BXP, Inc. (Boston Properties) — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010; filed February 25, 2011. The filing also reports fourth-quarter results. BXP is a REIT focused on Class A office properties, primarily in Boston, Washington, D.C., midtown Manhattan, San Francisco and Princeton, New Jersey.
Business context and portfolio
- At year-end, BXP owned or held interests in 146 properties with approximately 39.9 million rentable square feet, including five projects under construction; in-service occupancy was 93.2%, versus 92.4% a year earlier.
- Average remaining lease term was 7.1 years. Leases covering 6.9% of portfolio space expire in 2011; management estimated those tenants’ current rents were about 3% above market for comparable space.
- Completed the approximately $930 million John Hancock Tower and Garage acquisition in Boston, financed with cash and assumed debt. Acquired 510 Madison Avenue, a development project, and completed the Bay Colony Corporate Center acquisition in February 2011.
Financial and operating results
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Total revenue | $1,550.8 million | $1,518.2 million | +2.1% |
| Operating income | $610.5 million | $567.5 million | +7.6% |
| Net income attributable to BXP | $159.1 million | $231.0 million | −31.1% |
| Basic and diluted EPS | $1.14 | $1.76 | −35.2% |
| FFO attributable to BXP (non-GAAP) | $547.4 million | $606.3 million | −9.7% |
| Cash from operating activities | $375.9 million | $617.4 million | −39.1% |
- Approximate operating margin was 39.4% and net income attributable to BXP was 10.3% of revenue. These are calculated from reported figures.
- Same-property NOI, excluding the hotel, declined 0.2%; consolidated NOI increased 2.6%, supported by properties acquired or placed in service. Same-property rental revenue fell 0.6%.
- Year-end cash and cash equivalents were $478.9 million, down from $1.449 billion. Investing activities used $1.161 billion; financing activities used $184.6 million.
- Consolidated debt was $7.786 billion, up from $6.720 billion. The weighted-average GAAP interest rate was 5.56%, weighted-average maturity approximately 5.4 years, and approximately 95.9% of debt was fixed-rate. Debt was 35.75% of consolidated market capitalization at year-end.
- Unconsolidated joint ventures had approximately $3.15 billion of debt. BXP reported its share of joint-venture revenue as 17.9% of consolidated revenue plus its share of joint-venture revenue.
- Quarterly common dividends were $0.50 per share; declared FY 2010 dividends totaled $2.00 per share, down from $2.18 in 2009.
Material changes and unusual items
- Net income included $89.9 million of losses from early debt extinguishments, principally a $79.3 million loss related to redeeming $700 million of 6.25% notes due 2013 and a $10.5 million loss on repurchasing exchangeable notes. The redemption reduced near-term maturities but depressed reported earnings.
- Interest expense rose 17.1% to $378.1 million. Operating cash flow was lower in part because of debt redemption and exchangeable-note repurchase costs, higher cash interest, tenant leasing costs and the 250 West 55th Street lease termination payment.
- Fourth-quarter revenue was $392.5 million; net income attributable to BXP was a loss of $12.9 million, or $0.09 per share, versus income of $53.3 million, or $0.38 per share, in Q4 2009.
- 2010 revenue included $12.2 million of non-cash deferred management fees recognized after the 280 Park Avenue buyer terminated the management and leasing agreement. BXP also recognized $7.2 million of income related to the 250 West 55th Street lease termination, compared with a $27.8 million development-suspension loss in 2009.
- Same-property revenue was affected by free-rent periods on new leases and lower tenant recoveries after lease terminations and expirations. Management reported more than 6.5 million square feet of leases signed in 2010, but did not expect significant near-term rent growth or materially lower tenant concessions.
Outlook, liquidity and risks
- Management expected 2011 hotel NOI of $8.0–$8.5 million, third-party fee income of $20–$25 million, and G&A expense of $80–$83 million. Estimated 2011 interest expense was $410–$420 million, including $30–$35 million of capitalized interest and assuming a refinancing of the 601 Lexington Avenue mortgage.
- Management expected the quarterly dividend to remain approximately $0.50 per share, subject to Board action and actual taxable income. It cited approximately $327 million of available cash and availability under the $1.0 billion credit line as of February 18, 2011. The line matured August 3, 2011; BXP was discussing renewal.
- Five projects under construction represented estimated total investment of $1.355 billion, of which $1.078 billion had been invested at year-end. BXP estimated net remaining capital needs, after anticipated and potential construction-loan funding, of approximately $87.8 million through late 2012.
- Near-term funding and refinancing exposures included $471.8 million of scheduled 2011 mortgage principal payments, the $456.6 million 601 Lexington Avenue mortgage maturing in May 2011, and a $25 million Montvale Center mortgage. BXP reported it had ceased payments and was in default on the Montvale loan, with resolution uncertain.
- Other risks include office-market weakness and tenant credit, rents on renewals potentially below expiring rents, construction cost and lease-up risk, refinancing and covenant risk, concentrated exposure to five markets, joint-venture obligations, tax-protection limits on property sales, REIT qualification, and uninsured or underinsured catastrophe and environmental losses. Management cited gradual leasing improvement but said labor-market recovery remained important.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective; ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Montvale Center default status, lender negotiations, collateral exposure and any potential loss or recourse obligations.
- Renewal or replacement of the $1.0 billion credit facility and refinancing of the 601 Lexington Avenue mortgage, including actual proceeds, pricing and maturity terms.
- 2011 maturities and holder put dates, including the Series Two Preferred Units’ potential May 2011 cash redemption right and exchangeable-note repurchase provisions.
- Leasing and occupancy progress, especially 2011 expirations, renewal spreads, concessions and the lease-up of 510 Madison Avenue and development projects.
- Reconciliation of reported net income, FFO and cash flows, including the recurring versus one-time effects of debt extinguishment losses and non-cash deferred fees.
- Actual development spending, remaining funding needs, and whether projected 2011 interest expense, hotel NOI, third-party fees and dividend assumptions are achieved.
- Joint-venture debt maturities and guarantees, including any capital calls, and the adequacy of catastrophe coverage and captive-insurer resources.