BXP, Inc. (Boston Properties) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet amounts are as of March 31, 2012. BXP is a REIT focused primarily on owning, operating and developing Class A office properties in Boston, New York, Princeton, San Francisco and Washington, DC. Its portfolio included 153 properties and approximately 43.3 million rentable square feet.
Financial performance and position
- Revenue: $447.7 million, up 7.3% from $417.2 million in Q1 2011. Rental revenue increased 7.1% to $432.7 million.
- Profit: Operating income was $144.7 million, up 4.9%; income from continuing operations was $56.4 million, up 15.8%. Net income attributable to BXP was $64.6 million versus $40.8 million. Diluted EPS was $0.43 versus $0.29; basic EPS was $0.44 versus $0.29.
- Important earnings qualification: Q1 2012 net income included a $17.8 million gain on forgiveness of debt following foreclosure of Montvale Center; $15.8 million of that gain was attributable to BXP. The property’s operating results were reported as discontinued operations.
- NOI and FFO: Consolidated net operating income (NOI), a non-GAAP measure, increased 4.4% to $275.9 million. Same-property NOI, excluding the hotel, declined 0.9% to $252.0 million; total same-property NOI including the hotel declined 0.7%. Funds from Operations attributable to BXP was $166.9 million, up from $160.0 million.
- Cash flow: Operating activities provided $169.3 million, compared with $132.3 million a year earlier. Investing used $760.1 million, principally reflecting real estate acquisitions; financing used $641.2 million, mainly for debt repurchases/redemptions, mortgage repayments and distributions. Cash and equivalents were $591.2 million at quarter-end, down from $1.823 billion at December 31, 2011.
- Debt and liquidity: Consolidated debt was $8.0 billion, all fixed-rate at quarter-end, with a 5.38% GAAP weighted-average rate, 5.05% stated rate and 5.8-year weighted-average maturity. Debt equaled 31.0% of consolidated market capitalization. BXP reported $736.1 million available under its $750 million unsecured credit line and no borrowings on it. Unconsolidated joint ventures had $3.0 billion of debt in aggregate, of which BXP’s proportionate share was approximately $1.4 billion.
Changes versus Q1 2011
- Revenue growth reflected acquisitions and properties placed in service. Same-property rental revenue rose 1.2%, but same-property rental operating expenses rose 5.1%, contributing to the slight decline in same-property NOI.
- Same-property average occupancy decreased to 92.1% from 92.6%; average revenue per square foot increased. Operating expense growth included a $3.2 million cumulative non-cash ground-rent adjustment and higher real estate taxes.
- Interest expense increased 4.8% to $103.2 million. The company cited interest on new debt and financings, partly offset by debt repayments and repurchases.
- Net income growth was materially affected by the Montvale Center debt-forgiveness gain. FFO growth was more modest, at approximately 4.4%.
Outlook, management commentary and risks
- Management expected 2012 occupancy of approximately 91%–93% and projected same-property NOI to decline approximately 1%–2% from 2011, citing lease expirations, vacancies and redevelopment-related interruptions. It noted stronger leasing trends in Cambridge and parts of San Francisco, weaker recent activity in Midtown Manhattan, and continued weakness in Washington, DC private-sector leasing.
- Management estimated 2012 hotel NOI of $9–$10 million, development and management fee income of $27–$32 million, G&A expense of $85–$87 million and net interest expense of $388–$393 million. These estimates depend on assumptions, including no additional debt or repayments and no material changes in interest rates or development activity. No full-year EPS or FFO guidance is provided in the filing text.
- At quarter-end, BXP had eight properties under construction, with estimated total investment of approximately $1.83 billion and 54% leased (excluding residential space). Management estimated approximately $690 million of future funding to complete developments through 2015 and about $250 million of budgeted development costs for the remainder of 2012.
- Management reported approximately $889 million of secured and unsecured debt maturities in 2013, of which BXP’s share was approximately $837 million. It stated that 2012 debt maturities had been satisfied and identified May 2013 repurchase rights on the 3.750% exchangeable notes as a liquidity need.
- Material events included the $615 million acquisition of 100 Federal Street, the $6.7 million acquisition of 453 Ravendale Drive, repayment of $143.9 million of Bay Colony debt, and repurchase/redemption of $576.2 million principal of 2.875% exchangeable notes. BXP raised $109.3 million net through ATM stock sales during the quarter and a further $67.7 million net through May 8.
- Other items include approximately $4.5 million of Q1 expense related to the COO’s resignation and a $3.2 million prior-period ground-rent adjustment recorded in Q1; management stated the adjustment was not material to prior or current financial statements.
- Principal disclosed risks include economic weakness affecting tenant demand, occupancy and rents; tenant and counterparty credit risk; development and construction execution; financing costs and availability; joint-venture obligations; REIT qualification; and uninsured or inadequately insured catastrophic losses. BXP also described terrorism and earthquake coverage provided partly by its own captive insurers, which it characterizes as modified self-insurance.
Investor verification priorities
- Separate recurring operating performance from the Montvale Center debt-forgiveness gain and assess the same-property NOI trend against management’s 2012 outlook.
- Review the 2013 debt maturities, exchangeable-note put rights, and available liquidity, including the subsequent ATM equity issuance.
- Track leasing, occupancy and rent commencement at newly acquired and developed assets, and confirm delivery, lease-up and funding assumptions for the development pipeline.
- Assess total leverage including BXP’s share of unconsolidated joint-venture debt, as well as guarantees and potential insurance exposure through captive subsidiaries.