Posted by: BayAreaComRE | August 3, 2010

Who’s doing well? Case Study: Boston Properties

Boston Properties (NYSE: BXP) reported earnings last week, and despite the continued “turmoil” in the global commercial real estate markets, BXP exceeded Wall Street’s expectations by roughly $0.14 per share for a heavily touted Real Estate Investment Trust metric, Funds from Operations (similar to Earnings per Share for stocks, FFO definition here). This is good news and it seems that the Boston Properties moto, “Premier Properties. Core Markets. Experienced Leadership.” has paid off.

“In terms of the existing real estate the number of markets that we are in, that are doing very well or relatively well is, I think, a direct reflection of the strategy we have followed for many years,” said Mort Zuckerman Chairman and CEO on last Wednesday’s conference call, “it reflects two things: One is, these are supply constrained markets that we are in and we are either building or owning real estate at the very upper end of that market…[and second] we have frankly done very well in terms of keeping our occupancy up or rebuilding our occupancy. We’ve lost some tenants to bankruptcies or other things. So, we are actually feeling quite bullish about the prospects that we have.”

If you’ve ever been in a BXP building or visited, you can feel the professionalism of the management. From a historical perspective (and a fundamental one), tenants typically fly to quality during downturns; prices are cheaper and offerings are more compelling; you can conceptually liken it to “trading up” in residential real estate. If you are a company with strong balance sheet looking to upgrade your image during a downturn, leasing a corporate office from a landlord like BXP can provide that image. BXP has done a phenomenal job in capitalizing on that, from our personal experience, and further reiterated on the earnings call, there’s a definite strategy to their continued drive to increase occupancy during downswings.

This is not without warning however. Doug Linde, President of BXP spoke cautiously with a hint of positivity about our local Bay Area Market:

“In San Francisco, activity continues to lag the other markets, but we have seen an increase in tour activity, and we have issued over 400,000 square feet of proposals to eight separate tenants, ranging from a full floor to a 150,000 square feet during the last quarter for that availability of EC4 that’s coming up at end of 2011 and early ‘12. We have one lease out for signature on a floor, and we are negotiating a second lease today. Rents at EC4 are in the high 40s to low 60s.

Leasing activity is also picking up in terms of smaller suites in the Embarcadero Center. In the Valley, leasing activity is still slow and given that availability is 20% plus the landlords are still being very aggressive in quoting tenants. Nonetheless, there are signs of some positives there as well. Google has removed space from the sublet market in Mountain View, where availability has dropped to 16% and activity in Palo Alto has really picked up significantly, and those are the two markets that are the leading indicators of a Silicon Valley recovery.”

Some skeptics have said that BXP made some bad bets in Silicon Valley with their R&D and land acquisitions and development pipeline, but it still remains to be seen how large of an effect that will have on their steady balance sheet. BXP recently refinanced a majority of their 2010 debt exposure and are flush with cash to the tune of $1.7 Billion, $1.0 Billion of which is a secured line of credit.  Mike LaBelle, BXP’s CFO went so far as to raise guidance (always a good sign); “Considering all of these assumptions in addition to our second quarter results, we’re increasing our 2010 full year guidance and now project funds from operation of $4.24 to $4.29 per share. This is an increase in our range of $0.18 per share at the low end, resulting primarily from the outperformance in the second quarter. For the third quarter, we’re projecting funds from operation of $1.01 to $1.03 per share.”

The full BXP 2Q 2010 report can be found below for all the Michael Burry’s out there:

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