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Analyst Blog

On Jun 7, 2013, we reiterated our long-term recommendation on Boston Properties Inc. (BXP - Analyst Report) at Neutral. The decision is based on the company’s improved core operations and strategic repositioning efforts, though rising expenses and stiff competition from developers, owners and operators of office properties and other commercial real estate remains a plausible concern.

Why Neutral?

Boston Properties’ first-quarter 2013 funds from operations (FFO) per share of $1.06 came in considerably below the Zacks Consensus Estimate of $1.21 and the year-ago quarter level of $1.12. Substantial increase in operating expenses hurt the quarterly results.

Yet, a rise in revenues acted as a tailwind. Notably, during the quarter, Boston Properties appointed Owen D. Thomas as the new CEO, succeeding Mortimer B. Zuckerman. As a result, the company recognized a part of the compensation expenses in the quarter with the remaining to be realized by the second quarter of 2014. In addition, the company incurred charges related to its property.

Nevertheless, the company is benefiting from improved core operations and has been successful in maintaining a strong grip on high barrier-to-entry geographic markets across the U.S. Notably, the company’s Times Square Tower in Manhattan is on sale, as per a Bloomberg report.

The deal value for this 1.2 million-square-foot office building is expected to surpass $1 billion. The news was revealed by the company at the National Association of Real Estate Investment Trusts conference in Chicago.

Mostly occupied, the Times Square Tower, a 47-story Class A office tower, enjoys an enviable location in the popular shopping district with its tenant roaster including several law firms, restaurant chain and clothing retailer ANN Inc. (ANN - Snapshot Report).  Rise in rents and the value of such properties in the area are attractive and, hence, the value recognition of its asset through sale by Boston Properties is a strategic fit. The company can redistribute the funds in its several other projects.

Yet, the demand remains moderate for office space in several other regions with unemployment levels remaining elevated and space availability adequate, thus creating pressure on the rent and occupancies.

Following the release of first-quarter 2013 results, over the last 30 days, the Zacks Consensus Estimate for 2013 fell marginally to $5.10 per share. For 2014, it went down by 0.4% to $5.63 per share. The stock now has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better performing REITs include CommonWealth REIT and Sunstone Hotel Investors Inc. (SHO - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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