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‘Sentiment Around Office Is Worse Than The Reality’: Boston Properties Stock Up On Q2 Earnings

National office REIT Boston Properties touted its improved financial performance during the second quarter as a positive sign for the office market, even as it sees challenges in the capital markets and in the Bay Area region.

Boston Properties executed 938K SF of leases during the second quarter, up from 660K SF in Q1. The company's revenue of $817.2M was up 5.6% from the same quarter last year, and it beat its previous earnings projections and raised its guidance for the rest of the year.

“Despite strong negative market sentiment, BXP had another productive quarter with financial performance and leasing above expectations,” BXP CEO Owen Thomas said on Wednesday's earnings call.

The entrance to Boston's Prudential Center, a mixed-use complex owned by Boston Properties and home to the REIT's headquarters.

The REIT’s stock price rose 3.6% Tuesday after its earnings release, bucking the day's trend as the S&P 500 and Dow Jones both fell.

Boston Properties President Doug Linde said that usage of its office buildings picked up last quarter, with 80% of the desks in its New York City buildings being used at least once a week, 75% in Boston and 70% in San Francisco. 

“The sentiment around office is worse than the reality," Linde said. "To illustrate the point in our portfolio, we continue to see an incremental pickup in daily activity as we look at the month-to-month trendline.”

Linde said the REIT has 44 leases in negotiations that total 1.2M SF, a bump from the 900K SF at the end of the first quarter.

“Much of the available space in our markets is not competitive with our assets, and some buildings are not in a position to compete due to their owners' unwillingness to invest capital, while their capitalization is in restructure mode," Linde said. "Our clients are using our space.” 

Mike LaBelle said that there could still be some challenges in the future as interest rates are expected to stay high. He said the company has $700M in unsecured notes set to expire in 2024, which he predicts will have almost double the refinancing rate at 6.5%.

The company said it was able to refinance multiple projects in the quarter including a $105M loan for 500 North Capitol St. in Washington, D.C., as well as one-year extensions on loans for the Marriott International headquarters in Bethesda, Maryland, and the Hub on Causeway in Boston. 

"Looking further forward, we do expect a high-interest rate environment to continue to be a headwind as we refinance, low-cost expiring debt and anticipated higher rates," LaBelle said.

The company is also seeing some headwinds in tech-heavy office markets like Silicon Valley and San Francisco.

The view of San Francisco from Boston Properties' Salesforce Tower.

In May, Google revealed plans to shed 1.4M SF of office in the area with plans to sublease office space in Sunnyvale and Mountain View. San Francisco had one of the worst quarters for its office sector since the late 1990s with negative 2.2M SF of absorption, according to a Transwestern report.

“Unfortunately, market conditions in the Silicon Valley including San Jose have deteriorated meaningfully with rising direct vacancy, few large space requirements and technology companies, including Google, putting significant space in the sublease market,” Thomas said.

Because of this, the company said it paused construction on the first phase of Platform 16, a 1.1M SF, three-property campus in the Bay Area. Completion of the garage and foundation is still scheduled for the end of the year, Thomas said.

“Although disappointing, as market conditions recover, we will have a project that can be delivered to users in under two years, which is 12 to 14 months more quickly than the ground-up development,” Thomas said.

The company also announced the retirement of its executive vice president for the San Francisco region, Bob Pester, who will be succeeded by Rod Diehl. Boston Properties is also restructuring its organization to have Diehl manage the Los Angeles and Seattle regions, which are both relatively new for the REIT. 

Despite the challenges of interest rates and the Bay Area office market, Boston Properties executives still expressed optimism about the company's performance and its positioning for the coming quarters. 

“Overall we had a strong quarter with top-line revenue growth, earnings outperformance, improved leasing volumes, positive mark-to-market [rents] on our commenced leases and timely capital raising activity," LaBelle said. "Our balance sheet is in excellent shape and we are well positioned in an uncertain environment for any economic outcome.”