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

All right. Thank you so much for joining us today. My name is John Kim with BMO Capital Markets. It's my pleasure to be hosting this presentation with BXP, formerly known as Boston Properties. With us today, Owen Thomas, Chairman and CEO; Doug Linde, President and Director; and Mike LaBelle, Executive Vice President, CFO and Treasurer. I think at this time, I'll just pass it off to Owen for opening remarks and why people should be investing in BXP today.

Great. John, thank you for hosting this panel. Great to see all of you. Thank you for your interest in our company. The message that we've been giving in our meetings today about why you should own our stock is we believe we have a great opportunity to grow our FFO per share over the next couple of years. So why is that? First of all, we've seen strong and accelerating leasing activity. The leases that we report every quarter have been -- certainly in the first quarter versus the first quarter of '24, it was up something like 30%. If you look at the last 4 quarters versus the 4 quarters before that, it was up something like 30%. So we've had very strong leasing activity. A lot of the dislocation and concerns that are out there about tariffs and bills and so forth. We've had a lot of questions about the impact of that on our leasing activity. And so far, the impact on our leasing activity has been not at all. The acceleration that I described is continuing. So if you take that leasing activity and then you overlay that with our rollover exposure in '26 and '27, both of those years, it's materially under 5%. We have an opportunity to grow the occupancy of our company. And right now, we're running at about 87% occupancy, plus or minus. And at our peak right before COVID, we were at 93%. And I'm not suggesting in a year that we're going to have a 6-point jump, but it shows you what the potential of the firm is. And every point in occupancy, Mike, is about $0.20 a share, plus or minus, of FFO. So that's a big opportunity for us, accelerating leasing, low rollovers. The second thing is we are continuing to deliver a development pipeline. And most notably, in the first half of next year, we're going to be delivering a project that we've been working on for 5 years called 290 Binney Street, and it's a lab building. It's in East Cambridge. It's 100% leased to AstraZeneca, and it will add about $45 million to $50 million of cash flow to the income of the company, which is another plus for next year. And then lastly, and we've been talking about this on our earnings call, we've been pretty aggressively selling nonproducing assets. So for example, right now, we have 4 land parcels that we have under contract in various stages of closing, and they will generate about $75 million in proceeds before the end of the year, and we have more behind that. And this is also accretive because these properties actually -- they're negative FFO because we're paying carry on them. And when we get that cash flow, we can repay debt, which costs us around 6%. So that also accretes earnings. And we hope to do more sales in the quarters ahead. So that's what we see as the opportunity, and we think growing FFO will increase our share price.

Since Liberation Day, office REITs have gotten hammered pretty hard, including BXP. But you mentioned on your first quarter call that there's been no real change in demand on the office leasing side. Is that still the case today? Has that carried on through May?

So we had our earnings call on April 29, I think. And at that time, what we sort of described was we did about 1.1 million square feet of leasing that was executed in the first quarter, and we had a pipeline of leases under negotiation of about 1.175 million square feet. And then we had about 1.7 million square feet of what I would refer to as our sort of pipeline of things that we're percolating. And call it, 34 days later, our leases under negotiation is at -- just under 1.5 million square feet, and that other activity is still about 1.7 million square feet. So we've actually seen a modest acceleration in our leasing volumes and our leasing activities over, call it, the last 30 days. So I would say things are getting a little bit better, not a little bit worse. Whether we have a recession or not or whether we have stagflation or not, it doesn't seem to be impacting capital decisions that are being made by our current and potential clients. Just one other point that I just want to make because it's really important on occupancy. The leasing that we're doing now is leasing on either vacant or 25 expiring space. So of the 1.4 million to 1.5 million that we are currently working on, about 1 million of that will be additive to our occupancy as we move into 2026 because it's on currently vacant or known expirations. And that's really, really important in terms of growing our occupancy, our leased square footages. So the amount of space that's actually leased by BXP that's "on our books" is about 250 basis points higher than what is "occupied". And all of that will be occupied by the end of 2026. So it sort of gives us the clarity of understanding where our opportunity is coming from relative to our existing portfolio.

So on that note, you have occupancy guidance for the year, 86.5% to 88%. Your leased rate is 89.4%. Where do you think that ends up by the year?

I would hope that we will be above 90% by the end of the year. And our -- I think where we're sort of geared towards in terms of our occupancy as we started 2025 at 87.5%, and I think we'll be around 87.5%, sort of in the midpoint of that as we end of the year, and we'll be probably somewhere between 250 and 300 basis points higher on our leased square footage.

Can you provide an update on your markets, which ones are the strongest versus the weakest in terms of leasing activity? Manhattan is obviously the strongest, but just love to hear your updated thoughts.

Yes. So I'm trying to do this succinctly as possible. Manhattan is by far the strongest market in our portfolio by a factor of 3 or 4. There's just more relative supply challenges in this market, i.e., there is no availability, and that is providing us with heightened activity, quicker urgency associated with leasing decisions and better economics. I mean we are pushing rents, and our rents will probably be up a meaningful amount, double digits from a year ago to where they are quarter-to-quarter in 2025. The other 2 markets where things are pretty good still are the Back Bay of Boston, which is where our dominant portfolio is in, in our Massachusetts portfolio and then in Northern Virginia and Reston, Virginia. Those 2 marketplaces for us, our portfolios are in the high 90s from a lease percentage, which means we have very little availability, again, which means we can push rents in those marketplaces, right? That's the sort of thing that impacts us. And I would say nobody is talking about work from home or remote work on the East Coast. It's like not part of the conversation. When I jump to the West Coast, things are a little different. The first is the characteristics of where the demand is coming from are different than the East Coast. So on the East Coast, primarily, we're talking about financial services, asset management, people who are doing something with other people's money. On the West Coast, it's still a technology-oriented market. And we are still not at a point where we're seeing the kind of demand that we saw from, call it, 2012 to 2019 with enormous blocks of space being absorbed by large technology companies. There is clearly AI demand. There is clearly AI absorption. The Bay Area is clearly going to be the place where the AI ecosystem is at its strongest. But so far, we're not seeing 10 unicorns taking 0.5 million square feet of space. And it's that sort of difference between what's going on there versus what's going on, on the East Coast, where it's all financial services oriented, and there's a lot of incremental growth of a meaningful size by midsized firms. That's the difference between the East Coast and the West Coast from a leasing perspective.

And when do you think San Francisco, which is the most controversial market, I guess, when does that become New York?

If I knew that, I wouldn't be in this room. I can tell you that right now. I think that it's going to be a longer period of time. It's not a 2025 or 2026 experience. Look, we have a whole host of what I would refer to as nascent companies that are working in and around artificial intelligence in lots of different ways. And we have a couple of what I would refer to as the large language model infrastructure companies, which are Anthropic and OpenAI. Those companies are big. Those other companies, however, are pretty small, and they average probably 10,000 to 50,000 square feet. So we need a lot of those companies to be growing in a meaningful way to really get San Francisco going. And I just think it's going to be a matter of time before we start to get enough granular growth from enough of those companies to show a meaningful impact on the overall availability of space in San Francisco. That doesn't mean that there won't be submarkets and subpockets of really strong growth, aka, if you're looking for space in a view building in North of Market, you're paying up for it and there's a relatively modest amount of availability. If you're looking for low-rise space in a great building, there's a lot of availability and the economics are challenged.

And also, I would just add to Doug's comments on San Francisco, a couple of other things. Don't forget, it's a smaller market. New York's ZIP code 400 million square feet of office. San Francisco, depending on how you measure it, 60 million to 80 million square feet. So even though it's more available, you don't need as much leasing activity to have that market tighten up. And then look at the history of the city. I mean, if you look at where rents have been and where vacancy, the city has volatility. And volatility means it goes down as it has during COVID, but it also comes back and it also comes back quickly. But I agree with Doug, it's very hard to define the exact timing for that.

The DNA of BXP is a developer. But do you also look at acquisition opportunities? And would that be for existing assets or really just for land sites for future development?

Well, right now, we are always looking for new acquisitions. I mean that's true always. And I would say, particularly in this environment, we think acquisitions should be available at interesting prices. And recall, for those of you that watch our company, about 5 quarters ago, we bought interests in 3 buildings that we already own from our joint venture partners, we thought at that time at interesting prices, and we thought that might be the start of something. But this cycle is actually quite different from what we've seen in the office world in the past. And the reason is, is even though the market has softened up and vacancy has increased, the clients have all migrated into the best buildings. So if you look at the difference between what we call premier workplaces, which are the top 10% of buildings and everything else, it's way different. The vacancy rates are -- overall levels are 5 percentage points or about 1/3 lower. Asking rents are 50% higher. There's net positive net absorption versus negative for everything else. So in that environment, it's much more difficult to find things to buy. Most of those -- most of the buildings that are what we would be interested in, which are the premier workplaces, they're not for sale. They're not distressed. And the owners, even though I think they could get a good -- a reasonable cap rate for their property, they may be holding out for what they perceive to be a better cap rate. So what we have found is in this cycle, acquisitions have actually been quite difficult. And a little bit to our surprise, we've been finding some very interesting development opportunities. Our team in D.C. was able to concurrently buy a note on a building for a little bit over $100 a foot on a metro stop. The plan is to demolish the building and build a new one. Concurrent with that acquisition, they signed a lease with a tenant to take half the property, and they signed an LOI with another tenant to take more or less the other half of the property. And that tenant just signed their lease and the overall yield on the deal to our capital is over 8% unleveraged. And we can't go out and buy a premier workplace in any of our cities that's fully leased at an 8% cap. That's not available, but yet we can create them through developments. So again, a little bit to our surprise, this seems to be a better allocation -- a better decision for allocation of our capital on the new investment side.

So an asset like 590 Madison, which RXR ended up winning, is that something you looked at and were interested in acquiring? And can you just talk about the overall market as far as investors in office?

Yes. So it is -- again, there have been very, very few assets that I would say fit into our premier workplace desire. By the way, these are assets that get offered to the market. If we're doing our job, we try to find assets that are not being offered to the market. So all of our regions have charted which assets they're interested in. And as appropriate, we've been talking to those owners and trying to figure out if we can create some opportunities for our company. But 590 was offered to the market by a state pension plan through a broker, and we did look at it. And the pricing is somewhere in the mid-5s cap rate, and it's a little bit over $1,000 a foot. And to get up to a higher yield, you have to lease the property up from 85% where it is today. So there's a little bit of lift in that. And then there's also a plan that some, I think, of the acquirers believed in, which is it was at the corner of 57th and Madison, which is an interesting retail corner. So I think there was a ground level retail redevelopment play in the asset that could increase the lift. But I think it's a real -- and it's not a new building. It's an older building, and it's got a fairly narrow glass line. So I think it's a good example of the pricing that's coming out for buildings like that, that have some lift, but not a lot of lift. So we contrast that, okay, with our 343 Madison development, which we're getting close to launching. And there, we're going to have a brand-new building with escalator access into Grand Central Terminal. And we think that the development yield for that project is over 8%. So we think a better allocation of capital for our company if we can find developments like that is to do those because we think the buildings are higher quality, and we're getting them at a higher yield.

Yes. And I would just add that everything Owen said was 100% accurate, but what he didn't say was there's a difference between NOI and cash flow. And when you do a development like 343 Madison and you're signing leases that generally are somewhere between 10 at a minimum and 20 years and you're building a brand-new building, you don't have what's referred to as capital expenditures on that building for a long, long time. And when you're purchasing a building like 590 Madison, which has a habitual rollover, the difference between your NOI yield and your cash flow yield is pretty significant. I'm guessing it's a couple of hundred basis points. So you're talking about a cash yield of 8% or a cash yield of somewhere in the low 4s, maybe the 5s on another building. And quite frankly, given our cost of capital, it's really hard to make sense of those kinds of investments when we have the opportunity to invest money into a building like 343 Madison.

So let's talk about 343 Madison. You're on record saying you're going to start it this year. You mentioned 8% yields on it. What kind of rent do you need to achieve those yields given inflationary pressures?

Yes. So just to go -- be a little bit more precise on language about where we are with this. So we -- the build -- the land under the building is owned by the MTA, and we have signed a ground lease with the MTA. And we have until the end of July to not go forward with the ground lease. And if we don't go forward, we get reimbursed all the capital that we've invested in the project. But by the end of July, if we don't terminate the ground lease, we're committed to build the building. So we haven't done that yet. But given all of what you've heard from Doug and I about the strength of the market and the attractiveness of this development, I would have every expectation that we would go forward. So in terms of rents, as Doug described, the Midtown New York office market is extremely tight and attractive. The vacancy rate is sub-7%, and there are no blocks of space over 100,000 square feet available. So we think the rents that we can achieve in the building average a little bit over $200 a square foot. So that's probably $150 to $170 gross in the base and getting up to close to $300 at the top of the building. And we think that's achievable in today's market. This building -- by the way, the other thing about the building that's a little bit different from some of the other developments that we've done over the years is it's a large building, 950,000 feet, and it's a tall building, but it has reasonably small floor plates. They're 25,000 feet at the base and then they're about 22,000 feet at the top. So what that means is it's not likely that there's going to be an anchor client for this building for like half of it because a client that's 400,000 square feet or maybe 500,000 feet that's -- they're spreading out over a lot of floors versus being in a building with a floor plate that's 150% to 200% of that.

Yes. And I would just say that one of the things that's going on, and I'm assuming that what we are experiencing at BXP is not dissimilar from what some of the other landlords on Park Avenue are experiencing, there's a -- I don't want to use the word desperation, but a nervousness about where rents are going. And we are being approached in our existing leased buildings by our clients to do early renewals right now. And these are early renewals for as early as 2028 and as late as 2031. And we are asking for rents that are meaningfully higher than where "rents" in the buildings are today. And as you think about what your opportunity is as a client in Midtown and you're looking at where the rents are likely to be in existing product and you look at where the rents are that we're going to be asking for 343 Madison, yes, there's a premium, but there's not a shockingly high premium for being in a brand-new energy-efficient, sustainable side core building with great amenity space with outdoor areas with significantly higher ceiling heights than a traditional building with a very different structural system. There's a real value opportunity here. And we expect that one of the 150,000- to 400,000-square-foot clients that we have made proposals to is going to step up and say, "We think we're prepared to make a decision today to lease space in this building for an occupancy in 2030 or 2031."

New York is one of the markets that has more conversions out of office than new supply being delivered. So 343 Madison, what's a realistic time frame as to when you complete the building and occupancy starts?

Yes. So we -- if we're -- if we have somebody who's ready to go soon, we would be in a position where we could deliver space for tenant build-out in sometime in early 2029 for occupancy in 2030 or '31.

Moving on to Washington, D.C. Can you talk about 725 12th Street? Is this a one-off opportunity for you? Or are you looking at other land sites that you could develop and meet the demand?

Yes. So this -- I described the deal a little bit earlier. This was the project that I mentioned where we bought the note and concurrently signed 2 leases and now have a new building development in Washington, D.C., that's a market that's close to 20% vacant. So that's the kind of deal where we wouldn't build the building on spec and hope the tenants would show up. We would want a pre-lease. And we have had other law firms come to us when they saw that deal get done, and they are interested in being in new buildings. So we are looking around for other potential sites. And if we did something else like that in D.C., it would be a very similar structure where we would know what the tenancy of the building is before we committed to the site.

Mike, how do you fund all these projects? Your net debt to EBITDA is 7.9x on an adjusted basis. I think you said you were comfortable going higher than that near term, which is atypical for you. But can you talk about the balance sheet strength and funding?

Sure, John. Thanks. Look, our leverage is a little bit higher than it has been, and it's primarily due to we're in the kind of later stages of funding some of the development that is underway right now. And as Owen mentioned, the 290 Binney Street project, which delivers next summer, is going to generate a significant amount of immediate cash flow because it's 100% leased, and that's the largest project in our pipeline. So that will delever us when that occurs. So our leverage will creep up a little bit over the next few quarters until that occurs. From a funding perspective, there's a couple of things. One, we have free cash flow. So we've been using our free cash flow the last several years to fund development as our primary external growth vehicle, and we will continue to do that as a primary funding source for the development. And then we also are looking at an asset sales program, primarily non-income-producing suburban land holdings that we have. And so we have several under contract, and we have several others that we're working on, and we believe that we can raise somewhere between $200 million and $400 million over the next 2 to 3 years that will be utilized to either reduce debt or fund development needs that we have to fund. And then we could use incremental debt as well to fund additional development, which as it generates an 8% yield is accretive to the company and also helps delever us as it comes in.

Yes. I would just add that the other thing we're doing, and we don't need -- we're not going to be bashful about it, we're going to sell some assets. And we have an asset that's under offer right now called 1330 Connecticut Avenue in D.C. And it's a stabilized building at 7 years of average weighted lease length still with a law firm. It's a fine building. It's in Dupont Circle. And we're going to see what the pricing is, and we're likely to be a seller of what we would deem to be our less valuable, less growthy assets on a going-forward basis, and we're going to use that to both delever and fund development as well. So don't be surprised to see us selling assets on a consistent basis, as Owen described, which is what we were doing pre-COVID, and we're just like we're going to get back at it and continue to do that.

I think I'll take a break now to take any questions from the audience.

Can you talk about the decision in San Jose [indiscernible]?

The question was the decision in San Jose to sell land? Was that what...

Yes. There has been some bad, I'd say, inaccurate press in -- about our land sales in San Jose. We have 4 sites and one that was mentioned in the press was Platform 16, and that's actually the one that we're not trying to sell. So it was misreported. But again, I was going back to the land sales that I talked about. None of those deals are in the $75 million that I talked about that we have under contract that we're selling right now. This is the future, what Mike talked about. But we have a site in downtown San Jose that we have on the market right now, we're looking at selling. And then we have 2 other sites in the -- one is in North San Jose and one is an adjacent community. And one of those we're re-entitling to residential, the other probably to industrial, and then we'll sell those assets as well. So these are sites that in a different marketplace, we thought could be developed into office. In the current marketplace and what we foresee as the future marketplace, much less likely. So what we'd like to do -- those assets are -- they're not generating any cash flow for shareholders, so you're not valuing them for anything. And so if we can get the cash, reduce debt, accomplish some of our development spend, we're creating value in the company.

We have time for maybe one more question. If not, I'm going to ask about 290 Coles. So that was an interesting development for you because it's Jersey City multifamily, stand-alone multifamily development. You're providing preferred capital to it. Does this open the door for you to do more of these type of investments and developments?

I think I would describe 290 Coles as a unique, probably one-off situation. First of all, New York was the only region in the company where we had not done a residential development. So that was a positive. And then the second thing that probably is most important is most of the capital that we invested in the project was put in on a preferred basis at a 13% return. So because there was already a landowner that had gone in and they subordinated to our position. So between the experience gain, the structure of the transaction, and then we're a co-developer, so we're earning compensation for that. We thought it was a good use of corporate capital and also a good opportunity to gain some experience. We will be -- continue to be an active residential developer. But I think the deals will be in 2 primary categories. One, we have mixed-use developments with office and also associated retail, but also residential, and we want to keep building those. Reston Next Phase 2 is the best example of that. We just delivered a project called Skymark very successfully, and there are some additional phases that over time, we think we'll be able to develop. And then the other thing that we're doing on the residential side is we're using our skills to create value in the land that we have. So much of our land is located in suburban towns and many of those communities need more housing and they're much more willing to entitle residential developments. So we have a project, a building that was at the address of 17 Hartwell Avenue in Lexington, Mass. And we went to the town and they entitled us for a 350-unit apartment complex. And the value of the land -- and we're going forward with the project. We've identified an institutional partner to put up most of the equity capital and the value of this land has been greatly enhanced by the fact that we got these entitlements. So that's what we're going to be doing with our residential capabilities going forward.

Maybe I'll end this with one final question. You talked to many different corporate heads and geographically, you're in many different markets. Is there anything that you see on the horizon that may surprise the market in 2025? It could be for any one of you.

Well, look, I think the surprise for me has been what I talked about right off the bat, which is every day, we pick up the press. We're fearful of reading about some text that -- about a tariff or a policy change. And so there's a lot of dislocation going on, but our leasing continues to move forward. So I think that's a surprise we've experienced, and I think we'll continue to experience it.

Great. Thank you so much for attending.

Thank you, John.