BXP, Inc. (Boston Properties) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with Q1 2013 unless otherwise noted. The company is a REIT focused on owning, operating and developing commercial real estate, primarily Class A office properties in Boston, New York, San Francisco and Washington, DC. At quarter-end, it owned or held interests in 175 properties totaling approximately 45.8 million net rentable square feet.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $574.7 million | $477.8 million; up 20.3% |
| Operating income | $176.9 million | $128.0 million; up 38.2% |
| Net income attributable to BXP common shareholders | $54.0 million; $0.35 per diluted share | $47.9 million; $0.31 per diluted share |
| Net operating income (NOI, non-GAAP) | $356.3 million | $293.0 million; up 21.6% |
| Same-property NOI | $296.9 million | $290.0 million; up 2.4% including residential and hotel |
| Cash provided by operations | $124.2 million | $237.4 million |
Revenue growth primarily reflected properties acquired or consolidated after Q1 2013, notably 767 Fifth Avenue (the General Motors Building), and growth in same-property rental revenue. Same-property average occupancy rose to 93.2% from 91.4%, while same-property rental revenue increased 3.9%. Total portfolio occupancy, however, fell to 92.4% at March 31 from 93.4% at December 31, 2013, as expirations exceeded leases commencing during the quarter. Second-generation lease commencements showed gross rent growth of 1.50% and net rent growth of 1.29%.
Operating income margin was approximately 30.8% of revenue, compared with 26.8% in Q1 2013. This comparison is affected by changes in the property portfolio and prior-year discontinued operations. Interest expense increased 13.1% to $113.6 million, chiefly reflecting debt consolidated with 767 Fifth Avenue and previously issued senior notes. Depreciation and amortization rose 29.2% to $154.3 million, also reflecting acquisitions and consolidation. No impairment loss was recorded in Q1 2014; Q1 2013 included an $8.3 million impairment and discontinued-operation items, including a $20.2 million debt-forgiveness gain.
Debt, liquidity and cash flows
- Consolidated debt was $10.58 billion at March 31, 2014, down from $11.34 billion at December 31, 2013. The Operating Partnership repaid $747.5 million principal of 3.625% exchangeable notes at maturity in February.
- All consolidated debt was fixed-rate at quarter-end. The weighted-average GAAP rate was 4.46% (5.01% coupon/stated rate), with a weighted-average maturity of approximately 5.5 years. Debt equaled approximately 34.81% of consolidated market capitalization; management’s adjusted-debt measure produced a 33.61% ratio.
- Cash and cash equivalents were $1.18 billion at March 31, versus $2.37 billion at year-end. Management reported approximately $0.9 billion available cash as of May 5 and approximately $990 million available under the $1.0 billion revolving credit line; there were no line borrowings at quarter-end.
- Cash used in financing was $1.16 billion, primarily reflecting repayment of the exchangeable notes and payment of regular and special dividends. The $2.25-per-share special dividend, in addition to the $0.65 regular dividend, was paid in January. Operating cash flow was lower year over year partly because of a $93.0 million settlement of accreted debt discount associated with the note repayment.
- Development projects had approximately $3.2 billion of projected total investment, with approximately $1.4 billion remaining to fund. Approximately $77 million of secured debt, of which BXP’s share was about $70 million, matured through year-end 2014.
Changes, outlook and notable items
- Management expected fiscal 2014 same-property NOI growth of 1.75%–2.5%, hotel NOI of $13–$14 million, development and management fee income of $19–$22 million, general and administrative expense of $100–$104 million, and net interest expense of $446–$450 million. These are management estimates, not guarantees; the interest estimate assumes no additional debt, prepayments, repurchases or interest-rate changes.
- Leasing activity totaled approximately 1.6 million square feet, but portfolio occupancy declined during the quarter. Management cited continued demand in technology and life-sciences-oriented markets, alongside office densification, new supply and slower Washington, DC public-sector demand.
- After quarter-end, a 95%-owned joint venture signed a 714,000-square-foot Salesforce Tower lease and committed to complete the project; management cited projected total cost of approximately $1.1 billion and expected completion in early 2017. The 1.4-million-square-foot tower was reported 51% leased as of May 5, including the subsequent lease.
- BXP completed and placed The Avant at Reston Town Center into service in February; the 359-unit residential project was 32% leased and its retail space was fully leased, according to the filing.
- The company was pursuing potential 2014 asset sales expected to exceed $1.0 billion in aggregate, subject to execution and market conditions. Management noted sales may be structured as tax-deferred exchanges where feasible.
- The company’s $45.2 million unsecured claim against Lehman Brothers was allowed by the trustee. Potential proceeds and timing remain uncertain; BXP disclosed it as a gain contingency.
- Risks include development cost and leasing execution, tenant credit and space-reduction trends, interest rates and access to financing, joint-venture partner obligations, and potentially inadequate or costly terrorism and earthquake insurance. Federal terrorism-risk insurance authorization was scheduled to expire December 31, 2014; BXP also noted that some insurer ratings may not meet certain loan requirements.
Important facts for investors to verify
- Whether occupancy and leasing improve after the quarter-end decline, including the effect of near-term expirations and lease commencement timing.
- Progress, leasing, costs and remaining funding needs for the development pipeline, particularly Salesforce Tower and 250 West 55th Street.
- Whether the company achieves its stated same-property NOI and other 2014 estimates, and how portfolio changes affect comparisons.
- Debt maturities, liquidity, covenant compliance and funding plans for development and preferred-unit redemptions.
- Potential insurance coverage gaps or higher premiums, and the timing and recoverable value, if any, of the Lehman claim.
Amounts are in U.S. dollars. NOI is a non-GAAP measure and should be considered alongside GAAP results and cash flows.