BXP, Inc. 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome to BXP's third quarter 2026 earnings conference call.

The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will 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, our regional management teams will also be available to address any questions. We ask that those of you participating in the Q&A portion of the call to please limit yourself to one and only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. As the big three are all reporting today, Alphabet, Microsoft, and of course, BXP, and we have the Fed call, so let's get started.

Owen Thomas will now begin his formal remarks.

Well, thank you, Helen, and good morning to all of you. BXP delivered another very strong quarter, both operationally and financially. Third quarter FFO per share exceeded both our guidance and consensus estimates by $0.08. We also raised the midpoint of our 2026 FFO per share guidance by $0.05 and now expect our FFO per share to grow more than 3% in 2026. We are delivering on the strategic plan we laid out at last year's investor conference and outperforming the three primary goals we articulated: leasing space to grow occupancy and FFO, selling assets to optimize our portfolio, raise capital for developments, and reduce leverage, and advancing developments that enhance portfolio quality and support future FFO growth. Leasing market conditions are robust across most of our portfolio and continue to improve.

We are growing rents and achieving record rental rates in New York City, the Back Bay of Boston, Reston Town Center, and for new development in the CBD of Washington, D.C. San Francisco is improving rapidly, and leasing activity in Seattle is gaining momentum. There are three primary reasons for these strong market conditions. First, investment in AI and associated infrastructure, when measured versus historical new technology CapEx cycles, is very material today and could become unprecedented. This investment activity is driving both U.S. GDP and corporate earnings growth, which creates strong leasing demand from not only AI companies, but also from financial, legal, and business service companies that are growing headcount to support the high levels of AI investment. Second, due to elevated construction costs and competition for capital from AI infrastructure investment, development of new offices in the U.S. is at record low levels.

Across BXP's six markets, office construction is limited to a handful of buildings planned in New York City and the new projects we are developing in Washington, D.C. Lastly, client demand is concentrated primarily in premier workplaces, which continue to materially outperform the broader office markets. As a reminder, premier workplaces represent roughly the top 14% of space and 8% of buildings in the four CBD markets where BXP has a major presence. Direct vacancy for premier workplaces in these four markets is 8% versus 13% for the broader office market, while asking rents for premier workplaces command a premium of more than 60% over the non-premier buildings. Low vacancy, strong demand, and minimal new supply is a uniquely positive combination of market circumstances and could not provide a better backdrop for BXP to grow rents and occupancy in its premier workplace portfolio in the quarters ahead.

The capital markets environment for real estate has been slower to reflect the vibrancy of the underlying property markets. An obvious issue is the 30-basis point rise in the 10-year U.S. Treasury over the last couple of months. Likely culprits for this increase are inflationary pressure from tariffs and energy prices, substantial AI-related capital spending, and upward pressure on term premium associated with the expanding U.S. federal budget deficit. A less obvious issue is the availability of equity for commercial real estate. Although debt capital continues to be readily available at attractive spreads but higher costs, competition for equity capital with the massive AI investment spend is impacting commercial real estate fund flows, including REIT share prices and capital raising, as well as fundraising, transaction volume, and pricing in the private real estate markets.

Office transaction volume in the private markets was $19.4 billion in the third quarter, which was up materially from both the second quarter and the third quarter of 2025, but was skewed by many small deals and two large medical office portfolio trades. Higher interest rates will likely reprice current assets in the market and may weigh on transaction volumes in future quarters. Though there continue to be very few premier workplace assets trading, there were a couple of transactions in the quarter with relevance to BXP's portfolio. A 49% interest in 1301 Avenue of the Americas, located in Midtown New York City, is under agreement to sell at a valuation of approximately $1.3 billion, which represents pricing of $740 a foot at an initial cap rate of 7.3%.

This asset comprises 1.75 million square feet, is fully leased, and is being sold by an opportunistic buyer to a domestic advisor. Second, a leasehold interest in 100 Altair, located in downtown Sunnyvale, California, was sold for $219 million, which represents pricing of over $1,200 a square foot and a 6.5% initial cap rate. This 180,000 square foot building is fully leased to Databricks on a long-term basis and was sold by the building's lender to an advisor. Turning to the execution of BXP's business plan, our first and most impactful goal is to lease space and improve portfolio occupancy. We had another strong quarter completing leasing of 1.2 million square feet and over 4 million square feet year to date. Our in-service portfolio occupancy rose materially and for the fourth straight quarter to 89.4%, which is above the 89% occupancy forecast we provided for year-end 2026.

This outcome reflects strong execution by our leasing teams, the quality of our portfolio, and the very healthy leasing markets previously described. Our second priority is to raise capital and optimize our portfolio through asset sales. At our investor conference, we communicated an objective to generate an aggregate $1.9 billion in net sale proceeds by 2028 from the sale of land, residential, and non-strategic office assets. We are well ahead of schedule as we've raised over $520 million in total net sale proceeds this year and $1.37 billion since our investor conference. Including four assets we have under contract for sale, total dispositions could reach approximately $1.45 billion. In addition, we have agreed terms and are negotiating a contract to sell Times Square Tower in New York City. A significant sale given our 55% unleveraged interest in this 1.2 million square foot building.

The buyer needs to secure debt and equity financing, and if completed, the sale would occur in the first quarter of 2027 and enable us to achieve our 2028 disposition target well ahead of schedule. The two operating property sales we completed in the third quarter were stabilized, older, non-strategic office assets in Washington, D.C. We sold Sumner Square, a 217,000 square foot, three building historic redevelopment that is 93% leased and subject to a ground lease for $63 million or $300 a square foot and a 9.9% cap rate. We also sold 1330 Connecticut Avenue, a 254,000 square foot building that is 83% leased. After extending the anchor tenant's lease, we achieved a gross sale price of $102 million or $400 a square foot and an 8% cap rate. Although these sales resulted in modest dilution, they raised capital and increased the quality of our remaining Washington, D.C. portfolio.

We are very pleased that we accelerated our $1.9 billion disposition program as the favorable pricing we received over the past year for many sale transactions would be difficult to replicate in today's higher interest rate environment. BXP's third priority is to grow FFO through new developments. Given current market conditions, we are proceeding selectively with pre-leased office developments and more actively for multifamily on land we control with an equity partner. BXP's largest development underway is 343 Madison, our premier workplace tower in New York City with direct access to Grand Central Terminal. This past quarter, we signed a two-floor lease with a business services company in the upper half of the podium level, bringing the building to 56% leased. Further, we are in lease negotiations with a five-floor client for the bottom floors of the podium, which if completed, would bring us to 70% leased.