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Why You Should Retain Boston Properties (BXP) Stock for Now
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Boston Properties’ (BXP - Free Report) office assets in a few select markets, a well-diversified tenant base, strategic conversion to life-science asset, and a solid balance sheet bode well for long-term growth. However, a volatile office market landscape and a high interest rate environment present significant challenge.
Boston Properties concentrates on a few select high-rent, high barrier-to-entry geographic markets of Boston, Los Angeles, New York, San Francisco, Seattle and Washington, DC and is well-poised to benefit from the flight-to-quality preference of office tenants.
The company enjoys a diverse tenant base across industries, which includes several forerunners. As of Mar 31, 2023, the weighted average remaining lease term for its 20 largest clients, based on leased square footage, was 10.4 years. The long-term leases with such tenants with a solid credit profile ensure stable revenue generation for the company. We estimate revenues from lease to improve 3.4% in 2023.
Moreover, BXP’s life-science assets have been witnessing solid demand on the back of the growing need for drug research and innovation, aiding leasing activity. Amid this, the company is converting numerous straight office buildings to laboratory/life science spaces in its suburban portfolio, especially its Kendall Center project, which is one of the leading preferred locations for life-science clients in the world.
Boston Properties has a healthy balance-sheet position with ample liquidity. As of May 4, 2023, the company had $3.2 billion of liquidity. The company’s share of net debt to EBITDAre (annualized) was 7.78X, while the fixed charge coverage ratio was 2.67 times as of Mar 31, 2023. Given its solid operating platform and prudent financial management, the company is well-poised to navigate any economic uncertainties.
However, the choppy macroeconomic environment amid inflation woes and high interest rates has softened demand in all of Boston Properties’ markets as tenants are adopting a cautious approach and refraining from making new commitments. Moreover, the U.S. office real estate market continues to struggle from the aftereffects of the health crisis, with negative absorption and high vacancy levels. The lackluster environment can be attributed to the pandemic-led job cuts and remote-working models, which have diminished office space utilization.
In first-quarter 2023, Boston Properties’ in-service portfolio occupancy fell 50 basis points year over year to 88.6%. We project in-service portfolio occupancy to be 88.7% for 2023.
Additionally, elevated interest rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. It has a substantial debt burden and its share of debt as of Mar 31, 2023, was approximately $15 billion. We expect 2023 interest expenses to rise 19.4% year over year.
Shares of this Zacks Rank #3 (Hold) company have gained 8.3% over the past three months against the industry’s rise of 3.2%. The Zacks Consensus Estimate for the company’s 2023 funds from operations (FFO) per share has decreased by 0.7% over the past month to 7.16.
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Why You Should Retain Boston Properties (BXP) Stock for Now
Boston Properties’ (BXP - Free Report) office assets in a few select markets, a well-diversified tenant base, strategic conversion to life-science asset, and a solid balance sheet bode well for long-term growth. However, a volatile office market landscape and a high interest rate environment present significant challenge.
Boston Properties concentrates on a few select high-rent, high barrier-to-entry geographic markets of Boston, Los Angeles, New York, San Francisco, Seattle and Washington, DC and is well-poised to benefit from the flight-to-quality preference of office tenants.
The company enjoys a diverse tenant base across industries, which includes several forerunners. As of Mar 31, 2023, the weighted average remaining lease term for its 20 largest clients, based on leased square footage, was 10.4 years. The long-term leases with such tenants with a solid credit profile ensure stable revenue generation for the company. We estimate revenues from lease to improve 3.4% in 2023.
Moreover, BXP’s life-science assets have been witnessing solid demand on the back of the growing need for drug research and innovation, aiding leasing activity. Amid this, the company is converting numerous straight office buildings to laboratory/life science spaces in its suburban portfolio, especially its Kendall Center project, which is one of the leading preferred locations for life-science clients in the world.
Boston Properties has a healthy balance-sheet position with ample liquidity. As of May 4, 2023, the company had $3.2 billion of liquidity. The company’s share of net debt to EBITDAre (annualized) was 7.78X, while the fixed charge coverage ratio was 2.67 times as of Mar 31, 2023. Given its solid operating platform and prudent financial management, the company is well-poised to navigate any economic uncertainties.
However, the choppy macroeconomic environment amid inflation woes and high interest rates has softened demand in all of Boston Properties’ markets as tenants are adopting a cautious approach and refraining from making new commitments. Moreover, the U.S. office real estate market continues to struggle from the aftereffects of the health crisis, with negative absorption and high vacancy levels. The lackluster environment can be attributed to the pandemic-led job cuts and remote-working models, which have diminished office space utilization.
In first-quarter 2023, Boston Properties’ in-service portfolio occupancy fell 50 basis points year over year to 88.6%. We project in-service portfolio occupancy to be 88.7% for 2023.
Additionally, elevated interest rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. It has a substantial debt burden and its share of debt as of Mar 31, 2023, was approximately $15 billion. We expect 2023 interest expenses to rise 19.4% year over year.
Shares of this Zacks Rank #3 (Hold) company have gained 8.3% over the past three months against the industry’s rise of 3.2%. The Zacks Consensus Estimate for the company’s 2023 funds from operations (FFO) per share has decreased by 0.7% over the past month to 7.16.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Ventas (VTR - Free Report) and Host Hotels & Resorts (HST - Free Report) . While Host Hotels sports a Zacks Rank #1 (Strong Buy), Ventas carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Ventas’ current-year FFO per share has moved marginally northward over the past month to $2.98.
The Zacks Consensus Estimate for Host Hotels’ ongoing year’s FFO per share has been revised 1.6% upward over the past month to $1.91.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.