BXP, Inc. quarterly report, Q1 FY2011

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BXP, Inc. (Boston Properties) — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011; balance-sheet figures are as of March 31, 2011. Comparisons are with Q1 2010 unless stated otherwise. Dollar amounts below are in millions unless noted. The filing reports Boston Properties, Inc. and its consolidated subsidiaries, including the Operating Partnership.

Business context

BXP is a self-managed REIT focused on owning, developing and leasing primarily Class A office properties in Boston, Washington, D.C., Midtown Manhattan, San Francisco and New Jersey. At quarter-end it owned or had interests in 150 commercial properties totaling approximately 40.9 million net rentable square feet, including six properties under construction.

Financial results and key metrics

  • Revenue: $417.9, up 10.5% from $378.1. Rental revenue was $404.5, up 11.4%; much of the increase reflected acquisitions and properties placed in service.
  • Profitability: Operating income was $138.0, down 4.9%; net income was $48.2, down 22.9%; and net income attributable to BXP was $40.8, down 22.6%. Basic and diluted EPS were both $0.29, versus $0.38. Operating margin was approximately 33.0%, compared with 38.4% in Q1 2010, calculated as operating income divided by revenue.
  • FFO: Funds from Operations attributable to BXP, a non-GAAP measure, was $160.0, up from $149.6. The filing cautions that FFO is not a substitute for GAAP earnings or cash flow.
  • Property operations: Consolidated NOI was $264.7, up 10.8%, primarily reflecting acquired and newly placed-in-service properties. Same Property Portfolio NOI, including hotel NOI, was $238.9 versus $238.9 a year earlier. Management said it expects same-property NOI to decline slightly for full-year 2011.
  • Cash flow: Operating activities provided $132.3, compared with $60.1; investing used $121.0, compared with $152.9; financing provided $257.1, versus $135.7 used in Q1 2010. Cash and cash equivalents ended the quarter at $747.3. Q1 financing included $345.4 net proceeds from ATM share sales.
  • Debt: Consolidated debt was $7.94 billion, versus $6.67 billion at March 31, 2010. The weighted-average GAAP interest rate was 5.54%, stated/coupon rate 5.10%, and weighted-average maturity approximately 5.1 years. Fixed-rate debt represented 96% of consolidated debt. Debt was 33.44% of consolidated market capitalization, as defined by BXP.
  • Liquidity: The $1.0 billion unsecured line of credit had no borrowings at March 31; approximately $975.8 remained available after letters of credit. As of May 2, BXP reported approximately $700 of available cash and full availability under the line.
  • Dividends: BXP declared a $0.50 per-share dividend payable April 29. Management expected the quarterly dividend to remain approximately $0.50 for 2011, subject to Board decisions and taxable income.

Changes versus Q1 2010

  • Revenue growth was largely acquisition- and development-related: the John Hancock Tower and Garage, acquired in December 2010, and Bay Colony Corporate Center, acquired in February 2011, contributed $30.5 of rental revenue in Q1. Newly in-service properties contributed another $11.3.
  • Same-property rental revenue declined 0.4%; same-property NOI was essentially flat. Management attributed the revenue softness mainly to lower occupancy, partly offset by parking revenue and higher rent per square foot.
  • Depreciation and amortization rose 31.7% to $109.4, and interest expense rose 7.7% to $99.2, weighing on operating income and earnings. The depreciation increase included approximately $11.0 related to anticipated redevelopment of two Reston properties.
  • Comparability also reflects Q1 2010 items absent in Q1 2011: a $7.2 gain from suspension of development, a $1.8 gain on sale of real estate, and a $2.2 loss on early debt extinguishment. In Q1 2011 BXP recorded $4.3 of accelerated compensation expense after its 2008 outperformance awards were forfeited.
  • BXP issued 3.70 million shares through its ATM program in Q1 for $345.4 net proceeds; it issued a further 533,778 shares for $49.3 net proceeds in early April, exhausting the program’s $400 million capacity.

Outlook, risks and notable items

  • Leasing and rents: Management reported stabilizing rents and improving leasing activity in select markets. Q1 included 2.1 million square feet of leases commencing revenue recognition. For approximately 1.2 million square feet of recently occupied space, starting gross rents on second-generation leases averaged 1.1% below prior rents. Approximately 4.9% of portfolio space had leases expiring through year-end 2011; management estimated expiring office rents averaged 9% above comparable current market rents and expects rent roll-down, particularly at Embarcadero Center.
  • Management estimates for 2011: Hotel NOI of $8.0–$8.5; development and management services income of $25–$30; G&A expense of $80–$82; and interest expense of $407–$412, including expected capitalized interest of $32–$36. These are stated expectations, not guarantees.
  • Debt maturities and refinancing: A $454.1 mortgage secured by 601 Lexington Avenue matured May 11, 2011. BXP said it was pursuing an interim line-of-credit draw and a long-term mortgage of approximately $725 at an anticipated rate near 5%; completion and terms were not assured. The unsecured credit facility was due to mature in August 2011, and BXP was seeking a renewal, potentially reduced to $750.
  • Mortgage default: BXP had ceased debt service on the $25.0 Montvale Center non-recourse mortgage after stating property cash flow was insufficient for debt service and capital needs. The loan was in default and accruing interest at 9.93%; discussions with the special servicer were ongoing.
  • Joint ventures: Unconsolidated joint ventures had $3.15 billion of debt, of which BXP’s proportionate share was approximately $1.8 billion. A Value-Added Fund loan of approximately $112 was due May 31, 2011; BXP said it did not expect to meet extension conditions and was discussing a short-term extension. A separate approximately $24.7 loan had also been extended to May 31.
  • Development and asset sales: Six projects under construction represented estimated total investment of $1.36 billion, with $1.14 billion invested to date. BXP estimated approximately $875 of potential funding needs for additional developments that could start in 2011 or 2012. A proposed $468 Carnegie Center sale and a proposed 75 Ames Street transaction were subject to conditions and could fail to close.
  • Other risks: BXP cited economic and tenant-credit weakness, leasing and development execution, financing and interest-rate exposure, joint-venture obligations, uninsured catastrophic losses, and insurance availability or insurer-rating issues. It reported $26.6 of letters of credit and performance obligations related to lender and development requirements, as well as guarantees on certain joint-venture and property obligations.

Most important facts for investors to verify

  1. Whether the 601 Lexington refinancing closed on acceptable terms and how the August 2011 credit-facility renewal affected liquidity.
  2. Resolution and financial consequences of the Montvale Center default and the near-term Mountain View joint-venture maturities.
  3. Whether the Carnegie Center and 75 Ames Street transactions closed, and whether proceeds were reinvested or otherwise used as management described.
  4. Leasing, occupancy and rent-roll performance—especially the expected 2011 expirations and same-property NOI trend.
  5. Development costs, lease-up and delivery timing for the active pipeline, alongside the proposed additional development funding needs.
  6. Effects of ATM share issuance and other financing on per-share results, leverage and the ability to maintain the expected dividend.