BXP, Inc. (BXP) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial amounts are in millions unless noted. BXP is a REIT whose operating partnership, BPLP, conducts substantially all business. BXP owned approximately 89.4% of BPLP at quarter-end.
Business context and operating performance
BXP owns, develops and manages primarily premier workplaces in Boston, Los Angeles, New York, San Francisco, Seattle and Washington, D.C. Its portfolio included 191 properties and approximately 54.1 million net rentable square feet, including 13 properties under construction or redevelopment.
- In-service premier workplace and retail occupancy was 88.3% at June 30; including signed leases not yet commenced, the portfolio was 90.4% leased.
- BXP signed approximately 938,000 square feet of leases in Q2, up from 660,000 square feet in Q1. Management said first-half leasing volume was slower than the prior year amid economic uncertainty and longer tenant decision-making.
- Same-property occupancy declined to 90.3% in Q2 from 91.6% a year earlier. Higher average revenue per square foot partly offset the occupancy decline.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $817.2 | $773.9 | $1,620.4 | $1,528.2 |
| Net income attributable to BXP | $104.3 | $223.0 | $182.2 | $366.0 |
| Diluted EPS | $0.66 | $1.42 | $1.16 | $2.33 |
| Company’s share of NOI (non-GAAP) | $497.8 | $471.9 | $982.5 | $931.5 |
| FFO attributable to BXP (non-GAAP) | $292.8 | $304.6 | Not provided in the supplied filing text | Not provided in the supplied filing text |
- Revenue increased 5.6% in Q2 and 6.0% in the first half. BXP-attributable net income fell 53.2% and 50.2%, respectively; diluted EPS also declined materially.
- NOI increased 4.0% in Q2 and 4.3% in the first half. First-half same-property NOI was nearly flat, down 0.1%; total NOI growth reflected acquisitions and properties placed in service, among other portfolio changes. NOI and FFO are non-GAAP measures and may not be comparable across companies.
- Key reasons for lower reported earnings included the absence of prior-year real estate sale gains ($96.2 million in Q2 2022; $118.9 million in the first half of 2022 for BXP), higher interest expense (up $38.3 million in Q2 and $71.3 million in the first half), and higher depreciation. Interest expense rose 36.8% in Q2 and 34.7% year to date.
- Six-month operating cash flow was $613.2 million, compared with $616.6 million. Investing used $554.9 million and financing provided $833.4 million. Cash and escrow balances totaled $1.628 billion at June 30, 2023.
- Consolidated debt was $15.456 billion at June 30, including $11.0 billion of unsecured senior notes, $3.3 billion of mortgage debt and a $1.2 billion unsecured term loan. Debt was approximately 60.5% of consolidated market capitalization, a market-price-sensitive supplemental measure.
- The $1.2 billion term loan is floating-rate debt, but BXP entered into swaps fixing its Term SOFR reference rate at a weighted average 4.642% through May 16, 2024. The filing reports no unhedged variable-rate consolidated debt at quarter-end. The $1.5 billion revolving facility had no borrowings; approximately $1.5 billion remained available as of July 28.
- At June 30, BXP reported $8.3 billion of total equity and $25.3 billion of total assets. The board declared quarterly dividends of $0.98 per common share.
Material changes, outlook and risks
- Debt and refinancing: BPLP issued $750 million of 6.500% senior notes due 2034 in May, generating approximately $741.3 million net proceeds. Management said proceeds would be used to repay $500 million of 3.125% notes maturing September 1, 2023 and for general corporate purposes. Other near-term maturities include $700 million of notes due February 2024 and the $1.2 billion term loan due May 2024, subject to an extension option.
- Development commitments: BXP’s share of estimated total investment for its 13 development/redevelopment projects was approximately $2.6 billion, with $1.6 billion remaining to invest, primarily through 2026. Commercial space in the pipeline was 54% pre-leased. Management cited higher financing and construction costs and said it is being measured on discretionary spending and new investments.
- Demand and leasing: Management described softer demand across markets, slower leasing decisions and tenant focus on cost reduction and space utilization. It expects much of the remainder-of-2023 leasing to come from small and medium-sized professional and financial services firms. It also said return-to-office activity is gradually improving and premier workplaces are performing better than the broader office market.
- Joint ventures and projects: A 55%-owned joint venture paused vertical construction at Platform 16 in San Jose; it plans to finish below-grade parking and foundations before any restart. A joint-venture loan on 3 Hudson Boulevard had a modified maturity of August 13, 2023 and approximately $23.2 million of accrued interest due at maturity. After quarter-end, a joint venture extended the 100 Causeway Street loan to September 2024. BXP also announced a proposed 343 Madison Avenue joint-venture development; the filing cautions that phases may not proceed as contemplated.
- Management outlook: BXP said the economic outlook was uncertain, with a possible soft landing or recession scenario. It reported approximately $1.4 billion of available cash as of July 28 and said cash plus revolving-facility availability was sufficient for existing projects, maturities and other needs. It expects quarterly net interest expense to rise moderately for the rest of 2023 and into 2024, citing development deliveries, higher refinancing rates and lower interest income as cash is deployed.
- Principal risks: Higher interest rates and refinancing costs; office demand, occupancy and leasing trends; capital-market access; development delays, cost inflation and labor constraints; joint-venture partner performance and debt maturities; and potentially inadequate insurance for catastrophic losses. BXP reported compliance with applicable debt covenants at June 30. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How the September 2023 and 2024 debt maturities are funded, and whether refinancing or extension terms change the company’s interest burden.
- Whether occupancy, signed leasing, rent growth and tenant concessions stabilize or deteriorate, particularly in Washington, D.C., San Francisco and other softer markets.
- Actual remaining funding needs, leasing progress and delivery schedules for the $2.6 billion development pipeline; monitor the Platform 16 pause and any further project deferrals.
- Resolution and repayment status of the 3 Hudson Boulevard joint-venture loan, including accrued interest, and performance of other joint-venture debt and guarantees.
- Whether operating cash flow and liquidity remain sufficient while dividends, tenant improvements, leasing costs and development spending continue.
- Reconcile GAAP earnings with NOI and FFO, including the impact of prior-year asset-sale gains, increased interest expense, depreciation and noncontrolling interests.