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Boston Properties Inc (BXP - Analyst Report) – a real estate investment trust (REIT) – reported first quarter 2013 FFO (funds from operations) per share of $1.06, considerably lower than the Zacks Consensus Estimate of $1.21. Moreover, reported FFO per share was also below the year-ago quarter level of $1.12. Substantial increase in operating expenses coupled with lower operating income hurt the quarterly results.

Behind the Headlines Number

Total revenue during the quarter upped 8.9% to $483.0 million from $443.7 million in the year-ago quarter. The quarterly revenues were well above the Zacks Consensus Estimate of $463 million. The hike in revenues was primarily attributable to significant surge in rental revenues.

Rental revenues climbed 8.7% to $466.0 million from $428.7 million in the prior-year quarter. The increase was primarily aided by higher base rents and tenant recoveries revenues.

Notable Portfolio Activities

During the quarter, Boston Properties inked a 20-year lease deal with General Services Administration to fully lease a Va.-based property – Three Patriots Park.

The company also acquired a Calif.-based a development site – 535 Mission Street – for around $71.0 million in cash. In addition, Boston Properties, in collaboration with Hines, closed the acquisition for a land parcel - 101 First Street, next to the Transbay Terminal. The companies bought the asset from Transbay Joint Powers Authority (TJPA) for roughly $192 million.

During the quarter, one of Boston Properties’ joint ventures (JV) opened a Class A office property for operations – Annapolis Junction Building Six – located in Maryland. The company’s another JV completed a Class A office redevelopment project – 500 North Capitol Street, NW –located in Washington, DC. Further, Boston Properties completed a Class A office redevelopment project – Two Patriots Park – situated in Va..

Moreover, Boston Properties inked a binding contract for the divesture of a Class A office property, 303 Almaden, in Calif. for $40.0 million.

Property Update

As of Mar 31, 2013, Boston Properties’ portfolio comprised 157 properties spanning around approximately 44.6 million square feet, including 7 properties under development totaling 2.5 million square feet. In addition, the company has structured parking lots of around 15.9 million square feet.

The overall operating portfolio, which comprised 147 properties (excluding the two in-service residential building and the hotel), was 91.7% leased at the end of the quarter.

Liquidity

During the quarter under review, Boston Properties used available cash to pay-off the mortgage loan worth $17.0 million collateralized by Kingstowne One property located in Va. The facility was scheduled to mature on May 5, 2013.

Boston Properties ended first quarter 2013 with cash and cash equivalents of about $909.4 million compared to $1.04 billion as of Dec 31, 2012.

2013 Outlook

Boston Properties expects second quarter 2013 FFO per share in the range of $1.25–$1.27. However, the company tweaked its guidance for 2013 FFO per share to the range of $4.97–$5.07 from the previous range of $5.06–$5.18.

Change of Management

During the quarter, Boston Properties appointed Owen D. Thomas as the new Chief Executive Officer (CEO). He took over the reins from Apr 2, 2013. Thomas previously held top executive posts at many industry giants.

Prior to joining Boston Properties, Thomas served Lehman Brothers Holdings Inc. – the successor company to Lehman Brothers – as Chairman of the Board of Directors. Notably, he watched over the disposition of former Lehman Brothers assets, which include the sale of Archstone Enterprise LP to Equity Residential (EQR - Analyst Report) and AvalonBay Communities, Inc. (AVB - Analyst Report).

Our Viewpoint

Boston Properties’ reported mixed quarterly results on the back of strong portfolio restructuring activity but the increase in operating expenses acted as a dampener. However, we expect its strong leasing activity and JV deals to pave way for maintaining a strong grip on high barrier-to-entry geographic markets across the U.S. This will likely drive growth and prove accretive to its earnings going forward.

Nonetheless, Boston Properties has a large development pipeline, which increases operational risks, exposing it to rising construction costs, entitlement delays, and lease-up risk. This undermines the company’s profitability to some extent.

Boston Properties currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include DDR Corp. (DDR - Analyst Report) carrying a Zacks Rank #2 (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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