Office REIT Boston Properties (NYSE:BXP) reported its fourth-quarter and fiscal 2005 earnings Monday night. The results were slightly better than the company had forecast back in October and were solid overall.

The real estate investment trust focuses on unique high-demand properties in the Washington, D.C., San Francisco, midtown Manhattan, Princeton, N.J., and Boston markets, where barriers to entry are high. Among the company's top tenants are Citigroup (NYSE:C), Lockheed Martin (NYSE:LMT), AnnTaylor Stores (NYSE:ANN), and Wachovia (NYSE:WB).

For the fourth quarter, funds from operations (FFO) per diluted share increased by 3.8% to $1.09 from $1.05 last year. For the year, adjusted FFO increased by 2.2% to $4.25 per diluted share from $4.16. Both numbers are above the company's earlier forecasts, largely because the company was able to take advantage of some unexpected leasing opportunities during the fourth quarter.

What makes Boston Properties' performance most impressive is that the company does a very good job of making the most of the opportunities that are available and doesn't overreach. If markets are strong and investors are willing to pay a reasonable price for an office property, Boston Properties' will sell. In fact, the company has said that this applies to all of its properties, and this year it has sold a fair amount of properties and is using the funds to selectively reinvest in new properties and to fund a special dividend to shareholders that was paid earlier this fiscal year.

On the flip side, if it's cheaper to acquire an existing office property than to build, the company will acquire, and when it's cheaper to build a new property than to acquire an existing one, the company will build. Even though building itself is a risky process, Boston Properties is careful to build unique properties that will draw tenants and avoids constructing generic low-rent space.

The company's chief financial officer, Doug Linde, provided an example of this philosophy in Tuesday's conference call. The company recently purchased a property just outside of Boston in Waltham, Massachusetts. The property is only 67% leased and is leased at below-market rates, so it appears to be a dud. However, Waltham is one of the strongest markets in the Boston area and one the company has a great deal of experience in. The company expects that with a little TLC, it can bring the property up to market rates and get it fully leased by 2008. If the company is successful, as it has historically been, the property would offer an 8% cash yield. That would be a fantastic return, but to quote Linde, such opportunities are "few and far between." Still, that's the kind of creative thinking investors should look for in a REIT management team.

With a dividend yield of only 3.5% and a price-to-FFO multiple of 18.4, the stock is a bit pricey for a REIT, but Boston Properties is well-run with a history of not only strong performance but also of returning value to shareholders via dividend increases. Today's prices are by no means cheap, but for investors who are interested in wading into the REIT pool, slowly building a position in Boston Properties over a period of years sounds like a reasonable strategy to me.

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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.