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Boston Properties said higher borrowing costs would take a bite out of its financial results this year.
“High interest rates are our biggest earnings challenge,” Chief Financial Officer Michael LaBelle said on an earnings call Wednesday.
The owner of the GM Building and other premiere Midtown office towers said interest expense jumped by nearly $30 million last quarter, devouring its almost $15 million increase in rental income and then some. While costs rose, occupancy rates slipped to 88.2% from 88.6% in the prior-year period and 88.4% in the fourth quarter last year.
Expenses rising faster than incomes are raising the blood pressure of landlords everywhere, and the pressure won’t abate until the Federal Reserve starts cutting rates. In light of that, Boston Properties lowered its 2024 forecast for funds from operations to about $7.04 a share from $7.10. A cap that limits interest expense on a $1.2 billion term loan expires this month and is expected to reset 75 basis points higher.
The firm leased 900,000 square feet of space last quarter, slightly below 2023’s average of 1 million square per quarter. Officials said demand for space in its 10 million square-foot Manhattan office portfolio remains strong, and they are optimistic they can replace tenants who move out.
One hopeful sign was at 360 Park Ave. South, a vacant office building that Boston Properties acquired for one dollar from a partner who wanted out. The 450,000 square-foot building at East 28th Street is 23% leased, up from 18% in the fourth quarter.
“Occupancy will drop in the second quarter and recover as we move into the fourth,” President Douglas Linde said on the earnings call.
BMO Capital Markets analyst John Kim suggested the firm should consider selling office buildings in suburban markets such as Princeton, N.J., and focus on its portfolio in New York, Boston, San Francisco and Washington, D.C.
“This might be an ideal time to plan an exit,” Kim said, though Linde said the firm is committed to the markets it’s in.
Boston Properties’ stock fell by 3% Wednesday, to $60 a share. It traded for nearly $150 a share in early 2020.
Impatience appears to be on the rise among some investors.
“Is there a scenario where the BXP story can still work long-term if we’re looking at a permanent condition of under-utilization of office?” an analyst asked.
CEO Owen Thomas said its Manhattan buildings are as filled up as they ever were Tuesdays through Thursdays.
“New York is basically back the way it was, certainly three days a week,” he said. “We see improvement.”
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Aaron Elstein , 2024-05-01 23:09:00
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