BXP, Inc. (Boston Properties) — Q2 2010 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2010, compared with the same 2009 periods. BXP is a REIT focused on Class A office properties in Boston, Washington, D.C., Midtown Manhattan, San Francisco and New Jersey. At quarter-end it owned or held interests in 144 properties totaling approximately 37.8 million rentable square feet, including properties under construction.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $396.0 million | $389.5 million | $775.7 million | $767.0 million |
| Net income attributable to BXP | $61.4 million | $67.2 million | $114.1 million | $111.8 million |
| EPS, diluted | $0.44 | $0.53 | $0.82 | $0.91 |
| Consolidated NOI (non-GAAP) | $245.6 million | $250.4 million | $484.5 million | $490.0 million |
| Cash from operations | Not provided for quarter | Not provided for quarter | $210.5 million | $316.9 million |
All dollar amounts are in U.S. dollars. Q2 results show revenue up about 1.7%, while attributable net income fell about 8.5%. For the first half, revenue rose about 1.1% and attributable net income rose about 2.1%; diluted EPS declined in both comparisons as weighted-average shares increased substantially.
- Property operations: Same-property NOI declined 5.0% in Q2 and 4.1% in the first half. Consolidated NOI fell 1.9% and 1.1%, respectively. Same-property rental revenue weakened, partly offset by lower operating expenses and NOI from recently placed-in-service properties.
- Cash flow and investment: First-half investing cash outflow was $285.6 million, primarily for real estate additions and joint-venture contributions. Financing provided $329.6 million. Cash and equivalents were $1.70 billion at June 30, 2010, versus $1.45 billion at year-end 2009.
- Debt and liquidity: Consolidated debt was $7.23 billion, with a 5.86% GAAP weighted-average rate, 4.8-year weighted-average maturity, and 94.5% fixed-rate debt. Debt equaled approximately 38.5% of consolidated market capitalization. The company reported no revolver borrowings at June 30 and approximately $990 million available under its $1.0 billion facility. Management cited approximately $1.5 billion cash and $1.0 billion of revolver capacity as of August 2.
- Dividends: The quarterly common dividend was $0.50 per share, declared for payment July 30, 2010.
Material changes versus prior period
- Q2 rental revenue declined 1.8% year over year; first-half rental revenue declined 0.8%. Same-property declines reflected lower contractual rent, tenant recoveries and parking income, partly offset by straight-line rent recognition and new leases at recently completed properties.
- Interest expense increased $18.1 million in Q2 and $31.2 million in the first half, principally reflecting debt issued in 2009 and 2010 and lower capitalized interest.
- Development and management services revenue increased $10.3 million in Q2 and $11.0 million in the first half. A significant component was $12.2 million of non-cash deferred management fees recognized after the buyer of 280 Park Avenue terminated its management and leasing agreement.
- First-half 2010 included a $7.2 million gain related to suspension of development at 250 West 55th Street, compared with $27.8 million of suspension-related costs in the prior-year period.
- BXP recognized an $8.2 million first-half loss on repurchasing approximately $186.3 million principal amount of its 2.875% exchangeable notes for about $185.5 million. Q2 included $6.1 million of that loss.
- First-half operating cash flow decreased $106.4 million year over year. The filing reports significant movements in working-capital and other operating adjustments; it does not attribute the full decrease to a single driver.
Outlook, commentary and risks
- Management described gradual improvement in select submarkets, but noted substantial available space, constrained landlord pricing power, and no expectation of strong near-term rent growth or materially lower concessions. It expected occupancy to decline slightly from 93.0% to approximately 92.5% for the remainder of 2010.
- Leases representing approximately 5.3% of office space expire in the remainder of 2010 and 8.6% in 2011. Management estimated existing rents on those expirations were about 8% and 12% above current market rates, respectively, implying potential rent pressure on renewals.
- Management expected 2010 hotel NOI of $7.0–$7.5 million, development and management services income of $39–$42 million, and general and administrative expense of $82–$84 million. It expected the quarterly dividend to remain approximately $0.50 for the next several quarters, subject to board action and circumstances.
- Two principal development projects had estimated total investment of $980 million and were approximately 60% leased in aggregate as of August 6. Remaining capital requirements to complete developments, net of anticipated and potential construction-loan funding, were estimated at $139.6 million through mid-2012. Management said it did not anticipate new development absent significant preleasing to creditworthy tenants.
- Key risks include recession-related weakness in occupancy, rents and tenant credit; refinancing and interest-rate risk; development cost and leasing risk; joint-venture partner and property-debt exposure; and the possibility that financing or capital access could deteriorate. BXP disclosed approximately $3.2 billion of joint-venture debt, of which its proportionate share was about $1.5 billion, plus guarantees and other contingent support.
- Insurance is a material exposure: earthquake coverage may be inadequate, and terrorism/earthquake coverage partly provided by BXP-owned captive insurers is effectively modified self-insurance. The filing also notes potential lender concerns about insurer ratings and uninsured or underinsured catastrophic losses.
- Other unusual items include approximately $5.8 million of accelerated stock compensation tied to the former CEO’s death. Routine legal proceedings were not expected by management to materially affect financial position, results or liquidity. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether occupancy, leasing spreads and tenant recoveries stabilize, especially as 2010–2011 leases roll at below current contractual rents.
- How recurring property cash generation compares with reported earnings, including the effect of straight-line rent and the non-cash 280 Park Avenue fee recognition.
- Near-term debt maturities, refinancing progress, revolver availability and covenant compliance; also review joint-venture maturities and BXP’s guarantees.
- Remaining development costs, leasing progress and funding needs for Atlantic Wharf and 2200 Pennsylvania Avenue.
- Whether the $0.50 quarterly dividend remains supported by taxable income and cash flows, and how management balances distributions, debt repayment and investment.
- The adequacy and cost of catastrophe insurance, including BXP’s retained exposure through captive insurers.