BXP, Inc.

Good day, and thank you for standing by. Welcome to BXP fourth quarter and full year 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To return your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, to Helen Hahn, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to BXP's fourth quarter and full year 2023 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 teams 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 only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen, and good morning, everyone. After a brief review of our quarterly and annual performance, I intend to focus my remarks this morning on BXP's significant capital allocation activity over the last quarter, related real estate capital market conditions and key areas of focus for us in 2024. The operating trends I've described in prior quarters, specifically the steady return of workers to their offices, the importance of corporate earnings growth to leasing activity, and the outperformance of premier workplaces all remain important and substantially unchanged. BXP continued to perform in the fourth quarter as we did throughout 2023 despite withering negative market sentiment for the commercial real estate sector. Our FFO per share was a penny above market consensus for the fourth quarter and for all of 2023 was 15 cents above the midpoint of the guidance range we provided one year ago. We completed over a million and a half square feet of leasing in the fourth quarter and 4.2 million square feet of leasing for all of 2023, well above our prior forecast. Over the last year, signed leases remained long-term, over eight years' weighted average, and portfolio occupancy remained stable despite a challenging leasing environment. In 2023, VXP raised over $4 billion in new capital in the public unsecured debt, private secured mortgage, and private equity markets. In the fourth quarter alone, we completed a new $600 million mortgage financing, a $750 million asset-specific equity capital raise, both among the largest comparable transactions completed in our sector last year, as well as three new and highly accretive equity investments, one of which closed in January. So on capital allocation activities and starting with capital raising, last November, BXP announced the sale to Norges Bank Investment Management of a 45% interest in 290 and 300 Binney Street, both life science developments located in the Kendall Square District of Cambridge, leased on a long-term basis to creditworthy clients. 300 Binney is a 236,000 square foot existing office building that is being converted to lab use and scheduled for delivery at the end of this year. And 290 Binney is a 566,000 square foot ground-up development that we expect to deliver in 2026. Our partner purchased the assets at a gross valuation of $1.66 billion. or $2,050 per square foot, and an expected initial cash yield on cost at delivery for both assets of 5.9%. BXP will retain a 55% interest in each joint venture and provide development, property management, and leasing services. Norges has closed its investment in 300 BINI and funded $213 million, and we expect the 290 BINI joint venture will close in the first quarter of this year, which will reduce approximately $534 million of BXP's development funding requirement over time. We are pleased and honored to grow our important relationship with Norges, BXP's largest joint venture partner and one of our largest shareholders. Upon completion of this transaction, BXP will have raised just under $750 million of equity capital on attractive terms and reduced our forecast leverage. Next, BXP purchased interest in three currently owned assets from two different joint venture partners, one of which closed in early January. These transactions were sparked by anchor client renewals BXP achieved at two of the assets, requiring capital for tenant improvements, leasing commissions, and building upgrades. In the current environment, these two joint venture partners decided they wanted to reduce their exposure to office. We agreed to purchase their interests at attractive and accretive returns and complete the long-term lease extensions. Regarding the specific deals, 901 New York Avenue is a 548,000 square foot, 83% leased office building located in Washington, D.C. The building is encumbered by a $207 million mortgage with attractive terms due in 2025. In January, we completed the renewal of the 214,000 square foot anchor client in the building, Finnegan Henderson, for 18 years, purchased the 50% interest in the property we didn't own for $10 million and modified the loan to allow for an extension of the maturity date for up to five years. Pricing for the acquisition was $414 per square foot and a 6.4% initial cap rate on an as-is basis and $516 a square foot with an expected 8.4% cash yield on costs at stabilization in 2027. Santa Monica Business Park is a 21-building, 1.2 million square foot, and 88% leased office complex located adjacent to the Santa Monica Airport. The property is encumbered by a $300 million mortgage due in 2025, and 70% of the park is encumbered by a ground lease with above-market ground rent and a fee purchase option in 2028. We completed a 467,000 square foot lease renewal for SNAP, the anchor client in the park, for 10 years and purchased the 45% interest in the asset we didn't own for $38 million, which represents pricing of $395 per square foot and a 9% initial cap rate on a fee-simple basis based on market assumptions for land value. Lastly, in conjunction with the Santa Monica Business Park buyout, BXP purchased a 29% interest in 360 Park Avenue South for a dollar, bringing our ownership interest in the asset to 71%. 360 Park Avenue South is a 450,000 square foot office building that BXP is fully redeveloping in Midtown South and is encumbered by a $220 million mortgage. purchased 360 Park Avenue South using OP units priced at $111 per share in 2021 and subsequently introduced two financial joint venture partners who secured their interest by funding the required redevelopment capital expenditures over time. At the time of closing, the selling joint venture partner had funded $71 million and BXP assumed their remaining $46 million projected funding obligations. This investment represents pricing projected at building stabilization in 2026 of $754 per square foot and a 7.2% initial yield on cost. So in summary, for these three acquisitions, BXP invested only $48 million up front and materially increased its ownership position in three high-quality assets we understand well. We expect to receive projected total returns that will be well in excess of the cost of the equity capital we raised from the Binney Street joint ventures and project FFO per share accretion from the investments of approximately 14 cents in 2024. Regarding the broader private equity capital markets, office sales volume picked up in the fourth quarter to $14.4 billion, up 126% from the prior quarter and up 14% from a year ago. Interestingly, office sales went from 12% of total real estate transaction volume in the third quarter to over 27% last quarter. Though U.S. lenders continue to reduce exposure to office real estate, making secured financing extremely difficult to arrange, there is more distressed asset restructuring activity, more capitulation on pricing by owners, and more confidence by buyers in their forecast cost of capital. The Fed's announcement late last year that interest rate hikes are likely over and cuts could start to occur in 2024 is very favorable for real estate capital market conditions. There were few comparable premier workplace transactions completed last quarter other than our Benny Street joint ventures. One west side and west side two in West L.A. sold for $700 million or over $1,000 a square foot and a 6% cap rate to a user, but the economics are influenced by a lease buyout from the existing anchored tenants. Now, turning to BXP's priorities for 2024, our overriding goal is to leverage our competitive advantages to preserve and build FFO per share over time. Today, the key advantages for BXP are our commitment to the office asset class and our clients, as many competitors disinvest in the sector. A strong balance sheet with access to capital in the unsecured debt and private equity markets. and one of the highest quality portfolios of premier workplaces in the U.S. assembled over several decades of intentional acquisitions and development. Our primary focus for 2024 will be leasing, preserving and building over time our occupancy and addressing near and in some cases medium term lease expirations. With our portfolio 88% occupied, leasing vacant space is our least capital intensive way to build back FFO. Doug will focus his comments on leasing markets and our expectations for leasing this year. A second focus for 2024 is new investment activity. Many office owners are facing existential risks given slow leasing and limited secured financing, and many institutional owners want to diversify away from the office asset class. We said last quarter we intended to shift to offense on capital deployment, and this has started given the three new investments I described. There are and will be significant additional investment opportunities available from both lenders and owners of property. Our focus will remain in our core markets on premier workplaces, life science assets, and residential development. During the last market downturn caused by the global financial crisis, BXP was able to acquire premier workplaces such as the GM Building, 200 Clarendon Street, 100 Federal Street, and 510 Madison, all at attractive prices at the time. The third area of focus for us this year will be new development. We have two, possibly three, residential development opportunities under control that are being entitled and designed, and we intend to raise joint venture equity capital for these projects in the second half of the year. We also continue to have dialogue with anchor clients for sites under control in Manhattan, though the discussions are in early phases and the outcomes are much less certain. Significant pre-leasing, higher expected development yields, and joint venture equity would be required to launch any new premier workplace developments. We also have several specific sites and buildings that we are trying to re-entitle in advance for near-term viable use based on market conditions. BXP continues to execute a significant development pipeline with 10 office, lab, retail, and residential projects underway. These projects aggregate approximately 2.7 million square feet and $2.4 billion of BXP investment, with $750 million remaining to be funded after closing the 290 Binney Street joint venture and are projected to generate attractive yields in the aggregate upon delivery. We will be opportunistic with dispositions in 2024. Market conditions are generally unfavorable for selling assets at attractive prices, But we are interested in raising capital through asset sales if favorable opportunities present themselves. To summarize, in the face of strong negative market sentiment, BXP executed well in 2023, leasing over 4 million square feet of space, raising over $4 billion of capital, and launching two large-scale, fully pre-leased life science developments. We displayed resilience with stable occupancy and a stable dividend, and our FFO per share is higher today than it was before the pandemic started in 2020. Though we start the year with continued challenges in the leasing market, BXP is well positioned to gain market share in both assets and clients during this time of market dislocation. As a last closing remark, today represents a BXP milestone. This will be Bob Pister's last earnings call as he is retiring from BXP next month after more than 25 years of service. Our San Francisco region grew significantly under Bob's capable leadership. Thank you very much, Bob. You will be missed by all of us at BXP. Over to Doug.