Q3 2024 BXP Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to BXT 3rd Quarter 2020 for Ernens Conference Call. At this time, all participants are not listening only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is right. To withdraw your question, please press star 1-1 again.
Speaker Change: Please be advised that today's conference is being recorded. I'd like to hand a conference over to your first speaker, Helen Han, Vice President and Vesta Relations. Please go ahead.
Helen Han: Good morning and welcome to the XP-3rd Quarter 2024 earnings conference calls. The press release and supplemental package were distributed last night and furnished on 4 on 8K.
Helen Han: and a supplemental package, CX, here's reconciled, owned on Gapflaneancel measures, the most directly comparable Gap measure in accordance with RegG. If you do not receive a copy, these documents are available in the Investors section of our website at invectors.exe.com. A webcast of this call will be available for 12 months.
Speaker Change: At this time, we would like to inform you that certain statements may during this conference call, which are non-historical may constitute forward-looking statements within the meaning of the private security's litigation reform act.
Speaker Change: Although the F.P. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions that can give no assurance that expectations will be attained.
Speaker Change: Factors and risks that could cause actual results differently from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time and BXT's violence with the SEC. BXT does not undertake a duty to update any forward-looking statements.
Speaker Change: I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer, Doug Linde, President, and Michael Belle, Chief Financial Officer. During the Q&A portion of our call, Ray Richie, Senior Executive Vice President, and our regional management teams will be available to address any questions.
Speaker Change: We ask that those of you participating in the Q&A portion of the call to please limit yourself to one and 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 Thomas for a formal remark.
Owen Thomas: Thank you, Helen and good morning everyone. Our performance in the third quarter demonstrated BXP's continued resilience and provided evidence of property and capital market recovery.
Owen Thomas: Our FFO per share was one cent above our forecast and in line with market consensus for the third quarter.
Owen Thomas: We completed over 1.1 million square feet of leasing in the quarter 5% greater than the third quarter of 23.
Owen Thomas: and for the first three quarters of 2024 our leasing volume was 25% more than levels we achieved in the first three quarters of last year.
Owen Thomas: A weighted average term for office lease is signed this past quarter, remained long at 7.2 years.
Owen Thomas: and we continue to receive awards for our industry-leading work in sustainability. In just the last quarter, Time Magazine and Statista named BXP, one of the world's most sustainable companies.
Owen Thomas: and NaRi awarded BXP the Sustainable Design Impact Award for our 140 Kendrick Building A Redvelopment Project.
Owen Thomas: Now, moving to the economic and operating environment, we believe the most important market forces for BXP that being interest rates, corporate earnings return to the office behavior, outperformance of premier workplaces.
Owen Thomas: and valuation in the public and private markets are all currently working in our favor, serving as a tailwind for BXPs performance.
Owen Thomas: Please.
Owen Thomas: The Federal Reserve cut the Fed funds rate 50 basis points as most recent September meeting and has signaled for two more 25 basis points cuts in 24 and additional reductions in 2025.
Speaker Change: The most recently released inflation and GDP growth, economic data has signaled the economy as possibly stronger than previously believed and put into question the magnitude and timing of additional Fed funds rate cuts.
Speaker Change: No matter how this debate resolves itself, the facts are short-term interest rates are coming down, which is very positive for real estate valuations, as well as corporate earnings growth. Another important driver for BXPs performance given its correlation to leasing activity.
Speaker Change: after remaining flat for all of 2023, S&T 500 earnings as a proxy for corporate health.
Speaker Change: are expected to grow 9.9% in 2024. As mentioned before, companies with earnings growth are much more likely to invest, higher and procure space, as demonstrated in BXB's growing leasing volumes this year.
Speaker Change: We do not see evidence of a looming recession in the decision making of our clients.
Speaker Change: While it is true that long-term interest rates driven more by market forces than said behavior have recently been rising. Many corporations, particularly smaller ones, use floating rate and shorter-term financing, which are becoming less expensive.
Speaker Change: Return to office behaviors are clearly improving across the cities where we operate.
Speaker Change: It has been highly publicized that Amazon is requiring all workers, including support staff, to return to the office five days a week.
Speaker Change: Starting December 1.
Speaker Change: and I'm going to give an Amazon scale and industry presence. This decision could be a harbinger for the future policies of other technology companies.
Speaker Change: Dell, Salesforce, Starbucks and other companies have recently announced more stringent in office work requirements for their employees.
Speaker Change: KPMG completed a survey this past summer of 1300 CEOs regarding in-person work policies.
Speaker Change: 84% of the CEO's believe there will be a full return to office work at their companies within three years, up from 64% of those survey just one year ago.
Speaker Change: The reason cited for the increase were concerns about diminished collaboration, innovation and productivity, inadequate supervision and training for younger employees and the cost of maintaining vacant offices.
Speaker Change: ay
Speaker Change: BXP competes primarily in the premier workplace segment of the office sector, which continues to demonstrate material outperformance.
Speaker Change: Premier Workplaces are defined in CBR's research as the highest quality 6.5% of buildings representing 13% of total space in our 5 CBD market.
Speaker Change: Direct vacancy for premier workplaces is 13.2% versus 18.7% for the broader market.
Speaker Change: Likewise, net absorption for premier workplaces has been a positive 6.5 million square feet over the last three years, versus a negative 16.7 million square feet for the broader market.
Speaker Change: Asking rents for premier workplaces are 50% higher than the broader market, a consistent gap from prior quarters.
Speaker Change: This outperformance is evident in BXB's portfolio where approximately 90% of our NOI comes from assets located in CBDs that are predominantly premier workplaces.
Speaker Change: The CBD assets are 90.1% occupied and 92.1% least as of the end of the third quarter.
Speaker Change: Lastly, from a timing perspective, valuation changes in the public real estate industry, which are determined by daily trading, lead valuation changes in the private market, which are largely a praisel based.
Speaker Change: in the first three quarters of 2024 publicly traded office companies generated a return of 30%.
Speaker Change: Well, in the private market, as measured by the Necrepan decks, which is the best proxy for unreliverage private market values, office returns were a negative 7% over the same period.
Speaker Change: In other words, public markets are trading higher based on expectations of a recovery in the office sector. While the private market appraisal based marks are still dropping in an attempt to catch up to current market conditions.
Speaker Change: As a result, the XP has the opportunity to make increasingly a creative private market investment, both in acquisitions and in selective developments that underwrite to yield premiums versus pre-pandemic levels.
Speaker Change: and the real estate private equity capital markets. Office sales volume in the third quarter provided evidence of a picked up activity.
Speaker Change: Specifically, volume for significant U.S. office sales was $8.2 billion, 15% greater than the second quarter of 24 and 32% above the third quarter of last year.
Speaker Change: Lower Short Term Interest rates increase leasing activity for certain assets and locations and better access to debt financing where the drivers.
Speaker Change: An important change in the environment has been the increasing availability of debt financing at scale for office assets in the C.M.B.S. market with relatively attractive pricing.
Speaker Change: Barry recent examples of CMVF execution include a $3.5 billion dollar.
Speaker Change: 57% loan-to-value, five-year refinancing for Rockefeller's Center at a fixed rate of 6.2%.
Speaker Change: and a $750 million, 43% loan to value five year refinancing of 277 park Avenue at a fixed rate of 7%. Office sales this past quarter for assets with Comfortability to BXP's portfolio include.
Speaker Change: 730 slash 750 Main Street, a fully-leased 219,000 square foot multi-use building in the Kendall Center District of Cambridge.
Speaker Change: Seoul for $362 million or $1650 square foot and a 5.7% initial cap rate. A least-old interest was conveyed from the landowner to a private life science real estate owner and developer in Santa Monica.
Speaker Change: 2220 Colorado Avenue, a fully-leased 225,000 square foot office building, sold for $185 million or $819 square foot and a 7.1% initial cap rate.
Speaker Change: A pension advisor was the seller and a fund manager of the buyer.
Speaker Change: 799 Broadway is a 177,000 square foot.
Speaker Change: New Office Building located in Midtown South is under contract to sell for $255 million or $1,400 square foot and a 5.3% initial cap rate.
Speaker Change: The building is 71% least in the yield is estimated to be approximately 7% upon stabilization. A private read sold the building to a European family office.
Speaker Change: Moving to VXPs Capital Allocation Activities, we remain active in pursuing acquisitions from both real estate owners and lenders. Our pipeline of potential opportunities is growing, including building and note acquisitions.
Speaker Change: Sites with near-term pre-leasing potential and new residential developments. No agreements are imminent, but we are encouraged by the activity.
Speaker Change: We are in active negotiations for the disposition of three not-in-comproducing sites which have successful should close in 2025 and generate over $70 million of proceeds.
Speaker Change: For our development pipeline, we delivered into service 180 city point, a 329,000 square foot lab building, which is 4743% least located in our city point park in Waltham.
Speaker Change: The initial lease and completed exceeded our underwriting, the market saw fund before the asset was fully lease.
Speaker Change: The opening of Skymark, our 500-nate unit luxury residential tower development at Reston Town Center, continues to go well, having at least 35% of the units at the base of the building, and we believe we are on track to achieve our underwriting in terms of rents and schedule.
Speaker Change: We have been able to accelerate the completion of 300 binistry, a fully-leased 236,000 square foot library development in Kendall Center in Cambridge and will deliver the project to our client and into service in the fourth quarter.
Speaker Change: We continue to push forward with several residential projects. Primarily on land we control that are being entitled in design and for which we intend to partially fund with joint venture equity capital.
Speaker Change: Lastly, we broke ground on the Grand Central Madison Concourse Access Phase of 343 Madison Avenue, located two blocks south of J.P. Morgan's new headquarter building and one block north of one Vanderbilt.
Speaker Change: 343 Madison competes with the Park Avenue Submarket of New York City, which, given its access to Grand Central Terminals, one stop commute.
Speaker Change: is under 8% vacant with no block of direct space over 100,000 square feet available. And as arguably the strongest office of the United States.
Speaker Change: 343 Madison, which BXP has been working on for over 10 years. If the only fully entitled ready to commence workplace development located in the Corps of Midtown, and we are having constructive conversations with a handful of potential anchor clients.
Speaker Change: When complete, the building will comprise 942,000 square feet and include state-of-the-art sustainability features, as well as direct escalator access into grant central terminal.
Speaker Change: We hope to launch this approximately $2 billion project next year, whereas a reminder the XPN's is 55% interest.
Speaker Change: The XB continues to execute a significant development pipeline with nine office lab retail and residential projects underway as of the end of the third quarter which we expect will contribute to BXP's external FFO per shared road over time. These projects aggregate approximately 2.7 million square feet.
Speaker Change: and 2.1 billion of VXP investment with a billion dollars remaining to be funded.
Speaker Change: So in conclusion, BXB continues to leverage its key strengths, which are our commitment to premiere workplaces and our clients as many competitors this invest from the office sector.
Speaker Change: A strong balance sheet with ready access to capital in the public and private debt and equity markets. And one of the highest quality portfolios of premier workplaces in the U.S. symbol over several decades of intentional development acquisitions and dispositions.
Speaker Change: BXB continues to display resilience with a growing leasing pipeline as well as stability and FFO for share and dividend level, and we are well positioned to continue to gain market share in both assets and clients.
Speaker Change: While benefiting from a constructive environment of lower interest rates, higher corporate earnings growth, more workers returning to their offices, continued out performance of the premier workplace sector, and a very competitive cost of capitals.
Speaker Change: Over to Doug. Good morning everybody. So Owen noted that our leasing in 24 through the end of the third quarter is 25% higher than 23. And during this period we've completed 3.3 million square feet of scientists.
Speaker Change: Posts of Q3 are active pipeline of leases under documentation sits at 1.53 million square feet, as compared to 1.39 million square feet post the second quarter.
Speaker Change: We've done about 315,000 square feet of that pool since October 1st. Executed Lisa's.
Speaker Change: If we execute most of the remaining releases during the fourth quarter, we will end the year at over 4.5 million square feet of transaction.
Speaker Change: are January 24 guidance assumed 3.5 million square feet.
Speaker Change: Exclusive of our leases and documentation, we also have an additional transactions under discussion.
Speaker Change: Totally just over 1.5 million square feet in the pipeline that will seed our 2025 activity about 50% of that involved currently vacant space.
Speaker Change: As of September 30th, we have 1.04 million square feet of sign leases on the vacant space that has not yet commenced it.
Speaker Change: There is now a 210 basis point difference between our occupied space and our least space.
Speaker Change: No doubt the Amos community is looking keenly towards 2025 and 2026 occupancy.
Speaker Change: We will provide our occupancy guidance for 25 on our next call. However, we can provide the following inputs as you think about your own models.
Speaker Change: Our Q424 and full year 25 explorations total 3.7 million square feet.
Speaker Change: We have sign leases that we will recognize revenue on 476,000 square feet during the fourth quarter of 24.
Speaker Change: and 483,000 square feet for 25, totaling 959,000 which creates an uncovered exposure if you will of 2.74 million square feet.
Speaker Change: Our pipeline of leases in negotiation covers an additional 305,000 square feet of currently vacant space and 395,000 square feet are renewals. All of this set to commence in 24 and 25.
Speaker Change: Obviously there are a major involved for reliever news with the expiration after 25.
Speaker Change: This leads pro-forma revenue commencing leasing for the next five quarters of about two million square feet for us to be flat for the In-service portfolio. Additional leasing with revenue starting in 25 will be added in.
Speaker Change: Each of our regional EVPs are in the process of building their business plans for 25 and this will be the basis for the total leasing volumes embedded in our guidance when we talk to you next time.
Speaker Change: If you're wondering about the large known 2425 expressions which is often a question we get. The largest R312,000 square feet at Western Corporate Center, which has been released by Biogen but sublet for years.
Speaker Change: and the first time in the world, I've been working with the first time in the world.
Speaker Change: 350,000 square feet at 200 to 7,000 you. We own 28% of that.
Speaker Change: 270,000-square-foot-law-farm-leases at a Barca-dero center, and 260,000-square-feet at Restin corporate center, which is least to the GSA.
Speaker Change: This last building is the site for our next multi-phase development in Ressentown Center, and the building will be taken out of service on January 1, 25.
Speaker Change: We also have active developments that will be added to our in-service portfolio in 25 with availability that is noted in our supplemental materials. 360 Park Avenue, South, 651 Gateway and rest in next Phase 2.
Speaker Change: Our BXP regional teams are spending a lot of energy pursuing alternative uses for our suburban land portfolio, which include vacant office buildings, for which the highest and best use may not be waiting for a recovery in office leaving.
Speaker Change: We are now deep in a public reprimanding process for 17 heartwarming and Lexington to allow for 312 multi-family units.
Speaker Change: A similar process is underway for our site containing two office buildings that world gates in Hurned Virginia. We are working on a rezoning for 359 units and 99 town homes.
Speaker Change: and the shady group of office park in Rockville, Maryland with the first phase including 360 multi family units and 136 town homes.
Speaker Change: Additional land sites in the Bay Area, Waltham, Northern Virginia and Northern New Jersey are being actively evaluated. This quarter we took two buildings out of service that we will work to re-entite all, one in Waltham and one in Northern Virginia.
Speaker Change: During our last call, I explained that we would see up to a 40 basis point that climb in our occupancy for Q3 due to the addition of our partially-leased development at 180 city point. Owen noted that.
Speaker Change: with a slight reduction in the in-service portfolio. We only experience a 10 basis point deterioration and in a quarter at 87%.
Speaker Change: We expect to improve by 20 to 30 bases points during the fourth quarter, in spite of the delivery of 103 city point, which is 100% available.
Speaker Change: This quarter, we completed 74 transactions with 32 lease renewals for 681,000 square feet and 42 with new clients in cumbersome 420,000,000 square feet. Activity was concentrated in Boston with more than 58% of our total lease volumes. We completed 470...
Speaker Change: 647,000 square feet in Boston 143,000 square feet in New York 155,000 square feet in DC and 163,000 on the West Coast.
Speaker Change: 10 clients expanded into 142,000 additional square feet and we had four contractions totaling 70,000 square feet.
Speaker Change: The majority of the client expansions this quarter came from our back-based financial firms. The only significant contraction in the portfolio came from a tech company, downsizing and wall dim. They were about 70,000 square feet and went to 15 and we have released all of the space that they've dated.
Speaker Change: We continue to see downsizing of our legal firm clients on the West Coast and in DC and we experience one in a Barca Derrows Center, which was a renewal and downsizing this court.
Speaker Change: We executed only one transaction over 55,000 square feet and two others in excess of 45,000 square feet. Our leasing activity this quarter was very granular.
Speaker Change: As reported in our supplemental, the Mark Tomarket of the leases that commenced this quarter, so they may have been signed in 20 or 21 or 22 or 23. 9,000 square feet was down about 4.5% and the transaction cost average $11.83 in a year compared to about $11 last quarter.
Speaker Change: The overall mark to market of the starting castron on Lisa's executed disorder of the 1.1 million square feet Reload to the previous in-class in-place castrons was actually up 9% with a primary contribution coming from the Boston area.
Speaker Change: The starting cast rents on leases be signed during this quarter on second generation space, we're up 90% in Boston, 10% in New York and then down 11% in DC and 3% on the West Coast.
Speaker Change: Owen's comments about the state of the economy and the zeitgeist around the importance of in-person work with colleagues is translating into improvements in leasing activity.
Speaker Change: The level of improvement and the source of the incremental demand continued a very, greatly by marketing. I would also note that decision making continues to be slow, and while more transactions are being completed, the process takes time, lots of time.
Speaker Change: Our views this quarter are pretty consistent with the commentary we've provided during 24th.
Speaker Change: The sub-market with the largest concentration of users from financial institutions, alternative asset managers, professional service organizations and law firms are showing the most consistent pick-up in activity. And as we saw this quarter, in some circumstances, these clients are expanding absorption of space.
Speaker Change: [inaudible]
Speaker Change: We have no availability at 399 Park Avenue or 601 Lexington. When clients need to expand on these buildings, we proactively discuss possible terminations with their neighbors.
Speaker Change: While 599 Lex has always been not quite Park Avenue, in strong markets like this, the building is one of the first to experience the spillover of Park Avenue tenants that are unable to find space. We are now in lease with a Park Avenue tenant that was unable to grow in its current building for a couple of floors.
Speaker Change: Our most active building in New York during the quarter was the General Motors building. We completed 58,000 square feet of transactions, including the addition of a new private equity client and the expansion of another. Our other availability in this market is at 510 Madison, where we are in the middle of an amenity refresh.
Speaker Change: This building tends to lend itself to smaller financial firms given the 12,000 sq. ft. floor place. This particular market segment of demand has been slower to make decisions.
Speaker Change: Year-to-date, leases executed by technology tenants in Manhattan had still been pretty light.
Speaker Change: We have seen a pickup in activity among technology tenants touring the market and this is encouraging given our current availability at 360 Park Avenue South and the availability we will have at 205th Avenue.
Speaker Change: We are in active conversations with tenants at both buildings, but none have progressed to a lease in negotiation.
Speaker Change: The most active building in Boston as well as in the entire BXP portfolio during the quarter with 200 clarinets streets.
Speaker Change: We completed more than 460,000 square feet of leases. Virtually all the leases were with existing clients in the alternative asset management industry and 50% of those clients added additional space.
Speaker Change: We also completed over 116,000 square feet of leasing in our Boston Urban Edge portfolio. This was made up of eight separate transactions and seven with new clients for BXP. Our portfolio is uniquely positioned both in terms of quality and availability of capital for investment in new tenant installations.
Speaker Change: Here the demand came from a national retailer, a few life science companies with office requirements, a small technology firm, and a fund manager.
Speaker Change: We didn't execute any leases in our new life science developments this quarter. Life science clients in Greater Boston continue to display very little urgency about any potential new requirements or relocations.
Speaker Change: We have had tours from some larger users, but the requirements are for late 26 and 27 occupancy.
Speaker Change: Year-to-date, there have been a handful of leases signed on shelf space that total about 300,000 square feet in the markets outside of Cambridge and Boston.
Speaker Change: Our rest in portfolio was responsible for 55% of our executed leases during the quarter in the D.C. region. Leasing activity and tenant demand growth continues to come primarily from two industry areas, cybersecurity and defense contracting.
Speaker Change: This quarter, we had a growing cyber firm, more than double its square footage. This client signed its initial lease in Reston Town Center for 9,000 square feet in 2020, and has grown six-fold in the last four years.
Speaker Change: One of the great advantages of BXP's large holdings in Reston is our ability to accommodate the growth of our clients.
Speaker Change: We saw a pickup of smaller requirements in our CBDDC portfolio this quarter, which was good news. We had two clients expand, one at 2210 and another at Capital Gallery, and completed leases with two new customers at 1330 Connecticut Avenue.
Speaker Change: The district's private sector tenant demand continues to be dominated by the legal industry. Many of these potential law firm clients are not satisfied with the existing inventory, either due to the product quality, condition, or the asset's financial condition.
Speaker Change: While in almost every case, the law firm renewal or relocation is resulting in a smaller requirement, which is leading to negative adoption, these firms prefer to be in the top refurbished, amenity rich, well-capitalized buildings, which is creating a tight micro market.
Speaker Change: There are limited opportunities in the market and no appetite from traditional lenders to finance any new construction, which has traditionally been the outlet for law firm lease expirations.
Speaker Change: Our availability at 2200 Penn and 901 New York Avenue will fare well, and we are actually in lease documentation for a late 2026 known expiration at 2200 Penn today.
Speaker Change: The San Francisco CBD also continues to act as the financial center of the West Coast with its own set of asset managers including private equity, venture, hedge funds and specialized fund managers and their financial and legal advisors.
Speaker Change: This is the source of the bulk of the transactions in the market today from a leasing perspective. Tour activity from these non-tech clients has improved during the year.
Speaker Change: On a comparative basis, San Francisco is seeing much more demand in 24 than it did in 23. There continue to be lots of small clients actively looking for space, and we are seeing these deals at 535 Mission and Embarcadero Center.
Speaker Change: We have completed ORIN negotiations on five leases totaling about 40,000 square feet at 535 Mission. This will cover a third of the availability of the building, but we still have another 80,000 square feet to go.
Speaker Change: and Embarcadero Center, we are in discussions with a number of existing and potentially relocating law firms. In each case, the requirement is a downsizing relative to the current footprint. We will retain the majority of our clients, albeit with space reductions.
Speaker Change: We are adding other new customers, but the transaction sizes are small, so gaining occupancy takes time.
Speaker Change: Additional lease reductions from larger tenants upon lease expiration in the market, JP Morgan is the latest, which is stemming from their acquisition of First Republic, continue to mute the positive demand emanating from the AI organizations that continue to look for additional space.
Speaker Change: During the quarter, the market got the long-awaited announcement of OpenAI's 300,000 square foot expansion in Mission Bay. And it's great that Airbnb renewed their headquarters at 888 Brannan, but expansion requirements from large technology tenants are still sparse in San Francisco.
Speaker Change: Tenant tour activity is improving at our Mountain View Research R&D buildings, where we have about 215,000 square feet of vacancy, and it's uniquely attractive product.
Speaker Change: We are in lease for 26,000 square feet with a healthcare diagnostics company for a vacant building. We completed a renewal with an automotive company and recently have issued a multiple full building proposal.
Speaker Change: This is a significant improvement from last year and from last quarter. These buildings are designed for companies that are making some kind of device, be it a car sensor, a photovoltaic panel, or a medical device. They don't compete with the large multi-story office product that has flooded the market.
Speaker Change: In summary, 2024 is shaping up to be a better-than-expected year relative to overall leasing at BXP. Leasing in our development properties continues to lag, but these are some of the highest-quality workplaces in their prospective markets, and they will lease.
Speaker Change: We may not be in a clear, positive absorption market, but demand continues to grow and we will continue to gain market share.
Speaker Change: Excellent, thank you Doug and good morning everybody. I'm going to start with a few comments on the debt markets and then I'll plan to cover the details of our third quarter performance and the changes to our 2024 earnings guidance as well as provide some insight into several of the moving pieces that you should be aware of for 2025.
Speaker Change: We completed multiple transactions this quarter and continue to have strong access to the debt market.
Speaker Change: This quarter, we exercised our right to extend our $334 million mortgage loan secured by 100 Causeway Street in Boston for an additional year at SOFR plus 148 basis points.
Speaker Change: We also extended $300 million of mortgage financing for Santa Monica Business Park that was scheduled to mature in July 2025 at attractive terms.
Speaker Change: We bifurcated the loan into a $100 million unsecured term loan and a $200 million mortgage loan.
Speaker Change: The unsecured loan is for one year with three one-year extensions, and we reduced the pricing at closing to SOFR plus 105 basis points.
Speaker Change: And the $200 million mortgage loan will be priced at SOFR plus 160 basis points and matures in 2028.
Speaker Change: The secured debt markets have shown meaningful improvement this quarter for high-quality, well-leased office buildings at leverage points of 50% or less.
Speaker Change: Credit spreads have compressed and there's significantly more liquidity in the CMBS markets for both Conduit and SASB executions.
Speaker Change: The Sazzy Market, which is where most large loans in excess of $500 million are financed, was non-existent in 2023. It reopened in early 2024, but with pricing for the AAA tranches, that spreads in the low $200s.
Speaker Change: More recently, AAA spreads have improved into the mid-100s, which results in a significant improvement in overall pricing, and conduit pricing can be even tighter.
Speaker Change: This trend is a strong signal of improved liquidity in the sector, though the financing market remains challenged for buildings with vacancy, short-weighted average lease terms, or higher leverage.
Speaker Change: We have several mortgage financings that are part of our 2025 capital plan, and we plan to take advantage of the improved conditions in the market and extend term.
Speaker Change: These deals include our $250 million loan for Marriott's new headquarters building in Bethesda, and two mortgages totaling $487 million on our hub on Causeway Development in Boston. We own a 50% interest in each of these assets.
Speaker Change: In the unsecured market, we issued $850 million of 10-year bonds in late August at a 5.75% coupon.
Speaker Change: We're holding the cash proceeds pending repayment of an $850 million bond that is expiring in January 2025.
Speaker Change: As we described in our issuance press release in August, we reduced our 2024 FFO guidance by $0.02 per share to account for the incremental net interest expense associated with this bond issuance that was not in our prior earnings guidance.
Speaker Change: Thank you.
Speaker Change: Now turning to our earnings results for the quarter, we announced third quarter funds from operations of $1.81 per share. That's a penny ahead of the midpoint of our guidance as adjusted for our recent bond deal.
Speaker Change: The primary driver behind our earnings beat is from lower than projected G&A expenses.
Speaker Change: Our portfolio performed in line with our expectations for the quarter.
Speaker Change: Doug described the improvement in our leasing activity both in signed leases and in our pipeline. As we get into the third and fourth quarters of the year most of this activity will not have a revenue impact in 2024 due to the lag between signing a lease and achieving occupancy and revenue recognition.
Speaker Change: Renewals have an immediate impact, but we generally know who is renewing in advance and the revenue is included in our forecast.
Speaker Change: My point is that you should not be surprised that our portfolio performance is closely aligned with our 2024 forecast this late in the year.
Speaker Change: For the full year 2024, we're narrowing our guidance range for FFO to $7.09 to $7.11 per share. Adjusted for the $0.02 of dilution from our bond deal, our new range maintains the midpoint of our updated guidance.
Speaker Change: While we will provide full guidance for 2025 in January, there are a couple of items where we have seen variations in a number of the 2025 models from the analyst community that you should consider.
Speaker Change: First is interest income, where we project lower cash balances and interest rates next year. Since our bond offering in August, we have been holding $850 million in cash that we are going to utilize in January 2025 for the payoff of our expiring bond of the same size.
Speaker Change: We're also using cash balances in combination with operating cash flow to fund our developments.
Speaker Change: We expect our average cash holdings to be approximately $800 million lower in 2025 than they were in 2024.
Speaker Change: We expect our interest expense will be flat to modestly lower next year from the burn off of fair value interest expense and the impact of lower SOFR rates on our floating rate debt portfolio.
Speaker Change: Thank you.
Speaker Change: We also will be vacating Reston Corporate Center, which is the project Doug described in his comments.
Speaker Change: We will be taking these two older, low-rise buildings totaling 260,000 square feet out of service on January 1, 2025, when the full building lease expires.
Speaker Change: We have entitlements to build over 2 million square feet of mixed-use commercial and multifamily residential on the site as the next phase of our incredibly successful Reston Town Center. This will lead to a significant increase in density where we expect to create incremental value and earnings over time.
Speaker Change: From our development pipeline, we will have a full year of contribution from delivering 300 Bennie Street this quarter and the Dick's House of Sports store we delivered in the second quarter. We will also have incremental income from the completion and lease-up of our Skymark residential development in Reston, where our ownership is 20%.
Speaker Change: Overall, we had a solid quarter with a continuation of strong leasing momentum and our volumes year-to-date up 25% over last year.
Speaker Change: We modestly beat our FFO guidance for the quarter and maintained our full year earnings expectations.
Speaker Change: That completes our formal remarks.
Speaker Change: Operator, can you open the line for questions?
Speaker Change: Thank you, sir.
Speaker Change: As a reminder, to ask a question, you will need to press star 1-1 on your telephone.
Speaker Change: to which are your questions, please press star 1 1 again.
Speaker Change: We ask that you please 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 follow-up questions.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: And I show the first question comes from the line of Nick Ulico from Scotia Bank. Please go ahead.
Nick Ulico: Thanks. I guess, just turning to the leasing markets, can you just give a little bit more feel for, you know, what kind of needs to change in San Francisco, West Coast?
Nick Ulico: maybe, you know, Boston suburbs as well where I think it's been more of a sort of vacancy drag on the portfolio. What needs to change for that dynamic to improve in those markets?
Speaker Change: So I'll give a general statement and then I'll let Rod and Brian give their perspectives on San Francisco and the Boston suburbs in particular.
Speaker Change: In general, we need to see more technology and life science demand.
Speaker Change: come back to the markets, which means we need to see both company formations with capital, be it private or public, right? A lot of biotech companies are sort of hoping to go public but aren't able to go public.
Speaker Change: And then we need to sort of see the new ideas generated into new jobs and therefore new kinds of businesses being formed.
Speaker Change: And that has really not been part of the sort of demand picture in either market in 2020, 21, 22, 23, 24. It's been sort of, you know, more of a retrenching of a large tech.
Speaker Change: and a, I would say, a slight downsizing from both technology and life science. So, Rod, you can sort of talk about the CBD of San Francisco and then Brian can talk about Walter.
Rod: Yeah, thanks, Nick. Or, good morning, Nick. I would just add to Doug's comment that I think what needs to happen, at least in San Francisco, with the demand has picked up, certainly. So, as you heard, we've got good activity from multiple sectors.
Rod: and the traditional tenants still dominate, but there's plenty of technology companies that are out in the market. But I think what needs to happen before you're gonna see some meaningful change in some of the statistics.
Rod: is going to be a burn off of the sublease availability. That still is an overhang. There's about 8.2 million square feet of sublease space. I would say that the best space has been spoken for. There's still some buildings that are out there, but that's still, you know, causing us to compete with sublease space, which is difficult. So I think before you're going to see some changes in the direct vacancy and particularly in our buildings, you know, some of those better sublease spaces need to be leased out, which is happening. So it's been happening for the last couple of years.
Speaker Change: Thank you for watching!
Speaker Change: In Boston, I'd say, first off, no surprise. Doug did an excellent job of underwriting the total market where we're at.
Speaker Change: encourage you to re-look at those things because it was spot on. I would say with our urban edge, and you've heard us say this before, the urban edge is much different than, let's say, the 495 Ring Road, and then in particular the P2 corridor, as we call it, between the Pike
Speaker Change: and Route 2 on I-95 is much different. The theme for us is drastic differences. So there's a drastic difference between the P2 corridor and anything else in the suburbs in terms of activity and also rental rates.
Speaker Change: And then the other is product. There's a drastic difference between our product at CityPoint, the premier space that all our leadership has talked about today, and let's say the rest of the market. And it's important to note that, you know, these markets
Speaker Change: product is vintage, now over 50 years old. And there's a tremendous amount of that that's dragging down things. But the difference between CityPoint Premier Office Space at $77, CityPoint $190,
Speaker Change: to 30, 10, and 20 city point is much different. And that includes what we see in Reston, which is the cluster of amenities. And that is the biggest difference that we're seeing. There's drastic differences between product and then also location.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I show our next question comes from the line of Steve Saqua from Evercore ISI. Please go ahead.
Steve Saqua: Yes, thanks, good morning. I guess, Owen, you know, you sort of talked about 343 Madison and, you know, the work that you're doing there, but also you mentioned, you know, the disappointment in not seeing some of the leasing happening at places like 360 Park, so I guess the question is, you know, how are you thinking about
Steve Saqua: The pre-leasing and the risks that you take at 343 Madison to move forward in light of the fact that, you know, some of the development has been kind of slower to lease up than you would like.
Speaker Change: Yeah, I think I'm going to turn it over to Hillary, the big picture answer to your question.
Speaker Change: Steve is that north of 42nd Street is primarily a financial services, legal services market and it's very strong and particularly with the access to Grand Central. You go south of 42nd Street, much more tech-driven with the issues that Doug described. But let me turn this over to Hillary.
Hillary: Thank you, Owen. Hi, Steve.
Hillary: I would just echo what Owen has said, and I would add to that that there have been several sizable leasing transactions completed in the third quarter.
Hillary: post the end of the quarter. So Bloomberg signed a renewal for a million square feet.
Hillary: Aries signed a lease for 300,000 square feet. Wilkie Farr signed a 315,000 square foot lease. All of these leases...
Hillary: We're in Midtown Proper and they're all at scale. So there is demand from larger tenants in the marketplace, and I think it's just a question of matching the right demand profile client with the premier workplace that we're planning to build.
Hillary: very different proposition in Midtown South. The market, as Owen alluded to, is dominated by
Hillary: tech and media tenancy. We are starting to see some more traditional clients.
Hillary: poke around in Midtown South as they are figuring out that there's very little high quality space.
Hillary: in Midtown available, but I would say the bulk of that leasing demand continues to be from the more traditional tenant base and tech and media simply have not been adding jobs and space the way that finance and the industries that support it have in Midtown proper.
Hillary: Thank you.
Speaker Change: And I assure our next question comes from the line of John Kim from BMO Capital Markets, please go ahead
John Kim: Good morning. We're trying to figure out the occupancy trajectory going forward. Doug, you gave very helpful building blocks on what's...
John Kim: the puts and takes over the next few quarters. But at the end of the day, you mentioned 2 million square feet of leases need to be signed over the next five quarters with commencements in the next five quarters for occupancy to remain flat.
John Kim: and I'm wondering how realistic that is. This year you're on pace to sign four and a half million square feet of leases and how much of that is commencing this year?
Speaker Change: I can't answer your latter question because I don't know the actual number in terms of all the things that were signed this year, how much has commenced.
Speaker Change: We are we are I would say at this point optimistic that we will sign two plus million square feet of leases that will have revenue
Speaker Change: commencing in 2024 and 2025 so that our occupancy will be at a minimum be flat. I'm hoping that, you know, when we go through our planning process with our VPs, we're going to see some opportunities that will be better than that. But again, we're not giving guidance for 2025 at the moment.
Speaker Change: Thank you.
Speaker Change: And I show the next question comes from the line of Jeffrey Spector from Bank of America Securities, please go ahead
Jeffrey Spector: Great, good morning. You know, just back on the West Coast, and I know it's, it's a, you know, smaller, you know, presence there, but
Jeffrey Spector: Given it's such an important question topic, and I know you discussed it already, but you know there is a lot of skepticism over the latest you know return to office mandates
Jeffrey Spector: in particular, tech. I know early in the year when we did our tour, we kept hearing, you know, tech, they're just not using the stick to bring people back.
Jeffrey Spector: and you know so I know Owen you talked about that a little bit Doug you talked about some of the challenges
Jeffrey Spector: in San Francisco, are there lessons learned from New York City or do we really need to stop comparing New York to West Coast, West Coast are truly just different dynamics and it's gonna take several years for tech firms to really figure out their space needs.
Speaker Change: So, Jeff, my answer is that I do think there is a cultural difference.
Speaker Change: between the business community on the West Coast and the business community in cities like New York and Boston. And there's a differentiation. However, that differentiation I don't believe will result in any difference in terms of the utilization of space.
Speaker Change: from the company's perspective, it may...
Speaker Change: reduced the number of days any particular company demands their people come to work. And so we are seeing, as Owen said, a lot of organizations saying whatever we have been doing is no longer working for us.
Speaker Change: and we need to be a more aggressive about asking our associates to be more present more of the time. I believe we will see
Speaker Change: You know, month after month, over the next number of months and years, a continual pickup on the West Coast.
Speaker Change: And clearly, the companies that are involved in the artificial intelligence industry, large-scale,
Speaker Change: have said, the speed at which we are needing to do all the work that's required to be, quote-unquote, on top and a winner, means we need space and we need our people to be in that space.
Speaker Change: and as that sector of the economy starts to dominate the culture out there, I would hope that we will see an even larger pickup in other companies responding to the need from a talent perspective relative to productivity. And Rod, you know, you may have a different perspective.
Rod: I don't have a different perspective. I completely agree, and I can tell you that it has picked up.
Rod: Salesforce in particular has, as of October 1,
Rod: instituted their policy of getting people back in the office and they are tracking that data very closely with our team at the building and it seems to have if you were down there in that building today and you were sitting in that lobby you would feel a different vibe than you did a year ago. And then one other small anecdote I'm coming in from the East Bay which is where I live the BART system which is our light rail train system
Rod: The train station that I go to, there's three basic parking lots, and the third lot, which was most distant, had very few cars in it for the last few years. That lot is filling up on days Tuesday, Wednesday, Thursday, and that hadn't happened before. So they're going somewhere, they're going into the city, and so I think we are seeing a shift.
Speaker Change: And Jeff, I'll just add one other thing, and again, this is very anecdotal, but up in Seattle, we've done two leases at Madison Center in 2024. Both of them have been from
Speaker Change: branches of technology companies that gave space back
Speaker Change: early during the pandemic and when they changed their policy relative to return to work, needed more space and took an additional floor in both cases.
Speaker Change: at Madison Center.
Speaker Change: That does not suggest that any of these companies are going to demand everyone comes back and they're going to start firing people if they don't. We don't know how the quote-unquote stick is going to work.
Speaker Change: But there are clearly organizations that have said, in the technology business, on the West Coast, that we need to have our people in space and we want to have the space for those people.
Speaker Change: Thank you.
Speaker Change: And I show our next question comes from the line of Anthony Paoloni from JPMorgan. Please go ahead.
Anthony Paoloni: Thank you. Owen, you mentioned in your comments public markets leading private markets and maybe alluding to opportunities to invest. Can you maybe give us a sense as to where you think or where you see BXPs, capital costs, being versus maybe...
Anthony Paoloni: What you think you might make on something like 343 Madison or on investment opportunities you might be Getting shown and you know if we should really start to think about external growth in 2025. Yeah
Speaker Change: DXPs look through cap rate today at current share prices in the mid, yeah, call it mid-sixes.
Speaker Change: In terms of development yields, you know, in New York, before the pandemic, development yields were about 6%, and today I think they're materially higher than that, and that's certainly going to be our target. And then on acquisitions, there have been very few.
Speaker Change: deals done in this Premier Workplace segment, although there were a couple last quarter which I provided in my remarks.
Speaker Change: And again, it's a little bit all over the place, depends on the leasing status and ground lease and all those types of things, but it feels to me like the bid at least is in kind of the high 6-7% cap rate on a stabilized basis.
Speaker Change: So that's where the market is there, you know, in terms of the acquisitions, there haven't been a lot of takers of that. In other words, sellers are not accepting that price. And that's why there haven't been that many transactions, but that could clearly change.
Speaker Change: I also think transaction activity will probably go up in the coming quarters because there is more availability of financing, particularly in the CMBS market which I described.
Speaker Change: Thank you.
Speaker Change: And I'm sure our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.
Blaine Heck: Great, thanks. So along those same lines, in the past you guys have been pretty transparent about your desire to grow in some of the markets that you've entered most recently like LA and Seattle.
Blaine Heck: I guess can you just talk about whether your appetite to grow in those markets has changed at all given the tougher operating environment and just whether you guys are seeing any interesting investment opportunities in those markets or do you think you'll focus your acquisition efforts on markets that are a little bit healthier now?
Speaker Change: Yeah, our strategy top-down is to establish a perimeter, which we have with the six markets that we operate in, including some, in a couple of cases, like Waltham and Reston, you know, places that are outside the CBD.
Speaker Change: So that's the top-down strategy. In terms of what we actually invest in, it's bottoms up. We're opportunistic.
Speaker Change: What can we find? What's available? What can our teams generate? We're going to look for and execute on those investments that have the best best risk return opportunities
Speaker Change: So we're, you know, we certainly look at where the contributions come from the various regions to our overall result, but we want to be opportunistic in the way we do deals within the perimeter that I described.
Speaker Change: The last thing I'll say on this is there are opportunities in the West, but they're clearly harder to underwrite, you know, when you're looking at a building in New York or Boston, for example, or, you know, or say in the in the Reston area.
Speaker Change: It's easier to have a view on what are the rents, what can the leasing velocity be, what should we expect. Whereas in the West, particularly for some types of assets, that's more challenging because the leasing is slower. So I'm not suggesting we won't do or try to do deals in the West, but they're harder to underwrite.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I show our next question comes from the line of Michael Griffin from Citi. Please go ahead.
Michael Griffin: Great, thanks. I'm curious if you can give any color just on the Bain renewal in Boston and whether or not they were a potential candidate for that development you've got central in the Back Bay, 171 Dartmouth. Did you just need maybe more of a commitment in terms of rents or weighted average lease term to maybe justify moving them over to the new development? Just any color there would be helpful.
Speaker Change: I'm not going to comment about what Bain's decision-making process was.
Speaker Change: Suffice it to say that
Speaker Change: A new building construction in Boston today probably costs somewhere in the neighborhood of $1,400 to $1,600 a square foot, depending on whether or not you want to include a value for land.
Speaker Change: And if you need a return,
Speaker Change: and Owen described sort of our development expectations.
Speaker Change: that will create a rent that is...
Speaker Change: materially higher than the rents that are achievable in existing both under construction and recently delivered new buildings.
Speaker Change: in the financial district and the level of rents.
Speaker Change: that we can currently command in the back bay. And so I think the timing at the moment for that new development in Boston doesn't really pencil relative to where existing rents are. Now, if...
Speaker Change: The SOFR curve goes from 5.5% to 3%.
Speaker Change: and lending conditions go from 350 to 400 to non-existent over to 150 basis points over.
Speaker Change: and there is some softening in some of the inputs of the building and the building cost comes down.
Speaker Change: there's probably a different conversation that could happen at some point in the future with a number of tenants in our back pay portfolio but wanting to go to the new building at 170 Dartmouth Street and we hope to start that building at some point but it's not sort of part of the calculus in 2025.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: And I assure our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Alexander Goldfarb: Hey, good morning.
Alexander Goldfarb: A question on the D.C. market. You guys made some positive comments on...
Alexander Goldfarb: what's going on in D.C. and certainly echoes what we saw when we were down that market.
Alexander Goldfarb: earlier in the month.
Alexander Goldfarb: Just looking at twofold, one, as you think about the rents that are rolling in D.C.
Alexander Goldfarb: Directionally, do you see those rents, especially in the district...
Alexander Goldfarb: rolling up, rolling down, just trying to get a sense given that this market has had a tough time over the past decade.
Alexander Goldfarb: and then two, is there willingness, are the tenants themselves willing to pay the rents necessary for new development or do you see this market as really just trying to cram into the existing buildings that you have right now?
Speaker Change: Yeah, so Alex, thanks for the question. I'm going to answer the first part and then I'll let Jake Stroman answer the second part.
Speaker Change: in the District of Columbia.
Speaker Change: Every lease that we sign has somewhere between a 2.25% and a 3% annual bump. And generally those leases are at a minimum of 10 years and generally 15 to 20 years.
Speaker Change: And so, if you compound the rents where we started with those rents, it is almost impossible to have a rent roll up in DC on a like building. However, and I'll let Jake to describe sort of where the new market might be.
Speaker Change: for rent in new buildings and how that might impact sort of, you know, what the opportunity might be for us. Jake?
Jake Stroman: Yeah, sure. Thanks, Doug. And hello, Alex. Look, Alex, there's no doubt that
Jake Stroman: The preeminent office space and the demand for preeminent office space in the district is driven by the legal industry, as Doug alluded to in his comments, and there are definitely opportunities that exist.
Jake Stroman: and there are active prospects in the market that are looking for
Jake Stroman: better amenitized and well-located, new, high-quality product. And so we do believe that there will be opportunities in the D.C. market whereby hopefully BXP is able to capitalize on those opportunities.
Speaker Change: and the rent stake that would be necessary for those are what compared to where sort of existing product is.
Speaker Change: Yeah, they're probably 15 to 20 percent higher than existing sort of trophy quality product that exists in the market.
Speaker Change: Thank you.
Speaker Change: And I show our next question comes from the line of Floris Van Dakem from Compass Point, LLC. Please go ahead.
Speaker Change: Hey, good morning, guys. Thanks for taking my question. Owen, if I look at the public, and you sort of alluded to this a little bit earlier in your remarks, you know, the public office owners, not all of them, by the way, but some of them, like yourselves, are getting a green light to grow externally from the market. You're all trading at a premium to consensus-estimated NAV.
Speaker Change: But you have this issue about the lack of transactions.
Speaker Change: in the market as well. How do you think about...
Speaker Change: As the timing or potential, what are the catalysts that are going to need to occur for transaction activity to pick up and how do you think about your cost of equity to fund those potential transactions going forward?
Speaker Change: Yeah.
Speaker Change: Well, I mentioned, I answered the second question earlier, which is our look through cap rate today, depending on different models, but it's in the mid-sixes.
Speaker Change: in terms of what is going to spark new activity,
Speaker Change: I think one of several things, or multiple of several things, one, lower interest rates would certainly help.
Speaker Change: I talked about the new market phenomena, which is very constructive, which is the opening of the CMBS market for the office sector. I think that will help buyers create liquidity to buy things, so I think that's a catalyst.
Speaker Change: And then, you know, I think that lastly, fatigue on the sales side. You know, you're an owner of an asset, you have a business strategy, you want to downsize.
Speaker Change: your office exposure, you want to sell a particular building, you want to reuse the capital to do something else, you have goals and at some point you're going to move forward and try to accomplish those goals. So I think that will be part of the calculus going forward as well.
Speaker Change: and Michael LaBelle. Thank you.
Speaker Change: and Michael LaBelle. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: And I share our next question, comes from the line of Katelyn Burrows from Goldman Sachs, please go ahead.
Caitlin Burrus: Hi, good morning everyone. I know you aren't giving 2025 guidance so you're probably less inclined to talk further out, but with that said, I guess bigger picture, as you consider occupancy improving, development coming online, in place debt being refinanced, any comments you can give on kind of the trajectory of FFO or could you quantify any of those building blocks?
Speaker Change: I will just say, Caitlin, that we are an optimistic group here.
Speaker Change: and we believe that the markets will continue to recover.
Speaker Change: and we believe that we will pick up a meaningful amount of occupancy over time.
Speaker Change: And, you know, our average rent is somewhere around 80 bucks a square foot. And we should, you know, hopefully get to a stabilized...
Speaker Change: level at some point of 400 plus basis points or more of occupancy gain and You're talking about 80 times, you know 50 million square foot portfolio. So every hundred basis points is five hundred thousand square feet. So you're talking about 80 times 400 four million
Speaker Change: two million square feet of space, that's a significant amount of growth, both in occupancy and therefore internally. Owen just described, you know, hopefully the ability to do some external.
Speaker Change: transactions, which we would believe would be accretive.
Speaker Change: maybe not a lot in the short, short term, but certainly on a medium to long-term basis. So we're optimistic about the growth of our earnings over time and.
Speaker Change: I am sort of the outlier of BXP relative to where long-term interest rates are, but it's clear that short-term interest rates are coming down, which is a good thing. So I think that that will sort of...
Speaker Change: be a little bit of a sort of neutral for us?
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I show our next question comes from the line of Opal Rana from Key Bank Capital Markets. Please go ahead
Opal Rana: Great, thanks for taking my question. Could you give us some color on the sublease market across your markets? Yeah, I know you talked about San Francisco already, but what about the others? And then do you have a sense of what percentage of your tenants are currently subleasing their space?
Speaker Change: So, sublease, the biggest issue is clearly on the West Coast, and it's most dominated in San Francisco and then in Seattle.
Speaker Change: After that, it falls off pretty dramatically. We really don't have much in the way of a sub-lease problem in New York City, certainly not in the markets that we are competing with. In our portfolio, there's probably...
Speaker Change: 2-3 million square feet overall of space that has been sublet, that's not quote-unquote on the subleased market. Again, we've had, you know, these transactions.
Speaker Change: like I just described in Weston where Biogen sublet their space for a long time and, you know, two quarters ago we had the Riverbend space. So we have some sort of chunkier pieces like that. We have one of those in Reston, Virginia with the College Board. So I'd say it's sort of at that level, but we're not competing.
Speaker Change: with our own tenants, relative to transactions in our buildings, because most of it was done a long time ago, and in the short term, there's been very little in the way of new sublet space that's been brought on in our portfolio, per se.
Speaker Change: Thank you for joining us.
Speaker Change: Thank you.
Speaker Change: And I assure our next question comes from the line of Peter Abramowitz from Jeffrey's. Please go ahead.
Peter Abramowitz: Yes, thank you for taking my question. So you talked about the survey for CEOs. I think that something like 83 or 85 percent see their people coming back five days a week over the next couple years. I guess just could you sort of square that with with what you're seeing real time sort of on the ground conversations? I know
Peter Abramowitz: Some of the tech tenants have been calling their folks back to the office five days a week.
Speaker Change: He gave some helpful anecdotes there on the West Coast, but just kind of curious with how we square, you know, survey results like that with the reality of what your conversations are yielding.
Speaker Change: Sure. So...
Speaker Change: The way you need to think about this is, when you say someone's coming back to the office five days a week, they are never in the office five days a week, right? So in 2019,
Speaker Change: In the best building that we had in our portfolio, if 80% of the seats that were quote-unquote in the building were being used on a given day, that would have been Nirvana.
Speaker Change: And so what we are seeing is that in in New York City, we are basically at that level.
Speaker Change: in greater Boston and even in Washington D.C. now where we have measurements for turnstiles, we are sort of at the sort of 85 to 90% of that level. However, on the West Coast in San Francisco, we are still sort of at a 65% of that level.
Speaker Change: and so that's what the buildings are telling us. They're also telling us that in all of the markets, the people that are coming in are coming in.
Speaker Change: three plus days a week. So individual card swipe by a human being that we can identify in general, when you are coming in, you're coming in very frequently.
Speaker Change: and so I think it's just a question of building the number of those people who are coming in more frequently that it's going to sort of be the thing that creates more quote-unquote activity in these buildings. Yeah and just to add to Doug's data
Speaker Change: and I've mentioned this a few times on prior calls. First of all, CEOs are very, they're not positive about remote work. They want employees back in the office. They have been reluctant to do so for competitive purposes.
Speaker Change: Remote work is a benefit that many employees want, but it has a real cost. It's like compensation, other benefits you provide employees.
Speaker Change: And I think it's notable that groups like Amazon and Salesforce and particularly all the startup AI companies are saying, you know what, this is a benefit that we're no longer able to provide. We need you to come back. And I think those companies taking those actions will allow their competitors to take similar actions because they're all competing for talent.
Speaker Change: So, I'm not surprised by the survey. It's what we hear from our CEO clients, and I think slowly over time this issue will continue to dissipate in importance.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: and I show our next question comes from the line of Dylan Brzezinski from Green Street. Please go ahead.
Dylan Brzezinski: Good morning guys and thanks for taking the question. Doug, or maybe it was Owen, you talked about tech touring activity picking up in New York. Can you kind of compare that acceleration or pickup in tech tenant touring activity to some of your West Coast gateway markets, excluding any of the AI tenants that are in the market? I guess what I'm trying to get at is, are you seeing New York even lead on the tech touring activity front as well?
Owen Thomas: So I will let Hillary talk about the tech in New York, and I'll let Rod talk about the tech demand in San Francisco, and you can make your own conclusion.
Hillary: Hi Dylan, this is Hillary. The tech demand, I would say, really started to perk up a little bit after Labor Day, and I think it was pretty
Hillary: close to coincident with the timing of the interest rate cut and it just seems like businesses across the board are having an easier time
Hillary: Making planning decisions at this point that having been said to Doug's point earlier It is taking people an exceptionally long time to actually get through the process of making a decision about what space they want to take so
Hillary: OpenAI recently committed to space in the market at the Puck building. There are other tech tenants that are touring in the marketplace, but I think it's it's too early to say that there is a solid
Hillary: Um.
Hillary: trend toward them increasing the amount of space they're taking, certainly as we've been talking to executives amongst tech companies.
Hillary: They're more constructive on back to office and therefore the amount of space they need. But I think we're still in the process of sorting out what that means for the actual amount of space that's going to be taken in the market, particularly in Midtown South.
Speaker Change: Can I just add on the West Coast that I think in addition to the headlines coming out of the AI companies, which has been great, there's definitely a broader base of other technology companies, particularly down in the Valley. And I would just make one note of the autonomous vehicle industry. There's a handful of tenants that we're talking to down there. Some of them are already our clients, but there's others. And so it's not just AI, definitely.
Speaker Change: Thank you. And I show next question comes from the line of Ronald Camden from Morgan Stanley. Please go ahead.
Speaker Change: Please see the complete disclaimer at https://sites.google.com
Ronald Camden: Hey guys, thanks for the time this morning. Just quickly, looking at the health of the New York market overall and the quarter-over-quarter decline in occupancy, can you guys just speak to how much of that was baked into your expectations into the quarter? And looking forward, do you expect a rebound in the fourth quarter? Are there any headwinds facing the Manhattan office market that maybe were not as well appreciated by the market? Thanks.
Speaker Change: I hope that we've been pretty clear that we were going to lose O'Melveny and Myers at Times Square Tower in the third quarter and that's entirely the only.
Speaker Change: expectation. Now, many of those leases haven't commenced yet, so they haven't rolled into occupancy, but our buildings in Manhattan
Speaker Change: 360 Park Avenue, Park Avenue South side are seeing a significant amount of interest and we have and we have active dialogue.
Speaker Change: at buildings like Times Square Tower, at buildings like 205th Avenue, a lot of activity at 599 Lex. And so it's, you know, we feel really good about the overall level of sort of.
Speaker Change: transactional demand that is possible for 24 and 25 in our Midtown, you know, and hopefully our Park Avenue South slash Midtown South market as well.
Speaker Change: Thank you.
Speaker Change: And I show our last question in the queue comes from the lines of Brendan Lynch from Barclays. Please go ahead
Brendan Lynch: Great, thank you for taking my question. It sounds like you're potentially interested in acquiring more residential and you have some residential projects beginning the entitlement process. Just wondering if you could give us some color on what the playbook is there.
Speaker Change: Yeah, so all of what you said is true. We have, you know, we own today pushing 2,000 units and we have several projects on land we control that we're pushing forward with.
Speaker Change: And as Doug described in his remarks, we're looking at some other sites that we thought in a prior market might be well-suited for office, and we think that they can potentially be re-entitled to residential. Our playbook in residential is gonna be different from what we do with office and life science.
Speaker Change: Skymark is a good example of this at Reston Town Center. We own the site, we entitled the site.
Speaker Change: We did all the development work. We're supervising the construction. We have an 80% capital partner, and we also don't lease and manage the properties.
Speaker Change: So I think what you should expect from our residential business is less long-term hold and more generation of
Speaker Change: fees, generation of profits on a minority LP interest, and generation of carried interest as opposed to long-term holds.
Speaker Change #100: Yeah, and I would just add the following about our land inventory, and again, I said this in my prepared remarks.
Speaker Change #100: We have a significant amount of land inventory where we are carrying that both from a
Speaker Change #100: operating perspective as well as a cost-of-capital perspective. And we are not going to sit around and just wait for the markets to recover.
Speaker Change #100: And so we are actively looking at how we can put those resources to use in a creative way, and it's both
Speaker Change #100: multi-family units where we will likely be the developer with third-party money.
Speaker Change #100: where we will probably sell the parcels and Owen described a couple of parcels that are potentially going to get sold. That's what those are. We have some sites that might be good for big box use.
Speaker Change #100: We have a site that we've been in contact with somebody who wants to do data centers And so we are looking to try and as effectively and as quickly as possible
Speaker Change #100: create value from this LEND inventory because it's not anywhere on our balance sheet, and we get no credit for it relative to our share price. And we think there's actually a significant amount of opportunity there that we are going to try and mine over the next couple of years, and you will start to see
Speaker Change #100: Some of this occurring in the first quarter of 2025, when I hopefully will be announcing the commencement of this development at 17 Hartwell Avenue in Lexington, which will be the first of these things.
Speaker Change #101: Thank you. That concludes our Q&A session. At this time, I'd like to turn the conference back to Owen Thomas, Chairman and CEO, for closing remarks. Yeah, we have no more formal remarks. Thanks to all of you for your interest in BXP.
Speaker Change #102: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change #103: Thank you for watching!
Speaker Change #103: and Michael LaBelle. Thank you. Thank you.