BXP, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the BXP First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. And also, please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Helen Han. Thank you. Please go ahead.

Good morning, and welcome to BXP's first quarter 2022 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 all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G., If you do not receive a copy, these documents are available in the investor relations section of our website at investors.cxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although 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 any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen, and good morning, everyone. Today I'll cover BXP's operating momentum as demonstrated in our first quarter results, important trends emerging in post-pandemic work and office use, current private equity capital market conditions for office real estate, BXP's capital allocation activities, including a significant acquisition we just announced, and our prospects for future growth. BXP's financial results for the first quarter reflect the positive impact of U.S. economic growth, the gradual reopening of the major cities where we operate, and increasing needs by our clients for securing high-quality office space. Our FFO per share this quarter was well above both market consensus and the midpoint of our guidance, and we increased our forecast for full year 2022. We completed 1.2 million square feet of leasing, more than double the space we leased in the first quarter of 2021, and in line with our pre-pandemic leasing activity for the first quarter. And our leasing momentum continues in the second quarter, as Doug will cover. This success can be attributed to not only our execution, but also the enhanced velocity achieved in the current marketplace for premium quality workspaces which are the hallmark of BXP's strategy and portfolio. Finally, we just released our 2021 ESG report outlining the actions BXP has and will take to ensure continued leadership in this critical area. Highlights include remaining on track to achieve carbon neutral operations by 2025, enhanced disclosures regarding scope three emissions and diversity, achieving multiple financings tied to sustainability performance, inclusion in the Dow Jones Sustainability Index, and recognition for our work from many sources. The report is available on our website, and I encourage your review. As the effects of the pandemic are increasingly behind us, there continues to be much speculation about the future of work and its impacts on the use of office space. While many questions remain unanswered, there are a number of trends which are increasingly coming into focus. First, building census figures, roughly 40 to 80% on the peak day of the week in BXP's portfolio, depending upon the city, are improving weekly and are at post-pandemic highs, with many large employers, such as Google and Apple, just now implementing return-to-work plans. Second, City leaders are responding to the slow return to office as they understand a vibrant business district is critical to their city's economic health and recovery. The mayors of New York and San Francisco have partnered with their respective city's largest employers in encouraging return to work policies to help reinvigorate their business districts and local businesses that have experienced hardship from the delay in return to office. Third, Most business leaders see the challenges of an inconsistent return to the office by their employees, given the widening gaps their businesses are experiencing in maintaining corporate culture, onboarding and training employees, and talent retention. Employee unwillingness to return to the office today on a consistent basis is primarily due to very tight labor market conditions and employee desire for flexibility. As business conditions become more competitive due to rising interest rates, slowing economic growth, and changes in the labor market, business leaders will likely feel increased urgency in bringing their employees together on a much more consistent basis and modify their return to office policies accordingly. Fourth, return to office does not mean five days a week for most employers. Companies are increasingly providing a flexibility benefit allowing employees to work remotely one to two days or in some cases more per week. These employees invariably are electing to come in more frequently Tuesday through Thursday and want more physical separation, their own dedicated workspaces, and in-office amenities, all of which make it challenging for employers to reduce space, notwithstanding reduced occupancy for part of the week. Many of our clients have also materially grown their headcount due to buoyant economic growth and market conditions during the pandemic, increasing their need for seats. And lastly, building and workspace quality has never been more important in the office business. To help entice workers back to their workplaces, employers are increasingly attracted to buildings that are new or recently renovated, well amenitized inside and out and proximate to transportation. Aggregate office market statistics that currently show elevated levels of vacancy and weak net absorption do not properly reflect the market dynamics of the premium end of the market where most of our portfolio competes. We recently completed a disaggregated office market study with CBRE econometric advisors analyzing the relative performance of prime office assets as selected by CBRE representing about 17% of total space versus the rest of the market in five of our targeted CBDs. The West LA analysis is forthcoming. CBRE found the vacancy rate is more than five percentage points lower for prime office assets versus non-prime assets. and 10 percentage points lower in San Francisco. In 2021, for those five CBDs, net absorption for prime assets was a positive 1.2 million square feet versus a negative 6.6 million square feet for non-prime assets. This dynamic explains BXP's recent success in achieving pre-pandemic levels of leasing despite elevated total market vacancy statistics. David Wiltshire- Moving to real estate capital markets transaction volume for office assets remains vibrant as 25 billion of significant office assets were sold in the first quarter. David Wiltshire- Though volume was down 40% from the near record fourth quarter 2021 it was up 57% from the first quarter, a year ago and above first quarter levels in both 2020 and 2019. Pricing has remained stable for high-quality office buildings and anything life science related, though rising interest rates have impacted leveraged buyers, which could pressure volumes and cap rates. In Cambridge, a majority interest in the 100% leased lab building, 100 Binney Street, sold at an aggregate valuation of over a billion dollars. Pricing was $2,350 a square foot and a 3.5% cap rate. The seller was a REIT and the buyer was a JV of institutional real estate investors. In the Culver City submarket of LA, one Culver was recapitalized at a gross valuation of $510 million. This building is 90% leased and pricing was $1,350 a square foot and a 4.5% cap rate. A regional operator sponsored the recap with a global institutional fund manager. In New York City, 450 Park Avenue was sold for $445 million by an institutional operator to a REIT. The building faces near-term lease expirations with pricing at $1,320 a square foot and a sub-4% initial cap rate. In South San Francisco, the 144,000 square foot, 5,000 shoreline court building was sold for $1,140 a foot and will be vacated for lab conversion. The asset, which will require capital to redevelop, was purchased by an institutional fund manager from a corporation at a basis that is equivalent to our completed life science developments and higher than our redevelopments in the same market. Now, regarding BXP's capital market activity, we recently committed to purchase Madison Center, one of the highest quality office buildings in the Seattle CBD, for $730 million. Recently built in 2017, Madison Center comprises 760,000 square feet in 37 stories, is 93% leased to leading tenants, and is LEED Platinum certified. The building has one of the most generous amenity offerings in the Seattle market with 30,000 square feet of fitness, conference, library, living room, boardroom, fast casual food, bike storage, and roof deck space. Madison Center is well located, two blocks from light rail and bus transportation and direct vehicular access to the I-5 north and south ramps. Pricing for the investment is $965 a square foot and a 4.3% initial cap rate, stabilizing above 5% with additional leasing. The acquisition is expected to close on May 17th and will initially be funded with a $730 million bridge loan. Our funding plan over the next year is to either enter into a like-kind exchange with other assets we sell or bring in capital partners, as we have done with other acquisitions. The acquisition of Madison Center accomplishes several key strategic goals for BXP. It expands our presence in Seattle, targeting a growing technology market, adds one of the newest and most competitive buildings in the Seattle market to our portfolio, consistent with our quality strategy in all the markets where we operate. And it provides the opportunity to reallocate capital on a tax-efficient basis between markets and specific buildings. On dispositions, in the first quarter, we completed the sale of 195 West Street, which is a 64,000-square-foot, 100% leased building in Waltham for $38 million, and which represents pricing of just under $600 a foot and a 4.7% cap rate, we are either in the market or planning additional sales in our Boston and Washington, D.C. markets, several of which could be used in a like exchange for the Madison Center acquisition. If completed, these transactions will efficiently reallocate capital with limited loss in FFO from East Coast properties into a market-leading Seattle asset. We also completed another active quarter recharging our development pipeline. As previously described, we commenced the 390,000 square foot first phase of Platform 16 in San Jose to be delivered in 2025, and the 327,000 square foot conversion of 651 Gateway in South San Francisco from office to lab to be delivered in late 2023. Our share of investment in these two projects aggregates $378 million, and projected initial cash yields upon stabilization are in excess of 6%. AstraZeneca announced last week they have signed a lease for 570,000 square feet to consolidate into a major research facility at BXP's 290 Binney Street development in Cambridge. This development could commence in early 2023, but is contingent on several enabling milestones to be completed this year, at which time we will provide more details, including economics, on both it and the adjacent 250 Benny Street Lab and 135 Broadway residential projects. After all these movements, our current development pipeline aggregates 4.1 million square feet and $2.9 billion of investment is 54% pre-leased, is 27% life science related and projected based on lease up assumptions to add approximately $200 million to our NOI over the next five years at a 7% average cash yield on cost when stabilized. So in summary, we had another active and successful quarter with strong leasing and financial returns and continue to forecast significant growth in our FFO per share this year driven by strong leasing activity, continued recovery of variable revenue streams, delivery of a well-leased development pipeline, completion of new acquisitions both last year and this year, a rapidly expanding life science portfolio in the nation's hottest life science markets, and well-timed refinancing activity in 2021 and lower capital costs.