BXP, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; it also provides Q4 results. BXP is a self-managed REIT focused primarily on Class A office properties in Boston, New York, San Francisco and Washington, D.C. At year-end it owned or had interests in 175 properties totaling approximately 44.4 million net rentable square feet, including nine developments under construction.
Financial and operating performance
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Total revenue | $2.136 billion | $1.847 billion | Up 15.6%; growth includes acquisitions, consolidations and newly placed-in-service properties. |
| Operating income | $678.1 million | $640.3 million | Up 5.9%. |
| Net income attributable to BXP | $749.8 million | $289.7 million | Includes $386.0 million of gains on consolidation of joint ventures and substantial gains from property dispositions. |
| Basic / diluted EPS | $4.87 / $4.86 | $1.93 / $1.92 | Reported EPS increased sharply; earnings were materially affected by nonrecurring and transaction-related items. |
| Funds from Operations (FFO), attributable to BXP | $751.5 million | $741.4 million | Up approximately 1.4%; FFO is a non-GAAP measure and is not cash flow or liquidity. |
| Cash from operating activities | $777.9 million | $642.9 million | Up $135.0 million. |
| Cash used in investing activities | $532.6 million | $1.278 billion | Lower outflow, reflecting changes in acquisitions, asset sales and joint-venture distributions. |
| Cash from financing activities | $1.078 billion | $(146.1) million | Driven largely by debt and preferred-stock issuance and the sale of a property interest. |
- Q4 2013: Revenue was $576.2 million; net income attributable to BXP was $88.7 million; basic and diluted EPS were each $0.58. Q4 2012 revenue was $478.0 million, attributable net income $65.4 million and basic/diluted EPS $0.43.
- Property operations: Same-property NOI increased 2.55% year over year. Overall in-service occupancy rose to 93.4% from 91.4%; average annualized revenue per square foot increased to $56.36 from $55.43. Total portfolio NOI rose 16.45%, reflecting portfolio changes as well as operating performance.
- Debt and leverage: Consolidated debt was $11.34 billion at year-end, versus $8.91 billion a year earlier. All consolidated debt was fixed-rate; the weighted-average GAAP rate was 4.60% (4.93% stated/coupon rate), with average maturity of approximately 5.4 years. Debt was 39.50% of consolidated market capitalization; management’s adjusted-debt ratio was 38.31%.
- Liquidity and development: Year-end cash and equivalents were $2.365 billion; approximately $989.4 million was available under the $1.0 billion revolving credit facility, which had no borrowings. The nine-property development pipeline represented an estimated $2.501 billion investment, of which $1.756 billion had been invested by year-end.
Material changes versus the prior year
- Revenue growth reflected, among other factors, the acquisition of Mountain View Research and Technology Parks and the consolidation of 767 Fifth Avenue (the General Motors Building). Consolidating the latter added substantial assets and debt to reported results despite BXP retaining a 60% ownership interest.
- The 767 Fifth Avenue consolidation generated a $359.5 million noncash gain; consolidating the Mountain View properties generated a $26.5 million gain. These gains were major contributors to the increase in reported net income.
- BXP sold a 45% interest in Times Square Tower for net cash proceeds of approximately $673.1 million. Because BXP retained control, the transaction was accounted for as an equity transaction, not a real-estate sale: approximately $429.6 million was recorded in additional paid-in capital rather than as a gain.
- Other dispositions included 1301 New York Avenue, 10 & 20 Burlington Mall Road and One Preserve Parkway. The filing reports $112.8 million of gains on sales in discontinued operations and a $20.2 million gain on forgiveness of debt following foreclosure of Montvale Center.
- Same-property rental revenue increased 2.95%, while same-property operating expenses rose 4.06%, including higher property taxes, utilities, repairs and maintenance. Same-property NOI nevertheless increased 2.32% for office properties, excluding residential and hotel, and consolidated NOI increased 2.55% including those categories.
- Interest expense increased 8.7% to $446.9 million, largely reflecting the consolidation of 767 Fifth Avenue and new debt issuance. General and administrative expense increased to $115.3 million, including elevated executive transition and stock-compensation expense.
Outlook, commentary, risks and unusual items
- Operating outlook: Management expected 2014 same-property NOI growth of approximately 1.25%–2.5%, with average occupancy of 92.5%–93.5%. It forecast hotel NOI of $12–$13 million, development and management fee income of $19–$22 million, G&A expense of $100–$104 million and net interest expense of $448–$452 million. These estimates depend on stated assumptions and are not guarantees.
- Leasing and markets: Management described stronger demand in technology and life-sciences-oriented submarkets, including San Francisco, Silicon Valley, Cambridge and suburban Boston. It cited slower Washington, D.C. leasing amid federal budget uncertainty, sequestration and reduced discretionary spending. It also identified tenant densification and moderate new construction as pressures on space demand, occupancy and rents.
- Development commitments: Approximately $0.7 billion of the existing development pipeline remained to be funded through 2017. Management said available cash, revolver capacity, capital-market access and potential asset sales were expected to cover requirements. Development exposure includes construction-cost overruns, delays, lease-up risk and permitting uncertainty. Transbay Tower’s reported estimate covers only construction to grade; a decision on vertical construction was still pending.
- Subsequent events and liquidity: BXP repaid $747.5 million of exchangeable notes at maturity on February 18, 2014. As of February 21, 2014, management reported approximately $0.9 billion in available cash and $989.4 million available on the credit line. Approximately $77 million of secured debt, including BXP’s share of joint-venture debt, was expected to mature by year-end 2014.
- Unusual expenses and impairment: Executive Chairman Mortimer Zuckerman’s transition arrangements and accelerated vesting resulted in approximately $21.5 million of 2013 stock-based compensation expense; additional transition expense was expected in the first half of 2014. BXP also recorded an $8.3 million impairment on adjacent Almaden development land and a $3.2 million impairment associated with 303 Almaden Boulevard.
- Other risks and contingencies: The portfolio is concentrated in a few metropolitan office markets and exposed to tenant credit, lease rollover, interest-rate and refinancing, joint-venture, and development risks. The filing highlights potential gaps or higher costs in terrorism and earthquake insurance, including risks from BXP’s captive insurers; environmental remediation exposure; REIT qualification and distribution requirements; and tax-protection agreements that can constrain sales or debt actions. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity; disclosed tax deficiency notices were not material to date.
- Reporting and assurance: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- How much of the 2013 earnings increase reflects recurring property operations versus the $386.0 million consolidation gains, disposition gains and debt-forgiveness gain; compare GAAP earnings with FFO and operating cash flow.
- Whether reported occupancy and same-property NOI trends continue, especially in Washington, D.C., and whether lease renewals and expirations support management’s 2014 assumptions.
- The scope, schedule, pre-leasing, remaining funding and expected returns of the $2.5 billion development pipeline, including the eventual decision on Transbay Tower vertical construction.
- The debt maturity and refinancing profile, including the large 2017 mortgage maturities associated with 767 Fifth Avenue, and the effect of the February 2014 note repayment on liquidity.
- Whether the special $2.25-per-share dividend, funded primarily by the Times Square Tower transaction, is separate from the regular quarterly dividend policy; confirm the timing and cash impact.
- How joint-venture consolidation, outside-member notes bearing 11% interest, tax-protection restrictions, and insurance limitations affect economic leverage and available cash, beyond consolidated GAAP figures.