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spk14: Good morning and welcome to Boston Properties' second quarter and 2021 earnings call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At this time, I'd like to turn the conference over to Ms. Sarah Buda, VP of Investor Relations for Boston Properties. Please go ahead.
spk13: Great. Thank you. Good morning, everybody, and welcome to Boston Properties' second quarter 2021 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8K. In the supplemental package, the company has reconciled on 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 investor relations section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we'd like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President, and our regional management team will be available to address questions. And now I'd like to turn the call over to Owen Thomas for his formal remarks.
spk17: Okay, thank you, Sarah, and good morning, everyone. I'm delighted to report that for the first time since the pandemic, I'm together with Doug, Mike, Sarah, and our Boston team for this earnings call, and all BXP employees returned to the office on July 6th. BXP is emerging from the pandemic with strength and momentum as evidenced by improving financial results and rapidly elevating leasing and investment activity. This morning, I will cover the economic recovery that is underway in the U.S., BXP's momentum in terms of financial results and leasing, private equity capital market conditions, particularly for office real estate, and BXP's capital allocation activities, focusing on four new investments we announced this quarter, including our official entry into several new markets. The U.S. economy, awash with fiscal and monetary stimulus, is roaring back as we exit the pandemic. U.S. GDP growth was 6.4% in the first quarter and predicted to be higher for the second quarter and for all of 2021. Over 850,000 jobs were created in June, and aggregate unemployment decreased to 5.9%. Industries that use offices have been less impacted by the pandemic, and the employment rate for their workers is lower. Despite the annual inflation rate rising to 5.4% in June, the 10-year U.S. Treasury rate has dropped to around 1.3%, and the Federal Reserve's rhetoric remains distinctly dovish, given it believes recent inflation is driven by transitory factors. High economic growth and low interest rates create the ideal environment for strong real estate investment performance. Now, BXP's financial results for the second quarter reflect the impacts of this recovery and an increasingly favorable economic environment. Our FFO per share this quarter was 10 cents above market consensus and 12 cents above our own forecast, which Mike will detail shortly. We completed 1.2 million square feet of leasing, more than double the volume we achieved in the first quarter, and only 10% below our long-term second quarter averages. Our clients are making long-term commitments. The leases signed in the second quarter had a weighted average term of seven and a half years. Many are expanding, as was the case with two large media and tech clients in LA. And building quality is increasingly important as evidenced by strong tour and leasing activity at the GM Building, Reston Town Center, Colorado Center, and the view floors at Embarcadero Center. We believe this activity and performance supports our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate, and train, all critical for their long-term success. and that concerns about the work-from-anywhere impact on the BXP footprint are overstated. Moving to private equity market conditions, $15.7 billion of significant office assets were sold in the second quarter, flat the last quarter, up 77% from the second quarter a year ago, and down approximately 44% from 2019 pre-pandemic levels. and it remains 23% of commercial real estate transaction activity. Cap rates are arguably declining for assets with limited lease rollover in anything life science related, given lower interest rates. Notably, in Cambridge this last quarter, a REIT agreed to purchase Charles Park vacant, though with identified tenants, for $815 million, or $2,200 a square foot. Also, One Memorial Drive in Cambridge, a fully leased 409,000 square foot office asset, is under agreement to sell for $825 million, or over $2,000 a square foot at a 3.8% initial cap rate. Moving to BXP's capital market activity, we had a very active and successful quarter with acquisition. All of the investment strategies we have described to you over the last several quarters are represented in the four new investments we recently announced, which aggregate almost 2 million square feet. These strategies are grow in life sciences, enter the Seattle market, acquire high-quality assets that need redevelopment or refreshment at discounted valuations due to the pandemic, and Acquire office assets in partnership with private equity investors through a joint venture investment program we set up with GIC and CPP, two leading global real estate investors. So let's start with our official entry into the Seattle region with the acquisition of Safeco Plaza. We have previously discussed the Seattle area as having a strong real estate market, as well as a logical expansion region for BXP's gateway strategy. The Puget Sound region is the headquarters location for leading global employers like Amazon and Microsoft and has one of the largest clusters of computer science workers in the U.S. Seattle has experienced high levels of population and rent growth given its expanding technology and life science employment base and is much more affordable than other major technology markets given no state of Washington income taxes and lower real estate costs for both office space and housing. Rich Kedzior- rent land values and building values are lower in Seattle than any of our other core gateway market. Rich Kedzior- The broader puget sound market has the scale and growth potential to afford us opportunities to both acquire and develop in multiple districts of Seattle bellevue and other East side market. Rich Kedzior- we've had a bxp executive Kelly lotion who's joined the call this morning. Based in Seattle for well over a year, we have an attractive pipeline of additional investment opportunities currently under review and will build out a full-service real estate execution team over time. Safeco Plaza comprises 800,000 square feet, has a LEED Platinum certification, and is located in the center of the Seattle CBD with convenient access to rail, ferry, and highway transit options. The building is currently 90% leased with six years of weighted average lease term at rents that are approximately 30% below market. Safeco Plaza offers generous ceiling heights, 360 degree views and timeless architectural features and our strategy is to refresh the ground plane lobby and amenities and release the building at market rates in the coming years. Liberty Mutual, which acquired Safeco, is the anchor tenant leasing 68% of the building. BXP will own either 51% or 33.3% of the property, depending on whether one or two private equity investors join the partnership. We believe our basis in the acquisition, which is $465 million or $581 a square foot, is very favorable relative to replacement costs and recent office trading activity in the Seattle market. We believe Safeco Plaza to be a very attractive investment opportunity with a future redevelopment play given the quality and location of the building, our going in basis, as well as the cash flow we receive from existing tenants during the refreshment process. We have a non-refundable deposit posted and intend to close the acquisition in early September. We are also entering a new sub-market for BXP, Midtown South and New York City, with the acquisition of 360 Park Avenue South. Midtown South has become New York's strongest sub-market in terms of rent growth and vacancy, given it is the preferred location for many technology occupiers, New York City's most rapidly growing business segment. 360 Park Avenue South comprises 450,000 square feet and is in a prime location at the corner of 26th Street, one block from Madison Square Park. The transaction will close and the building will be vacated by a long-term corporate user later this year, which provides us the opportunity to plan in advance and subsequently execute a complete refreshment of the building. With generous ceiling heights and a unique elevator configuration allowing for two separate dedicated lobbies, We believe the building will appeal to both large and medium sized users seeking marketing and brand expression opportunities with their space. In terms of economics, we're paying $300 million for the building, or $667 a square foot, which leaves us significant latitude relative to comparable sales to budget generous building enhancements. The acquisition structure is also creative and we think favorable for BXP. Consideration for the purchase will be the assumption of a $202 million mortgage on the property and the issuance of $98 million of OP units in BXP's operating partnership. We are committed to complete the transaction on December 1st of this year, and the number of OP units issued at closing will be determined by BXP stock price at that time, but with a floor of $111 a share. In other words, we would benefit by issuing fewer units if our share price continues to rise through the closing date, but our downside is capped by a floor. Most importantly, the tax deferral inherent in our contribution structure distinguished our proposal such that it did not have to be the highest price to yield the seller the highest after-tax value. One of our joint venture investment program partners will likely join this investment by funding all of the capital needed for the refreshment, resulting in their owning up to a 50% interest in the project over time. Next on acquisitions, we added to our life science business and entered the Montgomery County, Maryland life science market through the acquisition of a seven building, 435,000 square foot office park located in close proximity to the Shady Grove Life Sciences Center the premier cluster for life sciences in the Washington, D.C. region. Montgomery County is the fourth largest life science market in the U.S. and home or proximate to several large biomedical institutions such as NIH, FDA, Johns Hopkins University, and the University of Maryland. The 4 million square foot Shady Grove sub-market at the epicenter is currently 3% vacant with rising rents. We are paying $116.5 million for the asset, or $267 a square foot, and intend to convert the entire park to lab and life science use over time. There are seven buildings in total, three of which are vacant and will be converted to lab immediately. The remaining four buildings are 63% leased and will be converted to lab use as leases expire and office tenants vacate over the next few years. The entire site is 31 acres and can accommodate additional ground-up development depending on demand. There is a strong backlog of space requirements in the market and we are already competing for a large bill to suit in addition to other requirements. We have a non-refundable deposit posted and plan to close the acquisition in August. And lastly, in the second quarter, we completed another life science acquisition, 153 and 211 Second Avenue in Waltham, Massachusetts. These two existing lab buildings comprising 154,000 square feet and 100% leased to Sanofi are located immediately adjacent to our 200 West Street lab conversion property, which is almost complete and expected to deliver in the fourth quarter of this year. This was an off-market transaction completed at a price of $100 million. or $650 a square foot and a 6.4% initial cap rate. Santa Fe's lease is short term and below market. The site comprises 14 acres and has 120,000 square feet of additional development rights, which could be increased when combined with the excess development capacity of our adjacent 200 West Street site. Life Sciences is a rapidly growing segment of our overall business. Today, Life Sciences at BXP is 3 million square feet, representing 6.4% of our total revenue. We have 920,000 square feet of lab redevelopment and development projects currently underway that are experiencing strong user demand and expected to deliver in the next 36 months. And we have approximately 5.5 million square feet of future conversion and development opportunities under our control in the Cambridge, Waltham, Lexington, South San Francisco, and now Montgomery County markets. Within five years, assuming continued strong market conditions, we could more than double the amount of BXP's revenue that is generated from the life science sector. Regarding dispositions, we have an agreement to sell our Spring Street office park in Lexington, Mass. for $192 million, or $575 a square foot. We expect the sale to close in September as part of an exchange with the two life science acquisitions mentioned previously. Year to date, we have completed or committed to dispositions aggregating $225 million in our share of gross proceeds and are considering additional asset sales in 2021. And as a reminder on investment activities, though we did not add to or deliver from our active development pipeline this quarter, we have 4.3 million square feet of development underway that is 71% pre-leased and projected to add approximately $190 million to our NOI and 3.7% to our annual NOI growth over the next three years. On a final and important personnel note, John Powers, who, as you know, is the head of our New York region, told us he would like to retire at the end of this year. We conducted a thorough external and internal search and are very excited to have Hilary Spann join BXP as an executive vice president. Hilary has many years of real estate management and investment experience as a senior officer of CPP and prior at JPMorgan Investment Management. having completed $12 billion in investments in New York City alone. Hillary will join BXP after Labor Day and commence her duties as New York Regional Manager at the beginning of 2022. So in summary, we had a very active and successful second quarter with strong financial results and multiple new business wins in the leasing and investment markets. BXP has a strong growth ramp driven by improving economic conditions and leasing activity, the recovery of our variable revenue streams, delivery of a well-leased development pipeline, completion now of four new acquisitions, a strong balance sheet, and capital allocated from large-scale private equity partners to pursue new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation's hottest life science markets, as well as low interest rates and decreasing capital costs. Finally, I want to express my sincere appreciation for the BXP team, which is back at the office serving our clients and winning new mandates with great care, expertise, and enthusiasm. Over to Doug.
spk19: Thanks, Owen. Good morning, everybody. Obviously, we have a lot to talk about on the transactional side. I'm sure there'll be some questions on that, but I do want to spend a few minutes talking about the leasing markets and the activity that we're seeing. There's certainly no question that we're on the precipice of significant change in the atmosphere around in-person work, but more announcements come out every day. The fact remains there's still some uncertainty and there's some trepidation about COVID-19, the Delta variant, and whatever the next thing is going to be. So, The transition period that we are now in, as many organizations like ours encourage or require their employees to come back to work, it's going to take some time. So there are going to be some ramifications to that. Many of you participated in our NAIRT meetings, and my comments this morning about impacts on work from home I think are going to be pretty consistent with what we talked about during that conference. The impacts on space needs are going to really vary depending upon the size of organizations, which we like to put in three categories. So the first are the really large employers. And honestly, they are moving forward with plans for space based on long-term growth plans, hiring that's occurred over the last 16 months, and thousands of open job requirements that they are trying to fill right now. Then you have really small organizations that are very stable. And they have all recognized that very little is going to change regarding how they utilize real estate. Maybe some will work more from outside the office, but everyone's going to continue to have a dedicated workspace in their facilities, and they're really not impacting the amount of space they have. And then there's the third group, which is an important group. And the third group are mid-sized organizations or younger companies that are experiencing growth, but where it's very unclear is how their organizational culture is effectively going to be built if people are or aren't in physical contact. And I think those companies are going to have to take some time to figure that out. Will it work or won't it work? And we don't believe that this is gonna happen immediately. We think it's gonna take six to 12 months. And it's gonna really depend, quite frankly, on how they're doing from a competitive perspective. How are their peers doing in their industries? And does it matter that they're not in contact with each other all the time? When surveyed, most employers prefer to have their teams together as much as possible to enhance efficiency and collaboration and serendipitous idea generation, et cetera, while many employees declare their preferences for some or more remote work. Well, with a tight labor market, employers are acknowledging the reality. There will be an increase of work that takes place outside the office, and this will incrementally moderate some space growth in the short term. But these same companies may over time add collaborative spaces to accommodate their teams when they're all getting together, and they may eventually decide that people need to be back more frequently. Unlike any other prior recession, There have been thousands and thousands of new positions created and there are lots and lots of job openings across the service sector, the technology sector, the life science sector, the generators of office demand in our market. And we believe many of these jobs are going to lead to space absorption over the coming years. Employees are returning to their offices with very few reminders of COVID restrictions and they're getting together formally in meeting rooms and collaboration areas and they're taking the time to reconnect at breakfast and lunch and dinner and restaurants. In many of our CBD assets, we have access control so we can sort of see what's been going on in our competitive building set. So comparing to February of 2020 in New York City, about 50% of the employees who had cards are now coming to the office at least once a week. And that number is about 34% in Boston and 20% in San Francisco. So it's very different from market to market. Our sequential parking income grew about 20% from the first quarter, and while we've not seen monthly parking permits pick up, tenants are driving in and paying for daily parking. We actually think that monthly parking permits will be a good indicator for the increase of office frequency in Boston and San Francisco. In Boston, true transient parking is actually up, and we've actually had to close portions of the Prudential Center garage around lunchtime every day during a couple of days in July due to lack of capacity, believe it or not. At Embarcadero Center, we've seen about a 20% pickup from the low point on monthly parking, but we're still only at 60% of our historical high. So we have a long ways to go on parking. We expect to see improvements during the rest of the year. And at the end of the year, we think we're going to be at about 70% of where we were in 2019 on a full year comparative basis. As you listen to the apartment company calls, you're hearing about the dramatic increase in occupancy in urban areas. The employees are moving back into the cities, into those same apartments, which, by the way, didn't grow during the pandemic. And so unlikely they're planning on working at home in those apartments on a frequent basis. And we're seeing this in our portfolio as we move from 51% occupancy in January to 82% at the Hub House project. That's the Hub on Causeway project. from 10% to 41% at Skyline in Oakland, and from 79% to 93% at Reston Signature. And then our restaurant activity is up materially, and only is really being limited now by the challenges that the operators are having with labor, both in the front and the back of house. We have begun to move away from percentage rent assistance to our retail tenants and back to contractual fixed rent. Believe it or not, in Reston, we actually had a tenant request a modification back to fixed rent because the percentage rent was creating a higher payment to us. Sublet space continues to be a major topic during many of our conversations with investors. Last quarter, I described the dynamics of opportunistic sublet space and discussed our belief in that many of the visceral announcements made by tenants that were putting space on the market would reverse as organizations began to plan their in-person work strategy again. This quarter at 535 Mission, a tech company without subletting any space withdrew 40% of their 100,000 square foot availability. In Manhattan, CBRE is reporting that there's been a drop of about 5.9 million square feet out of the total of 19.3 million square feet that was put on post-COVID and about 67% of that was backfilled by the prime tenant. Yes, there is a lot of sublets based on the market, but a large portion is going to be reoccupied. Some is not actionable because of short terms. It has unworkable existing conditions, or quite frankly, users just don't like the comfort of the lessors profile, and some of it's getting leased, like the three floors that were completed at 680 Folsom in San Francisco that Macy's.com had on a sublet market. The headwinds from sublet space exist, but they are going to dissipate as companies begin to come back to work. Now, as I pivot my remarks to the Boston Properties Office and Life Science portfolio specifically, I'm going to describe a level of activity that I think is counter to the headlines of weak market conditions across the office sector in the United States. The BXP portfolio includes a number of iconic, high-quality, well-maintained, and continually upgraded assets. When there is market weakness, our assets outperform. We spent a lot of time discussing our portfolio vacancy last quarter and our forward expectations. We experienced quicker than expected revenue commencement on signed leases and saw basically flat vacancy relative to the prior quarter. We were down 10 basis points on a 45 million square foot portfolio. And this included taking back 66,000 square feet of non-revenue space that I talked about last quarter and at the hub on Causeway from the cinema that had never opened. We now have new signed leases for 640,000 square feet of space that have yet to commence and are not included in our occupied in-service portfolio. So on a relative basis, here's my view of the markets, and I'm ranking it based upon activity in the portfolio, active lease negotiations, tours, RFPs, from best to least. Boston, Waltham. We don't have any available space in Cambridge, so we have no activity there. San Francisco, CBD. Northern Virginia. Midtown Manhattan. Peninsula, Silicon Valley. West L.A., Princeton. And finally, D.C., CBD. All the transactions I'm going to talk about are post-COVID negotiations, meaning they all began in the latter half of 20 or into 2021. So just to change things up this quarter, let's start with L.A., Last quarter, I acknowledged our disappointment that we were unable to keep a 200,000 square foot tenant at the Santa Monica Business Park. Less than 30 days later, we had a signed lease for 140,000 square feet of that space to a growing tech company. During May, we completed a 350,000 square foot long-term extension and expansion at Colorado Center with a media company. In total, this 490,000 square feet had a weighted average expiring rent that was effectively equal to the starting rent of that space. And 200,000 square feet of the expiring rents were at above market holdovers. This follows our immediate release of the 70,000 square feet vacancy that we had from a defaulting tenant in the first quarter. We have a number of smaller deals in negotiation in Santa Monica Business Park, and we're responding to requests from tenants that would prefer to go direct on some of the sublet availability at Colorado Center. In Boston, during the second quarter in the CBD, we signed six leases totaling 55,000 square feet, and the average rent starting represented a gross roll-up of about 20%. In each case, the tenant was either renewing or expanding. We have seven additional leases in the works totaling 70,000 square feet. Obviously, most of them are small since we don't have much in the way of availability in our Boston portfolios. In the suburban Boston portfolio, we completed 60,000 square feet. The average weighted cash rent on those leases was up 17%. Life science organizations are dominating activity in this market. We commenced construction on 880 Winter Street. That's the lab life science renovation that we're doing in Waltham. And I've signed an LOI for 16,000 square feet. We started the building on July 5th and are exchanging proposals with over 180,000 square feet of tenants for the 220,000 square foot building, and it will be delivering in August of next year. We've been responding to new inquiries just about every week on that space. Asking rent to the market for lab space are in the high 60s to mid 70s triple net, which are well above our underwriting when we planned this project about 15 months ago. Many of you have been asking about inflation and construction costs. When we do our construction budgeting, we always include an escalation expectation. So those numbers are baked into those numbers in our supplemental. It varies depending upon the labor market conditions, subcontractor availability, and material costs. We bid and are on budget for both 880 Winter Street and 180 City Point. So we figured out what the escalation would be, and we hit it. Currently, we're carrying about a 4% to 6% escalation for base building jobs that we would bid in 12 months. Now, turning back to leasing. In Waltham, we're negotiating leases for another 70,000 square feet of space with life science companies at Bay Colony, that's adjacent to 880 Winter Street, and our reservoir place building. Our new acquisitions at 211-153-2nd, which Owen described, have a lease expiration in late 22, and the current rental rates on the space are dramatically below market. the expirations will land right in the sweet spot of the current demand in the Boston and the Waltham and the Lexington submarkets. There is some pure office demand in the market, and with more and more buildings being converted to life science, we actually expect the office market is going to tighten dramatically over the next few years. In New York, we continue to have significantly more tours than we had in comparable periods in 2019, and the second quarter is actually up significantly on a sequential basis from the first. We completed 10 office leases totaling 90,000 square feet, including another full floor expansion at 399. In total, gross rents on leases signed this quarter were about 20% lower than the in-place rents. We are negotiating over 400,000 square feet of additional leases, including almost 250,000 square feet at Dock 72. The majority of the New York City leases will be for terms in excess of 10 years, and we include two more expanding tenants at 399 Park Avenue. Activity at the street plane of the buildings is also picking up. We signed up a new fitness provider at 601 Lex, a new fast casual restaurant at 399, and we're negotiating a lease for all the available restaurant space at Times Square Tower, and we plan on opening the Hugh Culinary Collective at 601 Lexington in September. In Reston, our buildings continue to have extensive activity. This quarter, we completed over 170,000 square feet of leasing, of which more than 100,000 square feet was on vacant space. In addition, we have active negotiations on another 72,000 square feet, including almost 60,000 square feet of currently vacant space. Reston Next is moving towards completion with the first tenant expected to take occupancy by the end of 2021. We have another 85,000 square feet of office renewals in negotiation in Springfield, Virginia. Retail leasing is roaring back in Reston Town Center. We've negotiated 35,000 square feet of restaurant transactions and have almost 100,000 square feet of cinema, fitness, and soft good transactions in the town center. Pedestrian activity and rest in town center is as active as any location in our portfolio. Office rents are basically flat to slightly down on the relet since the expiring cash rents have been contractually increasing by 2.5% to 3% for the last 10 years. In San Francisco CBD, We completed five transactions totaling 54,000 square feet with an average roll-up of 8%. Why is it so low this quarter? Well, the square footage was impacted by a full floor transaction that starts in the mid-90s where the tenant elected to forego any TIs for a lower rent. If you exclude that transaction, the mark-to-market would have been 17%. In addition, we have eight active lease negotiations involving 143,000 square feet with an average rent starting of over $100 a square foot. That's over $100 a square foot in this purportedly terrible market in San Francisco. The bulk of these spaces are in the higher floors of Embarcadero Center, and they all have views. Pedestrian activity at the street plane, particularly in the CBD of San Francisco, has improved over the last quarter, but it's still well behind Boston, Reston, and New York. And this has affected tenants' appetite for making space decisions. medium-sized technology users have begun to look for space. Sub-lease absorption has picked up in the city with about a million square feet of withdrawals or completed transactions. And as I said earlier, Macy's.com did 104,000 square feet at 680 Folsom, our building. In Mountain View, we continue to see a constant flow of medical device and alternative energy and automotive and other R&D users looking for space. We completed a full building lease with an energy company with a healthy 60% markup in rent. and we have another 21,000 square foot lease in negotiation. There are some large tech tenants in the market today looking for expansion space, and one recently executed leases for about 700,000 square feet of availability that was in Santa Clara. We are certainly pursuing those tenants for Platform 16, and we have begun internal discussions about the appropriate time for the speculative restart of this building. So to summarize, our leasing activity in the second quarter accelerated. Our portfolio is in great shape in L.A. We continue to see strong economic transactions in the CBD of Boston, our suburban Boston portfolio, and the CBD of San Francisco. We have significant activity in Reston and are covering our vacancy. New York tour activity is strong. We're doing deals, but economic terms are weaker. We are expanding our life science investments across the company, and in greater Boston and south San Francisco, our new construction is seeing strong demand at escalating rents. Mike?
spk16: Thank you, Doug. I'm going to start my comments by describing our earnings results, which, as Owen mentioned, significantly beat our expectations. We reported FFO for the quarter of $1.72 per share, which is $0.12 per share better than the midpoint of our guidance. About $0.06 of our outperformance came from earlier than anticipated leasing and better parking, retail, and hotel performance, which I would consider core revenue outperformance. The other $0.06 is from unbudgeted termination income and expense deferrals that we expect to incur in the third quarter. Our office portfolio beat our expectations by approximately $0.02 per share from accelerated leasing. We had several larger leases commence earlier than we expected, including our 350,000 square foot renewal and expansion with a large media tenant in LA, a 65,000 square foot health care firm in suburban Boston, and three technology tenants in Reston totaling over 100,000 feet. All of these leases were in our full-year assumptions and were completed faster than we anticipated. Leasing in our residential portfolio also improved this quarter, exceeding our revenue projections by a penny. The improvement was across the board with our stabilized residential buildings exceeding our occupancy assumptions by 100 to 200 basis points, and the recently delivered projects at the Hub House in Boston and the Skyline in Oakland seeing even stronger absorptions. While market rents continue to be below pre-pandemic levels, concessions are starting to dissipate. Our parking, hotel, and retail income exceeded our expectations by 3 cents per share. As Doug detailed, these components of our income stream have started to improve, which should continue as activity levels grow in our cities. The other two areas where we exceeded expectations were in termination income and lower operating expenses. Our termination income totaled $6.1 million, which was 3 cents above our budget. It came from two sources. First, at 399 Park Avenue, the building is full, and we have more demand than available space. This quarter, we were able to accommodate one of our expanding financial services tenants by recapturing 50,000 square feet from another tenant. The transaction resulted in $2 million of termination income in the quarter. And second, We received about $4 million in unexpected settlement income from tenants who defaulted on their leases last year. We categorize this as termination income. While we anticipate a modest amount of termination income every quarter, we do not assume receiving any additional settlement income this year. Finally, in our operating expense line, our maintenance expenses came in three cents per share lower than we anticipated. We've deferred these costs and expect it will be incurred in the third quarter. One other item I'd like to point out is that we reported second quarter same property NOI growth of 8.9% on a GAAP basis and 7.5% on a cash basis over the second quarter 2020. The strong increase, honestly, is primarily due to the charges for accrued rent and accounts receivable we took in 2020 related to tenants impacted by the pandemic. If you net out last year's charges, our GAAP same property NOI dropped by 1% year over year due to lower occupancy. However, our cash-same property in Hawaii grew by 3.8% year-over-year as free rent periods expired, and we've converted those to cash rents in 2021. This quarter's leasing statistics also require explanation. The total company in New York City leasing, in particularly, were negatively impacted by two retail leases in New York City. Excluding retail, the mark-to-market on our New York City office leases was positive 6% on a gross basis, and positive 8% on a net basis. And office leases in the total portfolio demonstrated strong rental increases of 14% gross and 21% net. Now I'd like to turn to our expectations for the rest of 2021. For the third quarter, we provided guidance of $1.68 to $1.70 per share, $0.03 above consensus estimates at the midpoint. At the midpoint, our third quarter guidance three cents per share lower than our second quarter FFO. Again, this is due to the outsized termination income and expense deferrals from the second quarter. Net of those two items, our third quarter guidance is two to four cents per share higher than the second quarter. In the office portfolio, our occupancy exceeded expectations in the second quarter due to early lease commencements. For the rest of 2021, we anticipate occupancy will be relatively steady. As Doug mentioned, we have 640,000 square feet of signed leases that have not yet commenced occupancy. We expect 450,000 square feet of these leases to occupy before year end. In addition, we have another approximate 600,000 square feet of both renewal and new leases in the works for 2021 occupancy. This activity, combined with already signed leases, are expected to cover the 1.1 million square feet of lease expirations that remain in 2021. With stable occupancy, the current run rate for the in-service portfolio is a good proxy for the rest of 2021. We are expecting consistent quarterly improvement from our other income sources, primarily from our parking and the continued lease-up of our recently delivered residential properties. Our assumptions result in two cents of projected incremental NOI growth in the third quarter from these sources. We also expect growth from the acquisitions that Owen described. Acquisition activity net of dispositions will add approximately a penny to our third quarter NOI and two cents to the fourth quarter. So in summary, after adjusting for six cents of higher termination income and deferred expenses from the second quarter, we project our in-service portfolio for the third quarter to be higher by two cents at the midpoint and our net acquisition and disposition activity to contribute a penny. While we are not delivering any developments into service in the third quarter, We anticipate incremental growth from developments in the fourth quarter that will accelerate in 2022. We anticipate that we will start to recognize revenue as the first tenants commence occupancy at our $270 million Hub on Causeway office tower in Boston in the fourth quarter. And by mid-22, we expect this project that is currently 95% leased to be generating a stabilized NOI. We also expect to deliver our $50 million life science lab conversion at 200 West Street that is 100% leased in December of this year. It will be at its full run rate in 2022. Our development deliveries will accelerate and be more meaningful to our earnings growth in 2022. In addition to the deliveries in Q4 of this year, next year we have $1.7 billion of developments slated for delivery and initial occupancy, and they're 85% leased in the aggregate. Overall, we're thrilled with our results this quarter as the markets continue to recover. Our leasing activity is exceeding our expectations, our variable income streams are improving, our development pipeline is on track to add future growth, and we're taking advantage of opportunities to acquire some unique assets at favorable prices that we expect will generate additional future earnings growth and value creation. Operator, that completes our formal remarks. Can you please open the line for questions?
spk14: At this time, I would like to remind everyone, if you would like to ask a question, press star 1 on your telephone keypad If you're using a speakerphone, please pick up the handset before asking your question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Alexander Goldfarb with Piper Santler.
spk18: Hey, good morning up there. The first question is, Mike, as you guys think about your earnings growth and dividend growth, You have the new $2 billion JV, which obviously provides a lot of capital that lessens the need for dispositions or raising external equity. So with the potential for more dispositions this year, is the BXP view that earnings growth and dividend growth will come first, meaning that dispositions will be limited in such a way that it really won't impair FFO growth and that way you know, all the development and life science stuff and all the good stuff that we see will flow through into earnings, you know, next year, the year after, et cetera?
spk16: Yeah, I mean, Alex, our goal is to continue to grow our earnings over time, no doubt about it. And we've got a very significant development pipeline and acquisition pipeline that we're working through to add to that growth over time that should result in additional dividend growth over time. So, you know, dispositions are a way to recycle capital, and we select assets based upon what we think their growth potential is, and we reinvest that capital into assets that we think are going to generate higher returns over time.
spk17: Yeah, the only other thing I would add is we've been selling 200 to 300 million of non-core assets for about five to seven years, and we're running out. We have fewer of them in terms of non-core assets.
spk18: Okay. That doesn't sound like such a bad thing. Sounds like you've cleaned the cupboard well. The next question is the rebound in the ancillary income, meaning the parking, the hotel and the retail. I think last quarter, you guys spoke about 130 million or so of sort of missing income that was impacted by the COVID shutdowns. How much of this was back in the second quarter? And then what are your thoughts for timing of full restoration?
spk16: So it was actually revenue of $130 million that we were talking about in those areas. You know, we do have some of it back. Obviously, the hotel, which used to generate about $15 million of NOI, is still losing money. So that has not, you know, it's improved slightly, but it hasn't improved, you know, significantly at all. And the other areas on an NOI basis, we are somewhere around $60 to $65 million short of where we were before on the retail and the parking.
spk19: Like I said, with the end of the year, we're going to be at about 70% of our parking revenue. So that's a meaningful number for 2022 as people really start ramping up our monthly parking again.
spk18: Okay, great. Thank you.
spk14: Your next question comes from the line of Steve Sackwith with Evercore ISI.
spk15: Thanks. I appreciate all the detail. And, Mike, you sort of talked about occupancy kind of trending flat the back half of the year. I realize it's early to really give guidance or think about 22, but when you just sort of talk to your tenants and you think about next year's expirations and you kind of look at your pipeline, you know, I guess I'm trying to just sort of think through when you think the occupancy is really starts to ramp in the portfolio? And how long do you think it takes you to get back to what you would consider to be normal occupancy?
spk19: So, Steve, this is Doug. I'd answer the question in the following manner. We have relatively modest amounts of rollover in 2022. And we are covering vacancy today. The increase in our development activities that will happen in early 22 or late 21 are effectively buildings that are 100% leased. So if you look at our portfolio occupancy in the first few quarters of 2021, it will be picking up. I'm not smart enough to tell you when we get to 92 or 93%. But, you know, I'd say that's the path we're on. Today we're very high, 88. I think we're 88.6 this quarter. So, you know, I would hope that by the end of next year we're going to be in the 90s again. And we may be significantly higher than that depending upon the recovery in the market and, honestly, how well we do with our life science developments. Because right now, you know, we are developing stuff that we believe will deliver 100% occupancy.
spk16: I think the other thing I would just add is our rollover is modest. It's 6% in 22 and 5% in 23. A big chunk of it is in Boston, which is our strongest market. So we think we're going to do well there, and we're going to have roll-ups there. We also have some in San Francisco in the CBD, where, again, I think we're going to see roll-ups. And as Doug described, we're already working on a lot of early renewals for 22 expirations that we think will exhibit roll-ups. You know, there's very little in L.A., there's very little in D.C., and, you know, New York City has about 500,000 square feet, you know, in 2022.
spk15: Okay, thanks. And then maybe secondly, I don't know if this is for Owen or Doug, you know, just maybe a little bit more commentary on the Seattle entrance issue. you know, the Safeco sounds like it's got a little bit of vacancy for you to lease up, but I'm just curious sort of what other opportunities you might be pursuing, and I assume you're looking on both sides of the lake, and I assume it would have some kind of development focus, but maybe just expand a little bit on Seattle comments.
spk17: Steve, I'll start, and Doug may want to jump in. You know, as I mentioned in my remarks, we have a very active pipeline of investments that We've been reviewing for probably six to nine months. Kelly Loftion, who's on the call, moved to Seattle in February of 2020, and with her help on the ground, it's been a very active pipeline. I think it's robust because it's, one, both acquisitions and development, and two, as you're suggesting, it's in multiple geographies. So we've been looking in the CBD of Seattle where Safeco is. We've been looking at South Lake Union. We've been looking at the Bellevue area and to the east of there. So we think it's a robust pipeline, and I think we will have success in growing out our region in Seattle in the near and medium term.
spk19: And regarding Safeco, Steve? Look, we're not looking to buy, you know, stabilized, beautiful assets that are achieving a stabilized return of 3.5% to 5%. Okay, that's not what we're doing. We're looking to find assets where we can create value through our operating prowess. And if you look at Safeco Plaza, it's an 800,000-square-foot building that was built in the late 60s. It's got great bones. It's got great ceiling heights. It's got great views. And it's fine from an architectural perspective in the interior, but it's not fabulous. And our goal is to do what we did at 100 Federal Street with that asset, which was make that building something that it wasn't, which was a building that tenants wanted to go to as opposed to just another nice building in a CBD that was sort of moving one way or the other with the markets. And we are actually, you know, we got to figure out exactly what it is we think we can do and economically how to do that. And honestly, I would say that we are, while there is a little bit of vacancy in the building, we're not in a rush to lease the space in the building tomorrow because we want to make sure we understand what the building could become and sell what it will be, not what it is. And so, you know, we're going to be thoughtful and constructive with how we do that. And obviously, it's a weaker market today than we believe it will be. And 12 months and 18 months, and we hope when we're at a point where we've done the work, the building is going to have a very different reputation and a very different positioning in the building, and we're going to use the Boston Properties skill set to do that. Great.
spk15: That's it for me. Thanks.
spk14: Your next question comes from the line of Jamie Feldman with Bank of America.
spk05: Thank you, and good morning. you know, clearly you've become more active on the value-add investment side here. Can you just talk about how the competitive landscape is changing and, you know, what we're likely to see in terms of people willing to make more bets on vacancy and office across your markets?
spk17: Yeah. I think as we described, you know, the last few quarters, we felt there'd be an opportunity to pursue high-quality but unstabilized real estate at pandemic discounts. And we're we think we're seeing that in the market. I think the capital for office real estate, for anything that's leased with a long-weighted average lease term, or certainly anything like science, is robust, highly competitive. I could argue cap rates are going down, and as Doug just said, that's just not, we don't see that value creation for our shareholders. What we want to do are things like Safeco that are not stabilized, great bones, and we think the competitiveness landscape for those kinds of assets is less than it is for the leased assets. And I think if our thesis holds true, which we obviously think it is, which is people are going to return to the office, I think the capital will follow what we're doing. And I think those transactions will get more competitive. But Jamie, I wouldn't leave you with the impression that you know, that they're not other bidders for these assets. But as you see from our success this last quarter, we have been able to buy quite a few things. And I think that is an indicator that pricing is somewhat different for that sector of our market.
spk05: And then how are you underwriting, or how did you underwrite, whether it's stabilized yields or IRRs? And what are you and your partners looking for at this point?
spk17: Yeah, look, we mark the market rents to market. If we think there's a change in market rents based on what's occurring, we underwrite that. I think we're conservative in the lease up. I think those assumptions actually drive the bus more than anything, and we feel like we're being appropriately conservative. But over time, what we're trying to achieve is a Approximately a 6% NOI yield over time.
spk19: That's not an IRR, right? When we get done, we're yielding in the low sixes with growth, obviously, because there are typically escalations in rents. And if you put some leverage on that and you assume some cap rate differential between what your yield is and what you could sell it at, it gives you a healthy IRR.
spk05: Okay, thank you. And then just to follow up the comment you made earlier, Doug, I think you were talking about either the Bay Area or Mountain View specifically about maybe tech, larger tech looking for space. Can you just talk like big picture across all the markets about what we should expect to see from big tech? And clearly they drove the market ahead of the pandemic. I'm just wondering what we might see coming out of it.
spk19: I think, honestly, you're going to see very much what you saw in the 2016 to 2020 era, which is big tech is looking for really thoughtful, talented people, and they believe that the markets that they're currently in have some of those people, and then there are places where they think they can expand. And so, I mean, there's a rumor that Facebook's looking for a couple hundred thousand square feet in the Boston marketplace. We can tell you that there is a rumor that Google and that Amazon are looking for additional space in the Silicon Valley. We see the requirements of what's happening right now in Bellevue and the amount of space that's under construction that we believe Amazon is going to be growing into. They don't announce when they do a lease, but that's the perception. So I think you're going to see more of the same. And these companies have enormous appetites for space and for talent. And whether or not antitrust impacts them, If it's one company or two companies or five companies, which obviously is a consideration, I do think that the growth is still going to be there.
spk05: Okay. You didn't mention New York. Any thoughts there?
spk19: Look, Facebook has put a fork in the ground in their campus, which they've done very quietly. I'm on the far west side. John, you know, John Powers on the phone. You can comment about other technology demand. I mean, we've announced that, you know, or the market knows that we're interested in doing 360 Park Avenue two weeks ago. And, you know, obviously we announced it last night. We've seen a significant amount of large tech demand for that building. So I don't think that New York is at all being left behind. In fact, I think it's similar to what's been going on. Remember that in 2020, Google and Facebook took and Amazon took some very large pieces of space. You know, people forget Amazon took the entire Lord and Taylor former WeWork headquarters building, which was almost 800,000 square feet, right? Google took a million square feet down at 500 Washington Street. And you know, and Facebook, I think is amassed over a million and a half square feet in the Hudson Yards. So that just happened. So I don't I don't think we feel any differently about New York City. John, do you have any other thoughts?
spk02: I can just tell you that at the end of June, there were 295,000 open jobs posted, most of those in tech in New York. So we're seeing a lot of expansion here.
spk05: All right, great. Thanks for your thoughts.
spk14: Your next question comes from the line of John Kim with BMO Capital Markets.
spk04: Thank you. On Safeco Plaza, according to media reports, The building has already undergone a fair amount of capex over the last 15 years, about $100 million. What do you expect in terms of capital spend to reposition the asset going forward? And can you remind us of your views on Liberty Mutual and whether or not you expect them to renew when their lease expires in 2028?
spk19: So we're not going to comment on what a tenant wants to do. Liberty Mutual purchased Safeco Insurance. Safeco Insurance has space on the sublet market, that would be an indication that they're not utilizing all their space. So that's probably an opportunity to have a conversation. With regards to what was spent on the building, almost all the capital that's been spent on the building has been on the bones of the building, not been on aesthetics and not been on placemaking. And that's going to be our primary focus, in addition to making sure there's no deferred capital. I don't have a budget I can give you. When we know what we're going to do and we present it to the Seattle office market, we will present it to you.
spk04: Okay. And on the co-investment program, are you looking at single asset transactions only, or is the fund willing to look at portfolio acquisitions? And also, is there a possibility for BXP to contribute assets to its fund?
spk17: We would definitely look at a portfolio acquisition. As you know, we tend to aggregate our company and our portfolio one asset at a time, either through acquisitions or development, but portfolio acquisitions would be included. And no, we have not had discussions about joint venturing our existing assets I want to just use, I want to clarify a word that you used that I don't think is necessarily an accurate statement about what we're doing. It's not a fund. You know, it's a co-investment program. So, every asset stands on its own. One or both or neither joint venture partner might elect to invest in a particular asset and they're not aggregated into a quote unquote fund. So, I just want to clarify that because I think it's important for you to understand.
spk04: Great. Thank you.
spk14: Your next question comes from the line of Nick Uliko with Scotiabank.
spk03: Thanks. Good morning, everyone. Doug, I appreciate you gave some, you know, color on leases signed in the quarter. You know, is it possible to just get, you know, the mark to market on those lease signings in the quarter? And I guess as well, how we should think about, you know, what that number could look like for the back half of the year based on lease signings so far? I mean, obviously the Second quarter number was, you know, 14%. But, you know, how does that number kind of shake out for lease signings in the quarter and how it could look for the rest of the year for commencements?
spk19: Well, so timing is everything. And the reason I provide you with the information I do is because it is an indication of what is going on with the spaces that we leased today, which, unfortunately... may not hit our supplemental statistics from a revenue perspective for two quarters, three quarters, or six quarters. So I'm just trying to sort of give you a flavor of what is going on on a relative basis, right? So it's very hard to sort of predict what's going to happen because I don't know which spaces we're going to lease and what the rent was versus what the rent might be on those spaces until it happens. So again, on average, everything I said was you know, as basically down in New York City of 20%, that doesn't mean the market's down by 20%. It may mean that those leases might have had a negative mark to market in 2019 because the rent went way up in a particular building and the market just never got to where the increases were. But so things were down in New York and they were flat in Los Angeles, again, on the portfolio of space we leased based upon what was being paid and what will be being paid on a cash basis. And then the other places in Boston and in San Francisco, we were up about 20%. In Mountain View, we were up 60%. And in Reston, we were down, you know, call it 5% to 7%. But again, a lot of the space in Reston was vacant. So it wasn't down. It's actually a 100% increase. because that space had been vacant for more than 12 months, right? So that's the reason that we give you what we give you in terms of the data, so you can have a sense of what's going on on a current basis.
spk03: Great. Thanks. Very helpful. Just second question on the Midtown South purchase. Maybe you can give us a feel for, you know, rough numbers about how you're thinking about the additional redevelopment costs and potential rents you're targeting there.
spk19: So let me just make a few comments, and I'll let John Powers give a more verbose answer. As Owen said, we bought the building for a very attractive basis. And we're going to be in this building for well under $1,000 a square foot. I'll let John talk about where rents are. Again, we're in the early stages of figuring out exactly what it is we want to do to this building. And I'm expecting John will say it's going to depend on who shows up because depending upon who shows up, they may want different things for the building. John?
spk02: The building is very attractive for us because it's being delivered vacant at the end of the year. So we don't even have a carry cost for this year. We're paying for it, as Owen said, at the end of the year. And it's very difficult to get a building in that market with good bones, and this has pretty good floor plates, and also get it back all vacant at the same time. So we're in the visioning stage now of this and putting it together. We had a session yesterday. It went very well. We think we're going to do some very interesting and different things in the lobby space there. And we think there will be a lot of interest from different types of tenants. It's very difficult to get identity if you're a 100,000-foot tenant or a 150- or 200,000-foot tenant. Certainly, that's the case in many of our buildings, which are much larger. So this, I think, will be a very good branding opportunity, as Owen said in his comments, for some tenants. Rents, it really depends upon the size of the lease up, and we're budgeting some downtime, obviously, next year, and we may convert quicker. We don't know how the leasing is going to go on this, but I would say if you think of something with a nine, that would be consistent with our underwriting, and we may do better than that, and we hope we will. Thank you.
spk03: Great. Thank you, John and Doug.
spk14: Your next question comes from the line of Manny Korchman with Citi.
spk08: Hey, everyone. Good morning. Just thinking about life sciences as a broader space, you guys are increasing your exposure there as are many other owners and developers. How should we think about sort of differentiating what you're building and overall supply versus what we're hearing in the headlines of seemingly everyone chasing life science?
spk17: Yeah. So I think the most important differentiation, Manny, is that we already control most of the conversion and land that we're going to develop. I mentioned in my remarks we already have 5.5 million square feet under control, so we don't have to go out and buy anything. And all those projects are in the nation's hottest life science markets. They're in Cambridge. They're in Waltham. They're in South San Francisco. They're now in Montgomery County, Maryland. So, again, we don't have to go create the raw material to build our business. We already control it. Now, that being said, fortunately, this last quarter, we did find some things that we thought were interesting. We bought a smaller existing lab building that's adjacent to a project they already had in Waltham, which we thought was a terrific, attractively priced tuck-in opportunity. And then our D.C. team got very comfortable with the Montgomery County market. and found a very interesting transaction to open up basically a new life science market for Boston Properties. And we're in the process of closing the deal, and we're already in discussions with a number of users for that site. So we have high hopes. So anyway, I think that's the big difference is you hear a lot of people, quote, getting into life science or growing in life science. We're going to do it by just executing on what we already control.
spk09: Hey Owen, it's Michael Billerman. I was wondering if I can follow up. In your opening comments you mentioned the concerns about work from anywhere impact on the BXP footprint are overstated. And I wonder if you can distinguish sort of BXP relative to the whole office market, because obviously you've made that comment that it doesn't impact the BXP footprint, but I have to assume there's going to be some impact overall on office. Are you able to sort of tease out sort of your outperformance relative to the broader office market and why you believe it's sort of greatly overstated.
spk17: Yeah. Yeah, Michael, I think, you know, let me answer that in two different or I'll answer just two different questions. Look, I think we have said we don't we believe there will be some impact on the office market due to work from anywhere. But we just think it's overstated. If you look at the recovery of the office companies relative to other property companies and overall industry, it's much lower. So, you know, clearly the market is concerned. It's not just about Boston Properties. It's about the whole sector and, you know, what this return to office profile looks like, you know, for office companies. So, you know, we acknowledge that's the case. In terms of BXP's differentiation, I would say two things are very important. One, we like our gateway footprint. I think we would acknowledge that in the short term, Cities in the southeast, southwest, they're opening more rapidly. And perhaps in the short term, they might have better performance. But we believe over the long term, our gateway markets that are increasingly driven by tech and life sciences demand and have some barriers to entry are long term the best place to be. And then the second thing that both Doug and I talked about in our remarks is a flight to quality. If you look at the tour activity in high-quality buildings, our tour activity in New York is much higher in terms of number of tours this year to date than it was in 2019. If you look at assets like the GM building, there's a lot of not only tour activity, but leases getting signed. And as Doug said in his remarks, when you're in a soft market, people want to upgrade their buildings. And they want to go to quality. I also think a lot of the future in terms of work from home is I do believe corporate leadership wants to have their employees return to the office. And one of the ways they're going to do that is to have great offices. They're going to want to be in great locations. They're going to want to have great space in place. And that's what we try to do.
spk09: And the other question I had was you talked a lot about sort of the employer versus the employee difference where clearly a lot of the surveys show that employees want significant flexibility, but obviously when you look at the employers or CEO surveys you get slightly different answers. With the Delta variant rising and sort of increased masking up in some of the gateway markets again, do you think that the tone with your tenants on the employer side just may be shifting a little bit sort of acknowledging, you know, we're going to be with this for a while, right? Unless the vaccination rate increases meaningfully, it's going to be hard to get rid of COVID and all the protections and things that are happening that all sort of got relaxed a little bit when we had this euphoria that we were done with COVID. Do you think it changes or slows anything down should sort of the frustration with going into the office on the employee side where sort of both of these things sort of meet at the head. I'm just curious how you think about that on a current basis, given what's happening.
spk17: Yeah, we haven't seen much evidence of that. Our footprint, as you know, it tends to be in a more highly vaccinated parts of the country. So I think that's the first important point. I completely agree with the dynamic that you described of it. You know, what is the employer preference and what is the employee preference? Now, I think that's a lot of the dynamic that's working itself out and determining office policies at this time. Look, the Delta variant could slow the recovery, but I don't think it's a matter. I think the recovery is going to happen, so it's not an if question. It's a when question. Thanks for the color.
spk14: Your next question comes from the line of Craig Millman with KeyBank Capital Markets.
spk10: Hey, guys. Just, you know, Mike, I know you gave us the kind of the impact from the acquisitions in 3Q and 4Q, but can you guys just provide some gap going in cap rates that we can think about initially for the different assets? Because I know you can kind of back into it, but the timing piece as we head into 22, I just figured it might be easier to get it run right.
spk19: I'd rather not give you explicit cap rates because these aren't closed and we have confidentiality agreements and such. I just would give you the following because I think this will be helpful. So 360 Park Avenue, as John Powers said, will be vacant in 2022. So I think the cap rate is obvious there. And as Owen said, the Shady Grove development, we intend to you know, basically vacate all of those buildings as quickly as we possibly can. And so there's very little incremental income there. Safeco is, you know, a well-leased building at very below market rents. You know, when we close, we'll be able to provide more detail on that. And I think we provided some detail on the 2nd Avenue and the 6.4%. And that's a, you know, if you back into that and you listen to what I said about where market rents are, you can get to, you know, where we think that's going to be in 22 when we release the building.
spk10: Okay. That's helpful. Then just a clarification on 360 Park F South. Did you guys buy the fee or the leasehold? We bought the fee interest.
spk19: We are buying the fee interest. We are buying the fee interest.
spk10: And then just one last one. I've been asked a couple times, and I'm just kind of curious myself, is there any potential to redevelop the Cambridge Marriott into life science or office over time, or is there something there that would stop you from doing that, if it made economic sense?
spk19: So the answer is there's nothing legally preventing us from having a conversation with the hotel operator about their contract. And there's nothing that legally prevents us from going to the Cambridge City Council and ask for a change in use there. So clearly, you know, we have been successful and doing other things like that in the city of Cambridge. And, you know, again, one of the things that people sort of, I don't think they ignore it. They just don't appreciate it. We're going to build you know, almost a million square feet of new lab or office space in Kendall Square that is, you know, currently being leased at rents of between $110 and $140 a square foot triple net. We have to build an underground parking structure for the existing space, and we have to give some below-grade ground to the local utility company, but that's going to happen sooner rather than later. So we have plenty of opportunity to grow our Cambridge portfolio. Okay. Great. Thanks.
spk14: Your next question comes from the line of Caitlin Burrows with Goldman Sachs.
spk01: Hi. Good morning. Earlier you mentioned that the list of non-core disposition candidates was shrinking. So I was just wondering, as you go through these acquisitions and developments, how you generally plan on funding them. I know this quarter you did mention the use of some OP units in one of the cases. So would you identify other dispositions, issue equity, only do it when your cash position allows, or something else?
spk16: I'll start to answer that, and then you guys can jump in if you want. Look, I mean, we've got a very, very strong balance sheet, and we've got a significant amount of pre-leased developments that the money has already been spent and the income is coming in in the next couple of years. So that balance sheet is only going to strengthen as that income comes in and brings our leverage down from a place where we're comfortable now, but bring it down to provide even more capacity. So, you know, we will continue to fund through, you know, some modest asset sales, some additional debt capital, and utilizing private equity to help on, you know, any kind of acquisition type of an activity. Typically, we want to do the developments on our own unless somebody else owns the land And that's the only way that we can access that. And, you know, we're comfortable with that strategy, you know, in the foreseeable future. That doesn't mean we would never bring in additional public equity into the company. That's really dependent on, you know, two things. One, the investment opportunities and profile that we think we're going to have over the next couple of years. And then obviously what our share price is and whether we think that's an attractive cost of capital for us. So we look at all of those things when we think about funding future investment.
spk19: So just to sort of put a finer line on it, this is Doug. Everything that we have done to date, we are funding with our existing capital capacity in addition to all of the developments that are currently underway and are very comfortable with our overall leverage, our use of capital, in terms of where the dollars are going and how those dollars are coming in to the extent that we need additional capital to fund that. I mean, everything that we've announced to date has been funded.
spk01: Okay. And then maybe just on the development pipeline, you guys went through a lot of the leasing that was done in the quarter, but it didn't look like the development pipeline in particular recognized that active leasing. So just wondering if you could go through the activity that you're seeing for those projects and expectations going forward.
spk19: Sure. So the only holes in our development pipeline to date are the Brooklyn Navy Yard, which is no longer part of development, which I described, and then our resting gateway And I'll let Jake and Pete Otney, who are our regional team from Washington, D.C., talk about the leasing efforts there and sort of where we are.
spk11: Sure, this is Jake Stroman in the D.C. region. So on the Reston Next project, we have about 150,000 square feet left to lease in the 1.1 million square foot building. We've actually had some great activity, lots of broker tours that have come through that building. We have trading proposals with a full-floor tenant right now, and we're also going to engage... a spec suite program on an additional 30,000 square feet, which has been very successful in the Reston market to date. So a really good activity, hoping to convert a few of those opportunities to leases here soon.
spk19: And then, Caitlin, on the stuff in Boston, I thought I'd describe that. So at 880 Winter Street, which is part of our Delta Pipeline now, as I said, we have a 16,000 square foot letter of intent already signed, and we have 180,000 square feet of active proposals some of which are actionable right now, and we're just arguing about economics. And then we actually are in discussions with some tenants at 180 City Point. These are not discussions that have gotten to the point where we have a letter of intent that we've said is close to being executable. That building also is later. So the sequencing is 880 is delivered and ready for people to be working in it in August of 2022. And then about a year later, 180 City Point is available Tad Piper- And that's why I said, you know, if you think about that. We also have these two new buildings that we've acquired at Tad Piper- On Second Avenue with a lease expiration in the fourth quarter of 2022 to right in the sweet spot of where all this activity is, I think, you know, if you if you listen to the market. Tad Piper- Commentary on demand for life science, particularly in the in the greater Boston market. There's way more demand than there are existing opportunity to lease space. Lots of people are talking about building new supply. Most of that supply are larger projects that won't be completed until 2024 to 2026. So the sweet spot of the market from our perspective over the next couple of years has a significant amount of demand and very little competitive supply.
spk01: Got it, thanks.
spk14: Your next question comes from the line of Brent Dilks with UBS.
spk07: Great. Thanks. Good morning. On page 16 of the supplement where you break out second generation leasing info, it's pretty clear the retail portfolio in New York still is a bit of a challenge. But I think in your prepared remarks, you referred to some current negotiations in that portfolio. So could you just talk about your outlook for a recovery there?
spk19: Yes. So I want to be very clear. So the reason that the numbers are as poor as they are in the retail portfolio in New York is because we took some space back, or we re-released some space on an as-is basis in 2019, okay, not in 2020, at the General Motors building on Madison Avenue, and the rents were dramatically lower than what the in-place rents were. That's the reason for the change, and that's effectively what happened. So we are now leasing vacant space, and the vacant space is obviously all gonna be incremental The rents are market rents. Depending upon where the spaces are, they're commensurate with what you would hear from a retail team. I don't want to negotiate rents on this call, but the spaces that we're negotiating, a fitness center in the basement of an office building or a high-quality restaurant in Times Square, are very, very different because of the nature of the spaces and the marketplaces. But we are acting at the market.
spk07: Okay, great. And then you have a decent amount of retail up for renewal in Boston and 3Q. Any color on how negotiations are for that space or if you've got plans to redevelop, et cetera?
spk19: So our biggest hole in Boston is at Lord & Taylor. And We have lots of active dialogue going on on that space, which we haven't seen revenue on for over a year, I think almost 16 months, which we now have back. The expiration that you're pointing to in Boston is actually not an expiration. It's a lease that is in litigation with the other anchor. They are now paying on a contractual basis, and I don't expect that that lease will be terminated. in the third quarter. Whether we are able to work something out with them on a long-term basis, unclear, but they're not going anywhere in the short term.
spk16: Basically, how we handled some of those leases where we had a retail tenant that defaulted, we terminated the leases and then we, in our rollout, we assume that it expires the next quarter because they're sitting in it. And most of these tenants, you know, we only have a couple left, but they're paying rent And it's just a matter of time before we're able to kind of negotiate what the new deal will be. So the expirations in the third quarter in Boston are those situations. So as Doug described, we don't expect them to create vacancy.
spk07: Okay. Thanks for clarifying that. And then just one last quick one on Seattle. I know you've already talked about it a decent amount. But do you have a target for where you want to get that market to as a percent of the portfolio over time?
spk17: Yeah, so I'll address that. Look, we set strategy top down. We like our gateway footprint. We think Seattle should be part of it. But the answer to your question is driven more by bottom-up opportunities. So we clearly want to be in Seattle. We're being aggressive there. We want it to grow. But it will be dependent on the volume and the timing of the attractive investments that we see.
spk07: Okay, that makes sense. Thanks, guys.
spk14: Your next question comes from the line of Vikram Miholtra with Morgan Stanley.
spk12: Thanks for taking the question. Sorry, just to clarify on that retail lease at GM Building you mentioned, the 33,000 square foot excluded, can you just remind us what that was and what drove that negative, the big negative markdown?
spk19: There was a space at General Motors that had a big negative markdown, and then there was also a space at 601 Lexington Avenue. And I'm not going to tell you what the rents are. Like I said, I'm not going to negotiate rents for tenants on the phone.
spk12: So those spaces were released, and that's what drove the markdown?
spk19: Yes. And just as an FYI, I mean, this is technical. One of them was actually paying $0.00. because they had defaulted on their lease, but we are using their what was contractual rent to define what the change in market to market is, even though they hadn't paid rent in six months prior to the date that they terminated.
spk12: Okay, that's helpful. Just, you know, given the talk we've had so far on employees wanting flexibility, employers maybe wanting slightly different things, I'm wondering if you can touch on two things. One, just sort of what you're seeing at your co-working platform and where you expect that to trend, maybe in terms of just offerings and additional buildings. And then second, just on lease terms itself, are you seeing any variations in discussions on lease length or flexible options for termination or expansion? That would be helpful. Thank you.
spk19: Sure. Let me just define what our platform is. So we have in Boston flexed by BXP in three CBD office buildings and then one suburban asset. And the character of the leasing there has actually been that it's picked up significantly over the past quarter. We've done, I'd say, you know, six or seven deals which have leased all of the space at our suburban location and the vast majority of our space at the Prudential Center location, and we're an activity at the Hub on Causeway. And the nature of all those tenants are companies that don't know what their long-term growth is. They didn't have office space prior to the pandemic they wanna get back quickly and they just need space because they want their people together and they're saying we're gonna take this for six to nine months and then we're gonna figure out how much we need and then we'll decide if we wanna do additional flex space with you or we want a long-term commitment. And again, our spaces are generally 4,000 to 6,000 square feet max and we have a few that are a little bit smaller but that's the character of the spaces.
spk17: And I think, Vikram, we don't have plans right now to grow that business. I mean, that could change over time depending on the economic performance, but we don't have – we're not planning to expand it at this time.
spk12: Okay, great. And then just – sorry, just to clarify, the lease – kind of the lease terms overall, are you – you're not seeing – Any change in the components, whether it's term or just out options or expansion options or anything like that?
spk19: In the perfect world, the tenant would like to have an ability to get out of their lease whenever they can. We obviously don't provide that kind of flexibility. As I think Owen said in his remarks, our average leases that were signed this quarter was seven and a half years. Typically, we've been telling people that we have an average lease length of eight years, so it's minimally less. But again, the leases that are in active negotiation right now are all on average 10 years or more, all the activities that I described, including the life science stuff. And I would tell you that, you know, tenants would like, as I said, would like to have more ability to be flexible in their space and buy their way out of leases in a occasionally we are giving some of that flexibility after longer periods of time. You know, you sign a 10-year lease and you can terminate after the seventh year, something like that. But there really hasn't been any shift in the profile of the amount of time that the companies that are looking at our kind of spaces are expecting. And all of our built-to-suit stuff is, you know, is still 10, 15, or 20 years.
spk12: Okay, great. And then just, sorry, just last one. I know the You've talked obviously a lot about Seattle and, you know, it makes sense strategically. You know, just thinking about other markets, you know, one of your West Coast peers expanded into, you know, Austin recently. And I guess, you know, you can never say never, but, you know, if we look at the next sort of, you know, two to three years, is it a possibility that you look at any of the kind of key Sunbelt markets as more tech tenants expand there?
spk17: Look, we believe in our gateway strategy. We think Seattle was the logical expansion as a gateway market. And there's plenty to do in the six markets we're in now. You know, Vikram, you and others are focused on Seattle. I could argue we actually went into three new markets this quarter. One was Park Avenue South, below 42nd, Midtown South Market. That's a new sub-market for Boston Properties. You know, the New York market is three times the size plus of Seattle. It's multiple cities in and of itself. We just went to a new one. And then our D.C. team went into the Montgomery County Life Science Market, which we hadn't been in before. That's managed out of D.C. region. So I think those two deals are evidence of all the robust opportunities we have to expand our footprint in our existing, quote, region. Great. Thank you so much.
spk14: Your next question comes from the line of Daniel Ismail with Green Street.
spk06: Great. Maybe going back to the development pipeline, Doug, I believe you discussed the speculative research of Platform 16. Are there any similar discussions across the pipeline, across the non-life science pipeline, such as Three Hudson or anything else?
spk17: I would say the only other project that is in our land portfolio at this time that we're looking is the Block D residential development in Reston, in Reston Next. I think that could be a start, you know, you could see later this year, early next year.
spk19: But to answer your question specifically, we're going to need a really large tenant commitment to start Three Hudson Boulevard or to start 343 Madison Avenue, which, by the way, won't even be in a position to start for a couple of years, or any of the other land holdings that we have in our more urban locations. Got it.
spk06: And then you discussed throughout the call today about the quality of your portfolio and the outperformance that it's generating. And I'm curious, within the leasing activity this quarter or in the pipeline, are you seeing any tenants trading up from Class B space to Class A?
spk19: I would say that we're not seeing people trading up from true Class B space because true Class B space is significantly less expensive than Class A, but we are getting tenants who are in what I would refer to as A minus minus buildings that are looking at our assets. In other words, modern inventory of office space that has really not been either amenitized, has not... where the landlords don't even understand what it means to create great place and great space, where they haven't made the changes to the infrastructure of the buildings, but where the building is well located. And so those tenants are there because of that, and they're sort of saying, wait a minute, given everything that's gone on and the importance, as Owen described, of having great places for their employees to want to come back to, and the health security issues that we've talked about at Nauseam for the last couple of quarters and how we're dealing with those things, There's a flight to those kinds of environments that I believe is occurring. And so to answer one of the questions that was asked previously, I do believe that there will be buildings that were built, call it in the modern era, so in the 70s, 80s, 90s, 2000s, that have not been well maintained or well thought of with landlords who really aren't thinking about the long-term viability of their buildings that will be left behind. in our core cities as people move to better buildings with better landlords and better activities for their customers. Got it. Thanks, everyone.
spk14: And there are no further questions at this time. I'll now turn the call back over to the speakers for any closing remarks.
spk17: Okay. Thank you, Operator. We don't have any more formal remarks, and I just want to thank everybody on the call for their time and their interest in BXP. Thank you.
spk14: This concludes today's Boston Properties Conference call. Thank you again for attending, and have a good day.
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