Q2 2020 Boston Properties Inc Earnings Call

Audience lines are currently any listen only mode.

Speakers will address your questions at the end of the presentation during the question and answer session.

At this time I'd like to turn the conference over to Miss Sarasota VP of Investor Relations for Boston properties. Please go ahead.

Great. Thank you and welcome everybody to the Boston properties second quarter 2020 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K in the supplemental package. The company has reconciled non-GAAP financial measures. The most directly comparable GAAP measure in accordance with Brent Ti.

If you did not receive a copy these documents are available in the Investor Relations section of our website at investors that the X P Dot com.

Webcast of this conference call will be made available for 12 months.

At this time, we'd like to inform you that certain statements made during this conference call, which are not historical may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act.

These statements involve known and unknown risks and uncertainties and although Boston properties believes the expectations reflected in the forward looking statement.

Based on reasonable assumptions, we cannot assure you that the expectations will be a team.

But uncertainties that could cause actual results to differ materially from those expressed or implied by forward looking statements. We are detailed in yesterday's press release.

From time to time in the company's filings with the FTC.

In particular, there was significant risks and uncertainties related to the scope severity in duration of the cold at 19 pandemic. The actions taken to contain a pandemic were mitigated impact in the direct and indirect economic effects of the pandemic and containment measures on Boston properties and our tenant.

Boston properties does not undertake a duty to update any forward looking statement.

I would like to welcome a one Thomas Chief Executive Officer, Doug Lindy, President and Mike Labelle, Chief Financial Officer during the Q and a portion of our call Ray retreat Senior Executive Vice President and our regional management team to be available to address any question.

I'd now like to turn the call over to almost a one Thomas for his formal remarks.

Thank you Sarah and good morning, everyone I'm, joining you today from Boston properties offices in New York, where I've been working for almost a month and it's great to be back.

Offices in Boston, Washington, D.C., and obviously, New York City your open.

In many of our employees have elected to join their property management colleagues and returned to the office.

Our buildings remain under 10% physically occupied at this time, but we anticipate some increase after labor day.

As we get our customers are anxious to safely return to work in the months ahead.

Despite a challenging environment Boston properties continue to perform in the second quarter and beat consensus earnings by two cents excluding charges.

We also collected 98% of our office rents, 94% of our rents overall and completed 942000 square feet of new leases I wouldn't rule, including a 400000 square foot new lease with Microsoft at Reston Town Center.

These achievements demonstrate the resilience of our business model in a difficult operating environment I'm, particularly proud of our team's commitment to serving our customers with the highest level of professionalism that is our standard at Boston properties.

This morning, I'll focus my comments in three areas the status and timing of the U.S. economic recovery, the future of office demand and Boston properties pivot to opt out.

The recovery of the U.S. and global economies is directly tied to the course of the pandemic.

Cobot 19 infection rates remain at elevated levels in the U.S. as many Americans appear to be less willing to follow the health safety protocols mandated by the CDC and local governments.

As a result, cobot 19 will likely linger in the U.S. and around certain regions of the world for some time.

Our federal cares to act will help the U.S. economic recovery has been extended out further and will likely not be able to return to a full new normal until therapeutics or a vaccine or developed.

Today, there have been significant strides made towards the development of a vaccine with multiple bio pharma companies currently in phase three trials ending in late fall.

The federal operation Warp speed has invested over $6 billion in the manufacturing of vaccine doses in advance of full approval.

Successful vaccine is not expected to be broadly available until year end 2020 at the earliest and more likely well into 2021.

Moving to the future of office much has been written and speculated about the pandemic effect on office use.

Which is understandable given the high percentage of employee still working from home and the resultant low physical occupancy of office building.

The fully evaluate what has and could transpire you have to consider the four key drivers of office demand employment location density and occupancy driven by work from home and look at each of these factors during and after the pandemic.

So starting with employment the pandemic has created significant job losses and other recessionary effects that are a headwind for office demand in many industry sectors.

Many companies are looking to cut costs Ceos or has it tend to invest capital in this space and leasing volumes have slowed considerably however, employment loss for office workers, 6%, which is well below the national average of 16% overall as many of the job losses were in the service in hospitality sectors.

Further economic recovery, though recently stalled has begun with recent jobs data showing employers have reinstated in may and June over one third of the job losses over the prior to March.

All recessions eventually come to an him and we're confident that new space demand will return as the economy recovers.

Further several industries, particularly tech and life science are performing well through the pandemic and Boston properties existing assets and developments are intentionally well positioned for this customer base.

Location preferences, another driver of office demand and there has been speculation about companies moving out of the major urban environments to smaller less expensive cities.

To date, we have not seen evidence of this behavior, among our customer base and remain confident our cities will continue to be a location of choice for talented knowledge workers and the companies that employ them.

I acknowledge the challenging budget deficits large cities space as a result of the crisis art obstacle urbanization will need to overcome once again.

There's also been speculation about corporate move it movement from city to suburban locations. This does not appear to be true for this does appear to be true for residential demand as housing market conditions are strengthening for commutable suburban locations, but we have yet to see evidence of companies looking to move their offices to suburban locations as a result of the panned out.

Right.

Moving to Densification. This is clearly a trend that is completely reversed during the pandemic period as companies are limiting workstation occupancy and actively spreading out employees for help security purposes.

So the urgency in magnitude of physical spacing may diminish after the pandemic. We do believe a reversal of densification trends will be a tailwind for office demand longer term.

Finally work from home a key driver of our office occupancy has been a surprisingly serviceable way to conduct business during the pandemic.

But many of our tenants and other large corporate believe it is not a long term sustainable substitute for in person work as time wears on it is increasingly clear to business leaders. There are widening gaps for their companies and activity such as collaboration creativity training mentoring and the.

Building of company culture went all employee communication and connection is virtual.

We have heard from countless customers and business leaders about the shortcomings and their desire to return to in person work.

No company and business function specific I do believe there will be greater acceptance and adoption of part time work from home for a larger segment of the workforce as an additive to.

It May act as a headwind to office demand growth, but will not be a full replacement of the office environment.

Overall, the pandemic and associated recession or challenging office demand in the short term, we are confident office markets and gateway cities will recover their vibrancy overtime.

Now moving to Boston properties activities over the past several months, we've been aggressively responding to the challenges of the pandemic, including collecting rent restructuring leases with customers and need ensuring the health security of our employees and customers and raising capital. These activities continue but we are selectively and pro.

Actively investing in our future growth.

We continue to invest in our development pipeline, which currently stands at 10 development and redevelopment projects, comprising 5 million aggregate square feet.

And 2.8 billion in total investment.

$2.8 billion the commercial component of this portfolio was 74% pre lease with aggregate projected cash yield that stabilization of approximately 7%.

In June we completed the acquisition of the site at fourth in Harrison in San Francisco for $140 million or $174 per developable square foot.

The 500000 square foot first phase of this project has fully completed entitlement entitlements and plans.

We're not planning speculative construction in the current environment.

Last week, we entered into a joint venture with Continental Development Corporation to acquire a 50% interest and their beach cities Media campus development on Rosecrans Avenue, and El Segundo, California for $21 million.

The site has the potential for a 275000 square foot development, which will not commence until the project is fully design and market conditions justify commencement of construction.

[noise]. This investment is the next albeit modest step in the growth of our Los Angeles region and shifts our attention to our core competency of office development.

Given the Jason ceased to the very attractive beach cities residential areas and L.A. acts we believe in the strength of the El Segundo market, particularly along Rosecrans Avenue. It's most vibrant district, we were excited and honored to form. This first partnership with continental the leading property company in the local market both parties who.

Share core values anticipate the relationship will grow overtime.

We also continue to monitor our five core markets and Seattle for value added investment opportunities, where we can utilize our real estate operating platform to create value.

These investments are primarily being pursued with private equity partners.

So far during this recession, there had been fairly limited opportunities I would describe the market as quote in discovery mode as transaction volumes for office assets are down 66% from the first quarter.

Sellers are holding out for pre pandemic pricing given lower interest rates and the financing market is reasonably healthy, allowing many owners to refinance there were a small number of transactions that closed in our markets over the last quarter, providing evidence of continued liquidity.

And perhaps marginally higher cap rates in Boston at leasehold interest in 27, dry Dock Avenue and the Seaport district sold for $270 million, which was $932 a square foot in a mid fives cap rate.

289000 square foot building is 97% leased and sold to a domestic pension fund and its manager.

In San Francisco, the Townsend building, which is a renovated early 19 hundreds assets in the Soma District recently sold for 138 million.

Little over $1000, a square foot and a low fives cap rate. This 137000 square foot building was under contract to sell early in earlier in the year for approximately 9% more.

But the original buyer defaulted forfeiting a deposit the building is fully leased and sold to an investment manager.

And lastly in the San Jose CBD 160, West Santa Clara sold for 138 million or a little over $1000 a square foot at a 5.2% cap rate.

This 212000 square foot building was sold to a private investor through a like kind exchange.

We are increasingly focusing on the life science sector, given the strong and resilient growth end user demand Boston properties is already well positioned for this industry with over 3.2 million square feet of office space leased the life science tenants and over 5 million square feet of new development and redevelopment opportunity.

In Boston and San Francisco.

These two markets, where we have leading office market positions are the top two lifestyles clusters in the country due to their proximity to important academic institutions in research hospital and dominant market share of venture venture capital and NIH funding for life Sciences.

Finally, despite the pandemic, we continue to raise capital an upgrade our portfolio through the sale of noncore assets.

This quarter, we completed the sale of a 455000 square foot divided interest in capital Gallery in the southwest Washington, DC CBD to the Smithsonian institution for $254 million.

Boston properties retained 176000 square feet in the East tower of the complex consisting of office and retail space, a parking garage and development capacity.

Boston properties will continue to provide property management services to Smithsonian, which retains various leasing and purchase rights for the portion of the east tower not conveys.

We also completed the sale of our 50% interest in Annapolis Junction eight.

Hundred 26000 square foot vacant office building and to land parcels at the Annapolis Junction Office Park in suburban Maryland to a user for a gross sale price of $47 million.

To conclude it 2020 has clearly been a trying period for many types of real estate due to both the recession and physical distance distancing requirements of the pandemic.

Fortunately for Boston properties, we have long lease terms minimal lease roll over the next few years and strong liquidity to invest opportunistically.

All recessions and Pandemics, eventually and and we are confident longer term in the U.S. economy in major cities and the importance of the in person workplace.

Boston properties has the franchise capital and business strategy to emerge from the pandemic with strength and momentum.

So let me turn the call over to Doug in Boston. Thank you.

Good morning, everybody, So Mike Labelle, Sarah boot and I are all sitting together more than six feet apart and our corporate office of the Prudential Center. We've been here since June 1st So we're on our if our ninth week.

It certainly feels a lot longer than 90 days since we had our last conference call and I think Sarah has organized calls or group meetings with more than 200 investors and analysts from since late April and she's also put out updates on a monthly basis.

As Owen discussed in his remarks, the business environment and that has arisen because of cobot nineteens induced economic shutdown is the thing that we are most focused on on a day they basis in our business.

Well, we are encouraged by the government and the life Science industries determination to test.

Manufacture in math distributor vaccine, we still have to manage the realities of the gradual ramp up of daily activity schools daycare commuting shopping dining leisure activities in business.

The immediate damage that has been inflicted on the economy and how it's going to impact the utilization of space.

The health and safety of our employees our tenants our service providers in our visitors continues it'd be first and foremost in our minds.

Almost 90 days ago, we published our health security plan and our assets are all position to provide a safe environment for workers based on C.D.C. and local government regulations.

We've had hundreds of group and one on one conversations with our tenant regarding their plans to bring their workforces back to the office.

Our first market to remove shelter in place requirements was Massachusetts in late May.

In early June the city, Boston and we are now in these three in Massachusetts.

However, governmental leaders continue to encourage businesses to work from home and that says it's in our building both suburban and urban continues to be very light.

Our suburban Boston portfolio includes over 5 million square feet in 33 single to six storey buildings.

Virtually every tenant employee drive the single Okcupid vehicle and elevators get in frequent use the census, there is under 8%.

At the moment a return to work is not about transportation and it's not about elevators.

We are seeing similar census levels and the greater DC in New York City markets, which have also left lifted their shelter in place orders.

While a number of our retail tenants have reopened with volume restrictions traffic is subdued and some of the foodservice and other amenities remain closed.

Parking utilization is up sequentially in May and June but it is still a fraction of its pre cobot levels and our Cambridge Hotel remains closed last quarter I described our revenue components and my remarks. This morning are organized around those themes.

This is our first exclusive exclusive cobiz quarter.

Our office revenue continued to perform as we expected the portfolio ended the second quarter of 2020 at 92% occupied as compared to 92.9 in the first quarter.

The own said collections were really good at 90% and there were the same in April May June and in July.

These statistics include the non payment of a Sina and Taylor parent company. During this entire period in the second quarter.

It's going to talk about our accrued rent on our a our charges in his remarks.

I want to make one note about our reported statistics.

We have a few large retail tenants. In addition to a sina that have not paid rents that were put it default and we didnt cure or their default we terminated their leases.

This totaled over 700000 square feet.

As long as these tenants refused to relinquish possession, we have no ability to re let their space and we are showing it is occupied and expiring in the subsequent quarter.

You're not recording any income and Footnoting these spaces as tenants in sufferings.

During our last call and then the updates that we provided during the quarter. We discussed the completion of some of our large leases that got signed and rest in 535000 square feet suburban Boston and 122000 square feet and New York City 35000 square feet, they're all started pre cobot.

The remainder of the activity with small leases under 10000 square feet for the quarter.

Loose sight that our business also includes our operating assets and our development projects. We continue to negotiate a 250000 square foot lease for the majority of the remaining space at rest. The next we've made four distinct life science and office proposals in excess of 200000 square feet each on our portfolio up.

Potential new development sites in Waltham in the last couple of months and earlier. This month, we made a proposal and did a virtual presentation to a million square foot user with a mid 2000 twentys delivery timeframe for three Hudson Boulevard. Some long range planning activities continue despite the current health.

An economic uncertainty.

However, our customers are focused primarily on their employee safety and on the uncertainty of the impact of the economic shut down on their businesses.

Facilities professionals and their brokerage advisors are showing a limited interest right now actively pursuing transactions that don't revolve around an immediate expiration since their business unit leaders have very little forecasting conviction.

There are very few post cobi, new transactions that have occurred in any of our market.

We're action is necessary many tenants are executing short term extension.

On July Onest as an example, we completed 110000 square foot 15 month extension with attendance at the General Motors building that had an early 2022 exploration that tenant with negotiating for relocation and cobot 19 resulted in a reevaluation of that decision.

And last week, we completed a one year extension for 70000 square for tenant at 510 Madison Avenue, extending that racing to early 2023.

Anyone that tells you they know that rents have moved blank percent or the concessions are up blanks dollars has no transaction volume to backup their views, it's simply a prediction.

It's absolutely true that there was more sublet space on the market in all of our region and in most submarkets conditions are going to be weaker.

There are a number of technology companies located in San Francisco in Boston that primarily served the travel and the transportation hospitality retail and foodservice industries that have see the dramatic impact on their revenues due to the shutdown and those have resulted in large head count reduction again getting back to the pandemic impacting the economy.

Many of the large block additions in inventory come directly from these companies. Some examples our air being being who bring San Francisco and trip advisor and post in Boston.

However, the majority of the sublet space is in small units with short term exploration, but it's going to impact the market.

To date, San Francisco has had the largest relative increase in sublet space, While New York City has limited space that added to its availability.

I want to repeat that the foundation of Boston properties ongoing revenues and cash flow is our contractual office lease book of business with an average at least like that still is over eight years at 8.8 0.1 years.

Our baseline office revenue for the second quarter before right out right off excuse me with 600 million dollar.

The remainder of 2020 assumes virtually no additional leasing other than renewals. So look to the transactions I described earlier, a minimal contribution from the 529000 square feet of space that we've already delivered but where the tenant is controlling the timing of occupancy and GAAP revenue recognition.

We have expected move out of about a million square feet with an average ran a $54 per square foot with about three month on average left.

Finally, the second half of 2020 revenue figures include the six month of contribution from 17 50 market Street in Reston versus three months in the first half.

This is the only 2020 office development that was not in 2019. So if you put all this stuff together, we have consolidated office rental revenue could contribution, including our share of unconsolidated jvs for the second half of 2020 of about $1.2 billion.

This would translate to 2020 <unk> full year baseline revenue.

About 1% higher than 2019.

The reopening of urban consumer bricks and mortar retail, including fast casual and sit down dining is gonna be slow.

After breaking out our financial institutions are technology, our telecom tenants with retail operations our remaining.

Brick and mortar retail cash revenue was about 12, and a half million dollars per month pre cobiz, so about 5% of total revenue.

This is made up of 275 tenants.

More than 40% in the fast casual and sit down restaurant sectors, the rest being soft.

And other men.

During the month of July we collected about 50% of our bricks and mortar retail cash rents relative to their pre Colby basis.

We continue to work with our foodservice and our other service amenities on ways to assist them in their reopening and in many cases, we're moving to an interim percentage rent arrangement as well as Cas accounting as Mike will discuss.

Retail sales are not going to get back to their 2019 levels in 2020, and we know that our retail revenue is going to get impacted into 2021.

With under 10% of our tenants employees using their space and limited retail traffic our share parking revenue in the second quarter was 14.2 million compared to 28 million in the comparative period in 2019.

Total parking was $113 million for 2019, and 56 million for the back half of 2019.

While we've seen some some large sequential increases in parking in May and June over 100% in some garage is the April base was very low and actually I lay dropped in June and given the increase in cases of cobot 19 in that market.

We have not recovered many monthly parkers, yet and we don't expect to get back in 2019 monthly levels in 2020.

As the population in our buildings pick up we do expect up significant ramp up in parking as more occupants will choose to drive into Boston in Cambridge, where the bulk of our parking revenues generated.

Our apartment portfolio contributed $33 million and consolidated revenue in 2019, that's about 1.2% of total lease revenue.

In person leasing has begun in the DC in Boston region, but we lost momentum in Boston as the college, we population uncertainty has dampened demand in the market and we have postponed the leasing at skyline in Oakland due to the shelter in place orders were projecting only $40 million of consolidated revenue for the apartment ports.

Full year for 2020 with an extended lease up at the hub 50 project in Boston and Skyline projects in Oakland.

All of our base building new developments have resumed and we have been pleasantly surprised to see no productivity losses due to covert 15 safety procedures.

All the projects are on schedule for completion within our contractual obligation consistent with their pre cobiz schedule.

Tenant construction is also underway across the portfolio and we have worked through most of the potential delay issues here the lack of traffic on the on the ground and the minimal occupancy in the buildings is actually allowed for enhanced productivity by the construction trades.

We've still got no clarity on the timing of the Cambridge Marriott opening until married Corp has visibility on a level of occupancy that can sustain variable operating costs were unlikely to reopen the hotel. This is a business hotel to generate the bulk of it room nights from the Kendall square businesses and at certain times of the year from MIT related events the.

Hotel will reopen and it will once again have strong performance, but it's not going to be in the next quarter. This concludes my remarks, and let me turn it over to Mike.

Great. Thank you Doug good morning.

So I'm going to cover three things this morning, our second quarter performance.

The credit write offs that we recorded.

And some high level perspective for the rest of 2020.

Despite the pandemic our core office portfolio that comprises 92% of our total second quarter revenue continues to perform well as we expected and described on our last call. The weakness primarily showed up in our retail park and hotel performance.

Our tenants in the retail industry continue to struggle with closed stores and reduced revenues. Many did not pay rent in the second quarter. The collections have improved as Doug described in July of stores have begun to reopen.

We evaluate our tenants consistently and this quarter, we recorded write offs totaling $41 million at our share.

This consisted of $15 million of accounts receivable.

And $26 million of noncash accrued rent.

The vast majority of this relates to tenants in the soft goods retail and restaurant categories as well as entertainment industries that have been hit hard by the impacts of the pandemic.

Going forward, we will record income from these tenants on the cash basis.

The largest write off is $14.3 million for in Taylor.

Polices 336000 square feet of office space for their headquarters in Times Square Tower in New York City.

No time square tower is a building we hold a joint venture than our ownership interest is 55%.

And Taylor also leases for retail stores, one in times square, one an Embarcadero center and two of the Prudential Center.

And parent company, a sina filed for bankruptcy last week.

We've indicated a reorganization plan primarily around the end Taylor and limb Lane Bryant brands.

But it's not clear what their plans are for our stores or their headquarter space.

They're currently obligated to pay a $15 million annual rent at our share.

The remaining $26.7 million of write offs are comprised of primarily local retail entertainment and restaurant concept, which by definition have more limited financial backing and where it is unclear we will collect unpaid and accrued rent as Doug described we are tempur, Larry temporarily converting some of our restaurants to a percentage.

Rent structure and recording rent on a cash basis is most appropriate.

Just $2.3 million of this remaining write off is related to office tenants.

Our second quarter AFFO result of $1.52 per share reflect these charges.

Excluding the write offs, our second quarter FFO would have been $1.76 per share, which is two cents per share above analyst consensus for the quarter.

The results came in closely aligned with the framework that we provided on last quarter's call. We expected our occupancy to come down to 92% due to expiring leases in Reston ended the GM building as well as the termination of a 125000 square foot space in suburban Boston, where we have a replacement tenant coming in.

Early next year.

We executed our 400000 square foot lease with Microsoft in Reston. They took possession of a portion of this space immediately but 220000 square feet will not be delivered until 2021.

We completed over 200 lease modifications, primarily with retail tenants that resulted in a bidding or deferring $17 million of cash rents in the second quarter.

The majority of this is recognized as straight line rent, but the expense recovery piece can't be straight line and result in lower income this quarter and higher income leader.

Our parking revenues came in at $14 million for the quarter that represents a decline of $11 million from the last quarter.

Due to loss of nearly all transient parking Doug described this and improvement in parking is going to be dependent on increases in our building population.

Our hotel, which is closed operated at a loss of $2 million and we have no immediate plans to reopening.

As you would expect several of our operating statistics were meaningfully impacted this quarter in concert with our Kobin 19 revenue impacts both our same property results and our F.A.D. were adversely impacted from the deferral of cash rent into later periods. The accounts receivable write offs and the loss of parking and hotel.

Well revenues, excluding these primarily cobot related items, our same property cash NOI would have grown by 3% over the second quarter 29 team and Additionally, our F.A.D. ratio would have been 83%.

We've included a summary of these items in our supplemental report under a new page entitled Cobot 19 impacts.

Turning to the rest of 2020.

We're not providing formal guidance due to the continued uncertain environment. However, I would like to provide some high level perspective for the remainder of the year.

For office revenues, we anticipate second half 2020 revenues to be $10 million to $15 million lower than the second quarter run rate due to the lease expirations that Doug described.

We wrote off $15 million of accounts receivable this quarter, primarily for tenants in retail sector. Most of these tenants continue to be delinquent.

We're completing workouts with some and others have refused to engage with us they remain and occupancy.

We'll be recognizing revenue on a cash basis for these tenants and we expect the second quarter run rate to continue until the retail environment improves.

For our parking and hotel revenue, we expect our second quarter run rate to be a good proxy for their contribution in the third quarter.

And for interest expense, we expect our quarterly run rate will be approximately $4 million higher than the second quarter due to having a full quarter of our recent 1.25 billion dollar 10 year bond issuance.

And finally at the end of June we sold 455000 square feet of capital Gallery in Washington, DC for $254 million the loss FFO from the sale as approximately $4 million per quarter.

As you think about our earnings outlook, it's important to remember the most of our revenues are subject to long term lease contracts with primarily large credit worthy corporations that do not expire for many years.

Our share of annualized office lease revenue, excluding the second quarter accrued rent write off is $2.4 billion.

For the remainder of 2020, only 3% of these annualized lease revenues expire and in all of 2021, just 5.8% expire.

In 2021, we will get a higher contribution from the lease up of our residential development and contractual rent from our 100 Causeway Street development in the latter half of the year.

This provides a strong base of contractual revenue during a period of likely challenging economic conditions.

Our hotel operations, our parking operations and our retail portfolio are at their names here.

And we have experienced a meaningful decline in 2020, if we're not at the bottom we're certainly close.

These business units will be coming back and when they do the revenue will flow directly to the bottom line.

We're also in a strong capital position.

We have $3.4 billion of liquidity that includes $1.9 billion of cash than our full one and a half billion dollars line of credit available.

Our cash balances are sufficient to redeem our consolidated debt maturities through early 2022 and fund our entire $1.1 billion of remaining development costs in our pipeline.

Development pipeline at 74% Preleased and it's expected to contribute significant earnings growth over the next several years.

That completes our remarks, operator, if you can open the lineup for questions.

Okay.

At this time I would like to remind everyone. If you would like to ask your question Press Star one on your telephone keypad.

Your next speakerphone, please pick up the handset before asking your question.

Pause for just about metric on top of the Q any roster.

Your first question comes from the line of Alexander Goldfarb with Piper sampling.

Oh.

Good morning, good morning up there.

So I guess it Mike just the first question is.

No.

With regards to the write offs that you guys took the tenants that you mentioned.

How many of these how many of the write offs like how should we think about the other write offs versus tenants that are closed end like bankrupt, where you have to like go in backfill. The space. So you talked about Ann Taylor you talked about this very small part of office and then you mentioned some.

Tenants that refused to lead their space. So as we think about you guys.

Collecting cash rents are percent rents from tenants the retail and restaurant how many of that write off bucket are still open and you expect them to slowly come back to business versus faith that actually closed and now you guys have to go eventually recapture and re let that.

Alex This is Doug I'm almost all of it is quote unquote open and those tenants are just not paying and as you're probably aware. We don't have much that we can do other than start the legal process with regard to that but our numbers and everything that Mike and I just talked about assumes no red.

Can you from any of those tenants in 2020, so as we related or as they come to the table and start to pay Theres upside obviously, there, but we have no sense of how long, it's going to take us to move through the process.

Alex there's only two tenants that are bankrupt.

And Taylor, which I spoke of and there is also 24 hour fitness.

So we have a 24, our fitness at 6.1 less in New York City.

And that's part of the write off to couple million dollars.

They are going to vacate that space.

And we have a unit also in Santa Monica, and we're not clear what they're going to do with that space.

Okay, and then b the under armour space that is money good.

Under armour is.

A tenant that's paying their current rent and their accompany that raise a significant amount of capital in the last quarter and they have a pretty significant revenue base. So we believe under armour as a viable strong retailer.

Okay and then the second question is on the investment side you guys closed on fourth in Harrison you announced the El Segundo JV and you did that submits cobot. So maybe you could just walk us through how you're underwriting of those two projects may have changed.

Given that you enter them versus what you previously would have considered given everything that's going on and Doug Your comments on the pace of the office markets and sublease that's coming on.

And you want to start without Yep Yep. So let me break those two apart Alex so forth in Harrison the or this is a project we've been working on for many years.

We have full entitlements for the first phase, which is half a million feet. So we have all the prop M is designed and before the pandemic.

Occurred we were going to proceed.

So with a pandemic we've put the project on pause to wait to see what market conditions are going to be.

We had an option on the site, we think the value that we acquired the site for is attractive whether it be a pandemic world are not gone pandemic world.

And then on our additional investment in L.A. as you know.

We've been talking a lot about trying to grow in L.A. I, we've talked a lot about our perimeter, which included Elsa gun, though.

We have been looking at lots of deals there and we've also had frankly long term conversation with Continental Development Corporation, Who's our partner and the leading property company in the local market.

And we were in discussions on this joint venture before the pandemic and given our interest in going to El Segundo, given our relationship with continental and given our confidence as I described in my remarks of the return to the office business. We elected to proceed with that modest investment in the site on Rosecrans Avenue in altogether.

And Alex and you know in both of those cases, we believe that the land basis that we entered into the transactions was up a.

Good basis and that in fact, the one of the you know unintended consequences of this.

Demick is that there will be a reduction of construction over the next number of years and we had been seeing in on the West Coast, you know significant annual escalation in construction costs and so we're hopeful that we're going to start to see either some moderation or some declines.

And what the base building components of these projects will be and which will hopefully you know go to some degree to alleviate.

So some of the issues associated with the market conditions on a going forward basis.

You know interestingly with when you're doing new development, and you're likely doing build to suits in many cases.

You don't start to building unless you think you're going to get an acceptable return.

Okay.

Thank you. Thank you.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Thanks, Good morning, I realize this sort of a tough question for Mike or Doug, but as you sort of you guys took a lot of sort of pain here in the second quarter here.

Just sort of trying to think through what else might be out there as you kind of move forward I know you've laid out a lot of things about hotel and parking but.

Are there things within kind of the office and it really retail smaller but are there other sort of leases that.

May be paid but you're worried about.

They paid in Q2, but theres sort of on the fence I mean, how do we just sort of think about other bad things that may occur.

Realizing it's still pretty dicey out there just sort of how much got flush through this quarter.

It looks youve I think our office portfolios in great shape.

Well occupied its paying is strong companies.

I mean, you've seen the portfolio of tenants that we have.

And you know the vast majority of those tenants are not the revenues have nothing significantly impacted like the retail companies are so the vast majority of the stuff is retail.

We did complete a full scrub of our tenants.

We were very thoughtful about recording charges, where we thought it was appropriate based upon the credit nature of the tenants and their payment history in.

The four month, I guess and that included both our office tenants and our retail tenants so that was everybody.

There is some of these tenants that we entered into rent deferral deals with where we think its credit. Good so were straight lining that rent deferral and we expect to get that rent and we reviewed those credits and we feel confident about that.

There's others that we said we're not so confident recorded on a cash basis.

So I can't tell you that theres going to be additional future charges or not we don't expect there to be future charges based upon our analysis in our view.

But it's really not possible to kind of fully predict with the link of this pandemic is what the impact on the economy is and you know that May result in additional challenges for some of our tenants, but at this point.

We feel we've done a really strong job of looking at our whole tenant base.

And the enrolled thoughtful about what we took.

Okay and it just as a quick follow up to 17 million I think that you said was abated in Q2 that you kind of believed as money. Good what is the Rob timetable to get that 17 million payback.

So there is obviously by tenant I'd say the vast majority of these tenants were getting back within the next 24 month.

So, it's a 21 and 22 to kind of payback.

The thing I would add is that we did extensions with many of these tenants.

And we're going to probably get in addition to getting the payback, we're going to get probably 50% plus more because we extended the leases by three months six months, but sometimes a year. So.

So we took we did take advantage of the opportunity and tried to improve the overall lease terms.

When we were facing the situation of helping out our clients that we're having some cash flow difficulties.

Okay, and then I realize you guys had about 300 million of cash sitting in escrow.

Some based on the sales and I think first quarter. Some based on the sales in second quarter to sort of what are the thought to be able to successfully 10 31 that money in the required timeframe or does that may be require a special dividend of that money.

So I do not believe it will require a special dividend of that money and the primary reason is that obviously, our cash flows or lower.

Because of the loss of all the revenues we've been talking about from the hotel in the.

The retail in the parking so that creates room.

In our current dividend with regard to reinvestment of the capital Gallery money, which is about 250 million of the 300 million.

We've got to identify something in the next I think 20 days or something like that and there's nothing that.

We are focused on right now so I would consider to be a relative low likelihood that we would find something for that at this point.

So that would come out and just add to our liquidity. The rest of the money that is in restricted cash is basically security deposits and stuff like that for tenants.

So that doesn't have anything to do with any of the tenthirty ones and the Tenthirty one money from the deals in the first quarter have already been invested in fourth in Harrison.

So there's nothing left in restricted cash for that none of Doug If you don't want to respond on investments at all that.

Okay.

Great. Thank you yes.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Thanks for taking the questions.

Maybe just first your comments broadly on on we work in coal working and speak to your exposure.

Kind of how do you how do you view it today is their need for any potential.

Reserves or write downs.

Or do you want to yeah, why don't I talked a little bit talk a little bit about the industry.

Which we have mentioned before.

Look I think clearly given the recession and given the pandemic, which is forcing spacing that creates a challenging environment for the co working model, which has generally been based on selling a product per seat as opposed to per square foot.

So that being said long term, we believe in the product because we believe the customers.

It will want it we think there will be retail demand from individuals, particularly given this recession and the number of people that will be out of work, we see it in our own flex by be XP offering we see the interest in small customers that are interested in getting space quickly and increasingly we see in.

Trust from enterprise customers, who want some flexibility in the procurement of a small percentage of their space. So long term, we think the products here to stay in the question is.

Who is going to be providing that and who is going to get through this pandemic. Most successfully and if you look at we work specifically, we have an important relationship with them.

They are backed by Softbank they have.

Significant capital on their balance sheet, the have new leadership and again when you never know exactly what's going to happen, but I think and they have 50% market share and I think they have a great opportunity if they manage well through this pandemic to be successful over the long term.

And.

The current thanks for your question I, just the we spoke on the first quarter call about our co working exposure in total and that there was an accrued rent balance associated with co working tenants that was roughly $30 million.

So we have mentioned done in the first quarter. That's still exists we did a full analysis of we work and.

We're comfortable with their credit based upon that analysis in the liquidity in the financial support.

That they have.

And as an industry on this is Doug speaking, we have five or six different operators.

Where current on almost every one of them, which obviously is good news and as Mike said, we spent a lot of time reviewing financial statements for all of these operators and and while were not sure what their short term revenue prospects are at the moment, where you know.

We're reasonably comfortable that we're going to continue to get paid.

Okay, Great and then just.

Just to maybe get a little bit more color you talked about the impact from known move outs.

In the back half of this year, but but maybe just give us the give us some color about move outs over the next call. It 12 or 18 months are there any known move outs. If you have already any any larger spaces that you're focused on.

In terms of potential need to really is number one and then just secondly from a top 10 perspective could you clarify I think star Indemnity I think set off of your thoughts 20 could you just clarify what happened there. Thank you.

So so Mike Mike I think said that.

5.5% of our tenant.

Square footage rolls over in 2021.

And there are no significant.

Tenants that are that are rolling out at that point the largest one that I believe that's occurring over the next six months is a company called E. Com, that's moving out of about 250000 square feet of space in Princeton, New Jersey, and we do not have it back off of that again Thats, obviously part of our per our numbers that we were describing in terms of our revenue for the for the remainder.

The year.

And we have some 50 or 60000 square for tenants that have a floor or two across the portfolio in Boston and across.

The portfolio in San Francisco that have expirations and in many cases will likely renew them in some cases they'll grow in some cases, the shrink and in some cases, though they will not.

Stay in the portfolio, but where I'd say in general.

Our ability to retain tenant picks up when economic conditions in the economy suffer because people are unsure of wanting to spend a lot of capital.

To relocate and that obviously in nervous to the landlord. So Dick typically are our recapture rate in improves over time during those periods of time.

And with respect to Star Indemnity, which is CV star there continue to be a tenant at 3 million on part there's been no change in their lease. The only reason then moved off is that other tenants moved up and that's primarily Microsoft.

Because Microsoft took on.

As I said a portion of the space, we leased to them and reps in the took immediately because that space was available. So they moved up the list.

Great. Thank you.

Your next question comes from the line of Jamie Feldman with Bank of America.

Great. Thank you.

So when you had mentioned.

Interest in Seattle, and working with private equity partners on the investment front can you talk about both of those comments yes.

So we have been mentioning I think for the last year and as we think about our footprint and growth that Seattle would be a market that we would.

I'd like to enter at some point provided we could find the right opportunity.

A little bit like la before.

Colorado Center, we wanted to go there we were speaking with.

With the market about that and we waited for the right opportunity. So I would say the same thing about about Seattle and we are actively looking at things, but have chosen so far not too.

Not not to act on that.

And then.

Jamie what was the second question.

You mentioned working through like with private equity partners and yes.

Vesting going forward I, just I know, what what that might look like and yes. So we as as you know we have done this in the past we have significant joint ventures with Norges with CPP.

[music].

That we've done for past acquisitions, and also passed capital raising we maintain a very active dialogue in the private equity market.

As you know the private equity markets larger than the public equity market for for real estate and we are working with these partners looking at acquisitions, we want to extend our capital further.

Obviously, we're not going to be.

We want to maintain our our current leverage levels and we're not going to be issuing equity to raise capital. So we are rate basically raising equity to do some of these deals on a partial basis with private with private partners and the other benefit that we get from that as it does add additional yield to our capital given the.

These are involved.

So I think as we continue as we as I described pivot to offense and start to look and are looking at opportunities.

During the pandemic things that our value added existing buildings.

I think it's likely we'll be doing those with private equity partners.

Okay, and then in Seattle was that life science or office that you'd be looking at both both.

Okay.

Then you would also mentioned is you're talking to your tenants, maybe there's a little bit more of a shift from work from home, but there to work from home, but people generally still think office, obviously very important has there been any talk around how they would redesign spaces.

When people still have dedicated offices or would there be little bit more sharing I'm just curious with the latest thought process on that.

Look right now I think our customers are.

Dealing with the pandemic with their existing footprint, so they're not spending significant dollars rebuilding their spaces there.

Looking at what occupancy they want to accomplish in the space. Some of that is dictated by by government regulation and simply stated I think in open areas, they're taking out workstations, they're putting in flexi class plexiglass dividers looking at work streams flow streams within the space.

Hands free.

Yes.

Doors whenever possible things like that that can be done quickly.

We haven't seen yet a lot of our much of companies doing complete rebuilds in a post covis environment, but I do think given met even though I think the.

Pressures of the pandemic will subside over time I do think health security is going to be increasingly on office workers mines and our strong expectation is that densities as a result will decrease.

In Buildouts that we do with tenants going forward.

Doug I don't know, if you've got something you'd like to add to that.

What I would say is that to date, we've seen nobody looking to pull a building permit to do anything in their offices and we have a number of tenants who are obviously looking at the buildings under construction and we've seen nothing change in the way. They are configuring their space look I think that they're all all saying we need to understand.

And how long this is going to last what.

What the expectations are going to be from a governmental perspective with regards to density going forward and what are the what are the patterns of our workers is going to be going forward and then we can start thinking about how we might reposition our T.I.s, but the base building infrastructure and the general layouts of the floors are not going to be significantly.

Really.

Impacted where where the buildings have any.

Inability to accommodate whatever the changes might be that they choose to make and it may very well be that it's the utilization of furniture.

That really solve the problems for them in terms of how they.

Change the configurations, because obviously most of the deals that we're doing now or with technology companies and those technology companies generally don't have a lot of at the moment perimeter offices, but they do have lots of caught up with huddle rooms, and conference rooms, and then other collaborative areas and again they use furniture in many cases to sort of.

Figure out how to divide and and utilize those spaces.

And as the attitude changed on sharing space, though.

And is there.

And then towards less dedicated space per person or more dedicated space for person.

Yes I.

I think definitely.

Right now.

Please that are back at work do not want to work close close to one another.

There's no question about that so clearly an open spaces, that's where a lot of the spacing has occurred.

So that six feet at a minimum distancing is maintained so that's why when we talk about the various impacts to office demand going forward. This reversal of Densification I do think is going to be important because even.

In a world, where cobot 19 is much less prevalent than it is today I do think health security is going to be very much on the mines of it's going to be on our minds that it's going to be on the mines of our customers and I do think dense.

[music].

Dense layouts are going to be much less well received by employees.

For health safety reasons.

Okay, and then just a quick follow up from Mike. So just about all down like as a percentage of total NOI.

How much did you actually impair this quarter.

And then how do you feel about dividend coverage going forward based on this new lower level.

Well I think the biggest thing that affected in the one was the $50 million accounts receivable charge off rate.

From a charge perspective, because that was expected to be paid right.

Whereas the accrued rent would leekin over a long period of time, so I mean, some small percentage.

I would have been allocated to 2020.

But most of it would be spread through the life of those leases.

So it's really the 15 million from the retail side.

That would be ongoing.

Until these tenants either make it then they start pan us or they don't make it and we have to replaced.

And then dividend coverage.

I kind of mentioned that in a previous question I mean I think this provides.

It's actually provides an opportunity for us to sell some assets.

In order to.

And enable us to.

Have gains.

Which would supplement.

Kind of lower cash income and continue to be able to maintain our dividend where it is.

At this point, we have no plans to change our dividend.

In 2020, we've got some significant gains that we expect to stay gains.

So at this point I don't anticipate any change to our dividend, but obviously, that's a decision that's up to our board that we talked about on a quarterly basis based upon outlook in China.

What's going on in the World. So right now I don't think there's any any impact.

Okay all right. Thank you.

Operator.

Yes. Your next question comes from the line of Manny Korchman with Citi.

Hey.

The government here with Manny.

At the front on the call you talked about those for independent factors that are going to try.

Active office demand and rental rates and ultimately values.

I want to the sort of dig in on two of them first as being the part time work from home versus.

Some corporations that have made declarations, a full remote which.

I would agree with you.

A lot more difficult to get all those items you talked about in a remote environment, but even on a part time basis I would imagine there some headwind.

From just lower square footage.

The company's plans for that.

As you are going out and seeking to make investments what are you baking in from that headwind.

How does that compare to the densification trend that you've had to deal with it for the last.

More than last decade.

If you have you put some numbers around it help sort of frame.

Today, two or three or four gay work, we different hours in a need for the amount of square footage 100200, or three 400000 square foot Ken would would need.

Yes.

So.

Michael So the just let's start with a part time aspect and what impact that could have on space demand.

When you say, that's going to be a headwind to space demand, which it could be you also are assuming that the employees are going to one schedule when they're going to be out of the office and to be prepared to be in a flexible workspace otherwise there is no savings and I'm not suggesting that all our customers.

Or some of our customers won't do that they probably will but that is an additional challenge I do think a lot of the types of workers that we have in our buildings. When they think about work from home I think they feel that they want to do that on their schedule and when they come to the office that they have a workstations and if thats your configuration Theres no safe.

Earnings on space.

Not to go to the second part of your question, which as to how to quantify all this.

Look I think it's difficult I mean, that's why I mentioned that there are these four factors out there I actually think the most important factor right now in the short term is the recession, that's what's driving most of the challenges that we're seeing in the office market conditions, it's the recessionary effects.

So any acquisition that we are going to be and we are that we are currently or we'll look at we're going to be very conservative on where market rents are and what their growth prospects are and it's not just driven by this balance that you suggest between work from home and Densification, it's driven by the whole whole menu.

You that I described and most importantly, I think recessionary effects in the short term.

Right and that's a good way to sort of break it up between the different.

Factors some drivers.

The second one you talked about the location aspect and clearly theres been a big boost in suburban Homebuying, yes.

And typically as I think about office market you are going for talent and they're also driven by where decision makers want to live right. So you think about the west L.A. market wise, So hot while everyone lives there that wants to have a short commute to their office. So I guess why shouldnt the market be more can you.

Earned with people.

Very wealthy people moving out of New York down to Florida, and then a younger generation that making the decision to flee urban markets that goes suburban won't that ultimately lead to businesses then going to chase those same employees or the decision makers, saying I want to have all my people here right you look at Barry Stern.

Moving down to Florida, and say I'm going to create my office down in Florida versus having it a large scale presence in Connecticut yeah.

Michael I think its a.

Challenging question just to answer definitively because every business has different characteristics different ownership different dynamics that are going on I.

I think you're I think the evidence we can go on is the evidence that we see and the evidence that we see particularly say for example here in the New York area is the Commutable residential locations are have very strong market conditions, because with cobot 19 being an accelerant.

Individuals young families, who were maybe considering leaving the city, they're saying Okay. This is now maybe the time to do it but I do think a lot of these locations are commutable.

And I think the.

We're not seeing a lot of companies, saying, we're going to move to west Chester to New Jersey, you know to chase. This talent pool I think that the talent pool is looking at locations, where they're going to be able to commute back into New York and go to work so.

That's what we see right now.

Okay. That's helpful color. Thank you.

Your next question comes from the line of Derrick Johnston with it do we CIT bank.

Hi, everyone. Thank you.

How is the glut of sublease space being offered in San Fran currently effect market dynamics from here on the ground vantage and I guess second to that.

San Francisco still the strongest market nationally.

So so this is Doug so the answer is it's not affecting the market yet because there is nobody out in the market looking for space It will affect the market and rents will be lower.

The.

The fact, the fact is that San Francisco is not the strongest market that we have in our portfolio right now.

Greater Boston market as a stronger relative market than San Francisco.

Given what has happened from an employment perspective.

San Francisco relative to the to the Massachusetts market, obviously, given the extensive life science community that is here on an ancillary businesses that surround it. There's just there's this more stability right now in the greater Boston market than there was in San Francisco.

Okay, great and what regions are being considered for expansion or when you do finally go on a sense you did mention outlay in Seattle are there any up incoming secondary markets, where which other metro's look interesting that team several quarters down the road.

From from todays, yes, we think we see it.

Our footprint today, we are very significantly sized and four major urban areas in the U.S. and we have a growing deployment in ally and we and we just took another step, albeit modest steps this quarter to increase the scale of our la operations.

I mentioned earlier in my remarks, and I'm answering one of the other questions about an ambition for Seattle and you should consider that to be our footprint. We're not looking at other cities at this time.

We are seeing plenty of United when I think we'll see overtime.

Significant opportunities not only in the two markets, where we're trying to grow ally in Seattle, but also in the four markets, where we currently exists given our relationships and access to deal flow and all those types of thanks.

I would also mentioned in terms of investments going forward. We also in addition to investing in the existing development pipeline we have.

In all of our.

Four major markets. We also have a significant land portfolio that we control and are always entitling and that will be part of our investment growth once the pandemic is over as well.

Operator, and your next question comes from the line Nick Yulico.

Thank you.

I just wanted to ask about the the rent abatements and deferrals you broke out that number which was helpful. Just over $16 million impact in the quarter.

Couple of questions on that first.

How much would that was really to retail versus office and then is it possible to get the deferral piece.

And particularly I'm just I'm I'm interested in how also you came up with the decision to include that deferral.

As a negative to your same store seems conservative versus how others companies are reporting it.

Since presumably you do expect to get some of that money back.

So.

This is Mike so the.

To answer your last question first I guess, it's really an accounting judgment.

And the navarrete worked with as the to give people kind of a short cut to be able to put deferrals up on accounts receivable instead of straight lining them like we would normally lease modification provided that deferral did not result in a change a material change in the.

Overall amount of rent that was being paid by that tenant. So basically if you're just saying somebody you don't pay for the next three months, but you pay double rent for the three months after that Theres no change in the lease and companies could could do that and just put the three months on accounts receivable count the cash income and then we get paid were really the receivable.

The vast majority of the stuff that we did we had lease extensions that we wanted to get out of these things.

So we may be election that we're just going to treat these all at lease modifications and so we.

Basically straight lined every single one of them, we took the reduction or cash same store.

For the deferral period, and we're going to have higher cash same store later because these deals that's how we decided to do what we thought that was the most appropriate way.

With respect to the breakdown I mean, there was a few office tenants. The vast majority of number these tenants where retail tenants.

And the most of it was deferral only 20 or 25% of this was kind of an abatement.

In total.

And the.

The majority of it is deferral there is some additional deferral.

That will come later in the year because some of these were longer than a three month deferral.

Right now I would expect another next quarter to have a similar it's a little bit less but somewhat similar deferral.

We have this quarter.

And we it's possible we could do additional activity, we talked about the restaurants.

And doing percentage rent with those tenants.

For a further period of time.

So that's kind of where we are with that and again most of this gets paid back over the next couple of years.

And we.

Did extensions with most of these tenants. So the overall rent that we're going to be getting over the terms. These leases is significantly higher than just getting the rent the pullback.

And that was a big part of what we wanted to do to again just to secure the longer team term lease. So we don't have to deal with downtime or transaction costs in the future.

Okay. That's helpful. Thank you Mike.

Second question is just going back to what you know it feels like a bit of a stalemate right now and.

In in the office rental market I think dog and when you talked about not really seeing much in terms of price discovery on new leases and yes, because tenants are really not looking to do a lot of leasing molesters near term expirations when does that end and I guess Im wonder.

During you know at the same time are you not yet adjusting asking rates adjusting concession terms are using our competitors also not doing that and yet because there's no need to if you have any gut feel for at what point you start to see a return to new leasing is it in the fall.

One more employees are back in the offices at 2021 issue I recognize it's hard to predict but any color there would be appreciated. Thank you.

Let me start and then on can add on I would say that the health.

Solution to what is going on with the virus is going to be the most critical component to when people start to get back to quote unquote ordinary transactional activity I.

I mean, there's obviously lots of leases that expire every year and right now known as doing anything and and as as people become more confident in the health solution.

They will be in a position where they can start to make decisions and actually do the kinds of things that they would normally do which is actually go out into or spaces.

Higher architects to do space planning start to gain proposals and then ultimately you'll start to see transaction volume occurring.

I might my own view is that.

Depending upon the area that will happen in the in the latter part of 2020.

At that at the very earliest so I don't see the third quarter being terribly active from a transactional perspective.

And obviously transactions take time to germinate and then get consummated. So there is a cycle associated with that that's going to be important to.

Just actually have to occur from a timing perspective.

The the new development economics, I think will will potentially see some additive transactions because those are much longer lead term items and so if you're looking for a new building or a new facility or a growth.

Alternative.

And you're looking at getting two or three years in front of that those transactions I.

I think we'll have less impact from an economic perspective again, because people are going out for capital to work.

As opposed to existing assets, where you know you've got to take what the market is going to give you.

Cohen.

Yes, no Doug I think you covered it I would just add again.

It's to me, it's all about the virus because it's in and I think businesses business leaders are going to be reticent to make.

Financial commitments until they have some feel for the course of the virus.

We've already had a.

I guess, a first spike in certain areas of the country, but certainly a second spike across the whole us.

They are the vaccine looks like there's good progress being made but theres nothing definitive yet and so I just don't see activity returning Intel there's a business leader has some.

Better definition around when the recovery can happen more in earnest.

And so right now you you or your competitors, you're not really you're you're not really fine need to adjust asking rents or adjust concessions being offered.

There are there are relatively few active requirement of tenants that are looking for new space.

That aren't that are different than hey, can you give us a six month extension can you give us a one year extension can we extend our lease by 15 month I mean, that's the that's what we're dealing with not with our tenant that out in the market wants to move is thinking about reconfiguring their space and their soliciting proposals for our relocation right and this is this.

Those are few and far between and so without without having activity, it's hard to hard to reset pricing because it's no pricing to reset too.

Okay. Appreciate it thanks, everyone.

Your next question comes from the line of Frank Lee with B L.

Hi, you mentioned census that 8% your office buildings I just wanted to clarify this was just suburban assets are across your portfolio.

And where do you think this could potentially go in September and then heading into 2021.

I'm sorry.

Yes.

So so we have pretty good.

[music].

Data for all of our CBD buildings in Boston all of our CBD buildings in New York City in a portion of our Phebe deal billings in San Francisco.

And on any any given day those buildings are running under 10% and in many days are running six 8% and similarly with the suburban locations.

As I said to you before I think that that the business leaders.

In our portfolio, our heating the risks and respecting the desire of the governmental authorities to ask people to work from home wherever possible and that is going to continue until there is more sustainable reduction in the spread rate across the economy.

And as as we look into the fall I don't think September is going to be bring a meaningful change could the number go up from 8% to 10% that 10% to 15% sure.

But it's it's not going to be at a level that is going to make us feel like.

Everyone is back to work until as Owen said the virus has.

Shown some degree of maintenance from a vaccine and the therapeutic perspective.

Yes be aware if you look if you go around our portfolio there's regulation on this as well Boston and New Yorker at 50%.

See areas at 25% in California, and New Jersey are closed. So there is also those those those caps as well.

I think I think going I think you'll have a tick up my guess is you'll have a little bit of a tick up after the summer after labor day I do hear that.

But I agree with Doug I don't think it's going to go back to quote anything close to normal, but I think it'll get above certainly where we are right now.

Okay. Thanks, and then going back to the 1 million square feet or expected known move outs do you have a sense. How this figure has changed over the past couple of months.

Yes, there. So the number was 1.5 million square feet and there's about 500000 therapy. This space that we believe is going to stay so the number is decline and the ones that we know about our have been known for a long time meeting a number of months if not years.

Okay. Thank you.

Your next question comes from the line of Daniel its smell with Green Street advisor.

Great. Thank you.

You bet from this briefly in your opening remarks, but given where the cost of debt is and hedging costs moving lower than we see cap rates for stabilize CBD office properties move lower wants transactions presume.

You know I.

Let's when you say lower I'm going to assume you're talking about pre pandemic levels.

I think that you have to look to answer the question I think you have to think about the characteristics of the building. So I think if you've got a building in a innovation market that has very little lease rollover.

To a credit to a or several credit tenants I think those kinds of buildings cap rates will definitely hold and they could go down.

I think buildings that have more lease rollover, that's where cap rates are probably not going to go down and probably are going to go up because.

Theres more uncertainty about dealing with that rollover what is the market rent. What's if there is a move out what's the time for the re less releasing of that space given some of the market uncertainty that we've described on this call. So I think the answer to your question lies in what's the characteristics of the building.

And then.

Do you think about expanding more towards the lifesize sector.

Are there any targets in mind for what that could reach as a proportion of your total portfolio and what are the pros and cons you see into expanding more life science versus commercial office.

Yes.

Well the.

The our strategy is always to be in the best cities have the best locations and try to have the best properties and to serve the customers that.

Are the most active at the time that want to be in those locations and in those buildings and today as we've been talking about life science as well as tech is a very strong.

As a very strong demands for new office space, So and the good news is as I described in my remarks, we already have.

A foothold in this business given the.

Buildings that we have the biopharma tenants that we have in the development portfolio that we have that we think.

We can.

Execute upon in the years ahead.

I gave the figure of 5 million square feet of potential development again, thats over a longer period of time. The company today is over 50 million square feet. If that gives you some.

Magnitude towards the question that you asked.

And finally, just a housekeeping question.

Going back to top tenants list it looks like Leidos also fall off the top 20 tenants.

I'm just curious if there's any anything happening with respect to statements or deferrals that are impacting that topped 20 cents list.

Now, let us was the they're basically we're in two buildings the ones because they've moved into their new building right at the end of the quarter and there were still in their old building another out of the old building their only in the Newbuilding. That's in Reston Town Center, where we where we relocated them and expanded them. So those it had all to do about that trends.

Action nothing to do with any changes in lease term.

Okay, great. Thank everyone.

Your next question comes from the line Blaine Heck with Wells Fargo.

Great. Thanks.

Just a quick one on on the fourth and Harrison you talked about that project being pause for now.

No, it's a pretty difficult environment, now and you're going to be dealing with pressure on rents from the increase in sublease space in that market, but I guess ultimately what are the major metrics signals or hurdles that you guys are looking for to maybe get more confident and your ability to start that project and ultimately achieve the returns that you guys Dean.

You know acceptable.

Yes.

Well I think the key will be the tenant activity I mean, we were actively attempting to speak with customers to pre lease all or a portion of that building now so those.

I would not say those described those conversations with robust given the environment that we described on this call but.

Will be driven by the demanded that we see in the marketplace and then of course, given the Doug might want to talk about this given recessionary effects on construction cost that could.

Be a benefit to our economics of the project.

Yes, just on that can you can you quantify kind of the what you're seeing and as far as.

The movement in construction cost how much it's come down if so relative to free pandemic levels.

We are we can't we have not been anything on a bit building basis of significance.

In the last call it three months.

On the on the larger Capex projects that were doing across the company, we're seeing reductions of.

A minimum of 5% and sometimes more.

Well as the pipeline for future business starts to get shallower for the construction.

Industry, we believed that there will be competitive pressures I am not not unlike what where we're going to see with regards to rental rates that are going to drive the contractors and subcontractors to be more hungry for business and therefore, lower their margins and put us in a position, where we're seeing and reductions in the rate of of Escalations as opposed to increases on an annual.

Well basis. So we won't know for you know until we actually did something and we have right now nothing is sort of in the pipeline to be bid.

Thanks, guys.

Your next question comes from the line of Tayo Okusanya with Mizuho.

Yes, good morning, hopefully I didnt, Miss but with any comments on co working in general and then we worked.

Jim.

We did get asked that earlier ill summarize again quickly.

We acknowledge that the current environment is a challenge for co working given that we have a recession and given that.

Yes.

Physical separation requirements.

Our difficult for.

A business that you're trying to sell by the seat versus the square foot.

That being said we have confidence in the co working model over the long term because we think it will continue to be attractive to various customer bases, including individual small business and larger enterprises.

The existing co working operators are clearly going through a challenging period, given the pandemic, but as we specifically look to we work they have a 50% market share. They have several billion dollars on their balance sheet have new leadership and they have the banking of Softbank.

We have strong relationship with them and.

We think they have a great chance of being successful over the long term and that business.

Good.

So at this point, they're not getting back so doing anything on that nature.

No.

Okay, great. Thank you.

And there no further questions at this time I would now like to turn it over to the speakers for final remarks.

Okay, I think that concludes all of our remarks I'd like to thank everyone for their attention. This afternoon. Thank you.

This concludes today's conference call you may now disconnect.

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