Q3 2021 Boston Properties Inc Earnings Call

Good day and thank you for standing by at this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Laura Society. Please go ahead.

Good morning, and welcome to Boston properties third quarter 2021 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K.

Elemental package the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G E.

You did not receive a copy these documents are available in the Investor Relations section of our website at Investor <unk> Dot Com a webcast of this call will be available for 12 months.

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

Actors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in yesterday's press release and from time to time in the company's filings with the SEC.

The company does not undertake a duty to update any forward looking statements.

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

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

Thank you Laura and good morning, everyone.

This morning, I will cover the economic recovery that's underway in the U S. Dxp's momentum in terms of financial results and leasing private equity capital market conditions for office real estate, and Dxp's capital allocation activities and growth potential.

The U S economy continues to exhibit strong growth as we emerge from the Covid pandemic U S. GDP grew six 7% in the second quarter, but is expected to slow in the third quarter due to the surge in infections caused by the delta. Various however, daily COVID-19 infection levels have dropped over 50% from <unk>.

Highs in September, which bodes well for strong economic growth in future quarters.

The relatively low unemployment rate at four 8% is being driven by both new job creation, which recently has been tepid and.

And workers withdrawing from the workforce there are over 10 million job openings across the U S and virtually every employer, including DXP is experiencing a highly competitive labor market.

Annual inflation remains high at five 4% in September driven largely by energy prices, which are up 25% versus one year ago supply chain challenges are a primary topic. This earnings season for many companies and Doug will cover <unk> experiences in his remarks.

Lastly, the 10 year U S. Treasury rate has increased approximately 40 basis points to one 6% since our last earnings call given the prospect of further interest rate increases we have been very active refinancing our corporate and specific asset level debt.

Interest rates remain extremely low relative to off the office cap rates and the yields we are achieving on our developments, creating the potential for lower cap rates and higher value creation in the quarters ahead.

Dxp's financial results for the third quarter continued to reflect the impact of this recovery and an increasingly favorable economic environment. Our <unk> per share. This quarter was <unk> <unk> above market consensus and <unk> <unk> above the midpoint of our guidance, which Mike will detail shortly we completed over one.

One 4 million square feet of leasing significantly more than double the volume achieved in the first quarter well above the leasing achieved in the second quarter and just under our long term third quarter average.

Our clients continue to make even longer term commitments as the leases signed in the third quarter had a weighted average term of nine three years versus seven five years in the second quarter.

Year to date, we've completed three 3 million square feet of leasing with an average lease term of eight three years.

This success can be attributed to not only our execution, but also the enhanced velocity and economics achieved in the current marketplace for premium quality Wella monetized assets, which are the hallmark of Dxp's strategy and portfolio.

In addition to our leasing activity, which included a 524000 square foot long term renewal with Wellington at Atlantic Wharf, Google purchased a one 3 million square foot building in New York for its use in.

In the Silicon Valley alone Apple completed a 720000 square foot new requirement Facebook is looking for 700000 square feet of additional square feet.

And bite dance of searching for approximately 250 to 300000 square feet.

In the Seattle region, Facebook is pursuing a half a million square foot requirement in South Lake Union and Amazon has executed an enormous growth in Bellevue I could go on.

These examples support our repeatedly stated position that tenants are committed to the offices their location of choice to collaborate innovate and train all critical for their long term success.

Measurable census in our portfolio also continues to improve our leading region is New York City, which hit 52% occupied last week.

Our lagging region of San Francisco, which is increasing but currently at 18% and the remaining regions are in between.

From watching on TV stadiums packed with unmatched people to trying to park at busy shopping centers to experiencing difficulties in making restaurant reservations in our core markets. It appears to us people are undoubtedly more comfortable with in person activities.

Liquidity fueled strong business performance and a tight labor market are clearly factoring into remote work decisions by businesses.

However, as time progresses, and the shortcomings of remote work become more apparent we increasingly hear concerns from business leaders about the decaying cultures are there companies inadequate training and difficulties in onboarding, new professionals as well as the potential for deterioration in innovation and competitiveness.

We believe that only a matter of time before employers more strongly encourage their teams to return to in person work.

Record levels of commercial real estate sold in the third quarter and private capital market activity for office assets is also recovering rapidly 26 billion a significant.

$6 billion of significant office assets were sold in the third quarter up 38% from last quarter and up 165% from the third quarter a year ago.

Cap rates are arguably declining for assets with limited Reso limited lease rollover and anything life science related given low interest rates.

And activity is increasing for assets facing near term lease expirations of note this past quarter and all of our markets.

One Canal Park, and MTI 112000 square foot office building in Cambridge sold to a REIT for $131 million or $11 $70 a square foot.

As mentioned as mentioned Google exercised its option to purchase St. John's Terminal in New York City, which is 1 million three square foot office building that fully occupies and the price was $2 1 billion or $1620 a foot.

Coleman High line, which is a 660000 square foot office complex under construction in North San Jose and fully leased to Verizon sold for $775 million, which is $1180 a square foot and a four 2% initial cap rate to a non U S buyer.

153, Townsend Street, which is a 179000 square foot office building in San Francisco sold for $231 million or 12, $90 a square foot to a local operator and fund manager. This added this asset is fully leased to a single user which has put the entire building on the sublease market.

West eight is a 540000 square foot office building in the Denny triangle, Seattle sold for $490 million of 910, a square foot to a REIT.

The building is fully leased but faces significant rollover through 2023.

49% interest in 655, New York Avenue in Washington, D. C sold for a gross price of $805 million or $10 $60, a square foot and a four 7% cap rate.

The building comprises over 760000 square feet is 93% leased and sold to a non U S investor with a domestic advisor and lastly, the post which is 100000 100000 square foot fully leased office building in Beverly Hills sold for $153 million, which is $1530 a square foot.

And a four 8% initial cap rate to a domestic fund manager.

Now moving to Dxp's capital market activity, we closed on the acquisition of Safeco Plaza and entered the Seattle market.

DXP will own a one third interest in the asset along with two partners and our strategic capital program.

We also closed the shady Grove biotech campus acquisition and entered the Montgomery County, Maryland Life Science market.

We're also on track to close the $363 60 Park Avenue, South acquisition with with strategic Capital program Partners on December one.

Thereby entering the Midtown south market in New York City.

Scribe the economics for all these acquisitions last quarter.

Regarding dispositions, we completed the sale of our Spring Street Office Park in Lexington mass this week, bringing our share of gross sale proceeds from dispositions year to date to $225 million. We're also marketing for sale two additional buildings, which if completed are projected to yield approximately $200 million in gross.

Proceeds.

On development activities. This quarter, we delivered half a million square feet of Verizon and other tenant space at 100 Causeway and 285000 square feet of Fannie Mae space at rest of the next in the aggregate, we have $4 3 million square feet of development underway that is 72% pre leased.

Future deliveries plus the stabilization of recently delivered projects are projected to add approximately $190 million to our NOI and three 8% to our annual NOI growth over the next few years.

So in summary, we had another active and successful quarter with strong leasing and financial results and entered several new geographic market.

We believe DXP is about to experience a strong growth ramp, which we project to be approximately 13% and <unk> per share in 2022, driven by improving economic conditions and leasing activity recovery of variable revenue streams.

Livery of a well leased development pipeline completion of four new acquisitions, our strong balance sheet combined with capital allocated from large scale private equity partners to pursue additional new investment opportunities as the pandemic recede a rapidly expanding life science portfolio in the nation's hottest life science markets.

And low interest rates and decreasing capital costs.

Finally, I'd like to welcome Hilary Spann, who is joining this call. This morning, <unk> executive team Hilary joined DXP right. After labor day and will become a regional head in New York When John Powers Retires in January let me turn our remarks over to Doug. Thanks, Owen Good morning, everybody I'm going to begin my remarks. This morning.

With a few comments on the supply chain and its impact on our capital expenditures, both for new construction and our existing assets.

So the impact of the supply chain are both in time and money schedule is one of the criteria. We use when we bid our jobs and to date, we've been able to award bids while maintaining the schedule is necessary to get our tenants and their spaces as required.

The supply chain challenges have made the process much harder, but we are still able to deliver the current development pipeline on time and within budget and as you. All know we have contingencies that are in our budget and at some point we are using those contingencies.

However in.

In the near term as we look at new jobs, there are fewer material choices and we are working closely with our consultants and our contractors to make sure that they are not specifying critical path item that could impact schedules. Our construction teams are working a lot harder at figuring out exactly how the key and the part that put together.

We are intentionally minimizing oversee items that and we're releasing our material packages as early as possible.

Walking issues are real and at times, we are being forced to air freight as well as stockpiled materials offsite, hence the use of some of our contingencies. There's no single answer to how much more is it going to cost, but when we're budgeting jobs that will start eight to 12 months from now we are using a 5% to 6% escalation in our total construction cost.

We are in the process of rebuilding our platform 16 based building project, which was previously budgeted in late 2019.

With an eye towards our 2020 to restart and we will have real time perspective in mid November but as today, we just don't know what that's going to be.

Supply shortages are also impacting our operating budgets energy as a material input into our operating expenses, while our largest utility costs electricity, we're mostly hedged for 2022, and we have been successfully increasing our procurement from green power. We are still exposed to the marginal cost of electrical generation.

In the Boston region, where we expect double digit increases from last year.

Cost per security cleaning and engineering labor continues to increase due to labor shortages across all those trades.

However, our lease contract take two forms we have net leases under which a 100% of the operating expense and real estate taxes are paid by the tenant and we have gross leases with a base here that is set upon the lease commencement with increases in expenses over that base year added to the rental obligation of.

The tenant in other words, our exposure is on our vacant space and for new or renewal leases, where we are setting our base. This is a pretty small percentage of the total so it really doesn't have a material impact on our actual operating results as we look at 2022.

As you saw in our supplemental our second generation leasing statistics were weak this quarter and they need some finer explanation I wish we could put all of this into our press release, but we simply can't the.

The universe of square footage that is encompassed in the statistics is about 500000 square feet and it includes 105000 square feet of short term transactions 18 to 24 months that we signed in the heart of the pandemic with tenants that were not in a position to make a long term commitment, but they were prepared to.

And then for a negotiated discounted as this deal.

One of those tenants has since agreed to lease space for 13 years, where the interim rent was $60 a square foot and there'll be paying a $103 a square foot and this isn't a new York asset if you eliminate that 105000 square feet. The statistics that we would have shown you changed dramatically going from down 14%.

To effectively flat.

You should also note that our transaction costs were also significantly below our run rate since there were no ti is involved in any of these short term deals.

Our life Science and office portfolio make up 91% of our revenues as we look towards 2022. We currently have more than 800000 square feet of signed leases that have not commenced.

In 2022 lease explorations for the whole portfolio not just our share total about $2 9 million square feet and we already have renewal conversations underway on over 25% of that space. Historically, we have leased well over a million square feet a quarter each and every year.

<unk> will be when those new expected leases will commence occupancy should slowly edge up in 2022.

The changes in the quarter occupancy this quarter are due to the addition of the shady Grove and Seattle acquisitions, not a degradation in our occupancy in our existing portfolio now let me give you a sense of what's going on in our portfolio today.

New York is a good place to start tour activity proposal and ultimately leases continue to be very consistent with the commentary we've been providing during the last few quarters. The high end buildings are seeing good activity brokers that advise the small and mid sized financial firms and professional services firm are very busy and their clients are taking action.

Many of those users are incrementally increasing their space requirements as they continue to acquire people in <unk>.

Sublease space continue continues to gradually melt from the statistics you may remember that we were asked about a 200000 square foot sublet at 399 Park Avenue during various conference calls in 2020 that space.

Space has been taken off the market as the user reoccupied.

Now Theres still is significant supply of direct and sublease space in New York City, and our views at net effective rents remain down 10% to 15% from pre pandemic levels.

During the quarter, we completed eight deal totaling 113000 square feet in the CBD portfolio. Many of these spaces were vacant but the two largest had a roll up of 8% in one case and a roll down of 4% in another.

About 70000 square feet of new leases are in the category of leases that will not have revenue commencement until sometime in mid 'twenty two.

Last week, we signed a lease at dock 72 for 42000 square feet. We don't anticipate this tenant completing their build out until the latter half of 'twenty two.

We have an additional 340000 square feet of leases under negotiation in New York right now, including almost 200000 square feet at Dock 72, we don't anticipate revenue commencement on 65% of that space until 2023.

One of the themes for next year is going to be a pickup in sign leases with contribution to occupancy or revenue flow through occurring when tenants complete their installations in late 'twenty. Two we're at 23, and we don't necessarily control of those times.

At Carnegie Center down in Princeton, We did eight leases for 38000 square feet and have another 106000 square feet in active lease documentation.

One final note on New York before I turn to the other markets our culinary collective the hue has opened at our 53rd Street campus in 601. Lex. This is as good. An example of place making as we can point to in our portfolio as user who want to encourage their employees to come back to work. This type of experience will dramatically enhance.

Physical space offering it's why we do what we do.

In Northern Virginia, our leasing team is seeing a consistent flow of inquiries tours lease proposals and ultimately completed transactions during the quarter. We completed seven leases totaling 70000 square feet in Reston and were in lease negotiation on another seven deals totaling 125000 square feet.

The tech tenants that have identified the DC metro market as a fertile area for workforce expansion are continuing to grow and their growth is going to be in northern Virginia. In addition, the contractors that service the defense and Homeland Security are also expanding their significant vacancy in northern Virginia, but the urban market corn rest and it's under 10%.

Went vacant and it continues to dramatically outperform with starting rents in the high <unk> to low <unk> growth and with our net rest of next project opening up this week.

The rents are starting to hit the low sixties the.

The rest of <unk> development as well as welcoming spanning may into the building. This month and we are actively marketing and leasing the remaining 160000 square feet of available space our.

Our Reston town center retail place, making its also a very active during the quarter, we completed a lease with a new theater operator for 50000 square feet last week, we signed a 20000 square foot lease with a local restaurant distillery and yesterday, a new 20000 square foot fitness operator, we have three more restaurants totaling 22000 square feet that are close to execution.

This 115000 square feet of leased retail is not expected to have any revenue contribution until 2023.

In the district of Columbia, We continue to chip away at our current availability at net square 901, New York Avenue in market Square North we completed seven leases for 49000 square feet during the third quarter and signed another and have signed another 32000 square feet during October.

As an aside we completed a major repositioning of <unk> this year and year to date, we've signed 162000 square feet over eight transactions. When we do our work are buildings lease.

The urban downtown recovery in San Francisco continued to lag our other markets very few businesses have commenced their return to work downtown streets remain quiet much of the ground plane remains closed and the city has had a very restrictive Mac mandate as Alan pointed out daily consensus continues to be significantly below.

Our other urban markets.

There's been a reduction of sublease space in the market stemming from active lease commitments and re occupancy plans, but overall availability continues to be elevated this description while accurate overlook important subtleties in the market pre pandemic there was very little available space in high quality multi tenanted building, particularly.

Those with views.

Broadly speaking those conditions still exist for that segment of the market. The bulk of the demand in the last 18 months has come from traditional financial asset management and professional services firms that are focused on the best space in the best buildings. This has resulted in very little change to leasing economics in the <unk>.

<unk>, particularly in spaces with views we've discussed this on recent calls and it continues today. This quarter, we've completed over 100000 square feet of leases, including full for full floor can transactions in embarcadero. The average starting rent was just over $100 a square foot on those full floor deals at 21% increase.

Over expiring rents we are negotiating leases on another 106000 square feet right now and from what we've seen these experiences are being repeated in the competitive set north of market. In contrast, sublet transactions are being closed a significant concessions to pre pandemic economics, but with no capital.

Life life science activity at our Gateway development continues to be healthy.

<unk> joint venture has signed an LOI with a full building user for 751 Gateway 230000 square feet and were actively responding to proposals for our anticipated redevelopment of $6 51 gateway about 300000 square feet, which won't commence until the third quarter of next year.

Whether down the peninsula in mountain view activity has picked up in the last 30 days. This quarter. We completed two full building deals totaling 58000 square feet, we're seeing less information gathering exercises and a lot more active tours with rfps and the need for immediate occupancy or early 2022 occupancy they're ours.

Owen said large tech requirements active in the Silicon Valley.

For those of you who saw that the Tesla announcement that they're moving their headquarters to Texas. You may have missed that they leased 325000 square feet in Palo Alto contemporaneously with that announcement.

High quality, new construction availability is very limited in the valley and we're actively considering when we should restart the construction of platform 16, <unk> facing in the future Google development in San Jose.

Finally, let's touch on Boston and the high end market in the Boston CBD, particularly in the back Bay. There is current Lee limited availability, particularly with view space rents have remained at pre pandemic levels and concessions are only marginally higher as we move closer to 2023, there will be additional new construction supply entering the <unk>.

And in the CBD, but not the back Bay as Owen mentioned, the big leads for the quarter was the early renewal with Wellington. They agreed to expand by 70000 square feet at Atlantic Wharf and were going to terminate 156000 square feet at 100 Federal Street in 2023.

We're getting back.

<unk> at a rate that's below market. So we're optimistic that we can create additional value through this relapse.

We completed an additional 73000 square feet of leases in our back Bay portfolio, and we have about 50000 square feet of leases under negotiation today in that same group of properties.

The Boston our retail portfolio is also a very active we have signed an LOI for the 118000 square feet, formerly occupied by Lord <unk> Taylor as well as 40000 square feet of in line space. That's currently vacant or in default. This 158000 square feet will likely commence paying rent in early 'twenty three as we move to the suburbs lifestyle.

Is dominating our activities last week, we signed our first lease at AAD Winter Street, our lab conversion that we started four months ago 37000 square foot deal, which will deliver in the middle of next year and we are in the final stages of negotiation on another 128000 square feet, which would bring that that 224000 square foot building to 74% lease.

And we have active dialog on the rest of the space and during the quarter, we signed over 105000 square feet of leases with life Science tenants at 1000 Winter 1100 winner in reservoir place traditional office buildings as we move into 'twenty. Two we're developing plans to convert additional available office space in Waltham into lab space.

<unk>.

So to summarize we've seen a recovery unemployment as Owen discussed employers are aggressively looking to higher capital raising in the venture world is breaking through levels never seen an IPO takeout.

Historically high level conditions are right for a recovery in office absorption employers are going to want to use their physical space to encourage their teams to be together. Our mantra has been to create great places and spaces to allow our customers to use space as a way to attract and retain their talent. If you believe that employee.

<unk> may be spending less time in their offices, it's even more important to have the right space in place when they are present and I'll stop there and give it over to Mike.

Great. Thanks, Doug Good morning, everybody.

Before I jump into the details of our third quarter earnings as well as our 2021 and 2020 to guidance I wanted to touch on our recent financing activities.

This quarter, we took advantage of the low interest rate environment, and the very attractive credit spreads to issue $850 million of 12 year unsecured green bonds. When the underlying 10 year Treasury rate was one 3% we achieved a coupon of 245% the lowest in the company's history.

We utilized the proceeds to redeem $1 billion of three 8% unsecured notes on October 15th.

Those notes were scheduled to expire in early 2023 and represented our largest debt maturity through 2025. The early prepayment will result in a redemption charge of 25 cents per share in the fourth quarter of 2021.

We will benefit from the 140 basis point drop in the relative debt cost and we're thrilled to issues such attractive long term financing.

The only other significant debt maturity, we have in the next 18 months as our $620 million mortgage on 601 Lexington Avenue in New York City.

That expires in April of next year.

<unk> to the bond we redeemed this loan also carries an above market interest rate of 475% given the increase in the cash flows from the building owing partially to the redevelopment. We completed earlier. This year, we anticipate that we will be able to increase the size of the financing and reduced the interest rates substantially we are working on this now and our assumption.

These include closing before the end of 2021.

The impact of these financing activities will be accretive to our 2022 earnings through a meaningful drop in our interest expense from 2021 that I will touch on in a minute.

First I would like to describe our third quarter 2021 results for the third quarter, we announced <unk> of $1 73 per share that's <unk> <unk> per share higher than the midpoint of our guidance and <unk> <unk> ahead of consensus estimates.

Our outperformance came from better portfolio NOI with <unk> of higher rental and parking revenue and approximately <unk> <unk> of lower than projected operating expenses.

Looking at our parking revenues they've started to accelerate sequentially as clients and visitors increased driving days into our properties. As Owen described we are seeing building census grow and the results are evident in our parking our share of this quarter's parking revenue totaled $22 million. This compares to a comparable pre COVID-19.

Quarterly result from the third quarter 2019 of $28 million at the bottom in the second quarter of 2020, our share of parking revenue was $14 million. So we're over 50% of the way back on an annualized basis using the third quarter run rate, we have about $25 million of revenue or <unk> 14 per share to recover.

Before we were back to pre Covid annual parking levels of $113 million.

Our Kendall square hotel was profitable for the first time in six quarters contributing about $1 million of positive NOI.

Given the hotel's location in the heart of Cambridge, and adjacent to <unk>, we expect that it will ultimately re stabilize at or above the $15 million annual NOI generated in 2019, though certainly not in 2022.

The third leg of our ancillary income as our retail income.

Other than in San Francisco, nearly all of our retailers have returned to paying previous contract rents this quarter our share of retail rental revenue was $43 $6 million on an annualized basis. This is $16 million less than our share of 2019 retail revenue, which totaled $190 million.

And as Doug mentioned, we have some vacancy in our retail due to the pandemic, but we're negotiating leases now on significant portions of that space.

If you combine an annualized our third quarter hotel NOI and our share of parking and retail revenues, we have the opportunity to gain approximately $52 million or <unk> 30 per share to return to 2019 full year levels.

We believe that all three of these income streams will fully recover and ultimately exceed prior peaks overtime.

Looking at the rest of this year, we released fourth quarter 2021 guidance of $1 50 to $1 52 per share and full year 2021 guidance of $6 50 to $6 52 per share.

The improvement is primarily from Verizon taking occupancy of its 440000 square foot lease at the hub on Causeway office development this quarter and lower interest expense after our refinancings.

And while we expect our same property portfolio NOI will also grow sequentially. The growth is partially offset by the <unk> dilution from the sale of our Spring Street office campus in suburban Boston the closed for $192 million. This week.

Turning to our assumptions for 2022.

Last night, we released our 2022 <unk> guidance, we have three major drivers that are all headed in the right direction that provide for very strong <unk> growth of 13% at the midpoint over 2021 the.

The drivers include delivering a significant volume of leased new developments and acquisitions growth in our same property portfolio and our refinancing activities that lower our interest expense.

The first growth drivers developments and acquisitions, we're delivering five of our development properties over the next four quarters totaling $1 6 billion of investment.

These projects totaled 3 million square feet of additions to our portfolio and our 92% leased.

They include the hub on causeway in Boston that is leased to Verizon $3 25 main street in Cambridge that is leased to Google The 200 West Street Life Science development in Waltham that is leased to translate bio Marriott's New headquarters facility in Bethesda, Maryland, and Reston next that is leased to Fannie Mae and Volkswagen and rest.

<unk>.

It is also possible that our life science conversion at $8 80 Winter Street in Waltham will begin to contribute in late 2022 in total we expect our development deliveries to contribute an incremental $65 million to $70 million to our <unk> in 2022.

Additionally, we've layered in several acquisitions that we completed this year, most notably Safeco Plaza in Seattle, and our life Science projects, we acquired and Walton. We expect these acquisitions will add $7 million to $10 million to our share of NOI next year.

The second growth driver for 2022 is the projected growth in our same property portfolio NOI our guidance assumes that our share of same property NOI will grow between 2% and three 5% next year. The growth is expected to come from higher parking revenues improvement in occupancy and pricing in our residential portfolio.

Higher NOI from our hotel and.

And increased occupancy in our office portfolio.

Our leasing velocity has picked up in the last two quarters, where we've leased two 7 million square feet of signed leases given the length of the typical leasing cycle. Many of these leases we signed or are negotiating will take occupancy either in late 'twenty two or 'twenty three we expect the improvement in our headline office occupancy to be gradual.

As Doug described we have several larger leases in the works for vacant space, where we anticipate occupancy will occur in 2023.

On a cash basis, we expect our share of 2022 same property NOI growth to be much stronger at between five five and six 5% over 2021. This equates to between 90 and $100 million of incremental cash NOI to 2020 too much.

Much of our cash NOI growth is coming from approximately $50 million of free rent that is burning off and contractual leases.

Our third <unk> growth drivers coming from lower interest expense as I mentioned earlier, we will incur a debt redemption charge of 25 cents per share in the fourth quarter of 'twenty. One we do not expect that this will recur.

Also we are aggressively refinancing loans that were placed five to 10 years ago in a higher interest rate environment with low cost current market financing.

Partially offsetting this we do expect to see higher interest expense and our joint venture portfolio. This is because we will cease capitalization of interest on the Marriott and hub on causeway projects when they are delivered into service.

In the aggregate, we expect the 2022 interest expense will be 52 million to $60 million less than in 2021.

That equates to 30% to 34 cents of incremental positive impact on our 2022 SFO.

So to summarize our guidance for 2022, <unk> is $7 25 to $7 45 per share the midpoint of our range of $7 35, which is 13% or 84 cents a share higher than the midpoint of our 2021 guidance.

At the midpoint the incremental growth is coming from 43 from development and acquisitions.

<unk> 25 from our same property portfolio and 32 <unk> from lower interest expense.

This will be offset by <unk> <unk> of dilution from our 2021 disposition activity <unk> of lower termination income and <unk> <unk> of higher G&A.

The past 18 months have brought challenges and uncertainty to so many including our team at DXP. These past few months, it's been heartening to see our cities reopen our colleagues and our clients starting to return to their offices and office leasing volumes picking up as I've spelled out we anticipate very strong <unk>.

In 2022 and beyond 2022, we have more developments underway that will deliver additional <unk> plus we have the highest quality portfolio of office buildings that we believe will generate higher occupancy rates and earnings in the future.

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

To ask you.

Question. Please press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Your first response is from Steve <unk> of Evercore ISI. Please go ahead.

Thanks, I appreciate all the detail I don't think I caught everything but two quick questions. Mike when you talked about retail and sort of what you are potentially recapturing I just want to make sure for tenants that are currently in occupancy today, but maybe arent fully paying their stated rent can you remind us what debt.

Dollar amount is just on a quarterly basis.

I don't think I have that number.

Front of me Steve.

But.

We've got $43 6 million.

That is our share currently so we're missing about $16 million on an annual basis.

So most of that honestly is coming from filling vacant space.

I would say that there is very little remaining in the way of kind of deferrals and things like that for retail tenants right now in San Francisco, which is the smallest retail portfolio, we have because of the tenants there just don't pay high rents.

That's where the tenants havent all returned to occupancy in the vast majority of them are not paying rent. So that's the place where those deferrals are I mean, I think thats, probably a couple of million Bucks a year something like that that's not the most significant piece.

The big chunks are some of the stuff Doug talked about where we filled the Lord we're filling the Lord <unk> Taylor space, That's a big 120000 square feet.

Got a number of new retailers coming into the Peru, where we had vacancy that was created by some bankruptcies.

They're in Reston as well so those are kind of the big ticket items, where its coming home. So I would say most of it's coming from filling vacant space not from tenants that were deferring rents and are going to be paying contract going forward is still Steve This is Doug.

If you take the summation of all of the spaces that I described where I basically said, we're not going to receiving receiving rent until probably late 'twenty. Two early 'twenty three I want to say.

Say its somewhere in north of 250000 square feet and the average rent is probably 45 Bucks a square foot net so we're talking about 11 or $12 million of incremental revenue from that portfolio of available currently either leased or LOI space that we will get at least in the next couple of months.

Got it okay, great. Thanks for the clarification and then I just wanted to circle back on the the average occupancy that you sort of outlined for 2002, the 80 to 90.

Just to be clear is that is that wide range really sort of I guess due to the uncertainty over when leases will start or is some of that uncertainty because leases actually need to get signed over the next say three to six months and then they need to commence I'm just trying to figure out how much is a.

Timing of when the revenue will start from a GAAP perspective versus how much actually needs to get lease so again.

Just going back to what I started from so right now we're call it 88% leased and we have 800000 square feet of signed leases that haven't commenced yet most of that will commence in the latter parts of 2022.

As I said, we're working on renewals on about 25% right now of our $2 9 million square feet of space.

Which is call it 700000 square feet of space plus or minus.

And we've been doing over 1 million square feet, a quarter of incremental leasing in the portfolio. So we don't have it's not a heavy lift.

For us to get the space leased the challenges we're not sure what the timing is going to be we don't we're going to sign a lease for 195000 square feet with another tenant at dock 72, and unlikely theyre going to be in in 'twenty, two but they could be.

And but we're assuming they're not right. So.

That's the sort of the I'd say the art behind our range of occupancy.

Got it thanks very much.

Thank you. Your next response is from Emmanuel Korchman with Citi. Please go ahead.

Hey, good morning, everyone.

Doug.

You mentioned, the net effective levels in New York versus pre Covid.

10% to 15, if I caught that correctly.

Do you have similar metrics for the rest of your markets.

Yes.

I'd tell you that I guess I try try to imply this.

Rents and concessions haven't changed in San Francisco, They haven't changed in Boston I mean, as we've talked about they've actually gotten better in suburban Boston and Cambridge, because we've been doing more life science as opposed to office.

So I would say that they are up to.

It's flat and then in Washington D. C. They are actually slightly down and rested because theres a slight amount of concession increase but rents are pretty consistent with where they were and honestly I don't think they've really changed in Washington D. C. Because the Washington, DC market was very challenged pre pandemic.

And that those conditions just remain today.

Okay. Thanks, and then if we look at your leasing pipeline how much of your pipeline is new to market tenants versus moves or trades trade.

Trade ops, maybe from other buildings in the market if you could classify it that way.

I don't know.

How you define a new to market tenants.

There are very few companies that are now relocating to any of these places from others. So I'd say in general it's a we're moving up our quality and or we're expanding.

In the market relative to the amount of space, we have or we are consolidating into a better building from where we were before that's where that's where the bulk of the demand is coming from other than obviously life science. Those are new formations. The companies are located here, but I mean, the lease we're negotiating right. Now for example at 880, it's a company that do.

Did their IPO they are moving from 80000 square feet or.

50000 square feet currently and they're adding another 120000 square feet that sort of dramatic growth that's occurring.

I guess, maybe to ask the question different way, if we look at the market vacancies so to listen to any of the broker calls or read any of the reports when we look at the market vacancies.

How much should we expect those market vacancies to change.

First as you sort of getting a bigger share of the pie and euro occupants you can move up market vacancies might be sticky at the levels of that.

It's a hard question to answer part of it is going to have to do with how much of the sublet space.

<unk> absorbed so as a sublet space gets absorbed that will improve the overall, our overall market statistic right. So for example, if you look at Manhattan, I want to say Theres, probably been four to 5 million square feet of space. That's been taken off the sublet market over the last couple of quarters right, that's improving the statistics, but youre still.

Talking about a very high level.

I'd say that we will outperform the market relative to where we are I can't tell you, whether our percentage chains will be higher or lower than the market. Because we don't we just don't have enough clarity on how much of the sublet space, which is the bulk of where the existing availability came from in San Francisco and in New York City, which is obviously the.

Two weakest markets from a statistical perspective.

Much of that is going to melt.

Thanks, Doug.

Your next response is from Nick <unk> with Scotiabank. Please go ahead.

Thanks, Good morning, I was hoping to just get a feel for what the leasing spreads were on signed leases in the quarter I know you quote those on commenced leases.

Yes, so so I tried to give you that where I could.

<unk> told you that again, when we have vacant space, that's been vacant for less than 12 more than 12 months.

We don't quote what that what the spread is but I said in San Francisco the spread was about 20%.

In New York City of the larger deals we did I said some of it was up 8% and some of it was down four so.

I guess, what I was trying to convey was that it's sort of flattish in New York City right now with the portfolio.

That we did this quarter.

In the greater Boston market virtually everything is up.

And then again if you if you look at our DC market. The deals that we're doing in reston are modestly up or down.

On the rent level because of the question of how much growth there was and the rent over the last period of time that the existing tenant was in there. So if we had a deal that was that was done 10 years ago, and we had 3% increases every year, there was probably a modest amount of negative.

Rental rate growth.

The tenant was a shorter term deal at.

It's probably positive because there's been a pickup in terms of the eye.

The strength of the market over the last 12 to 18 months and look these rents are all cash to cash so we've got to get it's much higher.

Okay. Thank you. That's helpful. Just second question is on San Francisco, and you'll hear a little bit more about your thoughts about the potential for that city to recover obviously, it's a much different dynamic you talked about match mandates. It's also a city that's kind of split between the financial district being more empty than the residential areas of the city, you're a tech company that arent.

Pushing employees back to work in a way that banks are in New York. So I guess, just a thought on kind of how the recovery potential of that market also.

Also maybe a return of some larger potential tenants looking for space in that market and then the second part is.

Our willingness to invest further in the cities and serious talk about one of the larger development sites in the city potentially.

Coming up as an opportunity.

Okay.

Yes.

Covid has had the biggest impact on San Francisco.

All of the markets, where we operate and I think a lot of that has been the.

The technology tenants in some ways, leading the way on work from home and second the very restrictive COVID-19 mandates that have been put in place and the <unk>.

<unk> of those mandates has lagged all of our other cities and Thats undoubtedly had an impact on the census data that I mentioned earlier.

That all being said San Francisco remains arguably the technology capital of the World. It's got the largest cluster of computer science workers.

Certainly in the United States and we believe in the long term recovery of the San Francisco market, but I do think it will lag our other markets.

We will continue to invest in the area, Doug talked about the potential for us to restart our platform 16 development. We haven't made that decision yet, but that's something that we'll be talking more about in future.

Future quarters, we also have a very attractive development site at fourth and Harrison that we will.

B looking at certainly in 'twenty, two and 'twenty three.

And we are open for business and we will consider other investments if they if we think they will if they make sense for shareholders.

Okay. Thank you.

Thank you. Your next response is from John Kim with BMO capital markets. Please go ahead.

Thanks, Good morning.

The concerns with the supply chain do you think this will delay our cable development projects either for you or your competitors just given market rents are not really moving up in lockstep with what the additional costs.

So I guess, what youre getting at is how is inflation going to impact the overall.

Development model going forward rate. If there is a significant inflation in the rents that are necessary to justify new construction assuming interest rates are also going up.

Are going to need to rise and there is no question that speculative development will be more challenging but there are still lots of customers in this country, who want new construction and want the best and brightest of the away buildings or bill.

Potentially being.

Very green carbon neutral net zero or whatever you want to describe it as it's harder to do that with a to older building.

And so I think the question will be what will the character of the leasing be and where it will occur but I don't think it's going to necessarily stop new construction I do think that speculative office development is a very I'd say challenging proposition today in most markets because of the amount of.

Supply that exists.

But remember that when youre, starting a new building you are talking about delivering somewhere between 36 and 48 months later, if it's a high rise and then even if it is a low rise building, it's a minimum of 24 months. So.

People's views on what the World will look like when we get to those periods of time will it be influential and as Owen suggested we're looking at the Silicon Valley and we're looking at platform 16, and we're saying to ourselves.

That's a really interesting market relative to the amount of demand. That's currently exists today. The lack of high quality first class class a office product the potential location of the building that we would be building relative to transportation and so we're pretty optimistic in certain instances, but clearly it's not what.

It would have been three years ago.

Okay, and Doug you mentioned the impact of the short term leases had on your leasing spreads this quarter.

How much of a drag will that'd be in future quarters.

I think theres very little remaining I mean, it was it was.

It was kind of a tsunami of these deals all starting in this quarter of 2000.

'twenty one.

Just to sort of give you a little bit of the sausage, making right. We're sitting sitting out in late 2020, and we have leases expiring in 'twenty, one and the tenants aren't using their spaces and they are coming to us and saying well you know we're not sure what we're going to do.

We might just give them the space back, but if you cut us a deal in the short term.

Hold the space and we'll continue to look at it and we'll think about what we're going to do in the future.

It's a negotiation right and our view was.

Very sort of selfishly rather have.

Half of it.

Dollar that a whole dollar versus no dollar and again, we're starting to see the success of that strategy, which is the tenants that did those short term commitments are going to likely be renewing on a long term basis, and we will get a dramatic uptick rate and I guess when you see in New York City, and a couple of quarters big increases.

Because we went from a $60 net gross number to a 100 dollar growth number it's not because the market has gotten better because we're moving away from what we did in this last couple of quarters.

Great. Thank you.

Yeah.

Your next response is from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey.

Good morning out there.

So two questions first.

Hey.

As you talk or Doug as you guys talk to different.

Ceos in office amateurs.

What are they telling you as far as the decision of some not all but to keep punting on the return to office I mean in fact, we even heard of one company that you have suspended indefinitely returned to office is it a fear that these companies have that their employees will just go elsewhere, because its such a tight labor market is it the commutes are still really add and people just don't feel.

Schlepping whether it's.

New York or San Francisco, or I know you guys arent Chicago, but Chicago is another sort of hard hit CBD. What is the reason that you are hearing that these companies keep delaying because obviously as you point out restaurants are full planes are full leisure hotels are full so it's clearly not a fear of COVID-19, that's keeping people at home.

Yes.

So good morning, Alex.

Look I think pretty much universally the Ceos and business leaders, we talk to.

If they're not back in the office they want to figure out a way to get back in the office for all the reasons I articulated in my opening remarks, So we think thats going on.

The delay that we experienced this fall I do think was driven by health security the infection levels from the Delta variant elevated city's put on masked mandates and things it's not pleasant to be in an office building wearing a mask. So that's a very real thing, even if youre not concerned about COVID-19.

But that being said as I mentioned the infection levels are down and I do think the tight labor market is factoring into Ceos decisions and the desire by some certainly not all employees to continue to work remotely that has caused some delays, but as I articulated I think over time.

I can't predict what the virus is going to do but I do think over time, you're going to see more and more companies, bringing their employees back to the office because those leaders are concerned about the future competitiveness and cohesion of their companies I would also say Alex that there's something else going on which is you get a.

A lot of public.

Positive reaction when you say, hey, we're thinking of remaining hybrid or we're thinking of delaying our return.

Don't get that same hurrah when you say everyone must be backed by January <unk> and what we're seeing I mean, we've had we had two conversations yesterday.

One was the Tech company, one with a professional services company and they both told US if they've already sent out announcements to their folks that pay in one case, they want everybody to start coming back to the office on a hybrid <unk>.

Model in November and the other one is hey, you better be near your office, because we expect it to be back in January those companies are companies that have also.

No publicly have said, we're not sure when we're coming back and we've delayed things and Theyre not publicly stating what I. Just described so I think there's more going on right now relative to companies starting to put pressure.

On their existing.

Employee base that it's time to start to think real hard about moving yourself into the right locations. So that you can be in the office in a much more consistent basis going forward.

And you just got.

Okay.

I mean, if you're a company's paying people.

The one paying gift to drive the bus so that it's funny that right now it's like the passengers driving instead of the bus driver, but so in August.

I think the other demonstration of proof of concept is look at all the leasing that's going on.

Our own company and in the market.

Companies weren't committed to the Opex why would they be leasing office space.

Great Great. The next question is as far as life Science goes you entered DC sorry.

Sorry, you entered Maryland on life Science, you haven't been there before I was reading an article this week or last week that people are contemplating in the Navy is trying to do life science.

Look around your portfolio, whether it's now like South Lake Union in Seattle, maybe the navy yards in Brooklyn, as a spot Avi, maybe not or maybe San Diego would be a good life science market to enter how much how many areas do you see the potential to expand your lifestyle life Science development program to when do you.

I think it would lead you to new markets driven by life science or most of the life Science development that Youre looking at is really in your existing markets plus Seattle.

First thing I would say is almost half of the lab space in the country is in Boston and in.

San Francisco area, where we're already very active so and if you look at the best opportunity. We have as a company is to build what we have I mean, we have 5 million squeak 5 million square feet, plus or minus of land for development in multiple millions of square feet of redevelopment and we control all of that real estate at pre.

<unk> co.

Covid pre life science pricing, so I think that's our best opportunity, but that being said just as we did in Montgomery County, we are open for business.

For making new acquisitions and were certainly going to focus in the markets, where we're active first.

Okay. Thank you.

Thank you. Your next response is from Ronald Camden with Morgan Stanley. Please go ahead.

Okay. Thank you a couple of quick ones from me just first is just.

Lot of transparency.

2022 outlook.

Same store cash NOI guidance I was just wondering I think you touched on some of the drivers for the same store cash NOI, but is there a way to quantify sort of the <unk>.

Contributions from whether it's retail or some of that hotel.

<unk> versus <unk>.

Sort of the core office.

Helpful.

Sure so.

Look I think we're going to get some nice benefit from parking coming back.

Look at it quarter over quarter over quarter, it's continuing to improve.

So I think Thats thats.

The Big one I also think we're going to get some nice benefit from some of the residential properties that we have.

Where pricing is improving and we've got some lease up opportunity there.

The hotel is a little bit harder to gauge.

Honestly, because it's just tougher to project.

So I would say, we're not necessarily expecting.

I think it will it will improve but we're not expecting a huge impact there.

And then the portfolio is the rest and it's.

Going to be a little bit more moderate and again I think it's related to what we see as kind of a gradual improvement in our occupancy.

With the hotel, which will we think is going to.

Accelerate into 2023 as some of these leases that were talking about.

Our going into occupancy and actually generating revenue.

Okay got it and then sort of the second.

Second question was just maybe asking Eric contrast between New York and San Francisco It different way.

You will certainly heard that.

Clearly San Francisco is behind E Org.

Right.

The expectation is still that at some point theyre going to be on the same recovery trajectory or is there anything that you're hearing or seeing that.

Yes, Brent.

Between those markets that got that could solve that so when you think about the year versus San Francisco.

Are there any sort of unique factors.

Yes.

For the lag basis.

Youre asking on.

Honestly.

Our social question more than an office question in my opinion, because the reason that San Francisco and quite frankly, the state of California.

Is behind us because of the decisions that have been made by the health Department and the political leadership.

And we unfortunately don't control those decisions.

When San Francisco starts to have a significant return to the office.

Wave.

I think it will pick up rapidly and that we will start to see a significant recovery remember that pre pandemic Manhattan, and New York had a supply problem and San Francisco did not have a supply problem. So the opportunity from Stanford for San Francisco as well.

How much of that labor will want to come back and how quickly will those companies that have grown dramatically in terms of their own head counts during the pandemic want to bring those people into close proximity with each other on a day to day basis.

And there is an opportunity for San Francisco to accelerate.

Quickly.

Return.

It's got it's got a challenge from a political perspective, right now and it's got a challenge from a statistical perspective, because theres a lot more available space on a percentage basis than there was and has ever been from a sublet perspective manner.

Pattern is still way below where it once was call. It 2002 2003 from a sublet as a percentage of the market San Francisco is way above where it's been historically and again a lot of that space could be reoccupied by the companies that they chose to clinical put it on the sublet market and so I think thats. What ultimately is going to is going to be the thing that.

As evidence of what you mentioned on social we were Boston This is Bryan Koop.

Labor day, we were ticking up every week in terms of occupancy and then the city of Boston that the state came out with the stricter mandate unmasking et cetera, and that changed the <unk>.

Return for like 5% to six of our major firms and it ticked back down.

We're starting to see that come back up again in fact, one of our buildings.

Eight I believe close to 70% occupancy last week. So it's evidence of the social part in the cities, saying, what's going on for that particular market.

Super helpful. Thank you.

Yes.

Thank you. Your next response is from Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, Owen or Doug as I think you guys mentioned a few times in your remarks. It seems like we're still seeing the majority of leasing activity and even investment sales activity is concentrated in high quality assets that are either recently developed or have recently undergone major renovations.

To take the opposite side of an earlier question do you think there is a risk in any of your specific markets that these trends for additional new development is office landlords kind of position themselves to benefit from that.

Flight to quality that we're seeing but ultimately maybe they end up hurting the market as a whole by adding new space.

I am not sure Thats a risk were concerned about at this time.

I agree with what you said about the interest by both investors I would say by the way the interest by investors is in assets that are of high quality or have the potential to be high quality.

And on the interest by tenants and higher quality buildings.

But the markets, even though they're recovering the level of availability, including sublicense sublease space is quite high.

That will be a headwind and as Doug described.

Instructions costs are going up because the supply chain issues, which makes development more difficult. So.

It's an interesting question, but I am not sure Thats, a major risk that faces us at this time.

Alright, Thats helpful and then maybe one for Mike.

You guys have been running at high operating margins relative to pre pandemic levels. So I wanted to get your sense for how sustainable those margins are going forward and how sticky any of the expense savings that you guys achieved during the pandemic might be as utilization in physical occupancy increases within your portfolio.

Look I mean, I think our margins should be continuing to run between $63 five and 64, 5%.

As Doug described.

The increases that we may see in some of our operating expenses. The vast majority of that stuff gets passed through to our tenants.

So we don't expect to see an impact.

A significant impact from those items.

And if you look over time, we've gone through inflationary and deflationary times over long periods of time in our operating margins have been within a band. So I would not expect that we would suddenly have a 200 basis point change or something like that in those margins.

Now what we see happening.

Great. Thank you guys.

Your next response is from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, This is Julian on for Caitlin.

There's been a lot of talk obviously and this is following up on on some of the questions about shifting to tenant demand towards newer high quality, well and monetize product.

And obviously that shift will benefit some of your assets both through recent builds and redeveloped assets, but as the elevated vacancy at the tail end of your portfolio call. It that older vintage non LEED certified office product.

Making you reconsider the strategic fit of some of these assets I'm thinking of vacancies at Carnegie Center.

Gateway Commons Bay Colony Corporate center.

Colorado Center et cetera.

And then second part of that question would be does it make economic sense to make capital intensive redevelopment in some cases.

It sounds like you have plans at gateway not sure if bay colony would be eligible for conversion to lab space, but more broadly maybe they try to elevate some of these assets to LEED gold platinum certifications.

So.

I'm not trying to be cheeky here, but UN Caitlin should spend some time actually coming out and seeing our portfolio because I think a lot of these questions would be answered.

We've been talking about all of the renovations that we've been doing up at Bay colony as an example, and I mentioned.

A few minutes ago that we've done 100000 square feet of new leases with life science companies and we're actively looking at converting some of those buildings are full life science buildings.

Carnegie Center is probably the most are monetized project in Central New Jersey, and we have a tremendous amount of investment that's been made and its been very receptive.

So so I think that the.

And by the way, we're probably at the at the forefront of lead.

Not just silver platinum new LEED standards energy efficiency indoor air quality I mean, we are doing those things.

As our rote tasks today everywhere in our portfolio. So I would tell you that the portfolio doesn't have any of those issues that you might describe as challenges.

And honestly, we have as much vacancy in a class a office building.

Today as we've had in other quote unquote challenging time periods.

We are we are committed to picking up our occupancy rate and we are doing that as I described in my comments relative to the amount of leasing that we're doing today.

So we feel really good about the whole portfolio now there are some markets that are.

Less.

Hearty as than others relative to the amount of leasing demand in San Francisco is obviously one of them, but as an example, you you mentioned gateway, we're taking 651 gateway out of service to convert it to life Science, It's why it's got.

90000 square foot lease and a 300000 square foot building right. We're trying to clear it out. So we are actively doing those things, but I would really encourage you guys to actually spend some time with our teams and get a feel for the portfolio and the only thing I would add to what Doug said is.

We have a 53 plus or minus million square foot portfolio, we sell $2 million to $500 million of assets per year. So we are in constantly refreshing our portfolio not only in the things that Doug described in terms of a monetization, but also selling assets, where we think we can get a good price that may not have some of the care.

Terrific described.

Awesome. Thank you.

Thank you. Your next response is from Anthony Powell with Barclays. Please go ahead.

Hello, everyone just a question on sensus.

Do you think that number goes to on a stabilized basis, given we've seen.

More companies, even that are backing off in its state of employees can work from home on Fridays and Ken.

And I guess, the leasing demand be couple in the future as tenants.

Tenants still want space, but allow their employees a bit more flexibility.

I think the.

The census, the denominator of the census was the.

Physical occupancy of the buildings the month before the pandemic started so look I think as we've been saying over and over again, we think our clients are going to return to the office, but we also think hybrid work is going to be a bigger factor for many employers and what we're also seeing for our clients that have returned.

The office.

Most of them have a hybrid work option, but theyre, saying to their employees you got to be we got to have everybody in the office on certain days of the week. So the answer to your question is I think our sense of should go back up to a 100%, but it may not be everyday of the week.

It may only be in the middle of the week, Mondays and Fridays it'd probably be a little slower.

And just the only other thing I'd add is that.

Over time, there may be more spatial considerations given by our tenants. So they may actually have.

Fewer people in their spaces not because there they are any less occupied but because they were so tight together and so densely packed and that given the issues associated with the pandemic and health security and indoor air quality and having people just feel comfortable in their spaces. They may actually.

Either increase their space in order to maintain the same occupancy or they will have fewer badges at any one time, because there just aren't going to be as many seats as they want that.

Got it thanks, and maybe on dock 72 seems like there's some momentum there can you talk about just because.

<unk> had more tenants are not going to be too and just be.

Feeling around the building.

John Powers do you want to take that.

Alright.

Well as Doug said, we we did a deal we're very happy with that transaction and we have a lease out for 192000 feet.

We have some action on the prebuilt and we've had more people coming to the navy yard and seen it.

Which which is really what we need because it's a fantastic building.

Alright, thank you.

Your next response is from Peter Abramowitz with Jefferies. Please go ahead.

Thank you just sort of a.

High level strategy question here sort of as you're evaluating new markets. How do you think about Miami as a potential next market.

It seems like a place that would kind of fit with your strategy of being coastal markets, maybe not as high barrier to entry is New York, and California, but certainly a more business friendly environment.

In addition, all of the demographic shifts that are kind of benefiting it.

As a result of the pandemic so any thoughts of how you look at it.

Market like that or any potential other markets, where you might enter.

We are very focused on the six coastal large gateway markets, where we currently operate we believe those markets have the largest clusters of knowledge workers that are important to the growth businesses that.

We serve particularly in the technology and the life science sectors.

We also see stronger barriers to new entry in those six markets and that's where we're focused in.

We've got and within that we are.

Our building our life science business as well as an office business and many of those markets and that's going to be our focus for the foreseeable future.

Okay. That's all I got thank you.

Yes.

Thank you. Your next response is from Daniel Ismail with Green Street go ahead.

Great. Thank you.

Touched on this earlier that while vacancy might change relative to markets.

Is it your sense that leasing volume will reach pre COVID-19 levels in 'twenty two 'twenty three events.

Mike.

I'll try and articulate what I've said in the past which is that.

For the large tenants.

I would refer to as the Tech Titans those tenants haven't left the market and they're going to continue to do what they were doing and those are the kinds of companies that Owen was describing there looking for space down in Silicon Valley.

Have made major expansions.

In the urban areas of all of our markets.

And then on the small.

Syed tenants that are less than a floor. They are back doing exactly what they were otherwise doing and so there is plenty of volume in that sector.

The challenge is that the companies that are thinking about what it is that hybrid means and how hybrid will work for them and those companies will need to get their people back into a consistent in person environment or understand what those what their employees want to do and what they want them to do.

And thats going to take some time and so I believe that 2022 will be a lighter year relative to absorption than pre pandemic and then in 2023 when the experiments have all.

Run their courses and companies understand what their expectations are for human capital and physical capital. That's when we will see I believe I believe and I think one articulated the reasons why we will see a very strong pickup in absorption and demand growth demand.

Great. Thank you and then maybe just last one a bigger picture question.

We would suggest that high quality.

<unk>.

Ground up and renovated office buildings seeing high strong pricing recently.

Is it your sense there is any pricing differential between ground up construction and a fully renovated office building.

Is there any difference in tenant demand between those two categories.

Are you talking about sales values or rental rates.

Sales values and then 10.

Demand as well.

I guess they can.

And demands.

I mean, I look I think it's a little bit dependent on the market that you're in I mean, let's take New York for example, there's been strong technology demand in on the west side in Midtown South and a lot of the stock there is.

Roundup development not it has happened, but it's not as available. So there have been some very successful an interesting renovations of existing stock I would say some of the best buildings in Midtown South are actually older buildings that have been renovated and we intend to make 360 Park Avenue South one of them. So I think it's very dependent on the.

<unk> market I think a very high quality older building thats been fully renovated and Midtown south is going to get equivalent pricing is something that's new.

On the demand side Danny.

The only thing that you can't fix or.

Or change on our renovation is the structure. So everything else can basically go right you can literally rip off the facade and put a brand new energy efficient.

Window system and you can dramatically change the mechanical you can even create new shafts.

For a larger.

Duct work and changed the mechanical equipment and the buildings. So if the if the building has a really challenged structural system meeting lots and lots of columns or a very low slabs slab I think those are the those are the impediments to a renovated building relative to new construction, where youre going to see.

Many fewer columns and youre going to see much larger volumes of space, but other than those two characteristics. A fabulous renovation of a building is going to get the same I think level of interest is a new construction building.

Got it and then one more if I may and you mentioned 360 Park Avenue.

You issued op units to do that deal.

Higher taxes seems to be increasing.

Utilizing that structure.

Increasing more in your discussions and your outlook for new acquisitions.

Yes.

It is a very valuable.

Structure that we can offer and it gives us as a public company a competitive advantage to be able to exchange op units for a tax sensitive seller.

And.

It's been a long time since the last op unit deal, so, but I would say today that we are having dialogues with other owners of real estate about about a similar structure.

I think it's very case specific though I wouldn't I wouldn't.

I would say, yes, the dialogues are higher but I also wouldn't suggest the tidal wave of this activity either.

Your next response is from Brent Dilts with UBS. Please go ahead.

Hey, great. Thanks, guys just could you talk about how demand for your flex product has evolved this year and where you see co working demand going from here as physical occupancy improves.

Brian you want to talk about flex by DXP or flex or DXP in Boston got four locations and its main.

Okay.

Great stability throughout Covid.

And we're starting to see some pickup in activity, but not really of the kind of that we'd be really proud to be saying that has taken place.

Pre COVID-19.

But we definitely have interest in it and we've got inquiries on it coming up and mainly from corporate users versus entrepreneurs seems to be the theme, where it's a corporate us saying, we're going to have a special project. What do you have in 2022 that we can take immediately.

And I think in terms of the broader market I would continue to reiterate what we've said in the past as we think flexible office space will be an important part of the office business going forward, we've seen in our own portfolio its value to small companies that just want space and they want they want it now and they want flexibility and I also think.

Larger corporates will see value in procuring a small percentage of their space on a flexible basis, given their business often changes more rapidly than space can be delivered to them.

But I think the first thing that has to happen in the market is.

Roughly what 2% to 3% of U S office space today is flex.

It is flexible to refill I mean thats. The first thing that needs to happen and then the question will be if it's going to grow how's it going to get financed.

Sure the operators are going to be financing additional growth of flexible office space I think is going to be the landlords and where and when and how much will they elect to do going forward and I think we'll see I don't think those decisions will need to be answered for the next year or so.

Okay. Okay. Thanks for that guys and then just one other one here I heard your comments on.

Physical occupancy maybe not being the same as <unk>.

Card counts itself in the future. So as companies have been returning employees to the office in bigger numbers has there been any increase in those tenants, making changes to floor plans are amenities and just.

Related to that are there any new tenants in the portfolio are requesting anything in terms of build out that's been different versus pre COVID-19.

So.

I am surprised that I am going to say, what I'm, saying, which is we've seen virtually no existing tenant do anything that requires a building permit that doesn't mean that they arent moving furniture around or theyre not eliminating workstations.

Or they're converting small chat rooms into offices, we don't know if that's going on or not.

But to date.

The energy has been on simply getting people to get comfortable coming back into their office environment, not changing the physical infrastructure and again.

Even the companies that are saying, Hey, we want you back it's going to take some time for those companies to get all of their employees to come back on a consistent basis and I think it's at that point that they will have a better understanding of how their space needs to be organized to effectively fit the way they want their people.

It would be working when they are in person.

Gotcha, Thanks for that.

All the questions that was it for me.

Thank you. Your next question is from Jamie Feldman with Bank of America. Please go ahead.

Great. Thank you I just wanted to go back to your last answer on Flex office now that we've seen we work as a public company.

One of your largest tenants I mean, do you think theyre going to grow in the portfolio going forward just how do you think youre DXP and we work.

<unk> will function together going forward.

Yes, when we have great relationship with them. We are delighted that they were able to go public.

And we have I believe five different stores with them right now and we're going to have to see how their success evolves and the whole flex market evolves as I mentioned a minute ago that flexible space is less occupied and there needs to be some recovery of that market before we could consider additional growth.

So we will consider in the future, but I think that's at least a year off.

Are there characteristics of the flex office leases that youre seeing more tenants request in terms of duration R. R.

So anything like that.

So Jamie the reason that we did our own flex space was because we have enough volume of space in our portfolio.

Where we wanted to be able to satisfy those customers, who basically said, we don't want to think about anything other than can we be in this space Tomorrow and we don't have to buy furniture, we don't have to buy technology services. We don't have to do anything other than bring our people in and go and so that was the nature of the.

The experiment that we have been doing with our spaces I would tell you that we continue to see requests from small companies for Hey, what do you have for me I'm just looking for some short term space and that's exactly what our flex product should be about what we are not doing and don't have any intention of doing.

Is taking large pieces of our space and converting it to flex space in competing with we work or any of the other.

<unk> operated for corporate users, who are looking for large blocks of space because that's just part of their strategy, that's not what we're going to be doing realm.

Relative to where our buildings are and the amortization we have.

I think that's the attraction of why the companies that are in our spaces have gone there because you can go to the Prudential Center or you can go to the hub on causeway or you can go to 100 Federal Street and get the advantage of all the amended edition and the great placed in space, making that we've done and do it on a short term basis. If that's what your business strategy calls for.

I think the decision to grow from our seat is really two things. One is what Doug is describing which is is this something we should just have to attract more customers, particularly where we have a high concentration of office space like if approved at rest in our Embarcadero Center.

If you are building an apartment building you don't just build single bedrooms, you have studios in two bedrooms. So this is a different product and is it valuable to have that product at one of our facilities and also by the way does it create tenants that might move become successful in bigger and then like being at the Peru for example, and become a longer term customer.

So that's one question and then the second question is what's the math.

And that's a big question because you have to do turnkey build out costs as cost hundreds of dollars a square foot.

<unk> vacancy because you don't have long term leases and you have to understand what the math looks like.

Yes, 100% of what Doug say on corporate users as evidenced at the hub. So we've got a full floor in the loft space that is flex space and 100% of our clients and there are users in the buildings and they tend to be special project related for six months to one year in term.

And.

A great example is we have a E gaming division in one of the units. That's a subsidiary of one of our clients up above so the hubs are Great example, it's 100% of our clientele in that one and other locations, it's probably 50% to 60%, but it tends to be.

Longer term not month to month, and then again, our flex product is totally different than co working we're not doing co. Working these are spaces that are prebuilt and we have no social aspects too.

The needs of our clients they do that.

Okay. That's all very helpful.

Then I guess, just some housekeeping questions for Mike on the guidance.

Are you assuming for leasing spreads and then can you talk about.

Capex next year, and maybe to help us get to like an <unk> number.

So I mean look leasing spreads.

It's not going to change that dramatically Boston and San Francisco spreads are going to be up and our view on the deals that Doug talked about that we're doing in San Francisco this quarter and the things that we have under discussion.

We're going to be roll up same thing with Boston.

In Cambridge in the suburbs.

I think restaurant will be closer to flat, maybe slightly up on the leasing that we do.

And New York City is going to be a little bit more volatile because it really depends on the space, but we have certain spaces that are going to be roll downs in certain spaces, there's going to be roll up. So I think you will see more volatility in New York City.

There with respect to kind of SFO.

If you look at 'twenty, one and then we've got three quarters in the books.

<unk> is getting pretty close to where it was in 2019 honestly, we have a shot of getting to I think it was $4 43, a share in 2019.

So I think we have a shot of getting there we may be slightly below but.

Looking at 2022.

I would say on the Capex side.

Probably pretty similar to what we're seeing this year, which is $100 million, maybe 120 million Max and kind of Capex.

Leasing costs.

They're running somewhere in the mid two hundreds.

On an annual basis.

Which is not that significantly different than what they've been in 'twenty one in prior years.

And then we've got a lot of obviously free rent burning off.

Our noncash rent is going to be slightly lower than we guided for 2020.

One and we gave that guidance is $90 million to $110 million of noncash rent, but theres a lot of free rent burning off.

And then you have other noncash items that go the other way like stock comp and.

Fair value ground lease rent and things like that Thats about $75 million the other way.

So the way I kind of look at it is if you want to add up all those adjustments theres probably.

$370 to $400 million of adjustments off of our <unk>. So thats.

225, a share.

So that will drive you to 2022 two.

And <unk>, it's around five Bucks, which is up significantly from where it was.

It will be in 'twenty, one, but also from where it was in 2019 pre COVID-19.

Because of all the cash NOI growth, we've had in the developments that have come in and are increasing our cash NOI. So I think it's a very positive story.

Okay. That's very helpful. And then how do you think about that dividend coverage and.

And growth.

I think as our cash NOI goes up you're going to see.

Our dividend coverage improve obviously, it's been pretty tight.

For the first quarter and second quarter, our <unk> ratio has been in the high <unk>. It went way down this quarter. It was like 72% because as kind of Doug talked about our transaction costs were lower this.

This quarter, which helped us.

And as our <unk> grows and our cash NOI grows it's going to improve and improve.

At this point, we haven't made any decisions about a dividend policy or strategy going forward, but it's certainly something we will be discussing with the board on a quarterly basis as this cash NOI comes in.

Okay, great. Thank you very much.

There are no further questions in the queue at this time.

Okay. Operator, thank you that concludes management's remarks, and thank all of you for your interest in Boston properties have a good day.

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

Okay.

Sure.

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Good day and thank you for standing by at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to Laura for Saudi Please go ahead.

Good morning, and welcome to Boston properties third quarter 2021 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K.

Elemental package the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G.

If you did not receive a copy these documents are available in the Investor Relations section of our website at investors <unk> Dot com a webcast of this call will be available for 12 months.

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

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

SEC.

The company does not undertake a duty to update any forward looking statements.

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

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

Thank you Laura and good morning, everyone.

This morning, I will cover the economic recovery that is underway in the U S. Dxp's momentum in terms of financial results and leasing private equity capital market conditions for office real estate, and Dxp's capital allocation activities and growth potential.

The U S economy continues to exhibit strong growth as we emerge from the Covid pandemic U S. GDP grew six 7% in the second quarter, but is expected to slow in the third quarter due to the surge in infections caused by the Delta Varian, However, daily Covid infection levels have dropped over 50% from <unk>.

Highs in September, which bodes well for strong economic growth in future quarters.

The relatively low unemployment rate at four 8% is being driven by both new job creation, which recently has been tepid and.

And workers withdrawing from the workforce there are over 10 million job openings across the U S and virtually every employer, including DXP is experiencing a highly competitive labor market.

Annual inflation remains high at five 4% in September driven largely by energy prices, which are up 25% versus one year ago supply chain challenges. Our primary topic. This earning season for many companies and Doug will cover <unk> experiences in his remarks.

Lastly, the 10 year U S. Treasury rate has increased approximately 40 basis points to one 6% since our last earnings call given the prospect of further interest rate increases we have been very active refinancing our corporate and specific asset level debt.

Interest rates remain extremely low relative to offer office cap rates and the yields we are achieving on our development, creating the potential for lower cap rates and higher value creation in the quarters ahead.

Dxp's financial results for the third quarter continued to reflect the impact of this recovery and an increasingly favorable economic environment. Our <unk> per share. This quarter was <unk> <unk> above market consensus and <unk> <unk> above the midpoint of our guidance, which Mike will detail shortly we completed over one.

One 4 million square feet of leasing significantly more than double the volume achieved in the first quarter well above the leasing achieved in the second quarter and just under our long term third quarter average.

Our clients continue to make even longer term commitments as the leases signed in the third quarter had a weighted average term of nine three years versus seven five years in the second quarter.

Year to date, we've completed $3 3 million square feet of leasing with an average lease term of eight three years.

This success can be attributed to not only our execution, but also the enhanced velocity and economics achieved in the current marketplace for premium quality Wella monetized assets, which are the hallmark of Dxp's strategy and portfolio.

In addition to our leasing activity, which included a 524000 square foot long term renewal with Wellington at Atlantic Wharf Google.

<unk> purchased a one 3 million square foot building in New York for its use.

In the Silicon Valley alone Apple completed a 720000 square foot new requirement Facebook is looking for 700000 square feet of additional square feet.

And bite dances searching for approximately 250 to 300000 square feet.

In the Seattle region, Facebook is pursuing a half a million square foot requirement in South Lake Union and Amazon has executed on enormous growth in Bellevue I could go on.

These examples support our repeatedly stated position that tenants are committed to the offices their location of choice to collaborate innovate and train all critical for their long term success.

Measurable census in our portfolio also continues to improve our leading region is New York City, which hit 52% occupied last week are lagging region of San Francisco, which is increasing but currently at 18% and the remaining regions are in between.

From watching on TV stadiums packed with unmatched people to trying to park at busy shopping centers to experiencing difficulties in making restaurant reservations in our core markets. It appears to us people are undoubtedly more comfortable with in person activities.

Liquidity fueled strong business performance and a tight labor market are clearly factoring into remote work decisions by businesses.

However, as time progresses, and the shortcomings of remote work become more apparent we increasingly hear concerns from business leaders about the decaying cultures of their companies inadequate training and difficulties in onboarding, new professionals as well as the potential for deterioration in innovation and competitiveness, we believe that.

Only a matter of time before employers more strongly encourage their teams to return to in person work.

Record levels of commercial real estate sold in the third quarter and private capital market activity for office assets is also recovering rapidly 26 billion a significant $26 billion of significant office assets were sold in the third quarter up 38% from last quarter and up one.

165% from the third quarter, a year ago cap.

Cap rates are arguably declining for assets with limited resale limited lease rollover and anything life science related given low interest rates.

And activity is increasing for assets facing near term lease expirations of note this past quarter and all of our markets.

One Canal Park, and MTI 112000 square foot office building in Cambridge sold to a REIT for $131 million or $11 70.

There's a square foot.

As mentioned as mentioned Google exercised its option to purchase St. John's Terminal in New York City, which is 1 million three square foot office building that fully occupies and the price was $2 1 billion or $1620 a foot.

Coleman High line, which is a 660000 square foot office complex under construction in North San Jose and fully leased to Verizon sold for $775 million, which is $1180 a square foot and a four 2% initial cap rate to a non U S buyer.

153, Townsend Street, which is 179000 square foot office building in San Francisco sold for $231 million or 12, $90 a square foot to a local operator and fund manager.

This asset is fully leased to a single user which has put the entire building on the sublease market.

<unk> eight is the 540000 square foot office building in the Denny Triangle, Seattle sold for $490 million of 910, a square foot to REIT.

Buildings fully leased but faces significant rollover through 2023.

49% interest in 655, New York Avenue in Washington, D. C sold for a gross price of $805 million or $10 $60, a square foot and a four 7% cap rate.

The building comprises over 760000 square feet is 93% leased and sold to a non U S investor with a domestic advisor and lastly, the post which is 100000 100000 square foot fully leased office building in Beverly Hills sold for $153 million, which is $1530 a square.

But.

And a four 8% initial cap rate to a domestic fund manager.

Now moving to Dxp's capital market activity, we closed on the acquisition of Safeco Plaza and entered the Seattle market.

DXP will own a one third interest in the asset along with two partners and our strategic capital program.

We also closed the shady Grove biotech campus acquisition and entered the Montgomery County, Maryland Life Science market.

We're also on track to close the $363 60 Park Avenue, South acquisition with strict with strategic capital program partners on December one, thereby entering the Midtown South market in New York City.

Describe the economics for all of these acquisitions last quarter.

Regarding dispositions, we completed the sale of our Spring Street Office Park in Lexington mass this week, bringing our share of gross sale proceeds from dispositions year to date to $225 million. We're also marketing for sale two additional buildings, which if completed are projected to yield approximately $200 million and grow.

Proceeds.

On development activities. This quarter, we delivered half a million square feet of Verizon and other tenant space at 100 Causeway and 285000 square feet of Fannie Mae space at rest and next in the aggregate, we have $4 3 million square feet of development underway that is 72% pre leased.

These future deliveries plus the stabilization of recently delivered projects are projected to add approximately $190 million to our NOI and three 8% to our annual NOI growth over the next few years.

So in summary, we had another active and successful quarter with strong leasing and financial results and entered several new geographic markets.

We believe DXP is about to experience a strong growth ramp, which we project to be approximately 13% and <unk> per share in 2022, driven by improving economic conditions and leasing activity recovery of variable revenue streams delivery of a well leased development.

Line completion of four new acquisitions, our strong balance sheet combined with capital allocated from large scale private equity partners to pursue additional new investment opportunities as the pandemic recede a rapidly expanding life science portfolio in the nation's hottest life science markets and low interest rates and decreasing <unk>.

Capital costs.

Finally, I would like to welcome Hilary Spann, who is joining this call. This morning to be Xp's executive team Hilary joined DXP right. After labor day and will become a regional head in New York When John Powers Retires in January let me turn our remarks over to Doug. Thanks, Owen Good morning, everybody I'm going to begin my remarks. This morning.

A few comments on the supply chain and its impact on our capital expenditures, both for new construction and our existing assets.

So the impacts of the supply chain are both in time and money schedule is one of the criteria. We used when we did our jobs and to date, we've been able to award bids while maintaining the schedule is necessary to get our tenants and their spaces as required.

Supply chain challenges have made the process much harder, but we are still able to deliver the current development pipeline on time and within budget and as you. All know we have contingencies that are in our budget and does at some point we are using those contingencies. However.

In the near term as we look at new jobs, there are fewer material choices and we are working closely with our consultants and our contractors to make sure that they are not specifying critical path items that could impact schedules. Our construction teams are working a lot harder at figuring out exactly how the key in the park to put together.

We are intentionally minimizing oversee items that and we are releasing our material packages as early as possible trucking issues are real and at times, we are being forced to air freight as well as stockpile materials offsite, hence the use of some of our contingencies. There's no single answer to how much more is it going to cost.

But when we're budgeting jobs that will start eight to 12 months from now we are using a 5% to 6% escalation in our total construction costs. We are in the process of rebuilding our platform 16 based building project, which was previously budgeted in late 2019 with.

With an eye towards our 2020 to restart and we will have real time perspective.

Mid November but as today, we just don't know what that's going to be.

Supply shortages are also impacting our operating budgets energy as a material input into our operating expenses, while our largest utility costs electricity. We are mostly hedged for 2022, and we have been successfully increasing our procurement from green power. We are still exposed to the marginal cost of electrical generation.

In the Boston region, where we expect double digit increases from last year.

Cost per security cleaning and engineering labor continues to increase due to labor shortages across all those trades.

However, our lease contracts take two forms we have net leases under which a 100% of the operating expense and real estate taxes are paid by the tenant and we have gross leases with a base year that is set upon the lease commencement with increases in expenses over that base year added to the rental obligation of the.

The tenant in other words, our exposure is on our vacant space and for new or renewal leases, where we are setting our base. This is a pretty small percentage of the total so it really doesn't have a material impact on our actual operating results as we look at 2022.

As you saw in our supplemental our second generation leasing statistics were weak this quarter and they need some finer explanation I wish we could put all of this into our press release, but we simply can't the.

The universe of square footage that is encompassed in the statistics is about 500000 square feet and it includes 105000 square feet of short term transactions 18 to 24 months that we signed in the heart of the pandemic with tenants that were not in a position to make a long term commitment, but they were prepared to.

Then for a negotiated discounted as this deal.

One of those tenants has since agreed to lease space for 13 years, where the interim rent was $60 a square foot and there'll be paying $103 a square foot and this isn't a new York asset if you eliminate that 105000 square feet. The statistics that we would've shown you changed dramatically going from down 14%.

To effectively flat.

You should also note that our transaction costs were also significantly below our run rate since there were no ti is involved in any of these short term deals.

Our life Science and office portfolio make up 91% of our revenues as we look towards 2022. We currently have more than 800000 square feet of signed leases that have not commenced.

In 2022 lease explorations for the whole portfolio not just our share totaled about $2 9 million square feet and we already have renewal conversations underway on over 25% of that space. Historically, we have leased well over a million square feet a quarter each and every year.

We will be when those new expected leases will commence occupancy should slowly edge up in 2022.

The changes in the quarter occupancy this quarter are due to the addition of the shady Grove and Seattle acquisitions, not a degradation in our occupancy in our existing portfolio now let me give you a sense of what's going on in our portfolio today.

New York is a good place to start.

Tour activity proposal and ultimately leases continue to be very consistent with the commentary we've been providing during the last few quarters. The high end buildings are seeing good activity brokers that advise the small and mid sized financial firms in professional services firms are very busy and their clients are taking action. Many of those users are <unk>.

Emily increasing their space requirements as they continue to acquire people in <unk>.

Sublease space continue continues to gradually melt from the statistics you may remember that we were asked about a 200000 square foot sublet at 399 Park Avenue during various conference calls in 2020.

Space has been taken off the market as the user reoccupied now Theres still is significant supply of direct and sublease space in New York City, and our view is that net effective rents remain down 10% to 15% from pre pandemic levels.

During the quarter, we completed eight deals totaling 113000 square feet in the CBD portfolio. Many of these spaces were vacant but the two largest had a roll up of 8% in one case and a roll down of 4% in another.

About 70000 square feet of new leases are in the category of leases that will not have revenue commencement until sometime in mid 'twenty two.

Last week, we signed a lease at dock 72 for 42000 square feet. We don't anticipate this tenant completing their build out until the latter half of 'twenty two.

We have an additional 340000 square feet of leases under negotiation in New York right now, including almost 200000 square feet at Dock 72, we don't anticipate revenue commencement on 65% of that space until 2023.

One of the themes for next year is going to be a pickup in signed leases with contribution to occupancy or revenue flow through occurring when tenants complete their installations in late 'twenty. Two we're 'twenty three and we don't necessarily control of those times.

At Carnegie Center down in Princeton, We did eight leases for 38000 square feet and have another 106000 square feet in active lease documentation.

One final note on New York before I turn to the other markets our culinary collective the hue has opened at our 53rd Street campus in 601. Lex. This is as good. An example of place making as we can point to in our portfolio as user who ought to encourage their employees to come back to work. This type of experience will dramatically enhance.

Physical space offering it's why we do what we do.

In Northern Virginia, our leasing team is seeing a consistent flow of inquiries tours lease proposals and ultimately completed transactions during the quarter. We completed seven leases totaling 70000 square feet in Reston and we are in lease negotiation on another seven deals totaling 125000 square feet.

Tech tenants that have identified the DC metro market as a fertile area for workforce expansion are continuing to grow and their growth is going to be in northern Virginia. In addition, the contractors that service the defense and Homeland Security are also expanding their significant vacancy in northern Virginia, but the urban market corn rest and it's under 10%.

Taken and it continues to dramatically outperform with starting rents in the high <unk> to low fifties growth and with our net rest of next project opening up this week.

The rents are starting to hit the low sixties.

The rest of the next development as well as welcoming Fannie Mae into the building. This month and we are actively marketing and leasing the remaining 160000 square feet of available space.

Our Reston town center retail place, making its also a very active during the quarter, we completed a lease with a new theater operator for 50000 square feet last week, we signed a 20000 square foot lease with a local restaurant distillery and yesterday, a new 20000 square foot fitness operator, we have three more restaurants totaling 22000 square feet that are close to execution.

<unk>.

This 115000 square feet of leased retail is not expected to have any revenue contribution until 2023.

In the district of Columbia, We continue to chip away at our current availability at net square and 901, New York Avenue in market Square North we completed seven leases for 49000 square feet during the third quarter and signed another and have signed another 32000 square feet during October.

As an aside we completed a major repositioning of met square this year and year to date, we've signed 162000 square feet over eight transactions. When we do our work are buildings lease.

The urban downtown recovery in San Francisco continues to lag our other markets very few businesses have commenced their return to work downtown streets remain quiet much of the ground plane remains closed and the city has had a very restrictive Mac mandate as Alan pointed out daily consensus continues to be significantly below.

Our other urban markets.

There's been a reduction of sublease space in the market stemming from active lease commitments and re occupancy plans, but overall availability continues to be elevated this description while accurate overlooked important subtleties in the market pre pandemic there was very little available space in high quality multi tenanted buildings, particularly.

Those with views.

Broadly speaking those conditions still exist for that segment of the market. The bulk of the demand in the last 18 months has come from traditional financial asset management and professional services firms that are focused on the best space in the best buildings. This has resulted in very little change to leasing economics and the best <unk>.

<unk>, particularly in spaces with views we've discussed this on recent calls and it continues today. This quarter, we've completed over 100000 square feet of leases, including full for full floor can transactions in embarcadero. The average starting rent was just over $100 a square foot on those full floor deals at 21% increase.

Over expiring rents we are negotiating leases on another 106000 square feet right now and from what we've seen these experiences are being repeated in the competitive set north of market. In contrast, sublet transactions are being closed a significant concessions to pre pandemic economics, but with no capital.

Life life science activity at our Gateway development continues to be healthy.

DXP <unk> joint venture has signed an LOI with a full building user for 751 Gateway 230000 square feet and we are actively responding to proposals for our anticipated redevelopment of $6 51 gateway about 300000 square feet, which won't commence until the third quarter of next year.

Whether down the peninsula in mountain view activity has picked up in the last 30 days. This quarter. We completed two full building deals totaling 58000 square feet, we're seeing less information gathering exercises and a lot more active tours with rfps and the need for immediate occupancy or early 2022 occupancy they're ours.

Owen said large tech requirements active in the Silicon Valley for those of you who saw that the Tesla announcement that they're moving their headquarters to Texas. You may have missed that they leased 325000 square feet in Palo Alto contemporaneously with that announcement.

High quality, new construction availability is very limited in the valley and we're actively considering when we should restart the construction of platform 16 next to divert on station in the future Google development in San Jose.

Finally, let's touch on Boston and the high end market in the Boston CBD, particularly in the back Bay. There is current Lee limited availability, particularly with view space rents have remained at pre pandemic levels and concessions are only marginally higher as we move closer to 2023, there will be additional new construction supply entering the.

And in the CBD, but not the back Bay as Owen mentioned, the big lease for the quarter was the early renewal with Wellington They agree to expand by 70000 square feet at Atlantic Wharf and were going to terminate a 156000 square feet at 100 Federal Street in 2023, the space, we're getting back.

<unk> at a rate that is below market. So we are optimistic that we can create additional value through this relapse.

We completed an additional 73000 square feet of leases in our back Bay portfolio, and we have about 50000 square feet of leases under negotiation today in that same group of properties.

The Boston our retail portfolio is also a very active we have signed an LOI for 118000 square feet, formerly occupied by Lord <unk> Taylor as well as 40000 square feet of in line space. That's currently vacant or in default. This 158000 square feet will likely commence paying rent in early 'twenty three as we move to the suburbs lifestyle.

Is dominating our activities last week, we signed our first lease at AAD Winter Street, our lab conversion that we started four months ago 37000 square foot deal, which will deliver in the middle of next year and we are in the final stages of negotiation on another 128000 square feet, which would bring that that 224000 square foot building to 74% lease.

And we have active dialog on the rest of the space and during the quarter, we signed over 105000 square feet of leases with life Science tenants at 1000 winner 1100 winner and reservoir place traditional office buildings as we move into 'twenty. Two we're developing plans to convert additional available office space in Waltham into lab space.

<unk>.

So to summarize we've seen a recovery unemployment as Owen discussed employers are aggressively looking to higher capital raising in the venture world is breaking through levels never seen an IPO takeouts are at a historically high level conditions are right for a recovery in office absorption employers are going to want to use their physical space.

To encourage their teams to be together, our mantra has been to create great places and spaces to allow our customers to use space as a way to attract and retain their talent. If you believe that employees may be spending less time in their offices, it's even more important to have the right space in place when they are present and I'll stop there and give it.

Mike.

Thanks, Doug good morning, everybody.

Before I jump into the details of our third quarter earnings as well as our 2021 and 2020 to guidance I want to touch on our recent financing activities.

This quarter, we took advantage of the low interest rate environment, and a very attractive credit spreads to issue $850 million of 12 year unsecured green bonds. When the underlying 10 year Treasury rate was one 3% we achieved a coupon of 245% the lowest in the company's history.

We utilized the proceeds to redeem $1 billion of 385% unsecured notes on October 15th.

Those notes were scheduled to expire in early 2023 and represented our largest debt maturity through 2025. The early prepayment will result in a redemption charge of 25 cents per share in the fourth quarter of 2021.

We will benefit from the 140 basis point drop in the relative debt cost and we're thrilled to issues such attractive long term financing.

The only other significant debt maturity, we have in the next 18 months as our $620 million mortgage on 601 Lexington Avenue in New York City that expires in April of next year similar to the bond. We redeemed. This loan also carries an above market interest rate of 475% given the increase in the cash flows from the building owners.

Really to the redevelopment we completed earlier this year, we anticipate that we will be able to increase the size of the financing and reduce the interest rates substantially we are working on this now and our assumptions include closing before the end of 2021.

The impact of these financing activities will be accretive to our 2022 earnings through a meaningful drop in our interest expense from 2021 that I will touch on in a minute.

First I would like to describe our third quarter 2021 results for the third quarter, we announced <unk> of $1 73 per share that's <unk> <unk> per share higher than the midpoint of our guidance and <unk> <unk> ahead of consensus estimates.

Our outperformance came from better portfolio NOI with <unk> <unk> of higher rental and parking revenue and approximately <unk> <unk> of lower than projected operating expenses.

Looking at our parking revenues they've started to accelerate sequentially as clients and visitors increased driving days into our properties. As Owen described we are seeing building census grow and the results are evident in our parking our share of this quarter's parking revenue totaled $22 million. This compares to a comparable pre COVID-19.

Quarterly result from the third quarter 2019 of $28 million.

At the bottom in the second quarter of 2020, our share of parking revenue was $14 million. So we're over 50% of the way back on an annualized basis using the third quarter run rate, we have about $25 million of revenue or <unk> 14 per share to recover before we are back to pre COVID-19 annual parking levels of 113 million.

<unk>.

Our Kendall square hotel was profitable for the first time in six quarters contributing about $1 million of positive NOI.

Given the hotel's location in the heart of Cambridge and adjacent to <unk>.

We expect that it will ultimately re stabilize at or above the $15 million annual NOI generated in 2019, though certainly not in 2022.

The third leg of our ancillary income as our retail income.

Other than in San Francisco, nearly all of our retailers have returned to paying previous contract rents this quarter our share of retail rental revenue was $43 $6 million on an annualized basis. This is $16 million less than our share of 2019 retail revenue, which totaled $190 million and as Doug mentioned, we have.

Some vacancy in our retail due to the pandemic, but we are negotiating leases now on significant portions of that space.

If you combine an annualize our third quarter hotel NOI and our share of parking and retail revenues, we have the opportunity to gain approximately $52 million or <unk> 30 per share to return to 2019 full year levels.

We believe that all three of these income streams will fully recover and ultimately exceed prior peaks over time.

Looking at the rest of this year, we released fourth quarter 2021 guidance of $1 50 to $1 52 per share and full year 2021 guidance of $6 50 to $6 52 per share.

Our fourth quarter guidance includes the 25 share redemption charge related to our bond refinancing excluding the charge our fourth quarter guidance would be sequentially higher than third quarter results by <unk> <unk> per share at the midpoint.

The improvement is primarily from Verizon taking occupancy of its 440000 square foot lease at the hub on Causeway office development this quarter and lower interest expense after our refinancings.

And while we expect our same property portfolio NOI will also grow sequentially. The growth is partially offset by the <unk> dilution from the sale of our Spring Street office campus in suburban Boston the closed for $192 million. This week.

Turning to our assumptions for 2022.

Last night, we released our 2022 <unk> guidance, we have three major drivers that are all headed in the right direction that provide for very strong <unk> growth of 13% at the midpoint over 2021 the.

The drivers include delivering a significant volume of leased new developments and acquisitions growth in our same property portfolio and our refinancing activities that lower our interest expense.

The first growth driver is developments and acquisitions, we're delivering five of our development properties over the next four quarters totaling $1 6 billion of investment.

These projects totaled 3 million square feet of additions to our portfolio and our 92% leased.

They include the hub on causeway in Boston that is leased to Verizon $3 25 main street in Cambridge that is leased to Google The 200 West Street Life Science development in Waltham that is leased to translate bio Marriott's New headquarters facility in Bethesda, Maryland, and Reston next that is least of Fannie Mae and Volkswagen and <unk>.

<unk>.

It is also possible that our life science conversion at 880 Winter Street in Waltham will begin to contribute in late 2022 in total we expect our development deliveries to contribute an incremental $65 million to $70 million to our <unk> in 2022.

Additionally, we've layered in several acquisitions that we completed this year, most notably Safeco Plaza in Seattle, and our life Science projects, we acquired and Walton. We expect these acquisitions will add $7 million to $10 million to our share of NOI next year.

The second growth driver for 2022 is the projected growth in our same property portfolio NOI our guidance assumes that our share of same property NOI will grow between 2% and three 5% next year. The growth is expected to come from higher parking revenues improvement in occupancy and pricing in our residential portfolio.

Higher NOI from our hotel and.

And increased occupancy in our office portfolio.

Our leasing velocity has picked up in the last two quarters, where we've leased $2 7 million square feet of signed leases given the length of the typical leasing cycle. Many of these leases we signed or are negotiating will take occupancy either in late 'twenty two or 'twenty three we expect the improvement in our headline office occupancy to be gradual.

As Doug described we have several larger leases in the works for vacant space, where we anticipate occupancy will occur in 2023.

On a cash basis, we expect our share of 2022 same property NOI growth to be much stronger at between five five and six 5% over 2021, this equates to between 90 and $100 million of.

Of incremental cash NOI to 2020 too much.

Much of our cash NOI growth is coming from approximately $50 million of free rent that is burning off and contractual leases.

Our third <unk> growth drivers coming from lower interest expense as I mentioned earlier, we will incur a debt redemption charge of 25 per share in the fourth quarter of 'twenty. One we do not expect that this will recur.

Also we are aggressively refinancing loans that were placed five to 10 years ago in a higher interest rate environment with low cost current market financing.

Partially offsetting this we do expect to see higher interest expense and our joint venture portfolio. This is because we will cease capitalization of interest on the Marriott and hub on causeway projects. When they are delivered into service in.

In the aggregate, we expect the 2022 interest expense will be 52 million to $60 million less than in 2021 that equates to 30% to 34 cents of incremental positive impact on our 2022 SFO.

So to summarize our guidance for 2022, <unk> is $7 25 to $7 45 per share the midpoint of our range of $7 35, which is 13% or 84 cents a share higher than the midpoint of our 2021 guidance.

At the midpoint the incremental growth is coming from 40, <unk> from development and acquisitions.

<unk> 25 from our same property portfolio and 32 <unk> from lower interest expense.

This will be offset by <unk> <unk> of dilution from our 2021 disposition activity <unk> of lower termination income and <unk> <unk> of higher G&A.

The past 18 months have brought challenges and uncertainty to so many including our team at DXP. These past few months, it's been heartening to see our cities reopen our colleagues and our clients starting to return to their offices and office leasing volumes picking up as I spelled out we anticipate very strong <unk>.

In 2022 and beyond 2022, we have more developments underway that will deliver additional SFO plus we have the highest quality portfolio of office buildings that we believe will generate higher occupancy rates and earnings in the future.

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

Yes.

You asked a question. Please press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Your first response is from Steve <unk> of Evercore ISI. Please go ahead.

Thanks, I appreciate all the detail I don't think I caught everything but two quick questions. Mike when you talked about retail and sort of what you are potentially recapturing I just want to make sure for tenants that are currently in occupancy today, but maybe arent fully paying their stated rent can you remind us what that dollar.

The amount is just on a quarterly basis.

I don't think I have that number.

Front of me Steve.

But we.

We've got $43 6 million.

That is our share currently so we're missing about $16 million on an annual basis.

So most of that honestly is coming from filling vacant space.

I would say that theres very little remaining in the way of kind of deferrals and things like that for retail tenants right now in San Francisco, which is the smallest retail portfolio, we have because of the tenants there just don't pay high rents.

That's where the tenants havent all returned to occupancy in the vast majority of them are not paying rent. So that's the place where those deferrals are I mean, I think thats, probably a couple of million Bucks a year.

Like that that's not the most significant piece.

The big chunks are some of the stuff Doug talked about where we filled the Lord we're filling the Lord <unk> Taylor space, That's a big 120000 square feet.

Got a number of new retailers coming into the Peru, where we had vacancy that was created by some bankruptcies.

They're in Reston as well.

So those are kind of the big ticket items, where its coming home. So I would say most of it's coming from filling vacant space not from tenants that were deferring rents and are going to be paying contract going forward. So Steve This is Doug.

Taken a summation of all of the spaces that I described where I basically said, we're not going to receiving receiving rent until properly late 'twenty. Two early 'twenty three I want to say, it's somewhere in north of 250000 square feet and the average rent is probably 45 Bucks a square foot net so we're talking about 11 or $12 million of incremental revenue from that portfolio.

Oh of available currently either leased or LOI space that we will get at least in the next couple of months.

Got it okay, great. Thanks for the clarification and then I just wanted to circle back on the the average occupancy that you sort of outlined for 'twenty two the 80 to 90.

Just to be clear is that is that wide range really sort of I guess due to the uncertainty over when leases will start or is some of that uncertainty because leases actually need to get signed over the next say three to six months and then they need to commence I'm just trying to figure out how much is <unk>.

<unk> of when the revenue will start from a GAAP perspective versus how much actually needs to get lease yes. So so again.

Just going back to what I started from so right now we're call it 88% leased and we have 800000 square feet of signed leases that haven't commenced yet most of that will commence in the latter parts of 2022.

As I said, we're working on renewals on about 25% right now of our $2 9 million square feet of space.

Which is call it 700000 square feet of space plus or minus.

And we've been doing over 1 million square feet, a quarter of incremental leasing in the portfolio. So we don't have it's not a heavy lift.

For us to get the space leased the challenges were not sure. The timing is going to be we don't we're going to sign a lease for 195000 square feet with another tenant at dock 72, and unlikely theyre going to be in in 'twenty, two but it could be.

And but we're assuming they're not right so that.

That's the sort of the I'd say the art behind our range of occupancy.

Got it thanks very much.

Thank you. Your next response is from Emmanuel Korchman with Citi. Please go ahead.

Hey, good morning, everyone.

Doug I think you mentioned the net effective levels in New York versus pre Covid down 10% to 15, if I caught that correctly.

Do you have similar metrics for the rest of your markets.

I would tell you that.

I tried to imply this.

Rents and concessions haven't changed in San Francisco, They haven't changed in Boston I mean, as we've talked about they've actually gotten better in suburban Boston and Cambridge, because we've been doing more life science as opposed to office.

I would say that they are up.

To flat and then in Washington D C, they're actually slightly.

Down in Reston, because theres, a slight amount of concession increase but rents are pretty consistent with where they were and honestly I don't think they've really changed in Washington D. C. Because the Washington, DC market was very challenged pre pandemic and that those conditions just remain today.

Alright, Thanks, and then if we look at your leasing pipeline how much of your pipeline is new to market tenants versus moves or trades.

Trade ops, maybe from other buildings in the market if it gets classified that way.

I don't know.

How you define a new to market tenants.

Because there are very few companies that are now relocating to any of these places from others. So I'd say in general it's a we're moving up our quality and or we're expanding.

In the market relative to the amount of space, we have or we are consolidating into a better building from where we were before that's where that's where the bulk of the demand is coming from other than obviously life science those are new formations. The companies are located here, but.

The lease we are negotiating right now for example at AAD is the company that.

Did their IPO they are moving from 80000 square feet or.

50000 square feet currently and they're adding another 120000 square feet that sort of dramatic growth that's occurring.

I guess, maybe to ask the question different way, if we look at the market vacancies. So if it wasn't any of the appropriate calls or read any of the reports when we look at the market vacancies.

How much should we expect those market vacancies to change.

As you sort of getting a bigger share of the pie and euro occupants you can move up market vacancies might be sticky at the levels.

It's a hard question to answer part of it is going to have to do with how much of the sublet space.

Gets absorbed so as a sublet space gets absorbed that will improve the overall, our overall market statistic right. So for example, if you look at Manhattan, I want to say Theres, probably been four to 5 million square feet of space. That's been taken off the sublet market over the last couple of quarters right, that's improving the statistics, but you still.

Talking about a very high level.

I would say that we will outperform the market relative to where we are I can't tell you, whether our percentage change will be higher or lower than the market. Because we don't we just don't have enough clarity on how much of the sublet space, which is the bulk of where the existing availability came from in San Francisco and in New York City, which is obviously the.

Two weakest markets from a statistical perspective.

How much of that is going to melt.

Thanks, Doug.

Your next response is from Nick <unk> with Scotiabank. Please go ahead.

Thanks, Good morning, I was hoping to just get a feel for what the leasing spreads were on signed leases in the quarter I know you quote those on commenced leases.

Yes, so so I tried to give you that where I could I mean.

Told you that again, when we have vacant space in vacant for less than 12 more than 12 months. We don't we don't quote what that what the spread is but I said in San Francisco the spread was about 20%.

In New York City of the larger deals we did I said some of it was up 8% and some of it was down four so.

I guess, what I was trying to convey was that it's sort of flattish in New York City right now with the portfolio.

With that we did this quarter.

In the greater Boston market virtually everything is up.

And then again if you if you look at our DC market. The deals that we're doing in reston are modestly up or down.

On the rent level because of the question of how much growth there was and the rent over the last period of time that the <unk>.

<unk> 10, it was in there. So if we had a deal that was that was done 10 years ago, and we had 3% increases every year. There is probably a modest amount of negative.

Rental rate growth.

If the tenant was a shorter term deal.

It's probably positive because there's been a pickup in terms of the I guess the strength of the market over the last 12 to 18 months and look these rents are all cash to cash so we've got to get.

Much higher.

Okay. Thank you. That's helpful. Just second question is on San Francisco, and you'll hear a little bit more about your thoughts about the potential for that city to recover obviously, it's a much different dynamic you talked about magic mandates. It's also a city that's kind of split between the financial district being more empty than the residential areas of the city tech companies that aren't pushing.

Our employees back to work in a way that banks are in New York. So I guess, just a thought on kind of how the recovery potential of that market also.

There is also maybe a return of some larger potential tenants looking for space in that market and then the second part is.

Your willingness to invest further in the cities and serious talk about one of the largest development sites in the city potentially.

Coming up as an opportunity.

Yes.

Covid has had the biggest impact on San Francisco.

All of the markets, where we operate and I think a lot of that has been the.

The technology tenants in some ways, leading the way on work from home and second the very restrictive COVID-19 mandates that have been put in place and the law.

Lifting of those mandates has lagged all of our other cities and that's undoubtedly had an impact on the census data that I mentioned earlier.

That all being said San Francisco remains arguably the technology capital of the World. It's got the largest cluster of computer science workers in certainly in the United States and we believe in the long term recovery of the San Francisco market, but I do think it will lag our other market.

We will continue to invest in the area, Doug talked about the potential for us to restart our platform 16 development. We haven't made that decision yet, but that's something that we'll be talking more about it.

Future quarters, we also have a very attractive development site at fourth and Harrison that we will.

B looking at certainly in 'twenty, two and 'twenty three.

And we are open for business and we will consider other investments if we think they will if they make sense for shareholders.

Sure.

Okay. Thank you.

Okay.

Thank you. Your next response is from John Kim with BMO capital markets. Please go ahead.

Thanks, Good morning.

<unk> with the supply chain do you think this will delay our cable development projects either for you or your competitors just given market rents are not really moving up in lockstep with what the additional costs.

So I guess, what youre getting at is how is inflation going to impact. The overall development model going forward. If there is significant inflation and the rents that are necessary to justify new construction assuming interest rates are also going up.

Are going to need to rise and there is no question that speculative development will be more challenging but there are still lots of customers in this country, who want new construction and want the best and brightest of the away buildings are built.

Potentially being.

Very green carbon neutral net zero or whatever you want to describe it as it's harder to do that with a to older building.

And so I think the question will be what will the character of the leasing b and where will it occur, but I don't think its going to necessarily stop new construction I do think that speculative office development is a very I would say challenging proposition today in most markets because of the amount of supply.

That exists.

Remember that when you are starting a new building you are talking about delivering somewhere between 36 and 48 months later, if it's a high rise.

And then if even if it's a low rise building, it's a minimum of 24 months. So.

People's views on what the World will look like when we get to those periods of time, we will be influential and as Owen suggested we're looking at the Silicon Valley and we're looking at platform 16, and we're saying to ourselves.

That's a really interesting market relative to the amount of demand. That's currently exists today. The lack of high quality first class class a office product the potential location of the building that we would be building relative to transportation and so we're pretty optimistic in certain instances, but clearly it's not.

It would have been three years ago.

Okay, and Doug you mentioned the impact of the short term leases had on your leasing spreads this quarter.

How much of a drag will that be in future quarters.

I think theres very little remaining I mean, it was it was.

It was kind of a tsunami of these deals all starting in this quarter of 2000.

'twenty one.

Just to sort of give you a little bit of a sausage, making right. We're sitting sitting out in late 2020, and we have leases expiring in 'twenty, one and the tenants aren't using their spaces and they're coming to us and saying well you know we're.

We're not sure what we're going to do.

Just give them the space back, but if you cut us a deal in the short term.

We'll hold the space and we will continue to look at it and we'll think about what we're going to do in the future.

It's a negotiation and our view was.

Very sort of selflessly rather have.

Half of it.

That a whole dollar versus no dollar.

And again, we're starting to see the success of that strategy, which is the tenants that did those short term commitments are going to likely be renewing on a long term basis, and we will get a dramatic uptick rate and I guess when when do you see in New York City, and a couple of quarters Big increases because we went from a $60 net growth.

Number to 100 dollar growth number it's not because the market has gotten better because we're moving away from what we did in this last couple of quarters.

Great. Thank you.

Yes.

Your next response is from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey.

Good morning up there.

Two questions first.

<unk>.

As you talk or Doug as you guys talk to different.

<unk> CEO as an office managers.

What are they telling you as far as the decision of some not all but to keep punting on the return to office I mean in fact, we even heard of one company that suspended indefinitely returned to office is it a fear that these companies have that their employees will just go elsewhere, because its such a tight labor market is it the commutes are still really add and people just don't feel like.

Slapping whether it's.

New York or San Francisco, where I know you guys arent Chicago, but Chicago is another sort of hard hit CBD. What is the reason that you are hearing that these companies keep delaying because obviously as you pointed out restaurants are full planes are full leisure hotels are full so it's clearly not a fear of COVID-19, that's keeping people at home.

Yes.

So good morning, Alex.

Look I think pretty much universally the Ceos and business leaders, we talked to.

If they're not back in the office they want to figure out a way to get back in the office for all the reasons articulated in my opening remarks, So we think thats going on.

The delay that we experienced this fall I do think was driven by health security the infection levels from the Delta variant elevated city's put on mask mandates and things, it's not pleasant to be in an office building wearing a mask. So thats a very real thing, even if youre not concerned about COVID-19.

But that being said as I mentioned the infection levels are down and I do think the tight labor market is factoring into CEO decisions and the desire by some certainly not all employees to continue to work remotely that has caused some delays, but as I articulated I think over time.

I can't predict what the virus is going to do but I do think over time, you're going to see more and more companies, bringing their employees back to the office because those leaders are concerned about the future competitiveness and cohesion of their companies I would also say Alex that there is something else going on which is you get a.

A lot of public.

Positive reaction when you say, hey, we're thinking of remaining hybrid or were thinking of delaying our return.

Don't get that same hurrah when you say everyone must be backed by January three and what we're seeing I mean, we've had we had two conversation yesterday.

One was the Tech company, one with a professional services company and they both told US if they've already sent out announcements to their folks that pay in one case, they want everybody to start coming back to the office on a hybrid model.

Model in November and the other one is hey, you better be near your office, because we expect it to be back in January those companies are companies that have also we know publicly have said, we're not sure when we're coming back and we've delayed things and theyre not publicly stating what I. Just described so I think there's more going on right now relative to companies starting to put.

Pressure.

On their existing.

Employee base that it's time to start to think real hard about moving yourself into the right location. So that you can be in the office in a much more consistent basis going forward.

Yes.

Okay.

Just thought I mean, if you're a company's paying people.

Loan paying guests to drive the bus so that it's funny that right now it's like the passengers driving instead of the bus driver but.

I think the other demonstration of proof of concept is look at all the leasing that's going on in our own company and in the market.

If companies weren't committed to the Opex why would they be leasing all of this space.

A great a great. The next question is as far as life Science goes you entered DC.

Sorry, you entered Maryland on life Science, you hadn't been there before I was reading an article this week or last week that people are contemplating in the Navy yard is trying to do life science.

Look around your portfolio, whether it's now like South Lake Union in Seattle, maybe the Navy yard and in Brooklyn, as a spot maybe not or maybe San Diego would be a good life science market to enter how much how many areas do you see the potential to expand your lifestyle life Science development program to do.

You think it would lead you to new markets driven by life science or most of the life Science development that Youre looking at is really in your existing markets plus Seattle.

First thing I would say is almost half of the lab space in the country is in Boston and in San.

San Francisco area, where we're already very active so and if you look at the best opportunity. We have as a company is to build what we have I mean, we have 5 million squeak 5 million square feet, plus or minus of land for development in multiple millions of square feet of Redevelopments and we control all of that real estate at pre.

<unk> co.

Covid pre life science pricing, so I think that's our best opportunity, but that being said just as we did in Montgomery County, we are open for business.

For making new acquisitions and were certainly going to focus in the markets, where we're active first.

Yes.

Thank you.

Thank you. Your next response is from Ronald Camden with Morgan Stanley. Please go ahead.

Hi, Thank you a couple of quick ones for me just versus just.

Lots of transparency sort of mid 2022 outlook.

Same store cash NOI guidance I was just wondering I think you touched on some of the drivers for the same store cash NOI, but is there a way to quantify sort of the call.

Contributions from whether it's retail or some of that hotel.

<unk> versus <unk>.

Sort of the core office that'd be helpful.

Sure so.

Look I think we're going to get some nice benefit from parking coming back.

If you look at it quarter over quarter over quarter, it's continuing to improve.

So I think thats.

I also think we're going to get some nice benefit from some of the residential properties that we have.

Where pricing is improving and we've got some lease up opportunity there.

The hotel is a little bit harder to gauge.

<unk>, because it's just tougher to project.

So I would say, we're not necessarily expecting.

I think it will it will improve but we're not expecting a huge impact there.

And then the portfolio is the rest.

It's going to be a little bit more moderate and again I think it's related to what we see as kind of a gradual improvement in our occupancy.

With the with the hotel, which will we think is going to accelerate into 2023 as some of these leases that were talking about.

Our going into occupancy and actually generating revenue.

Okay got it and then sort of the.

Second question was just maybe asking.

In contrast between New York and San Francisco.

Hey.

<unk> certainly heard that.

San Francisco is behind E org, but.

Is the expectation still that at some point theyre going to be on the same recovery trajectory or is there anything that you're hearing or seeing that may be different.

Between those markets that got that could solve that so when you think about New York or San Francisco.

Are there any sort of unique factors in San Francisco.

For the lag basis.

Youre asking on.

Honestly.

Our social question more than an office question in my opinion, because the reason that San Francisco and quite frankly, the state of California.

Is behind us because of the decisions that have been made by the health departments and the political leadership.

And we unfortunately.

<unk> don't control those decisions.

<unk> San Francisco starts to have a significant return to the office.

Wave.

I think it will pick up rapidly and that we will start to see a significant recovery remember that pre pandemic Manhattan, and New York had a supply problem and San Francisco did not have a supply problem. So the opportunity from Sanford for San Francisco as well.

How much of that labor will want to come back and how quickly will those companies that have grown dramatically in terms of their own head counts during the pandemic want to bring those people into close proximity with each other on a day to day basis.

And there is an opportunity for San Francisco to accelerate.

Quickly.

Return.

It's got it's got a challenge from a political perspective, right now and it's got a challenge from a statistical perspective, because theres a lot more available space on a percentage basis than there was and has ever been from a sublet perspective.

Hatton is still way below where it once was call. It 2002 2003 from a sublet as a percentage of the market San Francisco is way above where it's been historically and again a lot of that space could be reoccupied by the companies that chose to clinical put it on the sublet market and so I think that's what ultimately is going to is going to be the thing.

That changes the trajectory of San Francisco in terms of its rate of recovery pace.

Doug is evidence of what you mentioned on social with Boston. This is Bryan Koop.

Pre labor day, we were ticking up every week in terms of occupancy and then are the city of Boston that the state came out with the stricter mandate on masking et cetera, and that changed the return for like 5% to six of our major firms and it ticked back down.

We're starting to see that come back up again in fact, one of our buildings 88, I believe close to 70% occupancy last week. So it's evidence of the social part in the cities, saying, what's going on from that particular market.

Super helpful. Thank you.

Yes.

Thank you. Your next response is from Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, Owen or Doug as I think you guys mentioned a few times in your remarks. It seems like we're still seeing the majority of leasing activity and even investment sales activity is concentrated in high quality assets that are either recently developed or have recently undergone major renovations, so I guess to take.

The opposite side of an earlier question do you think there is a risk in any of your specific markets that these trends for additional new development is office landlords kind of position themselves to benefit from that.

Flight to quality that we're seeing but ultimately maybe they ended up hurting the market as a whole by adding new space.

Im not sure Thats a risk were concerned about at this time.

I agree with what you said about the interest by both investors I would say by the way the interest by investors is in assets that are of high quality or have the potential to be high quality.

And on the interest by tenants and higher quality buildings.

But the markets, even though they're recovering the level of availability, including sublicense sublease space is quite high.

That will be a headwind and as Doug described.

Construction costs are going up because of supply chain issues, which makes development more difficult. So.

It's an interesting question, but im not sure Thats, a major risk that faces us at this time.

Alright, Thats helpful and then maybe one for Mike.

You guys have been running at high operating margins relative to pre pandemic levels. So I wanted to get your sense for how sustainable those margins are going forward and how sticky any of the expense savings that you guys achieved during the pandemic might be as utilization in physical occupancy increases within your portfolio.

Look I mean, I think our margins should be continuing to run between $63 five and 64, 5%.

As Doug described.

The increases that we may see in some of our operating expenses. The vast majority of that stuff gets passed through to our tenants.

So we don't expect to see an impact.

A significant impact from those items.

And if you look over time, we've gone through inflationary and deflationary times over long periods of time in our operating margins have been within a band. So I would not expect that we would suddenly have a 200 basis point change or something like that in those margins.

Not what we see happening.

Great. Thank you guys.

Your next response is from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, This is Julian on for Caitlin.

There's been a lot of talk obviously and this is following up on some of the questions about shifting to tenant demand towards newer high quality, well and monetize product.

And obviously that shift will benefit some of your assets. Both your recent builds and redeveloped assets, but as the elevated vacancy at the tail end of your portfolio call. It that older vintage non LEED certified office product.

Making you reconsider the strategic fit of some of these assets I'm thinking of vacancies at Carnegie Center.

Gateway Commons Bay Colony Corporate center.

Colorado Center et cetera.

And then second part of that question would be does it make economic sense to make capital intensive redevelopment in some cases.

It sounds like you have plans at gateway not sure if bay colony would be eligible for conversion to lab space, but more broadly maybe they try to elevate some of these assets to LEED gold platinum certifications.

So.

I'm not trying to be cheeky here, but UN Caitlin should spend some time actually coming out and seeing our portfolio because I think a lot of these questions would be answered.

We've been talking about all of the renovations that we've been doing up at Bay colony as an example, and I mentioned.

A few minutes ago that we've done a 100000 square feet of new leases with life science companies and we're actively looking at converting some of those buildings are full life science buildings.

Carnegie Center is probably the most are monetized project in Central New Jersey, and we have a tremendous amount of investment that's been made and its been very receptive.

So so I think that the.

And by the way, we're probably at the at the forefront of lead.

Not just silver platinum new LEED standards energy efficiency indoor air quality I mean, we are doing those things.

Our rote tasks today everywhere in our portfolio. So I would tell you that the portfolio doesn't have any of the of those issues that you might describe as challenges.

And honestly, we have as much vacancy in a class a office building.

Today as we've had in other quote unquote challenging time periods.

Again, we are we are committed to picking up our occupancy rate and we are doing that as I described in my comments relative to the amount of leasing that we're doing today. So we feel really good about the whole portfolio now there are some markets that are less.

Party than others relative to the amount of leasing demand in San Francisco is obviously one of them, but as an example, you remit you mentioned gateway, we're taking 651 gateway out of service to convert it to life Science, It's why it's got a 90000 square foot lease.

And a 300000 square foot building right, we're trying to clear it out. So we are actively doing those things, but I would really encourage you guys to actually spend some time with our teams and get a feel for the portfolio and the only thing I would add to what Doug said is.

We have a 53 plus or minus million square foot portfolio, we sell $2 million to $500 million of assets per year. So we are in constantly refreshing our portfolio not only in the things that Doug described in terms of <unk>, but also selling assets, where we think we can get a good price that may not have some of the care.

<unk> described.

Awesome. Thank you.

Yes.

Thank you. Your next response is from Anthony Powell with Barclays. Please go ahead.

Hi, Hello, everyone. Just a question on sensus.

Do you think that number goes to on a stabilized basis, given we've seen more companies even that are backing off in state of employees can work from home on Fridays and Ken.

Sensors, and I guess do we think demand be couple in the future as.

Tenants still want space, but allow their employees a bit more flexibility.

Yes, I think.

The census, the denominator of the census was the.

Physical occupancy of the buildings the month before the pandemic started.

No.

Look I think as we've been saying over and over again, we think our clients are going to return to the office, but we also think hybrid work is going to be a bigger factor for many employers and what we're also seeing for our clients that have returned to the office.

Most of them have a hybrid work option, but they are saying to their employees you got to be we got to have everybody in the office on certain days of the week. So the answer to your question is I think our census should go back up to a 100%, but it may not be everyday of the week it.

It may only be in the middle of the week, Mondays and Fridays would probably be a little slower.

And just the only other thing I'd add is that.

Over time, there may be more spatial considerations given by our tenants. So they may actually have.

Fewer people in their spaces not because there they are any less occupied but because they were so tight together and so densely packed and that given the.

Issues associated with the pandemic and health security and indoor air quality and having people just feel comfortable in their spaces. They may actually.

Either increase their space in order to maintain the same occupancy or they will have fewer badges at any one time, because there just aren't going to be as many seats as they once had.

Got it thanks, and maybe on dock 72 seems like there's some momentum there can you talk about just.

Okay, because you have more tenants about can be too and just the feeling around the building John powers do you want to take that.

Okay.

Well as Doug said, we we did a deal we're very happy with that transaction and we have a lease out for 192000 feet.

We have some action on the prebuilt and we've had more people coming into the navy yard and seen it.

Which which is really what we need because it's a fantastic building.

Alright, thank you.

Your next response is from Peter Abramowitz with Jefferies. Please go ahead.

Thank you just sort of a high level strategy question here sort of as you're evaluating new markets. How do you think about Miami as a potential next market it.

It seems like a place that would kind of fit with your strategy of being coastal markets, maybe not as high barrier to entry is New York, and California, but certainly a more business friendly environment.

In addition, all of the demographic shifts that are kind of benefiting it.

As a result of the pandemic so any thoughts.

You look at on a market like that or any potential other markets, where you might answer yes. We are very focused on the six coastal large gateway markets, where we currently operate we believe those markets have the largest clusters of knowledge workers that are important to the growth businesses.

Is that that we serve particularly in the technology and the life science sectors. We also see stronger barriers to new entry in those six markets and that's where we're focused in.

We've got and within that we are building our life science business.

As well as an office business and many of those markets and that's going to be our focus for the foreseeable future.

Okay. That's all I got thank you.

Yes.

Thank you. Your next response is from Daniel Ismail with Green Street go ahead.

Great. Thank you.

You touched on this earlier that while vacancy might change relative to markets.

Is it your sense that leasing volume will reach pre COVID-19 levels in 'twenty two 'twenty three events.

Mike.

I'll try and articulate what I've said in the past which is that.

For the large tenants.

I would refer to as the Tech Titans in those tenants Havent left the market and they're going to continue to do what they were doing and those are the kinds of companies that Owen was describing there looking for space down in Silicon Valley and have made major expansions in.

In the urban areas of all of our markets.

And then on the small cell.

Syed tenants that are less than a floor there.

Our back doing exactly what they were otherwise doing and so there is plenty of volume in that sector. I think the challenge is that the companies that are thinking about what it is that hybrid means and how hybrid will work for them and those companies will need to get their people back into a.

<unk> in person in the environment or understand what those what their employees want to do and what they want them to do and Thats going to take some time and so I believe that 2022 will be a lighter year relative to absorption than pre pandemic and then in 2023 when the experiments have all.

All.

Run their courses and companies understand what their expectations are for human capital and physical capital. That's when we will see I believe I believe and I think one articulated as well for the reasons why we will see a very strong pickup in absorption and demand growth demand.

Great. Thank you and then maybe just last one a bigger picture question.

Yes.

High quality and.

Ground up and renovated office buildings seen high strong pricing recently.

Is it your sense there is any pricing differential between ground up construction and a fully renovated office building.

Is there any difference in demand between those two categories.

Are you talking about sales values or rental rates.

Sales values.

Tenant demand as well.

I guess they can.

Yes, I mean, I look I think it's a little bit dependent on the market that you're in I mean, let's take New York for example, there's been strong technology demand in on the west side in Midtown South and a lot of the stock there is.

<unk> developments not it has happened, but it's not as available. So there have been some very successful an interesting renovations of existing stock I would say some of the best buildings in Midtown South are actually older buildings that have been renovated and we intend to make 360 Park Avenue South one of them. So I think it is very dependent on the <unk>.

Local market I think a very high quality older building thats been fully renovated and Midtown south is going to get.

Equivalent pricing is something that's new.

On the demand side Danny.

The only thing that you can't fix.

Or change on our renovation is the structure. So everything else can basically go right you can literally rip off the facade and put a brand new energy efficient.

Window system and you can dramatically change the mechanical you can even create new shafts.

For a larger.

Duct work and change the mechanical equipment and the buildings.

If the if the building has a really challenged structural system meeting lots and lots of columns or a very low slabs slab I think those are the those are the impediments to a renovated building relative to new construction, where youre going to see many fewer columns and youre going to see much larger volumes of space.

But other than those two characteristics a fabulous renovation of a building is going to get the same I think level of interest as the new construction building.

Got it.

One more if I may you mentioned 360 Park Avenue.

You issued op units to do that deal.

The risks and higher taxes seems to be increasing.

Utilizing that structure.

Increasing more in your discussions and Youre looking for new acquisitions.

Yes.

It is a <unk>.

<unk> valuable.

Structure that we can offer and it gives us as a public company a competitive advantage to be able to exchange op units for a tax sensitive seller.

And.

It's been a long time since the last open unit deal so, but I would say today that we are having dialogues with other owners of real estate about about a similar structure.

I think it's very case specific though.

I wouldn't.

I would say, yes, the dialogues are higher but I also wouldn't suggest a tidal wave of this activity either.

<unk>.

Your next response is from Brent Dilts with UBS. Please go ahead.

Hey, great. Thanks, guys just could you talk about how demand for your flex product has evolved this year and where you see co working demand going from here as physical occupancy improves.

Brian you want to talk about flex by DXP, Yeah, our flex from DXP in Boston.

Four locations and its main team.

Tim.

Great stability throughout Covid.

And we're starting to see some pickup in activity, but not really of the kind of that we'd be really proud to be saying has taken place.

Pre COVID-19.

But we definitely have interest in it and we've got inquiries on it coming up and mainly from corporate users versus entrepreneurs seems to be the theme, where it's a corporate you, saying we're going to have a special project. What do you have in 2022 that we can take immediately.

Yeah, and I think in terms of the broader market I would continue to reiterate what we've said in the past as we think flexible office space will be an important part of the office business going forward, we've seen in our own portfolio its value to small companies that just want space and they want they want it now and they want flexibility and I also think.

Larger corporates will see value in procuring a small percentage of their space on a flexible basis, given their business often changes more rapidly than space can be delivered to them.

But I think the first thing that has to happen in the market is.

Roughly what 2% to 3% of U S office space today is flex.

It is flexible to refill I mean, that's the first thing that needs to happen and then the question will be if it's going to grow how is it going to get financed.

Not sure the operators are going to be financing additional growth of flexible office space I think it is going to be the landlords and where and when and how much will they elect to do going forward and I think we'll see I don't think those decisions will need to be answered for the next year or so.

Okay. Thanks for that guys and then just one other one here I heard your comments on.

Physical occupancy maybe not being the same as <unk>.

Card counts itself in the future. So as companies have been returning employees to the office in bigger numbers.

Has there been any increase in those tenants, making changes to floor plans are amenities and just related to that are there any new tenants in the portfolio are requesting anything in terms of build out that's been different versus pre COVID-19.

So.

Yes.

I am surprised that I'm going to say, what I'm, saying, which is we've seen virtually no existing tenant do anything that requires a building permit that doesn't mean that they arent moving furniture around or theyre not eliminating workstations.

Are there or they're converting small chat rooms into offices that we don't know if thats going on or not.

But to date.

The energy has been on simply getting people to get comfortable coming back into their office environment, not changing the physical infrastructure and again.

Even the companies that are saying, Hey, we want you back it's going to take some time for those companies to get all of their employees to come back on a consistent basis and I think it's at that point that they will have a better understanding of how their space needs to be organized to effectively fit the way they want their people.

It would be working when they are in person.

Got it.

All the questions that was it for me.

Thank you. Your next question is from Jamie Feldman with Bank of America. Please go ahead.

Great. Thank you I just wanted to go back to your last answer on Flex office now that we've seen we work as a public company.

One of your largest tenants I mean, do you think theyre going to grow in the portfolio going forward just how do you think youre DXP and we work.

Will function together going forward.

Yes, well, we have great relationship with them. We are delighted that they were able to go public.

And we have I believe five different stores with them right now and we're going to have to see how their success evolves and the whole flex market evolves as I mentioned a minute ago that flexible space is less occupied and there needs to be some recovery of that market before we could consider additional growth.

So we will consider in the future, but I think that's at least a year off.

Are there characteristics of the flex office leases that youre seeing more tenants request in terms of duration or.

Brakes or anything like that.

So Jamie the reason that we did our own flex space was because we have enough volume of space in our portfolio.

Where we wanted to be able to satisfy those customers, who basically said, we don't want to think about anything other than can we be in this space Tomorrow and we don't have to buy furniture, we don't have to buy technology services. We don't have to do anything other than bring our people in and go and so that was the nature of the.

The experiment that we have been doing with our spaces I would tell you that we continue to see requests from small companies for Hey, what do you have for me I'm just looking for some short term space and that's exactly what our flex product should be about what we are not doing and don't have any intention of doing.

Is taking large pieces of our space and converting it to flex space in competing with we work or any of the other.

<unk> operators for corporate users, who are looking for large blocks of space because thats just part of their strategy, that's not what we're going to be doing realm.

Relative to where our buildings are and the amortization. We have that's I think that's the attraction of why the companies that are in our space have gone there because you can go to the Prudential Center or you can go to the hub on causeway or you can go to 100 Federal Street and get the advantage of all the amended edition and the great placed in space, making that we've done and do it.

On a short term basis, if that's what your business strategy calls for.

The decision to grow from IRC is really two things one is what Doug is describing which is is this something we should just have to attract more customers, particularly where we have a high concentration of office space like it's approve or arrest in Embarcadero Center.

If you are building an apartment building you don't just build single bedrooms, you have studios in two bedrooms. So this is a different product and is it valuable to have that product at one of our facilities and also by the way does it create tenants that might move become successful in bigger and then like being at the Peru for example, and become a longer term customers.

So thats. One question then the second question is what's the math and Thats a big question because you have to do turnkey build out costs as cost hundreds of dollars a square foot you face vacancy because you don't have long term leases and you have to understand what the math looks like.

100% of what Doug say on corporate users as evidenced at the hub. So we've got a full floor in the loft space that is flex space and 100% of our clients and there are users in the buildings and they tend to be special project related for six months to one year in term and.

<unk>.

A great example is we have a.

E Gaming division in one of the units that's a subsidiary of one of our clients up above so the hubs are Great example, it's 100% of our clientele in that one and other locations, it's probably 50% to 60%, but it tends to be.

Longer term not month to month, and then again, our flex product is totally different than co working we're not doing co. Working these are spaces that are pre built and we have no social aspects too.

The needs of our clients they do that.

Okay. That's all very helpful. And then I guess, just some housekeeping questions for Mike on the guidance. What are you assuming for leasing spreads and then can you talk about capex.

Capex next year, and maybe to help us get to like an <unk> number.

So I mean look leasing spreads.

It's not going to change that dramatically in Boston and San Francisco spreads are going to be up and our view on the deals that Doug talked about that we're doing in San Francisco this quarter and the things that we have under discussion.

We're going to be roll up same thing with Boston.

In Cambridge in the suburbs.

I think restaurant will be closer to flat, maybe slightly up on the leasing that we do.

And New York City is going to be a little bit more volatile because it really depends on the space, where we have certain spaces that are going to be roll downs in certain spaces are going to be roll up. So I think you will see more volatility in New York City.

There with respect to kind of SFO.

If you look at 'twenty, one and then we've got three quarters in the books.

I think <unk> is getting pretty close to where it was in 2019 honestly, we have a shot of getting to I think it was $4 43, a share in 2019.

So I think we have a shot of getting there we may be slightly below but.

Looking at 2022.

I would say on the Capex side.

Probably pretty similar to what we're seeing this year, which is $100 million, maybe 120 million Max and kind of Capex.

Leasing costs.

They're running somewhere in the mid two hundreds.

On an annual basis.

Which is not that significantly different than what we had been in 'twenty one in prior years.

And then we've got a lot of obviously free rent burning off.

Our noncash rent is going to be slightly lower than we guided for 2020.

One and we gave that guidance is $90 million to $110 million of noncash rent, but theres a lot of free rent burning off.

And then you have other noncash items that go the other way like stock comp and.

Fair value ground lease rent and things like that that's about $75 million the other way so.

So the way I kind of look at it is if you want to add up all those adjustments theres probably.

$370 to $400 million of adjustments off of our <unk>.

It's $2 25 a share.

So that will drive you to 2022 to <unk>.

<unk>, it's around five Bucks, which is up significantly from where it was where it will be in 'twenty, one, but also from where it was in 2019 pre COVID-19.

Because of all the cash NOI growth, we've had in the developments that have come in and are increasing our cash NOI. So I think it's a very positive story.

Okay. That's very helpful. And then how do you think about dividend coverage.

And growth.

I think as our cash NOI goes up you're going to see.

Our dividend coverage improve obviously, it's been pretty tight.

For the first quarter and second quarter, our <unk> ratios than the high Ninety's. It went way down this quarter. It was like 72% because as Doug talked about our transaction costs were lower this.

This quarter, which helped us.

And as our <unk> grows and our cash NOI grows it's going to improve and improve.

At this point, we haven't made any decisions about a dividend policy or strategy going forward, but it's certainly something we will be discussing with the board on a quarterly basis as this cash NOI comes in.

Okay, great. Thank you very much.

There are no further questions in the queue at this time.

Okay. Operator, thank you that concludes management's remarks, and thank all of you for your interest in Boston properties have a good day.

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