BXP’s (Baa1 neg/BBB+ neg) asset sales and capital raises completed through YtD23 are credit positive developments. BXP closed on a USD600mn five-year mortgage loan secured by three Cambridge properties in February of this year, issued a long 10Y senior bond at a coupon (6.50%) in May, lower than its 2022 5Y issuance (6.70%), and in November announced the sale of a 45% stake in two life sciences properties to Norges Bank that will generate USD750mn of proceeds. We take the view that BXP has outperformed peers in the challenging higher rate/weaker demand backdrop due to its high quality asset portfolio, and mgmt. has positioned the company well in terms of its debt stack through 2025.
Our math (Figure 1) implies USD1.6bn of issuance needs through 2025 (two years), which means these needs would likely be at the low end of BXP’s annual issuance range seen from 2016-2023, where issuance varied between USD750mn-USD1.7bn each year. Technicals are looking much improved compared to our outlook at the beginning of 2023, driving much of our positive view on the bonds.
Fundamentally, BXP’s premier portfolio of office and life sciences assets, leased by a diversified set of large cap tenants has performed better than expected in FY23. A couple of indicators of improving performance 1) occupancy troughed in 2Q23 before rising 50bp in 3Q (88.8%, Figure 2) while leased assets were flat at 90.4%; and 2) new leasing (in USD) troughed in 1Q23 and BXP’s current pace of leasing relative to expirations implies that occupancy will rise further in 2024, and, along with new development NOI, bolstering flat-to-slightly positive NOI growth and driving deleveraging. BXP deleveraged 0.3x to 7.3x through 3Q this year, and will approach 7.0x in 2024, potentially saving the company from downgrades to mid-BBB by both Moody’s and S&P (currently with negative outlooks). We see a downgrade as a “coin flip” based on conflicting guidance on mgmt.’s willingness to add to its USD2.4bn/52% pre-leased active capital development backlog – on the 3Q23 earnings call mgmt. noted their balance sheet was in a position to “play offense,” while also noting rents need to be “much higher” in most of their markets to justify breaking new ground. Somewhat related: last week, Moody’s downgraded peers VNO and PDM to Ba1 due in part to office macro concerns, but also a large FY24 debt maturity walls specific to those issuers.
BXP bond spreads are highly correlated with interest rates (86%, BXP 2033s G-spread vs. US 10Y yield, Figure 3), given rates’ implications for asset values and financing costs of the real-estate business. With risks skewed to the downside for US rates as the labour market loosens, as seen in recent JOLTs/payrolls prints, and consumption normalises, as seen in personal spending/retail sales prints we see a tailwind in favour of BXP’s bonds.
Recommendation: Buy BXP 2030s (+230) capture value on BXP’s curve (could sell 2031s, move up 1Y, pick up 22bp and USD2) and pick up 125bp over the IG index (Figure 4). We see these wide spreads as compensating for the fundamental challenges BXP faces in FY24, and believe the technical and rate backdrop is highly supportive for spread tightening.