Boston Properties Inc’s (BXP - Free Report) efforts to concentrate its portfolio around a few select high-rent, high barrier-to-entry geographic markets helped the company achieve an annual compounded revenue growth rate of 8.17% over the last five years. However, the geographic concentration of the company’s assets makes it susceptible to economic downturns.
Although the company has been witnessing subpar demand for its office space, we anticipate a healthy increase in demand due to economic improvement and recovery in the job market. This is because, as the economy revives, business grows, and therefore corporate sectors seek expansion, renting more space to accommodate the increased workforce. Specifically, growth in demand for office space continues to be fueled by the technology and life science businesses.
The company’s tenant roster includes several industry bellwethers such as the U.S. Government, Biogen, Citibank, Bank of America and Wellington Management. With such a diversified tenant and industry base, the company remains well poised to record steady rental revenue growth in the near term.
Boston Properties has been enhancing its portfolio quality through a repositioning program by acquisitions, divestitures and development of properties in core markets. In fact, in July 2016, it obtained a 49.8% stake in the Colorado Center in Santa Monica, CA, for a gross price of roughly $511.1 million. This buyout marked the company’s foray into the expanding Westside Los Angeles market.
Beyond acquisitions, the company has also been pursuing active monetization of its assets. For this, it focuses on the disposition of its non-core assets. The company’s target for dispositions in 2017 remains around $200 million. Its consistent efforts to shed assets and recycle the proceeds in desired markets are anticipated to benefit Boston Properties over the long run.
Moreover, the company has registered a five-year annual dividend growth rate of 4.87%. Given its decent financial position and low payout ratio compared to the industry average, we anticipate this trend to continue.
However, Boston Properties has extensive development plans which increase its operational risks by exposing the company to escalating construction costs, entitlement delays and lease-up risks. In fact, at the end of second-quarter 2017, its development pipeline comprised eight new projects and two redevelopments, aggregating 4.7 million square feet.
Additionally, growth in supply of office space in the market remains a concern because higher supply curtails the landlord’s capability to demand more rents. There is also a trend of increased concessions in some of the markets.
Further, hike in interest rate is a concern for Boston Properties. Essentially, rising rates imply higher borrowing cost for the company, which would affect its ability to purchase or develop real estate, and lower dividend payouts as well.
The stock has lost 3.8% year to date, underperforming 3.9% growth recorded by the industry it belongs to. Boston Properties currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
A few better-ranked stocks in the REIT space include Getty Realty Corporation (GTY - Free Report) , Seritage Growth Properties (SRG - Free Report) and Communications Sales & Leasing, Inc. (UNIT - Free Report) .
While Getty Realty and Seritage sport a Zacks Rank #1 (Strong Buy), Communications Sales & Leasing carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Over the past 30 days, Getty Realty’s full-year 2017 funds from operations (FFO) per share estimates climbed 7.8% to $1.94.
Seritage’s full-year 2017 FFO per share estimates inched up 0.5% to $2.01 in the past month.
Communications Sales & Leasing’s full-year 2017 FFO per share estimates moved up 14.4% to $2.54 over the same time frame.
Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. 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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