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

The Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Seth Berge with Citi Research. Pleased to have with us BXP and CEO, Owen Thomas. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC-26 to submit questions. Owen will turn over to you, introduce your company and team provided in the opening remarks, tell the audience the top reasons and investors should buy your stock today, and then we'll get into Q&A. And Red is actually on.

There we go. Good. Thank you for that I need little IT support here to kick things off. So anyway, Nick and Seth, thank you once again for having us. I'm joined by Doug Linde, who's our President; Mike LaBelle, our CFO; and also Helen Han, who's our Head of IR. So just a quick overview for those that don't know about BXP, we're the largest public company in the U.S. that focuses on premier workplaces. We're in the S&P 500. We're investment-grade rated. We have about over 50 million square feet of in-service office assets. We're also -- we grow the company externally primarily through development. We have over 3 million square feet under development today. And though we're large, we're focused primarily on 4 markets, plus we have a smaller presence in 2 additional markets, and those are Boston, New York, D.C. and San Francisco which are the larger markets. So what is our strategy? Our strategy simply put is we are -- want to be and are the preferred provider of premier workplaces to leading U.S. companies. That is our strategy. That's what we do and what we are trying to grow. So we have our ticket -- we had an Investor Day last year where we articulated a very clear and significant plan to pursue this particular strategy. So what was that plan? We said, one, we were going to lease space. Two, we were going to sell assets. And three, we were going to invest in new developments. So that's our plan. And what is our goal from this plan? Well, one, we're going to grow our FFO per share, primarily through increasing the occupancy of the company and we said that we would grow our occupancy, we think about 2% in 2026 and another 2% in 2027. So grow the FFO per share. Second, we want to deleverage our balance sheet and then third, we want to continue to improve our portfolio quality, focusing on the most premier assets in CBD locations. So how are we doing on that plan. We've had a press release this morning at the open, and we are very much on track with all aspects of that plan. Last year, we leased 5.5 million square feet of space. In the fourth quarter of last year, we leased 1.8 million square feet of space. We announced this morning that this quarter, we've already leased 600,000 square feet of space. We have about 1 million square feet of space of additional leasing that's in a letter of intent stage, which we think will get signed. And then beyond that, we have a pipeline of 1.5 million square feet where we're in various stages of negotiations with clients. And by the way, of that leasing that I described for 2026, 50% of that is on vacant space. So that's the leasing. Second thing we said we were going to do is sell assets. So we announced today the sale of a couple of additional assets. So that brings our total sales through this morning at about $1.1 billion of net proceeds. And in our plan that we announced last year, we said we would do $1.9 billion by 2028. So we're very much on track. We have $150 million of additional sales that are currently under contract that we believe will be closing in the near to medium term. And then on the new developments, we've been one of the most prolific developers of office in the country. Last year, we launched 343 Madison, which is a major development in New York. We announced at the end of 2024, the development of 725 12th Street, which is a largely preleased office in Washington, D.C. And we also acquired a building, which is basically a development site in Washington last year, 2100 M Street, which is also pre-leased to a leading law firm. So we've made great progress in our development pipeline as well. And then specifically on 343, we might want to get into this in Q&A, but we've made additional progress leasing the property and we've also made great progress in both securing a construction loan as well as attracting investors into the asset. And we've also made great progress in terms of our development spend and achieving our budgets. So the last thing that I want to talk about because I think it's had a big impact on our shares over the last couple of weeks is the whole, what I call AI scar trade. And what I can tell you today is that AI has had nothing in our operations has had nothing but a positive impact on what we've been able to accomplish. What we've been articulating for a couple of years is that AI is going to create jobs, front office, client-facing, product facing, creative jobs, and it's also going to disrupt jobs that are more back office and processing. And our companies portfolio is geared towards that first group of employees, and that's what we're seeing. We've had great success leasing in San Francisco, either directly to AI companies or companies that are displaced by AI companies. There's been over 6 million square feet of net absorption in San Francisco due to AI companies. So it's been very positive. We've had no client -- by the way, the terms of the leases that we've been signing have been going longer. So if a company was worried about AI, why are they in 2025 signing 10-year leases with us and so far in this quarter, the terms are even longer. So again, these companies, these are major financial commitments. They're signing long-term leases. So they're not -- I don't think forecasting big impacts AI on their space demand. We've seen no impact of AI on the asset sale program that we've embarked upon. Interestingly, there's been no impact on our credit spreads. Credit trades every day, credit spreads remain stable. We've had tremendous success attracting lenders to our 343 Madison project. So the fixed income markets appear to be very, very steady. So with that, Nick, that concludes our opening remarks and delighted to answer questions.

Great. Well, thank you. And appreciate your comments on AI. It's certainly the question we get most frequently on, I feel like office broadly. Those insights are very, very timely. I guess my question is, do you think there's any merit to the concerns of office medium and longer term and maybe just less office space needed if these efficiencies do come to fruition. And look, maybe it's at different price points, right? Maybe the impact is the lower or lower quality office. But just broadly, do you think they're fully misplaced? Is it just misplaced relative to the quality of the public portfolios? How do you think about it medium and longer term?

Well, I think we've -- again, we've been saying for a couple of years that the issue that our shareholders and investors need to focus on is not work from home, actually, it's AI. And what we've articulated is a future where AI is going to create jobs, which it has, all the firms that are creating AI, creating AI infrastructure, all the financial and legal and business services that support all that and that's going to grow. And our goal, as I mentioned at the outside, is to be the space provider to these leading companies. But what is AI going to do? It is going to automate certain job tasks. And that, we think, is going to be more in the support areas in the back office. There will certainly be exceptions to that, but I think that's where most of that is occurring. And generally, our strategy is not to be in markets that are primarily back office and to own buildings that are geared towards back office uses. So I absolutely think it's going to have an impact. And that's why our strategy, I would describe it as a narrower path. Our company has always been our founders would articulate a strategy of owning the best buildings in the best markets, we've continued with that. And I would say today, we're pursuing an even narrower path, which is up quality, upping the quality further of the portfolio, focusing more on the CBD and getting even bigger in the gateway markets where we operate.

We've gotten some questions coming in on the audience just on that topic of AI. You focused on kind of those front office employees. For those employees who are kind of using AI tools and getting more efficient, how are you thinking about productivity and maybe those companies not needing to hire as many employees in those types of roles.

Yes. Look, there -- as I mentioned, I think there is going to be an automation benefit. I mean we've -- all of us that are using generative AI are seeing the benefits in whatever we're doing analysis, research, any of those types of things. But there's also a whole industry that's being created that's creating the AI. And so again, at least what we're seeing today in our leasing is those -- the creation of those jobs and the footprint that we have, far outstrips any the destruction of jobs or lack of hiring that might be going on as a result of their creation.

Maybe going back to some of the leasing activity that you announced this morning, can you just kind of broadly give us a market update where you're seeing strength and maybe tie it to some of those stats that you put out this morning? And kind of where does demand remain soft?

So let me go back to where we were in September when we had our investor conferences to sort of level set everyone? So what we said was we think we're going to achieve a couple of hundred basis points of occupancy gain in '26 and a couple of hundred occupancy gains in '27. So call it, 400 basis points, moving from 87% to 91%. We -- when we had our call a few weeks ago, said, look, we have 1.2 million square feet of leases that have been signed that have yet to commence. And we have, in 2026, lease expirations of just under 1.2 million square feet. So we actually -- if we do no leasing at all during calendar year 2026, we're going to be flat. For the first quarter, sitting here today, our total activity is about 1.6 million square feet, 600,000 of that has been signed and another 1 million square feet, we are negotiating the document with our counterparty, our clients. Of that space, about 800,000 square feet is on currently vacant space and 450,000 square feet is on 2026 and 2027 lease expirations. So we will have meaningful occupancy increases in 2026 and 2027. Our 2027 expirations today are about 1.8 million square feet. So we're going to gain occupancy this year. We're going to gain occupancy next year and we have another year of very limited rollover. Our activity, as we sit here today in 2026 is really pretty much across the portfolio. So we have somewhere in the neighborhood of 350,000 square feet of leasing in Manhattan, almost all of it is on vacant space. So that's a 360 Park Avenue South, where we will probably be 90% leased by the end of the quarter at Times Square Tower, where we have signed a lease for 3.5 floors and are negotiating leases for another floor and a half, so that's another 100,000 square feet of space. And then we have signed leases that have yet to commence recently at 510 Madison Avenue, where we had almost 140,000 square feet of availability starting in 2025. In our Boston portfolio, we have leases that we're negotiating on our rollover in '27 in our CBD portfolio, we are 98% leased in our CBD portfolio. So everything we are doing effectively is going forward lease expirations. And then in our Urban Edge portfolio, which is our Wealth and portfolio, we have another 200-plus thousand square feet of leases under negotiation and a pipeline of another, call it, 300,000 to 500,000 square feet behind that. Jumping to Northern Virginia. The majority of our activity is in Northern Virginia/Reston. That's where we are seeing defense contracting and cybersecurity companies growing. Again, we are almost 95% leased there and the majority of the leasing we are doing there is on known expirations in '26 and '27. Interestingly, almost every one of the clients we are talking to is growing in that marketplace. And we're actually being asked by some of our existing clients to see if we can take back space early from their neighbors on floors so that they can grow. And then finally, in San Francisco, the 2 largest components of our activity are south of mission. So at 680 Folsom and 50 Hawthorne, where on October 1, when we had our last call in 2025, we had no letters of intent or leases signed. And since that date, we have signed 3 leases for 120,000 square feet and a letter of intent that we expect to be executed in March for another 73,000 square feet. So we'll have done almost 200,000 square feet of leasing in that building. And down in Mountain View, where we have an R&D park, we are leasing 2 of 3 vacant buildings for a total of about 115,000 square feet of space. So it's across the board. And we do have these other 2 sort of smaller markets, which are Seattle and West L.A. And while they are not recovering to the same degree as our other markets, there's actually incremental positive news there as well. So we are seeing more activity in those markets than we had in 2025. So net-net, across our entire portfolio on the margin, things are better in 2026 than they are in 2025. From a rental rate perspective, we are seeing double-digit rental rate growth in our portfolio in Midtown Manhattan. We're seeing double-digit rental rate growth in our CBD Boston portfolio, which is primarily in the back day and we are seeing pretty strong growth of somewhere between, call it, 5% and 10% in our Northern Virginia portfolio, where concessions in all of those marketplaces are either static or decreasing. We still have some challenges in terms of concessions and rents in San Francisco, particularly in the high-rise product, and we're still having challenges from a rental rate perspective in West L.A. and NCL.

And then just maybe how is demand kind of -- it sounds like it's strong geographically. Is there anything to call out among the different tenant types or industries within tech. Any impact from software, professional services and then just on kind of overall leasing and tour activity, are you seeing any changes in terms of time from tour to lease execution?

Yes. So our markets are pretty different in terms of the kind of activity we're seeing. And so to try and do this very quickly. So in Boston, in our urban portfolio, it's almost exclusively asset management and legal. In our urban portfolio, it's a little smattering of everything. It's life science, some without lab and then general corporate. So for example, we have a national retailer that's relocating to Boston, where we're negotiating at least right now. In Manhattan, it's primarily financial services and professional services. Those are the kind of companies that are looking at 343 in our portfolio in Midtown at 360 Park Avenue South, we have a little bit more tech -- some of it's AI related and some of it's Fintech. Down in Northern Virginia, the majority of our requirements are around defense contracting or cybersecurity. And in the city, almost exclusively, it's the legal profession. Although we're negotiating at least again with a corporate type in one of our availabilities on Pennsylvania Avenue. And then in San Francisco, the dominant amount of the activity that we're seeing from a volume perspective is truly artificial intelligence oriented companies or interestingly, companies that have been displaced because of that growth. So as an example, we did a lease with a construction company at 680 Folsom Street because one of the large language model companies had rights on their space and they were kicked out of their building. And we're doing another deal with a technology company whose space was already sub led by OpenAI. So it's that kind of activity. The financial services and legal services activity in -- on the West Coast in San Francisco still is what I would say, a step behind what it has been in Boston and in New York.

Is that the type of activity you need to see accelerate in San Francisco for there to be increased demand for kind of your type of product in San Francisco? Or do you expect to see kind of increased demand from AI and tech for that type of tower product.

So we have sort of 2, I'd say, spheres of assets in San Francisco. So we have Embarcadero Center, and then we have our South of mission. And I would include Salesforce Tower in that. So Salesforce Tower is very much a place where both financial services and tech can locate or co-locate. And 535 Mission Street, again, is also a tech building. We actually have a lot of small tech companies in there and then 680 Folsom and 50 Hawthorne or pure tech company buildings. Embarcadero Center is really the only asset that we have that is primarily financially services and/or legal services. And I think the question will be, will there be a multiplier effect associated with some of the other growth that's going on. And I think on the margin, there will be, there's a lot of wealth that's being created in California, particularly in San Francisco. There's this transfer of wealth that's going on around America that everyone is reading about. My guess is that we will start to see more and more of those types of organizations, locating in urban locations in San Francisco, and they will primarily be in towers like Embarcadero Center. I would say that the overall level of tour activity in Embarcadero Center in the first quarter of 2026 is significantly stronger than it was in the first quarter of 2025.

And then you mentioned that L.A. and Seattle are a bit kind of slower to recover relative to San Francisco. And those are 2 markets where you have a smaller footprint. Just as you think about kind of the geographic exposure of the portfolio, how do you think about those 2 markets kind of medium to longer term?

Yes. Look, our goal is not to have 2 assets in a market. So our goal over the longer term would be to find additional assets and build those into regions like we have in the other cities. But whether it be COVID or what's going on right now with West Coast leasing, it's just been harder to accomplish.

And then conversely, as you think about the where different markets are and kind of the recovery cycle, where would you kind of like to allocate capital to?

So I think there are 2 answers to that question. What are we selling and what are we adding? So on the selling, the focus has been on land, on apartments that we built and on nonstrategic office. And so he asset sales actually have been spread around almost virtually all of our regions, not the 2 small regions, but over the 4 large regions we've been selling or in the process of selling assets and all of those. Very -- again, it's not specific so much to the market. It's specific to what the asset is. If it's a premier workplace in a CBD location in those 4 cities, we want to keep it, if it's not, it's -- at some point, I think we're going to want to -- we will want to monetize that asset. And then in terms of new, again, it's opportunistic based on the investments that we can find. We believe in those 4 major cities that I described. And if we can find attractive investment opportunities that are accretive to shareholders, we're going to be interested. So -- and right now, and we have made some very significant investments over the last 18 months. We started 343 Madison in New York, which is a $2 billion office building project that's located right next to Grand Central. And then we have launched a new development in Washington, D.C., which is pre-leased to 2 law firms, and that's about a $400 million project and then we have bought a building, which is basically going to be a site at 2100 M Street, and we have leased that substantially to a law firm as well. That project doesn't start until 2028. So we believe in our markets and the capital allocation is being driven by the specifics of the opportunity.

And then just you mentioned 343 Madison. So I think it's a good time to shift to that. You kind of are in the process of seeking perhaps a new kind of equity investor, you've pre-leased 29% of the building. Kind of where do you stand today, if there's any updates you can provide on how you're thinking about bringing in a new partner for that construction financing and then just anything you can comment on with respect to kind of pre-leasing activity and discussions with anchor tenants?

Yes. We're very encouraged by the progress that we're making at 343 Madison, as everyone knows, it follows us, we signed a lease with STAR to lease 30% of the property, which is right in the and they're going to take the middle block of the building. And we're making great progress with another client that would be about another 15% of the property. And we're focused very much on the lower bank at this point. And we have dialogues going with several clients there. So again, the leasing is going very well, and we're hitting the rents that we forecast to achieve the 7.5% to 8% yields that we've described. Second is it's a construction project. So we're on schedule with our construction. We've purchased roughly half of the job in terms of materials for construction and so forth and we are achieving savings from our budget on the construction by so far, which is also a big plus. So we're -- as we described last year, we continue to derisk the project. So now we're getting -- guessing the capitalization, and there's really 2 pieces of that. One is the equity partner and the other is, as we bring in a partner, we're going to need a construction loan. So on the equity partner, we're out speaking with a dozen or so investors. We have materials. We're making progress -- we have not signed a letter of intent with anyone yet, but we've had multiple investors expressed strong interest in the property. My guess is it will probably not go to a single investor, but we'll probably have multiple partners in the project is how it's going to shake out. And then Mike, Mike should get into the conversation here, talk about the success that we're having with the construction loan.

Sure. Thanks, Owen. So we -- in January, we launched a process to get a construction loan, and as Owen described, it's a $2 billion project roughly and at our Investor Day, we said that we were going to be looking to raise about $1 billion in construction financing. We went out to the market and indicated that we would raise between $1 billion and $1.2 billion of construction financing, which is basically 50% to 65% of cost and we went out to a group of large domestic financial institutions, which would be capable of leading a large syndicate construction financing. And there's a handful of those types of lenders out there. We got term sheets from all of them. We ended up creating our own kind of term sheet that was a little bit more aggressive than that and we were able to secure interest from all of the institutions that we talk to. So we effectively are going to do a club deal with a bunch of major institutions that are all interested in the project, given the high-quality nature of the project, the sponsorship that we're bringing, the pre-leasing that we have. So we're very excited. So at this point, we're finalizing term sheets to try to get to a full commitment in loan documents, and we're in great shape to be in a position to close the construction financing later this year, which would line up with the equity financing that we need to do.

Just overall on the financing both on the equity and debt. Just in the context of AI, have any of the investors kind of expressed hesitations or anything? Or how have the conversations kind of evolve from when you first announced the project to where you sit today?

AI is not an issue in the private equity market for our product at the current time. questions and the analysis that we get is who's going to lease the space? What's the time frame for that? What are the rents, things typical questions that you would expect from an investor investing in a development project. We have not heard anything about AI risk related to this development.

I think overall, the top markets for office have continued to improve. So the availability of financing, both in the bank market where those banks have seen an inordinate amount of loan runoff in 2025 compared to what they saw in 2023 and 2024, which is leading them to want to replace and grow those assets this year. We're seeing that. And then the CMBS market, both on the conduit side as well as the single asset securitization side for the larger loans is also improving through 2025 to the current date with every month, conduit deals going off with office of 15% to 25% of the pools and the single asset securitizations occurring every month at more attractive pricing with AAA somewhere in the low hundreds today, which is better than it was 12 months ago.

And then how much -- is there like a pre-leasing threshold you like to get the building to -- or that your debt partners would like you to get to before kind of finalizing a construction loan or how much would you like to kind of get done on that?

I think from the loan perspective, we only need to have the lease that we have signed already. Obviously, they know about the interest that we had, and we expect that we will be signing additional leases this year. As Owen described, we continue to derisk the project not only from a leasing perspective, but from a construction cost perspective to make the offering that much more attractive to investors.

Maybe just switching gears a little bit to kind of policy and the geopolitical environment in some of your markets. In New York, how are you underwriting the risk of either property tax increases or income tax increases? And how is the policy landscape in Seattle kind of impacted your appetite to be in that market?

I think we -- let me just step back for a second. We've had a progressive mayor in Boston for the last 4 years. And we have had a very constructive working relationship with the mayor, although -- and there's also shared agendas with the progressive mayors on things like affordable housing and things like that. Obviously, there's disagreements about how that should best be funded. But in Boston, some of the things that the mayor wanted to do like switch the tax base from residential to commercial couldn't get passed in the state house. And I think you have a similar, if not more, direct environment in New York State because the governor because of the financial history of New York and the fact that the state, to some degree, rescued in New York in the '70s, there's a tremendous approval rights for major policies by the state in New York City. So -- and the governor has been very much on the record that she doesn't support additional tax burden in New York City. So that's kind of the state that we're in right now. I would also point to the fact that Mayor Mamdani has done things that I think have been well received and feel very practical and commerce-friendly like reappointing the Chief of Police, Jessica Tisch, which was not certainly assured when he was reelected and law and order is a critical factor for Citi's health as well as obviously for real estate, and that's been a positive.

We do want to touch on AI and kind of the impact to BXP directly, put aside the kind of the office questions, but how BXP is actually using AI to be more efficient or create value and different opportunities internally.

So I would say that our -- we are never first movers on stuff. We are, I'd say, a little bit more circumspect on things. And so our perspective on AI is how can we use AI to reduce cost. Not "make people jobs better and happier, but actually how to reduce cost. And so at the moment, what we are doing is we are looking at ways and we've actually -- we have an experiment that's going to go live at the end of the first quarter, where we are using an AI bot to do a series of accounting processes that are currently being done by individuals, not a BXP but under a contract with a sensor in another part of the country or another part of the world. And so we're going to be eliminating somewhere between 6 and 8 FTEs and there's a cost associated with that, but the payback is basically a year plus. Those are the kind of things we're doing. As another example, we are looking at whether or not we any longer need to do a lease abstract. If there is a large language model that can answer a lease question for us succinctly and clearly, and it sort of works, then we don't need to go out and do a lease abstract and lease abstracts are, again, outsourced, but somebody has to check them. But if we don't need that, then that's creating another reduction in cost. Third, we're looking at how we can bring more of our legal activities in-house by giving productivity enhancing measures to our legal departments so that we don't have to use outside counsel to do as many things. So are there tools as an example, that will reduce the amount of time it takes to review the comments on a lease that are being negotiated with a counterparty. And if we can have one of our outside counsel, do things much more quickly, therefore, they won't need to use outside counsel to do as many things. Those are the kinds of things that we are doing internally. We are not doing it to do our analysis on tenant credits yet. We're not using it to do our accounting internally yet. We're not doing -- using it to do a financial analysis of an investment. Those are, I'd say, longer-term kinds of things, and we'll see if, in fact, the language models get good enough to do those things. And what we're seeing is the cost of these things are coming down pretty dramatically. So there's not a lot of advantage at quickly deploying one of these tools because 6 to 9 months later, you can do it for a significantly reduced cost.

Maybe just quickly touching on our rapid fire. Will there be more -- will the office sector have more or fewer or the same number of public companies in a year from now?

I always say fewer, and I'm right half the time.

And then what will net effective rent growth be for the office sector overall in 2027?

6%. Thank you.