Boston Properties Inc (BXP) — Q2 2022 Earnings Call Transcript

Thank you, Helen, and good morning, everyone. Today, I will cover BXP's continued strong performance as demonstrated in our second quarter results, high-level trends in the economy and in-person work affecting BXP, current private equity capital market conditions for office real estate, and BXP's capital allocation activities. BXP's financial results for the second quarter reflect the continued positive impact of the post-pandemic reopening of the major cities where we operate and the increasing needs for our clients for securing high-quality office space. Our FFO per share this quarter was well above both market consensus and the midpoint of our guidance, and we increased our forecast for full year 2022. We completed 1.9 million square feet of leasing, more than 160% of our leasing volumes in the first quarter and 140% of longer-term average leasing activity for the second quarter. This success can again be attributed to not only our execution but also the enhanced velocity achieved in the current marketplace for premium quality workspaces, which are the hallmark of BXP's strategy and portfolio. It's clear over the last quarter that economic conditions in the U.S. and globally have deteriorated. The key culprit is inflation, which as it continues to reach new highs, set off a chain reaction of events, starting with: the Federal Reserve taking and signaling severe tightening measures; interest rates rising across the yield curve; volatility and losses in the public equity and debt markets; and now increasing concerns that the U.S. economy may experience a recession. This evolving operating environment is having several impacts on BXP's operating activities. Though our leasing activity has been very strong for the last few quarters, we anticipate headwinds at least in the short term. Business leaders are generally more reticent to make large capital allocation decisions, such as a lease, in an uncertain economic environment. Before the summer season, office usage by our clients continued to gradually increase. There is increasing evidence that many businesses have or will tighten up in-person work policies as economic conditions worsen. Many of these companies also significantly increased their workforce during the pandemic without increasing their available space. These factors should help offset, at least partially, the recessionary headwinds to space demand. Our capital costs have increased, which Mike will cover in greater detail, due to higher interest rates and credit spreads. And private market debt financing, both for construction and existing assets, is significantly more challenging to arrange. As discussed in prior quarters, inflation has increased construction costs for new development. Though the cost for our launch development pipeline are essentially already locked in, the cost of potential future developments continues to increase. We are not able to predict the depth or length of the current economic slowdown. As a result, we are positioning BXP for relative success regardless of the economic trajectory by carefully managing leverage while continuing to selectively invest in opportunities with the highest return versus risk characteristics. In terms of real estate capital markets, transaction volume for office assets slowed to $18 billion in the second quarter, down 40% from the first quarter and flat to the second quarter last year. Though volumes are down, liquidity remains for the higher-quality assets that often trade to institutional buyers not requiring leverage. Cap rates have increased at least 10 basis points for the highest-quality assets with limited leasing exposure and more for assets of lower quality and/or with riskier income streams. Availability of financing is a key market driver. There were several transactions of note in the second quarter. In the Seaport District of Boston, a developer recapitalized 451 D Street with a fund manager for $708 million. This 480,000-square-foot building was fully leased and pricing was just under $1,500 a square foot and a 4% cap rate. In El Segundo, 555 South Aviation Boulevard sold for $206 million to a fund manager. This 260,000-square-foot building is fully leased and was extensively renovated in 2018. Pricing was $790 a square foot and a 5.3% cap rate. And lastly, in Sunnyvale, Moffett Green was sold to a pension fund adviser for $875 million. The 4-building 720,000-square-foot complex is fully leased to Meta and sold for just over $1,200 a square foot and a 4.5% cap rate. Regarding BXP's capital market activity, we closed on our previously described Madison Center acquisition in Seattle for $730 million and continue to selectively pursue acquisitions in our core markets with financial partners. On dispositions, we completed the sale of VA 95, an older 11-building 733,000-square-foot suburban flex office park located in Springfield, Virginia, for $127 million, which represents pricing of $173 a square foot and a 6.2% cap rate. Bought in 1981 and developed by BXP over time, VA 95 was an early and successful investment by BXP that no longer fits well with our corporate strategy. We are making good progress in the sale of several additional assets in the Washington, D.C. market, which we intend to use to fund the Madison Center acquisition through reverse lifetime exchanges. If these transactions are successful and including 2 sales already completed this year, total dispositions for 2022 could exceed $850 million, allowing BXP to both raise incremental liquidity and reallocate capital on a tax-efficient basis from the Washington, D.C. to the Seattle markets. Our development pipeline continues to deliver accretive projects to our in-service portfolio and is consistently recharged with new starts. This quarter, we delivered 325 Main Street in Cambridge, a 414,000-square-foot building in which the office component is 100% leased to Google. Our $418 million investment in the project is estimated to have a first-year cash yield on cost of 8.7%. In Reston, Virginia, we commenced the development of a mixed-use project in Reston Next, comprising a 4-story 90,000-square-foot jewel box office building and a 508-unit highly amenitized residential complex. Most of the residential units will be located in a notable 39-story tower, which will be the tallest building in Reston. BXP will own 100% of the office component and a 20% interest in the residential in partnership with an institutional investor. This project is the next step in the full build-out of our very successful Reston Next development within Reston Town Center. Overall, our current development pipeline of 11 office, lab, and residential projects aggregates 4.2 million square feet and $2.6 billion of investment that we project, based on delivery date and lease-up assumptions, to add more than $190 million to our NOI over the next 5 years at a 7.5% average cash yield on cost when stabilized. The commercial component of our development pipeline is 49% preleased. In summary, we had another very successful quarter with above-expectation financial performance, strong leasing success, and significant investment and capital reallocation activity. Let me turn the call over to Doug.

Thanks, Owen. Good morning, everybody. So our last conference call was on May 3. Over the last 86 days, the conversations on the demand side of our business have really shifted from, as Owen described, return to work and space utilization to the pace of job growth and job reductions as the impacts of the Fed's actions moved their way through the economy. While leasing activity has slowed some across every market, new lease transactions that have been in documentation during the first half of the year across all of our markets and not just with our tenants continue to move towards completion. In our portfolio, none of our active lease negotiations have been scrapped. I think that's important relative to how we have seen other dramatic slowdowns occur, where people and companies have become much more cautious about what they're doing. There is, however, less urgency with clients to make new commitments. As we consider our expectations for leasing completions in the back half of '22 and '23, we are obviously factoring in the impact of the slowdown in the macroeconomic activity, business performance, and reduced overall demand for space. The availability rate defined by third-party brokers that look at the entirety of the markets continues to appear to be very elevated across virtually every office market in the country, and our markets are no exception. Last quarter, we described the work that CBRE Econometric did on the availability in the premier assets in the urban markets. Availability of space is at lower levels among premier buildings. These assets continue to get more than their proportionate share of market demand. There are still premier building micro markets like the Back Bay in Boston or View Space in Class A buildings in San Francisco that are still performing really well, meaning rents and concessions are equal to, if not better than, pre-pandemic. We have moved away from looking at the percentage of card access swipes relative to February of 2020. It seems to be talked about in the Wall Street Journal every day. We are now measuring the daily and weekly utilization of seats. We've got pretty good data on daily utilization in our Boston Back Bay and New York City assets, where the customer makeup is dominated by traditional financial services and professional services firms, i.e., very few technology companies. Here, we're seeing about 70% of the space being used on a weekly basis with about 50% of the employees using the space 3, 4, or 5 days a week. Now when we compare utilization from 2020 pre-pandemic, the striking difference is the daily difference, where we saw 80% of the employees coming in 3 or more days a week in early 2020, 2019. There was a ramp-up, as Owen said, between March and June, but it really has plateaued as we began the summer. Some business leaders, including a few renowned technology CEOs, are becoming sterner in their message to employees regarding the importance of in-person daily activities in traditional office space. This may lead to greater daily utilization as we end the summer holiday season. We'll be able to tell you about that as we look at our September data when we talk to you in October. In the last week, we've seen announcements from some of the tech titans, Amazon and Meta, acknowledging that they're trying to figure out how they’re going to match their human capital with the utilization of physical space. Changes in the labor market supply are also going to impact these decisions. As I said last quarter, I think this is going to be a journey where any industry expert could tell you they know how business is going to use their space or what they even think remote or hybrid work actually means in 2024 is grossly overestimating their expertise. Getting to our performance, the second quarter was a great leasing quarter for BXP. This is now the fourth straight quarter of strong overall leasing activity in our portfolio. To remind everybody, beginning with the third quarter of '21, we've signed 1.4 million, 1.8 million, 1.2 million, and this quarter, 1.9 million square feet of leases. So that's 6.3 million square feet of signed leases in the last 12 months. This activity has occurred amidst the Delta variant, the Omicron variant, remote work fits, and starts, and, most importantly, significant labor market headwinds. As we speak to you this morning, we have signed leases on more than 975,000 square feet of in-service baked-in space that is not yet in our occupancy figures. About 50% is going to commence in '22 and the remainder in '23. At the end of the second quarter, after completing the 1.9 million square feet of active leasing, we have an additional active lease portfolio in negotiation in the in-service portfolio of 1.3 million square feet. 640,000 square feet would cover currently vacant space, so most will go into service in '23 and the other 660,000 involves currently leased space, renewals or replacement tenants. Known expirations for the remainder of '22 total under 1.7 million square feet. Over the last 4 quarters, our occupancy has improved by 90 basis points and stands at 89.5% as of June 30. We expect to see a slight decline over the next few quarters as we wait for all of these signed leases to commence, but despite our less robust leasing expectations, we should see occupancy pick up slightly in 2023 from today's level. The development portfolio includes 1.1 million square feet of signed leases that have yet to commence, and these buildings are not included in our occupancy figures this quarter. Reston Next will be included in the in-service portfolio of '22 without the 200,000 square feet signed Volkswagen lease that won't commence until '23. We are going to see an increase in contribution from these assets even though they will show a reduction in our reported in-service occupancy. A good portion of the vacancy in our Boston suburban portfolio is now comprised of space in buildings we have actually vacated as we plan our next group of future life science conversions. When we commence redevelopment, these assets will be taken out of service. So let's talk about sort of my ranking of the markets. It goes into sort of 3 tranches. The Boston CBD stands out as the most active of our portfolio, and it is by itself in the top tranche. And by CBD, I'm really referring to the Back Bay because that's where we have the majority of our portfolio. The New York City, Reston, Virginia really leases under 25,000 square feet; San Francisco, again, smaller tenants, leases under 25,000 square feet; and Washington, D.C. CBD make up sort of the second tranche. And then suburban Boston, South San Francisco, Mountain View, Princeton, and West L.A. make up the third. Activity on the East Coast is stronger than activity on our West Coast portfolio. I think this is a function of the composition of customer demand, which has a much heavier weighting of market occupancy from traditional financial services and professional services firms on the East Coast versus technology and media companies on the West Coast. I think the big changes from the last quarter in our portfolio are the increased level of leases we're actually working on in our D.C. CBD portfolio and then the slowdown we've seen in the Boston suburbs. To be fair, we completed over 220,000 square feet of suburban office leasing in the suburban Boston in-service portfolio during the second quarter, where the average market rent on second-generation space was up 34%. Additionally, all of the life science leases we were negotiating at 88 Winter Street were executed this quarter. We signed 3 separate leases totaling 72,000 square feet in that building, and it's now 97% leased with expected occupancy in September for the first tenant. We also signed 2 leases at 180 CityPoint, our next life science delivery totaling 140,000 square feet. If you include the 570,000 square feet on Binney Street, we actually executed over 775,000 square feet of life science leases during the quarter in our Boston portfolio. 2021 was an extraordinary leasing year for life science, and the slowdown we are now seeing in the office leasing activity is also being felt in the life science market in our suburban Boston, suburban San Francisco, and suburban Montgomery County portfolio. The biotech index, IBX, is down significantly from a year ago, and fewer private companies are getting funded, which translates into a drop in active requirements relative to last year. I would note that the big pharma companies continue to have an appetite for new space in our markets. Early-stage life science tenants and their investors, with an eye to slowing down their capital outflows, are also pushing more of the capital spend needed to fit out space to the landlord in the form of higher TI demand. In the Boston CBD, we completed 253,000 square feet of leases. The markup on that portfolio was 18%. More than 450,000 square feet of our leases in negotiation are in the Boston CBD portfolio, and that includes 200,000 square feet of retail space that has been vacant. In the San Francisco CBD, there have been a few more large tech tenants that have completed leases in sublease space, but the bulk of the activity on a direct basis has been north of market and concentrated in the premier buildings with professional services and financial services firms. This quarter, we did 9 leases totaling 96,000 square feet in the CBD portfolio, and the leases had a second-generation increase of 37%. We also completed 2 transactions in Mountain View with an uptick of only 3%. In other positive news on the West Coast, we completed a 60,000-square-foot lease for the top 3 floors that are vacant at Safeco Plaza in Seattle. When we purchased the asset in '21, our plan included a major repositioning of the public and amenity spaces at the Fourth Avenue and Third Avenue Street plans. We have begun to introduce our repositioning plans for the building. This, combined with our proven track record in creating great places and spaces, allowed us to win over a current BXP West Coast client to Safeco Plaza. Activity in the D.C. region was pretty light during the second quarter with the 8 office transactions totaling only 43,000 square feet and 8 retail transactions totaling 39,000. But as we look forward, we are negotiating over 270,000 square feet of leases for the in-service portfolio and 95,000 square feet of leases at 2100 Pennsylvania Avenue, our newest development in D.C. In the New York region during the quarter, the most significant transaction was a 125,000-square-foot extension at the General Motors building that got signed in early April, which I described last quarter. In addition, we completed another 168,000 square feet of leases across the portfolio. There were some ups and downs in the lease-to-lease rent comparison, but together, the portfolio had a slightly positive under 1% mark-to-market on the leases executed during the second quarter. We have multi-floor lease negotiations underway at 399 Park Avenue, 601 Lex, and last week, we signed a 71,000-square-foot 2-floor lease at Dock 72. Total active leases in the New York City portfolio as of July 1 was in excess of 260,000 square feet. We have had 4 consecutive strong quarters of office leasing. We have incremental development deliveries hitting in '22 that will be at their run rate in '23. We still expect occupancy improvement in '23, though at a reduced rate based on the slowdown in the economy. We continue, as Owen said, to feel really good about our portfolio position in each market. Our lack of meaningful lease expirations in '23, just over 2 million square feet, puts us in a great position entering the year. We have a strong balance sheet with low floating rate exposure and near-term maturities, so debt financing costs are going to be higher in '23. In addition to his commentary on the second quarter performance, Mike will discuss our internal interest rate expectations and our financing plans.

Great. Thank you, Doug. Good morning. So as Doug said, this morning, I plan to cover the details of our second quarter performance and our full year earnings guidance. And while I don't plan to provide specific guidance for 2023 until next quarter, I do want to discuss the potential impact of rising interest rates as well as the leasing commentary that Doug described and our development deliveries. Overall, we had another strong quarter. Our share of revenues and FFO this quarter are up over 10% and 13%, respectively, over the second quarter of 2021. We reported second quarter funds from operation of $1.94 per share that exceeded the midpoint of our guidance by $0.09 per share. The improvement mostly came from a combination of higher rental revenues, stronger performance at our hotel, and lower operating expenses. Lower expenses drove $0.05 per share of the outperformance and is primarily from the repair and maintenance category. We anticipate that many of these jobs will be completed in the back half of 2022, so the majority of this expense is only a deferral and will be incurred later this year. Our 1 hotel, which is located in Kendall Square in Cambridge, experienced stronger occupancy and RevPAR growth that exceeded our expectations by $0.02 per share. The return of business and educational activity to Kendall Square, along with the college graduation season, drove the improvement in hotel NOI back to the level that we saw in the second quarter of 2019. In the rest of the portfolio, we experienced better-than-projected rental revenues of $0.03 per share from timing of our leasing leading to improved occupancy and higher parking revenue. Our share of parking revenue continues to grow as activity levels increase in our cities and buildings. This quarter, our share of parking revenue grew by $5 million and is now operating at over 90% of its pre-COVID run rate. The outperformance in these 3 areas was partially offset by $0.01 of higher-than-anticipated interest expense coming from both lower capitalized interest, from changes in the timing of our development spend, and higher short-term rates impacting the interest expense on our floating rate debt, which includes our new $730 million term loan that we used as a bridge to acquire Madison Center. As Owen covered, we're progressing well with our asset sales and anticipate paying down debt with the proceeds from sales later this year. There are a couple of other items of note in the quarter. First, we closed a 10-year $185 million financing at a fixed rate of 4.43% on our Hub 50 House residential joint venture in Boston. This new mortgage refinanced floating rate construction financing. Second, we recorded $6.6 million or $0.04 a share of other income for assigning our rights to a purchase contract on a building in Reston. This income was included in our guidance, but we don't expect it to recur, so you should not expect it in our run rate going forward. Now I'd like to cover the changes to our guidance for the full year 2022. We've increased our guidance range for 2022 FFO to $7.48 to $7.53 per share. That's an increase of $0.06 per share at the midpoint from our guidance last quarter. Our portfolio exceeded our projection in the second quarter. As Doug described, we had a strong quarter of leasing activity, some of which will result in earlier than projected rental revenues in 2022. The result is an increase in our assumption for our 2022 same-property NOI growth by 75 basis points to now 3.5% to 4.5% over 2021. We also increased our assumption for 2022 cash same-property NOI growth by 50 basis points to 5.5% to 6.5% over 2021. At the midpoint, the increase in our same-property NOI assumption adds $0.07 per share to our full year guidance. We've also increased our NOI assumptions for the incremental impact from properties in our non-same portfolio by about $0.03 per share. The increase is primarily from delivering our 400,000-square-foot build-to-suit for Google in Cambridge. The building and tenant improvements were completed over a month ahead of schedule, so revenue recognition commenced earlier than we anticipated. In addition, we've refined the timing of our asset sales activity, adding incremental income to our model. Doug touched on the impact of rising interest rates. Since we last provided guidance, the Fed has become much more aggressive in its rates policy and short-term rates have risen dramatically. 30-day LIBOR and 1-month term SOFR have risen from approximately 60 basis points in April to just over 2.25% today. Our projections assume they increase to 4% over the next few quarters. We currently have approximately $1.7 billion of floating rate debt, representing a relatively modest 12% of our total debt. This includes $800 million in our share of floating rate debt in our joint venture portfolio, our line of credit with current borrowings of $165 million, and our $730 million term loan. The increase in our interest rate assumptions result in higher interest expense in 2022 of approximately $0.05 per share at the midpoint of our range. In summary, we're increasing our guidance for 2022 FFO by $0.06 per share at the midpoint. The increase is from higher same-property NOI of $0.07, higher non-same-property NOI of $0.03, higher fee income of $0.01 offset by higher interest expense of $0.05. As we look out into 2023, there are a few things you should consider when modeling our projected earnings. First, we anticipate that our interest expense will be meaningfully higher in 2023. While the pace of interest rate increases may moderate, we expect the average interest rate on our debt portfolio will be higher in 2023 than it is this year. We expect the size of our floating-rate debt will remain relatively stable, with repayments from asset sales later this year offset by funding our development spending with our line of credit in 2022 and 2023. We also expect to refinance $800 million of debt that expires in the second half of 2023 in the long-term fixed rate market. The current average rate on the expiring debt is 3.4%. Today, our borrowing costs for 10-year unsecured bonds are between 5.25% and 5.5%. The market has varying views for interest rates in 2023, so it's anyone's guess where they end up. If you assume short-term rates continue to rise and our long-term borrowing costs remain relatively stable, this results in an average 200 basis point increase in borrowing costs on approximately $1.7 billion of floating rate debt and $800 million of refinancing, or about $40 million of potential incremental interest expense in 2023. Additionally, we also expect our capitalized interest to be slightly lower in 2023 due to delivering several large developments. Second, we expect our same-property portfolio to continue to grow, but likely at a slower pace than the 4% midpoint growth rate we assume for 2022. This year, we're benefiting from the recovery of income from our retail, parking, and hotel. With the continued improvement in parking and the strong performance of our hotel this quarter, we've now recovered over 90% of our ancillary income. Our annual growth in these income streams going forward should be more normalized. In the office portfolio, Doug described our healthy backlog of signed leases and leases under negotiation that total over 2 million square feet that we expect will go into occupancy this year and next. Based on the timing of this activity and our lease rollover, we expect our occupancy will decline modestly in the second half of 2022 and then start to increase in 2023. Third, we expect that our development pipeline will add to our earnings in 2023. We anticipate a full year of income from our Google development in Cambridge, and we expect to deliver 2100 Pennsylvania Avenue in D.C. and 880 Winter Street in suburban Boston later this year. We also plan to open View Boston, our 60,000-square-foot experiential observation deck at the Prudential Center in the second quarter of 2023. These developments represent more than $1 billion of investment at an expected stabilized unleveraged return in excess of 8%. In conclusion, we've had a strong second quarter performance, and we've increased our full year 2022 FFO guidance. We're projecting over 14% FFO growth in 2022. Despite headwinds from higher interest rates and economic uncertainty, our portfolio is well positioned with modest rollover exposure and growth from our pipeline of developments. Lastly, we're looking forward to hosting you at our investor conference to be held in Boston on September 19 and 20. The conference will be a fantastic opportunity to hear from the broader BXP team, learn more about our current and future strategic initiatives, and tour some of our Boston Area properties. If you've not received an invitation, please reach out to our investor relations team. That completes our formal remarks.

Doug, you mentioned on your commentary Class A San Francisco is holding up really well. You had a lot of strength in the market among smaller tenants. Can you just provide some more commentary on the makeup of those tenants renting space, and also the impact of sublease space in the market, including Salesforce across the street from your building?

Sure. As I described, the high-end premier space is really where the market has held up very, very well. I would describe those tenants as smaller to midsize professional services, asset management, legal, financial services companies, so hedge funds, money managers, private equity firms, law firms, consultants, etc. None of those tenants are looking at a sublet of a floor at 50 Fremont, which is the building you’re describing that Salesforce owns. That's actually direct space in the market.

I guess just thinking big picture, your comments about some markets seem like they might be coming back faster. You're growing in Seattle. Just as you think about the future, are there certain markets where you're much more cautious about putting incremental capital to work and some that you are more aggressive putting capital to work here as you just think about how return to the office will work out and space usage will work out and kind of all the changes we're seeing in the market today?

Yes. Jamie, it's Owen. Look, I think our perimeter is established in the six markets where we operate. As we look at opportunities, they're very much driven from the bottom up. What deals are available, and where do we think there's an attractive return versus risk trade-offs? Sometimes that’s in acquisitions that we've been recently doing with partners, and sometimes that’s in launching a new development. So you have seen us reallocate capital this year from downtown Washington, D.C. to Seattle. That certainly occurred in '22. In terms of the future, it’s going to be more bottoms up based on the opportunities that we see. It's harder to predict. As Doug described in his remarks, we are seeing stronger leasing activity in Boston, in New York, and in the suburban Reston, Virginia markets than we're seeing on the West Coast.

So question just putting everything that you've said together. I think if I heard the comments correctly, generally, the office leasing is slowing, but premium buildings like the ones you guys have are continuing to win more than their fair share of leasing. And it didn't sound like you expect any slowdown in the robust four quarters of successive leasing that you have. It sounded like that leasing is good. Mike, you outlined $40 million more of interest expense for next year, but in outlining that $1 billion 8%-plus yielding pipeline that's going to be on track to be in service next year, that's an $80 million on the positive. So just putting it all together, is the takeaway that generally, the office market is getting tougher but BXP is winning more than their fair share? And because of the developments, you're way more offsetting rise in interest expense, so net, BXP should be better positioned? Or is that not the right takeaway and that we should think about more headwinds for 2023 and from what's going on?

Let me talk about the in-service portfolio, and then I'll let Mike and Owen describe sort of the other components. On the in-service portfolio, Alex, I think it would be fair to say that we have a constructive but moderating view on the leasing that we will do between now and the beginning of 2023. We're assuming the economy is going to continue to be less strong than it is today. That doesn't mean that we will see any meaningful change in our portfolio outcome. We have some leases that are rolling over that are higher, and we have some leases that are rolling over that are lower. The real question will be, as we always talk about, whether there are incremental pieces of downtime on spaces that we have leased where we haven't started revenue. So net-net, we feel that next year and this year relative to our same-store portfolio are going to be pretty consistent. Mike, you may want to talk about expense development.

Yes. I mean, I think the one thing that you got to remember about development, Alex, is all of it is not going to be stabilized day one. 880 Winter Street is delivering this year, and it will be stabilized day one because it's 97% leased. All the tenants are going to be in by the first quarter next year. But 2100 Penn is 61% leased currently. As Doug mentioned, we've got a number of leases in the works, which will take that into the mid-80s percent lease perspective. But most of those leases aren't going to start until mid to late '23. So that building is not going to be stabilized probably until '24, I would say. The other thing that's important is that View Boston is going to have a ramp-up period. It's a little bit harder to estimate how long the ramp-up will be, and we're highly confident that it's going to have a very strong return when it stabilizes. But the operator that we have that we've been working through believes that there will be a few years ramp-up period. Its stabilized return is going to be a year or two out.

Yes. So Alex, kind of pulling all this together, what you're hearing from us is that we are in a less certain economic environment today than we were last quarter. 2023 is a long time from now, and given the uncertainty, it's very hard to predict. What we're trying to provide is what are all the trade-offs here, what could be up, what could be down. We don't know the magnitudes of those yet. It's dependent on market forces. Doug described the leasing; clearly, the slowdown in economic activity is a headwind to leasing. Absolutely, we believe that our premium assets will get more than their fair share, so that trend continues. Capital costs will be higher. How much? I don't know. It depends on what your assumption is for interest rates. The developments will add to our results.

So the newly formed JV, can we get some more details on the 39-story new development tower in NoVA? And specifically on the JV structure, are you seeing deep interest from potential JV partners like sovereigns, pensions, and other institutional capital? Does it seem ready and willing here to partner up on Class A office? How deep is this pool versus previous cycles and maybe markets as well as assets?

Okay. Let me break that question down into some component parts. So let's start with the interest by institutional investors in office and, in this case, also in residential real estate. The answer to your question is that there absolutely is interest by institutional investors in office and residential real estate. I think the interest is probably higher for the residential, but we continue to look at new investments and developments with the partners that we have done deals with over the last year and a half. We are continuing to look at new things. There's clear interest in office real estate. Moving specifically to this joint venture, this is about capital allocation. The yields from residential development are generally materially lower than office development. We are being discriminating with the use of our capital and trying to put it in the highest-yielding opportunities. In this case, we decided to bring in a partner for 80%. We own 20%. The office component of the development is higher yielding, so it brings the whole yield from the project to us up. Some compensation we receive as the manager of this development augments our returns. So we're putting out less capital, requiring less capital to make the investment. We're doing the development, and the returns for the capital we have invested are higher, which is why we're doing it. You should expect that BXP will continue to work with capital partners certainly on office acquisitions and possibly on developments sparingly.

Just to circle back on the leasing. We've seen big tech kind of hit the brakes pretty hard on leasing. Certainly, they've kind of frozen their hiring. It's unclear when that comes back. Given the macro uncertainty, at what point do you need to see those things pick up from a timing perspective to be able to move the occupancy needle forward in 2023? I realize there's still time, but I know these things take a while to get the leases in place and signed. I’m just trying to think through the renewals for next year, the new leasing activity that’s slowing, and what kind of pressure that maybe puts on the occupancy build into '23.

Yes. Steve, you ask an interesting question because if I actually parse down where our availability is, other than Northern Virginia, where we actually have operating assets with vacant floors that would likely be what I would refer to as techy because it's either cybersecurity or web services or defense contracting companies, which have a technology bend to them, the vast majority of our portfolio is, in terms of our availability, is in our CBD assets, which are not primarily geared towards technology tenants. Embarcadero Center is a very different asset than, as an example, Salesforce Tower or 680 Folsom Street. So we are not really, I would say, from a portfolio perspective very focused on what's going on from a technology perspective relative to what we think we can achieve in 2023. I'm not saying that we're not immune to the fact that the technology sector has been a meaningful contributor to the growth in office absorption in every one of our markets. It’s hard to see the markets improving without a meaningful change in technology companies' desire to take additional office space. I think that we can surf above the fray relative to occupancy, but we will be impacted by the overall market dynamics intrinsic to lack of additional absorption because those tenants are simply not aggressively looking for space today.

It's more of a philosophical question. I think in the last several quarters, you've talked about how the focus is perhaps more centered on leasing rather than rent growth, given how that flows through the financials. How are you thinking about the trade-off, given the macro that you described? And then how can you lean into leasing even more in sort of this uncertain macro environment?

First and foremost, we have a great portfolio of buildings that generally, as I said earlier and Owen reiterated, get more than their fair share of market demand. However, as I also said, we are not immune to what's going on in the market. We have to be more competitive because the market is desiring more in the way of concessions on particular transactions. Where we have to do that, we're doing that. Our goal is to utilize our capital as best we can to get occupancy in our buildings with great tenants on a long-term basis. We want to stabilize the amount of occupancy that we have, hopefully at that sort of 93% to 94% level as opposed to the 89% to 90% level, which is where we are today. We are going to do that through active management with our operating teams who are the best in the business in their respective markets and work really hard to understand our customers' and clients' needs and fulfill them in ways that get traction and allow us to create additional occupancy.

Just wanted to go back to some of the thoughts around interest expense in '23 and just the amount of variable rate debt that will be outstanding, especially with the new term loan on Madison. How much of that do you expect to fix probably over the next 12 months? Does it make a difference whether it is via you guys raising fixed unsecured to take out the term loan or putting swaps, whether that can make a really big difference one way or another in regards to the impact on interest expense going forward?

Tayo, this is Mike. As I mentioned on the refinancings, we have $800 million of floating rate debt. About $300 million is floating and about $500 million is fixed; that is refinancing that we're going to fix. The $730 million term loan we expect to repay, and we have some pretty good visibility into that, so we feel confident we’ll be repaying that. The development pipeline is basically $150 million a quarter type of run rate over the next, say, 6 quarters. Our plan is to fund that with our line of credit. It is possible that we could bake the election to do some sort of unsecured financing sometime in 2023 to fix some of that. We're looking at those strategies and thinking about those strategies. I'll continue to. The bond market today has credit spreads that are wider than they have been historically and reflecting the uncertainty in the economy. I’m hopeful that those credit spreads will become more attractive next year as people gain more visibility into the economy during this cycle.

I'm just curious how share repurchases factor into today's strategic plan and just your overall thoughts on the overall resilience of higher-quality office versus what we're seeing in the public share price today.

Danny, it's Owen. We have needs for our capital. We have exciting investment opportunities in development and, in some cases, acquisitions, and feel that's a better allocation of our capital than repurchasing shares. We care about the level of leverage of the company, particularly given the economic slowdown that we've described. So that's our priority.

I just wanted to clarify something. I think I heard you say something around the stabilized or same-store portfolio into ‘23 being steady. Without giving us a number, does that mean same-store is likely to be flat on an absolute basis or actually see some sort of growth? And could you just clarify on life sciences, as somewhat contrast to your peers, just specifically around the view on mark-to-market and leasing velocity near term?

What I said was that in 2023, we anticipate that our same-property NOI will grow but likely not at the pace we saw in 2022, which is 4% at the midpoint. The reason being our ancillary income has basically gotten almost to where it was, so it’s going to grow but at a slower pace. We’ve looked at the leasing markets that Doug described and we’ve throttled back a little bit the occupancy growth that we would have expected to have a couple of quarters ago. We think our occupancy is going to grow from where it is today in 2023 but potentially not as fast as we had thought a couple of quarters ago.

We have very little in the way of what you refer to as life science rollover in our portfolio because the vast majority of the life science stuff that we've done are leases that have either recently or are about to commence. We have one building that has a lease expiration in November, which is a building that we acquired about a year ago on Second Avenue, and there’s a material mark-to-market on that when we’re able to re-lease that building. We just don’t have much exposure to expirations in the life science business.

Thank you for all of your time and attention this morning, and we hope to see all of you at our investor conference in September. Thank you very much.