Boston Properties, Inc. (NYSE:BXP) Q4 2023 Earnings Call Transcript
Boston Properties, Inc. (NYSE:BXP) Q4 2023 Earnings Call Transcript January 31, 2024
Boston Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to BXP Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would 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: Good morning, and welcome to BXP's fourth quarter and full year 2023 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. The 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 that 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 a 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 Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions.
We ask that those of you participating in the Q&A portion of the call to please limit yourself to only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks.
Owen Thomas: Thank you, Helen, and good morning, everyone. After a brief review of our quarterly and annual performance, I intend to focus my remarks this morning on BXP's significant capital allocation activity over the last quarter, related real estate capital market conditions and key areas of focus for us in 2024. The operating trends I've described in prior quarters, specifically the steady return of workers to their offices, the importance of corporate earnings growth to leasing activity and the outperformance of premier workplaces, all remain important and substantially unchanged. BXP continued to perform in the fourth quarter as we did throughout 2023, despite withering negative market sentiment for the commercial real estate sector.
Our FFO per share was $0.01 above market consensus for the fourth quarter and for all of 2023, was $0.15 above the midpoint of the guidance range we provided one year ago. We completed over 1.5 million square feet of leasing in the fourth quarter and 4.2 million square feet of leasing for all of 2023, well above our prior forecast. Over the last year, signed leases remain long term over eight years weighted average and portfolio occupancy remained stable, despite a challenging leasing environment. In 2023, BXP raised over $4 billion in new capital in the public unsecured debt, private secured mortgage and private equity markets. In the fourth quarter alone, we completed a new $600 million mortgage financing, a $750 million asset-specific equity capital raise, both among the largest comparable transactions completed in our sector last year as well as three new and highly accretive equity investments, one of which closed in January.
So on capital allocation activities and starting with capital raising, last November, BXP announced the sale to Norges Bank Investment Management of a 45% interest in 290 and 300 Binney Street, both life science developments located in the Kendall Square District of Cambridge, leased on a long-term basis to creditworthy clients. 300 Binney is a 236,000 square foot existing office building that is being converted to lab use and scheduled for delivery at the end of this year, and 290 Binney is a 566,000 square foot ground-up development that we expect to deliver in 2026. Our partner purchased the assets at a gross valuation of $1.66 billion or $2,050 per square foot and an expected initial cash yield on cost at delivery for both assets of 5.9%.
BXP will retain a 55% interest in each joint venture and provide development, property management and leasing services. Norges has closed its investment in 300 Binney and funded $213 million, and we expect the 290 Binney joint venture will close in the first quarter of this year, which will reduce approximately $534 million of BXP's development funding requirement over time. We are pleased and honored to grow our important relationship with Norges, BXP's largest joint venture partner and one of our largest shareholders. Upon completion of this transaction, BXP will have raised just under $750 million of equity capital on attractive terms and reduced our forecast leverage. Next, BXP purchased interest in three currently owned assets from two different joint venture partners, one of which closed in early January.
These transactions were sparked by anchor client renewals BXP achieved at two of the assets, requiring capital for tenant improvements, leasing commissions and building upgrades. In the current environment, these two joint venture partners decided they wanted to reduce their exposure to office. We agreed to purchase their interest at attractive and accretive returns and complete the long-term lease extension. Regarding the specific deals, 901 New York Avenue is a 548,000 square foot, 83% leased office building located in Washington, D.C. The building is encumbered by a $207 million mortgage, with attractive terms due in 2025. In January, we completed the renewal of the 214,000 square foot anchor client in the building, Finnegan Henderson for 18 years, purchased the 50% interest in the property we didn't own for $10 million and modified the loan to allow for an extension of the maturity date for up to five years.
Pricing for the acquisition was $414 per square foot and a 6.4% initial cap rate on an as-is basis, and $516 a square foot with an expected 8.4% cash yield on cost at stabilization in 2027. Santa Monica Business Park is a 21 building 1.2 million square foot and 88% leased office complex located adjacent to the Santa Monica Airport. The property is encumbered by a $300 million mortgage due in 2025, and 70% of the park is encumbered by a ground lease, with above-market ground rent and a fee purchase option in 2028. We completed a 467,000 square foot lease renewal for Snap, the anchor client in the park for 10 years, and purchased the 45% interest in the asset we didn't own for $38 million, which represents pricing of $395 per square foot and a 9% initial cap rate on a fee simple basis based on market assumptions for land value.
Lastly, in conjunction with the Santa Monica Business Park buyout, BXP purchased a 29% interest in 360 Park Avenue South for $1, bringing our ownership interest in the asset to 71%. 360 Park Avenue South is a 450,000 square foot office building that BXP is fully redeveloping in Midtown South and is encumbered by a $220 million mortgage. We purchased 360 Park Avenue South using OP units priced at $111 per share in 2021 and subsequently introduced two financial joint venture partners, who secured their interest by funding the required redevelopment capital expenditures over time. At the time of closing, the selling joint venture partner had funded $71 million, and BXP assumed their remaining $46 million projected funding obligation. This investment represents pricing projected at building stabilization in 2026 of $754 per square foot and a 7.2% initial yield on cost.
So in summary, for these three acquisitions, BXP invested only $48 million upfront and materially increased its ownership position in three high-quality assets we understand well. We expect to receive projected total returns that will be well in excess of the cost of the equity capital we've raised from the Binney Street joint ventures, and project FFO per share accretion from the investments of approximately $0.14 in 2024. Regarding the broader private equity capital markets, office sales volume picked up in the fourth quarter to $14.4 billion, up 126% from the prior quarter and up 14% from a year ago. Interestingly, office sales went from 12% of total real estate transaction volume in the third quarter to over 27% last quarter. Though U.S. lenders continue to reduce exposure to office real estate, making secured financing extremely difficult to arrange, there is more distressed asset restructuring activity, more capitulation on pricing by owners and more confidence by buyers in their forecast cost of capital.
The Fed's announcement late last year that interest rate hikes are likely over and cuts could start to occur in 2024 is very favorable for real estate capital market conditions. There were a few comparable premier workplace transactions completed last quarter other than our Binney Street joint ventures. One Westside and Westside Two in West L.A. sold for $700 million or over $1,000 a square foot, and a 6% cap rate to a user, but the economics are influenced by a lease buyout from the existing anchor tenant. Now turning to BXP's priorities for 2024. Our overriding goal is to leverage our competitive advantages to preserve and build FFO per share over time. Today, the key advantages for BXP are our commitment to the office asset class and our clients, as many competitors disinvest in the sector, a strong balance sheet with access to capital and the unsecured debt and private equity markets and one of the highest quality portfolios of premier workplaces in the U.S. assembled over several decades of intentional acquisitions and development.
Our primary focus for 2024 will be leasing, preserving and building overtime our occupancy in addressing near and in some cases, medium-term lease expirations, with our portfolio 88% occupied, leasing vacant space is our least capital-intensive way to build back FFO. Doug will focus his comments on leasing markets and our expectations for leasing this year. A second focus for 2024 is new investment activity, many office owners are facing existential risks, given slow leasing and limited secured financing and many institutional owners want to diversify away from the office asset class. We said last quarter, we intended to shift to offense on capital deployment and this has started, given the three new investments I described. There are and will be significant additional investment opportunities available from both lenders and owners of property.
Our focus will remain in our core markets on premier workplaces, life science assets and residential development. During the last market downturn caused by the global financial crisis, BXP was able to acquire premier workplaces such as the GM building, 200 Clarendon Street, 100 Federal Street and 510 Madison, all at attractive prices at the time. A third area of focus for us this year will be new development, we have two possibly three residential development opportunities under control that are being entitled and designed and we intend to raise joint venture equity capital for these projects in the second half of the year. We also continue to have dialogue with anchor clients for sites under control in Manhattan, though the discussions are in early phases and the outcomes are much less certain.
Significant pre-leasing, higher expected development yields and joint venture equity would be required to launch any new premier workplace developments. We also have several specific sites and buildings that we are trying to re-entitle in advance for near-term viable use based on market conditions. BXP continues to execute a significant development pipeline with 10 office, lab, retail and residential projects underway. These projects aggregate approximately 2.7 million square feet and $2.4 billion of BXP investment, with $750 million remaining to be funded after closing the 290 Binney Street joint venture and are projected to generate attractive yields in the aggregate upon delivery. We will be opportunistic with dispositions in 2024. Market conditions are generally unfavorable for selling assets at attractive prices, but we are interested in raising capital through asset sales if favorable opportunities present themselves.
To summarize, in the face of strong negative market sentiment, BXP executed well in 2023, leasing over 4 million square feet of space, raising over $4 billion of capital and launching 2 large-scale fully pre-leased life science developments. We displayed resilience with stable occupancy and a stable dividend and our FFO per share is higher today than it was before the pandemic started in 2020. So we start the year with continued challenges in the leasing market, BXP is well positioned to gain market share in both assets and clients during this time of market dislocation. As a last closing remark, today represents a BXP milestone, this will be Bob Pester's last earnings call as he is retiring from BXP next month, after more than 25 years of service.
Our San Francisco region grew significantly under Bob's capable leadership. Thank you very much, Bob. You will be missed by all of us at BXP. Over to Doug.
Douglas Linde: Thanks, Owen. Good morning, everybody. After a moment of silence to Bob, I'm going to start. In early 2023, we established our baseline leasing expectations for our portfolio of about 3 million square feet in flat occupancy. As Owen commented, we ended the year with 4.2 million square feet and the fourth quarter included our 467,000 square foot early renewal with Snap at Santa Monica Business Park. We executed about 500,000 square feet more than we expected in 2023 and it was primarily pulling forward some 2024 transactions. The Snap lease was part of our baseline expectations and interestingly, it was only 1 of 2 leases in excess of 130,000 square feet that we executed in the portfolio during the year. On 12/31/22, so over -- just over a year ago, our in-service occupancy was 88.6% and we finished the year, 12/31/23, at 88.4%, essentially flat.
Our in-service portfolio is 49 million square feet, so 20 basis points amounts to 98,000 square feet sort of a rounding era. Maintaining portfolio occupancy in the current environment is an accomplishment in its own right. Our large lease expirations in 2024 are 200,000 square feet at 680 Folsom, 230,000 square feet at 7 Times Square, where we own 55% and 230,000 square feet at Carnegie Center and they all occur in the first half of the year. A few comments on WeWork. We are actively engaged in lease modification discussions at our 4 units, Dock 72 in Brooklyn and our 3 sites in San Francisco. Our occupancy expectations assume, we reach agreements that result in a smaller overall footprint and a reduction to the $33 million of rent they are currently paying.
It is obvious that WeWork emerges from bankruptcy as an operating business that is positioned for success. Mike will discuss the impacts in his same-store property performance for 2024. In '23, the U.S. office [ph] markets experienced negative leasing absorption. This included the BXP coastal cities, as well as the major Sunbelt and Midwest markets, basically everywhere. How are we thinking about the broad market for '24? If you look at the most recent labor statistics, while the U.S. added 216,000 jobs in December, only 5% were categorized as professional and business services, a.k.a. true office using jobs. The pace of job reductions related to the slowdown in the business economy has slowed, but we continue to see employee layoff announcements across a wide variety of industries, particularly technology.
The U.S. economy may not enter a technical recession, but no one should assume that the soft landing is going to stimulate a pickup in office-using employment. Operating in this macro environment, it's hard to envision any dramatic pickup in market leasing absorption in '24. We think overall earnings growth for our clients and potential clients will improve and are optimistic it will lead to employment and space additions just not right away. However, we're not counting on a market recovery to maintain BXP's occupancy. Our leasing, construction and property management teams will lean in on our operating prowess to gain new clients and market share, as clients choose premier properties that are in sound financial conditions for their workplaces.
This is how we release known explorations and cover vacant space. The bifurcation of client demand between the East Coast and the West Coast continues to be very wide. San Francisco, West L.A. and Seattle are dependent on technology employers. Traditional technology demand growth continues to be weak and more times than not renewing technology clients are reducing their lease premises. Snap is a case in point. We were successful in executing a forward-starting 10-year lease extension commencing in '26 for 467,000 square feet. However, the transaction does include an early termination of 140,000 square feet at 12/31 24. We can't require clients to lease more space, but we can meet their workplace needs. The leasing excitement on the West Coast in '23 was all about growth from AI organizations in the city of San Francisco, where we saw over 1 million square feet of positive absorption from the industry in the San Francisco CBD in '23.
There have been billions of dollars of recent investment in this growing ecosystem, and there are additional clients in the market, but let's acknowledge that, these other AI organizations are predominantly seed or early round funded entities and not at the same scale as an OpenAI or an Anthropic. Their leasing is focused on small footprint built opportunities that are available at significantly discounted terms relative to rents being achieved in Premier. However, all demand is good demand in San Francisco if it translates into absorption. The Seattle CBD continues to have very little active demand other than lease exploration-driven exploration. Our vacancy in Seattle increased by about 100,000 square feet in the second half of '23, due to WeWorks termination, as well as the give back of a floor from a technology company as part of a 5-floor lease extension at Madison Center again, technology-company staying with us in our portfolio, but reducing some space.
The entertainment industry, union contract settlements are clearly a positive for West L.A., but there continues to be pressure from streaming profitability, industry consolidation and job reduction in the gaming and media space that is impacting overall demand growth. The concentration of the strongest user demand, which will be the source of occupancy pickup, is still broadly speaking, asset managers, including private equity, venture hedge funds and specialized fund managers and their financial and legal advisers. These organizations are the heart and soul of our New York City activity and are an important sector of the Boston and San Francisco CBD demand as well. In some instances, these clients are growing their teams and capital under management, but in many cases or in all cases, they want to occupy premier workplaces.
To illustrate the point, during the quarter, we completed a 25,000 square expansion for an investment bank in Manhattan, a 17,000 square foot lease with a foreign bank that's relocating to one of our other properties in Manhattan, a 10,000 square foot lease with a venture capital firm that's relocating to Embarcadero Center, a 30,000 square foot renewal with a private equity firm at Embarcadero Center, a 74,000 square foot renewal with a law firm in Embarcadero Center and a 15,000 square foot renewal with a long-only manager in Boston. This is where the demand is going to come from. Our strongest activity remains in our Midtown Manhattan portfolio, the Back Bay of Boston, the urban cores of Reston Town Center in Northern Virginia and our Embarcadero Center assets in San Francisco.
This quarter, we executed leases of about 74 transactions. We signed 37 lease renewals, 37 leases with new tenants. There were 8 contractions and 9 expansions among our existing clients, with a net reduction of about 100,000 square feet across those 17 transactions. If you exclude Snap, the number is actually a positive 40,000 square feet. The bulk of the transactions were on the West Coast and the majority of the expansions were in New York City. Total leasing volume this quarter was led by New York at 567,000 square feet, then 468,000 in L.A., 198,000 in San Francisco, 153,000 in Boston and 140,000 square feet in the greater Washington, DC area. I would highlight two leases that were executed this quarter. First, the Pratt Institute entered into a long-term lease for 63,000 square feet at Dock 72, a real accomplishment for the New York team and DoorDash executed 115,000 square foot lease, including 57,000 square feet of expansion at 200 Fifth Avenue, again, in Manhattan.
The mark-to-market of the leases that commenced this quarter, meaning they hit our revenue, was flat as reported in our supplemental. The overall mark-to-market of the starting cash rents on leases executed this quarter, relative to the previous in-place cash rents was down 1.8%. The starting cash rents on leases we signed this quarter on second-generation space were up 7.5% in Boston, flat in New York, down 15% in D.C. and overall on the West Coast down 3%, but the San Francisco CBD was still up 9%. At the end of the quarter, we had signed leases that had yet to commence on our in-service vacancy, totalling approximately 750,000 square feet, with 625,000 square feet anticipated to commence in '24. Our pipeline of active leases under negotiation sits at just under 1 million square feet today.
We have only one transaction currently in negotiation over 70,000 square feet. Comparing this to last quarter, we were at 1.2 million square feet of active discussions at the same time and included the 467,000 square foot Snapdeal. We've seen an uptick in the number of active deals, but the size is smaller. For modelling purposes, our 2024 leasing activity is anticipated to be about 3.5 million square feet. As of January 1st, 2022, so going back two years, our total expirations for '24 totalled 3.5 million square feet. On January 1st, 2024, we have 2.7 million square feet of current expected expirations. If we renew 25% of the remaining 2024 expirations or 675,000 square feet, it means we will have renewed about 43% of our expiring square footage, which is sort of in line with our historical averages.
We have executed leases on 625,000 square feet of vacant space commencing in '24. So effectively, we need about 1.4 million square feet of leases that we have yet to execute on 2024 vacant space to have a rent commencement during the year to maintain a flat occupancy. That's what is built into the model and into Mike's same-store. As we look forward into the year 2024, we expect to have sticky occupancy defined as 20 basis points plus to minus 120 basis points negative at the year, and that also factors in some tenant defaults in addition to contractual expirations. During the year, we will have property additions and subtractions to the portfolio. These are not included in the current portfolio occupancy guidance. As an example, in the fourth quarter of '24, the two Waltham Life Science developments will join the in-service portfolio.
Their 32% leased and include 300,000 square feet of vacant space that will hit the reported vacancy, that's not part of our projections. We're just looking at our intra-service portfolio as of today. And as long as we're on the topic of life science leasing, new life science activity across our two markets as well as our entire portfolio, continues to be light. During the quarter, we actually had 137,000 square foot known exploration of a life science lease in our Waltham portfolio, which impacted our sequential occupancy and there were no new leases signed in South San Francisco at 651 Gateway. In Waltham, we are seeing some tour activity and have made some proposals, but potential clients don't feel a sense of urgency to make a quick decision.
Before Mike discusses our 2024 guidance, I want to make one additional comment around the cost of potential new developments that Owen described. We are seeing more competitive pricing in tenant improvement projects. We've not experienced deflation in material prices or labor, but it's true that there is less work, and we believe that this has resulted in lower pricing from the various subcontractors, who want to maintain a certain size of business. As we think about new base building construction costs, we're hopeful that escalation is no longer part of the conversation and that the same pressures will result in bids that allow us to consider moving forward. However, there are lots of infrastructure projects as well as institutional construction that is filling a portion of the void from lower commercial construction in our markets.
Capital costs still haven't received. Construction financing requires a significant capital charge for lenders and obviously results in a higher margin on top of the underlying SOFR. Everyone has a view on the timing and depth of Fed Red rate cuts, but if SOFR goes to 4%, construction financing, if you can arrange it, it's still going to be very expensive and a significant drag on new construction starts. Current market rents and concessions associated with available existing space don't support office -- new office development. To a potential client that requests a proposal for new construction understands it will involve appropriate lease economics to justify the new capital requirements. So Mike, it's time to talk about the quarter and guidance for '24.
Michael LaBelle: Great. Thanks, Doug. Good morning, everybody. So this morning, I plan to cover the details of the fourth quarter and our full year 2023 performance, but I'm going to spend most of our time describing our 2024 initial earnings guidance that was included in our press release, with additional details in our supplemental financial package. So for 2023, we reported full year FFO of $7.28 per share and that was $0.02 per share of the midpoint of our guidance range provided last quarter and $0.01 above Street consensus. Owen described the strong 1.5 million square feet of leasing activity in the quarter, and included in this is 270,000 square feet within our unconsolidated joint venture portfolio, where we generate leasing commissions that exceeded our budget by $0.02 per share.
We also outperformed our guidance for the quarter with $0.02 per share of lower net interest expense. There were two real reasons for that. Last quarter, we announced the closing of our $600 million five-year floating rate mortgage on three of our Cambridge buildings. When interest rates rallied in December, we opportunistically hedged this financing to fix the rate at 6% for the term. This reduced our interest rate by 160 basis points, contributing to lower interest expense in the quarter. Additionally, the closing of the sale of a 45% interest in 300 Binney Street raised $213 million of equity. That transaction closed earlier than we expected, so the interest earned on the cash represents an increase to our net interest guidance. These two items were offset by about $0.02 per share of onetime unbudgeted transaction expenses related to the forming of the joint venture for 290 and 300 Binney Street as well as slightly higher G&A costs in the quarter.
Our portfolio NOI performed in line with our expectations, though we did experience a shift from the same property income bucket to termination income. We booked $10 million of termination income in the quarter, which was $7 million higher than our assumption, primarily from WeWork terminating its lease for two floors in Madison Center in Seattle. Our practice is to exclude termination income from our same property results. So the impact caused our same-property growth to be slightly negative for the quarter. If you exclude the impact of the termination income, our same-property performance actually would have been roughly flat. So with that, I'm going to turn to our 2024 guidance. On a high level, our 2024 guidance can be summarized as follows.
We project growth from the delivery of development and the acquisitions of our partners share in Santa Monica Business Park and 901 New York Avenue, a slight decrease in our same-property portfolio NOI compared to 2023, higher net interest expense due to the persistency of the current high interest rate environment and lower development and management services fee income. I'm going to start with the impact of the acquisitions of our partner's interest in Santa Monica Business Park and 901 New York Avenue that Owen described. 360 Park is still in development, so that transaction has limited impact on 2024 FFO. There are a lot of moving pieces with these transactions from an income and balance sheet perspective, so bear with me for a moment. Including the impact of the incremental debt acquired as well as the loss of fee income earned from our former partners, we project these acquisitions are highly accretive, adding approximately $25 million or $0.14 per share to our 2024 FFO.
Noncash components represent about 50% of the incremental FFO pickup and are derived from straight lining the leases and fair valuing the debt and the ground lease at Santa Monica Business Park. If we break that down into the categories for our guidance assumptions, the incremental property NOI is approximately $0.22 per share, and that's offset by the additional interest expense of $0.05 per share and the loss of fee income of $0.03 per share. We will now be consolidating the results from these properties. So starting in 2024, you will see the increase in our consolidated NOI and interest expense and a decrease in FFO from unconsolidated joint ventures and fee income. Also impacting 2024 is the disposition of Metropolitan Square in Washington, D.C. that we transacted last year.
Inclusive of interest expense, the transaction is neutral to our 2024 FFO. But we do expect a reduction in property NOI of $0.03 per share, that's offset by a comparable $0.03 per share reduction in interest expense. Turning to development activity. Our development activity includes $550 million of investments that delivered in 2023 and will contribute incremental growth for a full year in 2024. These include 2100 Penn, 140 Kendrick Street and 751 Gateway that are in aggregate 97% leased. We have an additional $665 million in developments that are projected to deliver in the near term that we expect will commence revenue in 2024, but be much more meaningful to our growth in 2025 as they complete their lease-up. In aggregate, we expect our developments to contribute an incremental $35 million to $42 million in 2024 or $0.20 to $0.24 per share.
Turning to the same property portfolio. Doug spent time describing our occupancy outlook and the impact of the uncertain economic environment that our clients are dealing with. Most continue to be very cautious around new investments, including space, and our leasing projections reflect this conservatism. We still expect to have a productive leasing year. And as Doug described, we have a large backlog of signed leases and leases and negotiation that will go into occupancy in 2024. We expect an occupancy range for our in-service portfolio of 87.2% to 88.6%. Overall, our assumption for 2024 same-property NOI growth from 2023 is negative 1% to negative 3%. As Doug mentioned, we're in discussions with WeWork on modifications for the remaining four leases.
Our guidance assumes -- our guidance includes assumptions for these modifications that comprise 45 basis points of the decrease in our projected same-property NOI performance. As you all should expect, our interest expense will be higher in 2024 with the continued high interest rate environment. We expect floating rates will start to drop in the back half of the year and are modelling 75 basis points of Fed cuts, which is more conservative than the current forward SOFR curve. Currently, floating rate debt is only 5% of our total debt, is comprised of $730 million of mortgages, and we have a $1.2 billion term loan that's currently fixed and the interest rate swap expires in May of 2024. Our liquidity is very strong. We have current cash balances of $1.5 billion and our entire $1.8 billion line of credit is available.
We will be using approximately $700 million of cash to redeem our maturing 3.8% $700 million unsecured bond that expires tomorrow. Other than that, we have no meaningful 2024 debt maturities without extension provisions, so we're not projecting significant changes in our debt profile. Our only external funding need is approximately $600 million of development spend in 2024 that will be funded with available cash. The majority of the increase in interest expense is coming from our 2023 refinancing activity, resulting in a roll up to market interest rates and the consolidation of the mortgage threat for Santa Monica Business Park and 901 New York Avenue. And lastly, as I mentioned last quarter, our average cash balance will be less in 2024 than it was in 2023, and we expect approximately $30 million of lower interest income.
So overall, we're projecting net interest expense of $570 million to $590 million in 2024. We expect consolidated net interest expense to be higher by $72 million at the midpoint, inclusive of the drop in interest income I mentioned. With the consolidation of SMBP and 901 New York Avenue, the interest expense and our unconsolidated joint venture portfolio is expected to be $18 million lower. So this results in a projected increase from year-to-year in total interest expense, including our joint ventures of $54 million or $0.31 per share at the midpoint of our guidance range over 2023. Additionally, the consolidation of Santa Monica Business Park requires us to fair value the above-market ground lease, we project a $10 million positive non-cash impact to FFO from this in 2024.
The last item I would like to cover is our fee income projection. We have or will be delivering several joint venture development projects, including our Gateway joint ventures, 360 Park and the Skymark Residential Development. With the delivery of these projects, our development fees are expected to be lower by about $5 million in 2024. Also, we're no longer receiving fees of about $5 million from Santa Monica and 901 New York Avenue, now that they are wholly owned. So our guidance for fee income is lower and is now $25 million to $28 million in 2024. So if you aggregate all of these assumptions, we're providing an initial 2024 FFO guidance range of $7 to $7.20 per share. At the midpoint of our guidance, that's $0.18 per share lower than our 2023 reported FFO.
The difference is comprised of increases of $0.19 of incremental NOI from acquisitions and dispositions, $0.22 from our developments, $0.02 of lower G&A expense, offset by $0.26 of higher interest and fair value ground lease amortization, $0.21 of lower contribution from Same Property NOI, $0.08 of lower fee income and $0.06 of lower termination income. At the midpoint, our 2024 FFO results in a modest 2.5% decline from 2023. So despite the economic headwinds, we continue to gain market share with our leasing and operating prowess and premier workplace portfolio, demonstrating relative stability in times of negative absorption. We're optimistic that the interest rate environment will settle at a lower level, providing more confidence in the economy.
We're also successfully executing on accretive new investments and continue to focus on additional opportunities to grow our earnings and create shareholder value. That completes our formal remarks. Operator, can you open the line for questions?
Operator: Thank you, sir. [Operator Instructions]. And I show our first question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.
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