Is it Wise to Retain Boston Properties (BXP) Stock for Now?
Boston Properties BXP boasts a portfolio of Class A office assets in a few select markets of the United States. Although the overall demand for office spaces in some markets is likely to be subdued in the near term, healthy tenant demand for premier office assets and the company’s ability to offer such spaces will likely drive decent leasing activity and help it tide over near-term challenges.
With the pandemic’s impacts waning, the return-to-office policies implemented by many companies, coupled with a relatively low unemployment rate and consistent job growth, are likely to drive the demand for Boston Properties’ strategically located, high-quality office properties in dynamic gateway markets — Boston, Los Angeles, New York, San Francisco, Seattle and Washington, DC. Given the robust demand for life-science assets, BXP is expected to witness healthy leasing activities in the life-science portfolio, driving the segment’s growth.
This office real estate investment trust (REIT) enjoys a diversified, creditworthy tenant base, which includes several bellwethers. The long-term leases with these tenants assure stable revenue generation for the company, driving steady top-line growth.
In 2023, the company executed 4.2 million square feet of leases, with a weighted average lease term of 8.2 years. As of Dec 31, 2023, the weighted-average remaining lease term for its 20 largest clients, based on leased square footage, was 10.2 years. With 2.7 million square feet of leases in its pipeline, Boston Properties is well-positioned to navigate through the current challenging environment. Although we estimate a 0.7% year-over-year increase in lease revenues in 2024, the same is expected to climb 2% in 2025.
Boston Properties’ encouraging development and redevelopment pipeline is likely to fuel net operating income growth in the coming years. The company projects the properties under development and redevelopment through 2026 to add $249 million to the company’s share of net operating income cash upon stabilization. It also projects seeing a 4.4% compound annual growth rate (CAGR) from development projects through 2026. The company’s solid balance sheet position, with $3.4 billion of liquidity as of Dec 31, 2023, is likely to help it capitalize on long-term growth opportunities.
However, the U.S. office real estate market continues to struggle from the after-effects of the health crisis, with negative absorption and high vacancy levels. The lackluster environment can be attributed to the continuation of work-from-home, flexible or hybrid work setups, which have diminished office space utilization. Although property tours and leases under negotiation continue to take place, there is less urgency from clients to make new commitments. Also, persistent macroeconomic uncertainty has led to a slowdown in leasing activities.
For 2024, management expects to have sticky occupancy due to some tenant defaults in addition to contractual expirations. For 2024, management expects average in-service portfolio occupancy between 87.2% and 88.6%. We anticipate the company to maintain an occupancy rate of 87.9% in 2024.
A high interest rate environment is another concern for Boston Properties. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden and its share of debt as of Dec 31, 2023, was $15.9 billion. High interest expenses are anticipated to adversely impact FFO per share in 2024. Management expects consolidated net interest expenses for 2024 between $570 million and $590 million.
Analysts seem a bit bearish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share has been lowered marginally over the past week to $7.12.
BXP shares have gained 2% in the past year, underperforming the industry’s rise of 6.2%.
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Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Iron Mountain IRM and SL Green Realty Corp. SLG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for IRM’s 2024 funds from operations (FFO) per share is pegged at $4.38, which suggests year-over-year growth of 6.3%.
The Zacks Consensus Estimate for SLG’s 2024 FFO per share stands at $5.88, which indicates an increase of 19.03% from the year-ago period’s actual.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.
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