BXP, Inc. Q3 FY2024 earnings call

• Performance: FFO per share was $0.01 above forecast, leasing volume up, weighted average term for office leases long, and received sustainability awards. - Economic environment: Interest rates coming down, S&P 500 earnings expected to grow, return to office behaviors improving, premier workplaces outperforming. - Capital allocation: Active in acquisitions, pipeline of opportunities growing, pursuing disposition of non-income-producing sites, development pipeline with projects like 180 CityPoint, Skymark residential tower, 300 Binney Street, and 343 Madison Avenue under development.

In the third quarter, BXP's FFO per share was $0.01 above the forecast. They completed over 1.1 million square feet of leasing in the quarter, 5% greater than the third quarter of 2023. For the first three quarters of 2024, leasing volume was 25% more than the first three quarters of last year. Approximately 90% of BXP's NOI comes from assets in CBDs that are predominantly premier workplaces. These CBD assets were 90.1% occupied and 92.1% leased as of the end of the third quarter.

• For 2024, narrowed FFO guidance range to $7.09 to $7.11 per share. - In 2025, expect average cash holdings to be approximately $800 million lower, interest expense flat to modestly lower, and incremental income from developments like 300 Binney Street and Skymark Residential. - Will provide full 2025 guidance in January.

• Market forces could cause actual results to differ from forward-looking statements, including factors in SEC filings. - Long-term interest rates rising could impact real estate valuations. - Leasing market recovery in some areas may be slower than expected, especially in certain West Coast markets.

Q: Just turning to the leasing markets, can you just give a little bit more feel for what kind of needs to change in San Francisco, West Coast, maybe Boston suburbs as well?

A: Need to see more technology and life science demand come back, including company formations with capital. Also, product and location differences matter, with premier workplaces and amenities being key.

Q: How are you thinking about the pre-leasing and the risks that you take at 343 Madison to move forward in light of the fact that some of the development has been kind of slower to lease up than you would like?

A: North of 42nd Street is strong financial and legal services market, south is more tech-driven. Need to match right demand profile client with premier workplace.

Q: I'm curious if you can give any color just on the Bain renewal in Boston and whether or not they were a potential candidate for that development you've got potential in the Back Bay, 171 Dardmouth?

A: New building construction in Boston today has higher costs, so timing doesn't pencil out relative to existing rents now, but could change with different market conditions.

Q: Just a question on the D.C. market. You guys made some positive comments on what's going on in D.C. and certainly echoes what we saw when we were down that market earlier in the month. Just looking at twofold. One, as you think about the rents that are rolling in D.C., directionally, do you see those rents, especially in the district rolling up, rolling down? And then two, is there willingness -- are the tenants themselves willing to pay the rents necessary for new development? Or do you see this market as really just trying to cram into the existing buildings that you have right now?

A: In D.C., leases have annual bumps, making rent roll up hard. There are opportunities for better amenitized new high-quality product, with rents for new buildings 15%-20% higher than existing trophy quality product.

Q: Hey, Owen, guys thanks for taking my public you sort of alluded, if I look at the public, and you sort of alluded to this a little bit earlier in your remarks, the public office owners, not all of them, by the way, but some of them like yourselves are getting a green light to grow externally from the market. You're all trading at a premium to consensus and estimated NAV. What -- but you have this issue about the lack of transactions in the market as well. How do you think about the timing or potential, what are the catalysts that are going to need to occur for transaction activity to pick up? And how do you think about your cost of equity to fund those potential transactions going forward?

A: Look-through cap rate is in the mid-6s. Lower interest rates and opening of CMBS market for office sector could help. Fatigue on sell side may also spark new activity.

Q: Hi. Good morning everyone. I know you aren't giving 2025 guidance, so you're probably less inclined to talk further out. But with that said, I guess, bigger picture, as you consider occupancy improving, development coming online, in-place debt being refinanced, any comments you can give on kind of the trajectory of FFO? Or could you quantify any of those building blocks?

A: Optimistic about markets recovering, expecting occupancy gain and potential external transactions to drive FFO growth over time. Short-term interest rates coming down is a good thing, and floating rate debt will come down, while refinancing may impact interest expense on fixed rate side.

Q: Great. Thanks for taking my question. Could you give us some color on the sublease market across your markets? I know you talked about San Francisco already, but what about the others? And then do you have a sense of what percentage of your tenants are currently subleasing their space?

A: Sublease is biggest issue on West Coast, especially in San Francisco and Seattle. In other markets like New York City, not much of a sublease problem. Overall, there's some sublease space in portfolio but not competing with own tenants in transactions.

Q: Yes. Thank you for taking my question. So you talked about the survey for CEOs. I think that something like 83% or 85% see their people coming back five days a week over the next couple of years. I guess just could you sort of square that with what you're seeing real-time sort of on-the-ground conversations?

A: In New York City, at nirvana level of usage, in Greater Boston and D.C. at 85%-90% of that level, and on West Coast in San Francisco at 65% of that level. People are coming in three-plus days a week. CEOs want employees back, and companies like Amazon and Salesforce are taking actions, which will lead to more activity.

Q: Good morning guys and thanks for taking the question. Doug or maybe it was Owen, you talked about tech touring activity picking up in New York. Can you kind of compare that acceleration or pickup in tech tenant touring activity to some of your West Coast gateway markets, excluding any of the AI tenants that are in the market?

A: Tech demand in New York perked up after Labor Day, but taking time to make decisions. On West Coast, besides AI, there's broader base of technology companies, including autonomous vehicle industry.

Q: Hey, guys. Thanks for the time this morning. Just quickly, looking at the health of the New York market overall and the quarter-over-quarter decline in occupancy, can you guys just speak to how much of that was baked into your expectations into the quarter? And looking forward, do you expect a rebound in the fourth quarter? Or are there any headwinds that facing the Manhattan office market that maybe were not as well appreciated by the market?

A: Expected to lose O'Melveny & Myers at Times Square Tower in third quarter, other leasing activity in Manhattan is above expectation. Feel good about transactional demand for 2024 and 2025 in Midtown.

Q: Great. Thank you for taking my question. It sounds like you're potentially interested in acquiring more residential and you have some residential projects beginning the entitlement process. Just wondering if you could give us some color on what the playbook is there?

A: Residential playbook is different from office and life science. Skymark is an example, with less long-term hold and more generation of fees, profits on minority LP interest and carried interest. Also actively looking to create value from land inventory through various uses like multifamily, townhouses, big box, data centers.