BXP, Inc. (Boston Properties) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing combines BXP’s and its operating partnership BPLP’s reports; BXP owned approximately 89.7% of BPLP. Unless noted, amounts below are for the consolidated company and in U.S. dollars.
Business context and financial highlights
BXP is a REIT focused primarily on owning, developing and operating Class A office properties in major U.S. markets. At quarter-end, it owned or held interests in 178 properties totaling approximately 50.2 million rentable square feet; 12 properties totaling approximately 6.0 million square feet were under construction or redevelopment.
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Total revenue | $664.5 million, versus $656.9 million in Q2 2017 | $1.326 billion, versus $1.289 billion in 2017 |
| Operating income | $230.6 million, versus $238.7 million | $438.8 million, versus $444.9 million |
| Net income attributable to BXP common shareholders | $128.7 million; diluted EPS $0.83, versus $133.7 million and $0.87 | $304.7 million; diluted EPS $1.97, versus $230.8 million and $1.50 |
| Net operating income (NOI, non-GAAP) | $406.7 million, down 1.0% from $410.7 million | $808.1 million, up 0.9% from $801.1 million |
| Common dividend | $0.80 per share, versus $0.75 | $1.60 per share, versus $1.50 |
Q2 revenue increased about 1.2%, while operating income and common-shareholder earnings declined. Six-month common earnings rose 32.0%, but the increase principally reflects real estate sale gains: BXP reported $114.7 million for the six months, compared with $3.9 million in 2017. Excluding those gains, income before real estate sale gains fell 5.9% to $262.2 million. The filing reports NOI as a non-GAAP measure; it is not directly comparable across companies with different definitions.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $560.8 million, compared with $364.8 million; investing cash outflow was $485.8 million, compared with $547.7 million; financing cash inflow was $146.6 million, compared with $302.6 million.
- At June 30, cash and cash equivalents were $472.6 million and cash held in escrows was $254.5 million. Combined cash and escrow balances were $727.1 million. Escrow cash is restricted for specified purposes.
- Consolidated debt was $10.72 billion: $7.25 billion of unsecured senior notes, $2.97 billion of property mortgage debt and $498.2 million under the variable-rate term facility. Approximately 95.4% was fixed-rate; the weighted-average GAAP interest rate was 4.04%, and average maturity was 5.8 years.
- Debt-to-consolidated-market-capitalization was 33.0%; BXP’s share-of-debt ratio was 31.8%. These are supplemental, market-price-sensitive measures, not measures of debt capacity.
- BPLP drew the full $500 million delayed-draw facility in April. At June 30, it had no revolving-facility borrowings and approximately $1.5 billion of availability. At August 2, revolving borrowings were $160 million and availability was approximately $1.3 billion; cash and equivalents were approximately $316 million.
- BXP reported no consolidated debt maturing in 2018 and $700 million of 5.875% senior notes due October 2019. The company estimated 2018 net interest expense of $363–$375 million, including estimated capitalized interest of $60–$70 million.
Operating changes, outlook and risks
- Same-property rental revenue increased 0.7% in the first half, but same-property NOI declined 1.0%. Revenue gains were more than offset by higher operating expenses, including real estate taxes, utilities and other costs. Same-property average occupancy edged up to 91.7% from 91.6% for the six-month comparison.
- Overall in-service occupancy was 90.4% at June 30, down slightly from 90.5% at March 31. BXP signed approximately 1.7 million square feet of leases in Q2. For second-generation leases commencing in the quarter, reported net rents increased 6.1% on relevant space occupied within the prior 12 months.
- Management described its outlook as optimistic, citing steady job creation, active leasing in several markets and expected generally healthy operating and financial conditions. It anticipated further Federal Reserve rate increases but did not view them as a major risk at the time. This is management’s assessment, not a guarantee.
- The development pipeline had an estimated total cost of $3.28 billion, including approximately $1.12 billion of BXP’s future equity requirement; 88% of commercial space was pre-leased as of August 6. Management cited rising construction costs and labor-market tightening, and said it uses measures such as guaranteed maximum-price contracts and budget contingencies.
- Management forecast 2018 hotel NOI of $13–$15 million, development and management services revenue of $37–$42 million, and general and administrative expense of $118–$121 million. It expected selected non-core asset sales, subject to market conditions.
- Subsequent investments included the Santa Monica Business Park acquisition for approximately $627.5 million through a joint venture, a 3 Hudson Boulevard development-site venture, and a committed 100 Causeway Street office development with a major tenant lease. These transactions add investment and execution demands beyond June 30.
- Risks include economic and leasing-market weakness, tenant credit and occupancy, construction delays and cost overruns, higher financing rates, joint-venture partner performance, and uninsured catastrophic losses. One unconsolidated joint venture loan for Annapolis Junction Building One remained in default and delinquent on debt service; the company’s share of the loan carrying amount was approximately $19.8 million. BXP also disclosed a maximum $144.7 million funding guarantee for reserves associated with 767 Fifth Avenue, with no liability recorded for it at quarter-end.
- The company adopted several accounting standards in 2018; adoption of the revenue standard did not materially affect the financial statements. The expected 2019 lease-standard adoption was still under evaluation. Management reported effective disclosure controls and no material change in internal controls; it said ordinary-course legal matters were not expected to materially affect results or liquidity.
Important facts for investors to verify
- How much of the six-month earnings increase reflects asset-sale gains, and whether underlying NOI and operating trends improve.
- Progress, final costs, leasing and funding needs across the $3.28 billion development pipeline, including the approximately $1.12 billion remaining equity requirement.
- Liquidity and refinancing plans for the $700 million of senior notes due in October 2019, as well as the effects of variable rates and future borrowing.
- Status and potential exposure of the delinquent Annapolis Junction joint-venture loan and the 767 Fifth Avenue guarantee.
- Whether occupancy, leasing spreads and cost trends support management’s outlook and stated 2018 expense and revenue ranges.
- Terms, financing and returns of the post-quarter acquisitions and development commitments, including the long-term ground lease at Santa Monica Business Park.