BXP, Inc.

Good day and thank you for standing by. Welcome to BXP's second 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 call is being recorded. I would now like to hand the conference call over to your first speaker, Helen Hahn, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to BXP's second 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 .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 the duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer, Doug Lindy, President, and Mike LeBel, 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. BXP's performance in the second quarter once again demonstrated the relative market strength of the premier workplace segment of the commercial office industry as well as BXP's strength and execution. Our FFO per share was six cents above our forecast and five cents above market consensus for the second quarter. Further, we raised the midpoint of our FFO per share guidance for 2024 by eight cents. We completed over 1.3 million square feet of leasing, which is 41% greater than the second quarter of 2023, and close to our 10-year average leasing volume for the second quarter. As our leasing volume continues to escalate, exceeding current lease expirations, we expect our occupancy will increase over time. Weighted average lease term on lease assigned this past quarter remained long, at nine years. On sustainability this past quarter, we released our 2023 Sustainability and Impact Report, hosted our third annual Sustainability and Impact Investor Update, and were recognized by Time Magazine as one of the world's most sustainable companies, ranking number one in the US among property owners. Delivering sustainable real estate solutions is increasingly important to our clients, as well as the communities where we operate, and decreases our cost of capital, given the growing number of ESG investors interested in our debt and equity security. Moving to macro market conditions, we continue to experience market tailwinds for the two most important external forces impacting BXP's performance. Interest rates and corporate earnings growth. The US inflation report released on July 11th reflected a 3% inflation rate for June, lower than expectations, sparking new forecasts of accelerated interest rate cuts by the Fed, as well as lower market yields for the 10 year US Treasury. Lower interest rates are obviously favorable for real estate and BXP's valuation, and for broader corporate earnings growth, the second important external factor driving BXP's performance. After remaining flat for all of 2023, S&P 500 earnings growth was .6% in the first quarter of this year, and is expected to be around 9% for the second quarter. As mentioned repeatedly, companies with earnings growth are much more likely to invest, to hire, and to lease additional space, as demonstrated in our growing leasing volumes this year. Premier Workplaces, defined as the highest quality .5% of buildings representing .1% of total space in our five CBD markets, continue to materially outperform the broader market. Direct vacancy for Premier Workplaces is 13% versus .5% for the broader market. Likewise, net absorption for Premier Workplaces has been a positive 6.9 million square feet over the last three years, versus a negative 22.8 million square feet for the broader market. Asking rents for Premier Workplaces are 51% higher than the broader market, a consistent gap from prior quarters. This outperformance is evident in BXP's portfolio, where just under 90% of our NOI comes from assets located in CBDs that are predominantly Premier Workplaces. These CBD assets are .4% occupied and .2% lease as of the end of the second quarter. We are also experiencing moderate but steady increases in workers returning to the office, based on the turnstile data we capture for roughly half of our 54 million square foot portfolio. Corporations continue to push for increased office attendance, including Salesforce, who recently announced their new policy shift from primarily flexible work to mandatory office attendance for most employees of three to five days per week, depending on job function. Regarding the real estate private equity capital markets, office sales volume in the second quarter continued to be muted at $6.9 billion, and has ranged from $6.2 billion to $9.1 billion for the last six quarters, well below volumes achieved before the Fed started raising interest rates in 2022. Completed transaction activity for Premier Workplaces has been very limited, though increasingly owners are testing the market to understand pricing. Moving to BXP's capital allocation activities, we remain active in pursuing acquisitions from owners and lenders, but as mentioned, have seen limited opportunities in the Premier Workplace segment. We are in active negotiations for the disposition of four land positions, which if successful, would generate approximately 150 million of proceeds, half of which could be realized this year. For our development pipeline, we delivered into service the 118,000 square foot Dick's House of Sport on Boylston Street at the Prudential Center in Boston, fully leased at a strong yield. On July 12th, we opened Skymark, our 508 unit luxury residential tower development at Reston Town Center. We've already leased 21% of the units ahead of schedule, and rents are also modestly above projection. We continue to push forward with several residential projects, primarily on land we control, that are being entitled and designed for which we intend to raise JV equity capital. BXP continues to execute a significant development pipeline with 10 office, lab, retail, and residential projects underway as of the end of the second quarter. These projects aggregate approximately 3.1 million square feet and $2.3 billion of BXP investment with $1.2 billion remaining to be funded, and will contribute to BXP's external FFO per share growth over time. Though market segment for the broad office asset class remains challenging, BXP continues to leverage its key strengths, which are our commitment to premier workplaces and our clients, as many competitors disinvest in the office sector, a strong balance sheet with ready access to capital and the secure and unsecured debt and private equity markets, and one of the highest quality portfolios of premier workplaces in the US, assembled over several decades of intentional development acquisitions and dispositions. So in conclusion, BXP continues to display resilience with a growing leasing pipeline, as well as stability and FFO per share and dividend level, and is well positioned to continue to gain market share in both assets and clients during this time of market dislocation for the office sector. Expectations for lower interest rates and stronger corporate earnings growth will also provide tailwinds for our renewed growth over time. So now, Doug, I'd like to wish you a happy birthday, and I'll turn the call over, and you can talk about our strong leasing activities.

Thanks, Owen, I really enjoy celebrating my birthday with all you on the call every two years.

The

highlights. So as we described during our NAIRY June meetings and the webcasts that we did, the trend line of BXP's leasing activity in the second quarter of 24 picked up materially relative to what we executed in the first quarter and what we discussed on our last call. All really good stuff. As of June 30th, we've completed 2.2 million square feet of leasing for 24. When we spoke to you during our May call, we stated our pipeline of leases under negotiation at that time, May 1st, was 875,000 square feet. And as Owen highlighted, we signed leases for 1.32 million square feet between April 1st and June 30th, a lot more. And our active pipeline of leases under documentation today has grown to 1.39 million square feet. So if we complete this full of transactions, we will have leased 3.59 million square feet of space, exclusive of our leases and documentation. We have an additional set of transactions under discussion totaling about 850,000 square feet. So if we execute 50% of those transactions, we will more than achieve our leasing guidance of 4 million square feet for the year. This quarter, we completed 73 transactions, 37 lease renewals for 830,000 square feet, 36 new leases encompassing 500,000 square feet. 12 clients expanded into 228,000 square feet of additional square footage, while we had four contractions totaling 63,000 square feet. 45% of our absorption was growth from our existing client pool. As a point of comparison, last quarter, we completed 61 transactions with 29 renewals encompassing about 400,000 square feet and 32 leases for 194,000 square feet. And we had only three expansions for 18,000 square feet, and we had four contractions totaling 44,000 square feet. So again, really big improvements. Q2 activity was concentrated in our East Coast markets with 445,000 square feet in New York, 343,000 square feet in Boston and 351,000 square feet in Northern Virginia. These three markets made up 1.14 million square feet or 86% of the activity. Our West Coast activity was almost exclusively in San Francisco with 146,000 square feet. The majority of our client expansions came from Manhattan this quarter. The only significant contraction in the portfolio came from a tech company downsizing in Reston. We had three transactions over 100,000 square feet, one each in Boston, New York and Reston. Expansions or new clients made up 42% of the activity in New York, 40% in Boston, 37% on the West Coast and 16% in DC. As reported in our supplemental, the mark to market of leases that commenced this quarter, which is about a 375,000 square foot base was up 6% and transaction costs averaged $11 per square foot per year. The overall mark to market of the starting cash rent on leases executed this quarter, which was a 1.15 million square feet pool relative to the previous in-place cash rent was about flat. The starting rents on leases we signed during the second quarter were up about 8% in Boston, really flat in New York, down 6% in DC and down 7% on the West Coast. Now I wanna spend a minute on our occupancy change during the quarter, which seems to have been a focus of many of the analyst reports that we saw this morning and last night. As we stated in February and May, we have two large known expirations, one in April, 200,000 square feet at 680 Folsom, which is in the second quarter figures and one in July, 200,000 square feet at Times Square Tower. That's a JV asset, so our percentage share is 110, but we report the 200. This quarter, we also vacated 148,000 square feet of occupied but non-revenue producing spaces. What do I mean? Well, we had some tenants in default where we had stock recognizing revenue, yet they were still in possession and we were in legal proceedings to vacate the space. In addition, we took back 60,000 square feet from WeWork at DOC 72, but there the absolute rent that we were receiving remains the same, it's just on a lower square footage. Finally, we terminated a 33,000 square foot lease in Waltham that was simultaneously released, but won't be delivered into next quarter. Those movements account for 92% of the reduction in our occupancy in the second quarter from the first quarter. As of June 30th, we have approximately one million square feet of signed leases that have not commenced, hence the 200 basis points difference between occupied space and lease space. In the first quarter, our leasing included 383,000 square feet of vacant space leasing. This quarter, that same vacant space leasing was 362,000 square feet. These leases are all part of our least square footage percentage. Our pipeline of leases in negotiation includes an additional 635,000 square feet of currently vacant space, which if signed will contribute another 130 basis points to our least square footage.

In addition

to the known 200,000 square feet expiration at Times Square Tower in Q3, our two Waltham life science developments will be added into our in-service portfolio in the third and fourth quarters, 180 City Point and 103 Fourth Avenue respectively. They are combined 32% occupied, which will reduce our in-service occupancy. These additions will result in about 50 basis point reduction at the year end. For those of you that are focused on the next quarter, expect us to be lower by about 40 basis points with a recovery in the fourth quarter where most of the leases that have been signed start to commence, where we project occupied space to be between 87 and 87 and a half percent inclusive of the additions to the in-service portfolio. In previous quarters, we have not been including the additions to in-service portfolio, but we're doing that now because it's a quarter away. Our least space will continue to be above 89%. BXP continues to lease space. In Manhattan, almost all of our demand continues to originate from financial institutions, alternative asset managers, professional service organizations and law firms. In many circumstances, these clients are expanding. Concessions are flat and taking market rents have risen double digits in 2024. The sub 8% availability in the Park Avenue sub market is a direct reflection of these users growing and competing for limited blocks of space. In one of our assets, we have three tenants that would like more space and we have no immediate availability. We had more than 130,000 square feet of expansions at the General Motors building and at 601 Lexington Avenue this quarter. Our strongest tour activity in New York City continues to be in the sub market. At the same time, technology demand across the city continues to be light. We completed a single floor lease at 360 Park Avenue South with a digital media firm this quarter, but Midtown South is a tech oriented sub market in the city where transactions over 20,000 square feet have been very limited in 2024.

In Princeton,

we completed 10 transactions tolling 150,000 square feet during the quarter, including an extension and expansion with a foreign pharma company. In the Back Bay and the financial district of Boston, we completed 195,000 square feet of leasing this quarter. The majority of this activity was in our Back Bay portfolio and the clients were alternative asset managers and professional services firms. The Back Bay continues to outperform the financial district which continues to have to digest the new construction pipeline. Our remaining activity was in our Waltham urban edge portfolio where we completed just over 110,000 square feet and 90% of those transactions were on either existing or near term vacancies, not renewals. Here, the demand came from a consumer products company, a home builder and a few pharma life science companies with office requirements. We did execute one 25,000 square foot life science lab lease. The life science lab demand in greater Boston continues to be lackluster with tenants displaying little urgency around any potential new requirements or relocations. To date this year, there have been eight non-renewal lab deals in Waltham, Lexington, Watertown and West Cambridge that didn't involve a sublet. Only one was greater than 25,000 square feet. Our rest in portfolio was responsible as I said for virtually all of our executed leases this quarter in the DC region. Leasing activity and tenant demand growth is coming primarily from two industries, cybersecurity and defense contracting. We had just over 30,000 square feet expansions from existing tenants, but we also experienced as I said, a 50,000 square foot contraction from a traditional tech company. The vibrant residential and retail environment continues to be a natural location for small businesses and the financial services and legal industry as well. And we did do six leases at 5,000 square feet or less in the town center, as well as a handful of retail deals. The District of Columbia office market is becoming more and more bifurcated. The private sector tenant demand is dominated by the legal industry in DC, but in almost every case, law firm renewal or relocations are resulting in smaller requirements, which is leading to negative absorption as we have all read and seen. It doesn't look like the government leasing for usage is gonna help with this problem. However, with the either existing or near term high vacancy, there are many buildings with over leveraged capital structures unwilling to provide capital for new transactions and therefore, they have very little client interest. When clients do want space, they prefer to be in the top of refurbished, amenity rich, well capitalized buildings. There appears to be limited opportunities in the market that meet these clients' demands. So our availability at 2200 Penn and 901 New York Avenue should fare well over the next few quarters. On a comparative basis, the West Coast markets, particularly San Francisco, are seeing more demand in 24 than 23. However, additional sublet availability and technology company lease downsizing upon lease explorations continue to mute the positive demand emanating from the AI organizations that continue to look for space. Tech growth away from AI has yet to emerge. The San Francisco CBD also continues to act as a financial center of the West Coast with its own set of asset managers, including private equity firms and venture firms, some hedge funds, a few specialized fund managers, and obviously their financial and legal advisors. This is the source of the bulk of the transactional activity in the market. And while the brokers correctly report a pickup in tenants in the market, if you look more closely, very little of that demand represents net growth from those tenants. Our San Francisco activity continues to center on traditional non-tech demands at Embarcadero Center. This quarter, we completed an 80,000 square foot law firm renewal with no change in square footage and five smaller deals, all 12,000 square feet or less with new tenants on currently vacant space. We continue to see many of the professional services in law firms continuing to downsize, which is in stark contrast to the activities of those same tenants in New York and Boston. We are seeing a steady flow of potential tenants, 12,000 square feet or less, which is about a full floor at our 535 Mission property. But this is in contrast to 680 Folsom, whose location is less desirable for non-tech demand and where the potential tech clients continue to have inexpensive furnished sublet options. Tenant activity is improving in our Mountain View research R&D buildings where we have about 215,000 square feet of availability and uniquely attractive products. These buildings are designed for companies that are making some sort of device, be it a car sensor, a photovoltaic panel or a medical device. They don't compete with the large multi-story office product that has flooded the market. We saw activity come to a halt when the SVB imploded last year. The entrepreneurial device maker companies still exist and they are now slowly making capital commitments once again and looking at leasing space. The lab market story in South San Francisco is not dissimilar to greater Boston. There were only a handful of new leases completed during the first six months of the year that didn't involve a renewal or sublease. So there have been about 100,000 square feet of new deals completed in the last 30 days. Overall, we are experiencing an improving operating environment. Leasing available space is primarily driven by gaining market share from competitive landlords and or lower quality building, but not net new market demand growth. While the markets need consistent incremental absorption to show a macro recovery, we have started to see pockets of strength where low availability is driving constructive client behavior. The back bay of Boston and the Park Avenue sub-market of New York are the obvious examples. As clients choose premier properties in sound financial condition operated by the best property management teams, we will continue to be successful in capturing demand, leasing space and increasing our occupancy. And with that, I'll turn it over to Mike. Great, thanks, Doug. Happy birthday,

thank you. So this morning, I'm gonna cover the details of our second quarter performance and the increase to our 2024 full year guidance. So for the second quarter, we reported funds from operations of $1.77 per share that exceeded the midpoint of our guidance from last quarter by six cents per share. Our portfolio NOI came in a penny ahead of the midpoint of our guidance. The majority of this resulted from lower operating expenses in the quarter. Our rental revenue was closely aligned with our expectations. And as Doug described, our occupancy decline was anticipated in our guidance as we've covered with you in the last two earnings calls. Five cents of our earnings fee came from a reduction in non-cash interest expense that we don't expect to recur and that you should not incorporate in our run rate going forward. The change is due to our reassessing a future earn out payment related to our Skyline multifamily project in Oakland. The reassessment results in the reversal of $9 million of previously accrued non-cash interest expense. Our structuring of this deal with the protection of an earn out in lieu of an upfront land purchase is saving us nearly $40 million of projected land payments. So moving to the full year, we're increasing our FFO guidance for 2024 to $7.09 to $7.15 per share. At the midpoint, this equates to $7.12 per share and is an increase of eight cents per share over the prior guidance midpoint. In addition to the second quarter out performance, we anticipate two cents per share of better projected portfolio NOI in the back half of the year from our in-service portfolio. We've negotiated three lease terminations, all in Boston, with payments that will add incremental income in the second half of 2024. Net of lost rental income, our NOI is projected to be higher by approximately $4 million, or two cents a share. The geography of the expected improvement shows up as an increase in termination income and a modest reduction of same property NOI. We don't include termination income in our same property guidance, and we guide to it separately. So you will see in our detailed guidance table in our supplemental that our full year 24 termination income guidance is now $14 million to $16 million, up $8 million. Correspondingly, we've reduced our 2024 same property NOI growth by 25 basis points at the midpoint to a range of negative 1 1⁄2% to negative 3% from 2023. If not for the terminations, our same property performance expectations would have been in line with our prior guidance. To provide a little more detail, most of our termination income comes from terminations we have negotiated to allow us to sign new long-term leases with both expanding and new clients. These transactions are reducing our occupancy by 100,000 square feet temporarily, but the impact will be short-term as we have new leases coming in after six to 12 months of downtime that will cover virtually all of the space. These deals reduce our 2024 occupancy by about 20 basis points and are reflected in our updated occupancy guidance. We've also modified our guidance for net interest expense to incorporate the five cents per share of lower interest expense recorded in the second quarter. This results in lower interest expense for the full year and a new guidance range for net interest expense of 578 to $588 million. The remaining components of our prior guidance have not changed meaningfully. And overall, our earnings performance for 2024 is exceeding our prior expectations. I would like to spend a minute on interest rates as there's been no consistency quarter to quarter on Fed rate cut projections. Back in January, the street was projecting four to five rate cuts starting in the second quarter. Then the first quarter data came out and the street changed that to zero to one cut. And now with more progress on inflation, the street has reverted back to three cuts this year. We have not changed our base model that assumes one 25 basis point cut in December. Should the Fed cut by 25 basis points three times starting in September, our interest expense would be about $2 million or a penny per share lower, which is within our guidance range. Another item that could impact interest expense is the refinancing of our $850 million .35% bond expiring in January, 2025. We have access to multiple debt markets. And in general, the bond markets have been improving with tighter spreads and lower treasury rates. We are evaluating the timing of replacement financing and it is possible we could hit the market this year. We would expect to invest any financing proceeds temporarily in bank deposits that currently earn approximately 5% and then redeem the bond at its expiration. We haven't included the impact of a potential debt transaction in our current guidance. So in conclusion, we're increasing our guidance for FFO to $7.09 to $7.15 per share. This is an eight cent share increase from the midpoint from our prior guidance. The primary reason is improvement of 5 cents per share of lower non-cash interest expense, 5 cents of higher termination income offset by 2 cents of lower same property NOI from the lost rental income related to lease terminations. That completes our formal remarks. Operator, can you open up the line for questions?

Thank you, sir. As a reminder to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. We ask that you please limit yourselves to one question. If you have any follow-up questions, please feel free to rejoin the queue. Please stand by while we compile the Q&A roster. And I show our first question comes from the line of Nick Huliko with Scotiobank. Please go ahead.

Thanks, good morning. So appreciate some of the clarity there on the occupancy guidance and the leasing activity. Sounds like some of this is, you know, or a lot of this is sort of timing related in terms of the adjustment to the occupancy and same-store guidance. Is there a way to give us a feel for, you know, if some of the recent leasing pace continues, how that could translate into occupancy growth next year? I know Owen did talk earlier about, you know, getting to the point where, you know, occupancy will increase over time. I mean, any sort of early thoughts on 2025 impact? Thanks.

So Nick, this is Doug. So I think that Owen's comment was 100% accurate, which is our occupancy is going to increase. Mike would also tell you that, you know, we have a cycle with regards to, particularly our CBD leasing, which by the way, we're, you know, in the mid-90s on an occupancy level right now. Where those leases take some time to go from lease to occupy, right? So we have a 200,000 square foot piece of space that's available in a particular building and we sign a lease for it, but we may not see actual occupancy for, you know, 12 to 16 months because the tenant has to actually physically build out the space. And so it's a little hard for us to give you a, a tight projection on when our occupancy number will actually start to materially increase. The trajectory is, there's no question it's going up. And if we end the year again, with this new adjusted in-service portfolio with the availability that we have in these life science buildings, you know, in the mid-87s, we will, my guess is be in the 88s in 2025. And we could get lucky relative to delivering some space where the tenant takes it in and as its condition. And suddenly we get a big pickup in quote unquote occupied and therefore we can start recognizing revenue. Those are the kind of things that would make a material difference, but we're not counting on those.

Thank you. And I'm showing our next question comes from the line of Steve Sokwa from Evercore ISI. Please go ahead.

Thanks. You guys talked about maybe pursuing some new apartment developments. I'm just curious, you know, if you sort of look at pricing today for materials and kind of current rents, you know, what sort of yields do you get on untrended rents today? And, you know, it sounds like you might bring in JV partners, but you know, how would you just sort of think about funding those and what percentage of those deals would you likely keep?

Yeah, Steve, it's Owen. So most of what we're pursuing is on land or other assets that we control, that we are re-entitling. You know, there's no secret that there's a shortage of housing, certainly affordable housing in this country broadly. And I think communities are a lot more interested in entitling housing projects today than they have been in the past. And that's a real help to our activities. The obstacle is what you described, which is costs, which have gone up not only for material, but also capital, you know, given interest rates. But to come to your question, we have a pretty significant portfolio of land that we control that we're pushing through this entitlement and design process, but not all the projects pencil. What we're trying to get on a project basis is, you know, mid six yields and higher. And as you also suggested, our goal would be to bring in JV partners for that. You know, I mentioned this Skymark project that we are currently opening in rest. And we own 20% of that project and have an 80% JV partner. And, you know, our hope is to establish similar types of joint ventures for these projects on our pipeline.

And see, this is Doug. I just think following additional comment, which is this stuff works with stick frame. So the things that we are looking at in our suburban, you know, I'd say non office, likely potential properties in the greater wealth and market as well as in Northern Virginia, are the places where you will probably see us being able to start things in sooner rather than later. CBD construction and CBD rents are much harder to pencil right now. And all of our teams are looking at it and studying it, but we're not sure that 2025 will be a position for our, you know, an economic start on that stuff.

Thank you. And our next question comes from the line of Michael Griffin with Citi. Your line is open.

Great, thanks. Owen, I wanna go back to your comments around expectation for forward earnings growth and kind of how that translates to leasing. Should we take it as the fact that there is a pivot to earnings growth improves the outlook versus maybe the magnitude of what corporate earnings growth is expected to be maybe relative to history? And then, you know, I imagine that a lot of that growth is coming from tech companies. You're just given the fact that they've been more hesitant to lease space, as we've seen over the past couple of years, you know, how does that maybe factor into using that metric as a good forward indicator of leasing demand?

Yeah, Michael, good morning. So we provide in our IR deck a graph of S&P 500 earnings growth versus BXP's leasing activity. There's a clear correlation. Not all of our clients are in the S&P 500, but S&P 500 earnings growth is just an indicator of, I would say, corporate health. And when companies are growing and they're healthy, they're more likely to invest higher and lease space. So I think it's real. And, you know, this year it's proving itself once again, because in 23, we had more muted leasing activity. There was no S&P 500 earnings growth this year. The growth is stronger and, you know, our leasing is stronger. So that correlation holds. You are 100% right, I think, in terms of your comments about tech leasing. When you look at the markets today, I would say outside of tech and life science, our leasing is, you know, almost back to normal, whatever that is defined as pre-pandemic. Those are the two places that there's a gap. And I recognize some of the S&P 500 earnings growth is coming from tech companies. But again, when you look at the data, that correlation holds. S&P 500 earnings growth, the leasing, and it seems like it's holding this year in 2024.

Thank you. And our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Thank you. You pushed back the stabilization dates of several development projects. How should we think about the likely lease up period versus those new dates? And Mike, if you can remind us of your capitalization interest policy. I know in the past you stopped capitalizing as soon as initial occupancy took place. And I just wanted to clarify that position. So John,

I think that the stabilization dates assume a 85% occupied square footage of the building. So that's sort of how that works. So presumably the leasing would be done in the 12 to 18 months prior to that date occurring. And we would be building out space and generating revenue when those tenants actually moved in. I'll let Mike talk about our capitalization methods.

So the policy around capitalization is that we stop capitalizing interest and any expenses associated with asset like real estate taxes 12 months after the base building is completed. So like for 103 city point and 180 city point that Doug described that is going into the end service portfolio later this year, those base buildings completed in the third and fourth quarter of 23. So in third and fourth quarter 24, the capitalized interest will stop on those assets. And so they're not fully leased. So we'll have some impact there. The 751 gateway asset completed its base building in the second quarter of 24 and 360 park is later this year. So those will have some impact next year and then later next year for 360 park. So that's kind of the timing associated with how the capitalized interest works.

And again, unfortunately it's just geography but we throw all of these development assets 12 months after we've completed base building into our end service portfolio wherever they're leased. And so they have an amusing effect on our occupancy even though they're not really apples to apples part of the end service portfolio that we're describing on a sort of quarter by quarter basis.

Thank you. And I'm showing our next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.

Great, thanks, good morning. Oh, and conversations about the potential impacts of the election are ramping up. So I wanted to get your thoughts on whether you see any possible changes in regulations or the overall economic or political environment that would be impactful to your business under either party.

Yeah, I don't think that's a huge difference for us. I mean, clearly there's some tax issues that are coming up over the next couple of years where if there's

one

party or the other gets elected it could have some impact. But I will say state and local elections have a larger impact on our day to day business. You know, what's going on with real estate taxes in our city, what's our ability to entitle real estate, what's going on with commuter, you know, transit, what's going on with safety and crime in the streets of our cities. Those types of issues have a bigger impact on us than issues at the federal level.

Thank you. Thank you. And I'm showing our next question comes from the line of Camille Bonnell from Bank of America. Please go ahead.

Good morning. I wanted to pick up on the portfolios CAPEX spent for the first half of the year, which looks to be tracking in line with 2023 levels

and

well below your historic average. So could you provide an update on the CAPEX assumptions you have planned, giving expectations for higher lease commencement?

So our maintenance CAPEX, I would suggest, is gonna run somewhere between 80 and $100 million this year, which is in line with, I would say, historical type of averages, maybe a little bit lower. We do have some repositioning CAPEX that is more meaningful this year than it was last year, primarily at 200 Clarendon Street, where we're putting in a pretty significant amenity center that is gonna result in tenant retention and higher rents in that asset. So you may have noticed this quarter there was a little bit more repositioning capital. On the leasing side, this quarter was lower because we just didn't have that many leases commenced. This quarter was just a little bit bulky, obviously quarter to quarter on our leases commenced. And I think that the annual run rate is 200 to $240 million of lease transaction costs that would be part of our AFFO calculation.

Thank you. And I'm showing our next question comes from the line of Connor Mitchell with Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my question. Kind of following along with Mike's answer there in providing some capex on addicting amenities. Just wondering with the lease coming back, you guys had a good quarter of leasing volume and building out the pipeline some more. Do you feel it's time to really reengage in building amenity upgrades in existing buildings or are you still looking for a little bit more of a push from the demand side?

So this is Doug. What I would say is I'm gonna ask some of the regional management teams to discuss what's going on but we have effectively done almost every building from the sort of a re-imagination, re-amendization project perspective. It's either underway or it's just about complete. And I can let Rod talk about what's going on in Market Era Center and I'll let Peter J. talk about the things that we've been doing in the greater DC market and then Brian can discuss 200 Clarence Street. But that's kind of the last of the major changes. Hillary has a few little things going on on the margin in some of her buildings. But why don't we start with Rod?

Yeah, so as Doug mentioned, we are in the process of doing an amenity center at Embarcadero Center and we have always had a conference facility and what we've done now is basically we're decommissioning that conference facility and we're building a brand new both conference and amenity center over at Three Embarcadero. So that is under construction and it's got both indoor and outdoor space. It's gonna be available primarily to our tenants but it will be available to the general public as well. And we're excited about it. It's an absolute must. I mean, we are making those same improvements similar in concept anyway at our other projects and it's demanded by the tenants. So I'm very excited about getting this one done.

Pete.

Hey, good morning. This is Pete Otney in DC. So I would say we've been,

as Doug said, through several major projects here in the DC market. We just opened Wisconsin Place in the Chevy Chase Maryland market here recently to great fanfare and we're optimistic that that's gonna translate as Rod was just describing and Doug did into both increased demand and retention at the property. We're under construction at Sumner Square and that'll be done later this year. That's the result of some leasing that we have, Jake and his team have mostly already done and that was demanded by some of those tenants through part of their renewal. And then upcoming is at 901 New York Avenue as part of our lease renewal with Finnegan late last year and early this year. We're doing a pretty major renovation of both that lobby, the existing lobby and a replacement of the amenity center on the lower level. So I would say we are mostly through that in the DC market. There's no major

ones on the horizon and I'll see if Jake has anything to add.

No, nothing to add other than in terms of the repositioning that we just opened at Wisconsin Place. It's been met with quite a bit of fanfare. We've had some broker events and there's definitely some activity and interest in that space now, which is exactly what we wanted to have happen. And at 901 New York Avenue, we will hopefully commence construction on those renovations in first quarter of next year. And again, a lot of that information has been shared with brokerage community and with the plus or minus, 100,000 square feet of vacant space we have in that asset. We've got some really good activity on that space.

Brian, you wanna just sort of talk about what 200 Clarence is?

Yeah, we're towards the tail end of our investments and execution. Doug mentioned at 200 Clarence, that's a three-year process of design and inclusion with our clients in that building and also tied to commitments to renewal. And that is under construction as we speak and going well. At the Prudential Center, our View Boston should be included in upgrade of amenities for our clients. View Boston has a tremendous amount of design factors that were put in by input from the clients, the major clients at the Prudential Center for event space, for meeting space, et cetera. And then we finished at 140 Kendrick in the Urban Edge portfolio to tremendous success, really great feedback on that, high utilization. And if we do any others, it'll be on the margin in let's say one of the possible Urban Edge larger assets, but

it would be insignificant compared to our other investments.

Thank you. And our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.

Hi, good morning, everyone. You guys talked about how the tech and life science areas are to where at least things not quite back to normal, whatever that might be, but that the other areas are. So just thinking of the tech and life science, I think the details are different for each of them, but like, what do you think gets them back? How much downsizing is there still to see? But yeah, could you talk about that a little bit more?

Sure, so Camille, this is Doug. So on the tech side, I actually don't think it's about downsizing much anymore. Caitlin, it's really at this point about whether they want to make high value added investment in their real estate relative to their current platform of human beings and where their spaces are. So as an example, you may see some tech companies, large tech companies making incremental expansions in particular cities because that's where they think talent is. But on the margin, those companies are not growing quickly. We are starting to see dollars, right? And you're seeing this both on the life science side as well as the venture side, being raised by companies that will be the next group of organizations that are doing something to create value for the world at large, the business community, the improvement in the human condition from the perspective of life science and elongating the value of people's lives. That pipeline of money takes time to move into the organizations and those organizations to really create for new opportunities for growth from an office perspective. It's been going on. We're hoping that we'll start to pick up, but I'm not smart enough to know when that's going to happen, but we know it will happen. And as we think about our cities and our portfolio, we have a view that there will be more creation of new jobs and new economic activity in life science and in technology broadly thinking, then there will be in traditional financial services, asset management, professional administrative services. We're banking on that happening. It's just a question of when. It's really hard to be able to give you a timeframe for that.

Just to add a little bit to what Doug said, and I've mentioned this on prior calls, a lot of the large tech companies took a lot of space in 21 and 22. And I think there's a digestion process that's underway. We can't really forecast when that

completes,

but again, I would reiterate Doug's point about where the relative growth will be. And then I think the other thing that's interesting that I mentioned in my opening remarks is what are the in-person work policies of the tech companies? And Salesforce, just this last month or last couple of months announced that starting in October, they expect almost all their employees to be in the office three to five days a week. And that's a big change in their policy. And they're one of the biggest employers in San Francisco. So I think that's gonna have an impact as well.

Thank you. And our next question comes from the line of Vikram Malhotra from NewZero. Please go ahead.

Thanks for taking the question. Just two clarifications to the comments. I guess one, you've described sort of East Coast and financial easing picking up particularly New York, but maybe more broadly. How much of that is focused primarily on the premium product versus sort of the general market? In other words, is it still the divergence or is the market actually picking up, number one? And then number two, just in your comments on leasing and what that may mean for occupancy, could you maybe give us more color? How much of that is actually renewal or how much visibility today you have on renewals into 25? Thanks. You want to take the first question? Yeah, I mean,

Vikram, the pickup is clearly in the premium buildings. I gave you all the statistics on it, the asking rent gap. You know, there's a lot of speculation. Well, as the market improves, this gap is going to decrease, so that hasn't happened. It's definitely stayed flat, if not grown. I do think in certain locations though that are very desirable, like around Grand Central Station, market strength does creep into beyond the premier segment. I think that's true for special locations.

And Vikram, on your question about sort of renewal versus new, so one of the things I provided in my remarks were the amount of vacant space that we leased in each quarter and what's going forward. And so that number is coming out to somewhere around 40% of our leasing, is those types of added occupancy generators and the rest of it are renewals. And generally when we're doing renewals, the majority of it is forward, but some of it is, relatively speaking, sort of in the contractual expiration period of the given year. So we do have a bunch of leasing that we're doing for 2024 expirations, but the majority of that is for 2025 and 2026.

Thank you. And I show our next question comes from a line of Vloris Van Dishkom from Compass Point LLC. Please go ahead.

Morning guys, thanks for taking my question. Owen, you mentioned something in your comments about potentially transaction activity in the office market maybe starting to pick up and some of the pipeline as we think about it, the foreclosures maybe starting to transact. Could you maybe talk a little bit more about that part of the market? What percentage of those assets could be premium or the ones that you would target? And maybe also talk about the disconnect between buyers and sellers and what does that mean for your, are people closer to your cost of capital or are expectations on the seller and on the lender still too high?

Morning, Vloris. First of all, on the foreclosure activity and short sales, loan sales and things like that, there's been very limited activity in those areas for premier workplaces. I think generally the premier assets, usually they're less leverage, they're in stronger hands. And if they are leveraged, they're usually performing pretty well. And if they have a problem, the owners are doing whatever they can to fix the loans. So we just haven't seen much foreclosure or distress activity with the premier assets for all those reasons. That all being said, we've had a deal drought here for a couple of years and investors, other owners, they gotta get on with their business plans and at some point they need to transact. And so I do think we're seeing increased, as I described in my comments, testing of the market of certain assets. I won't get into any specifics, but there are definitely a handful of buildings right now that are being offered in the market. I think they're premier. And it's just gonna be interesting to me if that bid ask spread gets bridged. Because right now I do think there's a bid out there for premier assets and so far no owners have elected to take it. And I think the second half of this year will be interesting to see if any of those deals come to fruition.

Thank you. And I show our next question comes from the line of Rennie Peer from Green Street. Please go ahead.

Hi guys, thanks for taking the question. Just curious,

I appreciate your comments on the difference between premier assets versus the broader market averages. But just trying to get a sense for at what point you think you can start to see a pickup in net effective rent for you guys in premier portfolio. Is this something that, given the difference in rents between premier and non-premier that you don't think you'll start to see or sort of just how should we be thinking about process for net effective rent growth?

So I'm not entirely sure what you wanna use as your from when to when point. But I can tell you that net effective rents in our Park Avenue sub market of Manhattan, and I'll let Hillary comment, are higher today than they were six months ago. And they're higher today than they were a year ago. I can say the same thing definitively about the back bay sub market of Boston. But it's gonna take a long time for that to occur in markets where there's a significantly larger availability rate because of the nature of having to basically steal market share from existing embedded occupancy. And Hillary, you can maybe comment on sort of transaction costs and what's going on with rents in Manhattan, because it's obviously the clearest example of what's going on from an NER perspective.

Sure, thanks Doug. So in the Park Avenue sub market, which I think is the easiest one to focus on in Manhattan, the vacancy rate as noted earlier in the call is less than 8%. And when vacancy drops below, I'd say about 10%, folks start realizing that if they want to be in that sub market, the pickings are very, very slim and they have to move if they want to get leases done. And that's exactly what we've seen. We first saw face rates rise and concessions remain stable, which is a little bit unusual. In past cycles, you would first see concessions bleed out of the market before face rates began rising. Nevertheless, that's what happened. Face rates have risen, concessions have remained roughly stable. And so that has caused an increase in net effectives. Now, anecdotally and very, very inconsistently, we're starting to see concessions move in a little bit. And so we're hopeful that that means that net effectives will accelerate. But I would just reiterate that there isn't a lot of availability in the strongest sub market to test that theory against. In addition to the tightness in the Park Avenue sub market and what that's done for net effectives, I would say that it has bled outward in the sense of creating more leasing velocity in adjacent sub markets, but those sub markets remain sort of full with concessions. And so I think until those markets demonstrate more tightness in occupancy, we'll see stable concessions and rents flat for the near term.

Thank you. And our next question comes from the line of Peter Abramowitz from Jeffries. Please go ahead.

Yes, thank you. Just noticed that the operating expense growth was a little bit elevated in the same store portfolio this quarter. Just wondering if you can comment on that, anything you would call out and anything to look for for the rest of the year?

I actually think our operating expenses were less than we expected them to be. So I think maybe they increased a little bit because there's a little more utilities expenses in the second quarter and repair and maintenance in the second quarter versus the first quarter. We generally get started a little bit slower at the beginning of the year on some of those items. And I think the third quarter is generally higher than the second quarter seasonally as well because of weather conditions, again, utilities. And I would expect R&M to be a little bit higher too. And that's kind of in line with where our budget is. And then it would be probably a little lower in the fourth quarter.

Thank you. And I'm showing our next question comes from the line of Omoteo Acusania from Deutsche Bank. Please go ahead.

Yes, good morning. Thanks for taking my call. Quick question on leverage. Again, by our math picked up again a little bit this quarter. You do have kind of debt that matures next year that probably refinances to a higher rate. Just curious, how would you kind of think about the trajectory for leverage over the next six to 12 months? And also if the rising leverage is causing any issues, concerns, if I may use those words, with credit rating agencies.

So our leverage ratio is impacted by the funding of our development pipeline in a negative way. And then in a positive way when that development pipeline delivers and starts generating EBITDA. So every quarter we're funding developments that aren't gonna be completing and delivering for a year or two or three. We have two major developments in Cambridge that are gonna be delivering one 300 Benny Street delivering in the first quarter next year. And the other one is 290 Benny Street that is three times the size of that one. That's gonna be delivering in 2026. Both of those are 100% leased. So when that happens then it will moderate the leverage. The other developments, as was mentioned earlier, we pushed out a little bit, but when they stabilize they will also moderate the leverage. So that will be, I'd say, impactful. And when we think about leverage, we think about kind of pro forma leverage for those types of investments,

which would

reduce our leverage probably a full turn or so, plus or minus, which would bring it back down below into the six and a half to seven and a half times range, which is where we kind of typically target. So I think we're temporarily higher than that, but we're gonna stay higher than that for the next several quarters, the timeframe that you just described as we complete this pipeline.

Thank you. And our next question comes from the line of you, Paul. Rana from KeyBank Capital Markets. Please go ahead.

Great, thanks. Good morning. Could you give us a little more detail on the terminations? It looks like one of them was from Alavir at 1100 Winter, but what were the others and how did these transpire and any timing associated with these would be really helpful. Thank you.

So the terminations, not all of them have occurred. The one that you mentioned was in the media. And one of them, that one was a pure termination. The square footage in the media was inaccurate, however. It only impacts 20,000 square feet of our occupancy in the near term. The other two, one is the tenant that we're downsizing and relocating within our portfolio. They're staying with us. And we've got another tenant that is four or five times their size, that is gonna be coming in and taking their space as well as other vacant space that is in that building. So that deal is not signed yet, but it's something that we're working on and we're confident in. And then the last one is a tenant at the Verdencial Center where we have a tenant whose business plan has changed, they've been looking to vacate their space and we have somebody else that wants it. So that tenant is gonna be coming in, but the exiting tenant will be leaving in either the third or maybe the beginning of the fourth quarter, probably the third quarter, but the new tenants are not gonna be coming until the first quarter of 25. And so that's really the situation we're dealing with on these is the exiting tenants are leaving in 2024 and the new tenants aren't coming until 2025. We also had a similar situation in the New York City market at 601 Lect where we have an expanding tenant that's looking for space and we found somebody that would exit. And so that tenant has exited, but the expanding tenant will not be going in until mid 25. So it's just an example, if you add up all that square footage, it's 100,000 square feet of occupancy that's hurting us this year. Where we're really, it's really a good thing because we're bringing in a client that's a growing client wants to sign a long-term lease with a client who's closer to their expiration date, maybe their plans have changed. And in the case in New York, the client had already signed a lease in another building a couple of years ago because they needed space. And so they're able to just consolidate into that building. So every situation is a little bit different. It's all case by case, but this is kind of what we do. We try to manage these buildings and work these buildings so we can limit downtime, increase rents and cover exposure.

Thank you. And our final question comes from the line of Ronald Camdom from Morgan Stanley, please go ahead.

Hey, just a quick one for me. Look, if I think about this year on the same store and why front, some explorations that you guys have been able to backfill quite nicely, but still sort of ended up being a headwind to the same store and why. So as we roll into next year, maybe if you talk about whether it's commencement or sort of larger expiration, sort of those two aspects, how should we think about as you're rolling into next year, sort of potential headwind, tailwinds either from commencement or expiration? Thanks so much.

So the same story in OI this year, which is modestly down, right, is due to occupancy being a little bit lower this year than it was last year, right? We've actually offset that a little bit with rent growth. So rents are actually higher than they were last year, but the occupancy has a much bigger impact than the roll up or the roll down of a lease by five or 10%. So as Doug described in his occupancy views, and we don't know the exact timing, but our expectation is that we'll start to have more, some occupancy growth next year. And if we get occupancy growth, that should go into the same store. So that will help the same store.

Thank you. And this concludes our Q&A session at this time. I would like to turn it back over to Owen Thomas for closing remarks.

We have no more closing remarks, and I would like to thank everybody for their interest in BXP. Have a good rest of day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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