BXP, Inc.

Good day, and thank you for standing by. Welcome to BXP's third quarter 2024 earnings conference call. At this time, all participants are in 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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, Investor Relations. Please go ahead.

Good morning and welcome to BXP's third 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 do 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 non-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 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 and 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 remark.

Thank you, Helen, and good morning, everyone. Our performance in the third quarter demonstrated BXP's continued resilience and provided evidence of property and capital market recovery. Our FFO per share was one cent above our forecast and in line with market consensus for the third quarter. We completed over 1.1 million square feet of leasing in the quarter, 5% greater than the third quarter of 23. And for the first three quarters of 2024, our leasing volume was 25% more than levels we achieved in the first three quarters of last year. Weighted average term for office leases signed this past quarter remained long at 7.2 years. And we continue to receive awards for our industry-leading work in sustainability. In just the last quarter, Time Magazine and Statista named BXP one of the world's most sustainable companies. And Nareit awarded BXP the Sustainable Design Impact Award for our 140 Kendrick Building A redevelopment project. Now, moving to the economic and operating environment, we believe the most important market forces for BXP, that being interest rates, corporate earnings, return to the office behavior, outperformance of premier workplaces, and valuation in the public and private markets are all currently working in our favor, serving as a tailwind for BXP's performance. The Federal Reserve cut the Fed funds rate 50 basis points at its most recent September meeting and has signaled for two more 25 basis point cuts in 24 and additional reductions in 2025. The most recently released inflation and GDP growth Economic data has signaled the economy is possibly stronger than previously believed and put into question the magnitude and timing of additional Fed funds rate cuts. No matter how this debate resolves itself, the facts are short-term interest rates are coming down, which is very positive for real estate valuations as well as corporate earnings growth, another important driver for BXP's performance given its correlation to leasing activity. After remaining flat for all of 2023, S&P 500 earnings as a proxy for corporate health are expected to grow 9.9% in 2024. As mentioned before, companies with earnings growth are much more likely to invest, hire, and procure space, as demonstrated in BXP's growing leasing volumes this year. We do not see evidence of a looming recession in the decision-making of our clients, While it is true that long-term interest rates driven more by market forces than Fed behavior have recently been rising, many corporations, particularly smaller ones, use floating rate and shorter-term financing, which are becoming less expensive. Return-to-office behaviors are clearly improving across the cities where we operate. It has been highly publicized that Amazon is requiring all workers, including support staff, to return to the office five days a week starting December 1. Given Amazon's scale and industry presence, this decision could be a harbinger for the future policies of other technology companies. Dell, Salesforce, Starbucks, and other companies have recently announced more stringent in-office work requirements for their employees. KPMG completed a survey this past summer of 1,300 CEOs regarding in-person work policies. 84% of the CEOs believe there will be a full return to office work at their companies within three years, up from 64% of those surveyed just one year ago. The reasons cited for the increase were concerns about diminished collaboration, innovation, and productivity, inadequate supervision and training for younger employees, and the cost of maintaining vacant offices. BXP competes primarily in the premier workplace segment of the office sector, which continues to demonstrate material outperformance. Premier workplaces are defined in CBR's research as the highest quality 6.5% of buildings representing 13% of total space in our five CBD markets. Direct vacancy for premier workplaces is 13.2% versus 18.7% for the broader market. Likewise, net absorption for premier workplaces has been a positive 6.5 million square feet over the last three years versus a negative 16.7 million square feet for the broader market. Asking rents for premier workplaces are 50% higher than the broader market, a consistent gap from prior quarters. This outperformance is evident in BXP's portfolio where approximately 90% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 90.1% occupied and 92.1% leased as of the end of the third quarter. Lastly, from a timing perspective, valuation changes in the public real estate industry, which are determined by daily trading, Lead valuation changes in the private market, which are largely appraisal-based. In the first three quarters of 2024, publicly traded office companies generated a return of 30%. While in the private market, as measured by the NACREF index, which is the best proxy for unleveraged private market values, office returns were a negative 7% over the same period. In other words, public markets are trading higher based on expectations of a recovery in the office sector, while the private market appraisal-based marks are still dropping in an attempt to catch up to current market conditions. As a result, BXP has the opportunity to make increasingly accretive private market investments, both in acquisitions and in selective developments that underwrite to yield premiums versus pre-pandemic levels. Regarding the real estate private equity capital markets, office sales volume in the third quarter provided evidence of a pickup in activity. Specifically, volume for significant U.S. office sales was $8.2 billion, 15% greater than the second quarter of 24, and 32% above the third quarter of last year. Lower short-term interest rates increased leasing activity for certain assets and locations, and better access to debt financing were the drivers. An important change in the environment has been the increasing availability of debt financing at scale for office assets in the CMBS market with relatively attractive pricing. Very recent examples of CMBS execution include a $3.5 billion, 57% loan-to-value, five-year refinancing for Rockefeller Center at a fixed rate of 6.2%. and a $750 million, 43% loan to value five-year refinancing of 277 Park Avenue at a fixed rate of 7%. Office sales this past quarter for assets with comparability to BXP's portfolio include 730 slash 750 Main Street, a fully leased 219,000 square foot multi-use building in the Kendall Center District of Cambridge, sold for $362 million or $1,650 a square foot and a 5.7% initial cap rate. A leasehold interest was conveyed from the landowner to a private life science real estate owner and developer. In Santa Monica, 2220 Colorado Avenue, a fully leased 225,000 square foot office building sold for $185 million or $819 a square foot and a 7.1% initial cap rate. A pension advisor was the seller and a fund manager the buyer. 799 Broadway, a 177,000 square foot new office building located in Midtown South is under contract to sell for $255 million or $1,400 a square foot and a 5.3% initial cap rate. The building is 71% leased, and the yield is estimated to be approximately 7% upon stabilization. A private REIT sold the building to a European family office. Moving to BXP's capital allocation activities, we remain active in pursuing acquisitions from both real estate owners and lenders. Our pipeline of potential opportunities is growing, including building and note acquisitions, sites with near-term pre-leasing potential, and new residential developments no agreements are imminent but we are encouraged by the activity we are in active negotiations for the disposition of three non-income producing sites which if successful should close in 2025 and generate over 70 million dollars of proceeds for our development pipeline we delivered into service 180 city point a 329 000 square foot lab building which is 47 43% lease located in our City Point Park in Waltham. Though initial leasing completed exceeded our underwriting, the market softened before the asset was fully leased. The opening of Skymark, our 508 unit luxury residential tower development at Reston Town Center, continues to go well, having leased 35% of the units at the base of the building and we believe we are on track to achieve our underwriting in terms of rents and schedule. We have been able to accelerate the completion of 300 Binney Street, a fully leased 236,000 square foot lab redevelopment in Kendall Center in Cambridge, and we'll deliver the project to our client and into service in the fourth quarter. We continue to push forward with several residential projects, primarily on land we control, that are being entitled and designed and for which we intend to partially fund with joint venture equity capital. Lastly, we broke ground on the Grand Central Madison concourse access phase of 343 Madison Avenue, located two blocks south of J.P. Morgan's new headquarters building and one block north of 1 Vanderbilt. 343 Madison competes with the Park Avenue submarket of New York City, which given its access to Grand Central Terminal's one-stop commute, is under 8% vacant with no block of direct space over 100,000 square feet available, and is arguably the strongest office sub-market in the United States. 343 Madison, which BXP has been working on for over 10 years, is the only fully entitled, ready-to-commence workplace development located in the core of Midtown. And we are having constructive conversations with a handful of potential anchor clients. When complete, the building will comprise 942,000 square feet and include state-of-the-art sustainability features, as well as direct escalator access into Grand Central Terminal. We hope to launch this approximately $2 billion project next year, where as a reminder, BXP owns a 55% interest. BXP continues to execute a significant development pipeline with nine office, lab, retail, and residential projects underway as of the end of the third quarter, which we expect will contribute to BXP's external FFO per share growth over time. These projects aggregate approximately 2.7 million square feet and $2.1 billion of BXP investment with $1 billion remaining to be funded. So in conclusion, BXB continues to leverage its key strengths, which are our commitment to premier workplaces and our clients, as many competitors disinvest from the office sector. A strong balance sheet with ready access to capital in the public and private debt and 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. BXP continues to display resilience with the growing leasing pipeline as well as stability in FFO per share and dividend level, and we are well positioned to continue to gain market share in both assets and clients while benefiting from a constructive environment of lower interest rates, higher corporate earnings growth, more workers returning to their offices, continued outperformance of the premier workplace sector, and a very competitive cost of capital.