Boston Properties, Inc.
Company Profile
With a market cap of approximately $12 billion, Boston Properties, Inc (the “Company”) is the largest publicly traded developer, owner, and manager of Class A office properties in the United States. The company is a fully integrated, self-administered, and self-managed real estate investment trust (“REIT”). The properties are concentrated in commercial business districts (CBD) of six major metropolitans as follows: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. As of Q2-2022, the company owned 193 properties consisting of approximately 53.7 million square feet of rentable area.
Company Strategy
The Company’s strategy is to provide high-quality office space to creditworthy tenants. The need for quality real estate appears to be high as evidenced by the high occupancy rate of premier buildings. Although certain factors (such as proximity to public transport) are desirable amongst all the occupiers, it’s definitely not a one-size-fits-all type of solution. For example, the age of the building is not necessarily a defining factor. The company believes that identifying such factors and providing them to the tenants is critical because it not only attracts tenants from competition but also lures those who would have otherwise stayed on the sidelines. As such, management has done direct and indirect market research, and based on the findings, they are upgrading existing properties or are developing new properties in response to the market needs.
In terms of the market for office real estate, it is worth mentioning that a lot of companies prefer their employees to be present in the office. This is in conflict with the needs of some of the employees, mostly at the middle manager level. Currently, there is a pull and push between the two sides, but the strategy used by employers is to provide more and more incentives to the employees to bring them to the officer. The evolution of the workplace is yet to be seen. Common incentives are better amenities and accessibility. We believe that this trend will continue and reinforce as the companies need to bring back their employees in order to boost their productivity.
The Company has stated that its strategy is as per the following:
Maintaining a keen focus on markets that exhibit the strongest economic growth;
Invest in the highest quality buildings (primarily office) with unique amenities and desirable locations that are able to maintain high occupancy rates and achieve premium rental rates through economic cycles
Maintain scale and a full-service real estate capability (leasing, development, construction and property management)
Be astute in market timing for investment decisions by acquiring properties in times of opportunity, developing new properties in times of growth, and selling assets at attractive prices, resulting in continuous portfolio refreshment;
keep a strong balance sheet to maintain consistent access to capital and the ability to make new investments at opportune times; and
foster a culture and reputation of integrity, excellence and purposefulness
Analyst Comments:
The Company’s second-quarter earnings results were close to the first quarter. On a year-over-year basis, all lines of revenue (tenants, parking, and hotel) showed increases, with overall revenue up by 8.5%. The Company’s overall occupancy was at 89.5%, which marked the third consecutive quarter of occupancy growth and an increase of 40 bps from March 31, 2022. However, the occupancy for the second half of 2022 is expected to decrease slightly as it takes time for the newly signed leases to commence. The occupancy is expected to increase slightly in 2023 as the lease expiration in 2023 is at a low level (4.7%).
The Company is active in development with a track record of completing projects on time and on budget. As of June 2022, the Company’s development/redevelopment pipeline consisted of 12 properties, which upon completion are expected to add 4.2 million net rentable square feet.
The Company is cautiously pursuing new investment opportunities during the economic downturn, while is also vigilant in disposing of properties that are falling below the high standard of the Company or present a great sales opportunity.
For the three months ending June 30, 2022, the company reported FFO per share of $1.94 (2021: $1.72, var: +12.7%) and net income per share of $1.42 (2021: $0.71, var: +100%). The significant increase in net income compared to the prior year is primarily due to the gain from the sale of properties of $96 million (2021: $7.7 million). In addition, the company recorded lower repair and maintenance expenses which are due to the deferral of the expenses.
For the six months ending June 30, 2022, cash from operating activities was at $617 million (2021: $561 million), with dividend distributions of $342 million (2021: $343 million).
Capital Structure
The company’s debt comprises the following:
- Mortgages ($3.3 billion)
- Unsecured senior notes ($9.55 billion)
- Unsecured term loan ($730 million)
- Unsecured line of credit ($165 million)
The Company’s credit facility (line of credit) allows for borrowings up to $1.5 billion, of which only $165 million is used.
Buy-Case for Boston Properties:
Ownership of high-quality and well-positioned properties that can take advantage of the back-to-office trend.
The company has experience in the development of office properties which allows them to build customized buildings catering to the need of their tenants within a reasonable time frame.
The Company has a strong cash flow and operating income.
Differentiating factors of Boston Properties:
High-quality assets
Ownership in CBDs with limited space
Experienced management
Development experience
Risks associated with the investment in Boston Properties:
The risk of recession is increasing, which in turn dissuades the companies from making long-term decisions/commitments, and leasing office space (specifically expensive ones that the Company owns) is one such decisions.
The Company has a large development pipeline. Any major disruption in the market resulting in low liquidity or credit tightness might increase the cost of completion to a much higher level.
Target Price Estimate:
Methodology:
Source: The source of information we have used include companies publications including 10K, 1Q, and supplemental information, as well as information gathered from other REITS, NCRIEF, and Nareit.
Calculation: We used NAV per unit as an estimate for the long-term price of the shares. Please note that stock market forces have an impact on the short-term or even mid-term price of the shares. Using these data, the following steps were taken:
We first estimated Gross Asset Value (GAV) assuming that NAV equals market cap. From GAV, we calculated the implied cap rate and compared with the market cap rate appropriate for the Company’s properties.
Used Argus to create a 10 year model.
Used forward four quarter NOI with a cap rate of 6% to estimate GAV (DCM method).
Used 10 year discounted cash flow, with discount rate of 8.5% and exit cap rate of 6.5% to get another estimate of GAV (DCF method).
GAV using DCF was significantly different from DCM. We concluded that DCF is a more appropriate method because the Company is engaged in a significant amount of value add activities which will result in substantial rent increases in five to ten years, which in turn will increase the valuation.
Reviewed each line of the balance sheet and used judgment to estimate the fair value of each line.
Used GAV (DCF method) and the fair value of each balance sheet line in order to estimate NAV, and NAV per share.
Calculation:
Our price target is $145.17, which is almost double the current value. The reason is that we assume that all value-add activities of the company come to fruition and that they are both correct in identifying the tenants’ needs and executing on delivering those needs to the tenants in a timely manner. We believe that the Company is capable of it, however, there are always some unexpected events.
