Company Reports

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 191 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 5.5 million square feet of life sciences space and has an additional 5.8 million square feet of future development potential.

No-moat-rated Boston Properties posted a middling set of fourth-quarter numbers. Funds from operations of $286.2 million, or $1.82 per share, came in around 2.3% lower than the $292.9 million, or $1.86 per share, of the year-ago fourth quarter. The company’s 2024 FFO guidance is in line with our estimates as management expects $7.00-$7.20 per diluted share. The midpoint of the 2024 FFO guidance is 2.5% lower than full-year 2023 FFO primarily because of higher net interest expense of $0.31 per share, lower contributions from same-property portfolio performance of $0.26 per share, and reduced fee and termination income of $0.14 per share. 2024 FFO is expected to be positively affected by an estimated $0.42 per share from acquisitions, disposition activity, and development deliveries. We are maintaining our $95 fair value estimate for Boston Properties after incorporating the fourth-quarter results.

No-moat-rated Boston Properties’ posted a mixed set of numbers in the third quarter as the firm reported funds from operations, or FFO, of $292.8 million or $1.86 per share, which was around 2.3% lower than the $299.8 million or $1.91 per share in the third quarter of the previous year. The slight decrease in FFO compared with the previous year was mainly due to an increase in interest expenses of $19.0 million that was partially offset by greater contributions from portfolio operations of approximately $13.0 million. The headwind of higher interest expenses on FFO can turn into a tailwind when interest rates eventually start to decline from the currently elevated levels. The company tightened its 2023 FFO full-year guidance to $7.25-$7.27 per diluted share, which is around 4% lower than the 2022 full-year FFO. We are maintaining our $95 per share fair value estimate for Boston Properties after incorporating the third-quarter results.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Higher interest rates and a challenging office market environment weighed on Boston Properties’ second-quarter results. The no-moat-rated firm reported funds from operations, or FFO, of $1.86 per share in the second quarter, which was about 4% lower than the $1.94 reported in the second quarter of the previous year. The decrease in FFO from the previous year was primarily due to higher interest expenses, which were partially offset by higher contributions from portfolio operations. The company also updated its full-year 2023 FFO guidance to $7.24-$7.29 per diluted share, which is about $0.10 per share higher than the previous full-year guidance. We are reducing our fair value estimate for Boston Properties to $95 per share from $98 after incorporating the second-quarter results.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 191 properties consisting of approximately 54 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 5.6 million square feet of life sciences space and has an additional 5.8 million square feet of future development potential.

No-moat-rated Boston Properties reported a decent set of numbers in the first quarter as the demand for office real estate remains muted because of macroeconomic factors and a slower recovery in physical office utilization rates. The firm reported funds from operations, or FFO, of $1.73 per share in the first quarter, which was around 5% lower than the $1.82 per share FFO reported in the first quarter of the previous year. The decrease in FFO compared with the previous year was primarily due to higher interest expense that was partially offset by higher contributions from portfolio operations. The company also updated its 2023 FFO full-year guidance to $7.14-$7.20 per diluted share, which is about $0.04 per share higher than the previous full-year guidance.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 190 properties consisting of approximately 54 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 4.6 million square feet of life sciences space and has an additional 5 million square feet of future development potential.

No-moat-rated Boston Properties reported a respectable set of numbers in the fourth quarter amid a difficult office market environment. The firm reported funds from operations, or FFO, of $1.86 per share in the fourth quarter, which was mostly in line with the FactSet consensus FFO estimate of $1.84 per share. The company also updated its 2023 full-year FFO guidance to a range of $7.08 to $7.18 per diluted share, which was $0.09 per share lower than the previous full-year guidance. The midpoint of the updated 2023 FFO full-year guidance is approximately $0.40 per share lower than the 2022 FFO, mainly impacted by higher interest expenses. After incorporating the fourth-quarter results, we are maintaining our fair value estimate of $107 per share for Boston Properties.

No-moat-rated Boston Properties reported third-quarter results that were in line with our expectations as share prices of office REITs have declined significantly in the past few months. The firm reported funds from operations, or FFO, of $1.91 per share, 10.4% higher than the $1.73 in FFO during the third quarter of 2021. The company also provided 2023 FFO full-year guidance of $7.15 to $7.30 per diluted share, which was slightly below our expectations. The midpoint of the FFO 2023 guidance is around $0.30 per share lower than the guidance for full-year 2022 FFO. The difference between the two years is on account of $0.69 per share of higher interest expenses and $0.23 per share impact from dispositions and lower fee income that was partially offset by $0.62 per share of higher FFO contributions from acquisitions and developments. We have reduced our fair value estimate for Boston Properties to $107 per share from $112 per share after moderating our long-term rent growth, occupancy, and interest expense expectations for the company.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 200 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 4.6 million square feet of life sciences space and has an additional 5 million square feet of future development potential.

No-moat-rated Kilroy Realty’s high-quality office portfolio now looks appetizingly cheap amid the steep selloff of office REITs in the last few weeks. We recognize the uncertainty surrounding the future of the office and believe that the environment will remain challenging for office owners in the near to medium term. Having said this, we also believe that the selloff has been overdone and the current implied valuation of Kilroy’s shares is completely divorced from the current private market valuations of its office portfolio. We think that long-term-oriented investors can consider this stock for their portfolios as the company is currently trading at approximately 40% below our fair value estimate of $69 per share. Our U.S. office REIT coverage is approximately 30%-40% undervalued. Kilroy Realty is our preferred pick in this sector given its risk-return profile.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

No-moat Boston Properties reported middling second-quarter results as workers remain reluctant to return to offices. Physical attendance in restaurants, movies, and other entertainment-related events has reached prepandemic levels, but the recovery in physical office occupancy levels has remained tepid. We believe that the employee behavior is primarily driven by preference and flexibility with regard to returning to office. This is different from the early stages of the pandemic, where the risk of getting the coronavirus was the main reason for lower office utilization. This dynamic does not bode well for the owners of office real estate, as it points to a more permanent shift in worker and employer behavior. Remote work has now become a norm in corporate America. We are also seeing increasing signs of employers accepting remote work and becoming comfortable with the new normal.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 200 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 4.6 million square feet of life sciences space and has an additional 5 million square feet of future development potential.

We are relaunching the coverage of Boston Properties after taking a fresh look at it. We assign a no-moat rating, a negative moat trend and a standard capital allocation rating to the company. We are decreasing the fair value estimate for Boston Properties to $120 per share from $125 per share.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets--Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 200 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector as it owns approximately 4.6 million square feet of life sciences space and has an additional 5 million square feet of future development potential.

No-moat-rated Boston Properties reported decent first-quarter results with the firm reporting funds from operations, or FFO, of $1.82 per share, 16.6% higher than the $1.56 in FFO during the first quarter of 2021. The company exceeded first-quarter guidance for both EPS and FFO due to better-than-expected portfolio performance and slightly increased its full-year 2022 FFO guidance to a range of $7.40 to $7.50 per diluted share. After incorporating the first-quarter results, we are maintaining our $125 fair value estimate for Boston Properties.

Boston Properties is the largest office real estate investment trust in the United States, with operations in New York, Boston, San Francisco, Washington, D.C., and Los Angeles. With its focus on high-quality Class A office properties in dense and space-constrained central business districts, Boston Properties continues to attract reputable, investment-grade tenants. Salesforce Tower, the 1,070-foot skyscraper named after the cloud computing company, has added nicely to the San Francisco skyline. This property is representative of the new breed of developments that make up Boston Properties' multi-billion-dollar pipeline.