Q1 2021 Boston Properties Inc Earnings Call

Good morning, and welcome to Boston properties first quarter 2021 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 to MS. Theoretically that VP of Investor Relations for Boston properties. Please go ahead.

Thank you good morning, and welcome to Boston properties first quarter 2021 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 Reg G did.

Did not receive a copy these documents are available and the Investor Relations section of our website at investors don't be ex P. Dot com a webcast of this call will be available for 12 months at this time, we'd like to inform you that certain statements made during this conference call, which are not historical and may constitute forward looking statements within the meaning of the private security and took.

<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 and the company's 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 the call Ray Ritchey Senior Executive Vice President and our reach.

<unk> management teams will be available to address any questions and now I'd like to turn the call over to Owen Thomas for his formal remarks.

Okay. Thank.

Thank you Sarah and good morning, everyone.

BSP team is joining you today from our offices all over the country, where we're beginning to see renewed signs of life as our cities reopen with increasing activity on the street and shops and restaurants on public transportation and yes, even and office buildings. We're building census is picking up and tour activity is accelerating.

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U S. GDP is growing at four 3% over $1 6 million jobs were created and the first quarter. We close weekly jobless claims are in decline and unemployment has dropped to 6% only two five percentage points above pre pandemic levels of February last year.

Professional services employment has remained healthy which is important given our Tennessee U.

U S retail sales surged nine 8% in March and air travel as measured by TSA checkpoints is up 10 times over a year ago, but still only 50% of pre pandemic levels.

The U S and global economic recoveries continue to follow the course of the virus and vaccination rollout, while new COVID-19 cases have remained sticky at around 60000 per day since late February all data, including 3 million daily vaccinations.

43% of Americans, having received at least one shot and the J&J vaccine reinstatement suggest the trajectory for a highly vaccinated population and fewer new COVID-19 infections remains positive.

The U S economy will likely continue to surge given the financial health of most industry sectors. The significant federal fiscal stimulus provided to individuals and small business.

Combinative monetary policy and pent up consumption sparked by the pandemic reopening.

This recovery is starting to bring positive momentum to the office markets and Dxp's results.

For the buildings, we can track our census last week was depending on the city at or above the post pandemic peak established last October.

And the first quarter, we completed 500, and 592000 square feet of leasing 84% of the leasing volume, we achieved and the first quarter of last year and 46% of our long longer term first quarter average it.

And these leases had a weighted average term of seven six years.

Our leases that commenced this quarter demonstrated a 15% roll up of net rent per second generation space.

We exceeded our <unk> per share forecast for the first quarter and the tenant charges, we experienced in 2020 largely disappeared.

More broadly tenant requirements and our target markets and March based on data provided by VTS were up 33% versus the prior month and 51% versus the prior year.

So we're only down though are still down 40% from pre pandemic levels.

Office markets are lagging other asset classes, because very few employers are currently mandating in person work.

That is now changing rapidly as many large employers such as Google Goldman Sachs, JP, Morgan and Ernst and young Facebook, Amazon Apple and others have announced return to work plans for this summer.

We continue to see labor day as a key tipping point for employees returning to the office with forecast low COVID-19 infection rates high vaccination levels at the end of summer and schools reopening.

We hear repeatedly from our clients as well as and interviews we have completed with large occupiers that the key to future success and competitiveness is to successfully reintroduced in person work.

Unlike most recessions most of our clients are thriving and have not reduced head count.

And our leasing activity and renewal conversations with clients, we have not seen material reductions and space requirements.

Now moving to private equity market conditions, there were $15 billion of significant office assets sold and the first quarter. The volumes were down 37% from the first quarter of last year assets with limited lease rollover and anything life Science related currently received the best pricing often.

Other than before the pandemic.

There were again several deals of note completed and our markets, including and San Francisco The exchange on 16th located and the Mission Bay District sold for $1 1 billion or $14 40 per square foot a record price per square foot and San Francisco and it represented a four 9% cap rate.

This 750000 square foot recently developed building is 100% leased to a tenant trying to sublease. The entire building the asset was sold to a fund manager, which may attempt a life science conversion.

And Seattle 300 time, the Macys building sold for $600 million or $779 per square foot and a four 4% cap rate. The majority of this 770000 square foot asset was recently converted to office space, which is 100% leased by Amazon and the remainder is undergoing.

Further renovation and the building was purchased by joint venture between a fund manager and our real estate operator.

And in the Washington, DC, CBD, a 49% interest and Midtown Center was sold to and offshore buyer. The building comprises 870000 square feet and are substantially leased to Fannie Mae has its headquarters the gross sale price was $980 million $1129 a square foot.

And a four 7% cap rate.

Moving to be XP investment activities, let's start with our growing life science business.

DXP currently has over 3 million square feet leased to life science clients, approximately 2 million square feet of current and future office to lab conversion projects and sites for approximately 4 million square feet of life Science ground up development, primarily located and among the strongest life science markets.

And the U S, namely, Cambridge, Waltham, and South San Francisco.

We recently received 1 million square feet of new entitlements at Kendall Center, and Cambridge, and our joint venture at Gateway Commons is and discussions with local authorities and San Francisco to increase entitlements by one 5 million square feet.

We had a very active first quarter launching three new lab development and redevelopment projects.

<unk> hundred 80 city point of 330000 square foot ground up development and part of our larger city point campus in Waltham with strong visibility from I 95.

Second 880 Winter Street is a 224000 square foot class a office asset we acquired in 2019 for $270 a square foot and we will redevelop into a lab building and 751 Gateway 229000 square foot ground up led lab development as part of our Gateway comments Joe.

Venture and which we own a 49% interest.

So all three projects are being commenced speculatively, we are seeing many new life science requirements and both the Waltham and South San Francisco market and have made multiple lease proposals to potential tenants.

A large portion of our active development pipeline is now lab and currently comprises 920000 square feet and $560 million of projected investment for our share with projected cash yields at stabilization of approximately 8%.

DXP has a rich history of success, serving the life science industry, we have the land and building inventory and the strongest life science clusters, and the U S as well as the execution skill and client relationships to make life sciences, and even more meaningful component of our overall business.

Moving to the balance of our development pipeline.

We delivered into service this quarter 159, East 50, <unk> Street with 195000 square feet of office fully leased to NYU as well as the hue, which will open after labor day and serve as a unique culinary amenity for our three building 50, <unk> and Lexington campus.

We remain on track to deliver our 100 Causeway development and Boston later, this year, which is pre leased to Verizon and we have four additional and significant projects slated to deliver in 2022. This pipeline is 86% pre leased with aggregate projected cash yield stabilization projected to be approximately.

<unk>, 7%.

To maintain our external growth and addition to adding the three life science projects. We also are investing approximately $182 million into and observatory redevelopment project on the top of the Prudential tower in Boston.

When complete the observatory will have three levels comprise 59000 square feet and will be a world class attraction, featuring both indoor and outdoor 360 degree viewing decks as well as exhibit and amenity spaces.

The project will be the only observatory and Boston and we expect it will generate strong returns to BSP after delivery and <unk> and.

And the spring of 2023.

Net of all these movements our active development pipeline currently stands at 10 development and redevelopment projects, comprising $4 3 million aggregate square feet and $2 7 billion and total investment for our share. We expect these projects along with the lease up of two residential buildings delivered in 2002.

<unk> as well as one and $5 nine East 50, <unk> Street to contribute three 5% of annual and external growth to our NOI over the next three years.

We continue to actively pursue value added acquisitions, and our core markets and Seattle.

Despite the impacts of the pandemic office investment opportunities and our core markets remain highly competitive.

To enhance our financial resources execution speed and returns we have reached an agreement with two large scale sovereign investors to pursue select acquisitions together with.

And the partners, including DXP will commit up to $1 billion and we will have the opportunity to invest one third of the equity and each identified deal at their discretion.

DXP will provide all the real all real estate services and has agreed to commit its acquisition deal flow to the partnership subject to specific carve out.

We believe this debenture with approximately $2 billion of investment capacity provides us the financial resources and return enhancements to be and even more nimble and competitive participant and the acquisitions market. We will announce the completion of the partnership including the participants once documentation is complete likely.

And the next month.

Moving to dispositions, we recently completed the sale of our 50% interest and Annapolis Junction building six and seven and our last two remaining properties and the Fort Meade, Maryland market.

The buildings totaled approximately 247000 square feet and sold for a gross price of $66 million, which is $267 per square foot.

We have under contract three buildings and our VA 95 business Park, and Springfield, Virginia for a gross sale price of $70 million.

And we also have under letter of intent the sale of several stabilized suburban buildings for another approximately $190 million and.

Additional asset sales are being evaluated and we believe our gross disposition volume in 2021 will exceed $500 million.

To conclude VX.

<unk> is emerging from the COVID-19, pandemic with strength and momentum.

Leasing volumes and requirements are rising office collections exceed 99% our clients are healthy if not thriving tenant credit charges have largely disappeared our $30 million per quarter of lost variable revenue is poised to return with offices are reopening we've launched new life science.

Development, our active development pipeline is expected to deliver strong external growth and we've raised a war chest for new acquisitions to add even further growth.

Remain confident and both our near term and long term growth prospects.

Turn it over to Doug.

Thanks, Owen good morning, everybody.

I'm going to try and give you my best shot at are describing and the operating environment that we are seeing and our portfolio as we sit here in late April.

So as Owen said the office tenants are deep into planning for their return to the physical in person and work environment.

As we approach the back half of 2021.

And while there are lots of announcements as Owen said of Relaunches.

And our building census is up we're still at pretty low levels and I think you can see that most clearly from a financial perspective, when you look at our monthly or daily parking, which was basically flat and the first quarter to where it was in the fourth quarter of 2000 and.

'twenty, although just yesterday as an example.

We had our meeting for our California parking and we had 67 requests for additional monthly spaces, and <unk> 42 of them which are hard.

And to give you a perspective, we actually lost more than half of our monthly parking over over 800 monthly spaces in Embarcadero Center, so things are picking up.

When we spoke to you late in January we said that the first half from 'twenty, one was going to have a low level of market leasing activity as defined by executed leases and that statement still hold.

The reports that are published by the commercial brokerage organizations, describing broad market conditions and all the calls that are sponsored by the analysts that follow our sector really didn't have any surprises and them leasing volumes were off their historical pace. It was modestly more sublet space, which was added to the market and that translated into some negative absorption and increased availability and.

No surprise no shock.

Last quarter I described the dynamics around sublet space, particularly opportunistic sublet space.

And this is when tenants are lifting their entire premises obviously at no cost with an expectation that they'll decide what to do if they actually get and offer that they can accidentally respond to down the road, but the reality of transaction and when push comes to shove is that tenants may re occupy they may relocate and transact and.

And they may find a way to sublet a portion of their space and we're not the whole space. So give you a couple of examples.

And Boston, we had a 50000 square foot tenant two floors in our CBD portfolio lift their entire space. This successfully sublet.

Sublet one floor and then they pulled the second floor off and they are re occupying and July.

We competed actually against the long term fully furnished sublet space in mountain view and the Silicon Valley and the user began to negotiate on a sublease, but when the prime landlord refused to agree to recognize the leafs. They use are quickly walked away and took direct base.

So I'm not going to downplay. The fact that there is a lot of sublet space on the market, but a large portion of it is not actionable because of short term and workable existing conditions are quite frankly users discomfort with the lessors profile and when you ask what percentage is I don't know, but its meaningful and yesterday J O. All came out with reports, saying there was about a 1 million and <unk>.

Square feet of New York City, Sublet space that was pulled from the market by those sub tenants.

And now the headwinds from the sublet space are going to exist, but theyre going to dissipate as companies return to in person work.

Obviously, we are also confronting the caution that some organizations are facing as they worked through how they move beyond having their employees working from their homes and only interacting on video calls that are typically scheduled days and advance.

This may delay decisions to increase base needs, even though companies have hired more staff as Owen said during this COVID-19 shutdown and now as the economies reopening this.

This backdrop is obviously going to add some more short term pressure on lease economics and some markets.

Not going to affect all of the markets and the same way and it's certainly not going to impact all the buildings and in those markets and the same way either.

And the potential impact on pricing of sublet space and work from home makes for a really dramatic commentary, but it is not going to be driving Boston properties results I hope the following analysis will illustrate that point.

So the average gross rent on our expiring office base portfolio in 2021, 2022 and 2023, so the net.

Most three years totaled about $5 8 million square feet.

And the and the average expiring rent is about $65 50 per square foot. So if.

If you believe that pre pandemic market rents on that space were $70 per square foot and I'm just using that as an example, but it's close and you wanted to measure the impact of some kind of a decline and this is an example, not a statement of where I think what we think is going on with the rent, but let's let's use 10% as an example.

And then you would get to.

A 4% roll down and rent or $2 50 per square foot or approximately $4 $8 million per year over three years.

That's it that's the impact of the decline in rent on our portfolio from weak conditions.

And as a point of reference the change in second generation growth lease rent this quarter was positive nine 5%.

And Thats fair deal that started and were signed previous to this quarter as I go through my remarks, I'm going to talk about where rent are on spaces that we physically sign leases on this quarter or that we're working on now and how those rents compare to existing in place rents.

And so as I pivot my remarks to the Boston properties portfolio I'm going to describe our level of activity and I think it is going to be counter to the weak macro market conditions that you are hearing about and macro reports.

Let's start with our occupancy our in service portfolio occupancy, which includes a 100% of our Jv's ended the quarter 140 basis points down our 640000 square feet now 50% of that space that was added to our vacancy this quarter provided no revenue over the last 12 months.

That is it was base that we were trying to recapture from defaulted tenant in other words much of this drop in occupancy doesn't reflect and any future revenue decline. This.

And this includes the Lord and Taylor box at the Prudential Center.

And where we are in active discussions that we expect will result in a dramatic increase and the revenue from that piece of space. The office base that was given back by a center at times Square tower, and they are and tailor retail outlets at the Prudential Center.

And next quarter, we're going to have another one of these as we take back the Arclight cinema space since they've officially cease to operate that's a 66000 square foot lease at the hub on causeway joint venture and they again they never paid rent.

Also this quarter, we took back 62000 square feet and a recapture so we could expand a growing tenant that we are negotiating a lease extension and expansion at Colorado Center, but that lease hasnt been executed yet so the spaces and vacancy we did have one disappointment, which was the 200000 square foot departure at.

Santa Monica business Park.

We however today as I sit here talking to you have 640000 square feet of signed leases that have yet to commence and they are not included in our occupied in service portfolio and less we're actually booking revenue we don't consider it occupied.

On a relative basis, my view of the ranking and activity in our portfolio. So this is active lease negotiations and tours Rfps is as follows from top to bottom Boston Walt them, we don't really have any space and Cambridge. So I don't include that Midtown Manhattan and second.

The San Francisco, CBD, and third Northern Virginia its fourth.

Followed by the Silicon Valley Peninsula, West La Princeton and the D C CBD.

All of the transactions I'm going to describe to you or post COVID-19 and negotiations having begun in the latter half of 2020 or 2021, so let's start and Boston, which by the way represents over a third of the company's core revenue.

So during the first quarter and the Boston CBD, we did five leases totaling 37000 square feet and in every case the starting rent represented a gross rent roll up between 12 and 25%.

We continue to have additional activity and the CBD portfolio, albeit it's with a preponderance of smaller tenants and so we don't have much and the way of blocks available and we are working on eight leases totaling over 60000 square feet.

Of the 13 leases, we have done this quarter or and the works none of those customers are contracting and five of our expanding and more than doubling their footprint.

And the suburban portfolio, we completed a 124000 square foot of new leasing the cash rent on those leases was up by 50%. We continue to have additional activity in suburban Boston and Walt them, we're negotiating six more transactions totaling over 60000 square feet.

And the suburban portfolio, we have had some existing tenants expand and some contract, but we will be gaining occupancy with new tenants coming into the <unk> portfolio like our new tenants at 23 point and 195 West Street in Waltham again, those leases haven't commenced yet life.

Life Science demand and Waltham continues to accelerate we announced our plans to reposition and 880 Wintersweet and early March and have had significant tour activity and have begun making proposals. This 220000 square foot building will be available for tenant build out and the second quarter of 'twenty two.

And New York since the beginning of the year, we've had more physical tours, and we had and the comparable comparable period in 2020 and in 2019.

We completed three leases during the quarter totaling just 38000 square feet, including a full floor expansion by a tenant at 399 Park and total the gross rent on this space was about 5% higher than the in place rent now.

And I said, New York City is our second most active region and we're negotiating 14 office leases totaling over 170000 square feet, including a full floor lease at dock 72, and Brooklyn. We also have two other active proposals at dock 72, each in excess of 100000 square feet.

The majority of these New York City leases will be free of terms in excess of five years and more than half of those tenants are new to the portfolio.

We've had one midtown tenants pull their space off the sublet market and another large tenant that is still hasnt entire space listed has begun to repopulate.

Five of the 14th active deals represent tenants that are negotiating expansion.

Activity at the Street play and of our buildings is also picking up we're negotiating leases for food outlets and our 50 <unk> Street are eagerly anticipating the opening of the hue culinary collective at 601. Lex later this year and we have a new lease negotiation for our vacancy on the street and times Square tower.

And Princeton during the quarter, we completed four transactions and we executed this at the beginning of April for a total of 28000 square feet and were negotiating leases for another 29000 square feet all new tenants.

Activity and the D. C region was light during the quarter with only 50000 square feet of office leasing.

But as the calendar moved to April we signed another 170000 square feet.

210000 square feet of this total leasing was completed on currently vacant space and included two large leases at met square and the district, and and expanding tenant and Reston Town Center.

We have another 68000 square feet of leases and process and the D C region, including 25000 square feet and rest and from another expanding tenants and.

And the town center rents are basically flat to slightly down, 1% and 2% since the re let rent.

<unk> been adjusted by the fact that the current rents have been increasing contractually by two 5% and 3% for the last five to 10 years I would also note that retail activity and rest and has picked up we have now opened four new restaurants since November of 'twenty, we're negotiating leases with new food outlets totaling 27000 square feet there.

Going to open and 22 pedestrian activity and Reston Town Center is active.

California has finally begun to reopen and allow for higher levels of office occupancy. Although it is still way behind the rest of our markets.

During the quarter at Embarcadero Center, we settled rent arbitration on two multi floor five year extensions and completed another 10 year full floor renewal. The markup on these three deals totaling a 125000 square feet was 46%.

Core activity for small tenants a floor or under has picked up and grown about 40% sequentially month to month from January to April.

I would characterize half of our San Francisco CBD activity, because with expanding tenants and happens with tenants that are contracted.

Uncertainty level and the lack of pedestrian activity at the street plant, 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, but large tenant have started to begin to look for space. There had been a number of tours on the high quality sublet offerings and south.

The market, we see the activity and the proposals on the available sublet space, we have at 680 Folsom.

And South San Francisco, we signed a lease of 61000 square feet at 601 Gateway, that's going to absorb about 50% of the exploration that's going to occur and the second quarter we.

We are underway at $7 51 Gateway, our first lab facility development and South San Francisco and have begun responding to proposals for this early 2023 delivery.

651 gateway will be taken out of service and the second quarter of 'twenty two when the final tenant vacate and we will commence a lab conversion of that 293000 square foot building.

And mountain view, we continue to see a constant flow of medical device alternative energy battery storage automotive and other R&D users looking for space.

And renewal discussions with 24000 square per tenant and a commence lease negotiation with a second and for 30000 square feet.

And market ready vacant space and.

And we have a tenant ready to go on our remaining floor and <unk> of 18000 square feet at two four for El Camino. There are some large tech tenants in the market down in the valley today looking for expansion space and we are certainly chasing those tenants if the timing were to match for a potential delivery at platform 16.

In spite of the challenging COVID-19 conditions in California, and Santa Monica, We continue our renewal negotiations with a 260000 square per tenant at Colorado Center and as I said at the outset, we recaptured about 60000 square feet, that's going to roll into that tenants expansion. We've also signed a lease for 72000 square feet at Colorado Center with Roku.

Who's new to the portfolio and as you may recall earlier.

Late last year, we didn't expansion with staff at the Santa Monica business Park, So to summarize the takeaway from my comments, it's true that market fundamentals are weaker than they were a year ago, but will drive our same store portfolio performance will be occupancy pickup as well as the return of our parking income and the recovery of our retail activity and revenue.

There are tenants and our portfolio that are expanding and every one of our markets conditions are going to vary dramatically by sub market rent may or may not decline, depending upon the sub market, but we will still have embedded markups and our portfolio.

There will be a flight to quality and better buildings and see more tenant demand and tenant value paying less of a premium to be and the best assets and this will improve our occupancy let me turn to Mike.

Great. Thanks, Doug Great summary.

And then.

And everybody I'm going to start my comments this morning with little piece.

Pizza and our activity and the debt capital markets.

We had a very busy quarter and it impacted our results as.

As we guided last quarter, we redeemed $850 million of our expiring unsecured bonds that had a 4% and 8% coupon using available cash.

But in addition to that and not part of our prior guidance, we issued another $850 million of new 11 year unsecured green bonds at an attractive coupon of 255%.

The proceeds were used to repay our $500 million unsecured term loan that was due to expire next year and we redeemed at par and expense of $200 million, 5.25% preferred equity security.

We incurred non cash charges during the quarter of approximately $7 million or <unk> <unk> per share related to writing off unamortized financing costs.

Our next bond exploration is not until early 2023, when we have a $1 billion expiring at and above market interest rate of 395%.

And advance of that and early 'twenty two we.

We have a $626 million mortgage expiring on 601 Lexington Avenue in New York City. This loan also periods and above market interest rate of four and three quarter percent.

So turning to our earnings results for the quarter for the first quarter, we reported <unk> of $1 56 per share that was a penny above the midpoint of our guidance range. The variance variances to our guidance and comprised of <unk> <unk> per share of higher NOI from the portfolio and a penny per share.

And of higher fee income, partially offset by the <unk> <unk> per share non cash charge related to our refinancing activity.

The portfolio NOI outperformance included <unk> <unk> per share of lower operating expenses during the quarter much of which will be incurred later in the year and on the revenue side, we collected delinquent 2020 rent from several of our retail tenants, whose rents are being recognized on a cash basis. These collections drove a significant portion of our <unk> revenue base.

As we described last quarter, we believe the vast majority of our tenant credit charges are behind us our net write offs this quarter were immaterial.

And collections from our office clients continue to be consistent and very strong.

We provided guidance for the second quarter 2021, and <unk> in our earnings release of $1 59 to $1 61 per share.

At the midpoint. This is <unk> <unk> per share better sequentially from the first quarter.

And the expected improvement emanates from lower seasonal G&A expense and the cessation of preferred dividends from our redemption.

Also the first quarter financing charges are not expected to recur.

Really offsetting this we project lower termination income in Q2, and as Doug explained our occupancy declined by 140 basis points this quarter, which was expected, but results and a sequential drop and portfolio NOI from the half that was paying rent before.

We expect another drop in occupancy next quarter, followed by modest improvement and the back half of the year.

Doug described 640000 square feet of signed leases that have yet to commence occupancy 460000 square feet of this will take occupancy later this year, representing over 100 basis points of occupancy pickup.

While we are still not providing full year specific guidance, given the uncertainty and timing of our ancillary revenue streams. We did provide you with a framework for 2021 and our last call as you revisit your models for the full year. There are three other changes to consider first our financing activities. During the first quarter have a net <unk>.

<unk> of increasing interest expense by $5 million per year.

Second we have a lots of rental revenue from taking 880 Winter Street out of service for redevelopment and do a life science facility. This has a negative impact of about $2 million and.

And lastly, the additional $260 million of dispositions that Owen described are expected to result, and the loss of about $7 million of NOI.

In aggregate. These items are expected to reduce <unk> for the rest of 2021 by approximately $14 million or <unk> <unk> per share.

Looking further ahead to 2022, we've made substantial investments and pre leased development that will drive earnings growth, we anticipate delivering 100 Causeway Street in Boston, and 200, West Street, and wealth and late in 2021, representing $315 million of investment at our share that is collectively 95% leased.

The contribution from these two development deliveries will not be that significant to 2021, but there will be at a full run rate in 2022.

The bulk of the remaining pipeline is projected to deliver in 2022. This includes our building for Google and Cambridge rest and next for Fannie Mae and Volkswagen and the Marriott headquarters and 2100, Pennsylvania Avenue.

This represents delivery of one $7 billion of investment and 2022 at our share and $2 7 million square feet that is currently 85% pre leased.

And this $2 billion of investment in conjunction with the recovery of our ancillary income sources and improved leasing activity post pandemic sets us up for occupancy improvement and a period of solid future earnings growth.

With that and I would like to turn the call back over to Owen.

Thanks, Mike before we take questions. There just the last or last couple of things here I'd like to mention last week on Earth Day, We published our 2020 ESG report.

Where we made several important commitments.

And those include we set a goal to achieve carbon carbon neutral operations by 2025.

In addition, Dxp's had previously set a carbon emissions reduction goal in line with the most ambitious designation available under the science based targets initiatives program. In 2020, DXP was one of six North American real estate companies with this distinction and the only North American Office company.

We also established a new board level sustainability committee to among other things increase the board oversight of and input for our sustainability issues.

And lastly, we launched an internal diversity and inclusion committee last year with the mission of pursuing greater diversity, among our workforce and vendors as well as new programs supporting diversity and fairness and our communities.

Dxp's proud of its consistent recognition as an industry leader and sustainability and ESG and.

And area increasingly important to our clients our communities capital providers and employees.

And then lastly, there is one important milestone that I want to mentioned this will be Peter Johnston's last earnings call. As he is retiring from Boston properties next month after 33 years of service.

Peter has been and outstanding leader and our Washington, DC business and he will be greatly missed by all of you by all of US. Thank you very much Peter operator, we're ready for questions.

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 Alexander Goldfarb with Piper Sandler.

Hey, good morning.

Mike I guess, just going to the guidance question.

On the last quarter, you talked about sort of an unofficial $6 52. When you took sort of the run rate and then made the changes for the G&A and the various items that you guys had planned.

That would suggest that 2000 and pick up with the second half of this year, but you just outlined about eight of net.

<unk>.

And that is incremental to that.

Is that 652 sort of now a 645 ish type number or are there. Some other things that may impact, where we should be thinking about where this year, we'll end up.

So the reason I described that it was because of that fact, because these are new things that happened this quarter that we didn't project and our prior guidance.

Was not the pay off of the.

Larger bond that we paid up at the new bond that we did.

And then the sale of some of these assets so yes, I want to do.

Scribe those those <unk> drops.

For later this year now and we've given some guidance for second quarter and it does show.

We will have pick up later in the year.

And I think that if you look at Q2 Youre going to we expect to have a further drop in occupancy in Q2, and if you look at our rollover schedule and about 60% of the remaining rollover for the year is hitting and just Q2 Q3 and Q4 is very light rollover exposure. So we do expect to have some pickup in occupancy and revenue.

And the back half of the year.

From that leasing activity and we would expect occupancy by the end of the year to be somewhere between 88 and 89%.

Sure.

And then as.

As I also said, we have 460000 square feet signed this is going to occupy this year. So that's part of that.

Number so the improvement in the back half of the year is coming from a combination of some occupancy improvement from Q2 through Q4, and we also expect our parking to start to improve and Doug mentioned and we're starting to see some green shoots with the parking.

Will be helpful.

And then we have a couple of the development deliveries that I talked about it.

100 causeway and at 200 West Street, though that as you know later later in the year. So those are really the things that are the pickup and the back half.

Okay. So net Mike with the negative items that you mentioned right now, but youre, hoping for positive recovery on the ancillary and the parking et cetera. It sounds like still we're sort of probably in that upper 600, Forty's, maybe $6 50.

Mentally how the street should be thinking about it.

Yes, I think the street should be thinking about it as if we're.

And we feel good about the ability to kind of improve and the second half of the year, but there are the sales that we're going to have so it's going to be down from what I told you last quarter.

Okay second question is and you.

You didn't mention the MTA site in.

And your prepared remarks, certainly there seems to be a lot more interest around grand central and especially with the coming of the east side access and.

Commuting you got the Hyatt project.

Whatever does with 350 Park, Alright, and then obviously your site and I'm guessing, there's probably one or two others that people will try to pencil maybe you could just give an update and how.

And your tenant discussions.

How anchor tenants that you guys would be after thinking about taking potentially anchoring one of those projects.

John powers.

Line.

I'm on the line on.

First let me say, we're very excited about the MTA site is a terrific site.

It is a better site now and it was a couple of years ago, and it'll be a better site and four or five years and it is now.

J P Morgan finish and there we're entering Europe. So we have to go through the process. We don't know how that will come out.

We have to go through the whole community board et cetera to find out how big the building will be we've drawn in a certain way and we are.

Very excited to present it.

This is going to be quite a few years out from now so we're not talking to any difference.

Yes, I Didnt mentioned and I'd like to just because of the timeframe, but we're very excited about the site and it suggests the grand Central area. We think it is improving.

Okay, great. Thank you.

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

Thanks, Good morning, everyone. So I appreciate all the commentary does on the rent the rent for the leases signed in the quarter.

Wanted to see if you could give us a feel for what the blended <unk>.

Most rent number was the increase for the quarter on the ex on the saw and not executed leases and then also maybe you can just give us a feel for how that number would be different on a net effective basis and slow and continue to hear this team that face rents are down.

From net effective rents so so.

Nick I don't I don't have that information.

And my rental disposal here.

And the number is obviously up.

There were some that I described that were up.

5% and there were some that I described that were up 50%.

This quarter, there happened to be a lot more leases that we executed and we're up 50% debt and 5%. So the number is going to skew.

With regards to to net effective.

None other transactions that we had been working on have had much and the way of significant changes in either free rent or <unk>.

I would say we've been building more space, but we were building more space pre COVID-19. So.

No.

Hasnt been a pickup and a cost of space, particularly on the Ti side that we've seen yet which is obviously good.

So I don't I don't think that that has really impacted where our results are showing on a relative basis from sort of nine months ago to where we are today.

Okay. Thanks, My second question is on the topic of an assigned seating plans.

We have seen some examples on your portfolio, but and the New York City market.

And some tenants moving now increasingly to assigned seating plan. So space per desk may be going up right. That's space per employee is going down because youre not going ahead and employees for every every day.

Desks for every employee and so I guess I'm wondering and this is a channel we've seen not only for.

Firm.

Mature firm kind of downsizing, but also for smaller tech firm, who is expanding the not expanding at the rate as it would've been in the past because it's doing more and aside and seating and so I guess I'm wondering.

And your portfolio if youre seeing any examples of this what your thoughts are on this topic. Thank you.

So let me.

Let me let me let me just give a quick quick comments on that so first of all I described a whole host of expanding tenants and our portfolio and particularly on the on the smaller size, they're not making any changes to the way they are utilizing their space. Most of those most of those smaller tenants are and the financial asset management and professional services sector.

And they are building out perimeter offices, and or larger workstation areas and everyone is getting a workstation and nobody's sharing anything okay. So so there is a significant component of the market in terms of the transaction volume that is in that sector.

The rest of the larger tenants have I think there is a whole spectrum of <unk>.

Results that youre going to see we.

We had a tenant that took 75000 square feet of space and while Fam and provide a it put a press release out with US a couple of weeks ago and they basically said, we're obviously not putting a workstation and for every single person and our organization, who lives and the Boston area.

And we're anticipating that they're going to be some people who are working from home.

I have a.

A daughter, who is working for a Tech company and New York City and their mandate was if youre not prepared to work ex number of days per week.

Youre not getting a permanent workstation and youre going to have to work on the hotel and site right Owen had conversations and I'll describe them with some of the larger technology companies across the country and they have a very different perspective.

Yes, I would just add to what Doug said.

A lot of this.

And employers are trying to accommodate their workforce preferences and <unk>.

Certainly that includes flexibility, but if you look at some other surveys that were done most notably by gains are 90% of those surveyed said they wanted a fixed workstation and.

And I think around and I know around two thirds of those surveyed said they would not trade a fixed workstation for a flexible work benefit so.

And then you've got the COVID-19 issues.

Which makes sharing and desk more uncomfortable so look I can't tell you and we're not going to see some of that but I'm not sure it's going to be a torrent of activity.

Okay and can I just thank you all and can I just make a comment here John.

Yes.

I've heard a lot about this and and a lot of discussions about this but I can tell you and our portfolio in New York not a single tenant has pulled a building permit to make any changes to this space related to COVID-19 and we.

Had almost 1 million square feet under construction during COVID-19 and there was not one change order made by any of those tenants to adjusted plans pre COVID-19, while they run the construction. So I think this is a lot of wait and see it takes a lot of capital to make the adjustments that I hear people talking about.

Thank you.

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

Thanks, Good morning.

Mike I, just wanted to try and piece together a couple of things you talked about when youre going through guidance and sort of the bridge from <unk> to <unk>.

You guys talked about occupancy being down, but not all of that was sort of cash paying occupancy. So I just wanted to maybe try and figure out whats the loss revenue moving into Q2, and then you talked about rents being collected kind of back rent being collected in Q1 2020 rent it sounds like that might have been a onetime pickup so just.

Trying to think about those two.

As we kind of move into the next quarter.

I agree with you.

Steve that some of the retail rent that we got in the.

The first quarter was more one time, we had both tenants paying us for delinquency and also we had some termination income.

And the first quarter that we don't expect to repeat and our termination income was about four and $5 million per the quarter. So that's more than what it normally would be.

So.

I think that the.

About half of the occupancy that we lost and the first quarter.

Non rent paying last year, but half of it was and then again, we expect to lose some more occupancy.

This quarter, because we have some rollover coming so I mean I think that.

If you think about the amount of kind of lower portfolio NOI from that.

Probably three or four quarter to quarter, and then Theres a couple of cents of lower termination income.

And so that's the negative and then you've got.

The positives for the quarter, our obviously, our G&A seasonal.

The preferred dividends only about a penny and.

And the financing charges were <unk>.

So overall were sequentially up and then again I think the second quarter should be the bottom.

And Thats when R. R.

And kind of exposure to rollover really really slows for the last two quarters and we've got signed leases coming on and we do have some renewals and some other activity. We're working on bill honestly a lot of the activity that Doug talked about that we're working on is for 2022 at this point.

Got it thanks, and then I know, it's a little bit far out and but.

But would you think about the observatory.

How did you guys think about sort of the underwriting for that as you thought about visitors and the expense load Avi. So we have some exposure.

And understanding of observatories from.

One of your other public peers, but how did you guys think about.

Kind of the revenue and the expense structure of that.

Sure.

<unk>.

Go ahead Doug.

So Steve the answer answer to your question is at this point, it's an estimate right. It's a projection and we obviously don't have a observatory experience and Boston that we can point to but we do have three or four and New York and we took what I would say is a very conservative view.

On the number of visitors that we would get relative to the kind of visit visitation that is going on and New York City, and we have a price point, that's lower than the price points, and New York City and.

And we have a long ramp up and we looked at that relative to the visitors that were going to destinations like Dr. <unk>. The freedom Trail, the new England Aquarium The Science Museum, the museum of Fine Arts, and we kind of triangulate it into a range of where we thought we would start and where we might get two.

And obviously there is an expense load that we will be able to ramp up or down depending upon volumes and so we don't expect to be cash flow positive and the first six months of this thing, but as time goes on and we think this is going to be a very productive opportunity and it's going to be a unique offering and the city of Boston and we have the.

Capacity to.

To put a lot of people up there and push a lot of people through and we're creating a dedicated entry.

And the thing that I think people will experience that they have not experienced and the Boston market is you have a 360 degree outdoor experience at the top of the Prudential tower looking out to the harbor to Fenway Park to the back Bay and Cambridge.

And amazing place and Youre going to be outside 365 days a year as long as you don't mind cold weather and certain months.

So this is Bryan koop, some additional things that went into it.

Service providers that are acting as consultants for us operate several observatories throughout the world. So we use their advice on that we also had historic numbers from our old Observatory plus with historic numbers from the Hancock tower, which at one time many years ago.

There was two observatories and the city of Boston, and we had numbers from what those two.

<unk> observatories, we're doing at the same time and then in addition, we through and the mix of what we know our daily traffic counts at peak times at the Prudential Center were and what we may be able to capture there as well.

But I may add debt the city of Boston, we met with them just this last week and towards the mirror through and state officials and we're really excited about the support they want to provide us on this.

And I guess just as a quick follow up do you guys expect this to be kind of a double digit return on capital or maybe not quite that good.

I would hope that that it starts out.

Low single digits and over a couple of years gets into the double digits and and just goes from there and obviously, we're going to have to make some capital investment if we get the traffic.

We hope, we're going to get but it could be a substantial opportunity for revenue and net income for the company.

Got it thanks, that's it from me.

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

Okay.

Just in the conversations.

With you and other landlords and the brokers and Theres. This commentary that tour activity is way up.

Get leases haven't necessarily been signed and Occupancies have dipped.

Tour activity tenants that are potentially exploring just changing space within the market and it's just that it's kind of like youre going to and open house and your street, even if youre not thinking about moving your personal home.

And Thats why productivity is up or is there sort of a more fruitful.

Result of that productivity and it just hasn't come yet.

So I just wanted I wanted to sort of ground you and the following many which is.

And when we were talking to you in January I think it was January 30th.

We're pretty heavily into the lap COVID-19 wave. Okay. So we are 60 days from that and we are probably 40 days away out of sort of the worst of it relative to how much virus was around it takes time for leases to get some.

And right. There is a process. So that's why I said, there should be no shouldnt have been any expectation that the activity and the first quarter was higher than what you saw relative to what was published by the brokerage come in.

And houses because.

And there wasn't time to do things.

We are seeing a lot of activity now that I tried to describe was significant amounts of expanding tenants, particularly on the smaller side and then tenants that are looking to change their facilities and upgrade their premises now it is absolutely true that theres musical chairs associated with those kinds of demand.

Generators right somebody is and an older building and 50000 square feet and they move into a new building might be 45000 square feet that might be 55000 square feet. There is no question that there is not a lot of positive incremental growth overall in the market today, but you've got to start some place and we're starting with tours and we're starting with Lisa.

Explorations and we're starting with incremental smaller growth from smaller tenants and as I said, we're seeing a few signs, particularly in California, and some of the other west coast markets of large scale demand from some of the large what we refer to as Tech Titans I can't tell you if that's going to translate into additional absorption of growth.

And from smaller technology companies.

Think my comments were there's going to be a lot of as we own and I talk experimentation and figuring this out and theres going to be a delay relative to picking up incremental space, while that goes on and people understand how they're going to be utilizing their physical environment and their human capital and how they mesh those two things together, but I think youre going to see.

A lot more activity I don't necessarily think youre going to see a lot of positive absorption from growth, but youre going to see positive absorption from sublet space coming off the market.

One anecdote from Boston. This just may be specific to Boston, but I can't think of one example of tours that we've had.

Over the last let's say six months or descriptive of what you talked about where its just youre looking at open houses when you think of the significance of what it takes to get a tour going lets say five or six months ago.

And for the client and the broker et cetera to get them out of homes and coordinate its significant and one other things. That's been really interesting is the quality of information and we get on each of these call. It perspective assignments and these are all very definitive in terms of what kind of square footage they need and they have no quality.

And representative what you were talking about where they are just kind of taking a look at rounded what might be out. There. These are very specific requirements.

Great I appreciate that and then Owen and I know you said you would give us more details on the sovereign.

Venture JV.

And about a month, but just thinking about the acquisition and transaction environment more generally.

The assets that have transacted have been.

And at which valuations and sort of.

Locked down.

Leases for a long amount of time.

And that's sort of not what I think you would want to buy but maybe those sovereigns woodbine and so in those conversations that you're having with them is this going to be a.

Targeting value add type stuff or is it more.

And the types of assets that we have seen trading and how do you tie sort of.

The other valuation environment right now between those two pools together with forming a JV right now yes.

And then we're not going to be targeting core assets at low cap rates, that's not our goal.

Property company, we want to use our real estate skills to create value. We're going to this venture is going to be targeting assets that need to be re imagined repositioned or simply leased up and we're going to be a major co investor and these two sovereign groups.

Like our plans and also forecast that there will be opportunities.

As I've mentioned in previous quarters. It is true that most of the deal flow and most of the things that are happening are in the more core like assets.

And because there is liquidity for those there is not a discussion about lease up and market rents and those types of things and the bid and the ask can merge and I will say I do think our pipeline of value added deals is growing we are looking at more of these deals today.

<unk> has been going on now for over a year. There is a lot of these there are a lot of owners of these kinds of assets that just want to sell for whatever reasons and we're seeing it more of it come to the market.

So we'll see we'll see if the bid and the ask will narrow on those deals, but our pipeline is definitely elevated and the last month or two.

Yeah.

And then Owen just to clarify the size of this venture would be.

And 1 billion of equity total and that gets levered to what's going to be to be out of equity total and then you haven't talked about leverage yes, it's not a it's not a committed fund the $1 billion is just the capital that the investors have set aside for the venture and I do think it's anticipated that we'll carry probably 50% leverage at the property level.

And whatever we buy.

But it will be.

Investment by investment and if it goes well it can be bigger but these are just the initial allocations of capital to the venture.

Alright, thanks very much.

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

Great. Thank you and good morning.

And so.

I wanted to get your latest thoughts on co working and flexible space providers across the markets.

And as tenants start to think about coming back are there are there their needs going forward.

How do you think those types of users or those types of.

Space providers will fit into their plans and has that changed.

I think Jimmy I think there will be demand for shared workspace products going forward.

I think there'll be individual demand I think there'll be small company demand and I think large large occupiers as well, we'll want to procure a small percentage of their space on a flexible basis and will pay a premium for it and there's plenty of this product out and the market created by we work and many of the other companies as well as landlords like ourselves.

And.

The first step will be the refilling of that space, but I do think that demand will come back.

I mean, you realize Jamie that there is a.

I would say.

Flexible flexible operator to point out is happening which is.

JL is working with GW.

W. Newmark is working.

With another group.

Well see.

CBRE or CFW and Hana have there.

Arrangement.

And with industrious, so there seems to be a change and the.

The offering composition relative to being more of a service.

As opposed to a.

Transaction, where someone is trying to arbitrage the retail and wholesale rents right, where you're taking the space at wholesale and fair and theory leasing and a retail so there's going to be some change and presumably the landlords that have gotten space back we will work with these operators to fill.

Figure out better ways to market into.

Achieve occupancy.

I think the really interesting question and I wish we had an answer to it is how profitable can it be and what are the economics of the transactions that are being signed by the tenants and obviously the densities are going to change to some degree because of the nature of how tight those many of those operators were packed and people in.

And will the will the users pay the premium and order to give the operators the margin necessary to make it work and I think that we will see what happens.

Doug to that point this is ray.

Brian and hosted a <unk>.

Property management seminar with our four top tenants.

Professional services will all firms tech and he posed the question does co working play a role and your future spec.

Space needs every single one sort of permanently that co working does have a role and beating their space needs and future and.

It's directly from the user group.

Thank you. So do you think from a fee perspective, those types of tenants grow and the portfolio or do you think maybe you just have to have more flexible lease structures.

Pete for tenants larger tenants that want more from I think I would just say the following I think what you're hearing from US is we expect the demand increase.

The other thing that you've got and he's got a lot of the space that's not full at the moment because the.

Its flexible so a lot of other tenants left to the occupancy is quite low. So the first step is just going to be refilling all of the inventory that's out and the market that either landlord zone or the flexible operators own themselves.

The interesting question, which Doug was touching on is okay. Once all that's full then what happens.

Are the economics of this business such that it makes sense to do the expense of build out and to build more of it and I think that's that's going to be the question that is going to need to be answered in the years ahead as once all of the existing supply gets filled up and.

And Ot this rig and we're seeing a flight to quality.

And on the co working which is really great for our portfolio because and the vast majority of our markets. The best co working experiences and our Boston properties building.

So there may be more.

And that's attractive co working things that go by the wayside and Theyre going to aggregate and the best options for their clients and again, that's good for us.

Okay.

Alright, great. Thanks for the color and.

And then you had mentioned both dock 72 and platform 16 is seeing a little bit more interest and other places.

But from <unk> 16 is obviously larger and longer out but can you talk more about what's changed from those assets.

Jeremy.

There are more tenants, who are asking for proposals because their.

People are people have gotten out of hibernation as Owen and I talked about earlier today.

There's just there's just more overall demand and look we are negotiating a lease at dock 72, we weren't negotiating a lease 90 days ago, and 180 days ago, we werent talking to anybody so there's just a natural progression and.

Look it's a fabulous product that the team and New York built.

And it's ready available and we just think we have to get people to start walking through it looking for space and Thats whats going on and again I think youre seeing people come out of hibernation relative to large tech demand as well and we saw some of it that was going on during COVID-19. So it <unk> stop but it's I think it's we're going to see some acceleration of that across the country.

And hopefully it will it will fall into some of the markets that we operate and.

Yeah.

So would you say it's more.

And it is.

Closer to where people live it's not necessarily that good and downtown alright.

Midtown Manhattan asset and.

And does it change and what people want and are now this is just because the buildings. Finally built people can tour and interest is rising.

John you want to describe that.

And the locational interest from the demand that we have.

Yes, well I think it's more of the latter of what you said.

As I've said people are back.

As we got caught with that building was COVID-19 and that we have not finished the amenities are prior to COVID-19 and the amenities are very very big part of that.

And.

Building, if you haven't seen it.

Really come out and now it's done and it's showing really well.

And the tenant.

And the one tenant is from Manhattan and another two.

And two of from Manhattan that Doug mentioned earlier with a lease and paper being traded.

The other 212 from Manhattan, and one from Brooklyn, So it's really the buildings.

As Doug said, the building looks great and people around and looking at things knowing that they want to go back to the office and wanted to start the process.

Okay. Thank you.

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

Hi, everybody and thank you for.

From our data this is probably the second softest leasing quarter and over a decade on volumes, but when we kind of mixing from sessions.

Clearly looks to be the weakest which is understandable.

Standard.

So the question is are you starting to reduce Ti and free rent as the reopening and the momentum gained steam or our concessions at elevated levels still required to get deals done in this environment.

So Derek Derek again, I just want to ground you rate that there was there was very little activity in the first quarter because of the nature of what was going on with the pandemic and Theres a lot more activity now.

The real estate transaction and leasing.

Market is relatively long sales.

Cycle and I don't think we're going to see dramatic changes and the economics and our marketplaces.

Over the next couple of quarters. If you asked me will transaction volume and Wills concessions start to reduce in 2022 I think the answer is sure absolutely I feel very confident that that's going to happen, but I think the next couple of quarters, it's going to be we're going to be legging into the recovery of leasing.

<unk> and as I said earlier, I think there's going to be not much and the way of positive absorption overall from new tenant growth, but there will be a positive absorption from sublet reduction and so I think there is going to be concessionary pressure on and certain kinds of buildings and certain kinds of markets I will tell you that.

And you could have a building and a market.

And like New York, or San Francisco or Boston.

Where where rents are holding and concessions are not going up and there may be two buildings next door that have a lot of available space and they are being very aggressive about how they're positioning their space. So it's going to be very very.

Different from building to building and from Submarket to Submarket, but if you. If you want to have a broad general comment about overall levels across the country or across major markets I think youre going to youre going to see that are core.

Continuation of these conditions for a period of time.

Okay that makes sense.

So how would you describe the pipeline today versus pre COVID-19 and I guess more importantly versus pre COVID-19, maybe versus <unk> or <unk> of 2020.

And what levels are we at today versus prior.

So I'm not sure what you mean by pipeline, but what I said earlier and my comments was that and New York City, we have where have we have more tours that occurred in the first three months and ex number of days of April in 2021, and then we had in 2020 and more importantly than we had in 2019, okay. That's our portfolio.

And I don't think obviously you can make that same characterization for the market in general.

We have a lot of activity going on right now across the Boston properties portfolio and it feels not too dissimilar from what it would have been in 2019 with one exception that exception is we are not negotiating any large leases with new office tenants on new builds.

Okay, and that's a meaningful difference right that was a big driver of our volume and the last last few years as the team led by Ray in.

Washington D C and the team led by Brian in Boston, They did leases with Verizon and with light OS and with Fannie Mae and with Marriott right. We're not seeing any of these office new developments and our portfolio at the moment. So I'd say, that's the one substantive change between where we are today and where.

Were pre COVID-19.

Thanks, Doug.

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

Good afternoon, thanks for taking the question.

Maybe just first one on.

On the <unk>.

I think you made a comment around and San Francisco and maybe it was in the region.

Youre seeing sort of half the tenants.

For an expanding and hospital contracting could you maybe just give us a bit more color on those comments and in the Boston related to that you've compared and contrasted on interest and ranked markets in terms of rent growth expectations could you, maybe just compare and contrast, San Francisco Boston New York.

So.

As I said in our portfolio.

Folio with regard to the transactions, we are working on and we're seeing about half of the tenants' growing and have the tenants shrinking a little bit I mean, and these are again. These are all deals that are under a floor and thats what were working on and so there is these are these are modest increases.

We're down.

There is no rental rate growth and San Francisco and there is no rental rate growth and New York and either market today.

And I would tell you that the conditions in New York relatively speaking are a little bit stronger than they are in San Francisco, because and I.

Again, I hate to be a broken record San Francisco was behind New York and its relative pandemic recovery.

New York has been up and running people being able to go to work people starting to do things for nine plus months and San Francisco really didn't open up until call. It in March.

So it's just it's just been slower going but we are as I said when I described the sublet activity that we are experiencing on the space piece of space that is available at 680, Folsom Street, which is a fabulous piece of space. There are a lot of tourists from technology companies that are looking at that space.

So so it's slowly starting to happen and San Francisco, but it's behind New York City relative to recovery.

Got it and just to clarify so is the <unk>.

Office utilization, our census, lower in San Francisco than New York, Yes.

Demonstrably like by 50% of what we currently are at so if we're running at 20% and New York City, we're running at 10 plus percent and San Francisco.

Got it and then.

I think the broad announcement on the Xps and plan to go carbon neutral I think 2025 is really interesting and probably ahead of many of your peers I'm. Just wondering if you can give us a bit more color what what does the company need to do.

And maybe from a spend perspective or strategy perspective to achieve that and from a operational perspective.

Getting to carbon neutral or do you think that bring some benefit.

I'll start and Doug May have some comments on this too.

It has three pieces.

One is in reducing the energy intensity of our assets, which we have been doing for years.

Down roughly 30% already off of 2008 base year and Thats.

Improving and electrifying equipment in our buildings as well as some mixing and some new buildings and <unk>.

<unk> is converting our power sources from brown to green and we've been doing that.

And with some limited increases in costs, but I would describe them as limited and Thats, probably gotten us another third of the way there.

I think we will accomplish this goal we will continue to turn those dials both in terms of energy intensity and Green power and then we may have to do some offsets.

To fight to accomplish the final goal.

There is some cost associated with it but I wouldn't say, it's material relative to the overall results of the company.

And we think increasingly it's important to be a leader in this area again I always say, it's the right thing to do but it's also a smart thing to do because our customers care about it our certainly our cities do we're all and coastal cities. They are increasingly concerned about this topic many have their own regulations are.

Capital providers care about it.

And as you know Vikram we've.

<unk> seen more and more shareholders at ESG conferences, we did a green bond recently, where we thought we got some small benefit from offering a green bond and I can tell you our employees certainly care a lot about it so.

And that's the plan and Thats why were doing it.

Thank you.

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

Okay.

Helane Your line is open.

Sorry about that.

Can you just talk a little bit about more about L, a and general and Santa Monica and in particular, it seems like the west side of L. A has seen a particularly high amount of sublease space come to the market and.

It's great to see you guys get the Roku lease signed and I think you mentioned another lease you're close on.

Given that you guys saw a pretty substantial occupancy drop at both the assets and later this quarter.

Can you just touch on whether you think that sublease space is competitive to your vacancy or is it mostly opportunistic like Doug was describing and then can you talk about any additional prospects you might have.

Profile of those tenants that might be kicking the tires and that market and any thoughts on unexpected timing to getting those assets back to stabilized occupancy.

Relative to you and John want to take that one.

John would you start and I'll provide any color commentary.

Sure. So first the commentary on the sublet market there are a decent amount of both small blocks and large blocks available and as Doug mentioned, many of which are quite opportunistic we have some opportunistic sublet space and our portfolio here, but if you go ask the decision makers are.

Customers will tell you that yes, the spaces on the sublet market, but we want to be open and flexible and case, we capture a sublet tenant.

And if they if they come across someone that could backfill part of their space and it doesn't necessarily mean that they are going away. They just might need to downsize or rearrange and so I think that we see a lot of the competing sublet spaces out there that are not actually directly competitive with us and the other west side landlords.

<unk>.

As it relates to two.

What we are.

And what we're structuring with our with our prospective tenants right now we're seeing it be the story of the haves and the have nots, depending on the industry and the sector, you've got technology entertainment and content companies that are continuing to grow and a big way.

If you look and what we've done with Snapchat and a couple other leases that we signed over at Colorado Center and the expansion that Doug mentioned.

With our existing tenant at Colorado. These groups are growing and they're looking to grow right now and so we're excited about about the prospect of debt.

And while we're being mindful of the need to potentially switch their space and.

And really.

Kind of focus on.

Ray I'll turn it over to you I want to be cognizant of commentary of what what Youre seeing and what your.

What we're seeing from our tech tenants, Okay, well I would just say that.

And call our center I mentioned earlier flight to quality with another reference, but we're seeing the same at Colorado Center.

We are currently 90% occupied and.

With the activity we've seen in the last <unk>.

And three or four weeks.

We could easily be 100% leased there within the next six months.

Santa Monica business Park, a little bit different little order product.

Loss of tenant that decided to.

Shipped out of the center, but the internal demand from our existing tenants, whereby snap and others and we're quite confident that debt that park will return to.

Fully stabilized point very soon and I have seen.

Relative to reference to other markets I think the west La market may have had a pause but it is coming back very strong led by the same tech sectors as John just elaborated on and.

Not a lot of new supply is coming on and Colorado Center and Santa Monica business Park are really strong market leaders and highly respected by both the tenants and the markets and the brokers.

Yes, I would add debt.

The proposals that we're putting out there to the tech media and content firms net effective rates. The face rates are basically right there and the net effective rates are very close to what were seeing pre COVID-19 and there is renewed activity and the first quarter on our prospect list and Theyre coming from the credit tenants, we do have.

A lot of startup companies that are taking a look at our venture backed and growing here and what's delay.

But the other companies the large scale tech firms and the large scale content firms and it's a bit of a race to lockdown the quality space and so we're fortunate to have the class a space that we do and west La.

While we do see a lot of the other kind of B and B minus space aggregate. These sublet blocks and we don't think are that competitive to what we have here.

Great.

Very helpful. Thanks, Jon and Ray.

Second question is just on the demand for life science outside of Boston, and South San Francisco and I guess, what gave you the confidence to go ahead with three speculative developments and Redevelopments there I understand that they are.

Smaller buildings and then you guys are typically constructing but to go ahead with three of them at the same time seems like a lot. So can you just talk a little bit more about your prospects or lease up but those projects.

Projects and maybe more importantly, do you have any concerns related to the supply and the life science segment and the market.

Yes.

This is Doug I'll start so the most important life science markets and the country by far our Cambridge, Waltham, Lexington, and Boston and South San Francisco Brisbane.

It's not even if there's not even a close third and.

And.

And the markets are being led by demand growth and it's the demand growth debt gives us the comfort to be able to start these buildings on a specular basis with a relatively short delivery time frame because they are fully permitted and we have construction drawings and we bid bid the cost. So we know exactly what the cost side, we will look like and we know what.

Delivery time is going to look like.

And there again, we literally just started the foundations and $7 51, and we have two rfps that we're responding too and Thats and Thats a show me market and similarly as soon as we announced that we were going forward with 880, we've been having about a tour a week we've already.

And actually responded to two proposals we have two more proposals that are coming in and over the next couple of base and I'm told it.

The demand is there because the drug discovery and it changes in.

The way.

Capital is flowing into the life science sector, particularly into new compound development and new technologies for compound development is concentrated and these two parts of the country.

And there is just great demand and it's the demand.

And Brett Blaine, that's creating the confidence that we have to do what we're doing relatively speaking on a speculative basis.

We also are in markets that have I don't know the vacancy rate for first lab space and Boston is under 5% and it's probably in the 5% to 7% range and the South San Francisco Brisbane market. When you add in all of the space Thats been committed on the new development.

So no real concerns on the supply side.

Not not in the next couple of years.

Yes, we looked at before obviously before we made these investments we studied carefully not only the requirements that were and the market, but also the forecast deliveries and we do think the demand far outweighs the supply.

The other thing I'd, just add to doug's comments too.

There are three projects, there and two geographic locations and the Waltham assets actually are different too because once they are on different schedules.

The lab conversion deal can be delivered for tenant.

And build out next year, whereas the ground up as a year. Following so that also creates.

A different demand environment.

Great very helpful. Thank you both.

Your next question comes from the line of Brent Dilts with UBS.

Hey, guys. Thanks, just one question from me at this point and the call, but maybe you could talk about what impact do you think some of the current federal and local tax proposals.

And I might have on your tenant base and the leasing market if they get enacted.

Given some of your key markets are already high tax jurisdictions.

And.

Yes.

I'll start with that so.

Look I guess, the most important one that I would point to is the increased taxes and New York State and the reason I'm pointing that isn't because it actually happened everything else is conjecture at this point and as we know plans to.

Turned into legislation.

So look I do think that higher taxes are not great for business.

I do think that in New York It does impact.

A smaller portion of the population because it's primarily high the high earning population, which is not a large percentage of people.

And a lot of the employers that are attracted to <unk> and New York are employing broader parts of the population that are not necessarily impacted by those tax increases but.

It's certainly not a not a positive overall for business.

And then at the federal level again. These are all plans nothing has been enacted the things that we're paying attention to or obviously the.

The capital gains tax change.

The increase in taxes for high earners again, both of those are going to impact a pretty small percentage of the population don't really have a geographic overlay because.

It impacts the entire country and then the other one that's in the most recent buys and plan is repeal of the like kind exchange and this has been talked about before by federal legislature's legislators and it generally doesn't pass.

And I think at the end of the day a lot of like ex.

Change transactions just don't occur if you get rid of the like kind exchange benefit so, but we'll just have to see how that plays itself through the entire system. The other thing that we hear is being discussed and Washington is a repeal of the salt.

<unk> cap.

Again I have no idea, we have no idea, whether something like that would pass if it did it would clearly be beneficial to our footprint.

Great. That's it from me thank you.

Your next question comes from the line of Ah Matteo <unk> with Mizuho.

And your line is open.

Yes.

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

Great. Thank you.

You mentioned requirement is not changing genes from the pandemic or at least not changing thus far and does that include changes on densification and due to health concerns or is that too early to tell as well.

We haven't we haven't seen anybody reduce there.

Density because of health concerns per se as John said.

Nobody nobody had pulled a building permit.

I think it's pretty clear that a lot of companies are being a little bit more thoughtful as they buy new furniture and they creep they configure space going forward debt.

Facial and separation of people that are in open office areas will be slightly.

More generous.

And obviously as a tailwind to our business because it just means people will need more space.

Got it.

And honestly, it's not a significant factor at the moment.

Makes sense and then Doug you mentioned parking and starting to pick back up and some of these ancillary revenue streams generally picking up and the back half of the year and they recognize that it's a small portion of your overall business, but how does pricing compare to pre COVID-19 levels.

Has there been any degradation and parking rates or the revenue associated with certain parking spots.

Today versus pre COVID-19 and yes. So the answer is no Danny we have not changed our pricing on any of our ancillary parking revenue and particular on a monthly and monthly spot as a monthly spot and I mean.

Look we know and.

And what we will get to a point, where we're not going to have parking availability for people.

Don't know if thats going to happen in July September or October, but theres going to be a point, where we're we're going to have more demand from monthly spaces, and we have monthly spaces to sell.

And that's obviously a good thing for our revenue just a question of when.

And but we're also not going to raise prices to push.

Demand off where we are and this for the long term, we generally look at our parking revenue.

<unk> model once a year early in the year and we stick with it and we don't know.

A.

Our dynamic pricing model, where based upon and particular demand we.

Reduce or increase our pricing on an hourly or on a monthly basis.

And then just last one from me going back to the carbon neutral commitments.

And the tenants or potential tenants are demanding some level of ESG requirements and.

I'm trying to get a sense of how large of a competitive advantage that 2025 carbon neutral.

Thank you.

Tears and the rest of the market.

I think and Thats very hard to quantify.

Start with saying, there's no way, it's ever and negative.

And I think there are segments of our customer base some of it industry driven some of it city driven and that are not as concerned or focused on ESG factors with the building or the landlord and then there are other sectors and locations, where they're hyper focused on it and it's a reason they make a decision.

So it's always hard to quantify that in terms of rent I think certainly speed to lease up is helped by it.

But again, it's hard to quantify the other thing I would say is it's only going to get better.

It's only going to become a bigger issue and we're already seeing it.

Every year, we talk about we've been doing this for years and every year, we talk about sustainability and ESG the focus on it from our customers and other constituents just goes up every year.

Thanks, John and thanks, everyone.

And there are no further questions at this time I will now like to turn the call back over to the speakers for any closing remarks.

No closing remarks, thank you all everyone for your interest and Boston properties.

That concludes the call.

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

And then.

And.

And.

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Yes.

Yes.

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