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Can Boston Properties' (BXP) Portfolio Battle Supply Woes?

Boston PropertiesBXP keen focus on a few select high-rent, high barrier-to-entry geographic markets has enabled the company to achieve an annual revenue growth rate of 7.09% over the last five years. However, growth in supply of office space will likely curtail this office landlord’s capability to demand higher rents.

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to, over the past three months. The stock has rallied 12.4% compared with 8.4% growth recorded by the industry during the same time period. Further, with marginal upward revision over the past month, the trend in 2018 funds from operations (FFO) per share estimate revisions indicates an encouraging outlook for the company.

Notably, the company’s continued focus to improve core operations by investing in top-class buildings in prime locations enables it to maintain high occupancy. Further, it has been astute in executing acquisitions and non-core divestures across the real estate cycle. In fact, amid the lucrative pricing environment, the company disposed two properties, spanning 381,418 square feet of space, for net cash proceeds of $137.8 million, for the six-month period ended Jun 30, 2018.

Also, economic improvement and recovery in the job market will likely emerge as key growth drivers for demand of office spaces. This is because, as the economy revives, business grows and therefore, corporate sectors seek expansion, renting more space to accommodate the increased workforce.

Boston Properties has been actively pursuing development opportunities that offer higher investment returns and modernizes its portfolio. In addition, the company is likely to experience solid contribution in 2018 from its non-same-property portfolio, mainly driven by development deliveries. This will help the company maintain scale and boost its full-service real estate capabilities.

With 13 projects under development or redevelopments, spanning six million square feet of space, the company is exposed to construction cost overruns, entitlement delays and lease-up risks. In fact, it has been witnessing a steady rise in construction costs across its markets since 2014.

Also, amid increasing supply, there is a trend of higher concessions in some of the markets. Additionally, big financial players are opting for resizing of their business and cost-containment efforts, which is affecting demand for office space.

Furthermore, the company mainly has assets in only five U.S. markets — Boston, Los Angeles, New York, San Francisco and Washington, DC. This, again, makes it susceptible to economic downturns in these geographies.

Key Picks

Better-ranked stocks from the real estate investment trust (REIT) space include NorthStar Realty Europe Corp. NRE, Whitestone REIT WSR and PS Business Parks, Inc. PSB. NorthStar Realty and Whitestone REIT sport a Zacks Rank of 1 (Strong Buy), while PS Business Parks carries a Zacks rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NorthStar Realty’s Zacks Consensus Estimate for 2018 FFO per share has been revised 5.5% upward over the past 60 days. Its shares have returned 30.1% in the past six months.

Whitestone REIT’s FFO per share estimates for 2018 inched up 0.8%, in 60 days’ time. Its shares have appreciated 7.3% in the past six months.

PS Business Parks’ FFO per share estimates for the current year moved up marginally in the past 60 days. Its shares have rallied 14.3% in the past six months.

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Boston Properties, Inc. (BXP): Free Stock Analysis Report
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