Q1 2022 Boston Properties Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the <unk> first quarter 2022 earnings Conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

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And also please be advised that today's conference is being recorded.

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I would now like to hand, the conference over to your speaker today Ms. Helen Hahn. Thank you. Please go ahead.

Good morning, and welcome to Bx piece first quarter 2022 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K in the supplemental package. The company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Brad team.

You did not receive a copy these documents are available in the Investor Relations section of our website at investors, that's the X P Dot com.

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 it.

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.

I'd like to welcome Owen Thomas Chief Executive Officer, Doug, Wendy 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. We ask that those of you participating in the Q.

And a portion of the call. So please limit yourself to one question. If you have an additional query or follow up please feel free to rejoin the queue I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you Helen and good morning, everyone today I'll cover <unk> operating momentum as demonstrated in our first quarter results.

Porting trends emerging in post pandemic work in office use.

Current private equity capital market conditions for office real estate.

<unk> capital allocation activities, including a significant acquisition, we just announced and our prospects for future growth.

Dxp's financial results for the first quarter reflect the positive impact of U S economic growth the gradual reopening of the major cities, where we operate and increasing needs by our clients for securing high quality office space.

Our <unk> per share this quarter was well above both market consensus and the midpoint of our guidance and we increased our forecast for full year 2022.

We completed $1 2 million square feet of leasing more than double the space. We leased in the first quarter of 2021 and in line with our pre pandemic leasing activity for the first quarter and our leasing momentum continues in the second quarter as Doug will cover.

This success can be attributed to not only our execution, but also the enhanced velocity achieved in the current marketplace for premium quality Workspaces, which are the hallmark of DXP strategy and portfolio.

Finally, we just released our 2021 ESG report outlining the actions DXP has and will take to ensure continued leadership in this critical area highlights include remaining on track to achieve carbon neutral operations by 2025 enhanced.

Disclosures regarding regarding scope three emissions and diversity, achieving multiple financings tied to sustainability performance inclusion in the Dow Jones sustainability index and recognition for our work from many sources. The report is available on our website and I encourage you read.

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As the effects of the pandemic are increasingly behind US there continues to be much speculation about the future of work and its impacts on the use of office space. While many questions remain unanswered. There are a number of trends, which are increasingly coming into focus first.

Building census figures roughly 40% to 80% on the peak day of the week and Dxp's portfolio, depending upon the city.

Our improving weekly and are at post pandemic highs with many large employers such as Google and Apple just now implementing return to work plan.

Second.

City leaders are responding to the slow return to office as they understand the vibrant business district is critical to their city's economic health and recovery.

Mayors of New York, and San Francisco, we have partnered with their respective cities large largest employers and encouraging return to work policies to help reinvigorate their business districts and local businesses that had experienced hardship from the delay in return to office.

Third.

Most business leaders see the challenges of an inconsistent returned to the office by their employees given the widening gaps there businesses are experiencing and maintaining corporate culture, Onboarding and training employees and training employees and talent retention.

Employee unwillingness to return to the office today on a consistent basis is primarily due to very tight labor market conditions and employee desire for flexibility.

As business conditions become more competitive due to rising interest rates slowing economic growth and changes in the labor market business leaders will likely feel increased urgency and bringing their employees together on a much more consistent basis and modify their return to office policies Accordingly.

Fourth return to office does not mean five days a week for most employers companies are increasingly providing a flexibility benefit allowing employees to work remotely one to two days or in some cases more per week. These.

These employees and variably are electing to come in more frequently Tuesday through Thursday, and want more physical separation their own dedicated workspaces and in office amenities, all of which make it challenging for employers to reduce space notwithstanding reduced occupancy for part of the week.

Many of our clients have also materially grown their head count due to economic growth and market conditions during the pandemic increasing their need for seats.

And lastly building and work space quality has never been more important in the office business to help entice workers back to their workplaces employers are increasingly attracted to buildings that are new or recently renovated.

Well monetize inside and out and proximate to transportation.

<unk> office market statistics that currently show elevated levels of vacancy and weak net absorption do not properly reflect the market dynamics of the premium end of the market, where most of our portfolio competes.

We recently completed a disaggregated office market study with CBRE Econometric advisors analyzing the relative performance of Prime office assets.

As selected by CBRE, representing about 17% of total space.

Versus the rest of the market in five of our targeted cbd's the west L. A analysis is forthcoming.

CBRE found the vacancy rate is five is more than five percentage points lower for prime office assets versus non prime assets and 10 percentage points lower in San Francisco.

In 2021 for those five Cbd's net absorption for prime assets was a positive one 2 million square feet versus a negative $6 6 million square feet for non prime assets.

This dynamic explains dxp's recent success and achieving pre pandemic levels of leasing despite elevated total market vacancy vacancy statistics.

Yeah.

Moving to real estate capital markets transaction volume for office assets remains vibrant as 25 billion a significant office assets were sold in the first quarter.

<unk> volume was down 40% from the near record fourth quarter 2021, It was up 57% from the first quarter, a year ago and above first quarter levels in both 2020 and 2019.

Pricing has remained stable for high quality office buildings in anything life science related the rising interest rates have impacted leverage buyers, which could pressure volumes and cap rates.

And Cambridge, Marty a majority interest in the 100% leased lab building 100, Binney Street sold at an aggregate valuation of over $1 billion pricing was.

2000, and $350 a square foot and a three 5% cap rate the seller was a REIT and the buyer was a JV of institutional real estate investors.

In the Culver City Submarket of La one Culver was recapitalized at a gross valuation of $510 million. This building is 90% leased and pricing was $1350 a square foot and a four 5% cap rate a regional operator sponsored the recap with our global institutional.

Fund manager in New York City, $4 50 Park Avenue was sold for $445 million by an institutional operator to a REIT. The building faces near term lease expirations with pricing at $1320 a square foot in a sub 4% initial cap rate.

In South San Francisco, the 144000 square foot 5000 shoreline Court building was sold for $1140 a foot and will be vacated for lab conversion the.

The asset, which will require capital to redevelop with purchased by an institutional fund manager from our corporation at a basis that is equivalent to our completed life science development and higher than our Redevelopments in the same market.

Now regarding Dxp's capital market activity, we recently committed to purchase Madison Center, one of the highest quality office buildings in the Seattle CBD for $730 million recently.

Recently Bill in 2017 Madison Center comprised of 760000 square feet. In 37 stories is 93% leased to leading tenants and as lead platinum certified the building has one of the most generous amenity offerings in the Seattle market with 30000 square feet of fitness Conference <unk>.

Library living room, boardroom fast casual food bike storage and roof deck space.

<unk> centre as well located two blocks from light rail and bus transportation and direct vehicular access to the I five north and south ramps.

Pricing for the investment is $965 a square foot and a four 3% initial cap rate stabilizing above 5% with additional leasing.

The acquisition is expected to close on May 17th and will initially be funded with a $730 million bridge loan.

Our funding plan over the next year is to either enter into a like kind exchange with other assets, we sell or bring in capital partners as we have done with other acquisitions.

The acquisition of Madison Center accomplishes several key strategic goals for DXP.

It expands our presence in Seattle targeting a growing technology market.

<unk> one of the newest and most competitive buildings in the Seattle market to our portfolio consistent with our quality strategy at all of the markets, where we operate.

And it provides the opportunity to reallocate capital on a tax efficient basis between markets and specific buildings.

On dispositions in the first quarter, we completed the sale of 195 West Street, which is a 664000 square foot, 100% leased building in Waltham for $38 million, which represents pricing of just under $600 a foot and a four 7% cap rate.

We are either in the market or planning additional sales in our Boston and Washington, DC markets several of which could be used in a like kind a like exchange for Madison Center for the Madison Center acquisition.

If completed these transactions will efficiently reallocate capital with limited loss in <unk> from East coast properties into a market, leading Seattle asset.

We also completed another active quarter recharging our development pipeline. As previously described we commenced the 390000 square foot first phase of platform 16 in San Jose to be delivered in 2025, and 327000 square foot conversion of $6 51 gateway in.

South San Francisco from office to lab to be delivered in late 2023 or.

Our share of investment in these two projects aggregate $378 million and projected initial cash yields upon stabilization are in excess of 6%.

Astrazeneca announced last week, they have signed a lease for 570000 square feet to consolidate into a major research facility at Dxp's $2 90, Binney Street development in Cambridge.

This development could commence in early 2023, but is contingent on several enabling milestones to be completed this year at which time, we will provide more details, including economics on both it and the adjacent $2 50, Binney Street lab and $1 35 Broadway residential projects.

After all these movements our current development pipeline aggregate $4 1 million square feet and $2 $9 billion of investment is 54% pre leased is 27% life science related and projected based on lease up assumptions to add approximately 200 million.

Two our NOI over the next five years at a 7% average cash yield on cost when stabilized.

So in summary, we had another active and successful quarter with strong leasing and financial returns and continue to forecast significant growth in our <unk> per share. This year driven by strong leasing activity continued recovery of variable revenue streams delivery of a well leased development pipeline.

Completion of new acquisitions, both last year and this year, our rapidly expanding life science portfolio in the nation's hottest life science markets and well timed refinancing activity in 2021 and lower capital costs let.

Let me turn the call over to Doug Thanks, Joe and good morning, everybody. So we're sitting here on may 3rd pre lease for us to have a call, but obviously, we have a lot of news to report and we wanted to make sure our own schedules worked out there.

Most employers have begun their journey to discover how theyre going to match their human capital with their utilization of physical space. It's.

It's clear that the census on public transportation and in our office buildings continues to be below levels in 2019, they're going to be organizations that make few if any changes to their space configuration location or allocation of space per employee those clients will be and are in the market, making long term leasing commitments.

Based on their growth and as Owen said, a lot of companies grew and their lease expiration schedules there will be businesses that experiment with different models. These companies could sublet space.

Get to more or less short term space or they could simply watch how their business responds to their new in office cadence and do nothing until their lease gets closer to its natural exploration.

It's also true that the availability rate of space defined by third party brokers that look at the entirety of the market and as Owen described there are lots of ways to cut it but in general it's still it still continues to be elevated in our urban markets, but his own pointed out if you start to analyze the activity. The best buildings are getting more than their proportionate share of market.

Demand despite.

Despite these headwinds on demand and supply the BSP portfolio had its third consecutive sequential strong leasing quarter.

Our total activity was again spread amongst Boston, New York, San Francisco, and the Metropolitan Washington Region.

Last quarter, we showed an occupancy gain of 40 basis points and this quarter, we picked up another 30 basis points.

As we sit here today, we have signed leases for our in service portfolio on vacant space that has yet to commence so it's not in our occupancy figures of more than 757, 975000 square feet, which is up from 925000 square feet last quarter.

This would represent an additional 220 basis points of occupancy.

We began 2022 with over one 4 million square feet of leases in negotiation on space and the in service portfolio.

<unk> ended the first quarter after completing the $1 2 million square feet I mentioned.

We have active lease negotiations underway and the in service portfolio and about one 3 million square feet and we had over 750000 square feet in our development pipeline. During the month of April . So the last 30 days, we've signed in excess of $1 1 million square feet of space.

We're moving quickly and confidently to lease up our portfolio.

While our portfolio is comprised of the highest quality buildings in their submarkets, we have another advantage, which is our operational platform.

We are in constant contact with our clients as we look for ways to create opportunities in the portfolio for our customers. We're a leasing transaction may not be readily apparent let me illustrate as I begin my regional comments in Boston.

Life Science is a clear driver of new demand and the suburban Boston market, but our traditional route 120 office leasing is also extremely busy this quarter, we agreed to recapture and re leased 73000 square feet at 70 780 point.

We were aware of a large tech company that we are seeking to establish a presence inside of 128, when we were finalizing the recapture and a release of 16 12 65 main street late last year. This tenant express interest, but we were too far along with our transaction to accommodate them our tenant at 77 City point.

Had a lease that expires December 31, 24 and had listed space on the sublet market beginning in 2019 pre pandemic related.

Instead of simply waiting for the lease to expire we negotiated an early termination recapture and sign the new seven and a half year lease which also resulted in a 15% net increase in the rate. Let me give you. Another example, we have a relationship with Wellington the prime tenant at Atlantic Wharf, our team was aware of Wellington strong desire to.

Improve their carbon footprint and any new real estate commitments working in partnership with Wellington as well as the local energy provider ever source and a solar developer we were able to find a way to reposition the mechanical systems at our 140 Kendrick Street project and make a net zero commitment.

This resulted in a 105000 square foot lease for space scheduled to expire in November 22. In addition, we signed leases with two other tenants for the remaining 80000 square feet in this project and leases for that space. We're also scheduled to expire in November 22, all with rent roll ups of about 40%.

But just looking at the performance of the XP I on your stock screen, it's pretty clear that the equity markets have not been kind to public biotech companies. However, there continues to be significant demand for life science tenants in the Boston market, many of which continue to be funded with private capital and have strong science working in their favor over.

The last two weeks, we've signed another 45000 square feet of leases at EDI Winter Street and are in final lease negotiations on the remaining space and we signed 140000 square foot lease at 180 City point, the new 329000 square foot building under construction steel erection is underway and we're hoping to deliver that space in the fourth quarter of 'twenty three.

And obviously, we are excited to have astrazeneca as a new client in Kendall Center and look forward to getting that building under construction in early 'twenty three.

Our CBD Boston activity. This quarter was primarily small transactions, we completed seven deals for 47000 square feet average markup was 17% on a cash basis at the moment. We are in lease negotiations on more than 300000 square feet of leases in the CBD of Boston with four transactions over 40.

Square feet.

The New York Regional second generation statistics this quarter merits some explanation.

In early 2020.

Perella Weinberg made a decision to rollout relocate out of the GM building Covid hit they pause their plans to move and they ask for a short term renewal we accommodated that request at an as is market rent that was below their expiring rent with the hope that we could use this time to convince them to reconsider their decision.

And entertain a long term renewal at the G. M. What you see in our statistics. This quarter is the impact of that short term deal.

Fast forward to April one 2022, our operating team was able to work with Pwc to provide a long term solution and they have signed 125000 square foot lease renewal at G. M that will keep them as our client until 2040.

The mark to market on this new lease involved the relocation to lower contiguous floors on the floors that are remaining part of the premises the rents are down about 7%.

In New York City during the quarter. The most significant leasing transaction was at 330000 square foot extension and expansion at 601 Lexington Avenue. This lease involved the client expanding into a direct vacant floor as well as floors that are expiring in the second half of 'twenty, two totaling 180000 square feet. The rents on this block is.

Down about seven 5%. We also completed a 70000 square foot renewal at 510, Nason, where the cash rent is down about 10% and five small transactions totaling 24000 square feet.

Our current activity in New York continues to be strong we have multi floor at least negotiations underway at 399 Park Avenue at Dock 72, and another full floor lease at the General Motors building as well as a number of smaller leases at $2 50, West 50 bps Times Square tower and 510 Madison total activity is in excess of 400000 square.

Our feet.

Construction is underway at 360 Park Avenue, South and we are actively touring the building every week and trading proposed for 2023 lease commencements.

Our Boston, CBD, Cambridge, and Waltham markets as well as Midtown New York.

Significantly busier than San Francisco, Northern Virginia, D C and la in the San Francisco CBD There've been a handful of large tech tenants in the market and those deals have gravitated towards the well built sublease space at assets like 350 mission and 680 fulsome, our property with the Macy's sublet the bus.

Look of the activity on a direct basis had been in the financial district and it continues to be concentrated at the better buildings with professional service firms and financial firms. We completed 10 leases totaling 104000 square feet in the CBD of this quarter, our cash rents increased by 25% as we sit here. This morning, we're working on another 110000 square feet.

Including three full floors at Embarcadero Center, and we completed over 50000 square feet in our mountain view portfolio on currently vacant space.

Our venture with AARP as Owen said has commenced construction at 651 gateway and we are making a full floor and multi floor proposals with anticipated occupancy in late 'twenty three early 'twenty for the venture did about 45000 square feet of non lab leasing at 601, and 611 Gateway this quarter I'll finish my remarks with northern.

Around Northern Virginia, and D. C. During the first quarter activity in Reston was concentrated on parcel floor deals I E. Small deals we completed six totaling 20000 square feet and are actively negotiating another five in the in service portfolio. We have one full floor lease negotiation at their next phase of the Reston Town Center project, but large tenant activity.

And the rest of the Submarket has been slow as we started 2022 rents have held up during the low fifty's with a two 5% annual bump to the low sixties with similar bumps for RTC next in the district, we signed our second non anchor deal at 2100 pen and are in lease discussions now with a multi floor office tenant.

And a retail tenant that would bring the leasing of 2100% to over 80%.

Activity at the Street plain retail in Boston and in restaurant in New York City has picked up significantly.

<unk> revenue in Boston, and San Francisco continued to improve while activity and parking in D. C. L. A and Seattle is still restrained the first quarter parking revenue, excluding Seattle was 77% of it was in 2019, and we expect a meaningful bump in the second quarter as we moved away from Army crime.

We have had three consecutive strong quarters of office leasing and a great April 2022 employers continue to search for new employees businesses are leasing space and we are capturing incremental portfolio occupancy to circle back to Owen's comments about quality employers want to use their physical space to encourage their teams to be.

Together, the availability rate and the best buildings is lower and there is significant relative rental rate outperformance.

We create great placement spaces, so our customers can use space as a tool to attract and retain their talent, while not a 2019 levels employees are spending more and more time in the office and is even more critical to have the right place and space Mike.

Great. Thank you Doug good morning, everybody.

This morning, I plan to cover the details of our first quarter performance the impact of our current and projected capital markets activity and the changes to our 2022 earnings guidance.

Overall as Owen and Doug described we had a strong quarter, we increased our occupancy and we continue to grow our revenues our share of revenues. This quarter is up 4% sequentially from the fourth quarter and up 8% over the first quarter of 2021.

We reported funds from operation of $1 82 per share that exceeded the midpoint of our guidance by <unk> <unk> per share.

The most of the improvement mostly came from a combination of higher rental revenues and some lower operating expenses that aggregated to <unk> <unk> per share.

<unk> per share of the revenue outperformance came primarily from recognizing revenue earlier than anticipated due to our clients completing build outs and occupying their space faster than we expected for.

For example, at our Reston next development, we delivered a tranche of 11 floors to Fannie Mae almost a month earlier than we projected resulted in resulting in higher than expected revenue in the quarter.

We also recognized a penny of revenue from restoring the accrued rent balances from clients that struggled during the pandemic, but have now recovered. We had previously reclassified these clients, which are primarily retailers and restaurants to cash basis accounting and now their sales performance demonstrates the ability to pay their rent over the.

Full term.

On the operating expense side lower than anticipated expenses contributed <unk> <unk> per share to exceeding our <unk> guidance. A portion of this was from lower than anticipated physical occupancy in January and February during the height of the omicron variant.

This resulted in lower cleaning and utilities expense during the quarter.

We have seen our physical occupancy rebound and surpassed prior post pandemic highs. So we expect our expenses to normalize back to our budget for the rest of the year.

We also incurred lower than anticipated repair and maintenance expenses this quarter, some of which will be deferred to later in the year.

The remaining penny of increase in <unk> was due to lower than expected G&A expense in the quarter.

Now I would like to turn to our 2022 earnings guidance, including the financial impact of our projected capital markets activities that Owen described.

We've increased our guidance range for 2022, <unk> to $7 40 to $7 50 per share. This equates to an increase of about seven <unk> per share at the midpoint from our guidance last quarter.

Our portfolio is exceeding prior expectations and is projected to contribute 11 per share to that increase in our guidance at the midpoint the portfolio.

Stronger growth is partially offset by the loss of <unk> from our assumptions for asset sales net of acquisitions and the impact of our anticipated financing activities.

As Owen described we have entered into an agreement to buy Madison Center in Seattle for $730 million, we expect to close before the end of the month. Our objective is to fund the acquisition through proceeds from asset sales and our assumptions include asset sales of between 700 and $900 million for the year.

Including the impact of this elevated asset sales program, we expect the transaction to be neutral to <unk> per share dilutive to our 2022 <unk>. The range is really reliant on the ultimate size and timing of our sales activity.

Looking forward, we expect Madison centered demonstrate consistent cash flow growth as we lease up the currently vacant space and roll below market rents to market as leases expire the positive mark to market on current leases is between 10 and 15%. So the initial GAAP return, which fair values of the rent is about <unk>.

80 basis points higher than the cash return that Owen quoted and.

In addition, the property is new and a very high quality and will require minimal capital improvements.

In the interim and in advance of completing our asset sales strategy, we expect to close on a short term $730 million bridge loan to fund the acquisition.

We are also planning to secure long term fixed rate financing on our recently completed hub on causeway mixed use development in Boston.

We're in the market and close to finalizing terms for the residential component and expect to pursue financing for the office and retail component later this year. The impact of these financings is included in our guidance and is expected to increase our interest expense for 2022 by $6 million to $9 million.

A portion of which will run through our income from joint venture loans.

We are seeing improvement in NOI in both our same property portfolio and our development portfolio in the same property portfolio, we achieved faster lease up from delivering spaces to clients earlier than expected.

You saw this in our higher occupancy we reported in the quarter.

And as a result, we have increased our assumption for same property NOI growth by 75 basis points to 275% to 375% over 2021.

On a cash basis, we continue to anticipate strong same property NOI same property cash NOI growth of 5% to 6% over 2021.

Our non same properties, which is primarily our recently delivered and active developments are also exceeding our prior projections and achieving faster absorption.

Our share of NOI from the non same properties and that excludes the Madison Center acquisition is expected to be $75 million to $85 million, an increase of $5 million at the midpoint from our assumption last quarter.

The only other meaningful change to our guidance is an increase in our assumption of development and management fee revenue to 26% to $33 million, which is an increase of $2 million improvement primarily relates to higher construction management fees related to tenant buildout activity.

So in summary, we have increased our guidance range for 2022, <unk> by approximately <unk> <unk> per share at the midpoint. The drivers of the increase our eighth sense of improvement in the same property NOI performance <unk> from our developments and a penny of higher fee income offset by dilution of <unk>.

<unk> of higher interest expense and a penny from our net acquisition and disposition activity overall.

Overall, we anticipate strong growth with 14% projected 2022 <unk> growth over 2021 2021 at the midpoint.

We've improved our occupancy for two consecutive quarters and Doug described both the meaningful backlog of nearly 1 million square feet of signed leases that will come into the portfolio in the next year and our current activity.

We have additional future growth from the delivery of our $2 9 billion active development pipeline is currently 54% pre leased and will deliver over the next few years, plus we're making progress towards adding to the pipeline in the future.

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

Absolutely.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Also we are limiting participants to one question only.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John Kim from BMO Capital markets. Your line is open.

Thank you Doug you mentioned in your prepared remarks, some large renewals you had at GM and thanks, a lot, Mike, but with some rent roll downs.

Can you comment on the impact that inflation has had on the leasing market has that basically encourage tenants to commit to longer term leases.

At discounted rents and.

Going forward are there any is there any impact to the.

The annual escalators that you have on inside.

So so.

Thanks for the question John .

I would say that theres been no real direct impact on inflation the organizations that we are talking to.

Our steadfast in their desire to have really high quality, great space and they're obviously looking at the market and depending upon the particular sub market that they're in there they're able to cut whatever whatever deal. They can in some cases.

That means that the rent that they are currently paying is it is going to be higher than what they are going to what they will be paying in the future, which is obviously a good thing for them.

Our escalators are really pretty much market condition oriented so in a market like New York.

The increases are generally on a fixed rate basis every five years and there really hasnt been any change in the escalators in our other markets typically are between two and a half although mostly around 3% and again to be quite Frank theres not enough pricing power in the office markets for us to dictate additional terms. So we're just being competitive with.

With the market conditions that we're that we that we compete against within each individual sub market.

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

Great Thanks, and good morning.

Doug I thought your comment on the Boston Life Science market comparing demand there to the biotech index it was pretty interesting.

When you ship when you think about the Bay area can you talk about.

Whether it's on the tech side small and large companies small and large tenants.

And on the life Science side, how are you guys thinking about and what are you seeing in terms of.

Neither a pullback in leasing demand because of what's happening in the public markets or even into the market.

Or maybe you're not seeing a pullback at all would be great to get more color on those two sectors specifically.

Sure.

To answer the question in the following way, Jamie I think that the west coast, particularly the San Francisco market is just behind the rest of the country relative to their commitment to push their employees back to work on a more consistent basis, and therefore understand the cadence of their utilization of space and what <unk>.

The demand is going to be so in general it's just slower there.

Im describing both the CBD of San Francisco as well as the Silicon Valley and the Bay in the Greater Bay area right now most of the demand that we're seeing for our gateway assets are what I would refer to as VC backed smaller companies.

We are not because we just the nature of which $6 51 is it's not really geared towards a large.

When you refer to as the Bulge bracket life Science company, that's public in nature competing for that space.

On the tech side, our demand in mountain view, which is more sort of smaller companies.

As is consistent its not ferocious we're not seeing companies say, we have to make a decision because we have to bring our people back and we have to have the space I'd say theres, a little bit more caution.

Their decision, making but it hasn't really been a change relative to the environment that we saw.

Three year, three or six months ago. It's just it's just generally slower in the bay area than it has been on the east coast, where people have been I'd say much more constructive about going back to work on a longer term basis for the better part of call. It a year and even though there was the army crop blip.

Things sort of move quickly back to where they were in October of 2021.

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

Good morning, and thank you.

A question on development, you guys have been pretty consistent developing at 7% plus over the years.

Rising costs. So my question is is this just a function of either one development rents keeping pace or two if the legacy land basis that gives you that advantage or is there a risk that we could see yields come down because for DXP. The development is a key.

Driver of episodes, so just trying to see how sustainable it is given everything thats going on.

Yes.

Good morning, Alex.

Yes, I think the as I mentioned the developments that we launched this quarter were above 6% not at 7%. So that it's not across the board. We still have some that are above 7%, but there. There is some pressure I think on development yields.

I do think that customers are have the markets, where we've been developing had been very strong and rents have been rising. So it has been has been keeping up.

I agree over the longer term if inflation stays at these elevated levels. It will make development more challenging from a yield perspective.

Alex If you look at where we started and what we're doing right now on our development pipeline.

So we have a residential project that we're that we're that we're moving forward with in Reston.

And we're moving forward with life science.

In the greater Boston market, and obviously with our venture with Alexandria in South San Francisco, but you don't see other than our San Jose platform 16, us announcing major office developments at the moment and that's largely because the supply of space doesn't allow us to get the rents that are necessary to take care of.

The rather significant escalation in costs that we're seeing across every single market I mean, we're generally seeing one plus or minus percent.

The escalation right now in construction costs.

The fed reserve beds, making some changes we do think that theres going to be a meaningful pullback. We do believe that we're going to start to see the pressure on the supply chain in the construction industry start to alleviate we do believe that the challenges associated with labor are going to alleviate in the in the trades. So we're optimistic.

Mystic that things will start to come back, but in 2022, where we to start a project.

We would be assuming a pretty significant amount of escalation in our cost structure going forward.

One additional advantage, we have with our pipeline is that in.

In Boston, because it's not just the land basis and cost it's got an active carburetor on when we can start.

Where we can start and what type of product because we've got existing buildings that we can convert to lab like we're doing at 80 to 80, but then we also have <unk>.

Land that great cost basis with permits in place. So we think thats going to be a real advantage as things go on and we will be able to judge the market better.

Okay.

Your next.

Question comes from the line of Michael Goldsmith from UBS. Your line is open.

Good morning, Thanks, a lot for taking my question I'm trying to get a better understanding of how you're strategically looking at leasing are you. Most more focus on getting seatback performed with I think later or you can be patient for that rate may come back a bit before Stephanie I'm, just trying to trying to kind of understand.

Europe function when do you think is it a short intermediate and long term approach. Thank you.

Just say as a general matter, we meet the market in <unk>.

Our buildings to be full.

Our income is where how the company is valued we want to create income and if you go back historically.

We have never tried to time the market, we take what the market will give us.

And as you I think you look at our lease expiration schedules, we really try and get ahead of explorations wherever possible and so we bring down our near term exposure and so in a corner unquote challenging market. We don't have that much in the way of explorations that we're dealing with on an annual basis.

Might be tell me, where in the sort of 6% to 7% for the next two to three years and 5% in the next two years to 5%. The next two years and so and then if we can we will develop when the markets are better and we have less quote unquote rollover in our portfolio, but we take what the markets will give us and we.

We believe in meeting the market, obviously, we look for a premium because we have premium projects and we have premium assets and there are occasionally times when we have more than one customer looking at a particular piece of space and we have a little bit of pricing leverage and obviously we take.

Advantage of that whenever possible.

Your next question comes from the line of Rich Anderson from F. N. B C. Your line is open hey, thanks.

Still good morning.

So when we think about the long term.

Viability of the office business, you might get the point about flight to quality in your case, but.

If we're to get back to full.

Pre pandemic demand for space.

That just happened kind of broadly or do you as a landlord or the Reits as landlords have to adjust their tenant.

<unk> Pie chart. So I'm looking at your slides you page 24 of your supplemental and you lay out all the different industries that you have exposure to does it require a boston properties to change. This this roadmap for you to get back to sort of.

<unk> demand whenever that day comes for office space or do you think legal services will come all the way back in.

Real estate insurance, whatever the case may be I'm curious if it requires you to to be proactive to get back to that.

To that full demand profile. Thanks, Yeah, I think the.

The demand is going to continue to be driven by the growth of our client segments. So do the how many employees does the client have and do they need seats for those employees I think that is a key driver I went through what I felt were the key trends that are starting to evolve post pandemic and <unk>.

Office use flexibility is clearly going to be a bigger thing going forward, but at the end of the day what drives state space demand is employees that require in office, albeit maybe on a more flexible basis. So since the global financial crisis that has been primarily technology and life science tenants that is where.

The growth has been and if you look at our if you looked at that Pie chart for US 12, or 13 years ago will be very different finney.

Finance and legal services were a much bigger piece of it and technology and life science, where a smaller piece. So so I think that that is not going to change.

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

Great. Thanks, good morning, somewhat related to that last question I wanted to touch on some of your initial prepared remarks, when you talked about the tight labor market being some of the cause of the delay in the return to office I think you said as the labor market gets more competitive it could accelerate the return to office as employers have.

More negotiating or bargaining power to bring employees back into the office.

Following that line of thinking do you think that balance of power shifting toward the employer could have an effect on kind of the other part of your commentary and what you said employees want separation and their own dedicated spaces is that something you think could also shift as the labor market shifts and employers could require hotels for some of the.

Employees or other more kind of economically efficient configurations, just as theyre going to be requiring that that return to office.

So I think it's possible I think it's very it's very client specific it's very segment specific all of our clients face different challenges as it relates to their labor forces.

There.

Their workers have different requirements. So I think you are.

Your theory could be correct, but I.

I didn't quite say it the way you said it but I do think as I.

I have said before I don't think there is I have not spoken to a business later that is working.

Working remotely all the time as great as good for their businesses and so I do think as the labor market tightens up I think youre going to see more businesses have more in office work policies do I think that mean means that all companies go to five days a week no I don't but I do think that policies will continue to evolve and there.

We'll be more in person in person work.

As we move forward.

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

Hi, Good morning earlier, you mentioned that PK utilization is that 40% to 80% in the portfolio, which the big range. So I was just wondering if you could go through the difference, maybe New York City versus San Francisco or any other characteristics that seem to drive.

Building versus another maybe utilization is higher at newer properties or something else.

So the.

This obviously is.

Our portfolio right. So our portfolio is has its own unique characteristics relative who happens to be in a building and where the building is but in general what I would say is as follows.

On Tuesday, Wednesday, Thursday, the largest utilization of space is clearly in Manhattan.

Questionably undeniably.

And then second it would be in the Boston CBD and in the Boston CBD Interestingly, it's driven by the financial services firms.

In Manhattan, It's both financial services and legal so.

Certain of our buildings, we have some legal.

Customers, who are very very dogmatic about bringing their people back all the time it drops off precipitously from those two markets. When you look at San Francisco and you look at Washington D. C. Today, and so those numbers are much lower on a relative basis and honestly, we don't have a lot of them.

Clarity on what's going on in our suburban properties because of suburban properties don't have turnstiles and that those are open building atmospheres and so yes, we can go out and train count cars, but I think thats, a pretty inefficient way to know what's going on in the building and so we're just we're unable to really articulate what's going on in the in the sub.

Bourbon assets in a meaningful way because we simply don't have the tracking there.

Your next question comes from the line of Anthony Powell from Barclays. Your line is open.

Hi, Good morning, I guess, a question comparing Manhattan San Francisco.

Seeing more activity in Manhattan, but your Richard a bit down there, but their epic San Francisco, So what's driving that difference.

What's your least mark to market in New York, San Francisco and how are these rent trends impacting values both of those cities.

I'm going to I'm going to try as a part of those questions.

Youre gaming the system by asking a three part question.

Sorry about that.

That's okay.

So remember that when we are comparing our rents on a on a second generation basis. What we're looking at is the in place rent versus the rent that we're now achieving on that space. So it doesn't it doesn't give you a good sort of indicator on what's going on with market rents at a particular time, but.

I would tell you is that market rents in Manhattan have been very very stable for the last year and if you go back and look at the calls for example that we did in late 2000 and.

20 in early 2021, we said okay. There has been a rent reset we believe net effective rents face rents concession packages are down 15% to 20%.

That is a truism that still holds today. So as we are when we're doing deals today, depending upon the building. If we have to have a space that was leased it at a higher rent. We're just marketing to that current rents. So what's actually going on with market rents really doesn't isn't you're not able to decipher that from the statistics I'm, giving you I'm simply giving you a sense of what's going.

On in our portfolio. So if you sort of looking at so as my revenues rollover am I going to be up or down. We're trying to give you indications of how you can get to that number with regards to the portfolio. Mike you tell me.

In general we still have a positive mark to market of a reasonable amount in San Francisco, and we've had sort of a flat to slightly negative mark to market in Manhattan for quite some time largely because of the disparity of where the rents were achieved when those leases are rolling over over the next two or three years.

Okay, I think Thats correct I think the reasoning is that in San Francisco, you saw a decade of rent inflation.

Going into the pandemic so our in place rents were very low.

And we've been replacing those with higher rents for the last several years and we continue to replace those rents with higher rents. So we still have a strong mark to market positive in San Francisco over the next couple of years that should be somewhere around 10% to 15% on the leasing that we expect to do.

And I would say that the rents were getting in San Francisco.

On the high quality spaces that we have are stable I mean, we know what the rents are we able to get deals done.

New York City on the alternative had a lot of development with the Hudson yards before the pandemic and it limited the rent growth that the market before the pandemic.

So it didn't have the same kind of.

Growth over that timeframe. So then now we're looking at as Doug said rents went down a little bit. So we're looking at roll Downs.

Sometimes they're going to be higher this quarter, sometimes theyre going to be flat I think overall in New York City is probably something around maybe 5% to 10% negative overall something like that in the portfolio and again, that's why I'm trying to give you on the real deals that we're doing on a quarterly basis I'm trying to give you. The comparison. So you can sort of see what's going on right. So I said in New York, We got cut.

<unk> of large deals that we've done and it's been down about 7% and in Boston.

In the suburban portfolio was up by 40% and in the CBD, it's been up by 15% to 20%. So we're just trying to provide you with as much clarity as we possibly can and sort of what's going on in <unk>.

Revenue basis, as you think about modeling our portfolio going forward and when you may want to talk about values relative to New York and San Francisco.

Values for us.

<unk> capital markets.

Well look I think as the comparable.

Statistics, which I tried to give on this call every quarter indicate I.

I think values are driven primarily by cap rates and the per square foot comes out as a result, and those cap rates, both in New York and in San Francisco I think for high quality office building have been somewhere in the fourth.

Low or or high force, depending on what the rental structure is in the building.

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

Hey, everyone. Good morning, Joe.

Just hoping to get maybe a little bit more details on the asset sales I think he mentioned they'd be in Boston and D C.

And also just how you're thinking about all out sales versus getting those assets.

Yes so.

We will we are selling assets. This year, Mike mentioned the volume that we currently have in our projections.

If we're able to accomplish those sales we will like kind exchange them into Madison Center, and it's a very efficient way for us to reallocate capital we've talked about and are frequently asked about raising capital through asset sales and as we have described that as an inefficient way for us to raise capital.

The gain is plus or minus 50% and most of our major assets and that capital would have to be.

Dividend is a special dividend to shareholders and we would not be able to keep it for corporate purposes. So if we can accomplish this like kind exchange then we basically will be reallocating.

Investments that we have in assets in the Washington, DC and Boston markets to.

Terrific building that we just bought in Seattle, There is ace, we think a slight <unk> reduction associated with this because the cat there could be cap rate differential timing differentials things like that.

And just to just to further comments Manny. So first is you can't do a like kind of exchange with the JV unless it's the exact same JV and it's really hard to do that so.

So effectively if we're going to sell an asset and do a like kind exchange that has to be a wholly owned sale.

And to the reason that we're doing this and not simply doing J visas, because we're trying to maintain.

Balance sheet strength that we currently have and we're looking at ways to fund our strategic initiatives as Owen described which was to try and move into Seattle and a.

In a way that's leveraged neutral and so obviously, we're looking at ways, where we can raise capital for things that we want to accomplish from a strategic perspective.

Not just raise capital and dividend it out to.

Shareholders.

Yeah.

Your next question comes from the line of Nick illegal from Scotiabank. Your line is open.

Thanks, I just wanted to turn back to the guidance Mike.

The.

The fact that I guess, you got even in the first quarter revenue earlier than expected as tenants built out space faster I mean, how should we think about that impact in the guidance kind of where you are today in terms of budgeting for that I mean is there a chance that you are still you know theres still some benefit that still has to come from that process thats not fat.

Turning to guidance for the year.

Look I mean, it's possible. We've obviously provided a range and that range has expectations for when we do believe leases are going to start.

For leases that we have underway and it provides some room on either side for that to change.

In certain cases, our tenants control the timing because they're doing the build out and if we can't recognize revenue until they complete the work it can be a little bit harder to kind of judge exactly when it's going to happen and if you're a bigger leases starting like for example, Verizon at the hub of our Fannie Mae at rest and next and you've got a big chunk of space.

On it it can be meaningful if you miss by a couple of weeks or a month.

So I think thats built into our range when we think about our range and what could or could not happen, we build that into the range as we kind of look at the.

The two and three quarters to three and three quarters same property growth range and then we provided the range as well on the non same stuff, which is kind of as the developments start to tenants.

Tenants start to commence but it is it's not perfect. Because obviously, there's challenges out there with supply chain and getting work done on time, and we've been and our clients have been pretty effective at getting that stuff done on a timely basis, but we have to kind of think a little bit conservatively about what the boundaries are and that's what we do when we build a range.

Your next question comes from the line of Ronald Camden from Morgan Stanley . Your line is open.

Great Hey, just sticking with sort of the guidance and specifically on the occupancy guide.

Just when I think about where they are in service occupancy is today versus the guidance, maybe can you help us sort of bridge.

Maybe the upside and the downside.

Given the amount of leasing that's being done obviously I would've thought that would've.

A bit more of an occupancy pickup this year and.

Mainly there is a lag between signing and commence just trying to get a sense. If you could bridge that gap between the occupancy guidance and what could get you to the upside versus downside.

Let me let me describe why why don't we don't get it immediately and then I'll, let Mike give you sort of the range is that from an occupancy perspective. So let me give you. An example, so it's 601 Lexington Avenue, we have a tenant that's going to take space.

That's partly leased.

Towards the end of 2022, we're going to demo that space, we're going to deliver that demo space to that customer and that customer is going to build out that space that space won't get built out until sometime in the middle to late part of 2023, and even though we have a contractual agreement with that tenant has to win their rent commences, we're not going to be able to.

<unk> revenue recognition and therefore added to our occupancy until that date occurs so as I said earlier in my comments, we have 900 and call. It 75000 square feet of leases that have been signed.

Our revenue has yet to commence some of Thats in 'twenty, two and a lot of it is in 'twenty three and so we just we continue to have these timing issues associated with when we can quote unquote recognize occupancy and therefore show your revenue on a contractual basis, even if we're getting it right. We have had situations, where we're collecting cash rent and when.

Not able to record it because the tenant is not an occupancy and thats going to happen for example in our building at 325 main street, we're going to start collecting rent and we're not going to necessarily have a TCR because the tenant doesn't have all of their work done and they're paying us contractual rent and it is going to go onto our balance sheet and it's not going to show up in our revenue stream. So do you think.

Sort of happen on a consistent basis with us because of the timing of when we're actually quote unquote delivering space and Mike you can give the guidance on some of the range, Yes, I mean look.

Theres a lag as Doug is talking about when we signed leases and we get occupancy and during the pandemic our leasing volumes were lower.

So we weren't signing enough leases to replace what was going on so we lost some occupancy and for three consecutive quarters. Our leasing volume has been strong and Doug just talked about the April leasing volumes, which point to a pretty good second quarter. So that demonstrates that we should be able to gain occupancy and we only have 2 million square feet Rolling and we're doing a little over 1 million.

We're feet a quarter, we should be able to gain occupancy, but there is a lag of six months to 12 months to get the leases in place. So that's why it's a little bit slower at the beginning to kind of gain and I think it will accelerate later on as.

As we do it I mean, we feel very good about where we stand today, we have 2 million square feet expiring.

975000 square feet signed that is going to go into place over the next 12 months approximately.

And of our expertise, we probably have a half a million square feet that were working on deals as well. So I think we're really well positioned to gain occupancy I just think it's going to take a little bit of extra time and right now we've our guidance I think it's 80% to 90%.

I think that the.

I feel pretty good about that range.

It's going to be hard for us to get in excess of 90%.

This year based upon what we see.

I think that will do a good job.

I think it's going to be hard for us to reach the bottom two honestly given where we are today.

Your next question comes from the line of Neil.

The honey.

Mizuho Your line is open.

Are you starting to see any change in leasing activity from co working providers across your markets.

Yeah, well in terms of the they're doing primary leases I would say that activity is zero.

Okay.

But I think the question Youre asking is whats the occupancy of the co working units themselves and I think yes, I think they are going up.

Monitor this it's hard for us to know exactly we work is public now.

I do state these statistics and I do believe they have been reporting to their shareholders increases in occupancy, which makes sense to us. Our census is going up every week there should as well.

Okay.

Your next question comes from the line of Steve <unk> from Evercore. Your line is open yes.

Yes, Thanks, I guess, Doug there was really no comments on the la market and I'm. Just wondering if you could share your thoughts on the leasing.

The acquisition opportunities and whether you expect to start your 300000 foot development in the beach cities anytime in the near future.

Why don't I'll talk a little bit about capital markets I'll turn it over to Doug for the leasing.

We have a strong interest in growing our la footprint in our selected West L. A.

<unk>.

And.

And we're actively reviewing a few things, but we don't see the same level of transaction activity in the la market that we see in our other markets at the current time.

But when things are available we certainly pursue them.

And we're going to just regard with regards to our leasing activity. Steve. So we have we did a lot of leasing in calendar year 2021 in la So our we have one primary piece of space, which is at Colorado Center.

The former HBO space on the top two floors of one of the buildings and that space is currently being demolished and sort of readied for for quote unquote tenant delivery.

I would say the activity on it has been light there's been a decent amount of leasing that's going on in West L. A.

A lot of it has been musical chairs with a bunch of sub leases that were available that are no longer available or that have been taken off the market at decent amount of direct leasing in both Culver city as well as Playa Vista and so so I'd say, we're constructive on the Westfalia market. We just we don't have a lot of action on our space at the.

A moment and you know in light of that we just we're not we're not we're able to sort of show you statistically things that are going on in our portfolio. Because we just don't have much in the way of available space.

And then you asked about beach cities, we're in the middle of designing that building. It is going to be an extraordinary project I think it will be by far and away the best building in El Segundo.

And we are still in that process and we haven't really decided yet on what basis will launch the project, but more to come on that from us in future quarters.

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

Great. Thank you when.

When you started your comments off with ESG and sustainability and I'm just curious from what you've observed in the portfolio. How are those green aspects influencing tenant decision, making processes are deals being won or lost because of any of those factors.

Yes, but not universally across the board Doug described the engagement that we had with our great client Wellington in the suburbs of Boston, where.

Providing them a net zero fulfillment and also vary.

Limited scope three emissions relative to newbuild with critically important.

To their decision.

I noted when Astrazeneca announced their lease signing with us in <unk>.

Kendall Center, they talked about the sustainability characteristics of the project that we're going to build for them. So I think with some of our clients that is absolutely mission critical but I would not say that that exist across the board I think it is increasing and I think we're going to see more of it in the years ahead.

Coops anything you want to add to that.

It's growing is as mentioned by Owen with a client like Wellington entered with us with the Boston per screen skyscrapers.

Client partnership we've grown together and they become more committed and so have we.

But owens right. It's several of our top clients are getting more and more passionate about it and it's bigger criteria, but not across the board entirely but it is definitely growing.

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

Hi, everybody. Thank you a lot of good questions have been answered.

In your opening remarks.

You detailed recovery trends and thoughts.

Shared in your markets with admittedly some recovering faster than others.

But Meanwhile, southeast, Florida, Miami seem to be booming and we had net migration corporate relocations large scale job growth any interest in serving southeast, Florida with perhaps a small portfolio acquisition followed by your development prowess really gaining scale in what we.

See as a strong gateway market.

Yes.

We're excited about our gateway perimeter and footprint and we have gone into several new markets and businesses over the last three or four years, we went into L. A three or four years ago. It remains 1% to 2% of the company. We went into Seattle last year. We now have two buildings, it's probably 1% to 2% of the comp.

<unk>.

Although the life science efforts.

We've talked about that currently has 6% to 7% of our revenue and we've mentioned that we.

Believe we can double that over the next five years in the gateway markets, where we are so we have.

Tremendous growth opportunities as hopefully we've communicated on this call in the gateway markets, where we operate and at this point we are.

Not interested in expanding outside of those six markets.

There are no more questions at this time, turning the call back to Mr. Owen Thomas for closing remarks.

Thank you everybody for your interest in Boston properties and I Hope you enjoyed the one question system I made from a for a more efficient call. Thank you very much.

Sure.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect presenters. Please stay on the line for your post conference.

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