BXP, Inc. annual report, FY2009

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BXP, Inc. (Boston Properties) — FY 2009 Form 10-K

Reporting period: Fiscal year ended December 31, 2009; this is an annual filing, not a standalone fourth-quarter report. Filed February 25, 2010. BXP is an office-focused REIT operating principally in Boston, Washington, D.C., Midtown Manhattan, San Francisco, and Princeton, New Jersey.

Business context and portfolio

At year-end, BXP owned or had interests in 146 properties, with approximately 37.7 million rentable square feet and 12.8 million square feet of structured parking; the broader portfolio total including development projects was approximately 50.5 million square feet. In-service occupancy was 92.4%, down from 94.5% in 2008. Average remaining lease term was about 7.0 years, and 9.1% of portfolio square footage was scheduled to expire in 2010.

Financial and operating results

  • Revenue: $1.522 billion, up 2.3% from $1.488 billion in 2008. Rental revenue rose 3.6% to $1.453 billion, supported by properties placed in service and higher straight-line rent; hotel revenue and interest and other income declined.
  • Profit: Net income attributable to BXP was $231.0 million, versus $105.3 million in 2008; diluted EPS was $1.76 versus $0.87. The increase partly reflects the much smaller loss from unconsolidated joint ventures: income of $12.1 million in 2009 compared with a $182.0 million loss in 2008, which included substantial impairment charges. Income before joint-venture results, property-sale gains, and noncontrolling interests fell 10.3% to $250.7 million.
  • Property operations: Consolidated NOI, a non-GAAP measure, increased 3.7% to $957.5 million. Same-property NOI excluding the hotel rose 1.45%; the hotel’s NOI fell 31.4% to $6.4 million. Rental operating expenses increased 2.8%, including higher real estate taxes, partly offset by lower utilities and other costs.
  • FFO: FFO attributable to BXP was $606.3 million, up from $403.8 million. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was $617.4 million, up from $565.3 million. Investing activities used $446.6 million; financing activities provided $1.037 billion. Cash and equivalents ended the year at $1.449 billion, compared with $241.5 million a year earlier.
  • Debt and liquidity: Consolidated debt was $6.720 billion, up from $6.093 billion. About 94.2% was fixed-rate debt; the year-end weighted-average GAAP interest rate was 5.87%, with a 4.6-year weighted-average maturity. BXP reported approximately $1.4 billion in cash and about $989.8 million of available capacity on its $1.0 billion unsecured credit line as of February 19, 2010. The company stated it was in compliance with applicable debt covenants.
  • Capital and distributions: BXP raised approximately $841.9 million net through a June common-stock offering and approximately $693.7 million net through a $700 million senior-note offering due 2019. The quarterly common dividend was reduced from $0.68 to $0.50 during 2009; dividends declared totaled $2.18 per share for the year.

Material changes versus 2008

  • In-service occupancy fell 2.1 percentage points, while rental rates and lease economics weakened across the markets. Management said leasing activity improved during 2009, but tenant expansion remained limited and tenant-improvement allowances and free-rent periods increased.
  • Interest expense rose 9.3% to $322.8 million, reflecting new debt and less favorable capitalization effects, among other factors. The company also recorded $38.6 million of noncash interest expense in 2009 from accounting for exchangeable notes.
  • Cash increased substantially after the equity and senior-note offerings. Consolidated debt also rose, while investing cash outflow was lower than in 2008.
  • Lehman Brothers rejected leases covering about 437,000 square feet at 399 Park Avenue; its contractual rent had been approximately $44.9 million annually. By year-end, BXP had signed leases for about 372,000 square feet of the vacated space. General Motors rejected its lease for about 120,000 square feet at 601 Lexington Avenue; BXP had signed leases for about 90,000 square feet by year-end.

Outlook, risks, and unusual items

  • Management outlook: BXP expected 2010 occupancy to remain relatively flat and anticipated no significant new development starts in the foreseeable future without substantial preleasing to creditworthy tenants. Its stated 2010 ranges were hotel NOI of $6.0–$6.5 million, third-party fee income of $24–$27 million, general and administrative expense of $81–$83 million, and net interest expense of $355–$365 million.
  • Debt maturities and development funding: Management expected to repay about $78 million and refinance or extend approximately $632 million of $646 million of other debt maturing in 2010, including BXP’s share of joint-venture debt. The company cited approximately $355 million of remaining net funding needs for ongoing development through 2012. It expected to extend its credit line, which matured in August 2010, subject to conditions.
  • Development suspension: BXP suspended construction of its 1.0-million-square-foot 250 West 55th Street project and recorded a $27.8 million loss in 2009. It paid $12.8 million to terminate a related lease in January 2010 and expected to recognize approximately $7.2 million of other income in the first quarter of 2010. BXP also expected additional suspension-related costs.
  • Projects underway: Three development projects represented estimated total investment of approximately $1.13 billion, with $571.8 million invested by year-end and about 66% leased. Completion, leasing, cost, and financing outcomes remain exposed to market conditions.
  • Joint ventures and impairments: Unconsolidated joint ventures had approximately $3.2 billion of debt at year-end. BXP recorded approximately $9.4 million of impairment charges on its Value-Added Fund investment; its share of a separate impairment at the Fund’s One and Two Circle Star Way properties was approximately $4.2 million. Those properties faced difficult leasing conditions and were expected to be vacant by February 2010.
  • Other risks and events: Key risks include economic weakness and tenant credit, lease renewals and vacancies, refinancing and interest rates, debt covenants, joint-venture obligations, development costs, uninsured catastrophe losses, environmental liabilities, and maintaining REIT status. CEO Edward H. Linde died in January 2010; Chairman Mortimer B. Zuckerman assumed the CEO role, and Douglas T. Linde was appointed to the Board. The auditor gave an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.

Most important facts for investors to verify

  • Progress on 2010 debt refinancing and extensions, particularly joint-venture maturities and the credit-line extension.
  • Leasing, renewal, and tenant-credit trends, including the 2010 lease-expiration schedule and remaining Lehman and GM space.
  • Whether development projects meet budget, timing, and leasing targets, and whether the 250 West 55th Street suspension creates further costs.
  • Cash available after development commitments, debt service, and REIT distribution requirements; assess the dividend alongside operating cash flow, not FFO alone.
  • Further impairments, refinancing needs, or capital calls involving unconsolidated joint ventures and the Value-Added Fund.