BXP, Inc. (Boston Properties, Inc.) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. BXP is a self-managed REIT focused on owning, leasing, and developing commercial real estate, principally Class A offices in Boston, New York, San Francisco, and Washington, D.C. At quarter-end, it owned or held interests in 172 properties totaling approximately 46.4 million net rentable square feet; ten properties were under construction.
Financial performance
Amounts below are in millions of dollars unless otherwise noted. Comparisons are with the same periods in 2013.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $618.8 | $571.5 | $1,783.3 | $1,559.3 |
| Operating income | $214.8 | $186.8 | $593.0 | $483.1 |
| Income from continuing operations | $109.0 | $82.3 | $272.7 | $624.3 |
| Net income attributable to BXP common shareholders | $127.7 | $152.7 | $258.5 | $652.9 |
| Basic and diluted EPS | $0.83 | $1.00 | $1.69 | $4.27 basic; $4.26 diluted |
| Net cash provided by operating activities | — | — | $469.7 | $550.4 |
| Funds from Operations attributable to BXP | $223.4 | $197.9 | Not stated clearly in the provided filing text | Not stated clearly in the provided filing text |
- Q3 revenue increased 8.3% and operating income increased 15.0%. Q3 common-shareholder income and EPS fell, despite stronger property operations.
- For the first nine months, revenue rose 14.4%; consolidated NOI, a non-GAAP measure, increased 15.2% to $1,119.2 million. Same-property NOI rose 4.2%.
- Year-to-date common-shareholder income and EPS declined sharply from 2013, which included substantial gains from joint-venture consolidations and property dispositions. BXP reported no comparable consolidation gain in 2014; it recorded $41.9 million of real-estate sale gains.
- Nine-month investing cash outflow was $488.3 million and financing cash outflow was $1,499.9 million. Cash and cash equivalents fell to $846.7 million from $2,365.1 million at December 31, 2013.
Debt, liquidity, and capital allocation
- Consolidated debt was approximately $10.48 billion at September 30. All consolidated debt was fixed-rate; weighted-average GAAP interest rate was 4.46%, stated/coupon rate 5.00%, and weighted-average maturity approximately five years. Debt equaled 34.37% of consolidated market capitalization; management also reported adjusted debt of approximately $9.9 billion and an adjusted ratio of 33.20%.
- The $1.0 billion unsecured credit facility had no borrowings and approximately $984 million available at September 30. Management reported approximately $2.6 billion of available cash as of November 3, including approximately $1.9 billion of restricted cash held for potential like-kind exchanges.
- Management identified approximately $1.3 billion of remaining development costs through 2019 and approximately $165 million of secured debt maturities through 2015, of which BXP’s share was approximately $45 million. On November 3, the Operating Partnership gave notice to redeem $550 million of senior notes on December 15, 2014.
- Cash dividends and distributions paid during the first nine months totaled $726.3 million, including the special dividend declared in 2013 and paid in January 2014. The regular common dividend declared for Q3 was $0.65 per share.
Operating changes, outlook, and significant items
- In-service office occupancy was 92.0% at September 30, down from 93.0% at June 30, largely because 250 West 55th Street entered service at 54% leased. It was subsequently reported 77% leased, including future commencements. Management cited strong leasing activity, particularly in Boston and San Francisco, but noted weaker Washington, D.C. activity and office-space densification.
- Management forecast 2014 same-property NOI growth of approximately 3.0%–3.25%; for 2015 it expected same-property NOI to range from approximately 1.0% decline to 0.5% growth and occupancy of approximately 91%–92%, mainly reflecting Boston expirations. It also anticipated Washington, D.C. occupancy to average 93.3% in 2015.
- The development pipeline comprised ten projects totaling approximately 3.28 million square feet, with estimated investment of $2.13 billion, approximately $790.7 million invested, and approximately 54% leased as of November 3. Salesforce Tower was 51% leased and targeted for stabilization in 2019.
- Other management estimates: 2014 net interest expense of $456–$459 million and 2015 of $415–$425 million; hotel NOI of $13–$14 million in 2014 and $12–$14 million in 2015; development and management fee income of $22–$25 million in 2014 and $15–$20 million in 2015. These are estimates subject to the assumptions described in the filing.
- On October 30, 2014, BXP completed the sale of 45% interests in 601 Lexington Avenue, Atlantic Wharf, and 100 Federal Street for approximately $1.827 billion gross, less the buyer’s share of debt and other adjustments. BXP retained control, so the properties remain consolidated for financial reporting.
- A $7.7 million initial distribution on BXP’s Lehman Brothers creditor claim was recognized in base rent in Q3. Approximately $37.5 million of the claim remained; BXP recorded no estimate of future recoveries because timing and amount are uncertain.
- Key risks include leasing and tenant-credit conditions, new supply and development execution, interest rates and access to financing, joint-venture obligations, and catastrophic losses. Terrorism insurance legislation was due to expire December 31, 2014; BXP warned that replacement coverage could be more costly or insufficient. Earthquake coverage may also not cover all losses, and some coverage is provided through BXP’s captive insurer, effectively a form of self-insurance.
- Management disclosed a non-material $1.9 million out-of-period adjustment related to the accretion of a redeemable interest in the Fountain Square partnership. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether occupancy and leasing at newly delivered buildings, especially 250 West 55th Street, 680 Folsom Street, and 535 Mission Street, progress as expected, and how 2015 expirations affect occupancy and same-property NOI.
- Actual net proceeds, debt adjustments, tax treatment, and resulting liquidity from the October 30 portfolio-interest sale; the properties remain consolidated despite the transaction.
- Funding and leasing progress for the $2.13 billion development pipeline, including the approximately $1.3 billion still to be funded.
- Completion and cost of the announced $550 million note redemption, future debt maturities, and the availability of unrestricted liquidity after restricted exchange proceeds are excluded.
- Potential recovery on the remaining Lehman claim and the scope, cost, and adequacy of terrorism and earthquake insurance.