BXP, Inc. (Boston Properties) — Q3 2015 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2015. BXP is a REIT focused on owning, operating and developing commercial real estate, primarily Class A offices, in Boston, New York, San Francisco and Washington, DC. At quarter-end, it owned or had interests in 171 properties totaling approximately 46.6 million net rentable square feet, including 14 properties under construction or redevelopment.
Financial performance and liquidity
- Q3 revenue: $629.9 million, up 1.8% year over year. Operating income was $227.8 million, up 6.0%.
- Q3 earnings: Net income attributable to common shareholders was $184.1 million, or $1.20 per diluted share, versus $127.7 million, or $0.83, in Q3 2014. The increase was substantially influenced by real estate sale gains of $199.5 million, compared with $41.9 million a year earlier.
- Q3 property operations: Consolidated NOI, a non-GAAP measure, was $396.1 million, up 1.7%; same-property NOI was essentially flat, down 0.02%. Q3 FFO attributable to common shareholders was $217.3 million, versus $223.4 million in 2014.
- Nine months: Revenue was $1.87 billion, up 4.7%; net income attributable to common shareholders was $434.7 million, up 68.2%. Real estate sale gains totaled $294.6 million versus $41.9 million. Operating cash flow was $608.9 million, compared with $469.7 million.
- Balance sheet and debt: Cash and equivalents were $1.39 billion. Consolidated debt was $9.73 billion, all fixed-rate, with a 4.40% GAAP weighted-average rate and 4.3-year weighted-average maturity. Adjusted debt, including BXP’s share of unconsolidated joint venture debt and excluding partners’ share of consolidated debt, was $9.09 billion. No balance was drawn on the $1.0 billion credit facility; approximately $970 million was available as of November 2, 2015.
- Cash uses: Financing activities used $1.38 billion in the first nine months, principally for dividends and distributions, including the $4.50-per-share special dividend paid in January. Cash declined by $376.1 million from year-end 2014.
Material changes versus prior comparable periods
- Q3 earnings growth substantially reflected the 505 9th Street sale gain; approximately $101.1 million of that gain was allocated to outside partners. For the nine-month period, sale gains also included the Residences on The Avenue and land sales.
- Q3 same-property NOI was nearly unchanged as rent growth was offset by lower average occupancy and higher property operating costs. For the first nine months, same-property NOI increased 2.7%.
- Overall occupancy improved slightly during Q3, from 91.1% to 91.3%; BXP signed leases for approximately 1.3 million square feet during the quarter. Reported same-property average occupancy was 91.7%, down from 92.9% a year earlier.
- Debt declined from $10.48 billion at September 30, 2014 to $9.73 billion. Interest expense was lower year over year, while lower capitalized interest partly offset the reduction.
Outlook, management commentary and risks
- Management expected 2016 same-property NOI growth to be relatively flat and occupancy to average 90%–92%, citing large lease expirations, re-leasing downtime and planned repositionings. It anticipated stronger growth in 2017 from lease-up and development deliveries.
- Management projected 2016 interest expense of $400–$420 million, net of $38–$48 million of capitalized interest; development and management services income of $20–$24 million; hotel NOI contribution of $13–$15 million; and G&A expense of $102–$107 million. These estimates depend on stated financing, interest-rate and development assumptions.
- The development pipeline comprised 14 projects totaling approximately 4.7 million square feet, with BXP’s share of projected investment approximately $2.7 billion and approximately $1.5 billion remaining to fund. Commercial space was approximately 59% pre-leased. Management cited approximately $1.0 billion of available cash and $970 million of credit availability, plus potential asset-sale proceeds and debt financing.
- Eight mortgage loans totaling approximately $3.5 billion were scheduled to mature in 2016–2017, of which BXP’s share was approximately $2.9 billion. Forward-starting swaps were intended to hedge future financings, including a targeted $500 million financing in 2016.
- Management described strong leasing conditions in Boston and San Francisco and Reston Town Center, but slower Washington, DC CBD activity and constrained demand for certain government-related properties. Planned repositionings at 601 Lexington Avenue and 100 Federal Street, and expected tenant departures at Gateway, were likely to weigh on near-term occupancy or revenue.
- Key risks include refinancing and interest-rate exposure, development costs and lease-up, tenant credit and demand, joint-venture obligations, and potentially insufficient insurance for catastrophic events. BXP also disclosed a Lehman Brothers claim with approximately $29.4 million remaining; future recoveries are uncertain and were not recorded. A potential sale of Innovation Place for $207 million remained subject to closing conditions.
Important facts for investors to verify
- How much of reported earnings growth reflects property operations versus asset-sale gains, termination income and other nonrecurring items; compare GAAP earnings with FFO and same-property NOI.
- Progress on 2016–2017 mortgage maturities, refinancing costs, planned financing and the effectiveness of interest-rate hedges.
- Leasing, occupancy and cash-flow impacts from major expirations, tenant departures and repositioning projects, especially in Washington, DC and San Francisco.
- Funding needs, pre-leasing and delivery schedules for the development pipeline, including the stated remaining investment requirement.
- Potential exposure from the Residences on The Avenue NOI-support commitment, guarantees, insurance limitations and the unresolved Lehman claim; also verify whether the Innovation Place sale closes.
NOI and FFO are non-GAAP measures and are not substitutes for GAAP net income or operating cash flow.