EUR 850.00 For Business Accounts Only

Morningstar | BXP Updated Forecasts and Estimates from 23 Aug 2018

Though no-moat Boston Properties reported a slight miss on its bottom-line results, we believe the core business is growing in line with our expectations, and we will maintain our fair value estimate of $143 per share for the firm. Boston Properties reported a 3% drop in same-store cash net operating income from the same period in 2017 due to a move out and funds from operations was $1.58 per share, which beat management’s guidance but was 3% lower than our predictions. Although this is a slight FFO miss, since the miss was due to differences in noncontrolling interests in property partnerships, we believe that the core operations of the company are growing with our expectations. Management increased their FFO guidance closer to our estimates, but we still believe that the company is setting conservative goals for themselves. Same store leasing spreads are progressing as anticipated, with average cash leasing spreads around 6%, close to the midpoint of our long-term estimate of 5%-8% for the company, but there is a good bit of leasing spread variance within the company’s portfolio. As we predicted, the company's Washington, D.C. portfolio continues to struggle, and the company saw negative spreads on their same-store cash rents in that segment. Despite the hurdles in Washington, D.C., we see the core operations of the company progressing with our expectations, and we are watching how the company navigates its exposure to weaker markets.

We continue to appreciate the company’s growth strategy of generally developing, rather than acquiring, properties given the low cap rate environment for acquisitions. The company has about 6 million square feet of property either in construction or stabilizing, the commercial component of which is 83% pre-leased at cash yields mostly matching our estimates, which gives us confidence in our forecast that developments will drive FFO growth. One event that caught our attention was that the company recently purchased a 25% stake in a large office redevelopment project in Midtown Manhattan and partially financed the program through a disposition in Washington D.C., which we believe shifts exposure from a weak property market to a much stronger market. Looking forward, we hope to see Boston Properties continue to shift its exposure to stronger central business district property markets.