Q4 2022 Boston Properties Inc Earnings Call
Yeah.
Okay.
Good day, and thank you for standing by welcome to Dxp's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode.
So to speak of presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one on your telephone you wouldn't hear an automated message advising your hand is raised.
Your question. Please press star one again.
Be advised that today's conference is being recorded.
And I'd like to hand, the conference over to your first speaker today to Helen Hahn, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to VX, eight fourth quarter and full year 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on form 8-K.
What package DXP has reconciled all non-GAAP financial measures. 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 at investors <unk> DXP 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 <unk> believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that its expectations will be attained.
Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in yesterday's press release and from time to time in <unk> filings with SEC.
<unk> does not undertake a duty to update any forward looking statements.
I'd like to welcome Owen Thomas Chairman, and Chief Executive Officer, Doug Linde, President and Mike Labelle, Chief Financial Officer during the Q&A portion of our call Ray Ritchey Senior Executive Vice President and our regional management teams will be available to address any questions.
We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional quarry or follow up please feel free to rejoin the queue.
I'd 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 Bx piece continued strong operating performance as demonstrated in our fourth quarter and full year 2022 results.
I'll discuss key economic and market trends impacting DXP and finished with dxp's capital allocation decisions and activities.
Despite increasing economic headwinds DXP continued to perform in the fourth quarter and had strong overall operating results throughout 2022.
<unk> per share this quarter was above both market consensus and the midpoint of our guidance our <unk> per share grew 15% in 2022 due.
Due to development deliveries and strong leasing activity, we completed $1 1 million square feet of leasing in the fourth quarter and $5 7 million square feet of leasing for all of 2022.
Is 95% of our average annual leasing over the last 10 years.
Weighted average lease term for leases signed in 2022 was nine two years.
This success can again be attributed to not only be xp's strong client relationships and our team's execution, but also the increased share of tenant demand captured by Premier workplaces, which are the hallmark of DXP strategy and portfolio.
DXP raised $1 2 billion in additional liquidity through a $750 million unsecured green bond offering and the extension and upsizing of our bank term loan ensuring funding for our sizable and substantially leased development pipeline and a challenging capital markets environment and.
Lastly on 2022 DXP continues to be a decorated industry leader in sustainability, having most recently won NAREIT leader in the Light award named the highest ranking real estate company in 29th overall on Newsweek's list of most responsible companies and one of only eight property companies named to the Dow Jones sustainable.
Sustainability index.
Notwithstanding.
Standing, but running debate on whether the U S economy will experience a hard or soft landing commercial real estate markets are currently in a recession.
Many of our clients are experiencing a slowdown in growth or reductions in top line revenue and as a result, our focused on cost control, including moderating head count and spaces.
We all read the daily headlines of layoffs, which have been most significant in the technology industry, but are migrating into other sectors. Many companies, particularly in the technology sector are halting new requirements and or giving back space to the market.
The key culprit for the current economic slowdown as inflation, which sparked unprecedented federal reserve tightening measures last year, including rapidly increasing interest rates quantitative tightening measures and more regulatory scrutiny of banks. The better news is inflation is starting to come down the federal reserve is.
<unk> to moderate further interest rate increases with the fed funds rate, possibly peaking around 5% and the capital markets with a 10 year U S. Treasury at three 5% and rallying actual equity markets are much less hawkish hawkish on inflation and then the federal reserve.
We are not able to predict the depth or length of the current economic slowdown, but its trajectory is coming into clear focus our goal is to position DXP for success, regardless of the economy's trajectory by carefully managing leverage and liquidity.
The leasing activity is declining due to corporate earnings pressure the premier workplace segment of the office market continues to materially outperform users are increasingly interested in upgrading their buildings and workspaces to attract their workforce back to the office, resulting in an accelerating flight to quality in the office industry.
Yes.
As described previously CBRE is tracking our performance of Premier workplaces in the U S and for the five CBD, where DXP operates premier workplaces represent approximately 17% of the 700 million square feet of space and less than 13% of the total buildings.
As of year end 2022 direct vacancy for Premier workplaces was nine 6% versus 14, 7% for the rest of the market.
Also for all of 2021 and 2022 net absorption for Premier workplaces was a positive $7 1 million square feet versus a negative $25 4 million square feet for the balance of the market.
Rents and rent growth are higher for Premier workplaces, and we believe the segment captures well over half of all leasing activity include.
Including two buildings undergoing renovation, 94% of DXP CBD space is in buildings rated as premier workplaces, which has been and will be critical for our leasing success.
Moving to real estate capital markets for office assets U S transaction volume slowed materially to $12 billion in the fourth quarter down 40% from the third quarter.
Transaction volume across all real estate classes was down 36% over the same period.
<unk> financing is very challenging to arrange and available for only the highest quality leased assets and sponsors.
First mortgage financing costs have risen materially over the past year based on both higher rates and credit spreads.
Even the dearth of transaction activity office asset pricing is difficult to determine but it is clear cap rates have risen.
There were a handful of DXP comparable transactions of note in the quarter and the route 128 quarter of Boston two separate lab sales were completed for a total of $375 million, one sold to a REIT and another to an institutional investor.
But one of the transactions is a redevelopment pricing parameters indicate a stabilized yield of at least 6% and pricing per square foot in the mid nine hundreds.
In Sunnyvale, California, two separate and fully leased office complex is sold for $415 million.
One to a private real estate company and the other two and in our International Fund initial cap rates ranged from four eight to six 2% and prices per square foot from 11, 40% to 12 30.
Regarding <unk> capital market activity in the fourth quarter. We closed both the previously described acquisition of a 20% 27% interest in 205th Avenue in New York City, and the sale of the avant a luxury residential building in Reston.
For all of 2022, we acquired $1 6 billion of lab and office assets and completed over $860 million of dispositions of office and residential assets.
So we have additional asset sales and our targeted pipeline completion of the dispositions will require more liquid capital market conditions.
New acquisitions, we'll be opportunistic and solely focused on premier workplaces life science and residential development.
<unk> volumes for acquisitions and dispositions are very difficult to predict for 2023, given current market conditions.
Our development pipeline continues to be active delivering growth to our current and future financial results. This past quarter, we fully placed into service. The one 1 million square foot Reston next premier workplace, which is 90% leased on a long term basis to Fannie Mae and VW of America. This.
The project was delivered below budget on costs and is projected to yield seven 7% upon stabilization.
We also placed into service eight Eddie Winter Street, a 244000 square foot very successful office to lab conversion project located in Waltham that is 97% leased.
We purchased the office building in 2019 for $2 70, a square foot spent approximately $500 a square foot on the conversion and delivered the project at an initial cash yield of 10%.
We also commenced the conversion of 105 Carnegie Center, a 70000 square foot suburban office building in our Carnegie Center asset in Princeton to lab views. This is our first attempt at life Science at Carnegie Center, and we have life science clients reviewing the opportunity.
There are two projects $2 90, and 300 Binney Street in Cambridge that do not appear on our fourth quarter construction in progress schedule that we are commencing in the first quarter and have an impact on our current 2023 financial projections, which Mike will discuss in greater detail.
As described on our last call Biogen is in the process of vacating. The 300 Binney Street office building and we will commence the conversion of the asset to lab use for the broad Institute, which has agreed to lease the building for 15 years.
We have also completed the necessary pre development hurdles to commence the development of $2 90, Binney Street, a 570000 square foot 16 story lab building leased to Astrazeneca for 15 years.
We estimate that the project will cost approximately $1 2 billion and expect it to be delivered in 2026 at an initial cash yield in the mid 6% range given.
Given the annual Escalations in the Astrazeneca lease the initial <unk> yield is materially higher.
<unk> hundred 90, Binney Street is a complicated development and tailing the demolition of $11 130, 136 stall parking garage the temporary relocation of parking capacity from this garage. The construction of a subterranean vault, which will house, an electrical substation currently being permitted by ever source and other facilities.
Militating agreements.
Commencing 290 Binney Street also creates an obligation for <unk> to build 121 Broadway, which is a 37 story 40, 440 unit residential tower, which will likely commence in 2024 and.
In addition to these two buildings DXP also has remaining rights for an additional 580000 square foot life Science building and our tender Kendall Center development, which due to upfront infrastructure costs carried by the first two projects has the potential to be developed at significantly higher yields than 290 <unk>.
Right.
These projects demonstrate the skill of Dxp's development team in identifying an opportunity to creatively solve a community problem of locating a new electrical substation and having the expertise to bring the project to reality by solving problems for multiple interested stakeholders, thus, creating a highly.
Accretive development opportunity for DXP.
After all of these movements and including the $2 90, and FERC and 300 Binney Street projects. Our current development pipeline of 13 office lab and residential projects as well as view Boston.
Observation deck at the Prudential Center aggregates, approximately 4 million square feet and $3 $3 billion of DXP investment that we project based on delivery date and lease up assumptions to add more than $240 million to our annual NOI over the next five years at a seven 3%.
Average cash yield on cost when stabilized the commercial component of our development pipeline is 51% pre leased.
So in summary, despite adverse market conditions DXP had another very successful quarter and year with financial performance above expectations strong <unk> growth significant leasing success and robust investments in capital reallocation activity.
DXP is well positioned to weather the current economic slowdown given our premier workplace market position are strong and increasingly liquid balance sheet are significant and well leased development portfolio and progress and our potential to identify additional investment opportunities in the current market dislocation.
Let me turn the discussion over to Doug. Thanks, Alan Good morning, everybody. So Owen really spend some time, describing the totality of what's going on at DXP I'm going to be a little bit more concentrated today and talk about demand.
Everyday seems to bring another announcement of a staff reduction from some large or medium size employer.
And while the constant is that these announcements have been concentrated in the technology industries as Owen described primary primarily big Tech.
We're also seeing them in the finance industry, the legal industry and broader corporate America.
I can point to examples of companies in our portfolio that are growing but we are the first to acknowledge that the pool of clients overall demand that we serve is unlikely to be growing their overall footprint in 2023 8-K hard to see much noise positive absorption.
If there's a silver lining in the job reductions that are being announced its an improvement in the labor available.
Manifesting itself and encouraging ways.
Fewer job listings being offered for remote work.
Forms of hybrid work seem to be sticky, but the power dynamic between employers and employees is shifting companies are stepping up the days that workers are asked to acquired cajoled to come into the office.
In our portfolio, we're seeing a steady increase in the number of unique occupants that are in the office each week.
We measure the unique number of card swipes on a daily basis, where we have turnstiles.
These numbers vary day to day, and if I compare the best day in March of 2022, which is after the the last sort of Covid Army current surge versus the best day in January so a week ago across the DXP portfolio volume was up almost 40%.
I don't know how others measure their usage.
<unk> measures against the number of seats, we have in our spaces.
On a daily basis utilization ranges from between 34% in San Francisco, 48% in Boston and 58% in New York City and.
And if we look at the number of unique users coming into our buildings on a weekly basis relative to the number of seats. We're currently seeing as much as 82% in New York City, 76% in Boston and 70% in San Francisco, our clients are using their space. They are just not coming to the office every day.
As Owen said, we spent a better part of 18 months of redefining our business with you as being developers and operators are premier workplaces as Owen described in his comments that bifurcation between Premier product and General office space continues to widen.
The availability rates published by the brokerage firms and reported its headlines and business publications in newspapers track all of the space.
A meaningful amount of the existing office inventory may have a higher any better use as an alternative product and it's not relevant to users searching for space today.
<unk> will happen and we are studying non DXP buildings in our markets, but this process is going to take years. So the published statistics are going to be sticky, even though much of the availability is not attractive to users at any price in fact.
It's hard to see a potential client looking at DXP offering that would consider many of the buildings captured in the broad market surveys.
We have to acknowledge that there continues to be addition of new sublet or soon to be direct opportunities and premier space from technology companies 181, Fremont Street in San Francisco being the latest example.
Availability and premier space matters, but other issues matter, even more the floor plate size matters. The buildout configuration matters amenities matter in markets like Boston, and San Francisco parking availability matters and a specific location matters.
As we explained in our press release last night, while our reported in service occupancy declined in the quarter as we said it would on our last call and at our NAREIT meetings in November .
Simply due to the addition of new in service buildings that have leases that have not commenced and are reported as vacant. This includes arrest and next that is 69% occupied and 90% leased and 80 80 Winter Street that 85% occupied and 97% leased excluding those assets our occupancy was actually up this.
Quarter.
From 88, 9% to 89, 1% and if you do the math a little bit differently and we include those buildings at their lease percentages the portfolio would still be at 89, 1%. So our in service portfolio is picking up occupancy.
As we sit here today, we have signed leases on our in service vacancy totaling one 5 million square feet.
In the fourth quarter, we completed 145000 square feet of leasing in our development portfolio, which is now up to one 6 million square feet leased when we include 300, Binney and 290 billion, which is the one that are not yet on our development pipeline.
We completed two transactions totaling 90000 square feet at 2100 pen in the CBD of D C, which now stands at 80 181, 3% leased.
We executed one 1 million square feet of leases in the fourth quarter with New York, Boston and the D. C region, leading the way with about 300000 square feet in San Francisco, If 200000 square feet.
48% of the square footage came from new clients, 39% were renewals and 11% were expansions.
Some of the renewing clients did reduce their footprint as part of the extension.
Even in the midst of a slowdown in business activity and job reductions there are still businesses that are expanding their footprints.
The mark to market on the leases we signed this quarter were up 7% in Boston, 9% in San Francisco flat in New York City and down 11% in D C.
It should come as no surprise that we think be xps premier workspace portfolio is highly differentiated but on top of that our operating teams are the best in the business I wanted to describe three transactions, we accomplished in the fourth quarter that illustrate our teams creativity in Boston, we were getting 100.
<unk> thousand square feet block of space back in one of our assets. The team identified a client that typically does not do direct deals with landlords, but generally looked at sublet space. We engage the principles in a tour of the space. The space was in great condition, and we were able to secure a lease that met the tenants' desire to have an attractive annual rent as possible.
A premier building with limited capital outlay and make a long term commitment. The lease was executed in late December in San Francisco, a client with a fast approaching termination option in its existing non DXP building wanted to move to view space. They toured the market in early December and the identified two space.
<unk> in the 34% available market that met their needs on December 26, we signed a binding letter of intent the client I understood. They were not taking any counterparty risk with DXP and we signed the lease for 50000 square feet or two five floors that were vacant on January 16th.
In October our New York team identified a client that had a lease exploration and no ability to renew in place in mid 2023, which is a very tight timeline, we sent an unsolicited proposal for two vacant floors in our 50 <unk> Street campus with some persistence, we were able to arrange a tour we mobilize our.
Construction department to deliver the space per their needs and in December we signed a lease for two vacant floors and an option for a third.
Owen mentioned that we delivered our life Science project that AAV Winter Street. This quarter. We also completed our first lease at 651 Gateway, we have available space as well at our two developments in Waltham. The life Science market is also experiencing a slowdown in demand at the present time, we have not made any commitments to build additional projects other than.
290, Binney Street, which is 100% leased the AZ and the 70000 square foot project that Owen described at Carnegie Center.
It's a challenging market there is not going to be positive market absorption in the near term, we believe that DXP will outperform the market and we will lease our available space because our portfolio is fundamentally comprise a premier workspaces and the demand that is in the market wants to be in these types of properties medium and small financial and professional.
Clients will make up the bulk of the leasing that we complete in 2023, we completed 72 leases during the fourth quarter only one lease was above 100000 square feet.
Our activity continues to be strongest in the Boston CBD in New York City markets, where the concentration of technology users is less pronounced than the waiting of market market occupancy leans more heavily towards traditional financial and professional services firms not surprisingly the most active buildings in our portfolio are the GM building and 200 Claire.
With that I'll stop and turn the call over to Mike.
Great. Thanks, Doug Good morning, everybody I plan to cover the details of our fourth quarter performance and the changes to our 2023 earnings guidance.
I would like to start with a summary of our recent capital raising activities.
We've been very busy in the capital markets and a substantially bolstered our liquidity heading into 2023.
And the last 120 days, we've executed on three transactions in three different markets. We sold one of our residential buildings in Reston town center for $141 million and a four 3% cap rate.
We issued $750 million of five year unsecured green bonds and in January we extended and Upsized, our corporate unsecured term loan to $1 2 billion, an increase of $470 million.
In aggregate the net proceeds raised from these deals is $135 billion and we now have liquidity of $2 $6 billion, which puts us in an extremely strong position to complete our development pipeline, including our recently commenced 570000 square foot fully pre leased 290 Binney Street life Science project.
As well as provide additional capital for other opportunities that may arise.
We have also reduced our 2023 loan maturity exposure to $930 million, which is comprised of $500 million of senior unsecured notes that expire in September .
And five expiring mortgages totaling $430 million at our share. The majority of these mortgages have embedded extension options and we anticipate renewing or refinancing all of these facilities given.
Given the challenging state of the current debt markets, particularly with respect to the mortgage markets, we're very well positioned.
Now I'd like to turn to our fourth quarter earnings results, we reported fourth quarter <unk> of $1 86 per diluted share and full year 2022, <unk> of $7 53 per diluted share. This.
This is a penny ahead of the midpoint of our guidance and <unk> <unk> ahead of street consensus.
The improvement was primarily from better performance in our portfolio with our NOI up about $4 million or <unk> <unk> per share ahead of our forecast.
The outperformance was a mix of higher lease revenue stronger results from our hotel in Cambridge, and higher building service income, especially in New York City, where we see the highest space utilization.
Portfolio outperformance was partially offset by a penny of higher net interest expense related to our $750 million Green bond offering that was not part of our original guidance.
Although not part of <unk> I do want to described that we took a $51 million or 29 cents per share non cash impairment charge in the quarter, reducing the book value of our equity interest in our dock 72 property located in Brooklyn, New York.
This building is owned in a joint venture where we hold 50%. The building has suffered from weak leasing conditions in Brooklyn, and last quarter. The primary client contracted by two floors is currently just 25% occupied although it is 42% leased including leases that have not yet commenced.
Overall, we had a strong year in 2022, we increased revenue by 8% and our <unk> by 15% over 2021 or.
Our growth came from our same property portfolio as well as our developments and our acquisitions. Our same property NOI increased 4% over 2021, which was the high end of our range and on a cash basis. It was even stronger with cash NOI growth in our same property portfolio of six 5% over 2021 or.
Our development deliveries added 24 per share to our 2020 to earnings and our acquisitions net of our dispositions added <unk> 10 per share.
Now I'd like to turn to an update to our 2023 guidance as we detailed in our press release. The two most significant changes to our 2023 <unk> guidance or the impact of commencing our $2 90.
<unk> hundred 90, Binney Street development and the interest expense associated with our new financings.
We did not incorporate $2 90, binnie in our guidance last quarter due to several significant contingencies, we needed to clear prior to starting the project that were outside of our control.
Our team successfully closed out these items later in the fourth quarter and we were able to start the project in January the development plan includes closing and demolishing the existing Binney Street garage.
Thank you Raj produced $8 6 million of NOI in 2022, and we will lose this income in 2023 and going forward until the completion of the development, which will include a new underground parking facility at.
As Owen described the project is projected to be highly accretive to our future <unk> and by the way all of the lost garage income is incorporated into those development returns.
We are also required by GAAP to expense the garage demolition costs of approximately $3 $2 million, we expect to incur the demolition expense in the first and second quarters of 2023 with no impact thereafter, as the demolition will be complete.
These two items related to $2 90, Binney Street will result in $11 $8 million of lower <unk> in 2023, or <unk> <unk> per share with respect to our financing activity. We disclosed in our press release in November that our $750 million Green bond offering would add <unk> <unk> per share to our 2023 net interest.
Spence and reduce our <unk> guidance.
As a role a result, we expect the aggregate impact of starting to 90, Benny and issuing incremental debt capital will reduce our 2023 <unk> by <unk> 15 per share.
Despite this our new guidance range for diluted <unk> was $7 eight $7 18 per share as a reduction of only nine per share at the midpoint from our guidance last quarter.
That means we've increased the projected contribution to <unk> from other areas.
We previously communicated the impact of our bond offerings. So the reduction is really only a penny per share from our November adjusted guidance the.
The projected increase has come from three places.
First excluding 290 Binney Street, our assumption for incremental contribution to NOI from acquisitions and development is up <unk> <unk> per share. The increase is from higher contribution from our 205th Avenue acquisition and better than projected leasing in our development pipeline. Doug described the increased leasing this quarter and the pipeline and some of that will generate.
<unk> in 2023.
Second our revised assumption for net interest expenses are lower by <unk> <unk> per share net of the impact of the bond offering and this improvement is primarily from higher earnings on our cash balances and higher capitalized interest from changes in our development spend and higher interest capitalization rate.
And last we've increased our guidance for development and management services income by $2 million.
Or a penny per share, reflecting higher projected construction management fees.
So to summarize we've modified our 2023 guidance range per diluted <unk> to $7 eight to $7 18 per share a decline of nine <unk> per share at the midpoint. The changes are the result of costs from starting to 90 Binney Street of <unk> and.
And higher interest expense from our bond offering rebates and.
And these reductions are partially offset by higher contributions to NOI from acquisitions and developments of <unk>.
Interest income and capitalized interest of <unk> and higher fee income of a penny.
Our 2023 forecast, resulting in a projected reduction in <unk> of 5% from last year after growing 15% in 2020 to.
The reduction is wholly due to the significant increase in interest rates as our portfolio NOI continues to grow and we have a significant pipeline of accretive developments that are delivering over the next few years as Owen described it appears that we are close to the end of the fed's tightening cycle. So interest rates should not be the same headwinds.
Going forward, though.
Last thing I would like to mention that we intend to change the timing of our initial issuance of annual guidance. Starting next year, we plan to provide guidance for 2024 with our fourth quarter earnings release similar to the other companies in our sector.
That completes all of our formal remarks, operator can you open up the lines for questions.
Thank you Sir.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
We ask that you keep your questions to no more than one but please feel free to go back into the queue and if time permits we'll be more than happy to take your follow up questions at that time.
Please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Camille Banal from Bank of America. Please go ahead.
Hi, good morning.
Guidance mentioned higher contributions from acquisitions and development activities, but it looks like a few initial occupancy dates for offices and life science projects got pushed back a quarter into next year can you just provide a bit of.
Color on what's contributing to this outlook and any comments specifically on how the leasing pipeline is going for your construction properties would be very helpful. Thank you.
So we did a significant amount of leasing at 2110.
And a portion of that.
It will contribute.
In 2023, we did push out by one quarter.
360 Park Avenue South.
Based upon where the leasing activity and the development activities are on that asset and then the other place that we had a little bit of an increase was at 205th Avenue, which is the acquisition, we made and we finalized the kind of accounting of straight line rents and fair value rents for that asset. So that's flowing through into our straight line rents.
Next year, which our guidance is up for straight line rent.
Doug I don't know if you want to talk anymore about the development leasing I mean, you talked about a little bit.
I think in my in my comments I describe sort of where we are which is a big picture. We're about 50% leased on our the totality of our development assets and by the way, we will be including next quarter or 300 financing that had been on our CIP schedule.
The leasing is slow at 360 Park Avenue South.
The leasing picked up as Mike said at 2100, Pennsylvania Avenue, we are very well leased at the other assets that got brought on this quarter. So relative to 2023, I don't think youre going to see much in the way of changes.
Thank you.
And I show. Our next question comes from the line of John Kim from BMO Capital markets. Please go ahead.
Thanks, Good morning.
You spent a lot of time at your Investor day talking about the occupancy upside potential given your near term explorations.
I know a lot has changed since then but you have leased one 1 million square feet in the fourth quarter and.
And my question is how does that compare versus your expectations at the time.
And as you sit here today is $1 1 million square feet is that a good run rate for the rest of the year.
Well.
You are asking if if I if I described how we were thinking about the world in September versus the work the way we're thinking about the world today I would tell you that there's been a material change in the.
Overall economy relative to the risk of recession, and I think there is less demand in the overall environment than there was then we still feel really good about the overall quality of our assets and the ability to capture incremental demand in the marketplace due to the nature of the tenants that are.
Looking for space and so again.
We actually exceeded our own internal projections for the at the end of the year, because we thought we would be slightly below where we were in the third quarter and again, if you sort of.
Just for bringing these new assets into service and simply put that made it their actual leased occupancy or remove them, we actually increased our overall occupancy during the year and so I would tell you. If you look at our expiration schedules for 2023, when you look at the one 5 million square feet, we've already leased and we will again.
Hopefully be leasing somewhere in the neighborhood of 750000 to 1 million square feet per quarter.
We should again be increasing our occupancy as we move through 2023.
Yes, John I'd, just add I mean, we we've maintained our guidance for our same property portfolio and for our occupancy.
So our kind of outlook is similar to what it was when we gave guidance last quarter I think that our occupancy.
In the first quarter.
So three months from now we will likely be lower or flat the what it is.
Today.
But we've got a lot of leases that are already signed that Doug described one 5 million square feet that are coming into play and I think that starting in the second quarter, we're going to see our occupancy grow from there through the rest of the year.
And a lot of this.
Humans using coming in some of the major markets like New York City. We've got a number of leases that are signed that will be starting in the second quarter.
Doug described to deal in Boston that we did just in December and that deal is going to start in the second quarter.
But we also have some deals in reston starting so.
I think that we feel.
We've been conservative in our approach to our guidance based upon what we see future leasing activity as but.
But we feel good about the guidance that we provided.
Thank you.
And I show. Our next question comes from the line of Steve Sapphire from Evercore ISI. Please go ahead.
Yes, thanks, good morning.
I didn't know if you could talk a little bit about maybe platform 16, and $3 60 Park Avenue, South and I know both of those buildings were sort of geared towards <unk>.
Tenants in there.
Given your comments about slowing tech demand and even some of these tenants sub leasing I'm just curious how you're maybe altering the.
The marketing program there or.
Do you just need the macro environment to really get better too.
See traction on both of those buildings.
So let me ask Hillary expand to talk about 350 Park Avenue, South and I'll ask Bob to comment on.
Platform 16.
Thanks, Doug Hi, Steve how are you doing.
So at 360 Park Avenue South redevelopment is underway, we are very far along in discussions with our retail tenant that is going to be very exciting. When we are able to announce it I think it's fair to say that the demand for 360 Park Avenue South.
Is diversified, but tilted toward tech and media firms because of its location in the Midtown South Submarket and to the point that everyone has been making on this call that leasing velocity has slowed dramatically starting probably end.
End of the second quarter of last year, or maybe early third quarter of last year and so.
We're proceeding apace with the development and we expect to deliver it.
As per our original estimates.
And some of the demand that we have seen for that building is actually in a more traditional.
Industry groups finance.
The industry that support finance et cetera, but no question that the leasing has slowed there.
And so we're thinking that rather than looking at $1 <unk>. We may be looking more at 50 to 75000 square foot tenants to fill the demand for that building.
Bob Thank you.
Yes, hi.
Steve So on platform 16 that project doesn't deliver until 2025 and as we've told you many times before that the San Jose Silicon Valley market is built and they will come market, particularly tenants don't look at the buildings until they can walk the building or get a feel that this deal is going.
Up.
We still see it as a tech building, it's the only building that's going to deliver in that 2025.
<unk> frame in Silicon Valley, that's new.
So we're still optimistic that over the course of the next 24 months.
Tech user will materialize for the building.
Thank you.
And I show. Our next question comes from the line of.
Blaine Heck from Wells Fargo. Please go ahead great.
Thanks, Good morning.
Fourth quarter seemed to be a slow leasing quarter in the overall market <unk> DXP did relatively well compared to the market, but can you talk about whether you think you've seen a change in the level of demand or leasing activity. Thus far this year and maybe more importantly, what do you think needs to change to get some of the tenants that have been reluctant to sign a law.
Or leases to make those longer term commitments.
So blayne I am.
Make a comment as well I hope that my comments were both August and thoughtful regarding what I think we think the demand picture is which is there is less overall demand in the market today due to the nature of the business economies changes.
And we don't think theres going to be much if any are positive absorption occurring.
We think we will lease more space than our peers, because we have premier work spaces and places that are geared towards the tenants that are in the market and then there are making decisions and I don't actually believe that the tenants that are looking for space are concerned about making long term decisions there.
For the most part making long term decisions and we are still doing longer term leases and all of our leasing that we've been doing in the last couple of quarters. Some of it hasnt hit the lion's yet in terms of our occupancy numbers.
But so I can't tell you how long the economy is going to be where it is but as the economy recovers traditionally.
<unk> and slash occupancy our second derivative events associated with that and so it will be a period of time before tenants are core unquote growing again.
Maybe you have some other ideas.
You covered it well.
Thank you.
And I show our next question.
Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning, good morning out there.
First as a comment maybe dock 72 would be good for resi conversion, if youre, taking suggestions from the cheap seats.
A question for Ray is in D. C. It's good to see the politicians and including in Congress addressing the the work from home.
And <unk>, that's with the federal employees.
My question for you, though is.
How much does work from home for government workers really effect like Reston Town Center and the private office market I would guess that one GSA doesn't really sign high price deals too just given what's been going on I'm guessing more of the private investment market is focused on private companies or D O D or other <unk>.
<unk>.
Tenants, who have to be an office. So just sort of curious your take on what's going on in D. C and how much we need government workers to come back for the market to flourish.
Well first of all happy new year, Alex Thanks for the question.
We've been here in the district, it's really kind of frustrating to see the federal workforce.
Not fully engaged.
The return to work the real estate Roundtable has been very effective in reaching out to.
Mir Bowser and.
Really stressing to her the importance for the federal workforce return not only just in terms of consumption of office space with the social fabric of the city is completely deteriorating with the workers not coming and we're also very concerned about the impact upon metro.
Before the pandemic there was almost <unk>.
Riders a day on the Metro now is less than 300000, and then that will have an impact on the public transportation.
<unk> system here.
As it relates to.
The restaurant, specifically, we have a very large portion of our tenants who are engaged in government contract and support to the federal government.
The policy of the federal government not to return to work also is impacting occupancy in reston and while many of them have the requirement to be in the office because of the secured nature of their work.
It's still impacts the more traditional office.
For the federal government contractors, so it's impacting restaurant from a.
Our presence in the retail.
Impacts things like the fitness center and other support activities, we have in the building so even though we're a diverse.
Tenant base there the lack of the federal government coming to work is still impactful.
Or really assisting to the leadership in the district the importance for the federal government to return to their offices.
Thank you.
And I show. Our next question comes from the line of Michael <unk> from Citi. Please go ahead.
Great. Thanks.
It seems like relative to their east coast peers as West Coast markets continue to lag I guess, what sort of concern do you have for the long term viability of a market like San Francisco and if there were a bit would you look to maybe allocate capital out of there and then Doug one thing I wanted to clarify real quickly on your leasing comment I think you said, 39% of the leases.
This quarter came from renewals some of which took the same amount of space versus some amount of the downsize what percentage took the same space versus downsized. Thank you.
So Michael.
Don't have all the data in front of me Mike.
So we looked at it the other day in terms of the number of tenants there were two or three tenants the downsize, but they were larger I mean, the biggest example, being we had zillow trulia, which.
Renewed on two out of six floors, and 535 market Street, but there are one or two tenants like that the majority in terms of the number of tenants with signed leases that did renewals actually we're seeing basically the same number of square feet.
And then <unk>.
And to answer your question about West Coast.
And capital allocation.
You are right the West coast is lagging from a return to office perspective, and also from a leasing perspective is driven by the fact that there is a much higher percentage of technology users in those markets and those users are not using our office to the same extent for their industries are and.
So far they've led other industries in terms of the layoffs, which impacts space to use as we've described.
Look we're going through a cycle and award cycle means it goes down and it comes back up. This has happened before every cycle is different but they all look somewhat the same and I'm convinced this is a cycle as well and we will have a recovery and.
I think technology industries, the institutions that exist in California are not going to go away, but we.
We are going to have to work ourselves through the recovery that we see ahead.
Well one thing I'd like to add is on the kind of tenants.
Spanning versus contracting.
We have done an analysis of the rent leases that commenced in 2022.
For renewals.
And we had about.
4 million square feet of leases that commenced.
And.
We had actually those tenants expanded by 6% or almost 300000 square feet.
In the fourth quarter. It was a reduction of about 100000 square feet, but overall some expand some contracting again. This is only tenants that renewed in our portfolio.
Or are they took on additional space before their lease came up it doesn't have it doesn't count tenants that either left our portfolio and I don't know what they did before that or they came into our portfolio and we don't know what their size was before that but thats a signal that.
Not every tenant is contracting there's many tenants out there that are continuing to take more space.
Thank you.
Okay.
And I show. Our next question comes from the line of Rich Anderson from <unk>. Please go ahead.
Good morning.
If I could just play.
Devil's advocate on the Premier office excuse me Premier workspace.
Motif that you you are talking about here.
In a deep recession type of environment.
Is it is it potentially an outcome, where you could see a reversal of the trends that you're seeing relative to conventional more cookie cutter office, where people are looking for cheaper alternatives.
And maybe your Premier office.
Product becomes more vulnerable.
In a deep recession type of scenario is that something.
So that has happened clearly has happened in the past what gives you comfort that that won't be an outcome for you this time around.
Yes.
Certainly understand the logic of your question I would answer it simply that history has not shown that to be the case higher quality buildings have outperformed in recessions in the past.
And I think this recession is different because of the work from home.
And the flexibility that technology is providing for workers and therefore, I think this flight to quality and change of how we describe our business from office to Premier workplaces more important I think.
Market share.
That the Premier workplaces are getting in this downturn is actually much higher than it has been in previous downturns and it's important when you look at our business to not look at the overall market statistics, but to focus on the premier workplaces, because thats actually the market that we're competing in.
And I would just add rich that.
Two things one is most I think of the economists pundits would say if we hit a recession, we're not going to go into a critical deep recession.
But if you had a deep recession and we've had deep recessions in the past typically what has happened is there has been a compression in the pricing between class a and class B meeting class a has come down to a level that makes it so attractive that it squashes class b demand and people look at the realm.
<unk> opportunity set and jumped at taking additional space and great buildings, because there has been a dramatic reduction we don't believe we're going to see a quote unquote deep recession, but that is what has historically happened.
Thank you.
And I show. Our next question comes from the line of Anthony <unk> from Jpmorgan. Please go ahead.
Yes. Thank you I was wondering if you could comment on dispositions in in terms of anything you might have in the market right now our expectations for this year and whether or not you think that could be additive or dilutive to where you put guidance at this point.
Yes, we have assets that we would like to dispose of non core assets, but as I mentioned in my remarks.
Capital markets are very illiquid.
Generally, but also I would say for office assets and therefore, we didn't put out a.
Guidance on what we thought dispositions were for this year, because we don't the market's not cooperating in a moment.
Hopefully that will change, but we can't forecast that right now.
Tony if something if we would be in a position to sell something unlikely that we're going to put anything on the market in the beginning of 2023, which means any transactions would likely be weighted towards the back end of the year.
Thank you.
And I show. Our next question comes from the line of Ronald Camden from Morgan Stanley . Please go ahead.
Hey, just looking at the <unk> guidance of 167, when I compare that to the <unk> number of 186 any sort of that's the 19th Delta any sort of high level, how much of that is sort of the G&A seasonality versus sort of a onetime charge you talked about versus interest cost.
It would be helpful.
If I could sneak another one in just on the view Boston opening up in April just sort of curious sort of how the marketing highly interested in an update there would be helpful. Thanks.
So Mike, let's say these numbers I'll, let Bryan Koop, just describe sort of where we are with our plans from a marketing perspective on.
<unk>.
Observatory in Boston, we haven't officially announced the date yet so.
Yes.
<unk> news is given what we've worked through the last two years in construction work.
So you're ahead of schedule and it's turned out beautiful we're doing marketing tool.
Tours with people that would like to look at events in the future I'd say were oversubscribed on that and we're determining how we want to execute that because as you know each of these observatory locations are fairly highly bespoke and different and.
We have a good deal of space that we can do the event soon.
Pre marketing is going really well city of Boston is gearing up for tourism and we've seen a big response from that sector and <unk> to our team.
And in General, we're just focused on hiring people and getting staffed up for F&B and the overall staff, but we feel really great about it we feel.
Awesome about how it's turned out.
It's just spectacular.
So running on the first quarter, you're right, it's obviously down because it's seasonal.
We have a hotel that is seasonal that because it's located in Massachusetts. There's very few people that come do it during the winter. So it actually loses money in the first quarter and the profits. The other three quarters of the year and then our G&A expense is front loaded because of vesting and payroll tax issues and then.
Obviously, we borrow more money in the fourth quarter. So we expect our interest expense will be higher in the first quarter than it was in the fourth quarter.
The portfolio itself is actually we expect it to be up slightly and then going out for the following quarters, because if we started $1, 67% and we our guidance is much higher than that for the full year.
Obviously, we see pretty significant increases in the following quarters and as I mentioned, we expect our occupancy to start to move up in the second quarter.
Brian just talked about view, Boston, and we expect that to open up in the second quarter. So there are several things that are occurring.
In the second and third quarters that are going to push those.
The <unk> up later in the year.
Okay.
Thank you.
Great.
Yeah.
And I show. Our next question comes from the line of Sterling Brzezinski from Green Street. Please go ahead.
Hey, guys. Thanks for taking the question.
Just curious I think the story, thus far has been that office landlords have been able to hold face rents and we're giving up more on the concession side of things, but just curious Doug.
Given your comments about not expecting positive absorption in 2023 is this the year that we started to see landlords sort of give up on the face rent side of things.
I guess I don't think landlord at least this landlord is never going to give up on anything.
And we look we have we have situations in our portfolio, where we have very little space in a particular building and where we're very comfortable in.
And able to handle both.
Relatively modest concession packages and strong base rates, we have other <unk>.
<unk> of our portfolio, where we have vacancy or availability, where we are trying to be aggressive about increasing our occupancy and so in those cases, we are.
Thinking about all of the arrows in the quiver and figuring out what the right approaches for at a particular client that we're trying to serve some of those clients prefer to have free rent and some of those clients. We prefer to have more capex in terms of transaction costs and we might even agree to do turnkey builds in certain cases, and some of them may be looking for a lower quote unquote annual run rate.
And sort of to use the concessions in a different way. So I think it's very hard to sort of try and articulate a particular component of an economic deal that is being done with a with a client of ours and sort of say, we're going to gear towards one thing or another because we try and meet the needs of those clients in general transaction.
Costs are higher why because there is more available space and it's still very expensive for a company to move or relocate or grow.
And the landlord is contributing capital to that and it's coming in the form of either additional free rent or additional.
It's generally not in the form of quote unquote.
The face rent on the deal and I don't think thats going to change much as we approach 2000 Quaker.
Okay.
Thank you.
And I show. Our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.
Hi, yes. Thank you.
Just do you have any comments or commentary you can give around the.
The restructuring announcement from Salesforce from about a month ago I think.
They are both looking to divest their own real estate holdings, but also.
Reducing their footprint, where they lease space any conversations you've had with them and any impacts to your portfolio.
So I'll just make a comment and then I'll turn it over to Bob. So we have one building, which has a long term lease with Salesforce Dot com, which is salesforce tower, which is to some degree there there.
Pre eminent building and is the preeminent building in San Francisco.
And Bob why don't you comment on any conversations we've had with Salesforce. They are already in their utilization of space.
Yes, Dave got multiple buildings on the market, maybe at 53 monarch Cross the street that they own with 400000 feet. They had several hundred thousand square feet per lease.
350 mission and dig that space available.
The space that was occupied by flat all the indications we've had so far as Dave indicated no interest and sub leasing any of the space in the tower.
They do we've got nine plus years existing weighted average lease term on their lease in that building. So we're really not too concerned about it we do get calls constantly about major tenants. We just had one this past week 400000 feet that we'd like to be in the tower, but we don't have any space available.
Yeah.
Thank you.
And I show. Our next question comes from the line of Anthony Powell from Barclays. Please go ahead.
Hi, Good morning, just watching him acquisition, what you target.
In terms of <unk> changed in the past few months given the environment.
Less willing to do deals like.
Mr Park Avenue, given the leasing there and more targeted source stabilizer financial tenants, maybe just comment on what you're looking for would be great.
Well as I mentioned at the outset.
We.
Have the capital on the balance sheet to make additional acquisitions, but we're in the <unk>.
Market is repricing and so we're going to be very focused on evaluation for any acquisitions that we would look at in the coming years.
Yes, I also by the way I would also say I would add to that we are as I mentioned in my remarks, our focus is going to be on premier workplaces.
<unk> life science and residential development.
And I would just add.
The following which is if we're looking at an existing asset there obviously.
If we can't make it a premier workplace, we're not going to spend time on it. If we think we could then it's going to be a question of what are our views are on how long it will take us to lease up the space.
And I would say that we are we're constructive about our markets, but we are realistic as I think all of our comments. This morning were about the overall absorption of space in the marketplace.
And so I'm not sure our underwriting is necessarily going to mesh with our the seller's expectations for what they think their buildings or we will look at stuff, we will be thoughtful about it we will make offers but whether there is an ability for there to be a meeting of the minds I would say, we're skeptical that that will happen in 2023.
Thank you.
And I'm sure. Our last question comes from Nick <unk> from Scotiabank. Please go ahead.
Thanks, a question for I guess Owen or Doug I was hoping to get a feel for as you're having conversations with your JV partners or pension funds or other potential.
Institutional partners.
What is their attitude right now towards office space, particularly.
Nation to investing incremental capital until buildings with pipes building.
Buildings are still possible, what Ari and ultimately how you think this is all going to affect office building values.
Yes.
I think generally institutional investors in real estate not just the office are cautious at the moment given higher interest rates.
Slower leasing volumes that Doug just described and what the repricing is and so I <unk>.
Investment volumes generally from institutional investors have haven't gone up or have gone down materially. So as it relates to office I think it is I think there is capital available from institutional investors for Premier workplaces that are underwritten with the new cost of capital as well.
As the leasing.
The dynamics that Doug described and the last question, which is we have a slower leasing environment.
And the assumptions when you're underwriting a deal need to reflect that but assuming you have all those pieces I think there's capital available for premier workplaces.
I also think the other thing to think about here too as the.
We talk about the institutional investment world as it's some homogenous group of investors, while it's not they all come from different geographic locations. They all have different funding sources. They all have different funding obligations and so they don't all operate in a unified fashion.
My comments are not targeted any one group, but I would just I would just point that out.
Thank you.
That concludes the Q&A session at this time I would like to turn the call back over to Owen Thomas Chairman and CEO for closing remarks.
Yes. Thank you all for your time attention and interest in DXP.
Have a good day. Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect good day.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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