Good morning, and welcome to Q3 2023 BXP Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference call 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 third 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 measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes that 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. [Operator Instructions]. 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 operating outperformance in the third quarter, key economic and market trends impacting our company. And BXPs capital allocation activities for the quarter. BXP continued to perform in the third quarter despite escalating negative market sentiment for the commercial real estate sector. Our FFO per share was once again above both market consensus and the midpoint of our own forecast. We completed over a million square feet of leasing in the third quarter with a weighted average lease term of over eight years, and increased portfolio occupancy despite a weaker operating environment for most of our clients. We completed multiple company and asset specific financings both elevating our liquidity position and demonstrating BXPs sustained access to the capital markets. Moving to the economy, notwithstanding the Federal Reserve having increased the discount rate, five and a quarter percentage points and the 10-year U.S. Treasury having risen nearly 3% All since the since March of 2022. The U.S. economy's headline statistics remain remarkably strong, with GDP growth at 4.9% in the third quarter 336,000 jobs created in September, and the unemployment rate steady at 3.8%. This rosy economic picture is misleading as it does not accurately reflect the market tone and operating environment for many of our clients. Assuming forecasts for negative earnings growth in the third quarter are accurate. S&P 500 annual earnings growth has been negative for the last four quarters. Much of the recent strength in GDP has been consumption related. And Job creation has been in the leisure and hospitality healthcare, education and government sectors, not in the office seizing sectors such as information and financial services. Our clients are corporations that actively managed their headcount and operating expenses in times of weak or negative earnings growth. And…

Thanks, Owen. Good morning, everybody. Client demand across our portfolio has remained pretty stable over the last quarter but final leasing decisions are taking longer not pretty consistent with what Owen’s talking about relative to challenges with regards to the profitability of corporations. Our buildings continue to see the most activity from financial services, professional services, law firms, administrative services and asset management. Traditional technology demand continues to be absent from our markets and more times than not renewing technology clients are reducing their leased premises. This is most prevalent in our West Coast properties. Pretty much the same picture that I painted last quarter. Growth from the AI organizations in the city of San Francisco is real. More than 700,000 square feet of leasing has occurred in the past few weeks. And there have been billions of dollars of recent investment into this growing ecosystem. For now, that leasing is focused on large well-built opportunities that are available at significant discounted terms relative to the rents being achieved in premier buildings. Reducing availability is a positive for the broader San Francisco market, but it's not going to impact leasing and Embarcadero center in 2024. The concentration of strongest user demand, often with growth for our assets, is still broadly speaking alternative asset managers, private equity venture, hedge funds specialized fund managers, these companies are growing their teams and capital under management. This pool of clients typically wants to occupy premier workplaces to illustrate the point. During the third quarter, we completed a 15,000 square foot expansion for a hedge fund in Manhattan. And a 52,000 square foot multi floor lease with a private equity firm growing in our portfolio in Manhattan. A 70,000 square foot asset manager is growing in our portfolio in Manhattan, and an expansion for a…

Great, thank you. Good morning, everybody. I'm going to start my comments with some discussion on the debt markets and our activity. Then I will go over the third quarter performance and the changes to our 2023 earnings guidance. We have another busy financing quarter this quarter, we extended or refinanced mortgage facilities totaling $570 million. The two largest of these related to our hub on causeway premier workplace and retail mixed use project that's in Boston. First, we exercise the first of two one-year extension options we have on the $337 million mortgage loan on the office tower. And second, we completed a three-year refinancing of the $155 million mortgage loan secured by the low rise, creative office and retail component. We also expanded our corporate line of credit by $315 million to $1.8 billion. We honestly were surprised by the market's reaction we issued a press release on this earlier this quarter. As it increases our liquidity at a pretty modest cost. We had three new banks approach us, seeking to expand their relationship with us and up-tier the quality of their own client base. With so much uncertainty and illiquidity in the bank markets, our view is expanding our roster of banking relationships as a smart move. Last week, we closed on a new five-year, $600 million mortgage loans from a syndicate of banks on a portfolio of three premier workplaces in Cambridge. The credit spread at SOFR plus 225 basis points, is attractive in today's market. And we expect to use the proceeds to repay our upcoming $700 million bond maturity in February next year. Given the significant recent move in interest rates, we are happy with the timing of our last couple of bond deals, both of which have been below market coupons today. We…

[Operator Instructions] And I show our first question, comes from the line of Blaine Heck from Wells Fargo. Please go ahead.

Great. Thanks, good morning. Can you guys just talk about the acquisition or investment environment a little bit more? It still seems like we haven't seen the ways of opportunities that some well-capitalized potential investors, including yourselves, have been hoping for. I guess, are there any signs that opportunities are emerging? And if not, do you have any sense what needs to happen to shake things loose and when that might happen? And then lastly, in general, how much further does pricing need to adjust to make those investment opportunities more attractive from a risk-reward standpoint?

Yeah. It's Owen, I'll take a crack at that. I think that, as I mentioned in my remarks, I think buyers are concerned about two things. One, how do they underwrite lease-up and lease growth given some of the economic uncertainty that our clients face, as I discussed. And then second, what's their cost of capital, particularly their financing and can they get financing? So a lot of the deals that are happening right now, as I described, are small, private investors, probably not using much, if any, debt financing, things like that. So I think for -- so first of all, I think there's a tremendous amount of restructuring activity that's going on in the market generally. It may not all be reported, but it's definitely happening because there are over leveraged loans that are coming due all the time. And borrowers are in discussions with their lenders on what to do. So, there are lots of those things going on right now. And then I think second, for buyers to get more active, there has to be more visibility on the two uncertainties that I mentioned. I do think some of the interest rate behavior this morning might actually be somewhat helpful to that, because I do think a stabilization of interest rates would be very helpful for buyers to get more comfortable to do transactions. In terms of how much the price has to drop, I think for the space that we're interested in, which are obviously a higher quality building, it's hard to say, because there's not a lot of transactions that you can look at and say, what is the pricing today? But I just don't think, I think our general view at the moment is, all of the negative perspective out there on office is, in our view at least irrationally spilling over into premier workplaces, which will create opportunities for BXP.

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

Thanks. I was hoping we can maybe get a feel for in terms of the impairments that were done to the JVs, if there's any sense on how much the unlevered asset values may have changed in that impairment analysis?

Sure, Nick, this is Mike. The information in our supplement, I don't want to go through those details right now, but there is information in our supplemental that provides kind of what the changes in net equity values are on those assets. So, that you can determine that. Overall, from our perspective, this is an accounting adjustment that we felt we needed to make based upon the accounting rules for our consolidated joint ventures. And I don't think it necessarily reflects a meaningful change in the prospects of these assets other than Platform 16, which we talked about last quarter, where we're stopping construction. The other ones, if we had to look at -- we looked at every one of our joint ventures, just like we do every quarter. And given the kind of higher for longer and the rates. Our view is that these rates are going to be this high, and it's not necessarily going to be temporary to us. It's like, is it more than a year or not basically. And so we looked at everything and there were three other ones that just kind of got tripped. So, we reflected those. And those three other ones were smaller. Platform 16 was clearly the biggest one by far, because if you start looking at the kind of discounting the cash flows for a land development deal until you're actually going to build it. The discount rate that you would use on a development rate, which is pretty high, has a significant impact on the value.

Thank you.

And I show our next question, comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Thank you. Doug, in your prepared remarks, you talked about occupancy basically remaining stable next year despite another year of a very favorable backdrop, 2.7 million square feet expiring, your pipeline is 1.2 million square feet. That happens to be your quarterly average. So, I was wondering what known move-outs are there that you see next year? And anything else -- any other tenants besides WeWork, that will be a headwind to breaking out of that 88% to 89% occupancy range?

Yeah. So, there's a difference between know, no move-outs and tenants being headwind. So because tenants that are moving out are not moving out because they're, potentially, "in financial difficulty", right? So, the only tenant of significance that we have in our portfolio, which is obviously having financial challenges is WeWork, there are some smaller tenants, 25,000 or 30,000 square feet that we're -- that we have every year in our portfolio, who don't seem to have a business plan that's going to be long term in nature and ultimately, they give up their space. But those are de minimis. The portfolio of expirations next year actually are not -- there aren't any enormous ones. There are a couple on the West Coast, and a couple in the greater Manhattan, our New York City region, about 250,000 square feet in Princeton and just over 200,000 square feet at the building that we have on Folsom, in San Francisco, and then we're going to lose about 75,000 square feet of space from expiration Trulia, Zillow at 535. And those are really the only large ones, other than our joint venture property at 250, Times Square Tower, where O'Melveny & Myers is moving out, about 250,000 square feet, but we've covered already 75,000 to 100,000 square feet of that expiration. So it's not any sort of large particular roll out that's driving our stability sort of comment. There are three different kinds of leasing we do. We do leasing, where we have available space that we lease, and that leasing typically involve a build-out. And in our marketplaces today, those build-out periods tend to be extended, meaning, we're looking at not knowing whether or not the tenant will be in occupancy in six months or nine months or 12 months, and we…

Thank you. And I show our next question, comes from the line of Alexander Goldfarb from Piper. Mr. Goldfarb your line is open.

Great. Thank you. Morning down there. So, question on development. In the release, you guys talked about an extension until February '24 for your 25% stake in the 3 Hudson, in the land loan that's under 3 Hudson. And at the same time, articulated your optionality on the MTA site. Just looking at the two projects, the MTA site would seem to be like the winner just given the focus on Grand Central, Park Avenue, whereas 3 Hudson just seems like a more challenged deal given the economics of trying to lease up that building at the necessary rent given the size of that building. So, as you guys think about the upcoming land loan on 3 Hudson, is that something that you would consider just sort of exiting instead of pursuing, and mentioning the MTA optionality, should we take that as considering that maybe you guys would not proceed forward with the MTA site?

Yeah. So Alex, this is Doug. I'm going to let Hilary give you the most detail on this. I would just make the following comment, which is, we don't think one is a winner versus the other. I think it's clear that the timing opportunities associated with one are probably shorter than the other in terms of when we might actually get something going. But I'll let Hilary describe the demand for space in new buildings and also the challenges associated with getting those deals going. Hilary?

Thanks, Doug. Hi, Alex. So, as Doug noted, the two buildings are very, very different opportunities. 3 Hudson Boulevard is a 1.8 million square foot building, whereas 343 Madison is currently still in the design process, but let's just call it, 850,000 square foot to 900,000 square foot building. So, some of the demand that is currently in the market actually could not be satisfied by 343 Madison. So there are a few tenants in the market that are 1 million square feet, that are actively looking for space and they would need a larger building than what can be constructed at 343 Madison. To Doug's point, in order to build such a building, those clients would have to be willing to pay a rent that generated an acceptable return on cost to us at 343 Madison. And those decisions in this capital market environment takes time for clients or prospective clients like those to make. The prospective client base at 343 Madison, by definition, is somewhat smaller. There's plenty of demand among clientele in that square footage range as well. And again, the question really comes down to who's willing to commit to the project at the rents needed to launch the development. But I view them as distinctly different opportunities. And opportunities that serve different segments of the market. So, hopefully, that answers your question. But I agree with Doug. I wouldn't characterize one as better than the other. They're just very, very different opportunities.

Thank you. And I show our next question, comes from the line of Michael Griffin from Citi. Please go ahead.

Great. Thanks. I think in your prepared remarks, you mentioned some assets you're considering for sale. I'm just curious if you can quantify, what kind of IRRs buyers are looking at and kind of where pricing would need to be in order for you to effectuate on any of these potential sales?

Well, I think it varies, Michael, widely, depending on the quality and location of the asset, the leasing status of the asset, the walls of the asset. I think borrowing cost today with the 10-year, I guess it's dropped a little bit today, but pushing 7%, I think for the highest quality assets, you're definitely above that. And for an asset that has a lot of leasing and other risks associated with it. I think you're looking at double-digit return.

Thank you. And I show our next question, comes from the line of Michael Goldsmith from UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. Owen, you mentioned in the prepared remarks about how BXP's tenants are more cautious in the space commitments on many of the traditional macro indicators may not accurately reflect what's going on in your business. So, recognizing that different cycles have different drivers. What metrics do you think might more accurately reflect the business now, and are the ones that you're monitoring so that we can follow along at home? Thanks.

Well, so I think this is part of something that's been confusing in the marketplace because generally, when you have a recession, company's earnings are down. And they lease less space, and that's what’s help cycles have traditionally operated for office companies, because leasing slows down when you have a recession. Here, it's confusing because it's very different. All the economic indicators look favorable, GDP growth, employment statistics. But if you dig into those statistics, it's a lot of its consumption related. And a lot of the job creation isn't in office using jobs. And then if you look at earnings, which is what our clients are looking at, is their own earnings trajectory, it's negative. It's been negative for the last year, assuming the third quarter is negative. So, that is the driver of client behavior. If you're the CEO of a company, and your lease is coming up or you're thinking about your space requirement, your decisions about that are going to be very contingent upon what you think the future prospects of your business are. And many businesses are negatively impacted by rising rates and some of the uncertainty in the economic environment. So, that's the backdrop. And so I think coming back to your question, I think certainly lower rates will help. And I think as earnings generally rise, I would expect that our leasing activity will rise with it.

And Michael, this is Doug. I would just say that the best measure of corporate activity as it relates to the business that we are in, is job growth. And job growth typically is a little bit murkier. You can look at the employment numbers, but you really have to get into the specific industry categories, right? So government and hospitality are not going to be favorable to office, but financial services or technology or life sciences are going to be. And as you start to see the job listings start to perk up a bit, as you start to see hiring announcements by many of the larger technology companies and some of the financial institutions, which do in fact, broadly talk about those things, you will clearly see a more, I would say, conducive environment for office leasing on a going forward basis.

Thank you. And I show our next question comes from the line of Jason Wayne from Barclays. Please go ahead.

Good morning. You said in your prepared remarks, you don't expect WeWork to exit all of their assets. So, just wondering where you expect them to stay. And then you previously said that WeWork security deposits average eight months of rent. Is that a good number to think about when looking at termination income moving forward?

So, I'm not going to get into conjecture on where WeWork is going to decide their -- they have their productive units. And where they do it or where they don't. As Mike said, at the moment, they have stopped paying rent on two of our locations, which are at Madison Center in Seattle, and Dock 72 in Brooklyn. And we have three other locations with them which are in San Francisco. So that's the universe, and the decision as to what they are going to do, I think, is going to take some time. And they're going to have to figure it out. And then we're going to have the decisions to make as to whether or not we're comfortable with whatever they propose to us. And or taking the space back. So, I think that it's impossible for me to tell you where they're going to exit and where they're not going to exit. Mike, you can talk about security.

Yeah. I think on -- I mean you're correct on the security deposit because we said that before, that we have about eight months of security. And if the tenant defaults, we try to -- we sent out a lease termination. We execute that lease termination with the client. And if there's a security deposit, we get that, and we booked that all on the day that we get it. If the client is going to stay in the space for another 90 days or six months. We might have to amortize that over that period of time. The one thing I would add is that in the fourth quarter termination income guidance, there's two pieces to the termination income. One is, determination income we're going to be collecting that I described. But also at Madison Center in Seattle, their lease is way below market. So, there's what is called a fair value adjustment to the rent. And in order to take that off our balance sheet, we book that as income. So, about half of that termination income is this fair value that's kind of a noncash concept. And the concept is that once we get that space back either at termination or at natural maturity, we will be able to re-lease that space at a higher market rent. So, hopefully, we will be able to do that.

Thank you. And I show our next question, comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Yeah, thanks. I just wanted to circle back, Owen, on the distressed opportunities. I guess I'm just trying to get a sense from you as to kind of where you would need to peg stabilized yields in order to deploy new BXP capital given your trading 10 times cash flow and north of an 8% implied cap rate. And then just from a market perspective, could any of those opportunities take you to any new markets like, say, a San Diego or Austin to be, in addition to the existing markets?

I'll answer the second first and come back to your first question, Steve. So, we don't think we need to go to any new markets. We have a very significant footprint in our six core cities. And, in fact, one of the things that's going on now, which we have been talking about for several years is that the vacancy rates in certain areas of the Southeast and Southwest are actually higher than many of our core markets because of all the new development that's going on. So, we don't see a need or reason to expand outside of our footprint. Going back to your question about returns, we're going to focus on the premier segment of the market. And, so I think it's likely that the types of assets that we'll get involved in are un-stabilized. So, I'm not sure that the way to look at it is cap rate, but the way to look at it is total return. And I think that the total return requirement on a particular acquisition that we would look at would be, pushing double-digit returns.

Thank you. And I show our next question, comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.

Hi, good morning. Earlier, you guys talked about how you're opting to repay the $700 million of unsecured debt with mortgages collateralized by Cambridge properties at SOFR plus 225. So, what did you consider when opting for secured floating rate debt beyond just price? Was it price mixed with kind of BXP mix of debt or anything else? And I guess, in that decision, you were considering 10-year bonds. So, what pricing do you think you could issue a 10-year bond at today? Thanks.

Yeah. So, this is Mike. Look, we evaluated all the different markets when we decide how we're going to do a refinancing, and the credit spreads in the secured markets for very high-quality assets with long lease terms, we found is better than what the credit spread we can get from the bond market. So, our bond spreads right now for 10 years is about 285 for five years, it's probably 270-kind of area. So we're saving a lot in credit spread. The other opportunity, I think, we have is we're doing a floating rate deal. We haven't fixed it. We do have the opportunity to fix it via swap. And we're going to evaluate when and if we do that. As we kind of look at what's going on with interest rates over the next period of months. And if it becomes evident that SOFR is going to be dropping significantly by the FED in 2024 and 2025, we may keep the floating. If we see an opportunity to fix it because there's some sort of dislocation between the swap markets, we may fix that for a period of time. So I think it provides some flexibility that way. And it’s also a floating rate mortgage is prepayable. So if the market gets better for long-term debt two years from now, we can prepay this into a long-term fixed rate deal at that time. So, it does have some advantages that we looked at when we decided to do this bank financing.

Thank you. And I show our next question, comes from the line of Upal Rana from KeyBanc. Please go ahead.

Great, thank you. Doug, you went through some of the supply and sublease space availability in your prepared remarks. Given the elevated levels of supply and some of these spacing your markets, potential tenants have a lot more to look at today. Do you have a sense of how much of the available space is in direct competition with your buildings? And even though some of them may not be premier buildings, your potential tenants may be looking at them. I'm trying to get a sense of why tenants maybe, deciding to choose between your building versus others in today's environment? And if they're being more price sensitive today versus, or it could be something else?

Yeah. So, this is what I refer to as one of the sort of layup questions that I'm going to allow our regional teams to answer, because I think that they will be more -- they will be passionate about their responses. But in general, what I would tell you is not all space is the same. And there are many, many buildings that have either direct availability or sublet availability that are literally not part of the conversation. And so as you think about micro submarkets, getting down to a market like Park Avenue between 43rd Street and 59th Street. Or you're talking about an asset in the CBD of Washington DC that has views and is in a premier building, you would be surprised at how small the universe of opportunities may be. So, why don't I let Rod talk about the issues associated with the availability of chemicals [ph] that we're really dealing with. And then I'll let Brian talk about Boston. Rod?

Yeah. Hello everybody. So, there's definitely sublease space, a lot of it as everybody knows, in San Francisco. And some of it is higher end space. In fact, that's where a lot of the bigger deals over these last two years have actually happened. Some of them have been in our own buildings. 680 Folsom, for example, macys.com had roughly 240,000 feet available. And they leased all of it during the pandemic subleases. So, at the good space that has been out there has attracted some attention. But by and large, there's so much more that is not high quality and has either got no term left on it or it's got poor sponsorship with weak sublessors. So, those spaces are very difficult, and they're not going to compete with. We're not going to compete with them for sure. If tenant that's interested in those types of spaces is not going to go to any premier building.

Yeah, I would echo the same thing. I just had a brokerage dinner last night and with tenant rep people. And each of them expressed the same issue, which was, for their top-end clients, premier clients, they're having trouble with fewer locations to review. And it's not only just the amount of locations that they think are appropriate and been a lack of desire to do a sublease. And most of our sublease space tends to be in lower floors in this market right now. There's also the question of, for the first time I'm seeing tenant rep people really underwriting the landlord's capability to fund TIs. And that hasn't happened in a long time.

Thank you. And I show our next question, comes from the line of Dylan Burzinski from Green Street. Please go ahead.

Good morning, guys. And thanks for taking the question. I guess just going back to your comments on acquisition opportunities. Are there certain markets that you guys are looking at that you're getting more excited about deploying capital in today's environment?

The way we think about this is, we set, top down a parameter, which we have, which is our six markets. And in terms of specific investments, that is a bottoms-up process and a more opportunistic process. So, we're open for business everywhere, and it just depends on the opportunity, and we want to allocate capital to the best opportunities. That all being said, as you've heard from our remarks and you see in our results. It's easier to underwrite leasing activity in our East Coast markets, particularly in New York and Boston, than it is in our West Coast market. So, the assumptions that we would use in underwriting deals would obviously be more challenging on the West Coast given the market behavior.

Yeah. I just want to add one thing. And then maybe I'll let Hilary comment on this, for New York, which is, there is no question that the overall amount of demand in the market in the -- what I would refer to as sort of the Park Avenue District of New York, which is this area between, call it, 43rd Street and the 59th Street, Park Madison, Lexington, a little bit of Fifth Avenue is by far the strongest market from a demand perspective, we're seeing in the country. There are still really, really challenged opportunities in that market that are going to have to get resolved relative to the capital structures that these buildings are currently operating under. And you are not going to be able to, in my opinion, replace the mortgages that were put on many of these buildings, including Bs and mezzanine capital and preferred equity to the same level, which means there's going to be an equitization requirement. And that's going to potentially create opportunities, which, by the way, as both Owen and Mike said, that's why we were able to acquire the General Motors Building in 2008. That's why we were able to acquire 510 Madison Avenue. And Hilary, you may want to just sort of talk about what's going on in Manhattan.

Sure. Thanks, Doug. So as Doug mentioned, there are a number of high-quality assets in really desirable submarkets, the Park Avenue corridor, really all the way up to where the General Motors Building is that, or underwater on their financing and are having difficulty rationalizing, putting capital into the buildings to support leasing opportunities. And so we're really getting a lot of inbounds from the perspective of -- clients know that we have a strong balance sheet. They know that we're not over levered. They know that we can commit capital to leasing. So that's interesting to our benefit. And we're watching those situations where capital stacks are upside down, which may potentially present an opportunity for us. But again, to the point that Owen and Doug have raised, we would only really be interested in the highest quality assets that are premier workplace is consistent with what we already own. I would tell you, there's at least a handful of those situations in Midtown that we're tracking.

Thank you. And I show our next question, comes from the line of Peter Abramowitz from Jefferies. Please go ahead.

Yes. Thank you. One or two of your peers have mentioned just potentially some pressure on operating margins going forward, as return to office mandates have more of an effect than more people are in the office. Just wondering if you could talk about that, potentially, how we should think about that for your portfolio moving forward?

I'm going to get to be sort of tongue in cheek. We don't have any peers. We are who we are. And we operate our buildings in a very different way. And we've been operating our buildings with an expectation that our buildings are fully occupied for the last couple of years. So, return to work and increase occupancy, in my opinion, is going to have no impact on our margins. What will have an impact on our margins are, what I would refer to as the sort of atmospherics out there, which are, how will the labor rates associated with union contracts for janitorial work their way out? Will the insurance markets continue to be challenging relative to the number of weather-related events and how that's impacting desirability of the insurers to provide insurance? What will the municipalities do relative to their tax burden and valuations because valuations are clearly coming down, right? And so how will that be reflected in their desires to increase their rates. All of those things, I think, are going to have some degree of pressure on margins. They're not going to have pressure on margins on an incremental basis. It's going to be over a period of time because either our leases are triple net or there are growths with our operating base and that operating base is step based upon the existing lease. So, until you get the rollover, you don't really have that impact on your overall flow. And in general, if you look back historically, over the past decade, my guess is that the margins for BXP are somewhere in the mid- to high 60s, and they haven't really fluctuated very much. So, I don't think that is an issue.

Thank you. And I show our next question, comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Good morning. So, despite your FED payout ratio picking up this quarter, I know your FED is on track this year to deliver one of its best years. As we head into year-end using third quarter as a base, are there any factors we should be considering that could impact it after considering the FFO changes you highlighted? And can you help us understand how your FED growth has generally kept pace or outpaced FFO given how office is such a capital-intensive business? Thank you.

Thanks, Camille. I'll take that one. So, you're right. I mean, our FFO has held up really well. In fact, I anticipate that it's going to be somewhere between 5% and 10% higher than it was last year. And the primary reason for that is two things. One, we had a lot of free rent that burned off last year with some large leasing that we had done. And that became cash rent this year. So, that really helped our FFO. And then our leasing expirations in 2023 were lower. So we actually had to do less leasing to maintain the occupancy that we had. So our lease transaction costs are also a little bit lower. I think in the fourth quarter, we will see some incremental CapEx, if you look at the first three quarters of CapEx, it's not really where we would have a typical run rate for CapEx. So, I think our teams out there are trying to get everything done. So I do think that our CapEx will be a little bit higher in the fourth quarter. But overall, I mean, if you -- the guidance for FFO would be something like $5 and $5.20 is what we're looking at, which I think is pretty solid. So, the run rate is a little bit lower in the fourth quarter than it has been, basically due to kind of catching up on the CapEx items that we've planned, but haven't quite been completed yet.

Thank you. And I show our next question, comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead.

Hey just wanted to zoom in on the life sciences segment. If you could talk about what activity or the pipeline is looking like? And if you can comment on large tenants versus middle and smaller users would be helpful. Thanks.

Sure. So, again, the breadth of our life science activity is our property at 651 Gateway, which we're in partnership with [indiscernible]. And there, the only significant demand that we've been seeing is from small tenants, meaning single-floor type tenants that are looking for turnkey buildouts. And then our other life science opportunity is the two buildings that we have in the Greater Boston marketplace. 180 CityPoint, which is just completed. And when anybody goes there, they are blown away by sort of what it provides, not just from a life science infrastructure, but actually from a human infrastructure in terms of the amenity base that, that building provides to any client and why they would want to be in a building like that. And that our other building at 1034th Avenue. I would say we're seeing consistent tour activity, a couple of tours every week or so. These are, I would refer to as shoppers, not buyers, right? They all have a potential use for space, some of them are lease expiration-driven. Some of them are related to potential opportunities for successful drug discovery from a commercialization perspective and therefore, added capital and therefore, the ability to hire more people, but they are being very, very cautious and it's an elongated process. And for the most part, those tenants are privately funded organizations. There are a few public out there. There's one or two sort of large organizations that are I would say, traveling around in the Greater Boston market as well as in San Francisco that are, I think they are the same names you would have -- you probably would have heard 18 months ago. Looking for space, and they haven't yet to make a decision. And they could, at any time, make a decision or they could continue to postpone. So again, it's a relatively slow process and the demand is like the demand was, call it, back in 2014 or '15 relative to the demand that we were all experiencing in 2019, '20 and early '21 where it was just explosive.

Yes, for Boston, Doug's description is spot on in terms of the underwriting of what we're seeing. I would add, over the last two weeks, we have seen some encouraging amount of tour uptick. And in size as well, not huge but midsized 30,000 to 60,000 feet, a couple. And then also, we've been encouraged by the quality, as Doug mentioned, of these clients.

Thank you. And I show, our last question, comes from the line of Omotayo Okusanya from Deutsche Bank. Please go ahead.

Hi, yes. Good morning, everyone. Just if you could make any quick comments just about your outlook on life sciences. Is this an area you think you might dive into more as we go into 2024, fundamentals still somewhat uncertain, and it's an area where you may not do as much in. Any commentary would be appreciated. Thank you.

Okay. So I'll just, I'll assume that you'll -- the comments that I just made are not meant to be repeated. So let me take a different tack, which is we are not planning on starting any new life science activities in any of our marketplaces given current conditions. That being said, we have opportunities to build some fabulous life science buildings on land, which has virtually no basis in it. And therefore, we have a "cost advantage" at some point, if there is demand. When there is that demand, we will sequentially start to think about how we might be attractive to tenants that are looking for buildings where the economics would justify the new construction of the life science relative to where the market economics are. But in the short term, meaning, 2023, 2024, there's going to be absolutely no expectation for us to be starting a new life science building. There are a couple of places in our portfolio where we have existing office installations where there's actually some interested life science demand, were a tenant to show up and say, hey, we want 40,000 square feet in this particular location, would you consider putting the infrastructure in to the building to allow us to do light or heavy lab research? We would consider doing that depending upon the credit of that company. Those organizations could be anywhere in our portfolio. But absent that, what you see is what you get relative to our existing life science platform.

Thank you. And I show, we have a question from the line of Jamie Feldman from Wells Fargo. Please go ahead.

Great. Thanks for taking my questions. I guess since I'm last, maybe if you guys don't mind, if you humor me, I can ask two. First is, you mentioned San Francisco back to 45% of its turnstile activity. I mean, how do you think that plays out over time? That's a meaningful difference from what you said New York, is it 95%? And then secondly, what are partners saying, like capital -- potential capital partners saying in terms of wanting to put money to work in office? Is it more conversion activity? Are there certain markets? Just, are they starting to think about writing checks here more aggressively?

Yeah. So, Jamie, I'll take a crack at it. Definitely, the Bay Area, and actually, I'd just say the West Coast, Seattle, it's true in L.A. as well, the turnstile activity is slower, I think that is primarily driven by the behavior and policies of the technology client base. They have been less forceful and less prescriptive about having workers come back to the office. That all being said, the activity is increasing, and I think it's going to continue to increase just more slowly. So what was the second part of your question -- was private equity. So look, there is -- I would say, certainly much more limited interest in the private equity industry today generally for office. That's why you're not seeing much transaction activity. As I mentioned in my remarks, most of it is being driven by smaller investors, family offices groups that are seeing the deep discounts that are being offered in the market and are not needing debt financing. That all being said, I do think that sophisticated private equity investors understand the difference between premier workplace and a typical office asset. And I do think for the right asset at the right price, there will be institutional interest in those kinds of assets.

Yeah, Jamie, this is Doug. What my sort of add-on would be the capital that's currently aggressively thinking about office, is thinking about trading, right? They're looking at, there's an opportunity for us to get in and then get out at a much higher basis and these are trading sardines, not eating sardines. We are in the eating sardine’s business in general in our portfolio. So we're looking at these things on a long-term basis, finding a capital partner that is, today, saying, okay, now I want to jump in and I want to invest money for a duration of 10 or 15 or 20 or infinite years. Is certainly more problematic in terms of just desirability because of the nervousness associated with the overall fundamental. However, there are some, right? And Owen and James Magaldi went to the various parts of the globe this summer and had constructive conversations. We are having constructive conversations with other capital from other parts of the world that are coming into the United States, it's a slow, slow process. And I can't tell you that there's a transaction that will get consummated with BXP with one of those capital partners in the next couple of months. But there are opportunities. And as Owen said earlier in his original comments, we are talking to some JV partners about putting capital into some of our assets right now that would, I think, be the kind of capital that we would look at as long-term quality institutional capital that is not looking to trade for a profit. And so that is what we're focusing our time and attention on.

And I show our next question, comes from the line of Richard Anderson from Wedbush Securities. Please go ahead.

Yeah, so thanks using Jamie's logic, maybe I could sneak in three questions since I'm last.

Four if you want.

So, Owen, getting back to being prepared to take advantage of the marketplace, it sounds like mostly individual assets you're focused on. But could there be smaller portfolios or dare I say, companies, either private or public. Or is that just, does that just get too complicated? And I wonder if you could share some sort of dollar value of the pipeline of opportunities that you're looking at today?

Yeah. I'm not going to rule anything out, but I do think the reason that BXP has 94% of its portfolio in premier workplaces as the portfolio has been curated one asset at a time, either through acquisition, development also through our disposition activity. So, I think single asset activity is more likely. And I think it's difficult to put a dollar value on what we're looking at. I mean, we are -- our job is to be in dialogue with owners of assets that we're interested in, and the lenders to assets that we're interested in and these dialogues are fluid. And I think it's really hard to put a number on.

Thank you. I show no further questions in the queue. At this time, I would like to turn the call back to Owen Thomas, Chairman and CEO, for closing remarks.

Thank you. We have no more formal remarks. I want to thank everybody for their time, attention and interest in BXP.

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