BXP, Inc. (Boston Properties) — Q1 2010 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2010; financial statements are unaudited. Boston Properties is a self-managed REIT focused on Class A office properties in Boston, midtown Manhattan, Washington, D.C., San Francisco and New Jersey. At quarter-end, it owned or held interests in 143 properties totaling approximately 37.6 million net rentable square feet, including five properties under construction.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Total revenue | $379.8 million | $377.5 million; +0.6% |
| Net income attributable to BXP | $52.7 million; $0.38 per diluted share | $44.6 million; $0.37 per diluted share |
| Funds from Operations attributable to BXP (non-GAAP) | $149.6 million | $134.8 million |
| Consolidated NOI (non-GAAP) | $238.9 million | $239.6 million; down 0.3% |
| Cash from operating activities | $60.1 million | $110.1 million |
| Cash and cash equivalents | $1.22 billion at March 31 | $1.45 billion at December 31, 2009 |
| Consolidated debt | $6.675 billion; 5.87% GAAP weighted-average rate; 4.4-year weighted-average maturity | $6.113 billion at March 31, 2009 |
Same-property NOI, including the hotel, declined 3.05%; same-property rental revenue fell 2.24%. Base rent increased, but tenant recoveries and parking/other income declined. Total assets were $12.25 billion and total liabilities $7.13 billion at quarter-end. Approximately 94.1% of consolidated debt was fixed-rate. Debt was 35.34% of consolidated market capitalization, a market-value-based measure disclosed by the company.
Investing cash outflow was $152.9 million, principally for real estate additions ($119.4 million) and investments in unconsolidated joint ventures ($36.1 million). Financing cash outflow was $135.7 million, including $81.0 million of dividends and distributions and $49.3 million spent to repurchase exchangeable notes. Dividends and distributions exceeded operating cash flow by approximately $20.9 million for the quarter.
Material changes versus the prior comparable period
- Attributable net income rose 18.2%, while diluted EPS increased from $0.37 to $0.38 and FFO attributable to BXP increased approximately 10.9%. Results include a $7.2 million gain related to terminating the 250 West 55th Street lease; Q1 2009 included $27.8 million of suspension-related costs.
- Same-property operating pressure persisted: same-property NOI fell 3.1%, partly reflecting lower recoveries and free-rent periods on new leases. Four properties placed in service in 2009 added $8.5 million of rental revenue year over year.
- General and administrative expense increased $9.4 million to $26.8 million, including accelerated stock compensation for former CEO Edward Linde following his death. Interest expense increased $13.1 million to $92.0 million, driven chiefly by debt issued in 2009 and lower capitalized interest.
- Operating cash flow declined $50.0 million year over year. The company attributed the shortfall relative to distributions partly to free-rent periods and the 250 West 55th Street lease-termination payment.
Outlook, management commentary, risks and unusual items
- Management reported gradual improvement in leasing activity and completed more than 1.8 million square feet in 71 transactions during Q1. It expected occupancy to remain relatively stable in 2010, but did not forecast strong near-term rent growth or materially lower landlord concessions.
- Office leases covering 6.4% of space expire during the remainder of 2010 and 8.5% during 2011. Management estimated current rents on those expirations exceed market rents by approximately 9% and 14%, respectively, implying potential rent pressure on renewals and re-leasing.
- Management expected quarterly dividends to remain approximately $0.50 per common share for the next several quarters, subject to Board decisions and taxable income. It projected 2010 hotel NOI of $6.0–$6.5 million, third-party fee income of $25–$30 million, and G&A expense of $81–$83 million.
- Management said it did not expect to undertake new development in the foreseeable future without significant pre-leasing to creditworthy tenants. Remaining development funding requirements, net of anticipated and potential construction-loan funding, were estimated at approximately $246 million through mid-2012.
- As of May 3, 2010, the company reported approximately $1.7 billion of available cash and $1.0 billion of borrowing capacity on its unsecured line. The line had no borrowings, matured in August 2010, and management expected to exercise its one-year extension option, subject to conditions. It also expected to refinance or repay near-term maturities, including construction and property debt due in 2010.
- Subsequent to quarter-end, the Operating Partnership issued $700 million of 5.625% senior notes due 2020, receiving approximately $693.5 million net. It also repurchased a further $111.8 million principal amount of 2.875% exchangeable notes through May 6, with an expected $5.3 million extinguishment loss in Q2.
- Unconsolidated joint ventures had $3.16 billion of debt at quarter-end, of which BXP’s proportionate share was approximately $1.5 billion. BXP provided certain JV guarantees, including lease-rollover escrow guarantees; other guarantees and customary carve-outs are described in the filing. Preferred Operating Partnership units include holder cash-redemption rights beginning in 2011.
- Key risks cited include recession-related weakness in occupancy, rents and tenant credit; financing availability, interest rates and refinancing; development execution and JV partner obligations; and uninsured or underinsured catastrophe losses. Captive subsidiaries provide part of terrorism and earthquake coverage, so this coverage is partly self-insurance. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Lease rollover, occupancy, concessions and rent spreads against market—particularly the 2010–2011 expirations and free-rent leases.
- Whether operating cash flow recovers sufficiently to cover dividends and distributions, and the effect of ongoing development and leasing costs on liquidity.
- Execution of the unsecured-line extension and repayment or refinancing of 2010–2011 debt maturities; assess the company’s substantial consolidated and joint-venture debt separately.
- JV debt exposure, guarantees and escrow funding obligations, together with the preferred-unit redemption schedule.
- Progress and leasing of the construction pipeline, and the adequacy and cost of catastrophe insurance, including captive-insurer exposure.