BXP, Inc. (Boston Properties) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; selected quarterly results are noted below. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
BXP is a self-managed REIT focused primarily on Class A office properties in Boston, New York, San Francisco and Washington, DC. At year-end it owned or had interests in 169 properties totaling about 45.8 million net rentable square feet, including 10 properties under construction. In-service properties were 91.7% leased, versus 93.4% a year earlier. The average remaining lease term was 6.8 years.
Financial and operating metrics
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total revenue | $2.397 billion | $2.136 billion | Up 12.2% |
| Operating income | $801.8 million | $678.1 million | Up 18.2% |
| Net income attributable to BXP common shareholders | $433.1 million; $2.83 per share | $741.8 million; $4.87 per share | Down 41.6%; prior year included major nonrecurring gains |
| Funds from Operations (FFO), attributable to BXP | $807.5 million | $751.5 million | Up 7.5%; non-GAAP measure |
| Same-property office NOI | $1.202 billion | $1.163 billion | Up 3.4%; non-GAAP measure |
| Cash from operating activities | $695.6 million | $777.9 million | Down $82.4 million |
| Cash and cash equivalents | $1.763 billion | $2.365 billion | Down $602.1 million |
| Consolidated debt | $9.907 billion | $11.342 billion | Down $1.435 billion; all consolidated debt was fixed-rate |
Year-end debt had a 4.40% GAAP weighted-average rate, a 4.98% stated/coupon rate and about a five-year weighted-average maturity. The $1.0 billion revolving credit facility had no borrowings and about $983.5 million of availability at year-end and February 23, 2015. Consolidated debt to market capitalization was 30.84% at year-end; management also reported adjusted debt of about $9.1 billion, reflecting joint-venture debt and partner interests.
For the fourth quarter of 2014, revenue was $613.7 million, income from continuing operations was $85.3 million, and net income attributable to common shareholders was $174.5 million, or $1.14 per share. The quarter’s net income included real-estate sale gains.
Material changes and notable transactions
- Revenue growth reflected acquisitions and properties placed in service as well as same-property growth. Same-property revenue increased 3.7%; same-property operating expenses rose 4.1%, with higher real-estate taxes and repairs and maintenance among the drivers.
- Reported net income fell sharply, largely because 2013 included a $386.0 million gain on consolidation of joint ventures and gains from properties reported as discontinued operations. BXP adopted revised discontinued-operations accounting in 2014, so year-to-year presentation is not fully comparable.
- 2014 real-estate sale gains totaled $168.0 million. BXP reported approximately $2.3 billion of asset sales based on its share and about $2.0 billion of proceeds. Major dispositions included Patriots Park and a 45% interest in three office properties in New York and Boston.
- The 45% interest transaction generated about $1.497 billion of net cash proceeds but was accounted for as an equity transaction, not a real-estate sale; BXP retained effective control and continued consolidating the properties.
- Ten projects under construction totaled about 3.3 million square feet, with estimated total investment of $2.148 billion. BXP had invested $876.8 million by year-end, leaving about $1.3 billion to fund through 2019. Salesforce Tower was 51% leased as of February 23, 2015, including a 714,000-square-foot Salesforce lease.
- BXP repaid $747.5 million of exchangeable notes at maturity and redeemed $550 million of senior notes due 2015, recognizing a $10.6 million early-extinguishment loss. The special cash dividend of $4.50 per share was declared in December 2014 and paid in January 2015, in addition to the regular quarterly dividend.
Outlook, management commentary and risks
Management described leasing as strong overall and reported a record 7.7 million square feet of leases signed in 2014. It cited technology and life-sciences demand in San Francisco, Silicon Valley, Cambridge and suburban Boston, while noting slower demand in Washington, DC and some traditional office sectors. Densification and new construction could constrain occupancy and rental growth. Management remained optimistic about long-term fundamentals but highlighted near-term vacancies and lease expirations, including substantial John Hancock Tower space expected to be vacant during 2015.
- 2015 estimates: average occupancy of 91%–92%; same-property NOI from a 1.0% decrease to a 0.5% increase; hotel NOI of $12–$14 million; development and management fees of $17–$22 million; general and administrative expenses of $96–$100 million; and net interest expense of approximately $415–$425 million. These are management estimates, not guarantees.
- Management projected 2015 asset sales could exceed $750 million. A sale of the Residences on The Avenue for $196 million was under contract, subject to closing conditions and up to $6 million of NOI support.
- Liquidity at February 23, 2015 included about $1.1 billion of available cash, of which $342.2 million was restricted for potential like-kind exchanges, plus about $983.5 million available under the credit facility. Funding development, tenant improvements, distributions and debt obligations remain significant capital needs.
- Mortgage principal maturities are concentrated in 2017: approximately $2.82 billion of mortgage principal was scheduled then, including major property loans. Refinancing, interest rates, debt covenants and access to capital remain material risks.
- Other key risks include exposure to four concentrated metropolitan markets; tenant demand and lease rollover; development cost, completion and lease-up risk; joint-venture partner and refinancing risks; REIT qualification and tax-distribution requirements; and potentially insufficient terrorism, earthquake or other catastrophe insurance. BXP also disclosed environmental matters, certain guarantees and tax-protection restrictions.
Important facts for investors to verify
- Reconcile the decline in GAAP net income with recurring performance measures, including FFO and same-property NOI, and account for the significant 2013 consolidation and disposition gains.
- Review the 2017 mortgage maturity concentration, refinancing plans, covenant headroom and the distinction between consolidated and joint-venture debt.
- Track lease-up and occupancy at newly completed properties, 2015 lease expirations and the delivery and funding schedule for the $2.1 billion development pipeline.
- Confirm the closing and final economics of the Residences on The Avenue sale, projected asset sales and associated rent or NOI support obligations.
- Assess the special dividend’s tax and cash-flow implications, REIT distribution requirements, and the restrictions or contingent obligations tied to joint ventures, insurance and tax-protection agreements.