BXP, Inc. (Boston Properties) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. BXP is a REIT whose operating partnership, BPLP, conducts substantially all business; results are consolidated. Financial figures below are in U.S. dollars. Unless stated otherwise, dollar amounts are in millions.
Business context
BXP owns and operates primarily Class A office properties concentrated in Boston, Los Angeles, New York, San Francisco and Washington, D.C. At quarter-end it owned or held interests in 196 properties totaling approximately 51.9 million net rentable square feet, including 13 properties under construction or redevelopment totaling approximately 6.3 million square feet.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $743.6 | $686.3 | $2,203.1 | $2,011.9 |
| Net income | $141.4 | $150.4 | $476.0 | $527.3 |
| Net income attributable to BXP common shareholders | $107.8 | $119.1 | $370.2 | $423.8 |
| Diluted EPS | $0.70 | $0.77 | $2.39 | $2.74 |
| Company share of NOI (non-GAAP) | $433.3 | $391.1 | $1,292.7 | $1,142.6 |
- Revenue increased 8.3% for the quarter and 9.5% year to date; company share of NOI increased 10.9% and 11.4%, respectively. Same-property NOI grew 7.6% in Q3 and 8.0% year to date.
- Common-shareholder earnings fell 9.5% in Q3 and 12.7% year to date. Diluted EPS was lower in both periods.
- Q3 interest expense rose 11.6% year over year to $106.5 million; nine-month interest expense increased 11.5% to $309.8 million. General and administrative expense rose 14.8% year to date, partly because new lease accounting rules require certain internal leasing wages and legal costs to be expensed rather than capitalized.
- Operating cash flow was $819.8 million for the nine months, versus $770.6 million. Investing used $736.5 million, compared with $1,020.1 million; financing provided $82.2 million, compared with $167.9 million. Cash and cash equivalents plus restricted cash totaled $804.8 million at September 30, 2019, versus $423.8 million a year earlier.
- Quarter-end consolidated debt was $11.84 billion, including $8.39 billion of unsecured senior notes, $2.95 billion of mortgage debt and a $498.8 million term loan. The revolving facility had no borrowings; approximately $1.5 billion was available. About 95.8% of consolidated debt was fixed rate; weighted-average GAAP interest rate was 3.78% and weighted-average maturity was 6.1 years. Debt was 34.4% of consolidated market capitalization, a market-based measure.
- Management reported approximately $633 million of cash and cash equivalents and $1.5 billion of revolver availability as of November 1, 2019; the cash figure includes approximately $108 million attributable to consolidated joint-venture partners. BXP reported no consolidated debt maturing through 2020.
- Quarterly common dividend was $0.95 per share. Management states it will continue to assess the dividend in light of taxable income, liquidity and other circumstances.
Changes versus the prior comparable period
- Occupancy of in-service office and retail properties improved to 92.6% from 91.1% a year earlier. Management reported Q3 lease commencements of approximately 1.5 million square feet in second-generation space; those leases represented a 34% increase in net rental obligations over prior leases on the space evaluated.
- Year-to-date earnings were weighed down by the absence of substantial prior-year real estate sale gains: gains on sales were $0.8 million for BXP versus $122.6 million in 2018. The 2019 period also included a $24.0 million impairment loss and a $28.0 million early-debt-extinguishment loss.
- A $47.3 million gain associated with the sale of 540 Madison Avenue through an unconsolidated joint venture supported year-to-date income from joint ventures, which was $47.5 million versus a $3.1 million loss in 2018.
- Same-property lease revenue growth reflected higher average revenue per square foot and occupancy. Same-property operating expenses increased 4.8% in Q3 and 4.5% year to date, chiefly due to higher real estate taxes.
- BXP adopted the new lease accounting standard on January 1, 2019. It combined certain lease and non-lease tenant income in the “Lease” revenue line and recognized right-of-use assets and lease liabilities. The reclassification affects comparability of revenue categories; management described the impact on the income statement as a reclassification.
Outlook, risks and unusual items
- Management described Q3 macroeconomic conditions as stable and generally favorable, while noting slowing U.S. and global economies. It remained optimistic based on leasing trends, low interest rates and development activity; no quantified earnings or FFO guidance is provided in the supplied filing text.
- The construction and redevelopment pipeline was estimated at approximately $3.6 billion of BXP’s share of total costs, with approximately $1.6 billion remaining to invest; approximately 78% of commercial space was pre-leased as of November 1, 2019. The 2100 Pennsylvania Avenue project was approximately 66% pre-leased, with expected investment of approximately $356 million.
- Management intends to prioritize leasing, project completion, redevelopment, disciplined investment and management of debt maturities. It expects selective sales of non-core assets through 2020, subject to market conditions.
- Key risks include economic weakening and its effect on tenant credit, occupancy and rents; development delays and cost overruns; financing availability and interest rates; joint-venture partner performance; uninsured catastrophic losses and insurance costs; cyber and operational disruptions; and maintaining REIT status. Management noted that some insurers’ financial ratings were below requirements in certain loan agreements, although it believed qualifying replacement coverage could be obtained.
- Development and joint-venture commitments include a $1.6 billion estimated remaining development/redevelopment investment and various guarantees. The maximum funding obligation under a guarantee related to the General Motors Building was approximately $71.7 million; no liability was recorded for that contingent obligation. Letter-of-credit and performance obligations totaled approximately $15.2 million.
- An immaterial out-of-period reclassification of deferred stock units was recorded in Q3, correcting prior-period balance-sheet classifications. The filing also reports the $24.0 million One Tower Center impairment, $28.0 million debt-extinguishment loss, and new long-term ground-lease liabilities. Management said it was in compliance with senior-note financial covenants at September 30.
Important facts for investors to verify
- Review the full-year earnings and FFO outlook in subsequent filings; this 10-Q does not provide quantified guidance.
- Track occupancy, lease renewals, tenant credit and rent spreads, particularly in New York and Washington, D.C., and assess whether leasing gains persist.
- Verify project budgets, remaining funding needs, pre-leasing and delivery schedules across the development pipeline.
- Assess debt maturities, refinancing terms, interest-rate exposure and the distinction between consolidated debt and BXP’s share of unconsolidated joint-venture debt.
- Consider nonrecurring gains and charges, lease-accounting presentation changes and other adjustments when comparing earnings across periods.
- Monitor guarantees, joint-venture obligations, insurance coverage and potential exposure to catastrophe losses.