Q3 2023 Boston Properties Inc Earnings Call
Okay.
Yeah.
Good morning, and welcome to Q3, 'twenty twenty-three DXP earnings conference call.
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I would now like to hand, the conference over to your first speaker today to Helen Hahn Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Dxp's third quarter 2023 earnings Conference call. The press release and supplemental package were distributed last night and furnished on form 8-K in the supplemental package DXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy.
These documents are available in the investors section of our website at Investor <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.
There'll be XP 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.
The time and Dxp's filings with the SEC BSP 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 only 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 first part more remarks.
Thank you Helen and good morning, everyone today I'll cover Bx Pes operating outperformance in the third quarter key economic and market trends impacting our company.
<unk> capital allocation activities for the quarter.
DXP continues to perform in the third quarter, despite escalating negative market sentiment for the commercial real estate sector.
Our <unk> per share was once again above both market consensus and the midpoint of our own forecast.
We completed over 1 million square feet of leasing in the third quarter with a weighted average lease term of over eight years and increased portfolio occupancy despite a weaker operating environment for most of our clients.
We completed multiple company and asset specific financings, both elevating our liquidity position and demonstrating DXP sustained access to the capital markets.
Moving to the economy.
Notwithstanding the federal reserve, having increased the discount rate five in a quarter percentage points and the 10 year U S treasury, having risen nearly 3% all since the since March of 2022.
The U S. Economy's headlined statistics remain remarkably strong with GDP growth at four 9% in the third quarter 336000 jobs created in September.
Unemployment rate steady at three 8%.
This rosy economic picture is misleading as it does not accurately reflect the market tone and operating environment for many of our clients.
Assuming forecasts for negative earnings growth in the third quarter are accurate S&P 500 annual earnings growth has been negative for the last four quarters.
Much of the recent strength in GDP has been consumption related and job creation has been in the leisure and hospitality health care education and government sectors not in the office using sectors, such as information and financial services.
Our clients are corporations that actively manage their head count and operating expenses in times of weak or negative earnings growth and as a result, they are more cautious in making these space commitments.
The remote work is obviously not helping space demand. We believe economic conditions are the primary driver of our slower leasing activity in 2023, and leasing will rebound when earnings growth returns.
We continue to be encouraged with the return to office trajectory, we are experiencing in our buildings as well as the rhetoric and actions of many of our clients with respect to their in person work policy.
We believe the prod late the broadly reported turnstile data from castle systems, indicating buildings are generally 50% occupied versus pre pandemic levels over the course of a whole week is a measure of aggregate human activity important to cities, but it is not an accurate measure of.
Premier workplace space utilization, we collect turnstile data for approximately half of our 54 million square foot portfolio.
And as of mid October for Tuesday through Thursday, Our New York City buildings experienced 95% of the turnstile activity achieved before the pandemic.
These figures for Boston, and San Francisco, or 74% and 45% respectively.
And the space utilization data in all our markets continues to improve.
Workers and Premier workplaces are returning to their offices in greater numbers and it is difficult for years users to reduce space. If all employees are expected in the office on specific days of the week.
Lastly, and importantly, all office buildings are not the same.
We share in our IR materials every quarter CBRE report on the performance of the Premier workplace segment of the overall office market and the five CBD, where <unk> operates premier workplaces represent approximately 18% of this total space and 10% of the total buildings at the end of the third quarter direct V.
I can see for Premier workplaces was 12.4% versus 17% for the balance of the market also for the third quarter net absorption for the Premier segment was a positive half a million square feet versus a negative 600000 square feet for the balance of the market.
For the last 11 quarters net absorption for the Premier segment was a positive $8 1 million square feet versus a negative 38 million square feet for the balance of the market and asking rents are 44% higher for the premier workplace segment.
Including two buildings undergoing renovation, 94% of DXP CBD space is in buildings rated by CBRE as Premier workplaces, which has been important in driving the increasing office attendance statistics in our buildings and is a critical differentiator for DXP.
And the leasing marketplace.
Now moving to private real estate capital markets U S transaction volume for office assets in the third quarter was muted dropping 48% from the second quarter to $4 4 billion the lowest quarterly level of office transact office transaction activity since the first quarter of 2010.
Investors in the sector face material uncertainties in both office demand due to factors previously mentioned as well as the cost and availability of debt financing with 10 year U S Treasury.
<unk> has been and is rising and approaching 5% and consensus market sentiment currently believes rates will be higher for longer given pernicious inflation.
Most U S lenders are trying to reduce their exposure to commercial real estate loans and have limited available lending capacity for repayments.
No sales and Bx peace core markets were completed in the third quarter of significant assets that would be considered premier workplace.
In Boston There were three completed office transactions, all under $100 million.
Of reasonably well leased assets that sold for $2 90 to $6 $90, a square foot and six 7% to seven 5% cap rates and Santa Monica that Penn factory, a fully leased 220000 square foot Redeveloped Creative office complex sold for $178 million.
Denting pricing of over $800, a foot and an eight 4% cap rate.
The existing leases in the asset have terms that are significantly above market in seller financing was provided.
In New York City, a user is under agreement to purchase the 400000 square foot vacant Neiman Marcus store at 20 Hudson yards for $550 million or $1375 a square foot.
In the financial district of San Francisco, There were there are four sales either completed or pending for buildings that are ordinarily vacant each sale is for under $65 million and pricing ranges from 120 to $320 a square foot. These deals reflect many of the characteristics prevalent in <unk>.
Today's non Premier office sales market.
Entrepreneurial in many cases family office buyers attracted by the low per square foot values relative to historic historical levels.
Small transaction sizes, requiring less capital and likely not involving debt financing and renovation plans designed to take advantage of future leasing market recovery.
Moving to Dxp's capital market activity for the third quarter, we completed a restructuring of our investment in Metropolitan Square. Our recently renovated 657000 square foot office building located in Washington D C.
DXP owned a 20% interest in and provided leasing and management services for the asset, which was encumbered by senior loan of $305 million and a mezzanine loan of $115 million.
The existing mezzanine lender now owns 100% interest in the property with DXP continuing to provide management and leasing services further a new undrawn $100 million mezzanine loan has been structured to fund future leasing operating and other expenses of the property on an as needed basis.
DXP has a 20% interest in the new mezzanine loan, which is subordinate only to the $305 million senior loan and will receive interest at a 12% annual return.
<unk> will continue to earn leasing and property management fees as well as an attractive return with potential incentive fees for providing additional capital to stabilize the asset. We also experienced a $36 million gain as a result of the transaction.
In the coming quarters, given the negative sentiment towards the office industry, which spills over into the much better performing premier workplace segment. We believe DXP will will be presented with unique opportunities to expand its portfolio on attractive basis.
Our balance sheet remains strong and we have maintained access to capital primarily through the unsecured debt markets available to a few public and private competitors.
Our portfolio is outperforming peers due to its attractiveness in the market when competing for clients the hallmark of a premier workplace portfolio.
In anticipation of the current market distress in our sector, we have been positioning DXP to play offense for the past year by raising $4 1 billion and gross funding and currently holding $2 7 billion in liquidity.
In search of opportunities, we're maintaining continuous dialogue with lenders that are foreclosing on our restructuring assets as well as owners seeking to reduce their office exposure.
Our focus will remain in our core markets on Premier workplace assets life science and residential development.
During the last major downturn caused by the global financial crisis, DXP was able to acquire the general Motors building 200, Clarendon Street 100, Federal Street, and 510 Madison all at attractive prices at the time.
On dispositions, we continue to pursue additional capital raising through joint ventures, with select pre leased developments and to consider incremental asset sales.
Our development portfolio continues to create <unk> growth for DXP. This quarter, we placed fully into service 104000 square foot renovated and fully leased building at 140 Kendrick Street in need of math.
This redevelopment completed for a client with stringent sustainability objectives was delivered with net zero carbon performance and generating an 18% first year yield on incremental capital invested.
We also delivered into service 751 gateway as part of our Gateway Life Science Park, which is a 231000 square foot lab building that is fully leased.
DXP owns a 40, 49% interest in the asset which was delivered at a six 7% first year return on cost.
DXP continues to execute a significant development pipeline with 11 office lab retail and residential projects underway. These projects aggregate approximately two 8 million square feet and $2 4 billion of DXP investment with $1 4 billion remaining to be funded and are projected to generate attractive.
In the aggregate upon delivery.
So in summary, despite strong negative market sentiment DXP had another productive quarter with financial performance and leasing above expectations and a stable dividend.
DXP is well positioned to weather the current economic slowdown given our leadership position in the premier workplace market segment, our strong and liquid balance sheet with access to multiple capital sources, our significant development pipeline, providing growth and our potential to gain market share in both assets and clients due to the current.
Market dislocation.
Over to Doug Thanks, Owen good morning, everybody.
Client demand across our portfolio has remained pretty stable over the last quarter, but final leasing decisions are taking longer.
Pretty consistent with their own talking about relative to challenges with regards to the profitability of corporations are buildings continue to see the most activity from financial services professional services law firm, the administrative services and asset management.
Traditional technology demand continues.
To be absent from our markets and more times than not renewing technology clients are reducing their lease premises. This is most prevalent in our west coast properties.
Pretty much the same picture that I pointed painted last quarter.
Growth from the AI organizations in the city of San Francisco, Israel more than 700000 square feet of leasing has occurred in the past few weeks and there have been billions of dollars of recent investment into this growing ecosystem.
For now that leasing is focused on large well built opportunities that are available at significant discount to terms relative to the rents being achieved in premier buildings.
Loosing availability is a positive for the broader San Francisco market, but it's not going to impact leasing at Embarcadero Center in 2020 for the.
The concentration of strongest user demand.
And with growth for our assets is still broadly speaking alternative asset managers private equity venture hedge funds specialized fund managers.
These companies are growing their teams and capital under management. This pool of clients typically wants to occupy premier workplaces.
Illustrate the point.
During the third quarter, we completed a 15000 square foot expansion for our hedge fund in Manhattan at 52000 square foot multi floor lease with a private equity firm growing in our portfolio in Manhattan, a 70000 square foot asset manager growing in our portfolio in Manhattan and in expansion for our 21000 square foot private equity firm.
In D C.
Our strongest activity remains in our Midtown Manhattan portfolio, 200, Clarendon and the Prudential Center in Boston, The urban core of Reston Town Center in Northern Virginia.
Our Embarcadero center asset in San Francisco, we don't have direct availability at Salesforce tower, but we hear through the market that Salesforce has interest in the 150000 square foot sublet opportunity law firms are also in active portion of our portfolio an important client for DXP we are active.
Lease negotiations are LOI discussions with seven distinct law firms and Manhattan D C and San Francisco.
Owen highlighted to just over 1 million square foot of signed leases during the third quarter last October we provided the leasing expectations embedded in our 'twenty three guidance between 500 to a 1 million square feet per quarter AK, a 750000 square feet on average were $3 million for 2023 through.
Through the first half of the year, we were at 156 million. So to date, we're at $2 7 million square feet. We currently have an additional one 2 million square feet of transactions in active lease documentation.
I would say we have a high confidence that we will be beating our leasing target embedded in our 2023 guidance of 3 million square feet.
This quarter the executed leases included 52 transactions 32 renewals 20, new tenants there were five contractions in five expansions among our existing clients with a net reduction in that pool of about 33000 square feet.
There were no particular patterns relative to industry or size.
Given who is expanding and contracting breaking the volume down by market. We did about 439000 in Boston 240000 square feet in New York 100000 square feet in D. C. In 278000 square feet in the West Coast markets.
The mark to market of the leases that commenced this quarter was down 3% as reported in our supplemental the mark to market up leases executed this quarter was positive 4%.
Starting cash rents on leases, we signed this quarter on second generation space were up 16% in Boston about 1% in New York, and then down 13, and DC nine in San Francisco, 14% in La and 6% in Seattle.
We ended the third quarter with an in service occupancy of 88, 8% compared to 88, 3% last quarter.
As Owen said during the third quarter 140, Kendrick Street, and 600 751 Gateway were added to the portfolio at met square was taken out if you remove met square from the second quarter. The comparative period occupancy went from 88, 7% to $88 eight so again modest relevant increase I would also note that we terminated we work.
And 44000 square feet in the third quarter, we expect to have additional portfolio vacancy stemming from we work defaults as we move through the fourth quarter and into 2024.
Just to remind everyone. We work leases 493000 square feet as of 10, 1% 23 <unk>.
<unk> 2023 annualized revenue is $33 million, we don't expect we work to exit all the assets nor do we expect them to remain in place and their current footprint. This will be a drag on 24 occupancy and same store concept.
The development portfolio now sits at $2 8 million square feet and it's 52% leased we have recently signed a 70000 square foot office lease with an asset manager at $3 60 Park Avenue, South, bringing its 18% leased and another floor at $6 51 gateways that is now 21% leased to 100% leased assets totaling 335000 square feet.
Were removed and put into service, which accounts for the change in our total leased in the supplemental.
At the end of the quarter, we had signed leases that have yet to commence on our in service vacancy totaling approximately 750000 square feet with about 425000 square feet anticipated to commence in the fourth quarter up 23.
For the remainder of 'twenty three we have about 925000 square feet of expirations. Much of this was uncovered so we expect the drop of a few basis points of occupancy at year end and 24, we have a very manageable five 7% of our total portfolio exploration or $2 7 million square feet.
We believe our occupancy will be stable in 24 defined adds up or down 1% quarter to quarter, where we ended up relative to where we're going to end the year. In 2023, we will provide a leasing a volume outlook for 'twenty four along with guidance next quarter from.
From a broad market perspective, the office supply picture didn't really improve much in the third quarter with almost every market continuing to experience net negative absorption Manhattan being the one place where there was some positive the city specific <unk> brokerage reports are starting to characterize their markets in ways that acknowledged the bifurcation between the have and.
I have not.
Distinctive trends for premier assets.
Publishing their data broadly the availability and the Premier building that Owen described is depicting a more constructive picture and DXP relevant view of office supply, what's clear is that new speculative construction, which presumably would be premiere is nonexistent in the marketplace today.
Any new construction starts are going to require economic rents rent and concessions that are vastly different from the current transactions. The major inputs to a new building or construction of hard cost capital cost and leasing velocity.
Construction costs saw a dramatic increases over the past five years with annual increases in the high single digits. We've seen the rate of increase is slowing down, but we have not seen any reduction of costs construction financing could be found itself plus 200, when silver was 25 to 50 basis points today construction.
Financing for office space is simply not available from traditional lenders software is at five in a quarter and non traditional lenders might and I used the word might lend at double digit current interest rates with additional points upfront and lower loan to cost caps.
Speculative leasing assumptions also assume longer lease up you put all of this into a development pro forma.
And you need rents that are materially higher than what is supported by current market rents in every one of our cities. This quarter. We completed a 313000 square foot 10 year renewal in the back Bay of Boston for years prior to exploration at a rent level that both parties found attractive.
Our client is using all of their space.
<unk> is a critical component of their overall business strategy and when they looked out into the market did not believe that any new construction was likely to be built on a specular basis. This met they would need to pay replacement cost rents and sign a lease now using all the inputs I just outlined to be in new construction in the back Bay in four years.
Yes.
And there are no 300000 square foot block of high rise space available and premier buildings in the back base today.
New life science activity and the portfolio continues to be like during the quarter. We completed our third leased at 651 Gateway for another Florida. The property will open in 'twenty four and to date each lease requires our partnership to complete turnkey spaces and want them, where we have our other life science new development availability we are.
Seeing some tour activity, but there is no urgency for these requirements. There are a few large requirements that are touring but as I have discussed previously the bulk of the immediate demand is from small private companies that are looking for fully built space.
Dxp's regional teams continue to lease space and outperform the market because our portfolio was fundamentally comprised a premier workplaces. The majority of the demand new and existing clients in the market. We want to be in these types of properties and we're investing capital in our building infrastructures amenities and client bases, which.
Allow our teams to meet client needs.
We're all seeing the stress that many buildings are feeling due to their current capital structure and the reality of the supply and demand fundamentals reflected in the leasing market activity, the transition or recapitalization or re <unk> of these buildings is going to take an extended period of time. Many of these assets are not in a position to pick them up.
Capital to existing or new tenants, which greatly impacts the leasing brokers interested in considering them for their clients and offers us the opportunity to further increase our market share I'll stop here and turn things over to Mike.
Great. Thank you Doug good morning, everybody.
I'm going to start my comments.
With some discussion on the debt markets and our activity.
Then I will go over the third quarter performance and the changes to our 2023 earnings guidance.
We had another busy financing quarter this quarter, we extended or refinanced mortgage facilities totaling $570 million.
Two largest of these related to our hub on causeway premier workplace and retail mixed use project Thats in Boston.
First we exercised the first of two one year extension options, we have on the $337 million mortgage loan on the office tower.
And second we completed a three year refinancing of the $155 million mortgage loan secured by the low rise creative office and retail component.
We also expanded our corporate line of credit by $315 million to $1 8 billion.
We honestly, we're surprised by the market's reaction when we issued a press release on this earlier this quarter as it increases our liquidity at a pretty modest cost we had three new banks approach us seeking to expand their relationship with us and up tier the quality of their own client base.
With so much uncertainty and illiquidity in the bank markets. Our view is expanding our roster of banking relationships as a smart move.
Last week, we closed on a new five year $600 million mortgage loan from a syndicate of banks on a portfolio of three premier workplaces in Cambridge.
Credit spread so for plus 225 basis points is attractive in today's market and we expect to use the proceeds to repay our upcoming $700 million bond maturity in February next year.
Given the significant recent move in interest rates, we are happy with the timing of our last couple of bond deals both of which are below market coupons today.
We have no more financing needs in 2023, and we've taken care of a large piece of our 2024 maturities, which is the $700 million bond I just mentioned.
Our other 2024 maturities include our $1 $2 billion term loan.
$400 million at our share of floating rate mortgages.
The term loan is also floating rate, though we have swapped sofa to be fixed at 464% through may of 2024.
We expect to exercise one year extension options that are available on both the term loan and the majority of the maturing mortgages.
As you think about our interest expense moving into 2024, you need to account for higher borrowing costs.
We are refinancing $1 2 billion of bonds that expired in August of 2023 and February of 2024 that had a weighted average interest rate of three 5% with new financing at an average rate of 7%.
Additionally, we've been running with an average cash balance of approximately $1 billion in 2023 and.
In 2024, we expect to fund our development pipeline with available cash and run with an average balance closer to $400 million.
At our current earnings rate this projects to a decrease of approximately $30 million of interest income in 2024.
Now I want to turn to our third quarter earnings results for the quarter. We reported funds from operations of $1 86 per share that was <unk> <unk> per share above the midpoint of our guidance range.
Outperformance all came from better than projected portfolio net operating income revenues were higher than our assumptions from a mix of better rental revenues client service income parking and hotel performance. Our operating expenses were in line with our assumptions.
While not impacting our <unk>, we did record noncash impairment charges totaling $273 million this quarter related to four of our unconsolidated joint ventures.
The GAAP rules for unconsolidated joint ventures dictate that if we believe a loss in asset value below our basis is not temporary the asset is marked to fair value. The definition of temporary is somewhat subjective but is the length of the current market dislocation extends its harder to justify a temporary loss in value.
The charges relate to platform 16, which we discussed last quarter as well as 360 Park Avenue, 205th Avenue and Safeco Plaza.
Given the cyclical nature of the real estate business the value of assets like these will recover in the future when interest rates normalize and corporate economic conditions improve and we expect to hold these assets through their recovery. Our past experience reflects this recovery. After the GSC, we took a similar impairment charge and ultimately we sold the assets of <unk>.
Years later at a significant gain not only to the impaired value, but to the original book values of the buildings as well.
Now I'm going to turn to our guidance for the rest of 2023, we have narrowed our 2023 guidance range to $7 25 to $7 27 per share with the midpoint relatively unchanged from last quarter at $7 26 per share.
There are two key changes to our guidance from last quarter first we're projecting <unk> <unk> per share of higher termination income in the fourth quarter from lease terminations with rework at Madison Center in Dock 72 is they stopped paying rent in both locations. We have security deposits to cover a portion of the lost rent, which we will recognize as <unk>.
Emanation income.
The revenue loss is approximately $6 $5 million per year until those spaces re leased to other clients.
Comprised approximately 200000 square feet that equates to about 40 basis points of our occupancy.
Second we anticipate our net interest expense will be higher by approximately <unk> <unk> per share due to lower projected capitalized interest in closing the new $600 million mortgage financing earlier than we had previously expected we expect to invest the funds in cash equivalents until we repay our bond expiration at the beginning of February and the neck.
Arbitrage on the funds is about $3 million in 2023.
The remainder of our assumptions for the portfolio performance has not changed as Doug described we continue to execute leases in line with our expectations and net of the lease terminations or outlook for occupancy remains stable.
As we look ahead into 2024, we have several developments that delivered during 2023 or will deliver in 2024 that will add incremental <unk> next year. These include 2100, Pennsylvania Avenue, 651% and 751 Gateway 140, Kendrick Street 180 City point in view Boston.
However, as I described earlier, we expect our overall earnings trajectory will be negatively impacted by the persistent high interest rate environment that will result in higher net interest expense in 2024.
We will provide detailed earnings guidance for 2024, our next quarter's call in January.
That completes our formal remarks, operator can you. Please open the lines up for questions.
Thank you Sir.
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Please standby, while we compile the Q&A roster.
And I show. Our first question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.
Great. Thanks, good morning.
Can you guys just talk about the acquisition or investment environment, a little bit more it still seems like we haven't seen the ways of opportunities that some well capitalized potential investors, including yourselves have been hoping for I guess are there any signs that opportunities are emerging and it's Matt.
Do you have any sense, what needs to happen to shake things loose and when that might happen. Then lastly in general how much further does pricing need to adjust to make those investment opportunities more attractive from a risk reward standpoint.
Yes.
Okay.
I'll take a crack at that I think that as I mentioned in my remarks, I think buyers are concerned about two things one how do they underwrite.
Lease up and lease growth given some of the economic uncertainty that our clients face as I discussed and then second what's their cost of capital, particularly their financing and can they get financing. So a lot of the deals that are happening right now as I described are small.
Private investors, probably not using much if any debt financing things like that.
So I think for.
So first of all I think there's a tremendous amount of restructuring activity that's going on in the market generally it may not all be reported but its definitely happening because there are over leveraged loans that are coming due all the time and borrowers are in discussions with our lenders on what to do so there are lots of those things going on right now.
And then I think second for buyers to get more active.
There has to be more visibility on the two uncertainties that I mentioned I do think some of the interest rate behavior. This morning, I'd actually be somewhat helpful to that because I do think.
A stabilization of interest rates would be very helpful for buyers to get more comfortable too to do transactions.
In terms of how much the price has to drop I think for the space that we're interested in which are obviously at a higher quality buildings hard to say because there's not a lot of transactions that you can look at and say what is the pricing today, but.
Just don't think I think our general view at the moment is <unk>.
All of the negative perspective out there on office is.
And our view at least irrationally, we're spilling over into Premier workplaces, which will create opportunities for DXP.
Okay.
Thank you.
And I show. Our next question comes from the line of Nick <unk> from Scotiabank. Please go ahead.
Thanks, I was hoping we can maybe get a feel for in terms of the impairments.
That was done to the Jv's, if theres any sense on.
How much the.
Unlevered asset values may have changed in that impairment analysis.
Sure Nick this is Mike.
The information in our supplement I don't have those I don't want to go through those details right now, but there is information in our supplemental that provides kind of what the change in the net equity values are on those assets.
So that you can you can determine that.
Overall from our perspective.
This is an accounting adjustment that we felt we needed to make based.
Based upon the accounting rules for unconsolidated joint ventures, and I don't think it necessarily reflects a meaningful change in the prospects of these assets other than platform 16, which we talked about less less.
Last quarter, where we're stopping construction.
<unk>.
The other ones we had to look at we looked at every one of our joint ventures, just like we do every quarter and given the kind of higher for longer and the rates our view is that.
These rates are going to be this high and it's not necessarily going to be temporary and temporary two lessons like is it more than a year ago basically and so we looked at everything and there were three other ones that just kind of got tripped.
So we reflected those in those three other ones where smaller platform 16 was clearly the biggest one by far.
Because if you start looking at the kind of discounting the cash flows for our land development deal until you're actually going to build it the discount rate that you would use on a development right, which is pretty high as a significant impact on the value.
Thank you.
And I show. Our next question comes from the line of John Kim from BMO Capital markets. Please go ahead.
Doug in your prepared remarks, you talked about occupancy basically remaining stable next year. Despite another year of a very favorable backdrop, $2 7 million square feet expiring.
Pipeline is $1 2 million square feet that happens to be your quarterly average so.
So I was wondering what known move outs are there that you see next year and anything else any other tenants. Besides we work that will be a headwind to breaking out about 88%, 89% occupancy range.
Yes, so there is a difference between.
No no move outs and tenants being headwinds because tenants that are moving out or not moving up because they are quote unquote potentially in financial difficulty right. So the only tenant of significance that we have in our portfolio, which is obviously, having financial challenges as we work. There are some smaller tenants 25 or 30000 square feet that were that we have every.
Year in our portfolio, whose two don't seem to have a business plan, that's going to be long term in nature and ultimately they give up their space, but those are those are de minimis.
The portfolio of expirations next year actually are not there aren't any enormous ones. There are a couple on the west coast and a couple in the greater Manhattan.
Or are New York City region.
Hearing 50000 square feet in Princeton, and just over 200000 square feet.
At the <unk>.
Building that we have on Folsom in San Francisco, and then we're going to lose about 75000 square feet space from exploration with Trulia Zillow at 535, and those are really the only large ones other than our joint venture property at $2 50, sorry, Timeshare tower, where o'melveny <unk> Myers is moving out of about 250000 square feet, but.
We've covered already 75 to a 100000 square feet of that exploration. So so it's not large.
Any sort of large particular.
Roll out thats, driving our stability sort of.
Comment.
There are three different kinds of leasing we do.
We do leasing where we have available space that we lease and thats that leasing typically involve the build out and in our marketplaces today those buildup periods tend to be extended meaning we were looking at not knowing whether or not the tenant will be an occupancy in six months or nine months or 12 months and we can't typically.
But revenue on those particular assets and therefore increase our occupancy until those occur and that's why we started providing this.
Leased but not yet in service statistic, which is going to grow over time and you'll see a lot of that I believe in 2024, and so it's not going to impact our occupancy, but the leases are signed the second kind of leasing. We do are tenants that are renewing in their renewing in a relatively short period of time meeting. The next 12 months in those immediately hit the third type.
Of leasing that we're doing is for leases that it may be expiring in years post 2024 explorations and so as an example, I described the 300000 square foot deal that we did this quarter, which was for 2028. So our leasing volumes I believe will continue to be at a relatively strong level.
For the economic period that we're in but it's going to be its stubborn to sort of get that occupancy up in the short term.
I have said this in the.
One on one calls and in our presentations that we've made at NAREIT and other.
Analyst meetings, which is that our west coast portfolio is really where the opportunity is to drive enhanced occupancy. So the space that we have available at Embarcadero Center and what I. Just described at Folsom Street in at $5 35 market as well as some of the availability that we now have.
Because of lease terminations and Seattle at Madison Center.
And at Colorado Center, and West La those are really the sort of bigger blocks of space that we have in terms of overall volumes that will drive a outsized opportunity for growth as opposed to where we are now which is we're sort of treading water at this sort of 88% to 89% level and we are.
Make some marginal improvements in one quarter, we may have a little bit of degradation, because we have a particular kind of moving out, but we're making it up so so thats sort of the state of our views as we look at 2024.
Thank you.
And I show. Our next question comes from the line of Alexander Goldfarb.
Got it got it.
Mr Sandler.
Fabry Your line is open.
Great. Thank you good morning down there. So question on development in the release you guys talked about.
An extension until February 24 for your 25% stake in the three Hudson and the land loan that tender three Hudson and at the same time articulated your optionality on the MTA site, just looking at the two projects the MTA site, which seem to be like the winter just given the focus on Grand Central Park Avenue, where.
Three Hudson just seems like a more challenged deal given the economics of trying to lease up.
Bill to get the necessary rents given the size of that building. So as you guys think about the upcoming land loan on three Hudson is that something that you would consider just sort of exiting instead of pursuing an and and mentioning the MTA optionality.
Should we take that as considering that maybe you guys would not proceed forward with the MTA site.
Yes, so Alex this is Doug and I'm going to let Hillary give you the most detail on us I would just make the following comment which is we don't think one day winter versus the other I think it's clear that the timing opportunities associated with one are probably shorter than the other in terms of when we might actually get something going but I'll, let Hillary described.
<unk>.
So the demand for for space in new buildings and also the challenges associated with getting those deals going forward.
Thanks, Doug Hi, Alex.
So as Doug noted the two buildings are very very different opportunities.
Hudson Boulevard is a one 8 million square foot building, whereas.
343, Madison is currently still in the design process, but let's just call it $850 to 900000 square foot building. So some of the demand that is currently in the market actually could not be satisfied by $3 43, Madison. So there are a few tenants in the market that are 1 million square feet.
That are actively looking for space and they would need a larger building than what can be constructed at 343 Madison to Doug's point in order to build such a building those clients would have to be willing to pay a rent that generated in.
Unacceptable return on cost to us at 343, Madison and those decisions in this capital market environment take time for our clients or prospective clients like that has to make.
The prospective client base at 343 Madison by definition is somewhat smaller there is plenty of demand among clientele in that square footage range as well.
And again the question really comes down to who is willing to commit to the project.
At the at the rents needed to launch the development, but I view them as distinctly.
Different opportunities and opportunities that serve different segments of the market. So.
So hopefully that answers your question, but I agree with Doug I wouldn't characterize one as better than the other they're just very very different opportunities.
Okay.
Thank you.
And I show. Our next question comes from the line of Michael Griffin from Citi. Please go ahead.
Great. Thanks.
I think in your prepared remarks, you mentioned from asset you are considering for sale I'm. Just curious if you can quantify what kind of IRR buyers youre looking at and kind of where pricing would need to be in order for you to actually on any of these potential sales.
Well I think it varies.
Our widely depending on the quality and location of the asset the leasing status of the of the asset the walls of the asset.
I think borrowing costs today with the 10 year I guess, it's dropped a little bit today, but pushing 7%.
I think for the highest quality assets, you're definitely above that in for an asset that has a lot of leasing and other risks associated with it I think youre looking at a double digit return.
Thank you.
And I show. Our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
Good morning, Thanks, a lot for taking my question Owen you mentioned in the prepared remarks about how dxp's tenants.
Are more cautious in the space commitments in many of the traditional macro indicators may not accurately reflect what's going on in your business. So recognizing that different cycles have different drivers what metrics do you think more accurately reflect the business now and are the ones that you are monitoring so we can follow along at home.
Okay.
<unk>.
So I think this is part of something thats been confusing in the marketplace because generally when you have a recession.
Company's earnings are down and they lease less space and that's what's how cycles have traditionally operated for office companies because leasing slows down when you have a recession here, it's confusing because its very different all the economic indicators look favorable GDP growth.
Employment statistics.
But if you dig into those statistics, it's a lot of it is consumption related and a lot of the job creation isn't in office using jobs and then if you look at earnings which is what our clients are looking at their own earnings trajectory. It's negative it's been negative for the last year, assuming a third quarter's negative so that is the driver of client behavior.
Sure.
<unk> of our company and your leases coming up are you thinking about your space requirement.
Your decisions about that are going to be very contingent upon what you think the future prospects of your business are and many businesses are negatively impacted by rising rates and some of the uncertainty in the economic environment.
Thats the backdrop and so I think coming back to your question I think certainly lower rates will help and I think as earnings generally rise I would expect that our leasing activity will rise with it.
And Mike listen to Doug I would just say that.
The best measure of.
Corporate activity as it relates to the business that we're in is job growth and job growth typically.
As a little bit murkier, you can look at the employment numbers, but you really have to get into the specific industry categories right. So government and hospitality are not going to be favorable to office by financial services or technology or life sciences are going to be and as you start to see the job listing start to perk.
<unk> up a bit and you start to see hiring announcements by many of the larger technology companies and some of the financial institutions.
Which do impact broadly talk about those things you will clearly see.
A more I would say.
Conducive environment for office leasing on a going forward basis.
Thank you.
And I show. Our next question comes from the line of Jason Wang from Barclays. Please go ahead.
Good morning.
You said in your prepared remarks, you don't expect we were to exit all of their assets. So just wondering where you expect them to stay.
And then you've previously said that we worked security deposits average eight months of rent.
A good number to think about when looking at termination income moving forward.
So I'm not going to get into.
Sure.
Conjecture on where we were we work is going to decide there they have they're productive.
Units, and where they where they do or where they don't as Mike said at the moment. They have stopped paying rent on two of our locations, which are at Madison Center in Seattle and dock 72 in Brooklyn, and we have three other locations with them, which are in San Francisco. So that's the universe and the.
The decision as to what they are going to do I think is going to take some time and they're going to have to figure. It out and then we're going out with decisions to make as to whether or not we're comfortable with whatever they proposed to us <unk>, taking the space back. So I think that it's impossible for me to tell you when that where theyre going to exit and where they're not going to exit Mike you can talk about securities. Yes, I think I mean youre correct.
On the security deposit because we said that before that we have about eight months of security and the tenant defaults.
We.
We sent out a lease termination, we execute that lease termination with the client.
I mean, if there was a security deposit we get that and we booked at all on the data that we get it.
Tenant decline is going to stay on this bank for another 90 days or six months, we might have to amortize that over that period of time. The one thing I would add is that in the fourth quarter termination income guidance Theres two pieces to the termination income one is the termination income we're going to be collecting.
That I described but also at Madison Center in Seattle, they're leases way below market. So there is what is called a fair value.
Adjustment to the rent.
And in order to take that off our balance sheet.
We booked out as income so about half of that termination income.
Is this fair value, it's kind of a noncash concept.
And the concept is that once we get that space back either at termination or.
Natural maturity, we will be able to re lease that space at a higher market rent. So hopefully we'll be able to do that.
Thank you.
And I show. Our next question comes from the line of Steve <unk> from Evercore ISI. Please go ahead.
Yes. Thanks, I just wanted to circle back on on the distressed opportunities I guess I'm just trying to get a sense from you as to kind of where you would need to pay stabilized yields in order to deploy new DXP capital given your trading.
10 times cash flow and north of an 8% implied cap rate and then just from a market perspective could any of those opportunities take you to any new markets like say, a San Diego or Austin to be an exist. In addition to the existing markets.
Yes.
So let me I'll answer the second first and come back to your first question. Steve. So we don't think we need to go to any new markets.
We have a very significant footprint in our six core cities and in fact, one of the things that's going on now, which we have been talking about for several years is that the vacancy rates in certain areas of the southeast and southwest are actually higher than many of our core markets because of all the new development that's going on so.
We don't see.
We don't see a need or reason to expand outside of our footprint.
Coming back to your question about returns, we're going to focus on the Premier segment of the market and.
So I think it's likely that the types of assets that will get involved in or on stabilized. So I'm not sure that the way to look at it as a cap rate, but the way to look at it as total return and.
Yes, I think that the the total return requirement.
On a particular acquisition that we would look at would be.
Pushing double digit returns.
Thank you.
And I show. Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.
Hi, Good morning earlier, you guys talked about how youre opting to repay the $700 million of unsecured debt with mortgages collateralized by Cambridge properties at Zephyr plus 225, So what did you consider when opting for secured floating rate debt.
Beyond just price was it price mixed with.
DXP mix of data or anything else and I guess in that.
Decision you were considering 10 year bonds. So what pricing do you think you could issue 10 year bonds at today. Thanks.
So this is Mike.
We evaluated all the different markets when we decide how we're going to do a refinancing.
And the credit spreads in the secured markets for very high quality assets with long lease terms.
We found is better than what the credit spread we can get from the bond market. So our bond spreads right now for.
For 10 years is about $2 85.
For five years is probably $2 70 kind of area.
So we are saving a lot in credit spread.
The other opportunity I think we have as you know.
We're doing a floating rate deal we haven't fixed it we.
We do have the opportunity to fix it would be a swap.
And we're going to evaluate when and if we do that.
As we kind of look at what's going on with interest rates over the next period of months.
It becomes evident that sulfur is going to be dropping significantly by the fed in 2024, and 2020, Budd we may keep it floating.
If we see an opportunity to fix it.
Because there is some sort of dislocation between the swap markets, we may fix that for a period of time.
So I think it provides some flexibility.
Wei.
Also our floating rate mortgages pre payable.
So as the market gets better for long term debt two years from now we.
We can prepay this and do a long term fixed rate deal at that time. So it does have some advantages that we.
We looked at it when we decided to do this bank financing.
Yes.
Thank you.
And I show. Our next question comes from the line of few power runoff from Keybanc. Please go ahead.
Great. Thank you Doug you went through some of the supply and sublease space availability in your prepared remarks, and given the elevated levels of supply.
And sublease space in your markets potential tenants have a lot more to look at it today.
Do you have a sense of how much of the available space is in direct competition with your buildings and even though some of them may not be premier buildings, you are potential tenants may be looking at them.
Trying to get a sense of your tenants, maybe deciding to choose between your building versus others in today's environment.
They're being more price sensitive today versus or it can be something else.
Yes. So this is what I refer to as all of you sort of lay up questions that I'm going to allow our regional teams to answer.
Because I think that they will be more they will be passionate about their responses, but in general what I would tell you is not all space is the same and there are many many buildings that have either direct availability or sublet availability. They are literally not part of the conversation and so as you think about it.
Microsoft markets getting down to you know.
A market like Park Avenue between.
40, <unk> Street, and 59th Street, or Youre talking about an asset in the CBD of Washington D. C that has views and is it a premier building you would be surprised at how small the universe of opportunities may be so why don't I don't know I'll, let rod talk about.
The issues associated with the availability in San Francisco, what we're really dealing with and then I'll, let Brian talk about Boston Rod.
Yes.
Hello, everybody, so theres definitely sublease space, there's a lot of it is everybody knows in San Francisco and some of it is is higher end space. In fact, that's where a lot of the bigger deals over these last two years have actually happened some of them have been in our own buildings <unk> hundred 80 Fulsome for example, Macy's Dot com had roughly 240000 feet available and.
At least all of it during the pandemic sublease.
So the good states that has been out there.
Attention by and large there's so much more of that that is not.
High quality and is either got no term left on it or it's got poor sponsorship with with weak. Some lessors. So those spaces are very difficult.
Not going to compete with we're not going to compete with them for sure if tenants interested in those types of spaces is not going to go to.
Any premier buildings.
Yes, I would.
Echo the same thing I, just had a brokerage dinner last night with tenant Rep Pete.
And each of them expressed the same issue, which was for their top end clients premier clients. They are having trouble with fewer locations to review and it's not only just the amount of locations that they think are appropriate and there's a lack of desire to do a sublease in most of our sublease.
<unk> tends to be in the lower floors in this market right now.
There's also the question of for the first time I'm seeing tenant rep people really underwriting the landlord its capability to fund Ti's and.
That hasn't happened in a long time.
Thank you.
Okay.
And I show. Our next question comes from the line of Bill and percent ski from Green Street. Please go ahead.
Good morning, guys and thanks for taking the question I guess just going back to your comments on on acquisition opportunities are there certain markets that you guys are looking at that you are getting more excited on deploying capital in today's environment.
The way we think about this is we set top down a perimeter, which we have which is our six markets and in terms of specific investments that is a bottoms up process in a more opportunistic process. So we're open for business everywhere.
And it just depends on the opportunity and we want to allocate capital to the best opportunities.
That all being said.
As you've heard from our remarks and you see in our results it's easier to underwrite leasing activity in our east coast market, particularly in New York and Boston that it is in our west coast market. So the assumptions that we would use in underwriting deals would obviously be more challenging on the west coast given the market behavior.
Yes, I just want to add one thing and then maybe ill let Hillary comment on this for New York, which is there is no question that the overall amount of demand in the market and the what I would refer to as sort of a park Avenue District of New York, which is this area between call. It 40, <unk> Street and 59th Street.
Madison Lexington little bit of fifth Avenue is by far the strongest market from a demand perspective, we're seeing in the country. There are still really really challenged opportunities in that market that are going to have to get resolved relative to the capital structures that these buildings are currently operating under and you are not going.
To be able to I in my opinion replace the mortgages that were put on many of these buildings, including BS and mezzanine capital and preferred equity.
At the same level, which means there is going to be an equitation requirement and thats going to potentially create opportunities, which by the way is as Owen.
Owen and Mike said.
Why we were able to acquire the general Motors building.
2008, Thats why were able to acquire a 510 Madison Avenue and Hilary you may wanted to sort of talk about what's going on in Manhattan.
Sure. Thanks, Doug So as Doug mentioned, there are a number of high quality assets and really desirable Submarkets. The Park Avenue corridor of really all the way out to.
The general Motors building as that.
Our underwater on their financing and are having difficulty rationalizing putting capital into the buildings to support leasing opportunities and so we're really getting a lot of inbounds from the perspective of.
Clients know that we have a strong balance sheet. They know that we're not over levered. They know that we can commit capital to leasing so thats in hearing to our benefit and we are watching those situations, where capital stacks are upside down which may potentially present, an opportunity for us, but again to the point that Owen and Doug have raised we would only.
Be interested in the highest quality assets that are a premier workplaces consistent with what we already own.
I'd tell you there is at least a handful of those situations in Midtown that we're tracking.
Okay.
Thank you.
And our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.
Yes, Thank you I.
Most of your peers had mentioned.
Potentially some pressure on operating margins going forward.
As.
Return on office mandates have more of an effect.
And more people are in the office just wondering if you could talk about that.
How we should think about that for your portfolio moving forward.
And then going to be sort of tongue in cheek. We don't have any peers. We are who we are.
And we operate our buildings in a very different way and we've been operating our buildings with an expectation that our buildings are fully occupied for the last couple of years. So return to work and increased occupancy in my opinion, it's going to have no impact on our margins.
What will have an impact on our margins are what I would refer as the sort of atmosphere acts out there, which are how will the labor rates associated with union contracts for janitorial work their way out will the insurance markets continue to be challenging relative to the number of weather.
Weather related events and how that's impacting desirability of the insurers to provide insurance what will the municipalities do relative to their tax burden and valuations because valuations are clearly coming down right and so how will that be reflected in their desire to increase their rates all of those things I think are going to have some day.
<unk> of pressure on margins they are not going to have pressure on margins on an incremental basis. It is going to be over a period of time, because either our leases are triple net or their growth within our operating base and that operating basis that based upon the existing lease. So until you get the rollover you don't really have that impact on your overall flow and in general if you look back historically over the past.
Decade, and my guess is the margins for DXP are somewhere in the mid to high <unk> and they haven't really fluctuated very much. So I don't think that is an issue.
Thank you.
And I show. Our next question comes from the line of Camilo, but now from Bank of America. Please go ahead.
Good morning, so despite your fad payout ratio picking up this quarter.
This site is on track this year to deliver one of its best year.
As we head into year end using third quarter asset base are there any factors, we should be considering that could impact that after considering the SFO changes you highlighted and can you help us understand how your background has generally kept pace or outpaced SFO.
Given how offices such a capital intensive business.
Ya.
Thanks, Bill I'll take that one so.
Youre right I mean, our <unk> has held up really well in fact anti.
Anticipate that.
Going to be.
Somewhere between five and 10% higher than it was last year and the primary reason for that is two things. One we had a lot of free rent that burned off last year with some large leasing that we had done.
And.
That became cash rent this year.
So that really helped our <unk> and then our lease.
Leasing expirations in 2023 were lower.
So we actually had to do less leasing to maintain the occupancy that we had so our lease transaction costs are also a little bit lower I think in the fourth quarter, we will see some incremental capex.
We look at the first three quarters of Capex, it's not really where we would have a typical run rate for capex. So I think.
Our teams out there are trying to get everything done. So I do think that our capex will be a little bit higher in the fourth quarter, but overall I mean, if you.
The guidance for <unk> would be something like $5 and $5 20 is what we're looking at.
Which I think is pretty solid.
So the run rate a little bit lower in the fourth quarter than it has been basically due to kind of catching up on the capex items that we've planned but havent quite been completed yet.
Thank you.
Yeah.
And I show. Our next question comes from the line of Ronald Camden from Morgan Stanley. Please go ahead.
Hey, just wanted to zoom in on the life Sciences segment, if you could talk about.
What activity or the pipeline is looking like and if you can comment on large tenants versus middle and smaller users.
That would be helpful. Thanks.
Sure. So so again the breadth of our life science activity as our property at 651 Gateway, which are in partnership with <unk> and they're the only significant.
<unk> demand that we've been seeing is from small tenants meeting.
<unk> floor.
Type tenants that are looking for turnkey build outs.
Our other life science opportunity is the two buildings that we have in the greater Boston marketplace 2080.
City point, which isn't just completed and when anybody goes there they are blown away by sort of what it provides not just from a life science infrastructure, but absolutely from a human infrastructure in terms of the amenity base that that building provides to any client and why they would want to be in a building like that and that our other building at 134th Avenue I would say we're seeing consistent.
And tour activity.
A couple of tours every week or so.
These are I would refer to as shoppers not buyers right. They all have a potential use for space. Some of them are at lease exploration driven some of some of them are.
Related to potential opportunities for successful drug discovery from a commercialization perspective, and therefore added capital and therefore, the ability to hire more people, but they are being very very cautious and it's been a long gated process and for the most part those tenants are privately funded.
In addition, there are a few public out there there are one or two sort of large organizations that are.
I would say traveling around in the greater Boston market as well as in Cisco that are I think they're the same names you would've you probably would've heard 18 months ago looking for space and they have yet to make a decision and they could at any time make a decision or they could continue to postpone so again, it's a it's a relatively slow process in the <unk>.
Demand is like the demand was call it back in 2014 or 15 relative to the demand that we were all experiencing in 2019, 'twenty and early 'twenty, one where it was just explosive.
For Boston Doug's description is spot on in terms of the underwriting of what we're seeing.
I would add over the last two weeks, we have seen some encouraging amount of tour uptick.
And in size as well not huge but mid sized $30 to 60000 feet. A couple and then also we've been encouraged by the quality as Doug mentioned of these clients.
Thank you.
And I show our last question comes from the line of <unk> Okusanya from Deutsche Bank. Please go ahead.
Hi, Yes. Good morning, everyone. Just if you could make any quick comments just about your outlook on life Sciences. This is an area, where you think you might have.
Going into more as we go into 2024 fundamentals still.
And then that's an area, where you may not do as much in any commentary would be appreciated. Thank you.
Okay. So I'll, just I'll assume that youll.
With that I just made are not meant to be repeated so let me take a different tack, which is we are not planning on starting any new life science activities in any of our marketplaces given current conditions that being said, we have opportunities to build some fabulous life science buildings on land, which has virtually no basis in there.
We have a quote unquote cost advantage at some point if there is demand when there is that demand we will sequentially start to think about how we might be attractive to tenants that are looking for buildings, where the economics would justify the new construction of the life science relative to where the market economic.
But in the short term, meaning 2023 2024, there is going to be absolutely no expectation for us to be starting a new life science building.
There are a couple of places in our portfolio, where we have existing office installations, where theres actually some interested interested life science to EMEA, where a tenant to show up and say Hey, we want 40000 square feet. In this particular location would you consider putting the infrastructure in the building to allow us to do light or.
Heavy lab research, we would consider doing that depending upon the credit of that company those organizations could be anywhere in our portfolio, but.
Absent that are what you see is what you get relative to our existing life science platform.
Yeah.
Thank you.
And I show, we have a question from the line of Jamie Feldman from Wells Fargo. Please go ahead.
Great. Thanks for taking my question.
Since I'm last maybe if I got my if you'll humor me I got to first data.
You mentioned San Francisco are accurate.
45% of its turnstile activity I mean, how do you think that plays out over time.
Meaningful difference from what you said New York is at 95%.
And then secondly.
What are your partners, saying like capital potential capital partners, saying in terms of wanting to put money to work in office.
Is it more conversion activity or are there certain markets.
Are they starting to think about writing checks here.
More aggressively.
Yes, so Jamie.
Jamie I'll take a crack at it definitely the bay area and I'm excited to say the West Coast Seattle, that's true in la as well the turnstile activity is slower.
That is primarily driven by the behaviour and policies of the technology client base.
They have been.
Less forceful and less per strict prescriptive about having workers come back to the office that all being said.
<unk> activity is increasing and I think it's going to continue to increase just more slowly.
So.
What was the second part of your question was particularly private equity so.
Look there is.
I would say certainly much more limited interest in the private equity industry today generally for office, so thats why youre not seeing much transaction activity as I mentioned in my remarks.
Most of it is being driven by.
Smaller investors family offices group.
Groups that are seeing the deep discounts that are being offered in the market and are not needing that financing that all being said I do think that sophisticated private equity investors understand the difference between pre.
Premier workplace and a typical office asset and I do think for the right asset at the right price there will be institutional interest in those kinds of assets, yes, Jimmy This is Doug.
My sort of add on would be.
The capital Thats right currently aggressively thinking about office is thinking about trading right. They're looking at <unk>. There is an opportunity for us to get in and then get out at a much higher basis and these are trading sardines not eating SAR gains we are in the eating sardines business in general in our portfolio. So we're looking at these.
On a long term basis, finding a capital partner that is today say, okay now I want to jump in and why I want to invest money for a duration of 10 or 15 or 20 or infinite years is certainly more problematic in terms of desirability because of the nervousness associated with the overall fundamental.
However, there are some right and Owen and gave US mogul the went to their various parts of the.
Globe This summer and had constructive conversations we're having constructive conversations with other capital from other parts of the world that are coming into the United States. It's a slow slow process and I can't tell you that there is a transaction that will get consummated with DXP with one of those capital partners in the next couple of months.
But there are opportunities and as Owen said earlier in his original comments, we are talking to some JV partners about putting capital into some of our assets right now.
That would I think be kind.
The capital that we would look at is long term.
Quality institutional capital that is not looking to trade for a profit.
So that is what we're focusing our time and attention on.
Okay.
And I show. Our next question comes from the line of Richard Anderson from Wedbush Securities. Please go ahead, yes, thanks, Susan Jamie's logic, maybe I could sneak in three questions from some left.
Or if you want.
So.
Getting back to being prepared to take advantage of the marketplace.
It sounds like mostly individual assets, you're focused on but could there be smaller portfolios or dare I say companies either private or public.
Or is that just is that just get too complicated and I wonder if you could share some sort of dollar value of the pipeline of opportunities that youre looking at today.
Yes.
I'm not going to rule anything out, but I do think the reason that DXP has 94% of its portfolio in premier workplaces as the portfolio has been curated one asset at a time either through acquisition development and also through our disposition activity. So I think.
Single asset activity.
Is more likely and I think it's difficult to put a dollar value on what we're looking at I mean, we're our job is to be in dialogue with owners of assets that we're interested in and lenders to assets that we're interested in in these type of these dialogues are fluid and I think it's really hard to put a number on it.
Thank you.
I show no further questions in the queue at this time I would like to turn the call back to Owen Thomas Chairman and CEO for closing remarks.
Thank you we have no more formal remarks I want to thank everybody for their time attention and interest in <unk>.
Yeah.
Thank you. This concludes today's conference call. Thank you for attendance you may have.
I'll disconnect.
Okay.
Yes.
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