Boston Properties’ Higher FFO Payout Ratio, or Why Dividends Matter



Why dividends matter

REITs (real estate investment trusts) like Boston Properties (BXP) must pay at least 90% of their taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rent paid by tenants who occupy their properties. Rental rates usually rise during periods of inflation because many lease rates are tied to inflation, and so as a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.

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Special dividend in 2014

As mentioned in the previous article, Boston Properties’ FFO (funds from operations) increased to $5.26 per share in 2014, compared to $4.91 per share in 2013. Bolstered by its higher FFO, the company increased its dividend by 46.4% to a total of $7.10 per common share in fiscal 2014, compared to $4.85 per share in 2013.

This figure represents the highest dividend paid by the company during the past seven years. The higher dividend in 2014 was mainly due to a special dividend of $4.50 per share in 2014. Now, with the increase in the first three fiscal quarters of 2015 dividend to $1.95, Boston Properties is on course to pay around $2.60 per share in fiscal 2015.

Higher FFO payout ratio

An REIT’s FFO payout ratio is its dividend declared per common share divided by its diluted FFO per common share for a given period. A company’s FFO payout ratio provides investors with relevant and useful information because it measures the portion of FFO being declared as dividends to shareholders.

We should note, then, that Boston Properties’ FFO payout ratio, which was 42% in 2011, rose to 98.2% in 2013 and to 134.6% in 2014. So far in 2015—excluding the effect of a higher dividend—Boston Properties’ FFO payout is still above its level of 90% in 2014.

Peer group comparisons

Boston Properties’ FFO payout ratio is higher than most of its peers. For example, Columbia Property Trust (CXP) offered an FFO payout ratio of ~62.2%, and Highwoods Properties (HIW) offered a ratio of ~56.8%. By contrast, Kilroy Realty Corporation (KRC) offered a ratio of 46.4%.

The SPDR DJ Wilshire Global Real Estate ETF (RWO) invests ~1.9% of its total portfolio in Boston Properties.

But what about Boston Properties’ debt position? Continue to the next part of this series for the inside look.


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