Summary
- Boston Properties has a high-quality and well-diversified portfolio that has held up fairly well during COVID-19.
- The REIT has a very strong balance sheet that earns it a rare A- credit rating.
- Management is strategically targeting tenants that will be most resistant to a shift to working from home.
- The stock is very cheap based on dividend yield, share price history, and NAV metrics.
- That said, short-term economic uncertainties and long-term business model uncertainties should cause investors to take a relatively small-sized position in their portfolios.
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While I have never been a big fan of investing in office REITs, Boston Properties (BXP) does look like a compelling buy at current prices. With quality, diversification, and a strong balance sheet, it is arguably the best-positioned office REIT to weather the disruption and challenges facing the space right now. Investors should avoid taking on outsized exposure to office real estate given the risks, but BXP is a Buy given its significant margin of safety relative to its historical valuations and net asset value.
Portfolio
BXP boasts one of the strongest office portfolios in the world due to having significant geographic and tenant diversification and well-located properties. Its assets are primarily located in Boston (34%), New York (26%), and San Francisco (22%), along with a presence in Washington, D.C. and Northern Virginia (15%) and Los Angeles (3%). Each of these markets is considered a “Gateway Region” with strong durable demand drivers and solid long-term growth drivers.
(Source)
The REIT's top tenant is Salesforce.com (CRM) - a growing ecommerce business - and it accounts for less than 3.5% of its annualized rental income. Its largest industry exposures are to financial services (29%), media, technology, and life sciences (26%), and legal services (20%). With only 7% exposure to retail tenants, it is fairly well-insulated from the retail apocalypse.
Furthermore, 86% of BXP’s total revenue comes from office rents that are tied to lengthy average lease terms with maturities that are well-laddered (8.1-year average remaining lease term). For example, only 5% of its leases expire this year and only 7% expire in 2021. Given these factors, BXP enjoys a healthy occupancy rate of 92.9%.
