Q4 2020 Boston Properties Inc Earnings Call

Okay.

Good morning, and welcome to Boston properties fourth quarter, and 'twenty and 'twenty earnings call. This call is being recorded all audience lines are currently in a 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.

MS Sara Buda VP of Investor Relations for Boston properties. Please go ahead.

Great. Thank you and good morning, everybody and welcome to Boston properties fourth quarter, 'twenty and 'twenty earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K, and the supplemental package. The company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with <unk>.

G. If you did not receive a copy. These documents are available on the Investor Relations section of our website at investors that the X P. Dot com a webcast of this call will be available for 12 months 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 six.

<unk> Litigation Reform Act, 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 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 Companys filings with the SEC. The company does not undertake a duty to update any forward looking statements.

I'd like to welcome Owen Thomas Chief Executive Officer, Doug Linde, President and Mike Labelle, Chief Financial Officer during the Q&A portion of our call Ray Ritchey Senior Executive Vice President and our regional management teams will be available to address any questions.

I would now like to turn the call over to Owen Thomas for his formal remarks.

Yeah.

Thanks.

Thank you Sarah and good morning, everyone today I'm going to depart from my typical organization of remarks.

And instead summarize all the reasons why we are confident and Boston properties future prospects and enthusiastic about the company's growth potential at this unique point in time.

As part of my comments I will address our accomplishments and challenges of the past year.

Current capital and property market conditions, as well as Boston properties capital allocation decisions and strategy.

So why DXP and why now.

I will begin with three points from Boston properties potential for income growth both in the short and long term from where we closed out 2020.

First our variable income streams will recover over the next 24 months Boston properties will likely enjoy one of its most significant and predictable improvements and economic conditions and leasing activity as we witnessed the end of the COVID-19 pandemic.

Two vaccines with high efficacy rates have been FDA approved five 8% of Americans have already received at least one dose of the vaccine the more easily refrigerated Johnson and Johnson and vaccine is near approval and health authorities are advising that anyone who wants to be vaccinated will be accommodated by this summer.

The by the administration is aggressively pursuing a more rapid vaccine rollout as well as economic stimulus to help bridge the economic damage caused by the pandemic.

Given the herd immunity created by a high percentage of the population either recovered from infection and <unk> vaccinated infections will likely dropped precipitously in the middle of the year.

We are all anxious to come out of isolation and return to our normal lives. So as the infection rate drops the economy will reopen and individuals which will return to offices restaurants shops theaters and travel.

Approximately 97 million of Boston properties F. F. O decrease in 2020 came from the variable income streams of parking or single hotel and retail customers all of which were devastated by the lockdowns.

And we will likely see a strong recovery and these variable income streams and the near term as the economy reopens.

Second Boston properties office portfolio is stable.

We have been collecting through the pandemic over 99% of our office rents Oh, demonstrating the quality of our buildings and office tenants.

Only seven 1% of our leases rollover this year and we experienced 20% roll ups on average the last three years, providing a cushion for decreases and market rent caused by the pandemic.

We have signed over 600000 square feet of leases on currently vacant space that we'll experience rent commencement in 2021.

We expect the noncash charges experienced in 2020 for accrued rent balances to diminish if not cease in 2021.

We are now recognizing rent on a cash basis for all theater and co working tenants as well as the vast majority of retail credits we consider at risk.

We will also be delivering in whole or part three assets into service. This year 100 Causeway $1 50, 950, <unk> Street, and 200 West Street, just under a million square feet and the aggregate and 95% leased.

Third Boston properties has significant external growth drivers, which are readily quantifiable over the next four years. We currently have under development and redevelopment seven projects, comprising $3 7 million square feet and $2 2 billion and total investment.

These projects are 88% pre leased fully funded with cash on our balance sheet and projected to generate cash yields on cost and stabilization of approximately 7%.

In addition, we recently delivered three class a urban apartment complexes, and Boston rest and and Oakland with an aggregate of 1000 and 350 units that are only 56% leased and have substantial income upside as the economy reopens we.

The income from delivering this development pipeline to add three 4% annually to our <unk> growth over the next four years.

We also anticipate starts this year of over $800 million, the majority of which are new life science development and conversions and.

And lastly, we own or control land aggregating over 16 million square feet of potential office lab, and residential development, which we will commence as dictated by market conditions.

Now my next points relate to our business model and strategy.

Core strategic principles for Boston properties is to build acquire and own high quality buildings. Our portfolio is dominated by class a urban assets. Many among the leading buildings and their respective markets such as Salesforce tower. The General Motors building 200, Clarendon Street and Kendall Center.

Higher quality buildings stay more occupied and perform better and times of recession as certain customers take advantage of lower rents to upgrade their space for.

For example, VTS reported from their database that tours for class a buildings and New York City went from 38% of total before the pandemic to 54% during the pandemic.

Another hallmark of our quality strategy is market selection as we believe and the long term health and attractiveness of our coastal gateway markets. We acknowledged the economic damage to local businesses and city budgets. The pandemic has wrought as well as individual relocations to lower tax jurisdictions, but.

But we remain confident and the attractiveness of our target markets for two basic reasons, the clustering of knowledge workers and increased barriers to new supply.

The cities, where we currently and aspire to operate and New York, San Francisco, Boston, Washington, D C. Los Angeles, and Seattle have unmatched educational cultural and civic resources, which attract the leading clusters of knowledge workers in the U S, particularly in computer science and life Sciences.

Knowledge workers have more job opportunities and are more productive when working with others and clustered environments feud.

Future job growth and office demand is going to be driven and the technology and life science fields, where our target markets have a distinct clustering advantage.

And to create value and office real estate as an owner you need rental growth, which is driven by both job growth and barriers to supply.

Our markets have built and obstacles to new development, including a dearth of available sites difficulty and permitting anti development local ordinances and cost and complexity and construction.

My last point on business model as Boston properties fully integrated operating capability and quality of execution and 2020, we were able to lease $3 7 million square feet with a weighted average lease term of eight six years, which is around 60% of our recent annual leasing averages.

And the leasing activity and our markets was approximately 40% of recent annual averages.

And all our core cities, where our market, leading participant providing advantages and accessing new investment opportunities procurement and attracting and retaining talent.

We are an industry leader and ESG performance as measured by Greuze, the EPA U S GBC energy star fit well and others and were recently recognized as the leading office company and second best property company in Newsweek's 2021, most responsible companies ranking.

Yeah.

My next points relate to valuation.

Because of the pandemic and the variability and our parking retail and hotel income streams, Boston properties <unk> dropped approximately 15% the last three quarters of 2020.

Versus pre pandemic levels, which is clearly disconnected from our stock price, which has dropped 37% over the same period.

The GAAP is caused by expectations, specifically concerned about gateway markets addressed earlier and the impact of work from home on office demand.

We'll reiterate that we think more remote work is here to stay after the pandemic, but concerns over the impact of office space demand are overblown.

Business leaders want their employees back and the office to foster a culture of collaboration and teamwork and mentoring and to provide more supervision.

And a recent employee survey completed by Gensler workers want to return to the office as well, where they believe they are most productive and collaborative but.

But 52% on a hybrid model with more time to work from home for convenience and safety from COVID-19 fears of which should dissipate over time.

However, 90% of those employee survey, one and assigned workstation, when and the office and while only 21% of those surveyed at a private office lay out 47% wanted it.

Low employees may be working remotely more and the future it will be difficult for employers to translate lower census into space savings due to employees desire for more privacy and our fixed workstation.

Yes.

There is also a disconnect between where the private real estate market is valuing class a office assets in gateway markets and where the public market is valuing Boston properties.

And our current share price the look through cap rate on our portfolio is five 9%.

High quality office assets comparable to much of Boston properties portfolio are trading at sub 5% cap rate.

The office transaction volumes were down materially and the last three quarters of 2020 from the prior year activity improved each quarter as investors returned to the market.

Volumes were down 45% and the fourth quarter versus the fourth quarter and 2019, but were up 59% sequentially from the third quarter.

Office was no more out of favor than other asset classes. After the pandemic as office transaction volume was 29% of total commercial real estate volume both in 2019 and.

And the last three quarters of 2020.

And there continues to be a robust market for life science real estate as well as quality office buildings and technology driven markets with more limited leasing exposures.

Just and life Science life science as a portfolio dominated by leasehold interest and University Park, and Cambridge sold for $3 $4 billion around $500, a square foot and a mid 4% cap rate with roll up potential and a partial interest and discovery Park and Cambridge was sold for 720 million.

Representing 11, 90, a square foot and a four 7% cap rate.

And in office for 10, 10th Avenue in New York City sold for $950 million, which equated to 1004 hundred $90, a square foot and a four and 5% cap rate and 510 Townsend and 505 Brannan Street in San Francisco sold for a combined $570 million 12 and <unk>.

We're foot and a 5% cap rate.

Though both buildings are leased long term one is being sublet in full by its user.

And in the Seattle, CBD, a leasehold interest and two and you sold for $700 million.

20th square foot and a four 7% cap rate and 1918 eighth Avenue sold for $625 million $940, a square foot and also a four 7% cap rate.

There is a material investment activity and like assets to Boston properties.

And with interest rates forecast to remain low and the economy and the economic recovery described earlier, we expect transaction activity to increase and cap rates potentially the tightened for well leased assets.

And lastly, Boston properties has the balance sheet and access to capital to take advantage of opportunities that will present themselves. As a result of the pandemic. We currently have $3 $2 billion and liquidity and after the redemption of our unsecured bonds and fully funding. Our current development pipeline, we will have one from one.

$5 billion of liquidity remaining.

We have been more actively monetizing in service assets, having completed $570 million and gross sales in 2020.

And we expect a similarly elevated level of activity this year.

We have access and size at attractive terms to the unsecured debt market debt market, if needed and have been developing increasingly formalized relationships with large scale private equity partners to help us fund acquisitions.

We have a reasonable pipeline of potential new opportunities and our core markets and Seattle and continue to look for investments that require leasing and redevelopment to take advantage of our operating skills and to create higher returns.

As mentioned, we also intend to invest more aggressively into life science real estate and have five 8 million square feet of new development and redevelopment projects under our control located primarily in the life science hubs of Cambridge, Waltham and South San Francisco.

So in conclusion, the COVID-19 pandemic continues to create a very challenging environment for many sectors of the U S economy, and commercial real estate, including office assets.

However, the end of the pandemic is approaching and we are confident Boston properties will emerge with strength and momentum given our portfolio quality.

Income stability growth potential access to capital and highly engaged management team.

Doug over to you.

Thanks, Owen I thought about just sort of stopping right there and starting the questions, but I guess I'll make some remarks and give them time from Mike as well.

Good morning, everybody as we sit here in January of 'twenty. One we are shifting from Covid, COVID-19 COVID-19 and the obstacle to a pickup and activity to vaccine and vaccine and vaccine as the signal to rejuvenate and tenant conversations about bringing staff back to the office.

And starting the leasing transaction processes.

And there is no question that the rapid increase and Covid cases over the last six weeks of 2020, and the beginning of 2021 suppressed leasing tours and discussions.

During that period of time, but and the last two weeks two large Boston companies have announced their expected return to work dates.

We signed an LOI for a 70000 square foot tenant that's going to need space in December of 2021.

And just yesterday, Amazon announced and Boston, they're committing to another 630000 square feet to be built office building and bringing 3000 additional jobs to the Boston CBD.

So while the first half of 'twenty. One is expected to be quiet, we are cautiously optimistic that we've been through the worst of the pandemic and that the latter part of 'twenty. One we will have a discernible pickup and leasing transaction volume parking revenue and retail sales.

The year and market leasing reports that are published by the commercial brokerage organization held few surprises as you've probably heard there are many of the analyst calls.

Leasing volumes were way off their historical pace and with the significant sublet space added to the market, we saw negative absorption and increased availability everywhere.

It's important to remember that there are two types of sublet space.

First space that come from users that have had changes and their employee head count and are clearly no longer need all of that space and then there's a second group tenants that are being opportunistic lifting their entire premises by the way at no cost to them with an expectation that they will decide what to do if.

They get and acceptable actionable offer down the road they may reoccupied and they may relocate and transact or they may find a way to sublet a portion of their space. We just don't know.

But based on all the conversations we've had with our technology, our life science or professional services or legal or financial firms as well as the leasing brokers that are responsible for these listings a change and workplace strategy.

We're going to work from home, where we're going to go to a disaggregated workforce, that's not what's driving the bulk of the sublet activity.

One thing is sure not all of the sublet space is actually available.

And you might find the following illustrative that in Midtown Manhattan. After the great recession. According to CBRE from 2008 to 2009 about 24 million square feet of space was put on the sublet market.

Between 2009, and 2010, $13 6 million or 57% of that was withdrawn from the market not all space is available.

The Boston properties office portfolio ended the year at 91% occupied the quarterly sequential drop is entirely due to the addition of dock 72 at 33% leased into the and service portfolio.

And as Owen said, we have 600, plus thousand square feet of signed leases 134 basis points and our in service portfolio that has not yet commenced revenue and hence is still defined as vacant but it has been leased.

We completed another one 2 million square feet of leasing during the quarter.

And on a relative basis, my view of the ranking activity R&R portfolio active lease negotiations tours rfps and our market is as follows star.

Starting with the best and moving to the least.

Boston walk them by the way, we don't have any available space in Cambridge, and Northern Virginia, Midtown Manhattan, Princeton, Los Angeles, The Peninsula, and Silicon Valley and D C and finally, the CBD San Francisco.

During the fourth quarter and the Boston CBD, we did five leases, including another full floor new tenants at Atlantic Wharf, the cash starting rent on this full floor lease will be 34% higher than the expiring rent and there are future rent increases.

The cash rent on the other four leases had a weighted average increase of about 30%.

We continue to have additional activity and our CBD Boston portfolio, albeit with a number of smaller tenants under 10000 square feet.

A few are looking for incremental growth and a few were considering letting their 2020 when leases expire and are now actively engaged and short term renewal conversations I also want to note that we finally obtain possession of the 120000 square foot two story, former and Lord and Taylor building on Boylston Street during the early <unk>.

This month this was a big win as we believe we can find a far more productive use for this box and it's been under lease since the mid 19 sixties to Lord and Taylor and.

Our suburban Boston portfolio.

We completed 226000 square feet of new leasing, including all of the remaining space at 2000 and city 0.1st generation. This is in addition to the life Science lease we did a 200 West Street.

The cash rent on the second generation leases about 150000 square feet was up an average of 23% on a cash basis.

We continue to have additional activity in suburban Boston and whilst them. We're negotiating a 60000 square foot lease extension a lease with a new tenants for a 63000 square foot block of space and we're responding to a number of large life science lab requirements at the moment, we don't have any ready to go vacant lab space, but we hope to be.

And our conversion of 880 Winter Street 220000 square feet during the second quarter.

And our 300000 square foot 180 City point lab building has been fully designed fully permitted and we're simply waiting final construction bids over the next few months.

Turning to northern Virginia. This quarter, we completed six renewals at our VA 95 single storey park totaling about 218000 square feet.

In addition to the VW commitment and rest and next we completed another 82000 square feet and the town Center and Reston and total in 2020, we completed a 1.15 million square feet of leasing and Reston Town Center.

And we still have more work to do but we have a good start to 2021 with lease negotiations ongoing for an additional 60000 square foot block of space and.

And Reston town center rents are basically flat to slightly down and 1% to 2% on the roulette since the expiring cash rents have been increasing contractually by 2.5% to 3% for the last 10 years and they will continue to do so on a going forward basis.

Our D C CBD exposure risks and our JV asset, but here to activity and our portfolio has picked up we completed 24000 square feet of leasing during the quarter and were negotiating over 120000 square feet of leases as we speak.

And New York City, we executed a lease with a center at times Square tower for about 132000 square feet of office space.

We completed two floor deals in the New York City market, each 31000 square feet at 601, Lex and one was a one year extension and the second was a 10 year renewal and the cash rent decreased about 8% on that renewal. We also did for small transactions at 250, West 50, <unk> Street and times square tower totaling <unk> <unk>.

6000 square feet three were short term and one was a 10 year deal.

When negotiating a full floor for transaction at 399 Park on a space that's not expiring until the end of 2021.

While we didn't do much leasing and Princeton during the quarter, we have a number of active discussions ongoing and that we believe.

Tenants will be making decisions to expand or relocate and late 'twenty, one and are strongly considering Carnegie center.

When we talk about California, you need to appreciate the fact that the state has been strongly discouraging tenants from asking their employees to go to their offices for the last 11 months, the uncertainty level and the lack of pedestrian activity at the street plane, particularly in the CBD of San Francisco has been more severe than anywhere else and our portfolio.

And this has affected tenants appetite from making any decisions just to put this year and perspective from 2017 to 2019. There were on average 10, excuse me 14 Tech company leases per year and excess of 100000 square feet in 2020, there were.

None.

Our San Francisco assets are 95% leased and we have 280000 square feet expiring and 21.

The third quarter produced just three transactions totaling about 23000 square feet at EC and during the fourth quarter and we did another four leases all renewals up about 18% on a cash basis totaling 20000 square feet and it's pretty slow there.

And South San Francisco, our Gateway JV is planning to construction commencement of 751 Gateway 230000 square feet ground up lab development to begin over the next few months followed by the conversion of 651 gateway, which would be a renovated building if we're able to relocate the existing tenant there.

There is more activity and the Silicon Valley and mountain view area than the rest of the Bay area.

And two technology companies to 100000 square feet plus expansion during the quarter and there are three active requirements right now and the market and excess of 200000 square feet.

There continues to be a slow resurgence of medical device alternative energy automotive the hardware side of technology that are all out looking for space. We are seeing a few of these organizations looking at our mountain view single story product, which is plug and play ready.

And Santa Clara, we're going to be taking our 218000 square foot Peterson way building out of service when the lease expires and the second quarter of 'twenty. One. This was a covered land play and contributed about $4 $8 million of revenue in 2020, we have entitlements for a 630000 square foot campus permanent and improved ready to go.

<unk>.

In spite of the challenging COVID-19 related conditions, and California, and Santa Monica, We continue our renewal negotiations with our 2021 exploration and as I said at the outset, we signed a 70000 square foot LOI at Colorado Center from a new tenants.

You may recall earlier this year, we actually Didnt expansion with another technology company at the Santa Monica Business Park.

And I purposely didn't make any comments about market rents during my remarks, with very limited activity and he conjecture about where rents will settle out as pure opinion, what I can tell you is that there will be large differences between deals cut on sublet space and direct space sublet.

Sublet landlords will have less appetite for capital and more leeway with lower income base rents were giving free rent there.

And there will be tenants, however that simply don't want the risk of sublet space will that price tenant actually pay their rent for the full term is that a risk worth taking.

<unk>, the as as conditions and other issues associated with that may make them very uncomfortable with those risks there.

And there will be a very wide gap between the bid and ask on direct space at the outset until we have a meaningful amount of direct deal comparable transactions for the market to understand.

Landlords with vacant space that according tenants that want a new installation will use capital to entice easier to this space not necessarily face rents and landlords work and our renewals will be more aggressive with swing space, where it can be made available or lower contractual rates. If the installation. That's there currently works for the user.

However, there will be a flight to quality and the better buildings as tenancy value and paying less of a premium to be and the best assets and these market conditions.

Conditions are going to value are going to vary submarket by Submarket I'm going to stop there and yield the rest of our time to Mike.

Yes.

Excellent thanks, Doug good morning.

And so I'm going to I'm going to cover the details of our earnings for the fourth quarter and I'll also explain our guidance for the first quarter that we provided.

And some insight into our expectations for the full year 2021.

And we've reinstated quarterly <unk> guidance, which we hope will be helpful and serve as an indicator of our increased confidence and the operating environment. Our office tenant collections remained strong and we believe the write offs are largely behind us.

We also continued to execute on new and renewal office lease requirements as evidenced by the $1 2 million square feet of leasing and the fourth quarter and the $3 7 million square feet of losing and 2020 overall, despite the pandemic related shutdowns.

We're encouraged by the rollout of the vaccine and are confident we will see a return of workers to the office and mess, but there remains uncertainty with respect to timing, we anticipate our ancillary revenues such as parking and retail will continue to be weak until the population increases once we have better visibility into the timing we expect.

And restore full year guidance as well.

Our fourth quarter results contained two charges that I would like to explain.

The first is a $60 million non cash impairment of our equity investment and dock 72.

Our 670000 square foot development, we put into service and the Brooklyn Navy yard.

This investment is held in and unconsolidated joint venture, where we own 50% because the investment is unconsolidated GAAP requires a marked to current fair value.

Also while the 35 cent per share charge as a deduction from net income. It is added back to arrive at <unk>. So it has no impact on our reported <unk> pursuant to NAREIT definition.

Dock 72 is only 33% leased as Doug said and while we had some promising leasing activity pre COVID-19, there's little activity today, and the market conditions and Brooklyn have weakened.

We have increased our projected cost to stabilize as well as modified and extended our anticipated lease up and the combination of this has resulted in a lower current fair value for the property.

And the extension of timing to achieve stabilization has a meaningful impact on fair value.

And we see dock 72 is a unique situation and we do not anticipate any additional impairments and the portfolio. The rest of our development pipeline is very well leased at 88%. Our in service portfolio is over 90% leased and honestly most of the assets have significant embedded gains.

The second charge is a $38 million or 22 <unk> per share non cash charge to net income and and <unk> for the write off of all accrued rental income for tenants and the co working industry.

While these tenants are paying rent today, we believe the ongoing length of the pandemic is stressing the sector's revenue and liquidity.

As such we do not believe they meet the standard to maintain and accrued rent asset on our balance sheet.

As we discussed and both our second and third quarter earnings calls co working is the remaining tenants sector that we've been monitoring closely it is possible we could face a few individual credit situations. This year due to the impact of the pandemic across the portfolio, but we don't anticipate additional significant accrued rent write offs.

Other sectors of tenants like we've experienced with retail and with co working and 2020.

For the fourth quarter, our reported <unk> was $1 37 per share if you exclude the accrued rent charge, our fourth quarter <unk> would have been $1 59 per share and in line with consensus and the expectations that we shared with you last quarter.

Now I'd like to look forward to 2021, we.

We have provided first quarter 2021 guidance for <unk> of $1 53 to $1 57 per share at the midpoint. This is <unk> <unk> per share lower than our fourth quarter 2020, <unk> before charges.

The decline is entirely due to approximately <unk> <unk> per share of seasonally higher anticipated G&A.

The first quarter is always our highest quarter for G&A due to accounting for compensation. If you look back historically, we typically record 30% of our annual G&A expense and the first quarter.

The increase in G&A expense is anticipated to be partially offset by higher revenue contribution from our portfolio, including the commencement of revenue for a portion of the signed leases that Doug described.

We also expect lower interest expense as we are redeeming, our $850 million bond issuance and mid February with cash on hand. These bonds have a yield of four 3% and there will be no prepayment charge. We're currently earning close to zero and our cash. So we will see the full benefit of lower interest expense for the second half.

As of this quarter and for the rest of 2021.

So as we as we think about the full year 2021, Theres a few things to consider if you simply annualize the midpoint of our first quarter guidance you get to about $6 20 per share, but that does not account for the seasonality of our G&A. The reduction of interest expense from our bond redemption or the incremental impact of leased.

<unk> coming online during the year.

For modeling purposes, we suggest you consider adding the following to the Q1 annualized <unk> of $6 20 per share.

19, <unk> per share for the impact of lower G&A for the rest of the year <unk> per share from lower interest expense due to the bond redemption and <unk> <unk> per share of incremental <unk> from new developments coming online, including $105 nine East 50, <unk> Street, which is 96% leased to NYU and where we expect to come.

<unk> revenue and the second quarter.

100 Causeway Street in Boston, which is 94% leased with projected revenue phasing and starting in the third quarter and 200 West Street, our life Science development and wealth him, which is 100% leased and is projected to deliver in December.

So adjusting our first quarter annualized run rate for these known items gets to approximately $6 52 per share for 2021.

That said, we're not providing full year guidance for <unk>, because there remains uncertainty and our variable income streams, including our ancillary income and our same property leasing both of which impact revenues and occupancy.

The timing of recovery from the pandemic is still unknown.

Could have a material impact on the recovery of revenues from our parking retail and hotel.

Currently these income streams are depressed.

Their contribution is nearly $30 million lower on a quarterly basis than what we saw pre pandemic.

We're hopeful that a portion of this revenue will start to return and the back half of 2021, but the timing is really reliant on the success of the Covid vaccines, and a return to a safe and healthy environment and our cities.

We also have lease expirations in 2021 that will impact our occupancy and same property NOI.

Our rollover for 2021 is $3 2 million square feet.

As Doug described we already have 610000 square feet of leases signed that will take occupancy of currently vacant space. This year.

We're also actively working on over a million square feet of new leases and renewals across the portfolio.

Overall, we expect our year end 2021 occupancy to be flat to down 100 basis points compared to current occupancy.

It's also worth noting that we have a meaningful amount of free rent that burned off in 2020 that will boost our cash same property performance and <unk> and 2021 spin.

Specifically at 399 Park Avenue, we had 450000 square feet of space and build out and under free rent for nine months in 2020 that is now and cash rent and at the General Motors building, a 160000 square feet of office space and a portion of our retail was under free rent for most of 2020 and are now paying cash rent.

This showed up in our results and the fourth quarter with a $10 million increase and same property cash NOI sequentially from Q3 to Q4.

In summary, we're excited about the prospects for revenue and <unk> growth our portfolio cash flow is expected to grow in 2021. The success of the vaccine programs should give rise to the recovery of our ancillary revenue streams and we have $2 2 billion of leased developments coming online over the next couple of years all of them.

And which should drive future earnings growth and value.

That completes our formal remarks.

If you could open the lines up for questions operator that would be great.

At this time I would like to remind everyone. If you would like to ask a question. Please press star one on your telephone keypad. If you are using a speakerphone. Please pick up the handset before asking your question, we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Nick <unk> with Scotiabank.

Okay, great. Thanks, Good morning, everyone. So I guess in terms of some of the pieces that you gave on 2021. It's helpful to think about I guess, maybe starting first on on the point about occupancy being year and flat to down 100 basis points.

Can you just maybe explain what that assumes in terms of Av.

Actually getting our retention rate on renewals versus some new leasing.

Since I know you also said that you have already this embedded.

Occupancy gain is I think 130 basis points, just trying to kind of square away. How we should think about how you then get to a flat or down 100 basis point number by the end of the year.

So Nick this is Doug.

It's not as precise as youre going to youre going to want to hear but are are.

Method of sort of coming up with that number is to understand the amount of space that we have rolling over.

And while we have a probability on on renewals.

The real variability is on how much of the vacant space that we currently have.

And in a b be leased and BB revenue producing because it has to be revenue producing meaning we have to have deliberated and quote unquote as already space or and second generation and not demolished and and so it's that that's what's really driving the number.

To sort of flat to debt to negative because we just don't know what we're going to be asked to do relative to delivery conditions and that space and when revenue is going to start and as I.

Again, and we sit here today with 134 basis points of lease space, that's not revenue recognizing right now and we just don't know where we're going to be as we get to the end of the year and honestly, we expect our transaction volume is going to pick up as the year goes on it's going to be slow and the first half of the year and our expectation is if the vaccine rollout goes is.

We believe it will.

And there'll be a significant pickup and activity once people people are back and school from a population perspective and people are back and their desks and people are feeling very confident about.

Their business prospects and so the third and fourth quarters are going to be back weighted which again impacts net revenue number.

Okay. That's helpful. Thanks, Doug I guess just one other question.

Kurt two fold on on 2021, and one and the decision.

Not to provide guidance, maybe just hearing a little bit more about.

For the full year why you thought it made sense to to to not provide guidance. Since you did I think you have a lot of components to help us think about a potential range and then I guess in terms of when you were talking about the 652 days.

Mike and then you talked about some uncertainty on variable income streams and same property leasing I guess since you did give a year.

A year and sort of occupancy range I guess I'm trying to just think about the same property leasing and whether that ends up being a negative adjustment to that base on episodes that you talked about based on your year end occupancy number.

And so.

Try to describe it a little bit more and look we're trying to.

Provide as much assistance as we can.

But there are some variable pieces that are pretty big.

And require a wide range I would say.

And the same store.

Every 50 basis points of occupancy.

Based upon our current kind of rental rates is about $15 million. So thats nine cents a share as every 50 basis points of occupancy.

The variable income streams that I talked about.

Could add $30 million a quarter.

So we just don't know when that's going to come in I think that the hotel portion of that which is minor.

There's only $5 million a quarter.

And that.

We think it's going to take longer.

But the parking and the retail components of that.

Could snap back more quickly it could be third quarter, it could be fourth quarter, and it's just really hard for us to say when that's going to happen so providing a meaningful.

<unk> is just difficult at this time, so we've chosen.

Not to do that but I think I've given you a sense just on these comments of.

And what our expectation is if our occupancy is going to go down.

And then.

After you pull out the charges we incurred in 2020 from the same store and you just think about run rate.

If our occupancy goes down by 50 basis points on average I would expect our same store to be down slightly.

And we look at these are lease up on a lease by lease basis.

So we've looked at all of our units.

Renewal retention has gone up and you've seen it quarter over quarter. During the pandemic. It was I think 50, 657% this quarter was pretty good.

So we've done that analysis to come up with kind of the occupancy views that we have based upon the activity that we're seeing.

Today and the portfolio. So hopefully that's helpful. Just to say that yes, let.

Let me, let me just say slightly different way, we're really good at understanding what's going to happen and the portfolio and the next 90 days with regards to the variable income we're really not good at knowing what's going to happen three and six months from now and we hope that when we get to our net conversation with you which is in early.

May or late April we're going to have we're going to be and are better positioned to know how things are going across the country from a variable perspective, but we may not know, but I think we're just we're just we don't have the certainty associated with it and we just don't feel we can pontificate about.

Recovery of the based economy in terms of how people are going to act and so that's why we're sort of sticking with this quarter by quarter methodologies right now.

Okay, Great appreciate the added details guys.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Hi, everybody. Thank you.

A big bright spot and leasing with demand being pretty firm for life Science and biotech companies was certainly welcome but it seems that C suite decision, making and fire and maybe to a lesser extent tami tenants.

A bit more hesitant or muted with commentary often include a more work from homes and flexibility longer term and obviously people talk about the need potentially for less office space. What are you guys seeing and the field and when do you anticipate buyer and tami tenants to Reengage and.

And a meaningful way will it be during 2021 or potentially pushed out a bit Owen.

And you want to be on the soap box first.

Sure.

There are a few things there to unpack.

Look I think that you are correct.

<unk> life science demand is strong some of the other sectors are not.

I think the reason for that is most importantly, we are in a recession and and all recessions leasing activity slows down.

Businesses have more uncertain outcomes and Ceos are less likely to make major financial commitments, which are leases. So this is no different from prior recessions.

I think office lags a bit so I think youre going to youre going to we're probably not going to get more stronger leasing activity until later in the year when the.

When the virus dissipates people come back to the office and the economies clearly and improvement.

And as I've said in my remarks, we acknowledge the impact of work from home and do believe that workers and America and possibly around the world will want to work from home on a part time basis more frequently.

So we acknowledge that impact, but we also.

And the with our and we also see with Ceos I think the importance that they see and in person work and their strong interest and getting their employees back to the office. So then the issue is okay. What's the impact of the additional part time work on office demand and again to save.

Space.

By having with people working at home on a part time basis, you really need to do two things you need to schedule when that I'm out of the office is because everybody can't be out of the office on Monday, or Friday, and two you have to go to flexible workstations and move people around and again, if youre looking at employee.

Preferences, one of them and they want to work from home more and as I've said in my remarks and 90%.

Thursday and <unk>.

<unk> survey said they wanted to fix workstations so.

Which employee preference will be accommodated.

And we acknowledge there is an impact from work from home, but we think it's overblown for those.

Yes.

Okay.

Got it.

No. Thank you appreciate I appreciate the color, but let's just stick on on that employee survey that you guys mentioned and remarks, I mean, I'd say to play Devil's advocate, just because of worker wants and office or a dedicated workspace does not mean that they will be granted that especially if they prefer or demand.

A hybrid model, so hot desking seems to us potential solution, especially and in AEP or week on week off model that allows deep cleaning over the weekend. So I guess like what data from business leader conversations.

Do you believe to believe that hot desking is ultimately unlikely.

Thank you guys yeah.

Look I think you have to say I mean look we all as employers want to accommodate our talented workforces and that survey expressed employee preference. So I think business leaders across the country are going to have to sort out which employee preferences. They want to try to accommodate.

And I talked about the fixed workstation working from home more is also and employee preference I do think strongly and talking with other business leaders, there's a strong interest and having employees return to the office.

Because of all of the Dimunition thats going on in terms of culture competitiveness creativity Onboarding employees. So again I think this is a question that business leaders are going to have to sort out which employee preferences are they going to try to accommodate.

Yes.

Yeah.

Okay.

Your next question comes from the line of Anthony Pillow, and <unk> with J P. Morgan.

Yes. Thank you.

Doug you mentioned, it's hard to know where rents are going to ultimately shake out, but you did do auto leasing and the quarter and it sounds like you've got a pipeline.

What.

Where would you peg kind of the conversations around all and economics now versus pre COVID-19.

I think.

And with.

It depends Anthony it depends on the market and I mean, I will tell you that we're getting higher rents and our <unk>.

Life science oriented and our suburban portfolio and Boston right now than we were pre COVID-19 and in and a market like San Francisco All we've done is renewals and all of those renewals have been.

Well in excess of what the current tenants are paying.

And it's unclear if rents have really dropped by much but I can tell you that and my heart of Hearts and I do believe that we're going to see some softness and the markets that we're and so again I wish I could give you a firm answer but I just can't now if you. If you asked 100 people right now based upon the activity that's occurred.

And in these cities are rented up or down by more or less and 10% I would say that he would tell you that rents are down by less than 10%, but again, it's a net effective.

And.

Calculation, not a base rate versus a phase III previously.

And I mean, given a rollover and 'twenty 'twenty, one and I think you have a decent amount of Boston is it do you still anticipate debt that you'll likely have positive spreads across the portfolio. This year, when it's all said and done.

The answer is I think the answer will be yes, I mean, that's why I gave all of that data on all the leases that we've done recently again.

That's about what the rent was versus what the rent will be on and contractual basis not event not about would the rents have been higher had we done the deal six months ago. So.

And affirmative yes.

Okay, and then just a question on the capital allocation side just curious.

How did you think about or how do you weigh kind of the JV route as an acquisition vehicle versus the complexity it adds to.

To the to the company overall versus just selling assets to raise capital and then in terms of target markets Seattle the only.

Target that youre not in or are there any others out there.

So I'll touch on that.

Okay.

We do have significant capital, but we also have significant ambition in.

In terms of growing the company and making new investments that makes sense for shareholders. So we do think it makes sense to extend the equity capital we have with partners.

We have a rich tradition of doing this and the company we have a reasonably significant portfolio that's already partnered with.

Global leading real estate investors like Norges and CPP and.

And we think extending that type of business makes a lot of sense.

Selling assets is not and efficient way for us to raise capital most if not all of our major assets have a significant tax gain which requires a cash or requires a special dividend and therefore, the retention of capital is much lower so.

<unk>.

For all those reasons, we think the joint ventures make sense and the other thing I would say on the JV is is we are providing property services to those joint ventures. So we do enhance our yields as a result of providing those services to the joint venture partners.

Yes.

Thanks, and then Seattle piece of it Oh, sorry, the market, Yes, I would say in terms of new markets, where we currently are not in operation and Seattle is the only market that we are actively looking at investments right now.

Okay. Thank you.

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

Hey, good morning, everyone.

Mike in terms of the co working exposure.

Can you just remind everyone, where where youre concentrated geographically from a co working perspective and is it the lockdowns and those markets that are causing you to sort of take this.

Take down that those accruals and sort of pause and that income stream.

So this is Doug maybe let me, let me try and answer that question. So we.

So we've basically been approached by every operator, and our portfolio regardless of the market about relief and we saw this last quarter all over the country.

Put units into bankruptcy. So were now 11 months into this pandemic and its pretty clear that the flexible space operators customers, obviously, many of which had short term leases and many of those leases are probably expired.

Been very slow to come back to work, but really not dissimilar from the sensus, we've seen and <unk> as we've said before is.

Somewhere in the high single digits and low double digits right. So.

This industry is simply just facing revenue challenges and we decided that given the credit deterioration and we should be recognizing rent on a cash basis. So that was that was the reason we did what we did when we did it and with regard to our own portfolio. We have I think 13 units.

Across the country, three in California, and the rest.

Their portfolio, and Washington D C and in Boston.

Nothing and New York weight, and we have one and new Jersey and in total it's about $50 million.

And we've actually reduced our exposure by about 100000 square feet over the last year with leases that have expired.

No.

We don't have any specific concerns about any particular unit, where we're current on everything right now, but we just we just looked at the World and said. This is these guys are going to have a really rough time, and we think based upon the credit deterioration and this is the time to do what we did.

But thanks for that and then.

And as you go into these discussions with some of the longer term new leases.

Have you seen them I, just thinking about are actually changing their physical plant.

More space less space and hotel and concept.

We've discussed on this call and sort of just more topical trends but.

They build out their space with 10 or 15 year leases how are they building that out today.

So so we have had this conversation and past calls and I would wish I could tell you that theres been a sudden change.

And the in the sort of view that the tenants and their architects are taken but I can tell you that very few tenants are really looking at transformational design changes.

And their spaces across all industry types now.

It doesn't mean anecdotally that you won't find a customer that says you know what we are going to try and do this work from home.

Workforce strategy, but we want all of our people to be able to come to the office and therefore, we're going to need and different types of larger meeting rooms, and different types of breakout areas and far less quote unquote individual spaces. There are people talking about that but it's the exception not the rule to date and.

For the most part and all of the buildup, we are seeing and our portfolio right now.

Business as usual pre pandemic and <unk>.

Again, the tenants that are in place with longer term leases have yet to do anything.

And with their spaces relative to making a change and the way. It's currently configured because they have a unique way of looking at how they're going to sort of come out of the pandemic relative to their utilization and space.

Im a little surprised but that's just that's the fact that we just haven't seen it.

Thanks, Doug.

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

And I was hoping to dig into some of the markets and a little more detail.

And I guess, just starting out on D C post election and the.

And the Democrats Democrats doing well and.

Budget, we've seen any thoughts and what might change and in either CBD or northern Virginia.

Ray and Peter you want to take that one.

Yeah I'll start I'll go ahead, Peter could talk.

Well I was just going to say.

And I've been here as long as ray, but since the late eighties typically.

And when there's a line.

And the houses and Congress and the administration.

And certainly I think we're seeing it now with the top of the stimulus.

Always positively impacts the real estate market.

And that's going to occur and where that money gets spent and I certainly think the lifestyle and says we're going to benefit which would indicate the $2 70 quarter and around NIH closer in.

But also downtown and.

There's talk about Reenergizing the FBI. So historically, it's been a positive it's just given where we are with the pandemic, so probably a little more difficult to predict right now.

I will just add to that and this is more to manage point previously then and.

And yours, Jamie, but and D C relative to the four major tenants.

Debt, we're constructing new headquarters for Volkswagen Wilmar, Marriott and Fannie we're seeing virtually no change to the pre pandemic space configurations debt.

They were launching prior to the work from home and motivation and.

I think everybody all four of those are extremely excited about getting our employees back to work.

They're making virtually no plans from major downturns and the actual demand for space.

And they're quite excited about the new buildings, we're building so.

And the suburbs, we just completed perhaps one of the most successful years and Northern Virginia, We've had and 20 or 30 years. So.

And if there is a pandemic impact to our suburban portfolio, we're sure as Hell and I've seen it.

Yes.

Okay, and then what does the leasing pipeline look like from more Reston Town Center type product.

Well, specifically and rested and we've got probably cash.

And the other 200 250000 square feet of proposals out for.

And for occupancy this year or so.

And now, we're running and rest and run up against a lack of available space.

So.

We still have got cash about 150000 square feet coming on where new project RTC next.

Debt is now coming to a point and a physical condition, where we start showing the space.

So we think that the.

Real activity and do you see you will continue to be suburban focused with some hopefully.

Biden related activity downtown.

Okay. Thank you and.

And then I guess shifting gears to the Bay area and we all see the headlines about corporate relocation activity.

Just curious to hear if you think about the next couple of years, how much of a drag you think that will really be have on.

Market conditions.

Bob do you want to start with that one.

Yes.

Corporations and move from Bayer and this happens every time there is a recession.

Oracle was not a big occupier of new space or someone that was taking space.

Consistently over the last couple of years. So I think it has very little impact.

And the case for HP, they've been shedding space and the last 10 years, So I think and again it has very little impact.

So Jimmy.

Additional response would be that.

The profitability the revenue picture.

Aspirations of the technology companies that have significant footprints and the greater San Francisco and Silicon Valley have probably have been and are stronger now than they ever have ever been and.

And.

As I said to you before and my.

My sort of prepared remarks, it's been a really tough time and San Francisco in particular, because of the shelter and place orders.

Debt moved to basically asking people not to go to work if they if they can't help it but being able to go if they could.

And and we're just we are just waiting to see what happens with regards to the aspirations of these technology companies relative to.

Understanding that there is a heck of a lot of additional labor available.

Because of the recession and certain things that happened earlier in the year that residential rents have come down so affordability is very significantly changed.

And that San Francisco is still going to be a great city.

And and that there are opportunities to expand there and it very well and maybe that were surprised on the upside. We just we just don't know and it's there.

There's incredible amount of beta associated with what will happen and San Francisco and I think everyone. Right now is looking at the worst and assuming that's what the fact from the street are going to be and not looking at the opportunity side.

Okay. That's very helpful. Thanks for everyone's thoughts.

Yeah.

Your next question comes from the line of Steve <unk> with Evercore ISI.

Thanks, I guess first no and I just wanted to go back to the $800 million and I guess projected development starts and potential development starts.

I guess a lot of that life science, but just have you changed kind of your pre leasing hurdles have you kind of changed your yields targets and kind of what are you expecting on those projects and the extent you do startup.

Steve on the life Science right now given the heat and the market and the success that we had with 200 West Street and the dialogue that we're having with customers.

We would be prepared to launch speculative development and redevelopment in our core life science clusters.

Maybe some of these dialogues with customers will be signed before we start but we have a lot of confidence in the market.

And the yield requirements have not come down so we're still shooting for 7% and we would be a lot more we will and are a lot more cautious with office. So pure office development, we certainly wouldnt launch without a pre lease.

Yeah.

Okay, and then I guess, you mentioned sales might be a similar level it sounds like maybe $5 million to $600 million.

Any sense for kind of markets or how are you thinking about yields how do you think yields would stack up and are these sort of single tenant high credit deals with long lease terms and it's sort of been the flavor of the day and the market or are these more traditional multi tenants.

Average lease terms, which really had not cleared the market how do we think about those sales.

Well, we are already working on a couple and we are.

Wording out the remaining assets that we want to sell this year as we've discussed in the past we do have these gains.

And that come from the asset sales, but we are keeping our dividend flat and we have more suppressed income so those gains will be used.

And to pay the quote regular dividend.

And Steve I think the assets the assets, we will select will be a mix there'll be assets that we consider non core as you know we've been selling $2 million to $400 million of those per year, even before the pandemic and then there'll be other assets that we think will.

Meet the market in terms of some of the Comparables that I described earlier and the cap rates that are being achieved so I think it'll be a mix.

Okay, and then Mike.

I guess, you sort of given up.

And I guess.

A reasonable number for earnings in 'twenty one.

It sounds like debt doesn't per se contemplate the potential occupancy decline that you and Doug spoke about but nor does it contemplate on the plus side. Some of those tenants that are currently in place that are maybe on cash accounting, where youre not really collecting a lot of rent or maybe rent at all so how do.

And we sort of think about those two.

Kind of going in opposite directions, and influencing that $6 50 number.

Well I think that.

And the occupancy and.

Impact I mentioned in 2021.

And if it's.

50 basis points and could be nine.

And.

And the ancillary income side, I talked about $30 million, a quarter, which is significantly more than that.

And if you think about it basically 12 million and parking.

12 million is retail and some of which has vacated but some of which is just not paying us right now.

And.

$5 million as hotel, which again might take a little bit further to get back so depending on the timing and when that stuff come back and come back and could clearly outstrip.

Any kind of reduction and we might have and occupancy from the same store.

We do have I think what youre getting is we had some some tenants that are on abatements right now that are actually and occupancy. So we we had $19 million this quarter of those tenants. So we think that those tenants who are in occupancy and open.

And we'll start paying rent again.

Some of those were recognizing GAAP rent right now some of them were not it's probably about 50 50.

On that so those tenants are in place and and occupancy and we're hoping to get back to more of a contract rent basis next year.

As part of that.

Overall $30 million increase.

Right, so not to put words in your mouth, but it sounds like those things have the potential to maybe outstrip, our outweigh that potential occupancy declined at some of those really start to move and the positive direction, yes, They certainly do and especially when you get into 'twenty two.

And when things are expected even normalized further because there youre going to have both.

And starting to get more towards a full run rate on some of this stuff that returns hopefully and youre going to have more development coming online as well because in 'twenty. Two we're delivering Fannie Mae were delivering Google and we've got a lot of deliveries going on and the development growth for 2021 that I described is really pretty modest and I said, it's only five.

And thats because that stuff is kind of coming in later in the year and we will have a full year of that stuff and 'twenty. Two so I think there's again, there's a lot of positive things that we've got going on.

Great. Thanks, that's it from me.

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

Thanks, Good morning, Thanks for taking the questions. So maybe just so two questions first just on the sublease market.

It was interesting you mentioned some tenants are sort of testing out the market and putting everything on the sublease market.

Hope and see what sticks, but I'm just curious from your perspective.

Why is that occurring this cycle and why is it why is it.

Versus sort of prior cycles, where we may not have seen that phenomenon and we.

We have seen another other cycles and other front and which is more sort of was my point with regards to New York City between 2008, and 2009 right. I mean, there was 24 million square feet that was put on and $13 $7 million that was taken off it was exactly the same thing there is nothing different about this cycle relative to sublet space and then the last cycle.

Other than the fact that for the last 11 months Theres been no no traction from an absorption perspective, because most people have not been transacting on particularly with the kind of spaces that are on the sublet market, which are a lot of times shortlist short term and are as is in many cases, because they don't know when they're going to need the space because they are not.

Not sure when they're politicians are going to give them the okay to.

To have their public schools open and therefore.

The employees can feel comfortable making plans to go back to the space, even if the buildings are open.

Okay got it so last cycle. There were also just corporates, who just put their entire space on the sublease space just to kind of see what.

And what sticks, but then as you say some of it.

They took it back as the economy and prove that.

Interesting.

Maybe just a second.

You referenced sort of the implied cap rate of five nine for DXP and.

<unk> market and sub five range.

And I guess, just if I look at creep and then making the last five years for whatever reasons the equity market.

Always sort of true versus any of the equity market has afforded call it a 20% discount or a surplus to any of the.

Over the last five years and I'm, just wondering from Dxp's perspective, either actions you take or we have to exhibit value.

Post pandemic, assuming this kind of disconnect persist what are some of the other <unk>.

Actions or strategies, you could pursue to close this gap.

Vikram I think the key is to grow the company.

The market values growth more than <unk>.

And that's what we're focused on.

Fair enough. Thanks, so much.

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

Good morning.

Good morning up there or down there.

So question.

First Owen you mentioned.

Back on Seattle, but that's the only market that you guys are looking at but clearly.

Lot more growth and like places like Boston or Miami, I mean, you've got Blackstone looking at buying a building down in Miami, So as worker preferences change and certainly Florida looks to become Wall Street, and the South and Texas gets a lot more tech at what point do some of those markets.

Start to.

Create the same dynamics.

Culture.

Base et cetera that would attract you guys to start looking at debt markets, like and Austin or Miami et cetera.

Yeah.

So.

So Alex a couple of things I would say one we.

We acknowledge that there is some corporate relocation activity going on to south and most recently to south Florida and to Austin.

So I would say a couple of things one I think you've got to dig into that a little bit more I mean, I'm not sure I would describe south Florida is wall Street, South I think if you actually looked at the size of the requirements that some of these larger financial institutions have and the Miami market, they're not that big so it makes a big headline but it is not a lot of <unk>.

Base and it's not a lot of employees. So that's one.

And then to look I do I think we all acknowledge Austin is a computer science cluster there is no doubt about it but the.

And this is true and south, Florida, as well that the market dynamics for office investment are very different the level of new construction and existing vacancy even with class a space is very high and it's much it's much more elevated than the markets that we operate and so yes, you've got the growth, but you've also got plenty of.

Supply coming on and that has an impact on outcomes as a real estate investor.

Okay and then the second question is on the dividend.

Mike if we use your implied <unk> range and then deduct for all the funds start to get it to <unk>. It would suggest that the dividend is going to be.

Meaningfully uncovered this year.

Oh, and I think you'd probably agree that no one buys DXP necessarily for the dividend they buy it for the overall growth, especially given low dividend yield relative to other companies. So at what point does the dividend reduction become.

And the board would contemplate, especially as you guys talk about all the development potential life science, where the value creation and your platform.

Good at what point does the dividend come under reconsideration.

Our goal is to have a stable and growing dividend.

And given all the growth that.

Doug and Mike and I described on this call, we're going to we're going to grow back into our existing dividend and our opinion.

I mean, Alex just just.

Step back I mean, Mike said, and I thought pretty well, which is there is $30 million of Av.

Quarterly revenue that is not in our numbers right now that we absolutely is coming back whether it comes back and the fourth quarter of 2021, and the third quarter of 2022, we don't know.

But it is absolutely coming back and we have additional development that's coming online that's going to bring significant amounts of income we have real confidence and the growth and our taxable income and our <unk> and our <unk> over the next three to five years, including 2022 and.

And again, we hope in late 2021, so we're confident about what we have going on and our ability to to increase our revenue and a significant way just the other thing I would add to the question is.

Ratios, it's 105%.

Wouldn't consider that meaningfully uncovered.

And.

We anticipate debt our cash flows and our <unk> were going to improve next year and thats without.

Necessarily.

And improvement of this ancillary income which would.

And even further.

I mentioned that the.

And the sequential quarter improvement and the cash flow on the same store and.

There's a lot of free rent that burned off in 2020.

That is going to be there and 2021.

So.

I agree with my colleagues.

And we're not thinking about resizing our dividend at this time.

Okay. Okay.

Thank you. Thank you guys. Thanks.

Your next question comes from the line of Michael Lewis with the Truest Securities.

Alright, great. Thank you.

It looks like your tenant retention for 2020 averaged about 45% you could correct me if I'm wrong, but my real question is about the tenants that are not renewing and where they're going.

Are they finding sublease space.

And maybe some cutting or eliminating their physical footprint or some moving to other markets.

So I guess the question is are there any trends you are picking up on that front on.

And the tenants that are moving out that are clearly different from pre pandemic.

Michael This is Doug I don't I don't think Theres anything.

Debt, we can point to that would be a trend that we would be there are encouraged by our discards by its the natural and move out of tenants based upon.

And as of their space the way it was configured and what their future plans are and so.

We don't expect to see much and the way of changes in the profile of the kind of tenants that will stay versus the kind of tenants that will depart for whatever reason.

Okay and.

How many tenants have notified you of a return date to the office and other ones.

You have a rough schedule of how repopulation and your portfolio is likely to trend and the second half.

And you know where the physical occupancy.

Might be at the end of this year.

So the answer is nobody has notified us as the landlord.

What we are what we know is that they are having conversations internally and talking about dates that are beginning in the end of the second quarter early third quarter and going as far as as far into the year as the fourth quarter, depending upon the particular company and the particular location, but I would say that certainty around knowing that there will be a date and that.

<unk> that data sooner rather than later is the change that has occurred over the past couple of weeks and.

And I guarantee you that if the vaccine rollout is effective and work working that you will see more and more companies, having the confidence to tell their employees that they expect those kids to be back and their seats and they are those schools and getting on the buses come the fall of 2021 and the colleges will be.

Back in session and person and there'll be athletic events and things like that and it's going to be a question of simply getting through the scarred scar tissue damage that occurred over the last 11 months in terms of how quickly they ask those people to come back.

Okay, and then I'll just squeeze in one more price band.

I was just wanted to confirm.

The active development portfolio.

<unk> are there any tenants in there that want to renegotiate anything or maybe which day.

Had done their plans a little different maybe like sublease space and I can come back or any unusual risks and any.

And those projects.

Definitively know to all of those questions. Okay perfect. Thank you.

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

Okay.

And your line is open Sir.

Your next question comes from the line of Daniel is mill with Green streets.

Great. Thank you.

I'm just curious regarding co working and does this experience changed your thinking on how recent with these tenants might be structured and future such as the revenue share agreements.

Yeah, I think it absolutely does I think it makes it clear that we don't have a lot of appetite for doing these leases with other people on a going forward basis relative to what our current exposure is.

And that and when we do this stuff aren't with space and in the future it will be strategic and we will have.

Explicit needs and specific buildings, and we will probably look to do more of it ourselves.

And therefore, we're sharing the revenue with ourself.

And then on life Science, we've seen and life science cap rates trade inside of class a office cap rates across your market footprint, but I'm curious and your underwriting are you considering and that's a permanent change in valuation or does it revert to a more historical range post COVID-19.

I think a lot of it's driven by the fact that life science rents and a lot of the markets, where we operate have gone up a lot over the last few years. So when you look at an existing asset theres, a big roll up in it.

From where the building is rack rented to where the market is and thats, creating lower cap rates.

And if that dynamic changes I think the cap rates go back up and.

There is a scarcity.

Factor associated with it and there's not that much of it anywhere and any particular market and the country and.

Our own likes to use the word it's the hot dot.

There's lots of institutional capital that saying well, we don't have any of that stuff, we need to get some.

And so <unk>.

Supply and demand right there is relatively little and the way to supply there is lots of capital that's looking for it and so at the moment there is a very very strong bid for it.

Yes.

Thanks, Dan and thanks, everyone.

Your next question comes from the line of John Kim with BMO capital markets.

Thank you and I just had a couple of follow ups.

<unk> that you signed this quarter had an eight year term.

But what is your appetite to offer shorter term leases to build up occupancy.

So we are and the business of leasing space, John and if a tenant wants a short term lease we will.

Transact on a short term basis, if a tenant wants a long term lease we will transact on a long term basis.

We are customer centric and we want to do what our customers want to do.

Yeah, and and don't forget.

And we've been we've had a lot of success I think as you're pointing out and doing long leases. If we do the short extension that doug's talking about generally those don't have capex. So we're in essence, extending the tenant work over a longer lease term, which is also attractive.

Sure.

So do you view that as a short term solution, given where we are and the economic cycle or could this be a longer term trend and shorter.

And our lease was lowered capex and I think that.

Have different kinds of customers with different kind of motivations I mean, there are lots of customers who were going to say, we think theres been a car accident and the market and this is an opportunistic time for us to do a very long term lease.

Those customers are going to want to get as much capital out of the landlord world as they possibly can.

And except for as long as they think it's appropriate. So that's 15 to 20 years and some cases I think there is another group of tenants are saying were onshore we're not it's not clear to us how our business is going to perform relative to our current workforce strategy. We just want to kick the can for 18 months or two years and then look at it again, and we'll have more clarity and more confidence about our disk.

And then we will be able to make it more and more permanent capital decision I think that's always gone on and I don't think things are going to change dramatically other than I think it is going to be a slow ramp up this year just due to again.

And I referred to with the scar tissue associated with the length of the time people have not been back together and their offices and it's just going to change their decision making framework.

Okay, and then Mike.

Just wanted to clarify with you do you see the fourth quarter as being the peak quarter in terms of what you've offered and rent deferrals and abatements and it sounds like you think some tenants are going to start paying rent again, but I'm wondering if you're going to be offering.

<unk> rent relief as well during the year.

And certainly hope so I mean, I will say that many of our restaurant tenants, we were kind of going through the summer.

Because thats when we kind of have an expectation that it will be the next period of time, when maybe there'll be improvement.

So there is.

There is additional dollars that will occur over the next couple of quarters.

Based on what we know today, it's not going to be.

$19 million.

Because there's about the $19 million of those tenants I think theres about 10 left.

<unk>.

During 2021.

And we are not.

I guess, you can never say never where the tenants are going to come to you again.

But at this point, we've taken care of a lot of those tenants.

Great. Thanks.

Your next question comes from the line of Peter Abraham with Jefferies.

Thank you.

I just wanted to go back to Owen's comments at the beginning I think the worst and used.

The most significant and predictable improvement and conditions and leasing activity.

Which I think makes sense from coming off the base, we have and and the second and third quarter.

But at the same time, we are still coming out of recession and and.

And a lot of office using jobs have been lost so I'm just curious.

Your outlook what are your outlook kind of contemplates for.

Returning to job growth and how that impacts your thinking for for 'twenty, one and 'twenty two.

No look I chose those words carefully and I think that and maybe the interesting one was predictable and I guess the difference of this cycle is.

And then last year it has not been driven by <unk>.

Cyclical move and the economy, it's driven by it's been driven by a pandemic and a health crisis.

And so with the vaccine progress.

I think we see and I think the world sees a pretty obvious.

Correction and this over the next six months again knock on wood, maybe something goes wrong with the vaccines or theres, a slower rollout or there's something that goes on but in essence, unlike and economic recovery, which perhaps is harder to predict again. If this is all about vaccinations. Maybe this one is easier to predict.

And I think as all of us come out of the isolation that we're getting really tired of and returned to the world and to our offices and to restaurants and to theater and to each other the.

And the economy is going to reopen and I think jobs are going to come back I think of all the small businesses that will get to reopen and restart as part of all this so we do think this year, we're going to have a significant improvement and economic activity look office leasing tends to lag that so.

So we do think by the later quarters of this year.

The office activity will also elevate as a result.

Okay.

Right. Okay. Thank you.

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

Hey, it's Michael Bilerman here with Manny.

And I wanted to touch on two topics, one just coming off the vaccine.

I Wonder Doug are you thinking about I guess requirement.

Boston properties employees in terms of vaccination and he contractors building staff.

In terms of making your assets competitive it is for tenants to feel comfortable theyre coming into a safe environment and I know you can't force your tenants, but just how are you sort of thinking about vaccine rollout and how it is.

Here's to your public places.

Yes.

Doug.

Yes, so Michael I will I'll give I'll give you a and <unk>.

And on.

Discussed.

<unk> to that.

And so we are we.

Have the view I think that and our particular marketplaces.

The vast majority of the people who are tenants and our buildings will get the vaccine.

And.

It's hard to go from there to a rigorous.

Requirement that people get the vaccine, but it's not it's not something that we won't talk about understanding what the ramifications of that are.

But if if the vaccine is effective.

And the vast majority of that people get it.

And the vaccine will have done its duty, which is to effectively eradicate the virus and we wont have to really worry about the issue sort of on a going forward basis, but it's not something that we don't debt, we haven't haven't not thought about.

Okay and.

And then you talked a little bit about the sublease space and giving the Eni and Ken analogy for New York.

And the similarity is that we do have an economic crisis, that's going on.

But there's a big difference between the GSC and today, where people are not in their offices right people are still going to their offices and the GSC and people are not today, you have a lot more discussions and that movement of corporations around the U S. You certainly have a significant amount of discussions around about full remote working and hybrid remote working and okay. Thank you and love.

Being in the office and I love the interactions that provides and the advancement and a lot of things.

But what gives you the confidence that that sublease space won't have a more material impact because it doesn't feel like it's all opportunistic.

And it feels as though it.

And is much more real.

Today as people think about the amount of square footage that they need in this new environment.

I think you are asking a lot of fair questions and the answers are unknown at the moment.

Our our intuition is that as people start to go back to work the fear of mixed missing out.

And all of the.

Opportunities debt in person work have will become more clear to more people and they will start to get back on the bandwagon again, I am not saying that there won't be much more flexibility in the and the way employers treat their.

<unk> relative to requirements to be in a seat every single day.

The week, but I guess I am I'm, a strong believer in and Owen and I have talked to lots of people about the nature of the office from both a business and from a social capital perspective, and how critical it is for the growth of businesses and the growth of the individuals that are in those.

<unk> and so I guess I am more optimistic than your questions are suggesting.

The value that people will ultimately and clearly see and having people going back to work and a very significant way again on the margin is it is it going to be a headwind absolutely, but I don't think its going to be the.