Market Overview

Boston Properties Announces Second Quarter 2018 Results

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Exceeds Top Ends of its Guidance Ranges and
Increases Full Year 2018 Projections

Boston
Properties, Inc.
(NYSE:BXP), a real estate investment
trust and one of the largest owners, managers and developers of Class A
office properties in the United States, reported results today for the
second quarter ended June 30, 2018.

Financial highlights for the quarter include:

  • Net income attributable to common shareholders of $128.7 million, or
    $0.83 per diluted share, compared to $133.7 million, or $0.87 per
    diluted share, for the quarter ended June 30, 2017.
  • Funds from Operations (FFO) of $244.4 million, or $1.58 per diluted
    share. This compares to FFO of $257.9 million, or $1.67 per diluted
    share, for the quarter ended June 30, 2017.
    • FFO of $1.58 per diluted share was $0.04 per share greater than
      the mid-point of the Company's previous guidance of $1.53 - $1.55
      per diluted share, primarily due to:
      • $0.02 per share of greater than projected portfolio
        operations; $0.01 per share resulting from greater than
        projected development and management services revenue; and
        $0.01 per share of lower than projected interest expense.
  • The Company also increased its guidance for full year 2018 EPS and FFO
    per share as follows:
    • Projected EPS (diluted) for 2018 of $3.48 - $3.53 per share, an
      increase of $0.18 per share from the mid-point of its most recent
      guidance; and
    • Projected FFO per share (diluted) for 2018 of $6.36 - $6.41 per
      share, an increase of $0.07 per share from the mid-point of its
      most recent guidance.
  • Recent business highlights include:
    • Acquired Santa Monica Business Park in Santa Monica, California, a
      47-acre office park consisting of 21 buildings totaling
      approximately 1.2 million net rentable square feet, in a joint
      venture with Canada Pension Plan Investment Board.
    • Established a joint venture to acquire a development site at 3
      Hudson Boulevard in New York City that can accommodate the future
      development of a Class A office tower with up to 2.0 million net
      rentable square feet.
    • Signed a 440,000 square foot lease with an affiliate of Verizon
      Communications, Inc. and commenced development of The Hub on
      Causeway - Office development project located at 100 Causeway
      Street in Boston, Massachusetts, a 627,000 square foot, Class A
      office tower with the Company's 50/50 joint venture partner
      Delaware North. Under the lease agreement, Verizon will lease
      approximately 70% of the office tower for a term of 20 years.

At June 30, 2018, the Company's portfolio consisted of 178 properties
aggregating approximately 50.2 million square feet, including twelve
properties under construction/redevelopment totaling approximately 6.0
million square feet. The overall percentage of leased space for the 162
properties in-service (excluding the Company's three residential
properties and hotel) as of June 30, 2018 was 90.4%.

The reported results are unaudited and there can be no assurance that
these reported results will not vary from the final information for the
quarter ended June 30, 2018. In the opinion of management, the Company
has made all adjustments considered necessary for a fair statement of
these reported results.

Significant events during the second quarter included:

Development activities

  • On June 7, 2018, the Company completed and fully placed in-service its
    Signature at Reston development project comprised of 508 apartment
    units and retail space aggregating approximately 518,000 square feet
    located in Reston, Virginia. The retail space totaling approximately
    25,000 net rentable square feet is approximately 81% leased and the
    residential units are currently approximately 35% leased.
  • On June 20, 2018, the Company partially placed in-service its Proto
    Kendall Square development project comprised of 280 apartment units
    and retail space aggregating approximately 167,000 square feet located
    in Cambridge, Massachusetts. The retail space totaling approximately
    15,000 net rentable square feet is approximately 98% leased and the
    residential units are currently approximately 32% leased.

Acquisition and disposition activities

  • On May 24, 2018, the Company completed the sale of its 91 Hartwell
    Avenue property located in Lexington, Massachusetts for a gross sale
    price of approximately $22.2 million. Net cash proceeds totaled
    approximately $21.7 million, resulting in a gain on sale of real
    estate totaling approximately $15.5 million. 91 Hartwell Avenue is an
    approximately 119,000 net rentable square foot Class A office property.

Capital markets activities

  • On April 19, 2018, a joint venture in which the Company has a 50%
    interest obtained construction financing with a total commitment of
    $180.0 million collateralized by its Hub on Causeway - Residential
    development project. The construction financing bears interest at a
    variable rate equal to LIBOR plus 2.00% per annum and matures on April
    19, 2022, with two, one-year extension options, subject to certain
    conditions. The joint venture has not yet drawn any funds under the
    loan. The Hub on Causeway - Residential is an approximately 320,000
    square foot project comprised of 440 residential units located in
    Boston, Massachusetts.
  • On April 24, 2018, the Company's Operating Partnership exercised its
    option to draw $500.0 million on its unsecured delayed draw term loan
    facility. The unsecured term loan totaling $500.0 million bears
    interest at a variable rate equal to LIBOR plus 0.90% per annum based
    on the Company's Operating Partnership's current credit rating and
    matures on April 24, 2022.
  • On April 27, 2018, a joint venture in which the Company has a 60%
    interest refinanced the mortgage loan collateralized by its 540
    Madison Avenue property located in New York City totaling $120.0
    million. The mortgage loan bears interest at a variable rate equal to
    LIBOR plus 1.10% per annum and matures on June 5, 2023. The previous
    mortgage loan bore interest at a variable rate equal to LIBOR plus
    1.50% per annum and was scheduled to mature on June 5, 2018. 540
    Madison Avenue is an approximately 284,000 net rentable square foot
    Class A office property.

Transactions completed subsequent to June 30, 2018:

  • On July 13, 2018, the Company entered into a joint venture with a
    third party to acquire a development site at 3 Hudson Boulevard that,
    upon the future acquisition of additional available development
    rights, can accommodate a Class A office tower with up to 2.0 million
    net rentable square feet located on the entire square block between
    11th Avenue and Hudson Boulevard Park from West 34th Street to West
    35th Street in New York City. The Company owns a 25% interest in and
    will be the managing member of the joint venture. The acquisition
    includes improvements consisting of excavation work and foundation
    elements that are currently being constructed on the site. The Company
    contributed cash totaling approximately $45.6 million at closing and
    will contribute in the future approximately $62.2 million for its
    initial capital contribution, a portion of which will fund the
    remaining costs to complete the foundation elements to grade for the
    future office building. In addition, the Company has provided $80.0
    million of mortgage financing to the joint venture which bears
    interest at a variable rate equal to LIBOR plus 3.50% per annum and
    matures on July 13, 2023, with extension options, subject to certain
    conditions.
  • On July 19, 2018, the Company completed the acquisition of Santa
    Monica Business Park in the Ocean Park neighborhood of Santa Monica,
    California for a purchase price of approximately $627.5 million,
    including $11.5 million of seller funded leasing costs after the
    effective date of the purchase and sale agreement. Santa Monica
    Business Park is a 47-acre office park consisting of 21 buildings
    totaling approximately 1.2 million net rentable square feet.
    Approximately 70% of the rentable square footage is subject to a
    ground lease with 80 years remaining, including renewal periods. The
    ground lease provides the Company with the right to purchase the land
    underlying the properties in 2028 with subsequent purchase rights
    every 15 years. The property is 94% leased. The acquisition was
    completed in a joint venture with Canada Pension Plan Investment
    Board, which invested approximately $147.4 million for a 45% ownership
    interest in the joint venture. Boston Properties will provide
    customary operating, property management and leasing services to, and
    invested approximately $180.1 million in the joint venture. The
    acquisition was completed with $300.0 million of financing. The
    mortgage financing bears interest at a variable rate equal to LIBOR
    plus 1.28% per annum and matures on July 19, 2025. At closing, the
    borrower under the loan entered into interest rate swap contracts with
    notional amounts aggregating $300.0 million through April 1, 2025,
    resulting in a fixed rate of approximately 4.063% per annum through
    the expiration of the interest rate swap contracts.
  • On July 27, 2018, the Company entered into a joint venture with its
    partner at The Hub on Causeway mixed-use development to acquire the
    air rights for the development of an approximately 627,000 net
    rentable square foot Class A office tower at the site to be known as
    100 Causeway Street. The joint venture entered into a lease agreement
    with an affiliate of Verizon Communications, Inc. under which Verizon
    will lease approximately 70% of the office tower for a term of 20
    years. With the execution of the lease, the joint venture commenced
    development of the project. The Company will serve as co-development
    manager for the project and will own a 50% interest in the joint
    venture. The Company's share of the total project cost is estimated to
    be approximately $270 million.

EPS and FFO per Share Guidance:

The Company's guidance for the third quarter and full year 2018 for EPS
(diluted) and FFO per share (diluted) is set forth and reconciled below.
Except as described below, the estimates reflect management's view of
current and future market conditions, including assumptions with respect
to rental rates, occupancy levels and the earnings impact of the events
referenced in this release and otherwise referenced during the
conference call referred to below. The estimates do not include possible
future gains or losses or the impact on operating results from other
possible future property acquisitions or dispositions, other possible
capital markets activity or possible future impairment charges. EPS
estimates may be subject to fluctuations as a result of several factors,
including changes in the recognition of depreciation and amortization
expense and any gains or losses associated with disposition activity.
The Company is not able to assess at this time the potential impact of
these factors on projected EPS. By definition, FFO does not include real
estate-related depreciation and amortization, impairment losses on
depreciable real estate or gains or losses associated with disposition
activities. There can be no assurance that the Company's actual results
will not differ materially from the estimates set forth below.

As set forth below, the Company has updated its projected EPS (diluted)
for the full year 2018 to $3.48 - $3.53 per share from $3.28 - $3.37 per
share. This is an increase of $0.18 per share at the mid-point of the
Company's guidance consisting of $0.11 per share related to gains on
sales of real estate recorded in the second quarter of 2018, $0.03 per
share of better than expected portfolio operations, $0.03 per share of
additional development in management services revenue, and $0.02 per
share of lower interest expense, offset by ($0.01) per share related to
the sale of 91 Hartwell Avenue in the second quarter of 2018.

In addition, the Company has updated its projected guidance for FFO per
share (diluted) for the full year 2018 to $6.36 - $6.41 per share from
$6.27 - $6.36 per share. This is an increase of $0.07 per share at the
mid-point consisting of $0.03 per share of better than expected
portfolio operations, $0.03 per share of additional development and
management services revenue, and $0.02 per share of lower interest
expense, offset by ($0.01) per share related to the sale of 91 Hartwell
Avenue in the second quarter of 2018.

       
Third Quarter 2018 Full Year 2018
Low     -     High Low     -     High
Projected EPS (diluted) $ 0.73 - $ 0.75 $

3.48

- $

3.53

Add:
Projected Company Share of Real Estate Depreciation and Amortization 0.88 - 0.88 3.55 - 3.55
Less:
Projected Company Share of Gains on Sales of Real Estate   -   0.67   - 0.67
Projected FFO per Share (diluted) $ 1.61   - $ 1.63   $

6.36

  - $

6.41

 

Boston Properties will host a conference call on Wednesday, August 1,
2018 at 10:00 AM Eastern Time, open to the general public, to discuss
the second quarter 2018 results, the 2018 projections and related
assumptions, and other matters that may be of interest to investors. The
number to call for this interactive teleconference is (877) 706-4503
(Domestic) or (281) 913-8731 (International) and entering the passcode
6696808. A replay of the conference call will be available through
August 22, 2018, by dialing (855) 859-2056 (Domestic) or (404) 537-3406
(International) and entering the passcode 6696808. There will also be a
live audio webcast of the call which may be accessed on the Company's
website at www.bostonproperties.com
in the Investor Relations section. Shortly after the call a replay of
the webcast will be available in the Investor Relations section of the
Company's website and archived for up to twelve months following the
call.

Additionally, a copy of Boston Properties' second quarter 2018
"Supplemental Operating and Financial Data" and this press release are
available in the Investor Relations section of the Company's website at www.bostonproperties.com.

Boston Properties is a fully integrated real estate company, organized
as a real estate investment trust, that develops, redevelops, acquires,
manages, operates and owns a diverse portfolio of primarily Class A
office space totaling 50.2 million square feet and consisting of 166
office properties (including nine properties under construction), six
residential properties (including three properties under construction),
five retail properties and one hotel. The Company is one of the largest
owners and developers of Class A office properties in the United States,
concentrated in five markets - Boston, Los Angeles, New York, San
Francisco and Washington, DC.

This press release contains forward-looking statements within the
meaning of the Federal securities laws.
You can identify these
statements by our use of the words "assumes," "believes," "budgeted,"
"estimates," "expects," "guidance," "intends," "plans," "projects" and
similar expressions that do not relate to historical matters.
You
should exercise caution in interpreting and relying on forward-looking
statements because they involve known and unknown risks, uncertainties
and other factors which are, in some cases, beyond Boston Properties'
control and could materially affect actual results, performance or
achievements.
These factors include, without limitation, the
Company's ability to satisfy the closing conditions to the pending
transactions described above, the Company's ability to enter into new
leases or renew leases on favorable terms, dependence on tenants'
financial condition, the uncertainties of real estate development,
acquisition and disposition activity, the ability to effectively
integrate acquisitions, the uncertainties of investing in new markets,
the costs and availability of financing, the effectiveness of our
interest rate hedging contracts, the ability of our joint venture
partners to satisfy their obligations, the effects of local, national
and international economic and market conditions, the effects of
acquisitions, dispositions and possible impairment charges on our
operating results, the impact of newly adopted accounting principles on
the Company's accounting policies and on period-to-period comparisons of
financial results, regulatory changes and other risks and uncertainties
detailed from time to time in the Company's filings with the Securities
and Exchange Commission.
Boston Properties does not undertake a
duty to update or revise any forward-looking statement, including its
guidance for the third quarter and full fiscal year 2018, whether as a
result of new information, future events or otherwise.

Financial tables follow.

 

BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

    June 30, 2018    

December 31,
2017

(in thousands, except for share
and par value
amounts)

ASSETS
Real estate, at cost $ 20,152,578 $ 19,622,379
Construction in progress 1,163,040 1,269,338
Land held for future development 210,902 204,925
Less: accumulated depreciation (4,745,590 ) (4,589,634 )
Total real estate 16,780,930 16,507,008
Cash and cash equivalents 472,555 434,767
Cash held in escrows 254,505 70,602
Investments in securities 30,063 29,161
Tenant and other receivables, net 63,660 92,186
Accrued rental income, net 912,652 861,575
Deferred charges, net 678,319 679,038
Prepaid expenses and other assets 85,972 77,971
Investments in unconsolidated joint ventures 682,507   619,925  
Total assets $ 19,961,163   $ 19,372,233  
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net $ 2,972,052 $ 2,979,281
Unsecured senior notes, net 7,251,578 7,247,330
Unsecured line of credit 45,000
Unsecured term loan, net 498,248
Accounts payable and accrued expenses 327,067 331,500
Dividends and distributions payable 139,263 139,040
Accrued interest payable 96,844 83,646
Other liabilities 462,869   443,980  
Total liabilities 11,747,921   11,269,777  
 
Commitments and contingencies    
Equity:
Stockholders' equity attributable to Boston Properties, Inc.:
Excess stock, $0.01 par value, 150,000,000 shares authorized, none
issued or outstanding
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
5.25% Series B cumulative redeemable preferred stock, $0.01 par
value, liquidation preference $2,500 per share, 92,000 shares
authorized, 80,000 shares issued and outstanding at June 30, 2018
and December 31, 2017
200,000 200,000
Common stock, $0.01 par value, 250,000,000 shares authorized,
154,490,429 and 154,404,186 issued and 154,411,529 and 154,325,286
outstanding at June 30, 2018 and December 31, 2017, respectively
1,544 1,543
Additional paid-in capital 6,391,460 6,377,908
Dividends in excess of earnings (649,747 ) (712,343 )
Treasury common stock at cost, 78,900 shares at June 30, 2018 and
December 31, 2017
(2,722 ) (2,722 )
Accumulated other comprehensive loss (47,695 ) (50,429 )
Total stockholders' equity attributable to Boston Properties, Inc. 5,892,840 5,813,957
Noncontrolling interests:
Common units of the Operating Partnership 621,221 604,739
Property partnerships 1,699,181   1,683,760  
Total equity 8,213,242   8,102,456  
Total liabilities and equity $ 19,961,163   $ 19,372,233  
 

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)

 

   

Three months ended
June 30,

   

Six months ended
June 30,

2018     2017 2018     2017

(in thousands, except for per share amounts)

Revenue
Rental
Base rent $ 516,439 $ 520,542 $ 1,035,946 $ 1,024,104
Recoveries from tenants 95,259 89,163 190,377 178,327
Parking and other 26,904   26,462   53,038   52,072  
Total rental revenue 638,602 636,167 1,279,361 1,254,503
Hotel revenue 14,607 13,375 23,709 20,795
Development and management services 9,305 7,365 17,710 13,837
Direct reimbursements of payroll and related costs from management
services contracts
1,970     4,855    
Total revenue 664,484   656,907   1,325,635   1,289,135  
Expenses
Operating
Rental 237,790 230,454 478,119 458,741
Hotel 8,741 8,404 16,814 15,495
General and administrative 28,468 27,141 64,362 58,527
Payroll and related costs from management services contracts 1,970 4,855
Transaction costs 474 299 495 333
Depreciation and amortization 156,417   151,919   322,214   311,124  
Total expenses 433,860   418,217   886,859   844,220  
Operating income 230,624 238,690 438,776 444,915
Other income (expense)
Income from unconsolidated joint ventures 769 3,108 1,230 6,192
Interest and other income 2,579 1,504 4,227 2,118
Gains from investments in securities 505 730 379 1,772
Gains from early extinguishments of debt 14,354 14,354
Interest expense (92,204 ) (95,143 ) (182,424 ) (190,677 )
Income before gains on sales of real estate 142,273 163,243 262,188 278,674
Gains on sales of real estate 18,292   3,767   114,689   3,900  
Net income 160,565 167,010 376,877 282,574
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships (14,400 ) (15,203 ) (31,634 ) (19,627 )
Noncontrolling interest—common units of the Operating Partnership (14,859 ) (15,473 ) (35,311 ) (26,933 )
Net income attributable to Boston Properties, Inc. 131,306 136,334 309,932 236,014
Preferred dividends (2,625 ) (2,625 ) (5,250 ) (5,250 )
Net income attributable to Boston Properties, Inc. common
shareholders
$ 128,681   $ 133,709   $ 304,682   $ 230,764  
Basic earnings per common share attributable to Boston Properties,
Inc. common shareholders:
Net income $ 0.83   $ 0.87   $ 1.97   $ 1.50  
Weighted average number of common shares outstanding 154,415   154,177   154,400   154,019  
Diluted earnings per common share attributable to Boston Properties,
Inc. common shareholders:
Net income $ 0.83   $ 0.87   $ 1.97   $ 1.50  
Weighted average number of common and common equivalent shares
outstanding
154,571   154,331   154,638   154,273  
 

BOSTON PROPERTIES, INC.
FUNDS FROM OPERATIONS (1)
(Unaudited)

 

   

Three months ended
June 30,

   

Six months ended
June 30,

2018     2017 2018     2017
(in thousands, except for per share amounts)
 
Net income attributable to Boston Properties, Inc. common
shareholders
$ 128,681 $ 133,709 $ 304,682 $ 230,764
Add:
Preferred dividends 2,625 2,625 5,250 5,250
Noncontrolling interest - common units of the Operating Partnership 14,859 15,473 35,311 26,933
Noncontrolling interests in property partnerships 14,400 15,203 31,634 19,627
Less:
Gains on sales of real estate 18,292   3,767   114,689   3,900  
Income before gains on sales of real estate 142,273 163,243 262,188 278,674
Add:
Depreciation and amortization 156,417 151,919 322,214 311,124
Noncontrolling interests in property partnerships' share of
depreciation and amortization
(18,426 ) (19,327 ) (36,647 ) (40,742 )
Company's share of depreciation and amortization from unconsolidated
joint ventures
9,312 9,629 18,756 18,670
Corporate-related depreciation and amortization (406 ) (486 ) (811 ) (1,011 )
Less:
Noncontrolling interests in property partnerships 14,400 15,203 31,634 19,627
Preferred dividends 2,625   2,625   5,250   5,250  
Funds from operations (FFO) attributable to the Operating
Partnership common unitholders (including Boston Properties, Inc.)
272,145 287,150 528,816 541,838
Less:
Noncontrolling interest - common units of the Operating
Partnership's share of funds from operations
27,704   29,269   53,812   55,593  
Funds from operations attributable to Boston Properties, Inc. common
shareholders
$ 244,441   $ 257,881   $ 475,004   $ 486,245  
Boston Properties, Inc.'s percentage share of funds from operations
- basic
89.82 % 89.81 % 89.82 % 89.74 %
Weighted average shares outstanding - basic 154,415   154,177   154,400   154,019  
FFO per share basic $ 1.58   $ 1.67   $ 3.08   $ 3.16  
Weighted average shares outstanding - diluted 154,571   154,331   154,638   154,273  
FFO per share diluted $ 1.58   $ 1.67   $ 3.07   $ 3.15  
 

(1) Pursuant to the revised definition of Funds from Operations adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("Nareit"), we calculate Funds from Operations, or
"FFO," by adjusting net income (loss) attributable to Boston Properties,
Inc. common shareholders (computed in accordance with GAAP) for gains
(or losses) from sales of properties, impairment losses on depreciable
real estate consolidated on our balance sheet, impairment losses on our
investments in unconsolidated joint ventures driven by a measurable
decrease in the fair value of depreciable real estate held by the
unconsolidated joint ventures and real estate-related depreciation and
amortization. FFO is a non-GAAP financial measure, but we believe the
presentation of FFO, combined with the presentation of required GAAP
financial measures, has improved the understanding of operating results
of REITs among the investing public and has helped make comparisons of
REIT operating results more meaningful. Management generally considers
FFO and FFO per share to be useful measures for understanding and
comparing our operating results because, by excluding gains and losses
related to sales of previously depreciated operating real estate assets,
impairment losses and real estate asset depreciation and amortization
(which can differ across owners of similar assets in similar condition
based on historical cost accounting and useful life estimates), FFO and
FFO per share can help investors compare the operating performance of a
company's real estate across reporting periods and to the operating
performance of other companies.

Our computation of FFO may not be comparable to FFO reported by other
REITs or real estate companies that do not define the term in accordance
with the current Nareit definition or that interpret the current Nareit
definition differently.

In order to facilitate a clear understanding of the Company's operating
results, FFO should be examined in conjunction with net income
attributable to Boston Properties, Inc. common shareholders as presented
in the Company's consolidated financial statements. FFO should not be
considered as a substitute for net income attributable to Boston
Properties, Inc. common shareholders (determined in accordance with
GAAP) or any other GAAP financial measures and should only be considered
together with and as a supplement to the Company's financial information
prepared in accordance with GAAP.

 

BOSTON PROPERTIES, INC.
PORTFOLIO LEASING
PERCENTAGES

 

       
% Leased by Location
June 30, 2018 December 31, 2017
Boston 94.8 % 94.1 %
Los Angeles and San Francisco 89.8 % 89.3 %
New York 86.6 % 86.9 %
Washington, DC 89.5 % 91.3 %
Total Portfolio 90.4 % 90.7 %

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