EUR 850.00 For Business Accounts Only

Morningstar | Boston Properties Delivers Strong 2018

No-moat Boston Properties posted decent fourth-quarter and full-year 2018 results that fit well within our long-term views of the company. Full-year funds from operations grew 1.3% to $6.30, which we think is a solid capstone to a generally successful year. Year-over-year revenue grew somewhat faster than anticipated at 4.4%, largely due to a 70-basis-point increase in occupancy to 91.4%. As the portfolio’s occupancy is lower than comparable office REITs under our coverage, we agree with management that there is still room for occupancy growth in 2019. We were pleased to see same-store cash net operating income grew 7.9% from the linked quarter in 2017. We think these results demonstrate that Boston Properties continues to have a high-quality portfolio that will be able to compete in a more challenging leasing environment. The fastest growing segment of revenue was the relatively small development management segment, which we like because it is an asset-light income stream. We continue to agree with Boston Properties' strategy of generally developing, rather than acquiring, external growth because the low cap rate environment makes it challenging to find yield. Much of this quarter played out as expected, so we do not plan to make material changes to our $143 fair value estimate.

Boston Properties is the only office REIT under our coverage with material exposure to the Washington, D.C. market, which makes up 17.8% of Boston Properties' net operating income, and the U.S. government is the company’s second largest tenant. We were relieved to see that the shutdown was not a material factor for the company because much of Boston Properties’ governmental tenants are not linked to annual appropriations. Boston Properties also reduced its exposure to the government by selling its stake in the construction of the TSA headquarters. Although the stake was sold at a 6% cap rate, which is higher and value negative to the 5% cap rate we place on Boston Properties’ portfolio, we recognize that the buyer must continue construction and that the building is in the suburbs. We think these factors justify the sale at a higher cap rate.