Boston Properties: Solid Leasing Improves The Outlook (NYSE:BXP)

Expensive readers/followers,

Boston Properties (NYSE:BXP) is an workplace REIT with a number of the highest high quality buildings within the US by way of high quality, location and age.

The corporate focuses completely on established legacy markets corresponding to Boston, NYC and San Francisco. What’s vital is that their buildings are virtually completely A-Class (CBRE classifies 94% of their properties as premier) and positioned in the very best places (with 80% of properties within the CBD inside every metropolis). Furthermore, the REIT has a number of the youngest buildings on common.

I have been actually attempting to emphasise the truth that the standard of buildings is essential as of late, as a result of as demand drops as a result of WFH and recession fears, we’re seemingly going to see the sturdy (places of work) getting stronger and the weak (places of work) getting weaker.

In truth, based on a study executed by CBRE, premier house in CBD markets the place BXP operates has seen optimistic web absorption of seven Million sft between 2021 and in the present day, whereas non-premier house has seen unfavorable web absorption of virtually 30 Million sft. The delta is sort of massive and confirms that premier buildings have been in a position to hold their occupancy secure, whereas non-premier ones noticed their occupancy decline meaningfully.

The standard of BXP’s buildings, alongside a really depressed valuation, had been the first causes, why I issued a BUY ranking on the inventory again in March at $54 per share with a value goal of a minimum of $75 per share.

Since then, the inventory has climbed to $67 per share, returning round 30%. With a big a part of upside to my value goal already realized and following the newly launched Q2 2023 earnings which have been fairly sturdy, it is time to replace our thesis.

Latest Earnings

Let’s begin with leasing, which might be crucial indicator of efficiency proper now. Administration has been guiding in direction of leasing 3 Million sft of house in 2023, that is 750,000 sft per quarter, on common.

In Q1, they executed 660 ths. sft of leases and in Q2 leasing accelerated to 940 ths. sft. That places their mid-year leasing at 1.56 Million sft, which is correct heading in the right direction (really a bit above goal).

Occupancy of their in-service portfolio has dropped barely in comparison with final quarter (88.3% vs 88.6%) because of including 2100 Pennsylvania Avenue to the in-service portfolio.

Be aware that the newly added constructing is 91% leased, however solely 61% bodily occupied (as a result of tenants have not moved in). Consequently, the constructing causes a slight drag on reported occupancy. Excluding this impact, occupancy remained flat QoQ.

At present, the REIT additionally has about 1 Million sft of signed leases that have not began, about 80% of that are scheduled to begin earlier than the tip of the yr. Furthermore, there are 1.17 Million sft of house at the moment beneath negotiations, up from 900 ths. sft similar time final quarter – once more indicative of an acceleration in leasing general.

With remaining 2023 expirations of about 1.3 Million sft, the corporate appears to be on observe to ship on their steerage of over 3 Million sft leased. I anticipate them to report optimistic web absorption for the yr and due to this fact barely enhance their occupancy at year-end.

By way of steerage, following a stable quarter, administration has raised full yr per share FFO forecast by $0.10 at midpoint to $7.27 (-3.5% YoY). Half of this enhance ($0.05 per share) comes from the next same-store property NOI progress assumption which has been elevated by 100bps to 2.5%. The opposite half, comes from decrease anticipated web curiosity expense because of newly issued bonds at a decrease than assumed fee and better deposit charges on greater money balances.

Going ahead, excessive rates of interest will clearly proceed to be a headwind for BXP as low curiosity debt maturities come due. The corporate has ample liquidity with $1.6 Billion in money and $1.5 Billion accessible on their revolver. So debt maturities do not actually threaten the REIT’s survival, however will enhance their curiosity expense.

Particularly, the $500 Million be aware due in September of this yr at the moment prices simply 3.13%, however is anticipated to get refinanced at 6.5%. Subsequent yr, there’s one other $700 Million be aware due in February and a $1.2 Billion time period mortgage due in Might.

General, the REIT stays in good condition financially with a BBB+ ranking, although I want to see their web debt/EBITDA come down barely from 7.3x.

Valuation

Going ahead I anticipate BXP’s FFO to be flat for the foreseeable future, as:

• they refinance the $1.9 Billion of debt due subsequent yr, their annual curiosity expense will rise by a minimum of $30 Million.
• and this will get roughly offset by 2% same-store NOI progress

By way of multiples, since my final article, the inventory has elevated from 7.4x FFO to 9.2x which continues to be deeply beneath the historic common of 19x.

In actuality, although, everyone knows {that a} return to the historic common is very unlikely at this level. Nonetheless I see 10-12x FFO for a corporation of this high quality as affordable, which might point out a value goal of $75-85 per share.

From a cap fee perspective, the REIT trades at an implied cap fee of seven.2% which remains to be comparatively low-cost, contemplating the standard and site of its buildings.

There have been only a few workplace transactions recently. Administration has highlighted the 2 comparable offers – a sale of three buildings within the Boston space at a 5.8% cap and a sale of a growth web site in Santa Clara at a 6.1% cap. This too suggests that there is nonetheless some room within the valuation.

Backside Line

All issues thought of, BXP has had a superb quarter and I see no purpose to maneuver my $75 per share value goal. Lots of the upside potential has already been realized, however if you happen to’re searching for a long run play on places of work, BXP is probably going your greatest guess. I reiterate my BUY ranking for the inventory right here at $67 per share.