BXP, Inc. (Boston Properties) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing combines BXP, Inc. and its operating partnership, Boston Properties Limited Partnership (BPLP); BXP owned approximately 89.5% of BPLP. BXP is a REIT focused primarily on Class A office properties.
Business context and performance
At quarter-end, the company owned or held interests in 174 properties totaling approximately 47.7 million rentable square feet, including eight properties under construction or redevelopment. Its principal markets were Boston, New York, San Francisco, Washington, D.C., and Los Angeles.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $625.2 million | $629.9 million | $1,914.8 million | $1,866.6 million |
| Operating income | $157.6 million | $227.8 million | $626.1 million | $638.9 million |
| Net income attributable to BXP common shareholders | $76.8 million | $184.1 million | $355.1 million | $434.7 million |
| Diluted EPS | $0.50 | $1.20 | $2.31 | $2.82 |
| BXP FFO attributable to common shareholders | $219.6 million | $217.3 million | Not stated in the supplied filing text | Not stated in the supplied filing text |
Q3 rental revenue was $606.5 million, down from $611.4 million. Nine-month net operating income (NOI), a non-GAAP measure, rose 3.1% to $1.207 billion; same-property NOI increased 2.9%. Q3 total-portfolio NOI declined 3.5% to $382.2 million, while same-property NOI declined 3.2%. BXP reported common dividends of $0.65 per share for the quarter, unchanged year over year.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $743.8 million, versus $608.9 million a year earlier. Investing activities used $1.104 billion, principally reflecting development spending and a $505.1 million contribution to the Colorado Center joint venture. Financing activities provided $56.2 million.
- Cash and cash equivalents were $419.3 million at September 30, down from $723.7 million at December 31, 2015. The filing cited approximately $380 million cash and $993.3 million available under the revolving credit facility as of November 2, 2016.
- Consolidated debt was approximately $9.809 billion; all consolidated debt was fixed-rate. The reported weighted-average GAAP interest rate was 4.06%, and weighted-average maturity was 5.2 years. Debt included $7.244 billion of unsecured senior notes, $2.078 billion of mortgage debt, $307.4 million of mezzanine debt and $180 million of outside members’ notes. Consolidated debt to market capitalization was 29.35%; BXP’s share of combined debt to its share of combined market capitalization was 27.62%.
- The $1.0 billion revolving facility had no borrowings; approximately $993.3 million was available after letters of credit. Management reported compliance with applicable debt covenants.
- About $1.6 billion of 767 Fifth Avenue mortgage and mezzanine debt was due in October 2017; BXP’s estimated share was approximately $960 million. The company expected to refinance it and had interest-rate swaps covering $450 million of notional amount.
Material changes and unusual items
- Net income and EPS fell sharply versus 2015, primarily because prior-year results included much larger property-sale gains: nine-month gains were $80.6 million versus $294.6 million; Q3 gains were $13.0 million versus $199.5 million. Q3 operating income also reflected approximately $50.8 million of accelerated depreciation related to redevelopment of the low-rise portion of 601 Lexington Avenue.
- In February, a tenant paid $45 million to terminate an 85,000-square-foot lease at 250 West 55th Street. This was included in base rent. A $1.8 million impairment was recorded on land at Washingtonian North following a sale letter of intent.
- BPLP issued $2.0 billion of 10-year senior notes in two offerings during 2016, with effective rates of approximately 3.766% and 3.495%. Proceeds and available cash funded repayment of approximately $1.3 billion of mortgages, including the $750 million 599 Lexington Avenue loan and approximately $344.8 million at Embarcadero Center Four. Nine-month interest expense declined $11.1 million year over year.
- The company acquired a 49.8% interest in Colorado Center for approximately $503.6 million cash net of adjustments, entering the Los Angeles market. It was 65.5% leased at September 30; management later cited a 160,000-square-foot lease and 79.9% leased occupancy. Overall in-service occupancy fell from 90.8% at June 30 to 89.6% at September 30, mainly due to this acquisition.
- At September 30, the development and redevelopment pipeline comprised approximately 4.0 million square feet, with estimated total investment of $2.234 billion and 51% of commercial space pre-leased. Management estimated its remaining share of costs through 2020 at approximately $1.2 billion.
Outlook, commentary and risks
Management described economic indicators as mixed, office fundamentals as improving, and the cycle as late-stage and slowing slightly. Priorities included leasing available and development space, completing projects, repositioning selected assets, disciplined investment, and managing maturities. It reported approximately 894,000 square feet of leases signed in Q3; second-generation leases commenced during the quarter produced an 8.44% increase in net rent on qualifying space recently occupied.
Management expected no further asset sales in 2016 and anticipated selling non-core assets in 2017, subject to market conditions. It forecast 2016 hotel NOI of $13–$14 million and development and management services income of $24–$25 million; 2017 estimates were $13–$15 million and $24–$28 million, respectively. Estimated interest expense was $403–$407 million for 2016 and $378–$391 million for 2017, subject to stated assumptions, including refinancing the 767 Fifth Avenue debt. Management also noted that raising debt ahead of funding needs could leave excess cash and dilute earnings through higher net interest expense. It anticipated that taxable income growth could lead to higher annual dividends, but future dividends were not assured.
Risks highlighted include leasing demand and tenant financial health, vacancy and lease rollover, development delays and cost overruns, financing availability and interest rates, joint-venture obligations, and potential uninsured catastrophe or terrorism losses. A joint venture’s Annapolis Junction Building One loan was in covenant default for loan-to-value purposes; the lender later elected to charge default interest. The approximately $39.7 million loan was non-recourse to BXP, but the outcome of lender discussions was uncertain. Earthquake insurance may be insufficient, and some insurer ratings may not meet loan requirements. Management stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile reported earnings with the impact of prior-year sale gains, the $45 million lease termination payment, and accelerated depreciation at 601 Lexington Avenue.
- Track leasing, occupancy and rental-rate progress, particularly Colorado Center, Salesforce Tower, and the significant 2017 expirations at 399 Park Avenue and 767 Fifth Avenue.
- Assess refinancing plans and terms for the 767 Fifth Avenue debt due in 2017, including swap coverage and the joint venture’s outside-member obligations.
- Monitor project budgets, pre-leasing and funding needs against the estimated $1.2 billion remaining company share of development costs and available liquidity.
- Review the Annapolis Junction Building One default and any resulting change in interest, lender remedies or joint-venture exposure.
- Distinguish GAAP earnings and cash flows from company-defined NOI and FFO; these non-GAAP measures are not substitutes for GAAP results or liquidity measures.