BXP, Inc.

Good day and thank you for standing by. Welcome to BXP's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, to Helen Han, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to BXP's third quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the investor section of our website at investors.bxp.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 BXP 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 BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer, Doug Lindy, 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 will cover BXP's continued strong execution as demonstrated in our third quarter results. I'll provide a brief update to my remarks at our recent investor conference on the economy, return to office dynamics, and the premier workplace market. I'll discuss private equity capital market conditions for office real estate, BXP's capital allocation activities and provide a reminder from the investor conference of BXP's strategic shifts given current market conditions. Our SFO per share this quarter was well above both market consensus and the midpoint of our guidance. And we once again increased our forecast for full year 2022. We completed 1.4 million square feet of leasing just below our long-term average leasing activity for the third quarter. And year-to-date, we've leased 4.6 million square feet, which is meaningfully above our long-term leasing activity for the first three quarters of the year. This success is due to our team's strong execution, increasing return to the office behavior by workers, and the strong preference of our clients for premier workplaces, which are the hallmark of BXP's strategy and portfolio. Also in the quarter, BXP reinforced its ESG credentials by earning the highest five-star rating in the 2022 GRESB assessment, as well as its 11th consecutive green star recognition. We also commenced a partnership with the New York State Energy Research and Development Authority as part of the Empire Building Challenge, a public-private effort to support low-carbon retrofits and high-rise buildings in New York City to reduce emissions and combat climate change. As a company, we remain focused on climate action and are on track to achieve carbon-neutral operations in 2025. Now, I covered in detail at BXP's investor conference in September our views of economic conditions, client preferences, and in-person work behavior, and market statistics for premier workplaces. So in terms of what's new, inflation unfortunately remains resilient. The Fed remains committed to taming it through higher interest rates, and as a result, markets remain volatile. Workers continue to return to the office as our badge swipes grow each week, led by non-technology industry clients. Premier workplaces, as defined by CBRE, represent only 17% of the office inventory in the five CBDs where we operate. And this segment continues to outperform the broader office market. At the end of the third quarter, vacancy in these five CBDs was 9.1% for premier workplaces and 14.8% for the rest of the market. Net absorption in the third quarter was negative 200,000 square feet for premier workplaces and negative 1.7 million square feet for the rest of the market. Net absorption for the last seven quarters was negative 900,000 square feet for premier workplaces and negative 17.3 million square feet for the balance of the market, obviously a very significant difference. Given that 94% of BXP CBD space competes in the premier workplace market, we believe it's increasingly necessary to understand operating trends for the premier workplace segment of the market to assess and forecast our leasing performance. In terms of real estate capital markets, transaction volume for office assets slowed to $18 billion in the third quarter, down 11% from the second quarter and down 41% from the third quarter last year. We expect transaction volumes to decline further, particularly in the next few quarters. Debt financing is increasingly expensive and difficult to arrange. And many institutional buyers have withdrawn from the market due to real estate over-allocations caused by the denominator effect and or a view that more attractive entry points for new investments will be forthcoming in future quarters. There are, however, were several transactions of note in the third quarter. In the office sector, the most significant transaction was our sale of 601 Massachusetts Avenue in Washington, D.C. for $531 million to a non-U.S. property company. The 480,000 square foot building is 98% leased and sold for a 5.1% initial cap rate and $1,110 a square foot. In New York City, 1330 Avenue of the Americas sold for $320 million to a private investment firm. The 536,000 square foot building is 85% leased and sold for just under $600 a square foot and a 5.7% cap rate. In the lab sector, there were four significant transactions completed in Cambridge, the Seaport District of Boston, and South San Francisco for a total of over $1.6 billion. Pricing ranged from a 4.2 to a 5.5% cap rate and approximately $1,200 to $2,200 per square foot. BXP was active this quarter with capital allocation. We completed a significant transaction with Biogen involving two adjacent buildings, in our Kendall Center project. We acquired 125 Broadway, a 271,000 square foot lab building that Biogen has agreed to lease back for six years for $592 million, which is $2,185 a square foot. Immediately adjacent is 300 Binney Street, a 195,000 square foot office building owned by BXP and leased to Biogen for six remaining years. We terminated Biogen's lease, will convert the building to lab use, upsize to 240,000 square feet, and entered into a new lease with the Broad Institute for 15 years at significantly higher rents. The total cost to redevelop 300 Binney Street is $210 million, and the building will be delivered in the fourth quarter of 24. For both investments, the projected blended initial cash return is over 7%, including the acquisition cost of 125 Broadway and the redevelopment cost foregone Biogen rent and initial cost basis for 300 Binney Street. The projected blended gap yields are materially higher given the 3% annual rent escalations in both the Biogen and Broad Institute leases. We also continue to advance pre-development work for 290 Binney Street, a 570,000 square foot lab development that is 100% pre-leased to AstraZeneca, and our 121 Broadway residential tower, also both located in Kendall Center. Assuming all pre-development hurdles are achieved, we expect these projects will commence in early 2023. Strategically, we are making major steps forward in our life science ambitions by acquiring, developing, and redeveloping at attractive yields significant lab space at Kendall Center, one of the leading preferred locations for life science clients in the world. We also just announced an agreement to acquire a 27% interest in 205th Avenue, one of the top five premier workplaces in the Midtown South Submarket of New York City, located directly on Madison Square Park. The building comprises 870,000 square feet and is 93% leased to leading clients such as Tiffany, Gray Advertising, and Eataly. The acquisition price for our interest implies a building valuation of $1.05 billion, which equates to just over $1,200 a square foot, and a 5.3% initial cap rate. The building has a $600 million first mortgage that matures in 2028 and bears interest at a fixed rate of 4.34%, which is well below current market rates. BXP will assume management and leasing from the current developer who is monetizing their interest in the asset. We are entering into the existing partnership, and as a result, we'll grow our relationship with JP Morgan Global Alternatives, a leading real estate investment advisor. This investment was sourced off-market. Strategically, we are excited to grow our presence in Midtown South and add such a leading premier workplace to the BXP portfolio. We remain active with dispositions as well, given the recent announcement of our contract to sell the Avant, a 15-story, 359-unit luxury multifamily building in Reston, which we built in 2013. The sale price is $141 million, or $393,000 per unit, which represents a 4.3% cap rate on current NOI. We also sold a 10-acre land parcel in Loudoun County Virginia for $27 million to a data center developer. Both sales, along with 601 Mass Ave, will be like-kind exchanged with the Madison Center acquisition. Our previously described strategy to reallocate capital from the Washington, D.C. region to Seattle is now complete, having sold assets totaling approximately $700 million to fund the $730 million acquisition. We do not anticipate any further sales this year and our total dispositions in 2022 is projected to be $864 million. Our development pipeline remains robust as we added this quarter a 104,000 square foot building at 140 Kendrick Street in Needham, Mass., that we are redeveloping to net zero carbon performance for Wellington Management. and the 118,000 square foot 760 Boylston Street Retail Building at the Prudential Center in Boston that is also fully leased. Our current development pipeline of 13 office, lab, residential, and retail projects, as well as View Boston, the observation deck at the Prudential Center, aggregates 4.4 million square feet and $2.7 billion of investment that we project based on delivery date and lease-up assumptions to add nearly $200 million to our NOI over the next five years at a 7.4% weighted average cash yield on cost when stabilized. The commercial component of our development pipeline is 52% pre-leased. These figures exclude the positive contribution of 300 Binney Street, which will be added to the development pipeline in the first quarter of next year. In closing, I'd like to reiterate the strategic shifts BXP is executing as a result of the pandemic and current economic slowdown. We will continue to embrace our leadership position in the premier workplace industry and leverage our strengths in portfolio quality, client relationships, development skills, market penetration, and sustainability to profitably build market share. We will pursue attractive asset class adjacencies where BXP has a track record of success which today are life sciences, as evidenced most recently by the transaction with Biogen, and multifamily development. We will continue to raise the quality bar for our portfolio and actively recycle capital by selling assets as we did in 2022, subject to market conditions. And lastly, given rising interest rates and financial market turbulence, we will prioritize risk management by actively managing liquidity, investing more extensively with joint venture partners to manage our debt levels, and being highly selective in new investment commitments. Though near-term challenges in the capital markets confront BXP in our industry, we are confident our platform, strategy, and team will build market share and continue to create value over the long term. Let me turn the discussion over to Doug.