Ladies and gentlemen, thank you for standing by, and welcome to the BXP First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Helen Han. Thank you. Please go ahead.

Good morning, and welcome to BXP's first quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, the company 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 Investor Relations 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 Boston Properties 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 the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statement. I'd like to welcome Owen Thomas, 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 1 question. If you have an additional query or a 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, everyone. Today, I'll cover BXP's operating momentum as demonstrated in our first quarter results. Important trends emerging in post-pandemic work and office use, current private equity capital market conditions for office real estate BXP's capital allocation activities, including a significant acquisition we just announced and our prospects for future growth. BXP's financial results for the first quarter reflect the positive impact of U.S. economic growth, the gradual reopening of the major cities where we operate, and increasing needs by our clients for securing high-quality office space. Our FFO per share this quarter was well above both market consensus and the midpoint of our guidance, and we increased our forecast for full year 2022. We completed 1.2 million square feet of leasing, more than double the space we leased in the first quarter of 2021 and in line with our pre-pandemic leasing activity for the first quarter, and our leasing momentum continues in the second quarter as Doug will cover. This success can be attributed to not only our execution but also the enhanced velocity achieved in the current marketplace for premium quality workspaces, which are the hallmark of BXP's strategy and portfolio. Finally, we just released our 2021 ESG report outlining the actions BXP has and will take to ensure continued leadership in this critical area. Highlights include remaining on track to achieve carbon-neutral operations by 2025, enhanced disclosures regarding Scope 3 emissions and diversity, achieving multiple financings tied to sustainability performance, inclusion in the Dow Jones Sustainability Index, and recognition for our work from many sources. The report is available on our website, and I encourage your review. As the effects of the pandemic are increasingly behind us, there continues to be much speculation about the future of work and its impacts on the use of office space. While many questions remain unanswered, there are a number of trends which are increasingly coming into focus. First, building census figures, roughly 40% to 80% on the peak day of the week in BXP's portfolio depending upon the city, are improving weekly and are at post-pandemic highs, with many large employers, such as Google and Apple just now implementing return-to-work plans. Second, city leaders are responding to the slow return to office as they understand the vibrant business district is critical to their city's economic health and recovery. The mayors of New York and San Francisco have partnered with their respective city's largest employers and encouraging return to work policies to help reinvigorate their business districts and local businesses that have experienced hardship from the delay in return to office. Third, most business leaders see the challenges of an inconsistent return to the office by their employees given the widening gaps their businesses are experiencing in maintaining corporate culture, onboarding and talent retention. Employee unwillingness to return to the office today on a consistent basis is primarily due to very tight labor market conditions and employee desire for flexibility. As business conditions become more competitive due to rising interest rates, slowing economic growth and changes in the labor market, business leaders will likely feel increased urgency in bringing their employees together on a much more consistent basis and modify their return to office policies accordingly. Fourth, return to office does not mean 5 days a week for most employers. Companies are increasingly providing a flexibility benefit allowing employees to work remotely 1 to 2 days or in some cases, more per week. These employees invariably are electing to come in more frequently Tuesday through Thursday and want more physical separation, their own dedicated workspaces and in-office amenities, all of which make it challenging for employers to reduce space, notwithstanding reduced occupancy for part of the week. Many of our clients have also materially grown their headcount due to buoyant economic growth and market conditions during the pandemic increasing their need for seats. And lastly, building and workspace are more important in the office business. To help entice workers back to their workplaces, employers are increasingly attracted to buildings that are new or recently renovated, well-amenitized inside and out and proximate to transportation. Aggregate office market statistics that currently show elevated levels of vacancy and weak net absorption do not properly reflect the market dynamics of the premium end of the market where most of our portfolio competes. We recently completed a disaggregated office market study with CBRE Econometric Advisors, analyzing the relative performance of prime office assets as selected by CBRE representing about 17% of total space versus the rest of the market in 5 of our targeted CBDs. The West LA analysis is forthcoming. CBRE found the vacancy rate is more than 5 percentage points lower for prime office assets versus non-prime assets and 10 percentage points lower in San Francisco. In 2021, for those 5 CBDs, net absorption for prime assets was a positive 1.2 million square feet versus a negative 6.6 million square feet for non-prime assets. This dynamic explains BXP's recent success in achieving pre-pandemic levels of leasing despite elevated total market vacancy statistics. Moving to real estate capital markets. Transaction volume for office assets remains vibrant as $25 billion of significant office assets were sold in the first quarter. Though volume was down 40% from the near record fourth quarter 2021, it was up 57% from the first quarter a year ago and above first quarter levels in both 2020 and 2019. Pricing has remained stable for high-quality office buildings and anything life science related, though rising interest rates have impacted leverage buyers, which could pressure volumes and cap rates. In Cambridge, a majority interest in the 100% leased lab building 100 Binney Street sold at an aggregate valuation of over $1 billion. Pricing was $2,350 a square foot and a 3.5% cap rate. The seller was a REIT and the buyer was a JV of institutional real estate investors. In the Culver City submarket of LA, One Culver was recapitalized at a gross valuation of $510 million. This building is 90% leased and pricing was $1,350 a square foot and a 4.5% cap rate. A regional operator sponsored the recap with a global institutional fund manager. In New York City, 450 Park Avenue was sold for $445 million by an institutional operator to a REIT. The building faces near-term lease expirations with pricing at $1,320 a square foot and a sub 4% initial cap rate. In South San Francisco, the 144,000 square foot 5000 Shoreline Court building was sold for $1,140 a foot and will be vacated for lab conversion. The asset, which will require capital to redevelop was purchased by an institutional fund manager from a corporation at a basis that is equivalent to our completed life science developments and higher than our redevelopments in the same market. Now, regarding BXP's capital market activity, we recently committed to purchase Madison Centre, one of the highest quality office buildings in the Seattle CBD for $730 million. Recently built in 2017, Madison Centre comprises 760,000 square feet in 37 stories, is 93% leased to leading tenants and is LEED Platinum certified. The building has one of the most generous amenity offerings in the Seattle market with 30,000 square feet of fitness, conference, library, living room, boardroom, fast casual food, bike storage and roof deck space. Madison Centre is well located 2 blocks from light rail and bus transportation and direct vehicular access to the I5 North and South ramps. Pricing for the investment is $965 a square foot and a 4.3% initial cap rate, stabilizing above 5% with additional leasing. The acquisition is expected to close on May 17 and will initially be funded with a $730 million bridge loan. Our funding plan over the next year is to either enter into a like-kind exchange with other assets we sell or bring in capital partners as we have done with other acquisitions. The acquisition of Madison Centre accomplishes several key strategic goals for BXP. It expands our presence in Seattle, targeting a growing technology market, adds one of the newest and most competitive buildings in the Seattle market to our portfolio, consistent with our quality strategy in all the markets where we operate. And it provides the opportunity to reallocate capital on a tax-efficient basis between markets and specific buildings. On dispositions, in the first quarter, we completed the sale of 195 West Street, which is a 64,000 square foot, 100% leased building in Waltham for $38 million which represents pricing of just under $600 a foot and a 4.7% cap rate. We are either in the market or planning additional sales in our Boston and Washington, D.C. markets several of which could be used in a like-kind exchange for the Madison Centre acquisition. If completed, these transactions will efficiently reallocate capital with limited loss in FFO from East Coast properties into a market-leading Seattle asset. We also completed another active quarter recharging our development pipeline. As previously described, we commenced the 390,000 square foot first phase of Platform 16 in San Jose to be delivered in 2025 and the 327,000 square foot conversion of 651 Gateway in South San Francisco from office to lab to be delivered in late 2023. Our share of investment in these 2 projects aggregates $378 million and projected initial cash yields upon stabilization are in excess of 6%. AstraZeneca announced last week they have signed a lease for 570,000 square feet to consolidate into a major research facility at BXP's 290 Binney Street development in Cambridge. This development could commence in early 2023, but is contingent on several enabling milestones to be completed this year, at which time we will provide more details, including economics on both it and the adjacent 250 Binney Street Lab and 135 Broadway residential projects. After all these movements, our current development pipeline aggregates 4.1 million square feet and $2.9 billion of investment, is 54% pre-leased, is 27% life science related and projected based on lease-up assumptions to add approximately $200 million to our NOI over the next 5 years at a 7% average cash yield on cost when stabilized. So in summary, we had another active and successful quarter with strong leasing and financial returns and continue to forecast significant growth in our FFO per share this year, driven by strong leasing activity, continued recovery of variable revenue streams, delivery of a well-leased development pipeline, completion of new acquisitions, both last year and this year, a rapidly expanding life science portfolio in the nation's hottest life science markets and well-timed refinancing activity in 2021 and lower capital costs. Let me turn the call over to Doug.

Thanks, Owen. Good morning, everyone. We're having this call on May 3, which is a bit late for us, but we had a lot of news to share and wanted to coordinate our schedules. Most employers are now figuring out how to align their workforce with their use of office space. Public transportation usage and occupancy in our office buildings is still below 2019 levels. Some organizations won't change their space configuration or allocation per employee and are actively making long-term lease commitments based on their growth, as many companies have lease expirations coming up. Other businesses are exploring various models, such as subletting, taking on short-term leases, or simply observing how their in-office presence evolves before making decisions as their leases approach expiration. The availability rate of space, as assessed by third-party brokers, is still high in urban markets. However, as Owen noted, the best buildings are attracting a larger share of market demand. Despite challenges in both demand and supply, the BXP portfolio experienced a strong leasing quarter for the third consecutive time. Our leasing activity was primarily spread across Boston, New York, San Francisco, and the Metropolitan Washington region. Last quarter, we saw an occupancy gain of 40 basis points, followed by another 30 basis points this quarter. Currently, we have signed leases for over 975,000 square feet of vacant space that has not yet commenced, which will add an estimated 220 basis points to our occupancy figure. We started 2022 with more than 1.4 million square feet of leases in negotiation for our in-service portfolio. As of the end of the first quarter, after completing 1.2 million square feet, we now have about 1.3 million square feet under active negotiations and over 750,000 square feet in our development pipeline. In the last 30 days alone, we signed more than 1.1 million square feet of leases, demonstrating our quick and confident approach to filling our portfolio. While we focus on high-quality buildings in prime submarkets, we also have the advantage of an operational platform that keeps us connected with clients, allowing us to identify opportunities even when a leasing transaction isn’t immediately obvious. For example, in Boston, the life sciences sector is driving demand in the suburban market alongside traditional office leasing along Route 128. We successfully agreed on the recapture and re-lease of 73,000 square feet at 77 CityPoint, recognizing interest from a large tech company as we finalized another transaction. Instead of awaiting the current tenant's lease expiration in December 2024, we negotiated an early termination and signed a new 7.5-year lease reflecting a 15% net rent increase. In another case with Wellington, the main tenant at Atlantic Wharf, we partnered with them and others to enhance the carbon footprint of our 140 Kendrick Street project, leading to a 105,000 square foot lease for space expiring in November 2022. We also signed leases for an additional 80,000 square feet in the same project, with expected rent roll-ups of about 40%. Despite the challenges faced by public biotech companies, the demand for life science tenants in Boston remains strong, particularly from firms backed by private capital. Recently, we signed an additional 45,000 square feet at 880 Winter Street and are finalizing negotiations for remaining space, as well as securing a 140,000 square foot lease at 180 CityPoint, a new building under construction scheduled for completion in the fourth quarter of 2023. We are thrilled to welcome AstraZeneca as a new client at Kendall Center and anticipate commencing construction early in 2023. In the Boston central business district this quarter, we primarily facilitated smaller transactions, completing 7 deals totaling 47,000 square feet with an average cash rent markup of 17%. Currently, we are negotiating leases for over 300,000 square feet in central Boston, including 4 transactions exceeding 40,000 square feet. The leasing landscape in New York City also deserves attention. Perella Weinberg initially planned to move from the GM building in early 2020, but with the onset of COVID, their move was postponed. We provided a short-term renewal at a lower market rent, hoping to encourage a long-term renewal. As a result, on April 1, 2022, we worked with them to secure a long-term extension and expansion of 125,000 square feet at GM, which will ensure their tenancy until 2040. The new lease involved a shift to lower contiguous floors, resulting in a rent decrease of about 7%. Noteworthy this quarter, we also finalized a 330,000 square foot extension and expansion at 601 Lexington Avenue and a 70,000 square foot renewal at 510 Madison, with both transactions reflecting a decrease in cash rents. Our activity in New York remains robust, with ongoing negotiations for multiple leases totaling over 400,000 square feet across various properties, and construction at 360 Park Avenue South is progressing. Our markets in Boston, Cambridge, Waltham, and Midtown New York are significantly more active compared to San Francisco, Northern Virginia, D.C., and Los Angeles where the recovery is slower. In San Francisco, while some major tech tenants are exploring available spaces, the bulk of activity is concentrated in the financial district, particularly in top-quality buildings. This quarter, we completed 10 leases totaling 104,000 square feet in the CBD, achieving a 25% increase in cash rents. As we assess our ongoing opportunities, we are working on securing an additional 110,000 square feet, including three full floors at Embarcadero Center. Meanwhile, our development venture with ARE at 651 Gateway is progressing, with construction underway and proposed multi-floor leases anticipated for late 2023 or early 2024. In Northern Virginia and D.C., activity in Reston has primarily involved smaller deals, and we are currently negotiating several leases, although large tenant activity is sluggish. Rents in the area remain stable, with annual increases expected. In the district, we are engaging with a potential multi-floor office tenant, working toward bringing occupancy at 2100 Penn to over 80%. Retail activity is picking up in Boston, Reston, and New York City, while parking revenues are improving in Boston and San Francisco, though still lagging in D.C., L.A., and Seattle. Excluding Seattle, parking revenue in the first quarter reached 77% of 2019 levels, and we anticipate a significant boost in the second quarter as we move past the Omicron variant. We have experienced three strong quarters of office leasing and an excellent April 2022. Employers are actively seeking new hires, which is driving business leasing activity and allowing us to enhance our occupancy. To reiterate Owen's points about quality, employers aim to utilize their physical space to foster teamwork. The availability rate in premium buildings is lower, and rental rates are showing considerable outperformance. We create exceptional environments that enable our clients to leverage their spaces for talent attraction and retention. Though not yet at 2019 levels, employees are increasingly frequenting the office, emphasizing the importance of having the right workspace.

Great. Thank you, Doug. Good morning, everybody. This morning, I plan to cover the details of our first quarter performance, the impact of our current and projected capital markets activity and the changes to our 2022 earnings guidance. Overall, as Owen and Doug described, we had a strong quarter. We increased our occupancy, and we continue to grow our revenues. Our share of revenues this quarter is up 4% sequentially from the fourth quarter and up 8% over the first quarter of 2021. We reported funds from operation of $1.82 per share that exceeded the midpoint of our guidance by $0.09 per share. The most improvement mostly came from a combination of higher rental revenues and some lower operating expenses that aggregated to $0.08 per share. $0.03 per share of the revenue outperformance came primarily from recognizing revenue earlier than anticipated due to our clients completing build-outs and occupying their space faster than we expected. For example, at our Reston Next development, we delivered a tranche of 11 floors to Fannie Mae almost a month earlier than we projected, resulting in higher-than-expected revenue in the quarter. We also recognized $0.01 of revenue from restoring the accrued rent balances from clients that struggled during the pandemic but have now recovered. We had previously reclassified these clients, which are primarily retailers and restaurants to cash basis accounting, and now their sales performance demonstrates the ability to pay their rent over the full term. On the operating expense side, lower-than-anticipated expenses contributed $0.04 per share to exceeding our FFO guidance. A portion of this was from lower-than-anticipated physical occupancy in January and February during the height of the Omicron variant. This resulted in lower cleaning and utilities expense during the quarter. We have seen our physical occupancy rebound and surpass prior post-pandemic highs, so we expect our expenses to normalize back to our budget for the rest of the year. We also incurred lower-than-anticipated repair and maintenance expenses this quarter, some of which will be deferred to later in the year. The remaining $0.01 of increase in our FFO was due to lower-than-expected G&A expenses in the quarter. Now I would like to turn to our 2022 earnings guidance, including the financial impact of our projected capital markets activities that Owen described. We've increased our guidance range for 2022 FFO to $7.40 to $7.50 per share. This equates to an increase of about $0.07 per share at the midpoint from our guidance last quarter. Our portfolio is exceeding prior expectations and it is projected to contribute $0.11 per share to that increase in our guidance at the midpoint. The portfolio's stronger growth is partially offset by the loss of FFO from our assumptions for asset sales, net of acquisitions and the impact of our anticipated financing activities. As Owen described, we've entered into an agreement to buy Madison Centre in Seattle for $730 million, and we expect to close before the end of the month. Our objective is to fund the acquisition through the proceeds from asset sales, and our assumptions include asset sales of between $700 million and $900 million for the year. Including the impact of this elevated asset sales program, we expect the transaction to be neutral to $0.02 per share dilutive to our 2022 FFO. The range is really reliant on the ultimate size and timing of our sales activity. Looking forward, we expect Madison Centre to demonstrate consistent cash flow growth as we lease up the currently vacant space and roll below-market rents to market as leases expire. The positive mark-to-market on current leases is between 10% and 15%. So the initial GAAP return, which fair values the rents is about 50 basis points higher than the cash return that Owen quoted. In addition, the property is new and a very high quality and will require minimal capital improvements. In the interim and in advance of completing our asset sales strategy, we expect to close on a short-term $730 million bridge loan to fund the acquisition. We are also planning to secure long-term fixed-rate financing on our recently completed Hub on Causeway mixed-use development in Boston. We're in the market and close to finalizing terms for the residential component and expect to pursue financing for the office and retail component later this year. The impact of these financings is included in our guidance and is expected to increase our interest expense for 2022 by $6 million to $9 million, a portion of which will run through our income from joint venture line. We are seeing improvement in NOI in both our same property portfolio and our development portfolio. In the same-property portfolio, we achieved faster lease-up from delivering spaces to clients earlier than expected. You saw this in our higher occupancy we reported in the quarter. And as a result, we have increased our assumption for same-property NOI growth by 75 basis points to 2.75% to 3.75% over 2021. On a cash basis, we continue to anticipate same-property NOI same-property cash NOI growth of 5% to 6% over 2021. Our non-same properties, which is primarily our recently delivered and active developments, are also exceeding our prior projections in achieving faster absorption. Our share of NOI from the non-same properties, and that excludes the Madison Centre acquisition, is expected to be $75 million to $85 million, an increase of $5 million at the midpoint from our assumption last quarter. The only other meaningful change to our guidance is an increase in our assumption of development and management fee revenue to $26 million to $33 million, which is an increase of $2 million. The improvement primarily relates to higher construction management fees related to tenant build-out activity. So in summary, we have increased our guidance range for 2022 FFO by approximately $0.07 per share at the midpoint. The drivers of the increase are $0.08 of improvement in the same property NOI performance, $0.03 from our developments and $0.01 of higher fee income, offset by dilution of $0.04 of higher interest expense and $0.01 from our net acquisition and disposition activity. Overall, we anticipate strong growth with 14% projected 2022 FFO growth over 2021 at the midpoint. We've improved our occupancy for 2 consecutive quarters, and Doug described both the meaningful backlog of nearly 1 million square feet of signed leases that will come into the portfolio in the next year and our current activity. We have additional future growth from the delivery of our $2.9 billion active development pipeline. It’s currently 54% pre-leased and will deliver over the next few years, plus we're making progress towards adding to the pipeline in the future. Operator, that completes our formal remarks. You can open the line for questions, please.

Your first question comes from the line of John Kim from BMO Capital Markets.

Doug, you mentioned in your prepared remarks some large renewals at GM and 601 Lex, although there were some rent roll downs. Can you discuss the impact that inflation has had on the leasing market? Has it prompted tenants to sign longer-term leases at lower rents? Additionally, moving forward, is there any effect on the annual escalators you have on site?

Thank you for the question, John. I would say there hasn't been a direct impact from inflation. The organizations we speak with remain committed to securing high-quality spaces. They are evaluating the market, and depending on their specific submarket, they can negotiate deals. In some instances, this means the rent they are currently paying might be higher than what they will pay in the future, which benefits them. Our escalators are mainly influenced by market conditions. In a place like New York, rent increases typically occur on a fixed rate every five years, and there hasn't been any change in our other markets, where escalators usually range from 2.5% to around 3%. To be honest, there isn't much pricing power in the office markets for us to enforce additional terms, so we are simply remaining competitive with the market conditions in each submarket.

Your next question comes from the line of Jamie Feldman from Bank of America.

Doug, I found your observation regarding the Boston life science market in relation to the biotech index quite intriguing. When you think about the Bay Area, could you share your thoughts on both the tech sector and life sciences? Are you noticing any changes in leasing demand due to developments in the public markets or the venture capital market, or is demand remaining stable? It would be helpful to gain further insights into these two sectors.

I would respond to your question like this, Jamie. The West Coast, especially the San Francisco market, is lagging behind the rest of the country in terms of getting employees back to the office consistently, which affects how they use space and their demand. Generally, things are just moving slower there. This applies to both downtown San Francisco and areas like Silicon Valley and the Greater Bay Area. Currently, most of the demand we see for our key properties comes from what I would call venture capital-backed smaller companies. We aren't seeing interest from larger life science companies that are publicly traded and competing for space because the nature of our property at 651 isn't suitable for them. On the tech side, demand in Mountain View from smaller companies remains steady but not particularly intense. There's no urgency from companies to decide on space as they bring employees back. Their decision-making is somewhat cautious, but that's consistent with what we observed three to six months ago. Overall, the Bay Area is just slower compared to the East Coast, where businesses have been more proactive about returning to work for nearly a year. Even though there was a brief disruption with Omicron, things returned to how they were by October 2021.

Your next question comes from the line of Alexander Goldfarb from Piper Sandler.

A question on development. You guys have been pretty consistent developing at 7% plus over the years despite rising costs. So my question is, is this just a function of either, one, development rents keeping pace or two, it's the legacy land basis that gives you that advantage? Or is there a risk that we could see yields come down because for BXP, the development is a key driver of FFO? So just trying to see how sustainable this is, given everything that's going on.

Yes, as I mentioned, the developments we launched this quarter are above 6%, but not at 7%. It's not uniform; some are above 7%, but there is pressure on development yields. The markets where we've been developing are very strong, and rents have been rising, which helps. However, I agree that if inflation remains high over the long term, it will make development more challenging from a yield perspective. Looking at our development pipeline, we have a residential project in Reston and a life science project in the greater Boston area, along with our venture in South San Francisco with Alexandria. Aside from our San Jose Platform 16, we are not announcing major office developments right now due to limited supply preventing us from achieving the necessary rents to cover the significant increases in costs across every market. Currently, we're seeing approximately 1% monthly escalation in construction costs. Changes in reserves are underway, and we expect a meaningful pullback. We believe pressures on the construction supply chain will start to ease, as will labor challenges in the trades. We're optimistic that conditions will improve. However, for projects we began in 2022, we would be assuming a significant escalation in our cost structure moving forward.

One additional advantage we have with our pipeline is that in Boston because it's not just the land basis and cost, we've got an active carburetor on when we can start and where we can start and what type of product because we've got existing buildings that we can convert to lab like we're doing at 880. But then we also have land at a great cost basis with permits in place. So we think that's going to be a real advantage as things go on, and we'll be able to judge the market better.

Your next question comes from the line of Michael Goldsmith from UBS.

I'm trying to get a better understanding of how you're strategically looking at leasing. Are you more focused on getting occupancy back before emphasizing rate? Or are you being patient on that rate may come back a bit before stepping up? I'm just trying to understand how you're approaching, do you think is it a short, intermediate or long-term approach?

As a general principle, we aim to meet market demands and ensure our buildings are fully occupied. Our valuation is tied to our income, and our goal is to generate that income. Historically, we haven't attempted to time the market; instead, we accept what it offers. Looking at our lease expiration schedules, we strive to manage expirations proactively to minimize our near-term exposure. In a challenging market, we are not facing many expirations annually. Currently, we expect about 6% to 7% of expirations over the next two to three years.

5% in the next 2 years.

We will focus on development when the market conditions improve and we have less turnover in our portfolio. We adapt to what the market provides while aiming to achieve a premium due to our high-quality projects and assets. There are times when multiple customers are interested in the same space, granting us some pricing leverage, and we capitalize on these situations whenever we can.

Your next question comes from the line of Rich Anderson from SMBC.

When considering the long-term sustainability of the office sector, I understand your concern regarding the shift towards higher quality spaces. If we were to return to pre-pandemic demand levels for office space, would that be a general trend, or would landlords and REITs need to adjust their tenant portfolios? Referring to your supplemental materials, which outline the various industries you are involved with, will Boston Properties need to modify its strategy to reach full demand for office space in the future? Do you believe that sectors like legal services and real estate will fully rebound on their own, or will proactive measures be necessary to achieve that demand profile?

I believe that demand will continue to be influenced by the growth of our client segments. The number of employees a client has and their need for workspace is a significant factor. I discussed the main trends emerging post-pandemic, and it’s clear that office flexibility will become increasingly important. Ultimately, the need for office space drives demand, even if it is on a more flexible basis. Since the global financial crisis, growth has mainly been seen in technology and life science sectors. If we compare our current situation to 12 or 13 years ago, when finance and legal services constituted a larger share, we can see that this trend is not expected to change.

Your next question comes from the line of Blaine Heck from Wells Fargo.

Somewhat related to that last question. Owen, I wanted to touch on some of your initial prepared remarks when you talked about the tight labor market being some of the cause of the delay in the return to office. I think you said as the labor market gets more competitive, it could accelerate the return to office as employers have more negotiating or bargaining power to bring employees back into the office. Just following that line of thinking, do you think that balance of power shifting towards the employer could have an effect on kind of the other part of your commentary in which you said employees want separation and their own dedicated spaces? Is that something you think could also shift as the labor market shifts and employers could require hoteling for some of the employees or other more kind of economically efficient configurations just as they're going to be requiring that return to office?

I believe it's feasible, but it really depends on the specific client and segment. Each of our clients encounters different challenges with their workforce, and their employees have unique needs. Your idea could hold some truth, although I wouldn’t express it exactly as you did. However, I haven't talked to a business leader who thinks that remote work all the time is beneficial for their operations. As the labor market tightens, I expect more companies will implement in-office work policies. That doesn't mean all companies will switch to a 5-day workweek; I don't believe that will happen. But I do think work policies will continue to change, leading to an increase in in-person work in the future.

Your next question comes from the line of Caitlin Burrows from Goldman Sachs.

Earlier, you mentioned that peak day utilization is at 40% to 80% in the portfolio, which is a big range. So I was just wondering if you could go through the difference maybe in New York City versus San Francisco or any other characteristics that seem to drive one building versus another maybe utilization is higher at newer properties or something else?

Our portfolio has unique characteristics depending on the tenants and the locations of the buildings. Generally, on Tuesday, Wednesday, and Thursday, the highest usage of space is in Manhattan, without question, followed by the Boston Central Business District, which is primarily driven by financial services firms. In Manhattan, there’s also significant activity from legal firms, some of which are very committed to having their employees return consistently. However, utilization drops sharply when looking at markets like San Francisco and Washington, D.C., where the numbers are much lower relative to those top two markets. We lack sufficient clarity on our suburban properties since they don't have turnstiles and operate in open environments. While we could attempt to estimate activity by counting cars, this method is not an effective way to gauge building usage. Therefore, we are not able to provide a clear understanding of what’s happening with our suburban assets.

Your next question comes from the line of Anthony Powell from Barclays.

I guess a question comparing Manhattan to San Francisco. You're seeing more activity in Manhattan, but your rents are a bit down there, but they're up in San Francisco. So what's driving that difference? What's your lease mark-to-market in New York versus San Francisco? And how are these rent trends impacting values in both of those cities?

I'm going to address part of those questions, even though you've asked a three-part question. When we compare our rents based on second-generation usage, we look at the in-place rent versus the rent we've recently achieved for that space. This doesn't clearly reflect the current market rents at a specific time. However, I can tell you that market rents in Manhattan have remained very stable over the last year. If you review our calls from late 2020 and early 2021, we noted that there had been a rent reset, with net effective rents, face rents, and concession packages down by 15% to 20%. This remains true today. Therefore, when closing deals now, depending on the building, if we have a space that was previously leased at a higher rate, we are marketing it at the current rent level. So, what's happening with market rents isn't something you can easily interpret from the statistics I'm sharing; I'm providing an overview of our portfolio's performance. When considering how my revenues may trend, I aim to give you guidance on how to project those figures. As for the portfolio, generally speaking, we still have a positive mark-to-market in San Francisco, while we've experienced a flat to slightly negative mark-to-market in Manhattan for some time, mainly due to the differences in the rents achieved as leases roll over in the coming two to three years.

I believe that's accurate. The situation in San Francisco reflects a decade of rent increases leading up to the pandemic, resulting in very low in-place rents. We have been replacing these with higher rents over the past few years and are continuing to do so. Consequently, we expect a strong positive mark-to-market in San Francisco over the next couple of years, projected to be around 10% to 15% on the leasing we anticipate. The rents for our high-quality spaces in San Francisco are stable, and we have a clear understanding of the rental prices, allowing us to secure deals. In contrast, New York City experienced significant development at Hudson Yards before the pandemic, which restricted rent growth during that period. As a result, we didn’t see the same level of growth. Currently, as Doug mentioned, rents have decreased slightly, so we are facing roll-downs. Some may be higher this quarter, while others will be flat. Overall, it seems that New York City might experience something like a 5% to 10% decline across the portfolio.

I want to share the real deals we are making each quarter for your comparison and understanding. In New York, we've completed a few significant deals, and there's been a downturn of about 7%. In Boston's suburban market, there's been an increase of 40%, while in the central business district, it has risen by 15% to 20%. I'm doing my best to provide clarity regarding our revenue as you model our portfolio moving forward. Owen, you might want to discuss the values in relation to New York and San Francisco.

Values for assets capital markets?

Well, look, I think as the comparable comp statistics, which I try to give on this call every quarter indicate, I think values are driven primarily by cap rates and the per square foot comes out as a result. And those cap rates, both in New York and in San Francisco, I think for a high-quality office building have been somewhere in the 4s, low or high 4s depending on what the rental structure is in the building.

Your next question comes from the line of Manny Korchman from Citi.

Just hoping to maybe a little bit more details on the asset sales. I think you mentioned they'd be in Boston and D.C. And also just how you're thinking about all-out sales versus JVing those assets?

Yes, we will be selling assets this year. Mike mentioned the volume in our projections. If we succeed in these sales, we plan to reinvest the proceeds into Madison Centre, which allows us to efficiently reallocate capital. We often get inquiries about raising capital through asset sales, but as we've explained, this method is inefficient for us because the gains on our major assets fluctuate around 50%. Any capital raised this way would need to be distributed as a special dividend to shareholders, preventing us from using it for corporate purposes. If we can complete this reinvestment, we will essentially be shifting our investments from assets in Washington, D.C. and Boston to a great building we just acquired in Seattle. However, we do expect a slight reduction in funds from operations due to potential differences in cap rates and timing.

To clarify further, Manny, we cannot perform a like-kind exchange with a joint venture unless it is the exact same joint venture, which is quite challenging. Therefore, if we want to sell an asset and engage in a like-kind exchange, it must be a wholly owned sale. Additionally, we are pursuing this strategy instead of simply forming joint ventures because we aim to maintain the strength of our balance sheet and explore ways to fund our strategic initiatives, as Owen mentioned, specifically our goal to enter the Seattle market in a leverage-neutral manner. We are actively seeking avenues to raise capital for our strategic objectives rather than raising capital solely to distribute it as dividends to shareholders.

Your next question comes from the line of Nick Yulico from Scotiabank.

I wanted to revisit the guidance, Mike, and note that you received revenue for the first quarter earlier than anticipated as tenants quickly built out their spaces. How should we view the impact of that on the guidance and your current budgeting? Is there a possibility that there are still benefits from that process that haven't been included in the guidance for the year?

It's possible that we may see fluctuations in our guidance. We've established a range that reflects our expectations for when leases will commence, allowing for some variation. The timing can sometimes be in our tenants' hands, particularly if they are responsible for the build-out. We can't recognize revenue until their construction is complete, making it harder to predict exact timing. Larger leases, such as those with Verizon at the Hub or Fannie Mae at Reston Next, could significantly impact our results if they shift by a few weeks or a month. We've considered these factors when establishing our growth range of 2.75% to 3.75% for same properties, as well as for developments that are in progress. However, it's important to acknowledge the challenges we face with supply chain issues, which can affect timelines. While our clients have generally been effective at completing work promptly, we approach our projections with a degree of conservatism to account for these uncertainties.

Your next question comes from the line of Ronald Kamdem from Morgan Stanley.

Just sticking with sort of the guidance and specifically on the occupancy guide. Just when I think about where the in-service occupancy is today versus the guidance maybe can you help us sort of bridge maybe the upside and the downside given the amount of leasing that's being done? Obviously, I would have thought that would have been more of an occupancy pickup this year? And admittedly, there's a lag between signing and commence. Just trying to get a sense if you could bridge that gap between the occupancy guidance and what you get you to the upside versus downside?

Let me explain why we don’t see immediate results, and then I’ll let Mike provide the occupancy ranges. For instance, at 601 Lexington Avenue, we have a tenant who will occupy space currently leased at the end of 2022. We will demolish that space and deliver it to the tenant, who will then build it out. That build-out won't be completed until the middle to late part of 2023. Although there’s a contractual agreement for when the tenant's rent starts, we can't begin revenue recognition or add it to our occupancy until that date arrives. As I mentioned earlier, we have around 975,000 square feet of leases signed where revenue has not started. Some of this is from 2022, but much is from 2023. We continue facing timing issues related to when we can recognize occupancy and reflect revenue on a contractual basis, even when we are receiving it. There are cases where we collect cash rent but cannot record it because the tenant hasn't moved in. For example, at 325 Main Street, we will start collecting rent without having a temporary certificate of occupancy since the tenant's work isn't complete. They will be paying us rent, which will appear on our balance sheet but won't contribute to our revenue stream. These timing issues occur regularly due to when we actually deliver the space. Mike, you can provide guidance on the ranges.

Yes, there is a delay between signing leases and gaining occupancy, as Doug mentioned. During the pandemic, our leasing volumes decreased, so we weren't signing enough leases to maintain our occupancy levels. However, we've seen strong leasing volume for three consecutive quarters, and Doug pointed out the positive April leasing volumes, which suggest a promising second quarter. This indicates that we should be able to increase occupancy. Currently, we have 2 million square feet expiring while we're completing over 1 million square feet per quarter. We should be able to improve occupancy, but there's a 6 to 12-month delay in finalizing leases, which is why the initial growth may be slow. We feel optimistic about our current situation. With 2 million square feet set to expire and 975,000 square feet already signed to be added to the portfolio in the next year, we also have about 500,000 square feet in negotiations. We're well-positioned to enhance occupancy, though it may take some additional time. At the moment, our guidance is between 88% and 90%, and I feel confident about this range. Achieving over 90% this year will be challenging based on current circumstances, and reaching the lower end of our range may also be difficult.

Your next question comes from the line of Amit Nihalani from Mizuho.

Are you starting to see any change in leasing activity from co-working providers across your markets?

Yes. In terms of primary leases, I would say that activity is zero. However, I think the real question is about the occupancy of the co-working units. I believe that occupancy is increasing. It's challenging for us to know exact numbers, but since WeWork is public and shares these statistics, they have been reporting increases in occupancy, which aligns with our observations. Our occupancy is improving weekly, and I expect theirs should be as well.

Your next question comes from the line of Steve Sakwa from Evercore.

I guess, Doug, there was really no comments on the L.A. market. I'm just wondering if you could share your thoughts on the leasing, the acquisition opportunities and whether you expect to start your 300,000-foot development in the Beach Cities anytime in the near future.

I'll talk a little bit about capital markets. I'll turn it over to Doug for the leasing. We have a strong interest in growing our L.A. footprint in our selected West L.A. markets. And we're actively reviewing a few things, but we don't see the same level of transaction activity in the L.A. market that we see in our other markets at the current time. But when things are available, we certainly pursue them.

Regarding our leasing activities, we have been active in leasing in L.A. during 2021, particularly in a primary space at Colorado Center, which is the former HBO space on the top two floors of one of the buildings. That space is currently being demolished and prepared for tenant delivery. However, activity has been light. While there has been a decent amount of leasing in West L.A., much of it has involved subleases that are no longer available or have been taken off the market, along with some direct leasing in Culver City and Playa Vista. We are optimistic about the West L.A. market, but currently, we don't have much action on our space. As a result, we aren't able to provide significant statistical information about our portfolio due to the limited availability of space.

Yes. And then you asked about Beach Cities. We're in the middle of designing that building. It's going to be an extraordinary project. I think it will be, by far and away, the best building in El Segundo. And we are still in that process, and we haven't really decided yet on what basis we'll launch the project, but more to come on that from us in future quarters.

Your next question comes from the line of Daniel Ismail from Green Street.

Owen, you started your comments off with ESG and sustainability. And I'm just curious from what you've observed in the portfolio, how are those green aspects influencing tenant decision-making processes? Are deals being won or lost because of any of those factors?

Yes, but not universally across the board. Doug described the engagement that we had with our great client Wellington in the suburbs of Boston, where providing them a net zero fulfillment and also very limited Scope 3 emissions relative to new build was critically important to their decision. I noted when AstraZeneca announced they're at least signing with us in Kendall Center. They talked about the sustainability characteristics of our clients, it's absolutely mission-critical, but I would not say that, that exists across the board. I think it's increasing. And I think we're going to see more of it in the years ahead. Koop, anything you want to add to that?

It's growing, as mentioned by Owen. With a client like Wellington, they entered with us with Boston's first green skyscraper. So as part of client partnership, we've grown together, and they've become more committed, and so have we. But Owen is right, several of our top clients are getting more and more passionate about it, and it's bigger criteria, but not across the board entirely, but it is definitely growing.

Your next question comes from the line of Derek Johnston from Deutsche Bank.

A lot of good questions have been answered. In your opening remarks, you detailed recovery trends and thoughts were shared in your markets with admittedly some recovering faster than others. But meanwhile, Southeast Florida and Miami seem to be booming. I mean, you have net migration, corporate relocations, large-scale job growth. Any interest in serving Southeast Florida with perhaps a small portfolio acquisition followed by your development prowess, really gaining scale and what we see as a strong gateway market?

We're excited about our gateway perimeter and footprint, and we have gone into several new markets and businesses over the last 3 or 4 years. We went into L.A. 3 or 4 years ago, it remains 1% to 2% of the company. We went into Seattle last year. We now have 2 buildings, it's probably 1% to 2% of the company. There's a life science efforts, we've talked about that currently at 6% to 7% of our revenue. And we've mentioned that we believe we can double that over the next 5 years in the gateway markets where we are. So we have tremendous growth opportunities. As hopefully, we've communicated on this call in the gateway markets where we operate. And at this point, we are not interested in expanding outside of those 6 markets.

There are no more questions at this time. Turning the call back to Mr. Owen Thomas for closing remarks.

Thank you, everybody, for your interest in Boston Properties. And I hope you enjoyed the 1 question system. I made for a more efficient call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Presenters, please stay on the line for the post-conference.