor base in it.

The speaker discusses the decision to develop 121 Broadway and the expected timeline for completion and stabilization. They mention that the forecast returns for this project alone are below their typical thresholds for development, but when considering the entire entitlement package and potential new stick build projects, the returns meet their development hurdles. They also mention a pickup in occupancy expected in the back half of the year, particularly in the strong markets of Back Bay and Park Avenue.

The speaker is discussing the expected occupancy gains in the second half of the year. They mention specific examples of buildings and markets where they anticipate increases in occupancy, such as the General Motors building and the greater Metropolitan Washington, D.C. area. They also mention a pipeline of activity in places like Waltham and Western Virginia. Overall, they believe that they will reach an occupancy level of 88% by the end of 2024, and they are hoping for some positive surprises in terms of earlier lease signings.

The company is unsure about when they will be able to recognize revenue for their projects due to delays in client decision-making and construction. The demand for life science space in Waltham and South San Francisco is slow, but there is some encouragement from clients who are making progress with their projects. The company has completed a project in South San Francisco and has secured three deals for it, but there is currently little new activity in the market.

The office market has been quiet, with smaller deals being made rather than the large ones seen in previous years. However, the company's building is well positioned to attract the current demand in the market, with a space being built specifically for potential tenants. The utilization of office space is still low, but the CEO believes that the Castle data used to measure it is imperfect and not an accurate reflection of the overall demand for office space.

The speaker is unsure which buildings are being measured for occupancy rates and believes that the current data does not accurately reflect the state of office occupancy. They have their own data for half of their managed buildings, which shows that New York is back to pre-pandemic levels, while Boston is at 75% and San Francisco is lagging at 45-50%. The speaker believes that the slow leasing is due to businesses not growing their earnings, rather than work-from-home policies.

The speaker believes that as earnings increase, leasing will also pick up. They also mention that new construction is not expected to happen in the next few years, which will lead to a decrease in premier office space and an increase in occupancy. They also mention a dislocation in the market, particularly in Washington DC, where buildings are struggling to make leasing transactions due to high debt and lack of available capital.

The speaker discusses the strong demand for buildings in the DC and Northern Virginia portfolio due to the troubled assets and dislocation in the region. They also mention a flight-to-quality and a flight-to-certainty among brokers. The next question is about the occupancy at 535 Mission, which has fallen below 60% due to WeWork. The speaker explains that WeWork is negotiating to remain in the space, and the majority of the availability is due to the consolidation of Trulia and Zillow. They also mention that the leasing prospects in South America are strong.

The speaker is clarifying that the guidance adjustments are based on the shift in the curve, not on any potential rate cuts.

The speaker discusses two points in response to a question. Firstly, they mention that an expected interest rate cut later in the year will not significantly impact their guidance. Secondly, they explain that occupancy may decrease in the first half of the year due to expirations, but they expect it to stabilize and increase in the second half due to signed leases and LOIs.

In the third and fourth quarter, the company expects NOI from the portfolio to increase due to occupancy improvements. G&A is also expected to be lower in the third and fourth quarter, and interest income will decrease as the company funds its development pipeline. The company anticipates that these factors will drive an improvement in FFO to achieve the midpoint of the guidance range. In terms of debt, the company is unsure if banks are willing to lend on new office development projects, but the interest rate is expected to be lower in the third and fourth quarter.

The team discusses the challenges of obtaining financing for development projects, particularly in the current economic climate. Lenders are not eager to take on new projects and are demanding high yields, making it difficult for developers to justify undertaking new developments. The team also notes that the cost of development has increased due to inflation and higher yield requirements.

The company is considering a 100 basis point increase over exit cap with untrended rents for residential developments. Bank financing is becoming more selective, but the company's broad relationships and profitable deals make them attractive to lenders. The additional information market and stricter criteria for making loans is causing difficulties for development firms.

The speaker is unsure of how long the digestion process for tech leasing will last, but believes that the companies will eventually return to the market due to their strong earnings and position in the innovation industry.

The speaker is asked about future investment plans for the company, specifically regarding land holdings in Northern Virginia and the potential for data centers, office to residential conversions, and the potential for Lexington Avenue to benefit from development west of Grand Central. The speaker responds by discussing the success of buildings on Lexington Avenue and the challenges of converting existing assets to residential. They also mention ongoing efforts to rezone land for residential use.

The company is looking to benefit from office building conversions and sees opportunities for their residential team to get involved in such projects. They mention specific examples of office buildings they plan to convert to residential, including one in Lexington, one in Shady Grove, and one in Herndon, Virginia. They also mention plans to convert a portion of their asset at North First to residential and potentially provide a parcel for affordable housing.

The speaker discusses the potential for development and conversion of the Santa Monica Business Park, as well as the current pipeline and backfill progress at 680 Folsom and 7 Times Square. They mention that 680 Folsom has excellent space and has received proposals, while 7 Times Square is also being marketed for potential tenants.

The team at New York's 7 Times Square has successfully converted sublet spaces to direct tenancies, signing a lease for 27,000 square feet in the first quarter. However, the Times Square submarket is experiencing some weakness in demand due to factors like the streetscape. The company is working to address these issues and convert more sublease tenants to direct tenants. The recent talk of raising commercial property taxes in Boston may not have a significant impact on the company's operating margins, but it could potentially affect a tenant's decision to lease in the market and could also make investing in Boston less attractive.

The company does not believe in passing expenses on to tenants and works hard to reduce operating expenses. They believe that the commercial property sector already bears a disproportionate burden of taxes and should not have to bear any more. They hope that their stance will be recognized by political leaders and that policies will not be implemented that would further burden the commercial sector. The CEO and COO have no further comments and the call is concluded.

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