BXP, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. BXP is a REIT and conducts substantially all operations through Boston Properties Limited Partnership (BPLP), which BXP owned approximately 89.5% of at year-end.
Business context and portfolio
BXP owns, develops and manages primarily Class A office properties concentrated in Boston, Los Angeles, New York, San Francisco and Washington, DC. At year-end it owned or had interests in 174 properties totaling approximately 47.7 million rentable square feet; eight properties totaling approximately 4.0 million square feet were under construction or redevelopment.
Financial and operating performance
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue | $2.551 billion | $2.491 billion | Up 2.4% |
| Net income attributable to BXP common shareholders | $502.3 million | $572.6 million | Down 12.3%; lower property-sale gains were a major factor |
| Income before gains on real estate sales | $489.4 million | $424.0 million | Up 15.4% |
| Diluted earnings per share | $3.26 | $3.72 | Down 12.4% |
| Funds from Operations (FFO), attributable to BXP | $927.7 million | $823.7 million | Up 12.6%; non-GAAP measure |
| Net operating income (NOI) | $1.601 billion | $1.564 billion | Up 2.4%; non-GAAP measure |
| Cash from operating activities | $1.037 billion | $799.4 million | Up $237.5 million |
| Cash used in investing activities | $1.329 billion | $280.2 million | Higher development spending and joint-venture contributions |
| Cash and cash equivalents at year-end | $356.9 million | $723.7 million | Down $366.8 million |
| Consolidated debt at year-end | $9.796 billion | $9.189 billion | All consolidated debt was fixed-rate; weighted-average stated rate 4.50% |
| In-service portfolio occupancy | 90.2% | 91.4% | Down 1.2 percentage points |
Average annualized revenue per square foot increased to $62.54 from $60.89. Same-property rental revenue increased 2.4%, while same-property average occupancy declined from 92.0% to 91.4%. Reported net income was also affected by real estate sale gains of $80.6 million, versus $375.9 million in 2015. BXP reported 31.0% consolidated debt to consolidated market capitalization at year-end.
Material changes and notable items
- Issued $2.0 billion of 10-year unsecured notes in 2016: $1.0 billion at 3.650% and $1.0 billion at 2.750% coupon. Proceeds helped repay approximately $1.3 billion of property mortgage debt, including loans on 599 Lexington Avenue and Embarcadero Center Four.
- Acquired a 49.8% interest in Colorado Center in Santa Monica for approximately $503.6 million net cash consideration, adding a presence in Los Angeles.
- Sold 415 Main Street and a Broad Run Business Park land parcel for combined net proceeds of approximately $122.8 million. Separately, sold an 80% interest in the Metropolitan Square joint venture; BXP received approximately $58.2 million net proceeds and recorded a $59.4 million gain, while retaining a 20% interest.
- Recognized $60.2 million of termination income in 2016, including $45.0 million for a tenant’s early termination of a lease at 250 West 55th Street that otherwise ran through 2035.
- Recorded approximately $50.8 million of accelerated depreciation at BXP associated with demolition for the 159 East 53rd Street redevelopment. Also recorded a $1.8 million impairment on Washingtonian North land in connection with a planned sale.
- Settled $550 million of forward-starting swaps for approximately $49.3 million in cash when issuing the 2.750% notes. Approximately $49.2 million is to be amortized into interest expense over ten years, about $4.9 million annually.
Liquidity, outlook and risks
At February 22, 2017, BXP reported approximately $289.7 million of cash and $869 million available under its $1.0 billion unsecured revolver. Management said it believed liquidity, debt financing and asset-sale proceeds were sufficient to fund remaining development commitments and pursue investment opportunities. The development and redevelopment pipeline had estimated total investment of approximately $2.26 billion, with about $1.0 billion of BXP’s share remaining to fund; approximately 50% of commercial space was pre-leased as of February 22, 2017.
A significant near-term financing priority is the October 2017 maturity of debt secured by 767 Fifth Avenue (the General Motors Building). Total related debt was approximately $1.8 billion, including outside-member notes; BXP’s share of the remaining maturing debt was estimated at approximately $960 million. Management expected to refinance, but stated there was no assurance of refinancing on expected terms or at all.
Management cited continued U.S. economic growth and improving employment indicators but described varied market conditions. New York leasing faced new supply, large expirations and higher tenant concessions; Washington, DC demand remained competitive without meaningful improvement. San Francisco leasing was described as healthy, while the company focused on leasing Salesforce Tower. Management expected to continue selective development, repositioning and sales of non-core assets, subject to market conditions.
For 2017, management estimated hotel NOI of $13–$15 million, development and management services income of $27–$33 million, general and administrative expense of $110–$115 million, and interest expense of $378–$391 million, net of estimated capitalized interest. These are estimates, not company-wide earnings guidance. The regular quarterly common dividend was raised to $0.75 per share in December 2016.
Key risks include office-market and tenant demand changes in the five concentrated markets, lease renewals and tenant concessions, development cost and schedule overruns, refinancing and interest-rate exposure, joint-venture risks, and potential uninsured catastrophe losses. An unconsolidated Annapolis Junction Building One joint venture remained in default on a non-recourse loan of approximately $39.6 million; the lender had imposed default interest, and discussions were ongoing. Legal proceedings were described as ordinary-course matters that management did not expect to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Progress and terms of the 767 Fifth Avenue refinancing and repayment of the October 2017 maturities.
- Actual project costs, leasing and delivery timing for the approximately $1.0 billion of remaining development commitments, particularly Salesforce Tower and other major projects.
- Whether occupancy stabilizes and leasing spreads hold up amid weaker occupancy, upcoming expirations and market-specific pressure in New York and Washington, DC.
- Resolution and potential financial effects of the Annapolis Junction Building One loan default and other joint-venture exposures.
- Cash generation and dividend coverage, distinguishing recurring operating performance from sale gains, termination income and other unusual items; compare GAAP results with FFO and NOI, which are non-GAAP measures.