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Boston Properties Q3 2022 Earnings Call Transcript


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Participants

Corporate Executives

  • Helen Han
    Vice President of Investor Relations
  • Owen Thomas
    Chairman & Chief Executive Officer
  • Douglas Linde
    President & Director
  • Michael LaBelle
    Executive Vice President, Treasurer & Chief Financial Officer
  • Bryan Koop
    Executive Vice President of Boston Region

Analysts

Presentation

Operator

Good day and thank you for standing by. Welcome to BXP's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today to Helen Han, Vice President of Investor Relations. Please go ahead.

Helen Han
Vice President of Investor Relations at Boston Properties

Good morning and welcome to BXP's third quarter 2022 earnings conference call. The press release and supplemental package were distributed last night and furnished on Form 8-K. In the supplemental package, BXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for 12 months.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP's filings with the SEC. BXP does not undertake the duty to update any forward-looking statements.

I'd like to welcome Owen Thomas, Chairman and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of our call, Ray Ritchie, Senior Executive Vice President; and our regional management teams will be available to address any questions. [Operator Instructions]

I would now like to turn the call over to Owen Thomas for his formal remarks.

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

Thank you, Helen and good morning, everyone. Today, I will cover BXP's continued strong execution, as demonstrated in our third quarter results. I'll provide a brief update to my remarks at our recent investor conference on the economy, return to office dynamics in the premier workplace market. I'll discuss private equity capital market conditions for office real estate, BXP's capital allocation activities and I will provide a reminder from the investor conference of BXP's strategic shifts given current market conditions.

Our FFO per share this quarter was well above both market consensus and the midpoint of our guidance and we once again increased our forecast for full year 2022. We completed 1.4 million square feet of leasing just below our long-term average leasing activity for the third quarter. And year-to-date, we've leased 4.6 million square feet which is meaningfully above our long-term leasing activity for the first 3 quarters of the year. This success is due to our team's strong execution, increasing return to the office behavior by workers and the strong preference of our clients for premier workplaces which are the hallmark of BXP's strategy and portfolio. Also in the quarter, BXP reinforced its ESG credentials by earning the highest 5-star rating in the 2022 GRES assessment as well as its 11th consecutive Green Star recognition. We also commenced a partnership with the New York State Energy Research and Development Authority as part of the Empire building challenge, a public-private effort to support low-carbon retrofits and high-rise buildings in New York City to reduce emissions and combat climate change. As a company, we remain focused on climate action and are on track to achieve carbon-neutral operations in 2025.

Now I covered in detail at BXP's investor conference in September, our views of economic conditions, client preferences and in-person work behavior and market statistics for premier workplaces. So in terms of what's new, inflation unfortunately remains resilient. The Fed remains committed to taming it through higher interest rates and as a result, markets remain volatile. Workers continue to return to the office as our bad swipes grow each week, led by nontechnology industry clients.

Premier workplaces, as defined by CBRE, represent only 17% of the office inventory in the 5 CBDs where we operate and this segment continues to outperform the broader office market. At the end of the third quarter, vacancy in these 5 CBDs was 9.1% for Premier workplaces and 14.8% for the rest of the market. Net absorption in the third quarter was negative 200,000 square feet for Premier workplaces and negative 1.7 million square feet for the rest of the market. Net absorption for the last 7 quarters was negative 900,000 square feet for Premier workplaces and negative 17.3 million square feet for the balance of the market, obviously, a very significant difference.

Given that 94% of BXP CBD space competes in the premier workplace market, we believe it's increasingly necessary to understand operating trends for the premier workplace segment of the market to assess and forecast our leasing performance. In terms of real estate capital markets, transaction volume for office assets slowed to $18 billion in the third quarter, down 11% from the second quarter and down 41% from the third quarter last year. We expect transaction volumes to decline further, particularly in the next few quarters. Debt financing is increasingly expensive and difficult to arrange and many institutional buyers that withdrawn from the market due to real estate over allocations caused by the denominator effect and/or a view that more attractive entry points for new investments will be forthcoming in future quarters. There are, however, were several transactions of note in the third quarter.

In the office sector, the most significant transaction was our sale of 601 Massachusetts Avenue in Washington, D.C. for $531 million to a non-U.S. property company. The 480,000 square foot building is 98% leased and sold for a 5.1% initial cap rate and $1,110 a square foot. In New York City, 1330 Avenue of the Americas sold for $320 million to a private investment firm. The 536,000 square foot building is 85% leased and sold for just under $600 a square foot and a 5.7% cap rate. In the lab sector, there were 4 significant transactions completed in Cambridge, the Seaport District of Boston and South San Francisco for a total of over $1.6 billion. Pricing ranged from a 4.2% to a 5.5% cap rate and approximately $1,200 to $2,200 per square foot.

BXP was active this quarter with capital allocation. We completed a significant transaction with Biogen involving 2 adjacent buildings in our Kendall Center project. We acquired 125 Broadway, a 271,000 square foot lab building that Biogen has agreed to lease back for 6 years for $592 million which is $2,185 a square foot. Immediately adjacent is 300 Binney Street, 195,000 square foot office building owned by BXP and leased to Biogen for 6 remaining years. We terminated Biogen's lease will convert the building to lab use upsized to 240,000 square feet and entered into a new lease with the Broad Institute for 15 years at significantly higher rents. The total cost to redevelop 300 Benning Street is $210 million and the building will be delivered in the fourth quarter of '24. For both investments, the projected blended initial cash return is over 7%, including the acquisition cost of 125 Broadway and the redevelopment cost forgone Biogen rent and initial cost basis for 300 Binney Street. The projected blended GAAP yields are materially higher given the 3% annual rent escalations in both the Biogen and Broad Institute leases.

We also continue to advance predevelopment work for 290 Binney Street, a 570,000 square foot lab development that is 100% pre-leased to AstraZeneca and our 121 Broadway residential tower, also both located in Kendall Center. Assuming all predevelopment hurdles are achieved, we expect these projects will commence in early 2023. Strategically, we are making major steps forward in our life science ambitions by acquiring, developing and redeveloping at attractive yields, significant lab space at Kendall Center, one of the leading preferred locations for life science clients in the world. We also just announced an agreement to acquire a 27% interest in 200 Fifth Avenue, 1 of the top 5 premier workplaces in the Midtown South submarket of New York City located directly on Madison Square Park. The building comprises 870,000 square feet and is 93% leased to leading clients such as Tiffany, Gray Advertising and [indecipherable]. The acquisition price for our interest implies a building valuation of $1.05 billion which equates to just over $1,200 a square foot and a 5.3% initial cap rate.

The building has a $600 million first mortgage that matures in 2028 and bears interest at a fixed rate of 4.34% which is well below current market rates. BXP will assume management and leasing from the current developer who is monetizing their interest in the asset. We are entering into the existing partnership and as a result, we'll grow our relationship with JPMorgan Global Alternatives, a leading real estate investment adviser. This investment was sourced off market. Strategically, we are excited to grow our presence in Midtown South and had such a leading premier workplace to the BXP portfolio. We remain active with dispositions as well given the recent announcement of our contract to sell the Avant, a 15-story 359-unit luxury multifamily building in Reston which we built in 2013. The sale price is $141 million or $393,000 per unit which represents a 4.3% cap rate on current NOI. We also sold a 10-acre land parcel in Loudon County Virginia for $27 million to a data center developer. Both sales, along with 601 Mass Ads will be like-kind exchange with the Madison Center acquisition.

Our previously described strategy to reallocate capital from the Washington, D.C. region to Seattle is now complete, having sold assets totaling approximately $700 million to fund the $730 million acquisition. We do not anticipate any further sales this year and our total dispositions in 2022 is projected to be $864 million. Our development pipeline remains robust as we added this quarter a 104,000 square foot building at 140 Kendrick Street and Needham math that we are redeveloping to net zero carbon performance for Wellington Management. And the 118,000 square foot 760 Boylston Street retail building at the Prudential Center in Boston that is also fully leased.

Our current development pipeline of 13 office lab residential and retail projects as well as view Boston, the observation deck at the Prudential Center, aggregates 4.4 million square feet and $2.7 billion of investment that we project based on delivery date and lease-up assumptions to add nearly $200 million to our NOI over the next 5 years at a 7.4% weighted average cash yield on cost when stabilized.

The commercial component of our development pipeline is 52% pre-leased. These figures exclude the positive contribution of 300 Binney Street which will be added to the development pipeline in the first quarter of next year. In closing, I'd like to reiterate the strategic shift BXP is executing as a result of the pandemic and current economic slowdown. We will continue to embrace our leadership position in the premier workplace industry and leverage our strengths in portfolio quality, client relationships, development skills, market penetration and sustainability to profitably build market share. We will pursue attractive asset class adjacencies where BXP has a track record of success which today are life sciences, as evidenced most recently by the transaction with Biogen and multifamily development.

We will continue to raise the quality bar for our portfolio and actively recycle capital by selling assets as we did in 2022, subject to market conditions. And lastly, given rising interest rates and financial market turbulence, we will prioritize risk management by actively managing liquidity, investing more extensively with joint venture partners to manage our debt levels and being highly selective in new investment commitments. The near-term challenges in the capital markets confront BXP in our industry, we are confident our platform, strategy and team will build market share and continue to create value over the long term.

Let me turn the discussion over to Doug.

Douglas Linde
President & Director at Boston Properties

Thanks and good morning, everybody. So I'm going to pivot the discussion this morning to our 2023 earnings guidance. We expected and saw a number of notes last night. So obviously, this is of critical importance to everybody. And I think we outlined a bunch of the critical variables in the press release and Mike is going to provide some commentary on the most significant components in his remarks. I am going to focus my remarks on our in-service operating portfolio which is really driving our same property expectations. But I'm going to start with what happened in the third quarter because I think the trends that I'm describing are going to be relatively relevant to our forward assumptions as we think about 2023.

So the third quarter was another really good leasing quarter for BXP. It's now the sixth straight quarter of strong overall leasing activity in the portfolio. Just to remind everybody, beginning in the second quarter of '21, we signed 1.2 million, 1.4 million, 1.8 million, 1.2 million, 1.9 million and this quarter, 1.4 million square feet of leases. So that's about 6.3 million over the last 12 months. Obviously, it's a deceleration between the second -- the third quarter from the second quarter.

We have successfully executed leases with clients in the midst of the delta variant, the Omicron variant, remote work fits and starts, significant labor market headwinds and now what is surely a pullback in business activity. The Boston CBD led our activity this quarter with about 260,000 square feet of leases, including some renewals expansions and the addition of new clients into the portfolio. The mark-to-market on the previously leased space and again, giving you data on the leases that were signed this quarter, not leases that are in our supplemental which may have happened 2 or 3 or 4 years ago but the mark-to-market on the spaces this quarter was 15% positive. The lease of 300 Binny Street dominated our Cambridge activity this quarter and because we are moving from a 2011 office lease to a 2024 Lab lease, the markup is over 250%. So it's a very, very significant increase. The suburban 128 workspace market remains slow with all of our leasing under 10,000 square feet other than a 55,000 square foot renewal that we did, there, the markup was about 3%. This was also an unusually busy quarter for our retail space, including the 118,000 square feet at 750 Boylston, we completed 181,000 square feet of retail leasing in the Boston region this quarter. We didn't complete any new life science leasing in the Waltham, Lexington portfolio, where we have our buildings under construction.

The life science market has seen a significant slowdown. We have available space of both of these developments that we are aggressively marketing. As we discussed at our Investor Day, there are a number of other suburban buildings that we have been vacating in order to be in a position to redevelop them as lab buildings. These buildings are not yet under development, so they reduced the portfolio occupancy that we're showing. At the present time, we have not made any commitments to begin any additional developments that these assets but we are vacating these buildings intentionally.

In New York City, we completed 250,000 square feet of leasing, much like Boston, in Manhattan, we saw a number of renewals, expansions and new clients join the portfolio. the mark-to-market on the second-generation space that was recently occupied was down about 4%. New activity in New York City was off in September but we have seen a meaningful pickup during the month of October. As a case in point, on September 30, we had no active discussions on our 120,000 square foot block of space at 599 Lexington Avenue. Today, we have 3 active proposals covering over 70,000 square feet of that space. We completed another lease at Dock 72 this quarter but WeWork relinquished space on October 1 that will mute the contribution to occupancy as you look at it next quarter.

In Princeton, we completed 6 transactions with professional and financial firms totaling 40,000 square feet with an increase of rent of 3.5%. In D.C., we completed 4 leases for about 100,000 square feet. This is in CBD including 1 lease renewal with a markdown of about 12%. Now remember in D.C., the lease structure has 2% to 3% annual increases for leases that are generally 10 to 15 years. So in virtually every renewal, the last year of a 10- to 15-year-old lease with a 2.5% to 3% increase is less than the starting rent of the new lease. So that's typically what we see all the time there. Small financial and professional service firms made up the activity in Northern Virginia, where we saw about 50,000 square feet of activity and the largest lease was only 15,000 square feet. The markdown was about 3.5% on that portfolio. We continue to make progress at 2100 Penn, where we have 90,000 square feet of leases under negotiation that will bring that asset to 80% leased.

Finally, in San Francisco, the story is the same as the other markets though the lack of technology demand is more impactful on overall market segments. We completed 8 CBD leases all under 11,000 square feet with professional services and financial clients. The markup was flat with an average starting rent of about $100 a square foot. Down in the Valley, we did 92,000 square feet with 3 renewals and added 1 client. The 60 basis points of occupancy loss this quarter was in line with our comments and expectations from last quarter. These 3 assets were removed from the portfolio. 601 Massachusetts Avenue, obviously which was sold and 100% leased, 140 Kendrick Street Building A which is 100% leased is in redevelopment and our large box at the Prudential Center, 760 Boylston which is 100% leased and in redevelopment. Shearson, 350,000 square foot 20-year lease renewal at 599 lex commenced this quarter and they relinquished 120,000 square feet, the block I was describing.

Biogen moved out of the first portion of 300 Binny Street which will eventually grow by 40,000 square feet when it's converted to lab and is fully preleased. The partial termination is reflected in our statistics not the new lease. Biogen will vacate the rest of this 195,000 square foot building in the first quarter of 2023. So we're going to lose occupancy on that as we redevelop it for the long-term addition of a liability. At Santa Monica Business Park, we had a post-movie operation that completed their use of space this quarter and they moved out. Our second-generation release synthesis for the quarter, if you look at our FAD in particular, include the Shearman transaction at 599 Lex. They converted a bunch of their free rent to TI and the entire cost for that 20-year 350,000square foot is in the Fed this quarter which is why the Fed looks unusual.

The global central bank tightening has resulted in softened demand in all the markets, while tours continue and leases under construction move forward under negotiation move forward, there is less urgency from clients to make new commitments. We have conversations with potential clients during space tours who acknowledge that economic uncertainty is impacting space decisions as we consider our expectations for leasing completions in '23 and we're factoring the impact of a materially slower economy, softer business performance and reduced demand for space. We expect the bulk of our leasing will continue to come from small- and medium-sized professional and financial services firms.

So as we think about '23, let's start with what we know. We have signed leases on more than 886,000 square feet of in-service on vacant space that are not in our occupancy figures. Approximately 700,000 will commence in 2023, the remainder in '24. At the end of the third quarter, we had active leases under negotiation in the in-service portfolio of about 800,000 square feet, 270,000 of that would currently cover currently vacant space that will go into service in 2023. The rest is on our near-term expirations.

In sum, we have visibility on about 1 million squares feet of currently vacant space and about 500,000 square feet of expiring leases. The remainder of '22 and '23 totals about 3 million square feet of expirations. This would mean we need to lease about 1.8 million square with 2023 commencements to remain flat. We typically leased more than 1 million square feet on a quarterly basis. Obviously, I described what happened over the last 6 quarters where the lowest was about 1.2 million. The issue is the timing of these commitments on vacant space, that's the big wildcard. We just don't know if we sign a lease, whether the space is going to be in a shell condition or an as-is condition and whether that lease is going to commence in 2023 or 2024. What we said last quarter remains true. We will see a slight decline over the next few quarters as we wait for all signed leases to commence but in spite of our less robust leasing expectations, we still anticipate an improvement as we move into 2024.

Tour activity continues to be strongest in the Boston CBD and New York City markets where the concentration of technology users is the least pronounced and the weighting of market occupancy leads more heavily towards financial and professional services firms. Consistent with my earlier remarks on the third quarter, small and medium-sized financial and professional services firms continue to be the active portion of our portfolio as those tenants clients look for premier workspaces. These users are also active, though to a lesser extent, in D.C., San Francisco and Reston.

We have all seen the announcements regarding higher increases, job reductions through attrition and explicit job cuts that are occurring on a consistent basis from many of the large technology employers. In some cases, these announcements coincide with decisions to put space on sublet market. It's hard to envision much technology-related demand growth in 2023. Owen described the stark divergence between premier workplaces and everything else. When clients do make space decisions, we expect them to gravitate to premier workplaces that we have at BXP. I want to make a few more points about the same property portfolio before I hand the speaker over to Mike.

The elimination of income from 300 Binney Street as we redeveloped this fully leased building into a lab building is about $10 million in 2023 relative to '22. The reduction in income from the Boston suburban assets as well as building a Carnegie Center and Shady Grove properties in Maryland that we are now enabling for life science constitutes a reduction of about $10 million in 2023 from 2022. This positions us to add life science portfolio properties over time.

We expect our parking income to be about 90% of the 2019 level and up about 6% from '22 estimates. Our retail portfolio has come back in Boston, New York City and D.C. where we have a significant number of new spaces under construction with 23 openings. The West Coast continues to be a laggard. We expect little change in contribution from retail in San Francisco in '23. The daily traffic in our West Coast portfolio continues to be dramatically lower than the East Coast. We continue to provide extensive subsidies to many of our retail tenants in San Francisco. In spite of the challenges with the new lease at 760 Boylson, we expect the overall contribution from retail to return to 2019 levels by the middle of '24 when the lease of 760 commences.

In summary, we have reduced our total leasing expectations in '23 due to the issues stemming from the aggressive battle against inflation and the ensuing slowdown in the economy. We still expect occupancy improvement in '23, though at a reduced rate. Our flat same-store guidance is based on these variables. Mike, take it away.

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

Great. Thanks, Doug. Good morning. So today, I plan to cover the details of our third quarter performance and also the increase to our 2022 full year guidance. And I will spend most of my time describing the details of our 2023 initial earnings guidance. The third quarter results were strong. We reported third quarter funds from operation of $1.91 per share that was $0.04 per share higher than the midpoint of our guidance. The improvement came from better-than-anticipated portfolio performance. Higher revenues contributed $0.03 per share to our results from earlier than projected revenue commencement on space that we delivered to clients ahead of schedule. And we also exceeded our budget for parking revenues, particularly in Boston, where return to office continues to grow. Lower operating expenses also contributed $0.03 per share, this was primarily from lower-than-projected repair and maintenance costs, most of which will be deferred into the fourth quarter. These positives were partially offset by the termination of our lease with Biogen at 300 Binney Street in Cambridge. The lost revenue resulted in a $0.02 per share reduction in revenue versus our budget that assumed full rent and occupancy for the quarter.

While not part of FFO, our net income included gains on asset sales of $262 million or $1.50 per share, primarily from the sale of 601 Mass Avenue in Washington, D.C. Our asset sales this quarter raised $540 million in net cash proceeds. On the new investment side, our acquisition of 125 Broadway, a fully leased lab facility in Cambridge utilized $592 million of cash. For the rest of 2022, we have increased our guidance for full year funds from operations to $7.51 to $7.53 per share. That's an increase of $0.02 per share at the midpoint from our prior guidance. The increase is projected to come from higher revenue from the portfolio and our 125 Broadway acquisition, partially offset by the deferral of third quarter operating expenses into the fourth quarter and higher interest expense from both higher floating interest rates and incremental debt from funding our new investments.

The new bid [Phonetic] midpoint of our 2022 guidance represents strong growth in FFO and of $0.96 per share or 15% over 2021. At the midpoint of our guidance, our growth is comprised of 3.75% year-over-year improvement in our same-property NOI and that adds $0.35 per share, $0.63 per share of external NOI growth from acquisitions and developments coming online and $0.16 per share of lower interest expense from locking in low rates in our financing activities last year. These positives are partially offset by the loss of $0.15 per share from asset sales and $0.03 per share of other items, primarily higher G&A expense. Overall, we expect 2022 to be one of the strongest years for earnings growth in the company's history.

Now, I'd like to turn to our initial guidance for 2023. The most significant impact by far to next year's guidance is the dramatic increase in interest rates in 2022 which is expected to continue into 2023. Stubborn inflation is leading to even more aggressive actions by the Fed that are having a meaningful impact on borrowing costs. Our assumptions include the Fed increasing short-term rates to 4.75% which drives an increase in the borrowing cost under our line of credit and term loan facilities into the high 5% range. We currently have $1.9 billion of floating rate debt that comprises just 14% of our share of total debt. So we still have the vast majority of our debt being fixed.

Our floating rate debt includes outstanding amounts under our line of credit, our $730 million term loan and $800 million, representing our share of floating rate debt in our unconsolidated joint venture portfolio. In addition, we anticipate that our floating rate debt will likely increase in 2023 as we use our line of credit to fund a portion of our development spend. A change in our assumption for short-term rates of 50 basis points either way, impacts our projected earnings by $0.06 per share.

Owen described the new acquisitions and developments that we announced during the quarter. This use of capital results in a projected $50 million of incremental interest expense. So overall, our assumptions for interest expense in 2023 are an increase of approximately $122 million at the midpoint of our range. This amount includes our consolidated interest expense and our share of unconsolidated joint venture interest expense. At the midpoint, this is an increase of $0.69 per share of interest expense from 2022.

Doug provided a substantial amount of detail on the changes in our same-property portfolio. Our leasing assumptions reflect the uncertainty in the broader economic environment that has resulted in elongating the lease-up of some of our vacant and expiring space. In addition, as Doug said, we have several projects that we have targeted for future life science conversions where we are intentionally creating vacancy. We still expect to have a productive leasing year and we have a large backlog of signed leases and leases and negotiation that will go into occupancy over the next 12 months.

Overall, we expect our occupancy to be relatively stable year-over-year. We project our 2023 same-property NOI growth to be flat from 2022 and we expect that we will have positive same-property cash NOI growth our guidance assumes growth of 1% to 2.5%. We anticipate that we will see strong external growth in 2022 from the delivery of development and the impact from a full year of our 2022 acquisition program. Next year, we will fully deliver our 880 Winter Street life science facility that is 97% leased. Our carbon net zero redevelopment of our building at 140 Kendrick Street that is 100% leased and View Boxton, our immersive observation experience at the Prudential Center. We will also see a full year from our 2022 deliveries, including our Google building in Cambridge, 2100 Pennsylvania Avenue and Reston Next.

In aggregate, we project our developments will add between $55 million and $65 million in incremental NOI in 2023. This year, we acquired Madison Center in Seattle and 125 Broadway in Cambridge and we just announced the acquisition of an interest in 200 Fifth Avenue in New York City that Owen described. In 2023, we project these acquisitions to provide an incremental $45 million to $50 million to our NOI. We were also an active seller in 2022. And as Owen described, we currently have the Avant residential building under contract. In total, we project sales for the year of $864 million which we expect will reduce our portfolio NOI by $28 million to $30 million in 2023.

The other changes that impact our 2023 guidance are a modest expected decline in fee income due to a $7 million assignment fee we generated in 2022 that we do not expect to recur. And we project that our G&A will increase by approximately 5% next year. So to summarize, we expect our 2023 FFO to be lower than 2022 by approximately 4% or $0.30 per share, primarily due to higher interest expense. At the midpoint of our guidance, we expect growth from our acquisitions and development of $0.62 per share, offset by higher interest expense of $0.69, a reduction in NOI from asset sales of $0.16 and lower fee income of $0.03 and higher G&A expense of $0.04. While we are never happy forecasting a reduction in FFO, 4% is relatively modest and entirely due to a steep increase in interest rates. Our portfolio NOI continues to grow and we have a significant pipeline of accretive developments delivering over the next few years.

That completes our formal remarks. Operator, can you open the lines for questions?

Questions and Answers

Operator

[Operator Instructions] I show our first question comes from the line of John Kim from BMO Capital Markets.

John Kim
Analyst at BMO Capital Markets

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

Douglas Linde
President & Director at Boston Properties

Sure. So I'm going to -- I'll back up. So that was a 3-part but I'm going to give you credit for it all being at least consistent with each other. So lease terminations are not included in our occupancy. Things are definitely feeling slower in the fourth quarter than they did in the third quarter of 2022. And again, we believe that our occupancy will be higher at the end of '23 than it will be at the end of 2022 because we have visibility on a significant amount of leases that have already been signed and we're covering a significant amount of our existing portfolio vacancy today.

Operator

And our next question comes from the line of Steve Sakwa of Evercore ISI.

Stephen Sakwa
Analyst at Evercore ISI

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

Steve, it's Owen. Clearly, the -- our cost of capital is going up, as indicated and what we've reported -- and I do think our hurdle for new acquisitions is going up from a quality standpoint and also from a return standpoint. I referenced the 125 Broadway and 300 Binney Street, one is an acquisition and one is a redevelopment and the blended yield on that when fully delivered is over 7%. And buildings in that location, certainly lab buildings in that location have been trading in the -- maybe even in the low 4s. So I think there's significant margin in that yield versus where we made the investment. And then, as it relates to 200 5th, a couple of things I would mention. One, I think it's a very unique property. It is clearly a premier workplace I think transactions like that don't come around very often. Second, I think the cap rate is understated because it has below-market debt on the property for the next 6 years. And then third, we're purchasing a minority interest of stake. So it is not a full acquisition, the billing requires less capital. But our -- it is -- we are raising our hurdles for making new investments and our pipeline is less [Phonetic] right now for new investments as a result. I would say the largest thing we're working on, I mentioned in my remarks which is the 290 Binney Street development and the 121 Broadway Residential.

Operator

And I show our next question comes from the line of Derek Johnston from Deutsche Bank.

Derek Johnston
Analyst at Deutsche Bank Aktiengesellschaft

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Douglas Linde
President & Director at Boston Properties

And Derek, I would just add the following which I think is actually going to be helpful but it's not going to be helpful in the short term in terms of improving things which is that as these businesses, I'd say, get more aggressive. I'll use the word at asking their employees to -- our associates to come back to work. I don't think it's going to lead to them taking more space. I think it's going to lead to a better urban platform environment, whereby there are going to be more people in our cities on a day-to-day basis which I think will be helpful over time at convincing both the workers and the employers that these cities really can potentially get back to where they were relative to the Street platforms and be very vibrant local communities.

Right now, one of the problems is there's sort of this vicious circle going on where because there aren't as many people going to work every day, the cities feel different and the other sort of issues associated with the urban nature of the challenges associated with Prime, homelessness, et cetera, become more visible and there's a sort of cycle that I think will be helpful as things go in the other direction.

Operator

And I show our next question comes from the line of Nick Yulico from Scotiabank.

Nicholas Yulico
Analyst at Scotiabank

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

Yes. Okay. I think that was a 3-part question but I won't stick Helen on you. So first of all, JVs, we absolutely want to continue to do joint ventures and we absolutely want to continue to sell assets but it's going to be subject to market conditions. As I mentioned, there are many institutional investors who are more cautious on the market, somewhat withdrawn for the market for the reasons I mentioned in my remarks, denominator effect or a view that perhaps the market will get more interesting from a pricing perspective in the future. But again, subject to market conditions, that's absolutely what we want to do. Going to your comparison of 200 5th to 1,330 Avenue of the Americas, humbly, I would say, I think 200 is a higher-quality asset and warrants a lower cap rate. I do think the below-market debt does have some impact on how to think about pricing for the asset because that's clearly an asset to have such a below-market debt on the building. And to your point, with debt cost rising, I absolutely believe that there is some increase in cap rates. I think it is probably less in the office sector because I think office buildings have been trading at higher cap rates than some of the other real estate sectors. But I do think it has had some increase on where market cap rates are.

Operator

And I show our next question comes from the line of Blaine Heck from Wells Fargo.

Blaine Heck
Analyst at Wells Fargo Securities

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

Douglas Linde
President & Director at Boston Properties

So I guess let me just start it back up. So our Investor Day was not about 2023 earnings guidance. Our Investor Day was about here is Boston Properties portfolio regarding its human capital and its assets and what we are trying to do from a strategic perspective in the context of where the market is today. And I don't think at any time did we talk about what we thought was going to happen in 2023. So I don't think anything that we said at that conference should be construed as different than what we're seeing today. Regarding our outlook for actual leasing activity in 2023, -- we -- I would tell you that we feel modestly less rosy about that because the Fed has been more aggressive than I think people expected when we had our conference in 2020 -- in September 2022 relative to rate hikes. And the inflation has been more challenging to get under control. And all of that has effectively transferred itself into a higher interest rate expectation. Mike's using the dot plot, we're using 4.75% average interest rate for our underlying index in 2022, right?

So -- and all of that sort of from my perspective, manifests itself in less robust leasing activity in 2023 because I think the economy is going to be less strong and there are going to be less decisions that are made by companies relative to decisions on their space, be it staying in place and just upgrading to a premier workspace like our buildings or incremental growth. And so I guess that's, from my perspective, sort of the subtle change between what we were describing in September and what we're talking about this morning.

Operator

And I show our next question comes from the line of Camil [Phonetic] from Bank of America.

Unidentified Participant
at Boston Properties

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Operator

And I show our next question comes from the line of Michael Griffin from Citi.

Unidentified Participant
at Boston Properties

It's Nick Joseph [Phonetic] here with Michael. I appreciate the color on the rising rates on the business and guidance. But just going back to the financing market for office assets today broadly. What are you seeing the differences in terms of lender appetite, LTVs, rate terms on Premier versus other assets?

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

This is Mike. I mean I think that lenders are overall significantly more cautious about putting capital out for all the reasons that we've talked about. And credit spreads are clearly wider in all of the markets that we deal with. So I mean credit spreads in the bond markets are wider, credit spreads in the mortgage markets are wider. I mean, I can say they are at all timelines but they're significantly wider of where I would say a normal environment is. I think that CMBS is underwriting cash flow. And if there's rollover, they're very conservative about the rollover and they're requiring reserves in order to mitigate the risk of rollover and those reserves drive down proceeds levels. That are available in the CMBS market for real estate assets. So I think that can drive down some of the leverage that you can get and could impact the refinancing of certain assets that might need to be recapitalized in order to refinance.

If you have a high-quality property that has a long lease term, you can clearly get it financed. People will finance office buildings, other real estate with those types of lease terms, there's just going to be higher cost of capital. So with the treasury that is between 4 and 4.25 and a credit spread that's probably between 250 and 300 and you're talking about high 6s, the type of rate that you can get. But that financing is available today. And then, the banks are also providing mortgage loans and term loans and things like this to the market to add liquidity as well. And you've seen a number of REITs, including ourselves kind of use term loan financing to help fund new acquisitions and new investment. And that market is still available to us.

Operator

And I show our next question comes from the line of Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb
Analyst at Piper Sandler Companies

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Operator

And I show our next question comes from the line of Michael Goldsmith from UBS.

Michael Goldsmith
Analyst at UBS Group

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

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

I'll start and the others can lob in as well. Look, I think that we have a development pipeline that delivers cash flow through 2025 as it goes into service and that is going to continue to be a tailwind for us and provide growth for us as we deliver that pipeline and hopefully increase that pipeline with some opportunities that we have that we're working on. On the debt side and for interest rates, I mean, 2022 has been an extreme year of interest rate increases and I think that our expectation is that they've got a little main ways further to go up but it's not going to continue to go up at this pace for the next 2, 3, 4 years that there's going to be a point that has reached where the Fed has done its job and you start to see inflation turn where they're going to slow down the increases in the Fed rate which will affect SOFR and that will start to moderate and potentially turn the other way, if the economy weakens like we have been talking about.

So that's not in our expectation for 2023 because we assume the SOFA rate is going to go up and then it's going to stay flat. And we assume the small amount of refinancing that we need to do which is very small because we don't have very much in the way of mortgages coming due that we will have to refinance those at high permanent rates. So we have a $500 million bond coming due, for example, in the third quarter of 2023. And we can borrow in the bond market today for 10 years in the high 6s. So that's what we're assuming. So that has an impact on our interest expense guidance. If interest rates start to moderate and the 10-year comes down a little bit or slows its increase and credit spreads which right now are as wide as they've been in a really long time, start to moderate because people kind of see the end of the rate hikes and see what the pain is going to be felt in the economy, we could see credit spreads come in 50, 100, 125 basis points which could help. Now I don't know when these things are going to happen. But I do believe that we won't see the same increase in rates from '23 to '24 during 2023 that we saw in 2022.

Douglas Linde
President & Director at Boston Properties

Yes. I would just add to Mike's remarks. First of all, on the development deliveries, as I mentioned, that's $200 million of NOI over the next 5 years and that number excludes contributions from 300 Binney Street which are material which comes in the next couple of years. So that's the quantification of that. Mike talked a little bit about the interest rate opportunity. And then, the last piece is portfolio occupancy. Again, Doug went through a lot of math on how to think about that and the timing for it. But we're going through a business cycle. I said this at the investor conference, it called a cycle for a reason. It doesn't last forever. And this will turn at some point. And when you looked at BXP before the pandemic, we were at 93%. So again, we're not giving any forecast on what the timing for that is but that's clearly a growth opportunity for the company is to increase the occupancy of our portfolio.

Operator

And I show our next question comes from the line of Vikram Malhotra from Mizuho Group.

Vikram Malhotra
Analyst at Mizuho Securities

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

Douglas Linde
President & Director at Boston Properties

Yes. So Vikram, the only thing that's changed, I'll just repeat what I said before is that I think we've moderated the amount of leasing that we will do in 2023 that has a 2023 lease commencement associated with it. And I'll sort of give you effectively how the sausage is made, color on that which is, when we have space that is currently built out and that space is revamped, we would start recognizing revenue when the lease commences. When we have a piece of space that we make a decision to go and polish, okay? So we basically remove all the existing improvements. And those improvements are now referred to as sort of a white box condition and we then do that lease, we have to wait until the tenant has completed their build out of the space even if we're contributing to capital until we can recognize revenue.

So we have a bunch of spaces that we are building as a sort of white box right now because we think it will give us a leg up in terms of leasing that space that will -- while it may actually improve the timing of actual cash revenue may not help us relative to our "revenue" from an occupancy perspective in 2023. So that's really the only thing that has changed. With regards to the overall sort of going around the country perspective, as I think I said, our views and the pulse that we have on overall leasing activity is much stronger in our Boston and our New York City CBDs relative to tour activity and likelihood of transactions occurring than it is on the West Coast in San Francisco and Los Angeles and Seattle. And that's because the majority of the traffic that we're seeing are from professional services and financial services-oriented companies who are concentrated in those marketplaces in Boston and in New York City to a wider degree than they are in the West Coast markets which are more concentrated with technology-oriented companies.

And as I tried to describe, many of those transactions are the smaller transactions, right? They're a floor or less. And so we're doing a lot more of those than we are a 3 or 4 or 5 floor lease with a client who's in the technology business. And so I'd say that's sort of what's driving our near-term views on our occupancy in 2023. But again, when we were -- when we sat up there and made our presentations, we were trying to describe to all the analysts in the room and all the investors in the room and on the phone, how we were looking at Boston Properties from a long-term perspective.

And I just -- I do want to make the point that we are in a long-term business. relative to the decisions that we're making. So let's just -- Owen described 601 Mass and he said, "Oh, by the way, we sold the building at a 5 11 cap rate. We acquired the land for 601 NASA in 2008. We started a building in 2011. We completed the building in 2013 and we sold the building in 2022. And starting in 2008 to 2022, the unlevered IRR on that investment was 9.65%. So this is a business of long-term decisions and long-term investments. And so while we are focused dogmatically on and providing you with guidance and our expectations quarter by quarter by quarter because we're a public company and that's what we required and want to do, when we're making our real estate decisions, we're making decisions based upon long-term investment perspective.

And so at times, that means that we might not be able to satisfy an immediate quarterly opportunity to do something because in the long term, is that we're better off doing something that may be short-term dilutive. So that's just -- that's the way we approach our work in our business from an operating perspective and from an investment perspective.

Operator

And I show our next question comes from the line of David Rodgers from Baird.

David Rodgers
Analyst at Robert W. Baird & Co.

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

Douglas Linde
President & Director at Boston Properties

So all the numbers I used at the investor conference were as of June 30, 2022. So everything was sort of a quarter delayed and lots of things happened during the third quarter that are now reflected in the numbers, both in terms of leases that we signed that pushed out occupancy and leases that we signed that have yet to commence and leases that we've got on vacant spaces that have already commenced that are sort of baked into the numbers. So the numbers that I provided earlier is sort of how I'm looking -- we're looking at things on a going-forward basis. So instead of the 1 million square feet of leases, for example, that we had that were 1.2 million if that was number of leases that were signed that had yet to commence. Right now, it's about 1 million square -- or 885,000 square feet, of which 700,000 of that are 2023 commencements in the rest of our buildings that will have a lease commencement in 2024, right? So that's sort of how I would sort of look at the numbers. So what I gave you earlier today were the numbers as of 09-30-2022.

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

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

Operator

And I show our next question comes from the line of Tayo Okusanya from Credit Suisse.

Omotayo Okusanya
Analyst at Credit Suisse Group

So you guys talked a little bit about, again, the business being a long-term one which I wholeheartedly agree with I'm just wondering specifically on the Life Science side, though, we are clearly creating more exposure. You are taking back space specifically to redevelop into life science. But again, I think, Doug, you also mentioned the comment that life science demand generally seems to be slowing at least near term. So just wondering how you kind of balance those 2 things on a going-forward basis where demand seems to be slowing but you're clearly also increasing exposure to that particular industry?

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

Yes. So I'll jump in. Doug may have some comments as well. We have a lot of confidence in the long-term growth prospects in life science. We think there is tremendous capital that is prepared to invest in that space and there's also tremendous unresearched science and it has very strong prospects. I think the other thing that's important about life science is the importance of location is critically important and Kendall Center where we're making most of our investments today is absolutely a key critical, it's one of the best locations for life science in the world. And I look at all the demand we generated and the deals that we've announced.

We talked about the AstraZeneca lease at 290 Binney Street, the Broad lease that we did at 300 Binney. So we're demonstrating very strong demand at that location. So I do think there's been more of a slowdown in Waltham. And therefore, we've slowed down a little bit of our new deliveries to be responsive to that. But again, given my prior remarks, we have confidence that, that will return.

Douglas Linde
President & Director at Boston Properties

Yes. And I would just add that remember that we are looking at our investment decisions over a long term and it takes a long time to clear a building of existing tenants. And so we want to be in a position where we can start the next building when we're successful leasing the ones that we currently have or we feel the market has started to dramatically change from a demand perspective as we enter into the latter part of 2023, early 2024. So we're sort of -- we're setting ourselves up for these opportunities.

And by the way, I mean, I'm just going to sort of give you some examples, we actually have three proposals that we're negotiating right now and they're not leases on a building that's currently vacant in Princeton at Carnegie Center for life science users. And so having the ability to stay to one to a user, the building is unencumbered and we can start construction. And if you're interested in signing a lease, we will start construction is an opportunity that we're trying to create within the portfolio at large. And so I'd say we are -- we're taking some short-term pain for some long-term gain on a going-forward basis. But we think it's the right approach to expanding our ability to do these things in a thoughtful way.

And by the way and we said this a number of times, we're not out there buying land for $200 to $250 in FAR foot which is what sort of the going price has been for many of these sites in locations that require rents that are not supported today. We have a very different land basis in our redeveloped assets because of the nature of when the buildings were purchased when they were built and the fact that there always existing infrastructure there that is a value. So we have a relatively speaking, a well-priced portfolio of opportunities that we can bring to the market over time.

Bryan Koop
Executive Vice President of Boston Region at Boston Properties

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

Operator

And I show our next question comes from the line of Anthony Powell from Barclays.

Anthony Powell
Analyst at Barclays Bank

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

Douglas Linde
President & Director at Boston Properties

We're starting to approach the higher rents that we've leased over the past 4 or 5 years in market -- in our West Coast markets and particularly San Francisco which again is why I when I provided the statistics for this quarter, I said, we basically were slightly above. It was a couple of percent and it was about -- the average starting rent was over $100 a square foot, right? So we are we're not seeing declines in rents. We're just not seeing the same relative increases that we were seeing. And so as we get closer to leases that were signed x number of years ago, there's a tighter range associated with what that roll up or roll down is..

Relatively speaking, the Boston market and the San Francisco market still have the most embedded growth. Our New York City market is very hit or miss. It's somewhere up and somewhere down. So when we lease a piece of space in the mid- to high-rise the 7550th Avenue of the General Motors Building will have an increase. When we lease that piece of space at 510 Mason Avenue where the rents were done in a decade ago and we're increasing significantly and operating expenses went up we're going to see a decline. So it's -- again, it's very much building by building, lease by lease. And in our Washington, D.C. portfolio, as I described to you, generally, those have come down in Reston, has been 3% to 5% and in the district, it's been around 10% because of the nature of the leases from a cash perspective, right? When we actually report GAAP numbers, we actually won't have these declines because there -- when you average a 3% increase for 10 or 15 years and at least it's starting 10% below what was expiring, you actually have a positive mark-to-market. So that's not what we're providing, we're guiding with a cash numbers you give a perspective of what's going on in the marketplace. So that's sort of my perspective on sort of where the embedded growth is.

From a transactional perspective, on the margin TIs are still very, very elevated. And it depends on what kind of a tendency you're talking to and what their options are. So the larger requirements where there's more desperation, if you will, from landlords or subtenants that have large box in available space, there are more aggressive terms for smaller transactions, a floor or less where the tenant is looking for a premier workspace, we have been able to maintain the economics of the deals that we're doing in our markets and that includes San Francisco which again has obviously got a very significant overall vacancy in it that the people report but where the vacancy in the premier space is still significantly lower.

Operator

[Operator Instructions] And I show our next question comes from the line of Anthony Paolone from JPMorgan.

Anthony Paolone
Analyst at JPMorgan Chase & Co.

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

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

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

Operator

And I show our next question comes from the line of Jamie Feldman from Wells Fargo.

James Feldman
Analyst at Bank of America

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

And I think that -- Look, we've got a lot of cash flow that's coming online from these developments over the next few years. 70% of the debt capital has already been raised that is funding this. So we've got a lot of follow kind of capital out there on these properties where income hasn't started. So yes, we expect our leverage to tick up a little bit as we kind of go through the development process over the next few quarters. But if we don't do anything else, can we just let this stuff come in our leverage is going to be down into the low 6s. And that's below our target range. So there's still capacity on our balance sheet to do things if we find those opportunities.

And then it's a question of how we fund it, right? And I think that in order to continue to lengthen our balance sheet, that's why we've been using private capital to help us fund some of these new opportunities. And I would expect that we would continue to kind of look at that as a vehicle to help us do that because we're not going to be raising public equity at the kind of prices that we're at right now.

Operator

And I show our last question comes from the line of Daniel Ismail from Green Street.

Daniel Ismail
Analyst at Green Street Advisors

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Michael LaBelle
Executive Vice President, Treasurer & Chief Financial Officer at Boston Properties

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

Operator

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

Owen Thomas
Chairman & Chief Executive Officer at Boston Properties

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

Operator

[Operator Closing Remarks]

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