Good day, and thank you for standing by. Welcome to BXP's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your first speaker, Helen Han, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to BXP's second quarter 2024 earnings conference call. The press release and supplemental package were distributed last night, and we furnished it 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 expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP's filings with the SEC. BXP does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, 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 only one question. If you have an additional clarity 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, everyone. BXP's performance in the second quarter once again demonstrated the relative market strength of the premier workplace segment of the commercial office industry as well as BXP's strength in execution. Our FFO per share was $0.06 above our forecast and $0.05 above market consensus for the second quarter. Further, we raised the midpoint of our FFO per share guidance for 2024 by $0.08. We completed over 1.3 million square feet of leasing, which is 41% greater than the second quarter of 2023 and close to our 10-year average leasing volume for the second quarter. As our leasing volume continues to escalate exceeding current lease expirations, we expect our occupancy will increase over time. Weighted average lease term on leases signed this past quarter remained long at nine years. On sustainability this past quarter, we released our 2023 Sustainability & Impact Report, hosted our third annual Sustainability & Impact Investor Update, and were recognized by Time Magazine as one of the world's most sustainable companies, ranking number one in the U.S. among property owners. Delivering sustainable real estate solutions is increasingly important to our clients as well as the communities where we operate, which reduces our cost of capital given the growing number of ESG investors interested in our debt and equity securities. Moving to macro market conditions, we continue to experience market tailwinds for the two most important external forces impacting BXP's performance: interest rates and corporate earnings growth. The U.S. inflation report released on July 11th reflected a 3% inflation rate for June, lower than expectations, sparking new forecasts of accelerated interest rate cuts by the Fed as well as lower market yields for the 10-year U.S. Treasury. Lower interest rates are favorable for real estate and BXP's valuation and for broader corporate earnings growth, the second important external factor driving BXP's performance. After remaining flat for all of 2023, S&P 500 earnings growth was 6.6% in the first quarter of this year and is expected to be around 9% for the second quarter. As mentioned repeatedly, companies with earnings growth are much more likely to invest, to hire and to lease additional space, as demonstrated in our growing leasing volumes this year. Premier workplaces, defined as the highest quality 6.5% of buildings, representing 13.1% of total space in our five CBD markets, continue to materially outperform the broader market. Direct vacancy for premier workplaces is 13% versus 18.5% for the broader market. Likewise, net absorption for premier workplaces has been a positive 6.9 million square feet over the last three years versus a negative 22.8 million square feet for the broader market. Asking rents for premier workplaces are 51% higher than the broader market, a consistent gap from prior quarters. This outperformance is evident in BXP's portfolio where just under 90% of our NOI comes from assets located in CBDs that are predominantly premier workplaces. These CBD assets are 90.4% occupied and 92.2% leased as of the end of the second quarter. We are also experiencing moderate, but steady increases in workers returning to the office based on the turnstile data we capture for roughly half of our 54 million square foot portfolio. Corporations continue to push for increased office attendance, including Salesforce, which recently announced their new policy shift from primarily flexible work to mandatory office attendance for most employees three to five days per week depending on job function. Regarding the real estate private equity capital markets, office sales volume in the second quarter continued to be muted at $6.9 billion and has ranged from $6.2 billion to $9.1 billion for the last six quarters, well below volumes achieved before the Fed started raising interest rates in 2022. Completed transaction activity for premier workplaces has been very limited, though increasingly, owners are testing the market to understand pricing. Moving to BXP's capital allocation activities, we remain active in pursuing acquisitions from owners and lenders, but as mentioned, have seen limited opportunities in the premier workplace segment. We are in active negotiations for the disposition of four land positions, which, if successful, would generate approximately $150 million of proceeds, half of which could be realized this year. For our development pipeline, we delivered into service the 118,000 square foot Dick's House of Sport on Boylston Street at the Prudential Center in Boston, fully leased at a strong yield. On July 12, we opened Skymark, our 508-unit luxury residential tower development at Reston Town Center. We've already leased 21% of the units ahead of schedule, and rents are also modestly above projections. We continue to push forward with several residential projects primarily on land we control that are being entitled and designed for which we intend to raise JV equity capital. BXP continues to execute a significant development pipeline with 10 office lab retail and residential projects underway as of the end of the second quarter. These projects aggregate approximately 3.1 million square feet and $2.3 billion of BXP investment with $1.2 billion remaining to be funded and will contribute to BXP's external FFO per share growth over time. The market segment for the broad office asset class remains challenging. BXP continues to leverage its key strengths, which are: our commitment to premier workplaces and our clients as many competitors disinvest in the office sector, a strong balance sheet with ready access to capital and secured and unsecured debt in private equity markets, and one of the highest-quality portfolios of premier workplaces in the U.S. assembled over several decades of intentional development, acquisitions, and dispositions. So in conclusion, BXP continues to display resilience with a growing leasing pipeline as well as stability in FFO per share and dividend level, and is well positioned to continue to gain market share in both assets and clients during this time of market dislocation for the office sector. Expectations for lower interest rates and stronger corporate earnings growth will also provide tailwinds for our renewed growth over time. So now, Doug, I'd like to wish you a happy birthday. And I'll turn the call over, and you can talk about our strong leasing activity.

Thanks, Owen. I really enjoy celebrating my birthday with all of you on the call every two years; it is one of the highlights. So as we described during our NAREIT June meetings and the webcast that we did, the trend line of BXP's leasing activity in the second quarter of '24 picked up materially relative to what we executed in the first quarter and what we discussed on our last call, all really good stuff. As of June 30, we've completed 2.2 million square feet of leasing for '24. When we spoke to you during our May call, we stated our pipeline of leases under negotiation at that time, May 1, was 875,000 square feet. And as Owen highlighted, we signed leases for 1.32 million square feet between April 1 and June 30, which is a lot more. Our active pipeline of leases under documentation today has grown to 1.39 million square feet. So if we complete this pool of transactions, we will have leased 3.59 million square feet of space, exclusive of our leases in documentation. This quarter, we completed 73 transactions, 37 lease renewals for 830,000 square feet, and 36 new leases encompassing 500,000 square feet. 12 clients expanded into 228,000 square feet of additional square footage, while we had four contractions totaling 63,000 square feet. 45% of our absorption was growth from our existing client pool. As a point of comparison, last quarter, we completed 61 transactions with 29 renewals, encompassing about 400,000 square feet and 32 leases for 494,000 square feet. We had only three expansions for 18,000 square feet and we had four contractions totaling 44,000 square feet. So again, really big improvements. Q2 activity was concentrated in our East Coast markets with 445,000 square feet in New York, 343,000 square feet in Boston, and 351,000 square feet in Northern Virginia. These three markets made up 1.14 million square feet or 86% of the activity. Our West Coast activity was almost exclusively in San Francisco with 146,000 square feet. The majority of our client expansion came from Manhattan this quarter. The only significant contraction in the portfolio came from a tech company downsizing in Reston. We had three transactions over 100,000 square feet, one each in Boston, New York, and Reston. Expansions or new clients made up 42% of the activity in New York, 40% in Boston, 37% on the West Coast, and 16% in D.C. As reported in our supplemental, the mark-to-market of leases that commenced this quarter, which is about a 375,000 square foot base, was up 6%, and transaction costs averaged $11 per square foot per year. The overall mark-to-market of the cash rent on leases executed this quarter, which was a 1.15 million square feet pool relative to the previous in-place cash rent was about flat. The starting rents on leases we signed during the second quarter were up about 8% in Boston, really flat in New York, down 6% in D.C., and down 7% on the West Coast. Now I want to spend a minute on our occupancy change during the quarter, which seemed to have been a focus of many of the analyst reports that we saw this morning and last night. As we stated in February and May, we have two large known expirations, one in April, 200,000 square feet at 680 Folsom, which is in the second quarter figures, and one in July, 200,000 square feet at Times Square Tower. That's a JV asset, so our percentage share is 110, but we report the 200. This quarter, we also vacated 148,000 square feet of occupied but non-revenue-producing spaces. What do I mean? Well, we had some tenants in default where we had stopped recognizing revenue, yet they were still in possession and we were in legal proceedings to vacate the space. In addition, we took back 60,000 square feet from WeWork at Dock 72, but there, the absolute rent that we were receiving remains the same. It's just on a lower square footage. Finally, we terminated a 33,000 square foot lease in Waltham that was simultaneously released but won't be delivered until next quarter. Those movements account for 92% of the reduction in our occupancy in the second quarter from the first quarter. As of June 30, we have approximately one million square feet of signed leases that have not commenced. Hence, the 200 basis points difference between occupied space and leased space. In the first quarter, our leasing included 383,000 square feet of vacant space leasing. This quarter, that same vacant space leasing was 362,000 square feet. These leases are all part of our leased square footage percentage. Our pipeline of leases in negotiation includes an additional 635,000 square feet of currently vacant space, which if signed will contribute another 130 basis points to our leased square footage. In addition to the known 200,000 square feet expiration at Times Square Tower in Q3, our two Waltham life science developments will be added to our in-service portfolio in the third and fourth quarters, 180 CityPoint and 103 Fourth Avenue, respectively. These are combined 32% occupied, which will reduce our in-service occupancy. These additions will result in about a 50 basis point reduction at the year-end. For those of you that are focused on the next quarter, we expect us to be lower by about 40 basis points with a recovery in the fourth quarter where most of the leases that have been signed start to commence where we project occupied space to be between 87% and 87.5%, inclusive of the addition to the in-service portfolio. In previous quarters, we have not been including the additions to the in-service portfolio, but we're doing that now because it's a quarter away. Our leased space will continue to be above 89%. BXP continues to lease space. In Manhattan, almost all of our demand continues to originate from financial institutions, alternative asset managers, professional service organizations, and law firms. In many circumstances, these clients are expanding. Concessions are flat and taking market rents have risen double digits in 2024. The sub 8% availability in the Park Avenue submarket is a direct reflection of these users growing and competing for limited blocks of space. In one of our assets, we have three tenants that would like more space, and we have no immediate availability. We had more than 130,000 square feet of expansions at the General Motors Building and at 601 Lexington Avenue this quarter. Our strongest tour activity in New York City continues to be in the submarket. At the same time, technology demand across the city continues to be light. We completed a single-floor lease at 360 Park Avenue South with a digital media firm this quarter, but Midtown South is a tech-branded submarket in the city, where transactions over 20,000 square feet have been very limited in 2024. In Princeton, we completed 10 transactions totaling 150,000 square feet during the quarter, including an extension and expansion with a foreign pharma company. In the Back Bay and the Financial District of Boston, we completed 195,000 square feet of leasing this quarter. The majority of this activity was in our Back Bay portfolio, and the clients were alternative asset managers and professional services firms. The Back Bay continues to outperform the Financial District, which continues to have to digest the new construction pipeline. Our remaining activity was in our Waltham urban edge portfolio, where we completed just over 110,000 square feet and 90% of those transactions were on either existing or near-term vacancy, not renewals. Here, the demand came from a consumer products company, a homebuilder, and a few pharma life science companies with office requirements. We've executed one 25,000 square foot life science lab lease. The life science lab demand in Greater Boston continues to be lackluster, with tenants displaying a little urgency around any potential new requirements or relocations. To date, this year, there have been eight nonrenewal lab deals in Waltham, Lexington, Watertown, and West Cambridge that didn't involve a sublet. Only one was greater than 25,000 square feet. Our Reston portfolio was responsible, as I said, for virtually all of our executed leases this quarter in the D.C. region. Leasing activity and tenant demand growth is coming primarily from two industries, cybersecurity and defense contracting. We had just over 30,000 square feet of expansion from existing tenants but we also experienced, as I said, a 50,000 square foot contraction from a traditional tech company. The vibrant residential and retail environment continues to be a natural location for small businesses in the financial services and legal industry as well, and we did do six leases at 5,000 square feet or less in the Town Center as well as a handful of retail deals. The District of Columbia office market is becoming more and more bifurcated. The private sector tenant demand is dominated by the legal industry in D.C., but in almost every case, law firm renewals or relocations are resulting in smaller requirements, which is leading to negative absorption as we have all read and seen. It doesn't look like the government leasing or usage is going to help with this problem. However, with the either existing or near-term high vacancy, there are many buildings with overleveraged capital structures unwilling to provide capital for new transactions, and therefore, they have very little client interest. When clients do want space, they prefer to be in top refurbished, amenity-rich, well-capitalized buildings. There appears to be limited opportunities in the market that meet these clients' demand, so our availability at 2200 Penn and 901 New York Avenue should fare well over the next few quarters. On a comparative basis, the West Coast markets, particularly San Francisco, are seeing more demand in '24 than '23. However, additional sublet availability and technology company lease downsizing upon lease expirations continue to mute the positive demand emanating from the AI organizations that continue to look for space. Tech growth away from AI has yet to emerge. The San Francisco CBD also continues to act as a financial center of the West Coast with its own set of asset managers, including private equity firms and venture firms, some hedge funds, and a few specialized fund managers, and obviously, their financial and legal advisers. This is the source of the bulk of the transactional activity in the market. And while the brokers correctly report a pickup in tenants in the market, if you look more closely, very little of that demand represents net growth from those tenants. Our San Francisco activity continues to center on traditional non-tech demands at Embarcadero Center. This quarter, we completed an 80,000 square foot law firm renewal with no change in square footage and five smaller deals, all 12,000 square feet or less with new tenants on currently vacant space. We continue to see many of the professional services in law firm continuing to downsize, which is in stark contrast to the activities of those same tenants in New York and Boston. We are seeing a steady flow of potential tenants 12,000 square feet or less, which is about a full floor at our 535 Mission property. But this is in contrast to 680 Folsom, whose location is less desirable for non-tech demand and where the potential tech clients continue to have inexpensive furnished sublet options. Tenant activity is improving in our Mountain View research R&D buildings, where we have about 215,000 square feet of availability and uniquely attractive products. These buildings are designed for companies that are making some sort of device, be it a car sensor, a photovoltaic panel, or a medical device. They don't compete with the large multistory office product that has flooded the market. We saw activity come to a halt when the SVB imploded last year. The entrepreneurial device maker companies still exist, and they are now slowly making capital commitments once again and looking at leasing space. The lab market story in South San Francisco is not dissimilar to Greater Boston. There were only a handful of new leases completed during the first six months of the year that didn't involve a renewal or sublease, though there have been about 100,000 square feet of new deals completed in the last 30 days. Overall, we are experiencing an improving operating environment. Leasing available space is primarily driven by gaining market share from competitive landlords and/or lower quality building, but not net new market demand growth. While the markets need consistent incremental absorption to show a macro recovery, we have started to see pockets of strength where low availability is driving constructive client behavior, the Back Bay of Boston and the Park Avenue submarket of New York are the obvious examples. As clients choose premier properties and sound financial conditions operated by the best property management teams, we will continue to be successful in capturing demand, leasing space, and increasing our occupancy. And with that, I'll turn it over to Mike.

Great. Thanks, Doug. Happy birthday. So this morning, I'm going to cover the details of our second quarter performance and the increase to our 2024 full-year guidance. So for the second quarter, we reported funds from operations of $1.77 per share that exceeded the midpoint of our guidance from last quarter by $0.06 per share. Our portfolio NOI came in $0.01 ahead of the midpoint of our guidance. The majority of this resulted from lower operating expenses in the quarter. Our rental revenue was closely aligned with our expectations. And as Doug described, our occupancy decline was anticipated in our guidance as we've covered with you in the last two earnings calls. $0.05 of our earnings beat came from a reduction in non-cash interest expense that we don't expect to recur and that you should not incorporate into our run rate going forward. The change is due to our reassessing of future earnout payments related to our Skyline multifamily project in Oakland. The reassessment results in the reversal of $9 million of previously accrued non-cash interest expense. Our structuring of this deal with the protection of an earnout in lieu of an upfront land purchase is saving us nearly $40 million of projected land payments. So moving to the full-year. We're increasing our FFO guidance for 2024 to $7.09 to $7.15 per share. At the midpoint, this equates to $7.12 per share and is an increase of $0.08 per share over the prior guidance midpoint. In addition to the second quarter outperformance, we anticipate $0.02 per share of better projected portfolio NOI in the back half of the year from our in-service portfolio. We've negotiated three lease terminations, all in Boston, with payments that will add incremental income in the second half of 2024. Net of lost rental income, our NOI is projected to be higher by approximately $4 million or $0.02 a share. The geography of the expected improvement shows up as an increase in termination income and a modest reduction of same-property NOI. We don't include termination income in our same property guidance, and we guide to it separately. So you will see in our detailed guidance table in our supplemental that our full year '24 termination income guidance is now $14 million to $16 million, up $8 million. Correspondingly, we've reduced our 2024 same-property NOI growth by 25 basis points at the midpoint to a range of negative 1.5% to negative 3% from 2023. If not for the terminations, our same-property performance expectations would have been in line with our prior guidance. To provide a little more detail, most of our termination income comes from terminations we have negotiated to allow us to sign new long-term leases with both expanding and new clients. These transactions are reducing our occupancy by 100,000 square feet temporarily, but the impact will be short term as we have new leases coming in after 6 to 12 months of downtime that will cover virtually all of the space. These deals reduce our 2024 occupancy by about 20 basis points and are reflected in our updated occupancy guidance. We've also modified our guidance for net interest expense to incorporate the $0.05 per share of lower interest expense recorded in the second quarter. This results in lower interest expense for the full-year and a new guidance range for net interest expense of $578 million to $588 million. The remaining components of our prior guidance have not changed meaningfully, and overall, our earnings performance for 2024 is exceeding our prior expectations. I would like to spend a minute on interest rates as there's been no consistency quarter-to-quarter on Fed rate cut projections. Back in January, the Street was projecting 4 to 5 rate cuts starting in the second quarter; then the first quarter data came out, and the Street changed that to 0 to 1 cut. And now with more progress on inflation, the Street has reverted back to three cuts this year. We have not changed our base model that assumes one 25 basis point cut in December. Should the Fed cut by 25 basis points three times starting in September, our interest expense will be about $2 million or $0.01 per share lower, which is within our guidance range. Another item that could impact interest expense is the refinancing of our $850 million, 3.35% bond expiring in January 2025. We have access to multiple debt markets, and in general, the bond markets have been improving with tighter spreads and lower treasury rates. We are evaluating the timing of replacement financing, and it is possible we could hit the market this year. We would expect to invest any financing proceeds temporarily in bank deposits that currently earn approximately 5% and then redeem the bond at its expiration. We haven't included the impact of a potential debt transaction in our current guidance. So in conclusion, we're increasing our guidance for FFO to $7.09 to $7.15 per share. This is an $0.08 share increase from the midpoint from our prior guidance. The primary reason is the improvement of $0.05 per share of lower non-cash interest expense, $0.05 of higher termination income offset by $0.02 of lower same-property NOI from the lost rental income related to lease terminations. That completes our formal remarks. Operator, can you open up the line for questions?

Thank you, sir. Our first question comes from the line of Nick Yulico with Scotiabank. Please go ahead.

Thanks. Good morning. I appreciate the clarity regarding the occupancy guidance and leasing activity. It seems that a significant portion of this is related to timing concerning the adjustments to the occupancy and same-store guidance. Can you provide insight into how the recent pace of leasing might impact occupancy growth next year, assuming it continues? I know Owen mentioned earlier that occupancy is expected to increase over time. Do you have any preliminary thoughts on the potential impact for 2025? Thanks.

So Nick, this is Doug. I believe Owen's comment was completely correct; our occupancy is set to rise. Mike would also point out that we have a cycle, particularly with our CBD leasing, where we currently stand at a mid-90s occupancy level. These leases take time to transition from signed lease to actual occupancy. For instance, we have a 200,000 square foot space available in a specific building. Once we sign a lease for it, we may not see actual occupancy for 12 to 16 months since the tenant needs to complete their build-out. Therefore, it's challenging for us to provide a precise timeline for when our occupancy numbers will significantly increase. There's no doubt that the trend is upward. If we conclude the year with this newly adjusted in-service portfolio and maintain our availability in these life science buildings at around 87%, I believe we could reach 88% in 2025. Additionally, if we manage to deliver some spaces where the tenant can move in without modifications, we might see a substantial increase in our occupied spaces, allowing us to start recognizing revenue. These scenarios could result in a significant change, but we aren't relying on them.

Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Thanks. You guys talked about maybe pursuing some new apartment developments. I'm just curious if you sort of look at pricing today for materials and kind of current rents, what sort of yields do you get on untrended rents today? And it sounds like you might bring in JV partners, but how would you just sort of think about funding those? And what percentage of those deals would you likely keep?

Yes, Steve, it's Owen. Most of what we're pursuing involves land or other assets that we control and are working on re-entitling. There's a well-known shortage of housing, particularly affordable housing, in this country. Communities seem to be more open now to approving housing projects than they were in the past, which is beneficial for our efforts. However, as you mentioned, the challenge lies in the rising costs, not just for materials but also for capital due to increasing interest rates. To address your question, we have a significant portfolio of land that we are navigating through the entitlement and design phases, but not every project is financially viable. Our aim for individual projects is to achieve mid-6 yields or higher. Additionally, as you noted, we are looking to involve joint venture partners for these projects. For example, the Skymark project we are currently launching in Reston has us owning 20% and having an 80% joint venture partner. We hope to establish similar joint ventures for the other projects in our pipeline.

Yes. And Steve, this is Doug. I will just make the following additional comment, which is this stuff works with stick frame. So the things that we are looking at in our Suburban, I'd say, non-office likely potential properties in the Greater Waltham market as well as in Northern Virginia are the places where you will probably see us being able to start things sooner rather than later. CBD construction and CBD rents are much harder to pencil right now. And all of our teams are looking at it and studying it, but we're not sure that 2025 will be a position from an economic start on that stuff.

Thank you. And our next question comes from the line of Michael Griffin with Citi. Your line is open.

Great, thanks. Owen, I want to go back to your comments around expectation for forward earnings growth and kind of how that translates to leasing. Should we take it as the fact that there is a pivot to earnings growth improves the outlook versus maybe the magnitude of what corporate earnings growth is expected to be maybe relative to history? And then I imagine that a lot of that growth is coming from tech companies, just given the fact that they've been more hesitant to lease space as we've seen over the past couple of years, how does that maybe factor into using that metric as a good forward indicator of leasing demand?

Yes, Michael. Good morning. So we provide in our IR deck a graph of S&P 500 earnings growth versus BXP's leasing activity. There's a clear correlation. Not all of our clients are in the S&P 500, but S&P 500 earnings growth is just an indicator of, I would say, corporate health. And when companies are growing and they're healthy, they're more likely to invest higher and lease space. So I think it's real. And this year, it's proving itself once again because in '23, we had more muted leasing activity. There was no S&P 500 earnings growth. This year, the growth is stronger and our leasing is stronger. So that correlation holds. You are 100% right. I think, in terms of your comments about tech leasing. When you look at the markets today, I would say outside of tech and life science, our leasing is almost back to normal, whatever that is defined as pre-pandemic. Those are the two places that there is a gap. And I recognize some of the S&P 500 earnings growth is coming from tech companies. But again, when you look at the data, that correlation holds, S&P 500 earnings growth to leasing, and it seems like it's holding this year in 2024.

Thank you. And our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Thank you. You pushed back the stabilization dates of several development projects. How should we think about the likely lease-up period versus those new dates, and Mike, if you can remind us of your capitalization interest policy. I know in the past, you stopped capitalizing as soon as initial occupancy took place. And I just wanted to clarify that position.

So John, I think that the stabilization dates assume 85% occupied square footage of the building. So that's sort of how that works. So presumably, the leasing would be done in the 12 to 18 months prior to that date occurring and we would be building out space and generating revenue when those tenants actually moved in. And I'll let Mike talk about our capitalization method.

So the policy around capitalization is that we stop capitalizing interest and any expenses associated with assets like real estate taxes 12 months after the base building is completed. So like for 103 CityPoint and 180 CityPoint that Doug described that is going into the in-service portfolio later this year, those base buildings completed in the third and fourth quarter '23. So in the third and fourth quarter '24, the capitalized interest will stop on those assets. And so they're not fully leased. So we'll have some impact there. The 751 gateway asset completed its base building in the second quarter of '24 and 360 Park is later this year. So those will have some impact next year and then later next year for 360 Park. That's kind of the timing associated with how the capitalized interest works.

And again, unfortunately, it's just geography, but we throw all of these development assets 12 months after we've completed base building into our in-service portfolio wherever they are leased. And so they have a muting effect on our occupancy, even though they're not really apples-to-apples part of the in-service portfolio that we're describing on a sort of quarter-by-quarter basis.

Thank you. And I'm showing our next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.

Great, thanks. Good morning. Owen, conversations about the potential impacts of the election are ramping up. So I wanted to get your thoughts on whether you see any possible changes in regulations or the overall economic or political environment that would be impactful to your business under either party?

I don't think it's a significant difference for us. There are some tax issues that may arise in the next couple of years depending on which party gets elected, and that could have an effect. However, I believe state and local elections affect our day-to-day business more. Factors like real estate taxes in our city, our ability to entitle real estate, issues with commuter transit, and concerns about safety and crime in our urban areas have a greater impact on us than federal-level issues.

Thank you. And I'm showing our next question, comes from the line of Camille Bonnel from Bank of America. Please go ahead.

Good morning. I wanted to pick up on the portfolio's CapEx spend for the first half of the year, which looks to be tracking in line with 2023 levels and well below your historic average. So could you provide an update on the CapEx assumptions you have planned, given expectations for higher lease commencement?

Our maintenance capital expenditures are expected to be between $80 million and $100 million this year, which aligns with historical averages, possibly slightly lower. We have some significant repositioning capital expenditures this year, particularly at 200 Clarendon Street, where we are developing a substantial amenity center aimed at improving tenant retention and increasing rents for that property. You might have noticed a bit more repositioning capital this quarter. On the leasing side, activity was lower this quarter due to fewer leases being initiated, which made it seem somewhat irregular from one quarter to the next. I anticipate an annual run rate of $200 million to $240 million in lease transaction costs that will be included in our adjusted funds from operations calculation.

Thank you. And I'm showing our next question comes from the line of Connor Mitchell with Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my questions. Kind of following along with Mike's answer there and providing some CapEx on adding some amenities. I was just wondering, with the leasing coming back, you guys had a good quarter of leasing volume and building out the pipeline some more, do you feel it's time to really reengage in building amenity upgrades in existing buildings? Or are you still looking for a little bit more of a push from the demand side?

So this is Doug. What I would say is I'm going to ask some of the regional management teams to discuss what's going on, but we have effectively done almost every building from the sort of a reimagination, reamenitization project perspective; it's either underway or it's just about complete. And I can let Rod talk about what's going on Embarcadero Center and I'll let Peter, Jake talk about the things that we've been doing in the Greater D.C. market, and then Brian can discuss 200 Clarendon Street, but that's kind of the last of the major changes. Hilary has a few little things going on the margin in some of her buildings. But why don't we start with Rod.

Yes. As Doug mentioned, we are currently working on an amenity center at Embarcadero Center. We have always had a conference facility, but we are now decommissioning it and constructing a brand-new conference and amenity center over three Embarcadero. This center is under construction and will feature both indoor and outdoor spaces. It will be primarily available to our tenants, but will also be accessible to the general public. We are very enthusiastic about this project, which is essential for us. We are making similar improvements at our other projects because our tenants have requested them. We are excited to complete this one.

Pete?

Good morning. This is Pete Otteni in D.C. We've recently completed several major projects in the D.C. market. We just opened Wisconsin Place in Chevy Chase, Maryland to positive feedback, and we are hopeful that this will lead to increased demand and retention at the property. We're currently constructing at Sumner Square, which will be completed later this year, following leasing efforts by Jake and his team that were prompted by tenant renewals. Additionally, at 901 New York Avenue, as part of our lease renewal with Finnegan last year and early this year, we are undertaking a significant renovation of both the lobby and the amenity center on the lower level. Overall, we have mostly completed our major projects in the D.C. market, and there are no significant ones on the horizon. I'll check if Jake has anything to add.

No, nothing to add other than in terms of the repositioning that we just opened at Wisconsin Place. It's been met with quite a bit of fanfare. We've had some broker events, and there's definitely some activity and interest in that space now, which is exactly what we wanted to have happened. And at 901 New York Avenue, we will hopefully commence construction on those renovations in the first quarter of next year. And again, a lot of that information has been shared with the brokerage community and with the plus or minus 100,000 square feet of vacant space we have in that asset, we've got some really good activity on that space.

Bryan, do you want to just sort of talk about 200 Clarendon Street?

Yes. We're towards the tail end of our investments in execution. Doug mentioned at 200 Clarendon, that's a three-year process of design and inclusion with our clients in that building also tied to commitments to renewal. And that is under construction as we speak and going well. At the Prudential Center, our View Boston should be included in upgrade of amenities for our clients. View Boston has a tremendous amount of design factors that were put in by input from the clients, the major clients at the Prudential Center for event space, for meeting space, et cetera. And then we finished at 140 Kendrick in the urban edge portfolio to tremendous success, really great feedback on that high utilization. And if we do any others, it will be on the margin in, let's say, one of the possible urban edge larger assets, but it would be insignificant compared to our other investments.

Thank you. And our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead.

Hi, good morning everyone. You guys talked about how the tech and life science areas are two where leasing is not quite back to normal, whatever that might be, but that the other areas are. So just thinking of the tech and life science, I think the details are different for each of them. But like what do you think gets them back? How much downsizing is there still to see? But yes, could you talk about that a little bit more?

Sure. So Camille, this is Doug. So on the tech side, I actually don't think it's about downsizing much anymore, Caitlin; it's really at this point about whether they want to make high value-added investments in their real estate relative to their current platform of human beings and where their spaces are. So as an example, you may see some tech companies, large tech companies making incremental expansions in particular cities because that's where they think talent is. But on the margin, those companies are not growing quickly. We are starting to see dollars, right? And you're seeing this both on the life science side as well as the venture side being raised by companies that will be the next group of organizations that are doing something to create value for the world at large, the business community, and the improvement in the human condition from the perspective of life science and elongating the value of people's lives. That pipeline of money, it takes time to move into the organizations and those organizations to really create for new opportunities for growth from an office perspective. It's been going on. We're hoping that we'll start to pick up, but I'm not smart enough to know when that's going to happen, but we know it will happen. And as we think about our cities and our portfolio, we have a view that there will be more creation of new jobs and new economic activity in life science and in technology broadly thinking, than there will be in traditional financial services to asset management, professional and administrative services. So we're banking on that happening. It's just a question of when, and it's really hard to be able to sort of give you a time frame for that.

So and just to add a little bit to what Doug said, and I've mentioned this on prior calls, a lot of the large tech companies took a lot of space in '21 and '22. And I think there's a digestion process that's underway, and we can't really forecast when that completes. But again, I would reiterate Doug's point about where the relative growth will be. And then I think the other thing that's interesting that I mentioned in my opening remarks is what are the in-person work policies of the tech companies, and Salesforce just this last month or couple of months announced that starting in October, they expect almost all their employees to be in the office three to five days a week, and that's a big change in their policy, and they're one of the biggest employers in San Francisco. So I think that's going to have an impact as well.

Thank you. And our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.

Thanks for taking the question. Just two clarifications to the comments. I guess, one, you've described sort of East Coast and financial leasing picking up, particularly in New York, but maybe more broadly, how much of that is focused primarily on the premium product versus sort of the general market? In other words, is it still the divergence, or is the market actually picking up? Number one. And then number two, just in your comments on leasing and what that may mean for occupancy. Could you maybe give us more color on how much of that is actually renewal? Or how much visibility today do you have on renewals into '25? Thanks.

Yes. The challenge is clearly in the premium buildings. I provided all the statistics regarding the asking rent gap. There's a lot of speculation. As the market improves, this gap should decrease, but that hasn't occurred; it has remained flat, if not increased. However, in certain highly desirable locations, like around Grand Central Station, the market strength does extend beyond the premier segment. I believe this applies to special locations as well.

And Vikram, on your question about sort of renewal versus new. So one of the things I provided in my remarks were the amount of vacant space that we leased in each quarter and what's going forward. And so that number is coming out to somewhere around 40% of our leasing is those types of added occupancy generators, and the rest of it are renewals. And generally, when we're doing renewals, the majority of it is forward, but some of it is relatively broadly speaking sort of in the contractual expiration period of the given year. So we do have a bunch of leasing that we're doing for 2024 expirations, but the majority of that is for 2025 and 2026.

Thank you. And I show our next question comes from the line of Floris van Dijkum from Compass Point LLC. Please go ahead.

Good morning, everyone. Thank you for taking my question. Owen, you mentioned some potential activity in the office market that might be starting to increase, particularly regarding foreclosures that could begin transacting. Could you elaborate on that segment of the market? What percentage of those assets might be considered premium or ones you would target? Additionally, can you discuss the gap between buyers and sellers? Are buyers' expectations more in line with your cost of capital, or do sellers and lenders still have higher expectations?

Good morning, Floris. Yes, regarding foreclosure activity and short sales, there's been very limited movement in those areas for premier workplaces. Typically, premier assets are less leveraged and held by stronger owners. If they are leveraged, they're generally performing well. If issues arise, the owners work to resolve the loans. Thus, we've seen minimal foreclosure or distressed activity with these premier assets. That said, we have experienced a drought of deals for a couple of years, and investors need to pursue their business plans, which means they will have to make transactions eventually. I believe we are noticing increased testing of the market for certain assets. While I won't go into specifics, there are definitely a few buildings currently on the market that I consider premier, and I find it intriguing to see if the gap between bids and asks can be narrowed. Currently, there seem to be bids for premier assets, yet no owners have decided to accept them. I think the second half of this year will be telling in terms of whether any of these deals are finalized.

Thank you. And I show our next question comes from the line of Reny Pire from Green Street. Please go ahead.

Hi, guys. Thanks for taking the questions. Just curious, I appreciate your comments on the difference between premier assets versus the broader market averages, but just trying to get a sense for at what point you think you can start to see a pickup in net effective rents for you guys in a premier portfolio. Is this something that given the difference in rents between premier and non-premier that you don't think you'll start to see? Or sort of just how should we be thinking about prospects for net effective rent growth?

So I'm not entirely sure of what you want to use as your from when-to-when point. But I can tell you that net effective rents in our Park Avenue submarket of Manhattan and I'll let Hilary comment are higher today than they were six months ago, and they're higher today than they were a year ago. I can say the same thing definitively about the Back Bay submarket of Boston, but it's going to take a long time for that to occur in markets where there is a significantly larger availability rate because of the nature of having to basically steal market share from existing embedded occupancy. And Hilary, you can maybe comment on sort of transaction costs and what's going on with the rents in Manhattan because it's obviously the clearest example of what's going on from an NER perspective.

Sure. Thanks, Doug. So in the Park Avenue submarket, which I think is the easiest one to focus on in Manhattan, the vacancy rate, as noted earlier in the call, is less than 8%. And when vacancy drops below, I'd say, about 10%, folks start realizing that if they want to be in that submarket, the pickings are very, very slim, and they have to move if they want to get leases done. And that's exactly what we've seen. We first saw face rates rise and concessions remain stable, which is a little bit unusual. In past cycles, you would first see concessions bleed out of the market before face rates began rising. Nevertheless, that's what happened. Face rates have risen, concessions have remained roughly stable, and so that has caused an increase in net effective rents. Now anecdotally and very, very consistently, we're starting to see concessions move in a little bit. And so we're hopeful that, that means that net effectives will accelerate. But I would just reiterate that there isn't a lot of availability in the strongest submarkets to test that theory against. In addition to the tightness in the Park Avenue submarket and what that's done for net effectives, I would say that it has bled outward in the sense of creating more leasing velocity in adjacent submarkets, but those submarkets remain sort of full with concessions. And so I think until those markets demonstrate more tightness in occupancy, we'll see stable concessions and rents flat for the near term.

Thank you. And our next question comes from the line of Peter Abramowitz from Jefferies. Please go ahead.

Yes, thank you. Just noticed that the operating expense growth was a little bit elevated in the same-store portfolio this quarter. Just wondering if you could comment on that, anything you would call out and anything to look for in the rest of the year?

I actually think our operating expenses were less than we expected them to be. So I think maybe they increased a little bit because there's a little more utilities expenses in the second quarter and repair and maintenance in the second quarter versus the first quarter. We generally get started a little bit slower at the beginning of the year on some of those items. And I think the third quarter is generally higher than the second quarter seasonally as well because of weather conditions again utilities. And I would expect R&M to be a little bit higher too, and that's kind of in line with where our budget is, and that it would be probably a little lower in the fourth quarter.

Thank you. And I'm showing our next question comes from the line of Omotayo Okusanya from Deutsche Bank. Please go ahead.

Hi, yes. Good morning. Thanks for taking my call. A quick question on leverage. Again, our math picked up again a little bit this quarter. You do have kind of debt that matures next year, that'll probably refinance to a higher rate. Just curious how we should kind of think about the trajectory for leverage over the next six to 12 months and also, if the rising leverage is causing any issues, concerns, if I may use those words, with credit rating agencies?

So our leverage ratio is impacted by the funding of our development pipeline in a negative way. And then in a positive way when that development pipeline delivers and starts generating EBITDA, right? So every quarter, we're funding developments that aren't going to be completing and delivering for a year or two or three. We have two major developments in Cambridge that are going to be delivering, one, 300 Binney Street delivering in the first quarter of next year. And the other one is 290 Binney Street that is 3x the size of that one, that's going to be delivering in 2026. Both of those are fully leased. Once they stabilize, it will help to reduce the leverage. The other developments, as previously noted, have been delayed somewhat, but once they stabilize, they will also aid in moderating the leverage. This will be significant. When we consider leverage, we are looking at the pro forma leverage for these investments, which is likely to decrease our leverage by approximately one full turn, bringing it back down to the range of 6.5x to 7.5x, which is our typical target. While we are currently above that range, we expect to remain so for the next few quarters as we work through this pipeline.

Thank you. And our next question comes from the line of Upal Rana from KeyBanc Capital Markets. Please go ahead.

Great, thank you. Good morning. Could you provide us with more details on the terminations? It seems one of them was from 1100 Winter. What about the others? Also, any information regarding the timing of these would be very helpful. Thank you.

Not all of the terminations have occurred. The one you mentioned was in the media, and that was a complete termination. The square footage reported in the media was incorrect; however, it only affects 20,000 square feet of our occupancy in the short term. The other two include a tenant that we are downsizing and relocating within our portfolio, which means they will continue to stay with us. Additionally, we have another tenant that is four to five times their size who will be moving in and taking their space, along with other vacant spaces in that building. That deal is not signed yet, but it's something we are currently working on and feel optimistic about. And then the last one is a tenant at the Prudential Center, where we have a tenant whose business plan has changed. They've been looking to vacate their space, and we have somebody else that wants it. So that tenant is going to be coming in. But the exiting tenant will be leaving in either the third or maybe the beginning of the fourth quarter, probably the third quarter, but the new tenants are not going to be coming until the first quarter of '25. And so that's really the situation we're dealing with on these is the exiting tenants are leaving in 2024, and the new tenants aren't coming until 2025. We also had a similar situation in the New York City market at 601 Lex, where we have an expanding tenant that's looking for space, and we found somebody that would exit. And so that tenant has exited, but the expanding tenant will not be going in until mid-'25. So it's just an example; if you add up all that square footage, it's 100,000 square feet of occupancy that's hurting us this year, where it's really a good thing because we're bringing in a client that's a growing client who wants to sign a long-term lease with a client whose closer to their expiration date, maybe their plans have changed.

Thank you. And our final question comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead.

Hey, just a quick one for me. Look, if I think about this year on the same-store NOI front, some expirations that you guys have been able to backfill quite nicely, but still sort of end up being a headwind to the same-store NOI. So as we roll into next year, maybe can you talk about whether it's commencements or sort of larger explorations, sort of those two aspects, how should we think about as you're rolling into next year sort of potential headwind tailwinds, either from commencements or expiration? Thanks so much.

This year, same-store NOI is slightly down because occupancy is a bit lower than last year. We have somewhat mitigated this with rent growth, as rents are higher than they were last year. However, occupancy has a more significant effect than the increase or decrease in a lease by 5% or 10%. As Doug mentioned regarding occupancy, we don't have a precise timeline, but we expect to see more growth in occupancy next year. If we achieve occupancy growth, it will positively impact the same-store results.

Thank you. And this concludes our Q&A session. At this time, I would like to turn it back over to Owen Thomas for closing remarks.

We have no more closing remarks, and I would like to thank everybody for their interest in BXP. Have a good rest of the day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.