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

Mike LaBelle, CFO from BXP. So thank you both for being here.

Thank you for having us.

Maybe just to kick it off, Owen, you participated in the CRE panel that we did yesterday, but I think it will be helpful for the group to just hear from you around the outlook for the market as you think about what's the health of the CRE market? Are there any differences and nuances that investors should be focused on?

Yes, sure. Delighted. Well everyone, thank you for having us again today, and with Mike's participation, hopefully, we'll hit on some new topics from yesterday's panel. So before I answer Ebrahim's question, let me just step back for those of you -- I know this is a financials conference, not a real estate conference, so I might explain what BXP is all about. We're the largest public company in the United States that focuses on premier workplaces, formerly known as office properties. We are an S&P 500 company. We have about 54 million square feet that we manage. Very importantly, we're a builder. So we're always developing new projects. We have about 4 million square feet under development today. And our footprint is in the large coastal talent centers in the United States. So Boston, New York, Washington, D.C., San Francisco, Los Angeles and Seattle. So that's an overall footprint of the company. So in terms of trends that are impacting us at the current time, and I'd say the overall CRE market, are the 2 things that I would focus on in order of importance are: one, the economic slowdown that we're experiencing; and then two, work from home. And we can dive into both of these topics with some detail. But I do say that in order of importance because when you read these articles about leasing slowing down and things like that, I'm convinced it's a lot more driven by the economic conditions than it is by impacts from work from home. So what about economic conditions? There's all this debate in the paper and media that you read about soft landing, hard landing, no landing, what's going to happen. Well, regardless of that outcome, what is happening is profits and growth from corporate America is slowing. And companies that formerly were focused on growth trajectory are now a lot more focused on earnings trajectory, and they're trying to cut cost. And the way they're doing that is they're doing layoffs. There's layoffs that are reported every day. And as part of layoffs, companies need less space because they have less people. So that has an impact on our leasing activity. Frankly, whether the economy goes into a recession or not, that's happening. And then the second impact is what's causing this slowdown. Well, obviously, it's inflation, and it's higher interest rates. And as a property company, our single largest cost is actually not people, it's capital. So -- and we had a small percentage of our balance sheet that's floating rate and that increased the cost of our capital, and it changes the dynamic in the capital markets for our assets as well because they get repriced as cost of capital go up. So anyway, that's one big set of impacts. And then the other is this whole work from anywhere, work from home phenomena. And my view of that is these 2 things are actually related because the harder this recession gets, the less there's going to be people working from home. And that's clearly what's happening. Even yesterday, Walmart announced, we're closing all our technology centers in Austin here and there, and everybody's got to come back to the office at least 2 days a week and that's the new rules of the company. And Bob Iger returned to Disney. One of the first things he did was said, enough work from home, we're all going to be working in the office now, at least partially during the week. So it is an issue, and we can talk about it in more detail. I've got statistics on it, but I do think that it's less of an issue than the economic things. And then the last thing we should talk about at some point in our discussion is based on these 2 trends, the big thing that's going on in commercial real estate and office is the flight to quality. And that's why I started my remarks by saying that we're in the premier workplace business because the performance of the top of the market in office is very different from the rest of the market. And we have some statistics we can share with you on that.

I guess maybe to break that down in terms of the economic cycle, and it's all interrelated. But when you think about the impact from interest rates, right, when we talk to bank investors, I think there's a lot of focus on just financing costs and projects that were financed 3 years ago, how are they going to hold up in this rate backdrop. When you're talking to investors, what is the sense in terms of just global real estate flows and their appetite to invest in the market?

Yes. So why don't -- let me -- I want to get Mike into the conversation. So why don't I talk a little bit about the equity side and Mike should talk about what's going on with the lending side, which is critically important to the business. So what happens -- this is not the first time interest rates went up and the real estate market got illiquid. It actually happens every time. We have a downturn and I've been through a few of these. So what happened was in April of last year, the Fed started raising interest rates and cost of capital went up and therefore, cap rates, which is basically inverse of multiple for properties went up, so they were repriced. And so the transaction market declined significantly because there's a bid-ask spread. The owner said, "Well, my property was worth x in the first quarter and now you're telling me it's 80% on the dollar or whatever it is, and I'm not prepared to take that". And that's kind of where we are right now. There's this -- there hasn't been capitulation. The buyers have reset their pricing based on where interest rates are and not many of the sellers have accommodated. However, very interestingly, I do think now that the Fed is starting to level out their rate increases. Just in January and February, we're out in the market talking to equity investors, and I think they're coming back. They clearly have -- and this always happens. Institutional investors have allocations. They don't have to invest the allocations, but they have them, and they're interested. They're out in the market. They're looking at what's out there. I mean, clearly, sectors like industrial and multifamily are the darlings, but I do think sophisticated investors recognize that premier work -- or the office sector is out of favor, but premier workplaces are outperforming. And I think they sense that, that could be an opportunity for them in the coming years. So my view of it is, is the capital markets are quite illiquid at the moment, but my guess is they will become less so as we get into '23, and there will be a -- the market will be reliquefied, albeit at a different pricing point than it was in the first quarter of last year.

Got it. So just -- so you don't think the rates need to be cut for, I guess, what you're getting to is price discovery in the market. It can happen even with higher for longer rate environment, it's just about things...

Yes, I think as long as it settles down. I mean when you have the Fed raising the Fed funds rate at 75 basis points in multiple meetings, investors kind of throw up their hands and say, well, where can I borrow, whereas pricing, that's a very rapid change. But now that it's leveling off, and Mike should talk a little bit about credit spreads. But I think now that it's leveling off, I think investors now have a better read on where the -- what their cost of capital is going to be.

Leveling off just creates less uncertainty. I mean there's been just a tremendous amount of uncertainty over the last 6 months, how far it was going to go and how bad it was going to get. And there's still uncertainty about the economic side of things. So I think there's still a lot of caution out there. I would say investors, both on the equity side and the debt side are very cautious. And so on the debt side, lenders have started to see defaults creep up because interest rates have gone up, so debt coverage ratios have been squeezed. So they're very, very cautious about putting out new capital. Underwriting criteria has tightened. Credit spreads really widened during the year last year. Now they started to come down again. So they've probably come down between 25 and 50 basis points in the last 90 days, say. So I think there's getting to be a lot more comfort when you look at spreads in the corporate bond market and you look at spreads in the CMBS market and things like that. But it's still a very challenging environment for somebody to go out. And I think you are going to see some distress because people will not be able to refinance, particularly if you are lower down on the quality spectrum or you don't have a lot of lease term associated with whatever the real estate is that you're trying to finance, I think it will be challenging. And there could be some opportunities out there. Every time we get into one of these cycles, and again, I've been through a lot of these as well, it creates opportunities. Because assets were overleveraged, owners become stressed and owners like us that have a lot of capital strength and balance sheet can kind of sit around and wait for these opportunities. And if it's the right one, we can start it.

Just in terms of financing in that regard, when you look at the sources of capital coming into the sector -- or just how is bank lending behaving over the last 6 to 9 months relative to other areas may be private equity or just debt investors?

I think the bank lending has really shrunk in the last 6 to 9 months. I think a lot of the banks -- it was interesting last year, the CMBS market had a hiccup in January. And it stopped providing financing spreads widened out dramatically. The war in Ukraine happened, all these things happened. And the banks kept lending and they were the last lender standing. And then at the end of the second quarter, they kind of looked up and they had bloated their balance sheets. And they put out a lot of paper, and then they kind of said, okay, we've got to look at our capital ratios, our balance sheets are bigger. So they kind of stopped lending last 6 months of the year, except for their best customers. And I think that's -- we'll see what happens this year and what kind of allocations come in. I do think they're still not getting the payoffs that they would normally expect. So I think that will impact the amount of new financing that they do. And we just did a $1.2 billion term loan and refinanced a $700 million term loan that we had coming due. And it's a syndicate of about 17 banks. Every single bank in the existing term loan re-upped and increased, and we brought 3 new banks in. So there is the ability to -- for high-quality clients, they have capital available...

But the covenant is tougher or any big...

Pricing and covenants are the same, everything was the same.

And just one more sort of on the macro, Owen, mentioned about the job market, right? I think the one bustling thing has been one, the resiliency of the job market over the last year in face of all these rate hikes. And the second is from what you read and see like tech is just such a small percentage of the overall job market and that's why you're not seeing it in the numbers, but you have an interesting vantage point around like, is it just we've not seen the pain come through yet or can the job market hold up relatively okay.

Yes. I wish I knew the answer to that question. I really don't. I have been surprised that the jobs numbers have continued to be so strong. Because what I read and what we experienced as a landlord to these clients is layoffs and less space. And yet, the last jobs number came in at 570,000 jobs. So now if you look at the breakdown of it, which -- and I'm not an economist, so take this for whatever it's worth, but a lot of it is in travel and service type pieces of the economy, not in the banking, technology world. So I think that could be what's going on, is it's a different segment of jobs. But that doesn't necessarily help us in the office component of the industry.

Maybe I guess pivoting to BXP strategy and what you're doing. So one, obviously, focus on the premier workspaces, just -- like what does that mean? Is it just singularly the same thing in Boston versus New York versus Miami? Or are there some nuances to it when you talk about premier workspaces?

So just to step back for a minute. So a year ago or so, we were -- in our company, we were reading all these reports from the service provider, CBRE, JLL, saying our markets were 20%, 25%, 30% available, which is very challenging market conditions. Yet, we were still leasing space at pre-pandemic volumes and more or less at pre-pandemic economics. So we were wondering what is going on. So we went to CBRE, and we said you need to study this and provide some research that's going to be more valuable to the marketplace. And we think it's a quality screen. So they came back, they went out to -- and CBRE in addition to having research, it has an industry-leading leasing brokerage practice. So they have professionals that know what buildings the clients want to be in. So they did a study on the 5 CBDs, central business districts, where we have buildings. And they segmented the market by premier workplaces and everything else. So you say, well, how did they say what's a premier building? Well, premier building is where a top-tier client would like to occupy. If Bank of America was going to do a search for a 100,000 foot requirement, what buildings would they look at? That's kind of the question. And by the way, I've seen a lot of studies done on age, like newer buildings perform better. That's true, but that's not a sophisticated analysis because actually older buildings can perform well, as well as long as they're in good locations, they have good bounds, and they're amenitized and taken care of, which is obviously what we do. So they went out and said, okay, these are the premier buildings. Well, what was that? So on the 5 CBDs where we operate, that 730 million square feet of space, and the buildings that they selected were about 17% of that total space. And then if you look at the buildings, there were 2,250 buildings and about a little bit less than 10% were premier. So you think about -- go around New York City, 1 in 10 are our premier workplace. So then what is the data on performance between those 2 segments? Well, on the vacancy at year-end 2022, the premier workplaces were about 9.5% vacant. And in the office world, when we have single-digit vacancy, that means it's a pretty healthy market. So now we're pretty close to double digits, but it's 9.5%. For everything else, it was about 15% or 16%. So not quite double, but close. And then I think even more starting -- in a more extreme case, if you look at the net absorption, so net absorption is the net amount of space that's occupied by a client in a market. So for the premier buildings for 2 years ended last year, so '21, '22, for the premier workplaces, that number was a positive 7 million square feet. And for everything else, which is 83% of the market, it was a negative 25 million square feet, which is big difference. And then if you look at rent levels, rent growth, all of these other factors, the premiers are outperforming significantly. When we have -- I'll give you another case example of this, which might put -- make it even more understandable. There was a prestigious law firm in San Francisco that had roughly a 40,000 or 50,000 foot requirement that wanted to move in the second half of last year. If you get a CBRE report, it will tell you, San Francisco is 30% available. So 30% of the space in the city is available. This client went out and said, we want views, they had certain requirements that they wanted. So in that 30% vacant market, they found 2 locations that worked for them, one of which was in Embarcadero Center, and we ended up signing a lease with them. So I think that's just a good example. When you see those studies and all those buildings that are half empty that contribute to that 30% available, we don't compete with them. The clients that we serve are not interested in being in those buildings. So those research statistics don't really impact the business that we're in. By the way, the other thing I should mention is CBRE rated 94% of our square footage in the CBDs in the premier workplace. Again, we didn't -- this wasn't a study we paid for or commissioned, this was their own work. So -- look, I think the economy clearly is a headwind and this work from home issue is a little bit of a headwind. But I think what's really helping us is this flight to quality because clearly the premier buildings are capturing share in the rest of the market.

Right. And just to that point, in terms of the law firm example, you talked about, what are the top 3 things you would say like a premier corporate is looking for in terms of that they need in the building? Is it floor sizes, climate, like what are the top 3 priorities you would say?

Yes, I think it starts with the old funny location, location, location, I think that's really where it starts. Where is my workforce located, how are they going to get to this building. So even taking New York City, right? There's -- a huge city. I mean, New York is almost equal to the -- in size to 2 or 3 of our next market. So it's enormous city. So where is my workforce and how are they going to get to the building. So I've got to have something that's proximate to public transportation. We own 3 buildings at 53rd and Lex, which is, I would call it, the pretty far east side. And those buildings perform extremely well because they're right on a subway that has east-west and north-south access, it's a top 10 subway stop in New York, and a lot of the demand is driven by that. So that's number one. And then number two, I would say it's the amenities in the location. So if you have good food, is it fun, is it interesting. I think particularly food and restaurants is critically important. And then the building itself. New is great, but new -- it doesn't have to be new, if you've got good glass line. Different tenants want -- different clients want different things in terms of floor plate, but that's clearly part of it. Ceiling height, all those types of things. Don't forget too, the other thing to remember about our business, what do we provide and what does the client provide. We provide a location and a geometry, so what's the -- what are the physical characteristics of the building. But once we lease the space to the client, they determine how they want to build it out. And we pay for part of it as part of the deal, but they actually hire their own architects in most cases and build it out the way they want to. So we don't get involved in necessarily telling them or suggesting to them how their conference space should work and all that, they figure that out for themselves. The other thing that is important is amenitization of the building itself. So -- for example, right now, we just developed a project called [indiscernible] Club, which is on the second floor at the General Motors Building, and it's got a very large gym facility, it's got grab-and-go food, and importantly, it's got a conference facility. So a lot of the clients in -- we have some big clients like Weil Gotshal and Estee Lauder. But we also have a lot of midsize hedge funds, private equity firms. And if you think about it, they don't want to lease a big boardroom or a big conference room to have an annual meeting or have an all-hands meeting, they'd like to do that 2 or 3 times a year, not every day. And so having a big meeting space in the building that they can use to bring their constituents in for a meeting is really important. So we built this on the second floor, and it's just been, I would say, somewhat transformational in the clients that we've been able to attract and the flow that we've been able to attract to General Motors.

And I guess the other side of that, what -- we discussed conversions yesterday in the panel. One, it seems like there's going to be a lot of Class B, Class C stuff in urban city centers that are going to be up for repurposing. One, how does that play out? Do you need fair amount of government support to actually make that -- realize those conversions? And second, does BXP have a role to play there in terms of -- as an opportunity that you're looking at?

So let's talk about conversion. So I would describe it this way. I think this is a very big trend in commercial real estate, and it's going to unfold slowly because there are so many things that have to happen for it to happen. So let me explain. So if you go back to the premier workplace discussion, my view of this is I don't know exactly how it's going to happen, but clearly, the top 20% of the buildings are competing somewhat like pre-COVID. I think the bottom 20% need to be something else for sure. And then the middle 60, we'll see, some of them will get converted to premier, some will get repurposed into something else. And then some will satisfy, I would say, the second tier client -- second-tier office market, which is clients that are pursuing more value and are less focused on some of these amenities and things that I talked about. So 20% of the office markets around the country is a lot of space. And so -- so that's number one. Number two, cities are -- if you look at, and this isn't just in Texas and Georgia, this is in New York, Seattle, San Francisco, what are the mayors talking about? The mayors are talking about their urban landscape, getting people back to the cities, companies having their employees come back to the office and the spurring commercial activity in central business districts, including residential conversions. They all want this in right and left leaning political environments. So you're hearing a lot of conversation today about cities providing zoning and also potentially tax breaks and capital to promote these conversions. So having a real estate development theme that makes sense that has governmental and regulatory support, it's powerful in my opinion. So what do you need to convert? So you need a bunch of things, but I think there are 3 big things that have to happen, one is buildings got to be empty. All -- most buildings, even the B and C buildings, they are -- they had leased their leases. And so clients are in there for 2, 3, 5 years that somehow that's got to change. Now maybe in this market, that would be easier to do because there's lots of places for people to move. But don't forget, the office, there's a build-out and to move a client from one building to another, how are you going to deal with their build-out. So anyway, that's an issue. Second issue is the ideal depth of space for residential is different than for office. And the ideal depth is 30 feet and many office clients want a bay depth a lot deeper than 30 feet because they want to put more people out on to a large space. Whereas in residential, you want light and air, and that 30 feet is about maximum. So you think about a rectangle that's very large and the core is in the middle and the bay depths are more than 30 feet, what do you do with the center of the space? Some people put light wells down, other developers have said, okay, we'll use that as a storage space or interior offices or something like that. So that's an important thing to figure out as a developer. And then the last is economics. Because if you do the math around a residential conversion, it depends a lot on the city and the location and so forth. But I think $200, $250, maybe $300 a square foot is probably all the value that you'd be able to ascribe to a building to put it into a conversion. Again, that number is extremely broad. And I'm sure the answer would be all over the place depending on what city and what location be in. But my main point is, there's not a lot of office owners in the -- say, in New York that think their building's worth $200 a square foot today. So this is where the whole government subsidy issue comes into play because I think the whether it be a tax break or something that's going to need to happen to try to bridge that gap. By the way, the other thing I should mention is in terms of regulatory and government support, what do all cities want? They want more housing. They want affordable housing, and they want more market housing -- market rate housing. Because market rate housing is also very expensive, particularly here in New York. So with all this new supply that's going to do what I think the regulators and the government wants, which is going to bring the overall rent levels down. So all these conversion activity, I think, would accomplish a lot of goals for the communities that we serve. And I think it would be a very logical reuse for office stock. The other thing I did mention, another tailwind, sustainability. The embodied carbon impact of a new construction is very high. There's a tremendous amount of carbon emissions that goes into the creation of concrete and the fabrication of steel. So if you can take an existing building and convert it to something else, the embodied carbon footprint of doing that is half, maybe 60% lower than a new construction. I think that factor is also increasingly important in today's world.

Anything in the -- you mentioned the mayors in all these cities are actively looking into this. But anything at the federal level, I'm not sure -- was there anything in the inflation reduction that could kind of support or provide some subsidies that would be...

Thank you for asking me this. This is my soapbox moment. So one of the -- and I haven't talked about this yet, but one of the work-from-home issues that we and other property owners are dealing with is the fact that the GSA is working remotely and continues to work remotely. And that has a big impact on particularly the DC market. So there's a lobbying group for the real estate industry called the real estate roundtable. And we sent an open letter to the President Biden about a month ago, you can get a copy of it, and we basically asked him to ask the federal workers to return to their work. And the arguments were, one, it's helpful for the cities. I mean when people are not in the office, not only does it impact commercial real estate, but it impacts all the small local businesses, restaurants, shopkeepers, when you have less people on the street. So the city impact is huge. And then I think the other aspect of it is, is Corporate America is back in the office, so why isn't the GSA? And are you convinced that your productivity from GSA workers is equivalent to the U.S. business. And then, oh, by the way, is it equivalent to what's going on in other countries, who presumably are also working in the office. So -- and then as a result of that letter, there was a bill passed or bill -- I think it was passed in-house, something like the Show Up Act, and it was passed in the house, I love the name of that, by the way. So -- and I don't know where it goes from here, but if -- there is some activity going on in Congress around this point. So -- but I don't know where that shakes out, but I do hope that the GSA will return to the office in the coming months.

Okay. I just want to take a pause and see if there is any question in the room. So raise your hand if you have a question, please.

So the second-tier properties, which are not premier as you mentioned, how much -- what's the economics for landlords there to upgrade them to create competition for you people?

Yes, I think there will be some of that, that goes on. As a matter of fact, in our company right now, we have 2 buildings that we bought in 2021 that I would say were not in the premier -- in the top 17% of space that we are upgrading and bringing into that category. So I think there will be some of those buildings. I mean it's a lot cheaper to renovate an existing building, particularly if you can buy it at a good basis than it is to build something new. So I think some of that will go on. But I think those buildings have to be special. There has to be something about the way they were built or something about the way -- where they're located, their address. So I think there is some percentage of that, that will get upgraded. But I'm not sure it's the majority of that middle 60%. The other thing is one of the advantages that we have, and Mike talked about at the outset is our balance sheet and our access to resources. A lot of commercial real estate owners are heavily leveraged, and they're not S&P 500 public companies, and they don't have access to those resources. And right now, it's very challenging to raise capital in the traditional office industry. And so I think if they -- even if they found a project, I don't think there's very many competitors that we have that would be able to fund a project like that.

Any other questions?

Could you please speak to the opportunity that you see in Life Sciences and how you think about being competitive there in the Boston area and San Francisco?

Sure. I'm glad you asked the question because I was going to bring it up, glad you asked. Because it is something that we have been involved with for a very long time. We've had Life Science experience, mostly in Cambridge, Massachusetts, in suburban Boston and in South San Francisco. And over the last 3 or 4 years, we've increased our investment to that sector pretty significantly. It's grown from 3% or 4% to about 8% of the company today. And that happened primarily because there was a lot of economic growth in Life Science in the last few years. And we are in great locations for Life Science. So we've been able to develop new Life Science facilities. We've been able to convert older office facilities into Life Science facilities successfully. And we've done 6 or 7 developments over the last 3 or 4 years. And most recently, we just announced that we have 2 new developments starting in Cambridge, 1 fully leased AstraZeneca and 1 fully leased to the Broad Institute. So we're very excited about getting started with those projects, which is close to $1.5 billion of capital that we're investing. So we believe that we will continue to be able to increase our exposure to Life Science over time because we have a land pipeline in these markets that are at a good basis that makes us very competitive. I would say we're a little bit more cautious about taking speculative risk on Life Science today because the growth has slowed down a little bit, especially with the smaller-to-medium-sized companies that require external capital to continue to grow because that external capital has slowed. So those companies have slowed their growth profile. But the larger cap companies are still very strong, and I think that they will likely engage in more M&A because there's going to be some opportunities for them, I believe. And many of those are our clients. So I see that as a very -- a bright spot for us. And can we get it from 8% to 15% of the company over the next 3 or 4, 5 years, it's certainly possible. We have the footprint to be able to do that. And I think it's just dependent upon the economic growth that, that industry will see over the next few years. But we're excited about it. We've been in the business for 20-plus years, and it's been a great investment for us just over the last 3 or 4 years to expand.

Any other questions?

Just a quick question [Audio Gap] about equity sponsor in the office side decide whether to put more equity in or just give up. How should we think about the economic formula in the decision process? Like how much cushion on top of the cap rate nowadays equity sponsor is looking for to make the decision or walk away.

I think you're referencing, I think, a couple of buildings that were foreclosed in downtown Los Angeles that Brookfield owned, and I'm not sure who lenders are. I think you're going to -- you've seen some of that, and you're going to see more of it. And I think you're primarily seeing situations where either the buildings are over-levered or they're not premier workplaces. And I think what's -- what happens is the owner will -- when facing a maturity like that or -- sometimes the default occurs on cash flow because they're losing customers in the building and the cash of the building no longer covers its debt service, I think those were maturity driven. But the owner simply does a valuation work on the asset and says, okay, what do I think the prospects are for this asset and do I think it's worth more than the debt. And if so, maybe if they have access to resources -- my guess is those lenders would not have extended those loans without some kind of pay down. So you have to do the analysis and say is the value of this above the debt and if yes, do I have access to the capital to pay down the debt and try to extend it. And my guess is I don't know the facts around those buildings, but they did that work and they decided that it wasn't worth it. And they didn't want to put more capital after it and made the hard decision to give it back. I think you're going to see more of this with non-premier workplaces because I gave you those numbers earlier. The demand side is slow because of the economy. And then -- so that's the first bad thing that happens to non-premier workplaces. The second bad thing that happens is a lot of the clients are leaving the lower-quality buildings and moving into the premier workplaces. So you've got 2 headwinds, and I think that's having a big impact on buildings like that.

So just as a follow-up on that question, is BSCR the determining factor when someone walks away or there could be something else there?

I think it's a net present -- I think you do -- if you have a building and you have a loan on it and you're trying to determine what you want to do with it facing a maturity, you would do a discounted cash flow analysis, do an NPV and figure out what you think the building is worth. Because you want to know that if you're going to put in any incremental capital to lease the building or to pay down the debt are you're going to get an acceptable return for that incremental capital. And if you don't feel like you're going to get it, then you're going to let the building go.

I think that's a critical analysis. And obviously, an acceptable return is a little bit higher today, given the interest rate environment and everything else. And then the caution in the underwriting is a little bit tighter today. Because if you're analyzing how much capital you need to put and how long it will take the lease up, you may be more conservative in those estimates than you would have been a few years ago. And obviously, that will change over time. But if you've got a maturity staring in the face and the lender's telling you, you got to make a $50 million paydown or something, you have to make that decision today.

So it is more LTV driven kind of a cash or like liquidity crunch in terms of valuations may have come down and the loan probably exceeds whatever the lender is willing to refinance it there?

I think it's more about an unwillingness of the existing owner to put additional capital in because they don't think they're going to get an acceptable return on that additional capital. So why put it in?

But then you effectively have already written down your equity in the...

By definition, yes.

I mean, honestly, you don't know the history of all these buildings, too, right? It's being foreclosed, which is obviously not a positive event, but you don't know the history, was the debt originally put on and was equity pulled out at that time, or was this acquisition financing and it was a bad acquisition, you don't really know. There's a lot of history that goes into all these things. But I do know it's what Mike and I are describing, it's an NPV analysis for the incremental capital that's required. I mean, look, Brookfield is a high-quality, well-known borrower. They're not going to have banks that say we don't want to lend to Brookfield. So it's not about the sponsor, but it's about the value of the building versus the size of the loan.

We have 30 seconds left. I have 1 follow-up question on the Life Science piece. What changed in the last 3 to 4 years to drive that inflection in terms of just the growth in that sector? Is it venture capital funding? Is it some level of innovation where there's been a breakthrough, like what's driving that growth?

I mean I think a lot of it has to do with innovation in the way these drugs are being developed and just the use of computer-aided design features make the ability to develop these drugs occur much more quickly in terms of how they assess the success of these drugs and do the testing. They don't have to do these years long studies with humans before they get to the next phase of their development. They're doing a lot of this study in gene therapy and the genome project and things like this that has accelerated the drug development time, it used to take 10 years, and now they're shrinking that down to 3, 4 years. And so it's just a much more attractive economic model to investors that are investing in those drug discovery companies. So a lot of capital has come in. And there's a lot -- there's still tailwinds to that industry in terms of -- right the aging of the U.S., the need for additional health care, there's a lot of tailwinds to that industry, that we think will cause it to continue to access capital. So we may be in kind of a pause right now, where capital has kind of slowed a little bit. But when you look at the overall industry, you feel comfortable that there's going to be continued growth.

That's helpful. With that, thank you so much.

Thank you.

Thank you.