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Morningstar | Boston Properties Posts Slight Earnings Beat in 3Q

Boston Properties posted a slight beat to our top- and bottom-line estimates for the quarter, and we are not anticipating major changes to our $143 fair value for the firm or our no-moat rating. Strong economic fundamentals, particularly employment growth, continue to benefit the best office landlords as more tenants compete to rent their space. We see this impact the company’s income statement through 80 basis point growth in same-store occupancy, which beat our expectation of no growth, and 3.56% in releasing spreads, though this missed our estimate of 5%-7%. Top-line growth drove same-store cash net operating income up 2.5% from the third quarter in 2017. We think these results show the quality of Boston Properties’ portfolio, which we think is essential because many of their tenants use high-quality office space to attract high-skill workers. The resulting funds from operations of $1.64 beat our estimates by a penny and management raised guidance for the annual bottom line to be more in line with our expectations.

Boston Properties announced three dispositions of offices at attractive valuations and is focused on using development for external growth. We place a 5% cap rate on Boston Properties as a whole, so we were pleased to see the company’s announcement that it is selling three large office buildings at a range of cap rates between 4.5% and 4.9%, which we think will be value accretive. Boston Properties’ development portfolio is also looking strong, as they have already preleased 80%-100% of several large office complexes set to open in 2019-20. We think that development is one of the better ways for the company to use capital in the current lower cap rate environment because we expect developments to yield 8%, which is more than our expected 5% yield on acquisitions. We appreciate Boston Properties’ aggressive preleasing because it limits the risk that developed properties will remain vacant.