The operator introduces the BXP Second Quarter 2024 Earnings Conference Call, stating that all participants are in listen-only mode and the call is being recorded. Helen Han, Vice President of Investor Relations, is the first speaker and introduces the press release and supplemental package. She also mentions that certain statements made during the call may constitute forward-looking statements and that BXP does not guarantee their accuracy. The CEO, President, and CFO are also present on the call.

In the second quarter, BXP's performance in the premier workplace segment of the commercial office industry was strong, exceeding expectations and market consensus. The company completed a significant amount of leasing and expects occupancy to increase over time. BXP also released their 2023 Sustainability & Impact Report and was recognized as one of the world's most sustainable companies. Delivering sustainable real estate solutions is important for clients and communities, and decreases the company's cost of capital.

The market conditions for BXP's performance are favorable due to lower interest rates and strong corporate earnings growth. Premier workplaces, which represent the highest quality buildings, are outperforming the broader market in terms of vacancy, net absorption, and asking rents. BXP's portfolio is mostly made up of CBD assets, which are highly occupied and leased. There is also a steady increase in workers returning to the office, based on turnstile data for half of the portfolio.

Corporations are pushing for increased office attendance, and real estate private equity capital markets are seeing muted sales volume. BXP is actively pursuing acquisitions and has delivered a new development in Boston and opened a luxury residential tower in Reston. They also have several residential projects in the works and are raising JV equity capital for them. Overall, BXP has 10 office, lab, retail, and residential projects underway.

The article discusses Boston Properties' ongoing projects and its strengths in the challenging office market segment. The company has invested $2.3 billion and has $1.2 billion remaining to be funded. Boston Properties continues to display resilience and has a growing leasing pipeline, stable FFO per share, and a strong balance sheet. The company expects to gain market share and benefit from lower interest rates and stronger corporate earnings growth. The article also mentions the company's strong leasing activity in the second quarter of 2024, with 2.2 million square feet of leases completed and 875,000 square feet under negotiation as of May 1. The call also includes a birthday wish to Doug, who will discuss the company's leasing activity.

In the second quarter, the company signed leases for 1.32 million square feet and has a pipeline of 1.39 million square feet under documentation. If all transactions are completed, the company will have leased 3.59 million square feet, exceeding their leasing guidance of 4 million square feet for the year. The quarter saw 73 transactions, with 45% of the absorption coming from existing clients. East Coast markets accounted for 86% of the activity, with Manhattan being the source of most client expansion. The only significant contraction came from a tech company in Reston. Three transactions were over 100,000 square feet each. New York had the highest percentage of expansions or new clients at 42%.

The company's mark-to-market of leases that commenced in the quarter increased by 6%, while the overall mark-to-market of leases signed during the quarter remained flat. The starting rents on leases signed in Boston increased by 8%, were flat in New York, and decreased in D.C. and on the West Coast. The company's occupancy change during the quarter was affected by two large known expirations, vacated non-revenue-producing spaces, and lease terminations. As of June 30, there are approximately one million square feet of signed leases that have not yet commenced.

The company's first quarter leasing included 383,000 square feet of vacant space, which decreased to 362,000 square feet in the current quarter. The company's pipeline of leases in negotiation for currently vacant space is 635,000 square feet, which could contribute an additional 130 basis points to the leased square footage. The company's upcoming additions to the in-service portfolio, 180 CityPoint and 103 Fourth Avenue, will reduce in-service occupancy by 50 basis points by the end of the year. However, the company's leased space will continue to be above 89%. Demand for office space in Manhattan is mainly coming from financial institutions, alternative asset managers, professional service organizations, and law firms, with limited availability leading to double-digit rent increases. In one of the company's assets, there are 3 tenants looking for more space with no immediate availability.

During the quarter, the company saw a strong demand for office space in the submarket of New York City, with limited activity in the technology sector. In Princeton, there were 10 leases completed, including an expansion with a foreign pharmaceutical company. In Boston, the Back Bay area had the most leasing activity, while the financial district struggled with new construction projects. In Waltham, there was demand from consumer products, homebuilding, and life science companies. However, the demand for life science lab space in Greater Boston was weak. In the D.C. region, the Reston portfolio was responsible for most of the executed leases.

The leasing activity and tenant demand growth in the real estate market is primarily driven by the cybersecurity and defense contracting industries. There has been a mix of expansion and contraction from existing tenants, with smaller businesses in the financial and legal industries also showing interest in the Town Center. The District of Columbia office market is seeing a divide between private sector demand dominated by the legal industry, but with smaller requirements leading to negative absorption. The government sector is not expected to help with this issue. Many buildings with high vacancy rates and overleveraged capital structures are not able to meet the demands of clients who prefer top-quality, well-capitalized buildings. The West Coast markets, particularly San Francisco, are experiencing more demand in 2024 than in 2023, but sublet availability and downsizing from technology companies are still impacting the market. There has yet to be significant growth in the tech industry outside of artificial intelligence.

The San Francisco CBD is a financial center for the West Coast, with many asset managers and financial and legal advisers. However, there has been little net growth in demand from traditional non-tech tenants, such as law firms, who are downsizing. There is more demand for smaller spaces, but the location of some properties may not be desirable for non-tech clients. Tenant activity is improving in Mountain View for research and development buildings designed for companies making devices. There was a slowdown in activity last year, but now there is a slow increase as companies start to make capital commitments again.

In the second quarter, the lab market in South San Francisco and Greater Boston saw a few new leases, but most deals were renewals or subleases. The overall operating environment is improving, but net new market demand growth is not yet present. Some areas, such as the Back Bay of Boston and Park Avenue submarket of New York, are showing strength due to low availability. The company exceeded its guidance for the quarter, with funds from operations and portfolio NOI coming in above expectations. The majority of the beat was due to lower operating expenses, and a reduction in non-cash interest expense also contributed.

The company is changing its future earnings outlook due to a reassessment of an earnout payment related to a multifamily project. This results in a $9 million reversal of previously accrued interest expense. The company is increasing its FFO guidance for 2024 and anticipates better projected portfolio NOI from negotiated lease terminations. The expected improvement will show up as an increase in termination income and a modest reduction in same-property NOI. The company does not include termination income in its same-property guidance. Most of the termination income comes from negotiated terminations to sign new long-term leases with expanding and new clients.

The company's recent transactions will temporarily reduce occupancy by 100,000 square feet, but new leases will cover most of the space within 6 to 12 months. This will only have a minor impact on 2024 occupancy and net interest expense, which has been adjusted to reflect a $0.05 per share decrease in interest expense. The company's earnings for 2024 are exceeding expectations. The company's base model assumes one 25 basis point rate cut in December, but if the Fed cuts rates three times starting in September, interest expense will be slightly lower. The company is also considering refinancing a bond expiring in 2025 and may hit the market this year, investing any proceeds temporarily in bank deposits before redeeming the bond.

The company is increasing their guidance for FFO and have not factored in the potential impact of a debt transaction. The main reason for the increase is lower noncash interest expense and higher termination income offset by lower same-property NOI. The call was opened up for questions and the first one was about the timing of the occupancy and same-store guidance. The CEO and CFO both commented on the expected increase in occupancy over time, but also mentioned that there is a cycle in CBD leasing that can take 12-16 months for a lease to turn into actual occupancy.

The company is uncertain about when their occupancy numbers will significantly increase, but they believe it will go up. They are considering developing new apartments, but are facing challenges with high costs for materials and capital. They have a portfolio of land that they are working on for entitlement and design, but not all projects are financially viable.

In the paragraph, Owen Thomas discusses the company's goal for mid-6 yields and higher on projects and their plan to bring in JV partners. Douglas Linde adds that this strategy works with stick frame and they are looking at suburban and non-office properties for potential development. He also mentions that CBD construction and rents are harder to pencil and they are not sure if 2025 will be a good time to start. In response to a question about forward earnings growth, Owen Thomas states that there is a correlation between S&P 500 earnings growth and BXP's leasing activity, and they expect this to improve in the future. He also notes that tech companies, who have been hesitant to lease space in the past, may play a significant role in this growth.

The speaker discusses the correlation between S&P 500 earnings growth and corporate health, stating that when companies are healthy and growing, they are more likely to invest and lease space. They mention that this correlation is holding true in 2024, with the exception of the tech and life science industries. The speaker also mentions that they have pushed back the stabilization dates for some development projects and clarifies that the stabilization dates assume 85% occupancy of the building. They also mention that their capitalization method involves stopping capitalization as soon as initial occupancy takes place.

The speaker discusses the company's policy around capitalization and how it will affect their upcoming projects. They also mention the potential impact of the upcoming election on their business, specifically in regards to taxes.

The speaker believes that state and local elections have a bigger impact on their business than federal elections. Issues such as real estate taxes, entitlement, transportation, and safety have a significant effect on their business. The company's maintenance CapEx is expected to be between $80 million and $100 million this year, with additional repositioning CapEx at one of their properties. Lease commencement costs are expected to be between $200 million and $240 million annually.

The speaker asks about the company's plans for amenity upgrades in existing buildings now that leasing is picking up. The CEO explains that they have already completed most of these projects and are currently working on a new amenity center at Embarcadero Center. Other regional managers discuss similar projects in their areas, emphasizing the importance of these upgrades for attracting tenants.

The speaker discusses the completion of several major projects in the D.C. market, including the recent opening of Wisconsin Place and the upcoming completion of Sumner Square. They also mention a major renovation at 901 New York Avenue and positive reception from the brokerage community for these projects. Additionally, they mention the ongoing three-year process of design and inclusion at 200 Clarendon Street, tied to commitments for lease renewals.

The company is currently working on upgrading amenities at the Prudential Center and has received positive feedback for its recent project at 140 Kendrick. Leasing in the tech and life science areas is not yet back to normal, but the company believes it is not due to downsizing but rather a hesitation to make high value-added investments in real estate. Some tech companies may make incremental expansions in certain cities for talent, but overall, these companies are not growing quickly.

The speaker discusses the current trend of companies in the life science and venture sectors raising money to create value and improve the human condition. They acknowledge that it takes time for this money to flow into organizations and create new job opportunities. The speaker believes that there will be more growth in these sectors compared to traditional financial services, but cannot provide a specific timeline. They also mention that the large tech companies have taken up a lot of space in recent years and their in-person work policies may have an impact on the market.

During the Q&A portion of the conference call, Vikram Malhotra from Mizuho asked for clarification on the East Coast and financial leasing trends, specifically in New York and whether the market is picking up for premium products or the general market. He also asked for more information on the impact of leasing on occupancy and the breakdown between renewals and new leases. Douglas Linde and Owen Thomas addressed these questions, stating that the premium building segment is seeing the most activity, with a large gap in asking rents compared to the general market. They also provided statistics on the amount of vacant space that has been leased and mentioned that the majority of their leasing is renewals, with some new leases being added to occupancy.

The speaker discusses the potential for increased transaction activity in the office market, particularly in regards to foreclosures and short sales. However, they note that there has been limited activity in this area for premier assets due to factors such as lower leverage and stronger ownership. Despite this, the speaker believes that at some point, investors and owners will need to transact.

The speaker believes that there is currently a demand for premier assets in the market, but so far no owners have taken the bid. They expect to see a pickup in net effective rents for their premier portfolio in the near future, with net effective rents in their Park Avenue and Back Bay submarkets already higher than they were six months ago. However, it may take longer for this to occur in markets with a higher availability rate.

Hilary Spann commented on the transaction costs and rents in Manhattan, specifically in the Park Avenue submarket where vacancy rates are less than 8%. This has caused face rates to rise and concessions to remain stable, resulting in an increase in net effectives. However, there is not a lot of availability in the strongest submarkets to test this theory. Adjacent submarkets have seen more leasing activity, but remain full with concessions. Operating expenses in the same-store portfolio were slightly higher this quarter.

The speaker discusses the company's operating expenses, stating that they were lower than expected in the second quarter but may increase in the third quarter due to seasonal factors. They also mention that the company's leverage ratio has increased due to funding for development projects, but this is expected to improve once the projects are completed and generating income. The speaker also mentions upcoming debt maturities and potential refinancing.

The company has experienced some lease terminations, with one being a pure termination and the others being downsizing and relocation within the company's portfolio. The media has inaccurately reported the impact of one of the terminations, which only affects 20,000 square feet of occupancy. The company is currently working on filling the vacant space and is confident in securing a new tenant.

The last tenant at the Prudential Center has changed their business plan and is looking to vacate their space. A new tenant has been found, but they will not be moving in until 2025. A similar situation occurred at 601 Lex in New York, where an expanding tenant has moved in but will not occupy the space until mid-2025. This will result in a loss of 100,000 square feet of occupancy this year. However, it is a positive development as the new tenant is a growing client and the exiting tenant's plans have changed. This is part of the company's strategy to manage their buildings and minimize downtime, increase rents, and cover exposure.

During the Q&A session, the topic of same-store NOI was discussed. The company's CEO, Michael LaBelle, explained that the modest decrease in same-store NOI this year was due to lower occupancy rates, but that they expect occupancy to increase next year, which will help improve the same-store NOI. The conference call then concluded with no further remarks.

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