We have identified Boston Properties, Inc. (NYSE:BXP) and SL Green Realty Corporation (NYSE:SLG) as being in a position to benefit the most from the improved situation in the U.S. office market. Both are located in the high rent growth regions of New York and Boston. Therefore, we recommend our readers to long the two stocks.
U.S. Office Market:
Despite a sluggish U.S. economy, and the continuous efforts made by the Fed to stimulate it, indicators reveal that the scenario for office REITs is improving. We say this after analyzing the most recent nationwide office vacancy rates and office rental rates. Much of the improvement is associated with the dearth of construction of new facilities. This has led the vacancy rates to drop to the lowest since 2009. Much of the demand for office space is said to be coming from the growth in technology and energy companies in the country. Therefore, demand for office space is the strongest in cities where major technology and energy companies are present, like San Francisco, New York and Boston.
Overall, the empty nationwide office space declined moderately from 17.2% in the second quarter to 17.1% at the end of September. Asking and effective rents witnessed eight consecutive quarters' growth. Asking rents surged from $28.17 per square foot during the second quarter to $28.23 per square foot during the third quarter of 2012. Effective rents rose from $22.72 per square foot to $22.78 during the same time period.
Boston Properties is one of the large cap U.S. office REITs that has a large concentration in Boston and New York. At the end of the second quarter of the current year, the company reported over 37% of the revenues accrued from properties located in the Boston region, while 26% and 11.6% came from properties in New York and San Francisco. The company had 150 properties at the end of the most recent quarter. Besides owning office properties, the company owns a small proportion of residential and hotel buildings in the above-mentioned cities.
The company reported a 7.3% growth in its net operating income for the second quarter as compared to the linked quarter. Much of the improvement in the net operating income was associated with the surge in total rental revenues, which form a major part of total revenues. Operating expense, when compared to the same quarter of the previous year, surged 13%. The bottom line improved a significant 95% as compared to the same time period. Funds from Operations (FFO), a primary indicator of a property REIT, improved 12.5% when compared to the same quarter of the previous year. The stock offers an added advantage of a dividend yield of 2%, which is backed by an FFO yield of 5.55%.
Analysts have a mean price target of $116.63 for the stock, which is currently trading at $110.35 per share. The company is scheduled to report its third quarter performance on October 23, 2012.
SL Green Realty Corporation:
SL Green is a mid cap office REIT that owns and operates commercial office properties in the New York Metropolitan area. Total revenues that the company generated during the second quarter surged 17% YoY. Much of the surge was associated to a 12% growth in rental revenues. Investment and preferred equity income surged approximately 100% over the same time period. Operating expense rose 15%, largely on the increase in interest expense, and depreciation and amortization. The company reported a significant surge of 92% in the FFO that it generated during the second quarter of the current year, as compared to the same quarter of the previous year. The stock offers a dividend yield of 1.28%, combined with an FFO yield of 10%.
Analysts have a mean price target of $86.64 for the stock, which is currently at $79.12 per share. The company is scheduled to report its third quarter performance on October 24, 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.