BXP, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. BXP is a REIT that owns and operates premier workplaces, primarily in six U.S. gateway markets. It conducts substantially all business through Boston Properties Limited Partnership (BPLP); BXP owned approximately 89.4% of BPLP at quarter-end. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $803.2 | $754.3 | +6.5% |
| Net income attributable to BXP | $77.9 | $143.0 | -45.6% |
| Diluted EPS | $0.50 | $0.91 | -45.1% |
| Company share of NOI, non-GAAP | $484.7 | $459.6 | +4.6% |
| FFO attributable to BXP, non-GAAP | $272.0 | $286.1 | -5.0% |
| Net cash from operating activities | $234.0 | $219.5 | +$14.5 |
BXP’s net income margin, calculated as attributable net income divided by revenue, was approximately 9.7%, versus 19.0% a year earlier. Lower earnings primarily reflect the absence of the prior-year $22.7 million real estate sale gain, higher interest expense, increased depreciation and amortization, and a loss from unconsolidated joint ventures. Interest expense rose $33.0 million, or 32.6%, to $134.2 million. NOI growth was supported by acquisitions and properties placed in service, while same-property NOI was nearly flat at $448.1 million, up 0.1%.
Revenue growth included lease revenue of $756.9 million, up 5.4%; parking and other revenue of $24.0 million, up 10.5%; and hotel revenue of $8.1 million, up 77.8%. Total expenses increased to $568.7 million from $500.0 million, including depreciation and amortization of $208.7 million, up $31.1 million. Same-property operating expenses rose 5.8%, mainly from real estate taxes and other operating costs.
Cash flow, debt and liquidity
- Operating cash flow was $234.0 million. Investing activities used $285.6 million, including $119.7 million for construction, $67.2 million for tenant improvements and $60.7 million of joint-venture contributions. Financing activities provided $279.1 million, principally reflecting the new term loan, net of repayment of the prior loan, and distributions.
- Cash and cash equivalents were $919.0 million and escrow cash was $45.3 million at March 31, 2023. Separately, BXP reported approximately $670.2 million of available cash at April 28, 2023, including cash attributable to consolidated joint-venture partners.
- Consolidated debt was $14.7 billion. The company reported 60.8% consolidated debt to consolidated market capitalization and 61.2% for its share-based measure. Fixed-rate debt was 91.9% of total debt; the consolidated weighted-average GAAP interest rate was 3.81%, versus 3.39% a year earlier.
- BPLP had no borrowings on its $1.5 billion revolving facility at March 31 and approximately $1.5 billion available, subject to outstanding letters of credit. The $1.2 billion unsecured term loan is variable-rate, matures May 16, 2024, and has one 12-month extension option. Subsequent to quarter-end, BPLP entered swaps to fix its Term SOFR component at a weighted-average 4.642% through May 16, 2024; the stated loan rate based on its May 2 credit rating was 5.592%.
- Near-term consolidated note maturities include $500 million due September 2023 and $700 million due February 2024, in addition to the 2024 term loan. BXP said it expects to meet maturities with available cash, asset-sale proceeds, revolving-facility borrowings and/or refinancing. It also reported approximately $481 million of its share of joint-venture debt maturing through 2024.
Operations, outlook and key developments
- At March 31, in-service premier workplace and retail occupancy was 88.6%, unchanged from year-end; including signed leases not yet commenced, the portfolio was 91.0% leased. Q1 leases signed totaled approximately 660,500 square feet, with a weighted-average term of 7.7 years. Same-property average occupancy declined from 91.7% to 90.4%.
- Management described a cooling economy, softer space demand, slower leasing decisions, and increased sublease availability. It said premier workplaces continued to outperform the broader office market and reported a gradual increase in office occupants. Leasing expectations for the rest of 2023 reflect the softer environment; management expected much of the year’s leasing to come from small and medium-sized professional and financial services firms.
- Development and redevelopment pipeline: 15 properties totaling approximately 4.0 million square feet; BXP’s estimated share of total cost was $3.3 billion, with approximately $1.9 billion still to invest. Commercial space was 52% pre-leased as of April 28, excluding specified projects. The large 290 Binney Street and 300 Binney Street life-sciences projects were fully pre-leased to AstraZeneca and the Broad Institute, respectively, each for 15 years.
- Management expects quarterly interest expense to increase moderately for the rest of 2023, primarily as interest capitalization ends on development deliveries. It characterized available cash and revolving capacity as sufficient for existing project commitments, debt maturities, REIT distributions and selective opportunities, while emphasizing leverage and liquidity management.
- Other notable items: Q1 included approximately $11.0 million of accelerated depreciation associated with the 300 Binney redevelopment. BXP acquired a 50% joint-venture interest in two vacant Herndon, Virginia office buildings for approximately $17 million; the venture intends residential redevelopment, but commencement is not assured. BXP completed and placed 2100 Pennsylvania Avenue in service on April 29, after quarter-end.
Risks and contingencies
Highlighted risks include economic and capital-market volatility, higher rates and credit spreads, office demand and space-utilization changes, leasing and tenant-credit risk, construction inflation and delays, financing availability, joint-venture obligations, and uninsured catastrophic losses. BXP also cautioned that earthquake coverage may be insufficient and that its captive insurer creates exposure akin to modified self-insurance. Development plans are subject to permits and other conditions, and management gave no assurance that all planned phases will proceed. The filing reports ordinary-course legal matters that management does not expect to have a material adverse effect; it reports no material change to the prior annual report’s risk factors.
Important facts for investors to verify
- Progress on refinancing or repaying the 2023–2024 maturities, and the cost and availability of debt capital.
- Leasing, occupancy, tenant concessions and rent trends across BXP’s gateway markets as economic uncertainty persists.
- Construction costs, remaining funding needs and leasing progress across the $3.3 billion development pipeline.
- Interest-rate exposure, including variable-rate debt and the impact and effectiveness of the post-quarter-end swaps.
- Cash available after quarter-end, joint-venture funding obligations, and potential asset sales or equity issuance; the ATM program was scheduled to expire May 22, 2023 and management expected to replace it.