BXP, Inc. (Boston Properties, Inc.) — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Boston Properties is a REIT focused on Class A office properties in Boston, New York, Princeton, San Francisco and Washington, D.C. At quarter-end it owned or held interests in 152 properties totaling approximately 43.4 million net rentable square feet; eight properties were under construction.
Key financial metrics
Amounts below are in millions of dollars except per-share data, percentages and where otherwise indicated.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $470.9 | $449.7 | $1,389.0 | $1,298.9 |
| Operating income | $162.8 | $163.8 | $480.6 | $454.8 |
| Operating margin | 34.6% | 36.4% | 34.6% | 35.0% |
| Income from continuing operations | $66.1 | $80.4 | $219.3 | $198.4 |
| Net income attributable to Boston Properties | $57.8 | $70.5 | $241.5 | $171.4 |
| Basic EPS | $0.38 | $0.48 | $1.61 | $1.18 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $463.7 | $442.9 |
| Net operating income (NOI), company-defined | $287.1 | $281.7 | $856.5 | $819.8 |
| FFO attributable to Boston Properties | $176.1 | $190.3 | Not provided in the supplied filing text | Not provided in the supplied filing text |
- Q3 revenue rose 4.7%, while operating income was nearly flat and attributable net income fell 18.1%. Q3 diluted EPS was also $0.38 versus $0.48.
- Nine-month attributable net income increased 40.9%, but included $36.9 million gain on the Bedford Business Park sale and $17.8 million gain on debt forgiveness after foreclosure. Continuing-operations EPS was $1.28 basic versus $1.18.
- Nine-month consolidated NOI rose 4.5%, while same-property NOI, excluding hotel, declined 0.8%; same-property rental revenue increased 0.9% and expenses rose 4.1%. NOI is a non-GAAP measure.
- Cash and cash equivalents were $1.223 billion at September 30, down from $1.823 billion at December 31, 2011. Nine-month investing cash use was $1.020 billion, principally reflecting acquisitions, development and tenant improvements. Financing cash use was $43.6 million.
Debt, liquidity and capital
- Consolidated debt was $8.651 billion at September 30, 2012, versus $8.704 billion at December 31, 2011. Debt was reported as 100% fixed-rate at quarter-end; weighted-average GAAP interest rate was 5.19%, and weighted-average maturity was approximately six years. Debt represented 31.41% of stated consolidated market capitalization.
- The company issued $1.0 billion of 3.85% senior notes due 2023 and used cash to redeem $225 million of 6.25% senior notes due 2013 and repay mortgage debt. It reported $5.494 million of Q3 losses on early debt extinguishments.
- The $750 million unsecured revolving credit facility had no borrowings and approximately $740 million available after letters of credit. Management stated available liquidity, including approximately $1.0 billion cash as of November 2, plus the facility, was sufficient for obligations and existing development commitments.
- Management identified approximately $646 million of consolidated 2013 debt maturities, of which the company’s share was approximately $592 million. A $450 million exchangeable-note holder repurchase option also falls in May 2013.
- Remaining funding for developments through 2015 was estimated at approximately $720–$734 million in different sections of the filing; management expected funding from cash and available construction-loan draws. Verify the estimate and scope. The filing cites $1.032 billion invested to date and $1.753 billion estimated total investment for consolidated construction properties, with stated project ownership adjustments.
Changes, outlook and notable items
- The $615 million cash acquisition of 100 Federal Street in Boston contributed $36.5 million of revenue and $6.3 million of earnings from acquisition through September 30. The 680 Folsom Street San Francisco project, acquired for cash and preferred units, is 85% pre-leased; estimated total project cost is $340 million.
- Bedford Business Park was sold for approximately $62.8 million, generating net proceeds of about $62.0 million and a $36.9 million gain. Montvale Center was foreclosed on; its $25 million non-recourse mortgage was extinguished, producing a $17.8 million gain on forgiveness of debt.
- Management said leasing velocity slowed in most markets during Q3. Portfolio occupancy was generally stable in Washington, D.C.; Cambridge remained strong, while Boston suburbs faced negative absorption. Approximately 5.6% of portfolio space was due to expire through 2013. The filing says expected new-lease rents were generally near current rents, assuming no further market-rate change.
- For 2013, management projected same-property NOI growth of 1.5%–2.5%, hotel NOI of $10–$11 million, development and management fee income of $24–$30 million, general and administrative expense of $83–$86 million, and net interest expense of $385–$395 million. These forecasts depend on stated assumptions and are not earnings-per-share guidance.
- On November 8, the board declared a quarterly common dividend of $0.65 per share, an approximately 18% increase from $0.55. The filing also records a $3.2 million cumulative non-cash ground-rent straight-line adjustment in 2012; management said it was not material to prior or current financial statements.
- Principal risks discussed include weak or uncertain leasing demand, tenant credit and space needs, construction delays or cost overruns, refinancing and interest-rate conditions, joint-venture partner performance, and uninsured or underinsured catastrophic losses. Earthquake coverage in the San Francisco region was limited, with a 5% property-value deductible; company-owned captive insurers create exposure akin to modified self-insurance.
Important facts for investors to verify
- How much of nine-month earnings growth reflects recurring operations versus the Bedford sale and Montvale debt-forgiveness gains.
- The 2013 maturity and exchangeable-note repurchase funding plan, refinancing assumptions and covenant headroom.
- The final development funding requirement, construction-loan availability, lease-up progress and expected stabilization dates.
- Whether leasing and same-property NOI trends support management’s 2013 growth outlook, particularly given higher property taxes and operating costs.
- Exposure to earthquake and terrorism losses, captive-insurer obligations and any potential lender concerns over insurer ratings.