Stock Report | February 19, 2013 Real Estate Investment Trusts (REITs) S

Investment Advisors LLC.

BOSTON PROPERTIES, Inc.

Real Estate: Focused Office

NYSE: BXP $105.14

OVERALL VALUE: BEARISH E12-Month Target Price: $109

Outlook (6 Month)
Key Stock Metrics (Source S&P, co. report, Bloomberg) Underperform Hold Outperform

Closing Price (3Q2012) 52 Week Low 52 Week High Tot. Shares Outstg (000) Market Cap ($000) Institutional Ownership. Beta P/E Ratio Dividend Yield A2012 FFO E2013 FFO Growth FFO Multiple

$110.61 $108.45 $116.07 170,264 18,832,901 90.3% 0.915 55.41x $2.60 2.46% $5.18 (0.2%) 20.3x

Investment Summary
U.S. office rents and occupancies have declined due to a sharp cyclical downturn that now appears to be nearing bottom, particularly in high barrier to entry markets. BXP property net operating income contracted over the past two years as a consequence of tenant bankruptcies and move-outs and lower rents on new leases. Furthermore, their Princeton assets in NJ are still suffering from high vacancy rates of 24%. Overall portfolio vacancy is at approx.8.5% Considering the change in market behavior for office space, demand on trophy buildings has been declining which also justifies the -.2% decline in the estimated FFO. The FFO multiple is trading higher than the sectors mean at 20.3x and there is a high likelihood for the multiple to return to the mean. Although BXP has maintained a 2.75x fixed charge ratio, the liquidity cushion derived has been deployed into new construction and land. This increases the pressure on BXP in positioning the capital to grow rents which could translate into a shrinking margin compared to the market. With 4.6% of leases expiring in 2013 and with $450M unsecured exchangeable senior notes due, BXP will have a challenging year ahead. The Net Asset Valuation of the enterprise shows that the current stock price is trading at a premium of 15.63%. Additionally, the yield on investment is lower than the any of the peers within the office sector which will lead funds out of BXP on the short term. The PEGY Ratio is 8.83x which further justifies that BXP is currently overvalued. Considering the pressure on equity & short term growth potential, we maintain our HOLD rating.

Price Performance
Senior Debt Rating S&P A+ Fitch
AAA

A-

B+

B-

AA

BBB

BB

The past 12 month, the stock price varied between $98.92 & $117.00 with an average trading volume of 857,200. When compared to the RMZ index, BXP has shown more price volatility to shifts in the economy. Systematic risk from the underlying assets within the portfolio is well diversified since Beta is .915. Current support/resistance levels are between $101.34 & $109.50. YTD growth is 2.45% & SMA(50) $100.17 suggesting a potential deviation back to the mean.

Moodys
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News highlights

Net Asset Valuation

Investment Advisors LLC.

Boston Properties Seals $71M Buyout Zacks.com - Feb 11, 2013 Boston Properties to Build San Francisco Office Tower Wall Street Journal - Feb 7, 2013 Boston Properties Inc Issues Q1 2013 FFO Guidance Below Analysts' Estimates. Reuters Key Development Jan 29, 2013 Boston Properties Inc Issues Q4 2012 FFO Guidance Below Analysts' Estimates Reuters Key Development Oct 23, 2012

The data used is from the 10Q issued on 21/12/2013 for the period of 3Q2012. The National Real Estate survey made by Price Waterhouse Coopers (PWC) in 2Q2012 indicates a national average in cap rates for CBD office properties at 6.85%. Taking into account the markets BXP is exposed to and the quality of RE assets under their portfolio the effective cap rate would be 5.48% (an adjustment of 20%). All other net income are capped at 6.50%.

The remaining balance sheet items were carefully reviewed and an adjustment was made for each tier to ensure that values are brought to current. For example, construction in progress was increase to 150% of value due to the location and vertical development of the sites.

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Investment Advisors LLC.

Valuation P/E Ratio Price to Revenue Price to Cash flow Price to Book 64.17x 8.66x 21.74x 3.19x

From the analysis below, it is imperative to notice the current premium of 15.63% the stock is trading at market. The implied cap rate to match the ENAV to mark-to-market would be 3.29%, very high compared to the national average.

Fundamental Analysis
Mngt Effectiveness ROE ROA ROI 5.05% 1.95% 2.09%

Revenue for BXP grew modestly at the rate of 6.74% in 2012 and now represents $12.38 per share. This puts the price to sales ratio at 8.66 which is above the industry average. Operating expenses contracted by .8% boosting BXP FFO per share and allowing them to increase the dividend payout to .65 in 4Q. The Real Estate Assets increased by 10.3% from $12.3B to $13.5 showing that the board is still investing in the core activity of the company. BXP still holds a strong position is cash however contracted by 62.3% compared to 2011. The total assets also increased 4.5% to a total of $15.4. To support this growth the company mostly issued unsecured notes and as a consequence its liabilities increased by 3.2% to a total 57.64% LT debt to asset ratio. With interest rates at an all-time low, BXP has not taken proper advantage of their current low debt position and levered their assets higher. Most of the unsecured notes are at the operating partnership level and only 11% are at the c-corp level. Management has been effective throughout 2012 and increased the ROE to 5.05% from 4.98%. Effectively and by looking at the operating margin an argument can be made that BXP management stabilized the company and has diversified their portfolio at the cost of lower return to the shareholders. Such a strategy was welcomed by the market post 2008 which drove the P/E ratio to 64.19 .

Capital Structure Debt to Equity Debt to Assets 174.85% 57.64%

Business Analysis
BXP will face a 4.6% of maturity in lease spaces starting 2013 and management would have to be proactive in securing new tenants. BXP runs a high risk in signing lower rents and increase in consensus due to the general market conditions. This will have a direct impact on the FFO.
Profitability Opt Margin Net Profit Margin Gross Margin 34.50% 15.68% 63.47%

By 2017 and as the biggest chunk of leases is expiring (10% of total space) unsecured notes also come to maturity with a value of $1,52B. This can cause major issues in refinancing or disposition strategy of the assets. Approximately 50% of the value creation pipeline of land under development (170 Acers) is located in suburban areas in the submarkets of BXP primary selected markets. Such a hedge strategy in diversification of the portfolio may swing both ways. If secondary markets grow, those assets will be more valuation however their primary assets will decrease. Furthermore, the overall under construction value of the pipeline is $1.3B which represents 7% of the REITs asset and approx. 11% of the equity base. This pipeline is yet to come online in the next 4 years will present a near term leasing challenge in this slower climate, however the stabilized 7% yield on those assets is still attractive for investors with capitalization rates still rising due to lending constraints. BXP has concluded more acquisitions then disposition in 2012 which will be a higher burden on their liquidity in 2013 especially with the leverage constraints and expiring leases. Total acquisition concluded was valued at $1.36B while the disposition brought gains of $65.8M.
0.12x

Efficiency Asset Turnover

Finally, and one of the main reasons the current yield is low on BXP is due to the large portion of cash and equivalent sitting on the balance sheet with minimum to no yield. This portion represents approximately 12% of the asset base. In addition to a 33.3% ratio of debt to market cap, an argument can be made that BXP capital deployment is not optimum.

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Asset distribution by market

4% 28% 33%

Investment Advisors LLC.

The following chart shows the asset distribution by market. It is also imperative to note that 24% of the leases signed by BXP is for the US government with somewhat a higher credit quality. The basis of each market is diversified however since on an NOI basis Manhattan portfolio represents 34.7%, a careful eye should be kept on the financial sector.

21%

14%

Midtown Manhattan Greater Boston

Greater San Fransisco Princeton / Brunswich NJ

Greater Washignton DC

Strengths High class pure-play office REIT, superior management and operation portfolio Below market rents allowing for a support cushion Solid cash flow, underleveraged with a big development value-add opportunities.

Weakness Lease expiration in 13 to 17 will cause a challenge & below market rents will drive intrinsic value down. A high portion of the portfolio currently in under development projects. Slow growth in yields with S&P500 hitting 5 year high will drive investors out of real estate.

The recent dip in stock price of -2% can be justified with investor sentiment on the value of assets following the disposition of a position in 300 Billerica Road and the fact that BXP FFO earnings were below analyst expectation.

Funds Flow
Post 2008, core real estate assets constituted one of the many safe havens investors took to hedge their position from potentially rising inflation due to the QE measures taken by the FED. This led asset values sky rocketing. Combined with historically low interest rates and 10 year treasury bills (1.95%), REITs will remain one of the favorites safe havens. However with the overall recession coming to a bottom and S&P500 hitting a 5 year high, retail money will start to shift into securities that offer a similar volatility but higher yields. Institutional investors and pension fund managers will seek to deploy capital more efficiently and cover their current position in REITs by diversifying their portfolio elsewhere; this is further justified by the decrease of 38% in the yearly average daily volume from 2011 to 2012. Additionally comparing the S&P500 YTD total return of 16.6% and a volatility of 51.1% to RMZ YTD total return of 12.31% with a stable volatility of 28.73% confirms the latter theory of retail money flowing into securities The REIT index serves as a leading indicator to a lagging asset class justifying that the market still sees potential in value appreciation with time. This has spurred investors to establish private equity partnership and acquire properties throughout the country and sectors. Therefore, for BXP to achieve a competitive total return with a current yield of 2.46%, their asset values should appreciate at least by approximately 10% by year end ($115.64 stock price). Finally and considering the potential contraction in amount of funds flowing towards real estate in general and REITs in particular, we must analyze the potential flow to peers in other sectors and within the same industry.
Company Name/Symbol Boston Properties (BXP) Alexandria Real Estate (ARE) Mack-Cali Realty (CLI) SL Green Realty (SLG) Price $107.21 $71.62 $27.32 $82.70 Market Cap 15.9B 4.6B 2.4B 7.5B P/E 58.30x 51.10x 51.50x 115.70x PEGY Ratio 8.83x 5.03x 1.61x 10.25x FFO Multiple 20.30x 16.10x 10.60x 16.40x FFO Growth -0.20% 0.10% -0.10% 0.00% FFO Yield 2.50% 3.10% 6.70% 1.60% Debt/ Mkt Cap 33.30% 39.00% 45.10% 44.60% 5 Yr EPS growth -3.94% -16.56% -11.30% -39.64%

Comparing the above peers data to BXP, investors with opportunistic strategies may find better value or future appreciation in ARE or CLI since they both have a lower PEGY ratio and higher FFO yield. Additionally, with investment and consumer sentiment recovering, shopping center & lodging/resorts offer higher E2013 YTD return at 5.44% and 7.39% respectively compared to a 3.56% in the office sector. The overall conclusion will ultimately translate to less equity flowing to RE than the previous year and limited flowing into the office sector.
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Company Information Boston Properties, Inc. Prudential Center 800 Boylston Street Boston MA, 02199-8103 Tel: +1(617) 236 3300

Company Overview & Strategy

Investment Advisors LLC.

Boston Properties Inc (BXP), headquartered in Boston - MA, is a self-administered and managed Real Estate Investment Trust (REIT) that has significant presence in five markets: Boston, New York, Princeton, San Francisco and Washington DC. Founded originally in 1970 by Zuckerman & Linde as a real estate private equity vehicle and went public in 1997. BXP core competency is to develop core central business district office buildings and in-house manage them to ensure the highest possible services to the tenants. The overall strategy of the management team has been to concentrate on markets with high supply entry barriers, increase presence in the selected markets, and encourage JV partnerships while maximizing the managements expertise and leverage potential, and the disposition of assets at their optimum value. BXPs portfolio is comprised of 146 office buildings of which 128 Class A and 18 technical office, one hotel, three residential properties and four retail properties totaling approximately 60.3 million square feet. Additionally, BXP currently owns and control undeveloped land totaling approximately 510.5 acres which will support 11.4 million square feet of new development.

Management Team
Name Mr. Mort B. Zuckerman Mr. Douglas T. Linde Mr. Micheal E. LaBelle Mr James J Whalen Mr. Peter V. See Age 75 49 48 52 50 With BXP since 1970 1997 2000 1998 2000 Title Chairman & CEO President & Director CFO, Treasurer & SVP CIO & SVP SVP Property Management

The company employs approximately 700 staff members across all offices and markets.

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Primary credit analyst Ali Haidar, New York +1(347) 348 2346 Ali.haidar@nyu.edu
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