Boston Properties Inc (BXP) — Q2 2025 Earnings Call Transcript

Good morning, and welcome to BXP's Second Quarter 2025 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 measure 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 change. 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 and only one question. If you have an additional query or follow-up, 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 to all of you. Our results in the second quarter demonstrate BXP's continued strong execution and provide further evidence of the property and capital market recovery underway in our sector. Our FFO per share was $0.05 above our forecast and $0.04 above market consensus for the second quarter, primarily driven by improved operations. As a result, we're also raising the midpoint of our earnings guidance for the full year 2025 by $0.02. We completed over 1.1 million square feet of leasing in the quarter, bringing our total leasing in 2025 to 2.2 million square feet. Over the last four quarters, our leasing volume of 5.7 million square feet was 18% higher than the prior four quarters. We continue to increase the pre-leasing of our development pipeline, with 200,000 square feet of development leasing this quarter. Now regarding the operating environment, BXP's leasing activity remains vibrant across many, though not all, submarkets. Corporations generally see a favorable environment for their businesses unfolding this year, with a pro-growth tax bill recently passed in Congress, less regulation, geopolitical risk relief in certain regions, resolution of U.S. tariff agreements with many important nations, and the possibility of lower short-term interest rates. As a proxy for corporate health, 2025 S&P 500 earnings growth projections, though revised lower since the beginning of the year, remain healthy at 7% to 9%. Investors are confirming this view with U.S. equity market indices achieving new heights, and credit spreads on U.S. investment-grade bonds trading at or near ten-year lows. Further, in-person work behaviors continue to improve. JLL recently completed a study of Fortune 100 firms' office attendance policies. Over the last two years, ending the second quarter of 2025, Fortune 100 companies that are fully in the office climbed tenfold from 5% to 54%. Hybrid mandates dropped by nearly half from 78% to 41%, and fully remote policies dropped from 6% to only 1%. These are material shifts that have undoubtedly augmented leasing activity. Return to office behavior is more advanced in our East Coast markets, particularly New York City, and well behind on the West Coast. Moving on to office market conditions, I'll continue to emphasize that the premier workplace segment, defined as roughly the top 10% of buildings in a market and where BXP primarily competes, continues to materially outperform the broader office market. In our five core CBD markets, direct vacancy for Premier Workplaces is 7.5 percentage points or 38% less than the broader market. Asking rents for premier workplaces continue to be more than 50% greater than the broader market. Regarding the real estate private equity capital markets, office sales volume and transactions increased materially in the second quarter to $14.2 billion, up 80% from the prior quarter and 125% from the second quarter of last year. Financing at scale is increasingly available at tightening spreads for higher quality office assets, with VALT, particularly in the CMBS market. Equity investors are also starting to reenter the office sector, given improving operating performance in certain markets and attractive asset pricing versus other sectors. There were several notable office transactions completed or committed in the quarter. In Midtown New York City, 590 Madison was under contract for sale for $1.1 billion or $1,060 a square foot at a 5.2% cap rate. This building, constructed in 1981, is 85% leased and sold by a pension fund to a local real estate operator with a financial partner. Also in Midtown, a half interest in 1345 Avenue of the Americas was sold at a gross valuation of $1.4 billion or around $740 a square foot. The cap rate, not particularly meaningful against stabilization, is several years away, and the transaction was facilitated by $850 million CMBS financing. The building was originally built in 1969, is 92% leased and transacted between investment management firms with the building manager staying in and owning the other half of the asset. Lastly, in Culver City, California, Entrada was sold for a gross price of $212 million or $675 a square foot at a 7.4% cap rate. This building, constructed recently in 2021, is 75% leased and transacted between investment management firms, again, with the building manager staying in and owning a small stake in the property. Now let's transition to BXP's capital allocation activities. As discussed on many prior calls, BXP controls what we think is the best positioned, currently actionable office development site in New York City located at 343 Madison Avenue. The building will be a highly amenitized, sustainably designed 46-story, 930,000-square-foot premier workplace with direct escalator access into the Madison concourse of Grand Central Terminal from the building's lobby. Today, we are making several important announcements regarding this project. First, we're proceeding with the project for the terms of our ground lease with the MTA and plan to immediately commence full vertical construction of the building, which will allow delivery in late 2029. Site preparation, foundation work, and development of the Grand Central escalator access is well underway, having commenced in October 2024. Second, we have executed a letter of intent with an anchor client for approximately 30% of the building with economics consistent with our investment underwriting. The client is a prestigious investment-grade financial institution that will be leasing the lower middle section of the building. We have experienced strong client demand for the project and have active anchor tenant proposals out to six clients representing approximately 1.3 million square feet. Negotiations continue with anchor clients for the base of the building, and we intend to be patient leasing the upper floors of the project, which we expect will be attractive to smaller users that make leasing commitments closer to the date when they can occupy their new space. Third, BXP is opting to buy out our 45% equity joint venture partner, which we will do no later than the end of this quarter for approximately $44 million at their cost basis. While our partner has been funding its share of predevelopment expenses since 2017, they have decided to prioritize investment in existing as opposed to development assets which better align with their current risk-adjusted return objectives. Given the trophy status of the asset and very promising pre-leasing activity, we believe introducing a new capital partner for an interest in 343 Madison, if we elect to do so, is readily achievable. As a reminder, 343 Madison has a total development cost of just under $2 billion, including approximately $400 million of imputed capital cost carry and a projected stabilized cash yield on cost of approximately 7.5% to 8%, depending on how we ultimately elect to capitalize the project. The leasing market in Midtown remains very strong, with trophy buildings having a vacancy rate of 6.3% and no large blocks of space available in the Plaza District of Park Avenue. As a result, office rents are growing at rates well above inflation, and the very few high-quality building trades that have been completed were done at cap rates well below our projected development returns. Culminating 13 years of effort by our New York region in securing and entitling the site, we believe 343 Madison will be a core long-term holding for BXP and represents a very strong and significant value creation opportunity for BXP shareholders. Turning to asset sales, we're in various stages of execution for the sale of 10 non-income producing assets, both land sites and largely empty buildings that we believe will generate, if successful, net proceeds of nearly $300 million over the next two years. We're also exploring the sale of a handful of income-producing properties that could generate another $300 million in net proceeds, more likely in '26 than '25. There is strong demand for housing in the communities where many of our sites and out of service buildings are located, allowing us to create value through reentitlement. The process can, in select cases, take up to two years to complete. Other sites are being sold for industrial or other non-office uses. In the aggregate, we do not expect these sales will be dilutive to BXP's FFO because of the significant portion of non-income producing assets. A great example of our creativity in monetizing a non-producing asset is 17 Hartwell Avenue in Lexington, Massachusetts, which is a 30,000-square-foot commercial building built in 1966, vacated in 2024, and recently demolished. We successfully rezoned the property in the town of Lexington to build a 312-unit multifamily building on the 5-acre site and secured an institutional partner to provide both construction financing and 80% of the equity required to build the project. The stick-frame construction development will cost $180 million and is projected to deliver a 7.1% yield on cost, including land at current market value and capital cost carry upon stabilization in 2028. In terms of economics to BXP, we received $22 million at closing for our land contribution. We own 20% of the project, which will require $10 million of funding from BXP over time, and we'll earn a development fee of more than $4 million. The inferred land value is $70,000 per residential unit or $22 million, which is $733 a square foot for the existing empty commercial building, significantly more than its as-is value. So in conclusion, premier workplace leasing and capital markets continue to recover from their lows in 2024. Our clients are generally optimistic about their business prospects and are demanding more in-person work from their professionals, both creating leasing demand. Further, new construction for office has virtually halted, and users are gravitating to higher-quality assets with strong sponsorship, the combination creating occupancy and rent growth for many of our assets as we gain market share. Private equity investors are increasingly taking note of these trends and starting to invest in the office sector. With our current leasing momentum and limited rollover in 2026 and 2027, we expect to gain occupancy, revenue, and FFO in the years ahead, and development deliveries and potentially acquisitions will provide additional growth. Let me turn over our report to Doug.

Thanks, Owen. Good morning, everybody. Hope everyone is staying cool in this rather warm and humid air on the East Coast. As we think about the demand for premier office space across our markets, the pattern and the sources of demand that we've been describing for the last few quarters have really continued to go on, as we've already talked about. Specifically, on the East Coast, submarkets with a concentration of financial and professional services businesses, which are the New York and Boston CBDs, have seen real demand growth. Defense services and cybersecurity businesses located in Northern Virginia have continued to weather the potential federal spending cuts, and there's been growth there. Biotech demand growth with extensive lab uses continues to be light, while demand from life science clients with needs for high-quality office space continues in the Urban Edge of Boston. On the West Coast, there's been an improvement in overall demand in San Francisco led by organizations focused on AI, albeit with large established tech companies still largely absent from growth. Venture funding from a deal count continues to be dominated by California, where there are 2.3 times the next state, which is, by the way, New York. To reinforce the dominance of AI-related venture investing, California companies have raised more than $100 billion in the first half of '25, which is ten times what was raised by New York City start-ups, the next largest ecosystem. Financial service and professional service clients are active, though not showing the same growth that's present on the East Coast. Owen mentioned our 2.2 million square feet of leasing in the first half. During the first half of '25, we leased 810,000 square feet of vacant space and 750,000 square feet of space associated with 2025 expirations for a total of 1.56 million square feet. Our 2025 plan calls for 4 million square feet of total leasing with about 3 million square feet of activity on vacant space and known 2025 expirations. Leasing vacant space and near-term expirations will drive improvements to our occupancy over the next 12 to 18 months, during which we experienced very modest expiration. We are on track. Post July 1, 2025, the end of the second quarter, we have 1.8 million square feet of leases in negotiation compared to 1.1 million square feet at the beginning of the second quarter. If you include our letter of intent at 343 Madison, the number jumps to almost 2.1 million square feet. Our pipeline covers 575,000 square feet of currently vacant space, 65,000 square feet of known '25 expirations, and 600,000 square feet of '26 and '27 expirations. Additionally, we are engaged in more than 550,000 square feet of client-initiated early lease renewals on leases that expire between '28 and '31. We have active dialogue on space that is not yet in lease negotiations, totaling about 1 million square feet. BXP's total portfolio occupancy for the second quarter ended at 86.4%, a decline of 50 basis points or 240,000 square feet. As previously communicated during our first quarter earnings call as well as our remarks in January, Biogen's 355,000 square foot lease in the Urban Edge portfolio of Boston expired in May 2025 this quarter. We have re-let 45,000 square feet and have 310,000 square feet of space available. There were two other notable declines in our in-service property listings this quarter. At South of Market in Reston, Meta terminated 51,000 square feet in May. We have already executed a lease for the entire space this month, but the space was neither occupied nor leased at June 30. At 599 Lexington Avenue, we early terminated 100,000 square feet of late '25 expiring space in conjunction with executed leases for the entire square footage. We demolished these floors so they were taken out of occupancy and are shown as leased at June 30, 2025, but not occupied. Improvements at our other properties offset much of these declines. BXP's total portfolio percentage leased for the second quarter was 89.1%, a decline of only 30 basis points. As we highlighted last quarter and at our NAREIT meetings in June, the difference between leased and occupied square footage has grown again this quarter and now sits at 270 basis points versus 190 basis points on December 31, 2024. About 500,000 square feet of this approximately 1.3 million square feet of space is expected to become occupied in '25, with the bulk of the remaining 800,000 square feet commencing in the back half of 2026. Looking forward, we project the current in-service portfolio to end the year at around 87% occupied, an improvement from where we are today. However, there will be three developments that are being added to the in-service portfolio in the third quarter. 360 Park Avenue South, which is 450,000 square feet, 23% occupied and 28% leased; 1050 Winter Street, which is 162,000 square feet and will be 100% occupied and leased when it's added; and Reston Next Block D, which is 90,000 square feet, 4% occupied and 95% leased when it is added. If we were to add these properties this quarter, occupancy would drop by about 70 basis points. When we report statistics next quarter, you will need to adjust for these additions to gauge the progress of the in-service portfolio. We will be sure to highlight the impact on our occupancy in the third quarter earnings press release. Our development portfolio lease percentage this quarter increased by another 500 basis points to 67%. Office market conditions are pretty consistent with my earlier comments on demand. Those markets with the strongest demand growth also have the most landlord favorable conditions: Midtown New York City, the Back Bay of Boston, and Reston, Virginia. What this means is that availability is sparse, rents are increasing, and concessions are either improving or remaining constant. We completed 91 individual transactions this quarter: 236,000 square feet in Boston, 344 in New York, 185 on the West Coast, and 356 in D.C. We had 20 clients expanding the portfolio by a total of 190,000 square feet and only two contractions for just over 3,000 square feet. 482,000 square feet of the leasing this quarter represented new clients in the portfolio, and the rest were either renewals and/or expansions. The overall mark-to-market of leases signed this quarter on a cash basis was flat, with modest increases in Boston and New York and slight decreases on the West Coast and in D.C. We executed 3 leases in the in-service portfolio greater than 50,000 square feet this quarter. The second-generation rent change in the leasing statistics this quarter represents only about 400,000 square feet. If you're curious, the LA numbers are skewed by a subsidized rent at the Santa Monica Business Park for a secondary school that was destroyed by a Palisades fire, where we did a lease. Our activity in Boston this quarter was very granular and spread around the portfolio. We completed five renewals and expansions in the CBD in both the Back Bay and the Financial District. Last quarter, I described life science client activity without the need for lab infrastructure. The first of these transactions was executed in the first quarter at 180 City Point, and we are in lease negotiations with 2 additional clients for another 76,000 square feet, also at 180 City Point. Additionally, we have discussions going on with another group of companies that fit the same profile at our other Urban Edge assets. The economics of doing an office transaction on Ross space, even though the building has been purposeful for lab and has the infrastructure, are far superior to the lab transaction today, given the elevated tenant improvements necessary to compete in the lab market. We are in negotiations, however, with one true lab user for a second-generation lab building again in the Urban Edge portfolio. In New York, our leasing activity was focused on the Midtown East portfolio this quarter. The highlight was leasing 6 floors at 510 Madison Avenue, where we have opened an enhanced amenity offering, including a new outdoor space. We also completed a renewal of 399 Park Avenue and two law firm expansions, one at the General Motors Building and another at 200 Fifth Avenue. The 550,000 square feet of client-initiated extensions mentioned earlier are concentrated in our Midtown portfolio. At 360 Park Avenue South, we are currently in negotiations for 2 floors for approximately 47,000 square feet; one of those floors actually got executed last night, late breaking. So we're now at 33% leased there. In Princeton, we completed over 164,000 square feet of leasing with 13 clients, including 76,000 square feet of new clients and expansions. Interestingly, all the growth in Princeton is from office requirements for life science users. In San Francisco, at Embarcadero Center, we completed about 100,000 square feet of law firm transactions, including a 165,000 square foot renewal with no reduction in space square footage. Many traditional office users have continued to rationalize their space, which has led to little if any growth in traditional demand within the San Francisco CBD. So incremental leasing is going to be all about tenant relocations. Our largest lack of available space in San Francisco is at 680 Folsom, where we are finishing up an amenities improvement, including a new outdoor roof space as well. During the first 6 months of the year, we had 11 tours at the property. In July, we had 7 additional. Virtually every potential client is a technology company working in the AI space. The granular absorption of space is very much underway, and the South of Mission buildings are great options for these clients. Our listing agent at 680 Folsom provided us with a list of 37 AI-related tenants in the market with aggregate demand growth of almost 1.2 million square feet active in the market today. Before I conclude my remarks, I do want to discuss tariffs as they relate to construction activities, particularly because we are in the process of establishing our GMP contract for 343 Madison Avenue. Subcontractors are actively bidding the job after taking into consideration the sectorial tariffs associated with nondomestic suppliers and the recent preliminary country agreements. To date, we've either awarded or are negotiating bids for 3 separate components of the job, and in each case, we are obtaining meaningful savings relative to our last general contractor's estimate. Given the overall slowdown in construction activity in Manhattan, there is enough subcontractor interest to provide savings despite the tariffs. Remember, construction is a composition of labor, materials, and profits. Let me hand the call over to Mike to talk about our earnings piece.

Great, thanks, Doug. Good morning. So today, I'm going to talk about our second quarter earnings results as well as the update to full year 2025 earnings guidance. As Owen and Doug both described, we delivered a really strong second quarter. Earnings surpassed expectations and we're raising our full year guidance. For the second quarter, we reported funds from operations of $1.71 per share; that is $0.05 ahead of the midpoint of our guidance range and $0.04 above consensus estimates for the quarter. Our portfolio generated approximately $0.04 of the outperformance. $0.01 came from earlier-than-anticipated revenue recognition on leases, which was very granular and spread across the portfolio; we generated an additional $0.01 per share from higher-than-anticipated service income from our clients, primarily in Boston and New York, which tracks the higher space utilization on the East Coast. The last $0.02 of outperformance in the portfolio came from lower-than-projected operating expenses. Lower expenses partially came from lower real estate taxes resulting from successfully negotiating reductions in our assessed values. We do anticipate about $0.01 per share of the expense reduction related to repair and maintenance costs will be deferred into the third quarter and will not benefit our full year results. Our G&A expenses also came in lower than we expected, resulting in a $0.01 per share better earnings performance. The savings came from lower compensation expense due to capitalized wages and savings in professional fees versus our budget. Now turning to the increase in our full year 2025 guidance. We're increasing the projected contribution from our same-property portfolio from the second quarter's strong performance, combined with our ongoing leasing activity that Doug described, which continues to be aligned with our expectations. We now expect that the NOI from our same-property portfolio will increase in 2025 by about 0.25% at the midpoint from 2024. On a cash basis, we expect the same-property portfolio NOI to grow 1.25% at the midpoint year-over-year. This represents an improvement of approximately 25 basis points from our guidance last quarter or about $0.03 per share at the midpoint of our range. We continue to expect our in-service occupancy to start to improve in the second half of the year, excluding changes to the portfolio. As Doug detailed, we will be adding several development properties into service in the third quarter that will reduce our headline occupancy rate temporarily. We're increasing our assumption for interest expense on our floating-rate debt this quarter due to the expectation for fewer interest rate cuts by the Federal Reserve. Our prior guidance included the potential for three rate cuts starting in the third quarter, and we've now reduced this to a maximum of two cuts, both in the fourth quarter. The result is approximately $3 million of projected incremental interest expense for the year, or $0.02 per share of higher expense. In our G&A, we recognized $0.01 of lower expense in the second quarter, and we anticipate that savings flowing through to the full year in our FFO guidance. So in summary, we have increased our guidance range to $6.84 to $6.92 per share. This represents an increase of $0.04 per share at the low end and $0.02 per share at the midpoint of our range. The increase at the midpoint is from $0.03 of better same-property NOI, $0.01 of lower G&A expense, partially offset by $0.02 of higher interest expense. Overall, we had a great quarter highlighted by strong leasing activity at 343 Madison, catalyzing its development start, more than 1.1 million square feet of leases executed in the quarter, and an FFO beat and guidance raise driven by stronger core portfolio operations. The last thing I would like to remind everyone of is our upcoming Investor Day. It will be held in New York City on September 8 from 10:00 a.m. to 5:00 p.m., at 599 Lexington Avenue, with a cocktail event at 6:00 p.m. at our Coco's dining club on the 37th floor of the GM building. For those of you who are really ambitious, you can join Owen and James for the 6:00 a.m. fun run through Central Park before the conference. We already have over 100 RSVPs, and it will be a highly informative event with leadership from across our regions attending. So if you haven't responded and would like to attend, please RSVP to the invite or you can send Helen a note. That completes our formal remarks. Operator, can you open the line for questions?

Yes. Thanks for all the detail and some of the additional information on 343 Madison. I was just wondering if you could provide kind of an outlook for the unlevered return that you expect on that project. I realize when Norges was your partner, maybe fees were being factored in. But just sort of how are you thinking about that return on an unlevered basis? And of all the tenants that you're talking to, are many of them new to the BXP portfolio or are a number of the clients you're talking to kind of existing BXP tenants?

Yes, Steve. So we think about this on a yield basis. I quoted those numbers of 7.5% to 8%. That's an unlevered cash yield upon delivery. I think if you overlay that and looked at IRR, obviously, the exit cap would be very important, but it would certainly be a high single-digit number. If you put a construction loan on the property, the IRR levered would depend on what's the exit cap and when you sold it, but you're probably in the mid- to high teens on a levered basis.

Filling in for Blaine here. I just wanted to hear your thoughts on what tenants are considering regarding their space needs. Clearly, AI is a major factor driving demand in San Francisco. Since you have insights across many of the largest markets in the country and regularly engage with tenants, I would love to know your perspective on how AI is influencing demand—specifically, where it is likely to increase demand and where it might lead to a decrease. What are companies saying about their future space requirements and their workforce as AI becomes more widely implemented?

Yes. So I'll take a first crack at that. We've been starting to say and talk about the impact of AI, and frankly, have been saying that we think it's something more important than the work-from-home phenomena. My guess is we're going to have more conversations about this in the quarters ahead. Our basic premise, and we have spent time studying this with our Board, with outside experts and so forth, is that we think there will be job creation at the top of the intellectual pyramid in the workforce. Companies that are industry leaders will create AI products, will use AI products, and we will experience growth in demand from those companies, some of which will be start-ups. Doug talked about the extensive AI demand we're starting to see in San Francisco, and all of that is newly created jobs. There is a lot of discussion from CEOs across different sectors about the efficiencies they are getting from AI. We haven't seen an impact yet from those companies, where they're saying we're reducing our space because of AI. That being said, could that happen in the future? Yes, it's possible. I think where jobs are going to be reduced are in processing work. Those are the kinds of jobs that can be automated. As a result, we believe that the top of the intellectual pyramid and where we see the most job creation will be in cities with the deepest talent pools: the Bay Area, New York City, Boston, and so forth. I think job destruction will occur more in markets that are value-driven. Cheaper space and the workforce is more back-office work as opposed to front-office work. This strategy manifests itself in the quality of the buildings because our strategy is to be at the top of the pyramid from a quality standpoint. We want industry-leading clients leasing our properties. Most of our buildings aren't leased because they are cheap; they're leased because they are very high quality. That's a high-level overview of how we see things going forward.

Yes. And Jamie, I would just add the following. From an empirical perspective, our average lease length this quarter was 9.4 years, and the lease we are negotiating now at 343 Madison is a 20-year lease. Clients that are signing up for space now are not doing on a short-term basis with an expectation that they're going to reduce space. I do think it's fair to acknowledge there are established technology companies whose CEOs have come out saying that they think job growth will slow or go negative. We've seen layoffs from companies like Meta, Microsoft, and Google over the past year. The question will be whether an incremental addition of companies in the AI field will fill the gap associated with reductions in headcount from those organizations. There are 37 companies in the market right now. I cannot tell you if 1 or 2 or 10 will become unicorns and have real needs for significant numbers of employees, but there's a meaningful amount of growth in that sector.

On 343 Madison, you disclosed $390 million of capitalized interest at the project. I’m wondering if you can clarify if that's capitalized interest going forward. Additionally, in terms of financing the project, you discussed $600 million of asset sales, but I was wondering if you could discuss your other options and your preference in terms of finding another JV partner, construction loan, or if an equity raise is on the table for you?

That's two questions; we'll answer them both. So capitalized interest for this project — we always impute capitalized interest in all our development budgets based upon a blended cost of equity and debt that we anticipate. For this property, we're assuming a blended rate of around 7.5% for the four-year development and lease-up period. What the actual capitalized interest will end up being at the end of the day may be less than that, depending on how we capitalize it. Regarding funding for 343 and any growth we have, we have a lot of different sources. The 343 project has a four-year time horizon, and if you look at the total ramp-up of the costs, most of the costs really don't start ramping up until late in '26 or '27 or '28. We have time to address the funding needs for that project. With any funding decision, we have multiple sources: we can pursue asset sales, raise private or public equity, reset the dividend, utilize property-specific mortgage or construction debt, or corporate debt, in addition to the excess operating cash flow that we generate.

I was hoping to just hear a little bit more about the mark-to-market you reported this quarter. I know this is on the number in the supplemental, but it did look a little bit worse than last quarter, even in New York. Maybe just talk about what drove that? From a real-time leasing standpoint, how could the numbers differ on the re-leasing spreads?

Yes. So Nick, like I said, I gave you the number for the leases we signed this quarter, and this quarter the numbers were slightly up — small single digits in Boston and New York, but slightly down in Washington, D.C. and on the West Coast. It's only 400,000 square feet of space so it's not the entirety of the leasing that we commenced this quarter. In Boston, there was a 44,000 square foot deal at the space that was expiring from Biogen. It was an as-is deal, meaning no TIs associated. When you have no transaction costs, your rent will show in that. In New York City, we had a couple of 15-year leases in the lower portions of the building expiring, which we re-let to another client. There was a slight downturn there. In San Francisco, most of the leasing was either at gateway, which has some distress relative to life science demand. There has been a reduction in rental rates there where we were doing deals in the mid-threes. I would not read much into where those numbers were. I explained sort of the dramatic negative in the stuff that was done in Los Angeles.

One more question on 343 Madison. Can you remind us of the terms of the MTA ground lease?

Sure. The terms of the MTA ground lease are basically a 99-year ground lease. The company has the opportunity to move forward with this. There was a termination right that needed to be exercised by July 31. We have said that we are not exercising that because we're moving forward. As we proceed with the lease, the lease itself has documented increases in payments. Over time, we think it makes it really attractive to underwrite both from the perspective of tenant interest and financing.

One thing that's important about this ground lease that may be different from some others in New York City is that there's no reset associated with market valuation estimates in the future. The increases are knowable and related to the performance of the property, not the overall market values.

A question on the guidance. You beat on the second quarter earnings, but only took the bottom end of the annual range up? Can you just talk a little bit about the timing of the shift? It seems like it's a little bit more fourth quarter weighted than third quarter. Just trying to understand kind of the cadence of earnings through the back half of the year.

Thank you, Michael. Yes, you're correct. We increased the bottom end. The way we build our guidance is we have a base model, and we have a list of things that are underway or could happen. Some of those things happen in the quarter that allowed us to increase our bottom end. As I mentioned, most of it was in the portfolio. The reason the full year guidance hasn't increased as much as the quarterly beat is because we're giving back a bit of the expense savings in the second quarter into the third quarter, and we have a little higher interest expense that we expect later in the year. The third quarter will seasonally be a lower FFO than the fourth quarter because the fourth quarter operating expenses will be less. That makes up about $0.05 quarter-to-quarter if you look at what our guidance is. The other impact is the occupancy ramp that we expect later this year, which will have more of an impact in the fourth quarter than in the third quarter. Our property NOI should be higher in the fourth quarter.

You mentioned a number of funding sources for 343 Madison. I realize you kind of already talked about it, but as a potential follow-up to that. You mentioned the dividend reset was one of them. Based on your taxable income today, how much would you be able to reduce the dividend if you wanted? To the extent you do have that flexibility, what would make you wait rather than do that sooner?

We've maintained a steady dividend for several years, even though the current dividend has been higher than our taxable income during that timeframe. That's why we're putting it in as a potential funding source, as you mentioned, Caitlin. Our dividend has consistently been covered by our FAD, which is the reason we kept it stable. The size of our return of capital for '24 was about $0.41 a share. We also carried over our full fourth quarter dividend into '25, which is $0.98. That gives you some sense as to the size. We need some amount of carry forward — that's not going to go to zero. With respect to timing, we have plenty of time to make these decisions, and haven't made any decisions at this point on the dividend.

I just want to clarify two things. Just first on 343, you outlined a 7.5% initial yield. Can you give us a sense of the rents broadly you are targeting compared to One Vanderbilt, just $200 plus? What you hope to achieve, and how you get to that 7% yield, meaning if there are other fee streams or anything else baked in? Secondly, on occupancy trajectory, does your comments suggest you end up towards the lower end of the range or 86-ish percent by year-end?

On the rents for 343, our assumption is that in the lower part of the building, we're in the mid- to upper $100s, and at the top of the building, we're in the mid- to upper $200s per square foot gross. The average rent roughly throughout the property is in the low $200s. The pre-lease we have — the 30% client where we have a letter of intent for a lease is in line with the economics we assumed for this project. If you factor in those rents and use the costs as outlined, including the carry, the yield on cost is roughly 7.5% unlevered. I quoted a 7.5% to 8% range because if we bring in a capital partner into the project, our yields go up because we're able to put in less capital and earn some fees for all the property and investment services we provide the partner.

On our occupancy, the portfolio in service as it sits today, we believe will end the year around 87% occupied and significantly higher leased. We're going to add these three assets in the third quarter, and those will impact our overall portfolio by approximately 70 basis points based on where those buildings are currently leased. I would like to avoid surprises by the reduction in our in-service portfolio as it is transitioning. The in-service portfolio as it sits today will see an increase in occupancy as we move to the end of the year.

Yes. I'm curious about your thoughts on the emerging Mayoral race in New York City. If we do end up with Mamdani as Mayor, how do you think that kind of changes regulation that impacts CRE development in New York City? How do you guys think about preparing for that?

Yes. Let me take a first crack at this, and Hilary, please jump in. We acknowledge that some policies articulated by candidate Mamdani are not particularly constructive for commercial real estate. A few things I would mention: one, the election has not occurred yet, and it is a real possibility, but hasn’t happened yet. The system in New York, due to the 1970s financial crisis, means New York State headquartered in Albany has significant control over the operations and governance of New York City. Specifically, the state controls the MTA, the port authority, and various other agencies in the city, and the state also has approval rights over many matters that are important to business, such as local taxes. My guess is that some policies of candidate Mamdani won't be supported at the state level, particularly things like tax increases. New York is vibrant; it has excelled through many different mayors with differing political stances. I strongly bet that New York will continue to thrive regardless of the election outcome. Hilary, what did I miss?

We have investment-grade credit tenants committing to 20-year terms at 343 Madison Avenue as evidence that businesses successful in New York City plan beyond the length of a mayoral term or two for their success. They’re planning much farther than the next four or eight years.

Mike, you talked about just the various options you have for raising capital but maybe you can step back and just give us a sense, the over 8 times leverage. Where do you want that to be? I know you have time before you spend some of this money. But why wait and maybe pull some of these levers if in fact you want to reduce that leverage?

We've talked many times about our leverage and how we think about current leverage versus pro forma leverage. We believe our target is somewhere in the mid-6s to mid-7s, and that's been consistent over a long period. Expect our leverage to continue to move up over the next couple of quarters. We're delivering 290 Benny Street in the middle of next year to 100% leased, providing substantial EBITDA to the company, which will counteract that and reduce leverage. Other developments Doug talked about will also be leasing up, providing EBITDA. Additionally, occupancy improvement over the next 18 to 24 months can be powerful because it generates a lot of EBITDA as we achieve our business plan.

Touching on that last point on occupancy, it sounds like occupancy has bottomed and is expected to improve throughout the rest of this year. You mentioned that the pipeline remains strong. Leasing activity year-to-date is tracking above the initial expectations set forth at the beginning of the year. It seems like there's a clear path for BXP's in-service portfolio-level occupancy to get above 90% soon. Is that fair? Is there anything we might be missing as we think about that trajectory over the next 18 months?

That seems entirely fair, and that is our expectation. We must be careful about what the exact timing is. Over the next period of time, we expect a meaningful increase in our occupancy. Our leases signed have yet to commence. Most of our activity going forward is in our near-term expirations, thus if we're able to maintain a modest reduction in the amount of leasing we have in 2025 into 2026 and 2027, we're going to see a significant increase in occupancy.

I want to go back to the asset sales. I think you outlined $600 million of sales, including $300 million of net proceeds from income-producing assets. As we think about income-producing assets sold later this year, what would be the earnings hit on an annualized basis? Just trying to understand as we think into next year? Additionally, Mike, regarding your comment on deleveraging, if you're losing income, that also affects leverage. So I would like to understand the FFO impact of planned asset sales.

The $600 million we're talking about is still in process, being thought through and not finalized. The income-producing sales combined with land we'll be talking about, if utilized to reduce the borrowing the company needs to do, will not be dilutive to the company.

Can you provide an update on 360 Park Avenue leasing? Doug, you mentioned you got it leased last night, so the project is now 33% leased. Can you give us a sense of the current pipeline?

Sure. We have two additional leases in progress. As I said, one got executed last night. This brings us to 33% leased, and there's another that will be completed in 2025. That will bring us nearer to 40% by the end of 2025, assuming no other leasing gets done. Regarding the current pipeline, interest in Midtown South has been thinner than Midtown proper but we’re seeing consistent activity for the property. Larger tenants are showing interest as well as some single-floor tenants, particularly those in AI.

Just back on 343; I think the floors are a little bit smaller than some typical trophy buildings. Does this impact the kinds of tenants as you're leasing up the portfolio? Also, about the development pipeline — I noticed 651 Gateway stabilization was pushed out. Any comments on that asset and life science leasing in general?

I will let Hilary answer your first question. As for 651 Gateway, we're using Alexandria's accounting when it comes into service. I would say leasing activity for pure lab out there is still relatively quiet. More maker tenants are looking at spaces designed for lab than there are pure lab tenants. The market for pure wet labs is thin in the Bay Area currently.

The floor plates at 343 Madison range from about 27,000 square feet at the base to 22,000 at the top. I think this can lend itself to tenants in the 250,000 square foot range. But we have 1.5 million square feet of LOIs issued. Some will be around 300,000 to 400,000 square feet, indicating a lack of premier workplace availability in Park and Madison Avenue. High-quality firms seeking high-quality space have limited options, making 343 Madison well-positioned to capture clients of different sizes.

To add context, people have asked if the tenants are someone in our portfolio. If that was the case, it would be an opportunity for us to re-lease space that is under-leased. The average rents at 343 are in the mid-200s, which leads to huge upside potential.

Doug, can you talk about the portfolio at Embarcadero and demand in that part of the city versus some of the properties in South of Mission? Does the South of Mission seem to be picking up and participating in that recovery?

The demand is clearly improving in the South of Mission market; there is an AI-related resurgence from a demand perspective. However, demand around Embarcadero Center remains strong with traditional financial services companies. We're completing spec suites and prebuilt spaces that are successful, and we recently completed 8 retail transactions, attracting local businesses and enhancing the area’s appeal.

You mentioned clients starting renewal discussions for 2028 to 2031 already. When you look back at past cycles, how common is it for tenants to start negotiations so early?

It's common for larger tenants, particularly in our CBD markets, to start considering new developments well in advance. It indicates that tight markets make clients think about protecting their footprints in an improving environment.

Just going back to 343 Madison, I wanted to ask about funding. Do you have a timing perspective for an update on how to capitalize the project? Is this something to be laid out at the Investor Day? Any sort of timing would be helpful.

We're focusing intently on that high level over the next couple of quarters. With respect to raising private equity, we would like to get the lease signed and have other proposals for the building. If some of those get going, it creates a more enticing packet for that.

You were recently talking about how you would love to get space back in Midtown because of the positive mark-to-market, so I was wondering if you could square that with reported leasing spreads being down. Were those just specific spaces or something else?

The downturn in the mark-to-market predominantly came from smaller transactions at the lower part of the building, and I would expect improvement in rents in Midtown Manhattan to be reflected in future quarters.

Regarding the ramp-up of our FFO into the fourth quarter, part of it is our expectation of growing occupancy. We believe that NOI will be higher in the fourth quarter but we do not expect significant existing property asset sales to occur in 2025.

The square footage I mentioned earlier is likely going to start coming online in the third and fourth quarter.

Thank you all for your attention and interest in BXP. I'll just close by reminding everyone of our Investor Conference on September 8, and we look forward to continued engagement. Thank you very much.