BXP, Inc.

Good day and thank you for standing by. Welcome to BXP's first quarter 2024 earnings conference call. At this time, all participants are in 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 withdraw 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, Helen Hahn, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to BXP's first quarter 2024 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 meeting 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 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 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 one question. If you have any 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. BXP's performance in the first quarter continued to defy the negative market sentiment for the commercial office sector. Our FFO per share was in line with our forecast and market consensus for the first quarter. We completed just under 900,000 square feet of leasing, which is 35% greater than the first quarter of 23 when we leased 660,000 square feet. And this is a more relevant comparison than to the fourth quarter of 23 given elevated leasing activity associated with a quarter at year end. Our weighted average lease term on leases signed this past quarter was also notable at 11.6 years. In comparison, the leases we signed in 2023 had a weighted average lease term of 8.2 years. Our occupancy remains stable. We closed the previously announced joint venture with Norges at 290 Binney Street, our lab development in Cambridge that is fully leased to AstraZeneca. This transaction mitigates $534 million of development funding for BXP by raising property level equity for the company on attractive terms. Now moving to macro market conditions, the two most important external factors impacting BXP's performance are long-term interest rates and corporate earnings growth. Lower interest rates would improve our cost of capital, spark more transaction activity and investment opportunities in our sector, reduce the cost of new development, and be a tailwind for our clients' earnings growth. Much has been written and forecasted about the trajectory of interest rates, which we believe will come down over time, but we can only speculate on the exact timing. Companies generally do not hire new employees and increase their office space requirements unless their earnings are growing. Over time, the S&P 500 earnings grow around 10% per year. But in 2023, that growth rate was 0%, and in 2022, it was 5%. Though the U.S. economy is growing and unemployment remains low, only about 7% of the jobs created are in office-using categories versus a long-term average of over 25%. S&P 500 earnings are projected to grow 11% to 13% per annum over the next two years, which should be constructive to BXP's leasing activity. Many technology clients, a critically important sector driving space demand post the global financial crisis, overcommitted to space during the pandemic and are currently in a digestion process which has curtailed demand. There are exceptions, such as net demand for space from the AI sector in San Francisco. Over the long term, we expect many tech companies will experience strong earnings growth and return to requiring more office space. Premier workplaces, defined as the best 6% of buildings representing 13% of total space in our five CBD markets, continue to materially outperform the broader market. Direct vacancy for premier workplaces is 11.2% versus 17.9% for the broader market. Likewise, net absorption for premier workplaces has been a positive 7 million square feet over the last 13 quarters versus a negative 30 million square feet for the broader market. Asking rents for premier workplaces are 50% higher than the broader market, a widening gap from prior quarters. This outperformance is evident in BXP's portfolio, where 89% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 91% occupied and 93% leased as of the end of the first quarter. Regarding the real estate private equity capital markets, office sales volume in the first quarter was down was 8.7 billion down 3% from the prior quarter and up 32% from a low base one year ago. Office sales as a percentage of total commercial real estate transaction volume continued to rise to over 20%. Transaction activity for premier workplaces was very limited. BXP's overriding goal is to leverage our competitive advantages to preserve and build FFO per share over time. 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 secured and 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 development acquisitions, and dispositions. Today, clients and their advisors are more focused than ever on building quality as well as the financial stability and long-term commitment of their building owners, all strong competitive advantages for BXP. Last quarter, I spoke about three priorities for BXP in 2024, leasing space, new investments, and development. Though Doug will provide more details on leasing, we're off to a good start in the first quarter and see a growing pipeline of opportunities for later this year and 2025. On new investment activity, as you know, we pivoted to offense late last year and early this year through buying joint venture interest in three significant in-service assets at attractive prices. We remain in active pursuit of opportunities in our core markets and asset types with primarily two types of counterparties, lenders to highly leveraged assets that require recapitalization, and institutional owners seeking to diversify from the office asset class. To date, there has been limited market transaction activity for high-quality office assets. With lenders, there are fewer premier workplaces that are struggling with leverage, and in the few cases involving premier workplaces, lenders are generally electing borrowers who agree to invest modestly in their assets. Institutional owners are less interested in selling their highest quality assets, and there remains a material bid-ask spread given assets have in most cases not been marked down to market clearing levels. Notwithstanding these current challenges, our expectations are that transactions and our investment activity will increase in coming quarters given the volume of maturing financings, continued markdowns in institutional portfolios, and higher for longer interest rates. We also have interest from institutional investors in co-investing with us for select opportunities. On development, we commenced our 121 Broadway residential tower in Kendall Center as part of the 1 million square feet of commercial entitlements we received from the City of Cambridge to build 290 Binney Street and a future to be determined commercial building. Comprising 37 stories and 439 units, 121 Broadway, will be the tallest building in Cambridge with a state-of-the-art design and amenities setting a new quality standard for residential offerings in the Kendall Square neighborhood. Earlier this month, on Boston Marathon weekend, we celebrated the grand opening for and delivered into service the 118,000 square foot Dick's House of Sports store on Boylston Street at Prudential Center. We continue to push forward with several residential projects under control that are being entitled and design for which we intend to raise joint venture equity capital in the second half of the year. For office development, we have been approached by multiple clients in all our core markets who are interested in occupying new space and anchoring development projects. Given escalated material labor and capital costs, the anchor clients must pay a premium to market rent today to justify the launch of a new development project, which is a challenging dynamic exacerbated by the earnings growth issue previously described. Though BXP's new office development activity has slowed, there will also be very limited new office development for the foreseeable future in our core markets, which is favorable for our existing portfolio. As vacancies continue to decline for premier workplaces, rents should rise, which will ultimately bridge the economic gap to justify new developments. Though we believe buying is a better opportunity than selling in the current market environment, we are interested in raising capital through asset sales if attractive opportunities present themselves. We have a handful of small dispositions defined as under $30 million we are currently exploring. BXP continues to execute a significant development pipeline with 11 office, lab, retail, and residential projects underway as of the end of the first quarter. These projects aggregate approximately 3.2 million square feet and 2.4 billion of BXP investment, with $1.3 billion remaining to be funded and are projected to generate attractive yields in the aggregate upon delivery. So to summarize, in the face of strong negative market sentiment, BXP continues to display resilience and stability in occupancy, FFO, and dividend level. BXP is well positioned to continue to gain market share in both assets and clients during this time of market dislocation. The prospect of lower interest rates and stronger corporate earnings also provides a backdrop for renewed growth.