Good day and thank you for standing by. Welcome to the Q1 2023 BXP Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today, to Helen Han, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to BXP’s first quarter 2023 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday’s press release and from time to time in BXP’s filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen and good morning, everyone. Today, I'll cover BXP's continued steady operating performance as demonstrated in our first quarter results. The key economic and market trends impacting our company and BXP's capital allocation activities and funding. Despite significant economic headwinds, BXP continued to perform in the first quarter. Our FFO per share was above both market consensus and the midpoint of our guidance, and we increased our FFO per share guidance for all of 2023. We completed 660,000 square feet of leasing in the first quarter with a weighted average lease term of 7.7 years and kept occupancy flat despite more challenging leasing market conditions. Finally, BXP just published its 2022 ESG report and announced our second annual ESG investor webcast for May 31. Though the office sector is clearly facing challenges in the current economic environment, there are two underappreciated trends, which we believe will have a significant impact on BXP's longer-term performance. First, the deceleration in leasing, which we forecasted last year and are now experiencing driven primarily by the economic slowdown, a cyclical trend rather than remote work a secular trend. In other words, we believe the current leasing slowdown is cyclical and will recover along with economic conditions. Our clear evidence for this observation is our own leasing experience. In 2022, when the economy was much stronger and significantly fewer workers were using our offices, we leased 5.8 million square feet, essentially a normal year just below our 10-year average level of leasing. This year, the economy is clearly weaker, but many more workers are back in the office and our leasing has slowed. Though we are not in a recession defined as negative GDP growth, approximately 75% of S&P 500 companies are forecasting lower earnings this quarter and aggregate earnings are expected to…

Thanks, Owen. Good morning, everybody. So I think it's fair to say that we are operating in a challenging real estate supply and demand environment. And as Owen stated, businesses continue to make pronouncements about the importance of in-person work, but office job reductions related to the economy have impacted both supply and demand. In our portfolio, we continue to see incremental pickup in daily activity as we look at the month-to-month trend lines, and we see weekly patterns emerging based upon industry. The legal professions got a different perspective than asset management, which is different than private equity. People using their spaces at different times. The frequency of work, however, in the office is really about 3 days per week across our markets where we track the data, and this includes San Francisco, obviously, our portfolio being primarily professional services and financial services. No city is back to the levels of urban work activity that existed in 2019. We are aware of isolated instances where an organization has required all their employees to work in their existing office most of the week and they don't have enough space, but that's just not the norm. The pendulum could swing back to where organizations find themselves short on space for their existing and future workforce, but it's not the way they're planning today. The most dynamic and expanding reservoirs of demand over the last decade, technology and life science users are focused on profitability, cost reduction and capital preservation. This doesn't lead to near-term positive absorption. There's a lot of variability with the financial services and professional services firms space needs. Those that are reducing headcount through layoffs are replanning their facilities with less space. It's evident that some law firms in the market are signing leases with smaller footprints as…

Thanks, Doug. Good morning, everybody. So I am going to cover the details of our first quarter performance and also the changes to our guidance for the year. But before I do, I would like to address a couple of questions we've received from shareholders, and we'll start with a discussion of our liquidity, our near-term capital needs and the state of the debt markets from our perspective. There's been a lot of talk in the media about the lack of financing available for commercial real estate. And while we agree that underwriting criteria is tighter and financing costs, both in terms of credit spreads and reference rates are higher there is financing available for high-quality, well-leased premier workplace assets and portfolios. In fact, in the past 6 months, we issued $750 million of unsecured green bonds in the investment-grade bond market and extended and increased our term loan with a syndicate of banks to $1.2 billion, providing $470 million of incremental proceeds. We are currently in a strong position with $2.4 billion of liquidity comprised of $900 million of cash and full availability under our $1.5 billion line of credit. We do have 2023 capital needs, including funding our development pipeline and refinancing expiring debt facilities. For the remainder of 2023, we project to spend approximately $750 million to fund our developments. Our consolidated 2023 debt maturities are limited to a $500 million bond issuance expiring in the third quarter of 2023. If you extend the window into 2024, we have another $700 million coming due in the first quarter of 2024. The bond market experienced volatility and higher credit spreads in March, coming out of the bank failures over fears of a broader crisis. In April, the market has settled down, and our credit spreads have come in…

[Operator Instructions] And I show our first question comes from the line of Steve Sakwa from Evercore ISI.

Doug, I appreciate all the comments that you made on leasing. I did notice that there really was no, I guess, incremental leasing on the development pipeline outside of the 2 new projects that got added. So could you maybe just speak to the pipeline that you talked about, how much of that leasing that you're in discussions on is for the development? And I guess, how do you still feel about the projected yields on the development pipeline today?

Sure. So the pipeline of unleased property, Steve, is pretty bulky, right? So it's primarily in 2 places. It's in Platform 16 in San Jose, which won't deliver until the beginning of 2025. And as you probably can surmise, there's not a lot of technology demand in the market today. So there are no conversations going on there. And the other large bulk you want is 360 Park Avenue South. And we are starting to have conversations with smaller-sized tenants, so 1 to 4 floors. Hilary, I'll let you sort of comment in a second on that. But the overall -- and you'll notice are an increase in our costs on some of our development assets because we have pushed out the leasing time frames and therefore, we're carrying those properties for a longer period of time, and obviously, interest expense is meaningfully higher than when we started these projects, and that's impacting that. So the returns on our development assets will be slightly lower. I -- it will depend on the leasing success that we have, Steve. So I can't give you a comment on how many basis points they're going to be. But Hilary, if you want to comment on Park Avenue South. Hilary?

Next question in the queue comes from the line of John Kim from BMO Capital Markets.

You discussed extending some of your maturities on your JV mortgage debt and debt market overall, the mortgage market being inside bond pricing currently, which really goes against the grain of the issues we're hearing with the regional banks. I was wondering if you could just elaborate on how healthy that market is and who's willing to put more capital into office assets today.

So I think that the conversation around regional banks is something that is obviously out there. They're not necessarily lenders to us on properties like ours. We do have credit with the larger kind of multinational and global banks that we do business with and some of the super regional banks, I would call them. And then there's life insurance companies, there's pension funds, and there's the CMBS market, which the most active part of that is really the conduit marketplace. And there's been several large conduit offerings that have been distributed to the marketplace, including, I think, three in the last month where the office component of those are somewhere between 15% and 25%. And those loans are generally on an individual side, maybe $50 million to $100 million. You could do a larger loan and do a conduit, say, $200 million, $250 million, and you get a slight step into a couple of different securitizations. So again, I think that if you have a good quality income stream to finance in a good building with good tenants and long weighted average lease term, that will get recognized by the financing markets. And we've been talking to the market. We have term sheets on deals that we're working on, where there's a desire to do loans for those types of properties at credit spreads that are still higher than what they were. But their credit spreads that are below what it's currently in the bond market right now, not significantly below, but below. So as I said, we've got a couple of these mortgage financings that we're working on that we anticipate that we're going to execute on. And those are the markets that we're dealing with.

John, this is Doug. I'll just give another perspective. So we have a lot of what I would refer to as highly financeable assets with long-term credit leases and where we would likely go and finance, for example, a 15-year Google lease for fivce years or a 12-year Microsoft lease for 5 years, right? And we're not doing these 75% LTVs. We're looking for a modest amount of leverage. So those types of assets, we believe are highly marketable to the various counterparties in the lending community, be they insurance companies, be they domestic or foreign banks, be they the CMBS market. So that's sort of where we're looking for additional capital. And then as Mike suggested, we have a maturity in a relatively small-sized asset, a $100 million asset in Washington, D.C., and we had a number of term sheets from secured lenders on that. And so we are seeing evidence that our portfolio is as being receptive to additional secured initial.

And I show our next question comes from the line of Camille Bonnel from Bank of America.

Following up on the leasing pipeline, can you please comment on how you classified deals in the active proposal pipeline? And how this pipeline compared to last quarter or even a year ago?

So the way I characterize things is if we are negotiating a lease document, it's part of that 900,000 square feet. If we have an active conversation and are exchanging letters of intent, but we have not yet confirmed a letter of intent, AKA, meeting of the minds, and we haven't started a lease negotiation, that's sort of in that other pipeline. And I would say we have slightly more stuck in the active proposals or active negotiation stage than we had last quarter, largely because some of the stuff that I thought was going to get done in the first quarter reached into the second quarter. There are 2 meaningfully larger deals, meaning over 100,000 square feet that we had -- we thought we had a chance of signing in the first quarter that just didn't get signed yet. And our active proposal pipeline is, I would say, modestly growing sort of quarter-to-quarter, but pretty consistent with what it's been the last 2 or 3.

And I show our next question comes from the line of Anthony Paolone from JPMorgan.

Yes. So I appreciate all the color on capital markets and how you're trying to triangulate where pricing might be. But just for BXP for you to put capital out the door right now, what would you all want in terms of an IRR, how would you underwrite rents and cash flow growth? Like what would a deal that would prompt you to pull the trigger on look like?

It's Owen. A couple of things I would say. One -- first thing would be, what is it? So we're not going to go out and buy a cheap office building in the hopes that we can make it less cheap over time. We're going to focus on premier workplaces in the office segment. We're going to continue to focus on our life science portfolio, and we're also going to focus on residential development, probably more as a merchant builder as opposed to a long-term owner. So I think perimeter is very important. Look, in terms of overall -- yes, in terms of overall cost and what we're going to be looking for. One, it's certainly gone up. Number two, it would depend a lot on the risk profile of the asset. But then number three, what's always on our mind is our stock is currently trading at a look through cap rate of 9%. And that's got to be a guidance post as we think about putting out new capital.

And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler.

So Owen, along those lines, in prior cycles, you guys have bought some buildings 399, 510 Fed, you bought those in prior opportunistic times. But given the capital markets today, given Mike's comments about assessing the dividend if the disposition market doesn't open up. Are you guys more keen and confident to buy assets, let's say, around Park Avenue, Grand Central or other transit hubs? Or is the company's focus more on capital preservation and therefore only stick to the current pipeline and really limit incremental opportunistic existing asset purchases.

Alex, we have access to capital, as Mike and I pointed out and the key is pricing. We're interested. We're open for business. We're interested in growing our company. We think we will. But that's at a 9% look through cap rate is a guidepost for us.

And I show our next question comes from the line of Nick Yulico from Scotiabank.

I appreciate all the commentary on the secured lending market. I guess a question I have is -- and again, I realize this doesn't really apply to your near-term maturity schedule. But now if we think about, let's say, New York City, this is a market that historically relied on very large loans that were put into the securitization CMBS market and it's not a single tenant, long-term credit building often. It's multi-tenant, the vintage of the asset will vary, but we're talking about $1 billion loans that got done for New York City, which seems like cannot get done right now because of what's going on with the securitization market. So I'm just trying to figure out what your thoughts are about the ability for this let's say, New York City as a market to function from a property sales standpoint, from a lending standpoint, if it is historically a market that has very large loans that can't get done in the securitization market right now.

So this is Doug. I don't want to get into a conversation about other people's assets. So from our perspective, obviously, we don't have anything maturing anytime soon in our Manhattan portfolio. And we do have two large CMBS transactions that were done. There were SAS deals but they've got long duration associated with them. I would expect that the markets will heal and that there will be capital available at a different kind, as Mike described, a different kind of a leverage point and are a different kind of a pricing parameter. So there is going to be equity that's required in these assets to appropriately refinance them with a capital structure that makes sense for the large loan marketplace. And there's going to be, obviously, some degree of time before we get there. I mean there are obviously a lot of, I guess, sort of kick the cans or workouts or other conversations going on right now. But I believe with enough equity, you will be able to raise $1 billion financing in the market, but they're going to be done at different kind of leverage points.

And I show our next question comes from the line of Blaine Heck from Wells Fargo.

Doug, your commentary around the most activ tenant groups in the market was really helpful. Can you guys just talk about how you're taking advantage of that activity amongst medium and small financial and professional services companies. Are you breaking down any of your vacant spaces into smaller spec suites or doing anything else to accommodate that demand from small tenants?

So the answer is we are, and we are seeing, I would say, very deliberate about the kinds of things we're doing. I'll let Bob talk, for example, about some of the activities we have going on in San Francisco right now where what was put in front of me was a series of changes to some existing availability that we think will be very additive to the market. Bob, do you want to talk about our approach there?

Sure. We have a program of doing spec suites at Embarcadero Center on the smaller spaces, and we have several that are in the works right now. And some of them are designed where they can be combined with other suites that we need larger space. And typically, when we do these turnkey, we might have to put a little bit of TI in after the fact when we find a tenant. But we've had great success with these smaller suites so far.

And Pete, maybe you can -- you or Ray can comment on the program we've had in Reston, Virginia for probably the last seven years and how successful that's been.

Sure. So this is Pete Otteni from D.C. The -- yes, it was not too many years ago that the rest and town center market was not one where we had done spec suites very often, but in the intervening 24 to 48 months, we've done quite a few of those. I don't have the exact number off the top of my head. But it's in the high the number of -- the number of spec suites that we've done out there and all with great success, many leased prior to or at delivery. And then all of them that have been delivered are leased at this point, and we have activity on the balance of them. We did a full floor of spec suite at RTC Next in addition to the spec suites in the urban core Town Center. And it's been a very successful program out there, capitalizing on exactly this type of tenant that's being discussed. And obviously, we have done them in D.C. for many years. that's a little bit more of a competitive market, but we think in the right buildings, for instance, after some good success on the leasing front at 2100 Penn, we're likely to have some space left there where we think spec suites will be very, very sought after due to the quality of the building and the quality of the spec suites that we'll build there.

And our next question comes from the line of Caitlin Burrows from Goldman Sachs.

Maybe just another one on leasing. In the quarter, you did 660,000 square feet of leasing and have talked about now an expectation for about $750 million square feet per quarter the rest of the year. So I was just wondering, are you seeing activity that specifically points to an increase in leasing activity in 2Q and beyond? And if so, what and kind of where is that? Or is it more of a general expectation at this point?

I think it's general expectation based upon SAC, right? So I went through our sort of pipeline, and I've got 900,000 square feet of active leases under negotiation I've got 1.65 million square feet of proposals that I believe will manifest themselves into a significant number of signed leases, and it's -- we're talking about being in April of 2023. So I've got another eight months ahead of me. So I feel very confident that we will be able to achieve a 3 million square foot leasing market I hope we're going to exceed it, but it's not based upon our projections. Our projections are 3 million square feet and that's where it was built into our occupancy numbers and Mike's same-store numbers.

Our next question comes from the line of Michael Griffin from Citi.

Maybe we just shift back to San Francisco, down the Peninsula probably better off submarket be curious to get your thoughts about Google announcing the pause on that mega campus in San Jose. Could you see this being a potential benefit for that Platform 16 project? I think it's not expected to be stabilized till 2026. I know you have a relationship with Google. So any comments you can make there would be helpful.

Sure. Bob, do you want to take that one?

Sure. First off, the CNBC report that came out the other day that they were stopping the project is false news. It's been reported by the mayor on Friday and Google yesterday that they're still planning on proceeding with the project today -- or excuse me, this year. We do have a relationship with Google, whether or not they would have interest in that project remains to be seen. But we will be the first building out of the ground adjacent to their campus. So time will tell. They're several years away from actually starting a building because they've got to put all the infrastructure in place person.

And I show our next question comes from the line of Vikram Malhotra from Mizuho.

Just two quick ones. So one, can you just remind us, are there any risks sort of with the -- I think you have three or four rework leases in terms of just their performance and potentially being those being given back. And then just separately, broadly, I know you had embarked on -- over time, you've been investing CapEx to kind of keep the buildings fresh. And I'm just wondering sort of in this environment, can you remind us sort of what the sort of CapEx outlay may look like over the, call it, the next 2 years to keep the buildings competitive?

Let me answer your second question first. So your second question on CapEx is that BXP typically spends somewhere between $2 and $2.50 a square foot per year on its overall, what I would refer to as ordinary course of business CapEx. And that is defined as base building and what I would say sort of modest refreshes on our portfolio. It doesn't include if we're going to build a new amend center at the General Motors building or we're going to do a new amenity center and a market or a center or we're going to totally got and redo 1 of our lobbies. So it doesn't include those types of expenses, which would be outside of that. With regard to WeWork, WeWork is client of ours, WeWork is clearly reducing the number of units that they have. We've negotiated some reductions from WeWork in our portfolio and WeWork is not likely to be in the same relative position in terms of the amount of space that they take from BXP when we get to the next quarter.

And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley.

Just one quick one and a follow-up. Just on the asking the leasing question in a different way. So I thought the expectation before was for occupancy to potentially be down in the first quarter, first half. So it sounds like there was probably more leasing than expected. Maybe you could just comment on that. And I'd also love to hear sort of your comments on occupancy for the portfolio by market, specifically in the West Coast versus the East Coast. And a follow-up -- yes, the quick follow-up was just on -- there's been a lot of sort of news about Salesforce in the market subleasing space. And I'm wondering how you guys are thinking about that. for Salesforce Tower? And if any other tenants potentially could be subleasing space?

Okay. So that's about 8 questions and I'll try and answer them really fast. So we lease 5.8 million square feet of space in 2022, and our expectations were for 3 million square feet in 2023, so a lot less. The first quarter, I think, was pretty consistent with what our expectations were for the year. So I don't think that there are any sort of changes on a relative basis. Regarding occupancy, we've been pretty consistent with where we've basically been saying we think occupancy is expected to go down a little bit in 2023. I think we didn't describe exactly when that's going to occur. There will be some reduction in occupancy likely in the second quarter because we have some expirations. And then the 1.2 million square meter space that I described that we expect to get in service in '23 is more towards the back end of the quarter or the back end of the year, so it will pick up again. But net-net, we think our occupancy will be relatively flat to modestly higher as we enter the end of 2023, early 2024. With regard to Salesforce Tower, Salesforce.com has space on the sublet market. We're not part of their conversations. They have not come to us and said, "Hey, we have a tenant that would like to do a long-term lease? And would you consider doing a stub or would you consider taking the space back. So I'm not aware of what their specifically is going on with their sublet. But I can tell you that they're single location is likely to be at Salesforce Tower when they sort of get done with their "subleasing the space" because they've moved out of 350 Mission, and they have the majority of their space at 50 Fremont on the Sublomarket. And they obviously, they pulled out of the other buildings that were going to go up in that neighborhood. So the thing that's left is Salesforcetower.com.

I would just add, we have -- Bob should comment on this. We have market inquiries relatively frequently for the Salesforce Tower, and it's completely full. And one of the reasons Salesforce is putting floors in the tower on the market is because it's actually the easiest space they have sublease given the attractiveness of the asset.

Yes. I would just add, the building is 100% leased. It's probably the most sought after building in San Francisco for space and we get multiple inquiries every month about people looking for space in the building.

And I show our next question comes from the line of Dylan Bazinsky from Green Street.

Just curious how you guys are thinking about buybacks or potential buybacks in the current environment. Owen, you mentioned the 9% implied cap rate that the stock now trades at today. And I realize that obviously, office transaction markets are fairly illiquid. But if you guys were able to get dispositions to the finish line, would you guys view buybacks the potential use of that capital?

Well, we think that our stock represents a very uniquely interesting investment, particularly at this point in time. Most of the inquiries we've been getting recently, and that's the reason why Mike and I spent so much time on it in our remarks is our access to capital and how are we dealing with upcoming debt maturities and things like that. So in this kind of environment, buybacks are not a priority for us. And we also -- we have found interesting uses for the capital. We just put on our development pipeline this quarter. The 290 Binney Street development that's 100% leased to AstraZeneca and also the 300 Binney Street asset conversion.

And I show our next question comes from the line of Tayo Okusanya from Credit Suisse.

Just a quick one on office to resi conversion. Again, a lot of these buildings don't compete with your assets. So just curious how you guys think about that for movement? Is it something that you're excited about? Do you think it helps BXP longer term? Or just because it's not competitive product doesn't really matter to you guys?

No, I would say it this way. I think it's a very big trend that will unfold slowly. And the reason I think it's a very big trend is because I think virtually everyone benefits from it. There's too much out of -- there's too much obsolete office stock that something needs to happen with that stock. Number two, there is a shortage of housing in I think all the cities where we operate. Three, conversions would create more appraised value and more tax revenues for the cities that we operate in. And lastly, converting an existing building versus tearing it down and building something new creates much less embodied carbon. So I just think everything about conversion makes a ton of sense. The issue with it is -- and the reason I say it's going to unfold slowly is there are big challenges in doing it. First of all, building has to be empty, and there's not many office buildings that are fully empty, a lot of them are 50% empty or something like that. So that's number one. Number two, physical characteristics are very important, particularly the Bay depths in the property, access to light and air is very important for residential. So very large floor plate buildings they'll work as well. And then lastly, economics; most office buildings today are not appraised or valued at a level where a conversion is economic. But I think these forces will work themselves out over time. If you just take a very small percentage of the 733 million square feet of office in our markets and say it's converted, that's very material. And in terms of BXP, we don't have any assets that are conversion candidates themselves. But I do think it will represent an opportunity for us to do some residential development. And it's a little bit different from a typical conversion that I think you're asking me about, but this world gate investment, albeit small, that we just made is an example of us reusing a parking garage and taking a site that's currently an empty office building and converting it into something more productive.

Yes. And this is Doug. I would just add that World Gate is sort of an illustrative example of what we think may happen in certain instances in certain cities where the buildings have no intrinsic value as a repositioned conversion, and therefore, the land is really where the value is, and it probably has a higher and better use as residential. And so there are buildings probably that will be taken down and the sites will be then readapted as residential sites even though they're currently commercial office buildings.

Why don't we circle back to Hilary on 360 Park? Hilary?

Thanks, Helen. Can you guys hear me now? Okay. It's Hilary Spann. I just wanted to add a little bit of color to the leasing activity in Midtown South at 360 in addition to what Doug has already described with regards to the pipeline that's either out for signature or in negotiation. Last quarter, I told everyone that we thought that we would be seeing more demand from 50,000 to 75,000 square foot tenants leading into this year, and that largely proved itself to be correct. We are currently in discussions with five tenants that range from 25,000 square feet to 75,000 square feet at the building. But I think what is more interesting, and this is really just sort of a check on the spot market for leasing in Midtown South is that recently, we have toured 2 150,000 square foot tenant and one 200,000 square foot tenant for 360 Park Avenue South. And we also toward just yesterday at Tenet that lumped to start at 30,000 square feet and potentially has growth to 100,000 square feet. So it seems that the demand profile is shifting a little bit again toward larger tenancy in the submarket. Obviously, that will take some time to play out as these tenants decide where they're going to go and document transactions. But I think overall, it's a positive signal for the market. And if I looked at all of that combined with what we're trading paper and the tours that are in the market, that represents about 715,000 square feet of tenants that are in the market right now. So just wanted to share that in additional detail with you.

I'm showing no further questions in the queue. At this time, I would like to turn the call back over to Owen Thomas, CEO, for closing remarks.

Just want to thank everyone for your time, attention and interest in BXP. That concludes the call.

Thank you. This concludes today's conference call. Thank you all for attending. You may all disconnect at this time