BXP, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 7, 2019. BXP is a REIT that owns and operates primarily Class A office properties in Boston, Los Angeles, New York, San Francisco and Washington, D.C. Its operating partnership, BPLP, conducts substantially all business; BXP owned approximately 89.6% of BPLP at quarter-end. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial and operating highlights
| Metric | Q2 2019 / June 30, 2019 | Comparison |
|---|---|---|
| Total revenue | $733.7 million | Up 10.4% from $664.5 million in Q2 2018 |
| Net income attributable to BXP common shareholders | $164.3 million; diluted EPS $1.06 | Up from $128.7 million and $0.83 |
| Net income attributable to BXP common shareholders, six months | $262.4 million; diluted EPS $1.69 | Down from $304.7 million and $1.97 |
| Company share of NOI, a non-GAAP measure | $454.3 million for Q2; $859.4 million for six months | Up 11.7% and 14.4%, respectively |
| Operating cash flow, six months | $565.6 million | Versus $560.8 million |
| Cash and cash equivalents | $1.087 billion; plus $75.9 million held in escrows | At June 30, 2019 |
| Consolidated debt | $11.846 billion | 95.8% fixed-rate; 3.95% weighted-average GAAP interest rate; 5.8-year weighted-average maturity |
| Liquidity access | Approximately $1.5 billion available under BPLP’s revolving facility | No revolver borrowings at June 30 |
| Occupancy | 93.4% for in-service office and retail properties | Up 0.5 percentage points from March 31, 2019 |
Q2 company-share NOI rose 11.7%; same-property NOI increased 8.4% for the six months. Same-property lease revenue excluding termination income grew 6.5% for the six months, reflecting higher average revenue per square foot and occupancy; same-property operating expenses increased 4.4%, including higher real estate taxes and repairs. The company declared a quarterly common dividend of $0.95 per share, also paid per common OP unit.
Material changes and unusual items
- Six-month common-shareholder earnings fell 13.9% year over year, principally reflecting much smaller real estate sale gains than in 2018. The comparison was partly offset by higher operating performance and a $47.8 million gain recognized through income from unconsolidated joint ventures on the sale of 540 Madison Avenue.
- Q2 earnings increased year over year, with the 540 Madison joint-venture gain a significant contributor. The company’s share of sale proceeds was approximately $107.1 million after transaction costs; the buyer assumed the property’s $120 million mortgage.
- A $24.0 million BXP impairment loss ($22.3 million at BPLP) was recorded in Q1 for One Tower Center, which was sold in June for $38.0 million. Three property sales during the first half generated approximately $61.8 million of net proceeds; reported gains and losses were modest overall.
- On January 1, 2019, BXP adopted the new lease-accounting standard. It recognized right-of-use assets and lease liabilities, and presented lease revenue differently; prior-year comparative statements were not recast. Consequently, revenue-line comparisons are affected by reclassifications, although total revenue is reported.
- Q2 included the start of redevelopment at 325 Main Street, with approximately $9.9 million of accelerated depreciation associated with demolition. The project is a 420,000-square-foot office development, approximately 90% pre-leased to Google under a 15-year lease.
Outlook, management commentary and risks
Management described economic conditions as stable and generally favorable, while noting slowing U.S. and global growth. It cited strong leasing in most core markets, low interest rates and successful development activity, but did not provide specific earnings or revenue guidance. Overall office and retail occupancy reached its highest level since 2014, according to management. In Q2, BXP signed leases for approximately 2.4 million square feet; approximately 814,000 square feet of second-generation leases commenced, with net rental obligations about 25% above the prior leases for the qualifying space.
- The construction and redevelopment pipeline comprised 12 projects totaling approximately 5.7 million square feet, with estimated BXP share of total cost of approximately $3.2 billion and approximately $1.5 billion of equity still to invest. About 81% of commercial space was pre-leased as of August 2, 2019.
- After quarter-end, BXP commenced the approximately 480,000-square-foot 2100 Pennsylvania Avenue project under a 75-year ground lease. Approximately 66% of its office space was pre-leased; estimated total investment was approximately $360 million.
- Management expected cash, the revolving facility, debt financing and asset sales to fund committed development and near-term needs, while retaining capacity for attractive opportunities. It planned to continue selective sales of non-core properties, subject to market conditions.
- Key disclosed risks include weaker economic or tenant conditions, leasing and occupancy pressure, development delays and cost overruns, capital-market access and interest-rate changes, joint-venture partner performance, uninsured losses and natural disasters, cyber incidents, and maintaining REIT qualification. Earthquake coverage may be insufficient; the company also notes risks related to terrorism insurance, including its captive insurer and potential federal recoupment.
- The company reported compliance with the financial covenants on its unsecured senior notes at June 30. It also disclosed guarantees and contingent development obligations, including a maximum $79.8 million reserve-funding guarantee for the General Motors Building joint venture; no liability was recorded for that contingent guarantee.
Important facts for investors to verify
- How much of Q2 and six-month earnings growth reflects recurring property operations versus the 540 Madison gain, lease-termination income and other nonrecurring items.
- Whether the 81% pre-leasing level and remaining equity requirement across the development pipeline translate into timely delivery, planned costs and expected returns.
- The effect of higher property taxes, leasing costs, tenant improvements and lease-accounting presentation changes on margins and cash generation.
- Debt maturities, refinancing terms and interest-rate exposure, including the $500 million variable-rate term loan and off-balance-sheet joint-venture debt; BXP’s share of joint-venture debt was approximately $865.9 million.
- Dividend coverage and funding needs, including the $0.95 quarterly common dividend and BXP’s REIT distribution obligations. The filing provides no specific forward earnings guidance.
NOI and leverage-to-market-capitalization figures are company-defined non-GAAP measures and may not be comparable with similarly named measures reported by other REITs.