BXP, Inc. (Boston Properties) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. BXP is a REIT focused on owning, operating and developing commercial real estate, principally Class A office properties in Boston, New York, Princeton, San Francisco and Washington, D.C. At quarter-end it owned or held interests in 179 properties totaling approximately 44.8 million net rentable square feet.
Key financial results
Unless stated otherwise, dollar amounts are in millions. Comparisons are with the corresponding 2012 period.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $515.3 | $471.3 | $998.3 | $915.0 |
| Operating income | $170.8 | $173.3 | $301.3 | $316.9 |
| Net income attributable to BXP common shareholders | $452.4 | $118.6 | $500.1 | $167.0 |
| Diluted earnings per common share | $2.94 | $0.78 | $3.26 | $1.12 |
| Net operating income (NOI), company-reported non-GAAP measure | $320.3 | $294.0 | $614.9 | $567.6 |
| Funds from Operations attributable to BXP (FFO), non-GAAP | $195.4 | $206.5 | Not shown in the supplied excerpt | Not shown in the supplied excerpt |
- Earnings quality: Q2 and six-month net income included $387.8 million of gains on consolidating joint ventures, principally a $363.4 million noncash gain tied to 767 Fifth Avenue (the General Motors Building) and a $24.4 million gain on the Mountain View properties. These gains materially lifted reported earnings and are not recurring property operating income.
- Property operations: Q2 total revenue increased 9.3% and reported NOI increased 8.9%. However, same-property office NOI was approximately flat year over year for Q2; the six-month same-property portfolio NOI, excluding residential and hotel, rose 1.0%. Acquisition, consolidation and placed-in-service properties contributed substantially to total portfolio growth.
- Expenses and margins: Q2 operating income declined despite higher revenue as operating expenses and depreciation increased. Six-month general and administrative expense rose $19.1 million, including accelerated and transition-related executive compensation. Six-month impairment charges included $8.3 million on an adjacent San Jose development parcel and $3.2 million associated with 303 Almaden Boulevard, reported in discontinued operations.
- Cash flow (six months): Operating cash flow was $334.8 million versus $331.1 million; investing cash flow was negative $452.3 million versus negative $806.4 million; financing cash flow was positive $684.2 million versus positive $324.1 million. Cash and equivalents were $1.609 billion at June 30, 2013, up from $1.042 billion at December 31, 2012.
- Debt and liquidity: Consolidated debt was $11.366 billion, with a 4.59% GAAP weighted-average interest rate and approximately 5.9-year weighted-average maturity. BXP reported all consolidated debt as fixed-rate at June 30 and no line-of-credit borrowings. Consolidated debt was 38.33% of consolidated market capitalization; management also reported adjusted debt of approximately $10.8 billion and an adjusted ratio of 37.13%.
- Dividends and financing: BXP issued $500 million of 3.125% senior notes due 2023, $700 million of 3.800% senior notes due 2024, and $200 million of 5.25% Series B preferred stock during the first half. The common dividend was $0.65 per share for the quarter.
Material changes and significant transactions
- BXP began consolidating 767 Fifth Avenue effective June 1 after changes to governance and consent rights gave it control. Its economic ownership remained 60%; consolidation added substantial property assets and debt to reported balances and generated the noncash gain noted above.
- BXP acquired full ownership of Mountain View Research Park and Mountain View Technology Park for approximately $233.5 million, having previously held an approximately 39.5% interest.
- A joint venture sold 125 West 55th Street for $470 million; BXP’s share of net proceeds was approximately $152.2 million. BXP also sold 303 Almaden Boulevard for $40 million, with approximately $39.3 million net cash proceeds.
- In February, the court ratified the Montvale Center foreclosure, extinguishing $25 million of debt and producing a $20.2 million gain on debt forgiveness.
- The Operating Partnership redeemed or exchanged its 3.75% exchangeable notes due 2036; $449.0 million principal was exchanged, with 419,116 common shares issued, and approximately $1.0 million was redeemed for cash.
Outlook, management commentary and risks
- Management described leasing activity as stable and was cautiously optimistic about its markets. It cited technology and life-sciences demand in Boston and San Francisco, while noting federal budget uncertainty weighed on Washington, D.C. demand. Densification and new construction were cited as headwinds.
- Management projected 2013 average occupancy of 92%–93% and same-property NOI growth of approximately 2%–3% versus 2012. It expected hotel NOI of $9.5–$10.5 million, development and management fee income of $27–$30 million, general and administrative expense of $106–$108 million, and net interest expense of $438–$441 million. These are management estimates, not guarantees.
- The development pipeline totaled approximately 2.8 million square feet, with estimated total investment of about $2.5 billion; management estimated approximately $0.9 billion remained to fund through 2015. Several projects were pre-leased, including 601 Massachusetts Avenue at 79% and 250 West 55th Street at 46% as of the dates stated in the filing.
- Management indicated 2013 asset sales could approach or exceed $1 billion. A July 2013 sale contract for 1301 New York Avenue had an approximately $135 million gross price but remained subject to closing conditions.
- Management reported approximately $1.4 billion of available cash as of August 1 and approximately $990 million available under the amended $1.0 billion revolving credit facility. The facility was extended to July 2028? The filing states July 26, 2018; its commitment could potentially increase to $1.5 billion subject to conditions.
- Important risks include the $747.5 million exchangeable notes due February 2014, debt maturities and development funding needs; leasing, tenant credit and rental-rate risks; construction delays and cost overruns; interest-rate and capital-market exposure; and potential gaps or higher costs in terrorism and earthquake insurance. BXP also cautioned that its captive insurers represent modified self-insurance. Management said it was in compliance with stated debt covenants.
- CEO succession took effect in April 2013, with Owen D. Thomas succeeding Mortimer B. Zuckerman. The transition arrangement and accelerated vesting contributed materially to first-half compensation expense. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the reported earnings increase reflects the $387.8 million consolidation gains versus recurring property performance; review FFO and same-property NOI alongside GAAP results.
- The full debt and financing implications of consolidating 767 Fifth Avenue, including partner loans, related-party obligations and the distinction between consolidated and adjusted leverage.
- Funding and refinancing plans for the $747.5 million notes due in February 2014 and the approximately $0.9 billion development funding requirement.
- Whether leasing, occupancy and rent assumptions support management’s 2013 NOI outlook, particularly given flat Q2 same-property office NOI, densification and regional demand differences.
- Progress, leasing, costs and timing for the development pipeline, and whether proposed asset sales close at expected prices.
- Exposure from executive transition compensation, property impairments, insurance limits and the potential expiration of federal terrorism-insurance support after 2014.