BXP, Inc. quarterly report, Q2 FY2016

Full document

BXP, Inc. — Q2 2016 Form 10-Q

Business context and period: Quarter and six months ended June 30, 2016; filed August 4, 2016. BXP is a REIT whose operating partnership, BPLP, conducts substantially all business. The company owned or held interests in 168 properties totaling approximately 46.5 million rentable square feet, primarily Class A offices, in Boston, New York, San Francisco and Washington, D.C.; it entered Los Angeles through an acquisition after quarter-end.

Financial performance

  • Revenue: Q2 revenue was $623.5 million, up 0.9% year over year; first-half revenue was $1.290 billion, up 4.3%. First-half base rent rose to $1.030 billion from $977.3 million.
  • Profit and earnings: Q2 net income attributable to BXP common shareholders was $96.6 million ($0.63 per share), versus $79.5 million ($0.52) a year earlier. First-half common-shareholder income was $278.3 million ($1.81 per share), versus $250.7 million ($1.63). First-half net income was $333.6 million, up 7.6%.
  • Operating performance: Operating income was $218.1 million in Q2 and $468.5 million for the first half. First-half company-defined NOI was $824.6 million, up 6.5%; same-property NOI increased 6.0%, but included materially higher lease-termination income. Q2 same-property NOI declined 0.4% to $379.6 million.
  • Cash flow: First-half operating cash flow was $584.2 million, compared with $443.1 million in 2015. Investing activities used $425.6 million, principally for development, tenant improvements and the $78 million Peterson Way acquisition. Financing provided $297.8 million. Cash and equivalents were $1.180 billion at June 30.
  • Debt and liquidity: Consolidated debt was $9.754 billion, all fixed-rate, with a 4.32% GAAP weighted-average rate and 4.4-year weighted-average maturity. Debt was 29.91% of consolidated market capitalization. The $1.0 billion revolving facility had no borrowings; approximately $983.9 million was available at June 30. Management reported approximately $555 million cash and $983.5 million facility availability as of August 2, after the Colorado Center acquisition.
  • Dividends: Common dividends were $0.65 per share for each of Q2 and first-half 2016 ($1.30 first half), unchanged from 2015. The $1.25 special dividend paid in January 2016 related to 2015 asset-sale taxable gains.

Material changes and notable items

  • First-half same-property rental revenue increased 4.4%, including $59.0 million of termination income versus $21.6 million in 2015. A $45 million payment to terminate a long-dated lease at 250 West 55th Street was a major component. These items make reported growth less representative of recurring rent trends.
  • First-half real estate sale gains were $67.6 million for BXP, down from $95.1 million. The 2016 gain primarily reflected the February sale of 415 Main Street for approximately $105.4 million gross.
  • BXP issued $1.0 billion of 3.65% senior notes due 2026, with approximately $988.9 million net proceeds. It used cash to repay the $211.3 million Fountain Square mortgage. Mortgage debt declined while unsecured senior notes increased.
  • Three developments totaling approximately 850,000 square feet entered service during Q2; they were 94% leased on a weighted-average basis. At June 30, eight projects totaling approximately 3.8 million square feet were under construction or redevelopment, with estimated total investment of $2.1 billion and 52% of commercial space preleased.
  • On July 1, BXP acquired a 49.8% interest in the Colorado Center joint venture in Santa Monica for approximately $503.6 million net cash; the property was 68% leased. On July 29, it agreed to sell a land parcel for approximately $18 million, subject to closing conditions.

Outlook, management commentary and risks

  • Management cited healthy demand in core assets but elevated economic and capital-market uncertainty, including Brexit-related volatility, as potential factors delaying tenant decisions. Occupancy slipped from 91.0% at March 31 to 90.8% at June 30, largely due to planned New York expirations.
  • Management expects 2016 average occupancy of 90%–91.5% and same-property NOI to be relatively flat versus 2015, with moderation in the second half due to lease expirations and repositioning. It expects revenue growth in late 2017 and 2018 as leasing and development deliveries contribute.
  • Stated 2016 estimates include interest expense of $410–$430 million, hotel NOI of $13–$15 million, development and management services income of $23–$26 million, and G&A expense of $102–$107 million. Management expected $200–$350 million of asset sales. These are estimates, not a full-year earnings or FFO-per-share forecast.
  • Approximately $2.7 billion of consolidated mortgage and mezzanine loans mature through 2017, of which BXP’s share was approximately $2.1 billion. Management said refinancing markets were available and highlighted plans to refinance maturities and replenish cash after the acquisition. Forward-starting swaps hedge $550 million of targeted September 2016 financing and $450 million associated with 767 Fifth Avenue financing targeted for 2017.
  • A 50%-owned joint venture received a lender default notice for Annapolis Junction Building One because its loan-to-value covenant was not met; discussions with the lender were ongoing. The loan, with approximately $39.9 million outstanding, is non-recourse to BXP.
  • Other risks include major tenant lease expirations, leasing and construction costs, development execution, joint-venture obligations, interest-rate and refinancing conditions, and potentially insufficient coverage for catastrophic or uninsured losses. Swap fair-value changes produced a $91.0 million first-half effective hedge loss in other comprehensive income; approximately $4.8 million was expected to be reclassified to interest expense within 12 months.
  • Management reported disclosure controls were effective and no material change in internal control over financial reporting. Ordinary-course legal matters were not expected by management to have a material adverse effect.

Investor verification priorities

  • Separate recurring rental and same-property NOI trends from lease-termination income, property-sale gains and other nonrecurring items.
  • Track occupancy, lease expirations and renewals, leasing spreads, repositioning downtime, and the conversion of the development pipeline into occupied space and cash flow.
  • Verify refinancing progress and terms for 2016–2017 maturities, post-acquisition liquidity, and compliance with debt covenants.
  • Monitor the Annapolis Junction Building One default discussions and any effect on the joint venture or BXP’s investment.
  • Assess Colorado Center’s leasing and repositioning performance, development costs and preleasing, and whether planned asset sales close on expected terms.