BXP, Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; unaudited. Boston Properties is a REIT focused on owning, developing and leasing commercial real estate, principally Class A offices in Boston, Washington, D.C., Midtown Manhattan, San Francisco and New Jersey. At quarter-end it owned or held interests in 146 properties totaling approximately 49.6 million net rentable square feet.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $377.3 million | $358.0 million | $1,144.3 million | $1,098.1 million |
| Net income | $77.7 million | $52.4 million | $211.8 million | $243.3 million |
| Net income attributable to BXP | $65.8 million | $43.1 million | $177.6 million | $203.0 million |
| Diluted EPS | $0.47 | $0.35 | $1.38 | $1.67 |
| Consolidated NOI (non-GAAP) | $231.6 million | $213.2 million | $721.6 million | $675.3 million |
| Net cash from operating activities | Not presented quarterly | $447.9 million | $365.7 million |
- At September 30, cash and cash equivalents were $782.1 million, versus $241.5 million at December 31, 2008. The company reported approximately $1.5 billion of cash as of November 2, 2009, after subsequent financing activity.
- Consolidated debt was $6.009 billion, compared with $5.923 billion a year earlier; 93.6% was fixed rate. The weighted-average GAAP interest rate was 5.87%, and weighted-average maturity was approximately 4.2 years. Debt was 36.21% of reported consolidated market capitalization.
- Total liabilities were $6.499 billion. The $1.0 billion unsecured credit facility had no borrowings and $989 million of available capacity at September 30; availability as of November 2 was also reported at approximately $1.0 billion.
Material changes versus comparable periods
- Q3 revenue rose 5.4% and consolidated NOI rose 8.6% year over year. BXP-attributable net income increased 52.7%, while diluted EPS increased from $0.35 to $0.47. The June equity offering increased weighted-average shares, so per-share comparisons reflect dilution.
- For the first nine months, revenue increased 4.2% and NOI increased 6.9%, but BXP-attributable net income declined 12.5% and diluted EPS fell from $1.67 to $1.38. Higher interest and depreciation, the $27.8 million development-suspension loss, and lower gains on real estate sales were among the factors affecting results.
- Same-property rental revenue rose 2.7% for the nine months, while same-property real estate operating expenses rose 1.4%; same-property NOI excluding hotels increased 4.8%. Revenue growth also reflected properties placed in service and a $13.5 million of nine-month lease termination income, compared with $4.7 million in 2008.
- Operating cash flow increased to $447.9 million from $365.7 million. Investing cash use fell to $328.3 million from $1.216 billion, while financing provided $421.0 million versus $601.2 million used in 2008.
Outlook, management commentary and risks
- Management described office demand and rental markets as challenging amid economic weakness and unemployment. It expected overall occupancy to remain relatively flat during 2010, while anticipating that new leasing could involve lower rents and higher transaction costs. In New York, approximately 500,000 of 570,000 square feet returned over the prior year had been re-leased, at rents approximately 25% below prior rates.
- Management expected the quarterly dividend to remain approximately $0.50 per share for the next several quarters, subject to the Board’s decision. The dividend was reduced from $0.68 in Q2 2009 to preserve capital and support liquidity.
- Management projected 2009 hotel NOI of $6.0–$6.5 million, general and administrative expense of $74–$75 million, net interest expense of $318–$322 million, and third-party fee income of $7–$8 million for Q4. It expected $410.7 million of remaining development capital requirements, net of anticipated construction-loan funding, through 2012.
- Construction at the 1.0-million-square-foot 250 West 55th Street project was suspended; the company recorded a $27.8 million loss and said the suspension reduced future capital commitments by approximately $500 million. Management did not expect to start new developments in the foreseeable future without significant creditworthy pre-leasing.
- Capital-raising included approximately $841.9 million net proceeds from a June common-stock offering. Subsequent to quarter-end, the Operating Partnership issued $700 million of 5.875% senior notes due 2019 for approximately $693.7 million net proceeds. Management said it expected to refinance or extend remaining 2010 maturities and intended to extend the credit facility, which matures in August 2010, if conditions were met.
- Risks include tenant credit deterioration, weaker occupancy and rents, refinancing and capital-market access, development costs and delays, joint-venture obligations, and potential impairment of real estate or joint-venture investments. The company recorded a $7.4 million non-cash impairment on its Value-Added Fund investment in the first nine months and warned further declines could result in additional material charges.
- Unconsolidated joint ventures carried approximately $3.212 billion of debt. The company also disclosed insurance limitations and exposure through captive insurers, including potential uninsured catastrophe losses and possible lender concerns about insurer ratings. Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether leasing, occupancy and rental-rate trends support management’s expectation of relatively flat occupancy in 2010, particularly given rent concessions and tenant financial stress.
- The timing and funding of 2010 debt maturities, including approximately $658 million of joint-venture maturities (BXP’s stated share approximately $375 million), construction-loan extensions and the credit-facility extension.
- Use of cash raised through equity and debt offerings, progress against the $410.7 million remaining development funding estimate, and the effects of suspended construction on future interest expense.
- Whether the $0.50 quarterly dividend is sustainable relative to taxable income, operating cash flow, debt service and capital requirements.
- Potential additional impairments, joint-venture funding needs and exposure to guarantees, insurance shortfalls and other contingencies.