BXP, Inc. (Boston Properties) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial figures below are in U.S. dollars; amounts are rounded. BXP is a REIT focused primarily on Class A office properties in Boston, New York, San Francisco and Washington, D.C. At quarter-end, it owned or held interests in 170 properties totaling approximately 46.3 million net rentable square feet, including 13 properties under construction or redevelopment.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $618.2 million | $589.8 million | $1,236.7 million | $1,164.5 million |
| Operating income | $204.9 million | $201.3 million | $411.1 million | $378.2 million |
| Net income attributable to BXP common shareholders | $79.5 million | $76.5 million | $250.7 million | $130.6 million |
| Basic and diluted EPS | $0.52 | $0.50 | $1.63 | $0.85 |
| Net operating income (NOI), consolidated | $390.4 million | $373.3 million | $774.6 million | $729.6 million |
| Funds from Operations attributable to BXP common shareholders | $208.7 million | $207.0 million | Not stated here | Not stated here |
Q2 revenue increased 4.8%; common-shareholder net income increased 3.8%. Q2 operating expenses rose to $413.3 million from $388.5 million, while interest expense declined to $108.5 million from $111.0 million. Q2 operating income as a share of revenue was approximately 33.2%, compared with 34.1% a year earlier.
For the first half, net income included $95.1 million of gains on real estate sales, principally the sale of Residences on The Avenue. Excluding that gain, income before real estate sale gains was $214.8 million, versus $163.7 million in the first half of 2014. First-half operating cash flow was $443.1 million, up from $309.0 million. Investing activities provided $179.2 million, mainly reflecting real estate sale proceeds; financing activities used $1,042.6 million, largely due to dividends and distributions. Cash and cash equivalents were $1,342.8 million at June 30, down from $1,763.1 million at year-end 2014.
At June 30, total consolidated debt was $9.87 billion, all fixed-rate, with a 4.41% GAAP weighted-average interest rate and approximately 4.5-year weighted-average maturity. Adjusted debt, including BXP’s share of unconsolidated joint-venture debt and excluding partners’ share of consolidated debt, was $9.05 billion. Consolidated debt was approximately 32.0% of consolidated market capitalization. The $1.0 billion revolving credit facility had no borrowings; approximately $983.5 million was available at June 30. Total assets were $19.11 billion and total liabilities were $11.02 billion.
Changes versus comparable periods
- First-half total revenue rose 6.2% and consolidated NOI rose 6.2%. Same Property Portfolio NOI increased 4.3%, including residential and hotel; office NOI excluding those categories increased 4.4%.
- Same-property rental revenue growth was partly offset by higher costs: first-half real estate operating expenses increased 5.6%, particularly taxes, repairs and maintenance, and utilities. Average same-property occupancy declined from 93.0% to 91.8% for the six-month comparison.
- First-half common-shareholder net income rose 92.0%, substantially reflecting the $95.1 million real estate sale gain and higher income from unconsolidated joint ventures, including the impact of return thresholds at 901 New York Avenue.
- First-half interest expense declined $7.2 million year over year, as lower expense from debt repayments and redemptions more than offset reduced capitalized interest.
- Q2 occupancy improved from 90.3% at the end of Q1 to 91.1% at June 30. Management reported second-generation lease rent increases in Boston, San Francisco, New York City and Reston.
Outlook, management commentary and key risks
- Management expected occupancy to remain relatively stable through the rest of 2015 and forecast 2015 average occupancy of approximately 91%. It projected 2015 Same Property Portfolio NOI to range from a 0.5% decline to a 0.5% increase versus 2014.
- Management estimated 2015 net interest expense of $422–$431 million, assuming $31–$38 million of capitalized interest and no additional debt, prepayments, interest-rate changes or changes in development activity. It forecast hotel NOI of $12–$14 million, development and management services income of $18–$22 million, and general and administrative expense of $96–$100 million.
- The development pipeline comprised 13 construction/redevelopment projects totaling approximately 4.2 million square feet, with BXP’s estimated share of total investment at $2.4 billion and approximately $1.3 billion remaining to fund. Management targeted approximately $1 billion of new development and redevelopment starts in 2015.
- Management projected identified leasing transitions, repositionings and expirations to reduce 2016 NOI by approximately $35 million. It cited potential offsets from lease-up and approximately $850 million of development deliveries through 2016; the near-term delivery pipeline was projected to generate about $70 million of NOI at stabilization by the end of 2017.
- BXP reported a target of approximately $750 million of asset sales in 2015, with no assurance as to amount or timing. After quarter-end, a 50%-owned entity agreed to sell 505 9th Street, N.W. for approximately $318 million, including assumption of $117 million of mortgage debt; the sale remained subject to customary conditions. BXP also agreed to acquire its Fountain Square joint-venture partner’s interest for approximately $100.9 million in September 2015.
- Management highlighted 2016–2017 maturities: approximately $3.6 billion of mortgage loans, or BXP’s approximately $2.9 billion share, excluding the property under agreement for sale. Forward-starting swaps hedge portions of planned refinancing exposure. Interest-rate changes, refinancing access and execution of development plans remain important risks.
- Market risks include weak Washington, D.C. demand and federal budget uncertainty, tenant expirations and vacancies, construction cost overruns or delays, and potential economic weakness. BXP also disclosed possible exposure to uninsured or underinsured terrorism and earthquake losses, including risks related to its captive insurer. Some insurer ratings may fall below certain loan requirements.
- The sale of Residences on The Avenue generated approximately $192.5 million net proceeds and a reported $91.4 million gain after a reduction for up to $6 million of potential NOI support. Approximately $192.3 million of proceeds were held in escrow at June 30 for a possible like-kind exchange. BXP received a $4.5 million interim distribution on its Lehman Brothers lease claim; approximately $33 million remained, with future recoveries uncertain.
Important facts for investors to verify
- Whether operating cash flow and same-property NOI growth persist after excluding sale gains, termination income and other nonrecurring items.
- Progress on leasing and occupancy, particularly Washington, D.C. expirations, Boston space transitions, Gateway vacancies and the repositioning of 601 Lexington Avenue and 767 Fifth Avenue.
- Funding and leasing progress across the development pipeline, including the remaining $1.3 billion estimated investment and projected stabilization dates.
- Refinancing plans, debt maturities and covenant compliance, as well as the actual availability and cost of credit facilities and capital-market financing.
- Completion and proceeds of planned asset sales, the Fountain Square buyout, and the use of sale proceeds and escrowed funds.
- Potential financial effects of the Residences on The Avenue NOI support obligation, remaining Lehman Brothers claim, joint-venture obligations and insurance coverage limitations.