Finally, Boston Properties Inc. BXP disclosed the signing of a binding agreement to acquire a 49.8% stake in Colorado Center in Santa Monica, CA. The agreed upon gross value for the stake is around $511.1 million. The move, which was earlier revealed by the Los Angeles edition of The Real Deal, marks the company’s foray into the Westside Los Angeles market.
Signed with real estate funds managed by The Blackstone Group L.P. BX, through its investment in Equity Office Properties, the deal would allow Boston Properties to acquire the stake in an existing joint venture (JV) with Teachers Insurance and Annuity Association that owns the fee interest in Colorado Center. Boston Properties plans to pay for the buyout using existing cash balances and would become the managing partner of the JV.
Notably, Colorado Center is a 15-acre property in the Media and Entertainment District of Santa Monica. This six-building campus comprises nearly 1.2 million of rentable square feet, and is currently 68% leased. Presently no debt is placed on the property and the acquisition is expected in Jul 2016 subject to certain conditions.
This stake acquisition deal seems a strategic fit for Boston Properties given that the Santa Monica office market has a solid concentration of technology, media, advertising and entertainment tenants in Los Angeles.
In fact, Boston Properties estimates the acquisition to lead to an increase of around 5 cents in its projected 2016 diluted funds from operations (FFO) per share, given that the acquisition closes on Jul 1, 2016 and that no debt is placed on the property. On Apr 26, 2016 the company had projected FFO in the range of $5.85–$5.95 per share.
Moreover, there is significant upside potential imbedded in the asset. The company has scope to enhance the property’s net operating income from the leasing-up of around 370,000 square feet of present vacant space, together with the roll-up of in-place, below-market rental rates to market rental rates with leases expiration.
While Boston Properties’s class A office portfolio is concentrated in four markets – Boston, New York, San Francisco and Washington, DC, – the entry into the Santa Monica market in Southern California is expected to open up more scope to capitalize on improving market fundamentals.
Currently, Boston Properties carries a Zacks Rank #3 (Hold). However, investors interested in the REIT industry can consider better-placed stocks like PS Business Parks Inc. PSB and Whitestone REIT WSR. Both stocks have 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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