Boston Properties Earnings: Office Demand Remains Muted, but Shares Reflect Excessive Pessimism

No-moat-rated Boston Properties BXP 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.

We think that the current share prices of our office REIT coverage reflect excessive pessimism. Boston Properties is trading at around $51 per share after releasing its first-quarter results, which implies a 7 times forward FFO multiple. We think that a 7 times FFO multiple for high-quality office properties offers an attractive entry point for patient investors who can stomach short-term volatility. It can take several years for the sector to recover, but the patience of prospective investors will be duly rewarded. We are maintaining our fair value estimate of $98 per share for Boston Properties after incorporating first-quarter results.

The overall portfolio occupancy rate was flat on a sequential basis as it was reported at 88.6% for the current quarter. Management has maintained its 88.0%-89.5% occupancy rate guidance for full-year 2023. Same-store net operating income after excluding termination income was 0.5% higher on a year-over-year basis and same-store cash NOI was 2.1% higher compared with the previous year for the consolidated portfolio. The company has guided same-store cash NOI growth of 1.0% to 2.5% for the next year, which we think is decent in the current context.