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

Good afternoon, everyone. Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's office REIT analyst, and we're thrilled to have with us BXP's Chairman and CEO, Owen Thomas; President, Doug Linde; CFO and Treasurer, Mike LaBelle; and SVP Finance and Capital Markets, James Magaldi. I'll turn it over to Owen for opening remarks, and then we can jump into Q&A.

Great. Jana, thank you for having us, and a couple of opening things from me, which will suggest to you what our priorities are. A year ago this month, we had our Investor Day and we outlined 3 execution priorities for the company: leasing space, selling assets and advancing our developments. And I just want to give a little bit of a -- I want to give a report card to all of you on how we're doing. So on leasing, the first 2 quarters of this year, we leased 3 million square feet of space. This quarter, we're at about 950,000 so far. So that's going very well. Our occupancy at the end of the second quarter was 88.4%, and we gave you a target or a goal of 89% for year-end '26. So we're well on our way. And all of our major markets are very strong in terms of leasing, and they're all improved over where they were a year ago and we have a high degree of confidence in our continued success in leasing, given our strong pipeline. Sales, we're also doing great. We have closed $1.3 billion in sales. We have $200 million of additional sales under contract. One of those deals, which is about half of the $200 million, we think, is going to close this week. So if all that gets done, we'll be at $1.5 billion. We have another $400 million that's in the market. Our goal, as you might recall, for a 3-year period of time ending last September was $1.9 billion. So we're well on our way to accomplishing our goals. And as a reminder, a significant component of our asset sales are land and apartments that we're selling at low cap rates. And so the sales activity is less dilutive than selling office buildings at higher cap rates. And then lastly, we've had a lot of excitement and success in our development pipeline. We have in the pipeline right now about 3.5 million square feet and about $3.2 billion of BXP investment. This is reasonably consistent to levels that we carried even before COVID. We announced recently the delivery of 290 Binney Street in Cambridge, which is 100% leased to AstraZeneca. This is a very large project that we sold a 45% interest in. We delivered that project at an 8.9% development yield on cost, which is very high because of our execution, the savings we accomplished in the development and also the sell-down that we did. We have a major project going here in New York, as you know, 343 Madison, $2 billion. If you walk by the site, you'll see steel coming out of the ground. There's a couple of tower cranes up. We're now 56% leased. We launched this spec 13 months ago, and we have a letter of intent with another firm to take the bottom 5 floors. And if we get that done, we'll be at 70% pre-leased after only 13 or 14 months. We also signed a 320,000 square foot lease with Boston Dynamics on an empty building that we had in Waltham, Mass. So we've added that to the development pipeline. Boston Dynamics is a hard tech company. So this is a great win for us. We have 2 buildings, one of which is under construction in D.C. and one we've committed to do. And by the way, these are back-ended developments. We're not buying sites and taking risk. We're pre-leasing these developments before we even buy the real estate and we have a third one that is well along, although we haven't announced it yet. So anyway, if we continue down this path and we continue to have this success, we think we will accomplish our ultimate goals, which are to grow our FFO per share, reduce our leverage, all of which we think will be positive for our share value.

Great. Maybe jumping into the leasing, the 950,000 quarter-to-date, super impressive. Maybe if you could walk us through any latest leasing color across the region.

Sure. So when we had our call at the end of the second quarter in July, we said we had 1.3 million square feet of "active" leases under negotiation. So that number as of today is 1.8 million square feet. Of that 1.8 million, 950,000, as Owen said, has been executed. To break that those numbers down a little bit more, about 400,000 square feet of that 1.8 million is vacant space. When we lease vacant space, it all has flowed through to the bottom line, and that's where we gain from an occupancy perspective. About 250,000 square feet of that 1.8 million is '26 and '27 expiration. So that's the renewal conversations that we're having. 170,000 square feet is part of the 343. So we've executed our third lease at 343, which was a 2-floor transaction in the lower stack of the building. That's 55,000 square feet. And as Owen said, we have another 120,000 square foot client that is looking at another portion of that lower stack of the building. So that means the rest of the space are deals that we're doing on leases that are '28, '29 and out to 2030, early renewals or takedowns of space that we -- that are known expirations. As an example, Owen said, we're doing these 2 transactions in Washington, D.C. The first one is a building called 725 12th Street. That building is anchored by McDermott Schulte. McDermott Schulte is moving out of a building that we own called 500 North Capitol. We have now backfilled 100% of the space that they're moving out of with Google, who's going to be moving into that building for 220,000 square feet as soon as they move out, and we're actually getting them to move out of a few floors early, and then they're going to be moving to the rest of that space in 2028 when McDermott moves out of that space. So those are the -- most of our activity on a going-forward basis are going to be leases associated with 2028, '29, and '30. From an overall perspective, Midtown is so tight for us that we have very little left to do in our existing portfolio. In our Midtown East portfolio, we have a floor at 510 Madison, which I believe you all visited yesterday, where we've leased a tremendous amount of space. And then we have a floor at 599 Lex. We have no space at the General Motors building. We have no space at 601 Lex. We have no space at 399 Park until C. V. Starr moves out when they relocate over to 343 at the beginning of 2029. In San Francisco, we've been highly successful leasing our space at 680 Folsom Street, where we had almost 300,000 square feet of availability at the beginning of 2025. There rents are starting to accelerate, like they are in Manhattan. So everyone talks about the frothiness of the Park Avenue submarket, where rents are increasing at significant rates. As an example, we were leasing space at 510 Madison at the top of the building at $125 a square foot a year ago. now we're asking $175 to $200 a square foot, that kind of an increase. At 680 Folsom Street, we were doing transactions in the mid-60s a year ago, and now we're doing transactions in the mid-80s. So that's a market that has a 25% availability rate still and yet that submarket has gotten strong enough where we, as an organization, have been able to start to push on the economics. We are also starting our first round, believe it or not, of lease rollover at Salesforce Tower. So the building was leased up between 2014 and 2016, and we have a 2027 and 2028 expiration. In both of those cases, we expect a cash ending rate versus the new rate to be 30% to 50% higher. So we're going to have a roll up of between 30% and 50%. And then finally, on our Boston and our D.C. portfolios, in Northern Virginia, we are almost 98% occupied and leased, and we are now working on '28 and '29 exploration. We have 1 available floor coming due in 2027, in a portfolio of about 4 million square feet. And then Boston, we are doing all-time high rents in our Back Bay portfolio at 200 Clarendon Street and 888 Boylston Street in the Prudential Tower, where again, we are virtually fully leased. And so it's a very strong picture across the entire portfolio.

That's great. And maybe if you could just give us some context given that today, you're talking about the '28, '29, 2030 renewals, how common is that or relatively when do tenants, previous to this tightness in the market, approach you?

Yes. So I would say larger organizations that consider new space, so build-to-suits typically come out to the market 3-plus years before their expirations. I would say there is a little bit more urgency right now with tenants that are a little bit smaller than those who would be looking for build-to-suit. So these are tenants who are, call it, 100,000 square feet, plus or minus. And there is no question that the lack of new product in a market like Boston or a market like San Francisco, and the lack of availability of big blocks in all of our markets is encouraging our clients to be more aggressive about timing. And so -- and we are -- we encourage them to ask for proposals, and we will try and make deals. And yes, we have a hard time figuring out what rents might be in 2030, but we figure it out. When we look at where new development costs are, we look at potential increases on an annualized basis, and we try and come to a good outcome for us and for our clients. And obviously, there's risk associated with doing nothing. And so we factor all that in as we make these decisions.

Could I ask that would you set the rate now?

Yes. We've fixed the rate today.

[indiscernible] markets that are pretty tight as well as they are in Asia, and they're agreeing to set a rate for 2032?

Yes, we are doing that. I mean, in fact, we have one example right now with a 75,000 square foot tenant who has a lease expiration in 2032 that asks for a 10-year renewal proposal today starting in 2032.

One thing I would add to what Doug said, when he talks about the pipeline, there's always a lot of focus, obviously, on what's been signed that is either leased or in near-term expirations, which makes sense because that has real near-term impact on FFO and occupancy. But one of the reasons why we have such low rollover in '26 and '27 is because we've been doing early renewals in prior years. For example, Mass Financial at 111 Huntington and Ropes & Gray at the Prudential Center. So even though we -- that's in our leasing statistics and it doesn't have necessarily a real near-term impact, it helps us keep these rollovers low and helps us push the occupancy of the portfolio on a near-term basis.

Great. Maybe jumping to the San Francisco market and the AI-driven momentum we've seen this year. Curious how much demand you're seeing directly from AI versus more traditional tech and how much activity is the growth in AI also generating for more demand from finance, law and professional services.

Yes. So it's a hard question to answer because it's unclear to us what is traditional tech and what is AI at this point because everyone is, sort of, saying they're in the AI business, if you will. What I would say is that we are doing some leasing, not a lot to direct AI organizations, and that has been at 680 Folsom Street and actually in Manhattan at 360 Park Avenue South. And now we're starting to see some of that come to Embarcadero Center, which is a great opportunity for us in terms of improving our occupancy there. We've also had, what I would refer, to as some spill up. So what do I mean by that? So we have a -- we did a transaction with Dropbox. I don't consider Dropbox a "AI company" but maybe they do today. And the reason they were looking for space is because OpenAI took their space in another building. And so Dropbox needed to find a new home and they came to us to do that. So there's that kind of activity in the market as well. So the expanding large language models are basically resulting in the movement of other organizations in that marketplace. In a market like New York, there is no question that the AI infrastructure build-out is impacting law firms and financial services firms and some of their growth has to be around all the transaction volume there. That's really not going on in San Francisco per se. I'm sure there is some legal work that is being done by some of these firms with a San Francisco presence, but the bulk of those employees on the law firm and the financial service firm are all New York-centric in terms of their locations. And interestingly, San Francisco is really now a tech-dominated market, meaning once upon a time, San Francisco was considered to be the financial center of the western part of the United States. All the banks are done and anybody in the long-only asset management business has moved to another location. I mean there are a few unusual companies like Dodge & Cox who were there, but for example, the pod shops, some of whom may be in this room; the presence that they have in San Francisco compared to the presence they have in New York City is minuscule. And I just think that the San Francisco employment market has just focused much more on technology. And so what we're seeing today is a much more granular tenant in the market demand profile, lots and lots of smaller VC-backed or friends and family-backed companies that are growing at rapid rates. And the thing that is distinguishing us from our perspective, what's this sort of cycle in technology versus others is just this rapid revenue growth that these companies are having. If you look, sort of backtrack for software companies and how long it took them to get to, call it, $100 million of revenue compared to these new companies, it's exponentially different today. I mean it's taking them 1 to 2 years versus 10 years to get there. And so the revenue model associated with what is going on is a very different picture. And quite frankly, it gives us some confidence in James at the end of the table, sort of as our chief underwriter and as he thinks about how do I think about underwriting these credits? He gets a lot of confidence in what the revenue potential is.

James, how do you underwrite these tenants?

You had to say that, Doug. I mean, look, I think it's -- there's -- you have to understand that there's a difference in AI companies that we're doing business with. Some of them are application type companies that have a product that they're actually selling. Bank of America, I'm sure probably uses some of those products from companies like Rogo that create these pitch books for your clients. So that's a company that has revenues and we can actually get in and look at their financials and understand them from a more traditional sense. I would say that we do a significant amount of business. As Owen had mentioned, we've done a deal with Boston Dynamics in suburban Boston and Waltham. That is a hard tech technology company. They are backed by Kia and Hyundai. So from a credit perspective, there's somebody standing behind that business line, and it's a very different type of business line. It's not necessarily application, it's hard tech. We've done deals with major defense subcontractors are in drone technology. And this is not the pilot drones. This is new wave, AI technology as it relates to military applications, which we are all very much acutely aware of globally. If it's a smaller start-up application, we're looking at their bank account, we're getting a big security deposit. So those are the things that we have to evaluate when we make decisions regarding entering into long-term financial commitments with our clients.

And spec suites are becoming more popular with speed to occupancy becoming an important criteria for many tenants. How much are you leaning into this across the portfolio?

We are full bore plowing ahead with spec to those suites, particularly in San Francisco because we've been so successful. So we started with one spec suite, a floor at 680 Folsom Street, and we've leased all of the floors above 1, and we have a proposal today to lease that last floor with an organization that looked at our spec suite and said, "we want that." And so we're about to do that. At Embarcadero Center, we're actually doing 6 full floors, full floors, not spec suites, but full floors. The first one was completed last 2 weeks ago when we signed a letter of intent on Friday with an AI company to take the entire floor. We're doing a variety of different configurations. We have the law firm, professional services firm build-out, which is stacked with perimeter offices and a few conference rooms. We have more open office floors, which is like the one that we just got an LOI on. And then we are also doing some smaller spaces. Where we have built space, we have leased the space. And so it's been a very successful strategy. And it also is economically advantageous because one of the friction points is time to getting to yes on the space and then building it out. And if it's already built, once when that lease is signed, revenue commences and the tenant moves in and the whole free rent component becomes a much less important part of the equation. And so economically, it costs us less in terms of downtime and capital to build a floor. And we're also building floors that we have designed that we believe are somewhat credit risk-prone in terms of our ability to -- if we have a credit problem, provide another organization with that suite that will work for them as well as opposed to a bespoke kind of an environment where people are choosing colors that may be very unique or they're building out unusual office configurations or different kinds of conference rooms that are not necessarily "generic" and so it's a risk mitigation tool from a credit perspective as we think about it as well.

How do those spec suite build-outs per square foot kind of compared to TIs for some of those more...

So we can build a suite for -- in San Francisco, as an example, for somewhere between $160 and $220 a square foot. And if we're doing an 11-year deal in San Francisco, we're giving $185 to $220 a square foot. So the money that we're spending is about the same. The tenant unusually spends a lot more than that allowance. So we can do it more efficiently, but they tend to do these bespoke kinds of configurations and they hire architects who tend to have a different design aspiration. And so that just costs money. And so we can be more efficient than "our" tenants on their own.

And then maybe if we could just touch on, kind of, Los Angeles and Seattle, which have been a little bit weaker, also much smaller markets for BXP. But 2Q earnings commentary was trending a little bit more positive. If you can just kind of talk through those.

Sure. So -- and they're actually very different. So in Seattle at Madison Center, where we have available space, we have at least 3 vacant floors to AI companies over the last 2 quarters, really quickly. We've built the floors and they've taken the space immediately on an as-is basis. And then we also just did an early renewal, another one of these, call it, 2028, '29-ers with the large law firm and the tenant, Davis Wright, who has over 100,000 square feet of space. So I would say Seattle is continuing to perform as it has in the past, which is it's behind San Francisco, but it tends to have the same kind of organizations looking for space. And if you've read about it, OpenAI and Anthropic have done a new beachhead expansion in the Seattle market in Downtown, Seattle, aka not Bellevue. And then Bellevue itself has really recovered quickly, again, with a lot of technology companies who may or may not consider themselves AI companies. West L.A. is from a demand perspective, challenged. There are more tenants in the market but it's all musical chairs. There is no growth at the moment in the West L.A. marketplace. You have movement from tenants that are moving from different parts of what we refer to as the Mosaic of L.A. into Century City. That's the predominant place where activity is. And then you have a smattering of consumer products companies and other where you would refer to as media tech companies. Some of them are in the gaming, some of them are in the actual media content creation business that are out looking for space. None of them have a sense of urgency, but they are in the market looking, there's -- but there's not much in the way of growth in that marketplace.

Curious any -- go ahead.

So incredibly positive perspective, except maybe the West L.A. comments. What are the weaknesses in the portfolio?

So we've put out a trajectory of gaining 200 basis points in 2026 and 200 basis points in 2027, which sort of gets us into the 91% range. As Owen, sort of, suggested, we're likely to be above 20 basis points for 2026. The next opportunity we have in terms of occupancy gain is really coming from San Francisco. So we have a decent amount of available space at the basis of Embarcadero Center 1, 2 and 3 and we have about 150,000 square feet of available space in Mountain View, and there is a lot of activity on that portion of space. That's close to 1 million square feet, which is 250 basis points of potential additional occupancy. Once we get through that, the next, sort of, logical place for there to be upside is in our urban Boston portfolio, with Urban Edge portfolio, which is really our suburban portfolio in Boston where we have a couple of hundred thousand square feet of availability. And then in Northern New Jersey and our Princeton portfolio, the difference between those 2 markets and everything else is that the rental rate structure is much lower. And so the contribution from those will be less. So if the rents in San Francisco are $80 to $100 a square foot and in Mountain View, they're $70 to $80 a square foot, they're $40 to $50 a square foot in Suburban Boston, and the $35 to $40 a square foot in the Princeton market. So it's half the contribution. After that, the problems, if you want to call it, that we would describe are we have a block of space in Brooklyn, New York that we can't seem to move in a place called Dock 72. We have rollover exposure coming in a building in West L.A. that Hulu currently occupies in place called Colorado Center. And then we have a pending lease expiration in 2028 at Safeco Plaza with Liberty Mutual. That's what I would refer to as sort of the problem areas. In all of our projections and all of our conversations, we have taken into account that portfolio as being the last thing that we're going to ultimately see a recovery on. So everything that you hear about from us ignores the contribution from those assets. And it's why what we're saying is our stabilized occupancy for the portfolio somewhere between 93% and 94% because we're acknowledging that we have those other assets that are going to take a long time to see a recovery. I mean we may have different plans for those assets.

One other thing I would add to what Doug said is one of the themes that he touched on was that, in general, the suburbs are weaker than the urban locations. And that is true, I would say, post COVID with the work-from-home phenomenon because I think the return to office is a little bit different in the suburbs than it is in urban areas. So though we are working to lease our portfolio and have some great successes like the Boston Dynamics thing, we are changing our portfolio. So a lot of the sales that we've been doing have been suburban buildings because we want to reduce our exposure in the suburbs. And second, we haven't talked that much about this yet, but we have entitled thousands of multifamily or residential units in Lexington, Waltham, Weston, West Windsor Township, Fairfax County, Santa Monica. And in many of these cases, we are either tearing down office buildings or we have sites that we don't think are geared towards office development, and we're maximizing their value through residential development. So we are as a firm taking action to change our portfolio or to adjust it based on the impacts that we see in the marketplace.

Maybe following up on that capital recycling and the progress you've made on the disposition plan for the year. Being so active in the market, can you talk a little bit about the buyer profiles out there, the interest levels and pricing?

Yes. So our sales are in 3 buckets. So it's land, it's apartments and it's office, primarily suburban, although some urban. So just quickly to touch on that. So in the land, we found different uses and users, industrial development, a city bought one of our sites, but the most important value creation exercise that we have done is going to communities that need housing and getting them to entitle housing that in many cases, they had not done in a very, very, very long time. And as a result, we have residential entitlements that are extremely valuable in the market. And generally, what we do when we get those is if it's a for-sale product, we will sell the land to a homebuilder. That market, we have robust auctions, and we're getting good prices. And if we can make the numbers work, we'll hold on to the multifamily land, bring in a financial partner for 80% of the capital, we'll basically contribute to land. In many cases, we actually take out money as well and then we have a 20% interest, we get the development fee and then we build a building. So that -- the residential sales are the most accretive to the firm, and we want to do more and more and more of those. The pacing mechanism is our ability to get entitlements and go to the process and bring those projects to market. But you're going to continue to -- you're going to see us continue to do that. Second is selling multifamily. So we have built apartments. Historically, we actually -- we own 100% of these projects. More recently, we've been using outside capital. So we had over 2,000 units that we owned 100% and we held on to those because with interest rates going up, the cap rates went into the 5s, and we were growing our NOI on these projects at 3% or greater, but in the last year, cap rates came back down. And so we ended up selling 3 of our large apartment complexes, 4.5%, 4.6% cap rates, which we think particularly now with higher interest rates, was excellent execution and given our look through cap rate, that's also an accretive disposition for the firm. So I would say that market continues to be strong. We have a couple of additional assets that we may test -- we could test the market on in the next year. So coming lastly to the office. Look, I think the office sale market, there are not a tremendous number of what I'd call premier workplaces that have been selling in the market. And most of the buyers are not traditional institutional investors in real estate, they are -- or at least a core investors in real estate, they are opportunity funds, family offices, a lot of it is driven by higher yield expectations buildings that are in lease-up, buying buildings at large discounts to replacement costs and achieving higher IRRs. There is not very strong or we haven't seen, what I'd call, kind of, core institutional bid at least for the buildings that have come into the marketplace.

And maybe turning to your development of 343 Madison. Great to hear about all the leasing progress. Curious kind of the construction loan, maybe just, kind of, an update on kind of the next milestones you're looking to achieve there?