All right. Thank you so much for joining us today. My name is John Kim with BMO Capital Markets. It's my pleasure to be hosting this presentation with BXP, formerly known as Boston Properties. With us today, Owen Thomas, Chairman and CEO, Doug Linde, President and Director, and Mike LaBelle, Executive Vice President, CFO, and Treasurer. I think at this time, I'll just pass it off to Owen for opening remarks and why people should be investing in BXP today.
Great. John, thank you for hosting this panel. Great to see all of you. Thank you for your interest in our company. The message that we've been giving in our meetings today about why you should own our stock is we believe we have a great opportunity to grow our FFO per share over the next couple of years. Why is that? First of all, we've seen strong and accelerating leasing activity. The leases that we report every quarter have been certainly in the first quarter versus the first quarter of 2024, it was up something like 30%. If you look at the last four quarters versus the four quarters before that, it was up something like 30%. We've had very strong leasing activity.
A lot of the dislocation and concerns that are out there about tariffs and bills and so forth, we've had a lot of questions about the impact of that on our leasing activity. So far, the impact on our leasing activity has been not at all. The acceleration that I described is continuing. If you take that leasing activity and then you overlay that with our rollover exposure in 2026 and 2027, both of those years, it's materially under 5%. We have an opportunity to grow the occupancy of our company. Right now, we're running at about 87% occupancy plus or minus. At our peak, right before COVID, we were at 93%. I'm not suggesting in a year that we're going to have a six-point jump, but it shows you what the potential of the firm is.
Every point in occupancy, Mike, is about $0.20 a share plus or minus of FFO. That is a big opportunity for us, accelerating leasing, low rollovers. The second thing is we are continuing to deliver a development pipeline. Most notably, in the first half of next year, we are going to be delivering a project that we have been working on for five years called 290 Binney Street. It is a lab building. It is in East Cambridge. It is 100% leased to AstraZeneca, and it will add about $45 million-$50 million of cash flow to the income of the company, which is another plus for next year. Lastly, and we have been talking about this on our earnings call, we have been pretty aggressively selling non-producing assets.
For example, right now, we have four land parcels that we have under contract in various stages of closing, and they will generate about $75 million in proceeds before the end of the year. We have more behind that. This is also accretive because these properties, actually, they're negative FFO because we're paying carry on them. When we get that cash flow, we can repay debt, which costs us around 6%. That also accretes earnings. We hope to do more sales in the quarters ahead. That's what we see as the opportunity, and we think growing FFO will increase our share price.
Thank you. Since Liberation Day, office rates have gotten hammered pretty hard, including BXP. You mentioned on your first quarter call that there's been no real change in demand on the office leasing side. Is that still the case today? Has that carried on through May?
We had our earnings call on April 29th, I think. At that time, what we sort of described was we did about 1.1 million sq ft of leasing that was executed in the first quarter. We had a pipeline of leases under negotiation of about 1.175 million sq ft. We had about 1.7 million sq ft of what I would refer to as our sort of pipeline of things that were percolating. Call it 30-40 days later, our leases under negotiation is at just under 1.5 million sq ft. That other activity is still about 1.7 million sq ft. We have actually seen a modest acceleration in our leasing volumes and our leasing activities over, call it, the last 30 days. I would say things are getting a little bit better, not a little bit worse.
Whether we have a recession or not, or whether we have stagflation or not, it does not seem to be impacting capital decisions that are being made by our current and potential clients. Just one other point that I just want to make because it is really important on occupancy. The leasing that we are doing now is leasing on either vacant or 25 expiring space. Of the 1.5 million to 1.5 million five that we are currently working on, about 1 million of that will be additive to our occupancy as we move into 2026 because it is on currently vacant or known expirations. That is really, really important in terms of growing our occupancy.
Our leased square footages, so the amount of space that's actually leased by BXP that's "on our books," is about 250 basis points higher than what is "occupied." All of that will be occupied by the end of 2026. It sort of gives us the clarity of understanding where our opportunity is coming from relative to our existing portfolio.
On that note, you have occupancy guidance for the year at 86.5%-88%. Your leased rate is 89.4%. Where do you think that ends up by the year?
I would hope that we will be above 90% by the end of the year. I think where we're sort of geared towards in terms of our occupancy is we started 2025 at 87.5%, and I think we'll be around 87.5%, sort of in the midpoint of that as we end the year. We'll be probably somewhere between 250-300 basis points higher on our leased square footage.
Can you provide an update on your markets? Which ones are the strongest versus the weakest in terms of leasing activity? Manhattan is obviously the strongest, but I'd just love to hear your updated thoughts.
Yeah. So I'm trying to do this as succinctly as possible. Manhattan is by far the strongest market in our portfolio by a factor of three or four. There's just more relative supply challenges in this market, i.e., there is no availability. That is providing us with heightened activity, quicker urgency associated with leasing decisions, and better economics. I mean, we are pushing rents, and our rents will probably be up a meaningful amount, double digits from a year ago to where they are quarter to quarter in 2025. The other two markets where things are pretty good still are the Back Bay of Boston, which is where our dominant portfolio is in our Massachusetts portfolio, and then in Northern Virginia and Reston Virginia.
Those two marketplaces for us, our portfolios are in the high 90s from a lease percentage, which means we have very little availability, again, which means we can push rents in those marketplaces, right? That is the sort of thing that impacts us. I would say nobody is talking about work from home or remote work on the East Coast. It is like not part of the conversation. When I jump to the West Coast, things are a little different. The first is the characteristics of where the demand is coming from are different than the East Coast. In the East Coast, primarily, we are talking about financial services, asset management, people who are doing something with other people's money. On the West Coast, it is still a technology-oriented market.
We are still not at a point where we're seeing the kind of demand that we saw from 2000 and call it 2012 to 2019 with enormous blocks of space being absorbed by large technology companies. There is clearly AI demand. There is clearly AI absorption. The Bay Area is clearly going to be the place where the AI ecosystem is at its strongest. So far, we're not seeing 10 unicorns taking 500,000 sq ft of space. It is that sort of difference between what's going on there versus what's going on on the East Coast, where it is all financial services-oriented, and there is a lot of incremental growth of a meaningful size by mid-sized firms. That is the difference between the East Coast and the West Coast from a leasing perspective.
When do you think San Francisco, which is the most controversial market, I guess, when does that become New York?
If I knew that, I wouldn't be in this room. I can tell you that right now. I think that it's going to be a longer period of time. It's not a 2025 or a 2026 experience. Look, we have a whole host of what I would refer to as nascent companies that are working in and around artificial intelligence in lots of different ways. We have a couple of what I would refer to as the larger large language model infrastructure companies, which are Anthropic and OpenAI. Those companies are big. Those other companies, however, are pretty small. They average probably 10,000-50,000 sq ft. We need a lot of those companies to be growing in a meaningful way to really get San Francisco going.
I just think it's going to be a matter of time before we start to get enough granular growth from enough of those companies to show a meaningful impact on the overall availability of space in San Francisco. That does not mean that there will not be submarkets and subpockets of really strong growth. If you're looking for space in a view building in north of market, you're paying up for it, and there's a relatively modest amount of availability. If you're looking for low-rise space in a great building, there's a lot of availability, and the economics are challenged. Yeah.
I would just add to Doug's comments on San Francisco, a couple of other things. Do not forget, it is a smaller market. New York's zip code $400 million sq ft of office. San Francisco, depending on how you measure it, 60 million-80 million sq ft. Even though it is more available, you do not need as much leasing activity to have that market tighten up. Look at the history of the city. I mean, if you look at where rents have been and where vacancy, the city has volatility. Volatility means it goes down as it has during COVID, but it also comes back. It also comes back quickly. I agree with Doug, it is very hard to divine the exact timing for that.
The DNA of BXP is a developer. Do you also look at acquisition opportunities?
Would that be for existing assets or really just for land sites for future development?
Right now, we are always looking for new acquisitions. I mean, that's true always. I would say, particularly in this environment, we think acquisitions should be available at interesting prices. Recall, for those of you that watch our company, about five quarters ago, we bought interests in three buildings that we already owned from our joint venture partners. We thought at that time at interesting prices, and we thought that might be the start of something. This cycle is actually quite different from what we've seen in the office world in the past. The reason is, even though the market has softened up and vacancy has increased, the clients have all migrated into the best buildings. If you look at the difference between what we call premier workplaces, which are the top 10% of buildings, and everything else, it's way different.
The vacancy rates are overall levels are five percentage points or about a third lower. Asking rents are 50% higher. There's positive net absorption versus negative for everything else. In that environment, it's much more difficult to find things to buy. Most of the buildings that are what we would be interested in, which are the premier workplaces, they're not for sale. They're not distressed. The owners, even though I think they could get a reasonable cap rate for their property, they may be holding out for what they perceive to be a better cap rate. What we have found is in this cycle, acquisitions have actually been quite difficult. A little bit to our surprise, we've been finding some very interesting development opportunities.
Our team in DC was able to concurrently buy a note on a building for a little bit over $100 a foot on a metro stop. The plan is to demolish the building and build a new one. Concurrent with that acquisition, they signed a lease with a tenant to take half the property. They signed an LOI with another tenant to take more or less the other half of the property. That tenant just signed their lease. The overall yield on the deal to our capital is over 8% unleveraged. We cannot go out and buy a premier workplace in any of our cities that is fully leased at an 8 cap. That is not available. Yet, we can create them through developments.
Again, a little bit to our surprise, this seems to be a better decision for allocation of our capital on the new investment side.
An asset like 590 Madison, which you are winning, is that something you looked at and were interested in acquiring? Can you just talk about the overall market as far as investors in the office?
Yeah. So it is, again, there have been very, very few assets that I would say fit into our premier workplace desire. By the way, these are assets that get offered to the market. If we're doing our job, we try to find assets that are not being offered to the market. All of our regions have charted which assets they're interested in. As appropriate, we've been talking to those owners and trying to figure out if we can create some opportunities for our company. 590 was offered to the market by a state pension plan through a broker, and we did look at it. The pricing is somewhere in the mid-5s cap rate, and it's a little bit over $1,000 a foot. To get up to a higher yield, you have to lease the property up from 85% where it is today.
There is a little bit of lift in that. There is also a plan that some, I think, of the acquirers believed in, which is it was at the corner of 57th and Madison, which is an interesting retail corner. I think there was a ground-level retail redevelopment play in the asset that could increase the lift. I think it is a real, and it is not a new building. It is an older building, and it has a fairly narrow glass line. I think it is a good example of the pricing that is coming out for buildings like that that have some lift, but not a lot of lift. We contrast that, okay, with our 343 Madison development, which we are getting close to launching. There, we are going to have a brand new building with escalator access into Grand Central Terminal.
We think that the development yield for that project is over 8%. We think a better allocation of capital for our company, if we can find developments like that, is to do those because we think the buildings are higher quality and we're getting them at a higher yield.
I would just add that everything Owen said was 100% accurate. What he did not say was there is a difference between NOI and cash flow. When you do a development like 343 Madison and you are signing leases that generally are somewhere between 10 at a minimum and 20 years, and you are building a brand new building, you do not have what is referred to as capital expenditures on that building for a long, long time. When you are purchasing a building like 590 Madison, which has a habitual rollover, the difference between your NOI yield and your cash flow yield is pretty significant. I am guessing it is a couple of hundred basis points. You are talking about a cash yield of 8% or a cash yield of somewhere in the low fours, maybe the fives on another building.
Quite frankly, given our cost of capital, it's really hard to make sense of those kinds of investments when we have the opportunity to invest money into a building like 343 Madison.
Let's talk about 343 Madison. You're on record saying you're going to start it this year. You mentioned 8% yields on it. What kind of rents do you need to achieve those yields given inflationary pressures?
Yeah. So just to be a little bit more precise on language about where we are with this. The land under the building is owned by the MTA. We have signed a ground lease with the MTA. We have until the end of July to not go forward with the ground lease. If we do not go forward, we get reimbursed all the capital that we have invested in the project. By the end of July, if we do not terminate the ground lease, we are committed to build the building. We have not done that yet. Given all of what you have heard from Doug and I about the strength of the market and the attractiveness of this development, I would have every expectation that we would go forward. In terms of rents, as Doug described, the Midtown New York office market is extremely tight and attractive.
The vacancy rate is sub 7%, and there are no blocks of space over 100,000 sq ft available. We think the rents that we can achieve in the building average a little bit over $200 a sq ft. That is probably $150-$170 gross in the base and getting up to close to $300 at the top of the building. We think that is achievable in today's market. This building, by the way, the other thing about the building that is a little bit different from some of the other developments that we have done over the years is it is a large building, 950,000 sq ft. It is a tall building, but it has reasonably small floor plates. There are 25,000 sq ft at the base, and then there are about 22,000 sq ft at the top.
What that means is it's not likely that there's going to be an anchor client for this building for like half of it because a client that's 400,000 sq ft or maybe 500,000 sq ft, they're spreading out over a lot of floors versus being in a building with a floor plate that's 150-200% of that.
I would just say that one of the things that's going on, and I'm assuming that what we are experiencing at BXP is not dissimilar from what some of the other landlords on Park Avenue are experiencing. There's a, I don't want to use the word desperation, but a nervousness about where rents are going. We are being approached in our existing leased buildings by our clients to do early renewals right now. These are early renewals for as early as 2028 and as late as 2031.
We are asking for rents that are meaningfully higher than where rents in the buildings are today. As you think about what your opportunity is as a client in Midtown, and you are looking at where the rents are likely to be in existing product, and you look at where the rents are that we are going to be asking for 343 Madison, yes, there is a premium, but there is not a shockingly high premium for being in a brand new energy-efficient, sustainable side core building with great amenity space, with outdoor areas, with significantly higher ceiling heights than a traditional building with a very different structural system. There is a real value opportunity here.
We expect that one of the 150,000-400,000 sq ft clients that we have made proposals to is going to step up and say, "We think we're prepared to make a decision today to lease space in this building for an occupancy in 2030 or 2031.
New York is one of the markets that has more conversions out of office than new supply being delivered. 343 Madison, what's a realistic timeframe as to when you complete the building and occupancy starts?
Yeah. If we have somebody who's ready to go soon, we would be in a position where we could deliver space for tenant build-out sometime in early 2029 for occupancy in 2030 or 2031.
Moving on to Washington, DC, can you talk about 725 12th Street? Is this a one-off opportunity for you, or are you looking at other land sites that you could develop and meet the demand?
Yeah. So I described the deal a little bit earlier. This was the project that I mentioned where we bought the note and concurrently signed two leases and now have a new building development in Washington, DC that's a market that's close to 20% vacant. That is the kind of deal where we would not build the building on spec and hope that tenants would show up. We would want a pre-lease. We have had other law firms come to us when they saw that deal get done, and they are interested in being in new buildings. We are looking around for other potential sites. If we did something else like that in DC, it would be a very similar structure where we would know what the tenancy of the building is before we committed to the site.
Mike, how do you fund all these projects? Your net debt to EBITDA is 7.9 times on an adjusted basis. I think you said you were comfortable going higher than that in the near term, which is atypical for you. Can you talk about the balance sheet strength and funding?
Sure, John. Thanks. Look, our leverage is a little bit higher than it has been. It is primarily due to we're in the kind of later stages of funding some of the development that is underway right now. As Owen mentioned, the 290 Binney Street project, which delivers next summer, is going to generate a significant amount of immediate cash flow because it is 100% leased. That is the largest project in our pipeline. That will delever us when that occurs. Our leverage will creep up a little bit over the next few quarters until that occurs. From a funding perspective, there are a couple of things. One, we have free cash flow. We have been using our free cash flow the last several years to fund development as our primary external growth vehicle. We will continue to do that as a primary funding source for the development.
We also are looking at an asset sales program, primarily non-income producing suburban land holdings that we have. We have several under contract. We have several others that we're working on. We believe that we can raise somewhere between $200 million and $400 million over the next two to three years that will be utilized to either reduce debt or fund development needs that we have to fund. We could use incremental debt as well to fund additional development, which, as it generates an 8% yield, is accretive to the company and also helps delever us as it comes in.
I would just add that the other thing we're doing, and we're not going to be bashful about it, we're going to sell some assets. We have an asset that's under offer right now called 1330 Connecticut Avenue in DC.
It is a stabilized building at seven years of average weighted lease length still with a law firm. It is a fine building. It is in Dupont Circle. We are going to see what the pricing is. We are likely to be a seller of what we would deem to be our less valuable, less growthy assets on a going-forward basis. We are going to use that to both delever and fund development as well. Do not be surprised to see us selling assets on a consistent basis, as Owen described, which is what we were doing pre-COVID. We are just like, we are going to get back at it and continue to do that.
I think I'll take a break now to take any questions from the audience.
Can you talk about the decision in San Jose to sell land?
The question was the decision in San Jose to sell land? Was that what?
Yeah. There has been some bad, I'd say inaccurate press about our land sales in San Jose. We have four sites. One that was mentioned in the press was Platform 16. That's actually the one that we're not trying to sell. It was misreported. I was going back to the land sales that I talked about. None of those deals are in the $75 million that I talked about that we have under contract that we're selling right now. This is the future, what Mike talked about. We have a site in downtown San Jose that we have on the market right now. We're looking at selling. We have two other sites. One is in North San Jose, and one is in an adjacent community. One of those we're re-entitling to residential. The other probably to industrial.
We will sell those assets as well. These are sites that in a different marketplace we thought could be developed into office. In the current marketplace and what we foresee as the future marketplace, much less likely. What we would like to do, those assets, they are not generating any cash flow for shareholders. You are not valuing them for anything. If we can get the cash, reduce debt, accomplish some of our development spend, we are creating value in the company.
We have time for maybe one more question. If not, I'm going to ask about 290 Coles. That was an interesting development for you because it's Jersey City multifamily, standalone multifamily development. You're providing preferred capital to it. Does this open the door for you to do more of these types of investments and developments?
I think I would describe 290 Coles as a unique, probably one-off situation. First of all, New York was the only region in the company where we had not done a residential development. That was a positive. The second thing that probably is most important is most of the capital that we invested in the project was put in on a preferred basis at a 13% return. There was already a landowner that had gone in, and they subordinated to our position. Between the experience gain, the structure of the transaction, and then we are a co-developer, so we are earning compensation for that, we thought it was a good use of corporate capital and also a good opportunity to gain some experience. We will continue to be an active residential developer. I think the deals will be in two primary categories.
One, we have mixed-use developments with office and also associated retail, but also residential. We want to keep building those. Reston Next, phase two, is the best example of that. We just delivered a project called Skymark very successfully. There are some additional phases that over time we think we'll be able to develop. The other thing that we're doing on the residential side is we're using our skills to create value in the land that we have. So much of our land is located in suburban towns. Many of those communities need more housing. They're much more willing to entitle residential developments. We have a project, a building that was at the address of 17 Hartwell Avenue in Lexington, Mass. We went to the town, and they entitled us for a 350-unit apartment complex.
The value of the land, and we're going forward with the project. We've identified an institutional partner to put up most of the equity capital. The value of this land has been greatly enhanced by the fact that we got these entitlements. That's what we're going to be doing with our residential capabilities going forward.
Maybe I'll end this with one final question. You talked to many different corporate heads, and geographically you're in many different markets. Is there anything that you see on the horizon that may surprise the market in 2025? It could be for any one of you.
I think the surprise for me has been what I talked about right off the bat, which is every day we pick up the press, we're fearful of reading about some text about a tariff or a policy change. There is a lot of dislocation going on, but our leasing continues to move forward. I think that's a surprise we've experienced, and I think we'll continue to experience it.
Great. Thank you so much for attending.
Thank you, John. Thank you for coming.