BXP, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
For the three months ended March 31, 2017, Boston Properties, Inc. (BXP) reported jointly with Boston Properties Limited Partnership (BPLP), its operating partnership. BXP is a REIT and owned approximately 89.5% of BPLP. The company primarily owns, leases, manages and develops Class A commercial real estate in Boston, Los Angeles, New York, San Francisco and Washington, D.C. At quarter-end, it owned or held interests in 174 properties totaling approximately 47.7 million net rentable square feet; eight projects were under construction or redevelopment.
Financial and operating metrics
Unless otherwise indicated, amounts are in millions of dollars. BXP and BPLP results are substantially consolidated and should not be added together.
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $632.2 | $666.0 | Down 5.1%; rental revenue was $618.3 versus $650.5 |
| Operating income | $206.2 | $250.4 | Down 17.6% |
| Net income | $115.6 | $216.2 | Down 46.6% |
| Net income attributable to BXP common shareholders | $97.1 | $181.7 | Down 46.6%; diluted EPS was $0.63 versus $1.18 |
| Net operating income (NOI, non-GAAP) | $390.4 | $432.5 | Down 9.7% |
| Funds from operations attributable to BXP shareholders (FFO, non-GAAP) | $228.4 | $250.7 | Down 8.9% |
| Operating cash flow | $246.5 | $349.0 | Down $102.5 |
| Cash and cash equivalents at period-end | $302.9 | — | $356.9 at December 31, 2016 |
| Consolidated debt at March 31 | $9,886.8 | $10,160.4 | Debt-to-consolidated-market-capitalization ratio was 30.09% |
Interest expense declined $9.8 million to $95.5 million, mainly reflecting repayment of mortgage debt and higher capitalized interest. Quarter-end debt included $7.25 billion of unsecured senior notes, $2.05 billion of mortgage debt, $306.7 million of mezzanine debt and $105.0 million drawn on the credit line. Approximately 98.9% of consolidated debt was fixed-rate; the weighted-average debt maturity was 4.7 years. Separately, BXP’s share of debt, adjusted for its joint-venture interests, was approximately $9.07 billion.
Quarter-end occupancy of in-service properties was 90.4%, up from 90.2% at December 31, 2016. Same-property average occupancy was 91.4%, compared with 91.9% a year earlier. Same-property rental revenue increased 2.3%, but same-property NOI fell 9.4%, principally because of much lower lease-termination income and higher operating expenses. The company reported 565,188 square feet of leases executed during the quarter and 914,880 square feet of second-generation leases commencing; qualifying leases produced a 19.54% increase in net rents.
Material changes versus the prior comparable period
- Net income and EPS were sharply lower in part because Q1 2016 included a $67.6 million real-estate sale gain, compared with $0.1 million in Q1 2017. The prior-year period also included $51.3 million of lease-termination income, versus $5.4 million in Q1 2017.
- Despite a 2.3% increase in same-property rental revenue, same-property NOI declined 9.4%. Same-property real-estate operating expenses rose 2.9%, including higher property taxes, while average occupancy eased.
- Operating cash flow decreased 29%. Investing cash use increased to $262.6 million from $109.4 million, largely reflecting development and capital spending and the absence of the prior-year property-sale proceeds. Financing cash flow shifted to a $37.9 million use from $642.3 million provided, when the prior-year period included $997.1 million of senior-note proceeds.
- Quarterly common dividends increased to $0.75 per share from $0.65. The dividend declared for Q1 2017 was payable April 28, 2017.
Outlook, management commentary, risks and unusual items
- Management cited sluggish U.S. economic growth but said employment and market conditions supported continued growth. Its priorities include leasing available and development space, completing current projects, repositioning selected properties, disciplined investment and managing debt maturities. It expects to sell a modest number of non-core assets in 2017, subject to market conditions.
- The eight-project development and redevelopment pipeline represented approximately 4.0 million square feet and an estimated company-share investment of $2.25 billion; approximately $790 million of equity remained to be invested. About 54% of commercial space was pre-leased as of May 3, 2017. Management reported sufficient capital to complete the projects, citing approximately $346 million cash and $1.7 billion of credit-facility availability as of that date.
- On April 24, 2017, BPLP expanded its revolving credit commitment from $1.0 billion to $1.5 billion, extended maturity to April 2022, reduced variable borrowing margins and added a $500 million delayed-draw facility. The delayed-draw facility was undrawn at closing.
- A consolidated joint venture with a 60% BXP interest entered into a commitment for $2.3 billion of 10-year fixed-rate financing for 767 Fifth Avenue at 3.43%, expected to close by the end of June 2017. After costs and repayment of existing debt, estimated proceeds to the venture were approximately $650 million, including about $390 million attributable to BXP. The venture paid $14.4 million to settle interest-rate swaps; management estimated an effective financing rate of approximately 3.65%. Completion and terms were not assured. The property’s existing mortgage and mezzanine debt, together approximately $1.6 billion of principal, matured in October 2017; the company also disclosed $180 million of outside-partner notes maturing in June 2017.
- Management estimates for 2017 included net interest expense of $355–$368 million, general and administrative expense of $110–$115 million, development and management services revenue of $28–$33 million, and hotel NOI of $13–$15 million. These are estimates, not guarantees; the filing provides no clear full-year revenue, earnings or FFO guidance.
- A joint venture’s Annapolis Junction Building One loan remained in default after a loan-to-value covenant breach; the lender imposed a default rate, and the venture was not current on debt-service payments. This may pressure the property’s value and the investment.
- Other disclosed risks include construction cost, schedule, leasing and development exposure; interest-rate, refinancing and joint-venture risks; tenant and economic weakness; and uninsured catastrophe losses. Earthquake coverage may be insufficient, and the company’s captive insurer is a form of self-insurance. The company also disclosed a remaining approximately $28 million allowed Lehman Brothers lease-rejection claim, but recorded no estimated recovery because timing and proceeds are uncertain.
- Accounting changes included adoption of a stock-compensation forfeiture policy and early adoption of guidance clarifying the definition of a business. The company was still assessing the effects of upcoming revenue-recognition and lease-accounting standards.
Most important facts for investors to verify
- Whether the $2.3 billion 767 Fifth Avenue refinancing closed on the expected terms and by the expected date, and how the refinancing proceeds and swap settlement affected debt, liquidity and interest expense.
- Current debt maturities, covenant compliance and the status of the Annapolis Junction loan default, including any effect on BXP’s share of joint-venture exposure.
- Development costs, remaining equity needs, pre-leasing and delivery schedules—particularly for Salesforce Tower and other large projects—and whether leasing converts into expected cash flows.
- Occupancy, leasing spreads and same-property NOI trends, including whether higher property taxes and New York leasing concessions persist.
- Actual performance against management’s 2017 expense and hotel/service-revenue estimates, and the company’s subsequent dividend decisions.
- Reconciliation of GAAP earnings with non-GAAP NOI and FFO; these measures are company-defined and may not be comparable with other REITs.