BXP, Inc. (BXP) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. BXP is a REIT that conducts substantially all operations through Boston Properties Limited Partnership (BPLP); BXP owned approximately 89.5% of BPLP at quarter-end. The portfolio comprised 196 properties totaling approximately 51.4 million net rentable square feet, primarily Class A office space.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $725.8 million | $661.2 million, up 9.8%; presentation changed with lease-accounting adoption |
| Net income | $131.2 million | $216.3 million, down 39.4% |
| Net income attributable to BXP common shareholders | $98.1 million; $0.63 per diluted share | $176.0 million; $1.14 per diluted share |
| Company share of NOI (non-GAAP) | $426.0 million | $371.6 million, up 11.5% |
| BXP common-shareholder FFO (non-GAAP) | $266.0 million | $230.6 million, up 15.4% |
| Cash from operating activities | $207.2 million | $225.8 million |
| Cash and cash equivalents plus escrow cash | $432.3 million at March 31 | $455.1 million at March 31, 2018 |
| Consolidated debt | $11.0 billion; 32.08% of consolidated market capitalization | $10.34 billion at March 31, 2018 |
At March 31, consolidated debt was approximately 95.5% fixed-rate, with a 3.99% GAAP weighted-average interest rate and 5.7-year weighted-average maturity. BXP’s share of debt, including its share of unconsolidated joint-venture debt and excluding partners’ share of consolidated debt, was $10.72 billion. At May 2, management reported approximately $261 million of cash and $1.2 billion available on BPLP’s revolving facility; $255 million was drawn on that facility after quarter-end.
Changes versus the prior comparable period
- Revenue rose, and company share of NOI increased 11.5%. Same-property NOI grew 8.2%; same-property rental revenue increased 6.5% and operating expenses rose 3.4%.
- Common-shareholder earnings fell substantially, largely reflecting the absence of the approximately $96.4 million gain on a 2018 property sale, the $24.0 million One Tower Center impairment, and higher interest expense. Interest expense increased $10.8 million, to $101.0 million.
- Operating cash flow declined $18.5 million. Investing outflows were $223.5 million versus $183.8 million, while financing outflows were $190.6 million versus $92.2 million, principally reflecting distributions and dividends.
- Occupancy of in-service office and retail properties improved to 92.9% from 91.4% at December 31, 2018. For second-generation leases commencing in the quarter on space occupied within the prior 12 months, net rents increased 9.35% over prior leases.
- Effective January 1, 2019, BXP adopted lease-accounting guidance, recording operating-lease right-of-use assets and liabilities and changing the presentation of some tenant service revenue. Comparisons of certain revenue lines are therefore affected.
Outlook, commentary, and notable items
- Management characterized economic conditions as stable and favorable, citing steady employment, low unemployment and an expected pause in Federal Reserve rate increases. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
- The development and redevelopment pipeline comprised 11 projects totaling approximately 5.3 million square feet, with an estimated total investment share of $2.74 billion and approximately $1.47 billion of future equity requirement reported at quarter-end. Approximately 78% of commercial space was pre-leased as of May 2. Management also expected to begin projects supporting approximately 869,000 square feet in 2019.
- Occupancy and leasing trends varied by market. Management described Boston and San Francisco as strong, New York as active but with muted rent growth, and Washington, DC CBD leasing as competitive amid added supply. It identified available space to meet Boston demand as a constraint.
- BXP recorded a $24.0 million impairment on One Tower Center based on a pending offer; it signed an agreement on April 18 to sell the property for approximately $38 million, subject to customary conditions. BXP sold 2600 Tower Oaks Boulevard for a gross $22.7 million, recording an approximately $0.6 million loss.
- On April 1, BXP acquired its partner’s 5% interest and promoted profits interest in the Salesforce Tower entity for approximately $210.9 million, reduced by repayment of approximately $24.1 million of preferred equity and return. A joint venture subsequently secured a $255 million construction loan for 7750 Wisconsin Avenue; no amount had been drawn as of the filing.
- Material exposures include development costs and execution, debt refinancing and interest rates, joint-venture obligations, tenant credit and leasing conditions, and potentially uninsured catastrophe losses. BXP disclosed a maximum $110.5 million funding obligation under a guarantee related to reserves for the General Motors Building joint venture; no liability was recorded for that contingent guarantee. Joint ventures had approximately $2.1 billion of debt in total, of which BXP’s proportionate share was approximately $919 million.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. Ordinary-course legal matters were not expected by management to materially affect financial position, results or liquidity.
Investor verification priorities
- Confirm the drivers and sustainability of same-property NOI growth, occupancy gains and reported rent increases, accounting for lease-accounting presentation changes and termination income.
- Review the One Tower Center sale status and final proceeds against the recorded impairment, and assess other planned asset dispositions.
- Validate remaining development funding needs, pre-leasing levels, project schedules and exposure to cost overruns or delays.
- Check debt maturities, covenant compliance, revolver availability after subsequent-quarter borrowings, and variable-rate and joint-venture debt exposure.
- Assess the potential cash impact of guarantees, joint-venture commitments, catastrophe insurance limits and the outstanding Lehman Brothers claim; recovery on that claim is uncertain and was not recorded.
NOI and FFO are non-GAAP measures as defined by the company and should be considered alongside GAAP results. Figures are rounded.