BXP, Inc. quarterly report, Q3 FY2017

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BXP, Inc. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. BXP is a REIT whose operating business is conducted primarily through Boston Properties Limited Partnership (BPLP). Unless noted, financial amounts below are in U.S. dollars; millions are rounded.

Business context and period results

BXP owned or held interests in 177 commercial properties totaling approximately 49.8 million net rentable square feet, primarily Class A office space. Its principal markets are Boston, Los Angeles, New York, San Francisco and Washington, DC. The portfolio included 10 properties under construction or redevelopment.

Financial and operating metrics

  • Q3 revenue: $657.7 million, up 5.2% from $625.2 million. Rental revenue was $633.8 million.
  • Q3 earnings: Operating income was $233.7 million versus $157.6 million; net income attributable to BXP common shareholders was $117.3 million, or $0.76 per diluted share, versus $76.8 million, or $0.50.
  • Q3 property performance: Company-reported NOI, a non-GAAP measure, was $401.1 million, up 5.0%. Same-property NOI increased 4.0%. In-service occupancy was 90.2% at September 30, down from 90.8% at June 30, primarily due to expected expirations at 399 Park Avenue.
  • Nine-month revenue and earnings: Revenue was $1.947 billion, up 1.7%. Net income attributable to BXP common shareholders was $348.1 million, down 2.0%, and diluted EPS was $2.26 versus $2.31. NOI was $1.202 billion, down 0.4%; same-property NOI was down 0.24%.
  • Cash flow and liquidity: Nine-month operating cash flow was $592.7 million, compared with $743.8 million in 2016. Investing cash outflow was $622.4 million, versus $1.104 billion; financing cash inflow was $165.9 million, versus $56.2 million. Cash and cash equivalents were $493.1 million at quarter-end. Management reported approximately $2.0 billion available under the credit facility as of November 2, 2017, with no borrowings then outstanding.
  • Debt: Consolidated debt was $10.235 billion, all fixed-rate, with a 4.13% GAAP weighted-average rate and 6.1-year weighted-average maturity. Consolidated debt was 32.42% of consolidated market capitalization. BXP’s share of debt, including its share of unconsolidated joint-venture debt and excluding partners’ shares of consolidated debt, was $9.616 billion. These are company-presented measures.
  • Dividends: Common dividends were $0.75 per share for Q3, versus $0.65 a year earlier. The 5.25% Series B preferred stock remained outstanding.

Material changes versus comparable periods

  • Q3 common-shareholder earnings rose substantially, while nine-month earnings declined modestly. Q3 operating results benefited from lower depreciation and amortization, including the absence of approximately $50.8 million of accelerated depreciation recorded in 2016 for the 601 Lexington Avenue redevelopment. Lower interest expense also supported the quarter.
  • Nine-month interest expense fell $32.2 million year over year, while gains on real-estate sales fell $73.8 million. 2016 gains included sales of 415 Main Street and Broad Run Business Park; 2017 property sales generated approximately $6.8 million of BXP gains.
  • Same-property rental revenue increased, but operating expenses also rose: nine-month same-property rental revenue was up 1.1%, while real-estate operating expenses increased 3.5%, primarily from taxes and other costs in New York CBD properties.
  • Q3 leases executed totaled approximately 2.6 million square feet. Revenue recognition commenced on approximately 1.3 million square feet of second-generation leases; net rents on the measured leases increased 1.54%. Management noted increased construction costs and tenant allowances, although Q3 transaction costs per square foot were affected by several large renewals with lower allowance costs.

Outlook, management commentary and risks

  • Management described U.S. economic growth as tepid but consistent, expected reasonably healthy operating and financial-market conditions, and did not expect a sharp rise in long-term interest rates. It cited uncertainty around Federal Reserve policy and tax reform.
  • The development and redevelopment pipeline totaled approximately 5.7 million square feet, with BXP’s estimated share of total budgeted costs of $3.1 billion and approximately $1.4 billion still to invest. About 75% of commercial space was pre-leased as of November 2. Management said available cash, facility capacity, financings and asset-sale proceeds were expected to support existing commitments and attractive opportunities.
  • New build-to-suit commitments included a 20-year, fully leased Marriott headquarters project and a 15-year TSA headquarters lease. Management estimated BXP’s share of costs for the two projects at approximately $525 million; construction on Marriott’s project was expected to begin in 2018. Salesforce Tower was 87% leased as of November 2, with first occupancy expected in January 2018.
  • Management estimates included 2017 net interest expense of $355–$360 million and 2018 of $375–$390 million, both net of estimated capitalized interest of $50–$60 million; development and management services revenue of $32–$34 million in 2017 and $29–$34 million in 2018; and G&A of $110–$115 million in 2017 and $115–$120 million in 2018. The filing also expected hotel NOI of $13–$15 million for each of 2017 and 2018. These are estimates, not guarantees.
  • The $2.3 billion refinancing of 767 Fifth Avenue carries a 3.43% fixed rate and matures in 2027; it replaced debt with higher stated rates and near-term maturity. The renewed credit facility increased revolving capacity to $1.5 billion, added a $500 million delayed-draw facility and extended maturity to 2022.
  • Key risks include leasing and occupancy weakness, higher tenant-improvement and construction costs, development delays or overruns, financing and interest-rate conditions, joint-venture partner performance, and uninsured or underinsured catastrophic losses. The Annapolis Junction Building One joint-venture loan remained in default, was subject to the default interest rate, and the venture was not current on debt service. BXP also disclosed guarantees, including a maximum $222.7 million funding obligation for reserves tied to the 767 Fifth Avenue refinancing and completion/financing-related guarantees for development ventures.
  • The remaining approximately $27.6 million Lehman Brothers bankruptcy claim was not recorded as a recovery; timing and amount of any further proceeds are uncertain. Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal control.

Important facts for investors to verify

  • Whether leasing and occupancy recover from the 90.2% quarter-end level, especially at 399 Park Avenue, and whether replacement tenants there generate revenue as expected.
  • Progress on Salesforce Tower leasing and occupancy, and on the Marriott, TSA and other development schedules, budgets and pre-leasing.
  • Whether the approximately $1.4 billion remaining development investment and planned tenant-related costs remain financeable without materially increasing leverage or diluting earnings.
  • The status and potential exposure of the Annapolis Junction Building One loan default, disclosed guarantees, and BXP’s share of joint-venture debt.
  • Actual full-year results against management’s interest expense, G&A, services revenue and hotel NOI estimates; the filing does not provide a clear company-wide EPS or FFO guidance target.