Will Boston Properties Deliver Another Huge Special Dividend?

That time of year is fast approaching. I refer not to the holidays clustered around the winter solstice; I refer to Boston Properties (NYSE: BXP) and its year-end special-dividend declaration.
Each year for the past three years (and intermittently before), Boston Properties has supplemented its fourth-quarter regular dividend with a special dividend. The special dividend is of some consequence.
Since 2013, Boston Properties has declared special dividends per share of $1.60, $4.60, and $1.25, respectively. Boston Properties also pays a $2.60 per-share regular dividend. The recurrent special dividend lifts the Boston Properties dividend yield well above the 2.1% reported at the major financial portals. I expect another special dividend of some consequence to be declared near the end of December.
History fuels my expectations. Boston Properties management continually proves its acumen at deploying funds effectively to support higher-yield projects and higher-yield dividends. Superior business acumen manifests in superior stock performance. Since 2001, Boston Properties shares have posted an 11.1% average annual total, beating the office REIT average by a full percentage point.

More Cash Flow

Boston Properties’ playground is grade-A commercial real estate. It buys, develops, and sells properties in four of the toniest, most desirous commercial office markets in the United States: Boston, New York, San Francisco, and Washington, D.C. Boston Properties owns or holds an interest in 163 properties that make up 47.7 million in-service square feet. Boston Properties’ $19-billion equity value, reflective of its real estate portfolio, is the largest in the industry.
Girth supported by an upscale portfolio of real estate properties is fine, but only if it can produce more of what REIT investors most value – cash. I’d just as soon own a portfolio of trailer parks, if they produced more cash per invested dollar than a portfolio of grade-A properties.
Boston Properties won’t be downgrading to trailer parks in the near future. It continually draws forth more cash flow from its grade-A real estate portfolio.
Funds from operations (FFO) is the key cash-flow metric in valuing REITs. As FFO goes, so, too, goes REIT value. When FFO trends higher, dividends and REIT value eventually trend higher. Boston Properties’ FFO trends continually higher.
Third-quarter FFO posted at $1.42 per share compared with $1.41 per share in the year-ago quarter. Management recently increased full-year FFO guidance. FFO should post between $5.97 to $5.99 per share, $0.03 higher than guidance given in the previous quarter. Boston Properties reported FFO of $5.37 per share for all of 2015.  In 2014, it reported full-year FFO of $5.27 per share.

Boston Properties Dividend Record

Boston Properties’ special dividend has been less linear compared with FFO. Last year, it paid a $1.25 per-share special dividend; the year before it paid a $4.50 per-share special dividend. The 2014 special dividend was exceptional because Boston Properties sold $2.3 billion of property that year.
That said, investors enthusiastically received the 2014 special dividends. Boston Properties traded immediately higher after the special dividend was declared. After the shares were adjusted lower by the dividends (special and regular) on the ex-dividend date, they were trading at an all-time high in three months.
Gaming Boston Properties’ next special dividend is no easy feat, but given recent guidance on FFO, a $2 per-share dividend is within the realm of possibilities. A $2 per-share special dividend lifts the 12-month dividend payment to $4.60, which is still less than 80% – a low payout ratio – of projected FFO.

Buying Opportunity

In the meantime, Boston Properties is priced to move. REIT prices are down in the past three months on interest-rate concerns. Boston Properties share price is down 13%. A buying opportunity beckons.
Unbeknownst to many investors, history shows that share prices of listed equity REITs (like Boston Properties) frequently increase when the Federal Reserve shifts to a neutral monetary policy from a stimulative one. To wit: when the Fed raised its target range for the federal funds rate to 5.25% from 1% from 2004 through 2006, equity REITs produced an 80% cumulative total return.
Higher-than-expected yield, higher-than-expected share-price appreciation . . .  two reasons as good as any to consider a Boston Properties investment.

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