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Long only, growth at reasonable price, research analyst, REITs
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On Seeking Alpha there is a large amount of interest in the high yield portion of the REIT space, but less focus on the low yield, growth companies in the sector. A few weeks ago I discussed the performance potential of the less widely followed REITs. There was a comment request to discuss different companies, specifically Simon Property Group (SPG) and Boston Properties (BXP). I covered Simon Property Group a few days ago and this discussion will be about Boston Properties.

Boston Properties primarily owns class A office space in the cities of New York - mid-town Manhattan, Washington, D.C., Boston and San Francisco - including Silicon Valley. Also in the portfolio of over 140 properties are three residential properties, three retail properties and one hotel. With a $16 billion market cap, Boston Properties is the largest office space REIT.

Next largest in the sub-sector is Brookfield Properties (BPO) with an $8.8 billion market cap. The company was founded by Mortimer B. Zuckerman and Edward H. Linde. Mort Zuckerman remains as Chairman and CEO of Boston Properties. A significant portion of Zuckerman's reported $2.3 billion fortune is his stock holdings in Boston Properties.

As with many real estate investment trusts, the Great Recession put the brakes on the growth path for Boston Properties. Up through the end of 2007, the paid out dividends had increased steadily in the form of both quarterly payouts and large one-time dividends in 2005, 2006 and 2007. The company maintained the quarterly rate through 2008 then, in early 2009, slashed the dividend by 26% to 50 cents quarterly, where the dividend remained until the end of 2011, when the dividend was increased to 55 cents. Profits as indicated by funds from operations - FFO - per share were erratic through the period. The company missed projected FFO in 2010 but bounced back nicely in 2011.

At the current point in time, pressure remains on the rental rates Boston Properties can charge as leases come up for renewal. The tech boom is helping lease results in San Francisco while government spending issues are making Washington, D.C. a difficult market. CEO Zuckerman has noted that lower rental return rates are being offset by the lowest borrowing costs in the company's history. On the 2011 fourth quarter conference call, Zuckerman expressed pessimism about economic growth in the U.S. and is worried what will happen when the investment markets become "exhausted with the fumes of optimism".

The share value of Boston Properties has bounced back strongly from the 2009 bear market, up 300% from the March 2009 lows. In 2011, the stock provided an 18% total return to investors and the shares are matching the S&P 500 so far in 2012, up about 3%. At the current $107 per share, the opinion here is that, although Boston Properties is a very good company, the share price has run too far ahead of the value. The stock yield is just a few basis points over 2% and the shares are trading at 23 times management's own projections for 2012 FFO. The average dividend yield for the office REIT stocks I track is 4.5%.

The large REIT companies tend to trade at lower yields than their smaller, less successful competitors, but 2% is too low to make Boston Properties an attractive investment candidate. A share price range of $75 to $85 would put the yield in a 2.5% to 3.0% range - probably a more reasonable valuation for this company. If, over the coming months, market forces push the share value down to this range, Boston Properties will be an attractive investment candidate.

The company reports 2012 first quarter results in a couple of days. I will review the results and report back on any changes to my evaluations.

Source: Boston Properties: A 5 Star REIT, But Currently Overvalued