Owen Thomas - Chief Executive Officer Doug Linde - President Mike LaBelle - Chief Financial Officer Ray Ritchey - Senior Executive, Vice President Bryan Koop - Executive Vice President, Boston Region John Powers - Executive Vice President, New York Region Ray Ritchey - Senior Executive Vice President Sara Buda - VP of Investor Relations

Good morning, and welcome to Boston Properties, First Quarter 2021 Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At this time, I’d like to turn the conference over to Ms. Sara Buda, VP of Investor Relations for Boston Properties. Please go ahead.

Thank you. Good morning, and welcome to Boston Properties, first quarter 2021 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’d 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. And now I’d like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sarah, and good morning everyone. The BXP team is joining you today from our offices all over the country, where we are beginning to see renewed signs of life as our cities reopen with increasing activity on the street, in shops and restaurants, on public transportation and yes, even in office buildings where building census is picking up and tour activities accelerated. U.S. GDP is growing at 4.3%. Over 1.6 million jobs were created in the first quarter. Weekly jobless claims are in decline and unemployment has dropped to 6%, only 2.5 percentage point above pre-pandemic levels of February last year. Professional service employment has remained healthy, which is important given our tenancy. U.S. retail sales surged 9.8% in March and air travel as measured by TSA Checkpoint is up 10x over a year ago, though still only 50% of pre-pandemic level. The U.S. and global economic recoveries continue to follow the course of the virus and vaccination rollout. While new COVID-19 cases have remained sticky at around 60,000 per day since late February, all data including 3 million daily vaccinations, 43% of Americans having received at least one shot and the J&J vaccine reinstatement suggest the trajectory for a highly vaccinated population and fewer new COVID infections remain positive. The U.S. economy will likely continue to surge given the financial health of most industry sectors, the significant federal fiscal stimulus provided to individuals and small business, accommodative monetary policy and pent-up consumption sparked by the pandemic reopening. This recovery is starting to bring positive momentum to the office market and BXP's result. For the buildings we can track, our census last week was depending on the city, at or above the post pandemic peak established last October. In the first quarter we completed 592,000 square feet of…

Thanks Owen. Good morning everybody. I'm going to try and give you my best shot at it, describing the operating environment that we are seeing in our portfolio as we sit here in late April. So as Owen said, the office tenants are deep into planning for their return to the physical in-person work environment as we approach the back half of 2021, and while there are lots of announcements as Owen said of relaunches, and our building census is up, we are still at pretty low level, and I think you know you can see that most clearly from a financial perspective when you look at our monthly or daily parking, which was basically flat in the first quarter to where it was in the fourth quarter of 2020. Although you know just yesterday, as an example, we had a our meeting for our California Parking and we had 67 requests for additional monthly spaces, 42 of which are hard and to give you a perspective, we actually locked more than half of our monthly parking, over 800 monthly spaces in the market area center [ph], so things are picking up. When we spoke to you late in January, we said that the first half of ‘21 was going to have a low level of market leasing activity as defined by executed leases and that statement still holds. The reports that are published by the commercial brokerage organizations describing broad market conditions and all the calls that are sponsored by the analysts that follow our sector really didn't have any surprises in them. Leasing volumes are up at their historical pace, there was modestly more sublet space which was added to the market and that translated into some negative absorption and increased availability, no surprised, no shocks. Last quarter,…

Great, thanks Doug. Great summary. Good morning everybody. I'm going to start my comments this morning with little pieces on our activity in the debt capital markets. We had a very busy quarter and it impacted our results. As we guided last quarter, we redeemed $850 million of our expiring unsecured bonds that had 408% coupon using available cash. In addition to that, and not part of our prior guidance, we issued another $850 million of new 11 year unsecured green bonds at an attractive coupon of 2.55%. The proceeds were used to repay our $500 million unsecured term loan that was due to expire next year, and we redeemed at par an expensive $200 million 5.25% preferred equity security. We incurred non-cash charges during the quarter of approximately $7 million or $0.04 per share related to writing-off unamortized financing costs. Our next bond expiration is not until early 2023 when we have $1 billion expiring at an above market interest rate of 3.95%. In advance of that, in early ’22, we have a $626 million mortgage expiring on 601 Lexington Avenue in New York City. This loan also carries an above market interest rate of 4.75%. So turning to our earnings results for the quarter, for the first quarter we reported FFO of $1.56 per share; that was $0.001 above the mid-point of our guidance range. The variances to our guidance were comprised of $0.04 per share of higher NOI from the portfolio and a $0.001 per share of higher fee income, partially offset by the $0.04 per share non-cash charge related to our refinancing activity. The portfolio NOI outperformance included $0.02 per share of lower operating expenses during the quarter, much of which will be incurred later in the year. And on the revenue side, we collected delinquent…

Thanks Mike. Before we take questions, there is just a last couple of things here I'd like to mention. Last week on Earth Day we published our 2020 ESG report, where we made several important commitments, and those include – we set a goal to achieve carbon neutral operations by 2025. In addition BXPs had previously set a carbon emissions reduction goal in line with the most ambitious designation available under the science based targets initiatives program. In 2020 BXP was one of six North American real estate companies with this distinction and the only North American office company. We also established a new board level sustainability committee, to among other things increase the board oversight of and input for our sustainability issues. And lastly, we launched an internal diversity and inclusion committee last year with the mission of pursuing greater diversity among our workforce and vendors, as well as new programs supporting diversity and fairness in our community. BXP’s proud of its consistent recognition as an industry leader in sustainability and ESG, an area increasingly important to our clients, our community, capital providers and employees. And then lastly there's one important milestone that I want to mention. This will be Peter Johnston’s last earnings call as he's retiring from Boston Properties next month after 33 years of service. Peter’s been an outstanding leader in our Washington DC business and he will be greatly missed by all of you, by all of us. Thank you very much Peter. Operator, we're ready for questions.

[Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Piper Sandler.

Hey, good morning. Mike, I guess just going to the guidance question, you know in the last quarter you talked about sort of an unofficial 652 when you took sort of the run rate and then made the changes for the DNA and we’re very excited with what you guys have planned. That would suggest then 2010’s [ph] pick up with the second half of this year, but you just outlined about $0.08 of negative that is incremental to that. So is that 652 sort of now 645-ish type number or is there some other things that may impact where we should be thinking about where this year will end up?

So, I mean that was the reason I described that $0.08 was because of that fact, because these are new things that happened this quarter that we didn't project in our prior guidance, which was not the pay out of the larger bond that we have, but the new bond that we did and then the sale from these assets. So yes, I want to describe those FFO drops for later this year. Now, we’ve given some guidance for second quarter and it does show that we will have pick up later in the year, and I think that if you look at Q2 you're going to – we expect to have a further drop in occupancy in Q2, and if you look at our rollover schedule, about 60% of the main rollover for the year is sitting in just Q2. So Q3 and Q4 have very light rollover exposure, so we do expect to have some pick up in occupancy and revenue in the back half of the year from that leasing activity, and we would expect occupancy by the end of the year to be somewhere between 88% and 89%. And then as I also said, we had 460,000 square feet signed that this was going to occupy this year, so that’s part of that number. So the improvement in the back half of the year is coming from a combination of some occupancy improvement from Q2 through Q4, and we also expect our parking to start to improve. As Doug mentioned it, we're starting to see some green shoots with the parking, they'll be helpful. And then we have a couple of the development deliveries that I talked about, you know 100 Causeway and that sort of revenue provided later in the year. So those are the things that would pick-up in the back half.

Okay. So in that Mike, the negative $0.08 that you mentioned right now, that you're hoping for a positive recovery on the ancillary deposits [ph], etc. It sounds like still we're sort of probably in an upper 640’s, maybe 650. It’s sort of mentally how the street could be thinking about it.

Yeah, I think the street should be thinking about it as if we’re – you know we feel good about the ability to kind of improve in the second half of the year, but there are already sales that we're going to have. So it's going to be down from what I told you last quarter.

Okay. The second question is – oh! And you didn't mention the MTA site in your prepared remarks. Certainly there seems to be a lot more interest around Grand Central, especially with the coming of the inside access and the ease of commuting. You got the Hyatt project, whatever we know there as the 350 Park, then obviously your site numbers got to like probably one or two others that people try to cancel. Maybe if you could just give an update on how in your tenant discussions, you know how anchor tenants that you guys will be after, are thinking about taking – potentially anchoring one of those projects.

John Powers, are you on the line?

I’m on the line Owen. First, let me say we're very excited about the NGA site, it’s a terrific site. It's a better site now than it was a couple of years ago and it'll be a better sight in four or five years than it is now with JP Morgan finishing there. We're entering a new loop, so we have to go through the process. We don't know how that will come out. We have to go through the whole community board, etc., to find out how big the building will be. We’ve drawn it a certain way and we're very excited to present it. This is going to be quite a few years out from now, so we're not talking to any space.

Yeah, I didn't mention Alex, just because of the time frame, but we're very excited about this site and it’s just the Grand Central hearing that we think is improving.

Okay, great, thank you.

Yup.

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

Thanks. Good morning everyone. So I appreciate all the commentary there on the rents for the leases signed in the quarter. I just wanted to see if you could give us a feel for what the blended gross rent number was, you know the increase for the quarter on the signed, not executed leases. And then also maybe if you could just give us a feel for how that number would be different on a net effective basis and so continuing here is seeing the face rents are down less than net effective rents.

So Nick, I don't have that information at my rental disposal here. The numbers are obviously up. I mean they were something that I described that were up 5% and there were some that I described that were up 50%. This quarter there happened to be a lot more leases that we executed that were up 50% that 5%, so the number's going to spew up. With regards to net effective, none of the transactions that we have been working on have had much in the way of significant changes in either free rent or TI’s. I would say we've been building more space, but we were building more space pre-COVID, so there hasn't been a pickup in the cost of space, particularly on the TI side that we've seen yet, which is obviously good. So I don't think that has really impacted where our results are showing on a relative basis from sort of nine months ago to where we are today.

Okay, thanks. My second question is on the topic of unassigned seating plans. We have seen some examples on your portfolio, but in New York City market we’ve got some tenants moving now increasingly to unassigned seating plans or space per desk maybe going up, right, but space per employee is going down, because we’ll not be having – pretty sure we – that are best for our employees. And so I guess I'm wondering, you know and this can be seen not only for a mature firm kind of downsizing, but also for a smaller tech firm who is expanding and are expanding as it would have been in the past, but it’s in the wrong side of the seating. So I guess I'm wondering, you know in your portfolio if you're seeing any examples of this, you know what your thoughts are on this topic. Thank you.

So, let me just give a quick comment on that. So first of all, I just got a whole host of expanding tenants in our portfolio and particularly on the smaller side, they are not making any changes to the way they are utilizing their space. Most of those smaller tenants are in the financial asset management professional services sector and they are building our perimeter offices in to our larger workstation areas, and everyone is getting the workstation and nobody's sharing anything, okay. So there's a significant component of the market in terms of the transaction volume that is in that sector. The rest of the larger tenants have – I think there is a whole spectrum of results that you're going to see. We had a tenant that took 75,000 square feet of space in Waltham and provided a – put a press release out with us you know a couple weeks ago and they basically said, we're obviously not putting a workstation in for every single person in our organization who lives in the Boston area, and we're anticipating that there are going to be some people who are working from home. I have a daughter who is working for a tech company in New York City and their mandate was, if you're not prepared to work X number of days per week, you're not getting a permanent workstation and you're going to have to work on the hoteling side, right. Owen had conversation and he'll describe them with some of the larger technology companies across the country and they have a very different perspective.

Yeah, I would just add to what Doug said. You know a lot of this where employers are trying to accommodate their workforce preferences and certainly that includes flexibility, but if you look at some of the surveys that were done, most notably by Gendler [ph] 90% of those surveys said they wanted a fixed workstations, and I think around – and I know around two-thirds of those surveys said they would not trade a fixed workstation for a custom work benefit, so. And then you've got the COVID issues you know, which makes sharing a desk more uncomfortable. So look, I can't tell you Nick that we’re not going to see some of that, but I'm not sure it's going to be a torrent of activity.

Thank you.

Can I just make a comment here? John Powers.

Yeah.

I've heard a lot about this and in a lot of discussions about this, but I can tell you, in our portfolio in New York, not a single tenant has pulled a building permit to make any changes to their space related to COVID and we have almost 1 million square feet under construction during COVID and there was not one change order made by any of those tenants to adjust his plans pre-COVID while they were under construction. So I think this is a lot of wait and see. It takes a lot of capital to make the adjustments that I hear people talking about.

Thank you.

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

Thanks, good morning. Mike, I just wanted to try and piece together a couple of things you talked about when you're going through guidance and through the bridge from 1Q to 2Q. You guys talked about occupancy being down, but not all of that was sort of cash paying occupancy. So I just wanted to maybe try and figure out you know what’s the loss revenue moving into Q2 and then you talked about rents being collected, kind of background being collected in Q1 for 2020 rent. It sounds like that might have been a one-time pick up, so I was just trying to think about those two as we kind of move into the next quarter.

I agree with you Steve that some of the retail rent that we got in the first quarter was more one-time. We had both clients paying us for delinquency and also we had some termination income in the first quarter that we don't expect a repeat. And our termination income was about $4.5 million for the quarter, so that's more than what it normally would be. So you know I think that about half of the occupancy that we lost in the first quarter with non-rent paying last year, but half of it was, and then again we expect to lease some more occupancy this quarter, because we have some rollover coming. So I mean I think that, you know if you think about the amount of kind of lower portfolio NOI from that. It's you know probably $0.03 or $0.04 quarter-to-quarter and then there's a couple of cents of the termination income, and so that's a negative. And then you've got you know the positives for the quarter are – obviously are G&A seasonal. You know the preferred dividend is only about $0.001 and you know the financing charges were $0.04. So overall we’re sequentially up, and then again I think the second quarter should be the bottom and that's where our kind of exposure to rollover really, really slows for the last two quarters and we've got signed leases coming on and we do have some renewals and some other activity we’re working on. So honestly a lot of activity that Doug talked about that we’re working on. This is for 2022 at this point.

Got it, thanks. And then I know it's a little bit far out, but if you think about the observatory, how did you guys think about sort of the underwriting for that as you thought about visitors and the expense load. Obviously we had some exposure and understanding of observatories from one of your other public peers, but how did you guys think about you know kind of the revenue and the expense structure of that you know?

Go ahead, Doug.

So Steve, the answer to your question is, at this point it's an estimate, right. It's a projection. We obviously don't have a observatory experience in Boston that we can point to, but we do have three or four in New York, and we took what I would say is a very conservative view on a number of visitors that we would get relative to the kind of visitation that is going on in New York City, and we have a price point that's lower than the price point in New York City, and we have a long ramp up. And we look at that relative to the visitors that were going to destinations like Duck Tours, The Freedom Trail, The New England Aquarium, The Science Museum, The Museum of Fine Arts and we kind of triangulated into a range of where we thought we would start and where we might get to, and obviously you know there's an expense load that we will be able to ramp up or down depending upon volumes, and so we don't expect to be cash flow positive in the first six months of this thing, but as time goes on we think this is going to be a very productive opportunity and it's going to be a unique offering in the city of Boston, and we have the capacity to put a lot of people up there and push a lot of people through and we're creating a dedicated entry. And the thing that I think people will experience that they have not experienced in the Boston market is, you have a 360 degree outdoor experience at the top of the Prudential Tower, looking out to the harbor, you got Fenway Park, to the Back Bay in Cambridge, and it’s an amazing place. I mean you're going to be outside 365 days a year as long as you don't mind cold weather in certain months.

This is Bryan Koop. Some additional things that went into it were service providers that are acting as consultants for us, operate several observatories throughout the world, so we use their advice on that. We also had historic numbers from our old observatory, plus we had historic numbers from the Hancock Tower, which at one time many years ago, there was two observatories in the city of Boston. We had numbers from what those two observatories were doing at the same time. And in addition we threw in a mix of what we know our daily traffic counts at peak times at the Prudential Center were and what we may be able to capture there as well. But I may add that the city of Boston, we met with them just this last week and took the mayor through and state officials and we're really excited about the support they want to provide us on this.

I guess just as a quick follow-up, do you guys expect this to be kind of a double digit return on capital or maybe not quite that good?

I would hope that it starts out you know in the low single digits and over a couple of years gets into the double digit thing and it goes from there, and obviously we're going to have to make some capital investment if we get the traffic that we hope we're going to get, but it could be a substantial opportunity for revenue and net income for the company.

Got it, thanks. That’s it from me.

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

Just in the conversations with you and other landlords and the brokers, there's this commentary that tour activities what you have get you know leases, haven't actually been signed and occupancies have dipped up. Is that tour activity tenants that are potentially exploring, just changing their space within the market and it's just that – it's kind of like you going to an open house in your street, even if you're not thinking about moving your personal home and that's why tour activity is up, or is there sort of a more fruitful result of that tour activity and it just hasn't come yet?

So I just wanted – I wanted to sort of ground you in the following way, which is when we were talking to you in January, I think it was January 30, we were pretty heavily into the last COVID wave, okay. So we are 60 days from that and we are probably 40 days away, you know out of sort of the worst of it relative to how much viruses are around. It takes time for leases to get signed, right, there’s a process. So that's why I said there should be no – shouldn't have been any expectation of the activity in the first quarter. It was higher than what you saw relative to what we published by the brokerage connect houses, because there just wasn't time to do things. We are seeing a lot of activity now that I tried to describe was significant amounts of expanding tenants which grew on the smaller side, and then tenants that are looking to change their facilities and upgrade their premises. Now it is absolutely true that there's musical chairs associated with those kinds of demand generators, right. Somebody's in an older building with 50,000 square feet and they move into a new building, it might be 45,000 square feet, it might be 55,000 square feet. There is no question that there is not a lot of positive incremental growth overall in the market today, but you got to start at some place and we’re starting with tours and we're starting with lease expirations and we’re starting with incremental smaller growth and smaller tenants. And as I said, we're seeing a few signs, particularly in California and some of the other West Coast markets of large scale demand from some of the large, what we refer to as tech titans.…

Great, I appreciate that. And then Owen, I know you said you’d give us more details on the southern ventures in about a month, but thinking about the acquisition for the election environment more general, the assets that have had transacted have been at which valuations and sort of lockdown leases for a long amount of time. That's sort of not what I think you would want to buy, but maybe those sovereigns would buy. So in those conversations that you're having with them, is this going to be a targeting value-add type stock. Is it more the types of assets that we have been trading and how do you tie sort of the valuation environment right now between those two pools together with forming a JV right now, yeah.

Manny, this – we're not going to be targeting core asset at low cap rates, that's not our goal. We're a property company; we want to use our real estate skills to create value. We're going to eventually going to be targeting assets that need to be re-imagined, repositioned or simply leased up, and we're going to be a major co-investor and these two sovereign groups, like our plans and also forecasts that there will be opportunities. As I've mentioned in previous quarters, it is true that most of the deal flow, most of the things that are happening are in the more core like assets, because there's liquidity for those, there's not a discussion about lease up and market rents and those types of things and the bid and the ask can merge. I will say, I do think our pipeline of value added deals is growing. We are looking at more of these deals today. You know COVID has been going on now for over a year. There are a lot of owners of these kinds of assets that just want to sell for whatever reason and we're seeing it, more of it come to the market. So you know we'll see if the bid they are asking will narrow on those deals, but our pipeline is definitely elevated in the last month or two.

And oh! Just to clarify, the size of this venture would be $1 billion of equity total and that has levers too or it’s going to be too big of an equity total and then we haven’t talked about that.

Yeah, it's not a committed fund. The $1 billion is just the capital that the investors have set aside for the venture and I do think it's anticipated that we’ll carry probably 50% leverage at the property level on whatever we buy, but it will be investment by investment and if it goes well, it could be bigger, but these are just the initial allocation to capital for the venture.

Great! Thanks very much.

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

Great! Thank you and good morning. So, I wanted to get your latest thoughts and co-working and flexible space providers across the markets, you know as tenants start to think about coming back or their needs going forward. How do you think those types of users will or those types of space providers will fit into their plans and has that changed?

I think Jamie, I think there will be demand for shared workspace product going forward. I think there'll be individual demand, I think there'll be small company demand, and I think large occupiers as well will want to procure a small percentage of their space on a flexible basis and will pay a premium for it. There's plenty of this product out in the market created by WeWork and many of the other companies as well as a landlords like ourselves, and you know I think the first step will be the retelling of that space, but I do think that demand will come back.

You realize Jamie that there’s a, I'd say flexible operator 2.0 is happening, which is JLL is working with IGW, Newmark is working with another group, you know Nootel, CBRE or CNW and Hannah have their arrangement with industrious. So there seems to be a change in the offering composition relative to it being more of a service as opposed to a transaction where someone is trying to arbitrage retail and wholesale rents, where you're taking the space of wholesale in theory and leasing it to retail. So there is going to be some change, and they are presumably the landlords that have gotten space, that will work with these operators to figure out better ways to market and to achieve occupancy. I think that the really interesting question, and I wish we had the answer to it is, how profitable can it be and what are the economics of the transactions that are being signed by the tenants and obviously the densities are going to change to some degree because of the nature of how tight those many of those operators were packing people in, and will the users pay the premium in order to give the operators the margin necessary to make it work, and I think that – you know we’ll see what happens.

Hey Doug, to that point, this is Ray. Bryan hosted a property management seminar with our four top tenants; our professional services, law firms, tech, and he posed the question, does co-working play a role in your future space needs? Every single one said affirmatively that co-working does have a role in meeting their space needs in future and that’s directly from the user group.

Thank you. So do you think from a BXP perspective, those types of tenants grow on the portfolio or do you think maybe you just have to have more flexibility structures to compete for tenants, you know larger tenants that might want to…

Well, I think – I would just say the following. I think what you are hearing from us is we expect the demand increase. I think the other thing that you guided, you got a lot of the space that’s not full at the moment, because its flexible. So a lot of the tenants left and the occupancy is quite low. So the first step is just going to be refilling all of the inventory that's out in the market that either landlords own or the flexible operators own themselves. I think the interesting question which Doug was touching on is okay, once all that's full, then what happens? Are the economics of this business such that it makes sense to do the expensive build-out and to build more of it, and I think that's going to be the question that’s going to need to be answered in the years ahead as once all of these existing supply gets filled up.

And OT – this is Ray again. We are seeing a fight to quality on the co-working which is really great for our portfolio, because in the vast majority of our markets, the best co-working experiences in our Boston properties building. So there may maybe more -- less attractive co-working things that go by the wayside, and they're going to abrogate in the best options for their clients and again that's good for us.

Alright, great, thanks for the color. And then you had mentioned both Dock 72 and Platform 16 as seeing a little bit more interest. I know platform 16 is obviously larger, you know longer out, but can you talk more about what's changed for those assets or how you are thinking about activity?

There are more tenants who are asking for proposals, because there are, people have gotten out of hibernation as Owen and I talked about it earlier today. There is just more overall demand and look we're negotiating the lease at Dock 72. We weren’t negotiating a lease 90 days ago and 180 days we weren’t talking to anybody. So there is just a natural progression, and look, it’s a fabulous product that you know the team in New York built, and you know its ready available and we have to get people to start walking through it looking for space, and that's what's going on. And again, I think you're seeing people come out of hibernation relative to large tech demand as well. We saw some of it that was going on during COVID. So it never stopped, but it I think that we are going to see some acceleration of that across the country, and hopefully it will fall into some of the markets that we operate in.

So would you say it’s more, the fact that it’s closer to where people live, it's not necessarily like a down town or like a mid-town Manhattan asset, and there is a change in what people want or no, this is just because the building is finally built, people can tour it, interest is rising.

John, you want to describe the locational interest from the demand that we have?

Yes, well I think it's more the latter of what you said, that as Dough said, people are back. As we got caught with that building with COVID and that we had not finished the amenities prior to COVID and the amenities are very, very big part of the building if you haven't seen it or you should really come out. And now it's done and it's showing really well. The tenant, one tenant is from Manhattan and another – two are from Manhattan that Doug mentioned earlier with the lease out and paper being traded with the other two – two from Manhattan and one from Brooklyn. So it's really the buildings, as Doug said, the building looks great and people are around looking at things, knowing that they wanted to go back to the office and wanted to start the process.

Okay, thank you.

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

Hi everybody. Thank you. From our data, this is probably the second softest leasing quarter in over a decade on volumes. But when we kind of mix in concessions it clearly looks to be the weakest, which is understandable. So the question is, are you starting to reduce TI's, and free rent as the reopening momentum gained steam or are concessions at elevated levels still required to get deals done in this environment?

So Derek, again I just want to ground you right. There was very little activity in the first quarter because of the nature of what was going on with the pandemic, and there's a lot more activity now. The real-estate transaction leasing market is a relatively long sales cycle and I don’t think we are going to see dramatic changes in the economics in our market places over the next couple of quarters. If you ask me, will transaction volume and will concessions start to reduce in 2022? I think the answer is sure, absolutely I feel very confident that that's going to happen, but I think the next couple of quarters it's going to be, you know we are going to be leading into the recovery of leasing volume and as I said earlier, I think there is going to be not much in the way of positive absorption overall from new tenant growth, but there will be a positive absorption from sublet reduction. And so I think, there is going to be concessionary pressure in certain kinds of buildings, in certain kind of markets. I will tell you that you could have a building in a market like New York or San Francisco or Boston where rents are holding and concessions are not going up. And there may be two buildings next door they have a lot of available space and they're being very aggressive about how they are positioning their space. So it's going to be very, very different from building-to-building and from submarket-to-submarket. But if you wanted to have a broad general comment about overall levels across the country, across major markets, I think you're going to see a continuation of these conditions for a period of time.

Okay. That makes sense. So how would you describe the pipeline today versus pre-COVID and I guess more importantly versus pre-COVID, you know maybe versus 3Q or 4Q of 2020 and you know what levels are we at today versus prior?

So, I'm not sure what you mean by pipeline, but what I said earlier in my comments was that in New York City we have more tours that occurred in the first three months in X number of days of April in 2021 than we had in 2020, and more importantly than we had in 2019, okay, that’s our portfolio. I don't think obviously you can make that same characterization for the market in general. We have a lot of activity going on right now across the Boston Property portfolio and it feels not too dissimilar from what it would have been in 2019 with one exception. That exception is we are not negotiating any large leases with new office tenants on new buildings, okay, and that's a meaningful different right, that was a big driver of our volumes over the last few years as the team you know led by Ray in Washington DC and the team led by Bryan in Boston, you know they did leases with Verizon and with Litos and with Fannie Mae and with Marriott, right. We are seeing any of the office new developments in our portfolio at the moment. So I’d say that’s the one substantive change between where we are today and where we are pre-COVID.

Thanks Doug.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Good afternoon. Thanks for taking the question. Maybe just first one on, I think you made a comment in San Francisco, maybe within the region, you're seeing sort of half the tenants looking for expanding or half the tenants contracting. Could you maybe just give it a bit more color on those comments? And in the past just related to that you compared and contrasted or I should say ranked markets in terms of rent growth expectations. Could you maybe just compare and contrast San Francisco versus New York?

So, you know as I said, you know in our portfolio with regard to the transaction we are working on, we're seeing about half of the tenants growing and half of the tenants you know shrinking a little bit, I mean and these are again, these are all deals that are under our floor, that's what we're working on. So these are modest increases up or down. There is no rental rate growth in San Francisco and there is no rental rate growth in New York in either market today. I would tell you that the condition in New York relatively speaking are a little bit stronger than they are in San Francisco, because again I hate to be a broken record, San Francisco is behind New York in its relative pandemic recovery. New York has been up and running, people being able to go to work, people started to do things for a nine-plus months and San Francisco really didn't open up until, call it March. So it’s just you know – it’s just been slower going, but we are as I said when I described, you know the sublet activity that we are experiencing on the space – piece of space set is available at 680 Folsom Street, which is a fabulous piece of space. There are a lot of tours form technology companies that are looking at that space. So it’s slowly starting to happen in San Francisco, but it's behind New York City relative to the recovery.

Got it, and just to clarify, so is the office utilization or census lower in San Francisco than New York?

Yes. They are marginally, like 50% of what we currently are at. So if we're running a 20%-plus in New York City, we are running at 10%-plus at San Francisco.

Got it. And then you know I think the broad announcement on BXP’s plan to go carbon neutral, I think it's 2025, it’s really interesting and probably ahead of many of your peers. I'm just wondering if you can give us a bit more color, what does the company need to do maybe from a spend perspective or strategy perspective to achieve that and from a operational perspective, getting to carbon neutral, do you think that brings some benefit.

I'll start and Doug may have some comments on this too. I think three pieces, one is in reducing the energy intensity of our assets which we have been doing for years. We are down roughly 30% already off of 2008 base year and that’s improving and electrifying equipment in our building, as well as some mixing in some new building. Second is, converting our power sources from brown to green, and we've been doing that with some limited increases in costs, but I've described them as limited and that's probably gotten like another third away there. I think we will accomplish this goal. We’ll continue to turn the dial, both in terms of energy intensity and green power and then we may have to do some off to accomplish the final goal. There is some costs associated with it, but I wouldn't say it material relative to the overall results of the company and we think increasingly it's important to be a leader in this area. Again, I always say it's the right thing to do, but it's also a smart thing to do, because our customers care about it, certainly our city do, we are all in coastal cities. They're increasingly concerned about this topic, many have their own regulations. Our capital providers care about it. As you know Vikram we’ve seen more and more shareholder at ESG Conferences. We did a green bond recently where we thought we got some small benefit from offering a green bond, and I can tell you our employees certainly care a lot about it. So that's the plan and that's why we're doing it.

Thank you.

Your next question comes from the line of Blaine Heck with Wells Fargo. Blain, your line is open.

Sorry about that. Can you just talk a little bit about – more about LA in general and Santa Monica in particular. It seems like the west side of LA has been a particularly high amount of sublease come to the market, and while it's great to see you guys get the Roku lease signed and I think you mentioned another lease you co-signed. Given that you guys are pretty substantial occupancy drop at both assets in LA this quarter, can you just touch on whether you think that sublease space is competitive to your vacancy or is it mostly opportunistic like Doug was describing? And then can you talk about any additional prospect you might have, the profile of those tenants that might be kicking the tires in that market and any thoughts on expected timing to getting those assets back to stabilized occupancy.

So Ray, do you and John want to take that one?

John, why don’t you start and I’ll provide any further commentary.

Sure. So the first the commentary of the sublet market, there are a decent amount of both, small blocks and large blocks available. And as Doug mentioned, many of which are quite opportunistic. We have some opportunistic sublet space in our portfolio here, but if you go ask the decision makers, our customers, they’ll tell you that yes, this space is on the sublet market, but we want to be open and flexible in case we capture a sublet tenant. If they come across someone that could backfill part of their space, it doesn't necessarily mean that they're going away. They just might need to downsize or rearrange. So I think that we see a lot of the competing sublet spaces out there that are not actually directly competitive with us and the other West Side landlords. As it relates to you know kind of what we’re structuring with our prospective tenants right now, we're seeing it to be the story of the has and the has not’s. Depending on the industry and the sector, you've got technology entertainment and content companies that are continuing to grow in a big way. If you look at what we've done with Snapchat and a couple of the leases that we signed over at Colorado Center and the expansion that Doug mentioned with our existing tenant at Colorado, these groups are growing and they are looking to grow right now. And so we're excited about the prospect of that, while we're being mindful of the need to potentially switch the space and really kind of focus on. Ray, I’ll turn it over to you. I don’t want to be cognizant or commentary of what you're seeing and what you are – what we are seeing from our tech tenants.

Okay, well I would just say that, that Colorado Center, I mentioned earlier flight to quality with another reference, but we're saying the same at Colorado Center. We are currently, what? 90% occupied and I think with the activity we see in the last three or four weeks, we could easily be 100% leased there within the next six months. You know Santa Monica Business Park is a little bit different, a little older product. We just lost a tenant that decided to shipped out of the center, but the internal demand from our existing tenants led by Snap and others, we're quite confident that that Park will return to a fully stabilized point very soon. And I've seen, you know relative to reference to other markets, I think the west LA market may have had a pause, but it's coming back very strong, led by the same tech sectors that John just elaborated on and not a lot of new supplies coming on and Colorado Center and Santa Monica business park are really strong market leaders and how we are respected by both, the tenants in the markets and the brokers.

I would add that the proposals that we're putting out there to the tech, media and content firms, net effective rates, you know the face rates are basically right there and the net effect of rates are very close to what we're seeing pre-COVID. And there is renewed activity in the first quarter on our prospect list, and they're coming from the credit tenants. We do a lot of start-up companies that are taking a look, that have ventured backed and growing here in West LA, but the other companies, you know the large scale tech firms and the large scale content firms, it's a bit of a race to lock down the quality space and so we're fortunate to have the Class A space that we deal in West LA. While we do see a lot of the other kind of B and B-minus space aggregate these sublet blocks that we don't think are that competitive to what we have here.

Great, that's very helpful. Thanks John and Ray. Second question is just on the demand for life science outside of Boston and South San Francisco, and I guess what gave you the confidence to go ahead with three speculative developments or redevelopments there? I understand that they are smaller building than you guys are typically constructing, but to go ahead with three of them at the same time seems like a lot. So can you just talk a little bit more about your prospects or lease up at those projects and maybe more importantly, do you have any concerns related to the supply in the life science segment of the market?

This is Dough, I'll start. So the most important life science markets in the country by far are Cambridge, Waltham, Lexington, Boston and South San Francisco, Brisbane. It’s not even a – there is not even a close start. And it is the – the markets are being led by demand growth, and it’s the demand growth that gives us the comfort to be able to start these buildings on a specular basis, with a relatively short delivery time frame, because they are fully permitted and we have construction drawings and we did the costs, so we know exactly what the cost side will look like and we know what the delivery time is going to look like. And again, we literally just started the foundation 751 and we have two RFPs that we’re responding to, and that’s the showy market and similarly as soon as we announced that we were going forward with 880, we've been having about a tour a week, we've already actually responded to two proposals. We have two more proposals that are coming in over the next couple of days that I'm told. It’s just that demand is there, because the drug discovery and the changes in the way capital is flowing into the life science sector, particularly into new compound development and new technologies for compound development is concentrated in the two parts of the country, and there is just great demand and it’s the demand Blain that’s creating the confidence that we have to do what we're doing, relatively speaking on a specular basis. We are also considering on markets that have, I don't know, the vacancy rate for lab space in Boston that’s under 5% and it's probably in the 5% to 7% range in the South San Francisco Brisbane market when you add in all the space that’s been committed on the new development.

So no real concerns on the supplies there?

Not in the next couple of years.

Look, obviously before we made these investments, we studied carefully not only the requirement that were in the market, but also the forecast deliveries and we do think that demand far outweighs the supply. The other thing I’d just add to Dough comments too, you know there are three project, they are 2G Graphic locations and the Waltham assets actually are different too, because one they're on different schedules. The lab conversion deal can be delivered for tenant build out next year, rather for ground up is the year following. So that also creates a different demand environment.

Great! Very helpful. Thank you both.

Your next question comes from the line of Brent Dilts with UBS.

Hey guys, thanks. Just one question for me at this point in the call, but maybe you could talk about what impact you think some of the current federal and local tax proposals might have on your tenant base and the leasing market if they get enacted, just given some of your key markets are already high tax jurisdictions. Thanks.

I'll start with that. So look, I guess the most important one that I would point to is the increased taxes in New York State, and the reason I'm pointing that is because it actually happened. You know everything else is conjecture at this point and as we know plans don’t always turn into legislation. So look, I do think that you know higher taxes are not great for business. I do think that in New York it does impact a smaller portion of the population, because it's primarily the high earning population which is not a large percentage of people. And a lot of the employers that are attracted to New York are employing broader parts of the population that are not necessarily impacted by those tax increases, but it's certainly not a lot of positive overall for business. And then at the federal level again, you know these are all plans, nothing has been inactive. Those things that we are paying attention to are obviously the capital gains tax change, the increase in taxes for high earners, again both of those are going to impact a pretty small percentage of the population. Don't really have a geographic overlay, because it impacts the entire country. Then the other one that's in the most recent Biden plan is repeal of Licon [ph] exchange, and you know this has been talked about before by federal legislatures, legislators and it generally doesn't pass. And I think at the end of the day a lot of the Licon exchange transactions just don't occur if you get rid of the Licon exchange benefit, so. But we'll just have to see you know how that plays itself through the entire system. The other thing that we hear is being discussed in Washington is the repeal of the salt exemption cap. Again, I have no idea, we have no idea whether something like that would pass. If it did, it would clearly be beneficial to our footprint.

Great! That’s it from me. Thank you.

Your next question comes from the line of a Omotayo Okusanya with Mizuho. Your line is open. Your next question comes from the line of Daniel Ismail with Green Street.

Great! Thank you. Looks like you mentioned requirements not changing due to the pandemic or at least not changing thus far. Does that include changes on densification due to health concerns or is that too early to tell us well?

We haven't seen anybody reduce their density because of health concerns per se, as John said that nobody had pulled a building permit. Yeah, I think it's pretty clear that a lot of companies are being a little bit more thoughtful as they buy new furniture, and they configure space going forward that the spatial separation of people that are in open office areas will be slightly more generous, which obviously is a tail wind to our business because it means people will need more space. But honestly it's not a significant factor at the moment.

Makes sense and then Doug, you mentioned parking starting to pick back up and some these ancillary revenue streams, generally picking up in the back half of the year and to recognize that it’s a small portion of your overall business, but how does pricing compare to pre-COVID levels. You know has there been any degradation in parking rates so the revenue associated with a certain parking spot today versus per-COVID?

Yes, so the answer is no Danny, we have not changed our pricing on any of our ancillary parking review in particular on the monthly cost. Our monthly spot is a monthly spot and I mean, look we know that we will get to a point where we're not going to have parking availability for people. I don't know if that's going to happen in July, September or October, but they're going to be a point where we're going to have more demand for monthly basis and we have monthly basis to sell, and that's obviously a good thing for our revenue, it’s just a question of when. But we're also not going to raise prices to push demand off. We are in this for the long term. We generally look at our parking revenue pricing model once a year, early in the year and we stick with it and we don't, it's not a dynamic pricing model where based upon particular demand, we reduce or increase our pricing on hourly or a monthly basis.

And then, just last one from me, going back to the carbon neutral commitment, how many tenants or potential tenants are demanding some level of ESG requirements. I’m trying to get a sense of how large the competitive advantage that 2025 carbon neutral commitment is verses some of your peers and the rest of the market.

I think that’s very hard to quantify. I mean I just start with saying there's no way it’s ever a negative and I think there are segments of our customer base, some of it industry driven, some of it city driven that are not as concerned or focused on ESG factors with the building or the landlord and then there are other sectors and locations where they are hyper focused on it and it’s a reason they make a decision. So you know it's always hard to quantify that in terms of rent. I think certainly seeing the lease up has helped by, but again it's hard to quantify. The other thing I would say is, it’s only going to get better or it's only going to become a bigger issue and we're already seeing it, every year we talk about. You know we’ve been doing this for years and every year we talk about sustainability at ESG, the focus on it from our customers and other constituents just goes up every year.

Makes sense. Thanks a lot.

And there are no further questions at this time. I will now like to turn the call back over to the speakers for any closing remarks.

No closing remarks. Thank you, all, everyone for your interest in Boston Properties. That concludes the call.

This concludes today's Boston Properties conference call. Thank you again for attending and have a good day!