Boston Properties' Q2 a Penny Ahead, Guides Low

Zacks

Real estate investment trust (:REIT) – Boston Properties Inc.’s (BXP) second-quarter 2013 FFO (funds from operations) per share of $1.28 were a penny above the Zacks Consensus Estimate and the company’s guidance of $1.25–$1.27 per share. The results were aided by lower operating expenses and higher-than-expected leasing and other fee income.
 
However, this owner and developer of Class A office properties in the U.S., experienced a 5.9% fall in FFO per share from $1.36 reported in the year-ago quarter. The company has also lowered its guidance for 2013 FFO per share.

Behind the Headlines Number

Total revenue during the quarter advanced 9.3% to $515.3 million from $471.3 million in the year-ago quarter. The quarterly revenues were well above the Zacks Consensus Estimate of $470 million. The hike in revenues was primarily attributable to a significant surge in rental revenues.

Rental revenues climbed 9.9% to $496.3 million from $451.7 million in the prior-year quarter. The increase was primarily driven by higher base rents and tenant recoveries revenues.

Notable Portfolio Activities

During the quarter, Boston Properties started construction of Transbay Tower development project’s initial phase in San Francisco, Calif. as well as the 601 Massachusetts Avenue development project in Washington, D.C. (79% pre-leased).

In addition, Boston Properties acquired the Mountain View Research Park and Mountain View Technology Park properties from its Value-Added Fund for approximately $233.5 million in total. Prior to the purchase, the company’s ownership stake in the properties was around 39.5%.

In the quarter under review, one of its joint venture (:JV) in which Boston Properties has a 60% stake accomplished the sale of its 125 West 55th Street property - a Class A office property -  in New York City for $470.0 million.

Moreover, two of its JV partners in 767 Venture, LLC (owner of 767 Fifth Avenue (The GM Building) in New York City) transferred their entire stake in the JV to third parties. As a result, the JV terms were modified and the move resulted in Boston Properties gaining significant financial and operating control over 767 Venture, LLC.

Also, a Class A office project - 17 Cambridge Center in Cambridge, Mass. – was completed during the quarter and fully placed in service. The property is 100% leased.

Property Update

As of Jun 30, 2013, Boston Properties’ portfolio comprised 179 properties spanning approximately 44.8 million square feet, including 8 properties under development totaling 2.8 million square feet. Its properties include Class A office space, one hotel, three residential properties and four retail properties. In addition, the company has structured parking lots of around 15.7 million square feet.

The overall operating portfolio, which comprised 168 properties (excluding the two in-service residential properties and the hotel), was 92.1% leased at the end of the quarter.

Liquidity

During the quarter under review, Boston Properties used its available cash to pay-off the mortgage loan worth $47.6 million collateralized by its 140 Kendrick Street property located in Needham, Mass. The facility was scheduled to mature on Jul 1, 2013.

Boston Properties exited second-quarter 2013 with cash and cash equivalents of about $1.6 billion compared with $909.4 million at the end of the prior quarter and $1.04 billion as of Dec 31, 2012.

Outlook

Boston Properties expects third-quarter 2013 FFO per share in the range of $1.27–$1.29. However, the company has lowered its guidance for 2013 FFO per share to $4.89–$4.94 from the previously reduced range of $4.97–$5.07. This reflects higher interest expense and less income for the rest of the year as a result of the expected sale of 1301 New York Avenue in third-quarter 2013.

Our Viewpoint

Boston Properties 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. Yet, the demand remains moderate for office space with elevated unemployment levels and adequate space availability, thus creating pressure on rent and occupancies.

Boston Properties currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include Winthrop Realty Trust (FUR) that has a Zacks Rank #1 (Strong Buy) as well as Prologis, Inc. (PLD) and PS Business Parks Inc. (PSB), both 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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