BXP, Inc.

Good day and thank you for standing by. Welcome to Q2 2025 BXP earnings conference call. At this time, all participants are on the 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 second quarter 2025 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 Investors 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 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 remarks.

Thank you, Helen, and good morning to all of you. Our results in the second quarter demonstrate BXP's continued strong execution and provide further evidence of the property and capital market recovery underway in our sector. Our FFO per share was five cents above our forecast and four cents above market consensus for the second quarter, primarily driven by improved operations. As a result, we're also raising the midpoint of our earnings guidance for the full year 2025 by two cents. We completed over 1.1 million square feet of leasing in the quarter, bringing our total leasing in 2025 to 2.2 million square feet. Over the last four quarters, our leasing volume of 5.7 million square feet was 18% higher than the prior four quarters. We continue to increase the pre-leasing of our development pipeline with 200,000 square feet of development leasing this quarter. Now, regarding the operating environment, BXP's leasing activity remains vibrant across many, though not all, submarkets. As discussed before, the primary drivers of BXP leasing activity are corporate confidence and the in-person work behavior of our clients. Corporations generally see a favorable environment for their businesses unfolding this year with a pro-growth tax bill recently passed in Congress, less regulation, geopolitical risk relief in certain regions, resolution of US tariff agreements with many important nations, and the possibility of lower short-term interest rates. As a proxy for corporate health, 2025 S&P 500 earnings growth projections, though revised lower since the beginning of the year, remain healthy at 7% to 9%. Investors are confirming this view with U.S. equity market indices achieving new highs and credit spreads on U.S. investment grade bonds trading at or near 10-year lows. Further, in-person work behaviors continue to improve. JLL recently completed a study of Fortune 100 firms' office attendance policies. Over the last two years ended the second quarter of 2025, Fortune 100 companies that are fully in the office climbed tenfold from 5% to 54%. Hybrid mandates dropped by nearly half from 78% to 41%, and fully remote policies dropped from 6% to only 1%. These are material shifts that have undoubtedly augmented leasing activity. Return to office behavior is more advanced in our East Coast markets, particularly New York City, and well behind on the West Coast. Moving on to office market conditions, I'll continue to emphasize that the premier workplace segment defined as roughly the top 10% of buildings in a market and where BXP primarily competes continues to materially outperform the broader office market. In our five core CBD markets, direct vacancy for premier workplaces is 7.5 percentage points or 38% less than the broader market. And asking rents for premier workplaces continue to be more than 50% greater than the broader market. Regarding the real estate private equity capital markets, office sales volume increased materially in the second quarter to $14.2 billion, up 80% from the prior quarter and 125% from the second quarter of last year. Financing at scale is increasingly available at tightening spreads for higher quality office assets with Walt, particularly in the CMBS markets. Equity investors are also starting to reenter the office sector, given improving operating performance in certain markets and attractive asset pricing versus other sectors. There were several notable office transactions completed or committed in the quarter. In Midtown New York City, 590 Madison's under contract for sale for $1.1 billion, or 1,060 a square foot and a 5.2% cap rate. This building was constructed in 1981, is 85% leased and sold by pension fund to a local real estate operator with a financial partner. Also in Midtown, a half interest in 1345 Avenue of the Americas was sold at a gross valuation of $1.4 billion or around $740 a square foot. The cap rate's not particularly meaningful given stabilization is several years away. and the transaction was facilitated by $850 million CMBS financing. The building was originally built in 1969, is 92% leased and transacted between investment management firms with the building manager staying in and owning the other half of the asset. And lastly, in Culver City, California, Entrata was sold for a gross price of $212 million, or $675 a square foot at a 7.4% cap rate, This building was recently, constructed recently in 2021, 75% leased and transacted between investment management firms. Again, with the building manager staying in and owning a small stake in the property. Now let's transition to BXP's capital allocation activities. As discussed on many prior calls, BXP controls what we think is the best positioned, currently actionable office development site in New York City, located at 343 Madison Avenue. The building will be a highly amenitized, sustainably designed, 46-story, 930,000 square foot premier workplace with direct escalator access into the Madison concourse, of Grand Central Terminal from the building's lobby. Today we are making several important announcements regarding this project. First, we're proceeding with the project for the terms of our ground lease with the MTA and plan to immediately commence full vertical construction of the building, which will allow delivery in late 2029. Site preparation, foundation work, and development of the Grand Central escalator access is well underway having commenced in October 2024. Second, we have executed a letter of intent with an anchor client for approximately 30% of the building with economics consistent with our investment underwriting. The client is a prestigious investment grade financial institution that will be leasing the lower middle section of the building. We have experienced strong client demand for the project and have active anchor tenant proposals out to six clients representing in total approximately 1.3 million square feet. Negotiations continue with anchor clients for the base of the building, and we intend to be patient leasing the upper floors of the project, which we expect will be attractive to smaller users that make leasing commitments closer to the date when they can occupy their new space. Third, BXP is opting to buy out our 45% equity joint venture partner, which we will do no later than the end of this quarter, for approximately $44 million at their cost basis. While our partner has been funding its share of pre-development expenses since 2017, they have decided to prioritize investment in existing as opposed to development assets with as opposed to development assets which better align with their current risk-adjusted return objectives. Given the trophy status of the asset and very promising pre-leasing activity, we believe introducing a new capital partner for an interest in 343 Madison, if we elect to do so, is readily achievable. As a reminder, 343 Madison has a total development cost of just under $2 billion, including approximately $400 million of imputed capital cost carry and a projected stabilized cash yield on cost of approximately 7.5% to 8%, depending on how we ultimately elect to capitalize the project. The leasing market in Midtown remains very strong, with trophy buildings having a vacancy rate of 6.3%, and no large blocks of space available in the plaza district of Park Avenue. As a result, office rents are growing at rates well above inflation, and the very few high-quality building trades that have been completed were done at cap rates well below our projected development returns. Culminating 13 years of effort by our New York region in securing and entitling the site, we believe 343 Madison will be a core long-term holding for BXP and represents a very strong and significant value creation opportunity for BXP shareholders. Turning to asset sales, we're in various stages of execution for the sale of 10 non-income producing assets, both land sites and largely empty buildings, that we believe will generate, if successful, net proceeds of nearly $300 million over the next two years. We're also exploring the sale of a handful of income producing properties that could generate Another $300 million in net proceeds, more likely in 26 than 25. There is strong demand for housing in the communities where many of our sites and out-of-surface buildings are located, allowing us to create value through re-entitlement, though the process can, in select cases, take up to two years to complete. Other sites are being sold for industrial or other non-office uses. In the aggregate, we do not expect these sales will be dilutive to BXP's FFO because of the significant portion of non-income producing assets. A great example of our creativity in monetizing a non-producing asset is 17 Hartwell Avenue in Lexington, Massachusetts, which is a 30,000 square foot commercial building built in 1966, vacated in 2024, and recently demolished. We successfully rezoned the property in the town of Lexington to build a 312-unit multifamily building on the five-acre site and secured an institutional partner to provide both construction financing and 80% of the equity required to build the project. The stick frame construction development will cost $180 million and is projected to deliver a 7.1% yield on cost. including land at current market value and capital cost carry upon stabilization in 2028. In terms of economics to BXP, we received $22 million at closing for our land contribution. We own 20% of the project, which will require $10 million of funding from BXP over time, and we'll earn a development fee of more than $4 million. The inferred land value is $70,000 per residential unit, or $22 million, which is $733 a square foot for the existing empty commercial building, significantly more than its as-is value. So in conclusion, premier workplace leasing and capital markets continue to recover from their lows in 2024. Our clients are generally optimistic about their business prospects and are demanding more in-person work from their professionals, both creating leasing demand. Further, new construction for office has virtually halted and users are gravitating to higher quality assets with strong sponsorship, the combination creating occupancy and rent growth for many of our assets as we gain market share. Private equity investors are increasingly taking note of these trends and starting to invest in the office sector. With our current leasing momentum and limited rollover in 2026 and 2027, we expect to gain occupancy, revenue and FFO in the years ahead and development deliveries and potentially acquisitions will provide additional growth.