Boston Properties Post Strong Quarter; Looks to Tap Development Pipeline

The development at Back Bay Station will feature one office tower and two residential high-rise buildings.

BOSTON—A day after posting strong quarterly earnings, executives of Boston Properties say that the company sees the strongest demand for office space in locations driven by the technology, life sciences and other innovative industries. In a conference call lasting more than one hour and 15 minutes, Boston Properties CEO Owen Thomas said the company leased 1.5 million square feet in the first quarter, which was above historical averages and its portfolio’s vacancy rate at the end of the first quarter was 91%, down 40 basis points from year-end 2015 due primarily to the Genentech vacancy of 186,000 square feet at 601 Gateway in San Francisco. The company’s portfolio at the end of the first quarter consisted of 167 properties aggregating approximately 46.3 million square feet, including 11 properties under construction or redevelopment totaling approximately 4.6 million square feet. The company’s core markets are in Boston (including Cambridge and Route 128 suburbs), New York City (including properties in Brooklyn and New Jersey), San Francisco (including properties in Silicon Valley), and Washington, DC (which include holdings in Maryland, Virginia and Virginia Reston Center). In terms of the company’s capital investment strategy, Thomas said, “It remains unchanged and we’re investing more in new developments and redevelopments than in stabilized acquisitions and these investments will be funded partially by select asset dispositions in the balance with debt financing.” In terms of acquisitions, Thomas said that the company is actively reviewing and seeing an increase in value-add and development opportunities in its core markets. He added that in terms of asset sales, the company continues to pursue sales of non-core assets and is maintaining its 2016 asset sales target of between $200 million to $250 million. On the development front, Thomas said that project starts will “remain highly dependent on securing pre-leasing for entitled sites.” The potential project starts this year include Springfield Metro Center in Virginia where the company is pursuing a requirement with the Transportation Security Administration , Reston Block 5 located in the Reston Town Center in Virginia and 20 CityPoint, the mirror building to 10 CityPoint being developed in Waltham, MA. Those three projects total 1.1 million square feet of commercial space. “We’ve been very active in this past quarter, advancing our predevelopment pipeline for projects that would start beyond 2016,” he told analysts and reporters on the conference call. During his presentation, he provided an update on the 940,000 square feet of additional entitlements the company secured late last year at its Kendall Center development in Cambridge, MA. “We are in advanced discussions with multiple office users to fully pre-lease the 540,000 square foot office component of the entitlements. The balance of the project will be high-rise residential,” Thomas says. Due to the project’s complexity that involves replacing two smaller existing buildings on the site, work on the project will likely begin in 2017. Another major Boston project in the pipeline is its proposal that has been submitted to the Boston Redevelopment Authority  recently for a 1.3 million-square-foot mixed-use (office, retail and residential) at 165 Dartmouth St. at the Back Bay Station . The company is already managing the concourse level of the station as part of an agreement with the Massachusetts Department of Transportation . Due to required local approvals and public review, Boston Properties does not expect to start that project until late 2017. He also noted that in New York City the firm has been designated by the Metropolitan Transportation Authority as the developer for a site at 343 Madison Ave. The company intends to acquire a 99-year ground lease and build up to a 900,000-square-foot office tower there. While work on the project is still several years out, the company has commenced pre-development work on the project. Also in New York City, Boston Properties is conducting significant upgrades and redevelopment initiatives at its portfolio there, including 399 Park Ave. and the low-rise building at 601 Lexington Ave. Other redevelopment projects underway in its portfolio include 1330 Connecticut Ave. NW, and Metropolitan Square in Washington, DC and the Prudential Center retail component in Boston. Thomas said that at the end of the first quarter of this year, the company’s development pipeline was made up of 11 new projects and one redevelopment program totaling 4.6 million square feet and $2.6 billion in projected cost. He said the company’s projected NOI on those projects is in excess of 7% and the commercial component of the development pipeline is 61% pre-leased. “We have all the cash, $1.4 billion, required to complete the development of the portfolio, which should add materially to our company’s growth over the next four years,” Thomas said. On Tuesday, Boston Properties reported Funds from Operations (for the quarter ended March 31, 2016) of $250.7 million, or $1.63 per share basic and $1.63 per share diluted. This compares to FFO for the quarter ended March 31, 2015 of $200.4 million, or $1.31 per share basic and $1.30 per share diluted. FFO for the quarter ended March 31, 2016.