When investors consider the purchase of a real estate investment trust (REIT), along with performance and dividends, they need to consider the properties and tenants that accompany that REIT. Several questions must be answered: Are the tenants long-term and stable? Are they strong enough to survive recessions and market downturns? Is the portfolio diversified by location, type and annualized base rent (ABR)?
Take a look at one of the largest office REITs today to see whether it answers the above questions affirmatively.
Boston Properties Inc. BXP is a Boston-based office REIT with 54.5 million square feet in 192 properties concentrated among six of the largest U.S. cities — Boston, New York, Washington D.C., Los Angeles, San Francisco and Seattle. The firm calls itself “the largest publicly traded developer, owner and manager of premier workplaces in the United States.” Boston Properties has had a 555% total return since its initial public offering (IPO) in 1997. It’s a member of the S&P 500.
As of March 31, Boston Properties had 91% of its in-service properties leased, with a weighted average lease term (WALT) of 7.6 years. It presently has 4 million square feet valued at $3.3 billion in its active pipeline property development and another 17.6 million square feet in its future development pipeline.
The Boston area has the largest amount of square footage, but the vacancy rate, as shown in the chart below, is a bit high at 9.03%, and there is another 787,192 square feet that expires before the end of the year.
One potential remedy that Boston Properties has begun to use is the expansion of offices to life science companies, such as Biogen Inc. and AstraZeneca. Boston Properties has a six-story, 271,000-square-foot building in Boston that is 100% leased to Biogen and a 566,000-square-foot building that is 100% preleased to AstraZeneca, with an estimated initial occupancy starting in mid-2026.
Largest tenants
The following chart shows the top 20 tenants presently leasing space from Boston Properties:
It’s clear from the list that Boston Properties has a well-diversified top 20 client list, with many of its tenants publicly traded. Its top four tenants, Salesforce Inc. CRM, Alphabet Inc. GOOGL, Biogen Inc. BIIB and Akamai Technologies Inc. AKAM account for about 11% of the total ABR.
As for industry diversification, technology and media companies are the largest group, with 21% of rent, followed by legal services at 19% and financial services at 17%. While only three groups account for 57%, the remaining 43% is divided among eight other industry classifications.
Some of its largest tenants are well-known market leaders.
Salesforce Inc. is a San Francisco-based software company that provides sales, customer service, marketing automation, e-commerce, analytics and application development. Salesforce was founded by Marc Benioff, a former executive at Oracle Corp. Its IPO was in 2004. It was the first cloud computing company to reach $1 billion in annual revenue in 2009. As of September 2022, it was the 61st largest company in the world by market capitalization and has a present market capitalization of $206.63 billion. Salesforce contributes 3.43% of Boston Properties’ ABR.
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Alphabet Inc. is a Mountain View, California-based multinational technology conglomerate. It was created in October 2015 by a restructuring of Google to become the parent company of Google. Alphabet is the third-largest technology company by annual revenue in the world, and one of the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks that comprise the Nasdaq 100. The original founders, Larry Page and Sergey Brin, were replaced by Sundar Pichai near the end of 2019. It has a market capitalization of $1.62 trillion. Alphabet’s share is 2.81% of Boston Properties’ ABR.
Biogen Inc. is a Cambridge, Massachusetts-based multinational biotechnology company. It specializes in the discovery and delivery of therapies to treat a range of neurological diseases. Biogen was founded in 1978 in Geneva by a group of prominent biologists. At the time it was called Biotechnology Geneva. In 2003, Biogen merged with IDEC Pharmaceuticals in San Diego, and the name was changed to Biogen Idec. With this merger, Biogen became the third-largest biotechnology company in the world.
Over the decades, Biogen has grown by acquiring several other pharmaceutical companies that have developed notable treatments for cancer, multiple sclerosis, hemophilia, spinal muscular atrophy and other diseases. In 2020, Biogen constructed a state-of-the-art facility in Switzerland to produce a new drug called aducanumab, which will be used to treat Alzheimer’s disease.
Biogen contributes 2.61% of the total ABR.
Other Factors
Boston Properties has $15.7 billion in debt, of which 77.58% is unsecured and 22.42% is secured. It has $3.2 billion in liquidity, which includes $1.7 billion in cash and a $1.5 billion revolving credit facility.
Boston Properties pays a quarterly dividend of $0.98 per share. The dividend has not been increased since December 2019, but to its credit, Boston Properties never cut or suspended its dividend during the pandemic. The $3.92 annual dividend yields 7.8%, which is more than double its five-year dividend yield average of 3.85%. With the forward funds from operations (FFO) of $7.16, the payout ratio is a safe 54%.
Despite the lack of dividend growth, the yield has expanded because of a substantial loss of share price from obstacles such as COVID-19, an increasing home-based workforce, inflation, Federal Reserve interest rate hikes and ongoing fears of recession.
Having survived threats to share price from COVID-19, Boston Properties rallied from $63 in 2020 to $125 by March 2022. But with the interest rate hikes and concerns about increasing vacancies, office REITs have tumbled again since then. Boston Properties fell to $48.50 by the end of March. Since then, it’s rebounded, but only by about 8%.
It also doesn’t help the office REIT sub-sector when Wall Street gurus like Charlie Munger of Berkshire Hathaway and more recently Tesla Inc. CEO Elon Musk are predicting the demise of commercial office buildings by the end of 2023. Ironically, the same Musk, along with the late billionaire real estate developer Sam Zell, recently chastised home-based workers, saying they were less productive and that it’s hypocritical to ask first responders and others to work on-site while they have the luxury of working from home.
Recent Events
On April 25, Boston Properties announced its first-quarter 2023 operating results. Funds from operations (FFO) of $1.73 was lower than FFO of $1.82 in the first quarter of 2022, but revenue of $803.2 million was up from $754.31 million year over year. Boston Properties also said that second-quarter FFO would come in at a range from $1.79 to $1.81 and that full-year 2023 FFO would be $7.14-$7.20.
On May 17, Boston Properties announced it was filing for a mixed shelf of debt securities, guarantees, common stock, preferred stock, stock purchase contracts, depository shares and warrants, but the size of the offering was not disclosed.
There was one recent insider purchase, and that’s a positive sign. On May 31, Director Carol Einiger purchased 10,000 shares at an average price of $47.41 for an approximate total of $474,100.
On June 6, Boston Properties participated in the 2023 NAREIT REITweek Investor Conference.
There have been no recent analyst upgrades or downgrades on Boston Properties. The most recent analyst rating was on May 10 when Citigroup analyst Emmanuel Korchman maintained Boston Properties with a Neutral rating but lowered the price target 25% from $72 to $54.
Short interest on Boston Properties is 5.52%. When compared to rival office REITs such as SL Green Realty Corp. SLG, whose short interest is 27.06%, that doesn’t seem so bad. But it’s still another headwind for Boston Properties.
In summary, Boston Properties is a well-diversified office REIT, with the kind of Grade A long-term tenants that are unlikely to have problems paying rent. But the dark cloud hanging over the heads of office REITs in 2023 continues to prevail.
It is unlikely that office REITs will sit passively by and allow vacancies to pile up. Office space can always be converted into other types of facilities. Mixed-use space that incorporates offices, apartments, restaurants, nightclubs and health facilities is one of the most recent trends among REITs. Long-term investors have a real opportunity to pick up shares of Boston Properties now with a terrific dividend yield and the potential for outstanding total returns over several years.
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
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