Boston Properties, Inc. Q2 2010 Earnings Call Transcript

Boston Properties, Inc. Q2 2010 Earnings Call Transcript
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Boston Properties, Inc. (BXP)

Q2 2010 Earnings Call Transcript

July 28, 2010 10:00 am ET


Arista Joyner – IR Manager

Mort Zuckerman – Chairman and CEO

Doug Linde – President

Mike LaBelle – CFO and SVP


Jordan Sadler – KeyBanc Capital Markets

Alexander Goldfarb – Sandler O'Neill

Sri Nagarajan – FBR Capital Markets

Chris Caton – Morgan Stanley

George Auerbach – ISI Group

David Harris – Gleacher

Jay Habermann – Goldman Sachs

Shane Buckner – Wells Capital Management

Michael Bilerman – Citi

Jeff Spector – Bank of America/Merrill Lynch

Michael Knott – Green Street Advisors



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Good morning and welcome to Boston Properties second quarter earnings conference call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

Good morning and welcome to Boston Properties’ second quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In this supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

If you do not receive a copy, these documents are available in the Investor Relations section of our Web site, at An audio webcast of this call will be available for 12 months in the Investor Relations section of our Web site.

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 of 1995.

Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday’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.

Having said that, I’d like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. Also, during the question-and-answer portion of our call, our regional management team will be available to answer questions as well.

I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Mort Zuckerman

Good morning, everybody. We are happy to be able to rejoin you this quarter for number of reasons, not the least of which is that, we have frankly been really pleased by the response to the real estate we have and in the markets that we are in. Obviously, it’s been a stressful time for the economy in general. There is very little progress on the unemployment front. There is lot insecurity in the business community.

Nevertheless, I think we are pleased with the ability that we’ve had in the space that we have to continue a fairly successful leasing program, and frankly being quite energetic in the prospects of making some acquisitions, which we are working on, but which we have not concluded in any specific way, but we do feel that we are in a position to be serious and to hopefully be successful in that area.

In terms of the existing real estate the number of markets that we are in, that are doing very well or relatively well is, I think, a direct reflection of the strategy we have followed for many years. It reflects two things.

One is, these are supply constrained markets that we are in and we are either building or owning real estate at the very upper end of that market. This is not the first time, this has happened, although this is probably the most difficult economic downturn that we’ve had to work our way through, but essentially when you have vacancies in the buildings that we have and in the markets that we have, and you have a downturn in rents, a lot of people want to go into the kinds of buildings we’ve had or we have.

In this regard we have frankly done very well in terms of keeping our occupancy up or rebuilding our occupancy. We’ve lost some tenants to bankruptcies or other things. So, we are actually feeling quite bullish about the prospects that we have.

I have to say just in terms of macroeconomic conditions, we are in an unprecedented kind of economic stress, and therefore, it is unpredictable. We have not been in anything like this since the end of World War II. It’s called The Great Recession.

This is a recession, though, that has been provoked by a financial crisis, which is the first one we’ve had really since 1929, and the times of recession generally take a lot more time to resolve the inherent problems of them and to get back to the growth that the economy of the United States has been accustomed to.

We’re still in, I think, a fairly slow level of recovery. As I say, the good news for us is that we are in, we think, the best markets in this country with the best real estate, and not that everything is perfect, but I think we are really quite pleased with the effectiveness and the results that we have had.

With that, I’d like to turn it over to Doug for operations. Doug?

Doug Linde

Thanks, Mort. Good morning, everybody. So, Mort began the discussion talking about the economy, and it’s clear that, as an overall economy, we haven’t seen much in the way of change in the unemployment. Obviously, we’re in the office business, and when people hire, they need more office space, and if you get really strong increases in office demand, that gives us the opportunity to see rapid improvements in the economies of our business.

I don’t think we’re suggesting that we’re seeing that, but we have seen dramatic improvements in the condition of the financial system. We’ve seen that massive corporate cost cutting over the last two years has led to pretty big margin improvements. Most recently, there’s really been some top line growth across a broad array of industries and that’s given corporations a whole lot of cash.

In the overall economy and the business world my sense of it is that there is a tug of war between austerity and spending. At the moment, we seem to be experiencing a stalemate, but it looks like austerity has got the edge at least today.

In our industry, the leading indicator is leasing transaction activity, and I use 2005 as our benchmark because that’s really when we started seeing the last major recovery in the office business Boston Properties has averaged about 4.3 million square feet of leasing per year and about 1.6 million square feet in the first six months of any one of our calendar years. So, to-date in 2010, we’ve completed 2.5 million square feet of leasing; obviously, way above trend.

This quarter we had 77 transactions; we had 71 last quarter. Again, a slight increase, but it’s really the pace of activity that appears to be pretty steady, which is, I think, and something that’s giving us some comfort. We continually discuss the importance of looking at specific markets and specific locations and building characteristics and not the broad real estate statistics when you are evaluating real estate investments.

Our strategy, as Mort said, continues to be to own and operate the highest quality assets in our selective submarkets, to design buildings and tenant spaces suited to customer’s current needs and to continue to invest and invest and upgrade those assets.

But even in the better submarkets, the individual characteristics of the location and the building really matter. You can have two buildings across the street from each other in a great submarket and one can be 100% leased and the other 100% vacant.

I’m going to add one other critical component to our strategy, which also acts in concert with everything else we do, and that’s our customers. Many of the companies that value the physical attributes of our buildings, our operating expertise, our financial strength and our stability are also businesses that think about expansion or consolidation in our assets during challenging economic environments. Let me give you some examples of that.

Towers Perrin is 44,000 square feet tenant that moved into the Prudential Tower last year in a relocation from 111 Huntington Avenue. They recently merged with Watson Wyatt. Watson Wyatt happened to be located on Route 128 in Wellesley. A few weeks ago Watson Wyatt exercised a termination option at its 128 location and signed a 33,000 square feet 10-year expansion consolidating, as approved.

In Cambridge, Microsoft, Google and EMC are all expanding in our buildings today. Microsoft recently signed a lease starting out at 21,000 square feet in September, they’re going to grab 30,000 square feet more in January and another 62,000 square feet as we can deliver it to them over the next three years.

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