BXP, Inc. (Boston Properties) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. BXP is a REIT focused primarily on Class A office properties in Boston, New York, Princeton, San Francisco and Washington, DC. At quarter-end it owned or held interests in 150 properties totaling approximately 42.8 million net rentable square feet, including six properties under construction.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $472.9 million | $433.9 million | $918.1 million | $849.1 million |
| Operating income | $173.7 million | $153.6 million | $317.7 million | $291.0 million |
| Income from continuing operations | $97.5 million | $69.9 million | $153.2 million | $118.0 million |
| Net income attributable to BXP | $119.1 million | $60.2 million | $183.7 million | $100.9 million |
| Diluted EPS | $0.79 | $0.41 | $1.23 | $0.70 |
| Net operating income (NOI), as reported | $294.9 million | $274.9 million | $569.4 million | $538.1 million |
- Revenue rose 9.0% in Q2 and 8.1% year to date. Operating income increased 13.1% and 9.2%, respectively. Management’s reported NOI is a non-GAAP measure.
- Six-month funds from operations attributable to BXP was $206.8 million, compared with $181.6 million in 2011. The filing cautions that FFO is non-GAAP and is not a measure of liquidity.
- Six-month cash from operations was $331.1 million, versus $290.1 million. Investing used $806.4 million, principally reflecting acquisitions and development; financing provided $324.1 million. Cash and equivalents decreased by $151.2 million from year-end 2011 to $1.672 billion.
- At June 30, consolidated debt was $8.896 billion, up from $8.704 billion at December 31, 2011. All consolidated debt was fixed-rate; the weighted-average GAAP interest rate was 5.22%, stated/coupon rate 4.90%, and weighted-average maturity approximately 6.1 years. Debt was 32.53% of consolidated market capitalization.
- The $750 million unsecured credit line had no borrowings at quarter-end; approximately $736.9 million was available then, and $740.4 million was available August 2. Cash was approximately $1.5 billion on August 2. BXP reported covenant compliance.
- Quarter-end balance sheet: total assets $15.281 billion, total liabilities $9.523 billion and total equity $5.706 billion. The quarterly common dividend was $0.55 per share.
Material changes and operating developments
- Same-property NOI, excluding hotel, was nearly flat for the first six months, down 0.2%; consolidated NOI increased 5.82%, reflecting acquisitions and properties placed in service. In Q2, same-property NOI excluding hotel rose 0.51%, while consolidated NOI rose 7.28%.
- Same-property occupancy averaged 92.2% in the first half, versus 92.7% a year earlier. Same-property rental revenue increased modestly, while operating expenses rose 4.42%, including higher real estate taxes and a $3.2 million noncash cumulative ground-rent adjustment.
- BXP acquired 100 Federal Street in Boston for approximately $615 million and 453 Ravendale Drive in California for $6.7 million. 100 Federal Street contributed $19.5 million of revenue and $3.3 million of earnings from acquisition through quarter-end; the acquisition included a long-term lease to a Bank of America affiliate for approximately 735,000 square feet.
- BXP issued $1.0 billion of 3.85% senior notes due 2023, with net proceeds of approximately $989.4 million; it also issued shares through its ATM program for net proceeds of $247.2 million in the first half. It repurchased or redeemed $576.2 million of 2.875% exchangeable notes and repaid approximately $209 million of secured debt.
- Bedford Business Park was sold for approximately $62.8 million cash, generating a $36.9 million gain. Montvale Center was foreclosed upon; the $25 million nonrecourse mortgage was extinguished and BXP recognized a $17.8 million debt-forgiveness gain.
- An unconsolidated joint venture recognized approximately $11.8 million of BXP’s share of income from a General Motors Building lease termination. These items, together with the Bedford sale and foreclosure gain, materially benefited reported earnings; Q2 and first-half net income should not be viewed as purely recurring operating performance.
Outlook, commentary and risks
- Management expected 2012 occupancy of 91%–92%, and anticipated same-property NOI could decline approximately 0.5%–1% versus 2011 due to specific tenant vacancies and lease transitions. It noted slower leasing in some San Francisco submarkets and midtown Manhattan, and continued weakness in Washington, DC associated with federal budget uncertainty. Boston CBD demand was comparatively stronger.
- Management’s 2012 estimates included hotel NOI of $9–$10 million, development and management fee income of $30–$34 million, general and administrative expense of $85–$87 million, and net interest expense of $408–$412 million. It expected unconsolidated joint-venture income to fall approximately $37–$42 million versus 2011, partly reflecting the prior-year sale of Two Grand Central Tower and lower rent adjustments, offset in part by 2012 termination income.
- Remaining funding for development through 2015 was estimated at $639 million, expected to be funded by cash and available construction-loan draws. Development projects were approximately 51% leased overall. Management cited approximately $645 million of 2013 debt maturities after planned repayments, of which BXP’s share was approximately $591 million.
- After quarter-end, BXP gave notice to redeem $225 million of 6.25% notes due 2013 on August 24, 2012, using available cash. It expected a $5.3 million extinguishment loss and approximately $5.7 million of future interest savings through stated maturity. It also agreed to form a Reston joint venture involving Fountain Square; closing was expected by the end of Q3, but was not assured.
- Principal disclosed risks include economic weakness affecting tenant demand, occupancy and rents; tenant and joint-venture counterparty credit; development delays or cost overruns; financing availability, interest rates and refinancing; and uninsured catastrophe exposure. Terrorism and earthquake coverage includes insurance provided by BXP-owned captive insurers, which the company characterizes as modified self-insurance; earthquake coverage may be insufficient. Some insurer ratings may not meet certain loan requirements.
- Other unusual items include $4.5 million of expense associated with the COO’s resignation and the $3.2 million ground-rent adjustment. Management said the latter was immaterial to prior periods and to the current financial statements. The filing reported no material change to previously disclosed risk factors and no material adverse expected outcome from ordinary-course legal proceedings.
Most important facts for investors to verify
- How recurring leasing, occupancy and same-property NOI perform after the identified vacancies, particularly against management’s 91%–92% occupancy outlook.
- The effect of the Bedford sale, Montvale foreclosure and joint-venture lease termination on reported earnings, cash proceeds and future property income.
- Execution and funding of the $639 million development pipeline, including leasing, completion timing and construction-loan availability.
- 2013 debt maturities and completion of the planned $225 million note redemption and Sumner Square mortgage repayment; confirm liquidity and covenant headroom.
- Closing terms and BXP’s funding obligations, including the partner purchase/sale options, for the proposed Fountain Square joint venture.
- Exposure to contingent guarantees, joint-venture debt and captive-insurer claims, and the adequacy and availability of terrorism and earthquake insurance.