Good morning, and welcome to Boston Properties' Fourth Quarter and 2020 Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At this time, I would like to turn the conference over to Ms. Sara Buda, VP of Investor Relations for Boston Properties. Please go ahead.

Great. Thank you and good morning, everybody, and welcome to Boston Properties' fourth 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 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 Boston Properties 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 the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statements. I'd 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 would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sara, and good morning, everyone. Today, I'm going to depart from my typical organizational remarks and instead summarize all the reasons why we are confident in Boston Properties' future prospects and enthusiastic about the Company's growth potential at this unique point in time. As part of my comments, I will address accomplishments and challenges of the past year, current capital and property markets conditions, as well as Boston Properties' capital allocation decisions and strategy. So why BXP and why now? I will begin with three points on Boston Properties' potential for income growth, both in the short and long-term from where we closed out 2020. First, our variable income streams will recover. Over the next 24 months, Boston Properties will likely enjoy one of its most significant and predictable improvements in economic conditions and leasing activity as we witness the end of the COVID-19 pandemic. Two vaccines with high efficacy rates have been FDA-approved, 5.8% of Americans have already received at least one dose of the vaccine, the more easily refrigerated Johnson & Johnson vaccine is near approval, and health authorities are advising that anyone who wants to be vaccinated will be accommodated by this summer. The Biden administration is aggressively pursuing a more rapid vaccine roll out as well as economic stimulus to help bridge the economic damage caused by the pandemic. Given the herd immunity created by a high percentage of the population either recovered from infection and/or vaccinated, infections will likely drop precipitously in the middle of the year. We are all anxious to come out of isolation and return to our normal lives. So as the infection rate drops, the economy will reopen and individuals will return to offices, restaurants, shops, theaters, and travel. Approximately $97 million of Boston Properties’ FFO decrease in 2020…

Thanks Owen. I thought about just sort of stopping right there and starting the questions, but I guess I'll make some remarks and give some time for Mike as well. Good morning, everybody. As we sit here in January of 2021, we are shifting from COVID, COVID, COVID, as the obstacle to a pickup in activity to vaccine, vaccine, vaccine, as a signal to rejuvenate tenant conversations about bringing staff back to the office and starting the leasing transaction processes. There is no question that the rapid increase in COVID cases over the last six weeks of 2020 and the beginning of 2021 suppressed leasing tours and discussions during that period of time. But in the last two weeks, two large Boston companies have announced their expected return to work dates. We signed an LOI for a 70,000 square feet tenant that's going to need space in December 2021, and just yesterday, Amazon announced in Boston that they're committing to another 630,000 square feet to be built office building and bringing 3,000 additional jobs to the Boston CBD. So while the first half of 2021 is expected to be quiet, we are cautiously optimistic that we've been through the worst of the pandemic, and that the latter part of 2021 will have a discernible pickup in leasing transaction volume, parking revenue, and retail sales. The year-end market leasing reports that are published by the commercial brokerage organizations held few surprises as you probably heard through many of the analysts' calls. Leasing volumes were way off their historical pace and with the significant sublet space added to the market, we saw negative absorption and increased availability everywhere. It's important to remember that there are two types of sublet space. First, space that comes from users that have had changes in their…

Excellent. Thanks, Doug. Good morning. So I'm going to cover the details of our earnings for the fourth quarter. I'll also explain our guidance for the first quarter that we provided and some insight into our expectations for the full year 2021. We've reinstated quarterly FFO guidance, which we hope will be helpful and serve as an indicator of our increased confidence in the operating environment. Our office tenant collections remain strong and we believe the write-offs are largely behind us. We also continue to execute on new and renewal office lease requirements as evidenced by the 1.2 million square feet of leasing in the fourth quarter and the 3.7 million square feet of leasing in 2020 overall despite the pandemic related shutdowns. We're encouraged by the roll out of the vaccine and are confident we will see a return of workers to the office in mass. But there remains uncertainty with respect to timing. We anticipate our ancillary revenues such as parking and retail will continue to be weak until the population increases. Once we have better visibility into the timing, we expect to restore full-year guidance as well. Our fourth quarter results contained two charges that I would like to explain. The first is a $60 million non-cash impairment of our equity investment in Dock 72, our 670,000 square feet development we put into service in the Brooklyn Navy Yard. This investment is held in an unconsolidated joint venture where we own 50%. Because the investment is unconsolidated, GAAP requires a mark-to-current fair value. Also, while the $0.35 per share charge is a deduction from net income, it is added back to arrive at FFO. So it has no impact on our reported FFO pursuant to NAREIT's definition. Dock 72 is only 33% leased as Doug said, and…

[Operator Instructions] Your first question comes from the line of Nick Yulico with Scotiabank.

So I guess in terms of some of the pieces that you gave on 2021, it's helpful to think about. I guess maybe starting first on the point about occupancy being year-end flat to down 100 basis points, can you just maybe explain what that assumes in terms of actually getting retention rate on renewals versus some new leasing? Since I know you also said that you have already this embedded occupancy gain of, I think 130 basis points, just trying to kind of square away how we should think about how you then get to a flat or down 100 basis point number by the end of the year?

So, Nick, this is Doug. It's not as precise as you're going to want to hear, but our method of coming up with that number is to understand the amount of space that we have rolling over. And while we have a probability on renewals, the real variability is on how much of the vacant space that we currently have is going to: A, be leased; and B, be revenue-producing, because it has to be revenue-producing, meaning we have to have delivered it in “as ready space” or in second-generation and not demolished [ph]. And so that's what's really driving the number to sort of flat-to-negative because we just don't know what we're going to be asked to do relative to the delivery conditions of that space and when revenue is going to start. Again, we sit here today with 134 basis points of lease space that's not revenue recognizing right now, and we just don't know where we're going to be as we get to the end of the year. And honestly, we expect our transaction volume is going to pick up as the year goes on. It's going to be slow in the first half of the year and our expectation is if the vaccine rollout goes as we believe it will, there will be a significant pickup in that activity once people are back in school from a population perspective and people are back in their desks and people are feeling very confident about their business prospects. And so, the third and fourth quarters are going to be back weighted, which again impacts that revenue number.

Okay. That's helpful. Thanks, Doug. I guess just one other question, twofold on 2021. And one, a decision not to provide guidance, maybe just hearing a little bit more about for the full year, why you thought it made sense to not provide guidance since you did, I think, you gave a lot of components that help us think about a potential range. And then I guess in terms of when you're talking about the 652 days, Mike, and then you talked about some uncertainty on variable income streams and same-property leasing, I guess since you did give a year-end sort of occupancy range, I guess I'm trying to just think about the same-property leasing and whether that ends up being a negative adjustment to that base on FFO that you talked about based on your year-end occupancy number?

So, I'll try to describe it a little bit more, and look we're trying to provide as much assistance as we can, but there are some variable pieces that are pretty big that would require a wide range, I would say. On the same store, every 50 basis points of occupancy based upon our current kind of rental rates is about $15 million. So that's $0.09 a share is every 50 basis points of occupancy. The variable income streams that I talked about could add $30 million a quarter. So we just don't know when that's going to come in. I think that the hotel portion of that, which is minor is only $5 million a quarter. We think it's going to take longer, but the parking and the retail components of that could snap back more quickly. It could be third quarter, it could be fourth quarter, and it's just really hard for us to say when that's going to happen, so providing a meaningful guidance range to you all is just difficult at this time, so we've chosen not to do that. But I think I've given you a sense just on these comments of what our expectation is. If our occupancy is going to go down - then after you pull out the charges we incurred in 2020 from the same-store and you just think about run rate, if our occupancy goes down by 50 basis points on average, I would expect our same-store to be down slightly. We look at these - our lease-up on a lease by lease basis, so we've looked at all of our units. Our renewal retention has gone up and you've seen it quarter-over-quarter during the pandemic, it was I think 56% 57%. This quarter, it was pretty good. So, we've done that analysis to come up with kind of the occupancy views that we have based upon the activity that we're seeing today in the portfolio. Hopefully, that's helpful.

Let me just say it in a slightly different way. We are really good at understanding what's going to happen in the portfolio in the next 90 days with regards to the variable income. We're really not good at knowing what's going to happen three and six months from now. We hope that when we get to our next conversation with you, which is in early May or late April, we're going to be in a better position to know how things are going across the country from a variable perspective, but we may not know. But I think we don't have the certainty associated with it and we just don't feel -- we can pontificate about the recovery of the base economy in terms of how people are going to act, and so that's why we're sticking with this quarter-by-quarter methodology right now.

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

A big bright spot in leasing with demand being pretty firm for life science and biotech companies was certainly welcome. But it seems that C-suite decision making in FIRE and maybe to a lesser extent TAMI tenants is a bit more hesitant to a muted with commentary often including more work from home flexibility longer term. And obviously, people talk about the need potentially for less office space. What are you guys seeing in the field and when do you anticipate fire and TAMI tenants to reengage in a meaningful way? Will it be during 2021 or potentially pushed out a bit?

Owen, you want to be on the soapbox first?

Sure. There are few things there to unpack. Look, I think that you're correct. The life science demand is strong. Some of the other sectors are not. I think the reason for that is most importantly, we're in a recession and in all recessions, leasing activity slows down, businesses have more uncertain outcomes and CEOs are less likely to make major financial commitments, which are leases. So this is no different from prior recessions. I think office lags a bit. So I think you're going to - we're probably not going to get more stronger leasing activity until later in the year when the virus dissipates, people come back to the office and the economy is clearly in improvement. As I said in my remarks, we acknowledge the impact of work-from-home and do believe that workers in America and possibly around the world, will want to work from home on a part-time basis more frequently. So we acknowledge that impact, but we also see with our - and we also see with CEOs I think the importance that they see in in-person work and their strong interest in getting their employees back to the office. So then the issue is, okay, what's the impact of the additional part-time work on office demand. And again, to save space by having - with people working at home on a part-time basis, you really need to do two things. You need to schedule when that time out of the office is because everybody can't be out of the office on Monday or Friday. And two, you have to go to flexible work stations and move people around. And again, if you're looking at employee preferences, one of them is, they want to work from home more and as I said in my remarks, 19% of the people surveyed in the Gensler survey said they wanted a fix workstations. So which employee preference will be accommodated. So again, we acknowledge there is an impact from work-from-home, but we think it's overblown for those reasons.

Got it. No. Thank you. Appreciate. Appreciate the color. But let's just stick on that employee survey that you guys mentioned in the remarks. I mean, I'd say to play devil's advocate just because of worker wants an office or a dedicated workspace, does not mean that they will be granted that, especially if they prefer or demand a hybrid model. So hot desking seems to us a potential solution especially in an A, B or a week on, week off model, that allows deep cleaning over the weekend. So I guess like what data from business leader conversations lead you to believe that hot desking is ultimately unlikely? Thank you, guys.

Yes. Look, I think you have to say - I mean, look, we all as employers want to accommodate our talented workforces, and that survey expressed employee preference. So I think business leaders across the country are going to have to sort out which employee preferences they want to try to accommodate. I talked about the fixed workstation. Working from home more is also an employee preference. I do think strongly in talking with other business leaders there is a strong interest in having employees return to the office because of all of the diminution that's going on in terms of culture, competitiveness, creativity, onboarding employees. So again I think this is a question that business leaders are going to have to sort out, which employee preferences are they going to try to accommodate.

Your next question comes from the line of Anthony Paolone with JPMorgan.

Thank you, Doug. You mentioned it's hard to know where rents are going to ultimately shake out, but you did do a lot of leasing in the quarter, and it sounds like you've got a pipeline. Where would you peg kind of the conversations around all-in economics now versus pre-COVID?

I think it depends. Anthony, it depends on the market. And I mean I will tell you that we are getting higher rents in our life science oriented in our suburban portfolio in Boston right now than we were pre-COVID. And in a market like San Francisco, all we've done is renewals and all those renewals have been well in excess of what the current tenants are paying and it's unclear if rents have really dropped by much. But I can tell you that in my heart of hearts, I do believe that we're going to see some softness in the markets that we're in. So again, I wish I could give you a firm answer, but I just can't. Now, if you ask 100 people right now based upon the activity that's occurred in these cities, are rents up or down by more or less 10%, I would say, they would tell you that rents are down by less than 10%, but again it's a net effective calculation, not a base rate versus a face rate previously.

I mean given the rollover in 2021, I think you have a decent amount of Boston. Is it just do you anticipate that you'll likely have positive spreads across the portfolio this year when it's all said and done?

The answer is, I think the answer will be, yes, I mean that's why I gave all that data on all the leases that we've done recently. Again that's about what the rent was versus what the rent will be on a contractual basis. Not about would the rents have been higher, had we done the deal six months ago? So I mean that's an affirmative, yes.

And then just a question on the capital allocation side. Just curious how do you think about or how do you weigh kind of the JV route as an acquisition vehicle versus the complexity it adds to the Company overall versus say just selling assets to raise capital? And then in terms of target markets, is Seattle the only target that you're not in or are there any others out there?

So I'll touch on that. We do have significant capital, but we also have significant ambition in terms of growing the Company and making new investments that makes sense for shareholders. So we do think it makes sense to extend the equity capital we have with partners. We have a rich tradition of doing this in the Company. We have a reasonably significant portfolio that's already partnered with global leading real estate investors like Norges and CPP, and we think extending that type of business Makes a lot of sense. Selling assets is not an efficient way for us to raise capital. Most, if not all of our major assets, have a significant tax gain, which requires a cash or it requires a special dividend. And therefore, the retention of capital is much lower. So for all those reasons, we think the joint ventures makes sense. And the other thing I would say on the JVs is, we are providing property services to those joint ventures. So we do enhance our yields as a result of providing those services to the joint venture partners.

Thanks. And then the Seattle piece of it?

Sorry. So yes, I would say in terms of new markets where we currently are not in operation, Seattle is the only market that we are actively looking at investments right now.

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

Mike in terms of the co-working exposure, can you just remind everyone where you're concentrated geographically from a co-working perspective? And is it the lockdowns in those markets that are causing you to sort of take down those accruals and pause on that income stream?

So this is Doug, Manny. Let me, let me try and answer that question. So we've basically been approached by every operator in our portfolio regardless of the market about relief and we saw Regus this last quarter all over the country put units into bankruptcy. So we're now 11 months into this pandemic and it's pretty clear that the flexible space operators' customers, obviously, many of which had short-term leases and many of those leases are probably expired they've been very slow to come back to work. But it certainly not dissimilar from the census we've seen. In our census as we said before is somewhere in the high single digits to the low-double digits, right. So this industry is simply just facing revenue challenges and we decided that given the credit deterioration we should be recognizing rent on a cash basis. So that was our, that was the reason we do what we did when we did it. And with regard to our own portfolio, we have I think 13 units across the country, three in California, the rest in other portfolio - in Washington DC and in Boston, nothing in New York, we have one in New Jersey. And in total, it's about $50 million. And we've actually reduced our exposure by about 100,000 square feet over the last year with two leases that have expired. So we don't have any specific concerns about any particular unit. We're current on everything right now, but we just looked at the world and said, these guys are going to have a really rough time and we think based upon the credit deterioration, this is the time to do what we did.

Thanks for that. And then, as you are going through discussions with some of the longer-term new leases, have you seen them either thinking about are actually changing their physical plan, more space, less space, that hoteling concept we've discussed on this call is sort of just more topical trends, but as they build out their space with 10 or 15-year leases, how are they building that out today?

So we have had this conversation in past calls. And I would wish I could tell you that there has been a sudden change in the sort of view that the tenants and their architects have taken, but I can tell you that very few tenants are really looking at transformational design changes in their spaces across all industry types. Now, that doesn't mean anecdotally that you won't find a customer that says, you know what, we are going to try and do this work-from-home workforce strategy, but we want all of our people to be able to come to the office and therefore, we're going to need different types of larger meeting rooms and different types of breakout areas and far less, individual spaces. There are people talking about that, but it's the exception, not the rule to date. And for the most part in all of the build-outs, we are seeing in our portfolio right now, it's business as usual pre-pandemic. And again the tenants that are in place with longer-term leases have yet to do anything with their spaces relative to making a change in the way it's currently configured because they have a unique way of looking at how they're going to come out of the pandemic relative to their utilization of space. I'm a little surprised, but that's the fact. We just haven't seen it.

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

I was hoping to dig into some of the markets in a little more detail. I guess, just starting out on DC post-election, and Democrats doing well and the budget we've seen. Any thoughts on what might change in either CBD are in Northern Virginia?

So Ray and Peter, you want to take that one?

Yes. I'll start.

Go ahead, Peter. Go ahead and talk.

Well, I was just going to say, having not been here as long as Ray, but since the late '80s, typically, when there is a line, Houses and Congress and the administration, and certainly I think we're seeing it now with the talk of the stimulus, it always positively impacts the real estate market. How that's going to occur and where that money gets spent? I certainly think that life science are going to benefit, which would indicate, the 270 Quarter and around NIH, closer in. But also downtown and there's talk about reenergizing the FBI. So historically, it's been a positive. It's just, given where we are with the pandemic, it's probably a little more difficult to predict right now.

I will just add to that. And this is more to Manny's point previously and yours Jamie, but in DC, relative to the four major tenants that we're constructing new headquarters for, Volkswagen, Wilmar, Marriott and Fannie, we're seeing virtually no change to the pre-pandemic space configurations that they were launching prior to the work from home motivation. And I think everybody - all four of those are extremely excited about getting their employees back to work. They're making virtually no plans for major downturn in the actual demand for space and they are quite excited about the new buildings we're building. So in the suburbs, we just completed perhaps one of the most successful years in Northern Virginia we've had in 20 or 30 years. So if there is a pandemic impact to our suburban portfolio, we're sure as hell not seeing it.

And then what is the leasing pipeline look like for more Reston Town Center type product?

So specifically in Reston, we've got probably another 200,000 square feet, 250,000 square feet proposals out for occupancy this year. And now we're running - in Reston, we are running up against the lack of available space. So we still have got about 150,000 square feet coming on with our new project RTC Next. That is now coming to a point in a physical condition where we start showing the space. So we think that the real activity in DC will continue to be suburban focused with some hopefully Biden related activity downtown.

And then I guess, shifting gears to the Bay Area. I mean we all see the headlines about corporate relocation activity. I'm just curious to hear as you think about the next couple of years, how much of a drag you think that will really have on market conditions?

Bob, you want to start with that?

Yes. Corporations move from the Bay Area and this happens every time there is a recession. Oracle was not a big occupier of new space or someone that was taking space consistently over the last couple of years. So I think it has very little impact. In the case of HP, they've been shedding space over the last 10 years. So I think again it has very little impact.

So Jamie, my additional response would be that, the profitability, the revenue picture, the aspirations of the technology companies that have significant footprints in the Greater San Francisco and Silicon Valley have probably been - are stronger now than they have ever been. And as I said to you before in my prepared remarks, it's been a really tough time in San Francisco in particular because of the shelter in place orders that moved to basically asking people not to go to work if they can't help it, but being able to go if they could. And we're just waiting to see what happens with regards to the aspirations of these technology companies relative to understanding that there is a heck of a lot of additional labor available because of the recession and certain things that happened earlier in the year, that residential rents have come down, so affordability has very significantly changed. And let's say, this is still going to be a great city and that there are opportunities to expand there. And it very well may be that we are surprised on the upside. We just don't know. And there is an incredible amount of beta associated with what will happen in San Francisco. And I think everyone right now is looking at the worst and assuming that's what the facts on the Street are going to be and not looking at the opportunity side.

Okay. That's very helpful. Thanks for every one's thoughts.

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

Thanks. I guess first, Owen, I just wanted to go back to the $800 million in I guess projected development starts or potential development starts. I guess a lot of that is probably life science, but just have you changed your pre-leasing hurdles? Have you changed your yield targets and what are you expecting on those projects to the extent you do start them?

Yes. Steve, on the life science, right now, given the heat in the market and the success that we had with 200 West Street and the dialog that we're having with customers, we would be prepared to launch speculative development and redevelopment in our core Life Science clusters. Maybe some of these dialogs with customers will be signed before we start, but we have a lot of confidence in the market. The yield requirements have not come down, so we're still shooting for 7%. And we would be a lot more - we will and are a lot more cautious with office. So pure office development, we certainly wouldn't launch without a pre-lease.

Okay. And then I guess you mentioned sales might be at similar level. It sounds like maybe $500 million, $600 million. Do you have any sense for kind of markets or how are you thinking about yields? How do you think yields would stack up? And are these sort of single-tenant, high credit deals with long lease terms that have sort of been the flavor of the day in the market, or are these more traditional multi-tenant, say, average lease terms, which really have not cleared the market? How do we think about those sales?

Yes. Well, we are already working on a couple and we are sorting out the remaining assets that we want to sell this year. As we've discussed in the past, we do have these gains that come from the asset sales, but we are keeping our dividend flat and we have more suppressed income. So those gains will be used to pay the, regular dividend. And Steve, I think the assets we will select will be a mix. There'll be assets that we consider non-core. As you know, we've been selling $200 million $400 million of those per year even before the pandemic. And then, there'll be other assets that we think will meet the market in terms of some of that comparables that I described earlier and the cap rates that are being achieved. So I think it'll be a mix.

And then, Mike, I guess you gave it up, I guess, a reasonable number for earnings in '21. It sounds like that doesn't per se contemplate the potential occupancy decline that you and Doug spoke about, but nor does it contemplate on the plus side some of those tenants that are currently in place that are maybe on cash accounting, where you're not really collecting a lot of rent or maybe rent at all. So how do we think about those two kind of going in opposite directions and info between that $6.50 number?

Well, I think that the occupancy impact I mentioned in 2021, if it's 50 basis points, it could be $0.09. And on the ancillary income side, I talked about $30 million a quarter which is significantly more than that. And if you think about it, basically $12 million is parking, $12 million is retail, some of which is vacated, but some of which is just not paying us right now, and $5 million is hotel, which again might take a little bit further to get back. So depending on the timing of when that stuff comes back, it could clearly outstrip any kind of reduction we might have in occupancy from the same store. We do have - I think, what you're getting at, we had some tenants that are on abatements right now. They are actually in occupancy. So we had $19 million this quarter of those tenants. So we think that those tenants who are in occupancy and open, will start paying rent again. Some of those were recognizing GAAP rent right now, some of them were not, it's probably about 50-50 on that. So those tenants are in place and in occupancy, and we're hoping to get back to more of a contract rent basis next year as part of that overall $30 million increase?

Right. So not to put words in your mouth, but sounds like those things have the potential to maybe outstrip or outweigh the potential occupancy decline as some of those really start to move in a positive direction?

Yes. They certainly do and especially, when you get into 2022, when things are expected to even normalize further because there you're going to have both, starting to get more towards a full run rate on some of the stuff that returns hopefully, and you're going to have more development coming online as well because in 2022, we delivering Fannie Mae, we're delivering Google, and we got a lot of deliveries going on and the development growth for 2021 that I described is really pretty modest. I'd say, it's only $0.05. So last thing is that stuff is kind of coming in later in the year and we'll have a full year of that stuff in 2022. So I think, there is a lot - again, there's a lot of positive things that we've got going on.

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

Thanks for taking the questions. So maybe just - so two questions. First, just on the sublease market, interesting you mentioned at least some tenants are sort of testing out the market and putting everything on the sublease market, just hoping to see what sticks, but I'm just curious from your perspective why is that occurring this cycle and why is - versus sort of prior cycles where we may not have seen that phenomenon?

We have seen in other cycles and other and other - which also was my point with regards to New York City between 2008 and 2009, right. I mean there was 24 million square feet that was put on and 13.7 million that was taken off. It was exactly the same thing. There is nothing different about this cycle relative to sublet space than the last cycle other than the fact that for the last 11 months, there has been no traction from an absorption perspective because most people have not been transacting particularly with the kind of spaces that are on the sublet market, which are a lot of times short term and are as-is in many cases because they don't know when they're going to need the space because they are not sure when their politicians are going to give them the okay to have their public schools open and therefore, the employees can feel comfortable making plans to go back to the space even if the buildings are open.

So last cycle there were also just corporates who just put the entire space on the sublease space just to kind of see what sticks. But then as you say, some of it just - they took it back as the economy improved. That's interesting. Maybe just second. You referenced sort of the implied cap rate at a 5.9% for BXP and the private market in sub-5% range. I guess just if I look at pre-pandemic and the last five years, for whatever reasons, the equity markets have always sort of trade - versus NAV, the equity markets afforded call it a 20% discount or so plus to NAV over the last five years. And I'm just wondering from BXP's perspective either actions you take or we ways to exhibit value, post-pandemic assuming this kind of disconnect persists, what are some of the other actions or strategy you could pursue to close this gap?

Vikram. I think the key is to grow the Company. I think the market values growth more than NAV and that's what we're focused on.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

Good morning up there or down there. So question first, Owen, you mentioned back on Seattle that that's the only market that you guys are looking at, but clearly, you see a lot more growth in places like Austin or Miami. I mean you've got Blackstone looking at buying a building down in Miami. So as worker preferences change and certainly Florida looks to become Wall Street of the South and Texas gets a lot more tech, at what point do some of those markets start to create the same dynamics, culture, knowledge base, et cetera, that would attract you guys to start looking at markets like an Austin or Miami, et cetera?

Yes. So Alex, couple of things I would say. One, we acknowledge that there is some corporate relocation activity going on to South and most recently to South Florida and to Austin. So I would say couple of things. One, I think you got to dig into that a little bit more. I mean, I'm not sure I would describe South Florida as Wall Street South. I think if you actually looked at the size of the requirements that some of these larger financial institutions have in the Miami market, they are not that big. So it makes a big headline, but it's not a lot of space and it's not a lot of employees. So that's one. And then, two, look. I do - I think we all acknowledge Austin is a computer science cluster. There is no doubt about it, but the - and this is true in South Florida as well. The market dynamics for office investment are very different. The level of new construction and existing vacancy even with Class A space is very high and it's much more elevated than the markets that we operate in. So yes, you've got the growth, but you've also got plenty of supply coming on and that has an impact on outcomes as a real estate investor.

Okay. And then the second question on the dividend. Mike, if we use your implied FFO range and then deduct for all the fun stuff to get us to AFFO, it would suggest that the dividend is going to be meaningfully uncovered this year. Owen, I think you'd probably agree that no one buys BXP necessarily for the dividend. They buy it for the overall growth, especially given the low dividend yield relative to other companies. So at what point does a dividend reduction become something that Board will contemplate, especially as you guys talk about all the development potential life science where the value creation in your platform is pretty good? At what point does the dividend come under reconsideration?

Look, our goal is to have a stable and growing dividend. And given all the growth that Doug and Mike and I described on this call, we're going to grow back into our existing dividend in our opinion.

I mean, Alex, just step back. I mean, Mike said it I thought pretty well, which is, there is $30 million of quarterly revenue that is not in our numbers right now that we - absolutely it is coming back. Whether it comes back in the fourth quarter of 2021 or the third quarter of 2022, we don't know. But it's absolutely coming back and we have additional development that's coming online that's going to bring significant amounts of income. We have real confidence in the growth in our taxable income, in our FFO, in our AFFO over the next three to five years, including 2022, and again, we hope in late 2021. So I mean we're confident about what we have going on and our ability to increase our revenues in a significant way.

Just the other thing I would add to the question is, our FAD ratio is 105%. I wouldn't consider that meaningfully uncovered and we anticipate that our cash flows and our AFFO are going to improve next year and that's without necessarily the improvement of this ancillary income which would improve it even further. I mentioned the sequential quarter improvement in the cash flow on the same-store. And there's a lot of free rent that burned off in 2020, that is going to be there in 2021. So I agree with my colleagues that we're not thinking about resizing our dividend at this time.

Your next question comes from the line of Michael Lewis with Truist Securities.

It looks like your tenant retention for 2020 averaged about 45%. Correct me, if I'm wrong, but my real question is about the tenants that are not renewing and where they're going. Are they finding sublease space or maybe some cutting or eliminating their physical footprint or some moving to other markets? So I guess the question is, are there any trends you're picking up on that front, on the tenants that are moving out that are clearly different from pre-pandemic?

Michael, this is Doug. I don't think there's anything that we can point to that would be a trend that we would be either encouraged by or discouraged by. It's the natural move out of tenants based upon the age of their space, the way it was configured, and what their future plans are. And so we don't expect to see much in the way of changes in the profile of the kind of tenants that will stay versus the kind of tenants that will depart for whatever reason.

And how many tenants have notified you of a return date to the office? In other words, do you have a rough schedule of how repopulation of your portfolio is likely to trend in the second half? And where the physical occupancy might be at the end of this year?

So the answer is, nobody has notified us as the landlord. What we know is that they are having conversations internally and talking about dates that are beginning in the end of the second quarter, early third quarter, and going as far into the year as the fourth quarter, depending upon the particular company and the particular location. But I would say that certainty around knowing that there will be a date and that date is sooner rather than later is the change that has occurred over the past couple of weeks. And I guarantee you that if the vaccine roll out is effective and working, that you will see more and more companies having the confidence to tell their employees that they expect those kids to be back in their seats in those schools and getting on the buses come the fall of 2021. And the colleges will be back in session in person and there will be athletic events and things like that, and it's going to be a question of simply getting through the scar tissue damage that's occurred over the last 11 months in terms of how quickly they ask those people to come back.

And then, I'll just squeeze in one more if I can. I just want to confirm, the active development portfolio is 88% pre-leased. Are there any tenants in there that want to renegotiate anything or maybe wish they had done their plans a little different, maybe like sublease a space that could come back or any unusual risk that you see in any of those projects?

Definitively no to all of those questions.

Your next question comes from the line of Tayo Okusanya with Mizuho Securities. And your line is open sir. Your next question comes from the line of Daniel Ismail with Green Street.

I'm just curious regarding co-working does this experience change your thinking on how leases with these tenants might be structured in the future such as the revenue-share agreements/

Yes. I think it absolutely does. I think it makes it clear that we don't have a lot of appetite for doing these leases with other people on a going-forward basis relative to what our current exposure is. And that - and when we do this stuff with this space in the future, it will be strategic and will have explicit needs in specific buildings and we'll probably look to do more of it ourselves because, therefore we're sharing revenue with ourselves.

And then on life science, we've seen life science cap rates trade inside of Class A office cap rates across your market footprint. But I'm curious, in your underwriting are you considering this as a permanent change in valuation or does this revert to a more historical range post-COVID?

I think a lot of it's driven by the fact that life science rents in a lot of the markets where we operate have gone up a lot over the last few years. So when you look at an existing asset, there is a big roll-up in it from where the building is rack rented to where the market is, and that's creating lower cap rates. If that dynamic changes, I think the cap rates could go back up.

And there is a scarcity factor associated with it. There's is not that much of it anywhere in any particular market in the country and Owen likes to use the word, it's the hot dot. There is lots of institutional capital that's saying, we don't have any of that stuff. We need to get some. And so supply and demand, right, there is relatively little in the way of supply, there is lots of capital that is looking for it. And so at the moment, there is a very, very strong bid for.

Your next question comes from the line of John Kim with BMO Capital Markets.

I just had a couple of follow-ups. The leases that you signed this quarter had eight-year term, but what is your appetite to offer shorter-term leases to build up occupancy?

So we are in the business of leasing space, John, and if a tenant wants a short-term lease, we will transact on a short-term basis. If a tenant wants a long-term lease, we will transact on a long-term basis. We are customer-centric and we want to do what our customers want to do.

Yes. And don't forget that again, we've been - we've had a lot of success I think as you're pointing out in doing long leases. If we do the short extensions that Doug is talking about, generally those don't have CapEx. So we are in essence extending the tenant work over a longer lease term, which is also attractive.

So do you view that as a short-term solution given where we are in the economic cycle, or could this be a longer-term trend of shorter leases, lower CapEx?

I think that you have different kinds of customers with different kind of motivations. I mean there are lots of customers who are going to say, we think there has been a correction in the market and this is an opportunistic time for us to do a very long-term lease. Those customers are going to want to get as much capital out of the landlord world as they possibly can and extend for as long as they think it's appropriate. So that's 15 to 20 years in some cases, I think there is another group of tenants that's saying, we're unsure, we're not - it's not clear to us how our business is going to perform relative to our current workforce strategy. We just want to kick the can for 18 months or two years, and then, look at it again when we'll have more clarity and more confidence about our decision and then we'll be able to make a more permanent capital decision. I think that's always going on and I don't think things are going to change dramatically, other than, I think it's going to be a slow ramp-up this year just due to, again, the way I referred to it, the scar tissue associated with the length of the time people have not been back together in their offices, and it's just going to change their decision-making framework.

And then, Mike, I just wanted to clarify with you. Do you see the fourth quarter as being the peak quarter in terms of what you've offered in rent deferrals and abatements? It sounds like you think some tenants are going to start paying rents again, but I'm wondering if you're going to be offering more rent relief as well during the year?

We certainly hope so. I mean I will say that many of our restaurant tenants we're kind of going through the summer because that's when we kind of have an expectation that it will be the next period of time when maybe there'll be improvement. So there is additional dollars that will occur over the next couple of quarters. Based on what we know today, it's not going to be $19 million because there is about - of the $19 million of those tenants I think there is about 10 left during 2021. And we are not - I guess you can never say never whether tenants are going to come to you again, but at this point, we've taken care of a lot of those tenants.

Your next question comes from the line of Peter Abraham with Jefferies.

I just wanted to go back to Owen's comments at the beginning. I think the words you used were, the most significant and predictable improvement conditions in leasing activity, which I think makes sense coming off the base we had in the second and third quarter. But at the same time, we're still coming out of a recession and a lot of office-using jobs have been lost. So I'm just curious how your outlook - where your outlook kind of contemplates for returning the job growth and how that impacts your thinking for '21 and '22?

Yes. No. Look I chose those words carefully and I think - and maybe the interesting one was predictable. And I guess the difference of this cycle is, it's been less - it's not been driven by a cyclical move in the economy. It's been driven by a pandemic and a health crisis. And so with the vaccine progress, I think we see and I think the world sees a pretty obvious correction in this over the next six months. Again, knock on wood, maybe something goes wrong with the vaccines, or there is a slower roll out or there is something that goes on, but in essence unlike an economic recovery, which perhaps is harder to predict, again, if this is all about vaccinations maybe this one is easier to predict. And I think as all of us come out of the isolation that we're getting really tired of and return to the world and to our offices and to restaurant and to theater and to each other, the economy is going to reopen and I think jobs are going to come back. I think of all the small businesses that will get to reopen and restart as part of all this. So we do think, this year, we're going to have a significant improvement in economic activity. Look office leasing tends to lag that. So we do think by the later quarters of this year, that the office activity will also elevate as a result.

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

It's Michael Bilerman here with Manny. So I wanted to sort of talk on two topics. One, just coming off the vaccine, I wondered, Doug, are you thinking about I guess requirements: A, just Boston Properties employees in terms of vaccinations, any contractors, building staff, in terms of making your assets competitive for tenants to feel comfortable they are coming into safe environment. And I know you can't force your tenants, but just how are you sort of thinking about vaccine roll out and how it adheres to your public places?

Doug, you want to hit that?

Yes. So Michael, I'll give you an undiscussed response to that. So we have the view, I think, that in our particular marketplaces, the vast majority of the people who are tenants in our buildings will get the vaccine. And it's hard to go from there to a rigorous requirement that people get the vaccine, but it's not something that we won't talk about understanding what the ramifications of that are, but if the vaccine is effective and the vast majority of the people get it, the vaccine will have done its duty, which is to effectively eradicate the virus and we won't have to really worry about the issue on a going-forward basis, but it's not something that we haven't not thought about.

And then, Doug, you talked a little bit about the sublease space and giving the '09, '10 analogy for New York. The similarity is that we do have an economic crisis that's going on, but there is a big difference between the GFC and today, where people are not in their offices, right. People were still going to their offices in the GFC and people are not today. You've a lot more discussions with them, the corporations around the U.S., you certainly have a significant amount of discussions about full remote working and hybrid remote working. And aren't you going to love being in the office and I love the interactions that provides and the advancement in a lot of things, but what gives you the confidence that sublease space won't have a more material impact because it doesn't feel like it's all opportunistic? It feels as though it is much more real today as people think about the amount of square footage that they need in this new environment?

I think you're asking a lot of fair questions and the answers are unknown at the moment. I guess our intuition is that as people start to go back to work, the fear of missing out and all of the opportunities that in-person work have will become more clear to more people, and they will start to get back on the bandwagon. Again, I am not saying that there won't be much more flexibility in the way employers treat their employees relative to requirements to be in that seat every single day of the week. But I guess I am a strong believer and Owen and I have talked to lots of people about the nature of the office from both a business and from a social capital perspective, and how critical it is for the growth of businesses and the growth of the individuals that are in those businesses. And so I guess I'm more optimistic than your questions are suggesting about the value that people will ultimately and clearly see in having people going back to work in a very significant way. Again, on the margin, is it going to be a headwind? Absolutely. But I don't think it's going to be the radical disruptor that is certainly baked into I think the value of CBD office stocks.

Right. And I'm not trying to be a complete pessimistic person. I'm just trying to balance sort of the comment about looking at '09 and '10, and the sublease space coming back, feels different than where we sit today, but I understand sort of the points that you're making. How do you think...

Let me just give you two real-life examples of sublet space. Okay. So Mizuho which moved into a new installation on Fifth Avenue was always planning on putting their space on the sublet market. Okay. I don't think that sublet space is going to be competitive any longer because of other spaces on the market. So is it available? Yes. Is it going to be a sublet space, it's going to be actionable? I don't know. I think if you ask the people from BlackRock, I don't know if they have put them space on the sublet market, they had planned to put space on the sublet market because they took additional space when they were doing their lease and they always had the expectation that they would have some short-term sublet space. So there is a lot of that stuff that's there this time as well that people are all looking at it and saying, oh, it must be a change in philosophy for the workforce management of that organization and they're going to have more people working from home. I just don't think that there is as much of that as people think there is in the marketplaces. Sure, you can look at Dropbox and what Dropbox has decided to do in San Francisco. But we just saw Amazon take 600,000 square feet of new space in Boston. We saw Facebook last quarter take the REI building in Seattle. There are tenants on either side of the table doing contrary things at the same time. So again, I think it's very hard to make a directional conclusion.

What do you think the cadence is of the return to the office right? And a corporation today if they made the decision in March to say, hey, we're going to come back, I would assume there is a pretty long delay and amount of time that they have to give people given that a lot of people may have moved, they are in different places, maybe at that time when the workforce called them back and they say, what, I like being here, I'm going to go get a different job or go somewhere else. How do you think that cadence in your markets in terms of corporations making decision, and then, ultimately when their workers really come back into the office?

Owen, you want to take that one?

Yes. Sure. Look, I think the key - our premise on this that we've described a couple of times this morning is, employers want their employees back in-person work. They believe their companies will be more successful If that's going on, but I don't think they're going to push it until the environment is safe. And therefore, the infection rate needs to drop precipitously from where it is now. And I think it will, as more people get vaccinated and more people are immune because they've recovered from infections. So when I think it's deemed to be safe, I do think then companies are going to be faced with the dilemma, Michael, that you described, which is, okay, we want people back and how hard we going to push it because our employee base. Some of these employees do like the work from home and they want to be out of the office. I don't think they want to be out of the office full-time, but they certainly want to be out of the office more. So these employers are going to have to decide what are we comfortable with, what do we need to do to be competitive in our industry in terms of in-person work and what kind of policies should we put up to balance this competitiveness issue, with the retention of talent. And I think each company is going to make those decisions differently. But again, I think as the infection rate goes down and my assumption is that will be over this summer, I do think you'll see a lot more companies requiring employees to come back to work. And I think different companies will have different policies around work from home.

And I would like to say, Michael, that if an employee - if a human being is vaccinated and that human being is going to a restaurant to eat, they have basically said, okay. The stigma of being in the population is now over. And so as we see more and more of those types of things occurring, it's going to be quite clear that the difficulties associated with asking your employees to come back to work are going to have dissipated because they are going to have demonstrated that they are comfortable being in and around other human beings in a very close approximate way. If you're a believer in the efficacy of the vaccine and the vaccine does what it really is designed to do, which is you don't get sick if you are in contact with the virus. I think there is going to be a stronger desire for people to come back. Again once we solved those other issues, which are, we've now put people in a position where their children are going back to school, where they are comfortable going on public transportation, were all of the things that have been impediments to at least intellectually people coming to work and we have a governmental programmatic desire to get people back in seats, right, as opposed to saying, we think that people should remain as far apart as possible, because we're trying to keep this pandemic in containment, which is where we are and have been for the last 11 months.

Right. I was just trying to think through the timing of the corporate deciding, okay, it's now safe, we can do it, and then, asking their employees just not like - it can make a decision on Friday, so every one's there on Monday. I would expect there is a pretty slow build to getting people back, given how long they've been out of the office. And I don't know what that ratification is on leasing, on fundamentals, all the other income sources. So I'm just trying to - as I assume corporations are thinking about all this at this point given the vaccine distribution given, the efficacy, right. They're all trying to come up with their plans. And I just didn't know if you had more insights about if they flipped the switch, all right. It's no longer up and it's opt-out, How long that could last for as we move into that direction..

Michael, I don't think anybody is going to surprise their employees. I mean, we're doing it ourselves. We try to give a lot of preview over how we see the world and when people should anticipate coming back to work. So I think that will help in this repopulation that you described.

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

Yes. Sorry about that earlier. Can you hear me?

Yes. We can hear you.

Perfect. All right. Just a quick one. I know we're running long. Could you talk a little bit about just how you're thinking about dispositions in 2021 given some of what you've seen in regards to asset pricing, uses of capital next year, and also your leverage target?

Yes. No, as I mentioned in my opening remarks, we sold 500 between $500 million $600 million of assets in 2020 and that's an elevated level for us at least over the last five or six years. And we anticipate that level plus or minus going into 2021. We have a couple of assets we're working on now. As I described, the capital market conditions for office are reasonably favorable, particularly for assets with certain characteristics, and I think you should count on us selling around that level this year.

And from a leverage perspective, Tayo, we haven't changed our views on the leverage that we think is appropriate to run the Company. I think it is somewhere between the mid-6s in the mid-7s on the net debt to EBITDA basis. The leverage is obviously a little bit higher this year because of some of the income items that we've talked about. And then, if you look at our supplemental, our leverage is reported at 8.07 this quarter, but that's because the calculation annualizes the charges that we took this quarter. So we have provided a footnote that describes that if you pull out the charges, the effective leverage 7.26, which is within the range that we are comfortable operating in. And then, we've got a lot of income coming in from the development pipeline over the next couple of years that we've described and we've described in the past. A significant amount of that money has already been spent for that development pipeline. So that will naturally delever us over the next couple of years.

We have time for one final question and that question comes from the line of Rick Skidmore with Goldman Sachs.

Thank you. Mike, just a quick modeling question. How should we be thinking about real estate taxes as we go forward, given maybe what we've seen in 2020? And then, are you hearing anything from the cities with regards to how they're thinking about real estate taxes? Thanks.

Hi, Rick. This is Doug Linde. So obviously, it's market by market, right? In California, we know exactly what's going to happen because of the legislative referendums that didn't pass. So that one is taken care of. In New York City, I am sure that assessments are going to go way down. We won't know what's going to happen with the tax rate, but in New York, everything is sort of bled in over a five-year period of time as those changes occur. So year-to-year, it's not a very big change, a.k.a., versus what it would have been where we not in this evaluation challenge. In a market like Boston, there's been so much addition to the supply that we actually don't expect to see much in the way of significant rises in real estate taxes because of the assessments have gone up, but there is more base. The cities have actually reduced the tariff rate so it hasn't been significant. And similarly, I think in the Greater DC area, we'll, obviously, see they have tri-year evaluations in the district and you don't see much difference unless you're building is being revalued. But net-net, I mean it's quite clear that to the extent that jurisdiction has some fiscal issues, I mean it's going to be looking to its real estate taxpayers to bear a portion of that, but I don't think in the short term, it's going to be a meaningful detractor in our revenue or impact our margins in a very significant way.

And obviously, our tenants, we escalate our real estate taxes to our tenants, so an increase doesn't come back to us unless we have vacancy or we have leases rolling. So only a small portion of that increase actually comes to us every year.

And I would now like to turn the call back over to the speakers for any closing remarks.

Thank you, operator. Thank you, everyone, for your interest in Boston Properties. That concludes the call, all our comments and questions. Thank you very much.

This concludes today's Boston Properties conference call. Thank you again for attending and have a good day.