[Updated 03/31/2021] Boston Properties Update
We believe that Boston Properties stock (NYSE: BXP) has an upside potential of 40% in the next one to two years, once a majority of the U.S population receives the Covid-19 vaccine and the infection rate comes under control. This will likely result in the re-opening of office spaces, boosting the demand in commercial property lease markets. BXP, a developer, owner, and manager of Class A office properties in the United States trades at $103 currently and has gained 9% in value year-to-date. It traded at a pre-Covid high of $145 in February and is 29% below that level now. Also, BXP stock has gained 32% from the lows of $78 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent – the stock is trailing the broader markets (S&P 500 is up about 80% since March bottom). It is because investor sentiment is somewhat negative toward the REITs (Real Estate Investment Trust) like Boston Properties due to the ongoing impact of the Covid-19 crisis. Further, the company missed the consensus estimates for both revenues and earnings in its recently released fourth-quarter results. It reported total revenues of $665 million – down 12% y-o-y, primarily due to the Covid-19 related decreases consisting of write-offs associated with accrued rent, and account receivables, a drop in parking revenues, and lower hotel occupancy rates. Similarly, BXP revenues declined by 7% y-o-y to $2.76 billion on a full-year basis, mainly driven by lower lease income due to a drop in new leases, a 32% slump in parking & other income, and an 85% decrease in hotel revenues.
As more and more companies opted for a work-from-home arrangement during the pandemic, the new lease volumes suffered in 2020. Further, retail tenants, which constitute around 6% of total leased square-feet, were severely impacted by the Covid-19 crisis in the year, hurting the rent collection and renewal rates of the segment. That said, Boston properties’ portfolio of Class A office spaces is primarily concentrated in five markets – Boston, Los Angeles, New York, San Francisco, and Washington, D.C, totaling approximately 51.2 million square feet and consisting of 196 office properties. Given the premium locations of BXP properties, it makes them a preferred choice for a premium Class A office environment. The same is evident from 1.2 million square feet of new leases and renewals in the fourth quarter of the year. The new lease volume also saw some improvement in the quarter on a sequential basis, although it was still below the pre-Covid-19 level. Overall, we believe that the recovery in BXP’s revenues to the pre-Covid-19 levels hinges on the mass availability of the Covid-19 vaccine and improvement in the economic conditions. Despite some growth in BXP stock since late March, we believe that the stock has strong upside potential in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of Boston Properties’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
[Updated 11/30/2020] Boston Properties Stock Has A 40% Upside
We believe that Boston Properties stock (NYSE: BXP) has an upside potential of 42% in 1-1.5 years, once the office spaces fully open and the demand in commercial property lease markets improves to pre-Covid levels. BXP trades at $102 currently and it has lost 26% in value year-to-date. It traded at a pre-Covid high of $145 in February and is 29% below that level now. Also, BXP stock has gained 31% from the lows of $78 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets (S&P 500 is up about 60% since March bottom), as investors are cautious about the shutdown of office spaces due to the Covid-19 pandemic and its impact on REITs (Real Estate Investment Trust) like Boston Properties.
The company develops, owns, and operates a portfolio of primarily Class A office space in major markets including Boston, San Francisco, and Washington, D.C, totaling approximately 48.4 million square feet and consisting of 164 office properties. In response to the recent crisis, companies have adopted the Work-From-Home model to continue their operations. This has led to lower demand in the commercial leasing space. The same is evident from a drop in BXP’s cumulative revenues for the first three quarters of 2020 – down 5% y-o-y. However, the employee strengths in offices are likely to improve once a vaccine is released for public use, leading to high demand for its properties. Despite some growth in BXP stock since late March, we believe that the stock has room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of Boston Properties’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here’s how BXP and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
Boston Properties vs S&P 500 Performance Over 2007-08 Financial Crisis
BXP stock declined from levels of around $108 in October 2007 (the pre-crisis peak) to roughly $37 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 66% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.
However, BXP recovered strongly post the 2008 crisis to about $67 in early 2010 – rising by 81% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Boston Properties’ Fundamentals in Recent Years Look Strong
Boston Properties revenues grew 20% from $2.5 billion in 2015 to $3 billion in 2019. However, the company’s adjusted net income decreased from $572.6 million to $511 million over the same period, mainly due to income from the sale of real estate assets in 2015. The company’s Q3 2020 revenues were 7% below the year-ago period, reducing its EPS figure from $0.70 to $0.58.
Does Boston Properties Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Boston Properties’ total debt increased from $9.3 billion in 2016 to $12.6 billion at the end of Q3 2020, while its total cash increased from $356.9 million to around $1.7 billion over the same period. The company generated around $782.4 million in cash from its operations in the first nine months of 2020, and if its cash situation further worsens, it will be difficult for the company, based on the numbers.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment.
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $145 (42% upside) once economic conditions begin to show signs of improving, provided there is no further deterioration in its debt situation. This marks a full recovery to the $145 level Boston Properties’ stock was at before the coronavirus outbreak gained global momentum.
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