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Boston Properties Posts 8% Revenue Gains In Q3, Takes Protective Measures For Downturn

Boston Properties' chief executive downplayed WeWork’s impact on the REIT’s overall portfolio and instead focused on overall strength in its coastal U.S. markets on the company's third-quarter earnings call Wednesday. 

Rendering of Hub on Causeway, a Boston Properties development adjacent to Boston's TD Garden and North Station

There may be signs of an economic slowdown on the horizon, and WeWork’s financial tailspin has been a jolt to the office sector. But that isn’t slowing things down at Boston Properties, CEO Owen Thomas said, outlining how the largest office REIT in the country is securing itself in what he called the “healthy but moderating condition” of the U.S. economy. 

He also minimized any impact WeWork’s collapse would have on the REIT.

“Though we believe the shared workspace market has growth potential, we anticipate a pause given recent capital raising challenges in the industry,” Thomas said. “WeWork has built an important market position in the industry and has the potential for further growth, assuming it executes well with the proceeds from its recent recapitalization.”

While he is confident in coworking’s overall appeal and future, Thomas also downplayed the role it plays in the overall office sector and in Boston Properties’ portfolio. Coworking accounts for about 1.6% of all office space in the U.S. but increases to 3.6% in New York City and San Francisco, Thomas said. WeWork has five leases with Boston Properties and accounts for 1% of its overall revenue. 

“All WeWork facilities in our portfolio that have been open for more than a year are substantially full,” Thomas added before noting Boston Properties has relationships with other coworking operators as well as its own offering, FLEX by BXP.

SMBC Nikko Securities America Senior REIT Analyst Richard Anderson noted Dock 72, a 675K SF office building in the Brooklyn Navy Yard, has sat 33% pre-leased to lone tenant WeWork for "forever" (discussions with the coworking provider began six years ago).

But WeWork has since had a failed initial public offering and ousted founder Adam Neumann, who was part of early negotiations with Boston Properties' Dock 72 co-developer Rudin Management. In Boston, two landlords have called off deals with WeWork due to the company's uncertain financial future. 

"On Dock 72, clearly the lease-up of this property has been slower than we expected. That being said, it is an incredibly high-quality offering and building. And we haven't fully completed it yet," Boston Properties President Doug Linde said before pivoting to WeWork pullback concerns. "In terms of WeWork, they have opened their facility, and they started to sell desks and they're off to a good start."

Boston Properties CEO Owen Thomas

Revenue at the REIT was up 8% for Q3, and leadership is confident on future growth given its 6.3M SF, $3.6B development pipeline and how vacancies are limited in key markets like San Francisco and Boston. While Boston Properties doesn’t anticipate a recession in the near-term, Thomas recognized there are signs of a slowdown. 

The trade war with China doesn’t directly impact Boston Properties, but Thomas noted it is “not constructive for the broader economy.” He also highlighted weak economic numbers in China and Germany possibly already being in a recession as further evidence of a slowdown before pivoting to how Boston Properties is protecting itself in the event of a correction closer to home. 

“The recession risks continue to rise despite slower economic growth. Lower interest rates provide a tailwind for financing costs and real estate valuations,” Thomas said. “But at the same time, we are protecting the downside by keeping leverage low, pre-leasing most of our developments and keeping our buildings full with creditworthy tenants and increasingly long-term leases.”

The company is also protecting itself by investing in projects focused on tech and life science demand. 

Boston Properties is spending $48M to convert a 126K SF office at 200 West St. in Waltham, a Boston suburb, into life science and lab-ready space. It is also spending $20M renovating Waltham Woods, a 392K SF office campus it acquired in Q3. The acquisition made Boston Properties the largest owner and operator of Class-A office in Waltham, Thomas said. 

The developer also sees strong market fundamentals in San Francisco, where Boston Properties’ CBD portfolio is nearly 97% occupied and almost 99% committed, Linde said. Low vacancies and a limited availability of large blocks of space over 30K SF have pushed rents over $100 per SF, according to CBRE. 

Linde said he sees similar fundamentals in Boston, “where current conditions are as good as we have seen them in our company's history.”

The REIT's Boston CBD portfolio is 99% occupied, and it completed nearly 200K SF of early lease renewals and expansions with an average rent increase of 30%, it said in its quarterly report. The firm is also adding new supply to the market with projects like Hub on Causeway, which is 87% pre-leased with Verizon as an anchor tenant. 

“We have completed a significant amount of forward leasing over the past few years, which has had the effect of creating an extremely durable revenue stream and provided good clarity on the range of expected outcome going forward, especially for 2020,” Linde said.