BXP Q3 2021 Earnings Report

BXP EPS Results

• Actual EPS: $0.69
• Consensus EPS: $1.70
• Beat/Miss: Missed by -$1.01
• One Year Ago EPS: $1.57

BXP Revenue Results

• Actual Revenue: $730.06 million
• Expected Revenue: $708.97 million
• Beat/Miss: Beat by +$21.09 million
• YoY Revenue Growth: +5.30%

BXP Announcement Details

• Quarter: Q3 2021
• Date: 10/25/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, October 26, 2021
• Conference Call Time: 8:00PM ET

BXP (NYSE:BXP) (NYSE:BXP), formerly known as Boston Properties, is a publicly traded real estate investment trust that owns, develops, redevelops, and manages commercial properties. The company’s portfolio is primarily focused on office buildings, with additional investments in residential, retail, and life sciences properties.

BXP serves major U.S. metropolitan markets, including Boston, Los Angeles, New York, San Francisco, and Washington, D.C. Its properties are generally located in established business districts and are designed to accommodate corporate offices, research and development activities, retail operations, and residential tenants.

Founded in 1970, the company has grown into one of the largest owners and developers of office properties in the United States. BXP generates revenue principally through leasing space to businesses and other tenants, while also pursuing property development, redevelopment, and asset management opportunities.

BXP Q3 2021 Earnings Call Transcript

Key Takeaways

• Strong 3Q21 financial results: FFO per share of $1.73 beat consensus by $0.03 and guidance by $0.04, driven by robust leasing activity of 1.4 million sq ft with a 9.3-year average lease term.
• Supply chain challenges are increasing construction costs and timelines, leading BXP to budget 5–6% escalation on new projects and draw on contingency funds for materials and labor.
• Capital markets actions include issuing $850 million of 12-year green bonds at a record 2.45% coupon to redeem $1 billion of higher-rate debt, positioning BXP to capture lower interest expenses ahead.
• Development and acquisition pipeline of 4.3 million sq ft (72% pre-leased) is projected to add $190 million of NOI and 3.8% to annual NOI growth, highlighted by Hub on Causeway, 325 Main, RestonNext and life science investments.
• 2022 FFO guidance of $7.25–$7.45 per share (midpoint +13% year-over-year) reflects contributions from new developments/acquisitions (+$0.43), same-property portfolio growth (+$0.25) and lower interest expense (+$0.32).

Presentation

[Operator]

At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over toLaura M. Sesody. Please go ahead.

[Laura M. Sesody, SVP, Corporate Marketing & Communications at BXP]

Good morning, and welcome to Boston Properties' Q3 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 would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

[Laura M. Sesody, SVP, Corporate Marketing & Communications at BXP]

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 statements. 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, Rodney C. Diehl, Senior Executive Vice President, and our regional management teams will be available to address any questions. I would now like to turn the call over to Owen Thomas for his formal remarks.

[Owen Thomas, CEO at BXP]

Thank you, Laura, and good morning, everyone. This morning I will cover the economic recovery that's underway in the U.S., BXP's momentum in terms of financial results and leasing, private equity capital market conditions for office real estate, and BXP's capital allocation activities and growth potential. The U.S. economy continues to exhibit strong growth as we emerge from the COVID pandemic. U.S. GDP grew 6.7% in the Q2, but is expected to slow in the Q3 due to the surge in infections caused by the Delta variant. However, daily COVID infection levels have dropped over 50% from highs in September, which bodes well for strong economic growth in future quarters. The relatively low unemployment rate at 4.8% is being driven by both new job creation, which recently has been tepid, and workers withdrawing from the workforce.

[Owen Thomas, CEO at BXP]

There are over 10 million job openings across the U.S., and virtually every employer, including BXP, is experiencing a highly competitive labor market. Annual inflation remains high at 5.4% in September, driven largely by energy prices, which are up 25% versus one year ago. Supply chain challenges are a primary topic this earnings season for many companies, and Doug will cover BXP's experiences in his remarks. Lastly, the 10-year U.S. Treasury rate has increased approximately 40 basis points to 1.6% since our last earnings call. Given the prospect of further interest rate increases, we've been very active refinancing our corporate and specific asset level debts. Interest rates remain extremely low relative to office cap rates and the yields we are achieving on our developments, creating the potential for lower cap rates and higher value creation in the quarters ahead.

[Owen Thomas, CEO at BXP]

BXP's financial results for the Q3 continued to reflect the impact of this recovery and an increasingly favorable economic environment. Our FFO per share this quarter was 0.03 above market consensus and 0.04 above the midpoint of our guidance, which Mike will detail shortly. We completed over 1.4 million sq ft of leasing, significantly more than double the volume achieved in the Q1, well above the leasing achieved in the Q2, and just under our long-term Q3 average. Our clients continued to make even longer-term commitments as the leases signed in the Q3 had a weighted average term of 9.3 years versus 7.5 years in the Q2. Year-to-date, we've completed 3.3 million sq ft of leasing with an average lease term of 8.3 years.

[Owen Thomas, CEO at BXP]

This success can be attributed to not only our execution, but also the enhanced velocity and economics achieved in the current marketplace for premium quality, well-amenitized assets, which are the hallmark of BXP's strategy and portfolio. In addition to our leasing activity, which included a 524,000 sq ft long-term renewal with Wellington at Atlantic Wharf, Google purchased a 1.3 million sq ft building in New York for its use. In the Silicon Valley alone, Apple completed a 720,000 sq ft new requirement. Facebook is looking for 700,000 sq ft additional sq ft. ByteDance is searching for approximately 250,000-300,000 sq ft. In the Seattle region, Facebook is pursuing a 500,000 sq ft requirement in South Lake Union, and Amazon has executed on enormous growth in Bellevue. I could go on.

[Owen Thomas, CEO at BXP]

These examples support our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate, and train, all critical for their long-term success. Measurable census in our portfolio also continues to improve. Our leading region is New York City, which hit 52% occupied last week. Our lagging region is San Francisco, which is increasing, but currently at 18%, and the remaining regions are in between. From watching on television stadiums packed with unmasked people, to trying to park at busy shopping centers, to experiencing difficulties in making restaurant reservations in our core markets, it appears to us people are undoubtedly more comfortable with in-person activities. Liquidity-fueled strong business performance and a tight labor market are clearly factoring into remote work decisions by businesses.

[Owen Thomas, CEO at BXP]

However, as time progresses and the shortcomings of remote work become more apparent, we increasingly hear concerns from business leaders about the decaying cultures of their companies, inadequate training, and difficulties in onboarding new professionals, as well as the potential for deterioration in innovation and competitiveness. We believe it only a matter of time before employers more strongly encourage their teams to return to in-person work. Record levels of commercial real estate sold in the Q3. Private capital market activity for office assets is also recovering rapidly. $26 billion of significant office assets were sold in the Q3, up 38% from last quarter and up 165% from the Q3 a year ago. Cap rates are arguably declining for assets with limited lease rollover in anything life science related, given low interest rates.

[Owen Thomas, CEO at BXP]

Activity is increasing for assets facing nearer term lease expirations. Of note this past quarter in all of our markets, One Canal Park, an empty 112,000 sq ft office building in Cambridge, sold to a REIT for $131 million or $1,170/sq ft. As mentioned, Google exercised its option to purchase St. John's Terminal in New York City, which is a 1.3 million sq ft office building that it fully occupies, and the price was $2.1 billion or $1,620/sq ft.

[Owen Thomas, CEO at BXP]

Coleman Highline, which is a 660,000 sq ft office complex under construction in North San Jose and fully leased to Verizon, sold for 775 million, which is $1,180 a sq ft and a 4.2% initial cap rate to a non-U.S. buyer. 153 Townsend Street, which is a 179,000 sq ft office building in San Francisco, sold for 231 million or $1,290 a sq ft to a local operator and fund manager. This asset's fully leased to a single user, which has put the entire building on the sublease market.

[Owen Thomas, CEO at BXP]

West 8th is a 540,000 sq ft office building in the Denny Triangle of Seattle, sold for 490 million or 910 a sq ft to a REIT. The building's fully leased, but faces significant rollover through 2023. 49% interest in 655 New York Avenue in Washington, D.C. sold for a gross price of $805 million or $1,060 a sq ft and a 4.7% cap rate. The building comprises over 760,000 sq ft, is 93% leased and sold to a non-U.S. investor with a domestic advisor.

[Owen Thomas, CEO at BXP]

Lastly, The Post, which is a 100,000 sq ft, fully leased office building in Beverly Hills, sold for 153 million, which is $1,530 a sq ft and a 4.8% initial cap rate to a domestic fund manager. Now, moving to BXP's capital market activity, we closed on the acquisition of Safeco Plaza and entered the Seattle market. BXP will own a one-third interest in the asset, along with two partners in our strategic capital program. We also closed the Shady Grove Biotech Campus acquisition and entered the Montgomery County, Maryland, life science market. We're also on track to close the 360 Park Avenue South acquisition with strategic capital program partners on December first, thereby entering the Midtown South market in New York City.

[Owen Thomas, CEO at BXP]

I described the economics for all these acquisitions last quarter. Regarding dispositions, we completed the sale of our Spring Street Office Park in Lexington, Mass., this week, bringing our share of gross sale proceeds from dispositions year to date to 225 million. We're also marketing for sale two additional buildings, which, if completed, are projected to yield approximately 200 million in gross proceeds. On development activities this quarter, we delivered 500,000 sq ft of Verizon and other tenant space at 100 Causeway and 285,000 sq ft of Fannie Mae space at Reston Next. In the aggregate, we have 4.3 million sq ft of development underway that is 72% pre-leased.

[Owen Thomas, CEO at BXP]

These future deliveries, plus the stabilization of recently delivered projects, are projected to add approximately $190 million to our NOI and 3.8% to our annual NOI growth over the next few years. In summary, we had another active and successful quarter with strong leasing and financial results and entered several new geographic markets.

[Owen Thomas, CEO at BXP]

We believe BXP is about to experience a strong growth ramp, which we project to be approximately 13% in FFO per share in 2022, driven by improving economic conditions and leasing activity, recovery of variable revenue streams, delivery of a well-leased development pipeline, completion of four new acquisitions, a strong balance sheet combined with capital allocated from large-scale private equity partners to pursue additional new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation's hottest life science markets, and low interest rates and decreasing capital costs. Finally, I'd like to welcome Hilary Spann, who is joining this call this morning to BXP's executive team. Hilary joined BXP right after Labor Day and will become our regional head in New York when John Powers retires in January. Let me turn our remarks over to Doug.

[Douglas T. Linde, President at BXP]

Thanks, Owen. Good morning, everybody. I'm gonna begin my remarks this morning with a few comments on the supply chain and its impact on our capital expenditures, both for new construction and our existing assets. The impacts of the supply chain are both in time and money. Schedule is one of the criteria we use when we bid our jobs, and to date, we've been able to award bids while maintaining the schedules necessary to get our tenants in their spaces as required. The supply chain challenges have made the process much harder, but we are still able to deliver the current development pipeline on time and within budget. As you all know, we have contingencies that are in our budgets, and at some point, we are using those contingencies.

[Douglas T. Linde, President at BXP]

However, in the near term, as we look at new jobs, there are fewer material choices, and we are working closely with our consultants and our contractors to make sure that they are not specifying critical path items that could impact schedules. Our construction teams are working a lot harder at figuring out exactly how the key and the parts are put together. We are intentionally minimizing oversea items, and we are releasing our material packages as early as possible. Trucking issues are real, and at times, we are being forced to air freight as well as stockpile materials off-site, hence the use of some of our contingencies. There's no single answer to how much more is it gonna cost, but when we're budgeting jobs that will start eight-12 months from now, we're using a 5%-6% escalation in our total construction costs.

[Douglas T. Linde, President at BXP]

We are in the process of rebidding our Platform 16 base building project, which was previously budgeted in late 2019, with an eye towards a 2022 restart. We will have real-time perspective in mid-November, but as of today, we just don't know what that's gonna be. Supply shortages are also impacting our operating budgets. Energy is a material input into our operating expenses. While our largest utility cost is electricity, we are mostly hedged for 2022, and we have been successfully increasing our procurement from green power. We are still exposed to the marginal cost of electrical generation in the Boston region, where we expect double-digit increases from last year. Costs for security, cleaning, and engineering labor continues to increase due to labor shortages across all those trades. However, our lease contracts take two forms.

[Douglas T. Linde, President at BXP]

We have net leases, under which 100% of the operating expense and real estate taxes are paid by the tenant, and we have gross leases with a base year that is set upon the lease commencement, with increases in expenses over that base year added to the rental obligation of the tenant. In other words, our exposure is on our vacant space and for new or renewal leases where we are setting a base. This is a pretty small percentage of the total, so it really doesn't have a material impact on our actual operating results as we look at 2022. As you saw in our supplemental, our second-generation leasing statistics were weak this quarter, and they need some finer explanation. I wish we could put all this into our press release, but we simply can't.

[Douglas T. Linde, President at BXP]

The universe of square footage that is encompassed in the statistics is about 500,000 sq ft, and it includes 105,000 sq ft of short-term transactions, 18-24 months, that we signed in the heart of the pandemic with tenants that were not in a position to make a long-term commitment. They were prepared to extend for a negotiated, discounted as-is deal. One of those tenants has since agreed to lease space for 13 years where the interim rent was $60 a sq ft, and they'll be paying $103 a sq ft, and this is in a New York asset. If you eliminate that 105,000 sq ft, the statistics that we would have shown you change dramatically, going from down 14% to effectively flat.

[Douglas T. Linde, President at BXP]

You should also note that our transaction costs were also significantly below our run rate since there were no TIs involved in any of these short-term deals. Our life science and office portfolio make up 91% of our revenues. As we look towards 2022, we currently have more than 800,000 sq ft of signed leases that have not commenced. In 2022, lease expirations for the whole portfolio, not just our share, total about 2.9 million sq ft, and we already have renewal conversations underway on over 25% of that space. Historically, we have leased well over 1 million sq ft a quarter each and every year. The question will be when those new expected leases will commence. Occupancy should slowly edge up in 2022.

[Douglas T. Linde, President at BXP]

The changes in the quarter occupancy this quarter are due to the addition of the Shady Grove and Seattle acquisitions, not a degradation in our occupancy in our existing portfolio. Now, let me give you a sense of what's going on in our portfolio today. New York's a good place to start. Tour activity, proposals, and ultimately leases continue to be very consistent with the commentary we've been providing during the last few quarters. The high-end buildings are seeing good activity. Brokers that advise the small and mid-sized financial firms and professional services firms are very busy, and their clients are taking action. Many of those users are incrementally increasing their space requirements as they continue to acquire people and AUM. Sublease space continues to gradually melt from the statistics.

[Douglas T. Linde, President at BXP]

You may remember that we were asked about a 200,000 sq ft sublet at 399 Park Avenue during various conference calls in 2020. That space has been taken off the market as the user reoccupies. Now, there still is significant supply of direct and sublease space in New York City, and our view is that net effective rents remain down 10%-15% from pre-pandemic levels. During the quarter, we completed eight deals totaling 113,000 sq ft in the CBD portfolio. Many of these spaces were vacant, but the two largest had a roll up of 8% in one case and a roll down of 4% in another. About 70,000 sq ft of new leases are in the category of leases that will not have revenue commencement until sometime in mid-2022.

[Douglas T. Linde, President at BXP]

Last week, we signed a lease at Dock 72 for 42,000 sq ft. We don't anticipate this tenant completing their build-out until the latter half of 2022. We have an additional 340,000 sq ft of leases under negotiation in New York right now, including almost 200,000 sq ft at Dock 72. We don't anticipate revenue commencement on 65% of that space until 2023. One of the themes for next year is gonna be a pickup in signed leases with contribution to occupancy or revenue flow through occurring when tenants complete their installations in late 2022 or 2023, and we don't necessarily control those times. At Carnegie Center down in Princeton, we did eight leases for 38,000 sq ft and have another 106,000 sq ft in active lease documentation.

[Douglas T. Linde, President at BXP]

One final note on New York before I turn to the other markets. Our culinary collective, The Hugh, has opened at our 53rd Street campus in 601 Lexington Avenue. This is as good an example of placemaking as we can point to in our portfolio. As users who want to encourage their employees to come back to work, this type of experience will dramatically enhance their physical space offering. It's why we do what we do. In Northern Virginia, our leasing team is seeing a consistent flow of inquiries, tours, lease proposals, and ultimately, completed transactions. During the quarter, we completed seven leases totaling 70,000 sq ft in Reston, and we're in lease negotiation on another seven deals totaling 125,000 sq ft.

[Douglas T. Linde, President at BXP]

The tech tenants that have identified the DC Metro market as a fertile area for workforce expansion are continuing to grow, and their growth is gonna be in Northern Virginia. In addition, the contractors that service the defense and the homeland security are also expanding. There is significant vacancy in Northern Virginia, but the urban market core in Reston is under 10% vacant, and it continues to dramatically outperform with starting rents in the high 40s-low 50s gross, and with our Reston Next project opening up this week, the rents are starting to hit the low 60s. The Reston Next development is welcoming Fannie Mae into the building this month, and we are actively marketing and leasing the remaining 160,000 sq ft of available space. Our Reston Town Center retail placemaking is also very active.

[Douglas T. Linde, President at BXP]

During the quarter, we completed a lease with a new theater operator for 50,000 sq ft. Last week, we signed a 20,000 sq ft lease with a local restaurant distillery, and yesterday, a new 20,000 sq ft fitness operator. We have three more restaurants totaling 22,000 sq ft that are close to execution. This 115,000 sq ft of leased retail is not expected to have any revenue contribution until 2023. In the District of Columbia, we continue to chip away at our current availability at Met Square, 901 New York Avenue, and Market Square North. We completed seven leases for 49,000 sq ft during the third quarter and signed another 32,000 sq ft during October. Just as an aside, we completed a major repositioning of Met Square this year.

[Douglas T. Linde, President at BXP]

Year-to-date, we've signed 162,000 sq ft over eight transactions. When we do our work, our SF buildings lease. The urban downtown recovery in San Francisco continues to lag our other markets. Very few businesses have commenced their return to work. Downtown streets remain quiet. Much of the ground plane remains closed. The city has had a very restrictive mask mandate. As Owen pointed out, daily SF consensus continues to be significantly below all our other urban markets. There's been a reduction of sublease space in the market stemming from active lease commitments and reoccupancy plans, but overall, availability continues to be elevated. This description, while accurate, overlooks important subtleties in the market. Pre-pandemic, there was very little available space in high quality, multi-tenanted buildings, particularly those with views. Broadly speaking, those conditions still exist for that segment of the market.

[Douglas T. Linde, President at BXP]

The bulk of the demand in the last 18 months has come from traditional financial asset management and professional services firms that have focused on the best space in the best buildings. This has resulted in very little change to leasing economics in the best buildings, particularly in spaces with views. We've discussed this on recent calls, and it continues today. This quarter, we've completed over 100,000 sq ft of leases, including four full floor transactions at Embarcadero. The average starting rent was just over $100 a sq ft on those full floor deals, a 21% increase over expiring rents. We are negotiating leases on another 106,000 sq ft right now. From what we've seen, these experiences are being repeated in a competitive set north of market.

[Douglas T. Linde, President at BXP]

In contrast, sublet transactions are being closed at significant concessions to pre-pandemic economics, but with no CapEx. Life science activity at our Gateway development continues to be healthy. The BXP ARE joint venture has signed an LOI with a full-building user for 751 Gateway, 230,000 sq ft, and we're actively responding to proposals for our anticipated redevelopment of 651 Gateway, about 300,000 sq ft, which won't commence until the Q3 of next year. Further down the peninsula in Mountain View, activity has picked up in the last 30 days. This quarter, we completed two full-building deals totaling 58,000 sq ft. We're seeing less information gathering exercises and a lot more active tours with RFPs and the need for immediate occupancy or early 2022 occupancy.

[Douglas T. Linde, President at BXP]

There are, as Owen said, large tech requirements active in the Silicon Valley. For those of you who saw that the Tesla announcement that they're moving their headquarters to Texas, you may have missed that they leased 325,000 sq ft in Palo Alto contemporaneously with that announcement. High quality, new construction availability is very limited in the Valley, and we're actively considering when we should restart the construction of Platform 16 next to Diridon Station and the future Google development in San Jose. Finally, let's touch on Boston. In the high-end market in the Boston CBD, particularly in the Back Bay, there is currently limited availability, particularly with use space. Rents have remained at pre-pandemic levels, and concessions are only marginally higher.

[Douglas T. Linde, President at BXP]

As we move closer to 2023, there will be additional new construction supply entering the market in the CBD, but not the Back Bay. As Owen mentioned, the big lease for the quarter was the early renewal with Wellington. They agreed to expand by 70,000 sq ft at Atlantic Wharf, and we're gonna terminate 156,000 sq ft at 100 Federal Street in 2023. The space we're getting back is leased at a rate that's below market, so we're optimistic that we can create additional value through this relet. We completed an additional 73,000 sq ft of leases in our Back Bay portfolio, and we have about 50,000 sq ft of leases under negotiation today in that same group of properties. The Boston retail portfolio is also very active.

[Douglas T. Linde, President at BXP]

We have signed an LOI for the 118,000 sq ft formerly occupied by Lord & Taylor, as well as 40,000 sq ft of inline space that's currently vacant or in default. This 158,000 sq ft will likely commence paying rent in early 2023. As we move to the suburbs, life science is dominating our activities. Last week, we signed our first lease at 880 Winter Street, our lab conversion that we started four months ago, 37,000 sq ft deal, which will deliver in the middle of next year, and we are in the final stages of negotiation on another 128,000 sq ft, which will bring the 224,000 sq ft building to 74% leased, and we have active dialogue on the rest of the space.

[Douglas T. Linde, President at BXP]

During the quarter, we signed over 105,000 sq ft of leases with life science tenants at 1000 Winter, 1100 Winter, and Reservoir Place, traditional office buildings. As we move into 2022, we're developing plans to convert additional available office space in Waltham into lab space. To summarize, we've seen a recovery in employment as Owen discussed. Employers are aggressively looking to hire. Capital raising in the venture world is breaking through levels never seen, and IPO takeouts are at a historically high level. Conditions are ripe for a recovery in office absorption. Employers are gonna want to use their physical space to encourage their teams to be together. Our mantra has been to create great places and spaces to allow our customers to use space as a way to attract and retain their talent.

[Douglas T. Linde, President at BXP]

If you believe that employees may be spending less time in their offices, it's even more important to have the right space in place when they're present. I'll stop there and give it over to Mike.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Great. Thanks, Doug. Good morning, everybody. Before I jump into the details of our third quarter earnings, as well as our 2021 and 2022 guidance, I want to touch on our recent financing activities. This quarter, we took advantage of the low interest rate environment and the very attractive credit spreads to issue $850 million of 12-year unsecured green bonds when the underlying 10-year Treasury rate was 1.3%. We achieved a coupon of 2.45%, the lowest in the company's history. We utilized the proceeds to redeem $1 billion of 3.85% unsecured notes on October fifteenth. Those notes were scheduled to expire in early 2023 and represented our largest debt maturity through 2025.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

The early prepayment will result in a redemption charge of 0.25 per share in the fourth quarter of 2021. We will benefit from the 140 basis point drop in the relative debt cost, and we're thrilled to issue such attractive long-term financing. The only other significant debt maturity we have in the next 18 months is our 620 million mortgage on 601 Lexington Avenue in New York City that expires in April of next year. Similar to the bond we redeemed, this loan also carries an above market interest rate of 4.75%. Given the increase in the cash flows from the building, owing partially to the redevelopment we completed earlier this year, we anticipate that we will be able to increase the size of the financing and reduce the interest rate substantially.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

We're working on this now, and our assumptions include closing before the end of 2021. The impact of these financing activities will be accretive to our 2022 earnings through a meaningful drop in our interest expense from 2021 that I will touch on in a minute. First, I'd like to describe our third quarter 2021 results. For the Q3, we announced FFO of $1.73 per share. That's 0.04 per share higher than the midpoint of our guidance and 0.03 ahead of consensus estimates. Our outperformance came from better portfolio NOI with 0.02 of higher rental and parking revenue and approximately 0.02 of lower than projected operating expenses. Looking at our parking revenues, they've started to accelerate sequentially as clients and visitors increase driving days into our properties.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

As Owen described, we're seeing building census grow, and the results are evident in our parking. Our share of this quarter's parking revenue totaled $22 million. This compares to a comparable pre-COVID quarterly result from the third quarter of 2019 of $28 million. At the bottom in the Q2 of 2020, our share of parking revenue was $14 million, so we are over 50% of the way back. On an annualized basis, using the third quarter run rate, we have about $25 million of revenue or 0.14 per share to recover before we are back to pre-COVID annual parking levels of $113 million. Our Kendall Square hotel was profitable for the first time in six quarters, contributing about $1 million of positive NOI.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Given the hotel's location in the heart of Cambridge and adjacent to MIT, we expect that it will ultimately restabilize at or above the $15 million annual NOI it generated in 2019, though certainly not in 2022. The third leg of our ancillary income is our retail income. Other than in San Francisco, nearly all of our retailers have returned to paying previous contract rents. This quarter, our share of retail rental revenue was $43.6 million. On an annualized basis, this is $16 million less than our share of 2019 retail revenue, which totaled $190 million. As Doug mentioned, we have some vacancy in our retail due to the pandemic, but we're negotiating leases now on significant portions of that space.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

If you combine and annualize our third quarter hotel NOI and our share of parking and retail revenues, we have the opportunity to gain approximately $52 million or 30 cents per share to return to 2019 full-year levels. We believe that all three of these income streams will fully recover and ultimately exceed prior peaks over time. Looking at the rest of this year, we released fourth quarter 2021 guidance of $1.50-$1.52 per share and full year 2021 guidance of $6.50-$6.52 per share. Our Q4 guidance includes the 25-cent share redemption charge related to our bond refinancing. Excluding the charge, our fourth quarter guidance would be sequentially higher than third quarter results by three cents per share at the midpoint.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

The improvement is primarily from Verizon taking occupancy of its 440,000 sq ft lease at The Hub on Causeway office development this quarter and lower interest expense after our refinancings. While we expect our same property portfolio NOI will also grow sequentially, the growth is partially offset by the FFO dilution from the sale of our Spring Street office campus in suburban Boston that closed for $192 million this week. Turning to our assumptions for 2022. Last night, we released our 2022 FFO guidance. We have three major drivers that are all headed in the right direction that provide for very strong FFO growth of 13% at the midpoint over 2021.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

The drivers include delivering a significant volume of leased new developments and acquisitions, growth in our same property portfolio, and our refinancing activities that lower our interest expense. The first growth driver is developments and acquisitions. We're delivering five of our development properties over the next Q4, totaling $1.6 billion of investment. These projects total 3 million sq ft of additions to our portfolio and are 92% leased. They include The Hub on Causeway in Boston that is leased to Verizon, 325 Main Street in Cambridge that is leased to Google, the 200 West Street life science development in Waltham that is leased to Translate Bio, Marriott's new headquarters facility in Bethesda, Maryland, and Reston Next that is leased to Fannie Mae and Volkswagen in Reston.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

It is also possible that our life science conversion at 880 Winter Street in Waltham will begin to contribute in late 2022. In total, we expect our development deliveries to contribute an incremental $65 million-$70 million to our FFO in 2022. Additionally, we've layered in several acquisitions that we completed this year, most notably Safeco Plaza in Seattle and our life science project we acquired in Waltham. We expect these acquisitions will add $7 million-$10 million to our share of NOI next year. The second growth driver for 2022 is the projected growth in our same property portfolio NOI. Our guidance assumes that our share of same property NOI will grow between 2% and 3.5% next year.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

The growth is expected to come from higher parking revenues, improvement in occupancy and pricing in our residential portfolio, higher NOI from our hotel, and increased occupancy in our office portfolio. Our leasing velocity has picked up in the last Q2, where we've leased 2.7 million sq ft of signed leases. Given the length of the typical leasing cycle, many of these leases we've signed or are negotiating will take occupancy either in late 2022 or 2023. We expect the improvement in our headline office occupancy to be gradual. As Doug described, we have several larger leases in the works for vacant space, where we anticipate occupancy will occur in 2023. On a cash basis, we expect our share of 2022 same-property NOI growth to be much stronger at between 5.5% and 6.5% over 2021.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

This equates to between $90-$100 million of incremental cash NOI to 2022. Much of our cash NOI growth is coming from approximately $50 million of free rent that is burning off in contractual leases. Our third FFO growth driver is coming from lower interest expense. As I mentioned earlier, we will incur a debt redemption charge of 25 cents per share in theQ4 of 2021. We do not expect that this will recur. Also, we are aggressively refinancing loans that were placed five-10 years ago in a higher interest rate environment with low cost current market financing. Partially offsetting this, we do expect to see higher interest expense in our joint venture portfolio. This is because we will cease capitalization of interest on the Marriott and The Hub on Causeway projects when they are delivered into service.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

In aggregate, we expect that 2022 interest expense will be $52 million-$60 million less than in 2021. That equates to $0.30-$0.34 of incremental positive impact on our 2022 FFO. To summarize, our guidance for 2022 FFO is $7.25-$7.45 per share. The midpoint of our range is $7.35, which is 13% or $0.84 a share higher than the midpoint of our 2021 guidance. At the midpoint, the incremental growth is coming from 0.43 from development and acquisitions, 0.25 from our same property portfolio, and 0.32 from lower interest expense. This will be offset by 0.06 of dilution from our 2021 disposition activity, 0.06 of lower termination income, and 0.04 of higher G&A.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

The past 18 months have brought challenges and uncertainty to so many, including our team at BXP. These past few months, it's been heartening to see our cities reopen, our colleagues and our clients starting to return to their offices and office leasing volumes picking up. As I've spelled out, we anticipate very strong FFO growth in 2022. Beyond 2022, we have more developments underway that will deliver additional FFO. Plus, we have the highest quality portfolio of office buildings that we believe will generate higher occupancy rates and earnings in the future. Operator, that completes our remarks. Can you please open the line up for questions?

[Operator]

Your first response is from Stephen Sakwa of Evercore ISI. Please go ahead.

[Stephen Sakwa, Senior Managing Director at Evercore ISI]

Thanks, appreciate all the detail. I don't think I caught everything, two quick questions. Mike, when you talked about retail and sort of what you were potentially recapturing, I just want to make sure for tenants that are currently in occupancy today but maybe aren't fully paying their stated rent, can you remind us what that dollar amount is, just on a quarterly basis?

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

I don't think I have that number in front of me, Steve. you know, we've got 43.6 million that is our share currently, so we're missing about $16 million on an annual basis. Most of that, honestly, is coming from filling vacant space. I would say that there's very little remaining in the way of kind of deferrals and things like that for retail tenants right now. In San Francisco, which is the smallest retail portfolio we have because the tenants there just don't pay high rents, you know, that's where, you know, the tenants haven't all returned to occupancy, and the vast majority of them are not paying rent. That's the place where those deferrals are. I mean, I think that's probably a couple of million bucks a year, something like that.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

That's not the most significant piece. The big chunks are some of the stuff Doug talked about, where we're filling the Lord & Taylor space. That's a big 120,000 sq ft. We've got a number of new retailers coming into the Pru, where we had vacancy that was created by some bankruptcies there and then in Reston as well. Those are kind of the big ticket items where it's coming from. I would say most of it's coming from filling vacant space, not from tenants that were deferring rents and are gonna be paying contract going forward.

[Douglas T. Linde, President at BXP]

Steve, this is Doug. If you take the summation of all the spaces that I described, where I sort of basically said, we're not gonna be receiving rent until probably late 2022 or early 2023, I want to say it's somewhere north of 250,000 sq ft, and the average rent's probably 45 a sq ft net. We're talking about, you know, $11 million-$12 million of incremental revenue from that portfolio of currently either leased or LOI space that we will get leased in the next couple of months.

[Stephen Sakwa, Senior Managing Director at Evercore ISI]

Got it. Okay, great. Thanks for the clarification. I just wanted to circle back on the average occupancy that you sort of outlined for 2022, the 88%-90%. Just to be clear, is that wide range really sort of, I guess, due to the uncertainty over when leases will start, or is some of that uncertainty because leases actually need to get signed over the next, say, three-six months, and then they need to commence? I'm just trying to figure out how much is a timing of when the revenue will start from a GAAP perspective versus how much actually needs to get leased.

[Douglas T. Linde, President at BXP]

Yes. Again, you know, just going back to where I started from. Right now we'll call it, you know, 88%+ leased, and we have 800,000 sq ft of signed leases that haven't commenced yet. Most of that will commence in the latter parts of 2022. As I said, we're working on renewals on about 25% right now of our 2.9 million sq ft of space, which is, call it 700,000 sq ft of space, plus or minus. We've been doing over 1 million sq ft a quarter of incremental leasing in the portfolio. It's not a heavy lift for us to get the space leased. The challenge is we're not sure what the timing is gonna be.

[Douglas T. Linde, President at BXP]

We know we're gonna sign a lease for 195,000 sq ft with, you know, another tenant at Dock 72, and unlikely they're gonna be in 2022, but they could be, but we're assuming they're not, right? So it's that sort of the, I'd say, the art behind our range of occupancy.

[Stephen Sakwa, Senior Managing Director at Evercore ISI]

Got it. Thanks very much.

[Operator]

Thank you. Your next response is from Omotayo Okusanya from Deutsche Bank. Please go ahead.

[Omotayo Okusanya, Managing Director, Head of US REIT Research at Deutsche Bank]

Hey, good morning, everyone. Doug, I think you mentioned the net effective levels in New York versus pre-COVID of around 10%-15%, if I caught that correctly. Do you have similar metrics for the rest of your markets?

[Douglas T. Linde, President at BXP]

Yeah, I would tell you that, you know, I guess I try to imply this, rents and concessions haven't changed in San Francisco. They haven't changed in Boston. I mean, as we've talked about, they've actually gotten better in suburban Boston and in Cambridge because we've been doing more life science as opposed to office. I'd say that they're up to flat. In Washington, D.C., they're actually slightly down in Reston because there's a slight amount of concession increase, but rents are pretty consistent with where they were. Honestly, I don't think they've really changed in Washington, D.C., because the Washington, D.C. market was very challenged pre-pandemic, and those conditions just remain today.

[Omotayo Okusanya, Managing Director, Head of US REIT Research at Deutsche Bank]

All right. Thanks. Then, if we look at your leasing pipeline, how much of your pipeline is new to market tenants versus moves or trades, you know, trade ups maybe from other buildings in the market, if you could classify it that way?

[Douglas T. Linde, President at BXP]

I don't know how you define a new-to-market tenant because there are very few companies that are now relocating to any of these places from others. I'd say in general, we're moving up our quality and/or we're expanding in the market relative to the amount of space we have, or we're consolidating into a better building from where we were before. That's where the bulk of the demand is coming from other than obviously life science. Those are new formations. The companies are located here, but you know I mean, the lease we're negotiating right now, for example, at 880, it's a company that you know did their IPO, they're moving from 80,000 sq ft or 60,000 sq ft currently, and they're adding another 120,000 sq ft, right?

[Douglas T. Linde, President at BXP]

It's that sort of, you know, dramatic growth that's occurring.

[Omotayo Okusanya, Managing Director, Head of US REIT Research at Deutsche Bank]

I guess maybe to ask the question a different way. If we look at the market vacancy, so if we listen to any of the, you know, broker calls or read any of the reports, and we look at the market vacancies, how much should we expect those market vacancies to change versus you sort of getting a bigger share of the pie and your occupancy can move up, but market vacancies might be sticky at the levels they're at?

[Douglas T. Linde, President at BXP]

It's a hard question to answer. Part of it's gonna have to do with how much of the sublet space gets absorbed. As the sublet space gets absorbed, that will improve the overall market statistic, right? For example, you know, if you look at Manhattan, I want to say there's probably been 4-5 million sq ft of space that's been taken off the sublet market over the last couple of quarters, right? That's improving the statistics. You know, you're still talking about a very high level. I would say that we will outperform the market relative to where we are.

[Douglas T. Linde, President at BXP]

I can't tell you whether our percentage change will be higher or lower than the markets because we just don't have enough clarity on how much of the sublet space, which is the bulk of where the existing availability came from in San Francisco and in New York City, which is obviously those are the two weakest markets from a statistical perspective, how much of that is, you know, gonna melt.

[Omotayo Okusanya, Managing Director, Head of US REIT Research at Deutsche Bank]

Thanks, Doug.

[Operator]

Your next response is from Nicholas Yulico with Scotiabank. Please go ahead.

[Nicholas Yulico, Managing Director and Senior Equity Analyst at Scotiabank]

Thanks. Good morning. I was hoping to just get a feel for what the leasing spreads were on, you know, signed leases in the quarter. I know you quote those on commence leases.

[Douglas T. Linde, President at BXP]

I tried to give you that where I could. I mean, I told you that, you know, again, when we have vacant space that's been vacant for more than 12 months, we don't quote what the spread is. I said in San Francisco, the spread was about 20%. In New York City, of the larger deals we did, you know, I said some of it was up 8% and some of it was down 4%. I guess what I was trying to convey was that it's sort of flattish in New York City right now with the portfolio of these spaces that we did this quarter. In the Greater Boston market, virtually everything is up.

[Douglas T. Linde, President at BXP]

If you look at our D.C. market, the deals that we're doing in Reston are modestly up or down on the rent level because of the question of how much growth there was in the rent over the last period of time that the existing tenant was in there. If we had a deal that was done 10 years ago and we had 3% increases every year, there was probably a modest amount of negative rental rate growth. If the tenant was a shorter-term deal, it's probably positive because there's you know been a pickup in terms of the, I guess, the strength of the market over the last 12-18 months.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Nick, these rents are all cash to cash.

[Douglas T. Linde, President at BXP]

Yeah. Everything's cash to cash.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

GAAP to GAAP, you know, it's much higher.

[Nicholas Yulico, Managing Director and Senior Equity Analyst at Scotiabank]

Okay. Thank you. That's helpful. My second question is on San Francisco, and you know, I'd like to hear a little bit more about your thoughts about the potential for that city to recover. Obviously, it's a much different dynamic. You talked about mask mandates. It's also a city that's kind of split between a financial district being more empty than the residential areas of the city. You have tech companies that aren't pushing employees back to work in the way that banks are in New York. I guess, you know, your thoughts on kind of how the recovery potential of that market. Also, maybe, you know, if there's also maybe a return of some larger potential tenants looking for space in that market.

[Nicholas Yulico, Managing Director and Senior Equity Analyst at Scotiabank]

The second part is, you know, your willingness to invest further in the city since there is talk about, you know, one of the larger development sites in the city potentially coming up as an opportunity.

[Owen Thomas, CEO at BXP]

Yeah. COVID has had the biggest impact on San Francisco, of all the markets where we operate. I think a lot of that has been the technology tenants, in some ways, leading the way on work from home, and second, the very restrictive COVID mandates that have been put in place. You know, the lifting of those mandates has lagged all of our other cities, and that's undoubtedly had an impact on the census data that I mentioned earlier. That all being said, San Francisco remains arguably the technology capital of the world. It's got the largest cluster of computer science workers, certainly in the United States, and we believe in the long-term recovery of the San Francisco market. I do think it will lag our other markets.

[Douglas T. Linde, President at BXP]

We will continue to invest in the area. Doug talked about the potential for us to restart our Platform 16 development. We haven't made that decision yet, but that's something that we'll be talking more about in future quarters. We also have a very attractive development site at Fourth and Harrison that we will be looking at certainly in 2022 and 2023. You know, we are open for business, and we'll consider other investments if they make sense for shareholders.

[Nicholas Yulico, Managing Director and Senior Equity Analyst at Scotiabank]

Okay. Thank you. Over.

[Operator]

Thank you. Your next response is from John Kim with BMO Capital Markets. Please go ahead.

[John Kim, Managing Director, U.S. Real Estate covering REITs at BMO Capital Markets]

Thanks. Good morning. The concerns with the supply chain, do you think this will delay or table development projects, either for you or your competitors, just given market rents are not really moving up in lockstep with the additional cost?

[Douglas T. Linde, President at BXP]

Well, I guess what you're getting at is how is inflation gonna impact the overall, you know, development model going forward, right? If there is significant inflation, then the rents that are necessary to justify new construction, assuming interest rates are also going up, are gonna need to rise. There's no question that speculative development will be more challenging. There are still lots of customers in this country who want new construction and want the best and brightest of the way buildings are built, potentially being, you know, very green, carbon neutral, net zero, whatever you want to describe it as. It's harder to do that with an older building. I think the question will be, what will the character of the leasing be, and where will it occur?

[Douglas T. Linde, President at BXP]

I don't think it's gonna necessarily stop new construction. I do think that speculative office development is a very, I'd say, challenging proposition today in most markets because of the amount of supply that exists. Remember that when you're starting a new building, you're talking about delivering somewhere between 36-48 months later if it's a high rise, and then even if it's a low-rise building, it's a minimum of 24 months. You know, people's views on what the world will look like when we get to those periods of time will be influential.

[Douglas T. Linde, President at BXP]

I mean, as Owen just suggested, you know, we're looking at the Silicon Valley, and we're looking at Platform 16, and we're saying to ourselves, "That's a really interesting market relative to the amount of demand that's currently exists today, the lack of high quality, first-class, class A office product, the potential location of the building that we would be building relative to transportation." You know, we're pretty optimistic in certain instances, but clearly, it's not what it would have been three years ago.

[John Kim, Managing Director, U.S. Real Estate covering REITs at BMO Capital Markets]

Okay. Doug, you mentioned the impact that the short-term lease has had on your leasing spreads this quarter. How much of a drag will that be in future quarters?

[Douglas T. Linde, President at BXP]

I think there's very little remaining. I mean, it was kind of a tsunami of these deals all starting, you know, in this quarter of 2021. I mean, just to sort of give you a little bit of the sausage making, right? We're sitting out in late 2020, and we have leases expiring in 2021, and the tenants aren't using their spaces, and they're coming to us and saying, "Well, you know, we're not sure what we're gonna do.

[Douglas T. Linde, President at BXP]

we might just give the space back, but if you cut us a deal on a short term, we'll hold the space, and we'll continue to look at it, and we'll think about what we're gonna do in the future." You know, it's a negotiation, right? Our view was, you know, very sort of selfishly, rather have, you know, half a dollar than a whole dollar versus no dollar. You know, again, we're starting to see the success of that strategy, which is the tenants that did those short-term commitments are going to likely be renewing on a long-term basis, and we'll get a dramatic uptick, right?

[Douglas T. Linde, President at BXP]

I guess when you see in New York City, in a couple of quarters, big increases because, you know, we went from a $60 net gross number to a $100 gross number. It's not because the market's gotten better, it's because we're moving away from what we did in the, you know, in this last couple of quarters. Great. Thank you.

[Operator]

Your next response is from Alexander Goldfarb with Piper Sandler. Please go ahead.

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, good morning up there. So two questions. First, OT, as you guys talk to different, you know, CEOs and office managers, what are they telling you as far as the decision of some, not all, but to keep punting on the return to office? I mean, in fact, we even heard of one company that, you know, suspended indefinitely return to office. Is it a fear that these companies have that their employees will just go elsewhere because it's such a tight labor market? Is it the commutes are still really bad and people just don't feel like schlepping, whether it's, you know, New York or San Francisco or I know you guys aren't in Chicago, but Chicago is another sort of hard hit CBD. What is the reason that you're hearing that these companies keep delaying?

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

Because obviously, as you point out, restaurants are full, planes are full, leisure hotels are full. It's clearly not a fear of COVID that's keeping people at home.

[Owen Thomas, CEO at BXP]

Yeah. Good morning, Alex. Look, I think pretty much universally the CEOs and business leaders we talk to, you know, if they're not back in the office, they want to figure out a way to get back in the office for all the reasons I articulated in my opening remarks. We think that's going on. The delay that we experienced this fall, I do think was driven by health security. You know, the infection levels from the Delta variant elevated. Cities put on, you know, mask mandates and things. You know, it's not pleasant to be in an office building wearing a mask. That's a very real thing, even if you're not concerned about COVID.

[Owen Thomas, CEO at BXP]

That being said, as I mentioned, the infection levels are down, and I do think the tight labor market is factoring into CEOs' decisions and the desire by some, certainly not all employees, to continue to work remotely. You know, that has caused some delays. As I articulated, I think over time, you know, I can't predict what the virus is gonna do, but I do think over time, you're gonna see more and more companies bringing their employees back to the office because those leaders are concerned about the future, competitiveness and cohesion of their companies.

[Douglas T. Linde, President at BXP]

I would also say, Alex, that there's something else going on, which is you get a lot of public positive reaction when you say, "Hey, we're thinking of, you know, remaining hybrid," or, "We're thinking of delaying our return." You don't get that same hurrah when you say, "Everyone must be back by January third." What we're seeing, I mean, we had two conversations yesterday with...

[Douglas T. Linde, President at BXP]

One with a tech company, one with a professional services company, and they both told us that they've already sent out announcements to their folks that, "Hey," in one case, they want everybody to start coming back to the office on a hybrid model in November, and the other one is, "Hey, you know, you better be near your office because we expect you to be back in January." Those companies are companies that have also, we know publicly have said, "We're not sure when we're coming back, and we've delayed things," and they're not publicly stating what I just described.

[Douglas T. Linde, President at BXP]

I think there's more going on right now relative to companies starting to put pressure on you know their existing employee base that it's time to start to think real hard about you know moving yourself into the right location so that you can be in the office on a much more consistent basis going forward. You just-

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

It's just odd. I mean, if you have companies paying people, you know, the one paying gets to drive the bus. That it's funny that right now it's like the passenger is driving instead of the bus driver. But the second-

[Owen Thomas, CEO at BXP]

I think the other demonstration of proof of concept is look at all the leasing that's going on, you know, in our own company and in the market. You know, if companies weren't committed to the office, why would they be leasing all this space?

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

Agreed. The next question is, as far as life science goes, you entered D.C., I mean, sorry, you entered Maryland on life science. You hadn't been there before. I was reading an article this week or last week that people are contemplating in the Navy Yards trying to do life science. You know, as you guys look around your portfolio, whether it's now like South Lake Union in Seattle, maybe the Navy Yards in Brooklyn is a spot, maybe not, or maybe, you know, San Diego would be a good life science market to enter. How many areas do you see the potential to expand your life science development program to?

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

Do you think it would lead you to new markets driven by life science, or most of the life science development that you're looking at is really in your existing markets plus Seattle?

[Owen Thomas, CEO at BXP]

Yeah. First thing I would say is almost half of the lab space in the country is in Boston and in San Francisco area, where we're already very active. If you look at the best opportunity we have as a company is to build what we have. I mean, we have 5 million sq ft, plus or minus, of land for development and multiple millions of sq ft of redevelopments. We control all that real estate, you know, at pre COVID, pre life science pricing. I think that's our best opportunity. But that being said, just as we did in Montgomery County, you know, we're open for business for making new acquisitions, and we're certainly gonna focus in the markets where we're active first.

[Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler]

Okay. Thank you.

[Operator]

Thank you. Your next response is from Ronald Kamdem with Morgan Stanley. Please go ahead.

[Ronald Kamdem, Managing Director and Head of US REITs & CRE Research at Morgan Stanley]

Hey, thank you. A couple quick ones for me. Just first is just a lot of transparency, sort of the 2022 outlook and the same-store cash NOI guidance. I was just wondering, I think you touched on some of the drivers for the same-store cash NOI, but is there a way to quantify sort of the contribution from whether it's retail or some of the hotel versus sort of the core office? That'd be helpful.

[Douglas T. Linde, President at BXP]

Sure. Look, I think we're gonna get some nice benefit from parking coming back. If you look at quarter over quarter over quarter, it's continuing to improve. I think that's a big one. I also think we're gonna get some nice benefit from some of the residential properties that we have, where pricing is improving, and we've got some lease up opportunity there. You know, the hotel is a little bit harder to gauge, honestly because it's just tougher to project. I would say, you know, I think it will improve, but we're not expecting a huge impact there. You know, the portfolio is the rest and it's gonna be a little bit more moderate.

[Douglas T. Linde, President at BXP]

I think it's related to what we see as kind of a gradual improvement in our occupancy with the hotel, which we think is gonna accelerate into 2023 as some of these leases that we're talking about are going into occupancy and actually generating revenue.

[Ronald Kamdem, Managing Director and Head of US REITs & CRE Research at Morgan Stanley]

Great. Got it. Sort of the second question was just maybe asking a compare or contrast between New York and San Francisco a different way. You certainly heard that, you know, clearly San Francisco is behind New York, but is the expectation still that at some point they're gonna be on the same recovery trajectory? Or is there anything that you're hearing or seeing that's maybe different between those markets that could solve that? When you think about New York versus San Francisco, are there any sort of unique factors in San Francisco for the lag, basically? Thanks.

[Douglas T. Linde, President at BXP]

You're asking honestly a social question more than an office question, in my opinion, because the reason that you know, San Francisco and quite frankly, the state of California is behind is because of the decisions that have been made by the health departments and the political leadership. You know, we unfortunately don't control those decisions. When San Francisco starts to have a significant return to the office wave, I think it will pick up rapidly and that we will start to see a significant recovery. Remember that pre-pandemic, Manhattan and New York had a supply problem, and San Francisco did not have a supply problem.

[Douglas T. Linde, President at BXP]

The opportunity from San Francisco is, how much of that labor will want to come back, and how quickly will those companies that have grown dramatically in terms of their own headcounts during the pandemic want to bring those people into close proximity with each other on a day-to-day basis? You know, there's an opportunity for San Francisco to accelerate and to quickly return. It's got a challenge from a political perspective right now, and it's got a challenge from a statistical perspective because there's a lot more available space on a percentage basis than there was and has ever been from a sublet perspective. You know, Manhattan is still way below where it once was, you know, call it 2002, 2003, from a sublet as a percentage of the market.

[Douglas T. Linde, President at BXP]

San Francisco is, you know, way above where it's been historically. Again, a lot of that space could be reoccupied by the companies that, you know, that chose to, quote, unquote, "put it on the sublet market." You know, I think that's what ultimately is gonna be the thing that changes the trajectory of San Francisco in terms of its rate of recovery pace.

[Bryan Koop, EVP, Boston Region at BXP]

Doug, as evidence of what you mentioned on social, we were for Boston. This is Bryan Koop. Pre-Labor Day, we were ticking up every week in terms of occupancy. Our, the city of Boston, not the state, came out with a stricter mandate on masking, et cetera, and that changed the return for like five-six of our major firms, and it ticked back down. We're starting to see that come back up again. In fact, one of our buildings, 888, hit, I believe, close to 70% occupancy last week. It's evidence of the social part and the city saying, what's going on for that particular market.

[Ronald Kamdem, Managing Director and Head of US REITs & CRE Research at Morgan Stanley]

Super helpful. Thank you.

[Operator]

Thank you. Your next response is from Blaine Heck with Wells Fargo. Please go ahead.

[Blaine Heck, Executive Director at Wells Fargo]

Great. Thanks. Owen or Doug, as I think you guys mentioned a few times in your remarks, it seems like we're still seeing the majority of leasing activity and even investment sales activity is concentrated in high quality assets that are either recently developed or have recently undergone major renovations. I guess to take the opposite side of an earlier question, do you think there's a risk in any of your specific markets that these trends spur additional new development as office landlords kind of position themselves to benefit from that, the flight to quality that we're seeing, but you know, ultimately maybe they end up hurting the market as a whole by adding new space?

[Douglas T. Linde, President at BXP]

You know, I'm not sure that's a risk we're concerned about at this time. I mean, I agree with what you said about the interest by both investors. I would say, by the way, the interest by investors is in assets that are of high quality or have the potential to be high quality, and on the interest by tenants in higher quality buildings. You know, the markets, you know, even though they're recovering, the level of availability, including sublease space is quite high, and that will be a headwind. As Doug described, you know, construction costs are going up because of supply chain issues, which makes development more difficult. You know, it's an interesting question, but I'm not sure that's a major risk that faces us at this time.

[Blaine Heck, Executive Director at Wells Fargo]

All right. That's helpful. Maybe one for Mike. You know, you guys have been running at high operating margins relative to pre-pandemic levels. I wanted to get your sense for how sustainable those margins are going forward and how sticky any of the, you know, expense savings that you guys achieved during the pandemic might be as utilization and physical occupancy increases within your portfolio.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Look, I mean, I think our margins should be continuing to run between 63.5% and 64.5%. As Doug described, you know, the increases that we may see in some of our operating expenses, the vast majority of that stuff gets passed through to our tenants. You know, we don't expect to see an impact, you know, a significant impact from those items. If you look over time, you know, we've gone through inflationary and deflationary times over long periods of time, and, you know, our operating margins have been, you know, within a band. I would not expect that we would suddenly have, you know, a 200 basis point change or something like that, in those margins. That's just not what we see happening.

[Blaine Heck, Executive Director at Wells Fargo]

Great. Thank you, guys.

[Operator]

Your next response is from Caitlin Burrows with Goldman Sachs. Please go ahead.

[Analyst at Goldman Sachs]

Hi, this is Julian on for Caitlin. There's been a lot of talk, obviously, and this is following up on some of the questions about shifting tenant demand towards newer, high-quality, well-amenitized product. Obviously, that shift will benefit some of your assets, both your recent builds and redeveloped assets. Is the elevated vacancy at the tail end of your portfolio, call it that, older vintage, non-LEED certified office product, making you reconsider the strategic fit of some of these assets? I'm thinking of vacancies at Carnegie Center, Gateway, Bay Colony Corporate Center, Colorado Center, et cetera. Second part of that question would be, does it make economic sense to make capital-intensive redevelopments in some cases? Sounds like you have plans at Gateway.

[Analyst at Goldman Sachs]

Not sure if Bay Colony would be eligible for conversion to lab space, but more broadly, maybe to try to elevate some of these assets to LEED Gold Platinum certifications.

[Douglas T. Linde, President at BXP]

I'm not trying to be cheeky here, but you and Caitlin should spend some time actually coming out and seeing our portfolio because I think a lot of these questions would be answered. We've been talking about all of the renovations that we've been doing up at Bay Colony as an example. I mentioned, you know, a few minutes ago that we've done 100,000 sq ft of new leases with life science companies, and we're actively looking at converting some of those buildings to full life science buildings. Carnegie Center is probably the most amenitized project in central New Jersey, and we have a tremendous amount of investment that's been made, and it's been very receptive.

[Douglas T. Linde, President at BXP]

By the way, we are probably at the forefront of LEED, not just silver, but platinum, new LEED standards, energy efficiency, indoor air quality. I mean, we are doing those things as a rote task today everywhere in our portfolio. I would tell you that the portfolio doesn't have any of those issues that you might describe as challenges. Honestly, you know, we have as much vacancy in a Class A office building, you know, today as we've had in other quote-unquote challenging time periods. Again, we are committed to picking up our occupancy rate, and we are doing that, you know, as I described in my comments relative to the amount of leasing that we're doing today.

[Douglas T. Linde, President at BXP]

We feel really good about the whole portfolio. Now, there are some markets that are less, you know, hardier than others relative to the amount of leasing demand, and San Francisco is obviously one of them. As an example, you mentioned Gateway. We're taking 651 Gateway out of service to convert it to life science. It's why it's got, you know, a 90,000 sq ft lease in a 300,000 sq ft building, right? We're trying to clear it out. We are actively doing those things. I would really encourage you guys to actually spend some time with, you know, our teams and get a feel for the portfolio.

[Owen Thomas, CEO at BXP]

Yeah. The only thing I would add to what Doug said is we have a, you know, 53 ± million sq ft portfolio. We sell $200 million-$500 million of assets per year. We are constantly refreshing our portfolio, not only in the things that Doug described in terms of amenitization, but also selling assets where we think we can get a good price that may not have some of the characteristics he described.

[Analyst at Goldman Sachs]

Awesome. Thank you.

[Operator]

Thank you. Your next response is from Anthony Paolone with Barclays. Please go ahead.

[Anthony Paolone, Co-Head of U.S. Real Estate Stock Research at JP Morgan]

Hi. Hello, everyone. Just a question on census. Where do you think that number goes to on a stabilized basis, given we've seen more companies even that are back in the office say that employees can work from home on Fridays? Can census and, I guess, the leasing demand be coupled in the future as, you know, tenants still want space but allow their employees a bit more flexibility?

[Douglas T. Linde, President at BXP]

Yeah. I think the census, the denominator of the census was the physical occupancy of the buildings the month before the pandemic started. Look, I think, as we've been saying over and over again, we think our clients are gonna return to the office, but we also think hybrid work is gonna be a bigger factor for many employers. What we're also seeing for our clients that have returned to the office

[Owen Thomas, CEO at BXP]

Most of them have a hybrid work option, but they're saying to their employees, "we gotta have everybody in the office on certain days of the week." The answer to your question is, I think our consensus should go back up to 100%, but it may not be every day of the week. You know, it may only be in the middle of the week. You know, Mondays and Fridays would probably be a little slower.

[Douglas T. Linde, President at BXP]

Just the only other thing I'd add is that over time, there may be more spatial considerations given by our tenants. They may actually have fewer people in their spaces, not because they're any less occupied, but because they were so tight together and so densely packed, and that given the, you know, the issues associated with the pandemic and health security and indoor air quality and having people just feel comfortable in their spaces, they may actually have to either increase their space in order to maintain their same occupancy, or they will, you know, have fewer badges at any one time because there just aren't gonna be as many seats as they once had.

[Anthony Paolone, Co-Head of U.S. Real Estate Stock Research at JP Morgan]

Got it. Thanks. Maybe on Dock 72, it seems like there's some momentum there. Can you talk about just the conversations you've had with more tenants at Dock 72 and just the feeling around the building?

[Douglas T. Linde, President at BXP]

John Powers, do you want to take that?

[John Powers, EVP, New York Region at BXP]

Sure. Well, as Doug said, we did a deal. We're very happy with that transaction, and we have a lease out for 192,000 sq ft. We have some action on the pre-builts, and we've had more people coming to the Navy Yard and seeing it, which is really what we need because it's a fantastic building.

[Anthony Paolone, Co-Head of U.S. Real Estate Stock Research at JP Morgan]

All right. Thank you.

[Operator]

Your next response is from Peter Abramowitz with Deutsche Bank. Please go ahead.

[Peter Abramowitz, VP of Equity Research at Deutsche Bank]

Thank you. Just sort of a high-level strategy question here. Sort of as you're evaluating new markets, how do you think about Miami as a potential next market? Seems like a place that would kind of fit with your strategy of being coastal markets, maybe not as high barrier to entry as New York and California, but certainly a more kind of business-friendly environment. In addition, all the demographic shifts that are kind of benefiting it as a result of the pandemic. Any thoughts of how you look at a market like that or any potential other markets where you might enter?

[Owen Thomas, CEO at BXP]

Yeah. We are very focused on the six coastal large gateway markets where we currently operate. We believe those markets have the largest clusters of knowledge workers that are important to the growth businesses that we serve, particularly in the technology and the life science sectors. We also see stronger barriers to new entry in those six markets, and that's where we're focused. Within that, you know, we are building a life science business, you know, as well as an office business in many of those markets, and that's gonna be our focus for the foreseeable future.

[Peter Abramowitz, VP of Equity Research at Deutsche Bank]

Okay. That's all I got. Thank you.

[Operator]

Thank you. Your next response is from Daniel Ismail with Green Street. Go ahead.

[Daniel Ismail, Co-Head of Strategic Research at Green Street]

Great. Thank you. Doug, you touched on this earlier about how vacancy might change relative to markets, but is it your sense that leasing volume will reach pre-COVID levels in 2022, or is that a 2023 event?

[Douglas T. Linde, President at BXP]

I'll try and articulate what I've said in the past, which is that for the large tenants, what I would refer to as the tech titans, those tenants haven't left the market, and they're gonna continue to do what they were doing. Those are the kind of companies that Owen was describing. They're looking for space down in Silicon Valley and have made major expansions in the urban areas of all of our markets. Then on the small side, you know, tenants that are less than a floor, they are back doing exactly what they were otherwise doing. There's plenty of volume in that sector.

[Douglas T. Linde, President at BXP]

I think the challenge is the companies that are thinking about what it is that hybrid means and how hybrid will work for them. Those companies will need to get their people back into a consistent in-person environment or understand what their employees want to do and what they want them to do, and that's gonna take some time. I believe that 2022 will be a lighter year relative to absorption than pre-pandemic.

[Douglas T. Linde, President at BXP]

In 2023, when the experiments have all you know run their courses and companies understand what their expectations are for human capital and physical capital, that's when we will see, I believe, and I think, you know, Owen articulates as well the reasons why, we'll see a very strong pickup in absorption and demand growth.

[Daniel Ismail, Co-Head of Strategic Research at Green Street]

Great. Thank you. Maybe just last one, a bigger picture question. We've discussed the high quality and ground up and renovated office buildings seeing high strong pricing recently. Is it your sense there is any pricing differential between ground up construction and a fully renovated office building? Is there any difference in tenant demand between those two categories?

[Owen Thomas, CEO at BXP]

Are you talking about sales values or rental rates?

[Daniel Ismail, Co-Head of Strategic Research at Green Street]

Sales values and then, tenant demand as well. I guess they go hand in hand.

[Owen Thomas, CEO at BXP]

Yeah. I mean, Look, I think it's a little bit dependent on the market that you're in. I mean, You know, let's take New York, for example. There's been, you know, strong technology demand on the West Side and in Midtown South, and a lot of the stock there is, you know, the ground up development has happened, but it's not as available. There have been some very successful and interesting renovations of existing stock. I would say some of the best buildings in Midtown South are actually older buildings that have been renovated, and we intend to make 360 Park Avenue South one of them. I think it's very dependent, you know, on the local market.

[Owen Thomas, CEO at BXP]

I think a very high quality, older building that's been fully renovated in Midtown South is gonna get, you know, equivalent pricing to something that's new.

[Douglas T. Linde, President at BXP]

You know, on the demand side, Danny, the only thing that you can't fix or change on a renovation is the structure. Everything else can basically go, right? You can literally rip off the facade and put a brand-new energy-efficient window system in. You can dramatically change the mechanical. You can even create new shafts for larger you know, duct work and change the mechanical equipment in the buildings. If the building has a really challenged structural system, meaning lots and lots of columns or a very low slab to slab, I think those are the impediments to a renovated building relative to new construction, where you're gonna see many fewer columns and you're gonna see much larger volumes of space.

[Douglas T. Linde, President at BXP]

Other than those two characteristics, a fabulous renovation of a building is gonna get the same, I think, level of interest as a new construction building.

[Daniel Ismail, Co-Head of Strategic Research at Green Street]

Got it. Then one more, if I may. You mentioned 360 Park Avenue. I believe you issued a few OP units to do that deal. Just as the risk of higher taxes seems to be increasing, is utilizing that structure increasing more in your discussions when you're out looking for new acquisitions?

[Owen Thomas, CEO at BXP]

Yes. It is a very valuable structure that we can offer, and it gives us, as a public company, a competitive advantage to be able to exchange, you know, OP units for a tax-sensitive seller. You know, it's been a long time since the last OP unit deal, so, but I would say today that we are having dialogues with other owners of real estate about, you know, a similar structure. I think it's very case specific, though. I would say, yes, the dialogues are higher, but I also wouldn't suggest a tidal wave of this activity either.

[Operator]

Your next response is from Brent Dilts with UBS. Please go ahead.

[Brent Dilts, Analyst at UBS]

Hey, great. Thanks, guys. Just, could you talk about how demand for your flex product has evolved this year and where you see co-working demand going from here as physical occupancy improves?

[Owen Thomas, CEO at BXP]

Bryan, you want to talk about Flex by BXP?

[Bryan Koop, EVP, Boston Region at BXP]

Yeah. Our Flex by BXP in Boston, it got four locations, and it's maintained great stability throughout COVID. We're starting to see some pickup in activity, but not really of the kinda that we'd be really proud to be saying is taking place pre-COVID. But we definitely have interest in it, and we've got inquiries on it coming up, and mainly from corporate users versus entrepreneurs seems to be the theme, where it's a corporate user saying, "We're gonna have a special project. What do you have in 2022 that we can take immediately?

[Owen Thomas, CEO at BXP]

Yeah. I think in terms of the broader market, I would, you know, continue to reiterate what we've said in the past, is we think flexible office space will be an important part of the office business going forward. We've seen in our own portfolio its value to small companies that just want space, and they want it now, and they want flexibility. I also think larger corporates will see value in procuring a small percentage of their space on a flexible basis, given their business often changes more rapidly than space can be delivered to them. I think the first thing that has to happen in the market is, you know, roughly 2%-3% of U.S. office space today is flexible. It needs to refill.

[Owen Thomas, CEO at BXP]

I mean, that's the first thing that needs to happen. Then the question will be, if it's going to grow, how's it gonna get financed? You know, I'm not sure the operators are gonna be financing additional growth of flexible office space. I think it's gonna be the landlords, and where and when, you know, will, and how much will they elect to do going forward. I think we'll see. I don't think those decisions will need to be answered for the next year or so.

[Brent Dilts, Analyst at UBS]

Yeah. Okay. Thanks for that, guys. Just one other one here. I heard your comments on, you know, physical occupancy maybe not being the same as, you know, card counts and stuff in the future. As companies have been returning employees to the office in bigger numbers, has there been any increase in those tenants making changes to floor plans or amenities? Just related to that, are there any new tenants in the portfolio requesting anything in terms of build-out that's been different versus pre-COVID?

[Douglas T. Linde, President at BXP]

I am surprised that I'm gonna say what I'm saying, which is we've seen virtually no existing tenant do anything that requires a building permit. That doesn't mean that they aren't moving furniture around, or they're not eliminating workstations, or they're converting small chat rooms into offices. We don't know if that's going on or not. To date, you know, the energy has been on simply getting people to get comfortable coming back into their office environment, not changing the physical infrastructure. Again, even the companies that are saying, "Hey, we want you back," it's gonna take some time for those companies to get all of their employees to come back on a consistent basis.

[Douglas T. Linde, President at BXP]

I think it's at that point that they will have a better understanding of how their space needs to be organized to effectively fit the way they want their people to be working when they are in person. Gotcha. Thanks for all the questions. That was it for me.

[Operator]

Thank you. Your next question is from Jamie Feldman with Bank of America. Please go ahead.

[Jamie Feldman, Analyst at Bank of America]

Great. Thank you. I just want to go back to your last answer on flex office. You know, now that we've seen WeWork as a public company, they are one of your largest tenants. I mean, do you think they're gonna grow in the portfolio going forward? Just how do you think your, you know, BXP and WeWork will function together going forward?

[Owen Thomas, CEO at BXP]

Yeah. Well, we have a great relationship with them. We're delighted that they were able to go public. You know, we have, I believe, five different stores with them right now. We're gonna have to see how, you know, their success evolves and the whole flex market evolves. As I've mentioned a minute ago, flexible space is less occupied, and there needs to be some recovery of that market before we could consider additional growth. So, you know, we will consider it in the future, but I think that's at least a year off.

[Jamie Feldman, Analyst at Bank of America]

Are there characteristics of the flex office leases that you're seeing more tenants request in terms of duration or breaks or anything like that?

[Douglas T. Linde, President at BXP]

Jamie, the reason that we did our own flex space was because we have enough volume of space in our portfolio, where we wanted to be able to satisfy those customers who basically said, "We don't want to think about anything other than can we be in the space tomorrow, and we don't have to buy furniture, we don't have to buy technology services, we don't have to do anything other than bring our people in and go." That was the nature of the experiment that we have been doing with our spaces. I would tell you that we continue to see requests from small companies for, "Hey, what do you have for me? I'm just looking for some short-term space." That's exactly what our flex product should be about.

[Douglas T. Linde, President at BXP]

What we are not doing and don't have any intention of doing is taking large pieces of our space and converting it to flex space and competing with WeWork or any of the other, you know, flexible space operators for corporate users who are looking for large blocks of space because that's just part of their strategy. That's not what we're gonna be doing.

[Douglas T. Linde, President at BXP]

Relative to where our buildings are and the amenitization we have, that's the—I think that's the attraction of why the companies that are in our spaces have gone there, is because you can go to the Prudential Center, or you can go to The Hub on Causeway, or you can go to 100 Federal Street and get the advantage of all the amenitization and the great place and space making that we have done and do it on a short-term basis if that's what your business strategy calls for.

[Owen Thomas, CEO at BXP]

Yeah. I mean, I think the decision to grow from our seat is really two things. One is what Doug is describing, which is this something we should just have, you know, to attract more customers, particularly where we have a high concentration of office space, like at The Pru or at Reston or Embarcadero Center? You know, if you're building an apartment building, you don't just build single bedrooms. You know, you have studios and two bedrooms, so this is a different product, and is it valuable to have that product at one of our facilities? And also, by the way, does it create tenants that might move, become successful and bigger and then like being at The Pru, for example, and become a longer-term customer? That's one question. The second question is, what's the math?

[Owen Thomas, CEO at BXP]

That's a big question because you have to do turnkey build out, cost $100 sq ft. You face vacancy because you don't have long-term leases, and you have to understand what the math looks like.

[Bryan Koop, EVP, Boston Region at BXP]

Yeah, 100% of what Doug said on our corporate users is evidenced at The Hub. We've got a full floor in the loft space that is flex space. 100% of our clients in there are users in the buildings, and they tend to be special project related for six to one year in term. As a great example is we have a e-gaming division in one of the units that's a subsidiary of one of our clients up above. The Hub's a great example. It's 100% of our clientele in that one. In other locations, it's probably 50%-60%. It tends to be longer in term, not month to month. Our flex product is totally different than co-working. We're not doing co-working.

[Bryan Koop, EVP, Boston Region at BXP]

These are spaces that are pre-built, and we have no social aspects to the needs of our clients. They do that.

[Jamie Feldman, Analyst at Bank of America]

Okay, that's all very helpful. Then I guess just some housekeeping questions for Mike on the guidance. What are you assuming for leasing spreads? Then can you talk about, CapEx next year and maybe to help us get to like an AFFO number?

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

I mean, look, leasing spreads, I, it's not gonna change that dramatically. Boston and San Francisco spreads are gonna be up, in our view. The deals that Doug talked about that we're doing in San Francisco this quarter and the things that we have under discussion, are gonna be roll-ups. Same thing with Boston, and Cambridge and the suburbs. I think Reston will be closer to flat, maybe slightly up on the leasing that we do. You know, New York City is gonna be a little bit more volatile because it really depends on the space, right? We have certain spaces that are gonna be roll downs and certain spaces that are gonna be roll ups. I think you will see more volatility in New York City, there.

[Douglas T. Linde, President at BXP]

With respect to kind of AFFO, if you look at 2021, and then we've got Q3 in the books, I mean, I think our AFFO is getting pretty close to where it was in 2019, honestly. We have a shot of getting to, I think it was $4.43 a share in 2019. So I think we have a shot of getting there. We may be, you know, slightly below. You know, and looking out at 2022, I would say on the CapEx side.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Probably pretty similar to what we're seeing this year, which is, you know, 100 million, maybe 120 million max in kind of CapEx. Leasing costs, you know, they're running somewhere in the mid-200s on an annual basis, which is not that significantly different than what they've been in 2021 and prior years. We've got a lot of, obviously, free rent burning off. You know, our non-cash rent is gonna be slightly lower than we guided for 2021, and we gave that guidance. It's $90 million-$110 million of non-cash rent. But there's a lot of free rent burning off.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Then you have, you know, other non-cash items that go the other way, like stock comp and, you know, fair value, ground lease rent and things like that's about $75 million the other way. The way I kind of look at it is, if you want to add up all those adjustments, there's probably, you know, $370 million-$400 million of adjustments off of our FFO. That's, you know, $2.25 a share.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

That'll drive you to 2022 to, you know, an AFFO that's around $5, which is up significantly from where it will be in 2021, but also from where it was in 2019 pre-COVID, because of all the cash NOI growth we've had and the developments, right, that have come in and are increasing our cash NOI. I think it's a very positive story.

[Jamie Feldman, Analyst at Bank of America]

Okay. That's very helpful. How do you think about just dividend coverage and growth?

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Well, I mean, I think as our cash NOI goes up, you're gonna see our dividend coverage improve. Obviously, it's been pretty tight for the Q1 andQ2. Our FAD ratio has been, you know, in the high 90s. It went way down this quarter. It was like 72% because as kind of Doug talked about, our transaction costs were lower this quarter, which helped us. You know, as our FFO grows and our cash NOI grows, it's gonna improve and improve. You know, at this point, we haven't made any decisions about a dividend policy or strategy going forward, but it's certainly something we'll be discussing with the board on a quarterly basis as this cash NOI comes in.

[Jamie Feldman, Analyst at Bank of America]

Okay, great. Thank you very much.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Yep.

[Operator]

There are no further questions in the queue at this time.

[Michael E. LaBelle, EVP, CFO, and Treasurer at BXP]

Okay, operator, thank you. That concludes management's remarks, and thank all of you for your interest in Boston Properties. Have a good day.

[Operator]

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

Participants

Executives

• Laura M. Sesody, SVP, Corporate Marketing & Communications
• Owen Thomas, CEO
• Douglas T. Linde, President
• Michael E. LaBelle, EVP, CFO, and Treasurer
• Bryan Koop, EVP, Boston Region
• John Powers, EVP, New York Region

Analysts

• Stephen Sakwa, Senior Managing Director at Evercore ISI
• Omotayo Okusanya, Managing Director, Head of US REIT Research at Deutsche Bank
• Nicholas Yulico, Managing Director and Senior Equity Analyst at Scotiabank
• John Kim, Managing Director, U.S. Real Estate covering REITs at BMO Capital Markets
• Alexander Goldfarb, Managing Director and Senior Research Analyst at Piper Sandler
• Ronald Kamdem, Managing Director and Head of US REITs & CRE Research at Morgan Stanley
• Blaine Heck, Executive Director at Wells Fargo
• Analyst at Goldman Sachs
• Anthony Paolone, Co-Head of U.S. Real Estate Stock Research at JP Morgan
• Peter Abramowitz, VP of Equity Research at Deutsche Bank
• Daniel Ismail, Co-Head of Strategic Research at Green Street
• Brent Dilts, Analyst at UBS
• Jamie Feldman, Analyst at Bank of America