Q2 2021 Boston Properties Inc Earnings Call

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

Great. Thank you good morning, everybody and welcome to Boston properties second 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 on non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy. These documents are available on the Investor Relations section of our website at investors thought the X P dot com a webcast.

The 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 Securities Litigation Reform Act, Although Boston properties believes the expectations reflected in any forward looking statements are based on reasonable assumption. It can give no assurance that.

And this Quebec patients 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 would like to welcome Owen Thomas Chief Executive Officer.

Net of sex, 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 questions and now I'd like to turn the call over to Owen Thomas for his formal remarks.

Okay. Thank you Sarah and good morning, everyone.

1 I'm delighted to report that for the first time since the pandemic I'm together with Doug and Mike Sarah and our Boston team for this earnings call and all DXP employees return to the office on July 6.

DXP is emerging from the pandemic with strength and momentum as evidenced by improving financial results.

Officers and rapidly elevating leasing and investment activity.

And this morning, I will cover the economic recovery that is underway and the U S.

Dxp's momentum in terms of financial results and leasing private equity capital market conditions, particularly for office real estate and <unk>.

DXP is capital allocation activities, focusing on 4 new investments, we announced this quarter, including our official entry into several new markets.

So the U S economy are washed with fiscal and monetary stimulus is roaring back as we exit the pandemic.

U S.

<unk> growth was 6.4% and the first quarter and predicted to be higher for the second quarter and for all of 2021.

Over 850000 jobs were created in June and aggregate unemployment decreased to 5.9% industries that use offices have been less impacted.

<unk> by the pandemic and the employment rate for their workers is lower.

Despite the annual inflation rate rising to 5.4% and June the 10 year U S. Treasury rate has dropped to around 1.3% and the federal reserve's rhetoric remains distinctly dovish given it believes the recent inflation is driven.

G D transitory factors.

High economic growth and low interest rates create the ideal environment for strong real estate investment performance.

Now <unk> financial results for the second quarter reflects the impacts of this recovery and and increasingly favorable economic environment.

And by our <unk> per share this quarter was 10 cents above market consensus and 12 cents above our own forecast, which Mike will detail. Shortly we completed $1.2 million square feet of leasing more than double the volume, we achieved and the first quarter and only 10% below our long term second quarter averages.

Our clients are making long term commitments the leases signed and the second quarter at a weighted average term of 7 and a half years. Many are expanding as was the case with 2 large media and tech clients and L. A and building quality is increasingly important as evidenced by strong tour.

Sure and leasing activity at the GM building Reston Town Center, Colorado Center, and the view floors at Embarcadero Center.

We believe this activity and performance supports our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate innovate.

Train all critical for their long term success.

And that concerns about the work from anywhere impact on the BSP footprint are overstated.

Yes.

Moving to private equity market conditions, $15.7 billion of significant office assets were sold and the second quarter.

And flat to last quarter up 77% from the second quarter, a year ago and down approximately 44% from 2019 pre pandemic levels and it remains 23% of commercial real estate transaction activity.

Rates are arguably declining for.

Our assets with limited lease rollover and anything life science related given lower interest rates.

Notably and Cambridge This last quarter, a REIT agreed to purchase Charles Park vacant, though with identified tenants for $815 million or $2200 a square foot.

Also 1.

Oriel drive and Cambridge are fully leased 409000 square foot office asset is under agreement to sell for $825 million or over $2000, a square foot and a 3.8% initial cap rate.

Moving to <unk> capital market activity, we had a very.

<unk> active and successful quarter with acquisition on.

All of the investment strategies, we have described to you over the last several quarters are represented in the 4 new investments, we recently announced which aggregate almost 2 million square feet.

These strategies are grow and life Sciences and.

Seattle market.

Acquire high quality assets that need redevelopment or refreshment at discounted valuations due to the pandemic and acquire office assets and partnership with private equity investors through a joint venture investment program, we set up with GIC and CPP, 2 leading global real.

And her this investors.

So let's start with our official entry into the Seattle region with the acquisition of Safeco Plaza.

We have previously discussed the Seattle area is having a strong real estate market as well as a logical expansion region for <unk> gateway strategy the.

And the Puget Sound region.

Region as the headquarters location for leading global employers like Amazon and Microsoft and has 1 of the largest clusters of computer science workers and the U S C.

Seattle has experienced high levels of population and rent growth given its expanding technology and life science employment base and is much more affordable than other major.

Technology markets, given no state of Washington, and income taxes, and lower real estate costs for both office space and housing.

Rents land values and building values are lower and Seattle than any of our other core gateway markets.

The broader Puget sound market has the scale and growth potential to afford us opportunities.

These to both acquire and develop and multiple districts of Seattle, Bellevue and other east side markets.

We've had a BSP executive Kelly Losch, and who's joined the call. This morning.

Based in Seattle for well over a year, we have an attractive pipeline of additional investment opportunities currently under review.

And we will build out a full service real estate execution team over time.

Safeco Plaza comprises 800000 square feet has a LEED platinum certification and is located and the center of the Seattle CBD with convenient access to rail ferry and highway transit options the buildings.

Q1, and 90% leased with 6 years of weighted average lease term at rents that are approximately 30% below market.

Safeco Plaza offers generous ceiling heights 360 degree views and timeless architectural features and our strategy is to refresh the ground plane lobby and amenities and re leased the building at market.

And is currently in the coming years, Liberty mutual which acquired Safeco is the anchor tenant leasing 6.868% of the building.

DXP will own either 51% or 33, 3% of the property, depending on whether 1 or 2 private equity investors joined the partnership.

We believe our basis and the acquisition, which is $465 million or $581. A square foot is very favorable relative to replacement cost and recent office trading activity and the Seattle market.

We believe safeco plaza to be a very attractive investment opportunity with a future redevelopment play.

Given the quality and location of the building are going and basis as well as the cash flow we receive from existing tenants. During the refreshment process, we have a nonrefundable deposit posted and intend to close the acquisition in early September.

We are also entering a new sub market for DXP.

Mid town, South and New York City with the acquisition of 360 Park Avenue South.

And in Midtown South has become New York strongest sub market in terms of rent growth and vacancy given it is the preferred location for many technology occupiers.

New York city's most rapidly growing business segment.

<unk> hundred 60 Park.

Mariner South comprises 450000 square feet and is and a prime location at the corner of 26th Street, 1 block from Madison Square Park.

The transaction will close and the building will be vacated by a long term corporate user later this year, which provides us the opportunity to plan and advance and subsequently executed.

Park, and a complete refreshment of the building.

And with generous ceiling heights, and a unique elevator configuration, allowing for 2 separate dedicated lobbies and we believe the building will appeal to both large and medium sized users seeking marketing and brand expression opportunities with their space.

In terms of economics, we're paying.

<unk> million dollars for the building or $667 per square foot, which leaves us significant latitude relative to comparable sales to budget generous building enhancements.

The acquisition structure is also creative and we think favorable for DXP.

Consideration for the purchase will be the assumption of a 200.

$300 million mortgage on the property and the issuance of $98 million of OPE units and Dxp's operating partnership.

We are committed to complete the transaction on December 1 of this year and the number of <unk> units issued at closing will be determined by DXP stock price at that time, but with.

<unk> of $111 a share.

In other words, we would benefit by issuing fewer units if our share price continues to rise through the closing date, but our downside is capped by a floor.

Most importantly, the tax deferral inherent in our contribution structure distinguished our proposals such that it did not have to.

To be the highest price to yield the seller of the highest after tax value.

1 of our joint venture investment program partners will likely join this investment by funding all of the capital needed for the refreshment, resulting and they're owning up to a 50% interest and the project over time.

Flexed on acquisitions, we added to our life science business and entered the Montgomery County, Maryland, and life Science market through the acquisition of a 7 building 435000 square foot Office Park located in close proximity to the Shady Grove Life Sciences Center, the Premier cluster for life Sciences and the.

And D C region.

Montgomery County is the fourth largest life science market and the U S and home or proximate to several large biomedical institutions, such as NIH FDA Johns Hopkins University, and the University of Maryland.

The 4 million square foot Shady Grove Submarket at the epicenter is.

Currently 3% vacant with rising rents and.

We are paying $116.5 million for the asset or $267 per square foot and intend to convert the entire park to lab and life science use over time.

There are 7 buildings and total 3 of which are vacant and will be convert.

Washington Lab immediately.

Remaining 4 buildings are 63% leased and will be converted to lab use as leases expire and office tenants vacate over the next few years.

The entire site is 31 acres and Kim can accommodate additional ground up development depending on demand.

There is a strong backlog of space.

<unk> requirements and the market and we are already competing for a large build to suit and addition to other requirements.

We have a nonrefundable deposit posted and plan to close the acquisition in August.

And lastly, and the second quarter, we completed another life Science acquisition 153, and 211 second Avenue in Waltham.

Space from Massachusetts.

These 2 existing lab buildings, comprising of 154000 square feet and 100% leased to Santa Fe are located immediately adjacent to our 200 West Street lab conversion property, which is almost complete and expected to deliver and the fourth quarter of this year. This was an off market transaction.

<unk> completed at a price of $100 million or $650, a square foot and a 6.4% initial cap rate.

Santa fees lease is short term and below market.

The site comprises 14 acres and has 120000 square feet of additional development rights, which could be increased when combined.

Combined with the excess development capacity of our adjacent 200 West Street site.

Life Sciences is a rapidly growing segment of our overall, but overall business today life Sciences at DXP is 3 million square feet, representing 6.4% of our total revenue.

We have 920000 square feet of lab redevelopment and development projects currently underway that are experiencing strong user demand and expected to deliver in the next 36 months.

And we have approximately $5.5 million square feet of future conversion and development opportunities under our control.

Cambridge, Waltham, Lexington, and South San Francisco, and now Montgomery County markets.

Within 5 years, assuming continued strong market conditions, we could more than double the amount of dxp's revenue that is generated from the life science sector.

Regarding dispositions, we have an agreement to sell.

And our Spring Street Office Park, and Lexington mass for $192 million or $575 a square foot we.

We expect the sale to close in September as part of and exchange with the 2 life Science acquisitions mentioned previously.

Year to date, we have completed or committed to dispositions aggregating 220 <unk>.

And then and our share of gross proceeds and are considering additional asset sales and 2021.

And as a reminder, on investment activities that we did not add to or deliver from our active development pipeline. This quarter, we have $4.3 million square feet.

And of development underway that is 71% pre leased and projected to add approximately $190 million to our NOI and 3.7% to our annual NOI growth over the next 3 years.

On a final and important personnel note John powers.

Who as you know is the head of our New York region.

Hold us he would like to retire at the end of this year.

We conducted a thorough external and internal search and are very excited to have Hillary span joined BSP as an executive Vice president.

Hillary has many years of real estate management and investment experience.

As a senior officer of CPP and prior at JP Morgan investment management, having.

Having completed $12 billion and investments and New York City alone.

Hillary will join DXP after labor day, and commence her duties as New York Regional manager at the beginning of 2022.

So in.

Summary, we had a very active and successful second quarter with strong financial results and multiple new business wins, and the leasing and investment markets.

DXP has a strong growth ramp driven by improving economic conditions and leasing activity.

The recovery of our variable revenue streams.

Delivery of a well leased development pipeline completion now of 4 new acquisitions, our strong balance sheet and capital allocated from large scale private equity partners to pursue new investment opportunities as the pandemic recede.

A rapidly expanding life science portfolio and the nation's hottest.

Science markets.

As well as low interest rates and decreasing capital costs.

Finally, I want to express my sincere appreciation for the BSP team, which is back at the office, serving our clients and winning new mandates with great care expertise and enthusiasm.

Hottest line over to Doug Thanks, Owen and good morning, everybody. Obviously, we have a lot to talk about on the transactional side and I'm sure there'll be some questions on that but I do want to spend a few minutes talking about the leasing markets and the activity that we're seeing.

There is certainly no question that we're on the precipice of significant change and the atmosphere around in person work, but.

And more announcements come out every day. The fact remains there's still some uncertainty and there is some trepidation about COVID-19, and the Delta variant and whatever the next thing is going to be.

So the transition period that we are now in as many organizations like ours encourage or require their employees to come back to work, it's going to take some time.

And they're.

And theyre going to be some ramification to that.

Many of you participated in our NAREIT meetings and my comments. This morning about impacts on work from home I think youre going to be pretty consistent with what we talked about during that conference.

And the impacts on space. These are going on really vary depending upon the size of organizations, which.

Which we like to put it in 3 categories.

So the first are the really large employers and honestly they are moving forward with plans for space based on long term growth plans and hiring thats occurred over the last 16 months and thousands of open job requirements that they are trying to fill right now.

And then you have really small organizations that are very stable and they are all recognized.

Is that very little is going to change regarding how they utilize and real estate, maybe some will more work more from outside the office, but everyone's going to continue to have a dedicated workspace and their facilities and they are really not impacting this amount of space. They have and then there's the third group, which is an important group and the third group on midsized organizations.

<unk> or younger companies that are experiencing growth.

But we're it's very unclear is how their organizational culture is effectively going to be built if people arent in physical contact and I think those companies are going to have to take some time to figure that out will it work or won't work.

And we don't believe that this is going to happen.

We think it's going to take 6 to 12 months and it's going to really depend quite frankly on how they're doing from a competitive perspective, how are their peers doing and their industries and does it matter that they're not in contact with each other all the time.

When surveyed most employers prefer to have their teams together as much as possible to enhance.

And the efficiency and collaboration and serendipitous idea generation et cetera, while many employees declare their preferences for some or more remote work.

Well with a tight labor market employers are acknowledging the reality there will be an increase of work that takes place outside the office and this will incrementally moderate some space.

Growth in the short term, but these same companies may over time and collaborative spaces to accommodate their teams and we're all getting together and they may eventually decided that people need to be back more frequently.

Unlike any other prior recession, there have been thousands and thousands of new positions created and there are lots and lots.

<unk> openings across the service sector is the technology sector is the life science sector. The generators of office demand and our markets and we believe many of these jobs are going to lead to space absorption over the coming years.

Employees are returning to their offices with very few reminders of Covid restrictions and Theyre getting together.

Job normally and meeting rooms, and collaboration areas and they are taking the time to reconnect at breakfast and lunch and dinner and restaurants.

And many of our CBD assets, we have access control. So we can sort of see what's been going on and our competitive buildings debt. So comparing to February of 2020, and New York City about 50% of the employees who had car.

<unk> are now coming to the office at least once a week and that number is about 34% and Boston and 20% and San Francisco, So it's very different from market to market.

Our sequential parking income grew about 20% from the first quarter and while we have not seen monthly parking permits pick up tenants are driving.

Together, <unk> and paying for daily parking.

We actually think that monthly parking permits will be a good indicator for the increase of office frequency and Boston and San Francisco.

And Boston through transient parking is actually up and we've actually had to close portions of the Prudential Center garage around lunchtime every.

Every day during a couple of days and July due to lack of capacity believe it or not and.

At Embarcadero Center, we have seen about a 20% pickup from the low point on monthly parking, but we're still only at 60% of our historical high. So we have a long ways to go on parking.

And we expect to see improvements during the rest of the year and at the end.

For the year, we think we're going to be and about 70% of where we were in 2019 on a full year comparative basis.

As you listen to the apartment company calls you're hearing about the dramatic increase in occupancy and urban areas. The employees are moving back into the cities into those same apartments, which by the way didn't grow during the pandemic.

<unk> and so unlikely theyre planning on working at home and those departments on a frequent basis and we're seeing this and our portfolio as we move from 51% occupancy in January to 82% at the hub House project. That's the hub on Causeway project from 10% to 41% at Skyline, and Oakland and from 79%.

<unk> III at rest and signature and.

And our restaurant and activity is up materially.

And only as really being limited now by the challenges that the operators are having with labor both in the front and the back of house.

We have begun to move away from percentage rent assistance to our retail tenants and back to contractual fixed rent and believe it or not and rest.

And we actually had a tenant requests a modification and back to fixed rent because of percentage rent was creating a higher payment to us.

Sublet space continues to be a major topics during many of our conversations with investors.

Last quarter I described the dynamics of opportunistic sublet space and discussed our belief that many of the visceral announcements.

And it's made by tenants that were putting space on the market would reverse as organizations began to plant began to plan there in person and work strategy again this quarter at $5.35 mission a tech company without Subletting any space with through 40% of the 100000 square foot availability and Manhattan CBRE is reported.

Porting that theres been a drop of about $5.9 million square feet out of a total of $19.3 million square feet that was put on post COVID-19 and about 67% of that was backfill by the prime tenant.

Yes, there is a lot of sublet space on the market, but a large portion is going to be reoccupied. Some is not actionable.

Well because of short terms.

Unworkable existing conditions or quite frankly users just don't like the comfort of the lessors profile and.

And some of it is getting leased like the 3 floors that were completed at 680, Folsom and San Francisco that Macys Dot com had on a sublet market the headwind from sublet space exists, but theyre garner.

Dissipate as companies begin to come back to work.

And as I pivot my remarks to the Boston properties office and life Science portfolio, specifically I'm going to describe the level of activity that I think is counter to the headlines of weak market conditions across the office sector and the United States.

The <unk> portfolio includes.

Number of iconic high quality, well maintained and continually upgraded assets.

And there is market weakness our assets outperformed.

We spent a lot of time discussing our portfolio of vacancy last quarter and our forward expectations, we experienced quicker than expected revenue commencement on signed leases.

And so basically flat vacancy relative to the prior corner, we were down 10 basis points on a 45 million square foot portfolio and this included taking back 66000 square feet of non revenue space that I talked about last quarter at the hub on causeway from a cinema that had never opened.

We now have new signed leases.

<unk> hundred 40000 square feet of space that have yet to commence and are not included in our occupied and service portfolio.

And so on a relative basis, Here's my view of the markets and I'm breaking it based upon activity in the portfolio active lease negotiations tours and Rfps.

From best to least.

For Boston Waltham, we don't have any available space on Cambridge, So we have no activity, there and San Francisco CBD.

Northern Virginia, Midtown Manhattan Peninsula, and Silicon Valley West L. A princeton and finally Dc's CBD.

All of the transactions I'm going to talk about our post COVID-19 negotiation.

<unk>, meaning they all began and the latter half of 'twenty or into 2021, So just to change things up this quarter, let's start with la la.

Last quarter I acknowledged our disappointment that we were unable to keep a 200000 square foot tenant at the Santa Monica business Park.

Less than 30 days later, we had a signed lease for 140.

40000 square feet of that space to a growing tech company. During May we completed a 350000 square foot long term extension and expansion at Colorado Center with a media company in total.

This 490000 square feet had a weighted average expiring rent that was effectively equal to the starting rent on.

And that space and 200000 square feet of expiring rents were at above market holdovers.

This follows our immediate release of the 70000 square feet vacancy that we had from a defaulting tenant and the first quarter, we have a number of smaller deals and negotiation and Santa Monica business Park, and we're responding to requests from tenants that would prefer to go direct.

On some of the sublet availability at Colorado Center.

And Boston during the second quarter and the CBD, we signed 6 leases totaling 55000 square feet and the average rent starting represented a growth rollout of about 20% and.

And each case, the tenant was either renewing or expanding we have 7 additional.

Direct leases and the works totaling 70000 square feet. Obviously most of them are small since we don't have much and the way of availability and our Boston portfolio and.

And our suburban Boston portfolio, we completed 60000 square feet. The average weighted cash rent on those leases was up 17% and.

On life science organizations are dominating.

Additional activity in this market we commenced construction on a day to Winter Street. That's the lab life science renovation that we're doing and Waltham and have signed an LOI for 16000 square feet. We started the building on July 5th and our exchanging proposals with over 180000 square feet of tenants for the 220000 square foot building and it will be delivering and.

As of next year.

We've been responding to new inquiries just about every week on that space.

Asking rents and the market for lab space on the high <unk> to mid Seventy's Triple net which are well above our underwriting when we planned this project about 15 months ago.

Many of you have and asking about inflation and construction costs.

August when we do our construction budgeting, we always include and escalation expectation. So those numbers are baked into those numbers and our supplemental it varies depending upon the labor market conditions subtract track subcontractor availability and material costs, we've bid and are on budget for both AAV Winter Street.

And 180 city point, so we figured out what the escalation would be and we hit it.

Currently we're carrying about a 4% to 6% escalation for base building jobs that we would bid in 12 months.

Now turning back to leasing and Walton, we're negotiating leases for another 70000 square feet of space with life Science companies at Bay Colony, That's a.

And to aid and where street and our reservoir place building.

Our new acquisitions at $2.11, $1.53 seconds, which Owen described have a lease exploration and late 'twenty 2 and the current rental rates on this space are dramatically below market. The explorations will land right and the sweet spot of the current demand and the Boston and the Waltham.

Decent Lexington Submarkets there.

And there is some pure office demand and the market and with more and more buildings being converted to life science, we actually expect the office market is going to tightened dramatically over the next few years.

In New York, we continue to have significantly more tours, and we had and comparable periods in 2019 and the second quarter.

<unk> is actually up significantly on a sequential basis from the first.

We completed 10 office leases totaling 90000 square feet, including another full floor expansion at $3.99, and total gross rents on leases signed this quarter were about 20% lower than the in place rents.

We are negotiating over for.

<unk> and 100000 square feet of additional leases, including almost 250000 square feet at dock 72. The majority of the New York City leases will be for terms and excess of 10 years and we include 2 more expanding tenants at 399 Park Avenue activity at the Street plane of the buildings is also picking up we signed up a new fitness provider at 600.

For our new fast casual restaurant on 399, and we're negotiating a lease for all of the available restaurant space at times Square Tower, and we plan on opening the hue culinary collective at 601 Lexington in September.

And rest and our buildings continue to have extensive activity. This quarter, we completed over 170000 square feet.

Non lapsing of which more than 100000 square feet was on vacant space and.

In addition, we have active negotiations on another 72000 square feet, including almost 60000 square feet of currently vacant space.

And next is moving towards completion with the first tenant expected to take occupancy by the end of 2021.

We have leased and we have another 85000 square feet of office renewals and negotiation and Springfield, Virginia retail leasing is roaring back and Reston Town Center, we have negotiated 35000 square feet of restaurant transactions and have almost 100000 square feet of cinema fitness and soft good transactions in the town center.

Pedestrian activity and restaurant.

And town center is as active as any location and our portfolio.

Office rents are basically flat to slightly down on the <unk> since the expiring cash rents have been contractually increasing by 2.5% to 3% from last 10 years.

And San Francisco CBD, we completed 5 transactions totaling 54000 square feet with an average roll up of 8% why is it.

This quarter, while the square footage was impacted by a full floor transaction and start isn't starts and the mid nineties, where the tenant elected to forego any T is for a lower rent if you exclude that transaction the mark to market would have been 17%.

In addition, we have 8 active lease negotiations involving 100.

So low 3000 square feet with an average rent starting of over $100 a square foot.

And over $100 per square foot and this reportedly terrible market and San Francisco.

The bulk of these spaces are and the higher floors at Embarcadero Center and they all have use <unk>.

Pedestrian activity at this 3 plane, particularly.

<unk> and the CBD of San Francisco has improved over the last quarter, but it's still well behind Boston rest and in New York and this has affected tenants appetite from making space decisions. However.

<unk> <unk> technology users have begun to look for space Sublease absorption has picked up and the city with about 1 million square feet of withdrawals or completed.

40 transactions and as I said earlier Macys Dot Com did 104000 square feet at 680 fulsome are building.

And in Mountain view.

We continue to see a constant flow of medical device and alternative energy and automotive and other R&D users looking for space. We completed a full building lease with an energy company with a healthy 60% markup and rent and we have.

Another 25 to 21000 square foot lease and negotiation Theres, some large tech tenants and the market today looking for expansion space and 1 recently executed leases for about 700000 square feet of availability that was and Santa Clara. We're certainly pursuing those tenants per platform 16, and we have begun internal discussions about the appropriate.

Time for the speculative restart of this building.

So to summarize our leasing activity and the second quarter accelerated our portfolio is in great shape and La we continue to see strong economic transactions and the CBD of Boston, our suburban Boston portfolio and the CBD of San Francisco, we have significant.

Activity in Reston and are covering our vacancy New York tour activity is strong we're doing deals, but economic terms are weaker.

We are expanding our life science investments across the company and and greater Boston and South San Francisco on New construction is seeing strong demand at escalating rents and Mike.

Yes.

Thank you Doug.

Doug I'm going to start my comments by describing our earnings results, which as Owen mentioned significantly beat our expectations.

We reported <unk> for the quarter of $1.72 per share, which is <unk> <unk> per share better than the midpoint of our guidance.

About <unk> of our outperformance came from earlier than anticipated leasing.

And better parking retail and hotel performance, which I would consider core revenue outperformance and the.

And the other 6 senses from unbundled and termination income and expense deferrals that we expect to incur and the third quarter, our office portfolio beat our expectations by approximately <unk> <unk> per share from accelerated leasing.

We had several larger leases commence earlier than we expected, including our 350000 square foot renewal and expansion with a large media tenant and la <unk>, a 65000 square foot health care firm and suburban Boston and 3 technology tenants and rest and totaling over 100000 and meet all of these leases were and our full year assumptions.

<unk> and were completed faster than we anticipated.

Leasing and our residential portfolio also improved this quarter exceeding our revenue projections, but any.

The improvement was across the board with our stabilized residential buildings exceeding our occupancy assumptions by 100 to 200 basis points and the recently delivered projects at the hub House and Boston.

And in Oakland, and seeing even stronger absorption.

While market rents continue to be below pre pandemic levels concessions are starting to dissipate.

Our parking hotel and retail income exceeded our expectations by <unk> <unk> per share as Doug detailed these components of our income stream has started to improve which should.

Skyline, you as activity levels grow and our cities.

The other 2 areas, where we exceeded expectations were and termination income and lower operating expenses, our termination income totaled $6.1 million, which was 3 cents above our budget. It came from 2 sources first at 399 Park Avenue.

The.

And the building is full and we have more demand than available space. This quarter, we were able to accommodate 1 of our expanding financial services tenants by recapturing 50000 square feet from another tenant the transaction resulted in $2 million of termination income and the quarter and second we received about $4 million and unexpected.

<unk> settlement income from tenants, who defaulted on their leases last year, we categorize this as termination income.

While we anticipate a modest amount of termination income every quarter, we do not assume receiving any additional settlement income this year.

Finally on our operating expense line, our maintenance expenses came in and <unk>.

And are lower than we anticipated we've deferred these costs and expect that will be incurred and the third quarter.

1 other item I would like to point out is that we reported second quarter same property NOI growth of 8.9% on a GAAP basis, and 7.5% on a cash basis over the second quarter 2020.

The strong increase honestly is primarily due to the charges for accrued rent and accounts receivable and we took in 2020 related to tenants impacted by the pandemic if.

If you net out last year's charges, our GAAP same property NOI dropped by 1% year over year due to lower occupancy. However, our cash same property NOI grew by 3.

3.8% year over year as free rent periods expired and we've converted those to cash rents in 2021.

This quarter's leasing statistics also require explanation the total company and New York City leasing and particularly were negatively impacted by 2 retail leases and New York City.

Excluding retail the mark.

To market on our New York City office leases was positive 6% on a gross basis and positive 8% on a net basis and office leases and the total portfolio demonstrated strong rental increases of 14% growth and 21% net.

Now I'd like to turn to our expectations for the rest of 2021.

For the third quarter, we provided guidance of $1.68 to $1.70 per share <unk> <unk> above consensus estimates at the midpoint.

At the midpoint of our third party guidance, our third quarter guidance is <unk> <unk> per share lower than our second quarter. <unk> again. This is due to the outsized termination income and expenses.

Sales from the second quarter net of those 2 items, our third quarter guidance is $2 <unk> per share higher than the second quarter.

And the office portfolio, our occupancy exceeded expectations and the second quarter due to early lease commencements for the rest of 2021, we anticipate occupancy will be relatively steady.

And as Doug mentioned, we have 640000 square feet of signed leases that have not yet commenced occupancy we expect 450000 square feet of these leases to occupy before year and in addition, we have another approximate 600000 square feet of both renewal and new leases in the works for 2021 occupancy this activity.

He combined with already signed leases are expected to cover the $1.1 million square feet of lease expirations that remain in 2021 with stable occupancy the current run rate for the and service portfolio is a good proxy for the rest of 2021 we.

We are expecting consistent quarterly improvement from our other income sources primary.

Activity on parking and the continued lease up of our recently delivered residential properties. Our assumptions result in <unk> <unk> of projected incremental NOI.

Growth and the from and the third quarter from these sources.

We also expect growth from the acquisitions that Owen described acquisition activity net of dispositions.

Merrily from <unk>.

We'll add approximately a penny to our third quarter, NOI and <unk> to the fourth quarter.

So in summary, after adjusting for <unk> of high terminate higher termination income and deferred expenses from the second quarter. We project our in service portfolio for the third quarter to be higher by <unk> <unk> at the midpoint and our net acquisition and disposition activity to continue.

Tribute a penny.

While we are not delivering on any developments into service and the third quarter, we anticipate incremental growth from developments in the fourth quarter that will accelerate in 2022.

We anticipate that we will start to recognize revenue as the first tenants commence occupancy at our $270 million of hub on Causeway office tower in Boston.

And the fourth quarter and by mid 'twenty..2 we expect this project that is currently 95% leased to be generating a stabilized NOI. We also expect to deliver our $50 million life Science lab conversion at 200 West Street that is 100% leased and December of this year. It will be at its full run rate in 2022.

And our development deliveries will accelerate and be more meaningful to our earnings growth and 2022, and addition to the deliveries in Q4 of this year next year, we have $1.7 billion of developments slated for delivery and initial occupancy and they are 85% leased and the aggregate.

Overall, we're thrilled with our results this quarter.

As the markets continue to recover our leasing activity is exceeding our expectations. Our variable income streams are improving our development pipeline is on track to add future growth and we're taking advantage of opportunities to acquire some unique assets at favorable prices that we expect will generate additional future earnings growth.

<unk> value creation.

Operator that completes our formal remarks can you. Please open the line for questions.

At this time I would like to remind everyone. If you would like to ask a question press star 1 on your telephone keypad.

If youre using a speakerphone please pick up the handset before asking your question.

And 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 up there.

Our first question is Mike as you guys think.

And your earnings growth and dividend growth.

And so you have the new $2 billion, JV, which obviously provides a lot of capital debt.

And it lessens the need for dispositions or external raising external equity.

So with the potential for more dispositions. This year is the DXP view that earnings.

About and dividend growth will come first meaning that dispositions will be limited and such a way that it really won't impair <unk> growth and that way all the development and life science stuff and all the good stuff that we see will flow through into earnings.

Next year the year after et cetera.

Yes, I mean, Alex our goal.

Growth continue to grow earnings over time, no doubt about it and we've got a very significant development pipeline and acquisition pipeline that we're working through too.

And to that growth over time. This should result in additional dividend growth overtime.

Dispositions are a way to recycle capital and we select assets.

<unk>.

Based upon what we think their growth potential is.

And we reinvest that capital into assets that we think are going to generate higher returns overdone.

And then I think I would add is we've been selling $2 million to $300 million of non core assets for about.

5 to 7 years, and we're running out.

We have fewer of them in terms of non core assets.

Okay.

That doesn't sound like such a bad thing it sounds like you've cleaned the cupboard well. The next question is the rebound in the ancillary income, meaning the parking the hotel and the retail I think last quarter, you guys spoke about $130 million or.

And so of sort of missing income that was impacted by by by the Covid shutdowns how much of this was back in the second quarter and then what are your thoughts for timing of full restoration.

So the it was actually revenue of $130 million that we were talking about.

And those areas.

And we do have some of it back obviously the hotel.

Which used to generate about $15 million of NOI is still losing money.

So that has not it has improved slightly.

But it hasnt improved significantly at all and the other areas.

<unk> is on an NOI basis.

We're somewhere around $60 million to $65 million short of.

Where we were before on the retail and the.

Parking.

Okay.

And with the end of the year, we're going to be at about 70% of our parking revenue.

And so that's a meaningful number for 2022 as people really start ramping up our monthly parking again.

Okay, great. Thank you.

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

Thanks, I appreciate all the detail.

Area, and Mike you sort of talked about occupancy kind of trending flat back half of the year.

And I realize it's early to really give guidance or think about 'twenty 2 but when you just sort of talk to your tenants and you think about next year's explorations and you kind of look at your pipeline I guess I'm trying to just sort of think through when do you think the occupancy.

It really starts to ramp and the portfolio and and.

How long do you think it takes you to get back to what you would consider to be normal occupancy.

So Steve this is Doug I'll answer the question on the following manner, we have relatively modest amounts of rollover in 2022.

And.

And we are covering vacancy today.

The the.

Increase in our development activities that will happen in early 'twenty, 2 or late 'twenty..1 are effectively buildings that are 100% lease. So if you look at our.

Portfolio occupancy in the first few quarters of 2021, it will be picking up.

I am not smart enough to tell you when we're when we get to 92% and 93%, but that's I'd say that's the path. We're on where were today were very high 88, I think radio.

And fix this.

This quarter, so I would hope that by the end of next year, we're going to be and the nineties again, and we may be significantly higher than that depending upon the recovery and the market and honestly.

How well, we do with our life science developments.

Right now we.

We are we are developing stuff that we believe will deliver 100 per.

8.8.

The other thing I would just add is look toward rollover is modest.

And 6% in 'twenty, 2 and 5% and 23.

A big chunk of it is and Boston, which is our strongest market.

So we think we're going to do well there and we're going to have roll ups there.

We also have some on San Francisco.

And the CBD.

And again I think we're going to see roll ups and as Doug described we're already working on a lot of early renewals.

And for 'twenty, 2 expirations that we think will exhibit rollout.

And there's very little and L. A there's very little and DC and.

New York City has about 500000 square feet.

And.

And 2022.

Okay. Thanks, and then maybe secondly, I don't know if this is for Owen or Doug.

Just maybe a little bit more commentary on the Seattle and trends.

The safe goes sounds like it's got a little bit of vacancy for you to lease up but I'm, just curious sort of what other opportunities you might.

Be pursuing and I assume youre looking on both sides of the Lake and.

And I assume that would have some kind of development focus, but and maybe just expand a little bit Seattle comments.

Steve I'll start and Doug may want to jump in.

As I mentioned in my remarks.

We have a very active pipe.

Pipeline of investments debt.

<unk> been reviewing for probably 6 to 9 months Kelly option who's on the call moved to Seattle and February of 2020 and with her help on the ground that's been a very active pipeline I think.

It's robust because.

1 both acquisitions and development and 2 as you are suggesting it's and multiple geographies. So we've been looking in the CBD of Seattle, where Safeco is we've been looking at South Lake Union, we've been looking at Bellevue.

Bellevue area and to the east of there so.

We think there is.

It's a robust pipeline and I think we will have success and growing out our region and Seattle and the near and medium term and regarding Safeco. Steve look we are not looking to buy stabilized beautiful assets that are that are achieving a stabilized return of 3.5% to 5%. Okay. That's not what we're doing.

We're looking to find assets, where we can create value through our operating <unk> per hours and if you look at <unk> Plaza and 800000 square foot building that was built in the late sixties.

Great bones, it's got great ceiling highest it's got great views.

And its fine from an architectural perspective in the interior but.

It's a fabulous and.

And our goal is to do what we did and 100 Federal Street with that asset, which was make that building something that it wasn't which was a building that debt tenants wanted to go to as opposed to just another nice building and a CBD that was sort of moving 1 way or the other with the market.

And we are actually.

But now we've got to figure out exactly what it is we think we can do and economically how to do that and honestly I would say that we are while we're there is a little bit of vacancy and the building we're not in a rush to lease the space and the building tomorrow, because we want to make sure we understand what the building could become and sell what it will be not what it is.

So we're going on we're going to be thoughtful and and constructive with how we do that and obviously, it's a weaker market today than we believe it will be in 12 months and 18 months and we hope and we're at a point, where we've done the work. The building is going to have a very different reputation and and theyre very different positioning and the building and we're going to use the.

And thoughts on properties skill set to do that.

Great that's it from me thanks.

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

Thank you and good morning.

Clearly you've become more active on the value add investment.

And here can you just talk about how the competitive landscape is changing and what we're likely to see in terms of people willing to make more bets on vacancy and office across your market markets.

Yes.

I think as we described the last few quarters, we felt there'd be an opportunity to pursue high quality.

And sorry stabilized real estate debt pandemic discounts and where we think we're seeing that and the market I think the.

Capital for office real estate for anything Thats leased with a long weighted average lease term or certainly anything and life sciences robust highly competitive I could argue cap rates are going down and as Doug just said.

And Thats, just not we don't see that value creation for our shareholders.

What we want to do are things like safeco that are not stabilized great loans, and we think the competitive landscape for those kinds of assets is less than it is for the leased assets.

And I think if our thesis holds true, which we obviously think it is.

His which is people are going to return to the office.

I think that the capital will follow what we're doing and I think those transactions will get more competitive, but Jamie I Wouldnt leave you with the impression that.

That theyre not other bidders for these assets, but as you see from our success. This last.

Last quarter, we have been able to buy quite a few things and I think that is an indicator that pricing is somewhat different from that sector of our market.

And.

And then how you underwrite or how did you underwrite whether its stabilized yields or IRR and what have you and your partners looking for at this point.

Yes.

Look we mark the market rents to market. If we think there is a change in market rents based on whats occurring we underwrite that I think we're conservative and the lease up I think those assumptions actually drive the bus more than anything and we feel like we're being appropriately conservative but.

Over time, what we're trying to achieve is approximately a 6% NOI yield over time, which is and that's not an IRR right. So that's when we get done.

Yielding and the low sixes with growth obviously, because they are typically escalations and rents and if you put some leverage on that and you assume some.

Cap rate.

The differential between what your yield is and what you could sell it at it gives you a healthy IRR.

Okay. Thank you and then just a follow up to a.

And he made earlier, Doug I think you were talking about either the bay area or mountain Dew, specifically about maybe tech larger tech looking.

And you don't talk like Big picture across all the markets about what we should expect to see from Big Tech and clearly they drove the market ahead of the pandemic I'm just wondering what we might see coming out of it.

I think honestly youre going to see very much what you saw in the 2016 to 2020.

<unk> era, which is big Tech is looking for really thoughtful talented people and they believe that the markets that they're currently and have some of those people and then there are places where they think they can expand and so I mean, there's a rumor that Facebook is looking for a couple of hundred thousand square feet and the Boston marketplace.

And for Spike we can tell you that there is a rumor that there is that Google and that Amazon are looking.

For additional space in the Silicon Valley.

We see the requirements of of what's happening right now and Bellevue and the amount of space. That's under construction debt, we believe Amazon is going to be growing into it.

On announced when they do a lease.

And the perception. So so I, just I think youre going to see more of the same and these companies have enormous appetite for space and for talent and whether or not anti trust impacts them from if it's 1 company or 2 companies or 5 companies, which obviously is a consideration I.

Do think that the growth is still going to be there.

Okay, and you didn't mentioned, New York and any thoughts there.

Facebook has put it put a.

Hi.

A fork in the ground and their campus, which they've done very quietly on the far west side, John John powers on the phone you can comment about.

On other technology demand I mean, we've announced that are the market knows that we're interested in and doing $3.60 Park Avenue 2 weeks ago, and obviously, we announced that last night, we've seen a significant amount of large tech demand for that building.

So I don't think that New York, and all being left behind and in fact, I think it's similar to what's.

It's been going on and remember that in 2020, Google and Facebook took and Amazon took some very large pieces of space people forget Amazon took the entire Lord and Taylor former we work headquarters building, which was almost 800000 square feet. Google took a 1 million square feet out of 500, Washington.

<unk> Street, and and Facebook I think has amassed over 1 million and half square feet and the Hudson yard. So that just happened. So I don't I don't think we feel any differently about New York City, John do you have any other thoughts.

I can just tell you that.

And of June there were 295000 and open jobs posted most of those and tech and new.

Europe so.

We're seeing a lot of expansion here.

Yeah.

Alright, great. Thanks for your thoughts.

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

Thank you.

On Cisco Plaza According to.

To media reports.

On the building is already on undergone a fair amount of Capex over the last 15 years and about $100 million.

What do you expect it in terms of capital spend to reposition the asset going forward and can you remind us of your views on liberty mutual and whether or not you expect them to renew when their lease expires in 2020.

So we're not going to comment on what a tenant wants to do Liberty mutual purchase Safeco insurance Safeco insurance has based on the sublet market that would be an indication that they're not utilizing all of their space. So that's probably an opportunity to have a conversation.

With regards to what was spent on the building almost all of the capital Thats and spend on the building has.

And to the building not been on the statics and not been on place, making and that is that's going to be our primary focus in addition to making sure there is no deferred capital.

And we don't I don't have a budget I can give you.

When we know what we're going to do and we and we presented to the Seattle office market, we will present it to you.

Yes.

Okay and on the co investment program.

Looking at single asset transactions, only and are used to fund and willing to look at portfolio acquisitions and also is there possibility for DXP to contribute assets that fund.

We are definitely we would definitely look at our portfolio acquisition.

Okay.

Ben on the aggregate our company and our portfolio 1 asset at a time either through acquisitions or development, but that would certainly portfolio acquisitions will be included and no we have not.

Sure.

And had discussions about joint venturing our existing assets I want to just I want to clarify a word that you used.

Use that I don't think is unnecessarily and accurate statement about what we're doing.

It's not a fund.

Co investment program. So every asset stands on its own.

1 or both or neither joint venture partner might elect to invest in a particular asset and theyre not.

Aggregated into a quote unquote fund.

And I just want to clarify that because I think it's important for you to understand.

Great. Thank you.

Yes.

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

Thanks, Good morning, everyone. Doug I appreciate you gave some.

Some color on leases signed in the quarter.

It possible to just get the mark to market on those lease signings and in the quarter and I guess as well how we should think about what that number could look like for the back half of the year based on lease signings. So far I mean, obviously the second quarter number was 14.

Per cent, but how does that number kind of shake out for lease signings and the quarter and how it could look for the rest of the year for Commencements well so so.

Timing is everything and the reason I provide you with the information and I do is because it is an indication of what is going on with the spaces.

And <unk> leased today, which unfortunately may not hit our supplemental statistics from a revenue perspective for 2 quarters, 3 quarters or 6 quarters. So I'm just trying to sort of give you a flavor of what is going on on a relative basis right.

So it's very hard to sort of predict.

And that was going to happen because I don't know, which spaces, we're going to lease and what the rent was versus what the rent might be on those spaces until it happens so.

So again on average everything I said was.

As basically down and New York City of 20%, but that doesn't mean the markets down by 20% and.

And what is that those those leases might have had a negative mark to market in 2019, because the rent went way up and in particular building and the market just never got to where the increases were.

But so and so things were down and New York and they were flat and Los Angeles again on the portfolio of space. We leased based upon what was what was being paid and what.

And maybe be being paid on a cash basis, and then the other places and Boston and.

San Francisco, we were up about 20% and mountain view, we were up 60% and the and then rest and we were down call it 5% to 7%.

And but again a lot of the space and rest and was vacant and so there was.

We will be bound it's actually up 100% increase because of that space had been vacant for more than 12 months right. So so that's the reason that we give you what we give you in terms of the data. So you can have a sense of what's going on on a current basis.

Great. Thanks very helpful. Just second question on the Midtown South purchase maybe you can give us a feel.

And Daniel rough numbers about how you're thinking about the additional redevelopment costs and potential rent you're targeting there.

So let me let me just make a few comments and I'll, let John powers.

Give them more verbose answer.

We as Owen said, we bought the building for a very attractive basis.

And we're going to be in this building for well under $1000 per square foot.

I'll, let John talk about where rents are again, we are in the early stages of figuring out exactly what it is we want to do to this building and I'm expecting John will say its going to depend on who shows up because depending upon who shows up.

And want different things from the building John.

The building is very attractive for us because it's been delivered vague.

Vacant at the end of the year. So we don't even have the carry cost for this year, we're paying for it as Owen said at the end of the year.

And it's very difficult to get a building and that market with good bones and.

And this is pretty good flow of plates.

And and also get it back all vacant at the same time, so we are and that we're and the vision and stage now of this and putting it together we had a session yesterday and went very well.

We think we're going to do some very interesting and different things and the lobby space there.

And where we.

They may be a lot of interest from different different types of tenants.

It's very difficult to get identity or if you're on 100000 foot tenant or a 150 or 200000 foot tenant certainly and that's the case and many of our buildings, which are much larger. So this I think will be a very good branding opportunities.

And so I wouldn't set and his comments for some tenants rents it really depends upon the size of the lease up and and we're budgeting some downtime, obviously and next year and we may.

May convert quicker, we don't know how the leasing is going to go on this but.

I would say if you think of something with.

The 9.

That would be consistent with our underwriting and.

And we may do better than that and and.

And we hope we will thank you.

Great. Thank you John and Doug.

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

I mean, everyone and good morning.

Just thinking about life sciences, as a broader space.

You guys are increasing your exposure there as are many other owners and developers.

How should we think about sort of differentiating what you're building and and overall supply.

Versus what we're hearing and the headlines of seemingly.

Everyone chasing life science.

So I think the most important differentiation Manny is that we already control most of the conversion and land that we're going to develop you know I mentioned in my remarks, we already have 5.5 million square feet under control. So we don't have to go out and buy anything.

And all of those price.

Projects are in the nation's hottest life science market, and Cambridge, and Waltham, there in South San Francisco, There now and Montgomery County, Maryland. So again, we don't have to go create the raw material to build our business, we already control. It now that being said Fortunately this last quarter. We did find some things that we thought were interesting.

Interesting, we bought a smaller existing lab building adjacent to our project they already had and wall Fam, which we thought was a terrific attractively priced tuck in opportunity and then our DC team.

Got very comfortable with the Montgomery County market and found a very interesting transaction.

And to open up basically and new life science market for Boston properties.

And we're in the process of closing the deal and we're already in discussions with a number of users for that site. So we have high hopes so anyway I think that's the big difference is you hear a lot of people getting into life science are growing and life science we're.

We're going to do it by just executing on what we already control.

And it's Michael Bilerman I was wondering if I can follow up and your opening comments you mentioned the concerns about work from anywhere impact on the BSP footprint are overstated and I wanted if you can distinguish sort of bx.

Next fee relative to the whole office market, because obviously, you've made that comment that it doesn't impact the DXP footprint, but I have to assume there is going to be some impact overall on office and are you able to sort of tease out sort of your outperformance relative to the broader office market.

And you believe it sort of greatly overstated.

Yes, Michael I think let me answer that in 2 different I'll answer and just 2 different questions. I look I think we have said we don't we believe there will be some impact on the office market due to work from anywhere.

But we just think it's overstated if.

And why is that the recovery of the office companies relative to other property companies and overall industry, it's much lower so apparent.

Clearly the market is concerned.

It's not just about Boston properties, it's about the whole sector and what this return to office profile looks like.

For office.

The company. So we acknowledge that's the case in terms of Dxp's differentiation I would say 2 things are very important 1 we like our gateway footprint I think we would acknowledge that in the short term cities.

Cities and the southeast southwest there opening more rapidly.

And perhaps in the short.

If you look around and they might have better performance, but we believe over the long term our gateway markets that are increasingly driven by tech and life science demand and have some barriers to entry are long term the best place to be and then the second thing that both Doug and I talked about and our remarks this flight to quality.

If you look at the tour activity and high quality building, our tour activity and New York.

Much higher in terms of the number of tours. This year to date and then it was in 2019.

Look at assets like the GM building and Theres, a lot of not only tour activity, but leases getting signed and as Doug said in his remarks.

And when Youre in a soft market.

People want to upgrade their buildings.

And they want to go to quality I also think a lot of the future in terms of work from home.

I do believe corporate leadership wants to have their employees return to the office and 1 of the ways Theyre going to do.

That is to have great offices, they're going to want to be in great locations and they're going to want to have great space and place and that's what we try to do.

And the other question I had was you talked a lot about sort of the employer versus the employee difference where clearly a lot of the surveys.

Show that employees want.

Significant flexibility, but obviously when you look at the employers are CEO surveys you get slightly different answers.

And with the Delta variant and a rising and sort of increased.

And I'm asking up and some of the Gateway markets again, do you think that the tone with your tenants.

On the employer side.

It would be shifting a little bit sort of acknowledging we're gonna be with us for a while right unless the vaccination rate increases meaningfully is going to be hard to get rid of COVID-19 and all the protections and things that are happening that all sort of got relaxed a little bit when we have this euphoria that we were done with Covid do you think it change.

Just miss or slows anything down sure.

Should sort of.

Frustration with going into the office on the employee side, where it's sort of both of these things sort of meat.

On the head I'm just curious how you think about that on a current basis given what's happening.

Yes, we haven't seen much evidence.

Of that our footprint as you know and it tends to be on a more highly vaccinated parts of the country.

I think thats the first important point I completely agree with the dynamic that you described of it what is the employer preference and what is the employee preference and I think that's a lot of the dynamic that's working itself out.

Determining.

Office policies at this time look the delta could slow the recovery, but I don't think its a matter I think the recovery is going to happen. So it's not an if question if a when question.

Okay. Thanks for the color.

Your next question comes from the line of.

Craig Millman with Keybanc capital markets.

Hey, guys.

<unk>.

Mike I know you gave us the kind of the impact from the acquisitions and <unk> and <unk>, but.

Can you guys just provide some GAAP going in cap rates that we could think about initially.

For the different assets.

I know you can kind of back into it but the timing piece as we head into 'twenty 2 is figure it might be easier to get a run rate.

I'd, rather not give you explicit cap rates because these arent closed and we have confidentiality agreements and such I would just I just would give you the following so because.

And I think this will be helpful.

And so $3.60 Park Avenue as John powers debt will be vacant in 2022, So I think the cap rate is obvious there and the.

And as Owen said, the Shady Grove development, we intend to.

Basically vacate all of those buildings as quickly as we.

And we can and so there's very little incremental income there safeco.

And well leased building and very below market rents when we when we close we'll be able to provide more detail on that and I think we provided some detail on the second Avenue and 6.

6.3 and $6.4.

And Thats if.

And if you back into that and on you listened to what I said about where market rents are you can get to where we think that's going to be and 22, when we released the building.

Okay.

<unk>.

And then just a clarification on 360 park have sales did you guys buy the C or the leasehold.

We bought the fee interest.

We are buying the fee interest when you are buying and the fee interest.

And then just 1 last 1 I've been asked a couple of times and I'm just kind of curious myself is there any potential to redevelop the Cambridge Marriott into life science or office overtime or is there something there that would stop you from doing that.

If it made economic sense.

So the answer is there is nothing legally preventing us from having a conversation with the hotel operator about their contract and there is nothing that legally prevent us from going to the Cambridge City Council and ask for a change and use there.

And so clearly we have been successful and other doing other things like that in the city of Cambridge and again, 1 of the things that people sort of I don't think they they ignore it. They just don't appreciate it we're going to build almost 1 million square feet of new Labour office space.

And Kendall square.

That is currently being leased at rents of between 110 and $140 a square foot triple net.

We have to build a underground parking structure for the existing space and we have to give some below grade ground to the local.

<unk> <unk> company, but that's going to happen sooner rather than later, so we have plenty of opportunity to grow our Cambridge portfolio.

Okay, great. Thanks.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Hi, good morning.

Yeah.

Earlier, you mentioned that the list of non core disposition disposition candidates for shrinking. So I was just wondering as you go through these acquisitions and developments on how you generally plan on funding them I know this quarter you did mentioned the use of some OE units and 1 of the cases. So would you identify other dispositions issue equity only do it when your cash position.

Is there something else.

I'll start to answer that and you guys can jump in if you want look I mean, we've got a very very strong balance sheet.

And we've got a significant amount of pre leased developments that the money has already been spent and the income is coming in and the next couple of years. So that balance sheet is only going to.

And allowed to and as net income comes in and brings our leverage down from a place where we're comfortable now.

But bring it down to provide even more capacity. So we will continue to fund through.

Some modest asset sales some additional debt capital and you.

Utilizing private.

Equity to help on any kind of acquisition type of and activity. We typically won't want to do the developments on our own and let somebody else owns the land and.

And thats, the only way that we can access that.

And we're comfortable with that.

Strategy.

And the foreseeable future.

Strengthening and we would never bring in additional public equity into the company, that's really dependent on 2 things 1 the investment.

On opportunities and profile that we think we're going to have over the next couple of years and then obviously, what our share price is and whether we think thats an attractive.

Cost of capital for Us.

That does it look at all of those things when we think about funding future investment.

So just to sort of put a finer line on and this is Doug.

Everything that we have done to date, we are funding with our existing capital capacity and addition to all of the developments that are currently underway and are very.

So we go with our overall leverage or use of capital in terms of where the where the dollars are going and how those dollars are coming in to the extent that we need additional capital to fund that I mean, everything that we've announced to date has been funded.

Okay and.

And then maybe just on the development.

Comfort line you guys went through a lot of the leasing that was done in the quarter, but it didn't look like the development pipeline and particular recognize that active leasing. So just wondering if you could go through.

The activity that youre seeing for those projects and expectations going forward sure. So the only holes and our development pipeline to date are the Brooklyn.

And Navy yard, which is no longer part of development, which I described and then our Reston Gateway project.

Project, which is and I'll, let Jake and and Pete on any who are regional team from Washington D. C. You talk about the leasing efforts, there and sort of where we are.

Sure. This is Jake stroman and the D C.

Region. So.

On the rest and next project, we have about 150000 square feet left to lease and the $1.1 million square foot building.

You had some great activity lots of broker tours that have come through that building.

We have.

And we're trading proposals with a full floor tenant right now and.

We're also going to engage.

Cutlery program on an additional 30000 square feet.

So which has been very successful in the rest and market to date, so really good activity.

Hoping to convert a few of those opportunities to leases here soon.

And then Kayla and on the on.

And up in Boston, and I thought I would describe that.

ADT Winter Street, which is part of it.

Line now as I said, we have a 16000 square foot letter of intent already signed and we have a 180000 square feet of active proposals.

Some of which are actionable right now and we're just arguing about economics and then we actually we are in discussions with some tenants at 100.

On the city point. These are not discussions that have gotten to the point, where we have a letter of intent that we've said is close to being executed will that building also has later so the sequencing is 880 as delivered and ready for people to be working in it and August of 2022, and then about a year later.

<unk> on 180 city point is available and that's why I said, if you think about that we also have these 2 new buildings that we acquired at on second Avenue with a lease expiration and the fourth quarter of 2022, right and the sweet spot of where all this activity. It is.

Think.

If you if you listened to the market.

<unk> Terry on demand for life science, particularly and the greater Boston market. There are there's way more demand and there are existing opportunity to lease space lots of people are talking about building. These supply most of that supply our larger projects that won't be completed until 2024 to 2026, so the sweet.

Common market from our perspective over the next couple of years has a significant amount of demand and very little competitive supply.

Got it thanks.

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

Great Thanks, and good morning.

On page.

Page 16 of the supplement where you breakout second generation leasing and so it's pretty clear the retail portfolio and New York still a bit of a challenge.

And I think in your prepared remarks, you referred to some current negotiations on that portfolio. So could you just talk about your outlook for a recovery there yes.

I wanted to be very clear. So the reason that the numbers are as poor as they.

They are on the retail portfolio and New York is because we took some space back are we re re leased some space on and as is basis in 2019, okay and not in 2020.

At the General Motors building on Madison Avenue, and the rents were dramatically lower than what the in place rents were and Thats. The reason for the.

And the change.

Effectively what happened.

And so so we are now leasing vacant space and.

And the vacant spaces, obviously, all going to be incremental.

On the rents are market rents there depending upon where the spaces are there commensurate with what you would what you would hear from our retail team.

And want to negotiate rents on the.

On this call, but the spaces that we're negotiating.

Fitness center and the basement of an office building or a high quality restaurant in times square are very very different because of the nature of the spaces and the marketplaces, but it's where we.

We are acting aftermarket.

Okay, Great and then you have a decent amount of retail up for renewal on Boston and <unk> any color on how negotiations are for that space or if <unk> got plans to redevelop et cetera.

And so our biggest hole and Boston is at Lord and Taylor.

And we.

We have.

And lots of active dialog going on on that space, which we haven't seen revenue on for over a year I think I, almost 16 months and which we now have back.

And the exploration that you're pointing to and Boston is actually not and exploration.

It's a lease debt is in litigation with <unk>.

The other anchor there.

Hang on a contractual basis and.

And I don't expect that that lease will be terminated and.

And the third quarter, whether we are able to work something out with them on a long term basis unclear, but theyre not going anywhere in the short term.

Basically.

We handled some of those leases, where we had a retail tenant defaulted.

Now we terminated the leases and then we and our rollout we assume that it expires and the next quarter because they are sitting on it.

And most of these tenants and we only have a couple left but they are paying rent and it's just a matter of time before we're able to kind of negotiate with the new deal will be.

No.

The expirations and the third quarter and Boston.

And those situations.

So as Doug described we don't expect them to create vacancy.

Okay. Thanks for clarifying that and then just 1 last quick 1 on Seattle, I know you've already talked about it a decent amount.

Do you have a target for where you want to get that market to as a percent of the portfolio over time.

And so.

Ill address that look we strict.

We set strategy top down.

We like our gateway footprint, we think Seattle should be part of it.

But.

The answer to your question is driven more by bottom up opportunities. So we clearly want to be and Seattle, we're being aggressive there we want it to grow but it will be dependent on.

And on the timing of and attractive.

Attractive investments that we see.

Okay makes sense thanks, guys.

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

Thanks for taking the question and sorry, just to clarify on net debt retail leaves at GM.

And you mentioned the 33000 square foot excluded.

And you just remind us.

And what that was and what drove that negative the big negative markdown.

There was a space that general motors it had a big negative Mark down and then there was also a space at 600 on Lexington Avenue.

So and I'm not going to tell you what the rents are like.

As I said I'm not going to negotiate rents per tenants on the phone.

So just so those spaces were relieved and that's what drove the markdown and yes, and 1 of them was what and just.

And just as an FYI.

Technical 1 of them was actually paying zero because they had defaulted on there.

Lease, but we are using there there was contractual rent to define what the change and mark to market is even though they hadn't paid rent and 6 months prior to the date that they terminated.

Okay. That's helpful.

Just.

Given the talk we've had so far on employees wanting <unk>.

Flexibility employers may be wanting slightly different things on.

I'm wondering if you can touch on 2 things 1 just sort of what's your what youre seeing at your co working platform and where you expect that to trend maybe in terms of just.

Offerings and additional buildings.

And then second just on lease terms.

Itself are you seeing any variations and discussions on lease length or flexible options for termination or expansion that would be helpful. Thank you sure. So.

Let me just let me just.

Define what our platform is so we have in Boston and flex by DXP and.

And 3.

CBD office buildings, and then 1 suburban asset.

And the character of.

The leasing there has actually been that its picked up significantly over the past quarter.

We've done I'd say.

6 or 7 deals which have leased all.

All of this space at our suburban location and the vast majority of our space at the Prudential Center location, and where and activity at the hub on causeway and.

And the nature of all of those tenants are companies that.

Don't know what their long term growth as they don't didn't have office space prior to.

The pandemic they want to get back quickly and they just need space because they want their people together and theyre, saying, where you want it and we're going to take this for 6 to 9 months and then we're going to figure out how much we need and then we'll decide if we want to do additional flex space with you or are we want on long term commitment.

And again our spaces.

And nearly 4000 to 6000 square feet, Max and we have a few that are a little bit smaller but it's.

That's the character of the spaces.

And I think vikram.

We don't have plans right now to grow that business I mean that could change over time depending.

On the economic performance, but we don't have we're not planning to expand it at this time.

And.

Okay, Great and then just sorry, just to clarify the least kind of the lease terms overall you see youre on.

Not seeing any change and so the components, whether it's whether it's term or just out options are.

And expansion options or anything like that and.

And the perfect World the tenant would like to have and ability to get out of their lease whenever they can.

Obviously, we don't provide that kind of flexibility.

And I think Owen said in his remarks, our average leases.

That were signed this quarter was 7.5 years.

Typically we've been telling people that we have an average lease length of 8 years. So its de minimus Lee less.

But again the leases that are in active negotiation right now are all on average 10 years or more.

All the activity that I described including the life science stuff.

And I would tell you that.

Net.

Tenants would like as I said, we'd like to have more more ability to be flexible with their space and buy their way out of leases and <unk>.

Occasionally we are giving some of that flexibility after longer periods of time, you sign a 10 year lease and you can terminate after the seventh year, something like that but there really hasnt been any shift.

And the profile of the amount of time that the companies that are looking at our kind of spaces are expecting and all of our build to suit stuff is still 10, and 15 or 20 years.

Okay, Great and then just sorry, just last 1.

And you've talked obviously, a lot about Seattle and it makes sense strategically.

And just.

Other markets 1 of your West Coast B has expanded into Austin recently.

And I guess.

You never say never but if we look at the next sort of 2 to 3 years.

Is it a possibility that you look at any of the kind of keeps sunbelt market says.

More tech tenants expand there.

Look I, we believe and our gateway strategy, we think Seattle was the logical expansion.

As a gateway market and there is plenty to do and the 6 markets. We're in now Vikram.

You and others are focused on Seattle I could argue.

We actually went into 3 new markets this quarter.

1 was the.

Park Avenue South.

Low 40, <unk>, Midtown south market and its a new submarket for Boston properties.

And the New York market is 3 times the size plus of Seattle, It's got multiple cities and and of itself. We just went through a new 1 and then our.

Our DCT and went into the Montgomery.

On <unk> County, and life science market, which we hadn't been and before that's managed out of D. C region. So I think those 2 deals are evidence of all of the robust opportunity with opportunities we have to expand our footprint and our existing quote regions.

Great. Thank you so much.

Yeah.

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

Great maybe going back to the development pipeline.

And I believe you discussed the speculative restarts of platform 16 are there any similar discussions across the pipeline across the non.

Life Science pipeline, and as such as 3 Hudson or or anything else.

I would say the only other project that is in our land portfolio. At this time that we're looking is the block the residential development in Reston and rest and next I think that could be a start.

You can see later this year early next year.

And on Europe.

Your question specifically.

And I need a really large tenant commitment to start 3 Hudson Boulevard or to start 343, Madison Avenue, which by the way won't even be in a position to start for a couple of years.

Or any of the other.

Land holdings that we have and are more urban locations.

Yeah.

Got it and then you discussed throughout the call today about the quality of your portfolio and the outperformance and it's generating and I'm curious within the leasing activity this quarter or and the pipeline are you seeing any tenants.

Star trading up from class B space to class 8.

I would say that debt, we're not seeing people trading up from true class B space, because true class B space is is significantly less expensive than and class 8 but we are we are getting tenants who are in.

And what I would refer to as a minus minus buildings that are looking at our assets in other words modern inventory of office space that is really not been either a monetized is not where the landlords don't even know and understand what it means to create great place and great space, where they haven't made the changes to.

And the infrastructure of the buildings, but where the building is well located and so those tenants are that are there because of that and they are sort of saying wait a minute given everything that's gone on and the importance as Owen described of having great places for their employees, who want to come back to and the health security issues that we've talked about ad-nauseum for the last couple.

And we'll have quarters and how we're dealing with those things.

There is a flight to those kinds of environments that I believe is occurring and so to answer on.

On 1 of the questions that was asked previously.

I do believe that there will be and buildings that were built.

And in the modern era, so and.

70% <unk> 92, thousands that have not been well maintained or well thought of with landlords, who really aren't thinking about the long term viability of their buildings that will be left behind.

And our core cities as people move to better better buildings and better linked with better landlords are better.

Activities for their.

Customers.

Got it thanks, everyone.

Yes.

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

Okay. Thank you operator, we don't have any more formal remarks, and I just want to thank everybody on the call.

Time and their interest and BSP. Thank you.

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

Okay.

Okay.

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From there.

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Okay.

Yes.