BXP, Inc. (Boston Properties, Inc.) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited. Unless noted otherwise, dollar amounts below are in millions.
Business context
Boston Properties is a self-managed REIT focused on owning, developing and leasing Class A office properties in Boston, Washington, DC, Midtown Manhattan, San Francisco and New Jersey. At quarter-end, it owned or held interests in 153 properties totaling approximately 42.3 million net rentable square feet; seven properties totaling approximately 2.9 million square feet were under construction.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $452.4 | $386.4 | $1,306.7 | $1,158.3 |
| Operating income | $164.5 | $151.1 | $456.7 | $461.6 |
| Net income attributable to BXP | $70.5 | $57.7 | $171.4 | $171.8 |
| Diluted EPS | $0.48 | $0.41 | $1.18 | $1.23 |
| Consolidated NOI (non-GAAP) | $283.2 | $245.7 | $824.2 | $730.2 |
| FFO attributable to BXP (non-GAAP) | $190.3 | $150.8 | Not shown in the provided filing text | Not shown in the provided filing text |
- Cash flow: Nine-month operating cash flow was $442.9, versus $332.9 in 2010. Investing activities used $30.4, compared with $775.7 used in 2010; financing provided $171.6, versus $264.0. Cash and cash equivalents were $1,063.0 at September 30, 2011.
- Debt and liquidity: Consolidated debt was $7,950.4, with a 5.53% GAAP weighted-average interest rate (5.10% stated/coupon rate), 5.6-year weighted-average maturity and 34.73% debt-to-market-capitalization ratio. Approximately 99.37% of consolidated debt was fixed-rate. The $750 million unsecured revolver had no borrowings at quarter-end; approximately $736.3 million was available after letters of credit. Management reported approximately $1.2 billion of cash available as of November 1, 2011.
- Margins: The filing does not present a conventional gross margin. Calculated operating margin was approximately 36.4% for Q3 2011 versus 39.1% in Q3 2010, and 35.0% for the first nine months of 2011 versus 39.9% in 2010. NOI is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Dividends: The company declared a quarterly dividend of $0.50 per common share, payable October 31, 2011. It said it evaluates the dividend in light of taxable income, liquidity and other factors.
Material changes versus comparable periods
- Q3 revenue rose 17.1% and net income attributable to BXP rose 22.3%; nine-month revenue increased 12.8%, while attributable net income was nearly flat and diluted EPS declined from $1.23 to $1.18.
- Portfolio growth drove much of the revenue increase: the John Hancock Tower and Bay Colony Corporate Center acquisitions and properties placed in service contributed substantially. Same-property NOI increased 3.1% in Q3 and 1.36% year to date. Same-property occupancy, however, declined to 91.5% from 92.7% in Q3 and to 91.6% from 92.3% for the nine-month comparison.
- Depreciation and amortization increased to $109.5 in Q3 from $81.1 and to $330.0 for nine months from $245.6, reflecting acquired and newly placed-in-service properties and accelerated depreciation ahead of redevelopment. Nine-month operating income consequently decreased despite higher revenue.
- The company refinanced 601 Lexington Avenue with a $725 million, fixed-rate 4.75% mortgage maturing in 2022. It also amended its unsecured credit facility, reducing its commitment from $1.0 billion to $750 million and extending maturity to 2014, with a conditional one-year extension option.
- During the first nine months, the company issued shares through ATM programs, including approximately $439 million of net proceeds. Total equity increased to $5,384.2 from $4,964.2 at year-end 2010.
Outlook, commentary and risks
- Management said leasing and occupancy trends had stabilized overall, with improvement in selected submarkets, but described macroeconomic uncertainty and weaker Midtown Manhattan leasing velocity. Public-sector leasing in Washington, DC was affected by federal budget uncertainty.
- Q3 second-generation leases covering approximately 665,000 square feet that had been occupied during the prior 12 months began at rents averaging 10.2% below the prior leases’ ending gross rents. Management expected rents on leases expiring in the remainder of 2011 to be below current rents; it estimated expiring rents were about 15% above market. It expected same-property occupancy to fall below approximately 91% by year-end 2011, with improvement during 2012, and estimated vacancy and related transactions could reduce total-portfolio NOI by approximately $48 million from 2011 to 2012.
- Management estimated remaining development funding needs of approximately $823 million and said development through late 2014 was expected to be funded by cash and available construction-loan draws. Seven projects under construction had estimated total investment of approximately $2.18 billion and were 56% leased as of November 1, 2011.
- Through 2012, significant commitments included approximately $400 million for development and approximately $834 million of debt maturities or repurchase obligations, of which BXP’s share was estimated at $820 million. Holders could require repurchase of the remaining 2.875% exchangeable notes in February 2012. Subsequent to quarter-end, the Operating Partnership agreed to issue $850 million of 3.700% notes due 2018, with estimated net proceeds of $841.2 million intended in part for debt reduction, and agreed to repurchase $50 million of exchangeable notes for approximately $50.2 million.
- Management projected 2011 net interest expense of approximately $389–$391 million and 2012 net interest expense of approximately $392–$402 million. It projected hotel NOI of approximately $8 million in 2011 and $8–$9 million in 2012; development and management services income of $31–$32 million in 2011 and $25–$30 million in 2012; and general and administrative expense of $81–$82 million in 2011 and $82–$85 million in 2012.
- Default and contingencies: The $25 million Montvale Center mortgage was in default and special servicing after property cash flows proved insufficient for debt service and capital needs. The company accrued interest at the 9.93% default rate and said resolution discussions were ongoing. It also disclosed guarantees, letters of credit and performance obligations, including approximately $16.1 million related to lender and development requirements.
- Unusual items: An unconsolidated joint venture recorded a $39.4 million non-cash impairment related to the planned sale of Two Grand Central Tower; BXP reported no additional impairment because it had previously impaired its investment. The joint venture completed the sale after quarter-end for approximately $401 million; BXP expected to recognize an approximately $47 million gain in Q4. A proposed sale of the Carnegie Center portfolio for approximately $468 million was terminated in June 2011.
- Key risks include economic weakness affecting tenant demand, rents and asset values; leasing and development execution; financing access and interest rates; joint-venture partner performance; and potential uninsured terrorism, earthquake or other catastrophic losses. The company’s captive insurers represent a form of modified self-insurance. Management said it was in compliance with its credit-facility covenants at quarter-end and that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether leasing, occupancy and rents develop as expected, especially against the disclosed lease expirations, rent roll-downs and estimated $48 million 2011-to-2012 NOI impact.
- Progress on the $823 million remaining development funding requirement, project leasing and delivery schedules, and the expected sources of funding.
- Repayment or refinancing of 2012 debt and exchangeable-note repurchase obligations, including completion and use of proceeds from the announced $850 million note offering.
- Resolution and potential financial consequences of the Montvale Center mortgage default.
- Actual Q4 gain and cash proceeds from the Two Grand Central Tower sale, and any resulting tax or distribution decisions.
- How much reported earnings and FFO growth reflects acquisitions, new properties, termination income and other nonrecurring or non-cash items rather than same-property operations.