BXP, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. BXP is a REIT that owns and operates primarily office properties in six U.S. markets; substantially all operations are conducted through Boston Properties Limited Partnership (BPLP). Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 | Comparable period |
|---|---|---|
| Total revenue | $790.5 million | $730.1 million in Q3 2021, up 8.3% |
| Net income attributable to BXP common shareholders | $361.0 million; diluted EPS $2.29 | $108.3 million; diluted EPS $0.69 |
| Company’s share of NOI, a non-GAAP measure | $475.9 million | $435.2 million, up 9.4% |
| FFO attributable to BXP, a non-GAAP measure | $299.8 million | $270.5 million |
- Q3 net income included $262.3 million of real-estate sale gains, versus $0.3 million in Q3 2021. The earnings increase therefore substantially reflects asset sales, not solely recurring property operations.
- For the first nine months, revenue was $2.319 billion versus $2.158 billion; net income attributable to BXP common shareholders was $727.1 million versus $311.7 million. Real-estate sale gains were $381.3 million versus $8.1 million.
- Q3 same-property NOI increased 2.5%; same-property lease revenue, excluding termination income, rose 3.2%. Average same-property occupancy declined from 91.4% to 90.8%. Same-property operating expenses rose 7.3% for the quarter.
- Net cash from operating activities for the nine months was $912.4 million, compared with $786.9 million in 2021. Investing activities used $1.313 billion, including $1.320 billion for acquisitions; financing activities provided $348.5 million. Cash and escrow balances ended at $448.9 million, versus $1.082 billion at September 30, 2021.
- At September 30, consolidated debt was $13.833 billion. Approximately 92.3% was fixed-rate; weighted-average GAAP interest rate was 3.43% and weighted-average maturity was 5.6 years. Debt equaled 51.3% of consolidated market capitalization, a market-based leverage measure.
- Balance-sheet cash was $375.8 million, with another $73.1 million held in escrows. At November 1, management reported $268.5 million of available cash, including cash attributable to consolidated joint-venture partners, and approximately $1.1 billion available under the revolving facility.
Material changes and operating activity
- BXP acquired Madison Centre in Seattle for approximately $724.3 million and 125 Broadway, a 100%-leased life-sciences property in Cambridge, for approximately $592.4 million. It funded Madison Centre with a $730 million unsecured term loan that matures in May 2023; 125 Broadway was funded with cash and revolving-facility borrowings.
- Asset sales included 601 Massachusetts Avenue for $531 million gross proceeds and two Loudoun County land parcels for $27 million. Together with earlier 2022 sales, dispositions generated substantial reported gains and cash proceeds.
- Q3 leasing totaled approximately 1.4 million square feet, the strongest third-quarter volume since 2019, with a weighted-average term of 9.8 years. In-service office and retail occupancy was 88.9% at quarter-end, down 60 basis points from June 30. Management attributed the slight decline partly to signed leases not yet commencing.
- The development and redevelopment pipeline comprised 14 properties totaling approximately 4.4 million square feet. BXP’s estimated remaining investment was $948.2 million, and the applicable pipeline was 52% pre-leased. The estimate excludes approximately $210 million for the planned 300 Binney Street redevelopment, which management said was 100% pre-leased but subject to conditions.
Outlook, risks and contingencies
- Management cited persistent inflation, rising interest rates and credit spreads, more difficult financing for construction and existing assets, and higher costs for potential future developments. It reported softer leasing demand and less urgency among clients, and is factoring slower economic growth and reduced space demand into 2023 leasing expectations.
- Management expects interest expense to be materially higher in 2023, citing floating-rate debt, acquisitions funded with debt, development interest no longer eligible for capitalization, and refinancing at higher rates. BXP’s $730 million term loan matures May 16, 2023; $500 million of senior notes mature September 1, 2023. Management also identified approximately $533.6 million of its share of unconsolidated-joint-venture debt maturing in 2023.
- Management said it expects to fund maturities with available cash, asset-sale proceeds, the revolving facility and/or refinancings, and considered liquidity sufficient for current requirements. This depends on access to financing and successful execution of planned transactions.
- Key risks include economic weakness affecting tenant credit and office demand, interest-rate and refinancing exposure, construction inflation and delays, joint-venture obligations, and potential uninsured catastrophe losses. The filing warns earthquake coverage may be insufficient; certain coverage is provided through BXP’s captive insurer and is not equivalent to third-party insurance.
- BXP reported compliance with its debt covenants. Letter-of-credit and performance obligations were approximately $26.5 million. Management said ordinary-course legal matters were not expected to materially affect financial position, results or liquidity.
- Subsequent events: BXP agreed to sell the residential component of The Avant for $141 million gross and agreed to acquire an approximately 27% interest in the joint venture owning 200 Fifth Avenue for approximately $280.2 million gross. Neither transaction was assured to close on the proposed terms.
Most important facts for investors to verify
- How much of earnings and cash generation reflects recurring operations versus property-sale gains, and how FFO and NOI trends compare with GAAP results.
- Whether occupancy, leasing demand and same-property expense growth improve, particularly given management’s caution about 2023 demand.
- Completion, funding and expected returns for the development pipeline, including remaining costs, pre-leasing and the conditional 300 Binney Street project.
- Plans and final financing costs for 2023 corporate and joint-venture debt maturities, and the effect of higher rates on interest expense and liquidity.
- Whether the proposed Avant sale and 200 Fifth Avenue investment close, and their resulting effects on cash, debt and the portfolio.