Boston Properties Inc (BXP) — Q4 2022 Earnings Call Transcript

Good morning and welcome to BXP’s fourth quarter and full year 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday’s press release and from time to time in BXP’s filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I’d like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchey, Senior Executive Vice President and our Regional Management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one question. If you have any additional queries or follow-ups, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Helen, and good morning everyone. Today I will cover BXP’s continued strong operating performance as demonstrated in our fourth quarter and full year 2022 results. I’ll discuss key economic and market trends impacting BXP and finish with BXP's capital allocation decisions and activities. Despite increasing economic headwinds, BXP continued to perform in the fourth quarter and had strong overall operating results throughout 2022. Our FFO per share this quarter was above both market consensus and the midpoint of our guidance. Our FFO per share grew 15% in 2022 due to development deliveries and strong leasing activity. We completed 1.1 million square feet of leasing in the fourth quarter and 5.7 million square feet of leasing for all of 2022, which is 95% of our average annual leasing over the last 10 years. The weighted average term for leases signed in 2022 was 9.2 years. This success can again be attributed to not only BXP's strong client relationships and our team's execution, but also the increased share of tenant demand captured by premier workplaces, which are the hallmark of BXP's strategy and portfolio. BXP raised $1.2 billion in additional liquidity through a $750 million unsecured green bond offering and the extension and upsizing of a bank term loan ensuring funding for our sizable and substantially leased development pipeline in a challenging capital markets environment. And lastly on 2022, BXP continues to be a decorated industry leader in sustainability, having most recently won Nareit’s Leader in the Light Award, named the highest ranking real estate company and 29th overall on Newsweek's list of Most Responsible Companies, and one of only eight property companies named to the Dow Jones Sustainability Index. Notwithstanding the ongoing debate on whether the U.S. economy will experience a hard or soft landing, commercial real estate markets are currently in a recession. Many of our clients are experiencing a slowdown in growth or reductions in top-line revenue and as a result are focused on cost control, including moderating headcount and space use. We all read the daily headlines of layoffs which have been most significant in the technology industry, but are migrating into other sectors. Many companies, particularly in the technology sector, are halting new requirements and/or giving back space to the market. The key culprit for the current economic slowdown is inflation, which sparked unprecedented federal reserve tightening measures last year, including rapidly increasing interest rates, quantitative tightening measures, and more regulatory scrutiny of banks. The better news is inflation is starting to come down. The federal reserves are expected to moderate further interest rate increases, with the Fed funds rate possibly peaking around 5%, and the capital markets with a 10-year U.S. Treasury at 3.5% and rallying equity markets are much less hawkish on inflation than the Federal Reserve. We are not able to predict the depth or length of the current economic slowdown, but its trajectory is coming into clearer focus. Our goal is to position BXP for success regardless of the economy's trajectory by carefully managing leverage and liquidity. The leasing activity is declining due to corporate earnings pressure. The premier workplace segment of the office market continues to materially outperform. Users are increasingly interested in upgrading their buildings and workspaces to attract their workforce back to the office, resulting in an accelerating flight to quality in the office industry. As described previously, CBRE is tracking the performance of premier workplaces in the U.S. and for the five CBDs where BXP operates, premier workplaces represent approximately 17% of the 700 million square feet of space and less than 13% of the total buildings. As of year-end 2022, direct vacancy for premier workplaces was 9.6% versus 14.7% for the rest of the market; also for all of 2021 and 2022, net absorption for premier workplaces was a positive 7.1 million square feet versus a negative 25.4 million square feet for the balance of the market. Rents and rent growth are higher for premier workplaces, and we believe the segment captures well over half of all leasing activity. Including two buildings undergoing renovation, 94% of BXP's CBD space is in buildings rated as premier workplaces, which has been and will be critical for our leasing success. Moving to real estate capital markets for office assets, U.S. transaction volume slowed materially to $12 billion in the fourth quarter, down 40% from the third quarter. Transaction volume across all real estate classes was down 36% over the same period. Mortgage financing is very challenging to arrange and available only for the highest quality leased assets and sponsors. First mortgage financing costs have risen materially over the past year based on both higher rates and credit spreads. Given the dearth of transaction activity, office asset pricing is difficult to determine, but it is clear cap rates have risen. There were a handful of BXP comparable transactions of note in the quarter. In the Route 128 corridor of Boston, two separate lab sales were completed for a total of $375 million, one sold to a REIT and another to an institutional investor. The pricing parameters indicate a stabilized yield of at least 6% and pricing per square foot in the mid-900s. In Sunnyvale, California, two separate fully leased office complexes sold for $415 million, one to a private real estate company and the other to an international fund. Initial cap rates ranged from 4.8% to 6.2% and prices per square foot from 1140 to 1230. Regarding BXP's capital market activity in the fourth quarter, we closed both the previously described acquisition of a 27% interest in 205th Avenue in New York City and the sale of The Avant, a luxury residential building in Reston. For all of 2022, we acquired $1.6 billion of lab and office assets and completed over $860 million of dispositions of office and residential assets. We have additional asset sales in our targeted pipeline. The completion of the dispositions will require more liquid capital market conditions. New acquisitions will be opportunistic and solely focused on premier workplaces, life science, and residential development. BXP's volumes for acquisitions and dispositions are very difficult to predict for 2023 given current market conditions. Our development pipeline continues to be active, delivering growth to our current and future financial results. This past quarter, we fully placed into service the 1.1 million square foot Reston Next premier workplace, which is 90% leased on a long-term basis to Fannie Mae and VW of America. This project was delivered below budget on costs and is projected to yield 7.7% upon stabilization. We also placed into service 880 Winter Street, a 244,000 square foot, very successful office-to-lab conversion project located in Waltham that is 97% leased. We purchased the office building in 2019 for $270 a square foot and spent approximately $500 a square foot on the conversion, delivering the project at an initial cash yield of 10%. We also commenced the conversion of 105 Carnegie Center, a 70,000 square foot suburban office building in our Carnegie Center asset in Princeton to lab use. This is our first attempt at life science at Carnegie Center and we have life science clients reviewing the opportunity. There are two projects, 290 and 300 Binney Street in Cambridge that do not appear on our fourth quarter construction and progress schedule that we are commencing in the first quarter and have an impact on our current 2023 financial projections, which Mike will discuss in greater detail. As described on our last call, Biogen is in the process of vacating the 300 Binney Street office building, and we will commence the conversion of the asset to lab use for the Broad Institute, which has agreed to lease the building for 15 years. We have also completed the necessary pre-development hurdles to commence the development of 290 Binney Street, a 570,000 square foot, 16-story lab building leased to AstraZeneca for 15 years. We estimate that the project will cost approximately $1.2 billion and expect it to be delivered in 2026 at an initial cash yield in the mid-6% range. Given the annual escalations in the AstraZeneca lease, the initial FFO yield is materially higher. 290 Binney Street is a complicated development entailing the demolition of a 1136 stall parking garage, the temporary relocation of parking capacity from this garage, the construction of a subterranean vault, which will house an electrical substation currently being permitted by Eversource and other facilitating agreements. Commencing 290 Binney Street also creates an obligation for BXP to build 121 Broadway, which is a 37-story, 4,440-unit residential tower which will likely commence in 2024. In addition to these two buildings, BXP also has remaining rights for an additional 580,000 square foot life science building in our Kendall Center development, which due to upfront infrastructure costs carried by the first two projects has the potential to be developed at significantly higher yields than 290 Binney Street. These projects demonstrate the skill of BXP's development team in identifying an opportunity to creatively solve a community problem of locating a new electrical substation and having the expertise to bring the project to reality by solving problems for multiple interested stakeholders, thus creating a highly accretive development opportunity for BXP. After all of these movements and including the 290 and 300 Binney Street projects, our current development pipeline of 13 office, lab, and residential projects, as well as View Boston, the observation deck at the Prudential Center, aggregates approximately 4 million square feet and $3.3 billion of BXP investment that we project, based on delivery date and lease-up assumptions, to add more than $240 million to our NOI over the next five years at a 7.3% average cash yield on cost when stabilized. The commercial component of our development pipeline is 51% pre-leased. So in summary, despite adverse market conditions, BXP had another very successful quarter and year with financial performance above expectations, strong FFO growth, significant leasing success, and robust investment and capital reallocation activity. BXP is well positioned to weather the current economic slowdown given our premier workplace market positions, our strong and increasingly liquid balance sheet, our significant and well-leased development portfolio in progress, and our potential to identify additional investment opportunities in the current market dislocation. Let me turn the discussion over to Doug.

Thanks, Owen. Good morning everybody. So Owen really spent some time describing the totality of what's going on at BXP. I'm going to be a little bit more concentrated today and talk about demand. Every day seems to bring another announcement of staff reduction from some large or medium sized employer. And while these announcements have been concentrated in the technology industries, as Owen described, primarily big tech, we're also seeing them in the finance industry, the legal industry, and broader corporate America. Now I can point to examples of companies in our portfolio that are growing, but we are the first to acknowledge that the pool of clients' overall demand that we serve is unlikely to be growing their overall footprint in 2023, aka hard to see much in the way of positive absorption. If there's a silver lining in the job reductions that are being announced, it's an improvement in the labor availability, manifesting itself in encouraging ways. Fewer job listings are being offered for remote work. Forms of hybrid work seem to be sticky, but the power dynamic between employers and employees is shifting. Companies are stepping up the days that workers are asked, required, or encouraged to come into the office. In our portfolio, we're seeing a steady increase in the number of unique occupants that are in the office each week. We measure the unique number of card swipes on a daily basis where we have turnstiles. These numbers vary day-to-day and if I compare the best day in March of 2022, which is after the last sort of COVID omicron surge, versus the best day in January, across the BXP portfolio volume is up almost 40%. I don't know how others measure their usage. BXP measures against the number of seats we have in our spaces. On a daily basis, utilization ranges from between 34% in San Francisco, 48% in Boston, and 58% in New York City. And if we look at the number of unique users coming into our buildings on a weekly basis relative to the number of seats, we're currently seeing as much as 82% in New York City, 76% in Boston, and 70% in San Francisco. Our clients are using their space; they're just not coming to the office every day. As Owen said, we've spent a better part of 18 months redefining our business with you as being developers and operators of premier workplaces. As Owen described in his comments, the bifurcation between premier product and general office space continues to widen. The availability rates published by the brokerage firms and reported as headlines in business publications and newspapers track all of the space. A meaningful amount of the existing office inventory may have a higher and better use as an alternative product, and it's not relevant to users searching for space today. Conversions will happen and we are studying non-BXP buildings in our markets, but this process is going to take years. So the published statistics are going to be sticky even though much of the availability is not attractive to users at any price. In fact, it's hard to see a potential client looking at a BXP offering that would consider many of the buildings captured in the broad market surveys. Again, we have to acknowledge that there continue to be additions to new sublet or soon-to-be direct opportunities in premier space from technology companies, 181 Fremont Street in San Francisco being the latest example. Availability in premier space matters, but other issues matter even more. The floor plate size matters. The buildout configuration matters. Amenities matter. In markets like Boston or San Francisco, parking availability matters, and the specific location matters. As we explained in our press release last night, while our reported in-service occupancy has declined in the quarter as we said it would on our last call and in our Nareit meetings in November, it is simply due to the addition of new in-service buildings that have leases that have not commenced and are reported as vacant. This includes Reston Next that is 69% occupied and 90% leased and 880 Winter Street that's 85% occupied and 97% leased. The mark to market on the leases we signed this quarter was up 7% in Boston, 9% in San Francisco, flat in New York City, and down 11% in DC. It should come as no surprise that we think BXP's premier workspace portfolio is highly differentiated, but on top of that, our operating teams are the best in the business. I want to describe three transactions we accomplished in the fourth quarter that illustrate our team's creativity. In Boston, we were getting a 100,000 square feet block of space back in one of our assets. The team identified a client that typically does not do direct deals with landlords but generally looks at sublet space. We engaged the principles in a tour of the space. The space was in great condition, and we were able to secure a lease that met the tenant's desire to have an attractive annual rent as possible in a premier building with limited capital outlay and make a long-term commitment. The lease was executed in late December. In San Francisco, a client with a fast approaching termination option in its existing non-DXP building wanted to move to View space. They toured the market in early December and then identified two spaces in the 34% available market that met their needs. On December 26th, we signed a binding letter of intent. The client understood they were not taking any counterparty risk with BXP, and we signed the lease for 50,000 square feet or two and a half floors that became vacant on January 16th. In October, our New York team identified a client that had a lease expiration and no ability to renew in place in mid-2023, which is a very tight timeline. We sent an unsolicited proposal for two vacant floors in our 53rd Street campus. With some persistence, we were able to arrange a tour. We mobilized our construction department to deliver the space per their needs, and in December we signed a lease for two vacant floors and an option for a third. Owen mentioned that we delivered our life science project at 880 Winter Street this quarter. We also completed our first lease at 651 Gateway. We have available space as well at our two developments in Waltham. The life science market is also experiencing a slowdown in demand. At the present time, we have not made any commitments to build additional projects other than 290 Binney Street, which is 100% leased to AZ and the 70,000 square foot project that Owen described at Carnegie Center. It's a challenging market. There is not going to be positive market absorption in the near term. We believe that BXP will outperform the market, and we will lease our available space because our portfolio is fundamentally comprised of premier workspaces and the demand in the market wants to be in these types of properties. Medium and small financial and professional service clients will make up the bulk of the leasing we complete in 2023. We completed 72 leases during the fourth quarter. Only one lease was above 100,000 square feet. Tour activity continues to be strongest in the Boston CBD and New York City markets where the concentration of technology users is less pronounced, and the weighting market occupancy leans more heavily towards traditional financial and professional services firms. Not surprisingly, the most active buildings in our portfolio are the GM building and 200 Clarendon.

Great, thanks Doug. Good morning everybody. I plan to cover the details of our fourth quarter performance and the changes to our 2023 earnings guidance. However, I would like to start with a summary of our recent capital raising activities. We've been very busy in the capital markets and have substantially bolstered our liquidity heading into 2023. In the last 120 days, we've executed on three transactions in three different markets. We sold one of our residential buildings in Reston Town Center for $141 million at a 4.3% cap rate. We issued $750 million of five-year unsecured green bonds, and in January we extended and upsized our corporate unsecured term loan to $1.2 billion, an increase of $470 million. In aggregate, the net proceeds raised from these deals are $1.35 billion, and we now have liquidity of $2.6 billion, which puts us in an extremely strong position to complete our development pipeline, including our recently commenced 570,000 square foot fully pre-leased 290 Binney Street Life science project, as well as provide additional capital for other opportunities that may arise. We've also reduced our 2023 loan maturity exposure to $930 million, which is comprised of $500 million of senior unsecured notes that expired in September and five expiring mortgages totaling $430 million at our share. The majority of these mortgages have embedded extension options, and we anticipate renewing or refinancing all of these facilities. Given the challenging state of the current debt markets, particularly with respect to the mortgage markets, we are very well positioned. Now I'd like to turn to our fourth quarter earnings results. We reported fourth quarter FFO of $1.86 per diluted share and full year 2022 FFO of $7.53 per diluted share. This is a penny ahead of the midpoint of our guidance and $0.02 ahead of street consensus. The improvement was primarily from better performance in our portfolio, with our NOI of about $4 million or $0.02 per share ahead of our forecast. The outperformance was a mix of higher lease revenue, stronger results from our hotel in Cambridge, and higher building service income, especially in New York City where we see the highest space utilization. The portfolio outperformance was partially offset by a penny of higher net interest expense related to our $750 million green bond offering, which was not part of our original guidance. Although not part of FFO, I do want to describe that we took a $51 million or $0.29 per share non-cash impairment charge in the quarter, reducing the book value of our equity interest in our Dock 72 property located in Brooklyn, New York. This building is owned in a joint venture where we hold 50%. The building has suffered from weak leasing conditions in Brooklyn, and last quarter the primary client contracted by two floors. It's currently just 25% occupied, although it is 42% leased, including leases that have not yet commenced. Overall, we had a strong year in 2022. We increased revenue by 8% and our FFO by 15% over 2021. Our growth came from our same property portfolio as well as our developments and our acquisitions. Our same property NOI increased 4% over 2021, which was the high end of our range, and on a cash basis, it was even stronger with cash NOI growth in our same property portfolio of 6.5% over 2021. Our development deliveries added $0.24 per share to our 2022 earnings, and our acquisitions net of our dispositions added $0.10 per share. Now I'd like to turn to an update on our 2023 guidance. As we detailed in our press release, the two most significant changes to our 2023 FFO guidance are the impact of commencing our 290 Binney Street development and the interest expense associated with our new financings. We did not incorporate 290 Binney in our guidance last quarter due to several significant contingencies we needed to clear prior to starting the projects that were outside of our control. Our team successfully closed out these items late in the fourth quarter, and we were able to start the project in January. The development plan includes closing and demolishing the existing Binney Street garage. That garage produced $8.6 million of NOI in 2022, and we will lose this income in 2023 and going forward until the completion of the development, which will include a new underground parking facility. As Owen described, the project is projected to be highly accretive to our future FFO, and by the way, all the lost garage income is incorporated into those development returns. We are also required by GAAP to expense the garage demolition costs of approximately $3.2 million. We expect to incur the demolition expense in the first and second quarters of 2023 with no impact thereafter as the demolition will be complete. These two items related to 290 Binney Street will result in $11.8 million of lower FFO in 2023 or $0.07 per share. With respect to our financing activity, we disclosed in our press release in November that our $750 million green bond offering would add $0.08 per share to our 2023 net interest expense and reduce our FFO guidance. As a result, we expect the aggregate impact of starting 290 Binney and issuing incremental debt capital will reduce our 2023 FFO by $0.15 per share. Despite this, our new guidance range for diluted FFO of $7.80 to $7.18 per share is a reduction of only $0.09 per share at the midpoint from our guidance last quarter. That means we've increased the projected contribution to FFO from other areas. Also, we previously communicated the impact of our bond offering, so the reduction is really only a penny per share from our November adjusted guidance. The projected increases come from three places: first, excluding 290 Binney Street, our assumption for incremental contribution to NOI from acquisitions and development is up $0.02 per share. The increase is from higher contribution from our 205th Avenue acquisition and better than projected leasing in our development pipeline. Doug described the increased leasing this quarter in the pipeline, and some of that will generate revenues in 2023. Second, our revised assumption for net interest expenses is lower by $0.03 per share net of the impact of the bond offering, and this improvement is primarily from higher earnings on our cash balances and higher capitalized interest from changes in our development spend and higher interest capitalization rate. And last, we've increased our guidance for development and management services income by $2 million or a penny per share, reflecting higher projected construction management fees. So to summarize, we've modified our 2023 guidance range for diluted FFO to $7.80 to $7.18 per share, a decline of $0.09 per share at the midpoint. The changes are the result of costs from starting 290 Binney Street of $0.07 and higher interest expense from our bond offering of $0.08. These reductions are partially offset by higher contributions to NOI from acquisitions and developments of $0.02, higher interest income and capitalized interest of $0.03, and higher fee income of a penny. Our 2023 forecast results in a projected reduction in FFO of 5% from last year after growing 15% in 2022. The reduction is wholly due to the significant increase in interest rates as our portfolio NOI continues to grow, and we have a significant pipeline of accretive developments that are delivering over the next few years. As Owen described, it appears that we are close to the end of the Fed's tightening cycle, so interest rates should not be the same headwind going forward. The last thing I would like to mention is that we intend to change the timing of our initial issuance of annual guidance starting next year. We plan to provide guidance for 2024 with our fourth quarter earnings release, similar to the other companies in our sector. That completes all of our formal remarks. Operator, can you open up the lines for questions?

Hi, good morning. Your guidance mentioned higher contributions from acquisitions and development activities, but it looks like a few initial occupancy dates for offices and life science projects got pushed back a quarter into next year. Can you just provide a bit of color on what's contributing to this outlook and any comments specifically on how the leasing pipeline is going for your construction properties would be very helpful? Thank you.

So we did a significant amount of leasing at 2100 Penn, and a portion of that will contribute in 2023. We did push out by one quarter 360 Park Avenue South based upon where the leasing activity and the development activities are on that asset. And then the other place where we had a little bit of an increase was at 205th Avenue, which is an acquisition we made, and we finalized the kind of accounting of straight line rents and fair value rents for that asset. So that's flowing through into our straight line rents next year, which our guidance is up for straight line rents. Doug, I don't know if you want to talk anything more about the development leasing. I mean, you talked about it a little bit on notes.

Yes, I think in my comments I described sort of where we are, which is big picture we're about 50% leased on our total development assets. And by the way, we'll be including next quarter 300 Binney and 290 Binney on our CIP schedule. The leasing is slow at 360 Park Avenue South. The leasing picked up, as Mike said, at 2100 Pennsylvania Avenue. We're very well leased at the other assets that got brought on this quarter. So relative to 2023, I don’t think you’re going to see much in the way of changes.

Thanks. Good morning. You spent a lot of time at your Investor Day talking about the occupancy upside potential given your near-term expirations. And I know a lot has changed since then, but you have leased 1.1 million square feet in the fourth quarter. My question is, how does that compare versus your expectations at the time? And as you sit here today, is 1.1 million square feet a good run rate for the rest of the year?

Well, you’re asking if I described how we were thinking about the world in September versus the way we’re thinking about the world today. I would tell you that there’s been a material change in the overall economy relative to the risk of recession, and I think there is less demand in the overall environment than there was then. We still feel really good about the quality of our assets and the ability to capture incremental demand in the marketplace due to the nature of the tenants that are looking for space. And so again, we actually exceeded our own internal projections at the end of the year because we thought we would be slightly below where we were in the third quarter. And again, if you sort of adjust for bringing these new assets into service and simply put them in at their actual leased occupancy or remove them, we actually increased our overall occupancy during the year. And so I would tell you, if you look at our exploration schedules for 2023 and you look at the 1.5 million square feet we’ve already leased, and we will, again, hopefully be leasing somewhere in the neighborhood of 750,000 to 1 million square feet per quarter, we should again be increasing our occupancy as we move through 2023.

Yes, John, and just to add, I mean, we’ve maintained our guidance for our same property portfolio and for our occupancy. So our outlook is similar to what it was when we gave guidance last quarter. I think that our occupancy in the first quarter, so three months from now will likely be lower or flat than what it is today. But we have a lot of leases that are already signed, that Doug described, the 1.5 million square feet that are coming into play. And I think that's starting in the second quarter we’re going to see our occupancy grow from there through the rest of the year. A lot of this occupancy is coming in some of the major markets like New York City, where we've got a number of leases that are signed that we’ll be starting in the second quarter. Doug described a deal in Boston that we did just in December, and that deal is going to start in the second quarter. We also have some deals in Reston starting. So I think that we feel we’ve been conservative in our approach to our guidance based upon what we see future leasing activity, but we feel good about the guidance that we provided.

Yes, thanks, good morning. I didn’t know if you could talk a little bit about maybe Platform 16 and 360 Park Avenue South. I know both of those buildings were geared towards tech tenants, and Doug, given your comments about slowing tech demand and even some of these tenants subleasing, I’m just curious how you’re maybe altering the marketing program there or do you just need the macro environment to really get better to see traction on both of those buildings?

So let me ask Hilary Spann to talk about 360 Park Avenue South, and I’ll ask Bob Pester to comment on Platform 16.

Thanks, Doug. Hi, Steve, how are you doing? So at 360 Park Avenue South, the redevelopment is underway. We are very far along in discussions with a retail tenant that is going to be very exciting when we’re able to announce it. I think it’s fair to say that the demand for 360 Park Avenue South is diversified, but tilted toward tech and media firms because of its location in the Midtown South submarket. And to the point that everyone has been making on this call, that leasing velocity has slowed dramatically, starting probably in the end of the second quarter of last year, maybe early third quarter of last year. And so we’re proceeding at pace with the development, and we expect to deliver it as per our original estimates. Some of the demand that we have seen for that building is actually in more traditional industry groups, finance, the industries that support finance, et cetera, but no question that the leasing has slowed there. We're thinking that rather than looking at 150,000s, we may be looking more at 50,000 to 75,000 square foot tenants to fill the demand for that building.

Yes. Hi, Steve. So on Platform 16, the project doesn’t deliver until 2025. As we’ve told them many times before, the San Jose Silicon Valley market is a build-it-and-they-will-come market that typically tenants don’t look at the buildings until they can walk the building or get a feel that this deal is going up. We still see it as a tech building. It’s the only building that’s going to deliver in that 2025 timeframe in the Silicon Valley; it’s new. So we’re still optimistic that over the course of the next 24 months, tech users will materialize for the building.

Great, thanks. Good morning. The fourth quarter seemed to be a slow leasing quarter in the overall market. U.S. BXP did relatively well compared to the market. But can you talk about whether you think you’ve seen a change in the level of demand or leasing activity thus far this year? And maybe more importantly, what do you think needs to change to get some of the tenants that have been reluctant to sign longer leases to make those longer-term commitments?

So Blaine, I will also let Owen share his thoughts. I aimed for my comments to be honest and thoughtful about the current demand situation, which shows less overall demand in the market due to changes in the business economy. We do not anticipate much positive absorption happening. We believe we will lease more space than our competitors because we offer premier workplaces that appeal to the tenants currently making decisions. I don’t think the tenants searching for space are worried about making long-term commitments; in fact, they are generally making long-term decisions, and we have continued to secure longer-term leases in our transactions over the past couple of quarters, although some of this has not yet affected our occupancy figures. I cannot predict how long the economy will remain in its current state, but historically, job growth and occupancy tend to follow economic recovery with some delay. Therefore, it may take time before tenants start to expand again. Owen, do you have any additional insights?

No, you covered it well.

Yes, thank you. I was wondering if you could comment on dispositions. And in terms of anything you might have in the market right now or expectations for this year and whether or not you think that could be additive or dilutive to where you put guidance at this point?

Yes, we have non-core assets that we would like to sell. However, as I mentioned earlier, the capital markets are generally very liquid, particularly for office assets. That’s why we haven’t provided guidance on our expected dispositions for this year, as the market isn’t currently favorable. We hope this situation will change, but we cannot predict that at this time.

And Tony, if we were to sell something, it’s unlikely that we would put anything on the market at the beginning of 2023, which means any transactions are likely to occur towards the end of the year.

Looking at the first quarter guidance of $167 million compared to the fourth quarter number of $186 million, there’s a difference of $0.19. Can you provide insight on how much of that difference is attributed to G&A seasonality, the one-time charge you mentioned, and interest costs? Additionally, I’d like to ask about the View Boston opening in April—specifically, any updates on marketing efforts and interest would be appreciated. Thank you.

So while Mike looks at his numbers, I’ll let Bryan Koop just describe sort of where we are with our plans from a marketing perspective on the Observatory in Boston. And we haven’t officially announced the date yet. So...

Yes. The great news is, given what we worked during the last two years in construction, we’re actually ahead of schedule and turned out beautiful. We’re doing marketing tours with people that would like to look at events in the future. I’d say we’re oversubscribed on that, and we’re determining how we want to execute that because as each of these observatory locations are fairly highly bespoke and different. We have a good deal of space that we can do the events. Pre-marketing is going really well. The City of Boston is gearing up for tourism and we’ve seen a big response from that sector in call-ins to our team. In general, we’re just focused on hiring people and getting staffed up for F&B and the overall staff, but we feel really great about it. We feel awesome about how it’s turned out. It’s just spectacular.

Ronald, in the first quarter, you're correct that it's down due to seasonal factors. We operate a seasonal hotel in Massachusetts that experiences low visitor numbers in the winter, leading to losses during this period. However, it becomes profitable in the remaining three quarters. Our general and administrative expenses are higher at the start of the year because of vesting and payroll tax issues. Additionally, since we borrowed more in the fourth quarter, we anticipate an increase in interest expenses for the first quarter compared to the fourth. Overall, we expect the portfolio to see a slight increase. Looking ahead to the next quarters, we started with $1.67, and our guidance for the year is considerably higher, indicating significant growth moving forward. As I noted, we expect our occupancy rates to begin rising in the second quarter. Bryan mentioned View Boston, which we anticipate will open in the second quarter. There are various developments happening in the second and third quarters that will drive an increase in FFO later in the year.

Hey guys. Thanks for taking the question. Just curious, I think the story thus far has been that office landlords have been able to hold base rents and they’re giving up more on the concession side of things. But just curious, Doug, given your comments about not expecting positive absorption in 2023, is this the year that we start to see landlords sort of deal up on the face rent side of things?

I guess, I don’t think landlords, at least this landlord, is ever going to give up on anything. Look, we have situations in our portfolio where we have very little space in a particular building. We’re very comfortable and able to handle both relatively modest concession packages and strong face rates. We have other pieces of our portfolio where we have vacancy or availability where we are trying to be aggressive about increasing our occupancy. In those cases, we are thinking about all the arrows in the quiver and figuring out what the right approach is for a particular client that we’re trying to serve. Some of those clients would prefer to have free rent. Some of those clients would prefer to have more CapEx in terms of transaction costs. We might even agree to do turnkey builds in certain cases, and some of them may be looking for a lower annual run rate and sort of use the concessions in a different way. So I think it’s very hard to sort of try and articulate a particular component of an economic deal that is being done with a client of ours and sort of say, we’re going to gear towards one thing or another because we try and meet the needs of those clients. In general, transaction costs are higher. Why? Because there is more available space and it’s still very expensive for a company to move or relocate or grow, and the landlord is contributing capital for that, and it’s coming in the form of either additional free rent or additional TI; it’s generally not in the form of the face rent on the deal. And I don’t think that’s going to change much as we approach 2023.

Hi, good morning. Just a question on acquisitions, how has your target in terms of acquiring properties changed in the past few months given the environment? Would you be less willing to do deals like 360 Park Avenue, given the leasing there, and more targeted towards stabilized or financial tenants? Maybe just comment on what you’re looking for would be great.

We have the capital on our balance sheet to pursue additional acquisitions, but the market is currently adjusting. Therefore, we will be very focused on valuation for any acquisitions we consider in the upcoming year.

Yes, I would also say I would add to that. We are, as I mentioned in my remarks, our focus is going to be on premier workplaces, life science, and residential development.

Yes. And I would just add the following, which is if we’re looking at an existing asset, they’re obviously, if we can’t make it a premier workplace, we’re not going to spend time on it. If we think we could, then it’s going to be a question of what our views are on how long it will take us to lease up the space. I would say that we’re constructive about our markets, but we are realistic, as I think all of our comments this morning were about the overall absorption of space in the marketplace. I’m not sure our underwriting is necessarily going to match with the seller’s expectations for what they think their buildings are. We will look at stuff, we will be thoughtful about it, we will make offers. But whether there’s inability for there to be a meeting of the minds, I would say we’re skeptical that will happen in 2023.

Thanks. A question for either Owen or Doug, I was hoping to get a feel for the current attitude of your joint venture partners, pension funds, or other potential institutional partners regarding office space, specifically about investing additional capital into buildings. What types of buildings are still considered viable, and which are not? Ultimately, how do you think this will impact office building values?

Yes, I think generally, institutional investors in real estate, not just office, are cautious at the moment given higher interest rates, slower leasing volumes that Doug just described, and what the repricing is. So, I think investment volumes generally from institutional investors have gone down materially. As it relates to office, I think there is capital available from institutional investors for premier workplaces that are underwritten with the new cost of capital as well as the leasing dynamics that Doug described in the last question, which is we have a slower leasing environment, and the assumptions when you’re underwriting a deal need to reflect that. But assuming you have all those pieces, there's capital available for premier workplaces.

I also think it's important to recognize that the institutional investment world is not a homogeneous group of investors. They come from various geographic locations, possess different funding sources, and have unique funding obligations, which means they do not operate in a unified manner. My comments are not aimed at any specific group, but I wanted to highlight this point.

Yes, thank you all for your time, attention, and interest in BXP. Have a good day. Thank you.