The paragraph is an introduction to BXP's Third Quarter 2024 Earnings Conference Call, led by Operator and Helen Han, Vice President of Investor Relations. During the call, participants are initially in listen-only mode, and the session will be recorded. A press release and supplemental package with reconciled financial measures were distributed the previous night and are available on BXP’s website. The call will include forward-looking statements, with details on potential risks provided in the press release and SEC filings. The call features speakers Owen Thomas, Doug Linde, and Mike LaBelle from BXP’s leadership team.

During the Q&A portion of the call, Ray Ritchie and regional management will address questions, limiting participants to one question each, with the option to rejoin the queue for follow-ups. Owen Thomas then highlighted BXP's strong performance in the third quarter, surpassing FFO per share forecasts and completing over 1.1 million square feet of leasing, which is 5% more than the previous year. BXP's leasing volume for the first three quarters of 2024 increased by 25% compared to last year. Office lease terms averaged 7.2 years, and BXP received sustainability awards from Time Magazine, Statista, and NAREIT. Key market forces, including interest rates, corporate earnings, and return-to-office trends, are favorably impacting BXP. The Federal Reserve recently cut interest rates and signaled further cuts in 2024 and 2025.

The recent economic data suggests a stronger economy, raising questions about the extent and timing of future Fed rate cuts. Despite this debate, short-term interest rates are decreasing, benefiting real estate valuations and corporate earnings growth, which are important for BXP due to its link to leasing activity. S&P 500 earnings are expected to grow by 9.9% in 2024, indicating corporate health. There is no sign of a recession based on client decisions, and the cost of floating rate and shorter-term financing is falling, which benefits smaller corporations. Return to office trends are improving, with companies like Amazon, Dell, Salesforce, and Starbucks implementing stricter in-office policies. A KPMG survey revealed that 84% of CEOs expect a full return to office work within three years, an increase from 64% the previous year.

The paragraph discusses the increased demand for premier workplaces due to concerns about collaboration, innovation, and productivity, inadequate supervision for younger employees, and the costs of maintaining vacant offices. Premier workplaces, defined as the top quality segment of office buildings, exhibit better performance with lower vacancy rates and positive net absorption compared to the broader market. They also command higher rents. BXP benefits from having a majority of its income from these high-demand locations, with high occupancy and leasing rates. The public real estate market has shown strong returns, indicating optimism about recovery, while private market valuations lag, reflecting ongoing adjustments to current conditions.

BXP has the opportunity to make increasingly profitable investments in private market real estate due to favorable conditions. U.S. office sales volume increased significantly in the third quarter of 2024, driven by lower short-term interest rates, increased leasing activity, and better debt financing access. Notable deals include major refinancing in the CMBS market, such as Rockefeller Center and 277 Park Avenue. Recent office sales comparable to BXP's portfolio include properties in Cambridge and Santa Monica, with promising cap rates and square footage. Additionally, a new office building in Midtown South is under contract, expected to yield a 7% return upon stabilization.

A private REIT sold a building to a European family office, while BXP remains active in acquisitions and exploring opportunities, including real estate and residential developments, despite no imminent agreements. They are negotiating the sale of three non-income-producing sites, expected to close in 2025 with proceeds exceeding $70 million. Recently, BXP delivered a partially leased lab building in Waltham and is making progress with a luxury residential tower development in Reston Town Center, with 35% of units already leased. Additionally, BXP accelerated the completion of a fully leased lab redevelopment in Cambridge, set to be delivered in the fourth quarter. They continue advancing residential projects, utilizing joint venture equity capital, and have commenced a phase of construction on 343 Madison Avenue near major corporate buildings.

The paragraph discusses 343 Madison, a major office development by BXP in Midtown Manhattan, competing with the Park Avenue submarket, a strong office area near Grand Central Terminal with low vacancy rates. The project, set to launch next year, will cover 942,000 square feet with advanced sustainability features and direct terminal access. BXP owns a 55% stake in the $2 billion project. The company is managing a development pipeline with nine projects totaling 2.7 million square feet and $2.1 billion in investments, with $1 billion yet to be funded. BXP highlights its strengths of commitment to high-quality workplaces, a solid financial position, and a top-tier portfolio built over decades.

The paragraph highlights BXP's strong leasing performance and future prospects. The company has increased its leasing activity in 2024 by 25% compared to 2023, completing 3.3 million square feet of signed leases and currently having 1.53 million square feet under documentation. They aim to reach over 4.5 million square feet of transactions by year-end, exceeding their January 2024 guidance of 3.5 million square feet. Additionally, there are discussions for over 1.5 million square feet of transactions for 2025, with half involving vacant spaces. As of September 30th, BXP has 1.04 million square feet of signed leases on vacant space that have not commenced, and there is a 210-basis-point gap between occupied and leased spaces. Future occupancy guidance for 2025 will be provided in the next call, with 3.7 million square feet of expirations expected in Q4 2024 and full-year 2025.

The paragraph discusses the company's leasing activity and plans, highlighting signed leases for 2024 and 2025 totaling 959,000 square feet, with an uncovered exposure of 2.74 million square feet. The company is negotiating new leases for additional space, and its regional EVPs are developing business plans for 2025. Major lease expirations in 2024 and 2025 are listed, and upcoming developments are mentioned, including buildings to be added to their portfolio in 2025.

The BXP regional teams are actively repurposing suburban land portfolios by re-permitting properties for residential use, such as multifamily units and townhomes. Notable projects include new units in Lexington, Massachusetts, Herndon, Virginia, and Rockville, Maryland, with additional evaluations in the Bay Area and Northern regions. This quarter, the company removed two buildings from service for re-entitlement. Despite earlier predictions of significantly decreased occupancy, the decline was only 10 basis points, ending at 87%. Future improvements of 20 to 30 basis points are anticipated. During the quarter, BXP completed 74 leasing transactions, mostly in Boston, totaling over 1.3 million square feet. Ten clients expanded their space, primarily financial firms in Boston's Back Bay, while four clients contracted their space.

The paragraph discusses the leasing activity within a portfolio, highlighting a significant contraction due to a tech company's downsizing in Waltham. Despite this setback, all vacated space was re-leased. The paragraph notes ongoing downsizing among legal firm clients on the West Coast and in D.C., mentioning a specific instance at Embarcadero Center. It details lease transactions for the quarter, including a few substantial deals and generally granular activity. The mark-to-market rent for leases commencing this quarter was down 4.5%, while transaction costs rose slightly. Nonetheless, starting cash rents for newly executed leases increased by 9%, driven largely by a 19% rise in Boston. Owen's comments suggest that a renewed emphasis on in-person work is boosting leasing activity, though market demand varies, and decision-making is slow. The paragraph aligns with previous commentary from 2024, noting that submarkets with a high concentration of financial institutions and professional services are seeing the most consistent activity uptick.

In the current market, clients in New York City are expanding their space usage, leading to increased demand and rising market rents, particularly in areas like Park Avenue. Availability is tight at buildings like 399 Park Avenue and 601 Lexington, prompting proactive lease terminations for expansion. As overflow occurs, buildings like 599 Lexington and 510 Madison are becoming popular alternatives, with leasing activity picking up. The General Motors Building saw significant leasing activity, adding a new private equity client and expanding another. Technology tenant interest is growing, which is promising for availability at 360 Park Avenue South and 200 Fifth Avenue, although no leases are in negotiation yet. In Boston, 200 Clarendon Street was the most active building in BXP's portfolio, with over 460,000 square feet of leases completed.

The paragraph discusses BXP's recent leasing activities, highlighting that most leases were with existing clients in the alternative asset management industry, with half adding more space. In Boston, 116,000 square feet were leased, primarily to new clients, including a national retailer, life science companies, a tech firm, and a fund manager. However, there was little urgency from life science clients for new developments. Leases signed outside Cambridge and Boston totaled about 300,000 square feet. In the D.C. region, Reston accounted for 55% of executed leases, driven by growth in cybersecurity and defense contracting, including a cyber firm that grew six-fold since 2020. Smaller leasing activities increased in D.C.'s CBD, with expansions and new clients, primarily dominated by the legal industry.

The paragraph discusses challenges and trends in the law firm leasing market, highlighting dissatisfaction with current building inventory and a preference for high-quality, amenity-rich buildings, which creates a tight market. Traditional lenders are not financing new construction, impacting lease expirations. The San Francisco CBD remains a financial hub with strong leasing activity driven by asset managers and legal advisers, with increased demand in 2024 compared to 2023. There is notable leasing activity at locations like 535 Mission and Embarcadero Center, though many firms are seeking to downsize. The firm is negotiating multiple leases but faces the challenge of significant vacant space remaining.

The paragraph discusses the current leasing conditions and market dynamics faced by BXP. While there is growth in gaining new customers, the transaction sizes are small, and larger tenants, like JPMorgan, are reducing leases due to market consolidations such as the acquisition of First Republic. Despite muted positive demand from AI firms, significant expansions like OpenAI's 300,000 square foot project in Mission Bay and Airbnb's renewal at 888 Brannon highlight some positive developments. Tenant interest is improving at Mountain View R&D buildings, where unique spaces are attracting businesses like a healthcare diagnostics company and an automotive firm. Although development property leasing lags, these high-quality workplaces are expected to attract tenants. Overall, 2024 is forecasted to be a better year for BXP regarding leasing activities, even though the market absorption isn't clearly positive. Demand is growing, and BXP aims to increase its market share.

The paragraph discusses the company's strong access to debt markets and recent financing activities. It outlines the extension of a $334 million mortgage loan on a Boston property and $300 million mortgage financing for Santa Monica Business Park, with favorable terms. Improvements in the secured debt markets are highlighted, particularly for high-quality office buildings with leverage below 50%, noting compressed credit spreads and increased liquidity in the CMBS markets. The SASB market, which had been inactive, reopened in 2024 with improved pricing, signaling enhanced liquidity, though challenges persist for properties with higher vacancy, shorter lease terms, or higher leverage.

The paragraph discusses the company's 2025 capital plan, which includes several mortgage financings and bond issuances. A $250 million loan is being used for the Marriott headquarters in Bethesda, and $487 million in mortgages are for the Hub on Causeway in Boston, with the company holding 50% interest in each. They issued $850 million of 10-year bonds at a 5.75% coupon to cover an upcoming bond expiration in January 2025, impacting their 2024 FFO guidance by a $0.02 per share reduction. The third-quarter FFO was announced at $1.81 per share, slightly above expectations due to lower G&A expenses. Leasing activity showed improvement, but its revenue impact will mostly be seen after 2024. The company's 2024 FFO guidance range is adjusted to $7.09 to $7.11 per share, maintaining the midpoint despite the bond-related dilution.

The paragraph outlines the company's financial outlook and strategic developments for 2025. They anticipate lower cash balances and interest income due to recent bond activities and plan to use funds for debt repayment and project developments. Interest expenses are expected to remain flat or decrease slightly. The Reston Corporate Center will be vacated to make way for a large mixed-use project, enhancing future value and earnings. Additionally, they expect revenue from newly completed projects, including 300 Binney Street, Dick's House of Sports, and the Skymark Residential development in Reston. Overall, there has been strong leasing momentum, with a 25% increase in volumes compared to the previous year.

The paragraph discusses the challenges and potential improvements in the leasing markets, specifically in San Francisco, the West Coast, and the Boston suburbs. It emphasizes the need for increased technology and life science demand, driven by new company formations and job creation. Currently, there is a retrenchment and slight downsizing in these sectors. However, there are signs of demand picking up, especially in San Francisco, where traditional tenants still dominate, but technology companies are active in the market.

The paragraph discusses the challenges and differences in the commercial real estate market, particularly focusing on sublease availability and direct vacancy issues. There is a significant amount of sublease space, specifically 8.2 million square feet, which affects competition and occupancy rates. The speaker highlights the differences in real estate markets, noting that areas like the P2 corridor in Boston are distinct from suburban markets in terms of activity and rental rates. Moreover, there's a notable contrast between older buildings and modern, premier office spaces like CityPoint, which offer better amenities and are more desirable. The speaker emphasizes the importance of considering these factors when analyzing the market.

In the paragraph, Steve Sakwa from Evercore ISI poses a question about the leasing progress at 343 Madison, given the slower-than-expected leasing at other developments like 360 Park. Owen Thomas responds by highlighting the strong demand for office space north of 42nd Street, mainly from financial and legal services due to proximity to Grand Central, while noting tech influences south of 42nd Street. Hilary Spann adds that there have been significant leasing deals in Midtown, including large leases by Bloomberg, Ares, and Willkie Farr, indicating strong demand from large tenants. She emphasizes the importance of aligning tenant needs with the planned high-quality office space development.

The paragraph discusses the current leasing situation in Midtown South compared to Midtown proper. Traditional clients are exploring Midtown South due to a lack of high-quality space in Midtown. Most leasing demand still comes from traditional tenants, as tech and media are not expanding as much as finance and related industries in Midtown. John Kim from BMO Capital Markets questions the future occupancy trajectory, noting that 2 million square feet of leases need to be signed in the next five quarters to maintain flat occupancy. Douglas Linde expresses optimism about achieving this and mentions that while they expect leases to commence in 2024 and 2025, they are not yet providing guidance for 2025. Jeffrey Spector from Bank of America Securities asks a follow-up question regarding the West Coast presence.

The paragraph discusses the skepticism surrounding return-to-office mandates, particularly in the tech industry on the West Coast compared to cities like New York and Boston. Douglas Linde acknowledges cultural differences in business communities between coasts but doesn't believe they will significantly impact office space utilization. He notes that some organizations are realizing their current remote work strategies are ineffective and are pushing for more in-person work. Linde predicts a gradual increase in office attendance on the West Coast, especially as the artificial intelligence sector demands greater physical presence to enhance productivity and competitiveness, potentially influencing other companies to follow suit.

The paragraph discusses the return to office trends in certain areas, emphasizing that Salesforce has implemented a policy to bring employees back to the office as of October 1. There is a noticeable increase in activity in and around their building and commuting systems like the BART train are seeing more usage, with parking lots filling up on specific weekdays. This increase in office return is also reflected in Seattle, where technology companies have leased more office space at Madison Center after previously reducing their space during the pandemic. The discussion highlights that while some companies are encouraging a return to physical offices, there is no clear indication of strict enforcement or penalties for employees who do not comply.

In the conversation between Anthony Paolone and Owen Thomas, they discuss the capital costs and investment opportunities for Boston Properties (BXP). Thomas mentions that BXP's current cap rate is in the mid-6% range, and that development yields in New York have increased since the pandemic, with their target being above the pre-pandemic 6% yield. Regarding acquisitions, Thomas notes that the market is offering cap rates in the high 6% to 7% range, but there have been few transactions due to sellers not accepting these prices. He anticipates increased transaction activity in the future due to improved availability of financing, especially in the CMBS market. The discussion then transitions to Blaine Heck from Wells Fargo, who references BXP's pursuit of growth in new markets like Los Angeles and Seattle.

In the paragraph, Owen Thomas discusses the company's strategy for growth in various markets despite a challenging operating environment. While they have a perimeter established in six key markets, including areas outside of central business districts, their investment approach is opportunistic, focusing on the best risk-return opportunities within that perimeter. He explains that while there are opportunities in the western regions, they are harder to evaluate due to slower leasing activity compared to regions like New York or Boston. Blaine Heck thanks Owen, and the operator introduces a new question from Michael Griffin of Citi, who inquires about the Bain renewal in Boston and its potential involvement in a development project in Back Bay.

In the paragraph, Douglas Linde refrains from commenting on Bain's decision-making but explains that new building construction in Boston costs around $1,400 to $1,600 per square foot. This makes it challenging to justify new developments given current rent levels in Boston's financial district and Back Bay, which are not high enough to support such costs. He suggests that improvements in financial conditions, such as lower interest rates and building costs, could make new developments more feasible in the future. However, plans for building at 170 Dartmment Street are not currently anticipated before 2025. Michael Griffin thanks him, and the operator then introduces Alexander Goldfarb from Piper Sandler. Goldfarb refers to positive comments about the D.C. market and mentions observations from a recent visit there.

In the District of Columbia, rental rates for office space generally feature annual increases between 2.25% and 3%, with typical lease durations ranging from 10 to 20 years. Due to compounding, it's unlikely for rents to increase significantly in existing buildings. However, there is demand for high-quality new office spaces driven by industries like the legal sector. The new developments can command rents that are 15% to 20% higher than existing premium products. BXP sees potential opportunities to capitalize on this demand for well-amenitized and strategically located spaces.

In the paragraph, Floris Van Dijkum from Compass Point LLC asks Owen Thomas about the factors that could spark increased transaction activity in the office market, given that some public office owners, like Thomas's company, are in a favorable position to grow but face a lack of market transactions. Owen Thomas responds by suggesting that lower interest rates, the reopening of the CMBS market for the office sector to create liquidity, and sell-side fatigue, where owners want to downsize and reallocate capital to meet their strategic goals, could serve as catalysts for increased transaction activity.

In the paragraph, Douglas Linde from BXP expressed optimism about the company's future growth, highlighting expectations for increased occupancy and potential external transactions. He noted that the company anticipates a significant occupancy gain over time, which would enhance earnings. Linde mentioned a portfolio with an average rent of $80 per square foot and a potential occupancy gain of over 400 basis points. He also discussed the impact of changing interest rates, noting a mixed effect due to $1.8 billion of floating rate debt decreasing as short-term rates fall, though refinancing will bring some increased fixed-rate expenses. Overall, Linde conveyed a positive outlook on long-term growth despite some challenges.

The paragraph discusses the sublease market across various regions, highlighting that the most significant issues are on the West Coast, especially in San Francisco and Seattle. In contrast, New York City does not have much of a sublease problem in the markets where they compete. The portfolio contains about 2 to 3 million square feet of sublet space not currently on the sublease market. Some larger transactions, like Biogen in Westin and Riverbend space, have already occurred, including another significant sublet in Reston, Virginia, by the College Board. The speaker indicates that most of these sublease transactions happened a while ago, and there has been little addition of new sublet spaces in the short term. Subsequently, a new question from Peter Abramowitz from Jefferies is introduced, referring to a CEO survey about employees returning to the office and seeking details about real-time trends, particularly with tech companies on the West Coast.

The paragraph discusses the disparity between survey results indicating a return to the office and the reality reflected in actual building usage data. Douglas Linde explains that even before the pandemic, achieving 80% seat usage in an office was an ideal situation, with current occupancy rates reaching similar levels in cities like New York and Boston, but lower in places like San Francisco. People returning to offices typically attend three or more days a week. Owen Thomas adds that while remote work is a desirable benefit for employees, many CEOs are pushing for a return to the office due to the costs associated with remote work, with companies like Amazon, Salesforce, and AI start-ups reversing remote work policies.

The paragraph discusses the increase in tech tenant touring activity in New York, noting that the interest picked up after Labor Day, potentially linked to an interest rate cut. Businesses appear to find it easier to make planning decisions, though the decision-making process remains prolonged. OpenAI has recently committed to space in the Puck building, and other tech companies are exploring the market, but it's too early to confirm a significant trend of increasing space acquisition. The comparison also hints at differing activity levels in New York and West Coast markets like San Francisco.

The paragraph discusses the current state of the office space market, particularly focusing on New York and the West Coast, including Midtown South and the Valley. Executives in tech companies are re-evaluating their office space needs as they transition back to in-person work. Rodney Diehl highlights interest from AI companies and the broader tech industry, including autonomous vehicle companies. Ronald Kamdem from Morgan Stanley inquires about the New York market's health and occupancy decline, asking if the decline was expected and about future prospects. Douglas Linde responds, noting the loss of O'Melveny & Myers as a major factor in decreased occupancy at Times Square Tower, but asserts that other leasing activities in Manhattan are exceeding expectations, indicating increased interest despite current vacancies.

The paragraph discusses a real estate company's strategy and activities in the residential sector. They currently own around 2,000 residential units and are working on several projects on land they control. They are considering converting some office sites into residential developments due to changing market demands. Their strategy in residential will differ from their approach in office and life science properties. For residential projects, they tend to not hold properties long-term but focus on generating fees, profits from minority limited partner interests, and carried interest. An example of this strategy is their project at Reston Town Center, where they oversee development and construction and have an 80% capital partner.

The paragraph outlines a company's strategy to utilize its significant land inventory to generate value, instead of waiting for market recovery. They are exploring various development options, including being developers for multifamily units with external financing, selling parcels for townhouses, and considering uses like big box stores and data centers. The company aims to realize value from this land, as it currently doesn't reflect on their balance sheet or share price. They anticipate the start of this development strategy in the first quarter of 2025, beginning with a project at 17 Hartwell Avenue in Lexington. The paragraph concludes the Q&A session of a conference call, with closing remarks from Owen Thomas, the Chairman and CEO.

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