Boston Properties' Q3 2025: Contradictions Emerge on Office Demand, AI Impact, and Leasing Outlook

Guidance:

• Full-year 2025 FFO expected $6.89 to $6.92 per share (midpoint raised $0.03).
• Q4 2025 FFO expected to be higher than Q3 driven by higher portfolio NOI and lower net interest expense.
• 2025 guidance includes +$0.02 per share from same-property NOI and -$0.03 per share from lower net interest expense; Q4 asset sales projected to be ~-$0.01 per share dilutive.
• Disposition program: target ~$1.9B net proceeds by year-end 2027; 2025 dispositions could yield ~$500M–$700M net proceeds.

Business Commentary:

• Financial Performance and Guidance Increase:
• Boston Properties (BXP) reported FFO per share of $1.74 for Q3, which is $0.04 above their midpoint forecast and $0.02 above market consensus.

• The company increased its full-year guidance by $0.03 per share, driven by better-than-projected same-property portfolio NOI due to early renewals at higher rents and lower net operating expenses.

• Leasing Activity and Lease Expirations:

• BXP leased over 1.5 million square feet in Q3, exceeding the previous quarter's performance by 39% and surpassing the five-year average by 130%.

• The positive leasing momentum was supported by strong client growth, with 87% of S&P 500 companies beating earnings estimates.

• Disposition Strategy:

• The company has disposed of 4 land assets with total net proceeds of $57 million and has 9 assets under contract for estimated total net proceeds of approximately $400 million.

• BXP aims to sell 27 land, residential, and non-strategic office assets for approximately $1.9 billion by the end of 2027, driven by a strategy to optimize its portfolio and reduce leverage.

• New Development and Investment Strategy:

• BXP launched new development projects at 343 Madison Avenue and 725 12th Street, focusing investments on premier workplace assets in CBD locations.
• The investment strategy is supported by the high-quality development opportunities with pre-leasing that are expected to generate over 8% cash yield upon delivery.

Sentiment Analysis:

Overall Tone: Positive

• Management beat FFO expectations (FFO $1.74, $0.04 above midpoint), raised full-year midpoint by $0.03, highlighted accelerating leasing (1.5M sqft in Q3, YTD 3.8M) and improving capital markets (oversubscribed $1B exchangeable notes). They repeatedly stated they are "on track" executing the Investor Day plan.

Q&A:

• Question from Steve Sakwa (Evercore ISI): As you reallocate capital into premier locations, how are you thinking about smaller West Coast markets like Seattle and L.A.? Are there buy or development opportunities there and how do you view those markets long term if you can't scale?
  Response: West Coast markets (L.A., Seattle, San Francisco) are weaker leasing markets today; no near-term development expected, would consider selective acquisitions opportunistically but acknowledge these markets are smaller for BXP.

• Question from Anthony Paolone (JPMorgan): Given heavy leasing this year, what's the risk the remaining 2026 expirations have lower retention and how confident are you in the ~200 bp occupancy pickup you outlined?
  Response: We expect to renew a meaningful portion (~50%) of expirations, can sustain ~1M sqft leasing per quarter, and remain confident in the 200+ basis point occupancy improvement by end-2026.

• Question from John Kim (BMO Capital Markets): San Francisco recovery — AI demand is not in high-rises; do you plan to address this mismatch and any thoughts on Salesforce's $15B commitment to the city?
  Response: AI demand is concentrated in low-rise, south-of-Mission product (e.g., 680 Folsom); towers are less relevant for that cohort; Salesforce's announcement is positive but details pending; certain BXP mid-rise assets are well positioned.

• Question from Richard Anderson (Cantor Fitzgerald): What percentage of your portfolio are pre-pandemic leases yet to be addressed, and how have sqft-per-worker and tenant behaviors changed?
  Response: Hard to quantify exactly; portfolio skewed to long leases (avg ~8 years) with limited large expirations (no tenant >150k sqft expiring next 2.5 years); more renewals are resulting in expansions than contractions.

• Question from Nicholas Yulico (Scotiabank): Given build-out timing, can you declare victory soon on converting vacant space and achieving the occupancy benefit by year-end next year?
  Response: We view this on an annual cadence; ~1M sqft already signed to start in 2026 will drive occupancy gains; activity at 360 Park and other delivered assets supports the 200 bp 2026 target.

• Question from Unknown Analyst (Citi): You earlier estimated $0.09–$0.04 dilution from asset sales; with market improving and more assets marketed/under contract, how should we think about that impact now?
  Response: Timing drives the dilution range; with more assets under contract and market demand improving, sales could accelerate and be slightly more dilutive if earlier than modeled; we'll update as timing becomes clearer.

• Question from Alexander Goldfarb (Piper Sandler): How much have investment criteria tightened since Investor Day — have yield thresholds increased and how many deals are being screened out?
  Response: Development yield threshold has risen to roughly 8% (up 100–200 bps); BXP is more selective on office development and acquisitions, favoring projects meeting that hurdle or exceptional off-market acquisition yields.

• Question from Michael Goldsmith (UBS): With 89% of rents from CBD, how do the suburban dispositions affect CBD percentage short-term and is goal to be 100% CBD?
  Response: No exact target percentage provided; objective is to grow CBD exposure while retaining select suburban markets with strong demand — not aiming for 100% CBD but increasing urban concentration.

• Question from Jana Galan (Bank of America Securities): On the dispositions, how are pricing levels for land, residential and office versus initial expectations?
  Response: Pricing is in line or slightly better than expectations; land value uplift from residential re-entitlements notable; residential cap rates below 5% attractive; office pricing depends on quality and location.

• Question from Floris Gerbrand Van Dijkum (Ladenburg Thalmann): There was a notable occupancy decline year-over-year in DC/residential — can you explain?
  Response: The year-over-year change reflects portfolio composition and large deliveries (e.g., Skymark moved from development to lease-up); stabilized residential assets show strong occupancy and rents; Skymark is leasing up near ~90%.

• Question from Ronald Kamdem (Morgan Stanley): How should we translate the occupancy inflection into same-store NOI expectations — similar 100–200 bp acceleration?
  Response: They will not provide 2026/27 guidance now, but expect most growth to come from occupancy gains and improving mark-to-market; positive same-store NOI growth should follow the occupancy climb.

• Question from Unknown Analyst (KeyBanc Capital Markets): Please provide color on life sciences demand/supply across your markets given softer commentary from peers.
  Response: Life science exposure is limited to Boston Urban Edge (180k sqft first-gen available) and a JV in South San Francisco; demand remains tepid with inquiries but no major near-term transactions.

• Question from Dylan Burzinski (Green Street): Given tightening Midtown availability and rising rents, why seek an equity partner for 343 Madison now rather than delay?
  Response: Management is deliberately patient; inbound interest exists but they expect greater value and leasing progress by 2026 and plan to introduce a partner then to match capital timing and reduce leverage.

• Question from Blaine Heck (Wells Fargo): Any impact from the New York mayoral race on tenants or the office market?
  Response: Concerns are overstated in media; company is monitoring but believes state-level checks and ongoing engagement with city reduce material near-term risk; overall view more constructive than the headlines.

• Question from Brendan Lynch (Barclays): How will the new South Station tower affect Boston leasing dynamics?
  Response: The tower may be ultimately successful but entered a market with existing downtown availability; Back Bay remains extremely tight and BXP sees limited tenant transfer there — net impact modest and market should absorb over time.

Contradiction Point 1

Office Demand and AI Impact

It highlights differing perspectives on the impact of AI on office demand and the sectors most likely to be affected, which is crucial for understanding the company's market strategy and financial outlook.

How is San Francisco recovering and what impact could Salesforce's $15 billion commitment have on office demand? - John Kim (BMO Capital Markets)

2025Q3: AI is more significant than work-from-home, creating job growth in areas like New York, Boston, and San Francisco... Traditional tech companies may face job reductions due to automation, but AI's growth could offset this with new job creation. - Owen Thomas(CEO)

How is AI affecting office space demand and where are AI-related companies likely to locate? - James Colin Feldman (Wells Fargo Securities)

2025Q2: AI is seen as a more significant trend than work-from-home, creating job growth in areas with deep talent pools like New York, Boston, and San Francisco... AI will likely enhance demand for high-quality office space, attracting industries at the top of the intellectual pyramid. - Owen Thomas(CEO)

Contradiction Point 2

Occupancy Projections and Leasing Activity

It raises questions about the company's expectations for occupancy improvements and the timeline for leasing activity, which directly impacts financial performance.

How are you planning for next year’s remaining capacity after significant leasing this year? How confident are you in a 200-basis-point increase in occupancy? - Anthony Paolone (JPMorgan)

2025Q3: We are optimistic about the office leasing environment, and we think that the balance of demand will continue to be more positive than negative. - Douglas Linde(President)

What are the Q2 mark-to-market trends and anticipated lease spread improvements? - Nicholas Yulico (Scotiabank)

2025Q2: Mark-to-market was slightly down due to specific deals with lower rents. Generally, rents are increasing, especially in Boston and New York. - Douglas Linde(President)

Contradiction Point 3

Occupancy Improvements and Leasing Expectations

It involves differing expectations about occupancy improvements and leasing activities, which are critical for understanding the company's growth trajectory and financial outlook.

How are you planning for next year’s remaining period after significant leasing this year, and how confident are you in a 200-basis-point increase in occupancy? - Anthony Paolone (JPMorgan)

2025Q3: Doug Linde: We are confident in achieving occupancy growth projections of 200 basis points in 2026 and another 200 basis points in 2027. - [Douglas Linde](President)

Can you explain your confidence in achieving the 4M sq ft leasing plan, including 3M sq ft of vacant space and 2025 expirations? - John Kim (BMO Capital Markets)

2025Q1: Doug Linde: Over 1 million square feet of leasing on vacant and 2025 expirations has already been achieved. The pipeline includes another 400,000 square feet of vacant space and 250,000 square feet of 2025 expirations. - [Douglas Linde](President)

Contradiction Point 4

Impact of Asset Sales on Dilution

It involves differing expectations regarding the dilutive impact of asset sales, which is crucial for understanding the financial implications of the company's divestment strategy.

How do asset sales impact dilution? - Unknown Analyst (Citi)

2025Q3: Mike LaBelle: We expect some dilutive impact from early asset sales closures, but the timing is uncertain. - [Michael LaBelle](CFO)

Can you discuss your service portfolio's potential impact on NOI? - Seth Berge (Citi)

2025Q1: Mike LaBelle: The early payoff of some debt, including the 2023 mortgage, will be dilutive to FFO per share by $0.07 to $0.09 for the first and second quarters of this year. - [Michael LaBelle](CFO)

Contradiction Point 5

Occupancy and Leasing Expectations

It involves differing expectations for occupancy improvements and leasing activity, which are crucial for understanding the company's financial performance and market outlook.

How are you planning for next year's remaining leasing activity given this year's volume? What's your confidence level in a 200 basis point occupancy rate increase? - Anthony Paolone (JPMorgan)

2025Q3: We've talked about the 200 basis points of occupancy improvement in 2026 and another 200 basis points in 2027. And that's what we expect. It's what we're -- you know, that's our expectation. - Douglas Linde(CFO)

Can you clarify your retention ratio and expectations for new leasing activity on vacant space? - Steve Sakwa (Evercore ISI)

2024Q4: In that year, we expect to lease 2 to 3 million square feet of vacancy and known expirations. That's where we are right now. - Douglas Linde(CFO)