Remote Work Continues To Weigh On Office Recovery

Business Strategy & Outlook:

The company’s strategy is to develop and own premier properties that maintain high occupancy rates and achieve premium rental rates through economic cycles in supply-constrained markets that have the strongest economic growth and investment characteristics for office real estate. Management has also outlined its policies on capital recycling to ensure continuous portfolio refreshment and value creation while maintaining a strong balance sheet and having adequate access to capital to take advantage of opportunistic situations. The company also welcomes management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

The economic uncertainty emanating from pandemic recovery and the remote work dynamic has created a challenging environment for owners of office real estate. Employees are still hesitant in returning to the office as office utilization remains at approximately 45% of the pre-pandemic level. The national vacancy rate for office spaces was recorded at 17.5% in Q1 2022, which is roughly 500 basis points higher than pre-pandemic levels. The net absorption rate was marginally negative as of Q1 2022 and rental growth figures remain disappointing given the highly inflationary environment. Having said this, the company has seen an increasing number of companies requiring their employees to return to the office. In the long run, company believes that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths:

Boston Properties is in sound financial health. The company’s share of debt which also includes its share of unconsolidated joint venture debt was $12.9 billion as of the end of the fourth quarter in 2021, resulting in a debt/EBITDAre ratio of 7.7 times. The current debt/EBITDAre ratio is probably on the higher side and is slightly above the company’s long-term average. However, company thinks that the figure should return to the industry average over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.40% and the weighted average maturity period was 6.6 years. The maturity schedule of the company’s debt shows that the maturities are adequately spread. Company believes

that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed charge coverage ratio which is a ratio of EBITDAre divided by all fixed expenses (including interest expenses) was 2.8 times as of the end of 2021. As a real estate investment trust, Boston Properties is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 92.1% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends

Bulls Say:

Boston Properties owns premier properties in supply constrained cities which have favorable regional dynamics and strong growth prospects. Additionally, the life sciences portfolio of the company should benefit from the strong demand in the burgeoning sector.
The company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.
Boston Properties’ balance sheet strength, its access to low-cost capital, and its development expertise allow it to pursue lucrative large-scale development projects that generate value for shareholders.

Company Description:

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.

(Source: Morningstar)

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