BXP, Inc. (Boston Properties, Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing combines BXP and its operating partnership, Boston Properties Limited Partnership (BPLP); BXP owns approximately 89.7% of BPLP. BXP is a REIT focused primarily on Class A office properties in Boston, Los Angeles, New York, San Francisco and Washington, D.C. At quarter-end, the portfolio included 175 properties and approximately 48.4 million net rentable square feet.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $656.9 million | $623.5 million | $1,289.1 million | $1,289.5 million |
| Operating income | $238.7 million | $218.1 million | $444.9 million | $468.5 million |
| Net income attributable to BXP common shareholders | $133.7 million | $96.6 million | $230.8 million | $278.3 million |
| Diluted EPS | $0.87 | $0.63 | $1.50 | $1.81 |
| Net operating income (NOI, non-GAAP) | $410.7 million | $392.1 million | $801.1 million | $824.6 million |
| Operating cash flow | Not separately provided for the quarter | $372.3 million | $584.2 million |
- Q2 revenue rose about 5.4%; operating income increased about 9.4%. BXP’s calculated operating margin was approximately 36.3%, versus 35.0% a year earlier.
- Q2 common earnings and EPS increased, helped by a $14.4 million gain from early debt extinguishment and higher property NOI. The gain is unusual and should not be treated as recurring operating performance.
- For the first half, revenue was essentially flat and common earnings fell about 17.1%. The decline reflected, among other items, much lower real estate sale gains and termination income than in 2016. First-half NOI declined 2.9%, while interest expense fell $19.6 million.
- Same-property NOI declined 2.2% for the first half, despite 3.2% growth in same-property rental revenue; higher operating expenses and lower termination income more than offset rent growth. Q2 same-property NOI increased 5.7%.
- Cash and cash equivalents were $492.4 million at June 30, 2017, versus $356.9 million at December 31, 2016. First-half investing cash outflow was $539.5 million, principally for construction, capital improvements and tenant improvements; financing cash inflow was $302.7 million. Operating cash flow was down $211.9 million year over year.
- Consolidated debt was $10.24 billion: $7.25 billion of unsecured senior notes and $2.99 billion of mortgage debt. Debt was entirely fixed-rate at quarter-end, with a 4.13% GAAP weighted-average rate and 6.4-year weighted-average maturity. Consolidated debt was 32.4% of consolidated market capitalization; BXP’s share-of-debt ratio was 30.4%.
- BXP paid a $0.75 per-share quarterly common dividend, up from $0.65 in Q2 2016. The Series B preferred stock carries a 5.25% cumulative dividend.
Material changes and operating developments
- In June, the 60%-owned entity holding 767 Fifth Avenue refinanced its debt with a $2.3 billion, 10-year interest-only mortgage at a 3.43% stated rate (approximately 3.64% effective GAAP rate). The transaction extended maturity to 2027 and generated the debt-extinguishment gain noted above.
- In April, BPLP amended its credit facility: the revolving commitment increased from $1.0 billion to $1.5 billion, maturity extended to 2022, pricing was reduced, and a $500 million delayed-draw term facility was added. No amount was drawn at June 30; approximately $2.0 billion was available as of August 3.
- Management reported 90.8% occupancy in in-service properties at June 30, versus 90.4% at March 31. Q2 leases executed totaled approximately 927,000 square feet; management reported 2.9 million square feet leased since January 1, including July activity. Recent second-generation leases for space occupied within the prior year carried an average 28.4% increase in net rent during Q2.
- The development and redevelopment pipeline comprised nine projects, approximately 4.7 million square feet, and an estimated total investment of $2.9 billion; approximately $1.3 billion of BXP’s share remained to be funded. About 66% of commercial space was pre-leased as of August 3.
- During the quarter BXP began 145 Broadway, a 485,000-square-foot Cambridge office project reported as 98% leased in the development schedule. It also began a 402-unit Oakland residential development on ground-leased land. After quarter-end, a 50%-owned venture signed a 20-year build-to-suit lease with Marriott for its planned Bethesda headquarters; Marriott will lease the entire approximately 720,000-square-foot office building. Colorado Center’s joint venture also obtained $550 million of 10-year mortgage financing after quarter-end.
Outlook, risks and contingencies
- Management described U.S. economic growth as tepid but consistent, expected reasonably healthy operating and financial-market conditions, and did not expect a sharp near-term rise in long-term interest rates. It emphasized leasing, completing developments, selective investment, and balance-sheet discipline. No full-year EPS or FFO guidance is provided in the supplied filing text.
- Management estimated 2017 net interest expense, including debt-extinguishment costs, at $355 million to $368 million, net of an estimated $50 million to $60 million of capitalized interest. It expected hotel NOI of $13 million to $15 million, development and management services revenue of $30 million to $33 million, and G&A expense of $110 million to $115 million.
- Management cited rising construction costs, higher tenant allowances, increased tenant concessions and limited near-term rent-growth prospects in parts of New York. Development and repositioning require substantial capital and can reduce near-term revenue; management expected approximately $1.3 billion of remaining development and redevelopment funding through 2021.
- An unconsolidated Annapolis Junction venture remained in default on Building One’s mortgage after a loan-to-value covenant breach; the lender applied the default rate, and the venture was not current on debt service. BXP’s share of the venture’s debt is included in its reported share of unconsolidated joint-venture debt.
- BXP guaranteed up to approximately $263.8 million of reserves for tenant-related obligations at 767 Fifth Avenue; no liability was recorded for this guarantee at June 30. Other disclosed exposures include insurance limits and deductibles for catastrophic events, potential insurer-rating issues, ordinary-course legal matters, and uncertain future recoveries on a remaining Lehman Brothers claim of approximately $27.6 million.
- Management said it was assessing the effects of forthcoming revenue-recognition and lease-accounting standards. It expected the revenue standard mainly to affect recognition patterns, but the overall impact remained under review.
Important facts for investors to verify
- How much of earnings growth reflects recurring leasing and property operations versus the one-time debt gain, sale gains and termination income?
- Whether same-property NOI, occupancy and leasing spreads sustain growth as property taxes, construction costs and tenant concessions rise.
- Funding needs, leasing progress and returns for the $2.9 billion development pipeline, including the remaining estimated $1.3 billion equity requirement.
- Developments in the Annapolis Junction mortgage default, including potential funding obligations or impairment exposure at the joint venture.
- The full economic exposure and partner reimbursement arrangements for the 767 Fifth Avenue guarantee, as well as BXP’s joint-venture debt and other guarantees.
- Cash generation and dividend coverage: first-half operating cash flow declined materially year over year, while development and capital spending remained high.
- Actual adoption effects of new accounting standards and whether management’s stated 2017 expense and revenue estimates are achieved.
NOI is a non-GAAP measure defined by the company and may not be comparable with similarly named measures reported by other REITs.