Q3 2020 Boston Properties Inc Earnings Call

This call is being recorded all audience lines are currently any listen only mode. Our 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 Ms. syrup Buddha VP of Investor Relations for Boston properties. Please go ahead.

Great. Thank you good morning, and welcome to Boston properties third 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 all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy. These documents are available on the Investor Relations section of our website at investors about the XP Dot com a webcast of this call will be available for 12 months at.

At this time, we would 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 although.

Although Boston properties believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that its expectations will be attained factors and risks that should could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in yesterday's press release and from time to time in the company's fine.

Links with the FCC the company does not undertake a duty to update any forward looking statements.

I'd like to welcome Owen Thomas Chief Executive Officer, Doug Landy, President and Mike Labelle, Chief Chief Financial Officer during the Q and a portion of the call Ray Ritchey Senior Executive Vice President and our regional management teams will be available to address any question and now I'd like to turn the call over to Owen Thomas for his formal remarks.

[laughter]. Thank you Sarah and good morning, everyone I'm joining you today from BXP is New York Office, where I've been working since New York opened in June and have more recently been commuting on public transit.

New York City is slowly coming back to life with more open shops, and restaurants and are building census is over 15% and rising each week.

All of our markets and be X P offices with the exception of those in New Jersey, and Los Angeles are open at varying capacity limits set by local guideline.

Despite a challenging recessionary environment be X P continued to perform well in the third quarter, demonstrating the durability of our business in the quarter, we collected 99% of our office rents and 97% of rents overall.

We completed 811000 square feet of leasing, 40% being either new requirements or expanding existing customers.

And we increased our average net rental rates on our second generation leases by 20%.

We entered into an option agreement to joint venture City point, South a large scale multi phase development site in Waltham, Massachusetts that can accommodate both office and life science demand.

And we completed the previously described the acquisition of a 50% interest in the Beach City, a media center site in El Segundo.

Since quarter end, we signed a 200000 square foot 20 year lease with Volkswagen Group of America for their U.S. headquarters at our Reston next development in Reston, Virginia with the VW lease and previously secured anchor tenant Fannie Mae This 1.1 million square foot property is now 85% Preleased.

I'm proud of our team at be Xps resilience and fortitude in both assisting our customers and safely returning to work and delivering results for shareholders in a challenging time.

Well over 50% of our employees are opting to work in the office subject to local occupancy restriction.

Now moving to the economy, the course of the U.S. and global economic recoveries remain heavily impacted by the course of the pandemic.

New COVID-19 cases are hitting record highs in the U S.

Fortunately for BXP, New cases per unit of population in the states, where we operate remain at levels below the national average.

Well, we anticipate a vaccine will likely become available by year end. It is unlikely to be a magic bullet that immediately eliminates the pandemic given broad deployment will face issues around manufacturing distribution uptake and efficacy.

They are difficult to assess we think economic conditions for the first half of 2021 will remain sluggish, but expect a more pronounced reopening of the economy and return to the office in the second half of 2021 due to distribution of a backseat better therapeutics and more individual.

The option of health safety protocols as we all learn how to combat and live with COVID-19.

With many office workers still working remotely there continues to be much speculation not surprisingly about the future of work and use of office space.

To understand the current market environment, and contemplate future demand I will revisit the four key drivers of office demand I discussed last quarter, namely employment location density and occupancy or better known as work from home.

Job losses, and the slowdown in economic activity due to the pandemic have been and will be the most important drivers of office market conditions for the foreseeable future.

Recovery has commenced with almost 4 million jobs created in the third quarter and unemployment has dropped to 7.9%, which is 6.8 percentage points below the peak in April, but 4.4 percentage points above the low in February.

We are confident of economic recovery and believe our properties and markets will perform well overtime given their proximity to resilient and growing tech and life science demand.

Regarding location there continues to be speculation about companies moving from major major urban environments, the secondary markets or suburban locations to date, we have seen no evidence of pandemic driven movement, among our customer base to secondary cities or suburban locations.

On Densification. It is clear that the pandemic has reversed the trend of increasingly dance work environments as companies are spreading out their employees for health security purposes does.

Doug in his remarks, we'll provide case studies and be xps portfolio.

With many companies not back in their offices. It is impossible to quantify this trend today, but we believe the reversal of Densification will be a material tailwind for office demand over the longer term.

Finally on work from home, we remain convinced that successful companies will work in person.

It is increasingly clear to our customers and other business leaders that there are significant gaps in conducting business on a fully remote basis and.

In terms of creating and maintaining culture.

Creativity and productivity as well as Onboarding training and development again, Doug will provide several examples among our customers.

Following the pandemic work from home will become more accepted likely as a benefit offered to employees. However space savings cannot be achieved unless employee schedule their work from home days and utilized and utilize floating workstations when in the office, which could be more difficult with the type of workforce employed and.

Our premium assets.

Yeah.

Now moving to private equity market conditions for office assets transaction volumes are down 60% for the third quarter versus last year and 42% year to date.

Buildings in tech heavy markets with long weighted average lease term or selling for pre cobot cap rates and life science related assets are also in strong demand. However.

However, there's limited activity for assets with lease up and or rollover risk due to bid ask spread in pricing.

Buyers want a discount for lower rents and slower lease up and sellers believe in a full market recovery and can inexpensively hold on by refinancing.

Some of the fewer deals completed in the third quarter of note our GNS.

Genesis towers in South San Francisco sold for $1 billion, nearly $1300, a square foot and a four and three quarters cap rate.

This 780000 square foot two tower complex is 96% leased built for life Science, you said, it's sold to health care REIT. This deal illustrates the high level of liquidity available for life science related assets.

Reservoir would east in Waltham sold for 330 million to read.

The properties comprised of a 313000 square foot leased office building at 202000 square foot soon to be vacated office building that will likely be converted to lab views and land with development potential of approximately 440000 square feet assumed.

Assuming a land price of $80 per debt developable square foot. The buildings, one of which is essentially vacant would be valued at $575 a square foot.

In Santa Monica two for one Colorado is under agreement to sell for $166 million, which is $780 a square foot and a 4.3% cap rate.

This recently repositioned 93000 square foot property is 100% leased with a long weighted average lease term and is being sold to a domestic life insurance company.

In Reston Patriots Park was sold for 325 million or about $450, a square foot and a 5.6% cap rate.

This 724000 square foot asset is fully leased and sold to an asset management company BXP built and subsequently sold Patriots park into Fourq in 2014 at roughly the same valuation.

In the Bellevue, Washington bring district, two new buildings, comprising 540000 square feet long term leased to Facebook are under agreement to sell for 565 million to a fund manager pricing is approximately a 4.5% cap rate and a 1050 a square foot.

Moving to BXP capital activities last quarter I described a relative dearth of new investment deal flow due to the early phases of the pandemic and low refinancing costs. This past quarter, we've experienced a modest uptick in new acquisition opportunities and expect our pipeline to grow into.

2021.

So nothing is eminent we are actively looking at new investments with private equity joint venture partners.

We did complete an option agreement to become a 50% joint venture partner with a local developer in city point, South which is a 42 acre site supporting 1.2 million square feet in Waltham proximate to our city point assets.

The deal structure includes a favorable fixed land price with the option to close on individual sites in a phased manner based on market conditions, and our ability to secure pre lease commitments.

As part of this development will be we will be completing new interchange improvements onto the I 95 route 128 enhance.

Enhancing access to our entire Waltham portfolio well.

Well from already mature life science market has recently seen a significant increase in leasing interest from life science tenants and this site allows for the development of both office and lab properties. This investment provides a significant boost to our growing life science business and will create more life science critical mass for the opportunities we have also.

Already identified for potential lab development and redevelopment in Waltham.

We also continue to invest in our development pipeline, which currently stands at eight development and redevelopment projects comprising 4.3 million square feet.

And 2.4 billion in total investment the.

The commercial component of this portfolio is now close to 80% preleased with aggregate projected cash yield at stabilization of approximately 7%.

Our development pipeline is an underappreciated asset of BXP that we expect will add approximately $200 million to our NOI by the end of 2024.

This quarter, we placed into service to residential projects hub 50 House. The 440 unit residential component of our hub on causeway mixed youd mixed use development in Boston.

And the Skyline 402 unit multifamily asset located at the Macarthur Transit station in Oakland.

Both at both assets are heavily amenitized and have the highest relative quality in their local markets.

Initial lease up has been slow given the operating environment, but both assets will provide BXP NOI growth in future quarters.

And a final word about the investment opportunity and be XP shares.

Our office portfolio continues to demonstrate resilience with an outstanding base of credit worthy tenants across sectors.

With the future delivery of our leased development pipeline and recovery potential in our parking hotel and retail portfolios, we have a solid growth story.

From the peak in early 2020, our FFO per share is down 14%, but our share price is down 50%.

Our dividend yield has gone from 2.7% to 5.3%.

The xps current share price, our underlying asset cap rate is around 7%.

Private market cap rates as I described earlier are materially lower clear.

Clearly at our current stock price, we think the value story is obvious and glaring.

To conclude 2020 continues to be a challenging time for many types of real estate, including office as the pandemic continues to take its toll on the economy. However.

However, all pandemics and recessions eventually come to an end and we are confident and be xps and market position with long lease terms minimal near term lease roll over and strong liquidity to invest opportunistically.

DXP has the franchise capital and business strategy to emerge from the pandemic and recession with strength and momentum.

Let me turn it over to Doug.

Thanks, and good morning, everybody I think I might have missed heard what I said when he was talking about one of the asset sales, but the the building and near Colorado Center in La was $1700 a square foot not $700 a square foot. So if I Miss Miss heard that I apologize.

My comments. This morning are going to focus on our office in our life science leasing activity.

But first a couple of remarks on our ongoing operations. So as Owen said government and public health leaders continue to encourage businesses to work from home and with very few exceptions business leaders have not required their employees to return to the office.

Massachusetts was the first of our markets to pull back restrictions and while our office occupancy are allowed to be 50%. Our urban census has been pretty steady at about 9% for the last few months.

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

Virtually every tenant employee drives their own car to work the senses here is about 5%.

In Northern Virginia, the second market that relapse relaxed restrictions company.

Companies are actually required just to social distance and there are no limits to the occupancy threshold and employees drive to their office, we estimate our census is well under 15%.

At this time the return to work is not about transportation constraints.

And it's not about elevator constraints, either our New York City towers have the highest census.

About 60% daily and more than 23% of the people who have badges and our our CBD New York City buildings are going to work at least once a week.

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

While there were some urban retail street activity, we suspect it is more from local walkable residents and not from people coming to work every day monthly parking passes have not yet begun to rebound and transient parking continues to be pretty light.

If people are not coming to the office, then they're not paying for monthly parking and they're not shopping or dining in the areas close by our buildings.

We opened our Cambridge hotel in October and its running under 10% occupancy and we are simply trying to cover incremental operating expenses and put people back to work.

Room sales are predominantly leisure guests not business travelers and there are no food and beverage operations being offered at the property.

As youve heard or read from a lots of brokerage report market leasing activity is very light.

In the context of the comments that own I, just made and the continued uncertainty regarding the public health issues. This should be expected.

What I hope will be very encouraging for everybody on this call investors and analysts to here is the level of Boston properties activity right. Now this is what really matters for our performance in previous down cycles, our portfolio in our operating team have outperformed the market and we believe this is.

Happening again, I'm going to start with our Boston area operations.

This quarter, we completed a post could lease with Columbia Threadneedle investments for 83000 square feet at our Atlantic Wharf property on space that is currently leased and does not set to expire until the end of 2021 well.

While Colombia had targeted Atlantic wharf as a great option, we were actually not originally considered since we didnt have available space that can meet their occupancy window.

We were able to restructuring early termination of an existing tenant.

Who was expiring to accommodate the new tenants timing and we quickly completed a 13 year lease.

The cash rent on this lease will be 30% higher than the expiring rent fully grossed up and there are future rent increases. This is important because even though the markets are seeing higher availability and rent concessions may change our leases continue to have significant embedded growth parts.

Securely in our Boston and our San Francisco portfolios.

In suburban Boston, our life science activities continued to accelerate we are close to completing a lease with a single tenant for the entirety of our life Science conversion at 200 were at West Street 138000 square feet, we've actually grown the building.

To preempt. The question, we have spent about a $140 a square foot upgrading the beef building for lab used and if you amortize a portion of the lab T.I. against the lab rent, we will achieve an incremental return on cost of about 10%.

The base building is just being completed and this tenant will be occupancy in mid 2021.

We are in the final stages of completing a full building as extension within early stage life Science Company at 100, Hayden Avenue 56000 square feet, which will kick in when our direct lease with desire pharmaceuticals expires in mid 2021. This one only has a 40% increase in rent.

We also have an LOI with a healthcare company for the entirety of our 63000 square foot building at 195 West Street in Waltham.

As Owen said, we have a 1.2 million square feet joint venture at City point and we've also put our plans together to develop 180, Citypoint 310000 square feet as the life Science building. We're also studying the conversion of some of our Winter Street office assets in Waltham to life science and a person.

Permits for additional life science or office buildings on existing land holdings in Waltham and Lexington finally.

Finally in Waltham.

We are close to completing a 75000 square foot lease with a technology company that will bring 20 Citypoint office space to 100% leased that was a building that was put in service earlier this year.

Turning to northern Virginia. This quarter, we completed two additional leases with Microsoft to expand and extend their premises in Reston Town center. They leased an additional 45000 square feet and extended to 2028 expiration on 164000 square feet to 2033.

Weve also completed another 96000 square feet of leases eight transactions during the quarter there we.

We are in negotiation on five more leases totaling 65000 square feet for vacant space in the town Center.

As Owen said, we signed our 20 year lease with VW at rest a next.

And while we had a contract Fannie mae's premises in order to accommodate VW, we're now 85% leased and both of the tenants have right for short term growth.

Just as an aside if you looked at our development properties and include the leasing at 200 West Street. The office portfolio lease percentage will be 80% and this includes dock 72 at its current leasing up 33%.

Moving to New York in.

In New York on July 1st we completed a 110000 square foot 15 month extension at the General Motors building with a tenant that in early 2022 exploration.

It was negotiating for relocation and COVID-19 resulted in a reevaluation of that decision.

The General Motors building is our most active single asset in the entire company. Since June 1st Weve had 15 unique in person tenant tours for tenants ranging from 3000 square feet to 40000 square feet and we converted two to leases for comparison purposes, we had about 20 tours in our entire.

Boston CBD portfolio and 16 at Embarcadero Center since June 1st.

We've made some progress with SNS last and Taylor at Times Square Tower, we expect them to continue to lease about 150000 square feet of office and retail space with cash rent commencing in January of 2021.

We completed a one year extension for a 70000 square for tenant at 510 Madison, bringing their exploration into early 2023, and we've done four small tenant transactions. The 250 West 55th Street totaling 17000 square feet.

Two weeks ago, we completed the full floor post cobot lease renewal at 601, Lexington Avenue for 30000 square feet.

In Princeton, we've seen absolutely no New York City migration tenant inquiry, but weve completed five transactions, including two expansions for about 40000 square feet and we have an aggregate of about 100000 square feet of active conversations at Carnegie Center.

Our California properties have been subject to essential worker only restrictions until yesterday in San Francisco.

In Santa Monica, we continue our renewal negotiations with our 2020 and 21 exploration.

In the Silicon Valley, we signed in Ela why for 68000 square feet with a life science tenant to utilize available office space at six one gateway in South San Francisco, beginning in the fourth quarter of 21.

Our gateway JV is planning the conversion of 651 Gateway, which is the 293000 square foot office building to lab and we hope to start that construction in late 2021.

We are finalizing lease with a 31000 square foot life science tenant in our North first buildings downtown San Jose and Weve also seen life science tenant interest for our mountain view research properties.

That are single story structure is that in the past that had both wet benches and clean rooms.

Activity at our San Francisco CBD assets were just under 96% leased and have 415000 square feet of tenants expiring in the remainder of 20 and 21 has been greatly impacted by the governmental restrictions as I said, which were lifted yesterday and parcel basis.

The third quarter only produced three transactions totaling about 23000 square feet at Embarcadero Center. However, we have 114000 square feet of new near term expirations that we have gotten contractual commitments on renewals that have been exercised and they are simply subject to a rent reset.

The expiring rent on that 114000 square feet is $61 a square foot fully escalated gross.

I want to end with a brief comment on space utilization since we've seen a number of read analyst make some assumptions about reductions of office space utilization going forward largely due to work from home.

Im not going to give you our opinion, rather I'm going to provide a series of decisions that our customers are making in our Boston market post cobiz.

First.

One of our large tenants in Cambridge had the contractual right to give back a 190000 square feet of office space in July.

The right expired unused.

Second.

One of our large hundreds of thousands of square feet tenants in Boston.

Has completed a space cleaning process as part of a total reconfiguration of their premises that takes into consideration covert planning considerations and their seat count and that premises is down 30% pre.

Pre from pre cobot, 30%.

Third.

Columbia Threadneedle was downsizing from 156000 square feet pre kobin.

They signed a 13 year lease for 83000 square feet, which was in line with their original search requirement.

Fourth.

We are trying to find space in our back Bay portfolio for a 75000 square foot private equity firm and we are actively asking tenants. If they would consider early terminations. This tenant is currently leasing 60000 square feet.

Fifth we're managing the build out of a large multi floor installation for technology tenant in one of our Newbuildings. We continue to move forward with the space build out on the entire premises as planned.

Six we have a 70000 square foot technology and tenant in Waltham with a 2031 exploration.

We've made a proposal for them to really relocate into 100000 square feet in June.

With an expectation that they'll take another 100000 square feet over the next few years.

Finally to show I'm, not I am being objective, we have a 77000 square foot consulting firm as a tenant in the CBD portfolio with a June one 2021 exploration. This entity is part of a large corporate merger that was announced in late 2019 pre co would we were discussing a two year extension today.

Having no discussions and it's unclear if they will do anything prior to their lease expiration.

Despite being in the mid of this could induce recession and the corresponding slow repopulate re population. We continue to have leasing activity and tenants continue to make long term space commitments in previous down cycles as I said before our portfolio hub has outperformed and this.

Will happen again this concludes my remarks, Mike.

Thank you Doug.

Hello, everybody good morning.

I'm going to cover the details of our earnings for the quarter and also provide some insight into our expectations for the fourth quarter.

Some comments on how we are thinking about 2021.

For the quarter.

Reported FFO for the third quarter of $1.57 per share.

Earnings were in line with consensus estimates if you exclude the six cents per share of charges for the write down of $6 million of noncash accrued rent and $4 million of accounts receivable.

The $10 million of tenant write offs this quarter were substantially less than last quarter and once again, they were focused in our retail clients and particularly in particular, our theaters and health clubs are not demonstrating the ability to pay rent consistently and we've elected to write off unpaid rent and recognize all rent going forward from these two cats.

Igor is on a cash basis.

Our office portfolio remained strong and we continue to see no meaningful credit weakness among our office tenants.

As a reminder, the office portfolio comprises over 92% of our current revenue and collections continue to be strong at 99% of our third quarter billings.

Similar to last quarter, we have provided a page in our supplemental financial package that describes all the cobot related impacts to our portfolio.

Occupancy this quarter did declined by 90 basis points as we expected primarily from a known tenant move out of 234000 square feet in Princeton and a 100000 square feet of Transitionary vacancy between tenant in Reston Town Center, we've already signed leases for this space and rest and we expect.

Good to be occupied in 2021.

We partially offset the impact of the occupancy decline with revenue growth from a full quarter of contribution from our 100% leased 17 50 President's way development in Reston that we delivered in the second quarter and.

And $2 million of growth in our parking revenues parking revenues grew by 15% from last quarter and while this is on a small current base. It is a good sign of increases on our building census, and mobility in our cities relative to the second quarter.

I want to start my discussion of our expectations for the fourth quarter and 2021 with comments on our leasing exposure for the rest of the year.

We report 1.6 million square feet of leases expiring in the fourth quarter.

We are actively working on renewals for over 525000 square feet and we currently have approximately 400000 square feet of space that we anticipate will be vacating.

In addition, we have 675000 square feet in this grouping of tenants, whose leases we have terminated.

They have not yet vacated their space. So they are still in occupancy.

We expect that these tenants will remain in place until a resolution is reached.

We have not been recognizing revenue from these tenants in Q2, Q3 or Q4, so theres really no financial impact until we either negotiate a lease amendment such as within Taylor or we get the space back and obtain a replacement tenant.

We expect our year end same property occupancy to be between 90 and 90.5%.

We also will be adding dock 72 to the in service portfolio next quarter, which will negatively impact the headline occupancy rate, but have no impact on our annualized run rate.

We expect these changes in occupancy will result in a portfolio in NOI run rate for the fourth quarter that will be relatively flat to the third quarter inclusive of the $6 million of accrued rent write offs.

This assumes we have no new charges in the fourth quarter.

Looking ahead to 2021, we have 580000 square feet of signed leases in our same property portfolio that are not currently in our run rate.

We expect that these tenants will commence occupancy and revenue recognition in the first quarter of 2021.

This includes 170000 square feet of 399 Park Avenue, which will reach a 100% leased.

And 40000 square feet of space at the GM building.

Including these leases are New York City portfolio is 97% leased and it has moderate near term rollover exposure outside of in Taylor, which Doug described as.

As a reminder, we're currently recognizing zero revenue from in Taylor, So their extension and a portion of their space will add to our earnings in 2021.

This group of signed leases also includes our 125000 square foot lease with BG and 140 Kendrick Street in suburban Boston and the next phase of our lease with Microsoft and rest in the totaled 165000 square feet.

We also have deliveries in our development pipeline that we expect will add to our revenue in 2021.

We expect to commence revenue for our 200000 square foot lease with and why you at one five Ninetys 50, Threerd Street in the first quarter.

And later in 2021, we expect to deliver our 630000 square foot hub on Causeway office tower that is 94% leased and our life Science lab conversion at 200, West Street, and wealth and that Doug described.

Outside of the office portfolio, while we're encouraged that our hotel has reopened and our parking revenues are growing we still expect a slow ramp up from these areas next year.

The other item to keep in mind for 2021 is in our interest expense line.

We expect to repay our $850 million, 4.3% unsecured bonds in the first quarter of 2021 with cash.

We do anticipate lower capitalized interest next year as we deliver developments, but the net impact is that our interest expense should be lower in 2021 than 2020.

So to sum it all up we expect our fourth quarter funds from operations to come and closely aligned with this quarter. This assumes no additional tenant write offs for 2021, we expect to return to earnings growth. We have signed leases that are coming in that will add revenue, we expect a positive mark to market, particularly in our Boston and San Francisco leasing.

We have several leased developments delivering and we expect to benefit from lower interest expense.

That said, we do have a manageable 6.5% of the portfolio subject to expiring leases next year.

We're working on renewals to cover many of these leases but.

But for those that vacate we anticipate an active marketing program that will include white boxing vacant space and completing turnkey improvements in certain cases and this could result in modestly lower occupancy in 2021, as we wait for tenant spaces to be built out to commence revenue.

Well, we would love to provide earnings guidance as we have in the past on this call. There remains significant uncertainty as to the pandemics linked in severity and the impact on the overall economy, we hope to return to providing detailed forward looking guidance again in the future.

That completes my remarks.

Operator I'd appreciate it if you could open up the line for questions.

At this time I would like to remind everyone. If you would like to ask a question press star one on your telephone keypad.

Do you think you speakerphone, please pick up the handset before asking your question well.

Pause for just a moment to compile the queue any roster.

Your first question comes from the line of Derrick Johnson with Deutsche Bank.

Hi, good morning, everyone. Thank you.

Just on the work from home trends changing the dynamics of the business. We do have strong historical data on the cyclical impacts of recession on offices.

But there does seem to be some evidence of the secular shift here as well.

How do you view and could you address are there the possible work from home secular risks and office based as Matt and this is specifically.

As you speak directly with escalators.

So on your one of your Dart and yes, why don't I.

Well as I mentioned in my opening remarks, we continue to think that successful companies will be primarily in will primarily conduct their business in person.

The customers that we talk to the other business leaders that we talked to I think it's becoming increasingly clear to them that they're missing something with everyone working from home build.

Building culture, creating strategy I hear a lot.

Loss of productivity loss of creativity, and then of course, all companies hire and onboard new employees. How do you do that when your work from home. So I think the importance of the in person workplace is clear.

That being said I do think there will be more work from home.

Offered to employees as a benefit in.

As I mentioned in my remarks, I think for companies to save office space as a result.

Employees will have to schedule our work from home not everybody can be out on Friday.

And then when the employees come to work and they'll have to have flexible workstations and they won't be fixed and.

We do have premium assets and the kind of workforce in those assets may be less inclined to want to participate in such a program in that manner.

So that's the way we see it shaking out at this time.

You know I would I would just add again I just went through in our Tesar Boston market.

Six six litter.

Literally.

An immediate current decisions that were made.

That that refuted the the whole notion of work from home, reducing the utilization of office space. Okay. I mean, those are just fat those effects those aren't a a comment by a pundit in a on it or a talking head in either the wall Street journal or on some.

Evening news cast.

Just make the other following comment which is in that in 2017.

There were a whole host of.

Future, if and pundits who were describing the demise of the single vehicle utilization and the fact that autonomous cars were going to fundamentally transform.

The way people were going to buy buy in on cards and.

And that our parking garage is we're going to basically become derelict structures with no utilization.

I would tell you that I think a lot of the thinking that was behind that was just simply wrong and so I think it's fair for people to describe their views on what work from home might be but I think that there is another side of the equation, which own described and we were pretty strong believers in the fact.

People are going to be coming back to work in volume and they're going to be using their office spaces and quite frankly, and you know in 2022, we'll know what the answer is.

Thank you guys that's great.

Switching gears. So you completed two developments in three Q both residential.

Obviously, a small part of your business, but given the environment. How do you anticipate lease up and stabilization timing and your thoughts on achievable development yields versus initial underwriting and thank you.

So I'll I'll give you my perspective on this and when you can you can chime in the.

The lease up is a lot slower than it otherwise was because.

At the moment people are not moving around in significant ways.

In urban locations they are actually because as you've seen there has been some out migration.

We expect that the lease up is going to be prolong that if we thought we were going to be fully leased at the hub on causeway in late calendar year 2021, it's going to be in 2022, and similarly with Skyline. I think we had 18 month to 24 month lease up and it's going to be more than 24 months.

I don't know relatively speaking how much stress or is going to be on the rent, they're really coming in the form of free rent for the most part in urban locations and I think our yields are going to be lower our yields are going to be 20 basis points, lower or 50 basis points lower it'll depend on that Lisa.

Yes, I would agree with obviously with that answer and I would just comment that the both of these products are.

The best or among the best in their marketplace in terms of their quality amenities and offering and I think they will compete very well as this recovery that Doug described occurs.

Your next question comes from the line of Nick Yulico with Scotia Bank.

Great. Thank you I guess can you might just giving a bit of perspective on what you're seeing rents in your markets. You know how much how much are they down I mean I think this is one of the big questions. Everyone is trying to figure out is what is kind of the fall out and when it's been so far and.

Things could get worse as leasing activities.

Not really picking up here in the back half of the year.

So the answer to your question is nobody knows.

There are there are simply too few transactions to have occurred to to really have any sense and it's and I don't think its because there is not a pent up demand for leasing activity I just think it's because the health crisis has just prolong people's decision, making I mean, we are having success leasing space in three out of the.

Five markets that we're operating in and as I described in Boston, but urban and suburban and northern Virginia as well as in New York City and so so I do think there is some activity, but it's not enough to quote unquote determine where market rents are going to be more sublet space on the market and thats going to have an impact in the short term on rent.

No rate because as you know sublet space generally gets discounted and that discounted rent is going to impact the marketplaces, but we're just we're just not in a position where we can say how much rents are going to go down by and quite frankly in a couple of our markets were not sure they're going to go down I mean, I don't think they're going to go down at Cambridge, Massachusetts, I'm not sure they're going to go down in Reston, Virginia, but.

They're going to be places, where there's going to be some pressure I do want to make one really important point, which is market rents on average don't derive the growth of our NOI on a on a on a medium or short term basis, but occupancy drives it whether our rent.

Our up or down by five or seven or 10%.

Really isn't impacting what's going on from a total revenue perspective occupancy is what's driving that and if we are able to as we have in the past drive occupancy in a weaker market because people want to migrate to better buildings. I think we will do on a relative basis, well and we will not have a significant degradation are rare.

Good news because of market rents are going down.

Okay. Thanks second question is just about kind of strategic thinking here you know you talked earlier on about.

Value not being reflected in your stock price is at a 10 year low it's not just the Boston properties issue, it's happening to other office rates as well.

Yes, Im wondering what point do you guys start thinking about doing something.

More strategic look to joint venture assets think about a stock buyback I mean, one of the points. We are hearing is that longer term lease assets with good credit tenants are selling for strong cap rates in certain markets right now so.

What point do you start looking at pieces your portfolio on either joint venturing them or outright selling them thinking about recycling capital not just into development, but maybe into your stock price or or into a stock buyback doing something along those lines. Thanks, Yeah. So let me let me answer that question.

Which is obviously an important one both from a use of capital and then a source of capital and use of capital. So let's start with source of capital. So we have been selling assets. We didn't talk about it on our opening remarks, because we don't have anything active per se this quarter, but year to date in.

2020, weve sold over $700 million of assets. So we've been selling and I agree with what you're saying I think we will continue to do that selectively with selective assets.

One of the issues that we have faced in the past with this has been all of our major assets have a very significant tax gain in them. So if we sell them, we can't keep the capital or we can keep all of it and we have to make either a regular or a special dividend as a result, but.

Our income has dropped in our dividend has been flat and so we can include some of these asset sale gains into our regular dividends. So we don't face that issue now. So again, we sold 700 this year and I would anticipate that we will continue to be so.

Selling assets at a little bit more elevated level in the next few next few quarters in terms of use of capital, we clearly think about a buyback and we met and we.

Think about in the in the context of the following one.

How much of a difference would it make to our earnings to what would the rating agency impact be depending on size three what's the course of the pandemic and what our needs for capital going to be in the coming quarters and fourth what capital do we want to allocate to new investment opportunities.

I mentioned, we're seeing more of that this.

This past quarter in my my expectations is that will elevate further.

We have brought in joint venture partners to help Us fund new investment opportunities, which will help.

But given that balance of all those factors you know to date, we have elected not to use our capital repurchase.

Okay. Thank you own.

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

Hey, its Michael Bilerman here with Manny.

Oh, you gave a second half of 21 sort of outlook for return to the office.

And just in which is.

Pearce I think probably more realistic at this point given where the densities are.

You sort of see things evolving between now and then and what are the sort of key.

Indicators that you're looking for.

To that point and do you feel like Thats a.

And outside date that perhaps come earlier or do you view that as something that maybe could bleed into 20 to 22, yes.

Michael the number one thing that we're following to try to assess when the recovery could occur is what's the course of the virus what are the what's the daily infection rate are we beating this thing I think thats the most important factor and.

So as we think about the 2021, our assumption is that that a vaccine will get approved and it will be and it will work for many people and so then that vaccine has to be.

New doses have to be manufactured it has to be distributed there may be people that will take the vaccine. It may not work for everyone, but it's going to take a while for that to work through the system and then look I'd I think we all need to follow the health safety guidelines more carefully as a country I think that.

Why were seeing the.

The virus.

Blooming in parts of the country because the basic health safety protocols are not being followed and I am hopeful that more and more people will do that and that will help as well. So it's a hard thing to assess our best guess or gas.

Gas or judgment at this point is that it is in the middle of next year, but to answer your question. It could it could happen faster yeah, we certainly hope it does.

So to get delayed I think it could but our best case in thinking about the future or.

Most likely case would be sometime in the middle of the year.

The new organization as well as a lot of other sort of office companies, obviously are coming back to their offices, a lot faster and a lot more denser than other corporation.

Got shared some of the examples of some of those leasing up and down over the course of this pandemic showing that there is certain tenants that are willing to.

Take up space, but.

What are you in your discussions with other leaders what are they looking for.

In terms of elements to make it much more of an opt out.

Rather than an opt in and what can you do as a landlord to help your tenants and I think about a lot of the shopping center landlords that have the restaurant tenants clearly not doing as much business and they realize they got to be partners with them.

Help them stay in business and so what can you do or is there any program you're trying with the tenants that are more willing to.

Come back Yeah, Let me, let me start and I'll turn it over to Doug for any additional color.

So the couple of things I would mentioned first of all we tried to have and believe we have an industry, leading health security plan that we put together with outside medical experts, we posted on our website, we've met with hundreds of our customers we don't want the.

Coming to the office building to be the obstacle for someone or a company to come back into the office and we don't do not think it is.

Clearly at the the census levels that Doug and I described in our remarks I I don't think the offices the obstacle for people coming back to work.

I continue and then the other thing that we are doing as a company is trying to set. An example, we're all in our offices were using public transit were not all but many of US are in our offices were using public transportation knock on wood, we're not getting sick.

We're trying to set an example, but I do think as business leaders look at this situation and look at this decision today. It kind of goes back to my answer to your last question, which is what's the course of the virus how safe is it how how what are the infection rates in my locality and can I ask my employees to go back to work.

Given that there may be some health security issues at some point in the chain of the commute.

And Michael obviously that the difference between retail and office is that our customers are not suffering the gross decline in revenues.

From their businesses, because they're not quote unquote altogether at the same time right, they're clearly not as productive they're clearly not as effective they're clearly not growing in many cases, but.

But they are not suffering like a restaurant or a soft goods retailer who is is dependent upon physical traffic to basically make a revenue.

The issues issues that leaders I believe are facing are there are still issues associated with schools and unfortunately, thats not something Boston properties or any private company, Ken Ken Sol and until it's very clear that the school systems across the country private and public.

Our able to function in a quote unquote.

In person manner, theres going to be a hesitancy of business leaders to quote unquote demand that their people come back to work. That's just it's just not going to happen.

Getting back to sort of your first question about what could happen that would be better.

If the drugs are really effective I believe that that they will get a higher utilization rate in terms of people actually being vaccinated. If there is a very very high effective rate if the if the drugs aren't that effective I think there's going to be a slower take up of those vaccination so depending upon the efficacy.

These things you could see it surprised one way or the other relative to how quickly people want to be vaccinated and when those people are vaccinated help how much more comfortable they feel getting back out in about again with social distancing and with masks right as precautions, but where they feel much more comfortable being active members.

Our society.

Okay. Thank you.

Your next question comes from the line of Alexander Goldfarb with Piper sand.

Hi, good morning.

Thank you.

So just a few questions first Doug you mentioned that the leasing activity whenever you're putting in the water at the GM building I'd say, maybe keep putting it in there, but most struck by your average lease term or seven year deals speaking to brokers in especially in New York just hearing a lot.

Short term deals tenants just doing short term extensions, but it sounds like your deals this quarter and what you are talking about are more long term deals. So can you just give us more color. If this was just sort of nuance in the cadence of leasing work there something particular in the tenants that youre discussing with where they feel more comfortable doing long term b.

Versus short term wait and see.

I think that the profile of our customers are companies that have a long term view that their office space is very important to them and that the pandemic is a short term phenomenon that is not going to impact their long term space utilization trends and so they are making long term decisions and.

And Fortunately there are a lot of those customers across our marketplaces that we have relationships with and as I described with Ameriprise I'm Columbia Threadneedle I mean, we know there is a company that didnt have to come to us and we literally manufactured space for them and they were thrilled to be in our building so pardon.

Part of it is that the type of the customer and part of it is our operating prowess. This is what we do and we try and do these things all the time through good markets and bad markets. We we take what the market is giving us relative to rental rates and concessions and we do deals.

Okay and then the second question is out in California, You mentioned, San Francisco is now, allowing people back in the office. It sounds like outlay is still closed some would be or some of the other companies out there have talked about the issue with rent collection with the Invecture more times, where tenants feel like it's sort of voluntary to pay rent, but maybe you could.

Just give an update on what's going on with sublease in San Francisco and then just general office trends. If in fact people are still working from home in large part how that's going to shake out and and where you are and what you think the longer term impact is from some of these eviction moratoriums that seem to get extended each time a deadline approaches.

Yes, So again I think going described that Mike described at our collections for office tenants were almost 99% this quarter.

Art this month and that continues.

We have not had a a any pickup and sort of conversations or concerns relative to our collections with our office tenants and so we're there we're not having eviction problems with our tenants on the commercial side with regard to sublet space in San Francisco. So if you go back to 2001 sublet space as a percentage of the total inventory.

I think was in the mid Fortys.

And then in in owned nine during the great recession. It was sort of in the 20% range and this time, it's closer to the mid Fortys. So.

So I think it's probably going to feel more like the dot com than it is the great recession relative to the amount of sublet space Thats available I think the difference is that the health of the companies right now are very strong and so it's a question of when they're going to be prepared to start making business decisions again, when they have some degree of comfort about when they can get their people back to work.

And when they can start hiring people in a significant way when they're going to want to have them altogether and that's the that's the $64000 question in San Francisco, which is a technology dependent market. I mean, those companies are relatively speaking doing really really well and so we're optimistic that when we get through the the pandemic related issue.

Is there is going to be a pickup in activity in San Francisco.

Thank you.

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

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Thanks, Good morning, I guess first I wanted to just touch on the life Science. Doug you guys have spent a lot of time highlighting a number of other new parcels you picked up conversions.

Just maybe kind of big picture give us a sense for kind of where our life sciences today.

Where do you think it's going in Boston in particular, I know that there is a lot of space either under construction or to be built you may be part of that pipeline, but what concerns you have about the increasing supply in life science.

So I think today were Mike were about 6%, 6% of the company is leased to life science companies.

And so look the I think the reason that everyone is is I think focusing on life science at the moment is because there's demand right. It's about the demand that and particularly in certain key markets, Cambridge, Waltham, Lexington, and Boston now being probably the.

Pinnacle of that in the country.

And so we have an enormous number of early in life and late stage companies that are moving forward with their business models and that are looking for space and so it's that desire for the tenants to want space that is creating the opportunity to build those buildings and everything we're doing is we're saying okay were going.

To take our office buildings, and we're going to design the kind of office building, we want to design and then we're going to make sure that that building also.

Has the infrastructure from eight to be AC and from a loading and from a chemical storage and new neutralization perspective that will allow for easy life science utilization at the same time and then depending upon what the tenant wants we will build a life science inflation oral those profit installation and we'll figure that out on the go.

And generally.

So as we I think scene.

We're quite competent and capable of doing this and it's really a question of tenant demand that is going to derive which way the product mix goes.

There is clearly a lot of companies that are looking at doing these types of conversions.

Whether they're all be successful your bet is as good as mine the locations are becoming a little bit more.

Disbursed.

The echo centers of Cambridge.

It is I think the tuck in most people's minds built out although we are actually knock on wood trying to get a significant amount of new permits.

Through the city that will allow us to expand our portfolio in Kendall square, but so people are looking at as far as they're looking at Watertown at looking at Somerville are looking and south of the city of Boston and then they're looking Waltham Lexington, and the Waltham Lexington, I think is probably where we're focusing most of our attention and we control land out there be.

We know the brokers, who are representing these tenants and where these tenants likely want to be on and they want to be in those western suburbs. It's also more affordable and there's a there's a significant amount of demand that's out there which is what we're trying to.

To serve.

One of the additional comments.

From the Boston region that we're finding is that we clearly.

Have the competitive advantage with our basis not only in land or in the building. So we're converting and the strategy of.

Taking these incremental pieces of buildings that we already own has really played out and what we're hearing over and over again from these companies is predictability is so incredibly important to them and that gets back to doug's comment on operating prowess and then our ability to not only get the permits in these existing assets that deliver in a very.

Very predictable basis, it's been said over and over again recently that this is so important to them. So it plays well for our strategy in Boston.

Okay, and just a quick follow up is there any sort of update on your your joint venture with Alexandria in South San Francisco.

Well I think I made two comments. So first is we have a tenant and we signed a letter of intent for with an office tenant for the 601 Gateway building to take about 70000 square feet of space and in our plans are the first thing I think we are going to the venture is going to do is they are going to is there going to vacate 651 gateway and make that building into a lab building. Its currently an office building so I think that.

The first thing and then Theres a building that is under under.

Design for I think its 180000 square feet.

Which is the the next building, but we'll probably be in a position to deliver 650 wind at the lab building before we.

Get that other building underway.

Okay, and then maybe a question for Mike just I wanted to circle back deliberately you talked about revenue recognition.

I think you said it was 581000 square feet starting in one Q 21, and I know you have leases expiring next year, but what is the average sort of or average rent on that roughly 600000 feet that kicks in and 121.

Well the reason I gave you kind of where its located.

Is to provide the.

Some insight into what that is without giving you the exact rents, but I mean, a 170000 square feet is that 399 and 40000 square feet is at the GM building. So those are rents that are you know those.

Those are high rise buildings right. So those are close to a $100 road certainly over $100 for the GM building.

And then the other two big slugs of that is suburban Boston, where the average rents a room Boston is probably the mid mid Fortys high Fortys.

And Thats.

The 125000 square feet and then the rest in rents are right around $50 square foot, where again, we signed the big lease with Microsoft for 400000 square feet last quarter and it goes in phases. So a portion of that went in in the second quarter 165000 square feet of it is going in the first quarter of 21, and then I think is another.

50, or 60000 square feet that goes in later in 2021.

And that's all kind of in addition to the other renewable we did with them this quarter, which was 100 and about 160000 square feet and then two incremental extent expansions.

Which was a 45000 square feet and one of the Freedom square buildings and then the basically took all of one of the discovery square building. So the lease we mentioned in our press release was 186000 square feet and that was basically them extending long term and then taking we left additional floor. They didnt have in discovery square.

So thats been quite successful those so those expansions.

Which.

Went into place this quarter again, the rents in reston or right around $50 square foot. So that was intended to give you some insight.

Into the impact from those deals.

All right. Thanks, and then as the Athena 150000, but that's not part of the 581 that would be in addition to yeah. That's not part of the 581.

The expectation is hopefully we'll be able to get that deal signed it is not signed yet it is under discussion.

But we think they want to stay in the building theyre going to contract.

But probably 150000 square feet.

And then they are going to continue to take 150000 square feet on kind of a medium term basis with no kind of out of pocket costs for us so it's beneficial to us.

So I'd say the rent is a little bit below what we would otherwise get for that building, but there is no costs.

And its medium term and we're keeping occupancy so beneficial to us and I think that they should start paying rent at the beginning of 2021 and right now again, we're not recognizing any revenue for any of that space.

Got it thanks, that's it.

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

Great. Thank you.

You commented on the distribution at a 5% yield.

Can you guys just discuss the safety of that 5%.

And as we kind of work our way through the pandemic.

Risks that it goes lower Haven opportunity then it goes higher.

So you touching on the dividend, Jamie yes dividend coverage. So the dividend coverage rate is gone.

The two 110% the last couple of quarters, because we've had these rent deferrals that weve done.

That it affected our cash NOI, our parking in our hotel or obviously way off.

And then this quarter, we had a little bit occupancy degradation on top of that.

And as Owen described we think that this is going to continue.

Until these parts of the business start to improve.

And then our development starts to come in line.

And what we're doing is we're selling some assets.

Gains in them and were able to you know.

Be comfortable that we're maintaining our regular dividend without having to do a special dividend payments would kind of opportunistically doing this.

So if you include the gains on sales, we've got plenty of cash flow.

Cover our dividend, there's no kind of concerns with that we have no concerns at this point with our dividend and as you look further out and you look at the development pipeline coming in and the income that that is going to create in the cash flow that is going to create.

View is the oil.

In future years, we are going to be back to increasing our dividend.

So thats done there's no kind of view here at this point that.

We're going to reduce it.

Okay.

And then it was helpful to hear thank you.

That 15% increase in parking quarter over quarter are there any other line items that you can talk about sequentially that kind of give a picture of where things are heading any they got worse there any they got better.

So I would just I would just say Jami. This is Doug that so look so the hotel in the parking are unlikely to improve materially relative to where they were in 2019 in the first half of 2021, that's our view.

And again the parking revenue is driven by two things monthly.

Monthly Parkers, who are office tenants, who are coming to work a significant portion of the week.

And transient retail.

In Boston and in Cambridge, and in Washington, DC for people, who are enjoying the urban nature of those cities and our view is that the first half of 2021 is going to be a lot closer to how it feels today that it felt in 2019.

Again, we talked about the health issues, and we talked about Thats really whats leading our economic.

Viewpoint and.

And so we're we're while you may see sequential increases were down by from from such a low bar, it's not going to be a material difference.

And again, we the hotel was closed in the second quarter and it was closed in the third quarter and its going to basically be breakeven from an operating basis in the fourth for the fourth quarter of 2020, and probably the first quarter of 2021 again, because there's just no business travel so I don't people should anticipate and it.

Should not be a surprise to anybody that those line items continue to be some materially impacted by whats going on from a covert prospective but when they come back they are going to come back really strong and the question is when.

Okay and then finally, we get the question a lot of just you know if people were to.

Reduce their office space, what kind of impact is that to their total operating costs.

Can you just provide some color maybe from the conversations you have had with tenants about how much of a cost savings it really could be to their bottom line.

We have never had those conversations directly with a tenant I'm I mean, we see from all of the tenants that are public companies.

How much their their rent is as a portion of their.

Gross revenues or their gross margins and it's not very material with the financial institutions in the asset managers I mean, you know there there it's immaterial.

Probably under 5% with some of the professional services firms. They have two costs they have payroll and they have real estate and my guess is that payroll is vastly larger than their real estate.

On a relative basis, but it's a lot easier to quote unquote reduce your head count or your occupancy cost than it is to reduce your payroll right. It's just it's the emotion associated with that so I don't think that very many companies are thinking about utilization of space as a way to quote unquote.

Materially changed their margins unless they're in trouble because the recession has dramatically reduced their overall revenue and then everything is on the table and it really doesn't matter how much one is up the other this looking to shed costs wherever possible.

Okay. Thank you for that.

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

Okay, asking the questions and all the others. So far just maybe building on one of the life Sciences questions.

Obviously as you highlighted a lot of interest out of the mine.

On the on the private equity side had been recaps or potential sales reach.

Right and other SEC to Devops, you've been very active I'm, just sort of wondering where the footprint is today.

Enbridge, how you're thinking about you've talked about conversion than development. How are you thinking about act.

Potential acquisitions in light of the comment you made about your pipeline building.

And or potentially growing the life science piece of business in other markets. So.

Vikram I'll start and Doug and Mike, maybe you might want to jump in.

So as you know in terms of our current footprint as you heard about 6% of our revenue comes from life Science tenants today, we have about 2 million square feet of redevelopment opportunities in our existing portfolio. Some of which is already underway and then we have now about four and a half million square feet of new debt.

Element opportunities all of this is under control.

Some of it through option and as Brian mentioned, it's all on what I'd call the port.

The basis was established prior to all of this life science.

A fervor that's in the marketplace, so thats a huge benefit to us.

So we feel that we can materially grow our life science presence as a company.

Executing well on the opportunities that we already control and Boston and those opportunities are primarily in Boston and San Francisco, which represents the majority of all of the lab and life Science science space in the country anyway.

That being said, we're not blind to new opportunities and there are a number of them out there and we are looking at them and there is certainly a possibility that we could add to our portfolio maybe even in a market where we are currently operating but do not have a life science presence and were considering things like that.

But again I would make the point our life science business, we're going to grow based on the assets that we can currently control.

And then.

Just hoping to get more you mentioned from a value perspective higher quality buildings are trading at prequalified levels.

But where there is more work or lower quality, there's a big beat us just wondering kind of what you're hearing.

Terms of who those potential buyers are for that second category and is there any sense you have of what the actually what the bid ask just maybe.

It gives a sense of where values for certain types of properties School book.

Good months, yes. So.

First of all the assets that are trading if you looked at that list that I went through there too they are either want to in one of two categories, they're either life science.

Our life science related or are they have a long weighted average lease term in other words, there is no leasing risk in the property.

So buildings that have leasing risk.

510, 15% turnover per year or have some existing vacancy buyers are going to assume lower market rents in most in many of our markets and probably slower lease up given the volume of leasing activity is less.

So owners of those assets.

And when you do that underwriting that results in a discount to the value that it was pre cobot win win assumptions about market rent and the velocity of leasing were higher and.

And I do think a lot of owners when they are faced with that decision or they are going to say well I don't want to sell it now I believe in the full recovery of the office market and interest rates are very low I'm, just going to refinance that hold on so we just don't see that many trades and I think vikram. So to answer your question I don't think there is that.

Many deals you can actually look at to price it and second in terms of the value.

Drop I think it's highly dependent on the characteristics of the building a building Thats got just typically thats fully leased that's got typical rollover, you know five or 10% a year.

That one's probably not going to go down that much but something that is 30% vacant today or faces higher rollover rates that will go down more so I think the answer to your question is based on the.

Specific characteristics of the building.

Great. Thank you.

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

Okay.

Thanks, Good morning.

Looking forward to 2021 on the on the office side I think Mike touched on this but it looks like San Francisco and Boston make up the majority of your exploration.

86% of next years expirations between the two of them.

You mentioned that you still have significant upside in those particular markets. So im wondering if you could talk about where you think the mark to market is in those markets as it stands today and how much should that help in your ability to to report positive spreads next year.

So it depends again on the particular building.

In general in San Francisco, if we were in.

The fourth quarter of 2019, I would tell you that average rents were you know across our portfolio were in excess of $100 gross okay. So if the 60 60 $61 a square foot gross number represents a 114000 square feet of space that we already have.

Pre extra size relative to renewals theres still a profit is a significant embedded growth there.

Our properties down in mountain view that are expiring or probably expiring somewhere in the range of.

36 to $40 Triple net and in the.

Fourth quarter of 2019 rents were probably.

Somewhere in the neighborhood of $60 Triple net and interestingly I'd say of all of the markets are in the quote Unquote, California.

Part of our portfolio the proper to the market that held up the best it's been Silicon Valley.

Because there's a lot of engineering work and a lot of maker work and those companies are still doing their thing I'm going there still VC money. That's funding those companies. So that market is has seen much of much less sublet space come on the market.

In the greater Boston marketplace.

We again it depends on the buildings.

All the all the conversions were doing or have enormous embedded increases because were going from somewhere in the mid to high twentys on a net basis to somewhere at a minimum in the low fiftys on a net basis.

And then in our CBD portfolio.

The current rent.

Pre coded were some somewhere between 75 and 85 Bucks a square foot on average across our portfolio and my guess is our expiring rents were somewhere in the Sixtys a square foot. So just to give you those sort of gives you a sense of sort of where things are.

Okay. That's helpful and just just to be clear you're quoting those Q4 19 rents just because you haven't seen enough.

On the transaction side to give get current rent.

So I'm I'm, allowing you to say I think rents are going to go down by 5%, 10%, 15%. Whatever you think they are you can do the math. However, you want to do it.

Fair enough, Okay and.

Then you know first of all congratulations on the VW lease at Reston next and great to see that project get up to 85%. So I think that certainly the main thing to focus on here, but a few questions around that I think Doug you mentioned that Fannie Mae decrease their space requirement to around 700000 square feet, which is down from there a rich.

No agreement for 850000 square feet can you just confirm that the give back was well the reduction in requirement was solely to accommodate VW is lease or was it something else and given that this is the second time decreasing the space requirement.

I think there is any chance, they're looking to downsize any more.

Lastly, how does VW is rent compared to what you agreed on standing there.

Well Ray or Peter do you want to take the question.

I'll take a shot at Doug This is ray ritchey.

Well go ahead, Peter should we go ahead.

I was just going to say that.

Fannie delivered a.

Our properties built them, a very large complex downtown which is actually their headquarters that delivered a number of years ago and their operating history in that property.

Led them to revisit the actual space needs in the way they were operating in the space that was the reason for the initial reduction in Riyadh, you probably want to add to that.

Yes.

In order to make the Volkswagen deal Volkswagen was interest in our complex before but we didnt have enough space.

And so when when Fannie voluntarily gave back three floors. It gave us an opening to go back to VW.

And make an offer and what prevailed there was not so much the economics, but just the quality of the location this visibility access to metro and amenities.

And in order to do the deals we had to negotiate with Fannie ticking back to more fours, which they really didnt want to do but they wanted to be good partners with us. So we ended up concluding the deal with Fannie.

And in terms of ramp we're just not going to comment on what one rent looks in comparison to another but.

But I would just say is very much consistent with our performance.

So I just I just want to make one general comment here and I, because I think people sort of they don't appreciate it. So so what we accomplished in Reston and what we accomplished for example, with with with Columbia.

At Atlantic Wharf. These are these are hard manufactured deals and we we took these tenants from from going to other places where they were in the case of Fannie Mae excuse me VW I believe there was a signed letter of intent and a lease that was in negotiation and we were able to get the space and say by the way we can deliver the space Trust us can be complicated, but we can.

Get to there and similarly with with the Ameriprise.

Colombia Group I mean this this is what we do all the time to maintain occupancy in our portfolio and I think that's what differentiates us from many of the people who are in our our corn cost competitive marketplaces, and that's where the value creation is so you you.

When you when you think about the office market and you think about what's going on in a macro perspective with concessions and with where rents might be just have the underline perspective that we can do things in tough markets that other people might not want to do or can't do and maintain our occupancy in our portfolio in a way that.

It really puts us in a very good standing relative to our underlying revenues in our underlying FFO in our underlying AFFO and our cash flow Doug.

Doug if I could just add to that this is ray again in Reston on the Microsoft deal. We did we did a new deal with Microsoft for 400000 square feet, which were incredibly grateful to do.

But in doing so we had to relocate another 250000 square feet of existing tenants to other buildings and so when you have a critical mass CLEC in Reston Town Center on Cambridge Center, and Embarcadero Center.

The scale and size of our portfolio really allows us to be creative and deal structure and to accommodate both tenants growth and.

And contractions without losing the tenant outside our portfolio a building so really one of the strengths of concentration of efforts in certain geographic areas.

Certainly a great outcome I just wanted to get some color around the moving pieces and I appreciate the commentary from Olivia. Thanks. Thank you.

Your next question comes from the line of Craig Melman with Keybanc capital markets.

Good morning. This is already Cameron on to Craig I appreciate the color on the transaction market and kind of the difference between kind of the stabilized assets versus those that lease up risk. Just wondering given that you guys are kind of going to be more active on the acquisition front. Our good portion of those assets in the pipeline in that value add category, where we.

Lightning bid ask spread and kind of how are you guys thinking about underwriting those assets given obviously the uncertainty surrounding rent levels and maybe capex needs in the medium term. Thank you.

Yes, no. We this is owen.

Again, so absolutely I see our new investment.

Pipeline is going to focus on value added opportunities.

It's as Doug was describing that's our strength our ability to execute to attract tenants.

To secure tenants to to build buildings on time and on budget to reimagine existing buildings. Those the types of things that we want to get involved in and I think over time and we then we saw this past quarter I do think more opportunities like that will pay.

Present themselves and we are going to.

Have to adjust our underwriting again it depends on the market.

Doug was describing earlier I think some of our markets have been.

Perhaps relatively unaffected from a rental rate standpoint, given their strength and others have been more effective but we will have to adjust our underwriting both in terms of rents concessions and lease up velocity to.

Be mindful of the current environment.

Great. Thanks, and just one quick one can you guys talk about if there's any increase and sublease space Thats ticking up at all within the portfolio.

There is absolutely more sublet space in October of 2020 than there was in March of 2020 in.

In our portfolio is it meaningful I don't think it's meaningful but there there are certainly I can I know of a handful of our tenants that have said hey, if.

If we could get some going to take our space well, we'll get off of our space I mean, the the biggest example of that is CV Starr in our portfolio in Manhattan, where they have a lot of term left on their lease again, it's not because.

There there is a financial problem with that tenant there.

They're just they're trying to be opportunistic and you know to the extent that they are able to find somebody for that space.

I don't know what they'll do with their people but.

We'll we'll we'll deal with it but there are there are those types of examples throughout.

Throughout the portfolio, but but not in significant numbers.

Great. Thank you.

Your next question comes from the line of.

Okay.

This season Securities.

Hi, good morning, everyone.

Yes, your latest thoughts around 15 cents, but kind of on the eve of the elections.

Bob are you on.

I'm here.

I think that it's very close right now, but I don't think it will pass.

And is that based on just kind of think votes and that would be a little different.

An election dealer.

Jay just based on the pole the polling we've been seeing.

Okay. That's helpful and then just to confirm around life Sciences.

Salaries based on your comments that you guys are more interested in just kind of building up what we'll do it whether that can be buying it.

Is it fair to say some of the portfolios out there that potentially up for sale, you're not actively looking at them.

No we are looking.

Absolutely I think the point is we and we have we are in the market were of life Science player, we're going to look at new acquisitions.

And we will make.

Make those acquisitions, if we think they make sense, but the point I'm trying to stress is we don't need to do that to grow the life science component of Boston properties materially based on the development opportunities and redevelopment opportunities that we currently control.

Got it so we'll just let the types of mistakes of the Brookfield portfolio a lot of it is that.

Often in Cambridge is that something that would attract you or is it just the nature of the location doesn't really attractive.

Yes look we don't want to comment on specific investments that we're looking at are pursuing but I think it's our job.

To understand everything that's in the market and if we think we can create.

A value creation opportunity for shareholders to chase it so.

Clearly that's something that's on our radar screen.

Okay that one wasn't there.

We follow the market carefully.

I mentioned.

I believe five specific asset sales in my remarks and.

Four of them were on buildings that were almost immediately Jason are very proximate to buildings that we have so we're always in the market in the class a office and life science space in our core markets.

Sure and if it doesnt dollars would be one more development.

In the quarter, which so the.

I hope I Didnt, Miss as before but what does that recall some of the delays.

Having a hydrocarbon getting.

No leases signed or what's causing.

Some of the delays and development pipeline.

So I mean, we really haven't delayed I mean, 159 East 50, Threerd Street, we have pushed that asset back and it's really related to the recently you build out has.

Nothing to do with what we've done we've completed our obligation.

A year ago, and we've been getting cash rent from that tenant for over a year.

Sitting in prepaid rent on our balance sheet and as soon as we can deliver this thing it's actually going to come in.

So that one again, we're kind of reliant upon the buildout timeframe on that and then.

We pushed to 200 West Street stabilization out a little bit Doug described got a letter of intent signed for the entire building and thats when the tenants going to complete their build out we hope to have that lease signed shortly and 20 Citypoint. We also have anello life with an entire building and that tenant build out is going to be completed in Q3 of 2021. So we're basically.

Just adjusting based on leasing activity that is going on in the in the pipeline.

That's helpful. Thank you.

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

Good morning, everyone I just wanted to touch on the rent write offs taken so far do you have a sense of how much percent of the uncollected rents to account for and were there any reserves taken on your co tenants.

In terms of uncollected rent.

I'm not sure what the exact percentages on the.

Things are we do have deferred rents that we described in the quarter.

Which are rents, where we are accruing for those tenants and that was $18 million.

So those are I guess rents, where we wrote off $6 million. They are and we still have $18 million.

That came in this quarter that were different so I think that will give you a sense.

We did have one co working tenant that we.

Wrote off this quarter.

But.

It was a smaller exposure that we have so we do still have a couple of co working tenants.

In the portfolio to continue to pay us on a current basis.

And that we have not taken write offs for.

Okay great.

And then Doug you mentioned the GM building has been the most active in your portfolio can you provide some additional color whats driving this.

John Powers, you want take that one.

Yes, well I think it's a great building and the type of tenants that are in the building our financial tenants, mostly or family offices et cetera, I think there we have some vacancy in the building. That's one of the reasons of course that Theyre looking but this is a very attractive building we've had a good well we're.

We're also putting an amenity center in the building that has been very very well received by the tenants of the booking and also those tenants that have done business with us.

Okay, Great Thats all I have thank you.

Your next question comes from the line of Daniel is now with Green Street.

Great. Thank you.

You are looking at Redeveloping and wall time or at your land bank in other markets.

As the entitlement process change this year.

Is your or any any harder given the worsening.

Two questions in most cities and states, Brian you want to go and.

We've really seen no change at the local level in terms of these towns in fact in some cases, it's been more expeditious believe it or not just being able to get people. One zoom calls, where we have seen some great improvement as our work with the state and a great example of that that we are going to be coming out with the effects on is our improvements at the intersection.

At City point.

Our team was able to get that into.

Interception work done in four months, it's up and running which probably would have taken a year to year and a half previously so it's been an opportunity to partnership with the not only the city Waltham, but the state of Massachusetts to get that work done quicker. So that's where we have seen improvement.

And then related to any update on the MJ sites and on.

Okay.

John.

Well, we continue to work on the site with the FDA and is in city planning and we're about to enter into the EULAR process, our application Mimi, meaning our application will be accepted I think that will happen sometime in the first quarter, we are moving forward.

As the agent for the for the demo for MTS. So the demolition of the site and we're starting that Weve awarded that contract and the early demolition work to started so it's going to take about a year to take the building down.

We have not for any have not go ahead.

Okay pickup.

Yes. So we are we are still negotiating the deal.

Ground lease agreement with the MTV, we had now currently acting as an agent on the development side.

The demolition.

Great I appreciate the color.

And then maybe going back to promote working.

Appreciate all that real World. Examples you guys have provided on the call thus far.

But is it fair to say that you have not noticed any meaningful differences between regions and industries.

Where the demand for office space, specifically as it relates to Reno working.

I, it's an impossible question to answer to any because theres relatively speaking the different impacts on the the ability for companies to do business based upon the geographic location. So I mean.

I don't think it's it's a surprise that the activity level in Boston the activity level in northern Virginia, and the activity level in New York are greatly locks more significant than the activity level were seeing in Los Angeles, and San Francisco, and Los Angeles, and San Francisco have been the organ that the governments that have been most restrictive about going back to.

The work and where many companies in the technology space that quote unquote can work from home are located so those those organizations have been at the forefront of not being allowed to come back to work and so I think it's impacted their ability to sort of understand.

I know from a leasing activity perspective, and from a space utilization perspective, what the world's going to feel like when when they're able to start to do things in a more consistent basis.

And again, so we would anticipate that if were getting out of the cove. It.

Restrictions in the middle of 2021 in a significant way.

We will start to see those organizations, bringing their people back to work and then making decisions as to how it's going to how how is actually.

What impacted their productivity and their collaboration in their ability to get their business goals accomplished and if it if they couldn't do those things we think they will need to take more space to be able to fit those people.

To the extent that they decide that there is a portion of their population that can work partially from home I mean, they can his own said share their their physical.

Platforms amongst each other as opposed to having dedicated platforms to an individual than then they won't need more space.

I just think it's impossible to answer the question because everyone is in a different place relative to the to the where were the governments are allowing them to go from a health security perspective, and as we've seen even where we are there the restrictions have been lifted the social issues associated with particularly educate.

Additional systems have have put companies that are really positioned relative to quote unquote demanding their people come back to work.

One of the things that we're talking about at we're passing along to leadership to Doug unknown as we've had incredibly deep conversations with our clients and Boston, mainly because we're having this access to them that weve never had before as they talk about their space and they're more focused on it than ever and one of the Ceos put it really well to us he said.

I'm really concerned about uphill work and what he meant by it was downhill work is you know your E mail work year compulsory stuff that you do as a day to day basis, but uphill work being strategy projects heavy lifting about creating value is the biggest concern and I thought it was a great metaphor because that is the theme.

We're hearing over and over from our clients and the the fact that we are having these deep conversations on it I think shows the importance of office space, but we've been passing this long to leadership and while its still anecdotal, it's it's pretty strong message about the need for future value creation.

Portion of that that workspace is going to play on that.

Got it thanks for the color barrel.

I will now turn the call back over to the speakers for any closing remarks.

Thank you operator, I think that concludes our remarks concludes all the questions. Thank you for your interest in Boston properties.

This concludes today's Boston properties Conference call. Thank you again for attending and have a good day.

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