BXP, Inc. (Boston Properties) — Q3 2010 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Boston Properties is a REIT focused on owning, developing and leasing Class A office properties, primarily in Boston, Midtown Manhattan, Washington, D.C., San Francisco and New Jersey. At quarter-end, it owned or had interests in 145 properties totaling approximately 38.2 million net rentable square feet, including five properties under construction.
Financial performance and position
- Revenue: Q3 total revenue was $388.2 million, up 2.9% from $377.3 million; rental revenue rose 3.5% to $372.0 million. Nine-month revenue was $1.164 billion, up 1.7%.
- Profit and EPS: Q3 net income attributable to Boston Properties was $57.7 million, down 12.4% from $65.8 million; diluted EPS was $0.41 versus $0.47. Nine-month attributable net income was $171.8 million, down 3.3%, and diluted EPS was $1.23 versus $1.38.
- NOI and operating performance: Q3 consolidated net operating income (NOI, a non-GAAP measure) was $245.7 million, up 6.1%; nine-month NOI was $730.2 million, up 1.2%. Same-property NOI rose 3.7% in Q3 but fell 1.7% over nine months. Growth in properties placed in service offset weaker same-property results in the nine-month comparison.
- Cash flow: Nine-month operating cash flow was $332.9 million, down from $447.9 million. Investing used $775.7 million, principally for real estate additions, a cash-secured mortgage financing and joint-venture contributions; financing provided $264.0 million. Cash and cash equivalents were $1.270 billion at September 30, versus $1.449 billion at year-end 2009.
- Debt and liquidity: Consolidated debt was $7.445 billion, up from $6.009 billion a year earlier. The weighted-average GAAP interest rate was 5.65%, weighted-average maturity approximately 4.4 years, and 91.1% of consolidated debt was fixed-rate. Debt was 35.53% of reported consolidated market capitalization. The $1.0 billion revolving credit facility had no borrowings; reported availability was approximately $985.9 million after letters of credit. The facility maturity was extended to August 3, 2011, and the company reported covenant compliance.
- Joint ventures and contingencies: Unconsolidated joint ventures had $3.343 billion of debt in total, of which BXP’s proportionate share was approximately $1.6 billion. BXP disclosed guarantees, including funding obligations associated with joint-venture escrows. Management said ordinary-course legal matters were generally insured and were not expected to materially affect financial position, results or liquidity.
Material changes versus prior comparable periods
- Q3 revenue and consolidated NOI increased, but attributable earnings and EPS declined. Interest expense increased $20.0 million in Q3 and $51.2 million for the nine months, primarily reflecting senior notes issued in 2009 and 2010 and lower capitalized interest.
- Nine-month same-property rental revenue declined $18.9 million, including lower tenant recoveries and termination income; lower operating expenses partly offset the revenue decline. The company attributed rental trends partly to free-rent periods and lease expirations.
- Unconsolidated joint-venture income rose to $26.9 million for nine months from $11.1 million, including the absence of a $7.4 million prior-year impairment and improved contributions from certain ventures.
- Cash used in investing increased substantially, to $775.7 million from $328.3 million, while operating cash flow decreased. Consolidated debt rose, including after the $700 million senior-note offering.
Outlook, management commentary and notable items
- Management reported signs of market stabilization and leases signed for more than 4.3 million square feet in the first three quarters, but did not expect significant near-term rent growth or materially reduced landlord concessions. It estimated 2011 expiring office rents averaged about 9% above current market rents; leases covering 8.2% of office space expire in 2011.
- Management expected quarterly common dividends to remain approximately $0.50 for the next several quarters, subject to Board decisions and circumstances. It forecast 2010 hotel NOI of $7.5–$8.0 million and general and administrative expense of $80–$81 million; fourth-quarter acquisition costs were expected to be approximately $1.0 million.
- At September 30, developments under construction represented estimated total investment of approximately $1.355 billion, with $1.003 billion invested to date. Management estimated about $164.9 million of remaining capital requirements, net of anticipated and potential construction-loan funding, to complete ongoing developments and Weston Corporate Center through mid-2012.
- Pending acquisitions included Bay Colony Corporate Center for approximately $185 million and the John Hancock Tower and Garage for approximately $930 million. Both were subject to closing conditions. Management expected approximately $330 million of aggregate funding for these acquisitions and, after subsequent debt repayments and closings, estimated approximately $600 million cash plus full availability on the credit line.
- Unusual items: Nine-month results included a $7.2 million gain related to the prior suspension of development at 250 West 55th Street, an $8.2 million loss on extinguishment of exchangeable notes, and approximately $12.2 million of noncash deferred management fees recognized after the 280 Park Avenue agreement ended. Accelerated stock compensation related to the former CEO’s death also contributed to higher nine-month compensation expense.
- Key risks: Management highlighted economic weakness affecting occupancy, rents and tenant credit; refinancing and interest-rate exposure; development delays and cost overruns; joint-venture partner performance; and catastrophic-loss and insurance risks. Some coverage is provided by company-owned captive insurers and therefore is a form of modified self-insurance. The filing also warns that insurer ratings may not meet certain loan requirements.
Important facts for investors to verify
- Whether same-property leasing, tenant recoveries and occupancy trends improve, and how the 2011 lease expirations affect rents and cash flows.
- Completion, leasing and total costs of the development pipeline, particularly 510 Madison Avenue, Atlantic Wharf and 2200 Pennsylvania Avenue.
- Closing and operating assumptions for the John Hancock Tower and Bay Colony acquisitions, including their expected 2011 revenue and expenses.
- Debt maturities and refinancing needs, especially the credit facility’s August 2011 maturity and near-term property-level debt; distinguish consolidated debt from joint-venture debt.
- Cash availability after post-quarter debt repayments and acquisition funding, including the extent to which reported cash is restricted or pledged as collateral.
- Whether the $0.50 quarterly dividend remains supported by taxable income and operating cash flow, and how non-GAAP NOI and FFO reconcile with GAAP earnings and cash flow.