BXP, Inc. (Boston Properties) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparative periods are 2012. BXP is a self-managed REIT focused primarily on Class A office properties across Boston, New York, Princeton, San Francisco and Washington, D.C. At quarter-end it owned or held interests in 177 properties totaling approximately 44.6 million rentable square feet, including eight properties under construction.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $574.1m | $466.7m | $1,566.8m | $1,376.4m |
| Operating income | $187.4m | $160.7m | $485.0m | $474.3m |
| Income from continuing operations | $82.9m | $64.0m | $626.1m | $213.1m |
| Net income attributable to BXP common shareholders | $152.7m | $57.2m | $652.9m | $224.2m |
| Diluted EPS | $1.00 | $0.38 | $4.26 | $1.49 |
| Net cash provided by operating activities | — | — | $550.4m | $463.7m |
- Property operations: Same-property rental revenue rose 3.9% in Q3 and 2.7% year to date; same-property NOI increased 4.2% and 2.0%, respectively. Portfolio average occupancy for the nine-month same-property group improved from 91.3% to 92.0%.
- Funds from Operations: Q3 FFO attributable to BXP was $197.9m versus $175.8m a year earlier. FFO is a non-GAAP measure and is not cash flow or a measure of liquidity.
- Cash and investment: Cash and equivalents were $1.641bn at September 30. Nine-month investing outflow was $453.4m, including $522.9m of real estate acquisitions and $279.8m of construction spending, partly offset by property-sale proceeds and joint-venture distributions.
- Debt and liquidity: Consolidated debt was $11.354bn, all fixed-rate, with a 4.60% GAAP weighted-average rate and approximately 5.6-year weighted-average maturity. Debt was 38.05% of consolidated market capitalization; management’s adjusted-debt measure was 36.86% of adjusted market capitalization. The $1.0bn revolving credit facility had no borrowings and approximately $989.4m available at September 30. Management reported approximately $2.1bn of available cash as of November 4.
Material changes and unusual items
- Revenue growth reflects acquisitions, assets placed in service and consolidation as well as underlying property performance. BXP consolidated 767 Fifth Avenue (the General Motors Building) in May while retaining a 60% ownership interest; it also acquired full ownership of Mountain View Research and Technology Parks in April. Consolidation added substantial assets and debt and changed the presentation of the joint venture’s results.
- Nine-month continuing income included $386.0m of gains on consolidation of joint ventures, principally a non-cash $359.5m gain related to 767 Fifth Avenue and approximately $26.5m from the Mountain View assets. These gains materially lifted reported earnings and are not recurring property operating income.
- Discontinued operations included an $86.4m gain on the sale of 1301 New York Avenue and a $20.2m gain on forgiveness of debt following the ratified Montvale Center foreclosure. BXP also recorded an $8.3m impairment on adjacent Almaden development land and a $3.2m impairment related to 303 Almaden Boulevard.
- Interest expense rose 16.3% in Q3 and 5.7% year to date, reflecting debt assumed with the General Motors Building, new senior-note issuances and related partner-loan interest, partly offset by debt repayments and increased capitalized interest.
- Management reported Q3 leasing activity of approximately 1.9m square feet. However, year-to-date second-generation lease commencements had negative average rent change: gross rents down 1.55% and net rents down 3.07%.
Outlook, commentary and risks
- Management described leasing activity as improved in most markets and said it remained cautiously optimistic, while identifying office-space densification and slow Washington, D.C. public-sector and defense demand as headwinds. It projected same-property NOI growth of approximately 2.5%–3.0% for 2013 and 1.0%–2.5% for 2014, with average occupancy of 92.5%–93.0% for 2013 and 92.5%–93.5% for 2014.
- Management estimated 2013 net interest expense at $437m–$439m and 2014 at $448m–$452m, subject to stated assumptions including scheduled debt repayments and no additional borrowing or material interest-rate changes. Hotel NOI guidance was $10.5m–$11.5m for 2013 and $12m–$13m for 2014; development and management fee income guidance was $27m–$28m and $20m–$23m, respectively.
- The development pipeline totaled approximately 2.8m square feet, with estimated investment of $2.46bn and approximately $0.8bn remaining to fund through 2015. Management cited approximately $825m of debt obligations through the end of 2014, including $747.5m of exchangeable notes due February 2014, and said cash, credit availability, capital markets and potential asset sales were expected to provide funding.
- On October 9, after quarter-end, BXP sold a 45% interest in Times Square Tower for $684m gross and received approximately $673.4m net. It retained consolidation accounting and recognized no gain in consolidated operations. Management said it intended to consider tax-deferred reinvestment; otherwise, a distribution may be needed to avoid corporate-level tax on taxable gain.
- Principal disclosed risks include tenant demand and credit quality, leasing and rental-rate pressure, development delays and cost overruns, access to financing and interest-rate changes, joint-venture partner performance, and catastrophic losses. Terrorism and earthquake coverage includes captive insurers that represent a form of self-insurance; management noted coverage limits and uncertainty around renewal of federal terrorism insurance support after December 31, 2014.
Important facts for investors to verify
- Separate recurring property-level growth from the large non-cash consolidation gains and real-estate sale and debt-forgiveness gains driving reported earnings.
- Review the February 2014 $747.5m note maturity and the company’s funding plan alongside remaining development commitments and other debt maturities.
- Track same-property occupancy, NOI growth, lease spreads and tenant improvement/leasing costs; reported leasing volume alone does not establish rent growth.
- Assess the leverage impact of consolidating 767 Fifth Avenue, including its debt, related-party notes, partner interests and the difference between consolidated and adjusted debt measures.
- Monitor development leasing, projected costs and completion schedules, as well as insurance adequacy for earthquake, terrorism and other uninsured or underinsured events.