Good day and thank you for standing by. Welcome to BXP’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today to Helen Han, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to BXP’s third quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, 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, Raymond A. Ritchey, Senior Executive Vice President and our Regional Management team 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 one question. If you wanted to add an additional query 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. Today I will cover BXP’s continued strong execution as demonstrated in our third quarter results. I’ll provide a brief update to my remarks at our recent investor conference on the economy, returned to office dynamics and the premier workplace market. And I’ll discuss private equity capital market conditions for office real estate, BXP’s capital allocation activities and I will provide a reminder from the investor conference of BXP’s strategic shifts given current market conditions. Our FFO per share this quarter was well above both market consensus and the midpoint of our guidance, and we once again increased our forecast for full year 2022. We completed 1.4 million square feet of leasing just below our long-term average leasing activity for the third quarter, and year-to-date, we’ve leased 4.6 million square feet which is meaningfully above our long-term leasing activity for the first three quarters of the year. This success is due to our team’s strong execution, increasing return to the office behavior by workers, and the strong preference of our clients for premier workplaces, which are the hallmark of BXP’s strategy and portfolio. Also in the quarter, BXP reinforced its ESG credentials by earning the highest 5-star rating in the 2022 GRESB assessment, as well as its 11th consecutive Green Star recognition. We also commenced a partnership with the New York State Energy Research and Development Authority as part of the Empire Building Challenge, a public, a private effort to support low carbon retrofits and high-rise buildings in New York City to reduce emissions and combat our climate change. As a company, we remain focused on climate action and are on track to achieve carbon neutral operations in 2025. Now I covered in detail at BXP’s Investor Conference in September, our views of economic…

Thanks, Owen and good morning, everybody. So I’m going to pivot the discussion this morning to our 2023 earnings guidance. We expected and saw a number of notes last night. So obviously this is a critical importance to everybody. And I think we outlined a bunch of the critical variables in the press release and Mike is going to provide some commentary on the most significant components in his remarks. I am going to focus my remarks on our in-service operating portfolio, which is really driving our same property expectations. But I’m going to start with what happened in the third quarter, because I think the trends that I’m describing are going to be relatively relevant to our forward assumptions as we think about 2023. So the third quarter was another you know really good leasing quarter for BXP. It’s now the sixth straight quarter of strong overall leasing activity in the portfolio. Just to remind everybody, beginning in the second quarter of ‘21, we signed 1.2 million, 1.4 million, 1.8 million, 1.2 million, 1.9 million and this quarter, 1.4 million square feet of leases. So that’s about 6.3 million over the last 12 months. Obviously, it’s a deceleration between the second – the third quarter from the second quarter. We have successfully executed leases with clients in the midst of the delta variant, the Omicron variant, remote work fits and starts, significant labor market headwinds and now what is surely a pullback in business activity. The Boston CBD activity this quarter with about 260,000 square feet of leases, including some renewals expansions and the addition of new clients into the portfolio. The mark-to-market on the previously leased space and again, I’m giving you data on the leases that were signed this quarter, not leases that are in our supplemental,…

Great. Thanks, Doug. Good morning. So today, I plan to cover the details of our third quarter performance and also the increase to our 2022 full year guidance. And I will spend most of my time describing the details of our 2023 initial earnings guidance. The third quarter results were strong. We reported third quarter funds from operation of $1.91 per share that was $0.04 per share higher than the midpoint of our guidance. The improvement came from better than anticipated portfolio performance. Higher revenues contributed $0.03 per share to our results from earlier than projected revenue commencement on space that we delivered to clients ahead of schedule. And we also exceeded our budget for parking revenues, particularly in Boston, where return to office continues to grow. Lower operating expenses also contributed $0.03 per share, this was primarily from lower than projected repair and maintenance costs, most of which will be deferred into the fourth quarter. These positives were partially offset by the termination of our lease with Biogen at 300 Binney Street in Cambridge. The lost revenue resulted in a $0.02 per share reduction in revenue versus our budget that assumed full rent and occupancy for the quarter. While not part of FFO, our net income included gains on asset sales of $262 million or $1.50 per share, primarily from the sale of 601 Mass Avenue in Washington, DC. Our asset sales this quarter raised $540 million in net cash proceeds. On the new investment side, our acquisition of 125 Broadway, a fully leased lab facility in Cambridge utilized $592 million of cash. For the rest of 2022, we have increased our guidance for full year funds from operations to $7.51 to $7.53 per share. That’s an increase of $0.02 per share at the midpoint from our prior guidance.…

Thank you, sir. [Operator Instructions] I show our first question comes from the line of John Kim from BMO Capital Markets. Please go ahead.

Good morning. I was wondering if you can comment on your occupancy guidance for ‘23. I realized Doug you mentioned some of this is timing related and you’re expecting a slower economy next year. But can you also comment and if you’ve already seen leasing activity slow down this quarter? And also if you’re factoring in lease termination increasing in 2023?

Sure. So I’m going to – I’ll back up. So that was a three-part but I’m going to give you credit for it all being at least you know consistent with each other. So, the lease terminations are not included in our occupancy. Things are definitely feeling slower in the fourth quarter than they did in the third quarter of 2022. And again, we believe that our occupancy will be higher at the end of ‘23 than it will be at the end of 2022, because we have visibility on a significant amount of leases that have already been signed and we’re covering a significant amount of our existing portfolio vacancy today.

Thank you. And I show our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Thanks. Good morning. Owen or Doug, could you just comment on how you guys are adjusting your return hurdles on development? And maybe just speak to the acquisition of 200 Fifth you know in this environment, you know I guess why pursue acquisitions?

Steve it’s Owen. Good morning. Clearly, the – our cost of capital is going up as indicated and what we’ve reported and I do think our hurdle for new acquisitions is going up from a quality standpoint and also from a return standpoint. You know I referenced the 125 Broadway and 300 Binney Street, you know one is an acquisition and one is a redevelopment and the blended yield on that when fully delivered is over 7%. You know buildings in that location, certainly lab buildings in that location have been trading in the 4 maybe even in the low 4s. So I think there’s you know significant margin in that yield versus where we made the investment. And then as it relates to 200 Fifth, a couple of things I would mention. One, I think it’s a very unique property. You know well it is clearly a premier workplace I think transactions like that don’t come around very often. Second, I think the cap rate is understated, because it has below-market debt on the property for the next six years. And then third, we’re purchasing a minority interest of stake. So it is not you know a full acquisition, the billing requires less capital. But our – you know it is – we are raising our hurdles for making new investments and you know our pipeline is less right now for new investments as a result. I would say the largest thing we’re working on, I mentioned in my remarks, which is the 290 Binney Street development and the 121 Broadway Residential.

Thank you. And I show our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

Hi, good morning. Thank you. In your discussion with business leaders, do they view the likely recession as a tipping point for possible greater office utilization? And I guess, thus, you know the balance of power you know shifting favoring employers versus employees, especially the mid-level employees? And you know has this factored into discussions with business leaders or perhaps their thinking on future demand for space? Thank you.

I think the answer to your question is a little bit industry-specific. You know I certainly think amongst the financial service clients that we have, I think the slowdown in business conditions has, I think put some more urgency on in-person work, and we’re clearly seeing that in the traffic, particularly in Boston and New York. I also – you know I think – I’m not sure it’s that big an impact yet on the technology sector, where the return to in-person work has been certainly lagging the other industries. And I do think there’s an offset a bit as well in terms of what Doug described of you know a recession, delaying leasing decisions by businesses because there are you know significant capital events. And you know in this kind of environment, businesses try to create optionality on doing those kinds of things. But yes, I do think slower business conditions are leading to more in-person work behavior.

And Derek, I would just add the following, which I think is actually going to be helpful, but it’s not going to be helpful in the short-term in terms of improving things, which is that, as these businesses, I’d say, get more aggressive. I’ll use the word you know asking their employees to – or associates to come back to work. I don’t think it’s going to lead to them taking more space. I think it’s going to lead to a better urban platform environment, whereby there are going to be more people in our cities on a day-to-day basis, which I think will be helpful over time at convincing both the workers and the employers that these cities really you know can potentially get back to where they were relative to the Street platforms and be very vibrant local communities. Right now, but one of the problems is there’s sort of this vicious circle going on where because there aren’t as many people going to work every day, the cities feel different and the other sort of issues associated with you know the urban nature of the challenges associated with prime, homelessness, et cetera, become more visible, and there’s a sort of cycle that I think will be helpful as things go in the other direction.

Thank you. And I show our next question comes from the line of Nick Yulico from Scotiabank. Please go ahead.

Thanks. Good morning, everyone. Just in terms of JV you know potential you did talk about that at the Investor Day, you know how you’re thinking about maybe you know sales of existing assets or you know funding future development with joint venture partners? And then also you know in terms of the commentary you gave, Owen on you know cap rates for the New York City assets, I guess, in both of those cases, you know the asset you purchased and then the sale [technical difficulty] Avenue in the Americas you know they both had in-place debt as you mentioned that is below market today. And so I guess what we’re trying to figure out is, you know what does this mean for cap rates going forward, if you know instead you have to put new debt on buildings, which our understanding is that if you could even get it for the best buildings, you know your cost of that debt is going to be over 6% today, so does that mean cap rates then would have to be you know over 6% by some fashion in order for underwriting to kind of work in this new world we’re in?

Okay. I think that was a three-part question, but I won’t stick Helen on you. So, first of all, JVs, we absolutely want to continue to do joint ventures and we absolutely want to continue to sell assets. But it’s going to be subject to market conditions. As I mentioned, there are many institutional investors who are more cautious on the market, some have withdrawn for the market for the reasons I mentioned in my remarks, denominator effect or a view that perhaps the market will get more interesting from a pricing perspective in the future. But again, subject to market conditions, that’s absolutely what we want to do. Going to your comparison of 200 Fifth to 1330 Avenue of the Americas, humbly, I would say, I think 200 Fifth is a higher-quality asset and warrants a lower cap rate. I do think that below-market debt does have some impact on how to think about pricing for the asset, because clearly an asset to have such a below-market debt on the building. And to your point with debt cost rising, I absolutely believe that there is some increase in cap rates. I think it is probably less in the office sector, because I think office buildings have been trading at higher cap rates than some of the other real estate sectors. But I do think it has had some increase on where market cap rates are.

Thank you. And I show our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.

Great, thanks. Good morning. So the tone on the call and in the press release sounds a lot less optimistic than at your Investor Day. I wanted Doug, you guys did touch on this, so you guys did in the prepared remarks, but can you just expand on the main kind of factors driving that change in tone, especially in such a short period of time?

So I guess let me just start it back up. So our Investor Day was not about 2023 earnings guidance. Our Investor Day was about, here is Boston Properties’ portfolio regarding its human capital and its assets and what we are trying to do from a strategic perspective in the context of where the market is today. And I don’t think at any time did we talk about what we thought was going to happen in 2023. So I don’t think anything that we said at that conference should be construed as different than what we’re seeing today. Regarding our outlook for actual leasing activity in 2023, we – I would tell you that we feel modestly less rosy about that, because the Fed has been more aggressive than I think people expected when we had our conference in 20 – in September 2022 relative to rate hikes. And the inflation has been more challenging to get under control. And all of that has effectively you know transferred itself into a higher interest rate expectation. Mike’s using the dot plot, you know we’re using 4.75% average interest rate for our underlying index in 2022 right. So – and all of that sort of from my perspective manifests itself in less robust leasing activity in 2023, because I think the economy is going to be less strong, and there are going to be less decisions that are made by companies relative to decisions on their space, be it, staying in place and just upgrading to a premier workspace like our buildings or incremental growth. And so I guess that’s from my perspective sort of the subtle change between what we were describing and you know in September and what we’re talking about this morning.

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

Good morning. Given you have only entered an agreement to sell the residential component of the Avant, can you please confirm if this asset disposal is reflected in the 2023 guidance you provided? And at your Investor Day, you mentioned we could see a similar level of sales as we have in 2022. Can you please provide an update on how you’re thinking about dispositions in 2023? Has anything changed here?

So the answer to your question is, yes, the Avant sale is reflected in the ‘23 guidance. And with – as it relates to sales, we – Mike and I both mentioned a figure of $864 million for ‘22, which assumes the Avant is sold, it’s only under contract right now. And then we will – and I mentioned one of the strategic priorities for BXP is to continue to recycle capital and upgrade our portfolio into 2023. So our goal is to sell more assets since we don’t know what those are, those are not reflected in the ‘23 guidance and it’s going to be subject to market conditions. You know we have specific assets that we are looking at to sell, but it’s – again, we are going to execute on those sales subject to receiving attractive pricing.

Thank you. And I show our next question comes from the line of Michael Griffin from Citi. Please go ahead.

Thanks. It’s Nick Joseph here with Michael. I appreciate the color on the competitive rising rates on the business and guidance. But just going back to the financing market for office assets today Broad lease. You know what are you seeing the differences in terms of lender appetite, LTVs, rates terms on premier versus other assets?

This is Mike. I mean I think that the lenders are overall you know significantly more cautious about putting capital out for all the reasons that we’ve talked about. And credit spreads are clearly wider in all of the markets that we deal with. So I mean credit spreads in the bond markets are wider, credit spreads in the mortgage markets are wider. I mean, I can’t say they are at all time lines but they’re significantly wider of where I would say a normal environment is. You know I think that CMBS is underwriting cash flow. And if there’s rollover, they’re very conservative about the rollover and they’re requiring reserves in order to mitigate the risk of rollover and those reserves drive down proceeds levels that are available in the CMBS market for real estate assets. So I think that can drive down some of the leverage that you can get and could impact the refinancing of certain assets that might need to be recapitalized in order to refinance. If you have a high-quality property that has a long lease term, you can clearly get it financed. People will finance office buildings, other real estate with those types of lease terms, there’s just going to be higher cost of capital. So you know treasury that is between 4 and 4.25 and a credit spread that’s probably between 250 and 300, and you’re talking about high 6s is the type of rate that you can get. But that financing is available today. And then the banks are also providing you know mortgage loans and term loans and things like this to the market to add liquidity as well. And you’ve you know seen a number of REITs, including ourselves kind of use term loan financing you know to help fund new acquisitions and new investment. And that market is still available to us.

Thank you. And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.

Hey, good morning. So a question is on Seattle. Owen, you guys you know obviously entered in the past. And curious with what we’re hearing about Amazon and potentially pulling back from Bellevue, Microsoft potentially you know reverting back to Redmond out of Bellevue. As you guys look at your Seattle exposure, you’ve expanded it, is everything that’s going on in Bellevue and the potential disruption that could occur? Was all that part of your original underwriting? Or has the broader Seattle, Bellevue market changed since you initially entered the market and since you did the latest Madison acquisition?

So Alex, good morning. No, the Amazon moves in Bellevue were not part of our initial underwriting, because it was not known. We remain confident in Seattle for the long-term. We think we have two – we have one very high-quality asset and one asset that we’re going to make very high-quality that we’ve already performed some leasing in. We have confidence in those assets. But as Doug described in his remarks, you know the technology industry is retrenching to some degree. You know there have been layoffs announced. There have been space moves announced that you described. And you know we don’t see this as a big provider of growth in the near-term. But I think over the long-term, these companies you know have technologies that will grow and they will be successful, but it’s going to take a while to work through the environment that we’re currently dealing with.

Thank you. And I show our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. FFO per share expectations for 2023 is down 4% from what you’re anticipating for 2022. And this is primarily driven by pressure from interest expense as well as some other puts and takes, not asking for guidance, but I guess like what needs to happen in order for BXP to return to earnings growth in the coming years? Can you get there with just the maturity of the development or will it require a combination of more favorable interest rates and stronger fundamental demand? I’m just trying to get at the cadence of what needs to happen in order to get the company back on this path to earnings growth.

You know I’ll start, and the others can lob in as well. Look, I think that we have a development pipeline that delivers cash flow through 2025 as it goes into service, and that is going to continue to be a tailwind for us and provide growth for us as we deliver that pipeline and you know hopefully increase that pipeline with some opportunities that we have that we’re working on. On the debt side and for interest rates, I mean 2022 has been an extreme year of interest rate increases and I think that our expectation is that they’ve got a little main ways further to go up, but it’s not going to continue to go up at this pace for the next two, three, four years that there’s going to be a point that has reached where the Fed has done its job and you start to see inflation turn where they’re going to slow down the increases in the Fed rate, which will affect SOFR and that will start to moderate and you know potentially turn the other way, if the economy weakens like we have been talking about. So that’s not in our expectation for 2023, because we assume the SOFR rate is going to go up and then it’s going to stay flat. And we assume the small amount of refinancing that we need to do, which is very small, because we don’t have very much in the way of mortgages coming due that we will have to refinance those at high permanent rates. So we have a $500 million bond coming due, for example in you know the third quarter of 2023. And we can borrow in the bond market today for 10-year is in the high 6s. So that’s what we’re assuming. So that has an impact on our interest expense guidance. If interest rates start to moderate and the 10-year you know comes down a little bit or slows its increase and credit spreads, which right now are as wide as they’ve been in a really long time, start to moderate, because people kind of see the end of the rate hikes and see what the pain is going to be felt in the economy, we could see credit spreads come in 50, 100, 125 basis points which could help. Now, I don’t know when these things are going to happen. But I do believe that you know we won’t see the same increase in rates from ‘23 to ‘24 during 2023 that we saw in 2022. Yeah.

I would just add to Mike’s remarks, First of all, on the development deliveries, as I mentioned, that’s $200 million of NOI over the next five years, and that number excludes contributions from 300 Binney Street, which are material, which comes in the next couple of years. So that’s the quantification of that. Mike talked a little bit about the interest rate opportunity. And then the last piece is portfolio occupancy. Again, Doug went through a lot of math on how to think about that and the timing for it. But we’re going through a business cycle. You know I said this at the Investor Conference, it called a cycle for a reason. It doesn’t last forever. And this will turn at some point. And you know when you looked at BXP before the pandemic, we were at 93%. So again, we’re not giving any forecast on what the timing for that is, but that’s clearly a growth opportunity for the company is to increase the occupancy of our portfolio.

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

Thanks so much. I just you know wanted to go back to sort of the occupancy trajectory and comments. Maybe just if you can unpack it a bit more for us, because you know I came away from the Investor Day definitely thinking there’s upside to occupancy even if you trend sort of lower on the leasing front, and you kind of gave some numbers at multiple presentations. So maybe you can just unpack this a little bit more by maybe the risk to market? Were there more risk? Were there upside? How do we think about just timing-wise or trajectory? And you know just again what’s changed in the last month? It’s a bit unclear just based on what you talked about a month ago.

Yeah. So Vikram, the only thing that’s changed, I’ll just repeat what I said before, is that, I think we’ve moderated the amount of leasing that we will do in 2023 that has a 2023 lease commencement associated with it. And I’ll sort of give you, you know effectively how the sausage is made, you know color on that, which is, when we have space that is currently built out and that space is re-let, we would start recognizing revenue when the lease commences. When we have a piece of space that we make a decision to go and demolish, okay. So we basically remove all the existing improvements. And those improvements are now you know referred to as sort of a white box condition, and we then do that lease, we have to wait until the tenant has completed their build out of the space even if we’re contributing to capital until we can recognize revenue. So we have a bunch of spaces that we are building out as a sort of white box right now, because we think it will give us a leg up in terms of leasing that space that will – while that may actually improve the timing of actual cash revenue may not help us relative to our "revenue" from an occupancy perspective in 2023. So that’s really the only thing that has changed. With regards to the overall sort of you know going around the country perspective, as I think I said, our views and the pulse that we have on overall leasing activity is much stronger in our Boston and our New York City CBDs relative to tour activity and likelihood of transactions occurring than it is on the West Coast in San Francisco and Los Angeles and Seattle. And that’s because…

Thank you. And I show our next question comes from the line of David Rodgers from Baird. Please go ahead.

Yeah. Good morning, everybody. Doug, I wanted to follow-up just on the leasing numbers that you quoted earlier. I think it was at the Investor Day, you had signed 1.8 million square feet that probably grew to 2.2 million by the end of the quarter. It’s just simple math. And then today, you talked about 860,000 I think of vacancy leasing. So I guess I wanted to dovetail the combination of those is the rest all renewal leasing? Can you talk about how that reduces your expirations maybe next year and the spreads on that if that’s true and just kind of verify my numbers if I’m thinking about it, right?

So all the numbers I used at the Investor Conference were as of June 30th of 2022. So everything was sort of a quarter delayed and lots of things happened during the third quarter that are now reflected in the numbers, both in terms of leases that we signed that pushed out occupancy and leases that we signed that have yet to commence and leases that we’ve got on vacant spaces that have already commenced that are sort of baked into the numbers. So the numbers that I provided earlier is sort of how I’m looking – we’re looking at things on a going-forward basis. So instead of the 1 million square feet of leases, for example, that we had that were 1.2 million if that was number of leases that were signed that had yet to commence. Right now, it’s about 1 million square feet or 885,000 square feet, of which 700,000 of that are 2023 commencements in the rest of our buildings that will have a lease commencement in 2024, right. So that’s sort of how I would sort of look at the numbers. So what I gave you earlier today were the numbers as of 9/30/2022.

David, I think the only number that Doug gave at the Investor Conference that was different than what we gave today was he didn’t say at the Investor Conference, the amount of square footage that we had signed for leases that were expiring. Now those leases are not in our expiration table because we already have signed leases starting for those. And I think that number was like 800,000 square feet. So that really doesn’t affect the – I mean it affects occupancy, obviously, because it’s covered, but we don’t have that in our expiration table, because the lease is already covered by a signed lease. Just so you kind of understand the methodology of how we put – use our expiration table. The expiration table only includes space that is expiring where we do not have a new signed lease starting right away.

Thank you. And I show our next question comes from the line of Tayo Okusanya from Credit Suisse. Please go ahead.

Hi, yes. Good morning, everyone. So you guys talked a little bit about, again, the business being a long-term one, which I you know wholeheartedly agree with. I’m just wondering specifically on the life science side, though, that clearly you know creating more exposure. You are taking back space specifically to redevelop into life science. But again, I think, Doug, you also mentioned the comment that life science demand generally seems to be slowing at least near-term. So just wondering how you kind of balance those two things you know on a going-forward basis where demand seems to be slowing, but you’re clearly also increasing exposure to that particular industry?

Yeah. So I’ll jump in. Doug may have some comments as well. We have a lot of confidence in the long-term growth prospects in life science. We think there is tremendous capital that is prepared to invest in that space, and there’s also tremendous unresearched science, and it has very strong prospects. I think the other thing that’s important about life science is the importance of location that is critically important and Kendall Center where we’re making most of our investments today is absolutely a key critical, it’s one of the best locations for life science in the world. And I look at all the demand we generated and the deals that we’ve announced. You know we talked about the AstraZeneca lease at 290 Binney Street, the Broad lease that we did at 300 Binney. So you know we’re demonstrating very strong demand at that location. So I do think there’s been more of a slowdown in Waltham. And therefore, we’ve slowed down a little bit of our new deliveries to be responsive to that. But again, you know given my prior remarks, we have confidence that, that will return.

Yeah. And I would just add that, remember that, we are looking at our investment decisions over a long-term and it takes a long time to clear a building of existing tenants. And so you know we want to be in a position where we can start the next building when we’re successful leasing the ones that we currently have or we feel the market has started to you know dramatically change from a demand perspective you know as we enter into the latter part of 2023, early 2024. So we’re sort of – we’re setting ourselves up for these opportunities. And by the way, I mean, I’m just going to sort of give you some examples, we actually have three proposals that we’re negotiating right now and they’re not leases on you know a building that’s currently vacant in Princeton at Carnegie Center for life science users. And so you know having the ability to stay to one to a user, the building is unencumbered and we can start construction. You know and if you’re interested in signing a lease, we will start construction is an opportunity that we’re trying to create within the portfolio at large. And so you know I’d say we are – we’re taking some short-term pain for some long-term gain on a going-forward basis. But we think it’s the right approach to expanding you know our ability to do these things you know in a thoughtful way. And by the way, and we said this a number of times, we’re not out there buying the land for you know $200 to $250 in FAR foot, which is what sort of the going price has been for many of these sites you know in locations that require rents that are not supported today. We have a very different land basis in our redeveloped assets because of the nature of when the buildings were purchased, when they were built and you know fact that there always existing infrastructure there that is a value. So we have a relatively speaking you know a well-priced portfolio of opportunities that we can bring to the market over time.

Doug, I’d add – this is Bryan Koop from Boston Region. I think the prototype is 880 Winter Street for what Doug is talking about. We’ve got – we’re positioning other buildings for the same thing. But as we said at the Analyst Day event, we can turn on and off this positive supply with a moment’s notice. And we’re in a great position on our speculative side with 180 already having pre-leasing on it, good activity, not as strong as it was, but good activity. And then 880 is a 100% leased. And we want to have another building just like 880 ready to go when the time is right.

Thank you. And I show our next question comes from the line of Anthony Powell from Barclays. Please go ahead.

Hi, good morning. A question about the mark-to-market. I think outside of Boston was just strong. I think you’re seeing basically flat to down 4% or 5% in most of our other geographies, where do you think that goes in the next year or so? And are you seeing any changes in tenant lease terms or length of leases given kind of falling rent here?

So we’re starting to approach the higher rents that we’ve leased over the past four or five years in market – in our West Coast markets and particularly, San Francisco, which again is why I – when I provided the statistics for this quarter, I said, you know we basically were slightly above. It was a couple of percent, and it was about – the average starting rent was over $100 a square foot, right. So we’re not seeing declines in rents. We’re just not seeing the same relative increases that we were seeing. And so as we get closer to leases that were signed you know x number of years ago, there’s a tighter range associated with what that roll up or roll down is. Relatively speaking, the Boston market and the San Francisco market still have the most embedded growth. Our New York City market is very hit or miss. It’s you know somewhere up and somewhere down. So when we lease a piece of space in the mid-rise to high-rise the 767 Fifth Avenue of the General Motors Building will have an increase. When we lease that piece of space at 510 Madison Avenue where the rents you know were done in you know a decade ago, and we’re increasing significantly and operating expenses went up, we’re going to see a decline. So it’s you know again it’s very much you know building by building, lease by lease. And in our Washington DC portfolio, as I described to you, generally, those you know have come down you know in [technical difficulty] 3% to 5% and in the district, it’s been around 10% because of the nature of the leases from a cash perspective, right. When we actually report GAAP numbers, we actually won’t have these declines, because there – when you average a 3% increase for 10 or 15 years and the lease that’s starting 10% below what was expiring you actually have a positive mark-to-market. So that’s not what we’re providing, we’re guiding you with a cash numbers a perspective of what’s going on in the marketplace. So that’s sort of my perspective on sort of you know where the embedded growth is. From a transactional perspective, on the margin TIs are still very, very elevated. And it depends on what kind of a tenancy you’re talking to and what their options are. So the larger requirements where there’s more desperation, if you will, from landlords or subtenants that have large box in available space, there are more aggressive terms for smaller transactions, you know a floor or less where the tenant is looking for a premier workspace, we have been able to maintain the economics of the deals that we’re doing in our markets, and that includes you know San Francisco, which again has obviously got a very significant overall you know vacancy in it that the people report, but where the vacancy in the premier space is still significantly lower.

Thank you. [Operator Instructions] And I show our next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.

Thanks. I guess just for Mike, given the discussion and puts and takes on lease commencements next year, where does leverage go over the course of the year and just remind us of where your long-term target is?

The leverage right now is 7.5 times, which is basically in line with where our target is. And you know I would expect next year that you know it’s likely to tick up a little bit before it comes down. And then as our development pipeline delivers later next year and then into the following year, you know it would start to come down. And then the dependence is what kind of new investment activity do we have, right. And if we have significant new investment activity, we’ve got to figure out how to capitalize that. But if we don’t have that activity, I think that’s kind of the trajectory. So you may still see it increase a little bit and then start to come down.

Thank you. And I show our next question comes from the line of Jamie Feldman from Wells Fargo. Please go ahead.

Hey, guys. Great. Thank you. I’m here with Blaine. So I guess just sticking with that last response, Mike, your response, you know thinking about the fact that you know BXP, clearly, the interest rate outlook for the company and impact on earnings to the market off guard probably surprised you guys even where you sit today versus where you thought you’d be a couple of years ago. And what does that mean for the competitive landscape? I’m sure there’s a bunch of you know private operators or even public out there that you know having – you guys have always run your balance sheet particularly well and more conservative and locked in debt costs better than most. You know are you starting to see a lot of distress? And do you expect to see a lot of distress? I know you had mentioned you know wanting to grow more in residential and life science. Will this open up opportunities? And will this stuff be in scale if it’s out there? And if so, how would you capitalize it based on where your balance sheet sits today?

Yeah, Jamie, it’s Owen. Yes. I think when you go into an environment like this where interest rates have jumped up pretty dramatically, fairly quickly. I do think there’ll be more distress. I think there’ll be less distress in premier workplaces, because those assets are going to perform better. And I think lenders and other capital providers will realize that. And you know as we move forward, you know we will continue to look for opportunities. We will be very focused on pricing, you know given the higher cost of capital that we have. And we will be very focused on our leverage, and I would anticipate you know increasing use of joint venture partner equity to manage our balance sheet.

And I think that – look, we’ve got a lot of cash flow that’s coming online from these developments over the next few years. You know 70% of the debt capital has already been raised that is funding this. So we’ve got a lot of follow kind of capital out there on these properties where income hasn’t started. So yes, we expect our leverage to tick up a little bit as we kind of go through the development process over the next few quarters. But if we don’t do anything else, and we just let this stuff come in our leverage is going to be down into the, you know low 6s. And that’s below our target range. So there’s still capacity on our balance sheet to do things if we find those opportunities. And then it’s a question of how we fund it, right. And I think that in order to continue to lengthen our balance sheet, that’s why we’ve been using private capital to help us fund some of these new opportunities. And I would expect that we would continue to kind of look at that as a vehicle to help us do that, because we’re not going to be raising public equity at the kind of prices that we’re at right now.

Thank you. And I show our last question comes from the line of Daniel Ismail from Green Street. Please go ahead.

Great, thank you. I might be sounding a bit like a broken record here, but I’m just curious, given on our numbers, BXP is trading at some of the widest discounts on the history on a variety of metrics, implied cap rates, discount to NAV. I’m just curious what would cause any sort of incremental capital to be redirected into share repurchases versus external growth? What are sort of the triggers or is it a duration of these discounts persisting to see more capital go into – to see capital go into share repurchases? Or what would put that back on the table?

I think it’s the relative use of capital. So we – Mike described we’re currently at our target leverage that might tick up a little bit, then it comes down over time. We have – I mentioned a couple of additional developments that we’re looking at in Kendall Center, which require capital. But I think to look at share repurchases, I think it would be you know our leverage is low, and we don’t have the investment pipeline in front of us that we do right now.

And I think Owen described, right. I mean we’re going to – we’re picky about what we’re going to be investing in. The bar has got to be higher, but we have some opportunities like the ones we’ve talked about in Kendall Square that are you know once in a lifetime kind of opportunities and these are great transactions that are going to grow the value of this company. So investing in our capital and those kinds of opportunities, we believe will be very accretive to our shareholders over time.

Thank you. That concludes our Q&A session. At this time, I would like to turn the conference back to Owen Thomas, Chairman and CEO for closing remarks.

Thank you. We have no more formal remarks. Thank you for your interest in BXP.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.