BXP, Inc. (Boston Properties) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated. BXP is a REIT focused on owning, developing and managing Class A office properties in five U.S. markets, with additional hotel, residential and retail properties. At quarter-end, it owned or had interests in 152 properties totaling approximately 42.1 million net rentable square feet, including eight under construction.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $436.5m | $393.8m | $854.3m | $771.9m |
| Operating income | $154.1m | $165.4m | $292.2m | $310.5m |
| Net income attributable to BXP | $60.2m | $61.4m | $100.9m | $114.1m |
| EPS, basic and diluted | $0.41 | $0.44 | $0.70 | $0.82 |
| Consolidated NOI | $276.2m | $245.6m | $540.9m | $484.5m |
Q2 total revenue increased 10.8%, while operating income declined 6.8% and attributable net income declined 2.0%. For the first half, revenue rose 10.7%, but operating income fell 5.9% and attributable net income fell 11.6%. NOI is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Revenue drivers: Q2 rental revenue increased 14.2%, substantially reflecting acquisitions and properties placed in service. Same-property rental revenue rose 1.6% for Q2 and 0.4% for the first half; same-property NOI rose 0.7% and 0.4%, respectively. Management cited higher rent per square foot, partly offset by lower occupancy.
- Costs and margins: Q2 rental operating expenses increased 17.5%, while depreciation and amortization increased 36.5% to $111.1m. Management attributed much of the depreciation increase to accelerated depreciation ahead of planned redevelopment. Lower development and management services revenue also weighed on comparisons.
- Cash flow: First-half operating cash flow was $290.1m, versus $210.5m a year earlier. Investing used $190.1m, compared with $285.6m; financing provided $201.6m, compared with $329.6m. Cash and equivalents were $780.6m at June 30, up from $478.9m at December 31, 2010. First-half dividends and distributions paid were $164.8m.
- Debt and liquidity: Consolidated debt was $7.94bn, with a 5.24% GAAP weighted-average rate, 4.73% stated/coupon weighted-average rate and approximately five-year weighted-average maturity. About 90.3% was fixed-rate; debt represented 30.9% of consolidated market capitalization under the company’s calculation. Cash held in escrow ($302.4m) is separately reported from unrestricted cash. The amended revolver has a $750m commitment, matures June 2024, and had $453.3m drawn and approximately $282.9m available at June 30; BXP reported approximately $300m of availability and $600m available cash at August 1.
Material changes and notable items
- Acquired Bay Colony Corporate Center for approximately $185m, including assumed debt of $143.9m, and recognized revenue from the prior acquisition of John Hancock Tower and Garage. Acquisitions and newly placed-in-service developments contributed substantially to reported revenue growth.
- Issued 4.23m shares through the prior ATM program for approximately $394.7m net proceeds; the $400m program was fully used. A new $600m ATM program was established in June, with no shares issued under it by quarter-end.
- Refinanced the maturing $453.3m 601 Lexington Avenue mortgage with a revolver draw secured by the property. Management expected a new approximately $725m long-term mortgage at about 4.75% during Q3 2011, with proceeds also intended to refinance the $267.5m 510 Madison Avenue loan; this was a forward-looking expectation, not a completed transaction in this filing.
- Terminated the proposed $468m Carnegie Center sale without cost or payment to either party; BXP said it was not then marketing the portfolio. A ground lease and development agreement for 75 Ames Street was expected to yield $56.8m gross over time, including development fees; cash received is initially deferred rather than recognized immediately as sale revenue.
- First-half FFO attributable to BXP was not clearly provided in the supplied filing text; Q2 FFO attributable to BXP was $181.6m, compared with $156.9m. FFO is non-GAAP and should be considered with GAAP results and cash flows.
Outlook, management commentary and risks
- Management said leasing conditions had stabilized, with improving activity in selected Boston, Washington, DC and San Francisco submarkets, while midtown Manhattan activity moderated and Washington public-sector leasing faced budget uncertainty. Q2 leases totaling approximately 1.2m square feet commenced revenue recognition; second-generation starting gross rents were about 2.5% above prior rents for the cited space occupied within the prior 12 months.
- Near-term leasing pressure remained: management estimated expiring 2011 office rents were about 10% above current market rents. It expected occupancy to fall to approximately 90% by year-end 2011, then improve during 2012. Lease transitions were projected to reduce revenue by approximately $7m in the second half of 2011 and $16m in 2012.
- Management forecast 2011 hotel NOI of $8.0m–$8.5m, development and management services income of $29m–$31m, G&A expense of $81m–$83m, and interest expense of approximately $386m–$389m. These estimates depended on financing, development and other assumptions.
- Eight projects under construction represented estimated total investment of approximately $2.43bn, with 55% leased as reported using August 1 data. BXP estimated approximately $955m of future funding to complete developments, including its share of joint ventures, and said the pipeline through late 2014 was expected to be funded by cash and construction-loan availability.
- Credit and maturity concerns: BXP had ceased debt-service payments on the non-recourse Montvale Center mortgage and was in default, accruing default interest at 9.93%; resolution discussions with the special servicer were ongoing. The $626.2m 2.875% exchangeable notes could be put to the Operating Partnership in February 2012; management expected a repurchase and was considering financing options. Bay Colony’s assumed $143.9m mortgage matured in June 2012.
- Other risks include development cost, delay and lease-up exposure; tenant financial health and rent roll-down; interest-rate and refinancing risk; joint-venture debt and partner obligations; and uninsured or underinsured catastrophe losses. Certain insurance is provided by BXP-owned captive insurers and therefore is a modified form of self-insurance. Management reported compliance with revolver covenants at June 30.
- The filing reported ordinary-course legal proceedings that management did not expect to materially affect the company. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Investor verification priorities
- Confirm completion and final terms of the anticipated 601 Lexington Avenue financing and the planned repayment/refinancing of 510 Madison Avenue debt.
- Track the Montvale Center default, special-servicer discussions and any resulting impairment, loss or cash obligation.
- Verify the February 2012 exchangeable-note put exposure and the funding plan, alongside other 2012 mortgage maturities.
- Assess execution, leasing, funding needs and returns for the development pipeline, including the $955m estimated remaining funding and 250 West 55th Street’s cost and lease-up assumptions.
- Monitor same-property occupancy and rent spreads, the stated lease-transition revenue shortfalls, and the forecast year-end occupancy decline.
- Review unrestricted liquidity separately from escrow cash, revolver availability, covenant headroom, and joint-venture debt and guarantees.
- Reconcile GAAP earnings, operating cash flow, NOI and FFO, including the effects of depreciation, straight-line rent and acquisition/development activity.