BXP, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Boston Properties is a self-managed REIT focused on Class A office properties in Boston, New York, Washington, D.C., San Francisco and New Jersey. At quarter-end it owned or held interests in 146 commercial properties totaling approximately 49.1 million net rentable square feet.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $389.5 million | $368.7 million | $767.0 million | $740.1 million |
| Net income attributable to BXP | $67.2 million | $75.5 million | $111.8 million | $160.0 million |
| Diluted EPS | $0.53 | $0.62 | $0.91 | $1.32 |
| Consolidated NOI (non-GAAP) | $250.4 million | $232.4 million | $490.0 million | $462.1 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $316.9 million | $251.0 million |
Q2 revenue rose 5.6%, while net income attributable to BXP fell 11.0% and diluted EPS declined. Six-month revenue increased 3.6%, but attributable net income fell 30.1%. Consolidated NOI, a company-defined non-GAAP measure, increased 7.8% for Q2 and 6.1% year to date. BXP reported $166.7 million of FFO attributable to the company for Q2 versus $141.0 million a year earlier; FFO is non-GAAP and is not a measure of liquidity.
For the six months, rental revenue increased $41.0 million and operating expenses increased $11.8 million. Same-property NOI excluding hotels increased 4.3%; growth also reflected properties placed in service or acquired. Results were affected by a $27.8 million charge for suspending development, a $7.4 million noncash impairment of a joint-venture investment, higher interest and depreciation expense, and lower gains on real estate sales. The Q2 included $12.6 million of lease termination income, including $7.5 million cash and approximately $3.6 million noncash value of transferred furniture and fixtures.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $819.2 million at June 30, 2009, up from $241.5 million at year-end 2008. Total assets were $11.58 billion; total liabilities were $6.46 billion.
- Consolidated debt was $5.96 billion, with a 5.91% GAAP weighted-average rate and approximately 5.2-year weighted-average maturity. About 94.6% was fixed rate. Estimated fair value was $5.65 billion versus carrying amount of $5.96 billion.
- Debt-to-total-consolidated-market-capitalization was 43.63%, as calculated by the company. This measure fluctuates with BXP’s share price and does not itself establish borrowing capacity.
- The June equity offering of 17.25 million shares at $50 per share generated approximately $842 million net proceeds. BXP repaid $100 million on its unsecured line and approximately $77.9 million of mortgages during the quarter; the line had no borrowings at June 30. The company reported $986.8 million of borrowing availability, with $13.2 million of letters of credit outstanding.
- Net cash used in investing was $199.0 million for the six months; financing provided $459.8 million. Operating cash flow was $316.9 million. BXP paid $195.7 million in dividends and distributions during the period.
Material changes, outlook and risks
- Tenant and market pressure: Lehman Brothers rejected its lease at 399 Park Avenue in bankruptcy; its contractual rent had been approximately $44.9 million annually. By June 30, BXP had signed leases for about 37,000 square feet of the vacated space. General Motors rejected a lease for approximately 120,000 square feet at 601 Lexington Avenue; its scheduled July–December 2009 contractual contribution was approximately $6.6 million. BXP expected downtime and lower replacement rents. GM also leased space in a BXP joint venture, with a separate lease expiring in March 2010.
- Development: BXP suspended construction of the 1 million-square-foot 250 West 55th Street project, reducing future capital commitments by an estimated $500 million. It recorded $27.8 million of related costs in the first half and expected another $2.7 million in 2009. Five projects were under construction, totaling approximately 2.3 million square feet, with estimated total investment of $1.20 billion; remaining net funding needs were estimated at $505.8 million through 2012. Management said available cash, operating cash flow and credit availability were sufficient for current development obligations and foreseeable operating needs. No new development was expected in the foreseeable future without significant preleasing to creditworthy tenants.
- Management outlook: BXP expected 2009 hotel NOI of $5.5–$6.5 million, third-party fee income of $30–$32 million, G&A expense of $72–$74 million, and net interest expense of approximately $300–$305 million. It expected the quarterly dividend to remain approximately $0.50 for the next several quarters, subject to board action. Management described office demand and rents as under pressure, with challenging conditions likely to persist; leasing could take longer and incur higher transaction costs.
- Refinancing and joint ventures: Approximately $124.8 million of consolidated secured debt was due in 2010, excluding the line of credit and debt BXP had qualified to extend. Unconsolidated joint ventures had approximately $755 million of 2010 maturities, of which BXP’s share was approximately $399 million. BXP cautioned that refinancing or extensions might not be available on favorable terms or at all. Its $1.0 billion unsecured line matures in August 2010, with a one-year extension option subject to conditions; management expected to exercise it.
- Other risks and unusual items: BXP disclosed approximately $3.2 billion of unconsolidated joint-venture debt and guarantees, including a maximum $34.8 million funding obligation for escrows associated with the General Motors Building loan. Terrorism and earthquake coverage includes captive insurers and therefore partly represents modified self-insurance; coverage may be insufficient, costly or unavailable, and some insurer ratings were below requirements in certain loan agreements. The filing also identifies recession, tenant defaults, rent and occupancy declines, financing access, development costs, joint-venture performance and potential insurance losses as risks. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Subsequent events: BXP obtained $50 million of Reservoir Place mortgage financing on July 30, 2009, at LIBOR plus 3.85%, maturing in 2014; it repaid approximately $20.5 million of 1301 New York Avenue mortgages on August 3, 2009.
Investor verification priorities
- Track leasing, tenant improvements, downtime and replacement rents for space vacated by Lehman Brothers and General Motors.
- Verify refinancing progress and extension conditions for BXP and joint-venture maturities, particularly the 2010 obligations.
- Reconcile reported NOI and FFO to GAAP results, including termination income, the development suspension charge, joint-venture impairment and lower property-sale gains.
- Monitor development funding, leasing and stabilization assumptions, especially the $505.8 million estimated remaining net development commitment.
- Review the dividend’s sustainability against taxable income, operating cash flow, capital needs and debt service; the stated future dividend level is not guaranteed.
- Assess joint-venture guarantees and insurance exposures, including captive-insurer liquidity, policy limits, insurer ratings and possible uninsured catastrophic losses.