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‘Biggest Earnings Challenge’: BXP Cuts Guidance Due To Higher-Than-Expected Interest Rates

BXP’s 901 New York Ave. NW office building in D.C.

The country’s largest publicly traded owner of office buildings is reducing its earnings guidance, citing elevated interest rates.

Boston Properties cut its guidance for both the second quarter and full year due to higher interest expenses on office properties, it announced in its quarterly earnings report Tuesday.

The REIT adjusted its expected funds from operations for Q2 and the full year down 6 cents per diluted share, from between $1.70 and $1.72 for Q2 and between $6.98 and $7.10 for the full year.

“High interest rates are our biggest earnings challenge,” BXP Chief Financial Officer Michael LaBelle said on the earnings call. “This quarter our interest expense increased $7M sequentially.” 

The Federal Open Market Committee left its benchmark interest rate unchanged Wednesday at 5.25% to 5.5%. The Fed has kept rates the same since July in its effort to curb inflation to 2%, which has proven more difficult than it previously thought, Fed Chairman Jerome Powell said Wednesday. 

LaBelle said more than half of the REIT's interest expense increase was from elevated debt payments on two properties: 901 New York Ave. NW in D.C. and Santa Monica Business Park in Southern California. He said these adjustments resulted in a loss of five cents per share and were the primary reason it reduced its FFO guidance. 

“Other interest expense assumptions have also been impacted by the changing expectations for rate cuts in 2024," LaBelle said. "Last quarter we forecasted for rate cuts commencing in the second quarter, which was actually conservative to market expectations at the time. We've now pushed out any rate cuts to late in 2024.”

BXP executives said they expect to see some improvement in the second half of the year based on increased income with expected rising occupancy at its office properties, along with fewer expenses, based on seasonal trends and lower interest expenses. 

BXP’s first-quarter revenue increased 4.5% year-over-year to $839.4M. Its net income came in at $79.9M, down from $120M in Q4 but up from Q1 of last year. 

Leasing activity is strong for the REIT, BXP President Doug Linde said on the call — a factor executives said should help drive earnings in the back half of the year. BXP completed 900K SF of leasing during Q1, a 35% increase from the same time last year. 

But the momentum is countered by companies, especially technology companies, reducing space, Linde said.

“And so it's a challenge to dramatically increase occupancy in the short term, but we are getting to the point where we believe occupancy will continue to moderate upward," he said.

The REIT is continuing to take an aggressive approach to the office market, a strategy that began in Q4 when it bought out its partners at three different properties, in what executives described as a "shift to offense."

Thomas said BXP remains “in active pursuit” of office opportunities in its core markets. The REIT is interested in acquiring assets from “lenders with highly leveraged assets that require recapitalization” as well as “institutional owners seeking to diversify from the office asset class,” he said.  

BXP had 11 office, lab, retail and residential projects underway as of the end of Q1, Thomas said on the call, amounting to 3.2M SF. BXP has invested $2.4B in the pipeline with $1.3B remaining to be funded, Thomas said. 

Though the pipeline is slower than it has been historically, he said, the overall lack of office development in BXP’s markets is “favorable” for its existing portfolio. 

“As vacancies continue to decline for premier workplaces, rents should rise, which will ultimately bridge the economic gap to justify new development,” he said.