Real estate investment trust – REIT – company Boston Properties (NYSE:BXP) has provided an outstanding and nearly linear return to investors since the bottom of the 2008 to 2009 bear market. The current share price is a triple from the market bottom. However, a review of the company's actual financial results may have investors wondering where the growth will come from going forward.
Boston Properties develops and owns class A office buildings in Boston, New York, Washington, D.C., San Francisco and Princeton, New Jersey. At the end of 2011, the company owned 153 properties, of which 146 were class A offices and 7 of those were under construction. The office buildings total 42 million square feet plus 15 million square feet of parking structures. Class A office space is typically leased at premium rates to professional firms, large corporations and government entities. The buildings owned by Boston Properties are some of the most valuable pieces of real estate available. This is one reason for the high market valuation on the stock and one way to grow that valuation is to develop new properties to add to the portfolio.
The cash flow measure most widely reported and followed from REIT companies is funds from operations – FFO. The FFO number adds non-cash income statement charges such as depreciation back into the net income. The FFO per share amount is money available from which an REIT can pay dividends and the majority of REIT stocks are viewed as higher yield income stocks as they pay out a significant portion of FFO as dividends. An interesting set of data is the FFO per share number from Boston Properties over the last four years:
- 2008 FFO: $3.33 per share
- 2009 FFO: $4.59 per share
- 2010 FFO: $3.90 per share
- 2011 FFO: $4.84 per share
- 2012 FFO: Management guidance of $4.65 to $4.78 per share.
These figures do not give a pattern of growth to match the run up in the Boston Properties' share value.
The dividend paid by the company also does not show a pattern of growth. For the second quarter of 2009, the dividend rate was reduced from 68 cents quarterly to 50 cents per share. This prudent move was taken by the majority of REIT companies during the darkest days of the bear market and economic recession. The dividend rate remained at 50 cents until December 2011, when the distribution was increased to 55 cents per share. At the current share value the dividend yield on Boston Properties is 2.10%. Definitely not in high yield territory.
Boston Property is not the only class A focused REIT with a low dividend yield. Here are the current yields for other REITs in this sector of the real estate business: SL Green Realty Corp (NYSE:SLG) yields 1.30%, Alexandria Real Estate Equities (NYSE:ARE) yields 2.70% and Corporate Office Properties Trust (NYSE:OFC) yields a higher 4.40%. An interesting point to note is that SL Green Realty shares are up almost 800% since the bottom of the bear market, the primary reason the dividend yield is so low. Investors who have owned shares of SLG are probably not complaining.
The takeaway from this information about Boston Properties is that investors should not be looking at this stock based on current yield or a growing dividend stream. There are better choices in the REIT world to meet those goals. Boston Properties is valued by the stock market participants based on the perceived values of the properties in the company's portfolio. When it looked like the financial crisis would take down commercial real estate in the same manner as the housing market was devastated, the value of high end commercial properties came under pressure and the value of Boston Properties was driven down. In early 2007, Boston Properties traded as high as $127 per share, $25 higher than where the stock is now after a 220% two year gain. The bear market low price was under $32 per share.
Investors must judge Boston Properties on where they think high end commercial values will go plus the additional value of newly developed properties. A pattern of regular dividend increases would not make investors feel bad either. A healthier dividend provides some downside support for those bear market times when the stock market does not like real estate.