BXP, Inc. (BXP) Earnings Call Transcript & Summary

Okay. Sara, are we ready to go?

We are.

Okay. Wonderful. Well, good morning, everyone, to remote NAREIT. This is Owen Thomas, CEO of Boston Properties. It's a pleasure to be here. I was going to say with all of you this morning, but I guess with all of you remotely this morning. I'm joined by 3 colleagues, Doug Linde, the President of Boston Properties; Mike LaBelle, our CFO; and Sara Buda, our Head of Investor Relations. I'm going to kick it off and then turn it over to Doug. I'm going to kick off with an introduction of our company. For those that are unaware, Boston Properties is the largest public company in the office space. We have nearly 200 properties in 5 markets, which I'll talk about in a moment, about 52 million square feet. We are an S&P 500 company. We're investment-grade rated. We are also a very significant developer of real estate. We have 5.2 million square feet of development underway at the current time. We also have, we think, a resilient business model. Our weighted average lease term for the leases in our portfolio is 8.1 years. I do think a hallmark of Boston Properties that we're quite proud of is the quality. So if you look at the quality of our portfolio, we own some of the most notable assets in the markets that we -- most notable office assets in the markets that we operate in. Assets like the GM Building in New York and the Salesforce Tower in San Francisco and the Prudential complex in Boston, just to name a few. We're also in what we believe to be the most vibrant office markets for development and investment in the country. If you look at the slide that's up right now, we're one of the largest landlords and developers in the Boston area, in New York, in Washington, D.C., in Northern Virginia, primarily in Reston. Also in San Francisco, we're one of the largest landlords. And we did enter the Los Angeles market 3 or 4 years ago, and we're one of the bigger landlords in the western part of L.A. And we do believe, over time, these markets both for -- present some of the best opportunities for real estate investment, given the dynamism in their growth dynamics, because of the industries that reside there as well as the barriers that exist in those markets for development. As I mentioned, we think 3 of our -- highlights of our company are quality. I talked about the quality of the assets that we own. I would also point out, we're generally delivering into the market somewhere between $750 million and $1 billion of new developments each year. So our -- and we're also selling something like $250 million to $500 million of assets per year. So by definition, our asset portfolio is getting younger every year, which is important. And we also spend material dollars in modernizing our older well-located properties, and that's very important for our competitiveness and the quality of our assets. I talked about our rating. I talked about our leadership team. Our executives are some of the most known real estate executives in their local market. Also, our agility, we have a very diverse tenant mix. Our largest -- we only have 3 tenants that represent more than 2% of our total revenue stream. And our customers tend to be leaders in their own spaces, whether it be technology, financial services, legal services and other groups. I talked about our modest leverage. We have very substantial liquidity, with over $3.2 billion of cash at the current time. And I think very importantly, in terms of agility is our ability to take advantage of the investment opportunities at the moment. Clearly, as the economy was recovering after the global financial crisis, we were very active developers and we materially grew our portfolio through development at high yields relative to cap rates over the last 6 or 7 years. Now with the pandemic and the recession that we're in, I do think there's going to be more acquisition opportunities that we can also take advantage of, particularly if these acquisitions involve lease-up and other skills that are required to increase value at the property level. And then lastly, our durability. I mentioned our 8-year weighted average lease term, which provides us durable cash flows. We've had very high levels of success with our collections, which Doug is going to talk about. We have a strong growth profile, not only from the durability of our existing tenants but also from the development pipeline that we have underway, which is over 5 million square feet that's 73% pre-leased. If you look at our growth. There's 2 ways, I think, to think about our company from an investment perspective. The first one is growth. If you look at our current development pipeline, which as I mentioned, is over 5 million feet and 73% pre-leased, that represents 2.9% external growth over the next 4 years for our FFO per share. And then over the long term, our same-store NOI has been growing at about 2.8%. So the existing tenants in the portfolio, whether it be through renewals or rollovers, that's been our growth profile over the last 5 years. And then today, we pay a 3.4% dividend. So that's how you can think about growth and returns from our shares. And then, again, this is new to the pandemic, but I think the other important way to think about an investment in Boston Properties is the value proposition. We are -- Doug is going to talk about this. We're performing extremely well in this crisis in terms of collecting our rents, raising capital and doing leasing. But notwithstanding that, our stock has traded down about 35% this year. And if you look at this on a real estate basis, our look through cap rate, so to speak, is approaching 7%. And we do think -- before the pandemic, buildings that were similar to what we own in our portfolio were trading at cap rates of 4% to 5%. And though cap rates may be going up somewhat from this pandemic, it's nowhere close to 7%. So I do think there's a very strong value proposition in our shares right now. And Doug is going to address some of the reasons why that exists in the public market. So with that, let me turn it over to our President, Doug Linde.

Thanks, Owen. Good morning, everybody. So I think the -- with the -- Owen's talked about the sort of long-term strategic view that we're taking. I'm going to give you a little bit of a perspective on what's going on right now. The -- I think the first important comment to make is that we are collecting the majority of our revenue on a monthly basis. We updated The Street for our April collections, and we updated again for May, which is concluded. And we've had a very strong collection perspective. And the reason for that is that 86% of our revenue comes from our office portfolio, which is the dominant component of our income stream. And as you can see from this slide, we have, I think, dramatically shifted the composition of our portfolio makeup over the past decade to becoming more and more oriented towards technology and life sciences. We were a primarily financial services and a professional services organizational landlord when we went public in 1997 and continued on and then really made a push to change the allocation. And as you saw in our previous slide, now almost 60-plus percent of our revenues come from Boston, from the San Francisco marketplace and from Los Angeles, which are really dominated now by technology and life science users. We are in the midst of a development phase. We have $2.9 billion of development underway. The COVID crisis delayed the construction of our projects in Boston and in Cambridge for a couple of months, but we are now back to work in San Francisco, in Washington, D.C., in Northern Virginia, and in the Boston submarket, and we anticipate being fully back to construction in the New York City, where we don't really have much in the way of base building construction, just a sort of wrap-up of our projects at Dock 72 and at 601 Lexington Avenue at the end of next week. So we will be back in business from a construction perspective. And we are in a very comfortable perspective relative to the delivery of all of our developments. Everything is expected to be delivered on time. In fact, we have some slack in those budgets because we were so far ahead of our time frames, and we're in a position to get those buildings delivered in -- starting in '21 going through 2023. Next slide. So again, to give you a perspective on the really short term, we've collected 97% of our rents in the month of May from our office tenants. As you'll note from the chart on the right-hand side, the variable revenue in our portfolio really is from our parking in our hotel. We have one hotel, which represents about 1% of our revenue. It is shut down at the moment in Cambridge. And our parking revenue is down at the moment due to the stay-at-home orders, which has started to be lifted. The Boston marketplace came back on Monday. So all of our assets are now repopulating in Boston, Cambridge, Waltham, Lexington, Needham, in the state of Massachusetts and we're slowly starting to see a tick up in the number of people who are coming into those buildings and the number of people who are parking, and we're in a position where we expect the greater Northern Virginia marketplace to open up at the end of next week and followed by the other D.C. markets and then with New York towards the end of the month and California, either at the end of the month or early July at best case. And so we continue to do our business. We also updated The Street and told you that we did 870,000 square feet of new leasing in the months of April and May, and that included a new requirement from Microsoft that we were able to bring over the finish line, thanks to our team in Washington, D.C., for over 400,000 square feet, and that's a net absorption of space that was rolling over earlier this year and that we are now -- have committed to Microsoft for the next 12 years. We've also done a lease with a company called [ kaki ] for 160,000 square feet, a lease with IBG in Boston for 120,000 square feet. We've done 60,000 square feet of full-floor leases in the New York City submarket. And then we continue to do some small leasing in the greater San Francisco area, although we just don't have much in the way of available space there. So again, things are going well. There has not been a lot of "new activity" in the market over the last couple of months, largely due to the fact that you literally couldn't go into our space. We have begun to do virtual tours. We've got some really interesting technology so that we can start to show space and allow tenants and their representatives to get previews of the various opportunities they have in our portfolio from a virtual perspective. And then, obviously, following up with in-person tours. And we actually did some in-person tours in Boston yesterday, and we did one in Reston, Virginia last Friday. And so that is beginning again as well. Next slide. We've, I think, been at the forefront of getting our buildings ready back to go from a repopulation perspective. We commenced a health security planning process in early May. And we laid -- excuse me, in early April, and we laid out that product to our tenants, and it's also on our website in early May, and we followed that up with a series of town halls and so I think we have really been able to assure all of our customers that we are doing everything we can from an abundance of caution to -- in addition to the things that the CDC is recommending with regards to social distancing, and masks and hand sanitization to really put our buildings in a position to be very safe and very secure and very comfortable from an access perspective as our tenants come back into the properties over the next following months. Next slide. So I think the one headwind that we have been facing is the conversation regarding work-from-home and the issues that we have had with regards to the pundits that have quickly made commentary very publicly about, gee, do we really need our office space. And I think that from our perspective, our view on this is that this is a short-term phenomenon that we are all experiencing, that the experiment is going okay, people are functioning from a "home work environment," but that is really not going to be a long-term trend that is going to reduce the desirability of people working together in their offices. And so from our perspective and the Gensler's survey that we put out in our last press release, I think, is a good indication of this, demonstrated that 70% of the customers in larger organizations are desperately looking to go back to work for the majority of their day. And that while work-from-home is a great tool, and we've all acknowledged that it's worked a lot better than anyone probably thought it would in terms of functionality, it leaves a lot to be desired with regards to collaboration, culture and environment. And so we're really not in a position where we think it is going to be a significant disruptor for our business. Interestingly, one of the sort of result of the pandemic has been a desirability to "space out people", and we think that densification has come to its end on a relative basis. We won't be seeing companies looking to find ways to cram more people into as little space as possible. In fact, we think that they're going to be looking for incremental space in the next sort of cycle of leasing that's done so that they can best position themselves to respond to the next potential issue from a virus perspective. Not this pandemic, obviously, but the next one, if there is one, and we're there in a position where their space had been made to be flexible enough to deal with those types of situations. So we are very, very constructive on the long term, meaning once we get through this short-term period of disruption that we're all going through, as people go back to work and that we are very, very comfortable and are believers in our locations, in urban locations because that's where people have wanted to live, and we believe that the attractiveness of cities and the attractiveness of all of the cultural and leisure activities associated with cities, which are the reasons why the talent is going there, and that's why the companies want to be there, will continue. And we are strong believers in the long-term viability of our marketplace. Next. So let me turn it over to Mike to talk about our financial picture and our balance sheet.

Yes. Thanks, Doug. Good morning, everyone. So I wanted to just touch a little bit on our balance sheet, our capacity and some of the debt market transactions that we have conducted. We are in a phenomenal position right now from a liquidity perspective, to cover all of our obligations over the next couple of years. Our overall liquidity is $3.3 billion. We have $1.8 billion of cash, and we have a $1.5 billion revolving credit facility that is untapped today. We did issue bonds in the public markets several weeks ago. We did a $1.25 billion, 3.25%, 10.5-year bond deal to put additional capital on our balance sheet, both to make sure that in the case that things got worse that we had plenty of capital to fund all of our debt maturities through the end of 2021 as well as fund the remaining $1.2 billion of development funding that is necessary to complete our $3 billion pipeline that we have underway. This also provides opportunity for us to be opportunistic to the extent that investment opportunities arise that we are interested in. So we're in a great position, both on the defensive as well as the offensive side. Our debt maturity schedule is very laddered out. We generally use long-term debt. So this ladder actually goes out to 2031. And we generally use fixed-rate long-term debt, primarily in the public markets, although we also have access and utilize the mortgage markets from life insurance companies, from banks and from commercial mortgage-backed securities. With respect to our leverage and our capital structure, which is on the next slide, we're an investment-grade company, and we have been a high investment-grade company for a very long time. We have an A- rating from S&P and a Baa1 rating from Moody's. Our leverage is in the mid- to upper 6s and has been that way, pretty much since we've been rated. We did go down a little bit in 2014 when we sold a significant number of assets that delevered us and actually put us in a phenomenal position to fund our development growth that we have seen. We do see our leverage actually ticking down a little bit as we deliver our development pipeline because we have already expended $1.8 billion on a $3 billion pipeline that is not generating income today. And then overall, our balance sheet structure is generally between 30% and 40% of our market cap. And our FAD payout ratio, which is the payout for our dividend, we generate plenty of cash flow to cover our dividend, as you can see, our payout ratio ranges kind of in the 70% to 80% range typically. Finally, to conclude, and I'll leave some time for questions. Owen covered this and Doug covered this, look, we have a very high-quality portfolio. We're incredibly well positioned, both for strong markets and for more challenging markets. We have a portfolio of high credit corporate tenants with long-term leases, and they're paying their rents, even in this very difficult and uncertain time. We're highly occupied and our rollover exposure over the next several years is pretty moderate. So given our long lease term, we only have between 5% and 7% of our leases that expire every year, which gives us protection. I mentioned our balance sheet. And then our share price, obviously, has come down significantly which has driven our dividend yield up. Owen mentioned a 3.4% historical dividend rate. Our current dividend rate is 4.3%, and we're trading at a 7% implied cap rate, which is significantly below where these assets typically trade, which is between 4% and 5%. So there's a real misalignment today in the share price versus our NAV and versus the underlying fundamental strength of our cash flow streams. I think I'll stop there and ask Sara if we have any questions.

Thanks, everybody. We do have a few questions. The first is, have we seen or do we expect to see greater interest from tenants and prospects and the health-related features of green and green-certified buildings due to COVID-19?

Doug, do you want to do that one?

Sure. I think that we are, interestingly, at an inflection point relative to the operational components of a building. I think while there was a clear desire for people to go into "green buildings," healthy buildings are now clearly on everyone's tip of their tongue and in their conversations. And we actually think that landlords that are able to, like Boston Properties, demonstrate leadership with regards to how they are managing their buildings, most importantly, from an air quality perspective in terms of the amount of circulation of air that they're able to provide, as well as the materials that they're using, i.e., the filters that they have, potentially using ultraviolet light to reduce particulates. All of that stuff is going to become more and more important. In addition, we actually have a consultant on our staff now, Dr. Joe Allen from the Harvard School of Public Health, who's an industrial hygienist, who has sort of reviewed our standard operating procedures for how we are handling all of our mechanical systems and our janitorial products, again, to the -- from the perspective of making sure we're doing the right things and we're using the right kind of products from a health perspective. . And so we believe this really is going to be a differentiator on a going-forward basis and that buildings that have done it right are going to achieve a higher occupancy and hopefully, an overall higher rental rate than the buildings that don't.

Great. Thanks, Doug. The other -- we have several questions. But one, I think it's an easy question to answer. Any risk of cancellations to the development pipeline due to COVID 19?

Well, we have an existing development pipeline that is under construction that Doug described. It's over 5 million feet, $3 billion of investment, half of which, plus or minus, has already been done. It's 73% pre-leased. We will deliver those projects on time, and they represent, in our portfolio, a 2.9% external growth over the next 4 years. We also have a number of projects that we want to start to commence that we are going to wait for anchor tenants before we start those projects. But our land bank is 15 million feet. We have Fourth and Harrison in San Francisco, which we have the land under control. We have full design, we have entitlement, but we're going to wait for an anchor to launch that. Same with Platform 16 in San Jose, which is a $1.1 million -- 1.1 million square foot project. And similarly, in all of our markets, we have projects that we could launch, but we're going to wait for anchor tenants.

I think to the question is, is if somebody has committed to a pre-lease, do they have any out ability?

No.

Great.

Well, to be technically accurate. In those types of projects, a customer would have a milestone event. So if we didn't deliver the project on time, they could theoretically get out of it. But we're not in that situation in any of our projects.

Got it. Thank you.

We typically have between 12 and 24 months of cushion before that kind of event would occur. So at this point, even with the delays of 60 to 90 days that we've seen, we believe that all of these projects will still deliver on their original schedule.

Great. And then one more question is, thoughts on suburban and satellite markets. And related to that, how do urban high-rise office buildings compare with suburban from an air quality perspective? So one is about demand for suburban and the other is about air quality.

Doug, do you want to take that?

Sure. Let me start with the air quality piece. So every building is a little bit different in terms of the way their mechanical system has been put together. But in general, all of our buildings have the ability to increase the amount of outside air that we are using. And that outside air, obviously, is clean. And we bring that air in. And then to the extent that we're in a more or less human environment, we cool that air and condition that air. And our systems are set up so that we can take a significant amount of outside air. On the thing I think we're doing more significantly today than any other time is actually running our systems for longer periods of time, which, interestingly, has a negative impact relative to "green" because you're using more utility and more energy costs, but really to increase the number of circulations of air that we have in our buildings on a day-to-day basis. And so in general, we're trying to get to a standard where we are circulating air in our buildings consistent with how you might circulate air in a life science laboratory, which has a significant amount of, obviously, particulates and chemicals in their buildings. And we want to get to that level, and we're able to do that in the vast majority of our assets, both urban and the suburban. With regards to satellite offices, we've seen a few tenants make inquiries in the short-term about making sure that they have places for their tenants who desperately want to get back to work, who might not otherwise, because of where they're physically located, be able to get to their locations easily. They may have kids who are not able to get to child care. They may have kids who -- children who were going to summer camps that aren't there. And so they need to be a little bit closer to home and/or they may not, right now, feel comfortable with public transportation. But in general, we think that's a very short term phenomenon. And that overall, all of our assets are being -- we're being inundated with questions from our tenants about what we are doing and how we can quickly get them back into occupancy across the entire portfolio.

Great. I believe our allotted time was until 10:05, so that may mean that we're not able to answer the additional questions that came through, and we did have several. But I will point out that we are certainly available if anybody would like to reach out. I'm happy to put you in touch with our management team or answer your questions directly. My e-mail is [email protected], and we are happy to answer any additional questions. So thank you all for your time.

Thank you, everyone. Have a great day.

Thank you.

Bye-bye.