Boston Properties Inc. (NYSE: BXP), the company’s $2.4 billion development pipeline is focused on coastal markets mostly outside New York City. We see this as a competitive advantage relative to peers, such as New York-focused Vornado, whose rents are being pressured by rising supply. Management expects this to increase due to development/redevelopment efforts begun prior to the pandemic.
Coming into the pandemic, BXP had impressive NOI growth of 6.7% in 2019, with strong results in Boston and San Francisco. Going forward, we expect BXP to continue to benefit from its diverse tenant base and from the prime location of its office space.
Boston Properties builds, acquires, and leases Class A office buildings to tenants who are willing to pay top rents during periods of economic prosperity, as well as those seeking to upgrade their space when growth slows. The company’s experienced management team and healthy balance sheet are also strong positives.
The beta on BXP is 1.04.
BXP recently reported results that fell short of consensus estimates. For 3Q20, FFO came to $244 million or $1.57 per share. Revenue declined 4% to $667 million, but topped the consensus forecast of $662 million. Same-property NOI decreased 9% to $378 million, and the NOI margin fell 200 basis points to 54%.
Management withdrew its 2020 FFO guidance in 1Q due to coronavirus uncertainty and has not reinstated it. It previously projected full-year FFO of $7.47-$7.65 per share.
The most pressing issues facing BXP are the impact of new supply on rental growth in New York, the loss of revenue while properties are upgraded and delayed, and unpaid rents during the pandemic. In general, the company plans to grow through improved leasing, the development of pre-leased projects, and acquisitions. The company uses asset sales, as well as debt, to fund new development.
EARNINGS & GROWTH ANALYSIS
We are cutting our 2020 FFO estimate to $6.60 per share from $6.85 based on setbacks from COVID-19. Our long-term growth rate forecast remains 6%.
Operating trends and forecasts for the company’s primary business lines are as follows:
- Occupancy. For the company’s in-service portfolio, the 3Q20 occupancy rate fell 90 basis points sequentially to 91.1%. Even as offices remained closed, office collections came in at 99%.
- Leasing Activity/Leasing Expirations. In 3Q20, BXP signed leases totaling 811,000 square feet. These leases included a 13-year expansion and long-term extension with Microsoft in Virginia totaling 186,000 square feet, and a new 14-year, 82,000-square-foot lease with Columbia Threadneedle Investments in Boston. Lease expirations represent 3.2% of in-service square footage in 2020, with annualized revenue of $51.17 per square foot.
- Acquisitions/Dispositions. It also acquired three other assets in California. On the disposition side, BXP sold assets in the Washington, DC area.
- Construction/Development. The company completed Hub50House, a 320,000-square-foot residential property in Boston, in which it has 50% ownership. It also entered into an agreement with an existing joint venture partner for the development of a 1.2-million-square foot site in Waltham, Massachusetts. The agreement allows for the phased development of office and lab properties on 41 acres.
FINANCIAL STRENGTH & DIVIDEND
Over the past year, cash and debt have been used to fund joint ventures, construction, and building improvements.
MANAGEMENT & RISKS
Owen Thomas has been the CEO since 2013 and has more than 25 years of real estate experience. Joel Klein has been chairman of the board since 2019 and has almost 40 years of industry experience.
Investors in BXP face several risks. Tenants may fail to pay rent or decide not to renew leases, which would stress the company’s short-term liquidity. In addition, high vacancy rates can provide tenants with leverage when negotiating renewals, resulting in lease roll-downs. The company also faces asset concentration risk from its locations in New York and Washington, and could be hurt in regional slowdowns.
The company’s top tenants at the end of 2019 were Salesforce (with 3% of square footage), Arnold & Porter (one of BXP’s many law firm tenants), Akamai Technologies (a tech company), the U.S. government, Biogen, and Shearman & Sterling (2% each). Some of these tenants have been cutting back on office space.
Focuses on Boston, Los Angeles, New York, San Francisco, and Washington, D.C. BXP’s portfolio consists of 196 properties with 51 million square feet.
We believe that the stock warrants a premium valuation as Boston Properties is growing rent and NOI faster than peers.
On November 13, BUY-rated BXP closed at $91.62, up $4.53.