Good morning, and welcome to Boston Properties Second Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Sara Buda, VP of Investor Relations for Boston Properties. Please go ahead.

Great. Thank you, and welcome, everybody, to the Boston Properties Second Quarter 2020 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, the company 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 Relations section of our website at investors.bxp.com. A webcast of this conference call will be made available for 12 months. At this time, we'd 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. These statements involve known and unknown risks and uncertainties, and although Boston Properties believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, we cannot assure you that the expectations will be attained. Risks and uncertainties 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 the company's filings with the SEC. In particular, there are significant risks and uncertainties related to the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures on Boston properties and our tenants. Boston Properties does not undertake a duty to update any forward-looking statements. I would like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions. I'd now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sara, and good morning, everyone. I'm joining you today from Boston Properties Office in New York, where I've been working for almost a month, and it's great to be back. Our offices in Boston; Washington, D.C.; and obviously, New York City are open. And many of our employees have elected to join their property management colleagues and return to the office. Our buildings remain under 10% physically occupied at this time, but we anticipate some increase after Labor Day, as we and our customers are anxious to safely return to work in the months ahead. Despite a challenging environment, Boston Properties continued to perform in the second quarter and beat consensus earnings by $0.02, excluding charges. We also collected 98% of our office rents, 94% of our rents overall and completed 942,000 square feet of new leases and renewals, including a 400,000 square foot new lease with Microsoft at Reston Town Center. These achievements demonstrate the resilience of our business model in a difficult operating environment. I'm particularly proud of our team's commitment to serving our customers with the highest level of professionalism that is our standard at Boston Properties. This morning, I will focus my comments in three areas; the status and timing of the U.S. economic recovery, the future of office demand and Boston Properties' pivot to offense. The recovery of the U.S. and global economies is directly tied to the course of the pandemic. COVID-19 infection rates remain at elevated levels in the U.S. as many Americans appear to be less willing to follow the health safety protocols mandated by the CDC and local governments. As a result, COVID-19 will likely linger in the U.S. and around certain regions of the world for some time. Though a federal CARES two Act will help, the U.S.…

Good morning, everybody. So Mike LaBelle, Sara Buda and I are all sitting together more than six feet apart at our corporate office at the Prudential Center. And we've been here since June 1. So we're on, I guess, our 9th week. It certainly feels a lot longer than 90 days since we had our last conference call. And I think Sara has organized calls or group meetings with more than 200 investors and analysts since late April, and she's also put out updates on a monthly basis. As Owen discussed in his remarks, the business environment that has arisen because of COVID-19's induced economic shutdown is the thing that we are most focused on, on a day-to-day basis in our business. While we are encouraged by the government and the life science industry's determination to test, manufacture and mass distribute a vaccine, we still have to manage the realities of the gradual ramp-up of daily activities schools, day care, commuting, shopping, dining, leisure activities and business, the immediate damage that has been inflicted on the economy and how it's going to impact the utilization of space. The health and safety of our employees, our tenants, our service providers and our visitors continues to be first and foremost on our minds. Almost 90 days ago, we published our Health Security Plan and our assets are all positioned to provide a safe environment for workers based on CDC and local government regulations. We have had hundreds of group and one-on-one conversations with our tenants regarding their plans to bring their workforces back to the office. Our first market to remove shelter-in-place requirements was Massachusetts in late May, and in early June, the city of Boston, and we are now in Phase III in Massachusetts. However, governmental leaders continue to encourage businesses…

Great. Thank you, Doug. Good morning. So I'm going to cover three things this morning: our second quarter performance, the credit write-offs that we recorded and some high-level perspective for the rest of 2020. Despite the pandemic, our core office portfolio that comprises 92% of our total second quarter revenue continues to perform well. As we expected and described on our last call, the weakness primarily showed up in our retail, parking and hotel performance. Our tenants in the retail industry continue to struggle with closed stores and reduced revenues. Many did not pay rent in the second quarter, though collections have improved, as Doug described in July, as stores have begun to reopen. We evaluate our tenants consistently. And this quarter, we recorded write-offs totaling $41 million at our share. This consisted of $15 million of accounts receivable and $26 million of noncash accrued rent. The vast majority of this relates to tenants in the soft goods retail and restaurant categories as well as entertainment industries that have been hit hard by the impacts of the pandemic. Going forward, we will record income from these tenants on a cash basis. The largest write-off is $14.3 million for Ann Taylor, who leases 336,000 square feet of office space for their headquarters in Times Square Tower in New York City. Times Square Tower is a building we hold in a joint venture, and our ownership interest is 55%. Ann Taylor also leases four retail stores, one in Times Square, one in Embarcadero Center and two at the Prudential Center. Ann's parent company, Ascena filed for bankruptcy last week. They've indicated a reorganization plan, primarily around the Ann Taylor and Lane Bryant brands. But it's not clear what their plans are for our stores or their headquarters space. They are currently obligated…

[Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Piper Sandler.

Good morning. Up there. So I guess, Mike, just the first question is, with regards to the write-offs that you guys took in the tenants that you mentioned, how many of the write-offs like how should we think about the write-offs versus tenants that are closed and like bankrupt where you have to like go and backfill the space? So you talked about Ann Taylor, you talked about this very small part of office and then you mentioned some tenants that refuse to leave their space. So as we think about you guys collecting cash rents or percent rents from tenants, the retail and restaurants, how many of that write-off bucket are still open and you expect them to slowly come back to business versus the space that's actually closed and now you guys have to go eventually recapture it and relet that?

Alex, this is Doug. Almost all of it is "open," and those tenants are just not paying. And as you're probably aware, we don't have much that we can do other than start the legal process with regards to that. But our numbers and everything that Mike and I just talked about assumes no revenue from any of those tenants in 2020. So as we relet it or as they come to the table and start to pay, there's upside, obviously, there. But we have no sense of how long it's going to take us to move through the process.

And Alex, there's only two tenants that are bankrupt, Ann Taylor, which I spoke of, and there's also 24 Hour Fitness. So we have a 24 Hour Fitness at 601 Lexington in New York City, and that's part of the write-off. It's a couple million dollars. They are going to vacate that space. And we have a unit also in Santa Monica, and we're not clear what they're going to do with that space.

Okay. And then the Under Armour space, that is still money good?

Under Armour is a tenant that's paying their current rent, and they're a company that raised a significant amount of capital in the last quarter. And they have a pretty significant revenue base. So we believe Under Armour is a viable, strong retailer.

Okay. And then the second question is on the investment side. You guys closed on Fourth and Harrison, you announced the El Segundo JV, and you did this amid COVID. So maybe you could just walk us through how your underwriting of those two projects may have changed given that you entered them versus what you previously would have considered given everything that's going on? And Doug, your comments on the pace of the office markets and sublease that's coming on?

Owen, do you want to start with that one?

Yes. Yes. So let me break those two apart, Alex. So Fourth and Harrison, this is a project we've been working on for many years. We have full entitlements for the first phase, which is 0.5 million feet. So we have all the Prop M. It's designed and before the pandemic occurred, we were going to proceed. So with the pandemic, we've put the project on pause to wait to see what market conditions are going to be. We had an option on the site. We think the value that we acquired the site for is attractive, whether it be a pandemic world or a nonpandemic world. And then on our additional investment in L.A., as you know, we've been talking a lot about trying to grow in LA, we've talked a lot about our perimeter, which included El Segundo. We have been looking at lots of deals there, and we've also had, frankly, a long-term conversation with Continental Development Corporation, who's our partner and the leading property company in the local market. And we were in discussions on this joint venture before the pandemic. And given our interest in going to El Segundo, given our relationship with Continental and given our confidence, as I described in my remarks of the return to the office business, we elected to proceed with that modest investment in the site on Rosecrans Avenue in El Segundo.

Yes. Yes. So let me break those two apart, Alex. So Fourth and Harrison, this is a project we've been working on for many years. We have full entitlements for the first phase, which is 0.5 million feet. So we have all the Prop M. It's designed and before the pandemic occurred, we were going to proceed. So with the pandemic, we've put the project on pause to wait to see what market conditions are going to be. We had an option on the site. We think the value that we acquired the site for is attractive, whether it be a pandemic world or a nonpandemic world. And then on our additional investment in L.A., as you know, we've been talking a lot about trying to grow in LA, we've talked a lot about our perimeter, which included El Segundo. We have been looking at lots of deals there, and we've also had, frankly, a long-term conversation with Continental Development Corporation, who's our partner and the leading property company in the local market. And we were in discussions on this joint venture before the pandemic. And given our interest in going to El Segundo, given our relationship with Continental and given our confidence, as I described in my remarks of the return to the office business, we elected to proceed with that modest investment in the site on Rosecrans Avenue in El Segundo.

Okay, thank you.

Thank you.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Thanks, good morning. I realize this is sort of a tough question for Mike or Doug. But as you sort of you guys took a lot of sort of pain here in the second quarter here. Just sort of trying to think through what else might be out there as you kind of move forward. I know you laid out a lot of things about hotel and parking. But are there things within kind of the office? And I realize retail is smaller, but are there other sort of leases that maybe paid, but you're worried about, they paid in Q2, but they're sort of on the fence? I mean how do we just sort of think about other bad things that may occur, realizing it's still pretty dicey out there? I mean just sort of how much got flushed through this quarter?

Look, Steve, I think our office portfolio is in great shape. It's well occupied. It's paying. It's strong companies. I mean you've seen the portfolio of tenants that we have. And the vast majority of those tenants are not their revenues have not been significantly impacted like the retail companies are. So the vast majority of this stuff is retail. We did complete a full scrub of our tenants. We were very thoughtful about recording charges where we thought it was appropriate based upon the credit nature of the tenants and their payment history in the last four months, I guess. And that included both our office tenants and our retail tenants. So that was everybody. There are some of these tenants that we entered into rent deferral deals with, where we think it's credit good. So we're straight-lining that rent deferral, and we expect to get that rent. And we've reviewed those credits, and we felt confident about that. There's others that we said we're not so confident. So we're going to record it on a cash basis. So I can't tell you if there's going to be additional future charges or not, we don't expect there to be future charges based upon our analysis and our view. But it's really not possible to kind of fully predict what the length of this pandemic is, what the impact on the economy is. And that may result in additional challenges for some of our tenants. But at this point, we feel we've done a really strong job of looking at our whole tenant base and being really thoughtful about what we took.

Okay. And just as a quick follow-up, the $17 million, I think, that you said was abated in Q2 that you kind of believe is money good. What is the rough time table to get that $17 million payback?

So it varies, obviously, by tenant. I'd say, the vast majority of these tenants, we're getting back within the next 24 months. So it's 2021 and '22 kind of payback. The other thing I would add is that we did extensions with many of these tenants, and we're going to probably get in addition to getting the payback, we're going to get probably 50%-plus more because we extended the leases by three months, by six months, by sometimes a year. So we took we did take advantage of the opportunity and try to improve the overall lease terms when we were facing the situation of helping out our clients that were having some cash flow difficulties.

Okay. And then I realize you guys had about $300 million of cash sitting in escrow, some based on the sales and I think the first quarter, some based on the sales in the second quarter. Just sort of what are the thoughts to be able to successfully 1031 that money in the required time frame? Or does that maybe require a special dividend of that money?

So I do not believe it will require a special dividend of that money. And the primary reason is that, obviously, our cash flows are lower because of the loss of all the revenues we've been talking about from the hotel and the retail and the parking. So that creates room in our current dividend. With regard to reinvestment of the Capital Gallery money, which is about $250 million of the $300 million, we've got to identify something in the next, I think, 20 days or something like that. And there's nothing that we are focused on right now. So I would consider it to be a relative low likelihood that we would find something for that at this point. So that would come out and just add to our liquidity. The rest of the money that is in restricted cash is basically security deposits and stuff like that for tenants. So that doesn't have anything to do with any of the 1031s. And the 1031 money from the deals in the first quarter have already been invested in Fourth and Harrison. So there's nothing left in restricted cash for that. I don't know, Doug, if you Doug and I don't want to respond on investments at all, but no. Okay.

Great, thank you.

Yeah.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Thanks for taking the questions. Maybe just first your comments broadly on WeWork and coworking and specifically to your exposure, kind of how do you view it today? Is there a need for any potential reserves or writedowns?

Owen, do you want to give...

Yes. Why don't I talk a little bit about the industry, which we have mentioned before? Look, I think, clearly, given the recession and given the pandemic, which is forcing spacing, that creates a challenging environment for the coworking model, which has generally been based on selling a product per seat as opposed to per square foot. So that being said, long term, we believe in the product, because we believe the customers will want it. We think there will be retail demand from individuals, particularly given this recession and the number of people that will be out of work. We see it in our own FLEX by BXP offering. We see the interest in small customers that are interested in getting space quickly. And increasingly, we see interest from enterprise customers who want some flexibility in the procurement of a small percentage of their space. So long term, we think the product is here to stay. And the question is, who is going to be providing that and who is going to get through this pandemic most successfully? And if you look at WeWork, specifically, we have an important relationship with them. They are backed by SoftBank. They have significant capital on their balance sheet. They have new leadership. And again, you never know exactly what's going to happen, but I think and they have 50% market share, and I think they have a great opportunity if they manage well through this pandemic to be successful over the long term.

And Vikram, thanks for your question. I just we spoke on the first quarter call about our coworking exposure in total, and there was an accrued rent balance associated with coworking tenants that was roughly $30 million. So we've mentioned that in the first quarter. That still exists. We did a full analysis of WeWork, and we're comfortable with their credit based on that analysis and the liquidity and the financial support that they have.

And as an industry, this is Doug speaking, we have five or six different operators. We're current on almost every one of them, which obviously is good news. And as Mike said, we spent a lot of time reviewing financial statements for all of these operators. And while we're not sure what their short-term revenue prospects are at the moment, we're reasonably comfortable that we're going to continue to get paid.

Okay. Great. And then just to maybe get a little bit more color, you talked about the impact from known move-outs in the back half of this year. But maybe just give us some color about move-outs over the next, call it, 12 or 18 months. Are there any known move-outs that you have or any larger spaces that you're focused on in terms of potential need to release? Number one. And then just secondly, from a top 10 perspective, could you clarify I think Starr Indemnity, I think, fell off of your top 20. Could you just clarify what happened there?

So Mike, I think, said that about 5.5% of our tenant square footage rolls over in 2021. And there are no significant tenants that are rolling out at that point. The largest one that I believe that's occurring over the next six months is a company called AECOM, that's moving out of about 250,000 square feet of space in Princeton, New Jersey, and we do not have a backfill for that. Again, that's obviously part of our numbers that we were describing in terms of our revenue for the remainder of the year. And we have some 50,000 or 60,000 square foot tenants that have a floor or two across the portfolio in Boston and across the portfolio in San Francisco that have expirations, and in many cases, we'll likely renew them. In some cases, they'll grow, in some cases, they'll shrink and in some cases, they'll not stay in the portfolio. But we're I'd say, in general, our ability to retain tenants picks up when economic conditions in the economy suffer because people are unsure of wanting to spend a lot of capital to relocate. And that obviously enures to the landlord. So typically, our recapture rate improves over time during those periods of time.

And with respect to Starr Indemnity, which is C.V. Starr, there continue to be a tenant at 399 Park, there's been no change in their lease. The only reason they moved off is that other tenants moved up. And that's primarily Microsoft. Because Microsoft took on, as I said, a portion of the space we leased to them in Reston, they took immediately because that space was available. So they moved up the list.

Great, thank you.

Your next question comes from the line of Jamie Feldman with Bank of America.

Great, thank you. So Owen, you had mentioned interest in Seattle and working with private equity partners on the investment front. Can you talk about both of those comments?

Yes. So we have been mentioning, I think, for the last year, as we think about our footprint and growth that Seattle would be a market that we would like to enter at some point provided we could find the right opportunity. A little bit like LA before Colorado Center. We wanted to go there. We were speaking with the market about that, and we waited for the right opportunity. So I would say the same thing about Seattle, and we are actively looking at things, but have chosen so far not to act on that. And then what Jamie, what was the second question?

You mentioned working through like with private equity partners and investing going forward. I just wanted to know what that might look like in...

Yes. So we as you know, we have done this in the past. We have significant joint ventures with Norges, with CPP, that we've done for past acquisitions and also past capital raising. We maintain a very active dialogue in the private equity market. As you know, the private equity market is larger than the public equity market for real estate. And we are working with these partners looking at acquisitions. We want to extend our capital further. Obviously, we're not going to be we want to maintain our current leverage levels, and we're not going to be issuing equity to raise capital. So we're basically raising equity to do some of these deals on a partial basis with private partners. And the other benefit that we get from that is it does add additional yield to our capital given the fees that are involved. So I think as we continue as we as I described, pivot to offense and start to look and are looking at opportunities during the pandemic, things that are value-added existing buildings, I think it's likely we'll be doing those with private equity partners.

Okay. And then in Seattle, was that life science or office that you'd be looking at?

Both. Both.

Okay. And then you had also mentioned, as you're talking to your tenants, maybe there's a little bit more of a shift from work from home, but or to work from home, but people generally still think office is obviously very important. Has there been any talk around how they would redesign spaces? Would people still have dedicated offices? Or would there be a little bit more sharing? I'm just curious what the latest thought processes on that?

Yes. Look, right now, I think our customers are dealing with the pandemic with their existing footprints. So they're not spending significant dollars rebuilding their spaces. They're looking at what occupancy they want to accomplish in the space. Some of that is dictated by government regulation. And simply stated, I think, in open areas, they're taking out work stations, they're putting in plexiglass dividers, looking at work streams, flow streams within the space, hands-free doors whenever possible, things like that, that can be done quickly. We haven't seen yet a lot of or much of companies doing complete rebuilds in a post-COVID environment. But I do think given even though I think the pressures of the pandemic will subside over time, I do think health security is going to be increasingly on office workers' minds. And our strong expectation is that densities as a result will decrease in build-outs that we do with tenants going forward. Doug, I don't know if you've got something you'd like to add to that?

Yes. What I would say is that to date, we've seen nobody looking to pull a building permit to do anything in their offices. And we have a number of tenants who are obviously looking at the buildings under construction, and we have seen nothing change in the way they're configuring their space. Look, I think that they're all saying, "We need to understand how long this is going to last? What the expectations are going to be from a governmental perspective with regards to density going forward? And what are the patterns of our workers going to be going forward? And then we can start thinking about how we might reposition our TIs." But the base building infrastructure and the general layout of the floors are not going to be significantly impacted where the buildings have any inability to accommodate whatever the changes might be that they choose to make. And it may very well be that it's the utilization of furniture that really solves the problems for them in terms of how they change the configuration because, obviously, most of the deals that we are doing now are with technology companies, and those technology companies generally don't have a lot of, at the moment, perimeter offices, but they do have lots of "hollow rooms" and conference rooms and then other collaborative areas. And again, they use furniture, in many cases, to sort of figure out how to divide and utilize those spaces.

Has the attitude changed on sharing space, though, with COVID? And like is there a movement toward less dedicated space per person or more dedicated space per person?

Yes. I think definitely, right now, employees that are back at work do not want to work close to one another. There's no question about that. So clearly, in open spaces, that's where a lot of the spacing has occurred so that six feet at a minimum distancing is maintained. So that's why when we talk about the various impacts to office demand going forward, this reversal of densification, I do think is going to be important because even in a world where COVID-19 is much less prevalent than it is today, I do think health security is going to be very much on the minds of it's going to be on our minds, and it's going to be on the minds of our customers. And I do think dense layouts are going to be much less well received by employees for health safety reason.

Okay. And then just a quick follow-up for Mike. So just to boil it all down, like as a percentage of total NOI, how much did you actually impair this quarter? And then how do you feel about dividend coverage going forward based on this new lower level?

Well, I think the biggest thing that affected NOI was the $15 million of accounts receivable charge-off, right, from a charge perspective because that was expected to be paid, right? Whereas the accrued rent would leak in over a long period of time. So I mean, some small percentage of that, I suppose, would have been allocated to 2020. But most of it would be spread through the life of these leases. So it's really the $15 million from the retail side that would be ongoing until these tenants either make it, then they start paying us or they don't make it, and we have to replace them.

And then dividend coverage?

As I kind of mentioned that in a previous question, I mean, I think that this provides this actually provides an opportunity for us to sell some assets in order to and enable us to have gains, which would supplement the kind of lower cash income and continue to be able to maintain our dividend where it is. At this point, we have no plans to change our dividend. In 2020, we've got some significant gains that we expect to stay gains. So at this point, I don't anticipate any change to our dividend. But obviously, that's a decision that's up to our Board that we talk about on a quarterly basis based upon outlook and what's going on in the world. So but right now, I don't think there's any impact. Operator?

All right, thank you.

Yes. Your next question comes from the line of Manny Korchman with Citi.

Hey, it's Michael Bilerman here with Manny. Owen, at the front of the call, you talked about those four independent factors that are going to drive effective office demand and rental rates and ultimately values. And I wanted to sort of dig in on two of them. The first is being the part-time work from home versus some corporations that have made declarations of full remote, which I would agree with you, seem a lot more difficult to get all those items that you talked about in a remote environment. But even on a part-time basis, I would imagine there's some headwind from just lower square footage as companies plan for that. As you're going out and seeking to make investments, what are you baking in from that headwind? And how does that compare to the densification trend that you've had to deal with over the last more than the last decade? Have you put some numbers around it to help sort of frame what a 2- or 3- or 4-day work week different hours may mean for the amount of square footage, 100,000, 200,000 or 300,000, 400,000 square foot tenant would need?

Yes. So Michael, so the just to start with the part-time aspect and what impact that could have on space demand, when you say that's going to be a headwind to space demand, which it could be, you also are assuming that the employees are going to: one, schedule when they're going to be out of the office; and two, be prepared to be in a flexible workspace. Otherwise, there's no savings. And I'm not suggesting that all our customers or some of our customers won't do that, they probably will. But that is an additional challenge. I do think a lot of the types of workers that we have in our buildings when they think about work from home, I think they feel that they want to do that on their schedule and when they come to the office that they have a workstation. And if that's your configuration, there's no savings on space. Now to go to the second part of your question, which is to how to quantify all this? Look, I think it's difficult. I mean that's why I mentioned that there are these four factors out there. I actually think the most important factor right now in the short term is the recession. That's what's driving most of the challenges that we're seeing in the office market conditions, it's the recessionary effects. So any acquisition that we are going to be and we are that we are currently or will look at, we're going to be very conservative on where market rents are and what their growth prospects are. And it's not just driven by this balance that you suggest between work from home and densification, it's driven by the whole menu that I described. And most importantly, I think, recessionary effects in the short term.

Right. And this is a good way to sort of break it up between the different factors and drivers. The second one, you talked about the location aspect. And clearly, there's been a big boon in suburban home buying. And typically, as I think about office markets, you are going for talent, and they're also driven by where decision-makers want to live, right? So you think about the West LA market, why is it so hot while everyone lives there that wants to have a short commute to their office. So I guess, why shouldn't the market be more concerned with people very wealthy people moving out of New York down to Florida and then a younger generation that's making a decision to flee urban markets to go suburban? Won't that ultimately lead to businesses than going to chase those same employees or the decision-makers saying, "I want to have all my people here, right?" You look at barrister moving down to Florida and say, "I'm going to create my office down in Florida versus having a large-scale presence in Connecticut?"

Yes. Michael, I think it's a challenging question just to answer definitively because every business has different characteristics, different ownership, different dynamics that are going on. I think the evidence what we can go on is the evidence that we see. And the evidence that we see, particularly, say, for example, here in the New York area, is the commutable residential locations are have very strong market conditions because with COVID-19 being an accelerant, individuals, young families who were maybe considering leaving the city, they're saying, "Okay, this is now maybe the time to do it." But I do think a lot of these locations are commutable and I think that we're not seeing a lot of companies saying, "We're going to move to Westchester, to New Jersey to chase this talent pool." I think the talent pool is looking at locations where they're going to be able to commute back into New York and go to work. So that's what we see right now.

Okay, that's helpful color. Thank you.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Hi, everyone. Thank you. How is the glut of sublease space being offered in San Fran currently affecting market dynamics from your on the ground vantage? And I guess second to that is, is San Francisco is still the strongest market nationally?

So this is Doug. So the answer is, it's not affecting the market yet because there's nobody out in the market looking for space. It will affect the market and rents will be lower. The fact is that San Francisco is not the strongest market that we have in our portfolio right now. The greater Boston market is a stronger relative market than San Francisco given what has happened from an employment perspective in San Francisco relative to the Massachusetts market, obviously, given the extensive life science community that is here and the ancillary businesses that surround it. There's just there's more stability right now in the greater Boston market than there is in San Francisco.

Okay, great. And what regions are being considered for expansion? Or when you do finally go on offense, you did mention LA and Seattle. Are there any up and coming secondary markets or which other metros look interesting to the team several quarters down the road from today's?

Our footprint today, we are very significantly sized in four major urban areas in the U.S., and we have a growing deployment in LA, and we just took another step, albeit modest step, this quarter to increase the scale of our LA operations. I mentioned earlier in my remarks, and I answered one of the other questions about an ambition for Seattle. And you should consider that to be our footprint. We are not looking at other cities at this time. We are seeing plenty of and I think we'll see, over time, significant opportunities, not only in the two markets where we're trying to grow, LA and Seattle, but also in the four markets where we currently exist, given our relationships and access to deal flow and all those types of things. I would also mention in terms of investments going forward. We also, in addition to investing in the existing development pipeline we have, in all of our four major markets, we also have a significant land portfolio that we control and are always entitling, and that will be part of our investment growth once the pandemic is over as well. Operator?

And your next question comes from the line of Nick Yulico.

Thank you. I just wanted to ask about the rent abatements and deferrals. You broke out that number, which was helpful, just over $16 million impact in the quarter. A couple of questions on that. First, how much of that was related to retail versus office? And then is it possible to get the deferral piece? And then particularly, I'm just I'm interested in how also you came up with the decision to include that deferral as a negative to your same store, which seems conservative versus how other companies are reporting it since presumably, you do expect to get some of that money back?

So this is Mike. So the to answer your last question first, I guess, it's really an accounting judgment. And the NAREIT worked with FASB to give people kind of a shortcut to be able to put deferrals up on accounts receivable instead of straight-lining them like we would in normal lease modification, provided that deferral did not result in a change a material change in the overall amount of rent that was being paid by that tenant. So basically, if you're just saying somebody, you don't have to pay for the next three months, but you pay double rent for the three months after that, there's no change in the lease. And companies could do that and just put the three months on accounts receivable, the cash income, and then when it gets paid, relieve the receivable. The vast majority of the stuff that we did, we had lease extensions that we wanted to get out of these things. So we made the election that we're just going to treat these all like lease modifications. And so we basically straight-lined every single one of them. We took the reduction in our cash same-store for the deferral period, and we're going to have higher cash same-store later because of these deals. That's how we decided to do it. We thought that was the most appropriate way. With respect to the breakdown, I mean, there was a few office tenants. The vast majority of number of these tenants were retail tenants. And most of it was deferral. Only 20% or 25% of this was kind of an abatement in total, and the majority of it is deferral. There is some additional deferral that will come later in the year because some of these were longer than a three deferral. So right now, I would expect another next quarter to have a similar it's a little bit less, but somewhat similar deferral that we have this quarter. And we it's possible we could do additional activity. We talked about the restaurants and doing percentage rent with those tenants for a further period of time. So that's kind of where we are with that. And again, most of this gets paid back over the next couple of years. And we did extensions with most of these tenants. So the overall rent that we're going to be getting over the terms of these leases is significantly higher than just getting the rent deferral back. And that was a big part of what we wanted to do to, again, just secure the longer-term lease, so we don't have to deal with downtime or transaction costs in the future.

Okay. That's helpful. Second question is just going back to what, I guess, feels like a bit of a stalemate right now in the office rental market. I think, Doug and Owen, you talked about not really seeing much in terms of price discovery on new leases and because tenants are really not looking to do a lot of leasing unless there's near-term expirations. When does that end? And I guess I'm wondering, at the same time, are you not yet adjusting asking rates, adjusting concession terms? Are competitors also not doing that and yet because there's no need to? And if you have any gut feel for at what point you start to see a return to new leasing? Is it in the fall when more employees are back in the office? Is it a 2021 issue? Recognize it's hard to predict, but any color that would be appreciated.

Let me start and then Owen can add on. I would say that the health solution to what is going on with the virus is going to be the most critical component to when people start to get back to "ordinary transactional activity." I mean there's obviously lots of leases that expire every year. And right now, no one is doing anything. And as people become more confident in the health solution, they will be in a position where they can start to make decisions and actually do the kinds of things that they would normally do, which is actually go out into our spaces, higher architects to do space planning, start to gain proposals, and then ultimately, you'll start to see transaction volume occurring. My own view is that depending upon the area, that will happen in the latter parts of 2020 at the very earliest. So I don't see the third quarter being terribly active from a transactional perspective. And obviously, transactions take time to germinate and then get consummated. So there's just a cycle associated with that that's going to be important to just actually have to occur from a timing perspective. The new development economics, I think, will potentially see some additive transactions because those are much longer lead term items. And so if you're looking for a new building or a new facility or a growth alternative and you're looking at getting two or three years in front of that, those transactions, I think, will have less impact from an economic perspective, again, because people are going to have to put capital to work as opposed to existing assets where you've got to take what the market is going to give you. Owen?

Yes. No, Doug, I think you covered it. I would just add, again, it's to me, it's all about the virus because it's and I think businesses, business leaders are going to be reticent to make financial commitments until they have some feel for the course of the virus. We've already had, I guess, a first spike in certain areas of the country, but certainly a second spike across the whole U.S. The vaccine looks like there's good progress that's being made, but there's nothing definitive yet. And so I just don't see activity returning until there's a business leader has some better definition around when the recovery can happen more in earnest.

And so right now, you or your competitors, you're not really finding need to adjust asking rents or adjust concessions being offered?

There are relatively few active requirements of tenants that are looking for new space that are different than, "Hey, can you give us a six month extension? Can you give us a one year extension? Can we extend our lease by 15 months?" I mean that's what we're dealing with, not with tenant that's out in the market, wants to move, is thinking about reconfiguring their space and they are soliciting proposals for a relocation, right? I mean it's just those are few and far between. And so without having activity, it's hard to reset pricing because there's no pricing to reset, too.

Okay, appreciate it. Thanks everyone.

Your next question comes from the line of Frank Lee with BMO.

Hi, Owen, You mentioned census is at 8% in your office buildings. I just want to clarify if this was just suburban assets or across your portfolio? And where do you think this could potentially go in September and then heading into 2021?

I'm sorry...

Yes. So we have pretty good data for all of our CBD buildings in Boston, all of our CBD buildings in New York City and a portion of our CB deal billings in San Francisco. And on any given day, those buildings are running under 10%. And in many days, they're running 6% to 8%. And similarly with the suburban locations. As I said to you before, I think that the business leaders in our portfolio are heating the and respecting the desire of the governmental authorities to ask people to work from home wherever possible. And that is going to continue until there is a more sustainable reduction in the spread rate across the economy. And as we look into the fall, I don't think September is going to bring a meaningful change. Could the number go up from 8% to 10% at 10% to 15%? Sure. But it's not going to be at a level that is going to make us feel like that everyone is back to work until, as Owen said, the virus has shown some degree of maintenance from a vaccine and a therapeutics perspective.

Yes. Be aware, if you go around our portfolio, there's regulation on this as well. Boston and New York are at 50%, D.C. area is at 25% and California and New Jersey are closed. So there's also those caps as well. I think you'll have a tick up. My guess is you'll have a little bit of a tick up after the summer after Labor Day. I do hear that. But I agree with Doug. I don't think it's going to go back to "anything close to normal," but I think it will get above certainly where we are right now.

Okay. And then going back to the one million square feet of expected known move outs, do you have a sense how this figure has changed over the past couple of months?

Yes, the so the number was 1.5 million square feet, and there's about 500,000 square feet of space that we believe is going to stay. So the number has declined. And the ones that we know about are have been known for a long time, meaning a number of months, if not years.

Okay, thank you.

Your next question comes from the line of Daniel Ismail with Green Street Advisor.

Great, thank you.Owen, you referenced this briefly in your opening remarks, but given where the cost of debt is and with hedging costs moving lower, could we see cap rates for stabilized CBD office properties move lower once transactions resume?

I let's when you say lower, I'm going to assume you're talking about prepandemic levels. I think that you have to look to answer the question, I think you have to think about the characteristics of the building. So I think if you've got a building in an innovation market that has very little lease rollover to a credit to A or several credit tenants, I think those kinds of buildings' cap rates will definitely hold and they could go down. I think buildings that have more lease rollover, that's where cap rates are probably not going to go down and probably are going to go up because there's more uncertainty about dealing with that rollover. What is the market rent? What's if there's a move out, what's the time for the releasing of that space given some of the market uncertainties that we've described on this call? So I think the answer to your question lies in what's the characteristics of the building.

And then as you think about expanding more toward the life science sector, are there any targets in mind for what that could reach as a proportion of your total portfolio? And what are the pros and cons you see into expanding more into life science versus traditional office?

Yes. Well, the our strategy is always to be in the best cities, have the best locations and try to have the best properties and to serve the customers that are the most active at the time that want to be in those locations and in those buildings. And today, as we've been talking about, life science as well as tech is a very strong has a very strong demands for new office space. So and the good news is, as I described in my remarks, we already have a foothold in this business, given the buildings that we have, the biopharma tenants that we have in the development portfolio that we have that we think we can execute upon in the years ahead. I gave the figure of five million square feet of potential development. Again, that's over a longer period of time. The company today is over 50 million square feet, if that gives you some magnitude toward the question that you asked.

And finally, just a housekeeping question. Going back to the top tenant's list, it looks like Leidos also fell off the top 20 tenants. I'm just curious if there's anything happening with respect to abatements or deferrals that are impacting that top 20 tenant list.

No. Leidos was they basically were in two buildings at once because they moved into their new building right at the end of the quarter, and they were still in their old building, and now they're out of the old building and they're only in the new building. That's in Reston Town Center, where we relocated them and expanded them. So that was it had all to do about that transition and nothing to do with any changes in lease term.

Okay, great, thank you everyone

Your next question comes from the line of Blaine Heck with Wells Fargo.

Great, thanks. Just a quick one on Fourth and Harrison. You talked about that project being on pause for now. I know it's a pretty difficult environment now, and you're going to be dealing with pressure on rents from the increase in sublease space in that market. But I guess, ultimately, what are the major metrics, signals or hurdles that you guys are looking for to maybe get more confident in your ability to start that project and ultimately achieve the returns that you guys deem acceptable?

Well, I think the key will be the tenant activity. I mean we're actively attempting to speak with customers to prelease all or a portion of that building now. So those I would not say that describe those conversations, it's robust, given the environment that we've described on this call. But it will be driven by the demand that we see in the marketplace. And then, of course, given the Doug might want to talk about this given recessionary effects on construction costs that could be a benefit to our economics of the project.

Yes. Just on that, can you quantify kind of what you're seeing as far as the movement in construction costs? How much it's come down, if so, relative to prepandemic levels?

We're we can't we have not bid anything on a base building basis of significance in the last, call it, three months. On the larger capex projects that we're doing across the company, we're seeing reductions of a minimum of 5% and sometimes more. As the pipeline for future business starts to get shallower for the construction industry, we believe that there will be competitive pressures, not unlike what we're going to see with regards to rental rates. That are going to drive the contractors and the subcontractors to be more hungry for business and, therefore, lower their margins and put us in a position where we're seeing reductions in the rate of escalations as opposed to increases on an annual basis. So we won't know for until we actually did something. And we have right now, nothing is sort of in the pipeline to be bid.

Thanks Guys.

Your next question comes from the line of Tayo Okusanya with Mizuho.

Yes, good morning. I hopefully, I didn't miss it, but was there any comments on coworking in general and then WeWork around dot-com region?

We did get asked that earlier. I'll summarize again quickly. We acknowledge that the current environment is a challenge for coworking, given that we have a recession and given that physical separation requirements are difficult for a business that you're trying to sell by the seat versus the square foot. That being said, we have confidence in the coworking model over the long-term because we think it will continue to be attractive to various customer bases, including individuals, small business and larger enterprises. The existing coworking operators are clearly going through a challenging period given the pandemic. But as we specifically look to WeWork, they have a 50% market share. They have several billion dollars on their balance sheet, they have new leadership, and they have the banking of SoftBank. We have a strong relationship with them, and we think they have a great chance of being successful over the long-term in that business.

So at this point, they're not giving back space or do you mean anything of that nature?

No.

Okay, great. Thank you.

And there are no further questions at this time. I would now like to turn it over to the speakers for final remarks.

Okay. I think that concludes all of our remarks. I'd like to thank everyone for their attention this afternoon. Thank you.

This concludes today's conference call. You may now disconnect.