BXP, Inc.

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.

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.

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.