Yahoo Finance 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. However, the elevated supply of office properties in some of its markets and high interest rates raise concerns for the company.
What’s Aiding it?
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.
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 the first quarter of 2024, it executed 61 leases totaling around 894,000 square feet with a weighted average lease term of 11.6 years. As of Mar 31, 2024, the weighted average remaining lease term for its 20 largest clients, based on leased square footage, was 10 years.
With 2.7 million square feet of leases in its pipeline and modest lease expirations through 2024, Boston Properties is well-positioned to navigate through the current challenging environment. We estimate lease revenues to exhibit a year-over-year increase of 1.9% and 1.8% in 2024 and 2025, respectively.
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.
Boston Properties’ encouraging development and redevelopment pipeline is likely to fuel net operating income (NOI) growth in the coming years. The company projects the properties under development and redevelopment through 2026 to add around $165 million to the company’s share of net operating income cash upon stabilization. It also projects seeing a 3.2% compound annual growth rate (CAGR) from development projects through 2026.
The company’s healthy balance sheet position, with $2.3 billion of liquidity as of Mar 31, 2024, is likely to help it capitalize on long-term growth opportunities.
What’s Hurting it?
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.
The rising supply of office properties in some markets where the company operates remains a concern. Given this backdrop, it will be challenging for the company to backfill tenant move-outs and vacancies in the near term.
In the second quarter of 2024, management expects occupancy to decline slightly. For 2024, management expects average in-service portfolio occupancy to range from 87.2% to 88.6%. We expect the company to maintain an occupancy rate of 87% 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 Mar 31, 2024, was $15.38 billion. High interest expenses are anticipated to adversely impact FFO per share in 2024. Management expects consolidated net interest expenses for 2024 between $585 million and $600 million. Our estimate suggests a year-over-year rise of 3.2% in interest expense in 2024.
Shares of this Zacks Rank #3 (Hold) company have declined 6.1% in the past three months compared with the industry’s fall of 3.4%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Lamar Advertising LAMR and Paramount Group PGRE, 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 LAMR’s 2024 funds from operation (FFO) per share has moved 3.7% northward over the past two months to $8.03.
The Zacks Consensus Estimate for PGRE’s current-year FFO per share has been raised 5.5% over the past month to 77 cents.
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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Boston Properties, Inc. (BXP) : Free Stock Analysis Report
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