Boston Properties Earnings: Fundamentals Hold Up Reasonably Well in a Difficult Environment

No-moat-rated Boston Properties’ BXP 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 same-store office portfolio occupancy rate was up 50 basis points on a sequential basis but was down 40 basis points on a year-over-year basis as it was reported at 89.2% for the current quarter. Management has maintained its 88.0%-89.0% occupancy rate guidance for full-year 2023. Same-store net operating income after excluding termination income was down 0.3% on a year-over-year basis but same-store cash NOI was up 1.7% compared with the previous year for the company’s share in the overall portfolio. The company has guided same-store cash NOI growth of 1.5-2.5% for the full year, which we think is decent in the current context. The company commenced 1.18 million square feet of leases during the quarter with net rent declining by 5.6% on the second-generation leases signed during the quarter compared with previously expired leases. The negative re-leasing spreads highlight the challenging Manhattan office market environment.