BXP, Inc. (Boston Properties) — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018, and combines BXP’s and its operating partnership’s reports. BXP is a REIT focused primarily on owning, developing and managing Class A office properties in major U.S. markets. It owned approximately 89.7% of Boston Properties Limited Partnership (BPLP), through which it conducts substantially all of its business. At quarter-end, the company had interests in 200 properties totaling approximately 52.7 million net rentable square feet, including 14 projects under construction or redevelopment.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $686.3 million | $657.7 million | $2,011.9 million | $1,946.8 million |
| Operating income | $238.4 million | $233.7 million | $677.1 million | $678.6 million |
| Net income | $150.4 million | $147.7 million | $527.3 million | $430.3 million |
| BXP common-shareholder net income | $119.1 million | $117.3 million | $423.8 million | $348.1 million |
| BXP diluted EPS | $0.77 | $0.76 | $2.74 | $2.26 |
| Company-defined NOI (non-GAAP) | $411.7 million | $401.1 million | $1,219.8 million | $1,202.2 million |
Revenue rose 4.3% in Q3 and 3.3% year to date. Operating income was nearly flat for the nine-month period; calculated operating margin was approximately 34.7% in Q3 2018 versus 35.5% in Q3 2017. BXP common-shareholder net income increased 21.8% year to date, substantially reflecting higher real-estate sale gains; those gains were $122.6 million versus $6.8 million in the comparable period. Q3 diluted EPS increased from $0.76 to $0.77. BPLP reported diluted common-unit earnings of $0.79 for Q3 and $2.81 for the nine months.
- Cash flow: For the first nine months, operating cash flow was $770.6 million (up from $585.0 million); investing cash outflow was $1,020.1 million (versus $593.9 million); financing cash inflow was $167.9 million. Cash and cash equivalents were $322.5 million at September 30, plus $101.3 million held in escrows.
- Margins and property operations: Same-property NOI decreased 0.7% for the nine months and was approximately flat for Q3. Same-property rental revenue increased, but higher operating expenses—particularly real estate taxes and utilities—offset growth. Overall in-service occupancy was 91.1% at September 30, up from 90.4% at June 30.
- Debt and leverage: Consolidated debt was $10.9 billion, including $7.3 billion of unsecured senior notes, $3.0 billion of mortgage debt and $668.4 million drawn under the credit facility. The reported consolidated debt-to-market-capitalization ratio was 33.72%; BXP’s share measure was 33.03%. Weighted-average debt maturity was 5.5 years, and 6.14% of consolidated debt was variable-rate. BPLP was in compliance with the disclosed senior-note financial covenants.
- Liquidity: At November 2, BXP reported approximately $390 million of cash and cash equivalents and approximately $1.2 billion available under BPLP’s revolving facility. The $1.5 billion revolving facility matures April 2022; $500 million was drawn under its delayed-draw term facility. The next identified unsecured-note maturity was $700 million in October 2019.
- Distributions: BXP raised its regular quarterly common dividend 18.75%, from $0.80 to $0.95 per share, beginning with Q3 2018.
Material changes versus the prior comparable period
- Nine-month common-shareholder earnings benefited from approximately $115.8 million more in real-estate sale gains than in 2017. The 2018 sales included 500 E Street, S.W., 91 Hartwell Avenue and Quorum Office Park.
- Same-property NOI declined despite higher rental revenue, as same-property operating expenses rose 3.5% for the nine months. Lower lease-termination income also weighed on comparisons: $3.4 million versus $23.7 million.
- Cash from operations increased, while investing outflows grew, mainly due to development spending and $314.1 million of contributions to unconsolidated joint ventures. The 2017 comparison included a $251.0 million distribution from a joint venture.
- Debt increased from $10.2 billion at September 30, 2017 to $10.9 billion, including new variable-rate borrowing. Interest expense decreased $4.9 million year to date, but increased $3.3 million in Q3.
Outlook, management commentary and risks
- Management described its outlook as optimistic, citing favorable employment and leasing conditions, while noting market volatility, anticipated interest-rate increases, trade uncertainty and the prolonged economic expansion.
- The development and redevelopment pipeline totaled approximately 7.5 million square feet, with estimated total investment of $4.1 billion and approximately $1.9 billion of future equity requirements. About 85% of commercial space was pre-leased as of November 2. Management said rising labor and materials costs were affecting construction and tenant-improvement costs.
- Management expects 2018 hotel NOI of $14–$15 million and 2019 hotel NOI of $15–$16.5 million; development and management services revenue of $42–$45 million in 2018 and $37–$42 million in 2019; and general and administrative expense of $121–$123 million in 2018 and $134–$140 million in 2019. Estimated net interest expense is $363–$375 million in 2018 and $418–$433 million in 2019. These are management estimates, not guarantees.
- Risks include leasing and economic downturns, higher financing costs, development delays and overruns, joint-venture partner performance, and uninsured or underinsured catastrophic losses. The filing notes that one unconsolidated joint venture’s Annapolis Junction loan remained in default, with property cash flow insufficient for debt service and capital improvements.
- Contingencies include a maximum $126.4 million funding obligation under a guarantee related to 767 Fifth Avenue reserves; the filing records no liability for this contingent exposure at quarter-end. BXP also disclosed insurance limitations, possible lender concerns about insurer ratings, and a remaining $27.2 million Lehman Brothers claim for which no recovery was recorded.
- The company planned to adopt the new lease accounting standard in 2019. Management estimated that expensing certain non-incremental leasing costs under the standard would contribute approximately $10 million to the increase in 2019 G&A guidance. Adoption of the new revenue standard had no material overall financial-statement impact.
Important facts for investors to verify
- Whether leasing, occupancy and same-property NOI trends improve, and how operating-cost inflation affects margins.
- Timing, pre-leasing, total costs and remaining equity needs for the $4.1 billion development pipeline, including construction-cost and completion risks.
- Debt maturities, variable-rate exposure, refinancing plans and available revolving-credit capacity; particularly the October 2019 $700 million note maturity.
- The status and potential exposure of the Annapolis Junction joint-venture loan default, guarantees and other joint-venture obligations.
- Whether the pending sale of 1333 New Hampshire Avenue closes, and the timing and proceeds of planned non-core asset sales.
- Actual performance against management’s 2018–2019 estimates and the impact of lease-accounting adoption on reported expenses.
NOI is a company-defined non-GAAP measure and may not be comparable with similarly named measures reported by other REITs.