BXP, Inc. (Boston Properties) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; it also provides fourth-quarter operating updates. BXP is a REIT that conducts substantially all business through Boston Properties Limited Partnership (BPLP). The portfolio is concentrated in Boston, Los Angeles, New York, San Francisco and Washington, D.C.
Business and operating context
At year-end, BXP owned or held interests in 179 commercial properties totaling approximately 50.3 million rentable square feet, including 12 projects under construction or redevelopment. The portfolio was primarily Class A office space. In-service occupancy was 90.7%, compared with 90.2% a year earlier; average annualized revenue per square foot rose to $63.66 from $62.54. The average remaining lease term was about 7.3 years.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $2.602 billion | $2.551 billion | +2.0% |
| Operating income | $908.1 million | $825.8 million | +10.0% |
| Net income attributable to BXP common shareholders | $451.9 million | $502.3 million | -10.0% |
| Diluted EPS | $2.93 | $3.26 | Down |
| Net income before gains on real estate sales | $554.8 million | $489.4 million | +13.4% |
| FFO attributable to BXP common shareholders | $959.4 million | $927.7 million | +3.4% |
| Net cash provided by operating activities | $907.4 million | $1.037 billion | Down $129.4 million |
| Cash and cash equivalents at year-end | $434.8 million | $356.9 million | Up $77.9 million |
FFO and NOI are non-GAAP measures; the filing cautions they are supplements to, not substitutes for, GAAP results. Portfolio NOI was $1.605 billion, nearly unchanged from $1.601 billion. Same-property NOI was effectively flat: higher rental revenue was largely offset by higher operating expenses and substantially lower termination income. Cash used in investing was $897.8 million, mainly for construction, improvements and tenant costs; financing activities provided $68.2 million. The regular quarterly common dividend increased from $0.75 to $0.80 in December 2017.
Debt, liquidity and capital commitments
- Year-end consolidated debt was $10.27 billion, with a 4.08% GAAP weighted-average interest rate and 6.4-year weighted-average maturity. Approximately 99.6% was fixed-rate. Consolidated debt was 31.29% of market capitalization under the company’s stated calculation.
- BPLP’s credit facility was expanded to $1.5 billion revolving capacity plus a $500 million delayed-draw facility, with maturity extended to April 2022. Year-end borrowings were $45 million; approximately $1.8 billion remained available as of February 22, 2018.
- Management reported no consolidated debt maturing in 2018 and $700 million of senior notes due in October 2019. It reported approximately $301 million of cash as of February 22, 2018.
- The development and redevelopment pipeline totaled approximately $3.37 billion of BXP’s share of estimated investment, with about $1.49 billion of future equity requirements at year-end. Approximately 81% of commercial space in those projects was leased or pre-leased as of February 22, 2018.
Material changes, outlook and notable items
- Common-shareholder net income declined despite higher operating income and pre-sale-gain income, principally because gains on real estate sales fell to $7.7 million from $80.6 million. BXP’s 2016 results also included a $59.4 million gain from selling an interest in an unconsolidated joint venture.
- Interest expense declined to $374.5 million from $412.8 million. BXP refinanced the General Motors Building debt with a $2.3 billion, 10-year fixed-rate loan at 3.43%; the prior debt’s weighted-average stated rate was about 5.96%. It also issued $850 million of 3.20% notes due 2025 and redeemed $850 million of 3.70% notes due 2018, recording a $13.9 million early-extinguishment loss.
- Construction costs and tenant improvement costs were increasing. Management emphasized pre-leasing new developments, completing existing projects, managing debt maturities, and selectively pursuing acquisitions and asset sales. It expected to sell a modest number of non-core assets in 2018, subject to market conditions.
- Management described U.S. economic conditions as stable and expected reasonably healthy operating and financial markets, while noting uncertainty around interest rates and the effects of 2017 tax reform. It forecast 2018 net interest expense of $365–$380 million, hotel NOI of $13–$15 million, development and management services revenue of $29–$34 million, and general and administrative expense of $115–$120 million.
- Market commentary was mixed: management described San Francisco and Cambridge as strong, while citing competitive leasing conditions and limited near-term rent growth in New York and Washington, D.C. In the fourth quarter, 2.4 million square feet of leases were signed; second-generation leases commencing that quarter produced a 0.2% increase in net rents in aggregate.
- Material risks include concentration in five markets and office properties, tenant and lease rollover exposure, development cost/delivery risk, refinancing and interest-rate risk, and uninsured catastrophe or environmental losses. Unconsolidated joint ventures had approximately $1.44 billion of debt, of which BXP’s proportionate share was about $604.8 million. One joint venture property, Annapolis Junction Building One, remained in mortgage default, with the lender charging a default rate.
- Potential contingent exposures include a guarantee of up to approximately $193.4 million for tenant-related reserves at 767 Fifth Avenue and completion/financing guarantees for certain development ventures. Management said ordinary-course legal proceedings were not expected to materially affect financial position, results or liquidity. The auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Reconcile the decline in GAAP EPS and common-shareholder net income with growth in pre-sale-gain income, FFO and operating income; assess how much reported results depend on non-recurring gains and termination income.
- Track leasing, occupancy, rent spreads and tenant improvement costs, especially in New York and Washington, D.C., and monitor major tenant and government-related exposure.
- Test the development pipeline’s remaining funding needs, pre-leasing, construction-cost assumptions and delivery schedules against the company’s liquidity and stated outlook.
- Review debt maturities, credit-facility availability, covenant headroom, joint-venture debt and the status of the Annapolis Junction default; distinguish consolidated debt from BXP’s share of joint-venture debt.
- Confirm future dividend capacity against operating cash flow, development spending and REIT distribution requirements, and monitor the effects of tax and lease-accounting changes.