BXP, Inc. quarterly report, Q2 FY2014

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BXP, Inc. — Q2 2014 Form 10-Q Summary

Business context and reporting period

Boston Properties, Inc. is a self-managed REIT focused on owning, operating and developing commercial real estate, principally Class A office properties in Boston, New York, San Francisco and Washington, D.C. This unaudited filing covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are with December 31, 2013. At quarter-end, BXP owned or held interests in 180 properties totaling approximately 46.6 million net rentable square feet, including 13 properties under construction.

Financial and operating highlights

  • Revenue: Q2 total revenue was $589.8 million, up 15.6% from $510.0 million. Six-month revenue was $1.164 billion, up 17.9% from $987.9 million. Growth reflects higher same-property rents and occupancy, as well as properties acquired, consolidated or placed in service.
  • Operating performance: Q2 operating income increased to $201.3 million from $168.4 million. Q2 consolidated NOI, a non-GAAP measure, was $373.3 million, up 17.1%; same-property NOI increased 3.46%. For the six months, consolidated NOI rose 19.3% to $729.6 million, while same-property NOI increased 3.08%.
  • Profit and EPS: Q2 net income attributable to common shareholders was $76.5 million, or $0.50 per diluted share, versus $452.4 million, or $2.94 per diluted share, in Q2 2013. Six-month common income was $130.6 million, or $0.85 per diluted share, versus $500.1 million, or $3.26. The prior-year comparisons include a $387.8 million gain on consolidation of joint ventures, making GAAP earnings comparisons unusually elevated in 2013.
  • Funds from operations: Q2 FFO attributable to BXP was $207.0 million, compared with $195.4 million a year earlier. FFO is a non-GAAP measure and should not be treated as cash flow or liquidity.
  • Leasing and occupancy: Overall leased percentage for 163 in-service properties, excluding residential properties and the hotel, was 93.0% at June 30, versus 92.4% at March 31. BXP signed approximately 2.1 million square feet of leases in Q2. Six-month same-property average occupancy increased to 92.8% from 91.7%; second-generation leases commencing in the first half had a 3.97% increase in net rents.
  • Cash flow and liquidity: Six-month operating cash flow was $309.0 million, down from $334.8 million. Investing cash outflow was $346.6 million; financing cash outflow was $1.291 billion. Cash and equivalents were $1.037 billion at June 30, down from $2.365 billion at year-end, principally reflecting repayment of $747.5 million of exchangeable notes at maturity and payment of regular and special dividends. As of August 4, management reported approximately $0.7 billion of available cash and $990.1 million available under the $1.0 billion revolving credit facility.
  • Debt: Consolidated debt was $10.559 billion, all fixed-rate at June 30; weighted-average GAAP interest rate was 4.46% and average maturity approximately 5.2 years. Consolidated debt was 34.07% of consolidated market capitalization; management’s adjusted debt measure was 32.89% of adjusted market capitalization. The $300 million and $250 million senior notes due April and June 2015 are near-term maturities.
  • Development: The 13-project pipeline totaled approximately 4.79 million square feet, with estimated total investment of $3.52 billion and approximately $1.6 billion remaining to fund; the projects were 63% leased as of August 4, including future lease commencements.

Material changes versus the prior comparable period

  • Q2 and first-half revenue and NOI increased, supported by same-property growth and the inclusion of 767 Fifth Avenue (the General Motors Building) and other properties acquired, consolidated or placed in service. These portfolio changes limit direct comparability.
  • Same-property rental revenue rose 3.54% in Q2 and 3.63% for the first half. First-half same-property operating expenses increased 5.12%, including higher real estate taxes, repairs and maintenance, utilities and snow removal.
  • GAAP earnings declined sharply because 2013 included the $387.8 million non-cash joint-venture consolidation gain, as well as other discontinued-operation items. First-half 2013 also included a $20.2 million gain on forgiveness of debt from discontinued operations.
  • Interest expense increased $7.8 million in Q2 and $21.0 million for the first half, mainly due to debt associated with the consolidated General Motors Building and previously issued senior notes; repayment of the 2014 exchangeable notes partly offset the increases.
  • On February 18, 2014, BXP repaid at maturity $747.5 million of 3.625% exchangeable senior notes. The balance sheet showed no exchangeable senior notes at June 30.

Outlook, commentary, risks and unusual items

  • Management outlook: BXP expects fiscal 2014 same-property NOI growth of approximately 2.0%–2.5%, hotel NOI of $13–$14 million, development and management fee income of $22–$25 million, general and administrative expense of $100–$104 million, and net interest expense of approximately $444–$448 million. These estimates depend on stated assumptions and are not guarantees.
  • Markets and leasing: Management described strong leasing in San Francisco, Cambridge and suburban Boston, but slower activity in Washington, D.C. amid federal budget uncertainty and in parts of Manhattan. Densification, new supply, tenant space reductions, lease expirations and construction-related vacancy may constrain occupancy or rents. Management expects some leases expiring in 2015 to leave space temporarily vacant during tenant build-outs.
  • Capital requirements and dispositions: Management identified approximately $1.6 billion of remaining development funding, secured debt maturities through 2015 and $550 million of senior notes due in 2015. It expects liquidity, the credit facility and asset sales to support these needs. Patriots Park was under contract for $321 million, subject to approvals and closing conditions; subsequent to quarter-end, Mountain View assets were sold for $92.1 million. The company also reported other sales activity and contracts, with completion not assured where conditions remain.
  • Unusual accounting item: BXP recorded a $2.4 million out-of-period adjustment in Q2 related to the accretion of a redeemable noncontrolling interest in Fountain Square. The company said the adjustment was not material to prior or current-period financial statements.
  • Other contingent matters: BXP’s $45.2 million unsecured claim against Lehman Brothers was allowed, but no recovery was recorded; timing and proceeds remain uncertain. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
  • Insurance and other risks: Terrorism Risk Insurance Program authorization was scheduled to expire December 31, 2014; nonrenewal could increase insurance costs or reduce coverage and potentially affect property financing. Earthquake coverage, particularly in San Francisco, may not cover all losses, and some coverage is provided through BXP-owned captive insurers. Other identified risks include economic and tenant-credit conditions, interest rates and financing access, development cost and delay, joint-venture obligations, REIT qualification, and uninsured or underinsured losses.

Most important facts for investors to verify

  • Whether reported leasing gains and occupancy translate into sustained same-property NOI growth, given rising property expenses and market differences.
  • Progress, lease-up, cost and funding needs for the $3.52 billion development pipeline, especially the large San Francisco projects.
  • Plans and funding sources for the $550 million of senior notes due in 2015 and other scheduled debt maturities; confirm ongoing covenant compliance and actual liquidity.
  • Whether contracted and announced property sales close on expected terms, and the resulting proceeds, taxable gains and use of cash.
  • How much of reported earnings and period-to-period changes reflect recurring property operations versus consolidation effects, one-time gains, non-GAAP measures and accounting adjustments.
  • Developments in terrorism and earthquake insurance availability, the exposure retained by captive insurers, and the status and potential recovery of the Lehman claim.