Q2 2022 Boston Properties Inc Earnings Call

July 27, 2022

Okay.

Good day and thank you for standing by welcome to be X P second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.

Ask a question during this session you will need to slowly press star one one on your telephone and wait for your name to be announced.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today to Helen hand.

Good morning, and welcome to Dxp's second 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 BSP has reconciled all non-GAAP financial measures.

The comparable GAAP measure in accordance with Brad G. If you did not receive a copy. These documents are available in the investors section of our website at Investor Dot E. F E 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 DXP 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 and <unk> filings with the SEC.

<unk> does not undertake a duty to update any forward looking statements.

I'd like to welcome Owen Thomas Chief Executive Officer, Doug Linde D, 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.

Ask that those of you participating in the Q&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 will cover Dxp's continued strong performance as demonstrated in our second quarter results Hi.

High level trends in the economy and in person work effecting DXP.

Current private equity capital market conditions for office real estate and Dxp's capital allocation activity.

Dxp's financial results for the second quarter reflect the continued positive impact of the post pandemic reopening of the major cities, where we operate and the increasing needs of our clients for securing high quality office space.

<unk> per share this quarter was well above the market consensus and the midpoint of our guidance and we increased our forecast for full year 2022, we completed one 9 million square feet of leasing more than a 160% of our leasing volumes in the first quarter and 140%.

<unk> of longer term average leasing activity for the second quarter.

This success can again 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.

It's clear over the last quarter that economic conditions in the U S and globally have deteriorated.

The key culprit is inflation, which as it continues to reach new highs set off a chain reaction of events starting with the federal reserve taking in signaling severe tightening measures interest rates rising across the yield curve.

Volatility in the losses in the public equity and debt markets and now increasing concerns that the U S economy may experience a recession.

This evolving operating environment as having several impacts to be xp's operating activities.

So our leasing activity has been very strong for the last few quarters, we anticipate headwinds at least in the short term.

Leaders are generally more reticent to make large capital allocation decisions such as the lease.

And then in an uncertain economic environment.

Before the summer season office usage by our clients continued to gradually increase there is increasing evidence that many businesses have a will tighten up in person work policies as economic conditions worsen.

Many of these companies also significantly increased their workforce during the pandemic without increasing their available space.

These factors should help offset at least partially the recessionary headwinds the space demand.

Our capital cost have increased which Mike will cover in greater detail due to higher interest rates and credit spreads and private market debt financing both for construction and existing assets are significantly more challenging to a range.

As discussed in prior quarters inflation has increased construction cost for new development.

So the cost for our launch development pipeline are essentially already locked in the cost of potential future development continues to increase.

We are not able to predict the depth or length of the economic of the current economic slowdown.

As a result, we are positioning DXP for relative success, regardless of the economy's trajectory by carefully managing the leverage while continuing to selectively invest in opportunities with the highest return versus risk characteristics.

In terms of real estate capital markets transaction volume for office asset slowed to $18 billion in the second quarter down 40% from the first quarter and flat to the second quarter last year.

The volumes are down liquidity remains for the higher quality assets that often trade to institutional buyers not requiring a leverage cap.

Cap rates have increased at least 10 basis points for the highest quality assets with limited leasing exposure and more for assets of lower quality <unk> with riskier income streams.

<unk> ability of financing is a key market driver.

There were several transactions of note in the second quarter and the Seaport district of Boston that developer Recapitalized $4 51, <unk> Street with a fund manager for $708 million. This.

This 480000 square foot building was fully leased and pricing was just under $500 a square foot and a 4% cap rate.

<unk> five by five staff Aviation Boulevard sold for $206 million to a fund manager. This 260000 square foot building. It's fully leased was extensively renovated in 2018 pricing was $790 a square foot and a five 3% cap rate and lastly in Sunnyvale.

Moffitt Green was sold to a pension fund advisor for $875 million.

The four building 720000 square foot complex is fully leased to meta and sold for just over $200 a square foot and a four 5% cap rate.

Regarding dxp's capital market activity, we closed on our previously described Madison Center acquisition in Seattle for $730 million and continue to selectively pursue acquisitions in our core markets with financial partners.

On dispositions, we completed the sale of VA 95, and older 11 building 733000 square foot suburban Flex Office Park located in Springfield, Virginia for $127 million, which represents pricing of $173 a square foot and a six 2% cap rate.

A lot of $19 81, and developed by BSP over time.

95 was an early and successful investment by DXP that no longer fits well with our corporate strategy.

We are making good progress on the sale of several additional assets in the Washington D C market, which we intend to use to fund the Madison Center acquisition through reverse like kind of exchanges.

If these transactions are successful and including two sales already completed this year total dispositions for 2022 could exceed $850 million, allowing DXP to both raise incremental liquidity and reallocate capital on a tax efficient basis from the Washington D C to the Seattle.

Markets.

Our development pipeline continues to deliver accretive projects to our in service portfolio and its consistently recharged with new starts.

This quarter, we delivered 325 main street in Cambridge at 414000 square foot building in which the office component is 100% leased to Google.

$418 million investment in the project is estimated to have a first year cash yield on cost of eight 7%.

In Reston, Virginia, we commenced the development of a mixed use project in Reston next comprising a four story 90000 square foot Jewel box office building at 508 unit highly or monetize residential complex.

Most of the residential units will be located in a notable 39 storey tower, which will be the tallest building in the rest of it.

DXP will own 100% of the office component and a 20% interest in the residential in partnership with an institutional investor <unk>.

This project is the next step in the full build out of our very successful rest of next development within Reston Town Center.

All of these movements with after all of these movements. Our current development pipeline of 11 office lab and residential projects as well as view Boston the observation deck at the Prudential Center aggregates, $4 2 million square feet and $2 6 billion of investment that we project.

Based on delivery date, and lease up assumptions to add more than $190 million to our NOI over the next five years at a seven 5% average cash yield on cost when stabilized.

Commercial component of our development pipeline is 49% pre leased.

So in summary, we had another very successful quarter with above expectation financial performance strong leasing success and significant investment in capital reallocation activity, Let me turn the call over to Doug Thanks, Dan and good morning, everybody.

So our last conference call was on May 3rd and over the last 86 days the conversations on the demand side of our business have really shifted from as Owen described returned to work in space utilization to the pace of job growth and job reductions as the impacts of the fed's actions move their way through the economy.

While leasing activity has slowed some across every market new lease transactions that had been in documentation during the first half of the year across all of our markets and not just with our tenants continue to move towards completion and our portfolio. None of our active lease negotiations have been scrapped and I think.

That's important relative to how we have seen other quote unquote dramatic slowdowns occur where people and companies have become much more cautious about what theyre doing.

There is however, less urgency with clients to make new commitments as.

As we consider our expectations for leasing completions in the back half of 'twenty, two and 'twenty. Three we are obviously factoring in the impact of the slowdown in the macro economic activity business performance and reduced overall demand for space.

The availability rate defined by third party brokers that look at the entirety of the market continues to appear to be very elevated across virtually every office market in the country and our markets are no exceptions.

Last quarter, we described the work that CBRE Econometric <unk> did on the availability and the premier asset in the urban markets.

The ability of space is at lower levels. Among premier buildings. These assets continue to get more than their proportionate share of market demand and there are still premier building micro markets like the back Bay in Boston or abuse space and class a buildings.

San Francisco that are still performing really well, meaning rents and concessions are equal to if not better than pre pandemic.

We have moved away from looking at the percentage of card access swipes relative to February of 2020, it seems to be talked about in the Wall Street Journal everyday and are now measuring the Dalian weekly utilization of six we've got pretty good data on data daily utilization and our Boston back Bay in New York City assets, where the customer makeup is.

Dominated by traditional financial services and professional services firms I E very few technology companies.

Where were seeing about 70% of the debt is being used on a weekly basis with about 50% of the employees using their space three four or five days a week.

Now when we compare utilization from 2020 pre pandemic. The striking difference is the daily difference, where we saw 80% of the employees coming in three or more days a week and early 2000 22019.

There was a ramp up as Owen said between March and June , but it really has plateaued as we began this summer.

Some business leaders, including a few renowned technology Ceos are becoming sterner and their message to employees regarding the importance of in person daily activities in traditional office space. This may lead to greater daily utilization as we enter the summer holiday season, we will be able to tell you about that as we look at our September .

Data when we talked to you in October in.

In the last week, we've seen announcements from some of the Tech Titans Amazon data that acknowledged that they're trying to figure out how theyre going to match their human capital with the utilization of physical space.

Changes in the labor market supply are also going to impact these decisions and as I said last quarter. I think this is going to be a journey in any industry expert that tells you. They know how business is going to use their space or what they even take remote or hybrid work actually means in 2024 is grossly overestimating their expertise.

Turning to our performance.

The second quarter was a great leasing quarter for DXP. This is now the fourth straight quarter of strong overall leasing activity in our portfolio to remind everybody beginning with the third quarter of 'twenty. One we signed 141812 in this quarter $1 9 million square feet of leases, so that $6 3 million.

We're feet of signed leases in the last 12 months.

This activity has occurred in the midst of the Delta variant the omicron variant remote work fits and starts and most importantly significant labor market headwinds.

As we speak to you. This morning, we have signed leases on more than 975000 square feet of in service vacant space that are not yet in our occupancy figures about 50% is going to commence in 'twenty two and the remainder in 2003 at the end of the second quarter. After completing the $1 9 million square feet of active leasing we have an additional.

Active lease portfolio in negotiation and the in service portfolio of one 3 million square feet 640000 square feet would cover currently vacant space. The most will go into service in 'twenty three and the other 660 involves currently leased space, so AK renewals or replacement tenants.

Known expirations for the remainder of 'twenty to total under one 7 million square feet.

Over the last four quarters, our occupancy has improved by 90 basis points and stands at 89, 5% as of June 30, we expect to see a slight decline over the next few quarters as we wait for all of these signed leases to commence.

Despite or even our less robust leasing expectations, we should see occupancy pick up slightly in 2023 from today's level.

The development portfolio includes $1 1 million square feet of signed leases that have yet to commence and that excludes the Liza $2 90, Binney Street and these buildings are not included in our occupancy figures this quarter.

And next will be included in the in service portfolio by 22 without the 200000 square feet signed Volkswagen leaf that won't commence until 'twenty three we.

We are going to see an increase in contribution from these assets, even though they will show a reduction in our reported in service occupancy.

A good portion of the vacancy in our Boston suburban portfolio is now comprised of space in buildings, we have actually vacated as we plan. Our next group of future life Science conversions, when we commence redevelopment these assets will be taken out of service.

So, let's talk about sort of my ranking of the markets.

Goes into sort of three tranches, the Boston CBD stands out as the most active of our portfolio and it is by itself in the truck fronts and buy CBD I'm really referring to the back Bay, because thats, where we have the majority of our portfolio.

The New York City, Reston, Virginia, really leases under 25000 square feet, San Francisco again smaller tenants leases under 25000 square feet and Washington D. C. D. C. CBD makeup sort of the second tranche and then suburban Boston, South San Francisco Mountain view, Princeton and West La makeup.

Baird.

Activity on the East coast is stronger than activity on our West coast portfolio. I think this is a function of the composition of customer demand, which has a much heavier.

Heavier weighting of market occupancy from traditional financial services and professional services firms on the east coast versus technology and media companies on the West Coast.

The big changes from the last quarter in our portfolio are the increased level of leases, we're actually working on in our D. C. CBD portfolio and then the slowdown we have seen in the Boston suburbs that'd be fair.

We completed over 220000 square feet of suburban office leasing in the suburban Boston in service portfolio during the second quarter, where the average market rent on second generation space was up 34%.

In addition, all of the life science leases, we were negotiating at EDI Winter Street were executed this quarter, we signed three separate leases totaling 72000 square feet in that building and it is now 97% leased with expected occupancy in September for the first tenant. We also signed two leases at 180 City point, our next life science deals.

Every totaling 140000 square feet. So if you include the $5 70, 570000 square feet on Binney Street, we actually executed over 775000 square feet of life science leases during the quarter and our Boston portfolio.

2021 was an extraordinary leasing year for life science and the slowdown we are now seeing in the office leasing activity is also being felt in the life science market and our suburban Boston suburban San Francisco and suburban Montgomery County portfolio. The biotech index <unk> is down significantly from a year ago and fewer <unk>.

Companies are getting funded which translates into a drop in active requirements relative to last year.

Note that the big pharma companies continue to have an appetite for new space in our markets.

Our early stage life science tenants and their investors with an eye to slowing down their capital outflows are also pushing more of the capital spend needed to fit out space to the landlord in the form of higher Ti demand.

In the Boston CBD, we completed 253000 square of leases the markup on that portfolio was 18%.

More than 450000 square feet of leases in negotiation or in the Boston CBD portfolio and that includes 200000 square feet of retail space that had been vacant.

In the San Francisco CBD, there have been a few more large tech tenants that have completed leases in sublease space, but the bulk of the activity on a direct basis has been north of market and it continues to be concentrated in the premier buildings with professional services and financial services firms. This quarter, we did nine leases totaling 96000 square feet in the CBD.

Folio and the leases had a second generation an increase of 37%.

We also completed two transactions in that review with an uptick of only 3% in other positive news on the West Coast. We completed a 60000 square foot lease for the top three floors that are vacant at Safeco Plaza in Seattle, when we purchased the asset in 'twenty. One our plan included a major repositioning of the public and amenity spaces at the <unk>.

<unk> Avenue and third Avenue Street plans, we have begun to introduce our repositioning plans for the building and this combined with our proven track record in creating great places and spaces allowed us to win over our current DXP West coast client the safe Coast Plaza.

Activity in the D. C region was pretty light during the second quarter with the eight office transactions totaling only 43000 square feet and eight retail transactions totaling 39, but as we look forward. We're negotiating over 270000 square feet of leases for the in service portfolio and 95000 square feet of leases at 2100, Pennsylvania Avenue.

<unk>, our newest development in D C.

And the New York region during the quarter. The most significant transaction was 125000 square foot extension at General Motors building that got signed in early April and I described last quarter. In addition, we completed another 168000 square foot of leases across the portfolio. There were some ups and downs in the lease to lease rent comparison, but together the portfolio had a slightly <unk>.

Positive under 1% Mark to market on the leases executed during the second quarter, we have multi floor at lease negotiations underway at 399 Park Avenue 601, Lex and last week, we signed a 71000 square foot to floor lease at dock 72, total least active leases in the New York City portfolio as of July .

<unk> was in excess of 260000 square feet.

We have had four consecutive strong quarters of office leasing we have incremental development deliveries hitting in 'twenty two that will be at the run rate in 'twenty three we still expect occupancy improvement in 'twenty three though at a reduced rate based on the slowdown in the economy. We continue as Owen said to feel really good ABA.

Our portfolio position in each market and our lack of meaningful lease expirations and 23, just over 2 million square feet puts us in a great position entering the year we.

We have a strong balance sheet with low floating rate exposure and near term maturities, though debt financing costs are going to be higher in 'twenty. Three in addition to his commentary on the second quarter performance, Mike will discuss our internal interest rate expectations and our financing plans Mike.

Great. Thank you Doug good morning.

So as Doug said this morning, I plan to cover the details of our second quarter performance.

And our full year earnings guidance, and while I don't plan to provide specific guidance for 2023 until next quarter.

I do want to discuss the potential impact of rising interest rates as well as the leasing commentary that Doug described and our development deliveries.

Overall, we had another strong quarter, our share of revenues and <unk>. This quarter are up over 10% and 13% respectively over the second quarter of 2021.

And we reported second quarter funds from operation of $1 94 per share that exceeded the midpoint of our guidance by <unk> <unk> per share.

The improvement mostly came from a combination of higher rental revenues stronger performance at our hotel and lower operating expenses.

Lower expenses drove <unk> <unk> per share of the outperformance and is primarily from the repair and maintenance category. We anticipate that many of these jobs will be completed in the back half of 2022. So the majority of this expense is only a deferral and will be incurred later this year.

Our one hotel, which is located in Kendall square in Cambridge experienced stronger occupancy and revpar growth that exceeded our expectations by <unk> <unk> per share the return of business and educational activity to Kendall square along with the college graduation season drove the improvement in hotel NOI back to.

The level that we saw in the second quarter of 2019.

And the rest of the portfolio, we experienced better than projected rental revenues of <unk> <unk> per share from timing of our leasing leading to improved occupancy and higher parking revenue.

Our share of parking revenue continues to grow as activity levels increase in our cities and buildings. This quarter our share of parking revenue grew by $5 million and is now operating at over 90% of its pre COVID-19 run rate.

The outperformance in these three areas was partially offset by a penny of higher than anticipated interest expense coming from both lower capitalized interest from changes in the timing of our development spend and higher short term rates impacting the interest expense on our floating rate debt.

Which includes our new $730 million term loan that we used as a bridge to acquire Madison Center.

As Owen covered and we're progressing well with our asset sales and anticipate paying down debt with the proceeds from sales later this year.

There are a couple of other items of note in the quarter first we closed a 10 year $185 million financing at a fixed rate of 443% on our hub 50 house residential joint venture in Boston.

New mortgage refinanced floating rate construction financing.

And second we recorded $6 6 million or four cents a share of other income for assigning our rights to a purchase contract on a building in Reston. This income was included in our guidance, but we don't expect it to recur. So you should not expect it in a run rate going forward.

Now I'd like to cover the changes to our guidance for the full year 2022, we've increased our guidance range for 2022, <unk> to $7 48 to.

To $7 53 per share that's an increase of <unk> <unk> per share at the midpoint from our guidance last quarter.

Our portfolio exceeded our projected in the second quarter and as Doug described we had a strong quarter of leasing activity some of which will result in earlier than projected rental revenues in 2020 to.

The result is an increase in our assumptions for our 2022 same property NOI growth by 75 basis points to now three 5% to four 5% over 2021.

We also increased our assumption for 2022 cash same property NOI growth by 50 basis points to five 5% to six 5% over 22021.

At the midpoint the increase in our same property NOI assumption at <unk> <unk> per share to our full year guidance.

We've also increased our NOI assumptions for the incremental impact from properties in our non same portfolio by about <unk> <unk> per share.

The increase was primarily from delivering our 400000 square foot build to suit for Google in Cambridge.

The building and tenant improvements were completed over a month ahead of schedule. So revenue recognition commenced earlier than we anticipated.

In addition, we've refined the timing of our asset sales activity, adding incremental income to our model.

Doug touched on the impact of rising interest rates since we last provided guidance. The fed has become much more aggressive in its rates policy in short term rates have risen dramatically.

30 day, LIBOR and one month terms sulfur have risen from approximately 60 basis points in April to just over 2.25% today in our projections assume they increased to 4% over the next few quarters.

We currently have approximately $1 7 billion of floating rate debt, representing a relatively modest 12% of our total debt. This includes $800 million and our share of floating rate debt and our joint venture portfolio. Our line of credit with current borrowings of $165 million and our $730 million term loan.

The increase in our interest rate assumptions result in higher interest expense in 2022 of approximately <unk> <unk> per share at the midpoint of our range.

So in summary, we are increasing our guidance for 2022 <unk> by <unk> <unk> per share at the midpoint. The increase is from higher same property NOI of <unk> <unk> higher.

Higher non same property NOI of three higher.

Higher fee income of a penny offset by higher interest expense of <unk>.

As we look out into 2023 and there is a few things you should consider when modeling our projected earnings.

First we anticipate that our interest expense will be meaningfully higher in 2023, while the pace of interest rate increases may moderate we expect the average interest rate on our debt portfolio will be higher in 2023 than it is this year.

We expect the size of our floating rate debt to remain relatively stable with repayments from asset sales later this year offset by funding our development spend with our line of credit in 2022 and 2023.

We also expect to refinance $800 million of debt that expires in the second half of 2023, and the long term fixed rate market.

The current average rate on the expiring debt is three 4% today, our borrowing costs for 10 year unsecured bonds is between five and a quarter and five 5%.

The market has varying views for interest rates in 2023, so it's anyone's guess, where they end up if you assume that short term rates continue to rise and our long term borrowing costs remains relatively stable. This results in an average 200 basis point increase in borrowing costs on approximately $1 7 billion of floating rate debt and $800 million of refill.

Lansing or about $40 million of potential incremental interest expense in 2023.

In addition, we also expect our capitalized interest to be slightly lower in 2023 due to delivering several large developments.

Second we expect our same property portfolio to continue to grow but likely at a slower pace than the 4% midpoint growth rate we assumed for 2022. This.

This year, we're benefiting from the recovery of income from our retail parking and hotel with the continued improvement in parking and the strong performance of our hotel. This quarter. We've now recovered over 90% of our ancillary income our annual growth and these income streams going forward should be more normalized in the office portfolio, Doug described our healthy backlog.

Signed leases and leases under negotiation the total over 2 million square feet that we expect will go into occupancy this year and next based on the timing of this activity and our lease rollover. We expect our occupancy will decline modestly in the second half of 2022, and then start to increase in 2023.

And third we expect that our development pipeline will add to our earnings in 2023, we anticipate a full year of income from our Google development in Cambridge, and we expect to deliver 2100, Pennsylvania Avenue in DC and 880 Winter Street in suburban Boston later this year. We also plan to open view, Boston, our 60000 square foot.

<unk> observation deck at the Prudential Center in the second quarter of 2023. These developments represent more than $1 billion of investment and an expected stabilized unleveraged return in excess of 8%.

Conclusion.

Had a strong second quarter performance and we've increased our full year 'twenty to <unk> guidance, we are projecting over 14% <unk> growth in 2022, and despite headwinds from higher interest rates and economic uncertainty our portfolio is well positioned with modest rollover exposure and growth from our pipeline of development.

Lastly, we're looking forward to hosting you at our Investor conference to be held in Boston on September 19th and 20th.

The conference will be a fantastic opportunity to hear from the broader BSP team learn more about our current and future strategic initiatives and tour some of our Boston area properties. If you have not received an invitation please reach out to our Investor relations team.

That completes our formal remarks, operator can you open the lineup for questions.

Thank you.

At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to slowly press star one one on your telephone and wait for your name to be announced.

Please standby, while we compile the Q&A roster.

I show. Our first question comes from the line of John Kim from BMO Capital markets. Please go ahead.

Thank you.

Thank you Hey, Doug you mentioned on your commentary.

San Francisco is holding up really well.

And in the market among smaller tenants can you just provide some more commentary on the makeup of those tenants looking for space and also the impact of sublease space in the market, including the sales force compensation when you're building.

Sure. So so again.

I described that the high end Premier space is really where the market has held up very very well and those tenants are.

I would describe as smaller to mid sized professional services asset management legal financial services company. So hedge funds money manager as private equity firms law firms consultants et cetera, and none of those tenants are looking at a sublet of our floor at 50, Fremont, which is the bill.

<unk> Youre, describing that Salesforce has actually put its actually not sublets basically they own that building that's actually direct space in the market.

Thank you.

Our next question comes from the line of Jamie Feldman from Bank of America. Please go ahead.

Great. Thank you and good morning.

I guess, just thinking big picture Youre.

Your comments about some markets seem like they might be coming back faster.

You are growing in Seattle.

As you think about the future.

Are there certain markets, we are much more cautious about putting incremental capital to work.

And some that you are more aggressive putting capital to work here as you just think about how return to the office will work out and so.

Usage of work out in kind of all of them.

The changes we're seeing in the market today.

Yes, so good morning, Jamie it's Owen.

Look I think our perimeter is established in the six markets, where we operate and as we look at opportunities there very much driven from the bottom up so what deals are available.

Where do we think there is an attractive return versus risk trade off and at some sometimes thats in acquisitions that we have been recently doing with partners and sometimes thats in launching a new development. So.

I think so you have seen us reallocate capital this year from the downtown of Washington D C to Seattle.

That's certainly occurred in 'twenty two in terms of the future and again, it's going to be more bottoms up based on the opportunities that we see it is harder to predict as Doug described in his remarks, we are seeing stronger leasing activity in Boston in New York and in the suburban Reston, Virginia.

<unk> than were seeing on the West coast.

Thank you.

Next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.

Hey.

Good morning, good morning out there.

Good.

So question, just putting everything that you've said together I think.

If I heard the comments correctly generally the office leasing is slowing but premium buildings like the ones. You guys have are continuing to win more than their fair share of leasing and it didn't sound like you expect any slowdown in the robust.

Four quarters of successive leasing that you have it sounded like that leasing is good Mike you outlined 40 million more of interest expense for next year, but in outlining that billion dollar, 8% plus yielding pipeline that's going to be on track to be in service next year, that's an $80 million on the positive so just.

It altogether is the takeaway that generally the office market is getting tougher, but DXP is winning more than their fair share and because of the developments.

Way more offsetting ryzen interest expense, so net DXP should be better positioned or is that not the right takeaway and that we should think about.

More headwinds for 2023 and from what's going on.

So let me let me talk about the in service portfolio, and then I'll, let Mike and Owen described sort of the other components. So on the in service portfolio Alex.

I think it would be fair to say that we have a constructive but a more.

Moderating view on the leasing that we will do between now and the beginning of 2023.

And we are assuming the economy is going to continue to be less strong than it is today.

That doesn't mean that we will we will see any meaningful change in our portfolio outcome. We have some leases that are rolling over that are higher and we have some reaches letter rolling over that are lower and then the real question will be as we always talk about whether there are incremental pieces of downtime on spaces that we have lease where we havent started revenue.

So so net net we feel I would say that next year than this year relative to our same store portfolio are going to be pretty consistent.

Mike do you remember John talked about interesting development I think the one thing that you got to remember about development Alex is.

All of it is not going to be stabilized day, one right. So 80 80 Winter Street is delivering this year and it will be.

Stabilized day, one because it's 97% leased I think all the tenants are going to be in by the first quarter next year.

But 'twenty 110.

61% leased currently as Doug mentioned, we've got a number of leases in the works, which we'll take that into the mid 80 stroke our percent lease perspective, but most of those leases are going to start until mid to late 'twenty three.

So that building is not going to be stabilized probably until 'twenty four I would say and I think thats, what our disclosures and the other thing.

I think thats important is view Boston.

We believe it's going to have a ramp up period. So.

It's a little bit harder to estimate how long the ramp up will be and we're highly confident that it's going to have a very strong return.

When it stabilizes, but.

Operator that we have that we've been working through believes that there will be kind of a few year ramp up period. So again it stabilized.

The return is going to be a year or two out.

So Alex kind of pulling all this together what you're hearing from US is that we are in a less certain economic environment today than we certainly were last quarter.

2023 is a long time from now and given the uncertainty it's very hard to predict so what we're trying to provide is what are all the tradeoffs here what could be up what could be down and.

We don't know the magnitude of those yet and it's dependent on market forces. So Doug described the leasing clearly the slowdown in economic activity as a headwind to leasing absolutely. We believe that our premium assets will get more than their fair share. So that trend continues capital costs will be higher how much I don't know.

Pins on what your assumption is for interest rate and clearly the developments will add to our result.

Okay.

Thank you and I'm sure. Our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

Hi, everyone. Good morning.

The newly formed JV can we get some more details on the 39 story, new development tower in Nova and and specifically on the JV structure.

So really hoping for a private market read through.

So I guess the question would be.

Are you seeing deep interest from potential JV partners, Hi, sovereigns pensions other institutional capital does it seem ready and willing here to partner up on class a office and <unk>.

How deep is this pool versus previous cycles, and maybe markets as well.

Well as assets. Thanks.

Okay. So let me break that question down into some component parts. So let's start with the interest by institutional investors in commercial real estate and then we'll get into the JV in Reston next.

The answer to your question there absolutely is interest by institutional investors in office and in this case by the way residential real estate I think the <unk>.

Interest is probably higher for the residential but we continue to look at new investments and developments with the partners that we have done deals with over the last year and a half and we continue to look at new things. So there.

There is clear interest in office real estate.

Moving specifically to this joint venture this is about capital allocation the yields from the resident from a residential development are generally materially lower than an office development and we are being discriminating with the use of our capital and trying to put it in the highest deal up yielding opportunities.

So in this case, we decided to bring in a partner for 80% we owned 20%.

The office component of the development is higher yielding so it brings the whole yield from the project to us up and there is some compensation that we receive as the manager of this development, which augments our returns. So we're putting we're putting out less capital we require less capital to make the investment we are doing the development.

<unk> and the returns for the capital that we have invested are higher and Thats why of why we're doing it and I think you should expect that DXP will continue to work with capital partner certainly on office acquisitions, and possibly on developments sparing.

Sparingly.

Thank you.

And I show. Our next question comes from the line of Steve <unk> from Evercore ISI. Please go ahead.

Thanks, Good morning, just to kind of circle back on the leasing I guess, we've seen big tech kind of hit the brakes pretty hard on leasing and certainly they've kind of frozen they're hiring it's unclear I guess when that comes back and Doug we've seen certainly the biotech industry kind of hit the brakes on leasing I guess.

Given the macro uncertainty.

I guess at what point do you need to see those things pick up from a timing perspective to be able to move the occupancy needle forward in 2023, I realize there is still time, but I know these things take a while to get the leases in place get signed so I guess I'm just trying to think through the renewals for next year, the new leasing activity, that's slowing and we.

What kind of pressure that maybe puts on the occupancy build in the 'twenty three.

So Steve you asked an interesting question, because if I actually parts down where our availability is.

Other than northern Virginia.

Where we actually have operating assets with bacon floors that would likely be what I would refer to as sort of Turkey, because it's either cyber security companies or our web services companies or defense contracting companies, which have a technology bent to them.

The vast majority of our portfolio is really in terms of our availability.

As in our CBD assets, which are not primarily geared towards technology tenants AK Embarcadero Center is a very different asset then as an example, salesforce tower or 680 Folsom Street. So we are not really I would say from a portfolio perspective.

Very focused on what's going on from a technology perspective relative to what we think we can achieve in 2023, but what I'm not saying is that we're not immune to the fact that the technology sector has been a meaningful contributor to the growth in office absorption in every one of our markets.

And so it's hard to see the market improving in any material way without there being a meaningful change in technology companies desire to take additional office space. So I think that we can serve above the fray relative to occupancy, but we're going to be impacted by the over.

Raul market dynamics that are going to be intrinsic to lack of additional absorption because those tenants are just simply not aggressively looking for space.

Thank you.

I show. Our next question comes from the line of Michael Griffin from Citi. Please go ahead.

Hey, it's Michael Bilerman here with Michael Griffin.

Doug I don't know if you wanted to take this one I'm just thinking about sort of strategic direction of the company just from a property type perspective.

As I think about the company is obviously over index to oftentimes what you are or is your primary property type in.

The most high quality buildings in the most core urban coastal markets, but the company has had great success over the years of developing and selling.

Times, retaining whether its residential or hotel or retail and obviously all the life science stuff that's been core to the company for decades.

How are you thinking about given this economic environment that we're in today and if you will.

Look at the residential reports or the retail reports or even the hotel reports that are coming out.

There is not as much of negative drag or uncertainty to which you were talking a little bit about from an office perspective.

So is there any thought to perhaps going deeper from mixed use or alternate property type relative to offense, whether that be through development, which youre already starting to do or maybe through acquisitions and just how are you and the board sort of thinking about the next chapter of <unk>.

DXP and could that be different than from where we are today.

Yes.

Michael Doyle and good morning, so to answer your questions.

Our focus on office will obviously continue to be very important going forward, but.

Let me make a couple of related comments first of all.

We have increased our development of residential assets over the last few years and I think that will continue.

Talked about some of the yield challenges that we have experienced with that but we also have.

Capital partners that we can work with so I would anticipate that our residential our contributions will grow.

We have as you know also.

Emphasized more our abilities and assets that are geared towards the life science market and that segment is about 6% of the company and we've said we think we can double that over a five year period of time, and we continue to develop new assets and grow that segment of our <unk>.

So I think that will continue to grow as a percentage.

And then I think the other thing that we keep talking about it I think is critically important is that I think you have to bifurcate the office business between the premium assets and the balance of the market and the premium assets are something like 15% to 20% of the total assets. We if you look at our portfolio.

The vast majority of the assets are in the premium segment of the market and we continue to have dialogue with major corporations about moving into new office developments that were doing so.

These buildings are new they have the strongest sustainability characteristics and there what the clients that we want to serve want so I do think that the premium segment of the office business will continue to be rewarding to our shareholders over time.

And Michael I would just add a couple of things so the first versus that.

We continue to and have moved away from what I would refer to as greenfield ownership of assets, meaning we've looked at our Boston.

Suburban portfolio and said, which are the builders can we convert the life science, because theres a lot more life science demand. We believe going forward then there will be office demand a suburban locations you saw us sell our VA 95 assets and I would say that we will likely have a larger overall sales portfolio in 2000.

<unk> 22 in 2023 than we had in 2018, 2019, and 2020 and that will to some degree continue to sort of position the portfolio to be even more select about what it owns and where it owns it and what we believe the characteristics of those buildings are so we may get slightly smaller relative.

To the kinds of assets that we own today versus what we will own as we move into the next number of years and I would say that that's a conversation that the board has every single time, we get together.

Thank you.

I show. Our next question comes from the line of Ronald Camden from Morgan Stanley . Please go ahead.

Hey, just I just wanted to zoom in on the spreads this quarter given sort of there was a big bifurcation by markets.

Boston L a Seattle, San Francisco doing 20% plus.

Versus New York and D C sort of in the 2017 to 16 can.

Can you provide sort of any color of what's going on there whats happening in the market and how should we think about that.

Going forward in terms of the lease roll call. It over the next 12 months.

Yes, so I just I wanted to sort of step back and just provide provide you with this.

Commentary that I've made a number of times over the years, which is the data that we provide in our supplemental are leases that are becoming revenue contributing with a new lease this quarter and many if not all of those leases were done historically a much longer timeframe has been what's going on.

Today. So as an example, we did a lease in Washington D. C. In 2019 with a tenant where the rent went down by 15% was a five year lease and there were no ti, but the new rent is commencing this quarter and so we're showing that rent.

Downturn this quarter when I provide you with the market commentary each quarter for the leases that were signed and executed this quarter I'm, giving you sort of the real quote unquote mark to market that is occurring.

At the time, so it's impossible to look historically at the at the data that is in our supplemental and say well that's showing you what's going on in the market at that time.

Those are just those are historical numbers that are that are based upon what where our revenue contributions are so again, so that I gave you. The reason for the stuff that's going on in.

In Washington D C and similarly, we did a large lease with a tenant at 601 Lexington Avenue in 2000 early 2020, where they took space from Citibank that Citibank was expiring out of and the rent was down and so that was that was the logic on that transaction and again as I've said time and time again or.

New York City portfolio is.

Very sort of.

Chunky on the ups and the downs and this quarter again, I sort of aggregated altogether and set all the leasing that we did this quarter, we were basically flat it was.

3% positive so so and that's because there were some ups and there was some down.

Thank you.

And I show. Our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.

Thanks, Good morning, Owen you spoke a little bit about the transactional market in your prepared remarks, and how overall volume is down but there's still good demand for high quality assets I'm, just trying to reconcile that with your expected sales in D C, which I'm assuming are not some of the best properties in your portfolio, maybe more similar to VA 95.

I guess I'm, just wondering what's giving you confidence in completing those sales and how much flexibility do you guys have with respect to pricing on those assets are you committed to selling them or is there a price where maybe it just doesn't make sense.

Yes.

Well as I mentioned there is <unk>.

<unk> liquidity for office real estate.

Financing buyers being able to.

Arrange financing our buildings that have existing financing on them I think are critical for success.

And we are at various points along in the execution of the sales of the assets that we are attempting in D. C. And we are encouraged by our progress clearly, we're not going to sell or any price.

We don't need to sell these assets wed like to and reallocate the capital from DC Seattle So.

But again I do think there is good demand for higher quality buildings, if financing can be a range and more needed and Blaine I'd say the somatic comment that Owen made during his prepared remarks was these are all buildings that are selling at what I would say are sort of consistent.

Cap rates and they are all well leased with long lease terms and the assets. We are marketing in the greater DC area are generally buildings with long lease terms.

With very little if any exposure to the market over the next 10 plus years. So I think they will.

We expect them to sort of have a similar expectation in terms of the execution because of the nature of the cash flows in those assets.

Thank you.

I show. Our next question comes from the line of Nick <unk> from Scotiabank. Please go ahead.

Thanks, I just wanted to go back to the.

The guidance in the leasing assumptions.

Feels like the first half of the year played out a little bit better than expected in terms of leasing volume I mean, youre raising guidance on a same store because of some of this yet.

Overall occupancy number that you have in guidance hasn't changed for the year you just tightened up the range. This quarter. So just wondering how much of that is due to again sort of just being conservative in the back half of the year or you didn't speak of some level of known explorations.

And I'm wondering if that maybe shifted on you were you. There were some tenants you thought might renew and eventually there decided to not and that sort of prevented you from raising your occupancy guidance. This year.

I think your first comment was the accurate one which is we are I would say slightly less exuberant about leasing activity for the remainder of the year.

So if you look at the data that I provided I basically said look we have 1.7 plus million square feet actually slightly less than $1 7 million square feet of leases expiring.

I gave you a visibility on almost that much leasing thats been done the issue is some of it in 2022 and some of it is in 2023, and then I said, we by the way.

That's what we have active I will tell you that by active portfolio.

Not going to simply be all that we do between now and the end of the year or what we do at the beginning of 2023. There are things that will happen that I don't know about right now we're a big company that does millions of square feet of leasing every year and there are transactions that will pop up that will also be part of the calculus here again.

I don't know likely win those rents will commence from an occupancy perspective. So that's why I would say, we're being I don't think we're being overly conservative I think we're being realistic relative to sort of not having as much visibility on the rate of increase that as we had as we were looking at the volumes when we talk to you.

<unk> 86 days ago, where there was a lot more going on in the markets in general and in our portfolio.

The other thing to point to Nick as we brought up the bottom of the occupancy, but 50 basis points.

And thats related to the activity that we're seeing in the leasing that we've seen this quarter.

And so that gives us the confidence to increase that and Thats part of the reason we increased our guidance is that we knew that we had some uncovered rollover in the back half of the year, we knew that last quarter, we know that this quarter, but.

But we covered more of it now because of the activity that we had this quarter.

So the bottom end was brought up because we don't think we're going to lose as much of that occupancy, but theres still some some expires in suburban Boston and there is a few floors of 599 less and Theres a couple of floors at GM.

Small amounts of space that are coming back to us that aren't yet covered and we don't believe will be covered with leasing we will do later this year and thats kind of driving what we believe the short term increase in vacancy we will see later this year.

Yes.

Thank you.

Our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.

Good morning, Thanks, a lot for taking my question, it's more of a philosophical question I think.

Several quarters, you've talked about how the focus is perhaps more centered on leasing rather than rent growth given how that flows through the financials. I guess my question now is how do you think about the tradeoff given the macro that you described and then along the lines I guess.

How can you lean into leasing even more I guess in sort of this.

Certain macro environment.

So I guess I'll I'll describe it in the following ways, so first and foremost.

We have.

Great portfolio of buildings that generally as I said earlier and Owen Owen sort of reiterated get more than their fair share of market demand.

However, as I also said we are we are not immune to what's going on in the market and so we have to be more competitive in certain cases, because the market is is desiring more.

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