BXP, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is a combined annual report for Boston Properties, Inc. (BXP) and its operating partnership, Boston Properties Limited Partnership (BPLP); BXP consolidates BPLP. Q4 figures below are unaudited.
Business context
BXP is a REIT focused primarily on developing, owning and managing Class A office properties in Boston, Los Angeles, New York, San Francisco and Washington, DC. At year-end it owned or held interests in 197 properties totaling 51.6 million net rentable square feet; 11 properties, totaling 5.3 million square feet, were under construction or redevelopment. BXP owned approximately 89.7% of BPLP.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $2,717.1 million | $2,602.1 million | +4.4% |
| Net income attributable to BXP common shareholders | $572.3 million | $451.9 million | +26.6% |
| Diluted earnings per BXP share | $3.70 | $2.93 | +$0.77 |
| FFO attributable to BXP common shareholders | $974.5 million | $959.4 million | +1.6% |
| Net operating income (NOI) | $1,649.3 million | $1,605.4 million | +2.7% |
| Cash from operating activities | $1,150.2 million | $912.0 million | +$238.3 million |
FFO and NOI are non-GAAP measures; the company cautions that they may not be comparable across REITs and should be considered alongside GAAP results. Same-property NOI increased 0.4%. In-service occupancy was 91.4% at year-end, versus 90.7% a year earlier; average annualized revenue per square foot rose to $66.63 from $63.66.
Q4 2018: Revenue was $705.2 million, net income attributable to BXP common shareholders was $148.5 million, and diluted EPS was $0.96. Q4 2017 comparatives were $655.2 million, $103.8 million and $0.67, respectively.
Liquidity, debt and distributions
- At December 31, 2018, cash and cash equivalents were $543.4 million; cash held in escrows was $95.8 million. Operating cash flow exceeded investing outflows of $1,098.9 million; financing provided $82.5 million.
- Consolidated debt was $11.0 billion, up from $10.3 billion. Debt to consolidated market capitalization was 36.0%; this is a market-based, non-GAAP leverage measure. Including BXP’s share of unconsolidated joint venture debt and excluding partners’ share of consolidated debt, BXP’s share of debt was $10.7 billion.
- Approximately 95.5% of consolidated debt was fixed-rate; weighted-average GAAP interest rate was 3.99% and weighted-average maturity was 6.0 years. The company had $500 million of variable-rate term debt and no year-end revolver borrowings.
- BXP reported approximately $1.4 billion of revolver availability and $318 million of cash as of February 22, 2019. It stated that no consolidated debt matured in 2019, excluding unconsolidated joint ventures. BPLP was in compliance with its disclosed debt covenants at year-end.
- The regular quarterly common dividend increased from $0.80 to $0.95 beginning with Q3 2018. FY 2018 dividends declared were $3.50 per share.
Material changes and unusual items
- Net income growth substantially outpaced FFO and NOI growth, reflecting in part $182.4 million of real estate sale gains in 2018, compared with $7.7 million in 2017.
- BXP sold several properties and land parcels in 2018, reporting approximately $331.7 million in net cash proceeds from the listed sales. It recognized $11.8 million of impairment losses, including an $8.7 million charge associated with the sale of 6595 Springfield Center Drive and a charge on 2600 Tower Oaks Boulevard.
- BPLP issued $1.0 billion of 4.50% senior notes due 2028 and redeemed $700 million of 5.875% notes due 2019. The early redemption generated a $16.5 million loss, including a $16.0 million premium.
- Development and redevelopment investment was significant: estimated total investment for the year-end pipeline was $2.72 billion, with approximately $1.57 billion of future equity requirements. Approximately 78% of its commercial space was pre-leased as of February 22, 2019.
Outlook, management commentary and risks
Management described leasing conditions as generally constructive, while noting market differences: strong demand in Boston and San Francisco, more limited rent growth in New York, and competitive conditions in Washington, DC outside Reston. Management cited the Federal Reserve’s projected 2019 GDP growth of approximately 2.3% and expected to continue prioritizing leasing, project completion, selective development and debt management. It expected 2019 general and administrative expense of $136–$140 million, including about $10 million of anticipated expense impact from adopting the new lease standard.
The company expected to fund existing development commitments using operating cash flow, available cash, its revolver, debt financing and asset sales. It anticipated modest non-core asset sales in 2019, subject to market conditions. These are management expectations, not guarantees. Key risks include economic or local-market downturns, leasing and tenant credit risk, construction cost overruns or delays, refinancing and interest-rate exposure, joint-venture obligations, and uninsured catastrophe, environmental, cyber and climate-related losses. The U.S. Government was the largest tenant by square feet, representing 3.23% of the in-service portfolio. Ordinary-course legal matters were not expected by management to materially affect financial position, results or liquidity.
Important facts for investors to verify
- How much of the 2018 increase in GAAP earnings came from asset-sale gains and other nonrecurring items, versus recurring leasing and property operations.
- Whether the 91.4% in-service occupancy rate and 78% development pre-leasing translate into sustained rent and cash-flow growth; review upcoming expirations, including 5.78% of portfolio square feet expiring in 2019.
- Remaining development funding needs, project schedules, leasing commitments and exposure to cost overruns, particularly given the approximately $1.57 billion future equity requirement.
- Debt maturities, refinancing terms, variable-rate exposure and joint-venture debt and guarantees; assess the assumptions behind reported leverage measures and liquidity availability.
- The sustainability of the $0.95 quarterly dividend relative to recurring cash flow, capital commitments and REIT distribution requirements.