BXP, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Boston Properties, Inc. (BXP) is a self-managed REIT focused on owning, operating, and developing commercial real estate, principally Class A offices in Boston, New York, San Francisco, and Washington, D.C. This unaudited filing covers the three months ended March 31, 2015, with comparisons to Q1 2014. At quarter-end, BXP owned or held interests in 168 properties totaling approximately 45.5 million net rentable square feet, including 10 properties under construction.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total revenue | $618.5 million | $574.7 million | Up 7.6%; rental revenue was $604.1 million versus $561.3 million. |
| Operating income | $206.2 million | $176.9 million | Up 16.6%; operating margin was approximately 33.4%, compared with 30.8%. |
| Net income | $209.2 million | $67.8 million | Includes $95.1 million of real estate sale gains in 2015. |
| Net income attributable to BXP common shareholders | $171.2 million | $54.0 million | Up 216.8%. |
| Diluted EPS | $1.11 | $0.35 | 2015 basic EPS was $1.12. |
| Net operating income (NOI) | $384.2 million | $356.3 million | Up 7.8%; non-GAAP measure. |
| FFO attributable to BXP common shareholders | $200.4 million | $183.8 million | Up approximately 9.0%; non-GAAP measure. |
| Net cash from operating activities | $201.4 million | $124.2 million | Up $77.2 million. |
Margins and operating performance. Same Property Portfolio rental revenue increased 5.25%, while same-property real estate operating expenses increased 5.42%; same-property NOI increased 5.14%. Management attributed revenue gains to higher revenue per square foot, partly offset by lower average occupancy. Expenses rose primarily because of real estate taxes, utilities, and snow removal. Reported results also benefited from termination income of $14.9 million, compared with $1.1 million in Q1 2014; this included a $4.5 million distribution on a Lehman Brothers claim.
Cash, debt, and liquidity. Cash and cash equivalents were $1.064 billion at March 31, down from $1.763 billion at December 31, 2014; cash held in escrows was $588.2 million. Investing activities provided $2.7 million, compared with $147.1 million used in Q1 2014, reflecting property-sale proceeds and development spending. Financing activities used $902.9 million, mainly for dividends and distributions, including the special distribution declared in 2014 and paid in January 2015. Consolidated debt was $9.887 billion, all fixed-rate, with a 4.40% GAAP weighted-average interest rate, 4.98% stated rate, and approximately 4.8-year weighted-average maturity. Debt was 28.93% of consolidated market capitalization; management’s adjusted debt measure was $9.064 billion. The $1.0 billion revolving credit line had no borrowings and approximately $983.5 million available at May 4, 2015. Management reported approximately $1.3 billion of available liquidity at that date, including restricted cash. BXP reported no significant debt maturities in 2015, but identified nine mortgage loans totaling approximately $3.7 billion maturing in 2016–2017, with BXP’s share of consolidated and unconsolidated joint venture debt approximately $2.9 billion.
Material changes and unusual items
- Q1 net income included a $91.4 million gain on the March sale of Residences on The Avenue and a $3.7 million gain on sale of a Maryland land parcel. The residential property sold for $196.0 million gross, with approximately $192.5 million net proceeds. BXP agreed to provide up to $6.0 million of NOI support if specified thresholds are not met.
- Income from unconsolidated joint ventures increased to $14.8 million from $2.8 million, primarily due to BXP’s share of income from 901 New York Avenue. BXP also received a $24.5 million distribution from that venture following a $225 million mortgage refinancing; allocations reflected achievement of contractual return thresholds.
- Interest expense decreased by $4.8 million year over year, as lower expense from debt redemptions and repayments more than offset a reduction in capitalized interest.
- Operating cash flow exceeded the prior-year period, but cash declined substantially from year-end following the $4.50-per-share special dividend, in addition to the regular dividend.
- BXP began hedging a planned September 2016 financing with $250 million of forward-starting swaps at a weighted-average 10-year swap rate of approximately 2.492%. Subsequent to quarter-end, it entered into additional $75 million of swaps at 2.344%.
Outlook, management commentary, and risks
- Portfolio occupancy fell from 91.7% at December 31, 2014 to 90.3% at March 31, 2015, as approximately 2.0 million square feet expired or was terminated. BXP signed 91 leases totaling approximately 1.5 million square feet. Management expected 2015 average occupancy to be just under 91% and same-property NOI to range from a 0.50% decrease to a 0.50% increase versus 2014.
- Management cited stronger leasing demand in San Francisco, Silicon Valley, Cambridge, and suburban Boston, while Washington, D.C. activity remained slow amid federal budget uncertainty. Densification and new construction could constrain occupancy and rent growth. Some Boston space is expected to remain vacant during build-outs, delaying income into 2016 or later.
- The development pipeline totaled approximately 3.3 million square feet, with projected investment of $2.15 billion and approximately $1.2 billion remaining to fund through 2019. Projects were 61% leased as of May 4, 2015. BXP targeted approximately $750 million of total asset sales in 2015, while noting that timing and volume were uncertain.
- Management forecast 2015 net interest expense of approximately $423–$433 million, hotel NOI of $12–$14 million, development and management services income of $17–$22 million, and general and administrative expenses of $96–$100 million.
- Principal risks include tenant demand and credit quality, lease rollover and leasing costs, development delays or cost overruns, interest rates and financing access, joint venture obligations, and uninsured catastrophe losses. Earthquake insurance limits may be insufficient; some coverage is provided by BXP’s captive insurer and is therefore a form of self-insurance. BXP also disclosed guarantees and contingent support obligations, including the sale-related NOI support and development/lender obligations.
- BXP stated it was in compliance with its credit facility and unsecured note covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings growth is recurring: reconcile the $95.1 million real estate gains, elevated termination income, and joint venture refinancing-related income with ongoing property performance and FFO.
- Whether occupancy and leasing trends recover as expected, particularly in Boston and Washington, D.C., and whether lease-up of development assets delivers forecast rents and returns.
- Funding needs, lease-up, and cost exposure for the $2.15 billion development pipeline, including the approximately $1.2 billion yet to be funded.
- Refinancing plans for the 2016–2017 mortgage maturities and the impact of rates, prepayment costs, and the forward-starting hedges.
- Cash availability after the special dividend, including the restrictions on escrowed funds and reliance on asset sales or credit facilities.
- Potential claims or obligations from the Residences on The Avenue NOI support, joint venture guarantees, insurance arrangements, and BXP’s remaining Lehman Brothers claim; the filing gives no assurance of timing or recovery for that claim.