Boston Properties (NYSE: BXP) is a self-managed, self-administered office REIT. It owns, manages, operates, and develops Class A office properties in primarily five markets: Boston, Los Angeles, New York, San Francisco and Washington, DC. The company was founded in 1970 and went public in 1997.
The company concentrates on developing premium Central Business District office buildings and suburban office centers. It also develops build-to-suit projects for high-quality tenants including the U.S. government. It might seem unusual for a large office REIT to own property in so few markets but the strategy recognizes the demand consistency and economic growth afforded by the largest markets, and so far it has proven effective.
BXP prides itself on its expertise in building management and its excellent responsiveness to tenant needs. It is ranked in the top 4% of the most sustainable real estate companies. The company’s business model emphasizes quality, agility, and durability:
- Highest quality office properties with many new and refreshed assets
- Proven management emphasizes sustainability
- Wide diversity of tenants across geographies and sectors helps to capture growth while minimizing risk
- Strong funds from operations and modest leverage resulting in significant liquidity
- Extensive pipeline of pre-leased development projects
- Weighted-average lease term of 7.9 years yields dependable cash flows
Recent Company Trends
The pandemic caused the average office REIT share to lose about 35% in 2020. Working from home depressed the sector, but it remains to be seen whether this is a temporary blip or a true paradigm shift. The latter would reduce demand for office space, hurting rental rates and occupancy levels.
Despite the current conditions, many companies continue to sign office leases, helping to mitigate the industry’s worst fears. These tenants may be forecasting a hybrid model of in-office and remote work, where employees come into the office for onsite training, important meetings, and other office events.
The current market disruption has prompted large tenants in the tech and financial sectors to secure additional office space on favorable terms. The phenomenon is strongest in the biggest markets, which puts BXP in a good position to take advantage of it.
BXP shares rebounded somewhat in 2020 Q3 despite an overall down year. In the quarter, it collected an astounding 99% of its office rents and 97% of rents overall. BXP completed 811,000 square feet of leasing, 40% being either new requirements or expanding existing customers. Also, it increased its average net rental rates on its second-generation leases by 20%.
In terms of fundamentals, BXP has a good five-year record, with above-average return on equity and no interruption in dividends. However, BXP experienced below-average operating cash yields, reduced profits, and higher-than-average debt-to-capital in 2020.
In the third quarter, BXP saw an uptick in acquisition opportunities with the prospect for pipeline growth in 2021. In general, BXP works with private equity joint venture partners to find new investments. For example, the company became a 50% JV partner with a Waltham developer for a 42-acre, 1.2 million square foot site in CityPoint South at an attractive fixed land price. BXP holds options for phased development of this property and surrounding highway improvements.
In 2020, the company’s dividend yield almost doubled and the cap rate on its underlying assets is about 7%. Debt-to-EBDITA is 7.4, and it has a total occupancy rate exceeding 91%.
Holdings (2020 Q3)
Boston Properties holds Class A office space totalling approximately 51.2 million square feet and consisting of:
- 185 office properties (including 6 properties under construction/redevelopment with a total of 4.3 M square feet)
- 5 retail properties
- 5 residential properties (including 3 properties under construction)
- 1 hotel
As of Sept 30, 2020, Boston Properties had 91.1% of its in-service properties leased with a weighted average lease term of 7.9 years.
Over the past three years, BXP had $15.0 billion of acquisitions and $11.7 billion of dispositions.
The following chart depicts property net operating income by market:
As of 30 Sep 2020:
Boston Properties REIT - Table 1
|Return on Assets||4.49%|
|Return on Equity||17.44%|
|Revenue Growth (3-Yr Annualized)||5.09%|
|Operating Income Growth (3-Yr Annualized)||8.07|
|Earnings per Share (TTM)||$6.40|
|Dividend per Share||$0.98|
|Payout Ratio (TTM)||110.4%|
|Free Cash Flow (TTM)||1.14B|
As of 23 Dec 2020:
|Price/Cash Flow (TTM)||14.31|
|Dividend Yield (Annualized)||$4.23|
The Covid-19 vaccine should be widely disseminated by the end of 2021 Q2, auguring a better market for office space. Speculation surrounds the ultimate balance of working from home vs office, even after the vaccine and better therapeutics tame the virus. Factors that affect office demand include location density, employment, economic activity, and occupancy.
There is much debate as to whether offices will migrate from downtown locations to secondary and suburban markets, but there is little evidence to support this movement as of yet.
Office density has generally decreased due to social distancing concerns, but markets should strengthen as this phenomenon reverses later in 2021. BXP executives have expressed optimism that successful companies will work in-office due to requirements for maintaining a company culture and activities like onboarding, training, and development.
Despite a challenging 2020, the Covid-19 pandemic should end in 2021. When it happens, BXP will be in an excellent position to prosper thanks to its superior market position with minimal near-term lease turnover, long lease terms, and excellent liquidity. Look for BXP to show momentum and strength as the economy emerges from the pandemic-rooted recession.