Boston Properties Downplays Office Skepticism After Disappointing Earnings

Executives of the nation’s largest publicly traded office landlord held firm in their belief that a vaccine-fueled recovery would return most workers to the office after facing market skepticism following its fourth-quarter earnings release this week.

Boston Properties recorded a Q4 2020 net income of just $24.9M, a significant drop from Q4 2019's $176M profit, and took notable hits from coworking assets, a $12M decrease in parking revenue and a $4M decline in revenue from the firm’s only hotel.

The REIT's funds from operations were down 15% year-over-year since the start of the coronavirus pandemic, and it sold more than $530M in assets to offset its losses, more than the REIT sells in an average year. Executives said the company expects to sell roughly another $500M worth of properties in 2021.

Boston Properties recorded a $38M write-down on its assets with leases to coworking providers, which executives said have all approached the company for rent relief. The move caused the company to recognize their rents on a cash basis moving forward because of tenants’ credit concerns.

“We're current on everything right now, but we just looked at the world and said, ‘These guys are going to have a really rough time,’ and we think based upon the credit deterioration, this is the time to do what we did,” Boston Properties President Doug Linde said on the company's earnings call this week.

The REIT wrote down a $60.5M impairment charge at its brand-new, 670K SF Dock 72 office building in New York, currently only 33% leased to coworking giant WeWork. The fair market value of the property went down because that building will likely take longer to lease up than previously anticipated, the REIT disclosed.

Boston Properties CEO Owen Thomas cited a Gensler survey that found more than half of office workers wanted to return to the office, albeit in a hybrid-remote-work model, and noted two unnamed Boston companies announced expected return-to-work dates.

“We think more remote work is here to stay after the pandemic, but concerns over the impact to office space demand are overblown,” Thomas said on the earnings call. “Business leaders want their employees back in the office to foster culture, collaboration, teamwork and mentoring, and to provide more supervision.”

When analysts pressed on Boston Properties' return-to-work assumptions, Linde admitted he expects a slow rebound, but rejected the idea that the work-from-home movement would be a “radical disrupter.”

“I think you're asking a lot of fair questions and the answers are unknown at the moment,” Linde said. “I guess our intuition is that as people start to go back to work, the fear of missing out and all of the opportunities that in-person work have will become more clear to more people, and they will start to get back on the bandwagon.” 

Executives appeared taken aback by one analyst, Alexander Goldfarb of Piper Sandler, who suggested Boston Properties' dividend would be “meaningfully uncovered” in 2021, and asking if the REIT would consider a dividend reduction as it sees sluggish revenue from its parking, retail and hotel operations.

“I mean Alex, just step back,” Linde said in response to the investor. “There is $30M of quarterly revenue that is not in our numbers right now that we — absolutely it is coming back. Whether it comes back in the fourth quarter of 2021 or the third quarter of 2022, we don’t know. But it’s absolutely coming back, and we have additional development that's coming online that's going to bring significant amounts of income.”

The REIT was active in its own backyard in the last three months, counting five leases in Boston's Central Business District, four of which had a weighted average rent increase of about 30%. Boston Properties took the 120K SF former Lord & Taylor department store in Boston’s Back Bay and inked 226K SF of new leasing in the suburbs.

Among local deals was a previously undisclosed 75K SF, seven-year lease at 20 CityPoint in Waltham with an unnamed health care technology company. Representatives for Boston Properties didn't respond to requests for comment on the deal.

Boston Properties is also looking to capitalize on the massive demand for lab space grabbing the attention of nearly all of the region’s developers, anticipating a 220K SF conversion of 880 Winter St. into a lab development and breaking ground on 300K SF at 180 CityPoint.