BOSTON PROPERTIES, INC. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q, including the documents incorporated by reference, contain forward-looking statements within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions, in each case, to the extent applicable. Such statements are contained principally, but not only, under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." We caution investors that any such forward-looking statements are based on current beliefs or expectations of future events and on assumptions made by, and information currently available to, our management. When used, the words "anticipate," "believe," "budget," "estimate," "expect," "intend," "may," "might," "plan," "project," "should," "will" and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance or occurrences, which may be affected by known and unknown risks, trends, uncertainties and factors that are, in some cases, beyond our control. Should one or more of these known or unknown risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expressed or implied by the forward-looking statements. We caution you that, while forward-looking statements reflect our good-faith beliefs when we make them, they are not guarantees of future performance or occurrences and are impacted by actual events when they occur after we make such statements. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends. One of the most significant factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements is the ongoing impact of the global COVID-19 pandemic on theU.S. and global economies, which has impacted, and is likely to continue to impact, us and, directly or indirectly, many of the other important factors below and the risks described in (i) our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 including those described under the caption "Risk Factors," (ii) our subsequent filings under the Exchange Act and (iii) the risk factors set forth in this Form 10-Q in Part II, Item 1A. Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following: • the risks and uncertainties related to the impact of the COVID-19 global pandemic, including the duration, scope and severity of the pandemic domestically and internationally; federal, state and local government actions or restrictive measures implemented in response to COVID-19, the effectiveness of such measures and the direct and indirect impact of such measures on our and our tenants' businesses, financial condition, results of operation, cash flows,
liquidity and
performance, and the U.S. and international economy andeconomic
activity generally; whether new or existing actions andmeasures
continue to result in increasing unemployment that impacts the
ability of our residential tenants to generate sufficient income to
pay, or make them unwilling to pay rent in a timely manner, in full
or at all; the health, continued service and availability of our
personnel, including our key personnel and property management
teams; and the effectiveness or lack of effectiveness of
governmental relief in providing assistance to individuals and large
and small businesses, including our tenants, that havesuffered
significant adverse effects from COVID-19;
• volatile or adverse global economic and political conditions, health
crises and dislocations in the credit markets could adversely affect
our access to cost-effective capital and have a resulting material
adverse effect on our business opportunities, results ofoperations
and financial condition;
• general risks affecting the real estate industry (including, without
limitation, the inability to enter into or renew leases, tenant
space utilization, dependence on tenants' financial condition, and
competition from other developers, owners and operators of real
estate);
• failure to manage effectively our growth and expansion into new
markets and sub-markets or to integrate acquisitions and
developments successfully;
• the ability of our joint venture partners to satisfy their obligations;
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• risks and uncertainties affecting property development and
construction (including, without limitation, construction delays,
increased construction costs, cost overruns, inability to obtain
necessary permits, tenant accounting considerations that may result
in negotiated lease provisions that limit a tenant's liability
during construction, and public opposition to suchactivities); • risks associated with the availability and terms of financing and
the use of debt to fund acquisitions and developments or refinance
existing indebtedness, including the impact of higher interest rates
on the cost and/or availability of financing;
• risks associated with forward interest rate contracts and the
effectiveness of such arrangements;
• risks associated with downturns in the national and local economies,
increases in interest rates, and volatility in the securities
markets;
• risks associated with actual or threatened terrorist attacks;
• costs of compliance with the Americans with Disabilities Act and
other similar laws;
• potential liability for uninsured losses and environmental contamination;
• risks associated with the physical effects of climate change;
• risks associated with security breaches through cyber
attacks, cyber
intrusions or otherwise, as well as other significantdisruptions of
our information technology (IT) networks and related systems, which
support our operations and our buildings;
• risks associated with BXP's potential failure to qualify as a REIT
under the Internal Revenue Code of 1986, as amended;
• possible adverse changes in tax and environmental laws;
• the impact of newly adopted accounting principles on our accounting
policies and on period-to-period comparisons of financial results;
• risks associated with possible state and local tax audits;
• risks associated with our dependence on key personnel whose
continued service is not guaranteed; and
• the other risk factors identified in our most recently filed Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 or
described herein, including those under the caption "Risk Factors."
The risks set forth above are not exhaustive. Other sections of this report may
include additional factors that could adversely affect our business and
financial performance. Moreover, we operate in a very competitive and rapidly
changing environment, particularly in light of the rapidly developing
circumstances relating to COVID-19. New risk factors emerge from time to time
and it is not possible for management to predict all risk factors, nor can we
assess the impact of all risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. Investors should also refer to our
most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q
for future periods and Current Reports on Form 8-K as we file them with the SEC ,
and to other materials we may furnish to the public from time to time through
Current Reports on Form 8-K or otherwise, for a discussion of risks and
uncertainties that may cause actual results, performance or achievements to
differ materially from those expressed or implied by forward-looking statements.
We expressly disclaim any responsibility to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events, or otherwise, and you should not rely upon these
forward-looking statements after the date of this report.
Overview
BXP is one of the largest publicly-traded office real estate investment trusts
(REIT) (based on total market capitalization) as of March 31, 2020 in the United
States that develops, owns and manages primarily Class A office properties
concentrated in five markets in the United States - Boston , Los Angeles , New
York , San Francisco and Washington, DC . BPLP is the entity through which BXP
conducts substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. We generate revenue and cash
primarily by leasing Class A office space to our tenants. When making leasing
decisions, we consider, among other things, the
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creditworthiness of the tenant, the length of the lease, the rental rate to be paid at inception and throughout the lease term, the costs of tenant improvements and other landlord concessions, anticipated operating expenses and real estate taxes, current and anticipated vacancy, current and expected future demand for the space, the impact of any expansion rights and general economic factors. Our core strategy has always been to develop, acquire and manage high-quality properties in supply-constrained markets with high barriers-to-entry and to focus on executing long-term leases with financially strong tenants. Our tenant base is diverse across market sectors and the weighted-average lease term for our in-place leases was approximately 8.3 years, as ofMarch 31, 2020 , including leases at our unconsolidated joint ventures. The weighted-average lease term for our top 20 office tenant leases was approximately 11.9 years. Historically, these factors have minimized our exposure in weaker economic cycles and enhanced revenues as market conditions improve. To be successful in any leasing environment, we believe we must consider all aspects of the tenant-landlord relationship. In this regard, we believe that our competitive advantage is based on the following attributes: • our understanding of tenants' short- and long-term space utilization and amenity needs in the local markets; • our reputation as a premier developer, owner and manager of primarily Class A office properties; • our financial strength and our ability to maintain high building standards; • our focus on developing and operating in a sustainable and responsible manner; and
• our relationships with local brokers.
Outlook
In the first quarter of 2020 macroeconomic conditions were favorable and positive until COVID-19 began to escalate into a national and global pandemic in mid-March. In the first two months of the quarter,U.S. GDP remained stable and job creation remained steady. Starting in March, COVID-19 caused a precipitous drop in economic activity globally with significant negative impacts on businesses across theU.S. As the number of unemployment claims rose and the economy slowed, theFederal Reserve andU.S. Treasury implemented aggressive monetary and fiscal stimulus policies, including the CARES Act, to bring needed financial support to small businesses, individuals and industries most affected by the crisis. Also, theFederal Reserve quickly reduced the federal funds rate to zero. The effects of COVID-19 began to have an impact on us and our tenants near the end of the first quarter. As governments across all of our regions implemented social distancing and stay-at-home policies, we and our tenants migrated employees to a work-from-home model. All office properties throughout our portfolio remain open for tenants, although physical occupancy remains low due to these measures. By the end of March, construction of our development projects paused inBoston, New York andSan Francisco to comply with municipal social distancing policies, although construction continued in theWashington, DC region. Despite the work-stoppages at our development projects, we remain on schedule to meet all required delivery milestones in our leases and within budget. Our broad and deep experience as developers extends to our budgeting and planning, which have left us with ample time in our development schedules. However, we cannot be certain that work-stoppages will not extend beyond current expectations or, if they do, that we will meet the milestones and budgets. Leasing discussions remained active for leases that were in negotiation prior to COVID-19, but we have experienced a decrease in new leasing requirements and physical tours are on hold. Our most important activity at this time is planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. In earlyApril 2020 , we formed an internal Health Security Task force composed ofBoston Properties' employees, as well as outside experts in health care, industrial hygiene, cleaning and security. We designed standard operating procedures that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and use of vertical transportation, the use of personal protective equipment, signage, and management of construction activities. We began communicating the operating procedures with tenants in early May. 40
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Rent Collections Cash rent payments for a particular month are generally due on the first day of that month (although tenants have varying grace periods). Cash rent amounts are based on all rent billed by us, including all amounts from consolidated operations and all unconsolidated joint ventures, other thanGateway Commons for which we do not handle billing. OurApril 2020 rent collections among all tenants were approximately 93%, a reduction from prior levels as a result of COVID-19, primarily due to certain retail tenants. Collections from our office tenants in April remained strong. During the first quarter of 2020, approximately 87% of the aggregate amount of our consolidated revenues were derived from office leases. For the month of April, we collected approximately 97% of our total commercial rent payments dueApril 1 from office tenants. In some of these cases, the tenant paid its rent, but reserved its right to assert that the terms of its lease do not require the tenant to pay. Office tenants in the flexible office use and manufacturing/retail industries, which represent 3% and 5% of our office rents, respectively, present a heightened concern for rent collection, as we collected approximately 78% and 73%, respectively, from these tenants for the month of April. Unpaid April rent was approximately$1.3 million and$2.9 million for flexible office and manufacturing/retail, respectively. In addition, our share of the accrued rent for tenants in these groups is approximately$3.9 million and$7.2 million , respectively. For clarity, manufacturing/retail includes retail and consumer products office tenants. In addition, during the first quarter of 2020, approximately 7.2% of the aggregate amount of our consolidated revenues were derived from retail leases. For the month of April, we collected approximately 36% of our total commercial rent payments due from retail tenants for rents dueApril 1 . We are actively working on lease amendments with retail tenants in this category that we believe have justifiable financial needs. Of the retail tenants that did not pay rent for April, our share of the accrued rent balance for these tenants is approximately$25.1 million . We continue to analyze our accounts receivable, tenant creditworthiness and current economic trends to evaluate the adequacy of the collectability of our tenants' total accounts receivable balances, including lease revenue, and if considered uncollectible, we will write-off the receivable and accrued rent balances associated with the leases, and record future lease revenue on a cash basis. During 2019, our total parking revenue was approximately$100 million and our share of total parking revenue from unconsolidated joint ventures was approximately$13 million . Approximately$40 million of this aggregate amount of consolidated and unconsolidated parking revenue was derived from hourly/daily parking. The remainder of the aggregate amount of parking revenue was derived from monthly parking revenues, some of which are contractual agreements embedded in our leases, and some are at will individual agreements. In April, with stay-at-home orders and business closures, we generated minimal hourly/daily parking revenue and this trend may continue for as long as these stay-at-home orders and business closures continue. Approximately 2% of our total revenue in 2019 was from our hotel, theBoston Marriott Cambridge . The hotel property has been closed sinceMarch 22, 2020 and is currently running at a monthly deficit. It is unclear when the hotel will open. As a result of the impact of the current environment, we expect our 2020 revenues to be impacted from (1) lower collections, primarily from our retail tenants, parking and hotel operators, (2) a slowdown in new leasing activity for vacant and expiring space and (3) delayed revenue recognition related to tenants who are currently building out space as a result of construction delays. Despite the near-term challenges of COVID-19, we remain confident in our ability to weather the current market downturn and manage our business throughout uncertain future market conditions. As a leading developer, owner and manager of marquee Class A office properties in theU.S. , our priorities during and following COVID-19 remain focused on the following: • ensuring tenant satisfaction by keeping our properties safe, open and available for occupancy;
• implementing measures to ensure tenant and employee health security;
• communicating openly with tenants to provide assurance
before and
during re-occupancy;
• leasing available space in our in-service and development properties;
• resuming and completing the construction of our development
properties as conditions allow;
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• continuing and completing the redevelopment and
repositioning of
several key properties to increase future revenue and asset values
over the long-term;
• maintaining our conservative balance sheet and managing our
near-term debt maturities;
• actively managing our operations in a safe, sustainable and
responsible manner; and
• maintaining discipline in our underwriting of investment opportunities.
Following is an overview of portfolio activity and leasing activity in the first quarter of 2020, recognizing that both leasing activities and construction activities had slowed in the majority of our regions by the end of the first quarter due to COVID-19. The overall occupancy of our in-service office and retail properties was 92.9% atMarch 31, 2020 , a slight decrease of 10 basis points as compared toDecember 31, 2019 . During the first quarter of 2020, we signed leases across our portfolio totaling approximately 702,000 square feet and we commenced revenue recognition on approximately 995,000 square feet of leases in second generation space. Of these second generation leases, approximately 727,000 square feet had been vacant for less than one year and, in the aggregate, they represent an increase in net rental obligations (gross rent less operating expenses) of approximately 93% over the prior leases. The increase in net rental obligations included the commencement of a retail lease in theNew York region that had a significant impact on net rents. Excluding this lease, increase in net rental obligations in the first quarter of 2020 was 25%. A brief overview of each of our markets follows.Boston OurBoston central business district ("CBD") in-service portfolio was approximately 99% leased as ofMarch 31, 2020 . During the first quarter of 2020, we executed approximately 93,000 square feet of leases and had approximately 267,000 square feet of leases commence in theBoston region. Approximately 183,000 square feet of the leases that commenced had been vacant for less than one year and represent an increase in net rental obligations of approximately 43% over the prior leases. For the majority of the first quarter of 2020, we continued development of100 Causeway Street , an approximately 632,000 net rentable square foot office tower located inBoston, Massachusetts , of which we own 50%, that is 95% pre-leased, as ofMay 5, 2020 . Our approximately 2.0 million square foot in-service office portfolio inCambridge was 99.5% leased, as ofMarch 31, 2020 . For the majority of the first quarter of 2020, we continued the development of325 Main Street atKendall Center inCambridge, Massachusetts , which is 90% pre-leased to a tenant for a term of 15 years. In our suburbanWaltham /Lexington portfolio, we continued the redevelopment of a portion of200 West Street , an approximately 261,000 net rentable square foot Class A office property inWaltham, Massachusetts . The redevelopment is a conversion of a portion of the property to laboratory space to meet growing demand in the life sciences sector. Construction of ourBoston andCambridge developments/redevelopments has temporarily stopped to comply with the social distancing policies and directives of the cities.Los Angeles OurLos Angeles ("LA") portfolio is currently focused on West LA and includes an approximately 1.1 million square foot property, Colorado Center, of which we own 50%, andSanta Monica Business Park , a 21-building, approximately 1.2 million square foot property of which we own 55%. We believe both properties provide us with ample opportunity for future growth, as a majority of the current leases are at below-market rents. As ofMarch 31, 2020 , our LA in-service properties was approximately 96% leased. Depending on market conditions, we expect to continue to explore opportunities to increase our presence in the LA market by seeking investments where our financial, operational, redevelopment and development expertise provide the opportunity to achieve accretive returns. 42
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New York As ofMarch 31, 2020 , our New York CBD in-service portfolio was approximately 96% leased. In the first quarter of 2020, we commenced approximately 263,000 square feet of leases in theNew York region. Of these leases, approximately 143,000 square feet had been vacant for less than one year and represent an increase in net rental obligations of approximately 205% over the prior leases. Excluding the commencement of a retail lease that had a significant impact on leases, the increase in net rental obligations was 3.9%. Although the pace of new leasing activities in ourNew York region slowed by the end of the first quarter due to COVID-19, inApril 2020 , we signed an approximately 24,000 square foot lease at399 Park Avenue bringing the office portion of that property to 100% leased, and we also signed an approximately 27,000 square foot lease atTimes Square Tower with a law firm.San Francisco Our San Francisco CBD in-service properties were approximately 98% leased as ofMarch 31, 2020 . During the first quarter of 2020, we commenced approximately 169,000 square feet of leases in theSan Francisco region. Of these leases, approximately 111,000 square feet had been vacant for less than one year and represent an increase in net rental obligations of approximately 50% over the prior leases. In ourSilicon Valley portfolio, onFebruary 20, 2020 , we completed the acquisition of land underlying the ground lease at Platform 16 inSan Jose . Platform 16 is a joint venture in which we own 55% and consists of a parcel of land totaling approximately 5.6 acres that is expected to support the development of approximately 1.1 million square feet of commercial office space. OnJanuary 28, 2020 , the joint venture commenced site preparation work at Platform 16. Due to the uncertainty related to COVID-19, and in consultation with our partner, the joint venture has paused construction activities and will revisit its plans once the economic impact of COVID-19 becomes clearer. OnJanuary 28, 2020 , we entered into a joint venture with a partner to own, operate and develop approximately 1.1 million square feet of existing office and lab properties inSouth San Francisco, California , with the opportunity for approximately 640,000 square feet of additional future development. Upon completion, the joint venture is expected to own an approximately 1.7 million square foot life sciences campus, including a mix of office and lab buildings. Under the joint venture agreement, we contributed 601,611 and 651 Gateway Boulevard , three existing office properties that total approximately 768,000 net rentable square feet, and developable land for our 50% ownership interest in the joint venture. The partner contributed approximately 313,000 square feet of properties (including one property under construction) consisting of lab, office and amenity buildings, and developable land and will contribute cash totaling approximately$69.2 million in the future for its 50% ownership interest in the joint venture. As a result of the partner's deferred contribution, we have an initial approximately 55% interest in the joint venture. TheSouth San Francisco market has experienced strong demand from companies in the life sciences sector. Depending on market conditions, we expect this joint venture will allow us to expand the amount of developable land on the combined site and efficiently capitalize on tenant demand in the life sciences sector.Washington, DC In theWashington, DC region, our focus remains on (1) expanding our development potential inReston, Virginia , where demand from technology and cybersecurity tenants remains strong, (2) divesting of assets inWashington, DC and select suburban markets and (3) matching development sites with tenants to begin development with significant pre-leasing commitments. During the first quarter of 2020, we commenced approximately 600,000 square feet of leases in theWashington, DC region. Of these leases, approximately 275,000 square feet had been vacant for less than one year and represent an increase in net rental obligations of approximately 13% over the prior leases. In ourReston, Virginia portfolio, in the first quarter of 2020, we placed in service 17FiftyPresidents Street , a build-to-suit project with approximately 276,000 net rentable square feet of Class A office space that is 100% leased to an affiliate of Leidos Holdings, Inc. We also continued development ofReston Gateway , our mixed-use development project, which will consist of an aggregate of approximately 4.5 million net rentable square feet. The initial phase is approximately 1.1 million net rentable square feet, of which approximately 72% is pre-leased to Fannie Mae. OurReston, Virginia in-service portfolio was approximately 87% leased as ofMarch 31, 2020 and continues to be the strongest submarket in the region. 43
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In the first quarter of 2020, we completed the sale ofNew Dominion Technology Park located inHerndon, Virginia for a gross sale price of$256.0 million , resulting in net proceeds of approximately$254.0 million and reported gain on sale of approximately$192.3 million for BXP and approximately$197.1 million for BPLP.New Dominion Technology Park is comprised of two Class A office properties aggregating approximately 493,000 net rentable square feet. OurWashington, DC CBD in-service properties were approximately 85% leased, as ofMarch 31, 2020 , with modest near-term exposure and we have reduced our exposure in theWashington, DC CBD market significantly over the past few years through dispositions of assets. Leasing Statistics The table below details the leasing activity, including 100% of the unconsolidated joint ventures, that commenced during the three months endedMarch 31, 2020 : Three Months EndedMarch 31, 2020 Total Square Feet Vacant space available at the beginning of the period
3,135,170
Vacant space in properties acquired
-
Properties placed (and partially placed) in-service (1)
280,965
Leases expiring or terminated during the period
1,085,416
Total space available for lease
4,501,551
1st generation leases
321,456
2nd generation leases with new tenants
566,136
2nd generation lease renewals
428,887
Total space leased (2)
1,316,479
Vacant space available for lease at the end of the period
3,185,072
Leases executed during the period, in square feet (3)
701,730
Second generation leasing information: (4) Leases commencing during the period, in square feet
995,023
Weighted Average Lease Term 99 Months Weighted Average Free Rent Period 108 Days Total Transaction Costs Per Square Foot (5)$71.96 Increase in Gross Rents (6) 62.08 % Increase in Net Rents (7) 93.22 % __________________
(1) Total square feet of properties placed (and partially placed) in-service
during the three months ended March 31, 2020 consists of 5,156 at 145
Broadway and 275,809 at 17Fifty Presidents Street .
(2) Represents leases for which lease revenue recognition has commenced in
accordance with GAAP during the three months ended March 31, 2020 .
(3) Represents leases executed during the three months ended March 31, 2020 for which we either (1) commenced lease revenue recognition in such period
or (2) will commence lease revenue recognition in subsequent periods, in
accordance with GAAP, and includes leases at properties currently under
development. The total square feet of leases executed and recognized in
the three months ended March 31, 2020 is 244,020.
(4) Second generation leases are defined as leases for space that had
previously been leased by us. Of the 995,023 square feet of second
generation leases that commenced during the three months ended March 31,
2020 , leases for 756,159 square feet were signed in prior periods.
(5) Total transaction costs include tenant improvements and leasing
commissions, but exclude free rent concessions and other inducements in
accordance with GAAP.
(6) Represents the increase in gross rent (base rent plus expensereimbursements) on the new versus expired leases on the 727,342 square
feet of second generation leases that had been occupied within the prior
12
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months for the three months endedMarch 31, 2020 ; excludes leases that management considers temporary because the tenant is not expected to occupy the space on a long-term basis. (7) Represents the increase in net rent (gross rent less operating expenses)
on the new versus expired leases on the 727,342 square feet of second
generation leases that had been occupied within the prior 12 months for
the three months ended
considers temporary because the tenant is not expected to occupy the space
on a long-term basis.
Transactions during the three months ended March 31, 2020 included the
following:
Development/redevelopment
• On January 28, 2020 , we exercised our option to acquire real property
at 425 Fourth Street located in San Francisco, California for a
purchase price totaling approximately $134.1 million . 425 Fourth
Street is expected to support the development of approximately 804,000
square feet of primarily commercial office space. There can be no
assurance that the acquisition will be consummated on the terms
currently contemplated or at all.
• On March 26, 2020 , we completed and fully placed in-service 17Fifty
Presidents Street located in Reston, Virginia . 17FiftyPresidents
Street is a build-to-suit project with approximately 276,000 net
rentable square feet of Class A office space that is 100% leased.
Dispositions
• OnJanuary 28, 2020 , we entered into a joint venture with a third party to own, operate and develop properties at ourGateway Commons complex located inSouth San Francisco, California . We
contributed our
601, 611 and 651 Gateway properties and development rights with an
agreed upon value aggregating approximately $350.0 million for our 50%
interest in the joint venture. 601, 611 and 651 Gateway consist of
three Class A office properties aggregating approximately768,000 net
rentable square feet. The partner contributed three properties and
development rights with an agreed upon value aggregating approximately
$280.8 million at closing and will contribute cash totaling approximately$69.2 million in the future for its 50% ownership interest in the joint venture. As a result of the partner's deferred contribution, we have an initial approximately 55% interest in the joint venture. Future development projects will be owned 49% by us and 51% by the partner. We recognized a gain on the retained and sold interest in the real estate contributed to the joint venture totaling approximately$217.7 million for BXP and$222.4 million for BPLP during the three months endedMarch 31, 2020 , within Gains
(Losses) on
Sales of Real Estate on the respective Consolidated Statements of
Operations, as the fair value of the real estate exceeded its carrying
value (See Notes 3 and 5 to the Consolidated FinancialStatements).
• On
Park located in Herndon, Virginia for a gross sale price of
million. Net cash proceeds totaled approximately $254.0 million ,
resulting in a gain on sale of real estate totaling approximately
$192.3 million for BXP and approximately$197.1 million for
BPLP. New
Dominion Technology Park is comprised of two Class A officeproperties
aggregating approximately 493,000 net rentable square feet.
Unconsolidated joint venture activities
• On January 28, 2020 , we entered into a joint venture with a third
party to own, operate and develop properties at its Gateway Commons
complex located in South San Francisco, California . We will have a 50%
interest in the joint venture. See "Dispositions" above foradditional
information.
• On
commenced development of the first phase of its Platform 16project
located in San Jose, California . The first phase of the Platform 16
development project consists of an approximately 390,000 net rentable
square foot Class A office building and a below-grade parking garage.
Though the joint venture has completed site preparation work, in
consultation with our partner, the joint venture has paused
construction activities and it will revisit its plans once the
economic impact of COVID-19 becomes clearer. On February 20 , 2020, the
joint venture acquired the land underlying the ground lease for a
purchase price totaling approximately $134.8 million . The joint
venture had previously made a deposit totaling $15.0 million ,
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which deposit was credited against the purchase price. Platform 16 consists of a parcel of land totaling approximately 5.6 acres that is expected to support the development of approximately 1.1 million square feet of commercial office space. • OnMarch 18, 2020 , a joint venture in which we have a 50% interest extended the mortgage loan collateralized byAnnapolis Junction Building Seven andBuilding Eight . At the time of the extension, the outstanding balance of the loan totaled approximately$34.6 million , bore interest at a variable rate equal to LIBOR plus 2.35% per annum and matured onMarch 6, 2020 . The extended loan matures onJune 30, 2020 . Annapolis JunctionBuilding Seven andBuilding Eight are Class A office properties with approximately 127,000 and 126,000 net rentable square feet, respectively, located inAnnapolis, Maryland . Transactions completed subsequent toMarch 31, 2020 included the following: • OnApril 22, 2020 , a joint venture in which we have a 20% interest extended the mortgage loan collateralized byMetropolitan Square located inWashington, DC . At the time of the extension, the outstanding balance of the loan totaled approximately$156.4 million and was scheduled to mature onMay 5, 2020 . The extended loan continues to bear interest at a fixed rate of 5.75% per annum and matures onAugust 5, 2020 .Metropolitan Square is a Class A office property with approximately 654,000 net rentable square feet.
• On
aggregate principal amount of its 3.250% unsecured senior notes due
2031. The notes were priced at 99.850% of the principal amount to
yield an effective rate (including financing fees) ofapproximately
3.343% per annum to maturity. The notes will mature on January 30,
2031 , unless earlier redeemed. The aggregate net proceeds from the
offering were approximately $1.24 billion after deductingunderwriting
discounts and estimated transaction expenses.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our Consolidated Financial Statements, which have been
prepared in accordance with generally accepted accounting principles ("GAAP").
The preparation of these financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Certain accounting policies are considered to be
critical accounting policies, as they require management to make assumptions
about matters that are highly uncertain at the time the estimate is made and
changes in accounting estimate are reasonably likely to occur from period to
period. Management bases its estimates and assumptions on historical experience
and current economic conditions. On an on-going basis, management evaluates its
estimates and assumptions including those related to revenue, impairment of
long-lived assets and the allowance for doubtful accounts. Actual results may
differ from those estimates and assumptions.
Our Annual Report on Form 10-K for the year ended December 31, 2019 contains a
discussion of our critical accounting policies, except for our policies
established following the adoption of Accounting Standards Update ("ASU") ASU
2016-13, ASU 2018-13, ASU 2018-17 and ASU 2020-04. The adoption of each of the
pronouncements is discussed in Note 2 to our Consolidated Financial Statements.
Management discusses and reviews our critical accounting policies and
management's judgments and estimates with BXP's Audit Committee.
Results of Operations for the Three Months Ended March 31, 2020 and 2019
The full extent of the impact of COVID-19 on our business, operations and
financial results will depend on numerous evolving factors that we may not be
able to accurately predict. In addition, we cannot predict the impact that
COVID-19 will have on our tenants, employees, contractors, lenders, suppliers,
vendors and joint venture partners; any material effect on these parties could
also have a material adverse effect on us. The impact of COVID-19 on our
revenue, in particular lease and parking revenue for the second quarter of 2020
and thereafter, also cannot be determined at present. The situation surrounding
COVID-19 remains fluid, and we are actively managing our response in
collaboration with tenants, government officials and joint venture partners and
assessing potential impacts to our financial position and operating results, as
well as potential adverse developments in our business. See Item 1A: "Risk
Factors" for additional details.
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Net income attributable toBoston Properties, Inc. common shareholders and net income attributable toBoston Properties Limited Partnership common unitholders increased approximately$399.4 million and$453.0 million for the three months endedMarch 31, 2020 compared to 2019, respectively, as detailed in the following tables and for the reasons discussed below under the heading "Comparison of the three months endedMarch 31, 2020 to the three months endedMarch 31, 2019 " within "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations." The following are reconciliations of Net Income Attributable toBoston Properties, Inc. Common Shareholders to Net Operating Income and Net Income Attributable to Boston Properties Limited Partnership Common Unitholders to Net Operating Income for the three months endedMarch 31, 2020 and 2019 (in thousands):Boston Properties, Inc. Three months ended March 31, Increase/ % 2020 2019 (Decrease) Change Net Income Attributable toBoston Properties, Inc. Common Shareholders$ 497,496 $ 98,105 $ 399,391 407.11 % Preferred dividends 2,625 2,625 - - % Net Income Attributable toBoston Properties, Inc. 500,121 100,730 399,391 396.50 % Net Income Attributable to Noncontrolling Interests: Noncontrolling interest-common units of the Operating Partnership 57,539 11,599 45,940 396.07 % Noncontrolling interests in property partnerships 19,486 18,830 656 3.48 % Net Income 577,146 131,159 445,987 340.04 % Other Expenses: Add: Interest expense 101,591 101,009 582 0.58 % Impairment loss - 24,038 (24,038 ) (100.00 )% Other Income: Less: Gains (losses) from investments in securities (5,445 ) 2,969 (8,414 ) (283.40 )% Interest and other income 3,017 3,753 (736 ) (19.61 )% Gains (losses) on sales of real estate 410,165 (905 ) 411,070 45,422.10 % Income (loss) from unconsolidated joint ventures (369 ) 213 (582 ) (273.24 )% Other Expenses: Add: Depreciation and amortization expense 171,094 164,594 6,500 3.95 % Transaction costs 615 460 155 33.70 % Payroll and related costs from management services contracts 3,237 3,395 (158 ) (4.65 )% General and administrative expense 36,454 41,762 (5,308 ) (12.71 )% Other Revenue: Less: Direct reimbursements of payroll and related costs from management services contracts 3,237 3,395 (158 ) (4.65 )% Development and management services revenue 7,879 9,277 (1,398 ) (15.07 )% Net Operating Income$ 471,653 $ 447,715 $ 23,938 5.35 % 47
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Three months ended March 31,
Increase/ %
2020 2019 (Decrease) Change
Net Income Attributable to Boston
Properties Limited Partnership Common
Unitholders $ 566,333 $ 113,382 $ 452,951 399.49 %
Preferred distributions 2,625 2,625 - - %
Net Income Attributable to Boston
Properties Limited Partnership 568,958 116,007 452,951 390.45 %
Net Income Attributable to Noncontrolling
Interests:
Noncontrolling interests in property
partnerships 19,486 18,830 656 3.48 %
Net Income 588,444 134,837 453,607 336.41 %
Other Expenses:
Add:
Interest expense 101,591 101,009 582 0.58 %
Impairment loss - 22,272 (22,272 ) (100.00 )%
Other Income:
Less:
Gains (losses) from investments in
securities (5,445 ) 2,969 (8,414 ) (283.40 )%
Interest and other income 3,017 3,753 (736 ) (19.61 )%
Gains (losses) on sales of real estate 419,654 (905 ) 420,559 46,470.61 %
Income (loss) from unconsolidated joint
ventures (369 ) 213 (582 ) (273.24 )%
Other Expenses:
Add:
Depreciation and amortization expense 169,285 162,682 6,603 4.06 %
Transaction costs 615 460 155 33.70 %
Payroll and related costs from management
services contracts 3,237 3,395 (158 ) (4.65 )%
General and administrative expense 36,454 41,762 (5,308 ) (12.71 )%
Other Revenue:
Less:
Direct reimbursements of payroll and
related costs from management services
contracts 3,237 3,395 (158 ) (4.65 )%
Development and management services revenue 7,879 9,277 (1,398 ) (15.07 )%
Net Operating Income $ 471,653 $ 447,715 $ 23,938 5.35 %
At March 31, 2020 and 2019, we owned or had interests in a portfolio of 196
commercial real estate properties (in each case, the "Total Property
Portfolio"). As a result of changes within our Total Property Portfolio, the
financial data presented below shows significant changes in revenue and expenses
from period-to-period. Accordingly, we do not believe that our period-to-period
financial data with respect to the Total Property Portfolio is meaningful.
Therefore, the comparison of operating results for the three months ended
March 31, 2020 and 2019 show separately the changes attributable to the
properties that were owned by us and in-service throughout each period compared
(the "Same Property Portfolio") and the changes attributable to the properties
included in the Acquired, Placed In-Service, Development or Redevelopment or
Sold Portfolios.
In our analysis of operating results, particularly to make comparisons of net
operating income between periods meaningful, it is important to provide
information for properties that were in-service and owned by us throughout each
period presented. We refer to properties acquired or placed in-service prior to
the beginning of the earliest period presented and owned by us and in-service
through the end of the latest period presented as our Same Property Portfolio.
The Same Property Portfolio therefore excludes properties acquired, placed
in-service or in development or redevelopment after the beginning of the
earliest period presented or disposed of prior to the end of the latest period
presented.
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Net operating income ("NOI") is a non-GAAP financial measure equal to net income
attributable to Boston Properties, Inc. common shareholders and net income
attributable to Boston Properties Limited Partnership common unitholders, as
applicable, the most directly comparable GAAP financial measures, plus (1)
preferred dividends/distributions, net income attributable to noncontrolling
interests, interest expense, impairment loss, depreciation and amortization
expense, transaction costs, payroll and related costs from management services
contracts and corporate general and administrative expense less (2) gains
(losses) from investments in securities, interest and other income, gains
(losses) on sales of real estate, income (loss) from unconsolidated joint
ventures, direct reimbursements of payroll and related costs from management
services contracts and development and management services revenue. We use NOI
internally as a performance measure and believe it provides useful information
to investors regarding our results of operations and financial condition
because, when compared across periods, it reflects the impact on operations from
trends in occupancy rates, rental rates, operating costs and acquisition and
development activity on an unleveraged basis, providing perspective not
immediately apparent from net income attributable to Boston Properties, Inc.
common shareholders and net income attributable to Boston Properties Limited
Partnership common unitholders. For example, interest expense is not necessarily
linked to the operating performance of a real estate asset and is often incurred
at the corporate level as opposed to the property level. Similarly, interest
expense may be incurred at the property level even though the financing proceeds
may be used at the corporate level (e.g., used for other investment activity).
In addition, depreciation and amortization expense, because of historical cost
accounting and useful life estimates, may distort operating performance measures
at the property level. NOI presented by us may not be comparable to NOI reported
by other REITs or real estate companies that define NOI differently.
We believe that, in order to facilitate a clear understanding of our operating
results, NOI should be examined in conjunction with net income attributable to
Boston Properties, Inc. common shareholders and net income attributable to
Boston Properties Limited Partnership common unitholders as presented in our
Consolidated Financial Statements. NOI should not be considered as a substitute
for net income attributable to Boston Properties, Inc. common shareholders or
net income attributable to Boston Properties Limited Partnership common
unitholders (determined in accordance with GAAP) or any other GAAP financial
measures and should only be considered together with and as a supplement to our
financial information prepared in accordance with GAAP.
The gains on sales of real estate, depreciation expense and impairment losses
may differ between BXP and BPLP as a result of previously applied acquisition
accounting by BXP for the issuance of common stock in connection with
non-sponsor OP Unit redemptions by BPLP. This accounting resulted in a step-up
of the real estate assets at BXP that was allocated to certain properties. The
difference between the real estate assets of BXP as compared to BPLP for certain
properties having an allocation of the real estate step-up will result in a
corresponding difference in gains on sales of real estate, depreciation expense
and impairment losses, when those properties are sold. For additional
information see the Explanatory Note that follows the cover page of this
Quarterly Report on Form 10-Q.
Comparison of the three months ended March 31, 2020 to the three months ended
March 31, 2019
The table below shows selected operating information for the Same Property
Portfolio and the Total Property Portfolio. The Same Property Portfolio consists
of 140 properties totaling approximately 39.1 million net rentable square feet,
excluding unconsolidated joint ventures. The Same Property Portfolio includes
properties acquired or placed in-service on or prior to January 1, 2019 and
owned and in service through March 31, 2020 . The Total Property Portfolio
includes the effects of the other properties either acquired, placed in-service,
in development or redevelopment after January 1, 2019 or disposed of on or prior
to March 31, 2020 . This table includes a reconciliation from the Same Property
Portfolio to the Total Property Portfolio by also providing information for the
three months ended March 31, 2020 and 2019 with respect to the properties that
were acquired, placed in-service, in development or redevelopment or sold.
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Properties in
Properties Development or
Properties Placed In-Service Redevelopment
Same Property Portfolio Acquired Portfolio Portfolio Portfolio Properties Sold Portfolio Total Property Portfolio
Increase/ % Increase/ %
2020 2019 (Decrease) Change 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 (Decrease)
Change
(dollars in thousands)
Rental
Revenue:
(1)
Lease
Revenue
(Excluding
Termination
Income) $ 674,879 $ 647,031 $ 27,848 4.30 % $ 3,553 $ - $ 12,843 $ - $ 2,148 $ 4,331 $ 4,496 $ 13,371 $ 697,919 $ 664,733 $ 33,186 4.99 %
Termination
Income 2,399 6,956 (4,557 ) (65.51 )% - - - - - - - (20 ) 2,399 6,936 (4,537 ) (65.41 )%
Lease
Revenue 677,278 653,987 23,291 3.56 % 3,553 - 12,843 - 2,148 4,331 4,496 13,351 700,318 671,669 28,649 4.27 %
Parking and
Other 23,820 24,757 (937 ) (3.78 )% - - 514 - 6 6 1 10 24,341 24,773 (432 ) (1.74 )%
Total
Rental
Revenue (1) 701,098 678,744 22,354 3.29 % 3,553 - 13,357 - 2,154 4,337 4,497 13,361 724,659 696,442 28,217 4.05 %
Real Estate
Operating
Expenses 252,219 246,071 6,148 2.50 % 1,466 - 2,009 - 1,555 2,360 1,653 5,312 258,902 253,743 5,159 2.03 %
Net
Operating
Income,
Excluding
Residential
and Hotel 448,879 432,673 16,206 3.75 % 2,087 - 11,348 - 599 1,977
2,844 8,049 465,757 442,699 23,058 5.21 %
Residential
Net
Operating
Income (2) 5,892 3,941 1,951 49.51 % - - - - - - - - 5,892 3,941 1,951 49.51 %
Hotel Net
Operating
Income (2) 4 1,075 (1,071 ) (99.63 )% - - - - - - - - 4 1,075 (1,071 ) (99.63 )%
Net
Operating
Income $ 454,775 $ 437,689 $ 17,086 3.90 % $ 2,087 $ - $ 11,348 $ - $ 599 $ 1,977 $ 2,844 $ 8,049 $ 471,653 $ 447,715 $ 23,938 5.35 %
_______________
(1) Rental Revenue is equal to Revenue less Development and Management
Services Revenue and Direct Reimbursements of Payroll and Related Costs
from Management Services Revenue per the Consolidated Statements of
Operations, excluding the residential and hotel revenue that is noted
below. We use Rental Revenue internally as a performance measure and incalculating other non-GAAP financial measures (e.g., NOI), which provides
investors with information regarding our performance that is not
immediately apparent from the comparable non-GAAP measures and allows
investors to compare operating performance between periods.
(2) For a detailed discussion of NOI, including the reasons management
believes NOI is useful to investors, see page 49. Residential Net
Operating Income for the three months ended March 31, 2020 and 2019 is
comprised of Residential Revenue of
Expenses of
for the three months ended
Revenue of
respectively, per the Consolidated Statements of Operations.
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Same Property Portfolio Lease Revenue (Excluding Termination Income) Lease revenue from the Same Property Portfolio increased by approximately$27.8 million for the three months endedMarch 31, 2020 compared to 2019. The increase was a result of our average revenue per square foot increasing by approximately$2.32 , contributing approximately$22.4 million , and an approximately$5.4 million increase due to our average occupancy increasing from 93.6% to 94.4%. Upon the adoption of Accounting Standards Codification ("ASC") 842 - Leases, any write-off for bad debt, including accrued rent, will be shown as a reduction to lease revenue. However, the degree to which our tenants' businesses are negatively impacted by COVID-19 could result in a reduction in our cash flows or require that we write-off a tenant's accrued rent balance and this could have a material adverse effect on lease revenue. See Item 1A: "Risk Factors" for additional details. Termination Income Termination income decreased by approximately$4.6 million for the three months endedMarch 31, 2020 compared to 2019. Termination income for the three months endedMarch 31, 2020 related to 15 tenants across the Same Property Portfolio and totaled approximately$2.4 million , which was primarily related to tenants that terminated leases early inNew York City and theBoston region. Termination income for the three months endedMarch 31, 2019 related to 11 tenants across the Same Property Portfolio and totaled approximately$7.0 million , of which approximately$4.9 million is from two tenants that terminated leases early at399 Park Avenue inNew York City . Parking and Other Revenue Parking and other revenue decreased by approximately$0.9 million for the three months endedMarch 31, 2020 compared to 2019, primarily due to a decrease in transient parking. Due to COVID-19, we expect to see a decrease in parking revenue, for fiscal year 2020, as a result of mandatory business closures and "stay-at-home" orders. See Item 1A: "Risk Factors" for additional details. Parking revenue generally consists of two primary components: revenue from monthly passes and hourly/daily parking revenue. During 2019, total parking revenue was approximately$100 million and our share of total parking revenue from unconsolidated joint ventures was approximately$13 million . Approximately$40 million of this aggregate amount of consolidated and unconsolidated parking revenue was derived from hourly/daily parking. In April, with stay-at-home orders and business closures, we generated minimal hourly/daily parking revenue and this trend may continue for as long as these stay-at-home orders and business closures continue. Some of our monthly parking revenues are contractual agreements embedded in our leases, and some are at will individual agreements. Real Estate Operating Expenses Real estate operating expenses from the Same Property Portfolio increased by approximately$6.1 million , or 2.5%, for the three months endedMarch 31, 2020 compared to 2019, due primarily to increases in real estate taxes and other real estate operating expenses of approximately$5.3 million , or 4.2%, and$0.8 million , or 0.7%, respectively. The increase in real estate taxes was primarily experienced in the New York CBD properties. Properties Acquired Portfolio The table below lists the properties acquired betweenJanuary 1, 2019 andMarch 31, 2020 . Rental revenue and real estate operating expenses increased by approximately$3.6 million and$1.5 million , respectively, for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Rental Revenue Real Estate Operating Expenses Name Date acquired Square Feet 2020 2019 Change 2020 2019 Change (dollars in thousands) 880 and 890 Winter Street August 27, 2019 392,568$ 3,553 $ -$ 3,553 $ 1,466 $ -$ 1,466 392,568$ 3,553 $ -$ 3,553 $ 1,466 $ -$ 1,466 51
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Properties Placed In-Service Portfolio The table below lists the properties that were placed in-service or partially placed in-service betweenJanuary 1, 2019 andMarch 31, 2020 . Rental revenue and real estate operating expenses from our Properties Placed In-Service Portfolio increased by approximately$13.4 million and$2.0 million , respectively, for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Quarter Initially Rental Revenue Real Estate Operating Expenses Placed Quarter Fully Name In-Service Placed In-Service Square Feet 2020 2019 Change 2020 2019 Change (dollars in thousands) Second 20 Quarter, CityPoint 2019 N/A 211,000$ 1,849 $ -$ 1,849 $ 588 $ -$ 588 Fourth 145 Quarter, Fourth Quarter, Broadway 2019 2019 488,862 10,910 - 10,910 1,188 - 1,188 17Fifty First Presidents Quarter, First Quarter, Street 2020 2020 275,809 598 - 598 233 - 233 975,671$ 13,357 $ -$ 13,357 $ 2,009 $ -$ 2,009 Properties in Development or Redevelopment Portfolio The table below lists the properties that were in development or redevelopment betweenJanuary 1, 2019 andMarch 31, 2020 . Rental revenue and real estate operating expenses from our Properties in Development or Redevelopment Portfolio decreased by approximately$2.2 million and$0.8 million , respectively, for the three months endedMarch 31, 2020 compared to 2019. Rental Revenue Real Estate Operating Expenses Date Commenced Development / Name Redevelopment Square Feet 2020 2019 Change 2020 2019 Change (dollars in thousands) One Five Nine August 19, East 53rd Street 2016 220,000$ 886 $ 873 $ 13 $ 563 $ 559 $ 4 325 Main Street (1) May 9, 2019 115,000 - 1,200 (1,200 ) 149 493 (344 ) 200 West Street September 30, (2) 2019 261,000 1,268 2,264 (996 ) 843 1,308 (465 ) 596,000$ 2,154 $ 4,337 $ (2,183 ) $ 1,555 $ 2,360 $ (805 ) _______________
(1) Real estate operating expenses for the three months endedMarch 31, 2020 includes approximately$0.1 million of demolition costs.
(2) Rental revenue and real estate operating expenses for the three months
ended
is a conversion of a 126,000 square foot portion of the property to
laboratory space.
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Properties Sold Portfolio The table below lists the properties we sold betweenJanuary 1, 2019 andMarch 31, 2020 . Rental revenue and real estate operating expenses from our Properties Sold Portfolio decreased by approximately$8.9 million and$3.7 million , respectively, for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Rental Revenue Real Estate Operating Expenses Name Date Sold Property Type Square Feet 2020 2019 Change 2020 2019 Change (dollars in thousands) 2600 Tower Oaks Boulevard January 24, 2019 Office 179,000 $ -$ 159 $ (159 ) $ -$ 189 $ (189 ) One Tower Center June 3, 2019 Office 410,000 - 1,205 (1,205 ) - 1,176 (1,176 ) 164 Lexington Road June 28, 2019 Office 64,000 - - - - 43 (43 ) Washingtonian North December 20, 2019 Land N/A - - - - 36 (36 ) 601, 611 and 651 Gateway January 28, 2020 Office 768,000 1,946 7,135 (5,189 ) 881 2,464 (1,583 ) New Dominion Technology Park February 20, 2020 Office 493,000 2,551 4,862 (2,311 ) 772 1,404 (632 ) 1,914,000$ 4,497 $ 13,361 $ (8,864 ) $ 1,653 $ 5,312 $ (3,659 ) For additional information on the sale of the above properties and land parcel refer to "Results of Operations-Other Income and Expense Items - Gains (Losses) on Sales of Real Estate" within "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations." Residential Net Operating Income Net operating income for our residential same properties increased by approximately$2.0 million for the three months endedMarch 31, 2020 compared to 2019. The following reflects our occupancy and rate information for The Lofts atAtlantic Wharf , The Avant atReston Town Center , Signature atReston andProto Kendall Square for the three months endedMarch 31, 2020 and 2019. The Lofts at Atlantic Wharf The Avant at Reston Town Center Signature at Reston
2020 2019 Change (%) 2020 2019 Change (%) 2020 2019 Change (%) 2020 2019 Change (%)
Average Monthly
Rental Rate (1) $ 4,510 $ 4,433 1.7 % $ 2,419 $ 2,352 2.8 % $ 2,342 $ 2,260 3.6 % $ 3,027 $ 2,705 11.9 %
Average Rental
Rate Per
Occupied Square
Foot $ 5.04 $ 4.86 3.7 % $ 2.67 $ 2.57 3.9 % $ 2.51 $ 2.47 1.6 % $ 5.56 $ 5.07 9.7 %
Average Physical
Occupancy (2) 95.0 % 94.6 % 0.4 % 91.5 % 90.3 % 1.3 % 82.2 % 53.3 % 54.2 % 95.5 % 63.5 % 50.4 %
Average Economic
Occupancy (3) 94.3 % 95.0 % (0.7 )% 90.3 % 89.3 % 1.1 % 76.9 % 46.4 % 65.7 % 95.2 % 58.2 % 63.6 %
_______________(1) Average Monthly Rental Rate is calculated as the average of the quotients
obtained by dividing (A) rental revenue as determined in accordance with
GAAP, by (B) the number of occupied units for each month within the
applicable fiscal period.
(2) Average Physical Occupancy is defined as (1) the average number of occupied
units divided by (2) the total number of units, expressed as a percentage.
(3) Average Economic Occupancy is defined as (1) total possible revenue less
vacancy loss divided by (2) total possible revenue, expressed as a
percentage. Total possible revenue is determined by valuing averageoccupied units at contract rates and average vacant units at Market Rents.
Vacancy loss is determined by valuing vacant units at current Market Rents.
By measuring vacant units at their Market Rents, Average Economic Occupancy
takes into account the fact that units of different sizes and locations
within a residential property have different economic impacts on a
residential property's total possible gross revenue. Market Rents used by
us in calculating Economic Occupancy are based on the current market rates
set by the managers of our residential properties based on their experience
in renting their residential property's units and publicly available market
data. Actual market rents and trends in such rents for a region as reported
by others may vary materially from Market Rents used by us. Market Rents
for a period are based on the average Market Rents during that period and
do not reflect any impact for cash concessions.
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Hotel Net Operating Income Net operating income for theBoston Marriott Cambridge hotel property decreased by approximately$1.1 million for the three months endedMarch 31, 2020 compared to 2019. The following reflects our occupancy and rate information for theBoston Marriott Cambridge hotel for the three months endedMarch 31, 2020 and 2019. 2020 2019 Change (%) Occupancy 59.6 % 80.2 % (25.7 )% Average daily rate$ 211.35 $ 221.39 (4.5 )% REVPAR$ 126.00 $ 177.63 (29.1 )% As a result of COVID-19, theBoston Marriott Cambridge was closed inMarch 2020 and is running at a monthly deficit. We do not know when the hotel will re-open and its closure will have a material adverse effect on the hotel's contribution to our results of operations during the closure. See Item 1A: "Risk Factors" for additional details. Other Operating Revenue andExpense Items Development and Management Services Revenue Development and management services revenue decreased by approximately$1.4 million for the three months endedMarch 31, 2020 compared to 2019. Development services revenue decreased by approximately$1.5 million while management services revenue increased by approximately$0.1 million . The decrease in development services revenue was primarily related to a decrease of approximately$2.7 million in development fees and fees associated with tenant improvement projects earned in theBoston region offset by an increase of$0.6 million in development fees earned in theSan Francisco region and an increase of$0.6 million in development fees associated with a tenant improvement project earned in theWashington, DC region. The increase in management services revenue was primarily related to an increase in property management fees earned from theLos Angeles region. General and Administrative Expense General and administrative expense decreased by approximately$5.3 million for the three months endedMarch 31, 2020 compared to 2019 primarily due to a decrease in compensation expense. The decrease in compensation expense was related to an approximately$8.4 million decrease in the value of our deferred compensation plan partially offset by an approximately$3.1 million increase in other compensation expense, which includes the expense associated with our equity compensation programs, which includes the acceleration of amortization that occurred for employees that reached a certain age and number of years of service and therefore became vested in these awards sooner. Wages directly related to the development of rental properties are capitalized and included in real estate assets on our Consolidated Balance Sheets, and amortized over the useful lives of the applicable asset or lease term. Capitalized wages for the three months endedMarch 31, 2020 and 2019 were approximately$2.8 million and$2.9 million , respectively. These costs are not included in the general and administrative expenses discussed above. Transaction Costs Transaction costs increased by approximately$0.2 million for the three months endedMarch 31, 2020 compared to 2019 due primarily to transaction costs related to the pursuit and formation of new joint ventures. In general, transaction costs relating to the formation of new and pending joint ventures and the pursuit of other transactions are expensed as incurred. Depreciation and Amortization Expense Depreciation expense may differ between BXP and BPLP as a result of previously applied acquisition accounting by BXP for the issuance of common stock in connection with non-sponsor OP Unit redemptions by BPLP. This accounting resulted in a step-up of the real estate assets at BXP that was allocated to certain 54
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properties. The difference between the real estate assets of BXP as compared to BPLP for certain properties having an allocation of the real estate step-up will result in a corresponding difference in depreciation expense. For additional information see the Explanatory Note that follows the cover page of this Quarterly Report on Form 10-Q.Boston Properties, Inc. Depreciation and amortization expense increased by approximately$6.5 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Depreciation and Amortization for the three months ended March 31, Portfolio 2020 2019 Change (in thousands) Same Property Portfolio$ 164,216 $ 160,407 $ 3,809 Properties Acquired Portfolio 2,564 - 2,564 Properties Placed in-Service Portfolio 2,959 - 2,959 Properties in Development or Redevelopment Portfolio 468 673 (205 ) Properties Sold Portfolio 887 3,514 (2,627 )$ 171,094 $ 164,594 $ 6,500 Boston Properties Limited Partnership Depreciation and amortization expense increased by approximately$6.6 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Depreciation and Amortization for the three months ended March 31, Portfolio 2020 2019 Change (in thousands) Same Property Portfolio$ 162,407 $ 158,495 $ 3,912 Properties Acquired Portfolio 2,564 - 2,564 Properties Placed in-Service Portfolio 2,959 - 2,959 Properties in Development or Redevelopment Portfolio 468 673 (205 ) Properties Sold Portfolio 887 3,514 (2,627 )$ 169,285 $ 162,682 $ 6,603 Direct Reimbursements of Payroll and Related Costs From Management Services Contracts and Payroll and Related Costs From Management Service Contracts We have determined that amounts reimbursed for payroll and related costs received from third parties in connection with management services contracts should be reflected on a gross basis instead of on a net basis as we have determined that we are the principal under these arrangements. We anticipate that these two financial statement line items will generally offset each other. Other Income and Expense Items Income (Loss) fromUnconsolidated Joint Ventures For the three months endedMarch 31, 2020 compared to 2019, income (loss) from unconsolidated joint ventures decreased by approximately$0.6 million primarily due to the addition of ourGateway Commons joint venture and the partial placing in-service of the Hub50House joint venture inSouth San Francisco, CA andBoston, MA , respectively. These joint ventures reduced our net income by approximately$1.4 million for the three months endedMarch 31, 2020 . AtMarch 31, 2020 , the Hub50House was only 28% leased and is not expected to be stabilized until the first quarter of 2022. The decrease in net income from theGateway Commons joint venture was primarily related to depreciation and amortization. These decreases were offset by an approximately$0.8 million increase related to our share of net income from our other unconsolidated joint ventures. 55
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Gains (Losses) on Sales of Real Estate Gains on sales of real estate may differ between BXP and BPLP as a result of previously applied acquisition accounting by BXP for the issuance of common stock in connection with non-sponsor OP Unit redemptions by BPLP. This accounting resulted in a step-up of the real estate assets at BXP that was allocated to certain properties. The difference between the real estate assets of BXP as compared to BPLP for certain properties having an allocation of the real estate step-up will result in a corresponding difference in the gains on sales of real estate when those properties are sold. For additional information, see the Explanatory Note that follows the cover page of this Quarterly Report on Form 10-Q.Boston Properties, Inc. Gains (losses) on sales of real estate increased by approximately$411.1 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Gain (Loss) on Net Cash Sale of Real Name Date Sold Property Type Square Feet Sale Price Proceeds Estate (dollars in millions) 2020 601, 611 and 651 Gateway January 28, 2020 Office 768,000 $
350.0 $ -
493,000 256.0 254.0 192.3
$ 606.0 $ 254.0 $ 410.0 (2)
2019
2600 Tower OaksBoulevard January 24, 2019 Office 179,000$ 22.7 $ 21.4 $ (0.6 ) (3) ___________
(1) On
own, operate and develop properties at our
in
properties and development rights with an agreed upon value aggregating
approximately
Notes 3 and 5 to the Consolidated Financial Statements).
(2) Excludes approximately $0.1 million of gains on sales of real estate
recognized during the three months ended March 31, 2020 related to gain
amounts from sales of real estate occurring in the prior year.
(3) Excludes approximately $0.3 million of losses on sales of real estate
recognized during the three months ended March 31, 2019 related to loss
amounts from sales of real estate occurring in prior years.
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Boston Properties Limited Partnership Gains (losses) on sales of real estate increased by approximately$420.6 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Gain (Loss) on Net Cash Sale of Real Name Date Sold Property Type Square Feet Sale Price Proceeds Estate (dollars in millions) 2020 601, 611 and 651 Gateway January 28, 2020 Office 768,000 $
350.0 $ -
493,000 256.0 254.0 197.1
$ 606.0 $ 254.0 $ 419.5 (2)
2019
2600 Tower OaksBoulevard January 24, 2019 Office 179,000$ 22.7 $ 21.4 $ (0.6 ) (3) ___________
(1) On
own, operate and develop properties at our
in
properties and development rights with an agreed upon value aggregating
approximately
Notes 3 and 5 to the Consolidated Financial Statements).
(2) Excludes approximately $0.1 million of gains on sales of real estate
recognized during the three months ended March 31, 2020 related to gain
amounts from sales of real estate occurring in the prior year.
(3) Excludes approximately $0.3 million of losses on sales of real estate
recognized during the three months ended March 31, 2019 related to loss
amounts from sales of real estate occurring in prior years.
Interest and Other Income
Interest and other income decreased by approximately $0.7 million for the three
months ended March 31, 2020 compared to 2019 due primarily to a decrease in
interest rates.
Gains (Losses) from Investments in Securities
Gains (losses) from investments in securities for the three months ended
March 31, 2020 and 2019 related to investments that we have made to reduce our
market risk relating to deferred compensation plans that we maintain for BXP's
officers and non-employee directors. Under the deferred compensation plans, each
officer or non-employee director who is eligible to participate is permitted to
defer a portion of the officer's current income or the non-employee director's
compensation on a pre-tax basis and receive a tax-deferred return on these
deferrals based on the performance of specific investments selected by the
officer or non-employee director. In order to reduce our market risk relating to
these plans, we typically acquire, in a separate account that is not restricted
as to its use, similar or identical investments as those selected by each
officer or non-employee director. This enables us to generally match our
liabilities to BXP's officers or non-employee directors under our deferred
compensation plans with equivalent assets and thereby limit our market risk. The
performance of these investments is recorded as gains (losses) from investments
in securities. During the three months ended March 31, 2020 and 2019, we
recognized gains (losses) of approximately $(5.4) million and $3.0 million ,
respectively, on these investments. By comparison, our general and
administrative expense increased (decreased) by approximately $(5.4) million and
$3.0 million during the three months ended March 31, 2020 and 2019,
respectively, as a result of increases (decreases) in our liability under our
deferred compensation plans that was associated with the performance of the
specific investments selected by officers and non-employee directors of BXP
participating in the plans.
Impairment Loss
Impairment loss may differ between BXP and BPLP as a result of previously
applied acquisition accounting by BXP for the issuance of common stock in
connection with non-sponsor OP Unit redemptions by BPLP. This accounting
resulted in a step-up of the real estate assets at BXP that was allocated to
certain properties. The difference between the real estate assets of BXP as
compared to BPLP for certain properties having an allocation
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of the real estate step-up will result in a corresponding difference in depreciation expense. For additional information see the Explanatory Note that follows the cover page of this Quarterly Report on Form 10-Q. AtMarch 31, 2019 , we evaluated the expected hold period of our One Tower Center property located inEast Brunswick, New Jersey and, based on a shorter-than-expected hold period, we reduced the carrying value of the property to its estimated fair value atMarch 31, 2019 and recognized an impairment loss totaling approximately$24.0 million for BXP and approximately$22.3 million for BPLP. Our estimated fair value was based on a pending offer from a third party to acquire the property and the subsequent execution of a purchase and sale agreement onApril 18, 2019 for a gross sale price of approximately$38.0 million . OnJune 3, 2019 , we completed the sale of the property. One Tower Center is an approximately 410,000 net rentable square foot Class A office property. Interest Expense Interest expense increased by approximately$0.6 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Change in interest expense for the three months endedMarch 31, 2020 compared to ComponentMarch 31, 2019 (in thousands)
Increases to interest expense due to:
Issuance of
$ 7,259
Issuance of
5,082
Increase in interest due to finance leases
1,781
Other interest expense (excluding senior notes)
198
Total increases to interest expense
14,320
Decreases to interest expense due to:
Redemption of
(9,865 ) Increase in capitalized interest related to development projects that had finance leases
(1,781 )
Decrease in interest rates for the 2017 Credit Facility
(972 )
Repayment of a bond financing collateralized by New Dominion
Technology
(565 ) Increase in capitalized interest related to development projects
(555 )
Total decreases to interest expense (13,738 )
Total change in interest expense $ 582
Interest expense directly related to the development of rental properties is capitalized and included in real estate assets on our Consolidated Balance Sheets and amortized over the useful lives of the real estate or lease term. As portions of properties are placed in-service, we cease capitalizing interest on that portion and interest is then expensed. Interest capitalized for the three months endedMarch 31, 2020 and 2019 was approximately$14.1 million and$11.8 million , respectively. These costs are not included in the interest expense referenced above. AtMarch 31, 2020 , our outstanding variable rate debt consisted of BPLP's$2.0 billion unsecured revolving credit facility (the "2017 Credit Facility"), which includes the$500.0 million delayed draw term loan facility (the "Delayed Draw Facility") and the$1.5 billion revolving line of credit (the "Revolving Facility"). The Delayed Draw Facility and Revolving Facility had$500.0 million and$250.0 million outstanding as ofMarch 31, 2020 , respectively. For a summary of our consolidated debt as ofMarch 31, 2020 andMarch 31, 2019 refer to the heading "Liquidity and Capital Resources-Capitalization-Debt Financing" within "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations." 58
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OnMay 5, 2020 , BPLP completed a public offering of$1.25 billion in aggregate principal amount of its 3.250% unsecured senior notes due 2031 (See Note 12 to the Consolidated Financial Statements). We used a portion of the net proceeds from this offering for the repayment of borrowings outstanding under the Revolving Facility. Noncontrolling Interests in Property Partnerships Noncontrolling interests in property partnerships increased by approximately$0.7 million for the three months endedMarch 31, 2020 compared to 2019, as detailed below. Noncontrolling Interests in Property Partnerships for the three months ended March 31, Property 2020 2019 Change (in thousands) Salesforce Tower (1) $ -$ 116 $ (116 ) 767 Fifth Avenue (the General Motors Building) (2) 1,660 2,298 (638 ) Times Square Tower 6,869 6,892 (23 ) 601 Lexington Avenue 4,850 4,664 186 100 Federal Street (3) 3,661 2,555 1,106 Atlantic Wharf Office Building 2,446 2,305 141$ 19,486 $ 18,830 $ 656 _______________
(1) On
own 100%.
(2) The decrease was primarily due to a decrease in lease revenue from our
tenants.
(3) The increase was primarily due to an increase in lease revenue from our
tenants.
Noncontrolling Interest-Common Units of the Operating Partnership
For BXP, noncontrolling interest-common units of the Operating Partnership
increased by approximately $45.9 million for the three months ended March 31,
2020 compared to 2019 due primarily to an increase in allocable income, which
was the result of recognizing a greater gain on sales of real estate amount
during 2020 partially offset by a decrease in the noncontrolling interest's
ownership percentage. Due to our ownership structure, there is no corresponding
line item on BPLP's financial statements.
Liquidity and Capital Resources
General
Our principal liquidity needs for the next twelve months and beyond are to:
• fund normal recurring expenses;
• meet debt service and principal repayment obligations;
• fund development/redevelopment costs;
• fund capital expenditures, including major renovations, tenant
improvements and leasing costs;
• fund planned and possible acquisitions of properties, either directly or
indirectly through the acquisition of equity interests therein;
• fund dividend requirements on BXP's Series B Preferred Stock; and
• make the minimum distribution required to enable BXP to maintain its REIT
qualification under the Internal Revenue Code of 1986, as amended.
We expect to satisfy these needs using one or more of the following: • cash flow from operations;
• distribution of cash flows from joint ventures;
• cash and cash equivalent balances;
• BPLP's 2017 Credit Facility and other short-term bridge facilities;
• construction loans;
• long-term secured and unsecured indebtedness (including unsecured
exchangeable indebtedness);
• sales of real estate; and
• issuances of BXP equity securities and/or additional preferred or common
units of partnership interest in BPLP.
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We draw on multiple financing sources to fund our long-term capital needs. Our
current development properties are expected to be primarily funded with our
available cash balances, construction loans and BPLP's Revolving Facility. We
use BPLP's Revolving Facility primarily as a bridge facility to fund acquisition
opportunities, refinance outstanding indebtedness and meet short-term
development and working capital needs. Although we may seek to fund our
development projects with construction loans, which may require guarantees by
BPLP, the financing for each particular project ultimately depends on several
factors, including, among others, the project's size and duration, the extent of
pre-leasing and our available cash and access to cost effective capital at the
given time.
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The following table presents information on properties under construction as of
Financings
Estimated Future
Estimated Estimated Total Equity
Construction Stabilization Estimated Investment to Investment Total Outstanding at Requirement Percentage
Properties Date Location # of Buildings Square Feet Date (1)(2)(3) (1)(2) Available (1) 3/31/2020 (1) (1)(2)(4) Leased (5)
Office
First Quarter,
20 CityPoint 2021 Waltham, MA 1 211,000 $ 77,622 $ 97,000 $ - $ - $ 19,378 63 % (6)
Dock 72 (50% Third Quarter,
ownership) 2021 Brooklyn, NY 1 670,000 201,569 243,150 125,000 90,578 7,159 33 % (7)
Third Quarter,
325 Main Street 2022 Cambridge, MA 1 420,000 110,493 418,400 - - 307,907 90 %
100 Causeway Street Third Quarter,
(50% ownership) 2022 Boston, MA 1 632,000 136,514 267,300 200,000 61,218 - 95 %
7750 Wisconsin Avenue
(Marriott
International
Headquarters) (50% Third Quarter,
ownership) 2022 Bethesda, MD 1 734,000 103,848 198,900 127,500 40,768 8,320 100 %
Fourth
Reston Gateway Quarter, 2023 Reston, VA 2 1,062,000 207,516 715,300 - - 507,784 72 %
2100 Pennsylvania Third Quarter,
Avenue 2024 Washington, DC 1 469,000 76,983 356,100 - - 279,117 61 %
Total Office
Properties under
Construction 8 4,198,000 914,545 2,296,150 452,500 192,564 1,129,665 74 %
Residential
Hub50House (440 units) First Quarter, (50% ownership) 2022Boston, MA 1 320,000 139,938 153,500 90,000 77,685 1,247 41 % (8) The Skylyne (402 First Quarter, units) 2022Oakland, CA 1 324,000 221,806 263,600 - - 41,794 - (9)Total Residential Properties under Construction 2 644,000 361,744 417,100 90,000 77,685 43,041 41 %Redevelopment Properties One Five Nine East 53rd Street (55% Fourth ownership) Quarter, 2020New York, NY - 220,000 131,712 150,000 - - 18,288 96 % (10) Fourth200 West Street Quarter, 2021Waltham, MA - 126,000 5,120 47,800 - - 42,680 - % (11)Total Redevelopment Properties under Construction - 346,000 136,832 197,800 - - 60,968 61 %Total Properties under Construction and Redevelopment 10 5,188,000$ 1,413,121 $ 2,911,050 $ 542,500 $ 270,249 $ 1,233,674 73 % (12) ___________ (1) Represents our share.
(2) Investment to Date, Estimated Total Investment and Estimated Future Equity
Requirement all include our share of acquisition expenses, as applicable,
and reflect our share of the estimated net revenue/expenses that we expect
to incur prior to stabilization of the project, including any amounts
actually received or paid through March 31, 2020 .
(3) Includes approximately
costs and leasing commissions.
(4) Excludes approximately
costs and leasing commissions.
(5) Represents percentage leased as of May 5, 2020 , including leases with
future commencement dates.
(6) This property is 65% placed in-service as of
(7) This property is 34% placed in-service as of
(8) This property is 81% placed in-service as of
(9) This development is subject to a 99-year ground lease (including extension
options) with an option to purchase in the future.
(10) Represents the low-rise portion of
(11) Represents a portion of the property under redevelopment for conversion to
laboratory space.
(12) Percentage leased excludes residential units.
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Lease revenue (which includes recoveries from tenants), other income from operations, available cash balances, mortgage financings and draws on BPLP's Revolving Facility are the principal sources of capital that we use to fund operating expenses, debt service, maintenance and repositioning capital expenditures, tenant improvements and the minimum distribution required to enable BXP to maintain its REIT qualification. We seek to maximize income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our sources of revenue also include third-party fees generated by our property management, leasing and development and construction businesses, as well as the sale of assets from time to time. We believe these sources of capital will continue to provide the funds necessary for our short-term liquidity needs, including our properties under development and redevelopment. Material adverse changes in one or more sources of capital, including from the impacts of COVID-19, may adversely affect our net cash flows. For example, we may experience a decrease in cash rent collections resulting from restrictions implemented to limit the spread of COVID-19, including delays in tenant improvements and decreases in parking and hotel revenue. In turn, these changes could adversely affect our ability to fund operating expenses, dividends and distributions, debt service payments, maintenance and repositioning capital expenditures and tenant improvements. In addition, a material adverse change in the cash provided by our operations may affect our ability to comply with the financial covenants under BPLP's 2017 Credit Facility and unsecured senior notes. Our primary uses of capital will be the completion of our current and committed development and redevelopment projects. As ofMarch 31, 2020 , our share of the remaining development and redevelopment costs that we expect to fund through 2024 is approximately$1.2 billion . As ofMay 5, 2020 , we have approximately$1.6 billion of cash and cash equivalents, of which approximately$124 million is attributable to our consolidated joint venture partners, as well as approximately$151 million held in escrow for 1031 exchanges. Our cash and cash equivalents balance includes the proceeds from BPLP's issuance of$1.25 billion of 3.250% unsecured senior notes due 2031, which generated net proceeds of approximately$1.24 billion . We used$250.0 million of the net proceeds from this offering for the repayment of borrowings outstanding under the Revolving Facility. In addition, during the first quarter of 2020, we enhanced our liquidity with the sale of ourNew Dominion Technology Park property located inHerndon, Virginia , which generated net cash proceeds of approximately$254 million . Although the full extent to which COVID-19 impacts our liquidity and capital resources will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, we believe that our strong liquidity, including, as ofMay 5, 2020 , the approximately$1.5 billion available under the Revolving Facility, and proceeds from debt financings and asset sales will provide sufficient liquidity to fund our remaining capital requirements on existing development and redevelopment projects, fund pending new developments and still be able to act opportunistically on attractive investment opportunities. We have not sold any shares under BXP's$600.0 million at the market (ATM) program and intend to renew the program prior to its expiration inJune 2020 . We may seek to enhance our liquidity to provide sufficient capacity to fund our remaining capital requirements on existing development/redevelopment projects, fund our foreseeable potential development activity, pursue additional attractive investment opportunities and refinance or repay indebtedness. Our unconsolidated joint ventures have approximately$498.8 million of debt maturing in 2020, of which our share is approximately$202.5 million . We have no debt maturing until BPLP's$850 million of 4.125% senior unsecured notes mature inMay 2021 , and we intend to continue to evaluate the costs associated with an early refinancing or redemption of all or a portion of this maturity. Depending on interest rates and overall conditions in the debt and equity markets, we may decide to access either or both of these markets in advance of the need for the funds. Doing so may result in us carrying additional cash and cash equivalents pending BPLP's use of the proceeds, which would increase our net interest expense and be dilutive to our earnings. REIT Tax Distribution Considerations Dividend BXP as a REIT is subject to a number of organizational and operational requirements, including a requirement that BXP currently distribute at least 90% of its annual taxable income (excluding capital gains and with certain other adjustments). Our policy is for BXP to distribute at least 100% of its taxable income, including capital gains, to avoid paying federal tax. OnDecember 17, 2019 , the Board of Directors of BXP increased our regular quarterly 62
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dividend from$0.95 per common share to$0.98 per common share, or 3%, beginning with the fourth quarter of 2019. Common and LTIP unitholders of limited partnership interest in BPLP, received the same total distribution per unit. BXP's Board of Directors will continue to evaluate BXP's dividend rate in light of our actual and projected taxable income, liquidity requirements and other circumstances, including the impact of COVID-19, and there can be no assurance that the future dividends declared by BXP's Board of Directors will not differ materially from the current quarterly dividend amount. Sales To the extent that we sell assets at a gain and cannot efficiently use the proceeds in a tax deferred manner for either our development activities or attractive acquisitions, BXP would, at the appropriate time, decide whether it is better to declare a special dividend, adopt a stock repurchase program, reduce indebtedness or retain the cash for future investment opportunities. Such a decision will depend on many factors including, among others, the timing, availability and terms of development and acquisition opportunities, our then-current and anticipated leverage, the cost and availability of capital from other sources, the price of BXP's common stock and REIT distribution requirements. At a minimum, we expect that BXP would distribute at least that amount of proceeds necessary for BXP to avoid paying corporate level tax on the applicable gains realized from any asset sales. From time to time in selected cases, whether due to a change in use, structuring issues to comply with applicable REIT regulations or other reasons, we may sell an asset that is held by a taxable REIT subsidiary ("TRS"). Such a sale by a TRS would be subject to federal and local taxes. Cash Flow Summary The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. Cash and cash equivalents and cash held in escrows aggregated approximately$858.6 million and$432.3 million atMarch 31, 2020 and 2019, respectively, representing an increase of approximately$426.3 million . The following table sets forth changes in cash flows: Three months ended March 31, Increase 2020 2019 (Decrease) (in thousands)
Net cash provided by operating activities
$ (32,037 ) Net cash used in investing activities (73,793 ) (223,515 )
149,722
Net cash provided by (used in) financing activities 65,288 (190,612 )
255,900
Our principal source of cash flow is related to the operation of our properties. The weighted-average term of our in-place tenant leases, including our unconsolidated joint ventures, is approximately 8.3 years with occupancy rates historically in the range of 90% to 94%. Generally, our properties generate a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund regular quarterly dividend and distribution payment requirements. In addition, over the past several years, we have raised capital through the sale of some of our properties and through secured and unsecured borrowings. The full extent of the impact of COVID-19 on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. In addition, we cannot predict the impact that COVID-19 will have on our tenants, employees, contractors, lenders, suppliers, vendors and joint venture partners; any material effect on these parties could also have a material adverse effect on us. See Item 1A: "Risk Factors" for additional details. Cash is used in investing activities to fund acquisitions, development, net investments in unconsolidated joint ventures and maintenance and repositioning capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings to enhance or maintain their market position. Cash used in investing activities for the three months endedMarch 31, 2020 consisted primarily of development projects, building and tenant improvements and capital contributions to unconsolidated joint ventures, partially offset by the proceeds from the sales of real estate. Cash 63
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used in investing activities for the three months endedMarch 31, 2019 consisted primarily of the acquisition of real estate, development projects, building and tenant improvements and capital contributions to unconsolidated joint ventures, partially offset by the proceeds from the sale or real estate, as detailed below: Three months ended March 31, 2020 2019 (in thousands) Acquisition of real estate (1) $ -$ (43,061 ) Construction in progress (2) (143,160 ) (85,632 ) Building and other capital improvements (39,154 ) (32,719 ) Tenant improvements (64,172 ) (54,242 ) Proceeds from sales of real estate (3) 259,489 20,019
Capital contributions to unconsolidated joint ventures (4) (89,997 )
(26,995 )
Investments in securities, net 3,201 (885 )
Net cash used in investing activities $ (73,793 ) Cash used in investing activities changed primarily due to the following:
(1) OnJanuary 10, 2019 , we acquired land parcels at our Carnegie Center property located inPrinceton, New Jersey for a gross purchase price of approximately$51.5 million , which includes an aggregate of approximately$8.6 million of additional amounts that are payable in the
future to the seller upon the development or sale of each of the parcels.
The land parcels will support approximately 1.7 million square feet of
development.
(2) Construction in progress for the three months ended March 31, 2020
includes ongoing expenditures associated with 17Fifty
which was completed and placed in-service during the three months ended
during the year ended December 31, 2019 . In addition, we incurred costs
associated with our continued development/redevelopment of One Five Nine
East 53rd Street , Reston Gateway, 2100 Pennsylvania Avenue , 200 West
Street , The Skylyne and 325 Main Street .
Construction in progress for the three months ended March 31, 2019 includes
ongoing expenditures associated with Salesforce Tower , which was placed
in-service during the year ended December 31, 2018 . In addition, we incurred
costs associated with our continued development/redevelopment of One Five Nine
East 53rd Street , 145 Broadway , 20 CityPoint, 17Fifty Presidents Street , Reston
Gateway and The Skylyne.
(3) On February 20, 2020 , we completed the sale of New Dominion Technology
Park located in
million. Net cash proceeds totaled approximately
in a gain on sale of real estate totaling approximately
BXP and approximately
Park is comprised of two Class A office properties aggregating
approximately 493,000 net rentable square feet.
OnJanuary 24, 2019 , we completed the sale of our2600 Tower Oaks Boulevard property located inRockville, Maryland for a gross sale price of approximately$22.7 million . Net cash proceeds totaled approximately$21.4 million , resulting in a loss on sale of real estate totaling approximately$0.6 million .2600 Tower Oaks Boulevard is an approximately 179,000 net rentable square foot Class A office property. (4) Capital contributions to unconsolidated joint ventures for the three
months ended
approximately
Platform 16,
respectively.
Capital contributions to unconsolidated joint ventures for the three months endedMarch 31, 2019 consisted primarily of cash contributions of approximately$23.3 million to our100 Causeway Street joint venture. Cash provided by financing activities for the three months endedMarch 31, 2020 totaled approximately$65.3 million . This consisted primarily of the proceeds from borrowing under the Revolving Facility, partially offset by the payment of our regular dividends and distributions to our shareholders and unitholders. Future debt payments are discussed below under the heading "Capitalization-Debt Financing." 64
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Capitalization
The following table presents Consolidated Market Capitalization and BXP's Share
of Market Capitalization, as well as the corresponding ratios of Consolidated
Debt to Consolidated Market Capitalization and BXP's Share of Debt to BXP's
Share of Market Capitalization (in thousands except for percentages):
March 31, 2020
Shares /
Units Common Stock Equivalent
Outstanding Equivalent Value (1)
Common Stock 155,315 155,315 $ 14,324,702
Common Operating Partnership Units 17,765 17,765 1,638,466 (2)
5.25% Series B Cumulative Redeemable
Preferred Stock 80 - 200,000
Total Equity 173,080 $ 16,163,168
Consolidated Debt $ 12,061,224
Add:
BXP's share of unconsolidated joint
venture debt (3) 1,027,547
Subtract:
Partners' share of Consolidated Debt (4) (1,198,575 ) BXP's Share of Debt
Consolidated Market Capitalization$ 28,224,392 BXP's Share of Market Capitalization$ 28,053,364 Consolidated Debt/Consolidated Market Capitalization 42.73 % BXP's Share of Debt/BXP's Share of Market Capitalization
42.38 %
_______________
(1) Except for the Series B Cumulative Redeemable Preferred Stock, which is
valued at the liquidation preference of $2,500 per share, values are based
on the closing price per share of BXP's Common Stock on the New York Stock
Exchange on March 31, 2020 of $92.23 .
(2) Includes long-term incentive plan units (including 2012 OPP Units and 2013
- 2017 MYLTIP Units), but excludes MYLTIP Units granted between 2018 and
2020.
(3) See page 70 for additional information.
(4) See page 69 for additional information.
Consolidated Debt to Consolidated Market Capitalization Ratio is a measure of leverage commonly used by analysts in the REIT sector. We present this measure as a percentage and it is calculated by dividing (A) our consolidated debt by (B) our consolidated market capitalization, which is the market value of our outstanding equity securities plus our consolidated debt. Consolidated market capitalization is the sum of: (1) our consolidated debt; plus (2) the product of (x) the closing price per share of BXP common stock onMarch 31, 2020 , as reported by theNew York Stock Exchange , multiplied by (y) the sum of: (i) the number of outstanding shares of common stock of BXP, (ii) the number of outstanding OP Units in BPLP (excluding OP Units held by BXP), (iii) the number of OP Units issuable upon conversion of all outstanding LTIP Units, assuming all conditions have been met for the conversion of the LTIP Units, and (iv) the number of OP Units issuable upon conversion of 2012 OPP Units, 2013 - 2017 MYLTIP Units that were issued in the form of LTIP Units; plus
(3) the aggregate liquidation preference (
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The calculation of consolidated market capitalization does not include LTIP Units issued in the form of MYLTIP Awards unless and until certain performance thresholds are achieved and they are earned. Because their three-year performance periods have not yet ended, 2018 - 2020 MYLTIP Units are not included in this calculation as ofMarch 31, 2020 . We also present BXP's Share of Market Capitalization and BXP's Share of Debt/BXP's Share of Market Capitalization, which are calculated in the same manner, except that BXP's Share of Debt is utilized instead of our consolidated debt in both the numerator and the denominator. BXP's Share of Debt is defined as our consolidated debt plus our share of debt from our unconsolidated joint ventures (calculated based upon our ownership percentage), minus our partners' share of debt from our consolidated joint ventures (calculated based upon the partners' percentage ownership interests adjusted for basis differentials). Management believes that BXP's Share of Debt provides useful information to investors regarding our financial condition because it includes our share of debt from unconsolidated joint ventures and excludes our partners' share of debt from consolidated joint ventures, in each case presented on the same basis. We have several significant joint ventures and presenting various measures of financial condition in this manner can help investors better understand our financial condition and/or results of operations after taking into account our economic interest in these joint ventures. We caution investors that the ownership percentages used in calculating BXP's Share of Debt may not completely and accurately depict all of the legal and economic implications of holding an interest in a consolidated or unconsolidated joint venture. For example, in addition to partners' interests in profits and capital, venture agreements vary in the allocation of rights regarding decision making (both for routine and major decisions), distributions, transferability of interests, financing and guarantees, liquidations and other matters. Moreover, in some cases we exercise significant influence over, but do not control, the joint venture in which case GAAP requires that we account for the joint venture entity using the equity method of accounting and we do not consolidate it for financial reporting purposes. In other cases, GAAP requires that we consolidate the venture even though our partner(s) own(s) a significant percentage interest. As a result, management believes that the presentation of BXP's Share of a financial measure should not be considered a substitute for, and should only be considered with and as a supplement to our financial information presented in accordance with GAAP. We present these supplemental ratios because our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes and because different investors and lenders consider one or both of these ratios. Investors should understand that these ratios are, in part, a function of the market price of the common stock of BXP and as such will fluctuate with changes in such price, and they do not necessarily reflect our capacity to incur additional debt to finance our activities or our ability to manage our existing debt obligations. However, for a company like BXP, whose assets are primarily income-producing real estate, these ratios may provide investors with an alternate indication of leverage, so long as they are evaluated along with the ratio of indebtedness to other measures of asset value used by financial analysts and other financial ratios, as well as the various components of our outstanding indebtedness. For a discussion of our unconsolidated joint venture indebtedness, see "Liquidity and Capital Resources-Capitalization-Off-Balance Sheet Arrangements-Joint Venture Indebtedness" within "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" and for a discussion of our consolidated joint venture indebtedness see "Liquidity and Capital Resources-Capitalization-Mortgage Notes Payable, Net" within "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations." Debt Financing As ofMarch 31, 2020 , we had approximately$12.1 billion of outstanding consolidated indebtedness, representing approximately 42.73% of our Consolidated Market Capitalization as calculated above consisting of approximately (1)$8.4 billion (net of discount and deferred financing fees) in publicly traded unsecured senior notes having a GAAP weighted-average interest rate of 3.76% per annum and maturities in 2021 through 2030 (See Note 12 to the Consolidated Financial Statements), (2)$2.9 billion (net of deferred financing fees) of property-specific mortgage debt having a GAAP weighted-average interest rate of 3.90% per annum and weighted-average term of 6.1 years and (3)$749.1 million (net of deferred financing fees) outstanding under BPLP's 2017 Credit Facility that matures onApril 24, 2022 . 66
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The table below summarizes the aggregate carrying value of our mortgage notes payable and BPLP's unsecured senior notes, line of credit and term loan, as well as Consolidated Debt Financing Statistics atMarch 31, 2020 andMarch 31, 2019 . March 31, 2020 2019 (dollars in thousands) Debt Summary: Balance Fixed rate mortgage notes payable, net$ 2,919,157 $ 2,959,908 Unsecured senior notes, net 8,393,009 7,547,043 Unsecured line of credit 250,000 - Unsecured term loan, net 499,058 498,607 Consolidated Debt 12,061,224 11,005,558 Add:
BXP's share of unconsolidated joint venture debt, net (1)
1,027,547 919,217
Subtract:
Partners' share of consolidated mortgage notes payable, net (2) (1,198,575 ) (1,203,572 ) BXP's Share of Debt$ 11,890,196 $ 10,721,203 March 31, 2020 2019 Consolidated Debt Financing Statistics: Percent of total debt: Fixed rate 93.79 % 95.47 % Variable rate 6.21 % 4.53 % Total 100.00 % 100.00 % GAAP Weighted-average interest rate at end of period: Fixed rate 3.80 % 4.01 % Variable rate 2.16 % 3.49 % Total 3.70 % 3.99 % Coupon/Stated Weighted-average interest rate at end of period: Fixed rate 3.69 % 3.91 % Variable rate 2.07 % 3.40 % Total 3.59 % 3.88 % Weighted-average maturity at end of period (in years): Fixed rate 5.8 5.9 Variable rate 2.1 3.1 Total 5.6 5.7 _______________
(1) See page 70 for additional information.
(2) See page 69 for additional information.
Unsecured Credit Facility OnApril 24, 2017 , BPLP entered into the 2017 Credit Facility. Among other things, the 2017 Credit Facility (1) increased the total commitment of the Revolving Facility from$1.0 billion to$1.5 billion , (2) extended the maturity date fromJuly 26, 2018 toApril 24, 2022 , (3) reduced the per annum variable interest rates, and (4) added a$500.0 million Delayed Draw Facility that permitted BPLP to draw until the first anniversary of the closing date. Based on BPLP's current credit rating, (1) the applicable Eurocurrency margins for the Revolving Facility and Delayed Draw Facility are 82.5 basis points and 90 basis points, respectively, and (2) the facility fee on the Revolving Facility commitment is 0.125% per annum. 67
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OnApril 24, 2018 , BPLP exercised its option to draw$500.0 million on its Delayed Draw Facility. The Delayed Draw Facility bears interest at a variable rate equal to LIBOR plus 0.90% per annum based on BPLP'sMarch 31, 2020 credit rating and matures onApril 24, 2022 . As ofMarch 31, 2020 , BPLP had$500.0 million of borrowings outstanding under its Delayed Draw Facility,$250.0 million borrowings under its Revolving Facility and letters of credit totaling approximately$2.5 million outstanding with the ability to borrow approximately$1.2 billion under the Revolving Facility. As ofMay 5, 2020 , BPLP had$500.0 million of borrowings outstanding under its Delayed Draw Facility, no borrowings under its Revolving Facility and letters of credit totaling approximately$2.5 million outstanding with the ability to borrow approximately$1.5 billion under the Revolving Facility. Unsecured Senior Notes, Net The following summarizes BPLP's outstanding unsecured senior notes as ofMarch 31, 2020 (dollars in thousands) (See Note 12 to the Consolidated Financial Statements): Coupon/ Effective Principal Stated Rate Rate(1) Amount Maturity Date(2) 10 Year Unsecured Senior Notes 4.125 % 4.289 %$ 850,000 May 15, 2021 11 Year Unsecured Senior Notes 3.850 % 3.954 % 1,000,000 February 1, 2023 10.5 Year Unsecured Senior Notes 3.125 % 3.279 % 500,000 September 1, 2023 10.5 Year Unsecured Senior Notes 3.800 % 3.916 % 700,000 February 1, 2024 7 Year Unsecured Senior Notes 3.200 % 3.350 % 850,000 January 15, 2025 10 Year Unsecured Senior Notes 3.650 % 3.766 % 1,000,000 February 1, 2026 10 Year Unsecured Senior Notes 2.750 % 3.495 % 1,000,000 October 1, 2026 10 Year Unsecured Senior Notes 4.500 % 4.628 % 1,000,000 December 1, 2028 10 Year Unsecured Senior Notes 3.400 % 3.505 % 850,000 June 21, 2029 10.5 Year Unsecured Senior Notes 2.900 % 2.984 % 700,000 March 15, 2030 Total principal 8,450,000 Net unamortized discount (16,663 ) Deferred financing costs, net (40,328 ) Total$ 8,393,009 _______________
(1) Yield on issuance date including the effects of discounts on the notes,
settlements of interest rate contracts and the amortization of financing
costs.
(2) No principal amounts are due prior to maturity.
The indenture relating to the unsecured senior notes contains certain financial restrictions and requirements, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of greater than 1.50, and (4) an unencumbered asset value of not less than 150% of unsecured debt. AtMarch 31, 2020 , BPLP was in compliance with each of these financial restrictions and requirements. 68
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Mortgage Notes Payable, Net
The following represents the outstanding principal balances due under the
mortgage notes payable at
Stated Deferred
Stated GAAP Principal Financing Costs, Carrying Amount
Properties Interest Rate Interest Rate (1) Amount Net Carrying Amount (Partners' Share) Maturity Date
(dollars in thousands)
Wholly-owned
University Place 6.94 % 6.99 % $ 3,106 $ (17 ) $ 3,089 N/A August 1, 2021
Consolidated Joint Ventures
767 Fifth Avenue (the
General Motors Building) 3.43 % 3.64 % 2,300,000 (25,099 ) 2,274,901 $ 910,050 (2)(3)(4) June 9, 2027
601 Lexington Avenue 4.75 % 4.79 % 641,836 (669 ) 641,167 288,525 (5) April 10, 2022
2,941,836 (25,768 ) 2,916,068 1,198,575
Total $ 2,944,942 $ (25,785 ) $ 2,919,157 $ 1,198,575
_______________
(1) GAAP interest rate differs from the stated interest rate due to the
inclusion of the amortization of financing charges and the effects of
hedging transactions (if any).
(2) The mortgage loan requires interest only payments with a balloon payment
due at maturity.
(3) This property is owned by a consolidated entity in which we have a 60%interest. The partners' share of the carrying amount has been adjusted for
basis differentials.
(4) In connection with the refinancing of the loan, we guaranteed the
consolidated entity's obligation to fund various reserves for tenant
improvement costs and allowances, leasing commissions and free rent
obligations in lieu of cash deposits. As of
funding obligation under the guarantee was approximately
earn a fee from the joint venture for providing the guarantee and have an
agreement with our partners to reimburse the joint venture for their share
of any payments made under the guarantee (See Note 6 to the Consolidated
Financial Statements).
(5) This property is owned by a consolidated entity in which we have a 55%
interest.
Off-Balance Sheet Arrangements-Joint Venture Indebtedness
We have investments in unconsolidated joint ventures with our effective
ownership interests ranging from 20% to 60%. Fourteen of these ventures have
mortgage indebtedness. We exercise significant influence over, but do not
control, these entities. As a result, we account for them using the equity
method of accounting. See also Note 5 to the Consolidated Financial Statements.
At March 31, 2020 , the aggregate carrying amount of debt, including both our and
our partners' share, incurred by these ventures was approximately $2.3 billion
(of which our proportionate share is approximately $1.0 billion ). The table
below summarizes the outstanding debt of these joint venture properties at
March 31, 2020 . In addition to other guarantees specifically noted in the table,
we have agreed to customary environmental indemnifications and nonrecourse
carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) as
well as the completion of development projects on certain of the loans.
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Stated Stated Deferred
Interest GAAP Interest Principal Financing Costs, Carrying Amount
Properties Nominal % Ownership Rate Rate (1) Amount Net Carrying Amount (Our share) Maturity Date
(dollars in thousands)
Santa Monica
Business Park 55 % 4.06 % 4.24 % $ 300,000 $ (2,786 ) $ 297,214 $ 163,468 (2)(3) July 19, 2025
Market Square
North 50 % 4.85 % 4.91 % 115,529 (42 ) 115,487 57,743 October 1, 2020
Annapolis
Junction
Building Six 50 % 3.41 % 3.56 % 12,401 (14 ) 12,387 6,193 (4) November 17, 2020
Annapolis
Junction
Building
Seven and
Eight 50 % 4.02 % 4.17 % 34,630 (26 ) 34,604 17,302 (5) June 30, 2020
1265 Main
Street 50 % 3.77 % 3.84 % 37,957 (327 ) 37,630 18,815 January 1, 2032
Colorado
Center 50 % 3.56 % 3.58 % 550,000 (757 ) 549,243 274,622 (2) August 9, 2027
Dock 72 50 % 3.65 % 4.79 % 181,156 (2,576 ) 178,580 89,290 (2)(6) December 18, 2020
The Hub on
Causeway -
Podium 50 % 3.59 % 4.08 % 173,408 (1,460 ) 171,948 85,974 (2)(7) September 6, 2021
Hub50House 50 % 3.35 % 3.63 % 155,370 (1,062 ) 154,308 77,154 (2)(8) April 19, 2022
100 Causeway
Street 50 % 3.15 % 3.36 % 122,435 (2,894 ) 119,541 59,770 (2)(9) September 5, 2023
7750
Wisconsin
Avenue
(Marriott
International
Headquarters) 50 % 2.69 % 3.24 % 81,535 (4,293 ) 77,242 38,621 (2)(10) April 26, 2023
500 North
Capitol
Street, NW 30 % 4.15 % 4.20 % 105,000 (187 ) 104,813 31,444 (2) June 6, 2023
901 New York
Avenue 25 % 3.61 % 3.69 % 224,304 (849 ) 223,455 55,864 January 5, 2025
3 Hudson
Boulevard 25 % 4.97 % 5.05 % 80,000 (209 ) 79,791 19,948 (2)(11) July 13, 2023
Metropolitan
Square 20 % 5.75 % 5.81 % 156,701 (6 ) 156,695 31,339 (12) May 5, 2020
Total $ 2,330,426 $ (17,488 ) $ 2,312,938 $ 1,027,547 _______________
(1) GAAP interest rate differs from the stated interest rate due to the
inclusion of the amortization of financing charges, which includes
mortgage recording fees.
(2) The loan requires interest only payments with a balloon payment due at
maturity.
(3) The loan bears interest at a variable rate equal to LIBOR plus 1.28% per
annum and matures on
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.
(4) The loan bears interest at a variable rate equal to LIBOR plus 2.00% per
annum and matures on November 17, 2020 .
(5) The loan bears interest at a variable rate equal to LIBOR plus 2.35% per
annum and matures on June 30, 2020 .
(6) The construction financing has a borrowing capacity of
construction financing bears interest at a variable rate equal to LIBOR
plus 2.25% per annum and matures on
extension options, subject to certain conditions.
(7) The construction financing had a borrowing capacity of
principal balance in the amount of approximately
the borrowing capacity to $175.8 million . The construction financing bears
interest at a variable rate equal to LIBOR plus 2.25% per annum and
matures on September 6, 2021 , with two, one-year extension options,
subject to certain conditions.
(8) The construction financing has a borrowing capacity of
construction financing bears interest at a variable rate equal to LIBOR
plus 2.00% per annum and matures on
extension options, subject to certain conditions.
(9) The construction financing has a borrowing capacity of
construction financing bears interest at a variable rate equal to LIBOR
plus 1.50% per annum (LIBOR plus 1.375% per annum upon stabilization, as
defined in the loan agreement) and matures on
one-year extension options, subject to certain conditions.
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(10) The construction financing has a borrowing capacity of
construction financing bears interest at a variable rate equal to LIBOR
plus 1.25% per annum and matures on
extension options, subject to certain conditions.
(11) We provided
loan bears interest at a variable rate equal to LIBOR plus 3.50% per annum
and matures on
conditions. The loan has been reflected as Related Party Note Receivable,
Net on our Consolidated Balance Sheets.
(12) On
State and Local Tax Matters Because BXP is organized and qualifies as a REIT, it is generally not subject to federal income taxes, but is subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits or other inquiries. Although we believe that we have substantial arguments in favor of our position in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations. Insurance For information concerning our insurance program, see Note 6 to the Consolidated Financial Statements. Funds from Operations Pursuant to the revised definition of Funds from Operations adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts ("Nareit"), we calculate Funds from Operations, or "FFO," for each of BXP and BPLP by adjusting net income (loss) attributable toBoston Properties, Inc. common shareholders and net income (loss) attributable toBoston Properties Limited Partnership common unitholders (computed in accordance with GAAP), respectively, 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 our share of real estate-related depreciation and amortization. FFO is a non-GAAP financial measure. 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 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 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. We believe that in order to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with net income attributable toBoston Properties, Inc. common shareholders and net income attributable toBoston Properties Limited Partnership as presented in our Consolidated Financial Statements. FFO should not be considered as a substitute for net income attributable toBoston Properties, Inc. common shareholders or net income attributable toBoston Properties Limited Partnership common unitholders (determined in accordance with GAAP) or any other GAAP financial measures and should only be considered together with and as a supplement to our financial information prepared in accordance with GAAP. 71
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Boston Properties, Inc. The following table presents a reconciliation of net income attributable toBoston Properties, Inc. common shareholders to FFO attributable toBoston Properties, Inc. common shareholders for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 (in thousands) Net income attributable toBoston Properties, Inc. common shareholders$ 497,496 $ 98,105 Add: Preferred dividends 2,625 2,625
Noncontrolling interest-common units of the
57,539 11,599
Noncontrolling interests in property partnerships 19,486 18,830
Net income 577,146 131,159
Add:
Depreciation and amortization 171,094 164,594Noncontrolling interests in property partnerships' share of depreciation and amortization
(17,627 ) (18,002 )
BXP's share of depreciation and amortization from
unconsolidated joint ventures 18,332 15,470
Corporate-related depreciation and amortization (469 ) (395 )
Impairment loss - 24,038
Less:
Gains (losses) on sales of real estate 410,165 (905 ) Noncontrolling interests in property partnerships 19,486 18,830 Preferred dividends 2,625 2,625
Funds from Operations (FFO) attributable to the
316,200 296,314
Less:
Noncontrolling interest-common units of the
32,138 30,307
Funds from Operations attributable to
$ 284,062 $ 266,007 Our percentage share of Funds from Operations-basic 89.84 % 89.77 % Weighted average shares outstanding-basic 155,011 154,525 72
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Reconciliation to Diluted Funds from Operations:
Three months ended March 31,
2020 2019
Income Shares/Units Income Shares/Units
(Numerator) (Denominator) (Numerator) (Denominator)
(in thousands)
Basic Funds from Operations$ 316,200 172,549$ 296,314 172,131 Effect ofDilutive Securities : Stock based compensation - 247 - 319 Diluted Funds from Operations$ 316,200 172,796$ 296,314 172,450 Less: Noncontrolling interest-common units of theOperating Partnership's share of diluted Funds from Operations 32,092 17,538 30,251 17,606 Diluted Funds from Operations attributable toBoston Properties, Inc. (1)$ 284,108 155,258$ 266,063 154,844 _______________
(1) BXP's share of diluted Funds from Operations was 89.85% and 89.79% for the
three months ended March 31, 2020 and 2019, respectively.
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Boston Properties Limited Partnership The following table presents a reconciliation of net income attributable toBoston Properties Limited Partnership common unitholders to FFO attributable toBoston Properties Limited Partnership common unitholders for the three months endedMarch 31, 2020 and 2019: Three months endedMarch 31, 2020 2019 (in thousands)
Net income attributable to
$ 566,333 $ 113,382 Add: Preferred distributions 2,625 2,625 Noncontrolling interests in property partnerships 19,486 18,830 Net income 588,444 134,837 Add: Depreciation and amortization 169,285 162,682
Noncontrolling interests in property partnerships' share of depreciation and amortization
(17,627 ) (18,002 )
BPLP's share of depreciation and amortization from unconsolidated joint ventures
18,332 15,470
Corporate-related depreciation and amortization (469 ) (395 )
Impairment loss - 22,272
Less:
Gains (losses) on sales of real estate 419,654 (905 ) Noncontrolling interests in property partnerships 19,486 18,830 Preferred distributions 2,625 2,625
Funds from operations attributable to
$ 316,200 $ 296,314 Weighted average units outstanding-basic 172,549 172,131
_______________
(1) Our calculation includes OP Units and vested LTIP Units (including vested
2012 OPP Units and vested 2013 - 2017 MYLTIP Units).
Reconciliation to Diluted Funds from Operations:
Three months ended March 31,
2020 2019
Income Shares/Units Income Shares/Units
(Numerator) (Denominator) (Numerator) (Denominator)
(in thousands)
Basic Funds from Operations$ 316,200 172,549$ 296,314 172,131 Effect ofDilutive Securities : Stock based compensation - 247 - 319 Diluted Funds from Operations$ 316,200 172,796$ 296,314 172,450 Contractual Obligations We have various service contracts with vendors related to our property management. In addition, we have certain other contracts we enter into in the ordinary course of business that may extend beyond one year. These contracts include terms that provide for cancellation with insignificant or no cancellation penalties. Contract terms are generally between three and five years. 74
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During the three months endedMarch 31, 2020 , we paid approximately$81.9 million to fund tenant-related obligations, including tenant improvements and leasing commissions. In addition, during the three months endedMarch 31, 2020 , we and our unconsolidated joint venture partners incurred approximately$36 million of new tenant-related obligations associated with approximately 702,000 square feet of second generation leases, or approximately$52 per square foot. We did not sign any first generation leases. The tenant-related obligations for the development properties are included within the projects' "Estimated Total Investment" referred to in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." ITEM 3-Quantitative and Qualitative Disclosures about Market Risk. The following table presents the aggregate carrying value of our mortgage notes payable, net, unsecured senior notes, net, unsecured line of credit, unsecured term loan, net and our corresponding estimate of fair value as ofMarch 31, 2020 . As ofMarch 31, 2020 , approximately$11.3 billion of these borrowings bore interest at fixed rates and therefore the fair value of these instruments is affected by changes in the market interest rates. As ofMarch 31, 2020 , the weighted-average interest rate on our variable rate debt was LIBOR plus 0.85% (2.07%) per annum. The following table presents our aggregate fixed rate debt obligations with corresponding weighted-average interest rates sorted by maturity date and our aggregate variable rate debt obligations sorted by maturity date. The table below does not include our unconsolidated joint venture debt. For a discussion concerning our unconsolidated joint venture debt, see Note 5 to the Consolidated Financial Statements and "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations-Capitalization-Off-Balance Sheet Arrangements-Joint Venture Indebtedness." Estimated 2020 2021 2022 2023 2024 2025+ Total Fair Value (dollars in thousands) Mortgage debt, net Fixed Rate$ 10,076 $ 13,440 $ 611,132 $ (3,494 ) $ (3,494 ) $ 2,291,497 $ 2,919,157 $ 3,054,533 GAAP Average Interest Rate 5.07 % 4.98 % 4.79 % - % - % 3.64 % 3.90 % Variable Rate - - - - - - - - Unsecured debt, net Fixed Rate$ (7,720 ) $ 840,465 $ (9,074 ) $ 1,492,008 $ 693,286 $ 5,384,044 $ 8,393,009 $ 8,449,511 GAAP Average Interest Rate - % 4.29 % - % 3.73 % 3.92 % 3.67 % 3.76 % Variable Rate (341 ) (451 ) 749,850 - - - 749,058 750,379 Total Debt$ 2,015 $ 853,454 -$ 1,351,908 $ 1,488,514 $ 689,792 $ 7,675,541 $ 12,061,224 $ 12,254,423 AtMarch 31, 2020 , the weighted-average coupon/stated rates on the fixed rate debt stated above was 3.69% per annum. AtMarch 31, 2020 , our outstanding variable rate debt based on LIBOR totaled approximately$750.0 million . AtMarch 31, 2020 , the coupon/stated rate on our variable rate debt was approximately 2.07% per annum. If market interest rates on our variable rate debt had been 100 basis points greater, total interest expense would have increased approximately$1.9 million for the three months endedMarch 31, 2020 . The fair value amounts were determined solely by considering the impact of hypothetical interest rates on our financial instruments. Due to the uncertainty of specific actions we may undertake to minimize possible effects of market interest rate increases, this analysis assumes no changes in our financial structure. In the event that LIBOR is discontinued, the interest rate for our variable rate debt and our unconsolidated joint ventures' variable rate debt and the swap rate for our unconsolidated joint ventures' interest rate swaps following such event will be based on an alternative variable rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon. Such an event would not affect our ability to borrow or maintain already outstanding borrowings or our unconsolidated joint ventures' ability to maintain its outstanding swaps, but the alternative variable rate could be higher and more volatile than LIBOR prior to its discontinuance. We understand that LIBOR is expected to remain available through the end of 2021, but may be discontinued or otherwise become unavailable thereafter. ITEM 4-Controls and Procedures.Boston Properties, Inc. (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, our management, with the participation ofBoston Properties, Inc.'s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation,Boston Properties, Inc.'s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. (b) Changes in Internal Control Over Financial Reporting. No change inBoston Properties, Inc.'s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the first quarter of our fiscal year endingDecember 31, 2020 that has materially affected, or is reasonably likely to materially affect,Boston Properties, Inc.'s internal control over financial reporting.Boston Properties Limited Partnership (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the management ofBoston Properties, Inc. , the sole general partner ofBoston Properties Limited Partnership , with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer ofBoston Properties, Inc. concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. (b) Changes in Internal Control Over Financial Reporting. No change in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the first quarter of our fiscal year endingDecember 31, 2020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. 75
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