BXP, Inc. (Boston Properties), Form 10-Q — Q1 2013
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013 unless stated otherwise. Boston Properties is a REIT focused on owning, operating and developing commercial real estate, primarily Class A offices in Boston, New York, Princeton, San Francisco and Washington, D.C. Its portfolio comprised 157 properties and approximately 44.6 million net rentable square feet.
Financial and operating performance
- Revenue: $483.0 million, up 8.9% from revised Q1 2012 revenue of $443.7 million. Rental revenue was $466.0 million, up 8.7%.
- Profit: Operating income was $130.4 million, down 9.1%; continuing-operations income was $40.9 million, down 25.9%. Net income attributable to BXP common shareholders was $47.9 million versus $48.5 million; diluted EPS was $0.31 versus $0.33. The reported $0.32 basic EPS included discontinued operations.
- Margins: Operating income was approximately 27.0% of revenue, compared with 32.4% in Q1 2012. This calculation uses reported total revenue and operating income.
- Property operations: Same-property rental revenue increased 2.9%, same-property NOI excluding residential and hotel rose 2.3%, and consolidated NOI increased 7.7% to $294.6 million. Same-property average occupancy improved to 91.6% from 91.4%.
- Cash flow: Operating cash flow was $237.4 million, compared with $169.3 million. Investing used $433.0 million and financing provided $63.0 million. Cash declined by $132.6 million during the quarter to $909.4 million.
- Debt and liquidity: Consolidated debt was $8.872 billion; the weighted-average GAAP interest rate was 5.12% (4.87% coupon/stated rate) and weighted-average maturity was about 5.5 years. All consolidated debt was fixed-rate. Debt was 33.66% of reported consolidated market capitalization. The revolver had no borrowings and approximately $735 million available at quarter-end; as of May 1, cash was approximately $1.0 billion and revolver availability approximately $740 million. Unconsolidated joint ventures had $3.044 billion of debt, of which BXP’s proportionate share was approximately $1.4 billion.
- FFO: Funds from Operations attributable to BXP was $160.6 million, down from $166.7 million. FFO is a non-GAAP measure and is not cash flow or a liquidity measure.
Material changes versus the prior comparable period
- Growth in rental revenue and NOI was partly offset by higher rental operating costs, depreciation, and general and administrative expense. G&A rose $16.0 million to $43.6 million, substantially reflecting executive-transition and stock-compensation charges.
- Reported Q1 2013 net income included a $20.2 million gain on forgiveness of debt after the court ratified foreclosure of Montvale Center and the $25 million mortgage was extinguished. It also included an $8.3 million impairment on adjacent Almaden land and a $3.2 million impairment associated with the planned sale of 303 Almaden Boulevard.
- Q1 2012 comparative results were revised and reclassified. The filing reports revised Q1 2012 common-shareholder net income of $48.5 million and diluted EPS of $0.33; the prior presentation included a foreclosure gain that was reversed after the sale was dismissed, and certain property results were reclassified to discontinued operations.
- BXP issued $194.4 million net proceeds of 5.25% Series B preferred stock during Q1. Subsequent to quarter-end, the Operating Partnership issued $500 million of 3.125% senior notes due 2023.
Outlook, management commentary and risks
- Management forecast 2013 same-property NOI growth of approximately 2%–3% and average occupancy of 92%–93%. It expected 2013 hotel NOI of $10–$11 million, development and management fee income of $27–$31 million, G&A of $106–$108 million, and net interest expense of $374–$380 million. These are management estimates, not guarantees.
- The development pipeline was approximately 3.0 million square feet with projected investment of about $2.2 billion; roughly $0.9 billion remained to be funded through 2015. Management expected existing development costs to be funded by cash and available construction-loan draws.
- Management said leasing conditions varied by market: technology and life-sciences demand supported San Francisco and Boston, while federal-budget uncertainty weighed on Washington, D.C. Second-generation leases commencing in the quarter showed rent changes of -2.45% gross and -4.17% net, as disclosed by the company.
- Management was reviewing assets for potential sales and said 2013 asset sales could approach or exceed $1 billion. The 303 Almaden sale and the joint venture’s 125 West 55th Street sale were subject to closing conditions. The filing also disclosed the April acquisition of Mountain View Research and Technology Parks for approximately $233.5 million.
- Near-term funding items included $450 million of exchangeable notes subject to a May 2013 put/redemption process and $747.5 million of exchangeable notes due in February 2014. Management described liquidity as sufficient, while noting dependence on operating cash flow, financing access, joint-venture distributions and asset sales.
- Risks include leasing and tenant credit conditions, development delays or cost overruns, interest-rate and financing-market changes, joint-venture partner performance, REIT qualification, and potential uninsured or underinsured catastrophe losses. Terrorism insurance provisions were due to expire in 2014 unless extended; earthquake coverage may not cover all losses, and captive coverage is a form of modified self-insurance.
- Unusual compensation items included approximately $16.9 million of Q1 stock-based compensation related to the CEO transition, including accelerated expense for the outgoing Executive Chairman. Owen D. Thomas became CEO on April 2, 2013. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the 303 Almaden and 125 West 55th Street sales closed, and the realized proceeds and effects on earnings and FFO.
- How the May 2013 exchangeable-note put/redemption was completed and how the $747.5 million February 2014 maturity was funded or refinanced.
- Actual leasing, occupancy and rent trends versus management’s 2013 targets, particularly the disclosed negative rent changes on second-generation leases.
- Development spending, leasing progress and eventual returns on the approximately $2.2 billion pipeline, including the large San Francisco projects.
- Whether liquidity and covenant compliance remained adequate after debt repayments, development funding, distributions and subsequent transactions; also assess joint-venture debt and guarantees.
- The impact of executive-transition costs, land/property impairments and the Montvale debt-forgiveness gain when evaluating recurring earnings and FFO.