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Boston Properties: 5 Reasons It’s The Best Time In 11 Years To Buy The King Of Office REITs (NYSE:BXP) | #riskmanagement | #security | #ceo | #businesssecurity | #

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This article was coproduced with Dividend Sensei.

This pandemic has created incredible value for prudent and disciplined long-term income investors.

The broader market might be trading at its highest valuation in 19 years. Yet plenty of top-quality blue-chips can be found with generous and safe yields. They offer exceptional income and return potential over the coming five years and more.

Boston Properties (BXP) is one such blue-chip, in our opinion. We understand that it’s become a bit too speculative for some, and we’re not going to try to change your mind if you don’t feel it’s right for you.

Every investor needs to make his or her own decision.

For our part, we fully acknowledge the impacts of the worst recession in 75 years. It’s created increased uncertainty surrounding Boston Properties’ short and medium-term occupancy.

Even so, we maintain it as The Dividend Kings’ highest-conviction office REIT. At least two of our founding members even own it themselves.

And we’re more than happy to discuss why that is.

Source

1: A 4.5% Yielding Dividend Retirees Can Trust

The first thing we’ll look at dividend safety. Because companies with unsafe dividends are rarely worth owning.

For that reason, let’s rely on The Dividend Kings Safety Model. It looks at up to 18 safety metrics as appropriate per sector/industry.

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Here’s how BXP stacks up, using the most recent Q1 earnings results:

  • 2020 consensus adjusted funds from operations (AFFO) payout ratio: 81% versus 90% safe for this industry versus 89% 10% stress test
  • Debt/capital: 67% versus 60% safe
  • Debt/EBITDA: 6.6 versus 6 or less safe
  • Interest coverage ratio: 3 versus 2+ safe
  • S&P credit rating: A- negative outlook = 2.5% 30-year bankruptcy risk
  • Fitch credit rating: Not rated
  • Moody’s credit rating: Baa1 (BBB+ equivalent) stable outlook = 5% 30-year bankruptcy risk
  • Effective Interest Rate: 3.3%
  • Dividend growth streak: 4 years, cut 26% during the Great Recession (as did 87% of equity REITs), 9 years without a cut vs. Graham’s 20-year standard of quality
  • F-score: 5/9 versus 4+ safe, 7+ very safe: low short-term bankruptcy risk
  • M-score: -2.40 verus -2.22 or less safe = low accounting fraud risk
  • Safety score: 4/5 above-average safety
  • Dividend cut risk in this recession: 4%-6%
  • Dividend cut risk in a normal recessional: 1%.

It should be pointed out that analysts expect BXP to continue growing its dividend throughout the recession – though slowly.

  • 2020 AFFO consensus payout ratio: 81% versus 90% safe with 2% dividend growth
  • 2021 payout ratio: 79% versus 90% safe with 2% dividend growth
  • 2022 payout ratio: 77% versus 90% safe with 1% dividend growth.

The payout ratio, already safe for this industry, is expected to steadily fall to even safer levels as the pandemic winds down and the economy recovers.

For the qualitative part of the safety analysis, let’s consider the views of the credit rating agencies.

S&P, for one, downgraded BXP from stable to negative last October, including an A- rating. As it said:

We had previously expected S&P Global Ratings-adjusted debt to EBITDA to decline back below 7x before year-end, but we no longer see this pace of deleveraging materializing.”

And that was after the five previous quarters seeing the same elevated figure. In addition, the agency wasn’t pleased with the company’s debt to undepreciated capital being “in the high-40% area, well above most similarly-rated peers.”

With that said, it does:

… continue to project relatively strong operating performance over the next two years, with occupancy remaining in the low-90% area and same-property cash NOI growth in the low- to mid-single-digit percent area.”

Moody’s – the only agency to report an update since the pandemic began – puts BXP at Baa1 (a BBB+ equivalent) with a stable outlook. That’s actually an affirmation of the upgrade it gave from Baa2 back in 2018.

That reflects its large and high-quality office portfolio in major markets, diverse tenant base, and solid liquidity position. Of course, this does mean challenges related to such places as New York and Washington D.C.

Moody’s also notes:

Boston Properties has a large development pipeline with significant remaining funding needs, but high preleasing largely mitigate earnings risk, and existing liquidity and proven capital access offset financing risk.

(Source: investor presentation)

The company is sitting on $1.8 billion in cash as of June, with total liquidity of $3.3 billion. That’s compared to $1.2 billion in redevelopment commitments over the next three years. And it has $2 billion in debt that matures through the end of 2022.

(Source: investor presentation)

BXP’s balance sheet isn’t quite a fortress. Most REITs’ safe-leverage guideline is 6.0, yet this one has stayed above it for the four whole years.

That’s why we give it 4/5 in this category despite its 72% most recent payout ratio and 3.0 interest coverage.

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As such, it has about a 5% probability of a dividend cut risk right now.

With a current yield of 4.5% though, above-average safety, and excellent management… we’re not just recommending BXP. We’re buying it ourselves.

2: The Strongest Industry Giant Is Likely to Rise From the Ashes

The reasons we’re bullish on BXP can be summarized by three strengths, since it holds:

  • The largest and highest-quality property portfolio
  • The strongest balance sheet and best access to low-cost capital
  • The best management team in the industry.

To quote its investing relation page:

Boston Properties… is the largest publicly-held developer and owner of Class A office properties in the United States, concentrated in five markets – Boston, Los Angeles, New York, San Francisco, and Washington, DC.

The company is a fully integrated real estate company, organized as a… REIT that develops, manages, operates, acquires, and owns a diverse portfolio of primarily Class A office space. The Company’s portfolio totals 51.8 million square feet and 196 properties, including 10 properties under construction/redevelopment.

Morningstar, meanwhile which has a negative near-term outlook on BXP, still thinks it’s “well-positioned to endure the current storm.”

The company is geographically diversified and possesses the highest-quality office real estate in the country…

With its focus on high-quality Class A office properties in dense and space-constrained central business districts, Boston Properties continues to attract top-tier tenants.

(Source: investor presentation)

Washington D.C. has experienced slow rental growth, which is worth noting. But all of BXP’s other markets have seen 2%-5% annual rent growth over the past decade.

That’s slightly above-average for the office REIT industry. Here’s the individual breakdown of its holdings in terms of net operating income (NOI):

  • Boston: 35%
  • NYC: 29%
  • DC: 19%
  • San Francisco: 17%
  • LA: less than 1% (new market).

We’re not trying to claim that the pandemic doesn’t present significant disruption risk. Yet it’s also worth noting that cities like NYC remain hotspots of the highest talent in the country. That’s why the largest and most dominant names in corporate America continue to sign major lease agreements there.

These are the top five that have in the past year:

And here are five more:

They all no doubt recognize how resilient the city has proven to be in past recessions.

Boston Properties certainly does. And it just as carefully stays up-to-date about its other central business districts (i.e., large metropolitan areas) – from which it gets three-fourths of its NOI.

Source: Hoya Capital Real Estate

Office REITs in general are facing a large supply overhang for the next few years. But BXP is the best situated with its focus on only the most supply-constrained markets that attract big companies.

Morningstar interprets the current data this way:

In the short term, we expect all regions to experience declining occupancy and contraction in rental rates…

In the long term, we expect Boston Properties’ portfolio to perform well, given the high quality of its office buildings…

Occupancy in each of the five regions should stay relatively flat, with long-term occupancy assumptions coming down somewhat from current levels, which represent a cyclical peak.

Boston Properties’ net operating income margin should stay relatively flat over the long term, reflecting stable competitive dynamics in the office real estate industry.

Office REITs are naturally sensitive to the overall economy. And they’re especially vulnerable to disruption from increased telecommuting.

So the entire sector has suffered from expectations of an intense and permanent work-from-home trend. However, concerns about the “death of the office” are likely overblown.

Several surveys have recently come out showing that both employers and employees want to get back to the office. That includes Colliers’ report that a mere 12% of those surveyed wanted to work four or more days from home after the lockdowns end.

Almost half said they’d prefer to be in the office three days a week.

Corporations, naturally, don’t have to listen to their employees. But the most productive ones will, especially when it comes to a decision this big.

Let’s Talk About Owen Thomas

Boston Properties gets an exemplary stewardship rating from us thanks to CEO Owen Thomas and his team.

The company’s capital recycling program, for one, has been well executed. It takes advantage of climbing demand for top-tier office buildings and disposes of existing assets in a high-priced environment.

Plus, management isn’t afraid to improve existing properties to make them more attractive. We see this in BXP’s Prudential Center decision, in which it replaced one of the most successful food courts with Eataly – a play on the experiential retail phenomenon gaining popularity.

That’s all thanks to Thomas, who succeeded cofounder Mort Zuckerman in April 2013. With this transition, Thomas swiftly increased Boston Properties’ focus on new developments.

His development-focused strategy has allowed Boston Properties to produce Class-A office space in top locations… and at lower cost. This allows the company to squeeze a few extra percentage points out of potential yields.

Combined with his seven years as CEO of BXP, Thomas has 31 years of experience in real estate including as:

  • Chief executive officer of Morgan Stanley Asia
  • President of Morgan Stanley Investment Management
  • Head of Morgan Stanley Real Estate
  • A member of Morgan Stanley’s Management Committee (2005-2011).

The list goes on from there. He’s also currently:

  • Global chairman of the Urban Land Institute
  • A director of the Urban Land Institute Foundation
  • A director of the Real Estate Roundtable
  • An executive board member of the National Association of Real Estate Investment Trusts.

Needless to say, this man’s experience is first-rate. Therefore, it’s little surprise that BXP has delivered strong fundamental results under his watch.

  • 6.1% CAGR FFO growth
  • 6.7% CAGR dividend growth.

As Morningstar explains, that’s thanks to BXP’s efficient use of property development – which involves buying premium properties, improving them, or building the highest-value office space from scratch.

Thomas is joined in those efforts by a larger management team that averages 32 years of real estate experience. C-suite members also share an average 21 years with the company itself.

A deep bench indeed is what shareholders are counting on to steer the REIT through this unprecedented crisis.

Of the current situation they’re facing, Owen says:

The biggest impact to the office market near-term is the recession which, as I discussed previously, will adjust rent and capital value. Low-interest rates definitely help.

Second, our customers with a dense layout, including Boston Properties, are removing workstations and will return to work in a less dense environment. Some of these users will have a portion of their workforce continue to work remotely and some will require more space.

Third, modern healthy and well-managed building with state-of-the-art health security will be at a premium like never before.

Lastly, and anecdotally… this practice has improved our skill at using remote work tools and procedures. It has also made apparent that collaboration, productivity, and cultural benefits of working with others in an office environment.

In other words, increased work-from-home policies will have an impact. But the idea that it will be catastrophic to the sector is overblown.

Virtually all of BXP’s properties are safe to operate in during this pandemic. And such buildings are currently at a premium, commanding strong rental pricing power.

Truly, things haven’t been as horrible as the stock price might lead you to believe.

NYC rental prices in particular have remained relatively stable, as have occupancy rates. And here’s further good news for NYC office REITs, courtesy of Brad’s recent “Location, Location, Location” article:

  • Since May, over half of all office lease transactions were completed north of $90 per square foot. The top four deals averaged $110.
  • The average lease term since May [is] approximately seven years.
  • TikTok and Australia Super recently selected NYC for their U.S. headquarters and paid over $100 psf.

That kind of data – and similar findings – have led the following figures and institutions to see good things for BXP’s future:

  • Brad Thomas
  • Morningstar
  • S&P
  • Moody’s
  • MSCI
  • 12 analysts who collectively know it better than anyone other than its industry-leading and very experienced management team (who are also bullish).

Here’s another factor to consider: Its buildings never closed, which has no doubt helped it in the rent-collection department.

The company collected:

Who are BXP’s tenants that are holding up well enough to keep paying?

(Source: investor presentation)

BXP’s tenant base is very well diversified across strong companies such as Alphabet (GOOG), Bank of America (BAC), and Biogen (BIIB). As Thomas said:

First, we have a very high-quality portfolio of buildings in the most vibrant cities in the U.S. filled with industry-leading tenants. This is demonstrated by the fact that we have collected 95% of April rent due in our office portfolio as of yesterday. And office tenants represent 86% of our total revenue…

The balance of our revenue comes from retail and residential tenant, parking, service fees, and a hotel which are more economically sensitive.

So it’s continued to sign pre-pandemic leases and reports little trouble maintaining occupancy or relatively stable rental prices.

BXP has deferred some rent into 2021 to help its more financially strapped tenants. However, analysts are already pricing those cases into their 2020 and 2021 estimates.

And they’re doing so factoring in Boston Properties’:

  • Scale
  • Market diversity
  • Revenue stability
  • Credit
  • Access to liquidity.

To be more specific on some of those categories, it has access to billions in low-cost capital that no other office REIT can match…. and a virtual mountain of low-cost borrowing power through the bond market.

This means it should be able to refinance at much lower rates than its average 3.3% right now.

(Source: Ycharts)

A-rated bond yields are at their lowest level in history – nearly half the rate that BXP has borrowed at historically.

Its markets typically see 6% cash yields on average. Yet BXP is obtaining about 1% higher than that on its development pipeline… among the largest in the industry.

It’s go big or go home with this company. It’s accounting for 19% of all new office development in the country.

(Source: investor presentation)

There will be a short-term impact from the pandemic concerning occupancy rates – mostly from the 14% of revenue that come from retail, hotel, and parking tenants. Thus far tenants strapped for space have allowed renewal rates to remain high though, with occupancy staying stable at 93%.

Anything above 90% is considered good in this industry.

Normally BXP, as the largest office REIT in the industry, and with the strongest credit rating and lowest cost of capital, would earn a 3/3 business model (wide moat for its industry).

However, we agree with Morningstar that IT deserves a 2/3 (above-average) since it also faces a relatively commoditized market. The analysis company writes:

… we estimate that it owns less than 10% of total office inventory in each of its markets.

For example, the 12 million square feet of office space owned by the company in New York City only represents about 3% of total office inventory. This limited market share prevents Boston Properties from achieving the pricing power necessary to achieve an efficient scale moat source…

Brokers such as JLL and CBRE negotiate on behalf of tenants to ensure that the terms of lease agreements are priced appropriately. Because of the third-party broker arrangement, there is little opportunity for Boston Properties to directly influence a leasing decision. And leasing terms tend to be specified to meet client needs and reflective of current market rates coordinated through the brokers.

This dynamic is reflected in Boston Properties’ inability to charge a premium on its properties on a rent-per-square-foot basis as compared with properties of a similar quality and location. This points to the commodified nature of office space, supporting our assertion that Boston Properties lacks a moat.

So here’s the final summary on BXP:

  • 4/5 above-average safety
  • 2/3 above-average business model
  • 3/3 quality management/dividend corporate culture
  • 9/11 overall blue-chip quality REIT (speculative).

For the record, speculative doesn’t mean “high risk.” It just means there’s increased medium-term uncertainty surrounding the business model.

3: Strong Total Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Here’s what analysts are predicting for adjusted funds from operations (AFFO) estimates:

  • 12% lower AFFO consensus for 2021
  • 3%-13% lower consensus in 2022 (depending on the time frame)
  • 5% lower in 2023 (from one analyst forecast that far out).

How accurate have analysts been historically about the company?

Outside of severe recessions, they’ve been very accurate: usually within 10% of actual results on two-year forecasts.

The historical margin of error is -30% (Great Recession) to +10%. That’s what we apply to the long-term consensus growth range of 4.6%-7% compound annual growth rate (OTC:CAGR) profile:

  • FactSet growth consensus through 2023: 5.5%
  • FactSet long-term growth consensus: 4.6%
  • Ycharts long-term growth consensus: 5.6%
  • Reuters 5-year growth consensus (factors in the recession): 7.0%
  • 20-year rolling growth rates: 3%-11%
  • Margin of error adjusted analyst consensus growth range: 3%-8%.

According to Peter Lynch, John Templeton, and Howard Marks, there’s about a 70% probability of that last figure being true.

BXP Long-Term Growth Consensus Over Time

(Source: Ycharts)

That consensus is naturally volatile over time, rising and falling with the strength of the economy.

For instance, BXP’s Ycharts long-term growth consensus fell to 3.5% in April, at the peak of the lockdown concerns. It’s since recovered to 5.6%.

In other words, uncertainty and margins of error aren’t something we ignore. We factor them in when making every single investment recommendations.

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(Source: F.A.S.T Graphs, FactSet Research)

In a year when the S&P 500 is expected to fall -29% according to FactSet and Reuters’… BXP could post modest growth, as well as in 2021 and 2022.

Note the dividend is expected to also grow at a small pace. And the payout ratio – already safe for this industry – continues to decline to even safer levels.

Market Determined Fair Value FFO Multiples

(Source: F.A.S.T Graphs, FactSet Research)

Over the last 20 years, outside of bear markets and bubbles, BXP has traded at 20x-21x FFO. Which makes it the market-determined fair value range.

Applying that to the 3%-8% CAGR consensus growth range, we can estimate a 5-year total return potential range of 16%-20% CAGR.

BXP 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

BXP 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If BXP grows as expected – as it historically does 91% of the time – and returns to historical fair value, then its 2.5 and 5-year consensus return potentials are 100% and 148%, respectively.

That’s 32% and 18% CAGR.

Note the word “potential” though.

Up through year six, fickle market sentiment can drive the majority of total returns. Which is why bubbles and bear markets can last far longer than most investors think.

But even keeping that in mind, we’re still seeing speculative green.

4: Valuation Profile: Best Valuation In 11 Years

(Source: F.A.S.T Graphs, FactSet Research)

BXP hasn’t traded at today’s valuation since the financial crisis.

To determine exactly how undervalued that makes it, let’s approximate:

  1. The long-term CAGR consensus of 4.6%
  2. A similar interest rate environment (since REIT fundamentals are more affected by interest rates).

A screenshot of a cell phone Description automatically generatedThere’s an 80% probability that BXP’s intrinsic value lies between $146 and $172. $156 is the average historical fair value based on 2020 consensus estimates. So that’s our reasonable estimate of what it’s worth this year.

Rating

Margin of Safety for speculative 9/11 Blue-Chip Quality Companies

2020 Price

2021 Price

Potentially Reasonable Buy

0%

$156

$161

Potentially Good Buy

20%

$125

$129

Potentially Strong Buy

30%

$109

$113

Potentially Very Strong Buy

40%

$94

$97

Potentially Ultra-Value Buy

50%

$78

$81

Currently

44%

$87.58

Source: Dividend Sensei

For speculative 9/11 quality blue-chips, we consider a 20% margin of safety to be sufficient for a “potentially good buy” rating. And since BXP is trading at a 44% discount, that makes it a potentially strong buy.

Thus the reason for the extremely attractive dividend and total return potentials.

5: One of the Potentially Best Long-Term High-Yield Decisions You Can Make

Let’s run Boston Properties through the DK Investment Decision Tool.

It’s based on the three tenets of prudent long-term investing, as well as valuation factors. When we assess BXP that way, here’s how it compares to buying the lower-yielding and far more overvalued S&P 500:

  • Valuation – 4/4 44% Undervalued = potentially very strong buy
  • Preservation of Capital – 7/7 A- credit rating, 2.5% long-term bankruptcy risk
  • Return of Capital – 10/10 25.3% of capital returned over the next 5 year via dividends versus 11.2% S&P 500 (128% more)
  • Return on Capital – 10/10 13.7% PWR versus 4% S&P 500 (228% more)
  • Relative Investment Score – 100% versus 73% S&P 500
  • Letter Grade – A+ (Exceptional) versus S&P 500 C (market-average)

Remember that even the most accurate total return models will have a 30% margin of error over five-year time periods. Nobody knows what the market sentiment will be five years in the future.

There’s also a 20%-40% probability that analysts will simply be wrong about how fast a company grows. That’s true even factoring in the historical margin of errors on forecasts.

As such, the Investment Decision Tool factors takes all of that into consideration.

BXP Decision Matrix

Goal

BXP

Why

Score

Valuation

Potentially Very Strong (though speculative) Buy

44% undervalued

4.00

Preservation of Capital

Excellent

A- credit rating, 2.5% long-term bankruptcy risk

7.00

Return of Capital

Exceptional

25.3% of capital returned over the next five years via dividends versus 11.1% S&P 500

10.00

Return on Capital

Exceptional

13.7% PWR versus 4% S&P 500

10.00

Relative Investment Score

100%

Letter Grade

A+ (exceptional)

S&P

73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

BXP is potentially one of the highest-quality and most prudent high-yield choices for conservative income investors in this overvalued market… just as long as you’re comfortable with the risk profile and position-size accordingly.

Risks to Consider (Why BXP Is Speculative and Not for Everyone)

The most important short-term risk, naturally, is the ongoing effect of social distancing.

As already mentioned, that’s going to continue “being a thing” even after we go back to work. Employees will have to work at least six feet apart.

Thomas says he, his team, and their tenants are already working on such issues. But this could continue weighing on investor perception until 2022, when the pandemic is expected to end.

With U.S. coronavirus cases surging… 32.9 million now on unemployment… and the U.S. not expected to fully recover until 2022 or even 2024…

BXP investors have to understand the kind of short-term volatility risk we’re facing.

We also can’t forget what cutoffs the credit ratings have on their rating outlooks.

In the 2018 rating upgrade report, Moody’s outlined what might cause it to change the REIT’s ratings:

A ratings upgrade is unlikely in the near term andwould require a net debt to EBITDA ratio at about 5.5x or lower, fixed charge ratio well above 4.0x, and secured leverage below 10%, all on a consistent basis. Strong fundamentals in the target markets and a substantially de-risked and modest development pipeline would be other important considerations.

Conversely, net debt to EBITDA remaining above 6.5x, effective leverage above 45%, and fixed charge coverage below 3.5x on a sustained basis could result in downward rating pressure. Other significant factors include secured leverage approaching 20% and large speculative development investments.

S&P says that if BXP’s leverage ratio surpasses 7, it may be downgraded a notch to BBB+. That would still be the strongest rating in the industry, however, representing a 5% 30-year bankruptcy risk.

Analysts don’t expect that to happen this year. But the pandemic is driving the economy, and the economy is ultimately driving BXP’s cash flows. Thus the reason it’s designated speculative.

For those who want to get in for the first time, we recommended avoiding over-weighting beyond 2.5% of your portfolio. If you own more than that, we recommend making BXP a “personal hold.”

Another thing to consider is volatility risk. To be blunt, volatility is only risk if you do a poor job of allocating your portfolio properly. Becoming a forced seller for emotional or financial reasons shouldn’t happen nearly as much as it does.

To know whether or not BXP in particular works you, you have to first understand how volatile it can be… incredibly so.

(Source: Ycharts)

The average annual volatility for individual companies is 26%… It’s 15% for the S&P 500… And BXP’s 25-year average annual volatility is 25%.

But in any shorter time frame, volatility can surge, resulting in some truly gut-wrenching temporary drops.

BXP Total Returns Since 1998

(Source: Portfolio Visualizer)

Its yield in 1998 was 5.1%. Its yield on cost today is 32.6%.

Investors who have owned BXP for 22 years now enjoy a 33% yield on cost, meaning they’re swimming in safe dividends. BXP has made investors a lot of money over the last 22 years… if they owned it as part of a diversified and prudently risk-managed portfolio.

Even accounting for its higher volatility, the reward/risk (Sortino) ratio was 9% superior to the S&P 500 – which is naturally less volatile because it consists of 500 companies, not one.

(Source: Portfolio Visualizer)

BXP, despite falling far more than the S&P 500 in the Great Recession, recovered far faster and ended up reaching record highs seven months earlier.

IF and only if investors owned it in the right kind of portfolio.

How to Correctly Own BXP in Your Portfolio

Jeremey Siegel, professor of finance at the University of Pennsylvania’s Wharton School – and a senior investment strategy advisor at WisdomTree – recommends a 75/25 stock/bond portfolio for most people.

We believe that the old 60/40 model just won’t be able to cut it anymore,” he said Monday on CNBC’s ETF Edge.

That’s because ‘this environment of low-interest rates’ isn’t going to change.

The dividend yield on the S&P 500 is currently higher than what 10-year Treasuries are offering at 1.5%. That’s not exactly an income-making comparison, which is why Siegel recommends ’75/25 as the equity/fixed-income allocation’ instead. That

… would be the best way for those approaching retirement to establish their assets to get enough income and gains so they can maintain spending through retirement.

So let’s use his suggestion as the basis of a BXP focused portfolio, first applying the appropriate risk-management rules.

For a 9/11 quality speculative blue-chip like BXP, that means a 2.5% position size or less. Whatever helps you sleep well at night and avoid panic-selling a wonderful company at an absurd valuation.

To show you the power of proper diversification and asset management, here’s a BXP-balanced 75/25 stock/bond portfolio consisting of

  • 2.5% BXP
  • 72.5% VIG (blue-chip dividend growth ETF)
  • 12.5% BIL (1-3 month U.S. T-bills = cash equivalent)
  • 12.5% SPTL (long-duration U.S. Treasuries = recession hedge)

If we were building a portfolio like this today, we’d replace:

  • VIG with SCHD
  • BIL with GBIL
  • SPTL with EDV

That’s because they existed in January 2008 at the start of the financial crisis. Thus, we can see how BXP – which crashed 68% in the great recession – could be safely owned during a wealth-destroying inferno such as that.

All the same…

(Source: Portfolio Visualizer)

The Great Recession was the second-biggest U.S. market crash in history, only bested by the Great Depression’s 90% crash.

Balanced BXP Portfolio Since January 2008 (Annual Rebalancing)

(Source: Portfolio Visualizer)

Despite being made up of 75% stocks, including 2.5% in the very volatile BXP… this portfolio was no more volatile than a more conservative 60/40 stock/bond portfolio over the last 12 years.

  • 2.2% yield in 2008
  • 4.2% yield on cost in 2020
  • 5.3% CAGR income growth (including low-yielding bonds that never grow interest payments).

(Source: Portfolio Visualizer)

This diversified balanced portfolio:

  • Fell 2% less during the Great Recession (despite owning 15% more stocks)
  • fell 1% less during the March crash
  • Hasn’t suffered a non-recessionary correction in 12 years.

THIS is what we mean by a “well-diversified and prudently risk-managed portfolio.”

The comment sections of these articles are always full of people saying “there is no such thing as a SWAN [sleep well at night] portfolio.”

Those people don’t bother to read the article though. Because we clearly just showed you how to construct one – and one where BXP can safely be held while owning a significant amount of stocks… AND enjoying superior volatility-adjusted returns relative to a 60/40 stock/bond portfolio.

(Source: Portfolio Visualizer)

If you could consistently achieve a 7.6% CAGR long-term return, that would allow for a 10.6% annual withdrawal rate. And that in turn could allow smaller retirement portfolios to fund a comfortable retirement.

Not that we’re saying that 7.6% CAGR is likely in the coming years. Only that this balanced BXP portfolio is an example of how smart portfolio construction and prudent risk-management can make an enormous difference.

Market timing is something that even most Wall Street professionals can’t do consistently well. And retail investors are so terrible at it that, over the last 20 years, they’ve achieved 0.3% inflation-adjusted returns.

A diversified and prudently risk-managed portfolio is your highest probability/lowest risk chance to achieve your financial goals.

Bottom Line: It’s The Best Time in 11 Years to Buy the King of Office REITs

Now, we’re NOT saying BXP has bottomed and can only go up from here.

What we can tell you is that, at 13x FFO, BXP is trading at its best valuation in 11 years. That prices in about 2.3% CAGR long-term growth according to the Graham/Dodd fair value formula.

You can compare that to a 3%-8% CAGR consensus return range and 4.6% CAGR long-term consensus growth forecast.

This means that BXP, the strongest and best-run office REIT in America – at its approximate 44% discount to historical fair value – represents a potentially exceptional long-term high-yield dividend growth opportunity.

From today’s extremely low valuation, BXP can realistically deliver about 14% CAGR probability-weighted expected returns over the next five years.

That’s more than 3x what the overvalued S&P 500 is expected to deliver.

Better yet, it can do that while providing more than double the current yield… protected by the strongest balance sheet… with the best property base… managed by the most skilled and experienced management team in the industry.

Within a well-diversified and prudently risk-managed portfolio, it looks like a smart play for conservative income investors right now.

Source

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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Disclosure: I am/we are long BXP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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