BXP, Inc. (Boston Properties) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. BXP is a REIT operating primarily through Boston Properties Limited Partnership (BPLP). The company owned or held interests in 167 properties totaling approximately 46.3 million net rentable square feet, concentrated in Boston, New York, San Francisco and Washington, D.C.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $666.0 million | $618.5 million |
| Operating income | $250.4 million | $206.2 million |
| Net income | $216.2 million | $209.2 million |
| Net income attributable to BXP common shareholders | $181.7 million | $171.2 million |
| Diluted EPS | $1.18 | $1.11 |
| Consolidated NOI (non-GAAP) | $432.5 million | $384.2 million |
| FFO attributable to BXP common shareholders (non-GAAP) | $250.7 million | $200.4 million |
| Net cash provided by operating activities | $349.0 million | $201.4 million |
Revenue increased about 7.7%; operating income increased about 21.4%, and common-shareholder net income increased about 6.2%. Consolidated NOI rose 12.6%. Reported results included $51.3 million of lease-termination income, versus $14.9 million in the prior-year quarter, and lower gains on property sales. The filing does not present a single standardized operating-margin measure.
Cash, debt and liquidity
- Cash and cash equivalents were $1.606 billion at March 31, 2016, up from $723.7 million at year-end 2015. Operating cash flow was $349.0 million; investing activities used $109.4 million and financing activities provided $642.3 million.
- Consolidated debt was approximately $10.0 billion, all fixed-rate, with a 4.29% GAAP weighted-average interest rate and 4.6-year weighted-average maturity. Debt represented 31.18% of total consolidated market capitalization; management’s adjusted debt-to-adjusted-market-capitalization measure was 29.80%.
- BPLP issued $1.0 billion of 3.650% senior notes due 2026 in January, with approximately $988.9 million net proceeds. No borrowings were outstanding under its $1.0 billion revolving credit facility at quarter-end; approximately $983.9 million was available after letters of credit.
- Four mortgage or mezzanine loans totaling approximately $2.7 billion were scheduled to mature through 2017, including the General Motors Building mortgage and mezzanine debt. The company had entered into forward-starting swaps covering $550 million for planned 2016 financing and $450 million related to planned 2017 financing.
- Development and redevelopment projects had estimated total investment of approximately $2.6 billion; management estimated about $1.4 billion of remaining costs through 2020. Management cited quarter-end liquidity and financing access as adequate to fund current projects and pursue selected opportunities.
Operating changes and management outlook
- Same-property rental revenue increased 2.1%; average same-property occupancy eased to 92.0% from 92.1%. Overall portfolio occupancy declined from 91.4% at December 31, 2015 to 91.0% at March 31, 2016, primarily due to a vacancy at 611 Gateway.
- Q1 leasing totaled approximately 1.5 million square feet, above the company’s 10-year quarterly average. On qualifying second-generation leases, gross rents increased 16.39% and net rents 26.06% versus expired leases.
- Management expected 2016 same-property NOI to be relatively flat versus 2015, reflecting lease expirations, expected downtime and repositioning work, despite rent increases on new leases. It expected lease-up and development deliveries to support revenue growth in 2017 and 2018.
- Management expected 2016 hotel NOI of $13 million–$15 million; development and management services income of $22 million–$26 million; general and administrative expense of $102 million–$107 million; and interest expense of approximately $400 million–$415 million. Interest guidance assumed no additional debt or prepayments and no material changes in rates or development activity.
- Management expected 2016 asset-sale gross value to be less than half of the approximately $584 million sold in 2015, while prioritizing development and redevelopment over stabilized acquisitions. New construction would generally require significant pre-leasing.
Unusual items, risks and contingencies
- The $45 million payment for early termination of an approximately 85,000-square-foot lease at 250 West 55th Street was recognized in base rent. The lease otherwise ran through 2035. BXP also sold 415 Main Street for $105.4 million gross, recognizing a gain of approximately $60.8 million for BXP.
- After quarter-end, BXP repaid the $211.3 million Fountain Square mortgage using available cash. A 50%-owned joint venture received a lender default notice for Annapolis Junction Building One related to its loan-to-value covenant; the approximately $40 million loan is non-recourse to BXP, and discussions with the lender were ongoing.
- Property development, leasing demand, tenant credit, refinancing costs and interest rates, joint-venture performance, and property values are key business risks. The filing also discusses potential uninsured catastrophe losses, including terrorism and earthquake risks, and derivative counterparty and settlement risks.
- Forward-starting swaps had a fair-value liability of approximately $69 million at quarter-end. A debt acceleration default could trigger settlement obligations; no collateral had been posted. Management reported compliance with unsecured-note financial covenants.
- The company reported ordinary-course legal proceedings and ongoing state and local tax audits; management did not expect current matters to materially affect results, but audit outcomes were uncertain. No material changes to previously disclosed risk factors were reported.
Investor facts to verify
- How much of revenue and NOI growth reflects the $45 million termination payment and other termination income, rather than recurring leasing performance?
- Whether 2016 same-property NOI remains flat as forecast, given lease expirations, repositioning downtime and occupancy changes.
- Refinancing terms, availability of capital and covenant headroom for the approximately $2.7 billion of scheduled maturities through 2017.
- Resolution and any financial impact of the Annapolis Junction Building One loan-to-value default notice.
- Actual development spending, pre-leasing, delivery schedules and remaining funding needs compared with management’s estimates.
- Any material changes in insurance availability or cost, swap liabilities, or the company’s ability to realize proceeds from the remaining Lehman Brothers claim.