BXP, Inc. (Boston Properties) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. BXP is a REIT that conducts substantially all operations through Boston Properties Limited Partnership (BPLP); figures below generally refer to the consolidated company. Dollar amounts are in millions unless noted.
Business context
BXP owns, operates and develops primarily Class A office properties in major U.S. markets. At quarter-end it owned or held interests in 179 properties totaling about 50.3 million rentable square feet; 13 projects totaling about 6.5 million square feet were under construction or redevelopment. BXP owned approximately 89.6% of BPLP.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $661.2 | $632.2; up 4.6% |
| Operating income | $208.2 | $206.2; up 0.9% |
| Net income attributable to BXP common shareholders | $176.0; $1.14 per diluted share | $97.1; $0.63 per diluted share |
| Net operating income (NOI, non-GAAP) | $401.5 | $390.4; up 2.8% |
| FFO attributable to BXP common shareholders (non-GAAP) | $230.6 | $228.4; up 1.0% |
| Cash from operating activities | $225.8 | $239.9 |
| Cash and cash equivalents, plus cash held in escrows | $455.1 at March 31 | $354.2 at March 31, 2017 |
Q1 net income included a $96.4 million gain on the sale of 500 E Street, S.W. Excluding that gain, income before sale gains was $119.9 million versus $115.4 million in Q1 2017. The marked increase in reported earnings therefore largely reflects a property sale, while NOI and FFO grew more modestly. Dividends were $0.80 per common share, versus $0.75 a year earlier.
Same-property NOI increased 1.3%. Same-property rental revenue rose 2.6%, while real estate operating expenses increased 5.1%, including higher taxes and utilities. In-service occupancy was 90.5%, down from 90.7% at December 31, 2017.
At March 31, total assets were $19.6 billion and total liabilities were $11.4 billion. Consolidated debt was $10.34 billion: $7.25 billion of unsecured senior notes, $2.97 billion of mortgage debt and $115 million drawn on the credit facility. Debt was 32.56% of consolidated market capitalization; BXP’s share-of-debt ratio was 31.29%. Approximately 98.9% of consolidated debt was fixed-rate, with a 4.08% GAAP weighted-average rate and 6.1-year weighted-average maturity. Cash from operations was below the prior-year quarter; investing used $183.8 million and financing used $92.2 million.
Changes, outlook and management commentary
- Revenue growth reflected higher rents and recoveries, new space placed in service, and increased hotel and development-services revenue. Same-property average occupancy improved to 91.7% from 91.4%, and average revenue per square foot increased.
- Q1 leasing activity included 2.1 million square feet of leases executed and 1.2 million square feet of second-generation leases commencing. On qualifying recent second-generation leases, net rents increased 12.9%; weighted-average lease term was 95 months.
- The company sold 500 E Street, S.W. for net cash proceeds of $116.1 million and recorded the gain noted above. Management expects a modest number of additional non-core asset sales in 2018, subject to market conditions.
- The development pipeline had an estimated total investment of $3.51 billion, with approximately $1.42 billion of BXP’s share remaining to be funded; 83% of commercial space was pre-leased as of May 2. Management said cash, credit availability and financings were expected to support existing commitments.
- After quarter-end, BXP agreed to acquire Santa Monica Business Park for approximately $616 million, subject to closing conditions, and BPLP drew the $500 million delayed-draw facility. Management anticipated the acquisition could close in Q2 or Q3 2018 and was evaluating financing, including possible debt or a joint-venture partner.
- 2018 estimates disclosed include net interest expense of $365–$380 million, hotel NOI of $13–$15 million, development and management-services revenue of $31–$36 million, and general and administrative expense of $118–$121 million. The filing gives no full-year revenue, earnings or FFO guidance.
- Management cited positive economic conditions and expressed optimism, while noting rising construction costs and modestly higher long-term interest rates. Priorities include leasing, completing developments, disciplined investment, and maintaining liquidity. The overall occupancy and market conditions vary by region; Washington, D.C. CBD leasing remained competitive amid increased supply.
Risks, contingencies and unusual items
- A joint venture’s Annapolis Junction Building One loan was in default: the lender had elected to apply a default rate, and property cash flows were insufficient for debt service and needed capital improvements. The joint venture was not current on debt service and was not prepared to fund further shortfalls.
- BXP guaranteed up to approximately $171.7 million of specified tenant-related reserve obligations for the 767 Fifth Avenue joint venture; no liability was recorded for this contingent obligation at quarter-end. Other development and financing guarantees also apply.
- The filing identifies exposure to economic and leasing weakness, interest-rate and financing conditions, development delays and cost overruns, joint-venture partner performance, cyber disruptions, uninsured losses, and terrorism and earthquake risks. The company notes that earthquake and other catastrophic-event coverage may be insufficient or unavailable on acceptable terms.
- The company had no outstanding hedges at March 31, but continued to reclassify about $1.7 million per quarter from previously settled interest-rate contracts, primarily to interest expense.
- Adoption of the new revenue standard had no material overall impact, but changed timing for certain development-services revenue and added approximately $2.9 million of gross revenue and matching expense for payroll reimbursements. The lease-accounting standard was expected to be adopted in 2019; its impact was still being assessed.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of the earnings increase is attributable to the $96.4 million property-sale gain, versus recurring NOI and FFO growth.
- Leasing, occupancy, rent growth and expense trends by market, especially the effect of higher operating costs and construction costs.
- Remaining funding needs, pre-leasing and delivery timelines for the $3.51 billion development pipeline, and whether Santa Monica Business Park closes and how it is financed.
- Status and potential exposure of the Annapolis Junction loan default, joint-venture debt and guarantees, including the 767 Fifth Avenue contingent funding obligation.
- Liquidity and leverage after the $500 million delayed-draw borrowing, and sensitivity to higher rates, refinancing needs and future debt maturities.
- Whether stated 2018 expense and contribution estimates are achieved; these are selected outlook items, not full-year earnings guidance.