Q1 2023 Boston Properties Earnings Call
Good day and thank you for standing by welcome to the Q1 2023, B X P 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 the session you will need to press star one one on your telephone you will then hear and automate.
Message advising you hand has raised so which are your question. Please press star. One again, please be advised that today's conference is being recorded I would now like.
To hand, the conference over to your first Speaker, Helen Hahn, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to Dxp's first quarter of 2023 earnings Conference call. The press release and supplemental package were distributed last night and appointed furnished on form 8-K in the supplemental package. The XP 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 call.
These documents are available in the investors section of our website at investors not be X 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 he believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that 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 Dxp's filings with the 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.
He's limit yourself to one question. If you have an additional query or follow up please feel free to rejoin the queue I would now like to turn the call over to Owen Thomas for his formal remarks.
Thank you Helen and good morning, everyone.
Today I'll cover Bx piece continued steady operating performance as demonstrated in our first quarter results.
The key economic and market trends impacting our company and Dxp's capital allocation activity that's funding.
Despite significant economic headwinds DXP continued to perform in the first quarter, our <unk> per share was above both market consensus and the midpoint of our guidance and we increased our F. F O per share guidance for all of 2023.
We completed 660000 square feet of leasing in the first quarter with a weighted average lease term of seven seven years.
Kept occupancy flat, despite more challenging leasing market conditions.
Finally, DXP just published its 2022, ESG report and announced our second annual ESG Investor webcast for May 31.
So the office sector is clearly facing challenges in the current economic environment. There are two underappreciated trends, which we believe will have a significant impact on dxp's longer term performance.
First the deceleration in leasing, which we forecasted last year and are now experiencing.
Driven primarily by the economic slowdown a cyclical trend rather than remote work exactly a secular trend.
In other words, we believe the current leasing slowdown is cyclical and will recover along with economic conditions are.
Our clear evidence for this observation is our own leasing experience.
2022 when the economy was much stronger and significantly fewer workers were using their offices, we leased $5 8 million square feet essentially a normal year just below our 10 year average level of leasing.
This year the economy is clearly weaker but many more workers are back in the office at our leasing has slowed.
But we are not in a recession defined as negative GDP growth approximately 75% of S&P 500 companies are forecasting lower earnings this quarter and aggregate earnings are expected to drop over 6%.
There are seemingly daily announcements of corporate layoffs with slowing growth companies are more focused on cost control, reducing head count and taking less or reducing their space.
In addition capital market volatility on the heels of recent bank failures drive companies to be more cautious on capital outlays, including capital required for leasing new space.
With more challenging economic conditions, the return to office trend continues to improve.
A major tech companies have announced returned to work expectations and specific policies.
And many companies in a variety of industries continue to tighten their requirements, increasing the day as expected in the office.
President Biden has mandated a substantial increase for in person work at federal offices.
U S West coast cities, so improving remain behind the rest of the U S and other global business centers and their return to office work.
The second underappreciated trend as office users are much more discriminating about building quality than the current market sentiment regarding the overall office asset class.
The Premier workplace segment continues the material are out materially outperformed the broader office market users are compelled to upgrade their buildings and workspaces to attract that workforce back to the office.
Clients increasingly prefer assets with the highest quality managers and consistent and stable ownership.
Buildings facing that default do not have the tenant improvement and leasing commission capital available to complete leases and are therefore uncompetitive.
Lastly, full or significant remote work is more frequently allowed in practice for support workers across industries and areas such as accounting.
And HR.
This segment of the workforce does not as commonly occupy premier workplace assets, putting more pressure on the market for lower quality buildings.
As described previously CBRE is tracking the performance of Premier workplaces in the U S and for the five CBD, where DXP operates premier workplaces represented approximately 17% of the 733 million square feet of space and less than 10% of the total buildings.
In the first quarter of this year direct vacancy for Premier workplaces increased only 20 basis points to 10, 7%, while direct vacancy for the balance of the market increased 80 basis points to 15, 5%.
Also for the first quarter net absorption for the Premier segment was a negative 200000 square feet versus a negative $3 3 million square feet for the balance of the market.
For the last nine quarters net absorption for the Premier segment was a positive $6 9 million square feet versus a negative $28 6 million square feet for the balance of the market.
Rents and rent growth are higher for Premier workplaces, and we believe the segment captures the majority of all gross leasing activity.
Including two buildings undergoing renovation.
94% of Dxp's CBD space is in buildings rated by CBRE as Premier workplaces, which has been and will be critical for our long term success.
Moving to private real estate capital markets U S transaction volume for office asset slowed materially to $6 $6 billion in the first quarter down 47% from the fourth quarter of last year.
The reduction was by no means an office specific trend as transaction volume across all asset all real estate asset classes was also 43% lower over the same period.
Real estate values have reset down due to higher capital costs and sellers have so far been unwilling to accept lower prices, creating a big bid ask gap common in declining markets.
Mortgage financing for office is challenging to arrange and available for only the highest quality leased assets and sponsors.
Given the dearth of transaction activity office asset pricing is difficult to determine but there were several data points of note in the quarter and.
In the seaport of Boston.
The sale of about 37% interest in a lab development at 15, Necco Street to an offshore property company for evaluation of over $600, a square foot and approximately a five 4% cap rate.
The building, which is being delivered into service. Later this year comprises just under 350000 feet and it's fully leased to strong credit life science user for 15 years.
In downtown New York City, a global property company purchased the 49% interest it did not own in one Liberty Plaza for $426 a square foot at a six cap rate.
6% cap rate from a global fund manager.
$2 3 million square foot building is 80% leased.
There are several smaller non premier workplaces currently in the market testing pricing at cap rates of 7% or greater.
Okay.
Regarding dxp's capital market activity in the first quarter, we completed the acquisition of a 50% interest in World Gate, a residential conversion opportunity located on World Gate drive in Herndon, Virginia near Reston Town Center for $17 million.
Property. Currently consists of two vacant office buildings, comprising 350000 square feet and a 1200 stall parking garage all situated on a 10 acre site.
Plan, which is subject to receiving entitlements as to demolish the two office buildings and reuse a portion of the existing garage to support a 349 unit rental and for sale residential development.
DXP will serve as managing member and developer in partnership with Artemis Real estate partners. The current owner of the project.
Development is not expected to commence until 2024.
Additional new acquisition opportunities will undoubtedly grow in this environment and we will remain highly opportunistic and solely focused on premier workplaces life science and residential development.
We added the previously described $2 90, and 300 Binney Street developments to our active construction pipeline this quarter and now have underway 16 office lab retail and residential projects as well as view Boston the observation deck at the Prudential Center.
These projects aggregate, approximately 4 million square feet and $3 $3 billion of DXP investment with one with $1 9 billion remaining to be funded and are projected to generate attractive yield upon delivery.
We have received recent inquiries about our funding sources and needs, which is understandable in the current market environment.
We currently hold elevated levels of liquidity and have access to both the unsecured debt market and private secured mortgage mortgage market for select assets, albeit at higher rates and spreads than a year ago.
We can also monetize select residential assets and attract and attract JV partners into our lease development pipeline.
Our internal discussions on funding strategy are not about whether we are able to access capital, but rather how to best select and sequence our capital raising options to minimize costs and maximize flexibility Mike.
Mike will provide more details in his remarks.
In summary, despite unconstructive market conditions, DXP had another productive quarter with financial performance above and leasing in line with expectations.
DXP is well positioned to weather the current economic slowdown given our position in the Premier workplace segment, our strong and liquid balance sheet with access to multiple capital sources are significant development portfolio and progress and our potential to gain market share in both assets and clients due to the current market dislocation.
Lastly, on an organizational matter.
John Laing, our senior Vice President, who oversees the L. A region has elected to pursue professional interests outside of DXP.
John joined US seven years ago, and has been an important contributor to <unk> growth and the La region.
Melissa Cohen, La native and former project manager and Dxp's, New York Office.
We'll rejoin DXP as head of development for La <unk>.
Alex Cameron our current head of leasing in L. A and Melissa will be DXP senior later senior leaders for our La region. These changes will be effective at the end of June .
Let me turn it over to Doug Thanks, Joe and good morning, everybody. So I think it's fair to say that we are operating in a challenging real estate supply and demand environment.
And as Owen stated businesses continued made pronouncements about the importance of in person work.
But office job reductions related to the economy have impacted both supply and demand.
In our portfolio, we continue to see incremental pickup in daily activity as we look at the month to month trend lines, and we see weekly patterns emerging based upon industry. The legal profession, it's got a different perspective that asset management, which is different than private equity people using their spaces at different times.
Frequency of work. However in the office is really about three days per week across our markets, where we track the data and this include San Francisco, obviously, our portfolio being primarily professional services and financial services No city is back to the levels of urban work activity that existed in 2019.
We are aware of isolated instances, where an organization has required all of their employees to work in their existing office most of the week and they don't have enough space, but that's just not the norm.
Pendulum could swing back to where organizations find themselves short on space for their existing and future workforce, but it's not the way Theyre planning today.
The most dynamic and expanding reservoirs of demand over the last decade technology and life science users are focused on profitability and cost reduction and capital preservation. This doesn't lead to near term positive absorption.
There's a lot of variability with the financial services and professional services firms space needs.
Is that a reducing head count through layoffs are re planning their facilities with less space.
Evident that some law firms in the market are signing leases with smaller footprints as they move to a more uniform opex module, while a few are actually taking additional space.
The concentration of user demand strength in 2023 is broadly speaking alternative asset managers private equity venture hedge funds specialized fund managers. These companies are growing their teams and their capital under management.
This pool of clients typically wants to occupy premier workplaces, and it's not surprising that dxp's strongest activity is at the general Motors building in Manhattan, 200, Clarendon and the Prudential Center in Boston to 'twenty to 'twenty 200, 2100, Pennsylvania Avenue in D C. The urban core.
Core of Reston Town Center in Northern Virginia, and our Embarcadero Center assets in San Francisco by the way. We just don't have any space available at Salesforce tower, which is why it is nonetheless.
<unk> office supply picture is not a new York or San Francisco story.
There is high headline availability in virtually every market across the U S availability rates are at or above, 20% and coastal and Sun belt markets. These availability rates published by the brokerage firms and reported headlines track all of the space and every pocket of each.
Market. We've spent the last two years redefining our business is being developers and operators are premier workplaces, and explaining why these headline numbers hold much less relevant.
<unk> gave the most recent data, which demonstrates the dramatic bifurcation between Premier workplaces, and general office space availability and premier assets matters, and the location and the specific attributes of those buildings matter.
The client looking at $3 99 Park Avenue is not consider sharing space on third Avenue Midtown south of downtown.
But 20000 square for client wants to be in a premier building in the back Bay of Boston on a single floor with primarily exterior office configurations. There are limited availabilities, if a 40000 square foot tenant.
Once a client wants to be interviewed space North of 42nd Street in South of 59th Street between fifth Avenue in Lexington. There are limited availabilities. This is why we could recapture a 30000 square foot floor at 200, Clarendon this quarter and re leased the space as is with immediate occupancy to a new client. This is why we can lease the floor.
A mid 2020 for exploration at 399 Park Avenue this quarter with no downtime to a growing client at the building last quarter I described the 50000 square foot client in San Francisco that lease space at Embarcadero Center and two had two alternatives outside of a renewal the headline information that were reported.
By the brokerage community, it's true it's factual, but it's just not nearly as relevant if people think in our business.
Dxp's regional teams are leasing space.
We completed completed 660000 square feet of transactions during the first quarter on our last call. We gave an expectation of 3 million square feet for the year, which translates to about 750000 square feet per quarter on average we reaffirm this at the <unk> conference in March and our public webcast. There were 57 lease.
It is across our markets 29 leases were with newer growing tenants 410000 square feet and 28 renewals totaling 250000 square feet, we had 10 expansions and three contractions.
As we sit here today, we have signed leases that have yet to commence our in service vacancy totaling approximately one 3 million square feet, and one 2 million square feet of that space.
Anticipated to commence in 2023 this quarter, we added a secondary occupancy statistic. It shows the effect of these signed leases on our quarterly occupancy or.
Our headline in service occupancy stands at 88, 6% and with leases.
Signed but not commenced it rises to 91%.
This portfolio includes our in service properties and does not include the development portfolio, which is up to 4 million square feet and it's 52% leased.
We currently have leases in negotiation totaling 900000 square feet and we have a current pipeline of additional active proposals totaling over one 5 million square feet.
I would expect us to sign 95% of the leases in negotiation and more than 50% of the $1 5 million square feet of proposals. So to summarize we have active dialogue on 165 million square feet of space as we end the first quarter of 'twenty three.
40% of these leases arent vacant space or $2 23 expirations.
Should add about 660000 square feet of space to our occupancy we have one 2 million square feet of signed leases with an anticipated 2023 commencement.
With the leasing pipeline this at 1.86 million square feet to our occupancy our remaining 2023 explorations are $2 2 million square feet, we have additional activity across the portfolio and still expect to lease 3 million square feet. This calendar year.
The mark to market on the leases in the supplemental so we were down about 3% overall and D. C was down 47%, which was a little bit choppy.
This is due to our restructuring of a 70000 square foot Regal cinema lease in Springfield, Virginia, If you exclude the Regal cinema lease.
Portfolio was up two 5% and D. C was down 10%, we were up 21% in Boston.
9% of New York City, and up 6% in San Francisco the leases, we signed this quarter on second generation space were essentially flat across the company with Boston up in the other markets slightly down.
During the quarter, we experienced one life science default on 12000 square feet at 880 Winter Street, where forum biotech companies shut down its U S. Operations. This was one of the spaces. We built on a speculative basis in 2022, we are negotiating a new lease on this space as is with the rent that's 9% higher than the pre.
Right.
To provide some perspective on our life science credit exposure, our total annual revenue from in service life Science clients is about $226 million or 8% of our total revenue.
70% comes from public companies with equity market values over $1 billion. The other 30% $68 million is made up of 66 clients 20, public and 46% privately funded.
We've also signed leases that have yet to commence with total annual revenue of a $128 million 90.
Percent is with Roche Genentech, Astrazeneca and the broad Institute.
Activity in the life science market continues to be slow across both greater Boston and South San Francisco and there is new on lease space being added to the markets.
There are a few large requirements that are touring but as I have previously discussed the bulk of the demand is from small private companies that are looking for belief built space, our new client at 880 Order Street fits this profile.
We are also negotiating three additional leases at the development project at 651 Gateway in South San Francisco totaling 57000 square feet of property will open in 2024 and each lease requires our partnership to complete turnkey spaces.
DXP will outperform the market and we will continue to lead the available space because our portfolio was fundamentally comprised of premier workplaces and the majority of the demand new and existing clients in the market we want to be in these types of properties.
Medium and small financial and professional service clients will make up the bulk of the leasing we completed in 2003, we completed 57 leases during the first quarter, we had four leases over 30000 square feet and only one above 50000 square feet.
Occupancy case will be captured through lots of small and medium sized leases and renewals. We will have some contraction and we will also have some expansions tour activity continues to be strongest in the Boston CBD, New York City Plaza District in San Francisco, where the concentration of small professional firms and financial firms are.
I'll stop here and turn the call over to Mike.
Thanks, Doug.
I am going to cover the details of our first quarter performance and also the changes to our guidance for the year.
But before I do I would like to address a couple of questions. We've received from shareholders and we will start with a discussion of our liquidity our near term capital needs in the state of the debt markets from our perspective.
There's been a lot of talk in the media about the lack of financing available for commercial real estate and while we agree that underwriting criteria is tighter and financing costs. Both in terms of credit spreads and reference rates are higher there is financing available for high quality, well leased premier workplace assets and portfolios.
In fact in the past six months, we issued $750 million of unsecured green bonds in the investment grade bond market and extended and increased our term loan with a syndicate of banks to $1 2 billion.
Providing $470 million of incremental proceeds.
We are currently in a strong position with $2 4 billion of liquidity comprised of $900 million of cash and full availability under our $1 $5 billion line of credit.
We do have 2023 capital needs, including funding, our development pipeline and refinancing expiring debt facilities for.
For the remainder of 2023, we projected to spend approximately $750 million to fund our developments.
Our consolidated 2023 debt maturities are limited to a $500 million bond issuance expiring in the third quarter of 2023.
Do you extend the window into 2024, we have another $700 million coming due in the first quarter of 2024.
The bond market experienced volatility and higher credit spreads in March coming out of the bank failures over fears of a broader crisis.
In April the market has settled down and our credit spreads have come in meaningfully we.
We believe we could issue a new 10 year bond today at between six 4% and six 7%, which is inside the pricing we issued on a five year deal last November .
Spreads are still wider than historical levels, but the market is open and we expect to continue to monitor it as an option for our refinancing needs.
And our joint venture portfolio, we just exercised a one year extension on our mortgage loan for the Marriott headquarters located in Bethesda, and we have an additional option to extend it to 2025.
Our remaining 2023 mortgage expirations totaled just $287 million at our share and we have an extension option available on $168 million of this.
The expiring mortgages or for the Verizon anchor hub on causeway, New development in Boston that is 94% leased and 500 North Capitol in Washington, DC that is a 100% leased we expect to refinance or extend these loans in the mortgage market and are actively working on term sheets.
As Owen mentioned, we have a broad array of capital sources that we consistently evaluate that are available to us in varying amounts and cost to fund our capital requirements.
The unsecured bond market has been a reliable that capital source for us for over 20 years, we have a very liquid outstanding bond complex and a supportive core fixed income investors, who have partnered with us for years.
As I just mentioned the market is opened but at a cost higher than our historical levels.
The mortgage market is also available to us we have a large portfolio with over 90% of our assets unencumbered.
This allows us to selectively secure assets, if we want to raise capital.
And appropriately leveraged and well leased premier workplace can be financed in today's mortgage market at pricing inside our bond pricing.
We're also active in utilizing institutional private equity to help fund our acquisitions and development activities.
And although investors are highly selective.
Continue to evaluate investment opportunities with us we have an attractive pipeline of well leased developments in existing properties that represent unique offerings to these investors.
Asset sales are another source of capital and in the past four years, we've sold over $2 billion and properties and have efficiently recycled the capital into newer investments.
Asset sales market has definitely slowed dramatically with the increase in interest rates. So it is a lower probability for us in 2023. However, we have properties that we could sell including assets in our multifamily portfolio that are more liquid in today's market.
So while the public discussion continues to be broadly pessimistic on real estate and the availability of capital. We continue to have plenty of flexibility with strong liquidity and multiple sources of debt and equity capital that we can turn to.
Another question, we have received from investors is about our dividend policy given we are trading at a historically high 8% dividend yield.
We have maintained a consistent dividends since the beginning of 2020.
Our SAP D provides reliable coverage of our dividend such that we're able to reinvest excess cash flow into the growth of our business.
<unk> been successful in selling assets annually and fitting the gains on sale within a regular dividend policy without the need for special dividends.
Long term our goal is to maintain a steady dividend and increase it over time as our developments add to our income.
In the near term a slowdown in expected sales activity would create room in our dividend relative to the REIT distribution requirements.
If our outlook for the economy in the capital markets, because more negative and asset sales slow we do have flexibility to modify our policy.
Now I would like to turn to our earnings results. We reported first quarter <unk> of $1 73 per share our results exceeded the midpoint of our <unk> guidance by <unk> <unk> per share.
Nearly all of the variance to our guidance is from higher than projected NOI from our portfolio with <unk> coming from lower operating expenses and <unk> coming from higher rental revenues and fee income.
The expense savings are the result of lower energy cost due to both lower commodity prices and reduced utilization related to the mild winter in the northeast, we also incurred lower repair and maintenance expenses than expected.
As a result, we are increasing our funds from operations guidance for 2023 by <unk> <unk> per share at the midpoint, our new range of $7 14 to $7 20 per share.
Our full year guidance increase is less than the Q1 <unk> beat as we expect that <unk> of our Q1 operating expense savings will be moved into the rest of the year in the form of lower expense recoveries and the deferral of repair and maintenance expense.
So the <unk> increase in our full year guidance includes three sense of improvement in our portfolio NOI that is comprised of <unk> <unk> of lower expenses and a penny better than projected revenues.
While we are increasing our portfolio NOI guidance overall, we remain comfortable with the same property guidance range that we offered last quarter.
This includes our assumption that same property NOI growth from 2022 will be flat at the midpoint of our range while on a cash basis, we expect same property NOI growth of 1% two 5%.
We have increased our guidance for fee income for the full year by a penny per share. The increase is a combination of higher construction management and development fees.
We've made no changes to our interest expense assumptions. Currently we are assuming an additional 25 basis point increase in short term rates and then rates remaining flat for the rest of 2023.
So to summarize we've increased our guidance range for funds from operation to $7 14 to $7 20 per share the increase of <unk> <unk> per share at the midpoint.
And it comes from three a better projected contribution from our portfolio and one of higher fee income.
The last item I would like to cover is a reminder of the diversification and credit quality of the leases in our portfolio.
Doug provided some of the details on the 8% of our portfolio leased to life science clients and if you take a deep dive on our technology clients. The results are very similar.
Tech clients comprised about 17% of our revenues and over 80% is from large publicly traded companies. We have 85 leases with smaller public and private technology companies with an average annual rent of about $1 million each.
Our tech and life science clients comprised 25% of our revenue base. The rest of our portfolio consists of a diverse mix of financial services companies law firms other professional service firms media real estate retail and manufacturing companies.
Overall, our portfolio is incredibly diversified by client by industry sector and by geography, and our weighted average lease term is approximately eight years, which leads to manageable annual lease expiration exposure.
This portfolio construction is by design given our focus on premier workplaces that attract a high quality client base that desires longer term leases and are focused on attracting and retaining a talented workforce.
Operator that completes our formal remarks, if you could open up the line for questions that would be great.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone.
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.
And I show. Our first question comes from the line of Steve <unk> from Evercore ISI. Please go ahead.
Yes. Thanks, Good morning, Doug appreciate all the comments you made on leasing I did notice that there really was no I guess incremental leasing on the development pipeline outside of the two new projects that got added.
So could you maybe just speak to the pipeline that you talked about how much of that leasing that you're in discussions on it is for the development and.
I guess, how do you still feel about the projected yields on the development pipeline today.
Sure so the.
The pipeline of unleash property, Steve is pretty is pretty balti right. So it's primarily in two places.
In platform 16 in San Jose, which won't deliver until the beginning of 2025 and as you probably can surmise theres not a lot of technology demand in the market. Today. So there are no conversations going on there and the other large bulk you want it's 360 Park Avenue, South and we are starting to have conversations with.
Smaller sized tenants, so 1% to four floors.
Hillary I'll, let you sort of comment in a second on that but the the overall and you'll notice are an increase in our costs in some of our development assets because we have pushed out the leasing timeframes and therefore, we're carrying those properties for a longer period of time, and obviously interest expense is meaningfully higher.
And then when we started these projects so thats impacting that so so the returns on our development assets will be slightly lower.
It will depend on the leasing success that we have Steve sorry, I can't give you a comment on how many basis points theyre going to be the Hillary if you want to comment on Park Avenue South.
Hillary.
Hello are you may be on mute.
Right.
Our next question in the queue comes from the line of John Kim from BMO Capital markets. Please go ahead.
Thank you.
You discussed extending the maturities on your JV mortgage debt and that market overall.
Mortgage market being inside bond pricing currently which really goes against the grain of some of the issues, we're having with the regional banks I was wondering if you could just elaborate about how healthy that market is and who is willing to put more capital into office assets today.
So.
No I think that the conversation around regional banks as <unk>.
Something that is obviously out there theyre not necessarily lenders to us on properties like ours.
We do.
<unk>.
Credit with the larger multinational and global banks.
That we do business with and some of the Super regional banks I would call them.
And then there is life insurance companies or pension funds.
And there is the <unk> market, which is the most active part of that is really the conduit market place in there.
There's been several large conduit offerings that have.
Been distributed to the marketplace, including I think three in the last month.
Where the office component of those.
It's somewhere between 15 and 25%.
And those loans are generally you know on an individual's size, maybe $50 million to $100 million.
You could do a larger loan and do a conduit.
Say 202 hundred $50 million and get sliced up into a couple of different securitizations.
So again I think that if you have a good quality income stream to finance.
And a good building with good tenants and long weighted average lease term.
That will get recognized by the financing markets and we we've been talking to the market. We have term sheets on deals that we're working on where there is a.
A desire to.
Okay.
Do loans for those types of properties.
Credit spreads that are still higher than what they were.
But their credit spreads that are below what.
It is currently.
And the bond market right now and that's significantly below but below.
So as I said, we've got a couple of these mortgage financings that were working on that we anticipate that we're going to execute on.
And those are the markets that we're dealing with.
Yes, John This is Doug I would just give it give you another perspective, so so we have.
In light.
Of what I would refer to as.
<unk> Financeable.
Assets with long term credit leases and where we would likely go into finance for example, a 15 year Google lease for five years or a 12 year, Microsoft lease for five years right and we're not doing these at 75% Ltvs were.
Looking for a modest amount of leverage so those types of assets. We believe are highly marketable to the various counterparties and the lending community would be the insurance companies be they domestic or foreign banks bofa to say MBS market. So that's sort of where we are.
We're looking for additional capital and then as Mike suggested we have a maturity.
Relatively small small size asset a $100 million asset in Washington D. C and we had a number of term sheets from secured lenders on that and so we are seeing evidence that our portfolio is.
Being receptive to additional securities.
Okay.
Thank you.
And I show. Our next question comes from the line of Kamil <unk> from Bank of America. Please go ahead.
Okay.
So following up on the leasing pipeline can you. Please comment on how you classify deals EMEA.
Pipeline.
Pipeline compared to last quarter or even a year ago.
So the way I characterize things as if we are negotiating a lease document it's part of that 900000 square feet. If we have an active conversation and our exchanging letters of intent, but we have not yet confirmed a letter of intent.
A meeting of the minds and we Havent started a lease negotiation that sort of in that other pipeline and I would say we have slightly more stock in the active proposals are active negotiations dates than we had last quarter largely because some of the stuff that I thought it was going to get down in the first quarter leached into the second quarter.
<unk> there are two meaningfully larger deals, meaning over 100000 square feet that we had we thought we had a chance to signing in the first quarter that didn't get signed yet.
And our active proposal pipeline is I would say modestly growing sort of quarter to quarter, but pretty consistent with what it's been the last two or three.
Okay.
Thank you.
And I show. Our next question comes from the line of Anthony <unk> from JP Morgan. Please go ahead.
Yes, thanks, and good morning, So I appreciate all the color on capital markets, and how you're trying to triangulate where pricing might be but just for DXP for you to put capital out the door right now what would you all want to in terms of an IRR, how would you underwrite rents and cash flow grow.
Like what would a deal that would.
Prompt you to pull the trigger on work like.
Yes.
Sure.
A couple of things I'd say one.
First thing would be what is it so we're not going to go out and buy a cheap office building in the hopes that we can make it less cheap over time, we're going to focus on premier workplaces in the office segment.
We're going to continue to focus on our life science portfolio and we're also going to focus on residential development.
Probably more as a merchant builder as opposed to a long term owner. So I think perimeter is very important.
And look in terms of overall.
Yes in terms of overall cost and what we're going to be looking for one it's certainly gone up.
Number two.
It would depend a lot on the risk profile of the asset, but then number three what is always on our mind is our stock is currently trading at a look through a cap rate of 9% and that's got to be a guidepost as we think about putting out new capital.
Thank you.
And I show. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Hi, good morning, so along those lines in prior cycles, you guys have bought some buildings 399 510.
100 fed you bought those in prior opportunistic times, but given the capital markets today, given Mike's comments about assessing the dividend if the disposition market doesn't open up are you guys more keen and confident to buy assets, let's say around Park Avenue Grand Central or other transit.
Hubs, whereas the Companys focus more on capital preservation, and therefore, only stick to the current pipeline and really limit incremental opportunistic existing asset purchases.
Alex we have access to capital as Mike and I.
I pointed out and the key is pricing. We're interested we're open for business. We're interested in growing our company. We think we will but that 9% look through cap rate as a guidepost for us.
Thank you.
And I show. Our next question comes from the line of Nick <unk> from Scotiabank. Please go ahead.
Thanks, I appreciate all the commentary on the secured lending market.
Yes.
I have is and again I realize it doesn't really apply to your near term maturity schedule, but.
If we think about let's say New York City I mean, this is a market that historically relied on.
Very large loans that were put into the securitization see MBS market and it's not a single tenant long term credit building often it's multi tenant the vintage of the asset.
Barry, but we're talking about $1 billion loans that got done.
For New York City, which seems like cannot get done right now because of what's going on with the securitization market. So I'm just trying to figure out what your thoughts are about the ability for this let's say New York City as a market to function.
From a property sale standpoint from a lending standpoint, if it is historically a market that has very large loans that can get done in the securitization market right now.
So this is Doug.
I don't want to get into a conversation about other people's assets.
So so from our perspective, obviously, we don't have any anything maturing anytime soon in our Manhattan portfolio and we do have two large see MBS transactions that were done they were SaaS deals.
But <unk> got long duration associated with them.
I would expect that the markets will heal and that there will be capital available at a different kind as Mike described a different kind of a leverage.
Point in our different kind of a pricing parameter. So there is going to be equity that's required in these assets too.
Appropriately refinance them with a capital structure that makes sense for the large loan marketplace.
And theres going to be.
Obviously, some degree of time before we get there I mean, there are obviously a lot of I guess sort of kick the cans are workouts or other.
Conversations going on right now, but I believe with enough equity you will be able to raise billion dollar financings in the market, but theyre going to be done at different kind of leverage points.
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, Doug your commentary around the most active tenant groups in the market was really helpful. Can you guys just talk about how you're taking advantage of that activity amongst medium and small financial and professional services companies are you breaking down any of your vacant spaces into smaller spec suites or doing anything else to.
That demand from small tenants.
So the answer is we are and we are we are being I would say very <unk>.
Deliberate about the kinds of things we're doing I'll, let Bob talk for example, about some of the activity that we have going on in San Francisco right now where what was put in front of me was a series of changes to some existing availability that we think will be very additive to the market. Bob do you want to talk about our approach there.
Sure.
We have a program we're doing spec suites at Embarcadero center on the smaller spaces and we have several that are in the works right now.
And some of them are designed where they can be combined with other suites, we need larger space.
And typically when we do these turnkey.
We might have to put a little bit of Ti in after the fact, when we find a tenant.
We've had great success with these smaller suites so far.
And Pete maybe you can you or Ray could comment on the program. We've had in Reston, Virginia for probably the last seven years and how successful that's been.
Sure so.
This is Pete <unk> from D. C. The yes, it was not too many years ago that the Reston Town Center market was not one where we had done spec suites very often but in the intervening 24 to 48 months, we've done quite a few of those I don't have the exact number off top of my head, but it's in the high <unk>.
In terms of the number of square the number of spec suites that we have done out there and all with great success, many leased prior to or at delivery and then <unk>.
All of them that have been delivered are leased at this point and we have activity on the balance of them. We did a full floor spec suites at RTC next in addition to the spec suites in the urban core of town center and its been a very successful program out there capitalizing on exactly this type of tenant thats being discussed and obviously, we have done them in D C.
For many years, that's a little bit more of a competitive market, but we think in the right buildings for instance, after some good success on the leasing front at 'twenty, one underpinned we're likely to have some space left there, where we think spec suites will be very very sought after due to the quality of the building and the quality of the.
The spectrum that will build there.
Thank you.
And I show. Our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
If you have your phone on mute please UN mute your line.
Okay, we'll move on to the next question.
Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.
Hi, Good morning, everyone, maybe just another one on leasing in the quarter you did 660000 square feet of leasing and I have talked about an expectation for about 750000 square feet per quarter. The rest of the year. So I was just wondering are you seeing activity that specifically points to an increase in leasing activity in Q2 and beyond.
So what and kind of where is that or is it more of.
General expectation at this point.
I think it's general expectation based upon fact, right. So I went through that with through our pipeline and I've got 900000 square feet of active leases under negotiation I have got 165 million square feet of proposals that I believe.
Will will manifest themselves into.
Significant number of signed leases and it's we're talking about being in April of 2023. So I've got another eight months ahead of me. So I feel very confident that we will be able to achieve a 3 million square foot leasing market I hope, we're going to exceed it but it's not based upon our predictions or projections, our 3 million square feet and Thats, where he was built into our occupancy.
<unk> and Mike same store numbers.
Thank you.
And I do show. Our next question comes from the line of Michael Goldsmith from UBS. Your line is open.
Mr. Smith.
You have your phone on mute please UN mute your line.
Okay, well move on to the next question.
<unk>.
Our next question comes from the line of Michael <unk> from Citi. Please go ahead.
Maybe we'll just get back to San Francisco.
The peninsula, probably better off that market.
You talked about Google announcing their pause on that Mega campus in San Jose could you see that being a potential benefit for that platform 16 project I think it's not expected to be stabilized in 2026.
I know you have a relationship with Google So any any comments you can make there would be helpful.
Sure Bob you want to take that one.
Sure first off CNBC report that came out the other day that they were stopping the project is.
False news.
It's.
Been reported by the Bayer on Friday in Google yesterday.
Bill planning on proceeding with the project today.
Excuse me this year.
We do have a relationship with Google whether or not they would have interest in that project remains to be seen but we will be the first building out of the ground adjacent to their campus.
So time will tell.
There are several years away from actually starting a building because they've got to put all the infrastructure in place first.
Okay.
Thank you.
And I show. Our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.
Thanks for taking the questions just two quick ones. So one can you just remind us.
Are there any risks sort of with the or I think you have three or four rework leases.
In terms of just kind of performance and potentially being those being given back.
And then just separately.
Broadly I know you had embarked on over time, you've been investing capex to kind of keep the buildings.
Fresh and I'm, just wondering sort of in this environment can you remind us sort of what the.
Capex outlay may look like over the next two years.
Keep the buildings are competitive.
Let me answer your second question first.
FERC. So your second question on Capex is that DXP typically spend somewhere between two and $2 $5 a square foot per year on its overall, what I would refer to as.
Ordinary course of business Capex and that that is defined as base building and and what I would say sort of modest refit refreshes on a portfolio. It doesn't include if we're going to build a new amenity center at the General Motors building or.
We're going to do a new amenity center at Embarcadero Center, where we are going to totally got and redo one of our lobby. So it doesn't include those types of expenses, which would be outside of that with regard to we work with.
Work is.
Our client of ours, we work is clear clearly reducing the number of units that they have we've negotiated some reductions from we work in our portfolio and we work is not likely to have to be in the same relative position in terms of the amount of space that they take from DXP.
We get to the next quarter.
Okay.
Thank you.
And I show. Our next question comes from the line of Ronald Camden from Morgan Stanley . Please go ahead.
Hey, just one one.
One quick one and a follow up just on the.
Asking the leasing question a different way so I thought the expectation before was for occupancy to potentially be down in first.
First quarter first half so it sounds like there is probably more leasing.
Back then maybe you could just comment on that.
That's also love to hear some of your comments on occupancy for the portfolio.
By market, specifically in the West coast versus the East coast.
And follow up.
Yes, a quick follow up with Don there's been a lot of sort of news about sales force in the market subleasing space.
And I'm wondering how you guys are thinking about that.
For Salesforce tower, and if any other tenants potentially could be subleasing space.
So that's about eight questions, but I'll try and answer them really fast.
So we at least.
$5 8 million square feet of space in 2022, and our expectations were for 3 million square feet in 2023, So a lot less the first quarter I think was pretty consistent with what our expectations were for the year. So I don't think that there are any sort of changes on a relative basis regarding occupancy we've been pretty.
Consistent with where we basically have been saying we think our occupancy is expected to go down a little bit in 2023, I think we didn't describe exactly when that's going to occur there will be some reduction in occupancy likely in the second quarter, because we have some explorations and then the $1 2 million square feet of space that I described.
We expect a site to get in service in 'twenty three is more towards the back end of the quarter or the back end of the year. So it will pick up again, but net net we think our occupancy will be relatively flat to modestly higher as we enter 2000. The end of 2023 early 2024 with regard to Salesforce tower Salesforce Dot com has space.
On the sublet market were not part of their conversations and they have not come to us and said Hey, we have a tenant that we'd like to do a long term lease and would you consider doing a stock or would you consider taking the space back so I'm not aware of what the.
Specifically is going on with their sublet, but I can tell you that their single.
Location is likely to be at Salesforce tower, when they sort of get done with their quote unquote sub leasing of space because they've moved out of $3 50 mission and they have majority of their space of 50, Fremont on the sublet market and they obviously they pulled out of.
Other buildings that they were that we're going to go up in that neighborhood.
That's left is Salesforce tower dotcom.
Yes, I would just add we have Bob should comment on this we have market inquiries were relatively frequently for the Salesforce tower and it's completely full and one of the reasons sales forces putting.
Floors in the tower on the market because it's actually the easiest space they have sublease.
Given the attractiveness of the asset.
Yes, I would just add the buildings are 100% leased.
Really the most sought after.
Building in San Francisco for space, and we get multiple inquiries every month about people looking for space in the building.
And I show. Our next question comes from the line of Bill and Brzezinski from Green Street. Please go ahead.
Hi, guys. Thanks for taking the question just curious how you guys are thinking about buybacks or potential buybacks in the current environment and you mentioned, the 9% implied cap rate that the stock now trades at today and I realize that obviously office transaction markets are fairly illiquid, but if you guys were able to get business.
Through the finish line would you guys view buybacks the potential use of that capital.
Well, we think our stock represents a very uniquely interesting investment, particularly at this point in time.
Most of the inquiries, we've been getting recently and that's the reason why Mike and I spent so much time on it in our remarks is our access to capital and how are we dealing with upcoming debt maturities and things like that so.
And this kind of environment buybacks are not a priority for us.
And we also have <unk>.
Found interesting uses for the capital we just put on our development pipeline this quarter.
290, Binney Street development, that's a 100% leased Astrazeneca and also the 300 Binney Street asset conversion.
Great. Thank you. Thank you.
Thank you.
And I show. Our next question comes from the line of Tayo Okusanya from Credit Suisse. Please go ahead.
Hi, yes. Good morning, Thanks for keeping the call going just a quick one on office too rosy conversion they get a lot of these buildings don't compete with.
With your asset. So just curious how you guys think about that whole movement is it something that youre excited about do you think it helps VX belongs et cetera.
Just because it's not competitive product doesn't really matter to you guys.
Yes.
I would say it this way I think it's a very big trend that will unfold slowly and the reason I think it's a very big trend is because I think.
Virtually everyone benefits from it.
Too much.
Out of.
Yes, theres too much obsolete office stock, that's something needs to happen with that stock number two there is a shortage of housing and I think all of the cities, where we operate three conversions would create more.
Appraised value and more tax revenues for the cities that we operate in.
And lastly, converting an existing building versus tearing it down and building something new.
Creates much less embodied carbon so I just think everything about conversion makes a ton of sand.
Issue with it is.
And the reason I say, it's going to unfold slowly as their big challenges and doing it first of all building half PMT and Theres not many office buildings that are fully empty a lot of them are 50% empty or something like that.
So that's number one number two physical characteristics are very important, particularly the bay depths and the property access to lighten error is very important for residential so very large floor plate buildings don't work as well and then lastly economics.
Office buildings today are not appraised are valued at a level, where it conversion is economic but I think these forces will work themselves out.
Over time.
If you just take a very small percentage of the 733 million square feet of office and our markets and say it's converted that's very material.
And in terms of DXP, we don't have any assets.
That our conversion candidates themselves, but I do think.
It will represent an opportunity for us to do some residential development.
It's a little bit different from a typical conversion that I think youre asking me about but this world gate investment, albeit small that we just made is an example of us reusing a parking garage and taking a site. That's currently an empty office building and converting it into something more productive.
This is Doug I would just add that we are.
Worldview is sort of an illustrative example of what we think may happen in certain instances in certain cities, where the buildings have no intrinsic value as a repositioned.
Conversion and therefore, the land is really where the value is and it probably has a higher and better use as residential and so there are buildings, probably that will be taken down and the sites will be then.
We adapted as residential sites, even though theyre currently commercial office buildings.
Great.
I'll go back to Hillary I'm very sexy park okay.
Thanks, Helen can you guys hear me now.
Okay got.
Got it okay.
Thank you everyone hi, ancillary span.
I just wanted to add a little bit of color to the leasing activity in Midtown South at 360. In addition to what Doug has already described with regards to the pipeline that's either out for signature or in negotiation last quarter. I told everyone that we thought that we would be seeing more demand from 50 to 75000 square foot tenants.
Leading into this year and that largely proved itself to be correct.
We are currently in discussions with five tenants that range from 25000 square feet to 75000 square feet at the building, but I think what is more interesting and this is really just sort of a check on the spot market for leasing and Midtown South is that recently, we have toward Q1 hundred <unk>.
<unk> thousand square foot tenant and one 200000 square foot tenant for 200 After 360 Park Avenue South.
And we also toward just yesterday I want to start at 30000 square feet and potentially has grown to a 100000 square feet. So it seems that the demand profile is shifting a little bit again toward larger.
Tenancy in the Submarket, obviously that will take some time to play out as these tenants decide where they're going to go and document.
<unk> transactions, but I think overall, it's a positive.
We can offer the market and if I looked at all of that combined with what we're trading paper and the tours that are in the market that represents about 715000 square feet of tenants that are in the market right now.
So just wanted to share that in additional detail with you.
Okay.
Thank you.
I'm showing no further questions in the queue at this time I would like to turn the call back over to Owen Thomas CEO for closing remarks.
Okay.
Just wanted to thank everyone for your time attention and interest in DXP that concludes the call.
Thank you. This concludes today's conference call. Thank you all for attendance you may all disconnect at this time.
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