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

I want to welcome everyone to Citi's 26th annual and very first virtual global property CEO conference. I'm Michael Bilerman, Global Head of the Real Estate and Lodging team here at Citi. And I really hope everyone had a delay and stress-free trip down to the conference. And hopefully, you also got an upgrade to your room. Oh wait, Mark, that's from last year's speech. We're supposed to got -- edit that out. Anyways, on behalf of my entire team and my Citi colleagues around the world. We hope that each one of you, your families, friends and colleagues are all doing well after the difficult 12 months that we've all experienced. The good news is the vaccines are here and optimism is increasing, and I'm very confident that we'll be altogether this time next year in Florida. While uncertainty remains and there's still a lot of debates about the pace of the recovery, the longer term impacts from the pandemic, and a lot of other considerations, consumer and business activity seems to be picking up, and there definitely feels to be more optimism overall. Now I recognize that this conference looks a little bit different this year as we're not physically together. While we lose some of the benefits, that the beautiful Florida setting, all of the events and the face-to-face interactions that they provide, we think you'll still get a lot out of the next 4 days. And we've worked really hard to replicate a number of things from the conference, which starts with CEO attendance. We have a record number of companies attending this year, and I want to sincerely thank the CEOs and their management teams for providing time with investors and our team over the course of this week. We had a great morning, didn't have tech issues, thank, God, of all the analysts-moderated CEO roundtables. And I think we have another 150 sessions over the next 3.5 days. So please be sure to go over to the conference site. Or you can watch them on Citi Velocity and you too can participate in them. They're 35 minutes in length with 10-minute breaks in between. [Operator Instructions] Now before introducing our keynote lunch speakers on our discussion about the future of spaces and places, I wanted to make a few logistical announcements. First, tonight at 6:00 p.m., we do have an interactive magic show. Now I'm told it's family friendly, so you can bring your spouses, your partners, your kids, girlfriends. And hey, if you still happen to be at your parent's house, bring them, too. The link is in the showcase site and should already be in your calendar. Tomorrow at lunch, we'll be discussing the future of traveling and spending with the CEO of American Express, Steve Squeri, and the CEO of Hilton Hotels, Chris Nassetta. At Wednesday's lunch, we have 2 professionals discussing healthy snack recipes and wellness tips to get you through these longer days. And on Tuesday and Wednesday night, there are a bunch of virtual events with corporates. So please reach out to your Citi salesperson if you need any help or information. We also have some live workout classes being put on by our colleagues at Citi Live Well Fitness, every morning at 7:00 a.m. And those are -- for your consumption, your camera doesn't need to be on. You won't see anyone, and they'll also be available on the site on demand. And we think that's a lot better than walking up the escalator and seeing the gym with everyone at the diplomat. So normally, at this point, I would tell everyone to get out your clickers because we're going to do a live survey, but that's not possible in this environment. However, we did create a survey, and that link is on the homepage of the conference site. We would very much appreciate if you can start filling that out at your leisure over the next few days. So with all of that, I'm really excited to have this discussion today on the future of spaces and places. I know this is a top of mind issue for everybody in our industry in really understanding how corporates are thinking about the utilization as well as the design of their spaces in a post-pandemic world. And I couldn't be happier to have our 2 keynote speakers to explore this topic. I'm going to first introduce Owen Thomas and then ask Owen to introduce Diane Hoskins. So Owen, I'd like to welcome you to the stage. Now many of you watching likely know Owen, who is the CEO of Boston Properties. Owners and developers of some of the most recognizable buildings in the core urban markets of New York, Boston, DC, San Francisco and LA. Together with President, Doug Linde, they have continued to position the company well and lead its growth initiatives. Now I first met owen about 10 years ago. I don't know if you remember, but it was a Lehman Holdings board meeting where Owen was their first Chairman before eventually joining BXP. Now I was asked in to speak with the Board about the public real estate market. And I get out and I read his bio, and I was like, "Oh my God, this is like the real deal. This has got to be a tough guy. 24 years at Morgan Stanley, was the CEO of the Asia business, he was President of the Investment Management business, he was on John Mac's Management Committee, and oh well, he was also a mechanical engineer." Now for those that know Owen, you're probably smiling because what I encountered was pretty different than my expectations. I found this extraordinarily nice, kind, thoughtful and very insightful executive. And I have appreciated our relationship to this day, including when I called him last month to ask him about Diane Hoskins, the co-CEO of Gensler. So Owen, I'll let you take it from there.

Great. Well, Michael, thank you for that very kind introduction. And I do remember that. We had some important REIT business at Lehman to attend to. And it's very -- it's great to be here with you, whatever that means in a virtual environment. But in all seriousness, it's my great pleasure this morning to introduce to all of you, Diane Hoskins. Diane is the co-Chairman and co-CEO of Gensler, and she's also very fortunately for us, a Director of Boston Properties. For those of you that may not know, Gensler is the largest architecture firm in the world. They have about $1.6 billion in annual revenue in 2020. It's -- the firm is #1 in so many categories. I don't even know where to start, so I'm not going to start. They -- Diane and her partners manage 48 offices and over 6,000 employees worldwide. The initial focus of the firm was on interiors, although the scope of the firm has expanded dramatically, but they have over 3,300 current customers, which I'm going to come back to in a minute. So on the personal side, Ray Ritchie -- by the way, Diane is based in Washington, and Ray Ritchie had been telling me for years that we should recruit Diane to the Boston Properties' Board. And fortunately, for me, Diane and I met on a specific project about 4 or 5 years ago. And I immediately knew that Ray was right. Many directors of a real estate company, particularly ones with experience in the business can help with investment decisions, capital allocation, audit and other matters. But as you're about to learn Diane, given that customer base, has a very unique lens on office customers, what's their behavior? What are they doing? What's important to them and to be able to answer those questions also by industry and by location. And she's been an incredibly engaged Director with our company. She interfaces extensively with our D.C. team. She was kind enough to be a keynote speaker at a leadership training event that we put on. And also, I think for the first time in Boston Properties' history, she actually made a presentation to the Board herself about customer trends. So any way, Diane, welcome to the Citibank Real Estate Conference. We're delighted you're here.

Well, thank you so much, Owen, for such a generous, maybe too generous introduction. It is great to be here with you and Michael for this important conversation about places and spaces. If anything, this pandemic has shown us all how important the places and spaces in our lives are and how they matter to the experiences we all have. So looking forward to this important conversation.

Great. Well, why don't we kick off. And if we think about a year ago when the pandemic hit, it obviously has changed a lot for both, you as leaders of an organization in having to react to the pandemic and all, basically working from home, but it also had a profound impact on the business that both of you do. And maybe Diane, you can start a little bit about just the very nature of places and spaces when we have all of this commentary about everyone's working from home how just as a leader of a design and architectural firm, what's the latest that you're seeing on that front?

Well, thank you, Michael. I mean, to begin, certainly, and you used the word leadership, and leadership was incredibly critical for every company this past year. And I think in all cases, we all grew and hopefully, we're all stronger than ever because of what we've learned. We figured out pretty early that it was all about our 6,500 people as many CEOs on this call had to really confront that issue of how do I keep my people safe. So it was about our people and of course, our clients. And again, I would say this was certainly the test of a lifetime for me and all of what that meant. While most of our people are in the U.S. I guess, I have to thank our China office for the crash course on how to run a business through a quarantine because while we were hit in March with the quarantine, our China offices went into the lockdown in January. They had to mobilize in ways that none of us had ever even imagined before or certainly not experienced before. The working from home, moving all of our work. And again, we work on huge, huge digital files. All of that had to be moved to the cloud and not reside on our servers. And we had to start using these virtual platforms like Zoom and Microsoft Teams to meet with each other. I mean, it was so different. But in a month, all of those practices were the blueprint for the entire firm. And once we focused on the safety of our people and the continuity of our work with our clients, it became how do we run this business because everything was done through these virtual communication platforms, we actually decided to use these platforms as a powerful engine to drive engagement with our clients and communities. And most notably, we've been doing research on the workplace for over a decade. But it really became pertinent for this past year as a result of the changing trends in all of what was happening in work. This research became the anchor of our conversation with our clients. And during the pandemic, we surveyed the U.S. workforce twice during May and also in September and gained incredible insights. And in fact, our insights have been covered in media all over the world. There was so much demand for our content. Again, this is our research content that we started doing live webinars and scores of individual salons with various companies to share this insight because this is the conversation that the CEOs that we're working with wanted to have. And in fact, this ended up with literally hundreds of webinars, we've challenged hundreds of thousands of individuals who've attended our webinars and read our research papers. But the big, big takeaway, I would say, is that we had to address the immediate issues and immediate needs of our clients that were emerging because of this dramatic change. First, it was about how do we work from home, then it was about is work from home another mode of working that we should employ. And now it's all about the return to office and how we're going to go down that path.

And maybe if we take it off of that part, which I know, Owen, you're probably very keen to get companies to come back into the office. How are your -- both of your conversations going with corporate leaders because I would assume on one side of the ledger, they look at rent expense. And all of the other benefits of being together are harder to quantify. And so maybe you can talk a little bit, maybe starting with Diane about what you're hearing from the customer base and maybe segment different industries about how they're thinking about that return to the office. Diane, you wanna start?

Sure. Absolutely. Sorry about that.

I thought I lost your line for a second. I got all nervous. It's almost like being on stage, almost.

It really is. It really is. So again, this focus on research and this consultative work, I mean every -- and again, as Owen mentioned we work across sectors and what has started to happen is that every project now starts with a real deep dive and a consultative way about figuring out the real estate strategy. How do you blend? What is happening with the HR conversation and the business operations conversations with an overall real estate strategy as well? This has meant different things for different parts of our business. Our work in retail probably has been the hardest hit. As it relates to what is happening in real estate. But at the same time, while, again, you're hearing about the dramatic shift away from retail real estate, retail is not dead. In fact, we're currently working with scores of retail projects with an amazingly diverse array of sectors within retail. For instance, retail banking is, frankly, on the uptick in terms of our projects. In addition, all of the major automakers are working with us right now in terms of the kinds of, again, retail engagement that they're able to create with their brands, especially the new electric car brands. And surprisingly, we're working on retail offerings with every single one of the major tech companies. The tech and virtual brands want a physical presence and they recognize that, that physical presence builds brand loyalty and creates market penetration. And from a real estate standpoint, what we're hearing is that as space is starting to become cheaper, there's more interest even from local retail, which is actually potentially going to improve and benefit our communities.

Right. And Owen, if I shift to you for a moment in terms of what you're hearing from the corporate leaders as we -- I feel like we've emerged over the last few weeks with vaccine distribution where the corporates are really starting to think about a more serious return to the office for their employees. What are they saying to you?

Yes, so a couple of data points, and then we'll go into the more anecdotal conversations. So the census in the buildings is growing every week as vaccine is being distributed and as infection rates come down, although it's still below what it was in the peak of November of last year. And then also, it's very inconclusive by customer or by industry segment. They -- and I think it's more business-specific. So there are certain companies in different industries who have said, working in the office is important and they've done testing and put in other measures. And so their census is much higher, but you can't determine anything by looking at the data that certain companies are coming back to the -- or certain industries are coming back to the office quicker and some are slower. But in terms of discussions that we're having with our tenants, with business leaders, I think generally, leadership believes working in-person is critical for long-term success. I think CEOs and boards are seeing their companies have some decay in their culture and their collaboration, and their ability to onboard and train employees. And I do think CEOs suspect that a key for success in winning long-term is to have collaboration and innovation, which is done in-person. That being said, given the pandemic and that we've all worked successfully, arguably from home for the past year. It is clearly a tool that can be used to do certain types of work, and I think elements of the workforce have enjoyed it and want work-from-home as a part-time benefit. If you look at the surveys that have been done. And I think most -- very interestingly, the survey that Diane talked about that Gensler did, it clearly shows that a minority of people want to work from home all the time. And a majority of the people want a hybrid work model. So I think the challenge for business leaders going forward is, okay, what do we do? What's the benefit that we're going to provide and how do we manage that? And I've heard concerns expressed to me by business leaders that managing in a hybrid environment might be more challenging than in a virtual environment because in a virtual environment, you know what you need to do to communicate with everyone. But when people are sometimes in the office, sometimes not, it's more difficult. So again, I do think there will be a return to the office. I think it's a little bit early still, even with the vaccines, the infection rate is still reasonably high, and I don't think companies are deeming today to be the date under which it's safe to return to the office. But I think that will change, and I think we'll see a much more significant returning to the office over the summer and into Labor Day weekend.

I remember last year, we were talking about Labor Day, but it was 2020 versus 2021.

Sadly true. Diane, maybe you can talk a little bit about how your customers are approaching sort of some of the challenges that Owen talked about in terms of the utilization in that design of space and that hybrid environment.

Yes. There's no question that like all the other sectors that office space and office buildings will be impacted. My hope is that with all the attention on the office and work that we'll see more investment in office environments that support people. I've been a student of the office environment pretty much through my entire career because it has always struck me that people spend large amounts of their day in work environments. And this is as important as all environments that we and the design profession and as architects design. Just to be clear, whether it's at home, the office, co-working or at Starbucks, how people get work done is highly impacted by their environment and their surroundings. And because of so much discussion about the workplace, I think everyone is starting to see how important our work environments are to our lives and our livelihood. Through a lot of our research, we have found that people want a place to work that allows them to be collaborative as well as have that focused work environment. And this is a little bit of the tension between the various settings. We've been tracking workplace needs and behaviors and trends, again, for the last decade. And interestingly, and this is on the point -- one of the points I think Owen was making that prior to the pandemic, we've been tracking year-over-year that U.S. workers spend around 45% of their time in collaboration and roughly about the same amount of time, 45% to 47% of their time in individual focus work. Well, the collaborative time actually now in 2020 has fallen to 27% of people's time. So normally, for years, it's been 45% of an individual would be in a collaborative, either formal, informal, planned, unplanned, but about 45% of the time in that collaborative mode, and it fell to 27% of their time. So again, that has an impact. There was a really interesting report that Deloitte published in 2014 on the rise of the collaborative economy, which is what everyone believes that we are in and we've been in for building into this entire decade. And according to that study, the benefits of collaboration can be measured in 6 critical areas speed, quality of work, innovation, employee engagement, growth and even profitability. And these are all measurable and have been measured. So with this dramatic loss of collaboration that we've seen companies really need to try to find ways to bring collaboration back for the sake of their future performance and success as an organization. There could be digital platforms that can get there. But what we've seen is that the easiest way to get there actually is to be in person. And so again, it's a challenge. There's lots of dynamics going on here. We're seeing in the tech industry, this is probably where this debate and discussion is going on in the most substantial way because of the scale of some of these companies and the potential impact of these decisions, most of the tech firms have been surprised at how successful work from home has been. But now in -- now that it's been over a year, they're seeing definite productivity challenges. And now are really getting serious about the strategy to return to the office. Many of our clients are trying to figure out, as Owen said, this hybrid strategy. And if they can pull it off and at the end of the day, it's really, frankly, somewhat challenging because it is a human capital as well as an operational challenge and then you wrap a real estate strategy around that, and you've got lots of variables to solve for. And it's kind of like nobody really wants to be the first out of the gate on this. Just anecdotally, none of our clients are actually reducing space, again, at the larger tech companies, but neither are they increasing space. Many are recalibrating existing space to shift from individual to collaborative. And at the same time, many of these companies are still growing like wildfire. An effect -- and lots of times we get asked the question, if people are thinking about a lot of the dynamics of the vaccine, meaning the distancing and all of that, is that going to affect? And is that impacting a lot of the design? There are some companies where that's still the conversation. But larger tech companies are really focusing more on the post-vaccine world and kind of skipping over that in between phase with the masks and the distancing. And again, this is -- a lot of effort is being focused on how do we solve for this critical question.

How do you think we solve the hybrid nature? I remember I lived in London 20 years ago, and I remember Fridays was always lighter in the office. The pubs were really busy. But the in office was less. I got to assume more people think Mondays and Fridays are their work-from-home days, and then everyone's going to want to come in, in the middle of the week. How are the conversations? Maybe starting Diane with you, and then we'll shift to Owen. How are the conversations with the customers in dealing with that?

Yes. I mean, that's -- that is the question. Will people come back? How do we do this? I mean, sort of in that short term, everybody went home quickly. I remember when we sent out the go-home order. It was like in a day. It happened. I mean, I'm sure that was the case for everyone. But the return won't be as fast. It's not going to be in that 1 day like when we all left. People have moved to other locations to stay with family, people have children and the school situation is still uncertain for a lot of folks and the vaccinations are uneven. And this all means that once a return starts moving forward, it will take time for people to move back. What I recommend is for companies to allow flexibility for some kind of a work-at-home strategy, at least for 3 to 6 months during that early-stage so that people can have time to readjust back. But the real question is the longer term. What should be the game plan? Our firm is studying this question with many clients. And in fact, most of our projects, as I said before, begin with these questions. We've really -- and I would stress with all of the CEOs on this call to emphasize first to determine your human capital and business operational goals. And then secondly, what is the real estate solution that supports those goals. At the end of the day, the real estate strategy should support your human capital and business goals. There are companies that are kind of getting this backwards. Maybe there's a cost savings in this that I should really focus on first. And then how do I wrap around a strategy around this reduction. I can save money on my real estate if people work from home. Look -- I mean, look, we're in a recession. I think there's merit to it. There's nothing wrong with that. But, let's say, 20% of your people work from home on any given day because you -- and it can work with what you do. So how much space does that save you? And I won't go into all the math because we'll lose the audience here. It might be 7%, and it might even be less than 7% of the space. Again, there's lots of things that have to get factored in. And so at the end of the day, the savings isn't a one-for-one in terms of your footprint. But then there are also trade-offs. Let's say you want to get that 7% reduction. Number one, you'd have to implement all unassigned seating in your offices, meaning people who come into the office would come in some sort of first come, first get workspace situation. And we have done studies on people in unassigned versus assigned seating. And there are reasons for companies to be careful of going into that kind of strategy without a lot of beta testing and studying. Among other concerns, unassigned seating has been shown to increase turnover of your staff. So you really have to balance the pros and cons and decide the goals that are important. And in that case, is retention important and more important than space savings and reduction of real estate costs. Look, unassigned seating works for sales organizations and consultants who spend most of their time out of the office or at their client sites. The whole unassigned seating trend started during the SNL crisis in the late 1980s. In fact, Ernst & Young, I believe, was the first to implement that kind of strategy, and they called it hoteling and it was a way to reduce their real estate costs during that downturn, right? And for the past 20-plus years, we've seen this strategy be workable for companies or departments within companies that are more sales focused, and again, really spend a lot of time out of the office, not full-time in office workers or even some of the time -- majority of the time office workers. Again, it's important to start with that business needs, human capital needs and then define the real estate strategy and ask the question, what is the best environment that will support collaboration, culture, operational speed and agility for your organization. And at the end of the day, not speaking out of school or wanting to mention any client names, but already, we are working with many clients, tech clients in the Bay Area that literally have said to us that when they go back to the office later this year, close to half of their staff will have never been in the office before. There is significant turnover going on right now. And there's large concern with work from home and retention.

Owen, you feel the -- how do you feel about that -- all that trend?

Yes. Well, I think on the whole notion of the future and how is the hybrid system going to work, I come back to, particularly, for office workers, at least in the things that we like to own. I think you have to think about this more as incentives and carrots as opposed to stick. You want to evaluate and encourage specific behaviors through rewards. So I think it's going to be -- I think our customers are going to increasingly have to have space with collaboration, amenities to make it more valuable and interesting for their employees to come to the office. And I think we, as landlords, it's going to be incumbent upon us to help our customers do this through having great buildings, close to public transportation, having great amenities located nearby because, again, it's not going to be a stick, it's going to be a carrot. You have to lure your employees back to the office make them want to be there. One thing that's interesting right now, by the way, if you look at leasing tour activity in New York City, the percentage that's being done in Midtown is much, much higher than it was pre pandemic. And nobody really knows exactly the reason for that, but I suspect it's because customers are increasingly focused on one mode of transportation. In other words, commute to one spot as opposed to getting up 2 trains. Because, again, it's more health safe; and second, it will take less time. Again, it's one of the reasons people are working from home is because they don't want to deal with a long commute. So if you only have to take one train, it's not as long a commute. So guess what, the companies are going to be more interested in those spaces because it's going to help them lure their employees back to the office. And then I think, look, then there has to be a market that's generated. Employees have to say to themselves, wow, I need to be in the office because I'm missing out. I'm missing those conversations, those interactions with my boss that I would not get when I'm at home because he or she has to set up a Zoom call with me. I'm missing out, and other colleagues are not, as a result. And then also business results. We're all in competitive -- our customers are all in competitive businesses. And it's going to be telling going forward to see these different business models and who wins and loses as a result. It will prove or not, some of the things that Diane was talking about in terms of the importance of collaboration.

Diane, we started, and you talked about the lessons and hearing from your Asia team, right, and preparing to shut down everything that was happening in the U.S. If we flip it the other way as Asia started to reopen more significantly in different parts, is there anything that you're gleaning from their return that would be impactful for other regions?

Yes. As with everything else, location matters, culture matters and economic drivers matter. China came back, as you said, from the pandemic very quickly. And they've reoccupied their offices the exact same way that they had occupied them prior to the pandemic. The stimulus to their companies is significant in terms of what's going on across China. And they are building for their future. There's an enormous amount. When I look at our China office and the opportunities and the projects that are going forward. In fact, a lot of our U.S. colleagues are working on projects for our China locations because we can't even hire enough people in our China offices right now to meet the demand of the opportunities. And so we hope that at the end of the day, the kind of pent-up demand issue, and again, it wasn't pent-up that long there, but we did see a dramatic increase and have still seen it, and it's continuing into this year now. In our forecast, but a significant pent-up demand, significant projects that are moving forward and also shortage of talent. And that is something that, again, we talk about a lot. And certainly within our own company about the kinds of the ability to meet the needs and the demands and the pent-up projects that are hopefully going to be -- release this year. But at the end of the day, you can see in our offices and in our client offices, a workforce that's benefiting from the collaboration and speed that comes from being in the office together.

Diane, is there anything that you're seeing in other parts of your business? Owen, in his an intro, talked about that Gensler is involved in all types of spaces and places. Is there anything in those, whether it's design of large gathering places, entertainment venues, you talked a little bit about retail. Is there anything that you're gleaning because there is this negative overarching thing about return to the office? But I'm curious, as you think about all the other disciplines, is there more optimism there about recongregating?

It's really interesting because I took the pulse of some of our practice leaders from across the firm last week. Really in preparation for this conversation to kind of see what's going on in the hotel side, what's going on in the retail side, what's happening with our folks. And it actually kind of surprised me how much work is getting -- starting up again in a very robust way and the optimism, even in the hotel sector. Again, talking about retail, I would love to read through the list of, certainly, the retail clients that are active -- significantly active right now. Most of them are very confidential projects. And it's interesting, also, there's a lot of confidentiality around many of our projects more than before. I think people are using this as a strategic moment. I think people are using this as a transformation moment. We're also seeing that from the office sector side that there is -- and again, I will call this more from the mixed-use side because it's really -- the mixed-use projects are beginning to be a uniquely different mix where there might have been an anchor that was a department store, some of the other large tenants, where we're seeing new kinds of component parts, for instance, even looking at senior housing, as a potential using a mall for that kind of reuse -- adaptive reuse. Logistics is -- our data center work increased by 300% last year. And continues to project significant increases this year. And of course, we all understand what's happening from the standpoint of the cloud. And 5G and all the demands of data around us that is increasing the number of data centers, both the micro and the mega of various kinds all over the world, but also starting to see how logistics and last mile kinds of facilities are now being explored and being developed in mall spaces and department store spaces, along with, again, some other shifts that we're seeing, for instance, movie theaters. And thinking of them more -- in a more robust way is perhaps being centers for gaming and e-sports. And so again, this kind of unleashing of kind of getting past the -- okay, this is gone, but what is coming? And so many of our clients are seizing this moment of transformation. And again, what are their creative partner looking at? What if? And what are the possibilities? And there's a massive amount of that going on. Very, very exciting. And I'll just use the word very optimistic.

That's great to hear. I think we all can have that amount of optimism as we come out of this pandemic, and it's great to see that corporations are bringing on their front foot in terms of those types of investments. I know we only have a little bit of time left. I feel like we can go on for hours. I wish we can go on for hours, but I wanted to ask each of you about leadership. And Owen, maybe if I can start with you of understanding a leadership lesson that you picked up from Diane.

Yes. So Diane is -- tends to be very understated, but she has very strong convictions about her beliefs. And one of the things that she's pushed me, which I've appreciated is, maximizing Boston Properties' opportunity. I think she feels that given our brand and franchise, there's even more things that we could and should pursue and she is always encouraging me and supporting me in doing that, which I appreciate.

And Diane, I'm going to flip it to you for a leadership lesson that you've learned from Owen and the impact that it's had.

Well, well, Owen is just -- as you said in your intro, one of are the great ones. And just having the opportunity to be on his board and to kind of see him in action has just been definitely a graduate course in leadership. But I would also say that Owen has been a spectacular leader through the pandemic of the Boston Properties business and his team. And we were, during the really tough times of this, especially at the beginning, I think we were having meetings, seemed like every week. It might have been every other week, Owen. But a lot of upclose and seeing what was going on. But I would say I was really impressed with the way Owen operated -- Owen and his whole team, operated with the utmost of integrity and this real awareness of the impact of their company and the example that they would set by their own actions in their markets. And the positive action that they took regarding their operations to keep people safe. But also the fact that they were concerned about the small local retailers in their buildings. And took steps to do what they could do to help out these local retailers. And it's a tribute to the character of the people that Owen has put together as his team. So the lesson I take away from Owen is, care about the least able to withstand the storm in the tough time. It's hard to take that position. Is there really some kind of metrics, business case, maybe not. But I believe in the scales of the universe, it's worth a ton. And that's the kind of person that Owen is.

Well, listen, I greatly appreciate both of you for spending the time with the industry today. Disclosures are up on the webcast, if I didn't mention that before. And it's great to see you both. I can't wait until we can do this in person, and we will make it happen soon enough. And I wish you the best for the rest of the year.

Thank you. Thank you, Michael, and Thank you Diane for doing this.

Thank you so much.

Thank you, Owen, and thank you, Michael.

Thank you.

Good morning, everyone, and welcome to Day 2 of Citi's 2021 Virtual Global Property CEO Conference. I'm Michael Bilerman. I'm here with Manny Korchman, and we're extraordinarily pleased to have with us Boston Properties' CEO, Owen Thomas. I'm going to -- this session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today, to ask management any questions, simply type them into the question box on the screen, and they're going to come directly to Manny and myself, and we'll do our best to weave them into the conversation. Owen, I'm going to turn it over to you to make some introductory remarks and introduce Doug and Mike, and I think you're going to show some slides as well. So we'll go through that and then get through Q&A.

Great. Thank you. Thank you, Michael. Good morning. Thank you, Manny. Good morning. It's a pleasure to be with all of you. I'm joined by our President, Doug Linde; and our CFO, Mike LaBelle. This morning, in terms of -- I'm going to provide a quick introduction to Boston Properties and talk about some new investments and some new disclosures that we're making as part of this conference, which represent growth opportunities for Boston Properties. And then I'm going to turn it over to Doug to talk about the process of reopening and what we're seeing now and what we expect to see in the coming months. And then, of course, Doug, I and Mike are all available for your questions. So just jumping into this. In terms of a quick introduction of Boston Properties, I think most of you tuning in are familiar with us. But we are the largest public company that's focused on office properties specifically. We are a national company, but we're very focused on 5 and, hopefully, soon to be 6 gateway coastal markets in the United States. In addition to managing our assets, leasing our assets, nurturing our assets, we primarily grow the company through individual asset development. And we'll get into that and what our current development pipeline is, but that's been the history of the company, and our DNA and development is very deep. We believe we have some of the highest quality office assets in the markets where we operate. We have an extremely strong balance sheet. We have the highest debt ratings of any company in our sector. And we're also proudly a leader in ESG and specifically in sustainability. So moving to the company's growth opportunity going forward, Doug is going to talk about the reopening, but another part of our growth opportunity that we don't think is fully recognized is the development pipeline that we currently have underway, which is $2.2 billion of investment. It's 87% pre-leased. So a lot of risk has been taken out of this portfolio. These projects will be delivered over the next 3 years. And these, combined with 3 residential projects we recently delivered, will grow the FFO per share of the company at a 3.8% CAGR over the next 3 years. At this conference, we also made some new disclosures about some new development investments that we're adding to our pipeline. These 3 projects are all life science developments and redevelopments. They aggregate around $500 million of new investment. 880 Winter Street is a redevelopment, that is in Waltham, Mass, of a building that we bought in 2019. We expect to stabilize this asset in '23. 180 Third Avenue is a ground-up life science development. We're in conversations with tenants about leasing parts of this building. None of those leases are completed yet, but the market in Waltham for life science is extremely strong, and we have high hopes and prospects for both of these projects. And then lastly, we'll be launching 751 Gateway, which is the first joint development we're doing with Alexandria at the Gateway joint venture that we established early in 2020 when we and Alexandria both contributed to assets and formed this joint venture. And then the last new redevelopment we wanted to talk about is we are going to be developing an observation amenity at the top of the Prudential Tower. And the good news is a lot of the physical asset is already there, but this is a very substantial renovation. It's on 3 stories, 60,000 square feet. There's -- the center floor is a full outdoor amenity for our visitors. This will be the only observatory in Boston, and it opens in the spring of 2023. And then last one...

Owen, how come the cost and the yield are left off of this one, but they were on the others?

Yes. Well, we didn't put the yields on the others, but I will tell you, it's above 7%. And the -- we are still costing out all the final pieces of this, but we think that we will achieve very attractive return on capital when this project stabilizes beyond 2023 given the incremental costs that we're putting into it and the number of visitors to Boston and the capture rate that we think we can capture. So the last thing I just want to mention is new entitlements. We recently received 1 million square feet of new entitlements at our Kendall Center project in Cambridge. This is an additional upsizing of this particular asset. As you know, we've done this before, which led to the Akamai headquarters and the expansion with Google and an apartment complex. These are very valuable entitlements. There is some substantial predevelopment work we need to do, including the demolition of a garage and creating an underground bunker for a local utility. But given the vacancy rate in Cambridge, we think this is a very attractive project for us and for shareholders. And lastly, we are seeking 1.5 million square feet of additional development entitlements at Gateway Commons in South San Francisco. So with that, let me turn it over to Doug and talk a little bit about the reopening that we are experiencing.

So when we last talked at the beginning of January, I think the atmospherics from the COVID-19 pandemic were pretty horrific. And it was a pretty rough time relative to people thinking about going back to work, and it is strikingly amazing to me how quickly things have changed. And we are now in a position where 10% of the population in the United States have been vaccinated -- fully vaccinated. About 17% has had their first shot, and it's rapidly increasing. And we are believers that in the markets that we operate, which are obviously all in, in urban and locations in blue states, that the vast majority of the population is going to be vaccinated. And I think that's important for 2 reasons. One is, until we get there, I think there's still going to continue to be hesitancy about bringing people back to work because we're so close to being in a position where people really truly are protected from getting ill from COVID-19. And second, there is, I think, an expectation that we're going to be in a much more open, social perspective as we enter the summer and into the fall. Meaning schools are going to be open. Restaurants are going to start to reopen. Community events are going to start to occur. And I think the announcement from the CDC yesterday, which is if you're with other people who are vaccinated in small group settings in particular, you don't need to wear a mask is a good portending of what is going to be coming in the future. So how is that translating into our business? We are clearly seeing more in the way of tour activity today than we were seeing at the beginning of -- at the end of 2020 and the early 2021. That activity is, however, concentrated in what I would refer to as high quality, smaller financial professional services companies. Why? Because those are the kind of organizations who've clearly made the decision that they are going to be back in work on a full-time basis relative to how they were operating pre-pandemic. That doesn't mean they were there every single day, but they're looking at sort of business as usual on a going-forward basis with potentially some modifications to how many days a week they may come in. But when they come in, they're going to have the same kind of environment that they otherwise had. I think with regards to large leasing, meaning large technology companies, large financial companies. I think they're in a position right now where they have to pause on their decision-making because they're sort of looking at the world and saying work from home is something that we have to deal with. We're not sure how we're going to respond to work from home. We think we have ideas, but we've built up a tremendous amount of goodwill and empathy, quite frankly, with our associates and our companies. And until we understand the dynamics of how many days a week people are going to really need to be in the office, are we going to be in a position where we're going to really ask people to hot desks, are people going to really want to work from home and can they be as productive as they had been at the beginning of the pandemic, until those questions are answered, I think the large technology companies are going to be more pausing with regards to how they're going to be making decisions. And that's why we're not seeing them actively out in the market. Now I want to caveat that because there are, in fact, some signs of some locations where we are seeing that activity. So we obviously had a write-down on our Brooklyn development, Dock 72, during the first quarter. And when we went on the phone with you all, we basically said, look, we just have had a really tough time with an -- from an activity perspective. Well, suddenly, in the first 2 weeks of March, we actually had 2 active proposals. One for a couple hundred thousand square feet, another for over 50,000 square feet. So signs of things getting a little bit better. And then out in San Jose, where there hasn't been a lot of sublet space, there's a lot of activity of tenants starting to look for space, not necessarily growth, but either relocations or consolidations. And they're all looking for higher-quality space, and I think that's the theme that we really want to emphasize. In times like this, our customers always gravitate to better buildings and better space because it's a better value. There's been obviously a change in the pricing dynamics. And so they're going to take advantage of that, and they're going to upgrade. And that is exactly what we're seeing. And so we aren't back doing deals in our high-end buildings in New York City, our high-end buildings in Massachusetts, even our high-end buildings in San Francisco. I mean we've signed the lease in the top of one of our buildings in Embarcadero Center a week and a half ago for 17,000 square feet. We're in a renewal discussion for a full floor in one of the other buildings. So things are starting to happen in a more meaningful way as we enter calendar year 2021. And remember, the other important component of our businesses and why we struggled a little bit from an earnings perspective in 2020, we lost a lot of ancillary income. We had almost $130 million of pandemic charges effectively with reduction of parking, reduction of the retail at the base of our buildings, from our restaurants, our hotel being closed down and in charges. And all of that is going to start to reverse itself. And while we didn't see much in the way of improvement in the first quarter or haven't seen in the first quarter, we really do anticipate that as we get back into the second half of the year, a significant amount of that lost revenue is going to reemerge in our company, and we'll start to see that as we move into late 2021 and early 2022. So I'll stop there.

Great. Well, I think it's -- if you stop sharing your screen, then we will all be on screen for investors. I appreciate all that detail, which I know Manny and I want to get into. But the first thing is just, Owen, coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in BXP?

Growth, growth and growth. So the -- and I'll take you through that. So first, Doug described the reopening opportunity in terms of growth. So we've lost $130 million of annual FFO from parking, from the retail and from our hotel. And with the reopening of the economy and people coming back to work and frankly maybe using public transportation a little bit less, we think those revenue streams can certainly partially and perhaps fully recover in a fairly rapid manner. So that's growth #1. Growth #2 is, as I described in my opening remarks, we've got a significant development pipeline that's substantially pre-leased. That's going to come on stream with good credit tenants. They're great assets, and that adds 3.8% CAGR to our FFO. And again, we have to lease 12% of the assets, and there's a few risks left in it, but that is a very solid growth driver for the company going forward. And then third is all the new things that we have and we'll continue to add. I talked about the 3 life science projects. I mean here we are in the middle of a pandemic. Our offices, the census is 10%, and we just announced $600 million of new, we think, very attractive projects. We've successfully pivoted to an attractive adjacent lane to use our development skills to create value for shareholders. And we hope -- we have a 16 million square foot land bank, and we hope more of this will be coming for shareholders as we go forward.

Doug, because you talked about some of the leasing activity and much more so from the small-sized tenant and some of these active proposals, how are they looking at their space in terms of density? I mean how much COVID -- post-COVID things are they trying to put into those buildings that they're leasing the space for?

Michael, we've been surprised for the last year that there hasn't been more change that has occurred. We have tenants that were building out space in March of 2019, and they didn't stop what they were doing. I mean -- and these were relatively dense build-outs. So we actually don't see a lot of incremental significant change in the way tenants are building out their space. Not to say there isn't any change. So I do think there is more emphasis on rooms of size for training and for meetings. And so for example, we're sitting with Verizon right now, and they're building out their space at 100 Causeway, and they're supposed to be in that occupancy in September of this year. And they've actually come back and said, "You know what, this audiovisual room needs to be 100 feet bigger. And this particular auditorium area that we're working on need to be able to accommodate a larger group of people." So there's, I'd say, more emphasis on collaboration areas. But in terms of the physical layouts of the space, not a lot has changed for many of the users. And nobody who is physically in space in 2019 that is coming back has made changes to the space as they reenter. Now we have one financial company that was planning space, and they were in a very dense pack. And they made a decision to dramatically change their layout, but they haven't started yet. And they lost 30% of their spaces -- physical seats. So there are -- and that was a financial company. So those people who were looking sort of in where I refer to as trading operation configurations probably have a different perspective on how that needs to be organized. And I don't think it's about necessarily what's going to happen in 2022. It's -- if we have another example of COVID impacting our world, they want to be in a position where they can have their people in place even in the spite of the bit and never going forward. So there hasn't been a lot of change.

And you talked a little bit about how some of the tech companies are -- they're taking a wait and see approach, right? They don't -- their view is -- you mentioned it. They built a lot of goodwill with their employees. They don't want to sort of shoot that right away until, I guess, be all clear. But the other thing you mentioned was the productivity they had at the beginning of the pandemic. Are you implying that the productivity for those companies has been reduced or that there's -- they are starting to see the ill effects of not being in the office?

We've had enough conversations now, and Owen can describe some of the ones he's had more recently. It is quite clear that the overall level of intensity and productivity across businesses has declined as we have gone further and further into this experiment of working separately. And the number of people who've been hired by a lot of companies is not insignificant. I mean I have examples in my own family of kids, my children who have been laid off and then quickly rehired at the organizations, and they haven't met anybody in person. And it's very strange and odd, and they really don't understand the culture of the organizations they're working for. And so our view is that there is a clear degradation in the quality of the intensity of the workforces that are out there today due to what we are experiencing. And I think, Owen, you can chime in, that is the reason why we believe getting back into the physical office is so important for so many organizations.

Yes. I think it's a trade-off of innovation and productivity versus talent -- competition for talent. I think those are the -- that's -- those are the forces that are driving this. And I think that employers generally believe that they are more innovative and they are much more collaborative when they're in person. And so I think company leadership prefers an in-person environment. That being said, they know they have to provide a work from home benefit to be competitive for their talent, and I think companies are trying to figure out how they're going to manage that balance going forward.

So. Manny? Yes.

Yes. Wrapping all that together, it sounds like you guys expected there to be some change in layouts. There hasn't been. But as you sit here and chart the course forward as you go and entitle this land and think about future development, how much less utilization or take-up or occupancy, however you want to describe that, do you think we end up at? We're not talking about that today people are coming back to space they have. We're not talking about the people that are mid planning. But just what does that office building in the future really look like? Any thoughts.

Yes. Look, I would say that many of the trends that we were seeing before the pandemic will be accelerated by it. Going back to my theme about the importance of in-person work for innovativeness and productivity and collaboration and the importance that I think companies will put on being in person as much as possible, they're going to have to make their workplaces even better. And a lot of the big techs were already doing this before the pandemic in terms of amenities, collaboration space, food and other things. And the landlords need to participate and help their clients to accomplish this by providing great space, great place, amenities, restaurants, all those types of things. So I think that's -- so again, I think quality is very -- it has been important, will be even more important going forward, both in terms of the age of the building, its location, the amenities that are provided. All these things will be even more important going forward.

And Manny, but I think what's inherent in your question and in our comments is that I do think that there will be -- it will be a little bit slower out of the gate for the larger technology companies to be making growth decisions in 2022. And that's because they're going to -- they're saying to themselves, "Well, I hired all these people and I think I need space for them if I -- certainly, if I go back to where I was. But until I know that my workforce, human capital and workforce strategy is going to be consistent with what it was pre-pandemic, I don't want to go out there and make a commitment for incremental space in a significant way." Now do I think that's the case for Facebook or for Apple or for Microsoft or for Google? No. Those companies have such aspirations for growth that they know they're going to need space. But for the 75,000 square-foot technology company that's located in Lower Manhattan, I think they're probably thinking, how do we -- how are we going to organize ourselves, and we need to make sure that we understand what our expectations are for our workforce before we can make that commitment. Personally, as Owen, I think, and I are alluding to, we believe that they're going to come back and they're going to want to have that space, and it's going to be critically important. But it may take a little bit longer for them to sort of get off the schneid and make those decisions.

So we've got a bunch of questions in the live QA queue here, so let me get through those. Given your strong debt profile and liquidity strength, would you look at M&A opportunities as notwithstanding positive gains since November, there's still plenty of office companies listed and privately held that are available at bargains? Please give us your perspective.

Yes. Our approach has generally been one asset at a time in terms of being -- we talked about quality. We talked about selectivity. Boston Properties has generally been built by building buildings or acquiring them one at a time. I mean some of the acquisitions have been so large that they could be, I guess, defined as an M&A deal, even though they're a single asset, things like Embarcadero Center and the GM Building, things like that. So I think what you're going to see from us on the new investment side is much more likely that you're going to see what you just saw, which is us finding things in our portfolio to invest in to create value for shareholders. We're definitely looking for new acquisitions, but it's more on a building-by-building, site-by-site basis as opposed to a portfolio.

In your prepared remarks, I think you mentioned going into a sixth hub or sixth core city. Maybe elaborate on that, and then there's a follow-up here from the question queue.

Yes. We have had an executive based in Seattle for the last year who has been looking for new investments and embedding herself in the local real estate and business community. We have been studying a number of different investments. We continue to do that. And we want to enter the Seattle market. And as soon as we find the right opportunity, we're going to do it.

So going on with this question, they ask what your geographic mix is over the next 5 years, which I think we sort of settle, that you're going to go into L.A. in a bigger way and Seattle. I'll put some words in your mouth. But then the rest of the question is -- here is, are the migration trends towards Sunbelt enough to consider some of the core coastal holdings? So I guess, some -- to trade some of those across the holdings, I guess, is the question.

Let me kind of come back to the first part and then I'll get to the Sunbelt. Look, the -- we've -- strategically, high level, we've established a perimeter around 6 markets, and I would also say that we see the future as continuing to be driven by tech and life science, and we want to have more real estate geared towards those customer bases. So that's the strategy. That being said, we have very talented real estate teams in all of our regions who are constantly trying to turf up new opportunities. And if they do on a basis that we think makes sense for shareholders, we're going to make those investments. So a great example is the Marriott headquarters. We didn't have as part of our strategy to go into Bethesda, Maryland and build the Marriott headquarters. But Ray Ritchey and our local team in Washington generated that opportunity, which we think has been fabulous for shareholders, and so that's part of the value of our franchises. We've got these local teams that from time to time find these amazing opportunities that we'll pursue. So we have a top-down strategy, but we also pursue specific deals on a more opportunistic basis based on the flow that we see. So now moving to the whole Sunbelt question. We see strong growth in the Sunbelt. And we acknowledge there's, in some cases, cheaper costs, obviously lower taxes. And we acknowledge that there was, before the pandemic and during the pandemic, some migration to Sunbelt cities. We continue -- however, our strategy is to build, buy and hold. And to hold, it means you have to believe in long-term rent increases. To get rent increases, you have to have growth and some barriers to supply, and our concern with the Sunbelt markets is the barriers to supply. The vacancy rates and the level of construction over the existing stock in many Sunbelt markets is high, and so we are more concerned about a buy and build and hold strategy in those markets. So we are committed to our coastal gateway markets. We think they have tech and life science drivers of growth. And because of complexity and, in some cases, laws, we think there are more effective moats around increases in supply.

And just to sort of -- just one more thing on that. So pre-pandemic. California was the most expensive place for companies to locate and for people to live, and New York was probably second to it. And yet, those were the 2 places where many of the technology, life science and other innovation companies were all located. We don't believe that the pandemic is going to fundamentally disaggregate the talent and the idea generation from those types of places. And that there are lots of good things that brought those people there and that will keep them sticky. Yes, some people may go to Texas. Yes, some people may go to Miami. Yes, some people may go to Denver. But there are going to be lots of people who stay and lots of businesses that are formed in those jurisdictions, and we're confident that we will get back to an equilibrium and where those ecosystems are really powerful.

Just a question on London and Toronto. I guess, has that changed at all in your thought process? Obviously, there's a lot bigger announcements out of the financial services firms in London in terms of contracting space. Rates are low over there. Have you -- has that changed in your mindset at all?

We're -- Michael, we've got plenty to do in the 6 markets that we've selected in the United States. So we're not actively reviewing or considering investments outside the U.S. and specifically in Toronto and London.

Maybe switching to life science from a pure office. You have a couple of new things in the presentation deck, one, 4 million square feet of sort of pipeline. I guess that also includes an extra million-ish square feet at Gateway versus your initial expectations. Will you just talk about life science, your approach to life science development and then life science development in general? We see a lot of companies here all of a sudden have life science slides and talk about their rank in life science spectrum, which isn't all that big to begin with.

Life science is a hot dot in real estate, no question about it. The good news for Boston Properties shareholders is we were already in the business. 45% of all the lab space in the country is in Boston and San Francisco, where we happen to be the largest office landlord. So we have office buildings, and we have sites that are already under our control that we can develop into life science buildings. We have a track record of successfully doing so. We just redeveloped 200 West Street in Waltham and leased the whole thing to Translate Bio in 2020, which was 140,000 square foot deal. So the good news for our shareholders is we can do this without having to go out and buy a lot of land or existing buildings at elevated prices to make the deals work. We can just work through our existing inventory. The deals that you saw on that page are going to be delivered at well in excess of 7% because of our cost basis.

So we've been asking each company here. What are your top 3 priorities to improve your ESG score next year?

Yes. So we are proud of the fact that we believe we're a leader in ESG. We were ranked by Newsweek as one of the top Most Responsible Companies in the country, certainly the leader in the office world, and I think the second highest in the property owning world. So we were proud of that. But there's always improvements that we can make. So the 3 things that I would point to right now that we're focused on is, one, we want to get to the point where we can make an announcement about running our company on a net 0 basis from an emissions standpoint, and it's our hope and plan that we're going to do that this year. And we're figuring out exactly what the time frame for that will be and what we need to do to accomplish it, but that's important to us, and we want to do it. Second, we have a Diversity and Inclusion Committee that we formed last year, and they are making and have made a number of recommendations to us about a number of things, internal and external, including establishing specific diversity goals for our company for establishing certain types of outreach to the communities that will promote diversity, and we intend to implement those plans in 2021. So that would be second. And then third, we are in the process of likely formulating a Sustainability Committee of our Board to help us continue to maintain our leadership position in sustainability. And we have directors, like you saw Diane Hoskins yesterday, who have very unique insights into this whole world, and I think can help us do an even better job on our ESG initiatives. So those would be the 3 things, Manny, I'd like to...

And just quickly to wrap up ESG, there's what I found an interesting question in the queue here. Since working from home is probably the single most environmentally-friendly action any corporation can take, will it impact return to office decisions?

It may have been submitted by Bill Gates. I don't know.

Yes. No, I suppose that's possible. I have not -- I don't think we've bumped into that one yet, but I suppose that's possible.

All right. We're running out of time here. So let's go to our rapid-fire questions. When we're sitting physically together in Florida a year from now, what will be the one thing people will -- one thing that will have surprised people the most about your business over the prior 12 months?

That people have returned to the office.

What do you think your core...

I'm sorry to answer it that way, but that's all the questions that we had. And we keep mapping, so...

What do you think your corporate travel budget will be in 2022 as a rough percentage of what you spent in 2019?

Yes. So all of '22? Yes. So yes, I think it's going to be close to equal because my view of it is there's just pent-up demand. I mean speaking personally -- well, first of all, we're a regional company, and so not a lot of our people travel a lot. But in terms of leadership, we've got a lot of time to spend in the regions that we've missed in the last year. And I think people are going to want to go to conferences more and be with others. So I'd say it's 100% or greater.

What will same-store NOI growth be for the office sector overall in 2022?

Yes. We've debated this a little bit. It's funky because you've got half a year if that's down and then a half year that's coming back. So look, I would just say that I think same-store is down something like 3% because of the pandemic, and I think a lot of that will get restored. But we won't get back to 3% growth of a normal situation. So I'd say about 4%.

And then what do you think the 10-year treasury yield will be 1 year from today?

Mike, what do you think? You're on mute.

The first time he spoke he's still on mute.

Yes.

Roughly 2%.

2%?

2%. All right.

Thank you, everyone.

Thank you all.

Okay. Thank you all.

Great seeing you.

Yes. Bye-bye. Have a good conference.

You, too.