Q3 2022 Boston Properties Inc Earnings Call
Good day and thank you for standing by welcome to be expertise third 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 to ask a question. During this session you will need to press.
Our one one on your telephone you will then hear an automated message advisor in your hand is raised.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your first speaker today, So Helen Hahn Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Dxp's third quarter 2022 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K.
Supplemental package. He has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy. These documents are available in the investors section of our website.
There's got to be F. P. 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 B S. P believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that its expectations will be attained.
Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in yesterday's press release and from time to time M. P. F E filings with the SEC.
He does not undertake a duty to update any forward looking statements.
Like to welcome Owen Thomas Chairman, and Chief Executive Officer, Doug Lindy, 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&A portion of the call to please limit.
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I'll provide a brief update to my remarks at our recent investor confidence on the economy returned to office dynamics and the premier workplace market.
I'll discuss private equity capital market conditions for office real estate B.
<unk> capital allocation activities and provide a reminder, from the investor confidence of <unk> strategic shifts given current market conditions.
R. S F O per share this quarter was well above both market consensus in the mid point of our guidance and we once again increased our forecast for full year 2022.
We completed 1.4 million square feet of leasing just below her longterm average leasing activity for the third quarter.
And year to date, we'd least 4.6 million square feet, which is meaningfully above our long term leasing activity for the first three quarters of the year.
This success is due to our team strong execution and.
Increasing returned to the to the office behavior by workers and the strong preference of our clients for Premier workplaces, which are the hallmark of Dxp's strategy and portfolio.
Also in the quarter B X P reinforced its E. S. G credentials by earning the highest five star rating in the 2020 to grasp assessment as well as its 11th consecutive Green Star recognition. We also commenced a partnership with the New York State Energy Research and development authority as part of the Empire building.
Challenge a public private effort to support low carbon retrofits in high rise buildings in New York City to reduce missions to reduce emissions and combat climate change as.
As a company we remain focused on climate action and are on track to achieve carbon neutral operations in 2025.
Now I covered in detail at B X PS investor confidence in September our views of economic conditions client preferences in in person work behavior and market's statistics for Premier workplaces.
So in terms of what's new inflation. Unfortunately remains resilient the fed remains committed to taming it through higher interest rates and as a result markets remain volatile.
Workers continued to return to the offices are bad swipes grow each week led by non technology industry clients.
Premier workplaces as defined by CBRE represent only 17% of the office inventory and the five C. B DS where we operate in this segment continues to outperform the broader off office market at.
At the end of the third quarter vacancy in these five C. B DS was 9.1% for Premier workplaces, and 14.8% for the rest of the market.
Net absorption in the third quarter was negative 200000 square feet for Premier workplaces, and negative 1.7 million square feet for the rest of the market net.
Net absorption for the last seven quarters was negative 900000 square feet for Premier workplaces, and negative 17.3 million square feet for the balance of the market, obviously, a very significant difference.
Given that 94% of the XP CVD space competes in the Premier workplace market. We believe it's increasingly necessary to understand operating trends for the premier workplace segment of the market to assess and forecast or leasing performance.
In terms of real estate capital markets transaction volume for office asset slowed to $18 billion in the third quarter down 11% from the second quarter and down 41% from the third quarter last year we.
We expect transaction volumes to decline further, particularly in the next few quarters that financing is increasingly expensive and difficult to arrange and many institutional buyers have withdrawn from the market due to real estate over allocations caused by the denominator effect and or <unk>.
View that more attractive entry points for new investments will be forthcoming in future quarters.
There are however, where several transactions of note in the third quarter.
In the office sector. The most significant transaction with our sale of six Oh on Massachusetts Avenue in Washington D. C for $531 million to a non U S property company.
The 480000 square foot building is 98% leased and sold for a 5.1 per cent initial cap rate and 1100 and $10 a square foot.
In New York City, 13, 30 Avenue of the Americas sold for $320 million to a private investment firm. The 536000 square foot building is 85% leased and sold for just under $600 a square foot and a 5.7 per cent cap rate.
And the lab sector. There were four significant transactions completed in Cambridge, The Seaport district of Boston in South San Francisco for a total of over $1.6 billion pricing.
Pricing ranged from a 4.22 of 5.5 per cent cap rate and approximately 1200 to $2200 per square foot.
The X P was acted this quarter with capital allocation, we completed a significant transaction with biogen involving two adjacent buildings and our Kendall Center project. We acquired 125 Broadway of 271000 square foot lab building that Biogen has agreed to lease back for six years.
For $592 million, which is 2000 and $185 a square foot.
Immediately adjacent is 300 Binney Street 195000 square foot office building owned by B X P. At least the Biogen for six remaining years, we terminated biogen's lease will convert the building to lab use upsized to 240000 square feet and entered into a new lease with the <unk>.
<unk> for 15 years at significantly higher rents.
The total cost to redevelop 300, <unk> Street is $210 million in the building will be delivered in the fourth quarter of 24.
For both investments the projected blended initial cash return is over 7%, including the acquisition cost of 125 Broadway and the redevelopment cost foregone Biogen rent an initial cost basis for 300 <unk> Street.
The projected blended gap yields are materially higher given the three per cent annual rent escalations in both the Biogen and Brode Institute leases.
We also continue to advance pre development work for 290, Binney Street 570000 square foot lab development that has 100 per cent preleased to Astrazeneca and our 121 Broadway residential tower also both located in Kendal Center <unk>.
Assuming all Predevelopment hurdles are achieved we expect these projects will commence in early 2023.
Strategically we are making major steps forward in our life science ambitions by acquiring developing and redevelopment at attractive yields significant lab space. It Kendall center, one of the leading preferred locations for life science clients in the world.
We also just announced an agreement to acquire a 27% interest in 205th Avenue one of the top five premier workplaces in the Midtown South Submarket of New York City located directly on Madison Square Park.
The building comprises 870000 square feet and is 93% leased to leading clients such as Tiffany Gray advertising in Italy.
The acquisition price for our interest implies a building valuation of one point O $5 billion, which equates to just over $1200 a square foot and a 5.3 per cent of initial cap right <unk>.
The building has a 600 million dollar first mortgage that matures in 2028 and bears interest at a fixed rate of 4.34%, which is well below current market rates.
The X P will assume management and leasing from the current developer who is monetizing their interest in the asset.
We are entering into the existing partnership and as a result will grow our relationship with J P. Morgan Global alternatives, leading real estate investment adviser this investment was sourced off market.
Strategically we are excited to grow our presence in Midtown south and add such a leading premier workplace to the Bx P portfolio.
We remain active with dispositions as well given the recent announcement of our contract to sell the avant a 15 story 359 unit luxury multifamily building in Reston, which we built in 2013.
Sale price is $141 million or 300 $393000 per unit, which represents a 4.3 per cent cap rate on current in Hawaii.
We also sold a 10 acre land parcel in Loudoun County, Virginia for $27 million to a data centre developer <unk>.
Both sales along with six O one mass Av will be like kind exchange with the Madison Center acquisition or previously described strategy to reallocate capital from the Washington D. C region to Seattle is now complete having sold assets totaling approximately $700 million to fund the 730 million dollar.
<unk>.
We do not anticipate any further sales this year and our total dispositions in 2022 2022 is projected to be $864 million.
Our development pipeline remains robust as we added this quarter, a 104000 square foot building at 140 Kendrick Street in need of math that we are redevelop into net zero carbon performance for Wellington management.
And the 118000 square foot 760, Boylston Street retail building at the Prudential Center in Boston that is also fully leased or current development pipeline of 13 office lab residential and retail projects as well as view Boston the observation deck at the Prudential Center aggregates 4.4 million square feet.
And $2.7 billion of investment that we project based on delivery date and lease up assumptions to add nearly $200 million to our NOI over the next five years at a 7.4% weighted average cashed yield on cost one stabilized.
The commercial component of our development pipeline is 52 per cent preleased.
These figures exclude the positive contribution of 300, Vinnie Street, which will be added to the development pipeline in the first quarter of next year.
In closing I'd like to reiterate the strategic shifts B X P is executing as a result of the pandemic and current current economic slowdown.
We will continue to embrace our leadership position in the premier workplace industry and leverage our strengths and portfolio quality client relationships development skills market penetration and sustainability to profitably build market share.
We will pursue attractive asset class Adjacencies, where B X P has a track record of success, which today or life sciences as evidenced most recently about the transaction with Biogen and multifamily development.
We will continue to raise the quality bar for our portfolio and actively recycle capital by selling assets as we did in 2022 subject to market conditions.
And lastly, given rising interest rates and financial market turbulence, we will prioritize risk management by actively managing liquidity investing more extensively with joint venture partners to manage our debt levels.
And being highly selective in new investment commitments.
The near term challenges in the capital markets confront B X P. In our industry. We are confident our platform strategy and team will build market share and continue to create value over the long term.
Let me turn the discussion over to the X. One good morning, everybody. So I'm Gonna pivoted discussion this morning to our 2023 earnings guidance we.
We expected and saw it and number notes last night. So obviously this is of critical importance to everybody and I think we outlined a bunch of the critical variables in the press release and Mike is gonna provide some commentary on the most significant components in his remarks I am Gonna focus my remarks on our in service operating portfolio.
Which is really driving our same same property expectations, but I'm gonna start with what happened in the third quarter, because I think the trends that I'm, describing you are going to be relatively relevant to uhm. Our forward assumptions as we think about 2023.
So in the third quarter was another you know really good leasing quarter for B X P. It's now the sixth straight quarter of strong overall leasing activity in the portfolio just to remind everybody beginning in the second quarter of 21, we signed $1.2 million 1.4 million 1.8 million 1.2 million 1.9 million in this quarter 1.4 million square feet.
Lisa So that's about 6.3 million over the last 12 months, obviously deceleration between the second the third quarter from the second quarter.
We have successfully executed leases with clients in the midst of the Delta variant the omicron variant remote work fits and starts.
Significant labor market headwinds and now what is surely a pullback in business activity.
The Boston C. B the letter activity this quarter with about 260000 square feet of leases, including some renewables expansions and the addition of new clients into the portfolio the mark to market on the previously lease space and again I'm, giving you data on the leases that were signed this quarter not leases that earner supplemental which may have happened.
Two or three or four years ago, but the mark to market on the spaces. This quarter was 15 per cent popular.
The least at 300, <unk> Street, Uhm dominated or Cambridge activity this quarter and because we are moving from a 2011 office leads to a 2024 lab lease the markup is over 250 per cent. So it's a very very significant increase.
The suburban 128 work space market remains slow with all of our leasing under 10000 square feet other than a 55000 square foot renewal that we did there the markup was about three per cent.
This was also an unusually busy quarter for a retail space, including the hundred and 18000 square feet at 760, Boylston will be completed 181000 square feet of retail leasing in the Boston reason this this quarter.
We didn't complete any new life science leasing in the wall them Lexington portfolio, where we have our our buildings under construction. The life science market has seen a significant slowdown we have available space or both of these developments that we're aggressively marketing as we discussed at our Investor day. There are a number of other suburban buildings, but we have been.
Vacating in order to be in a position to redevelop them as lab buildings. These buildings are not yet under development. So they reduced the portfolio occupancy that were that were showing at the present time, we have not made any commitments to begin any additional developments that these assets, but we are vacating these buildings intentionally.
In New York City, we completed 250000 square feet of leasing much like Boston in Manhattan, We saw a number of renewables expansions in new clients during the portfolio the mark to market on the second generation space that was recently occupied was down about 4%.
New activity in New York City was often September , but we have seen a meaningful pick up during the month of October as a case in point on September 30th we had no active discussions on 120000 square foot block of space. It's 599 Lexington Avenue today, we have three active proposals covering over 70000 square feet of that space.
We completed another Lisa Doc 72, this quarter, but we work relinquish space on October 1st that will mute the contribution to occupancy as you look at it next quarter and Princeton, we completed six transactions with professional and financial firms totalling 40000 square feet with an increase of rent of 3.5%.
In D. C. We completed for leases for about 100000 square feet. This is in CBD, including one lease renewal with a mark down of about 12% and I remember in D. C. The least structure has two to three per cent annual increases for leases that are generally 10 to 15 years. So in virtually every renewal the last.
B or I mean, 10 to 15 year lease with a two and a half to three per cent increase his lessons starting range of the newly so that's typically what we see all the time, they're small financial and professional service firms made up the activity in Northern Virginia, where we start about 50000 square feet of activity in the largest lease was only 15000 square feet.
Mark down was about 3.5% on that port, but we continue to make progress at 2100 pen where we have 90000 square feet at least is under negotiation that will bring that asset to 80 per cent Lee.
Finally in San Francisco. The story is the same as the other markets, though the lack of technology demand as more impactful on overall market segments. We completed eight CBT leases all under 11000 square feet with professional services and financial clients.
<unk> was flat with an average starting rent of about $100 a square foot down.
Down in the Valley, we did fifth 92000 square feet with three renewals and added one client.
The 60 basis points of occupancy lost this quarter was in line with our comments and expectations from last quarter. These three assets were removed from the portfolio six O. One that theft, obviously, which was sold in 100 per cent least 140 Kendrick Street building, a which is 100% leased it isn't redevelopment and a large box at the Prudential Center 760 boil.
And which is 100 per cent lease and and redevelopment.
<unk> 350000 square foot 20 year lease renewal at 599, Lex come in this quarter and they relinquished 120000 square feet. The block I was describing biogen moved out of the first portion of 300, <unk> Street, which will eventually grow by 40000 square feet. When it's converted to lab and is fully released.
The partial termination is reflected in our statistics not.
<unk>, the new lease Biogen will vacate the rest of this hundred and 95000 square foot building in the first quarter of 2023, So we're gonna lose occupancy on that as we redevelop it for the long term addition of a liability at Santa Monica Business Park, We had a post movie <unk> operation that completed their use of space this quarter.
<unk> and they moved out.
Our second generation <unk> quarter, if you look at our F. A D. In particular include the Sheerman transaction, if 599 legs. They converted a bunch of their free rent to T I and the entire cost for that 20 year 350000 square foot lease as in the fab This quarter, which is why the fab looks unusual.
The global Central Bank tightening has resulted in soften demanded all the markets while towards continue and leases under construction move forward under negotiation move forward. There was less urgency from clients to make new commitments, we have conversations with potential clients during space tourists with knowledge that economic uncertainty is <unk>.
Impacting space decisions as we consider our expectations for leasing completions in twenty-three, we're factoring the impact of a materially slower economy software business performance and reduce demand for space. We expect the bulk of our leasing will continue to come from small and medium sized professional in financial services firms.
So what do we think about twenty-three, let's start with what we know we have signed leases on more than 886000 square feet of in service of Bacon space that are not an occupancy figures.
Approximately 700000 will commence in 2023, the remainder in 2004 at the end of the third quarter, we had active leases under negotiation in the in service portfolio of about 800000 square feet 270, and that would currently covered currently bacon space that will go into service in 2023, the rest of us.
On our near term explorations in some we have visibility on about a million square feet of currently vacant space and about 500000 square feet of expiring leases.
To to the remainder of 22, and 23 told us about 3 million square feet of explorations.
This would mean, we need to lose about 1.8 million square feet with 2000 twenty-three commencement still remained flat.
We typically least more than a million square feet on a quarterly basis, obviously I describe what.
[noise] happened over the last six quarters with a Lois was about 1.2 million. The issue is the timing at least commitments on Bacon space. That's the big wildcard. We just don't know if we sign the lease whether the space is going to be in a shell condition or in as is condition and whether that at least is gonna commenced in 2023 or 2024.
What we said last quarter remains true we will see a slight decline over the next few quarters as we wait for all sign leases to commence but in spite of our less robust leasing expectations, we still anticipate an improvement as we move into 2024.
Tour activity continues to be strongest in the Boston CBD in New York City markets, where the concentration of technology users at least pronounced and the waiting a market occupancy leads more heavily towards financial and professional services firms <unk>.
Consistent with my earlier remarks on the third quarter small and medium size financial and professional services firms continue to be the most active portion of our portfolio as those tenants clients look for Premier Workspaces.
These uses are also active though to a lesser extent in D. C. San Francisco interesting, we have all seen the announcements regarding hiring freezes job reductions to retraction inexplicit job cuts that are occurring on a consistent basis from many of the large technology employers in some cases these announcements coincide with decisions to put space on this.
Sublet market.
It's hard to envision much technology related demand growth in 2023.
Oh and described the stark divergence between Premier workplaces, and everything else when clients do make space decisions, we expect them to gravitate to premier workplaces that we have it be sp.
I want to make a few more points about the same property portfolio before I hand, the speaker over to Mike the elimination of income from 300 Binney Street as we read the dollop. This fully leased building into a lab building is about $10 million in 2023 relative to 22.
Reduction in income from the Boston suburban assets as well as a building and Carnegie Center and Shady Grove properties in Maryland that we are now enabling for life science constitutes a reduction of about $10 million in 2023 from 2022 dispositions us to add life science portfolio <unk>.
Pretty as overtime.
We expect our parking and <unk> to be about 90 per cent of the <unk> 2019 level and up about 6% from 20 to estimate.
Or retail retail portfolio has come back in Boston, New York City and D. C, where we have a significant number of new space is under construction with 23 openings. The west coast continues to be a laggard, we expect little changing contribution from retail in San Francisco and twenty-three the daily traffic and our west coast portfolio.
Changes to be dramatically lower than the east coast. We continue to provide extensive subsidies to many of our retail tenants in San Francisco in spite of the challenges with a new lease at 760 Boylston, We expect the overall contribution from retail to return the 2090 levels by the middle of 24, when the least at 760 commences.
In summary, we have reduced our totally seeing expectations and twenty-three due to the issues stemming from the aggressive battle against inflation and the ensuing slowdown in the economy, we still expect occupancy improvement in twenty-three, though at a reduced rate our flat same stored guidance is based on these variables take it away.
Great. Thanks, Doug good morning.
So today I plan to cover the details of our third quarter performance and also the increase to our 2022 pull your guidance and I will spend most of my time, describing the details of our 2023 initial earnings guidance.
The third quarter results were strong we reported third quarter funds from operation of $1.91 per share that was four cents per share higher than the mid point of our guidance the.
The improvement came from better than anticipated portfolio performance.
Higher revenues contributed three cents per share to our results from earlier than projected revenue commencement on space that we delivered to clients ahead of schedule.
And we also exceeded our budget for parking revenues, particularly particularly in Boston, where returned to office continues to grow.
Our operating expenses also contributed three cents per share. This was primarily from lower than projected repair and maintenance costs, most of the which will be deferred into the fourth quarter.
These positives were partially offset by the termination of our lease with Biogen at 300, Benny Street in Cambridge. The lost revenue resulted in a two cent per share reduction and revenue versus our budget that assumed full rent an occupancy for the quarter.
Well not part of that's F. O R. Net income included gains an asset sales of $262 million or $1.50 per share primarily from the sale of <unk> Avenue in Washington D. C. R.
Our asset sales this quarter raised $540 million in net cash proceeds.
On the new investment side or acquisition of 125 Broadway a fully leased lab facility in Cambridge utilized $592 million of cash.
For the rest of 2022, we have increased our guidance for full year funds from operation to $7.51 to $7.53 per share. That's an increase of two cents per share the mid point from our prior guidance.
The increases projected come from higher revenue from the portfolio and our 125 Broadway acquisition, partially offset by the deferral of third quarter operating expenses and of the fourth quarter and higher interest expense from both higher floating interest rates and incremental debt from funding our new investments.
The new <unk> mid point of our 2022 guidance represents strong growth in F. F. L of 96 cents per share or 15% over 2021.
At the mid point of our guidance our growth is comprised of <unk> recorded per cent year over year improvement in our same property NOI that is 35 cents per share.
63 cents per share of external NOI growth from acquisitions and developments coming online and 16 cents per share of lower interest expense from logging in low rates in our financing activities last year.
These positives are partially offset by the loss of 15 cents per share from asset sales and three cents per share of other items, primarily higher G&A expense.
Overall, we expect 2022 to be one of the strongest ears for earnings growth in the company's history.
Now I'd like to turn to our initial guidance for 2023 the.
The most significant impact by far to next year's guidance is the dramatic increase in interest rates in 2022, which is expected to continue into 2023.
Stubborn inflation is leading to even more aggressive actions by the fed that are having a meaningful impact on borrowing costs.
Our assumptions include the fed increasing short term rates to four and three quarters percent, which drives an increase in the borrowing cost under our line of credit and term loan facilities into the high five per cent range.
We currently have $1.9 billion, a floating rate that that comprises just 14% of our share of total debt. So we still have the vast majority of our debt being fixed.
A floating rate that includes outstanding amounts under our line of credit or $730 million term loan and $800 million, representing our share of floating rate that in our unconsidered joint venture portfolio.
In addition, we anticipate that are floating rate that will likely increase in 2023 as we use our line of credit to fund a portion of our development spend.
Change in our assumption for short term rates are 50 basis points, either way impacts are projected earnings by six cents per share.
Oh and describe the new acquisitions and developments that we announced during the quarter. This use of capital results in it and a projected $50 million of incremental interest expense.
So overall, our assumptions for interest expense in 2023, or an increase of approximately $122 million at the midpoint about range. This amount includes Arkansas dated interest expense and our share of unconsolidated joint venture interest expense.
At the midpoint. This is an increase of 69 cents per share of interest expense from 2022.
Doug provided a substantial amount of detail on the changes in our same property portfolio or.
Leasing assumptions reflect the uncertainty in the broader economic environment that has resulted in elon, gaining the least up with some of our bacon and expiring space and.
In addition, as Doug said, we have several projects that were targeted for future life science convergence, where we are intentionally creating vacancy wished.
We still expect to have a productive leasing here and we have a large a large backlog of sign leases and leases and negotiation that will go into occupancy over the next 12 months.
Overall, we expect our occupancy to be relatively stable year over year with reject or 20 twenty-three same property NOI gross to be flat from 2022 and.
And we expect that we will have positive same property cash and a lot of growth and our guidance assumes growth of one to two and a half per cent.
We anticipate that we will see strong external growth in 2022 from the delivery of developments and the impact from a full year of 2022 acquisition program.
Next year, we will fully deliver are 880 winner Street life Science facility that is 97% leased or carbon net zero redevelopment of our building at 140 <unk> Street that is 100 per cent least and view Boston or mercy of observation experience at the Prudential Center.
We will also see a full year from our 2022 deliveries, including or Google building in Cambridge, 2100, Pennsylvania Avenue and rest in next and aggregate we project our developments will add between 55 and $65 million in incremental NOI in 2023.
This year, we acquired Madison Center in Seattle, and 125 Broadway in Cambridge, and we just announced the acquisition of an interest in 205th Avenue in New York City that one described.
2000, twenty-three we project these acquisitions to provide an incremental $45 million to $50 million to our NOI.
We were also inactive seller in 2022 and is Owens described we currently have the avant residential building under contract and total we project sales for the year of $864 million, which we expect will reduce our portfolio NOI by $28 million to $30 million in 2023.
The other change of changes.
Changes that impact our 2000 twenty-three guidance are of modest expected decline in fee income due to a 7 million dollar assignment fee. We generated in 2022 that we do not expect a return and we project that are G&A will increase by approximately 5% next year.
So to summarize we expect our 2000 twenty-three episode would be lower than 2022 by approximately 4% or 30 cents per share primarily due to higher interest expense at.
At the midpoint of our guidance, we expect growth from our acquisitions and developments of 62 cents per share offset by higher interest expense of 69 cents a reduction in N Y from asset sales of 16 cents lower fee income of three cents and higher G&A expense of four cents.
Well, we are never happy for testing a reduction in F. S. O, 4% is relatively modest and entirely due to a steep increase in interest rates are portfoliocenter. While it continues to grow and we have a significant pipeline of accretive developments delivering over the next few years.
That completes our formal remarks.
Operator can you open the lines for questions.
Thank you Sir.
As a reminder to ask a question you would need to furnish star one one on your telephone we.
We ask that you keep your questions to no more than one but please feel free to go back into the queue and as time permits will be more than happy to take your follow up questions at that time so.
So you stand by while we compiled acuminate rosser.
I show. Our first question comes from the line of John Kim from BMO Capital markets. Please go ahead.
Good morning, Uhm I was wondering if you can comment on your occupancy guidance or twenty-three I realized Doug you mentioned some of this is timing related and you're expecting a slower economy next year, but can you also comment on if you've already seen leasing activity slowdown this corner and also if you're factoring in uhm lease termination.
Increasing in 2023.
Sure so.
<unk> all back up so.
Three part, but I'm Gonna give you credit for it all all being at least consistent with each other. So please terminations are not included in occupancy things are definitely feeling slower in the fourth quarter than they did in the third quarter of 2022.
And again, we believe that our occupancy will be higher at the end of twenty-three then it will be at the at the end of 2022, because we have visibility on a significant amount of leases that have already been sign and we are we're covering a significant amount of our existing portfolio vacancy today.
Thank you.
And I sure. Our next question comes from the line of <unk> Evercore ISI. Please go ahead.
Thanks, Good morning, Owen or dog could you just comment on how you guys are adjusting your return hurdles on development and maybe just speak to the acquisition of 200 <unk> you know in this environment you know I guess why pursue acquisitions.
Steve It's Owen <unk> good morning, clearly the our cost capital is going up as as.
Indicated and what were you reported.
And I do think our hurdle for new acquisitions is going up from a quality standpoint, and also from a return standpoint <unk>.
Reference the.
The 125 Broadway and 300 Binney Street, one is an acquisition that one's the redevelopment and they blended yield on that when fully delivered is over 7%.
Buildings in that location certainly lab buildings in that location.
We have been trading in the full maybe even the low for so I think there's significant margin and that yield versus where we made the investment and then as it relates to 205th couple.
A couple of things that I'd mentioned, one I think it's a very unique property yeah rella. It is clearly a premier workplace.
I think transactions like that don't come around very often.
Second I think the cap rate is understated because it has below market that on the property for the next six years.
And then third were purchasing a a minority interest mistake. So it is not a full acquisition the billing requires less capital, but our our you know it is it is <unk>, we are raising our hurdles for making new investments and you know our pipeline is last right now for new investments as a result.
<unk> I would say the largest thing we're working on I mentioned in my remarks, which is the 290 Binney Street development and the 121 Broadway residential.
Thank you.
And I should have our next question comes from the line of Derek Johnson from Deutsche Bank. Please go ahead.
Hi, Good morning, Thank you and your discussion with business leaders did they view the likely recession is a tipping 0.4 possible greater office utilization and and I guess, that's you know the balance of power shifted.
Shifting favoring employers person employees, especially the mid level employees and have this factored into discussions with business leaders or perhaps they're thinking on future demand for space. Thank you.
I think it's I think the answer to your question is a little bit industry specific.
I certainly think amongst the financial service clients that we have I think the slowdown in business conditions has I think put some more urgency an in person work and we're clearly seeing that and the traffic, particularly in Boston and New York I also you know I think I'm not sure it's that big an impact.
Get on the technology sector, where the return to in person work has been certainly lagging the other industries.
And I do I do think there is an an offset a bit as well in terms of what Doug described of a.
Recession, delaying leasing decisions by businesses because their significant capital.
Events and you know in this kind of environment businesses try to create optionality on doing those kinds of things, but yes, I do think slower business conditions are leading to more in person work behavior, So and Derek I I would just add the following which I think I think is I'm actually gonna be helpful. But it's not going to be helpful. In the short term in terms of improving things which is that.
As as these businesses I'd say get get more aggressive I'll use the word at you know asking their employees to our associates to come back to work I don't think it's going to lead to them, taking more space I think it's going to lead to a better urban platform environment, whereby they are going to be more people in our cities on a day to day basis.
Which I think will be will be helpful over time at convincing both the workers and the employers that the city is really you know Ken potentially get back to where they were <unk> relative to the three platforms and be very vibrant local communities right now that one of the problems is there sorry, this vicious circle going on where.
Because there aren't as many people going to work every day the city's feel different than the other sort of issues associated with you know the the.
Urban nature of the challenges associated with crime homelessness et cetera become more visible and and there's a sort of cycle I think will be helpful. As things go in the other direction.
Thank you.
And I shall next question comes from the line of <unk> Sounds Scotia Bank. Please go ahead.
Thanks, Good morning, everyone.
Just in terms of J V <unk>.
Potential you you didn't talk about that at the Investor Day, How're, you thinking about maybe sales of existing assets or funding future development with joint venture partners. And then also you know in terms of the commentary you gave Owen on cap rates for the New York City acids.
I guess in both of those cases, the asset you purchase and then sell 13 30 Avenue of the Americas, Yeah. They both had in place that as you mentioned that is below market.
Market today, and so I guess, we're all trying to figure out is.
What does this mean for cap rates going forward. If you know instead, you have to put new debt on buildings, which our understanding is that if you could even get it for the best buildings. You know your cost of that that is gonna be over 6%. Today. So does that mean cap rates then we have to be over six <unk>.
Per cent by some fashion in order for underwriting to kind of work in this new world <unk>.
Yeah.
Okay. Yeah, I think that was a three part question, but I won't stick Helen on you. So.
First of all Jv's, we absolutely want to continue to do joint ventures, and we absolutely want to continue to sell assets.
But it's going to be subject to market conditions as I mentioned there are many institutional investors who are more cautious on the market some of withdrawn from the market for the reasons I mentioned in my remarks denominator effect or review that perhaps the market will get more interesting from a pricing perspective in the future, but again subject to market conditions, that's absolutely what we want.
To do.
Go into your comparison of 205th to 13 30 Avenue of the Americas Humbly I would say I think 205th has a higher quality asset warrants a lower cap right I.
I do think that below market that does have some impact on how to think about pricing for the asset because that's clearly an asset to have such a below market that on the building.
And to your point with that cost rising I, absolutely believe that there is some increase in cap rates I think it is probably less in the office sector. Because I think office buildings have been trading at higher cap rates and some of the other real estate sectors, but I do think it has had some increase on where.
Market cap rates are.
Thank you.
And I should have our next question comes from the line of blame Heck from Wells Fargo. Please go ahead.
Great. Thanks, good morning, so the tone on the call and in the press release sounds just a lot less optimistic than than at your Investor Day. I wanted you guys did touch on this a bit in the prepared remarks, but can you just expand on the main kind of factors driving that change in tone, especially in such a short period of time.
So I guess, let me let me just started back up.
So our Investor day was not about 2023 earnings guidance are Investor day was about here is Boston properties portfolio regarding its human capital and its assets and what we are trying to do from a strategic perspective in the context of where where the market is today and I don't think at any time did we.
Talk about what we thought was gonna happen in 2023, So I don't think anything that we said at that conference should be construed as different than what we're saying today regarding our outlook for actual leasing activity in 2023, we I would tell you that we feel modestly less.
Rosie about that because the fed has been more aggressive, but I think people expected. When we had our conference in 2002 thousand in September 2022, relatively hikes uhm and the information has been more challenging to get under control and all of that has effectively transferred itself into and higher interest rate expectations Mike.
Using the <unk>, we're using four and three quarters percent average interest rate for our underlying index in 2022, right. So and all of that sort of from my perspective manifest itself in less robust policing activity in 2023, because I think the economy is going to.
Be less strong and they're gonna be less decisions that are made by companies relative to decisions on their space B staying in place and just upgrading to a premier work space like our buildings or incremental growth and so I guess, that's from my perspective sort of the the subtle change between what we were describing.
And you know in September on what we're talking about this morning.
Thank you.
And I sure next question comes from the line of Camille Banal from Bank of America, So he's gonna <unk>.
Good morning, giving you have only entered an agreement too sounds like that is essential component of <unk>.
Can you please confirm that this asset.
Reflected in 2023 got into your provider <unk>.
And at your Investor that you mentioned, we could see single line level.
Sam as we have in 2022 can you. Please provide an update on how you were thinking about dispositions and 2020th <unk> has anything changed here.
So the answer to your question is yes, the avant sale is reflected in the twenty-three guidance.
And with as it relates to sales, we uhm I cannot both mentioned I figure of $864 million for 22, which assumes Avon. It's old it's only under contract right now and then we will come to an end I mentioned one of the strategic priorities for B X P has to continue.
To recycle capital and upgrade our portfolio into 2023. So our goal is to sell more assets. Since we don't know what those are those are not reflected in the twenty-three guidance and it's going to be subject to market conditions. Yeah. We have a specific assets that we are looking at the sale, but it's again we're gonna.
Execute on those sales subject to receiving attractive prices.
Thank you.
And I show. Our next question comes from the line of Michael Griffin from City. Please go ahead.
Since Nick Joseph here with Michael I appreciate the color on the impact of rising rates in the on.
The business is guidance just going back to the financing market for office assets today properly.
What are you shooting the differences in terms of lender appetite L. T. DS reached terms on premiere versus other athletes.
This is Mike I mean, I think that lenders are overall, you know significantly more cautious about putting capital out for all the reasons that we've.
Talked about and credit spreads are clearly wider and all of the markets that we deal with so I mean credit spreads in the bond markets are wider credit spreads in the mortgage markets are wider I mean, I consider it all timelines, but they're significantly wider of where I would say a normal environment.
Is you know I think that.
C N b S as underwriting cash flow and if there's rollover, they're very conservative about the rollover and they're requiring reserves in order to.
Mitigate the risk of rollover and those reserves drive down proceeds levels.
That are available on the C. B S market for real estate assets. So I think that can drive down some of the leverage that you can get and could impact the refinancing of certain assets that might need to be recapitalized in order to refinance.
If you have a high quality property that has a long lease term you can clearly get it financed people will finance office buildings other real estate with those that's the lease terms.
Just gonna be higher cost of.
Cost of capital so the treasury that it's between four and four and a quarter and a credit spread that probably between 250 and 300, you know you're talking about I sixes type that type of break that you can get uhm, but that financing is available today and then the banks are also providing mortgage loans in term loans and.
Things like this until the market to add liquidity as well and you've seen you know a number of you know <unk>.
<unk>, including ourselves kind of used term loan financing you know to help fund new acquisitions and new investment in that market is still available to us.
Thank you.
[laughter].
And I should have our next question comes from the line of Alexander Goldfarb from Piper Sandwich. Please go ahead.
Hey, good morning.
So <unk> a question is on Seattle, Oh, and you guys. You. Obviously entered you know the past and curious with what we're hearing about Amazon and potentially pulling back from Bellview, Microsoft potentially you know reverting back to Redmond added Bellevue.
You guys look at your Seattle exposure, you've expanded it is everything that's going on in Bellevue and the potential disruption that could occur with all of that part of your original underwriting or has the broader Seattle Bellevue market changed since you initially entered the market and since you did the latest Madison acquisition.
So Alex good morning.
No the Amazon moves in Bellevue are not part of our initial underwriting cause it was not known.
We remain confident in Seattle for the long term, we think we have to we have one very high quality asset in one asset that we're gonna make very high quality that we've already performed some leasing in we have confidence in those assets. What is done described in his remarks, you know the technology industry is.
Ah retrenching to some degree yeah, there have been layoffs announced there've been space moves announced that you described and we don't see this as a big provider of growth in the near term, but I think over the long term these companies.
You know have technologies that will grow and they will be successful, but it's gonna take awhile to work through the environment that were currently dealing with.
Thank you.
And I shall next question comes from the line of Michael Goldsmith from you B S. Please go ahead.
Good morning, Thanks, a lot for taking my question.
Sure expectations for 2023 is down 4% from what you're anticipating for 2022.
Primarily driven by pressure from interest expenses, while some other put-and-take not asking for guidance, but I guess what needs to happen in order for <unk> for you to return to earnings growth in the coming years can you get there was just the maturity of the development <unk>.
Require a combination of more favorable interest rates and stronger fundamental demand I'm just trying to get at the kittens of what needs to happen in order to get get the company back on this path to earnings growth.
You know I'll start and the others can loving as well look I think that we have a development pipeline that delivers <unk>.
Cash flow through 220 25 as it as it goes into service and that is going to continue to be a tailwind for us.
And provide growth for us as we deliver that pipeline and you know hopefully increase that pipeline with some opportunities that we have that we're working on on the that side and for interest rates. I mean, 2022 has been an extreme year of interest rate increases.
And I think the our expectation is that they've got a little might ways further to go up but it's not gonna continue to go up at this pace.
For the next 234 years that there's gonna be there's gonna be a point that has reached where the fed has done its job and you start to see inflation turn where they're gonna slow down the increases mm mm and the fed rate, which will affect sopher and that will start to moderate and you know <unk>.
Essentially turn the other way if the economy.
Weakens like we have been talking about so that's not in our expectation for 2023, because we assume the silver rate is gonna go up and then it's gonna stay flat and we assume the small amount of refinancing that we need to do which is very small because we don't have very much in the way of mortgages coming due.
We will have to refinance those at high permanent right. So we have a 500 million dollar bond coming due for example, and you know the third quarter of 2023, and you know we can borrow in the bond market today for 10 years and the high sixes. So that's what we're assuming so that has an impact on her interest expense guidance.
If interest rates start to moderate and the 10 year, you know comes down a little bit or slows its increase in credit spreads, which right now are as wide as they had been in a really long time start to moderate because people kind of see the end of the rate hikes and see what the pain is going to be felt in.
The economy, we could see credit spreads come in 50, 100, 125 basis points Oh, no I don't know when these things are gonna happen, but I do believe that you know we won't see the same increase in rates from 23 to 24 during 2003 that we saw in 2022.
Yeah, I would just add to Mike's remarks.
First of all on the development deliveries as I mentioned, that's 200 million of NOI over the next five years and that number excludes contributions from 300, Binney Street, which are material, which comes in the next couple of years. So so that's the quantification of that Mike talked a little bit about the interest rate opportunity and then the last pieces pork.
L. A occupancy again, it's Doug went through a lot of math on how to think about that and the timing for it but we're going through a business cycle and I said, that's it the investor confidence that called a cycle for a reason doesn't last forever and this will turn at some point and.
When you looked at B X P. Before the pandemic, we were at 93 per cent. So again, we were not.
Giving any forecast of what the timing for that is but that's clearly a growth opportunity for the company just to increase the occupancy of our portfolio.
Thank you.
And I show. Our next question comes from the line of Vikram Malhotra from Missoula <unk> Group. Please go ahead.
Oh. Thanks, so much I just you know wanted to go back to sort of the occupancy trajectory and comments, maybe just couldn't back it a bit more for us because you know I I came away from the <unk> thinking there's upside to occupancy even if you trend sort of your on the lead thank front and you kind of gave some number that it multiple <unk>.
<unk>. So maybe you can just in fact, it's a little bit more by maybe the the <unk> to market, where they're more risk where they're upside how do we think about just dining wiser trajectory and <unk> you know just again, what's changed in the last month, it's a bit unclear just based on what you talked about a month ago.
Yeah. So so that from the only thing that's changed I'll just repeat what I said before is is that I think we are.
Moderator the amount of leasing that we will do in 2023 that has a 2023 least commencement associated with it.
And I'll I'll I'll sort of <unk> give you you know effectively how the sausages made you know color on that which is.
When we have space that is currently built out and that's spaces <unk>, we would start recognizing revenue in the least cummins's. When we have a piece of space that we make a decision to go into Polish okay. So we basically remove all the existing improvements in those improvements are now refer to as sort of a white box condition.
And we didn't do that at least we have to wait until the tenant has completed their build out of the space, even if we're contributing the capital.
Until we can recognize revenue. So so we have a bunch of spaces that would that we are building as a sort of white box right now because we think it will give us a leg off in terms of leasing that space that will while while it may actually improve the timing of actual cash revenue may not <unk>.
Help us relative to our quote unquote revenue from an occupancy perspective in 2023. So that's really the only thing that has changed.
With regards to the overall sort of you know going around the country perspective cause I think I said, our our our views and the pulse, though we have an overall leasing activity is much stronger in our Boston and are in New York City C V D's relative to tour activity and likelihood of transactions occurring.
Than it is on the West coast in San Francisco, and Los Angeles, and Seattle, and that's because the majority of the traffic that we're seeing are from her first professional services and financial services or anything companies, who are concentrated in those marketplaces in Boston and in New York City to a wider degree.
He then they are on the west coast markets, which are more concentrated with technology oriented companies and as I tried to describe many of those transactions or the smaller transactions right, there a floor or less and so you're we're doing a lot more of those than we are eight three or four or five floor.
Lease with a client who's in the technology business and so I'd say, that's sort of what's driving our near term views on our our occupancy in 2023, but again when we were you know when we sat up there and made our presentations we were trying to describe to all the animals in the.
[noise] room, and all the investments in the room and on the phone.
How we were looking at Boston properties from a long-term perspective, and I just I you know I I do want to make the point that we are in a longterm business relative to the decisions that were making so let's just you know Owen described six O one mass Av and he said Oh by the way we sold the building at a five point when cap right.
<unk>, we acquired the land for six O. One NASA have in 2008, we started a building in 2011, we completed the building in 2013, and we sold the building in 2022 and starting in 2008 to 2022.
<unk> I I'm Levered IR on that investment was 9.65 per cent.
So so this is a a business a longterm decisions and long term investments and so while we are focus dogmatically on providing you with guidance and our expectations quarter by quarter by quarter, because we're a public company and that's what we we are respect required in one.
To do when we're making a real estate decisions, we're making decisions based upon longterm investment perspective, and so you know it's at times that means that we might not be able to satisfy an immediate quarterly you know.
Opportunity to do something because in the long term. It that we are better off doing something that may be.
Short term dilutive. So that's just that's the way we approach our our work and our business from an operating perspective and from an investment perspective.
Thank you.
And I should my next question comes from the line of David Rogers from Bird. Please go ahead.
Yeah. Good morning, everybody Doug wanted to follow up just on the leasing numbers that you quoted earlier I think it was at the Investor Day, you wouldn't sign 1.8 million square feet That'd probably grew to 2.2 by the end of the quarter. If just simple math and then today you were talking about about 860000, I think a vacancy leasing so I guess I wanted a dovetail the the combination of those as the rest all renew.
Only thing can you talk about how that reduces your explorations, maybe next year and the spreads on that if that's true and just gonna verify my numbers, if I'm thinking about it right.
So all the numbers I used at the end at the Investor Conference where as of.
June 30th of 2022, so so everything was sort of.
Order delayed and lots of things happened during the third quarter that are not reflected in the numbers. Both in terms of leases that we sign that pushed out occupancy at least that we sign that have yet to commence and leases that we've got on Bacon states that have already commenced that are sort of baked into the numbers. So so the numbers that I provided earlier, a sort of how I'm.
Looking we're looking at things on a going forward basis, so instead of a million square feet. It leases for example that we had that where are the one point too if that was whenever you use of leases that were signed that had yet to commence right now it it's about a million square feet are 885000 square feet of which 700000 of that are 2002.
23 commencement from the rest of our buildings that will have a lease commencement in 2024 right. So so that's sort of how I I I would sort of look at the numbers. So what I gave you.
Earlier today, where the numbers as of 932022.
David I think the only number that Doug gave it the investor confidence it was different than what he gave today was he didn't say the investor confidence the amount of square footage that we had signed.
Or leases that were expiring.
Now those leases are not in our exploration table, because we already have signed leases starting for those and I think that number was like 800000 square feet. So that really doesn't affect the effects of occupancy obviously cause it's covered.
We don't have that in our exploration table, because the least authority covered by a sign lease.
Just so you can understand the methodology of how we put you use our exploration table. The expiration table only includes space that is expiring where we do not have.
A new sign lease starting right away.
Thank you.
And I sure. Our next question comes from the line of <unk> concerning Assam Credit Suisse. Please go ahead.
Ah yes. The morning, everyone. So you must also something about again, the the business being a long someone which you know wholeheartedly agree with just wondering specifically on the lifestyle side. So we get clearly you know, creating more exposure you are taking backspace specific needs to redevelop into <unk>.
<unk>, but again I think you also mentioned the comment that lifesize demand genuinely seems to be slowing at least you know time. So just wondering how you kind of balance those two things you know on a going forward basis with demand seems to be slowing, but you'll <unk>, you'll also be some exposure to that particular.
Industry.
Yeah, So I'll jump in and dug may have some comments as well.
We have a lot of confidence in the longterm growth prospects in life Science, We think there is <unk>.
Tremendous capital that is prepared to invest in that space and there's also a tremendous unrwa search science and it has very strong prospects.
I think the other thing that's important about life sciences. The importance of location is critically important and Tyndall center, where we're making most of our investments today is absolutely a key critical it's one of the best locations for life Science in the World and look at all the demand we generate.
<unk> and the deals that we've announced you know we talked about the Astrazeneca lace at 290 Binney Street. The <unk> that we did at 300 Guinea. So we're <unk>, we're demonstrating very strong demand at that location. So I do think there's been more of a slowdown in wall Fam and therefore, we've slowed down a little bit of our.
New deliveries to be responsive to that but again you know given my prior remarks, we have confidence that will return and I would just add that that remember that.
We we are looking at our investment decisions over a long time and it takes a long time to clear a building of existing tenants and so you know.
We wanna be in a position where we can start the next building if when we're successful leasing the ones that we currently have or we feel the market has started to you know dramatically changed from a demand perspective.
As we enter into latter part of 2023 early 2024th So we're sort of we're setting ourselves up for these opportunities and by the way I mean, I'll just gonna sort of give you. Some examples we we actually have three proposals that were negotiating right now there are leases on a building that's currently vacant [laughter] and Princeton.
Carnegie Center for life Science users and so you know having the ability to to say 2128 user. We the building is unencumbered and we can start construction you know and if you're interested in signing at least we will start construction uhm is an opportunity that we're trying to create within the portfolio at large.
And so you know I I.
I'd say, we are we're taking some short term pain for some longterm gain on a golf for basis, but it but we think it's a right approach to expanding our ability to do these things you know in a thoughtful way and by the way and we said this a number of times, we're not out there buying land for 202.
$150 an F. A R foot, which is what sort of the going price has been for many of these sites.
In locations that require rents that are not supported today, we have a.
Very different land basis, and our redevelop assets because of the nature of when the buildings were purchased when they were built and you know the fact that there is existing infrastructure. There. There is a value. So we have a <unk>.
Ah relatively speaking well priced portfolio of opportunities that we can break in the market over time.
I'd add this Brian coup from Boston region, I think the prototype is 880 Winter Street for with dogs talking about we've got <unk> positioning other buildings for the same thing, but as we said that the analysts say event, we can turn on and off this force of of supply with a moment's notice and we're.
In a great position on our speck of the side was 180 already having freely sing on it good activity not as strong as it was but good activity and then 880 is 100 per cent list and we want to have another building just like a dandy ready to go when the time is right.
Thank you.
And I show. Our next question comes from the line of Anthony Powell from Barclays. Please go ahead.
Hi, Good morning question about the Mark to market outside of Boston was a strong I think you're saying basically slapped it down for a five per cent and most of your.
<unk>, where do you think that goes in next year or so and are you seeing any changes in <unk>.
Tenant lease terms or or like the least is getting kind of falling run here.
So.
We're starting to approach the the higher rents that we've leased or the past four or five years and market and into our west coast markets, and particularly San Francisco with which again is why I when I <unk> provided the statistics for this quarter. I said you know, we basically were slightly above it was a couple of percent.
And it was about the average starting what was over $100 a square foot right. So so we're we're not seeing declines in rentz. We're just not seeing the same relative increases that we were seeing and so as we get closer to at least is that where sin X.
X number of years ago with it there's a tighter range associated with with that that roll off or roll down is relatively speaking the Boston market and the San Francisco markets still have the most embedded growth our New York City market is very hit or Miss it's somewhere up in summer down so when we least the piece of space and then.
Mid to high rise of <unk>.
760, 75th Avenue, the General Motors building, we'll have a we'll have an increase when we at least that piece of space at five to Madison Avenue, where the rents were diamond.
A decade ago, and we're increasing significantly in operating expenses went up we're gonna see a decline. So it's again, it's very much building by building at least by at least and in our Washington D. C portfolio as I described to you generally those or come down and.
And rest and it's been three to five per cent in the district and spin around 10 per cent because of the nature of the leases from a caf respect it right. When we actually report gap numbers, we actually won't have these declines because there. When you you average a three per cent increase for 10 or 15 years on at least it starting 10% below what what was expiring.
You actually have a positive mark to market, but that's not where we are providing you were providing with a cash number. So you have a perspective on what's going on in the marketplace. So that's that's sort of my my perspective on sort of aware that the.
Embedded growth is from a transactional perspective on the margin T. I's are still very very elevated and it depends on on what kind of a tendency you're talking to and what their options are so.
The larger requirements, where there's more desperation, if you will from from from landlords or sub tenants that have large blocks and available space. There. There's there are more aggressive terms for smaller transactions.
A floor or less where the 10 minutes looking for a premiere work space, we have been able to maintain the economics of the deals that we're doing in our markets and that includes San Francisco, which again is obviously got a very significant overall you know vacancy in it that that people report, but with a vacancy in the premier spaces still signal.
Typically lower.
Thank you.
As a reminder to ask a question you would need to first star one one on your telephone.
And I'm sure. Our next question comes from the line of Anthony Palimony from J P. Morgan and please go ahead.
Thanks, I guess just for my given the discussion and puts and takes on lease commencement next year, where does leverage go over the course of the year and just remind us where your long term target is.
The leverage right now is seven and a half times, which is basically in line with were targeted.
And you know I would expect next year that.
It's likely to pick up a little bit before it comes down.
And then as our development pipeline delivers later next year and then into the following year you know it would start to come down and then then the dependence is what kind of new investment activity do we have right and if we have significant new investment activity, we gotta figure out how to capitalize zed, but if we don't have that activity I think that's.
The trajectory. So you may see an increase a little bit and then start to come down.
Thank you.
And I should our next question comes from the line of Jamie Feldman from Wells Fargo.
Great. Thank you I'm I'm here with lane, so I guess, just sticking with that last response to make your response you know thinking about the fact that you know be X P. Clearly the interest rate outlook for the company and an impact on earnings cut that the market off guard, probably surprise you guys, even where you sit today versus where you thought you'd be a coupla years.
Ago, and what does that mean for the competitive landscape I'm sure. There's a bunch of private operators or even public out there that you know having you guys have always run your balance sheet, particularly well and more conservative and locked in.
<unk> better than most you know you're starting to see a lot of distress and do you expect to see a lot of distress I know you had mentioned.
Going to grow more in residential or my science, you know, whether it's open up opportunities and well. This will this 50 and scale if it's out there and if so how would you capitalize it based on what your balance sheets. It today.
Yeah, Jamie Uhm, it's Owen, Yes, I think when you go into an environment like this where interest rates have jumped up pretty dramatically fairly quickly I do think there'll be more distress.
I think there'll be less distress and premier workplaces, because those assets are gonna perform better than I think blenders another capital providers will realize that <unk>.
And you know as we move forward.
We will continue to look for opportunities we will be very focused on pricing you know given the higher cost of capital that we have and we will be very focused on our leverage and I would anticipate increasing use of joint venture partner equity two.
To manage our balance sheet.
And I think that.
Look we've got a lot of cash flow that's coming online from.
From these developments over the next few years.
70% of the capital has already been raised that is funding. This so we've got a lot of <unk> kind of capital out there on these properties were income hasn't started.
So, yes, we expect our leverage to pick up a little bit as we kind of go through the development process over the next few quarters.
But if we don't do anything else and we just let this stuff come in our leverage is gonna be down into the low sixes.
And that's below our target range. So there's still a capacity on our balance sheet to do things you know if we find those opportunities and then it's a question of how we funded right and I think that in order to continue to lengthen our balance sheet. That's what we've been using private capital to help Us fund.
Some of these new opportunities and I would expect that we would continue to kind of look at that as a vehicle to help us do that because we're not gonna be raising public equity at the kind of prices that we're at right now.
Thank you.
And I show our last question comes from the line of Danielle just Smile from Green Street. Please go ahead.
Great. Thank you alright, well might be sounding a bit like a broken record here, but I am just curious get in on our number is b S. T is trading at some of the widest discounts in history on a variety of metrics Uhm quiet.
<unk> cap rates discounts any D. I'm, just curious what would cause any sort of incremental capital to be redirected into share repurchases versus external growth what are the triggers or is it <unk>.
Duration of these discounts persisting to see more capital go into to go Catholic 50 capital go into share repurchases or what would I'll put that back on the table.
Yeah.
It gets the relative use of capital. So yeah. We might described we're currently at our target leverage that might pick up a little bit then it comes down over time.
We have I mentioned, a couple of additional development that we're looking at and Kendall Center, which require capital, but I think to to to look at share repurchases I think it would be you know our our.
Our leverage is low and we don't have the investment pipeline in front of us that we do right now.
And I think Owen described bread I mean, we're gonna. We're we're picky about what we're gonna be investing in the bars gotta be higher.
But we have some opportunities, let's the ones we talked about in Kendall square that are you know once in a lifetime kind of opportunities. I mean these are great transactions that are gonna grow the value of this company.
So investing on our capital and those kinds of opportunities, we believe will be very creative to our shareholders overtime.
Thank you.
That concludes our Kunai session at this time I'd like to turn the conference back to Owen Thomas Chairman and CEO for closing remarks.
Thank you we have no more formal remark remarks. Thank you for your interest in <unk>.
Thank you for this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin to T to raise your hand during Q&A you can dial 911.
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