Boston Properties (BXP) Up 19% in 6 Months: Will the Trend Last?
Shares of Boston Properties BXP have rallied 19% in the past six months compared with the industry's growth of 1.8%.
Although the overall demand for office real estate seems to be under pressure due to macroeconomic uncertainty and a high interest rate environment, select markets are bucking the negative trend.
Net absorption in the United States office market showed signs of improvement in the third quarter of 2023 compared with the first and second quarters. The growing preference by tenants for premier office spaces with class-apart amenities has played a vital role in aiding absorption rates.
Image Source: Zacks Investment Research
BXP’s ability to offer such properties in a few select high-rent, high-barrier-to-entry geographic markets of Boston, Los Angeles, New York, San Francisco, Seattle and Washington, D.C., is likely to have helped it benefit from this positive demand, driving increased optimism in its stock price.
In the nine months ended Sep 30, 2023, the Zacks Rank #3 (Hold) company executed around 2.7 million square feet of leases with a weighted average lease term of 7.2 years. The third quarter of 2023 was the second consecutive quarter where leasing increased, underscoring the demand for premier workplaces despite the challenging market.
This is a testament to the fact that new and existing clients continue to commit to the long-term use of space and prefer a premier workplace environment. Therefore, with an encouraging leasing pipeline and modest lease expirations through 2023, BXP is well-placed to navigate the challenging environment.
This real estate investment trust (“REIT”) enjoys a diversified, creditworthy tenant base, which includes several industry leaders. The long-term leases with these tenants assure stable revenue generation for the company, driving steady top-line growth. For 2023, we estimate a year-over-year increase of 4.5% in the company’s lease revenues.
The life-science industry is booming on the back of the increasing need for drug research and innovation. Against this backdrop, Boston Properties is converting numerous straight office buildings into 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. Given the robust demand for life-science assets, BXP is expected to witness healthy leasing activity in the life-science portfolio, driving the segment’s growth.
Boston Properties is enhancing its portfolio quality through repositioning initiatives via acquisitions and is developing properties in core markets and shedding properties in non-core markets.
From the beginning of 2010 through the end of the third quarter of 2023, the company carried out acquisitions worth $7.1 billion and disposed of properties for an aggregate amount of $7.4 billion. Such moves highlight its prudent capital management practices and relieve the pressure on its balance sheet.
In addition, BXP’s encouraging development and redevelopment pipeline is likely to fuel net operating income growth in the coming years.
On the balance sheet front, Boston Properties had $3.3 billion of liquidity as of Sep 30, 2023. Its net debt to EBITDAre (annualized) was 7.28X, while the fixed charge coverage ratio was 2.53 times as of the period. Also, it enjoys unsecured senior debt ratings of BBB+ from S&P Global Ratings and Baa1 from Moody’s, providing it access to the debt market at favorable rates.
Hence, with a solid financial position and prudent capital management, Boston Properties seems well-poised to navigate through industry choppiness and capitalize on long-term growth opportunities.
BXP’s current cash flow growth is projected at 30.59%, well ahead of the 8.02% estimated for the industry.
For 2023, Boston Properties expects funds from operations (“FFO”) per share in the band of $7.25-$7.27, revised from $7.24-$7.29, guided earlier. The Zacks Consensus Estimate is currently pegged at $7.28, which is within expectations.
Nonetheless, competition from industry peers may limit Boston Properties’ ability to retain tenants at relatively higher rents, denting its pricing power. Also, the elevated supply of office properties amid a competitive landscape may adversely impact BXP’s ability to backfill near-term tenant move-outs, hurting occupancy. For 2023, management expects in-service portfolio occupancy to range from 88% to 89.5%. We expect the company to maintain an occupancy rate of 88.6% in 2023.
Also, persistent macroeconomic uncertainty has led to a slowdown in leasing activity and management expects this trend to continue for the remainder of 2023. The company expects most of its leasing to come from small and medium-sized professional and financial services firms in the upcoming period.
Given the prevailing high interest rate environment, Boston Properties may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. Our estimate suggests a year-over-year rise of 18.6% in the company’s current-year interest expenses.
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties EGP, Stag Industrial STAG and Park Hotels & Resorts PK. While PK sports a Zacks Rank #1 (Strong Buy), EGP and STAG each carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past month to $7.70.
The consensus estimate for Stag Industrial’s ongoing year’s FFO per share has increased by 1.3% over the past two months to $2.28.
The consensus estimate for Park Hotels & Resorts’ current-year FFO per share has moved marginally northward over the past week to $1.99.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Boston Properties, Inc. (BXP) : Free Stock Analysis Report
Stag Industrial, Inc. (STAG) : Free Stock Analysis Report
EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
Park Hotels & Resorts Inc. (PK) : Free Stock Analysis Report
