Boston Properties (NYSE: BXP) is a leader among real estate investment trusts (REITs). It specializes in the development, acquisition, operation, and management of Class A office buildings in five select markets: Boston, Los Angeles, New York, San Francisco, and Washington, D.C.
While Boston Properties boasts a top-notch portfolio, the office industry has had a tough year, leaving investors to wonder if this REIT is a good investment for a retirement portfolio. Let's take a look at where it stands today.
Leading the way in the office sector
Boston Properties is the largest REIT in the office sector, with 195 properties and 51.2 million of rentable square feet under management and 50 million square feet under development or redevelopment.
It may seem odd Boston Properties owns such a robust portfolio in so few markets across the U.S., but it carefully selects these gateway markets because of their opportunity and stability as they relate to economic growth and consistency for demand.
This strategy has been a proven winner over the years. Boston Properties' portfolio consists of big-name tenants such as Microsoft (NASDAQ: MSFT), Bank of America (NYSE: BAC), Akamai Technologies (NASDAQ: AKAM), Salesforce.com (NYSE: CRM), and Google (NASDAQ: GOOGL).
There's no denying the office sector is experiencing a serious disruption from COVID-19. Earlier this year, working from home became the new normal for most U.S. companies, including a large portion of Boston Properties' tenants. Although many of these tenants have extended the option to work from home until the end of 2020, some even into 2021, they've also stated they plan to return to primarily in-office work once safe or allowable.
But despite an increase in people working from home, rental collections remain high for Boston Properties at a whopping 98% for its office tenants as of September 8 and 96% as a whole. However, funds from operations (FFO), net operating income (NOI), and revenues dropped, mostly due to initial market disruptions as well as a decrease in rental revenue and collections from its nonoffice tenants, including one hotel, parking, and mixed retail space. This pushed its payout ratio up to 110.4%, well above its 86.7% payout ratio for 2019.
Boston Properties also increased its debt to EBITDAre, pushing it up to 7.4 times, higher than its typical range (around 6.6 to 6.8 times). Out of current development projects underway, 74% are pre-leased, and its current office space is at 92% occupancy.
So is Boston Properties a good fit for a retirement portfolio?
When it comes to a retirement portfolio, stability is key. While Boston Properties is currently experiencing a temporary disruption in the marketplace, it's unlikely this disruption will break Boston Properties or erase the stability it's built for itself over the years.
Dividend payouts remain at $0.98 per quarter despite the decrease in revenues, and the company has ample liquidity to cover its debt service needs if revenues continue to remain flat over the next few years.
Because share values are down considerably right now, its dividend provides a return of almost 5%, not something frequently achieved with such a high-quality REIT, and its long-term outlook still remains positive.
Overall, Boston Properties' balance sheet and high-quality portfolio, as well as the demand and resilience its tenant base and office space are showing as a whole, makes it a good fit for a retirement portfolio.