BXP, Inc. quarterly report, Q1 FY2020

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BXP, Inc. (Boston Properties) — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. BXP is a REIT that conducts substantially all operations through Boston Properties Limited Partnership (BPLP); the filing presents their consolidated results. Amounts below are in U.S. dollars.

Business context and operating results

  • BXP owned or had interests in 196 commercial properties totaling approximately 51.8 million net rentable square feet, primarily Class A office space, across Boston, Los Angeles, New York, San Francisco and Washington, DC.
  • Total revenue was $752.6 million, up 3.7% from $725.8 million in Q1 2019. Lease revenue was $710.1 million, up 4.5%; hotel revenue declined to $6.8 million from $8.9 million.
  • Net income was $577.1 million versus $131.2 million. Net income attributable to BXP common shareholders was $497.5 million, or $3.20 per diluted share, compared with $98.1 million, or $0.63, a year earlier.
  • The sharp earnings increase primarily reflected $410.2 million of real-estate sale gains, versus a $0.9 million loss in Q1 2019. The 2020 gains included the Gateway Commons joint-venture contribution and sale of New Dominion Technology Park. Accordingly, reported earnings substantially reflect dispositions, not just recurring property operations.
  • Company-share net operating income (NOI), a non-GAAP measure, increased 5.4% to $452.8 million. Same-property NOI increased 3.9%; same-property lease revenue excluding termination income rose 4.3%, while real estate operating expenses rose 2.5%. NOI is not a GAAP measure and may not be comparable with other REITs’ definitions.
  • BXP FFO attributable to common shareholders, a non-GAAP measure, was $284.1 million versus $266.0 million. The filing does not provide a directly stated FFO-per-share figure in the supplied text.
  • Overall in-service office and retail occupancy was 92.9% at March 31, down 10 basis points from December 31, 2019. Weighted-average lease term was approximately 8.3 years, including unconsolidated joint ventures.

Cash flow, debt and liquidity

  • Cash provided by operating activities was $175.2 million, down from $207.2 million. Investing activities used $73.8 million, compared with $223.5 million used in Q1 2019; financing activities provided $65.3 million versus $190.6 million used.
  • At March 31, cash and cash equivalents were $660.7 million and cash held in escrows was $197.8 million, totaling $858.6 million. The filing reports $432.3 million for the corresponding total at March 31, 2019.
  • Consolidated debt was $12.1 billion at March 31: $8.4 billion of unsecured senior notes, $2.9 billion of mortgage debt and $749.1 million outstanding under the credit facility. Approximately 93.8% of debt was fixed-rate; the weighted-average GAAP interest rate was 3.70%. Consolidated debt was 42.73% of consolidated market capitalization, a market-price-sensitive ratio.
  • The next stated BPLP senior-note maturity was $850 million in May 2021. BPLP was in compliance with its senior-note financial covenants at quarter-end. The revolving facility had $250 million drawn at March 31 and approximately $1.2 billion available; after a subsequent debt offering and repayment, approximately $1.5 billion was available as of May 5.
  • After quarter-end, BPLP issued $1.25 billion of 3.25% senior notes due 2031, receiving approximately $1.24 billion net. A portion repaid $250 million of revolving-facility borrowings. As of May 5, BXP reported approximately $1.6 billion of cash and cash equivalents, including the offering proceeds; approximately $124 million was attributable to consolidated joint-venture partners and approximately $151 million was held in escrow for 1031 exchanges.
  • BXP declared a quarterly common dividend of $0.98 per share, up from $0.95 in the prior-year comparable quarter. Management said the board would continue to evaluate the dividend in light of taxable income, liquidity and COVID-19 developments.

Material changes and unusual items

  • On January 28, BXP contributed three Gateway Commons properties and development rights, valued at approximately $350 million, to a new joint venture. It recognized a $217.7 million gain for BXP; the transaction shifted the properties to equity-method accounting.
  • On February 20, BXP sold New Dominion Technology Park for $256 million gross, received approximately $254 million net cash and recognized a $192.3 million gain.
  • Q1 2019 included a $24.0 million BXP impairment loss related to One Tower Center; no impairment loss was recorded in Q1 2020.
  • BXP adopted the expected-credit-loss accounting standard on January 1, 2020, recording an approximately $1.5 million cumulative-effect reduction to earnings/capital and approximately $0.2 million attributable to noncontrolling interests.
  • Q1 operating cash flow decreased despite higher net income, in part because 2020 net income included large noncash property-sale gains. The cash-flow statement also reflects higher development and joint-venture investment activity.

Outlook, management commentary and risks

  • The filing provides no quantified full-year 2020 earnings or revenue guidance. Management said the full COVID-19 impact was not predictable and expected 2020 revenue pressure from lower collections, reduced parking and hotel activity, slower leasing and delayed lease revenue associated with construction delays.
  • April rent collections were approximately 93% overall. Office collections were approximately 97%; retail collections were approximately 36%. Collections from flexible-office and manufacturing/retail office tenants were approximately 78% and 73%, respectively. These are April figures disclosed after quarter-end, not Q1 results.
  • The Boston Marriott Cambridge closed on March 22, was running at a monthly deficit, and had no stated reopening date. Stay-at-home measures also left hourly/daily parking revenue minimal in April.
  • Office properties remained open, but physical occupancy was low, leasing requirements had declined, and physical tours were on hold. Construction had paused in Boston, New York and San Francisco by quarter-end, while continuing in the Washington, DC region. Management said projects remained on schedule and within budget at the time, but cautioned that extended stoppages could affect milestones, costs and returns.
  • Many retail and some office tenants requested concessions, deferrals or abatements; BXP was assessing requests case by case. Management warned that tenant distress, rent disputes, lease modifications, bad-debt write-offs, prolonged remote work, construction delays and capital-market disruption could materially affect results, cash flows, liquidity and dividends.
  • Management cited approximately $1.2 billion of BXP’s share of remaining development and redevelopment costs through 2024 and said available liquidity was expected to cover existing commitments and potential opportunities. This outlook is subject to substantial COVID-19 uncertainty.
  • Unconsolidated joint ventures had approximately $498.8 million of debt maturing in 2020, of which BXP’s share was approximately $202.5 million. Certain guarantees and insurance exposures remain; potential pandemic-related business interruption and rental-income losses were not yet quantifiable, and insurance coverage was uncertain.

Most important facts for investors to verify

  • Whether post-quarter rent collections, tenant credit quality and any concessions or rent write-offs materially changed from the April figures disclosed here.
  • How much of reported earnings and FFO reflects recurring property operations versus the Gateway and New Dominion transactions; also review the company’s non-GAAP reconciliations.
  • Cash available for corporate use versus amounts attributable to joint-venture partners or held in escrow, and the continued availability and terms of revolving credit.
  • Progress on the May 2021 $850 million note maturity, joint-venture maturities, covenant headroom and any further refinancing or repayment actions.
  • Whether COVID-related construction pauses, leasing slowdowns, hotel closure and reduced parking activity affect project delivery, occupancy, cash flows, development costs or the dividend.
  • Potential tenant, joint-venture, insurance and guarantee exposures that may develop as the pandemic and related claims evolve.