NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Boston Properties, Inc., a Delaware corporation, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”). Boston Properties, Inc. is the sole general partner of Boston Properties Limited Partnership and at
March 31, 2016
owned an approximate
89.4%
(
89.5%
at
December 31, 2015
) general and limited partnership interest in Boston Properties Limited Partnership. Unless stated otherwise or the context requires, the “Company” refers to Boston Properties, Inc. and its subsidiaries, including Boston Properties Limited Partnership, its operating partnership, and its consolidated subsidiaries. Partnership interests in Boston Properties Limited Partnership include:
|
|
•
|
common units of partnership interest (also referred to as “OP Units”),
|
|
|
•
|
long term incentive units of partnership interest (also referred to as “LTIP Units”), and
|
|
|
•
|
preferred units of partnership interest (also referred to as “Preferred Units”).
|
Unless specifically noted otherwise, all references to OP Units exclude units held by Boston Properties, Inc. A holder of an OP Unit may present such OP Unit to Boston Properties Limited Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally
one
year from issuance). Upon presentation of an OP Unit for redemption, Boston Properties Limited Partnership is obligated to redeem such OP Unit for cash equal to the value of a share of common stock of Boston Properties, Inc. (“Common Stock”) at such time. In lieu of a cash redemption, Boston Properties, Inc. may elect to acquire such OP Unit for
one
share of Common Stock. Because the number of shares of Common Stock outstanding at all times equals the number of OP Units that Boston Properties, Inc. owns,
one
share of Common Stock is generally the economic equivalent of one OP Unit, and the quarterly distribution that may be paid to the holder of an OP Unit equals the quarterly dividend that may be paid to the holder of a share of Common Stock.
The Company uses LTIP Units as a form of equity-based award for annual long-term incentive equity compensation. The Company has also issued LTIP Units to employees in the form of (1) 2012 outperformance plan awards (“2012 OPP Units”) and (2) 2013, 2014, 2015 and 2016 multi-year, long-term incentive program awards (also referred to as “2013 MYLTIP Units,” “2014 MYLTIP Units,” “2015 MYLTIP Units” and “2016 MYLTIP Units,” respectively, and collectively as “MYLTIP Units”), each of which, upon the satisfaction of certain performance and vesting conditions, is convertible into one OP Unit. The three-year measurement periods for the 2012 OPP Units and 2013 MYLTIP Units expired on February 6, 2015 and February 4, 2016, respectively, and Boston Properties, Inc.’s total stockholder return (“TSR”) was sufficient for employees to earn and therefore become eligible to vest in a portion of the awards. Unless and until they are earned, the rights, preferences and privileges of the 2014, 2015 and 2016 MYLTIP Units differ from other LTIP Units granted to employees (including, as of February 6, 2015, the 2012 OPP Units and, as of February 4, 2016, the 2013 MYLTIP Units). Therefore, unless specifically noted otherwise, all references to LTIP Units exclude the 2014, 2015 and 2016 MYLTIP Units. LTIP Units (including the 2012 OPP Units and the 2013 MYLTIP Units), whether vested or not, will receive the same quarterly per unit distributions as OP Units, which equal per share dividends on Common Stock (See Notes
8
,
9
and
11
).
At
March 31, 2016
, there was
one
series of Preferred Units outstanding (i.e., Series B Preferred Units). The Series B Preferred Units were issued to Boston Properties, Inc. on March 27, 2013 in connection with issuance of
80,000
shares (
8,000,000
depositary shares each representing
1/100th
of a share) of
5.25%
Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”). Boston Properties, Inc. contributed the net proceeds from the offering to Boston Properties Limited Partnership in exchange for
80,000
Series B Preferred Units having terms and preferences generally mirroring those of the Series B Preferred Stock (See Note
9
).
Properties
At
March 31, 2016
, the Company owned or had interests in a portfolio of
167
commercial real estate properties (the “Properties”) aggregating approximately
46.3 million
net rentable square feet of primarily Class A office properties, including
eleven
properties under construction/redevelopment totaling approximately
4.6 million
net rentable square feet. At
March 31, 2016
, the Properties consisted of:
|
|
•
|
157
Office properties (including
nine
properties under construction/redevelopment);
|
|
|
•
|
five
retail properties; and
|
|
|
•
|
four
residential properties (including
two
properties under construction).
|
The Company owns or controls undeveloped land parcels totaling approximately
457.1
acres.
The Company considers Class A office properties to be centrally located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings.
2. Basis of Presentation and Summary of Significant Accounting Policies
Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in Boston Properties Limited Partnership, nor does it have employees of its own. Boston Properties Limited Partnership, not Boston Properties, Inc., generally executes all significant business relationships other than transactions involving securities of Boston Properties, Inc. All majority-owned subsidiaries and joint ventures over which the Company has financial and operating control and variable interest entities (“VIEs”) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income.
The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by GAAP. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended
December 31, 2015
. Beginning on January 1, 2016, the properties that were historically part of the Company’s Office/Technical segment are reflected as Office properties (See Note
12
).
Fair Value of Financial Instruments
The Company determines the fair value of its unsecured senior notes using market prices. The inputs used in determining the fair value of the Company’s unsecured senior notes are categorized at a level 1 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized at a level 2 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) if trading volumes are low. The Company determines the fair value of its mortgage notes payable using discounted cash flow analysis by discounting the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on current market rates for similar securities. In determining the current market rates, the Company adds its estimates of market spreads to the quoted yields on federal government treasury securities with similar maturity dates to its debt. The inputs used in determining the fair value of the Company’s mortgage notes payable and mezzanine notes payable are categorized at a level 3 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company considers the rates used in the valuation techniques to be unobservable inputs.
Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair values of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
|
|
Estimated
Fair Value
|
Mortgage notes payable, net
|
$
|
3,416,622
|
|
|
|
|
$
|
3,477,310
|
|
|
$
|
3,435,242
|
|
|
|
|
$
|
3,503,746
|
|
Mezzanine notes payable
|
308,142
|
|
|
|
|
306,089
|
|
|
308,482
|
|
|
|
|
306,103
|
|
Unsecured senior notes, net
|
6,255,602
|
|
|
|
|
6,705,353
|
|
|
5,264,819
|
|
|
|
|
5,547,738
|
|
Total
|
$
|
9,980,366
|
|
|
|
|
$
|
10,488,752
|
|
|
$
|
9,008,543
|
|
|
|
|
$
|
9,357,587
|
|
The Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of
March 31, 2016
, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Variable Interest Entities (VIEs)
On January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 (1) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership and (3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The Company reviewed all of their legal entities in accordance with ASU 2015-02 and concluded that certain of its legal entities, including Boston Properties Limited Partnership, which had been consolidated in accordance with the voting interest model are now variable interest entities under the VIE model, as discussed below. The adoption of the guidance did not alter any of the Company’s consolidation conclusions, but resulted in additional disclosures.
Consolidated VIEs are those where the Company is considered to be the primary beneficiary of a VIE. The primary beneficiary is the entity that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and 2) the obligation to absorb losses or the right to receive the returns from the VIE that could potentially be significant to the VIE. The Company has determined that is it the primary beneficiary for seven of the eight entities which are VIEs.
Consolidated Variable Interest Entities
As of March 31, 2016, Boston Properties, Inc. has identified seven consolidated VIEs, including Boston Properties Limited Partnership. These are the entities which own the following in-service properties: 767 Fifth Avenue (the General Motors Building), Time Square Tower, 601 Lexington Avenue, Atlantic Wharf Office Building and 100 Federal Street, the entity that owns the Salesforce Tower which is currently under development and Boston Properties Limited Partnership.
The Company consolidates these VIEs as it is the primary beneficiary. The third parties’ interests in these consolidated entities, with the exception of Boston Properties Limited Partnership, are reflected as noncontrolling interest in property partnerships in the accompanying Consolidated Financial Statements (See Note 8).
In addition, Boston Properties, Inc.’s significant asset is its investment in Boston Properties Limited Partnership, and consequently, substantially all of Boston Properties, Inc.’s assets and liabilities represent the assets and liabilities of Boston Properties Limited Partnership. All of Boston Properties, Inc.’s debt is an obligation of Boston Properties Limited Partnership.
Variable Interest Entities Not Consolidated
The Company has determined that its BNY Tower Holdings LLC joint venture is a VIE. The Company does not consolidate this entity as the Company does not have the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and therefore, the Company is not considered to be the primary beneficiary.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contract with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s Accounting Standards Codification (“ASC”). In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which delayed the effective date of ASU 2014-09 by one year making it effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date. The Company is currently assessing the potential impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”
(“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and shall be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Early adoption is permitted for financial statements that have not been previously issued. On January 1, 2016, the Company adopted ASU 2015-03 and retrospectively applied the guidance to its Mortgage Notes Payable and Unsecured Senior Notes for all periods presented. Unamortized deferred financing costs, which were previously included in Deferred Charges, Net, totaling approximately
$3.2 million
and
$31.3 million
are included in Mortgage Notes Payable, Net and Unsecured Senior Notes, Net, respectively, as of March 31, 2016 and approximately
$3.5 million
and
$24.5 million
are included in Mortgage Notes Payable, Net and Unsecured Senior Notes, Net, respectively, as of December 31, 2015.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for the Company for reporting periods beginning after December 15, 2017. Early application is permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-01 will have on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
“
Leases
” (“ASU 2016-02”)
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors).
ASU 2016-02
requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine
whether the lease expense is recognized
based on an effective interest method
or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than
12
months regardless of their classification. Leases with a term of
12
months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASU 2016-02
is expected to impact the
Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. ASU 2016-02 supersedes previous leasing standards
.
ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”) which provides guidance clarifying that a novation of party to a derivative instrument, whereby one of the parties to a derivative instrument is replaced with another party, does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge criteria continue to be met. ASU 2016-05 is effective for the Company for reporting periods beginning after December 15, 2016, with early adoption
permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-05 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”)
.
ASU 2016-09 is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with ASU 2016-09, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for the Company for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-09 will have on its consolidated financial statements.
3. Real Estate Activity During the Three Months Ended March 31, 2016
Dispositions
On February 1, 2016, the Company completed the sale of its 415 Main Street property located in Cambridge, Massachusetts to the tenant for a gross sale price of approximately
$105.4 million
. Net cash proceeds totaled approximately
$104.9 million
, resulting in a gain on sale of real estate totaling approximately
$60.8 million
for Boston Properties, Inc. and approximately
$63.0 million
for Boston Properties Limited Partnership. As part of its lease signed on July 14, 2004, the tenant was granted a fixed-price option to purchase the building at the beginning of the 11th lease year, which option was exercised by the tenant on October 22, 2014. 415 Main Street is an office property with approximately
231,000
net rentable square feet. 415 Main Street contributed approximately
$1.2 million
and
$2.6 million
of net income to the Company for the period from January 1, 2016 through January 31, 2016 and for the three months ended March 31, 2015, respectively.
Lease Terminations
On February 3, 2016, the Company entered into a lease termination agreement with a tenant for an approximately
85,000
square foot lease at its 250 West 55th Street property located in New York City. The lease was scheduled to expire on February 28, 2035. In consideration for the termination of the lease, the tenant paid the Company approximately
$45.0 million
, which was recognized as termination income and is included in Base Rent in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2016.
4. Investments in Unconsolidated Joint Ventures
The investments in unconsolidated joint ventures consist of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal %
Ownership
|
|
|
Carrying Value of Investment (1)
|
|
Entity
|
|
Properties
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Square 407 Limited Partnership
|
|
Market Square North
|
|
50.0
|
%
|
|
|
$
|
(9,506
|
)
|
|
$
|
(9,951
|
)
|
|
The Metropolitan Square Associates LLC
|
|
Metropolitan Square
|
|
51.0
|
%
|
|
|
9,238
|
|
|
9,179
|
|
|
BP/CRF 901 New York Avenue LLC
|
|
901 New York Avenue
|
|
25.0
|
%
|
(2)
|
|
(11,617
|
)
|
|
(11,958
|
)
|
|
WP Project Developer LLC
|
|
Wisconsin Place Land and Infrastructure
|
|
33.3
|
%
|
(3)
|
|
43,057
|
|
|
43,524
|
|
|
Annapolis Junction NFM, LLC
|
|
Annapolis Junction
|
|
50.0
|
%
|
(4) (5)
|
|
21,134
|
|
|
29,009
|
|
|
540 Madison Venture LLC
|
|
540 Madison Avenue
|
|
60.0
|
%
|
|
|
67,715
|
|
|
68,983
|
|
|
500 North Capitol LLC
|
|
500 North Capitol Street, NW
|
|
30.0
|
%
|
|
|
(3,470
|
)
|
|
(3,292
|
)
|
|
501 K Street LLC
|
|
1001 6th Street
|
|
50.0
|
%
|
(6)
|
|
42,540
|
|
|
42,584
|
|
|
Podium Developer LLC
|
|
The Hub on Causeway
|
|
50.0
|
%
|
|
|
23,881
|
|
|
18,508
|
|
|
1265 Main Office JV LLC
|
|
1265 Main Street
|
|
50.0
|
%
|
|
|
16,143
|
|
|
11,916
|
|
|
BNY Tower Holdings LLC
|
|
Dock72 at the Brooklyn Navy Yard
|
|
50.0
|
%
|
(7)
|
|
12,196
|
|
|
11,521
|
|
|
|
|
|
|
|
|
|
$
|
211,311
|
|
|
$
|
210,023
|
|
|
_______________
|
|
(1)
|
Investments with deficit balances aggregating approximately
$24.6 million
and
$25.2 million
at
March 31, 2016
and
December 31, 2015
, respectively, have been reflected within Other Liabilities on the Company’s Consolidated Balance Sheets.
|
|
|
(2)
|
The Company’s economic ownership has increased based on the achievement of certain return thresholds.
|
|
|
(3)
|
The Company’s wholly-owned entity that owns the office component of the project also owns a
33.3%
interest in the entity owning the land, parking garage and infrastructure of the project.
|
|
|
(4)
|
The joint venture owns
four
in-service buildings and
two
undeveloped land parcels.
|
|
|
(6)
|
Under the joint venture agreement for this land parcel, the partner will be entitled to up to
two
additional payments from the venture based on increases in total entitled square footage of the project above
520,000
square feet and achieving certain project returns at stabilization.
|
|
|
(7)
|
Entity is a VIE (See Note 2).
|
Certain of the Company’s unconsolidated joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.
The combined summarized balance sheets of the Company’s unconsolidated joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
ASSETS
|
|
|
|
Real estate and development in process, net
|
$
|
1,041,533
|
|
|
$
|
1,072,412
|
|
Other assets
|
225,200
|
|
|
252,285
|
|
Total assets
|
$
|
1,266,733
|
|
|
$
|
1,324,697
|
|
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
|
|
|
|
Mortgage and notes payable, net
|
$
|
829,089
|
|
|
$
|
830,125
|
|
Other liabilities
|
38,920
|
|
|
44,549
|
|
Members’/Partners’ equity
|
398,724
|
|
|
450,023
|
|
Total liabilities and members’/partners’ equity
|
$
|
1,266,733
|
|
|
$
|
1,324,697
|
|
Company’s share of equity
|
$
|
238,166
|
|
|
$
|
237,070
|
|
Basis differentials (1)
|
(26,855
|
)
|
|
(27,047
|
)
|
Carrying value of the Company’s investments in unconsolidated joint ventures (2)
|
$
|
211,311
|
|
|
$
|
210,023
|
|
_______________
|
|
(1)
|
This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from impairment of investments and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level.
|
|
|
(2)
|
Investments with deficit balances aggregating approximately
$24.6 million
and
$25.2 million
at
March 31, 2016
and
December 31, 2015
, respectively, have been reflected within Other Liabilities on the Company’s Consolidated Balance Sheets.
|
The combined summarized statements of operations of the Company’s unconsolidated joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Total revenue (1)
|
$
|
37,669
|
|
|
$
|
39,532
|
|
|
Expenses
|
|
|
|
|
Operating
|
16,667
|
|
|
16,275
|
|
|
Depreciation and amortization
|
9,064
|
|
|
9,071
|
|
|
Total expenses
|
25,731
|
|
|
25,346
|
|
|
Operating income
|
11,938
|
|
|
14,186
|
|
|
Other expense
|
|
|
|
|
Interest expense
|
8,389
|
|
|
7,980
|
|
|
Net income
|
$
|
3,549
|
|
|
$
|
6,206
|
|
|
|
|
|
|
|
Company’s share of net income
|
$
|
1,599
|
|
|
$
|
14,642
|
|
(2)
|
Basis differential
|
192
|
|
|
192
|
|
|
Income from unconsolidated joint ventures
|
$
|
1,791
|
|
|
$
|
14,834
|
|
|
_______________
|
|
(1)
|
Includes straight-line rent adjustments of approximately
$2.2 million
and
$1.6 million
for the
three months ended March 31, 2016
and
2015
, respectively.
|
|
|
(2)
|
During the three months ended March 31, 2015, the Company received a distribution of approximately
$24.5 million
, which was generated from the excess loan proceeds from the refinancing of 901 New York Avenue’s mortgage loan to a new
10
-year mortgage loan totaling
$225.0 million
. The Company’s allocation of income and distributions for the three months ended March 31, 2015 was not proportionate to its nominal ownership interest as a result of the achievement of specified investment return thresholds, as provided for in the joint venture agreement.
|
5. Unsecured Senior Notes
The following summarizes the unsecured senior notes outstanding as of
March 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon/
Stated Rate
|
|
Effective
Rate(1)
|
|
Principal
Amount
|
|
Maturity Date(2)
|
|
10 Year Unsecured Senior Notes
|
5.875
|
%
|
|
5.967
|
%
|
|
$
|
700,000
|
|
|
October 15, 2019
|
|
10 Year Unsecured Senior Notes
|
5.625
|
%
|
|
5.708
|
%
|
|
700,000
|
|
|
November 15, 2020
|
|
10 Year Unsecured Senior Notes
|
4.125
|
%
|
|
4.289
|
%
|
|
850,000
|
|
|
May 15, 2021
|
|
7 Year Unsecured Senior Notes
|
3.700
|
%
|
|
3.853
|
%
|
|
850,000
|
|
|
November 15, 2018
|
|
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
|
|
10 Year Unsecured Senior Notes
|
3.650
|
%
|
|
3.766
|
%
|
|
1,000,000
|
|
|
February 1, 2026
|
|
Total principal
|
|
|
|
|
6,300,000
|
|
|
|
|
Net unamortized discount
|
|
|
|
|
(13,148
|
)
|
|
|
|
Deferred financing costs, net
|
|
|
|
|
(31,250
|
)
|
|
|
|
Total
|
|
|
|
|
$
|
6,255,602
|
|
|
|
|
_______________
|
|
(1)
|
Yield on issuance date including the effects of discounts on the notes 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. At
March 31, 2016
, Boston Properties Limited Partnership was in compliance with each of these financial restrictions and requirements.
On January 20, 2016, Boston Properties Limited Partnership completed a public offering of
$1.0 billion
in aggregate principal amount of its
3.650%
senior unsecured notes due 2026. The notes were priced at
99.708%
of the principal amount to yield an effective rate (including financing fees) of
3.766%
to maturity. The notes will mature on February 1, 2026, unless earlier redeemed. The aggregate net proceeds from the offering were approximately
$988.9 million
after deducting underwriting discounts and transaction expenses.
6. Derivative Instruments and Hedging Activities
As of
March 31, 2016
, Boston Properties Limited Partnership has entered into
seventeen
forward-starting interest rate swap contracts that fix the
10
-year swap rate at a weighted-average rate of approximately
2.423%
per annum on notional amounts aggregating
$550.0 million
. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in September 2016 and maturity in September 2026. In addition, as of
March 31, 2016
, 767 Fifth Partners LLC, which is the consolidated entity (in which the Company has a
60%
interest and owns 767 Fifth Avenue (the General Motors Building) in New York City), has entered into
sixteen
forward-starting interest rate swap contracts (including
two
contracts entered into during the three months ended March 31, 2016 with notional amounts aggregating
$50.0 million
), which fix the
10
-year swap rate at a weighted-average rate of approximately
2.619%
per annum on notional amounts aggregating
$450.0 million
. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in June 2017 and maturity in June 2027. Boston Properties Limited Partnership’s and 767 Fifth Avenue Partners LLC’s interest rate swap contracts consisted of the following at
March 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instrument
|
|
Aggregate Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
|
Strike Rate Range
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
Low
|
|
High
|
|
|
Boston Properties Limited Partnership:
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
550,000
|
|
|
September 1, 2016
|
|
September 1, 2026
|
|
2.129
|
%
|
-
|
2.571
|
%
|
|
Other Liabilities
|
|
$
|
(36,561
|
)
|
767 Fifth Partners LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
450,000
|
|
|
June 7, 2017
|
|
June 7, 2027
|
|
2.336
|
%
|
-
|
2.950
|
%
|
|
Other Liabilities
|
|
$
|
(32,387
|
)
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(68,948
|
)
|
Boston Properties Limited Partnership’s and 767 Fifth Avenue Partners LLC’s interest rate swap contracts consisted of the following at
December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instrument
|
|
Aggregate Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
|
Strike Rate Range
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
Low
|
|
High
|
|
|
Boston Properties Limited Partnership:
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
400,000
|
|
|
September 1, 2016
|
|
September 1, 2026
|
|
2.348
|
%
|
-
|
2.571
|
%
|
|
Other Liabilities
|
|
$
|
(5,419
|
)
|
Interest Rate Swaps
|
|
150,000
|
|
|
September 1, 2016
|
|
September 1, 2026
|
|
2.129
|
%
|
-
|
2.325
|
%
|
|
Prepaid Expenses and Other Assets
|
|
1,188
|
|
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,231
|
)
|
767 Fifth Partners LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
250,000
|
|
|
June 7, 2017
|
|
June 7, 2027
|
|
2.677
|
%
|
-
|
2.950
|
%
|
|
Other Liabilities
|
|
$
|
(7,247
|
)
|
Interest Rate Swaps
|
|
150,000
|
|
|
June 7, 2017
|
|
June 7, 2027
|
|
2.336
|
%
|
-
|
2.430
|
%
|
|
Prepaid Expenses and Other Assets
|
|
1,176
|
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,071
|
)
|
|
|
$
|
950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,302
|
)
|
Boston Properties Limited Partnership entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the
10
-year swap rate in contemplation of obtaining
10
-year fixed-rate financing in September 2016. The Company’s 767 Fifth Partners LLC consolidated entity entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the
10
-year swap rate in contemplation of obtaining
10
-year fixed-rate financing in June 2017. Boston Properties Limited Partnership has formally documented all of its relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Boston Properties Limited Partnership also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. All components of the forward-starting interest rate swap contracts were included in the assessment of hedge effectiveness. Boston Properties Limited Partnership has agreements with each of its derivative counterparties that contain a provision where it could be declared in default on its derivative obligations if repayment of its indebtedness is accelerated by the lender due to its default on the indebtedness. As of
March 31, 2016
, the fair value of derivatives in a liability position, excluding any adjustment for nonperformance risk and excluding accrued interest, related to these agreements was approximately
$69.3 million
. As of
March 31, 2016
, Boston Properties Limited Partnership has not posted any collateral related to these agreements. If Boston Properties Limited Partnership had breached any of these provisions at
March 31, 2016
, it could have been required to settle its obligations under the agreements at their termination value of approximately
$69.3 million
. The Company accounts for the effective portion of changes in the fair value of a derivative in accumulated other comprehensive loss and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings. During the
three months ended March 31, 2016
, the Company has recorded the changes in fair value of the swap contracts related to the effective portion of the interest rate contracts aggregating approximately
$68.9 million
in Other Liabilities and Accumulated Other Comprehensive Loss within the Company’s Consolidated Balance Sheets. During the
three months ended March 31, 2016
, the Company did not record any hedge ineffectiveness. The Company expects that within the next
twelve
months it will reclassify into earnings as an increase to interest expense approximately
$2.1 million
of the amounts recorded within Accumulated Other Comprehensive Loss relating to the forward-starting interest rate swap contracts in effect and as of
March 31, 2016
.
The following table presents the location in the financial statements of the losses recognized related to the Company’s cash flow hedges for the
three months ended March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Amount of loss related to the effective portion recognized in other comprehensive loss
|
|
$
|
(58,646
|
)
|
|
$
|
(3,533
|
)
|
Amount of loss related to the effective portion subsequently reclassified to earnings (1)
|
|
$
|
(627
|
)
|
|
$
|
(627
|
)
|
Amount of gain (loss) related to the ineffective portion and amount excluded from effectiveness testing
|
|
$
|
—
|
|
|
$
|
—
|
|
___________
|
|
(1)
|
Consists of amounts from previous interest rate hedging programs entered into prior to 2015.
|
Boston Properties, Inc.
The following table reflects the changes in accumulated other comprehensive loss for the
three months ended March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(14,114
|
)
|
Effective portion of interest rate contracts
|
|
(58,646
|
)
|
Amortization of interest rate contracts (1)
|
|
627
|
|
Other comprehensive loss attributable to noncontrolling interests
|
|
15,427
|
|
Balance at March 31, 2016
|
|
$
|
(56,706
|
)
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(9,304
|
)
|
Effective portion of interest rate contracts
|
|
(3,533
|
)
|
Amortization of interest rate contracts (1)
|
|
627
|
|
Other comprehensive loss attributable to noncontrolling interests
|
|
303
|
|
Balance at March 31, 2015
|
|
$
|
(11,907
|
)
|
___________
|
|
(1)
|
Consists of amounts from previous interest rate hedging programs entered into prior to 2015.
|
Boston Properties Limited Partnership
The following table reflects the changes in accumulated other comprehensive loss for the
three months ended March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(18,337
|
)
|
Effective portion of interest rate contracts
|
|
(58,646
|
)
|
Amortization of interest rate contracts (1)
|
|
627
|
|
Other comprehensive loss attributable to noncontrolling interests
|
|
10,526
|
|
Balance at March 31, 2016
|
|
$
|
(65,830
|
)
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(12,973
|
)
|
Effective portion of interest rate contracts
|
|
(3,533
|
)
|
Amortization of interest rate contracts (1)
|
|
627
|
|
Balance at March 31, 2015
|
|
$
|
(15,879
|
)
|
___________
|
|
(1)
|
Consists of amounts from previous interest rate hedging programs entered into prior to 2015.
|
7. Commitments and Contingencies
General
In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence. In addition, in the normal course of business, the Company guarantees to certain tenants the obligations of its subsidiaries for the payment of tenant improvement allowances and brokerage commissions in connection with their leases and limited costs arising from delays in delivery of their premises.
The Company has letter of credit and performance obligations related to lender and development requirements that total approximately
$22.5 million
.
Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exception, under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners. Under certain of the Company’s joint venture agreements, if certain return thresholds are achieved the partners will be entitled to an additional promoted interest or payments.
In connection with the assumption of 767 Fifth Avenue’s (the General Motors Building) secured loan by the Company’s consolidated joint venture entity, 767 Venture, LLC, the Company guaranteed the consolidated joint venture’s obligation to fund various escrows, including tenant improvements, taxes and insurance in lieu of cash deposits. As of
March 31, 2016
, the maximum funding obligation under the guarantee was approximately
$16.2 million
. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee.
In connection with 767 Fifth Partners LLC entering into interest rate swap contracts (See Note
6
), the Company guaranteed 767 Fifth Partners LLC’s obligations under the hedging agreements in favor of each hedge counterparty. 767 Fifth Partners LLC is the entity that owns 767 Fifth Avenue (the General Motors Building). It is a subsidiary of 767 Venture, LLC, a consolidated entity in which the Company has a
60%
interest. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee.
In connection with the mortgage financing collateralized by the Company’s Fountain Square property located in Reston, Virginia, the Company has agreed to guarantee approximately
$0.7 million
related to its obligation to provide funds for certain tenant re-leasing costs. The mortgage financing is scheduled to mature on October 11, 2016 (See Note
13
).
From time to time, the Company (or the applicable joint venture) has also agreed to guarantee portions of the principal, interest or other amounts in connection with other unconsolidated joint venture borrowings. In addition to the financial guarantees referenced above, the Company has agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) on certain of its unconsolidated joint venture loans.
In 2009, the Company filed a general unsecured creditor’s claim against Lehman Brothers, Inc. for approximately
$45.3 million
related to its rejection of a lease at 399 Park Avenue in New York City. On January 10, 2014, the trustee for the liquidation of the business of Lehman Brothers allowed the Company’s claim in the amount of approximately
$45.2 million
. During 2014, the Company received a distribution totaling approximately
$7.7 million
. During 2015, the Company received distributions aggregating approximately
$8.1 million
, including approximately
$4.5 million
received on March 11, 2015, which is included in Base Rent in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2015, leaving a remaining claim of approximately
$29.4 million
. The Company will continue to evaluate whether to attempt to sell the remaining claim or wait until the trustee distributes proceeds from the Lehman Brothers estate. Given the inherent uncertainties in bankruptcy proceedings, there can be no assurance as to the timing or amount of additional proceeds, if any, that the Company may ultimately realize on the remaining claim, whether by sale to a third party or by one or more distributions from the trustee. Accordingly, the Company has not recorded any estimated recoveries associated with this gain contingency within its Consolidated Financial Statements at
March 31, 2016
.
Insurance
The Company carries insurance coverage on its properties of types and in amounts and with deductibles that it believes are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act (as amended, “TRIA”) was enacted in November 2002 to require regulated insurers to make available coverage for “certified” acts of terrorism (as defined by the statute). The expiration date of TRIA was extended to December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 and further extended to December 31, 2020 by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), and the Company can provide no assurance that it will be extended further. Currently, the Company’s property insurance program per occurrence limits are
$1.0 billion
for its portfolio insurance program, including coverage for acts of terrorism other than nuclear, biological, chemical or radiological terrorism (“Terrorism Coverage”). The Company also carries
$250 million
of Terrorism Coverage for 601 Lexington Avenue, New York, New York (“601 Lexington Avenue”) in excess of the
$1.0 billion
of coverage in the Company’s property insurance program. Certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), are currently insured in separate insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are
$1.625 billion
, including Terrorism Coverage. The Company also currently carries nuclear, biological, chemical and radiological terrorism insurance coverage for acts of terrorism certified under TRIA (“NBCR Coverage”), which is provided by IXP as a direct insurer, for the properties in our portfolio, including 767 Fifth Avenue, but excluding certain other properties
owned in joint ventures with third parties or which the Company manages. The per occurrence limit for NBCR Coverage is
$1.0 billion
. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage provided by IXP is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” In 2016, the program trigger is
$120 million
and the coinsurance is
16%
, however, both will increase in subsequent years pursuant to TRIPRA. If the Federal Government pays out for a loss under TRIA, it is mandatory that the Federal Government recoup the full amount of the loss from insurers offering TRIA coverage after the payment of the loss pursuant to a formula in TRIPRA. The Company may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if there is a change in its portfolio or for any other reason. The Company intends to continue to monitor the scope, nature and cost of available terrorism insurance and maintain terrorism insurance in amounts and on terms that are commercially reasonable.
The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that the Company believes is commercially reasonable. In addition, this insurance is subject to a deductible in the amount of
3%
of the value of the affected property. Specifically, the Company currently carries earthquake insurance which covers its San Francisco region (excluding Salesforce Tower) with a
$170 million
per occurrence limit, and a
$170 million
annual aggregate limit,
$20 million
of which is provided by IXP, as a direct insurer. The builders risk policy maintained for the development of Salesforce Tower in San Francisco includes a
$60 million
per occurrence and annual aggregate limit of earthquake coverage. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact the Company’s ability to finance properties subject to earthquake risk. The Company may discontinue earthquake insurance or change the structure of its earthquake insurance program on some or all of its properties in the future if the premiums exceed the Company’s estimation of the value of the coverage.
IXP, a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco properties and the Company’s NBCR Coverage. Insofar as the Company owns IXP, it is responsible for its liquidity and capital resources, and the accounts of IXP are part of the Company’s consolidated financial statements. In particular, if a loss occurs which is covered by the Company’s NBCR Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government. IXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and its insurance policy is maintained after the payout by the Federal Government. If the Company experiences a loss and IXP is required to pay under its insurance policy, the Company would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance. In addition, Boston Properties Limited Partnership has issued a guarantee to cover liabilities of IXP in the amount of
$20.0 million
.
The mortgages on the Company’s properties typically contain requirements concerning the financial ratings of the insurers who provide policies covering the property. The Company provides the lenders on a regular basis with the identity of the insurance companies in the Company’s insurance programs. The ratings of some of the Company’s insurers are below the rating requirements in some of the Company’s loan agreements and the lenders for these loans could attempt to claim that an event of default has occurred under the loan. The Company believes it could obtain insurance with insurers which satisfy the rating requirements. Additionally, in the future, the Company’s ability to obtain debt financing secured by individual properties, or the terms of such financing, may be adversely affected if lenders generally insist on ratings for insurers or amounts of insurance which are difficult to obtain or which result in a commercially unreasonable premium. There can be no assurance that a deficiency in the financial ratings of one or more of the Company’s insurers will not have a material adverse effect on the Company.
The Company continues to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism and California earthquake risk in particular, but the Company cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars, for which the Company cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if the Company experiences a loss that is uninsured or that exceeds policy limits, the Company could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.
8. Noncontrolling Interests
Noncontrolling interests relate to the interests in Boston Properties Limited Partnership not owned by Boston Properties, Inc. and interests in consolidated property partnerships not wholly-owned by the Company. As of
March 31, 2016
, the noncontrolling interests in Boston Properties Limited Partnership consisted of
16,092,449
OP Units,
2,065,185
LTIP Units (including
215,709
2012 OPP Units and
103,882
2013 MYLTIP Units),
475,558
2014 MYLTIP Units,
367,936
2015 MYLTIP Units and
474,456
2016 MYLTIP Units held by parties other than Boston Properties, Inc.
Noncontrolling Interest—Redeemable Preferred Units
On June 25, 2015, Boston Properties Limited Partnership redeemed the remaining
12,667
Series Four Preferred Units for cash totaling approximately
$0.6 million
, plus accrued and unpaid distributions. The Series Four Preferred Units bore a preferred distribution equal to
2.00%
per annum on a liquidation preference of
$50.00
per unit and were not convertible into OP Units. The holders of Series Four Preferred Units had the right, at certain times and subject to certain conditions set forth in the Certificate of Designations establishing the rights, limitations and preferences of the Series Four Preferred Units, to require Boston Properties Limited Partnership to redeem all of their units for cash at the redemption price of
$50.00
per unit. Boston Properties Limited Partnership also had the right, at certain times and subject to certain conditions, to redeem all of the Series Four Preferred Units for cash at the redemption price of
$50.00
per unit. In order to secure the performance of certain post-issuance obligations by the holders, all of such outstanding Series Four Preferred Units were subject to forfeiture pursuant to the terms of a pledge agreement and not eligible for redemption until and unless such security interest was released. Due to the holders’ redemption option existing outside the control of the Company, the Series Four Preferred Units were presented outside of permanent equity in the Company’s Consolidated Balance Sheets.
The following table reflects the activity of the noncontrolling interests—redeemable preferred units for the
three
months ended
March 31, 2015
(in thousands):
|
|
|
|
|
Balance at December 31, 2014
|
$
|
633
|
|
Net income
|
3
|
|
Distributions
|
(3
|
)
|
Balance at March 31, 2015
|
$
|
633
|
|
Noncontrolling Interest—Redeemable Interest in Property Partnership
On
October 4, 2012
, the Company completed the formation of a joint venture that owns and operates Fountain Square located in Reston, Virginia. The joint venture partner contributed the property valued at approximately
$385.0 million
and related mortgage indebtedness totaling approximately
$211.3 million
for a
50%
interest in the joint venture. The Company contributed cash totaling approximately
$87.0 million
for its
50%
interest, which cash was distributed to the joint venture partner. Pursuant to the joint venture agreement (i) the Company had rights to acquire the partner’s
50%
interest and (ii) the partner had the right to cause the Company to acquire the partner’s interest on
January 4, 2016
, in each case at a fixed price totaling approximately
$102.0 million
in cash. The fixed price option rights were to expire on
January 31, 2016
. The Company was consolidating this joint venture due to the Company’s right to acquire the partner’s
50%
interest. The Company recorded the noncontrolling interest at its acquisition-date fair value as temporary equity, due to the redemption option existing outside the control of the Company. The Company was accreting the changes in the redemption value quarterly over the period from the acquisition date to the earliest redemption date using the effective interest method. The Company was recording the accretion after the allocation of net income and distributions of cash flow to the noncontrolling interest account balance.
On August 6, 2015, the parties amended the joint venture agreement to require the Company to acquire its partner’s
50%
interest on September 15, 2015 for approximately
$100.9 million
in cash. On September 15, 2015, the Company acquired its partner’s
50%
interest in the consolidated entity that owns Fountain Square located in Reston Town Center in Reston, Virginia for cash of approximately
$100.9 million
plus working capital and closing prorations and the partner's share of assumed mortgage indebtedness totaling approximately
$105.6 million
.
The following table reflects the activity of the noncontrolling interest—redeemable interest in property partnership in the Company’s Fountain Square consolidated entity for the
three
months ended
March 31, 2015
(in thousands):
|
|
|
|
|
Balance at December 31, 2014
|
$
|
104,692
|
|
Net income
|
75
|
|
Distributions
|
(1,400
|
)
|
Adjustment to reflect redeemable interest at redemption value
|
2,153
|
|
Balance at March 31, 2015
|
$
|
105,520
|
|
Noncontrolling Interest—Common Units
During the
three months ended March 31, 2016
,
13,259
OP Units were presented by the holders for redemption (including
7,277
OP Units issued upon conversion of LTIP Units and 2012 OPP Units) and were redeemed by Boston Properties, Inc. in exchange for an equal number of shares of Common Stock.
At
March 31, 2016
, Boston Properties Limited Partnership had outstanding
475,558
2014 MYLTIP Units,
367,936
2015 MYLTIP Units and
474,456
2016 MYLTIP Units. Prior to the applicable measurement date (February 3, 2017 for 2014 MYLTIP Units, February 4, 2018 for 2015 MYLTIP Units and February 9, 2019 for 2016 MYLTIP Units), holders of MYLTIP Units will be entitled to receive per unit distributions equal to one-tenth (
10%
) of the regular quarterly distributions payable on an OP Unit, but will not be entitled to receive any special distributions. After the measurement date, the number of MYLTIP Units, both vested and unvested, that MYLTIP award recipients have earned, if any, based on the establishment of a performance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit.
On February 6, 2015, the measurement period for the Company’s 2012 OPP Unit awards ended and Boston Properties, Inc.’s TSR performance was sufficient for employees to earn and therefore become eligible to vest in a portion of the 2012 OPP Unit awards. The final outperformance pool was determined to be approximately
$32.1 million
, or approximately
80%
of the total maximum outperformance pool of
$40.0 million
. As a result,
174,549
2012 OPP Units were automatically forfeited.
On February 4, 2016, the measurement period for the Company’s 2013 MYLTIP awards ended and, based on Boston Properties, Inc.’s relative TSR performance, the final awards were determined to be
109.5%
of target or an aggregate of approximately
$13.5 million
. As a result,
205,762
2013 MYLTIP Units were automatically forfeited.
The following table presents Boston Properties Limited Partnership’s distributions on the OP Units and LTIP Units (including the 2012 OPP Units and, after the measurement date, the 2013 MYLTIP Units) and its distributions on the 2013 MYLTIP Units (prior to the February 4, 2016 measurement date), 2014 MYLTIP Units, 2015 MYLTIP Units and 2016 MYLTIP Units (after the February 10, 2016 issuance date) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Distributions on the OP Units and LTIP Units
|
|
Distributions on MYLTIP Units
|
March 31, 2016
|
|
April 29, 2016
|
|
|
$0.65
|
|
|
|
$0.065
|
|
December 31, 2015
|
|
January 28, 2016
|
|
|
$1.90
|
|
(1)
|
|
$0.065
|
|
_______________
|
|
(1)
|
Includes a special distribution of
$1.25
per unit.
|
A holder of an OP Unit may present such OP Unit to Boston Properties Limited Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally
one
year from issuance). Upon presentation of an OP Unit for redemption, Boston Properties Limited Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of Boston Properties, Inc. Boston Properties, Inc. may, in its sole discretion, elect to assume and satisfy the redemption obligation by paying either cash or issuing
one
share of Common Stock. The value of the OP Units not owned by Boston Properties, Inc. and LTIP Units (including the 2012 OPP Units and 2013 MYLTIP Units) assuming that all conditions had been met for the conversion thereof had all of such units been redeemed at
March 31, 2016
was approximately
$2.3 billion
based on the closing price of Boston Properties, Inc.’s common stock of
$127.08
per share on
March 31, 2016
.
Boston Properties Limited Partnership
The following table reflects the activity of noncontrolling interests—redeemable common units of Boston Properties Limited Partnership for the
three
months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
$
|
2,286,689
|
|
Contributions
|
30,808
|
|
Net income
|
21,393
|
|
Distributions
|
(11,865
|
)
|
Conversion of redeemable partnership units
|
(446
|
)
|
Unearned compensation
|
(22,424
|
)
|
Accumulated other comprehensive loss
|
(4,901
|
)
|
Adjustment to reflect redeemable partnership units at redemption value
|
8,218
|
|
Balance at March 31, 2016
|
$
|
2,307,472
|
|
|
|
Balance at December 31, 2014
|
$
|
2,310,046
|
|
Contributions
|
38,371
|
|
Net income
|
20,188
|
|
Distributions
|
(11,705
|
)
|
Conversion of redeemable partnership units
|
(8,689
|
)
|
Unearned compensation
|
(18,597
|
)
|
Accumulated other comprehensive loss
|
(303
|
)
|
Adjustment to reflect redeemable partnership units at redemption value
|
211,747
|
|
Balance at March 31, 2015
|
$
|
2,541,058
|
|
Noncontrolling Interests—Property Partnerships
The noncontrolling interests in property partnerships consist of the outside equity interests in ventures that are consolidated with the financial results of the Company because the Company exercises control over the entities that own the properties. The equity interests in these ventures that are not owned by the Company, totaling approximately
$1.6 billion
at
March 31, 2016
and
December 31, 2015
, are included in Noncontrolling Interests—Property Partnerships on the accompanying Consolidated Balance Sheets.
On September 18, 2015, a consolidated entity in which the Company has a
50%
interest completed the sale of its 505 9th Street, N.W. property located in Washington, DC for approximately
$318.0 million
, including the assumption by the buyer of approximately
$117.0 million
of mortgage indebtedness. 505 9th Street, N.W. is an approximately
322,000
net rentable square foot Class A office building. Net cash proceeds totaled approximately
$194.6 million
, of which the partners’ share was approximately
$97.3 million
. The Company recognized a gain on sale of real estate totaling approximately
$199.5 million
and
$199.7 million
for Boston Properties, Inc. and Boston Properties Limited Partnership, respectively, of which approximately
$101.1 million
was allocated to the outside partners.
The following table reflects the activity of the noncontrolling interests in property partnerships for the
three months ended March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
$
|
1,574,400
|
|
Capital contributions
|
2,489
|
|
Net income
|
10,464
|
|
Accumulated other comprehensive loss
|
(10,526
|
)
|
Distributions
|
(12,915
|
)
|
Balance at March 31, 2016
|
$
|
1,563,912
|
|
|
|
Balance at December 31, 2014
|
$
|
1,602,467
|
|
Capital contributions
|
629
|
|
Net income
|
12,980
|
|
Distributions
|
(16,574
|
)
|
Balance at March 31, 2015
|
$
|
1,599,502
|
|
9. Stockholders’ Equity / Partners’ Capital
As of
March 31, 2016
, Boston Properties, Inc. had
153,604,966
shares of Common Stock outstanding.
As of
March 31, 2016
, Boston Properties, Inc. owned
1,717,626
general partnership units and
151,887,340
limited partnership units of Boston Properties Limited Partnership.
On June 3, 2014, Boston Properties, Inc. established an “at the market” (“ATM”) stock offering program through which it may sell from time to time up to an aggregate of
$600.0 million
of its common stock through sales agents over a
three
-year period. The Company intends to use the net proceeds from any offering for general business purposes, which may include investment opportunities and debt reduction.
No
shares of common stock have been issued under this ATM stock offering program since its inception.
During the
three months ended March 31, 2016
, Boston Properties, Inc. issued
13,259
shares of Common Stock in connection with the redemption of an equal number of redeemable OP Units from third parties.
The following table presents Boston Properties, Inc.’s dividends per share and Boston Properties Limited Partnership’s distributions per unit for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend (Per Share)
|
|
|
Distribution (Per Unit)
|
|
|
March 31, 2016
|
|
April 29, 2016
|
|
|
$0.65
|
|
|
|
$0.65
|
|
|
December 31, 2015
|
|
January 28, 2016
|
|
|
$1.90
|
|
(1)
|
|
$1.90
|
|
(1)
|
_______________
|
|
(1)
|
Includes a special dividend/distribution of
$1.25
per share/common unit.
|
Preferred Stock
As of
March 31, 2016
, Boston Properties, Inc. had
80,000
shares (
8,000,000
depositary shares each representing
1/100th
of a share) outstanding of its
5.25%
Series B Cumulative Redeemable Preferred Stock with a liquidation preference of
$2,500.00
per share (
$25.00
per depositary share). Boston Properties, Inc. pays cumulative cash dividends on the Series B Preferred Stock at a rate of
5.25%
per annum of the
$2,500.00
liquidation preference per share. Boston Properties, Inc. may not redeem the Series B Preferred Stock prior to March 27, 2018, except in certain circumstances relating to the preservation of Boston Properties, Inc.’s REIT status. On or after March 27, 2018, Boston Properties, Inc., at its option, may redeem the Series B Preferred Stock for a cash redemption price of
$2,500.00
per share (
$25.00
per depositary share), plus all accrued and unpaid dividends. The Series B Preferred Stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of Boston Properties, Inc. or its affiliates.
The following table presents Boston Properties Inc.’s dividends per share on its outstanding Series B Preferred Stock:
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend (Per Share)
|
|
May 5, 2016
|
|
May 16, 2016
|
|
|
$32.8125
|
|
February 5, 2016
|
|
February 16, 2016
|
|
|
$32.8125
|
|
10. Earnings Per Share / Common Unit
Boston Properties, Inc.
The following table provides a reconciliation of both the net income attributable to Boston Properties, Inc. common shareholders and the number of common shares used in the computation of basic earnings per share (“EPS”), which is calculated by dividing net income attributable to Boston Properties, Inc. common shareholders by the weighted-average number of common shares outstanding during the period. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are also participating securities. As such, unvested restricted common stock of the Company, LTIP Units, 2012 OPP Units and MYLTIP Units are considered participating securities. Participating securities are included in the computation of basic EPS of the Company using the
two
-class method. Participating securities are included in the computation of diluted EPS of the Company using the if-converted method if the impact is dilutive. Because the 2012 OPP Units and 2013 MYLTIP Units required and the 2014-2016 MYLTIP Units require the Company to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, the Company excludes such units from the diluted EPS calculation. Other potentially dilutive common shares, including stock options, restricted stock and other securities of Boston Properties Limited Partnership that are exchangeable for the Boston Properties, Inc.’s Common Stock, and the related impact on earnings, are considered when calculating diluted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016
|
|
Income
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
(in thousands, except for per share amounts)
|
Basic Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
181,747
|
|
|
153,626
|
|
|
$
|
1.18
|
|
Allocation of undistributed earnings to participating securities
|
(247
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
181,500
|
|
|
153,626
|
|
|
$
|
1.18
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Stock Based Compensation
|
—
|
|
|
291
|
|
|
—
|
|
Diluted Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
181,500
|
|
|
153,917
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
Income
(Numerator)
|
|
Shares
(Denominator)
|
|
Per Share
Amount
|
|
(in thousands, except for per share amounts)
|
Basic Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
171,182
|
|
|
153,230
|
|
|
$
|
1.12
|
|
Allocation of undistributed earnings to participating securities
|
(188
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
170,994
|
|
|
153,230
|
|
|
$
|
1.12
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Stock Based Compensation
|
—
|
|
|
643
|
|
|
(0.01
|
)
|
Diluted Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
170,994
|
|
|
153,873
|
|
|
$
|
1.11
|
|
Boston Properties Limited Partnership
The following table provides a reconciliation of both the net income attributable to Boston Properties Limited Partnership common unitholders and the number of common units used in the computation of basic earnings per common unit, which is calculated by dividing net income attributable to Boston Properties Limited Partnership common unitholders by the weighted-average number of common units outstanding during the period. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are also participating securities. As such, unvested restricted common stock of Boston Properties, Inc. and Boston Properties Limited Partnership’s LTIP Units, 2012 OPP Units and MYLTIP Units are considered participating securities. Participating securities are included in the computation of basic earnings per common unit using the
two
-class method. Participating securities are included in the computation of diluted earnings per common unit using the if-converted method if the impact is dilutive. Because the 2012 OPP Units and 2013 MYLTIP Units required and the 2014-2016 MYLTIP Units require Boston Properties, Inc. to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, Boston Properties Limited Partnership excludes such units from the diluted earnings per common unit calculation. Other potentially dilutive common units and the related impact on earnings are considered when calculating diluted earnings per common unit. Included in the number of units (the denominator) below are approximately
17,683,000
and
17,854,000
redeemable common units for the
three months ended March 31, 2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016
|
|
Income
(Numerator)
|
|
Units
(Denominator)
|
|
Per Unit
Amount
|
|
(in thousands, except for per unit amounts)
|
Basic Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
207,296
|
|
|
171,309
|
|
|
$
|
1.21
|
|
Allocation of undistributed earnings to participating securities
|
(275
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
207,021
|
|
|
171,309
|
|
|
$
|
1.21
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Stock Based Compensation
|
—
|
|
|
291
|
|
|
—
|
|
Diluted Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
207,021
|
|
|
171,600
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
Income
(Numerator)
|
|
Units
(Denominator)
|
|
Per Unit
Amount
|
|
(in thousands, except for per unit amounts)
|
Basic Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
193,369
|
|
|
171,084
|
|
|
$
|
1.13
|
|
Allocation of undistributed earnings to participating securities
|
(210
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
193,159
|
|
|
171,084
|
|
|
$
|
1.13
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Stock Based Compensation
|
—
|
|
|
643
|
|
|
(0.01
|
)
|
Diluted Earnings:
|
|
|
|
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
193,159
|
|
|
171,727
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
11. Stock Option and Incentive Plan
On January 25, 2016, Boston Properties Inc.’s Compensation Committee approved the 2016 MYLTIP awards under Boston Properties Inc.’s 2012 Stock Option and Incentive Plan (the “2012 Plan”) to certain officers and employees of Boston Properties, Inc. The 2016 MYLTIP awards utilize TSR over a
three
-year measurement period, on an annualized, compounded basis, as the performance metric. Earned awards will be based on Boston Properties, Inc.’s TSR relative to (i) the Cohen & Steers Realty Majors Portfolio Index (
50%
weight) and (ii) the NAREIT Office Index adjusted to include Vornado Realty Trust and exclude Boston Properties, Inc. (
50%
weight). Earned awards will range from
zero
to a maximum of approximately
$49.3 million
depending on Boston Properties, Inc.’s TSR relative to the
two
indices, with
three
tiers (threshold: approximately
$9.9 million
; target: approximately
$19.7 million
; high: approximately
$49.3 million
) and linear interpolation between tiers. Earned awards measured on the basis of relative TSR performance are subject to an absolute TSR component in the form of relatively simple modifiers that (A) reduce the level of earned awards in the event Boston Properties, Inc.’s annualized TSR is less than
0%
and (B) cause some awards to be earned in the event Boston Properties, Inc.’s annualized TSR is more than
12%
even though on a relative basis alone Boston Properties, Inc.’s TSR would not result in any earned awards.
Earned awards (if any) will vest
50%
on February 9, 2019 and
50%
on February 9, 2020, based on continued employment. Vesting will be accelerated in the event of a change in control, termination of employment by Boston Properties, Inc. without cause, or termination of employment by the award recipient for good reason, death, disability or retirement. If there is a change of control prior to February 9, 2019, earned awards will be calculated based on TSR performance up to the date of the change of control. The 2016 MYLTIP awards are in the form of LTIP Units issued on the grant date which (i) are subject to forfeiture to the extent awards are not earned and (ii) prior to the performance measurement date are only entitled to one-tenth (
10%
) of the regular quarterly distributions payable on OP Units and no special distributions.
Under the FASB’s ASC 718 “Compensation-Stock Compensation,” the 2016 MYLTIP awards have an aggregate value of approximately
$17.3 million
, which amount will generally be amortized into earnings over the
four
-year plan period under the graded vesting method.
On February 6, 2015, the measurement period for the Company’s 2012 OPP Unit awards ended and Boston Properties, Inc.’s TSR performance was sufficient for employees to earn and therefore become eligible to vest in a portion of the 2012 OPP Unit awards. The final outperformance pool was determined to be approximately
$32.1 million
, or approximately
80%
of the total maximum outperformance pool of
$40.0 million
. As a result,
174,549
2012 OPP Units were automatically forfeited.
On February 4, 2016, the measurement period for the Company’s 2013 MYLTIP awards ended and, based on Boston Properties, Inc.’s relative TSR performance, the final awards were determined to be
109.5%
of target or an aggregate of approximately
$13.5 million
. As a result,
205,762
2013 MYLTIP Units were automatically forfeited.
During the
three months ended March 31, 2016
, Boston Properties, Inc. issued
18,521
shares of restricted common stock and Boston Properties Limited Partnership issued
139,435
LTIP Units and
475,004
2016 MYLTIP Units to employees and non-employee directors under the 2012 Plan. Employees and non-employee directors paid
$0.01
per share of restricted common stock and
$0.25
per LTIP Unit and 2016 MYLTIP Unit. When issued, LTIP Units are not economically equivalent in value to a share of Common Stock, but over time can increase in value to one-for-one parity with Common Stock if there is sufficient appreciation in the value of the Company’s assets. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. Grants of restricted stock and LTIP Units to employees vest in
four
equal annual installments. Restricted stock is measured at fair value on the date of grant based on the number of shares granted, as adjusted for forfeitures, and the closing price of Boston Properties, Inc.’s Common Stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. The shares of restricted stock granted during the
three months ended March 31, 2016
were valued at approximately
$2.1 million
(
$111.14
per share). The LTIP Units granted were valued at approximately
$14.4 million
(
$103.26
per unit weighted-average fair value) using a Monte Carlo simulation method model. The per unit fair values of the LTIP Units granted were estimated on the dates of grant and for a substantial majority of such units were valued using the following assumptions: an expected life of
5.7 years
, a risk-free interest rate of
1.61%
and an expected price volatility of
33%
. As the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units, 2015 MYLTIP Units and 2016 MYLTIP Units are subject to both a service condition and a market condition, the Company recognizes the compensation expense related to the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units, 2015 MYLTIP Units and 2016 MYLTIP Units under the graded vesting attribution method. Under the graded vesting attribution method, each portion of the award that vests at a different date is accounted for as a separate award and recognized over the period appropriate to that portion so that the compensation cost for each portion should be recognized in full by the time that portion vests. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Dividends in Excess of Earnings in Boston Properties, Inc.’s Consolidated Balance Sheets and Partners’ Capital in Boston Properties Limited Partnership’s Consolidated Balance Sheets. Aggregate stock-based compensation expense associated with restricted stock, non-qualified stock options, LTIP Units, 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units, 2015 MYLTIP Units and 2016 MYLTIP Units was approximately
$9.4 million
and
$10.1 million
for the
three months ended March 31, 2016
and
2015
, respectively. At
March 31, 2016
, there was
$30.4 million
of unrecognized compensation expense related to unvested restricted stock, LTIP Units, 2012 OPP Units and 2013 MYLTIP Units and
$29.6 million
of unrecognized compensation expense related to unvested 2014 MYLTIP Units, 2015 MYLTIP Units and 2016 MYLTIP Units that is expected to be recognized over a weighted-average period of approximately
2.9 years
.
12. Segment Information
The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by both geographic area and property type. The Company’s segments by geographic area are Boston, New York, San Francisco and Washington, DC. Segments by property type include: Office, Residential and Hotel.
Asset information by segment is not reported because the Company does not use this measure to assess performance. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, development and management services income, general and administrative expenses, transaction costs, interest expense, depreciation and amortization expense, gains (losses) from investments in securities, income from unconsolidated joint ventures, gains on sales of real estate, noncontrolling interests and preferred dividends/distributions are not included in Net Operating Income as internal reporting addresses these items on a corporate level.
Net Operating Income is not a measure of operating results or cash flows from operating activities as measured by GAAP, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate Net Operating Income in the same manner. The Company considers Net Operating Income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of the Company’s properties. The Company’s management also uses Net Operating Income to evaluate regional property level performance and to make decisions about resource allocations. Further, the Company believes Net Operating Income is useful to investors as a performance measure because, when compared across periods, Net Operating Income reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspectives not immediately apparent from net income attributable to Boston Properties, Inc. common shareholders and net income attributable to Boston Properties Limited Partnership common unitholders.
The Company has modified the presentation of its Office/Technical properties to be included within Office properties to align with its method of internal reporting, which shifted after the disposition of 415 Main Street in Cambridge, Massachusetts. As such, the amounts previously included in Office/Technical are now included in Office for all periods presented.
Information by geographic area and property type (dollars in thousands):
For the three months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston
|
|
New York
|
|
San
Francisco
|
|
Washington,
DC
|
|
Total
|
Rental Revenue:
|
|
|
|
|
|
|
|
|
|
Office
|
$
|
177,827
|
|
|
$
|
291,858
|
|
|
$
|
76,317
|
|
|
$
|
100,488
|
|
|
$
|
646,490
|
|
Residential
|
1,171
|
|
|
—
|
|
|
—
|
|
|
2,878
|
|
|
4,049
|
|
Hotel
|
8,757
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,757
|
|
Total
|
187,755
|
|
|
291,858
|
|
|
76,317
|
|
|
103,366
|
|
|
659,296
|
|
% of Grand Totals
|
28.48
|
%
|
|
44.27
|
%
|
|
11.57
|
%
|
|
15.68
|
%
|
|
100.00
|
%
|
Rental Expenses:
|
|
|
|
|
|
|
|
|
|
Office
|
70,687
|
|
|
88,798
|
|
|
23,905
|
|
|
34,182
|
|
|
217,572
|
|
Residential
|
520
|
|
|
—
|
|
|
—
|
|
|
1,080
|
|
|
1,600
|
|
Hotel
|
7,634
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,634
|
|
Total
|
78,841
|
|
|
88,798
|
|
|
23,905
|
|
|
35,262
|
|
|
226,806
|
|
% of Grand Totals
|
34.76
|
%
|
|
39.15
|
%
|
|
10.54
|
%
|
|
15.55
|
%
|
|
100.00
|
%
|
Net operating income
|
$
|
108,914
|
|
|
$
|
203,060
|
|
|
$
|
52,412
|
|
|
$
|
68,104
|
|
|
$
|
432,490
|
|
% of Grand Totals
|
25.18
|
%
|
|
46.95
|
%
|
|
12.12
|
%
|
|
15.75
|
%
|
|
100.00
|
%
|
For the three months ended
March 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston
|
|
New York
|
|
San
Francisco
|
|
Washington,
DC
|
|
Total
|
Rental Revenue:
|
|
|
|
|
|
|
|
|
|
Office
|
$
|
176,027
|
|
|
$
|
253,098
|
|
|
$
|
71,911
|
|
|
$
|
96,173
|
|
|
$
|
597,209
|
|
Residential
|
1,178
|
|
|
—
|
|
|
—
|
|
|
5,676
|
|
|
6,854
|
|
Hotel
|
9,085
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,085
|
|
Total
|
186,290
|
|
|
253,098
|
|
|
71,911
|
|
|
101,849
|
|
|
613,148
|
|
% of Grand Totals
|
30.38
|
%
|
|
41.28
|
%
|
|
11.73
|
%
|
|
16.61
|
%
|
|
100.00
|
%
|
Rental Expenses:
|
|
|
|
|
|
|
|
|
|
Office
|
76,451
|
|
|
85,061
|
|
|
22,821
|
|
|
33,471
|
|
|
217,804
|
|
Residential
|
509
|
|
|
—
|
|
|
—
|
|
|
3,037
|
|
|
3,546
|
|
Hotel
|
7,576
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,576
|
|
Total
|
84,536
|
|
|
85,061
|
|
|
22,821
|
|
|
36,508
|
|
|
228,926
|
|
% of Grand Totals
|
36.92
|
%
|
|
37.16
|
%
|
|
9.97
|
%
|
|
15.95
|
%
|
|
100.00
|
%
|
Net operating income
|
$
|
101,754
|
|
|
$
|
168,037
|
|
|
$
|
49,090
|
|
|
$
|
65,341
|
|
|
$
|
384,222
|
|
% of Grand Totals
|
26.48
|
%
|
|
43.73
|
%
|
|
12.78
|
%
|
|
17.01
|
%
|
|
100.00
|
%
|
Boston Properties, Inc.
The following is a reconciliation of Net Operating Income to net income attributable to Boston Properties, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Net Operating Income
|
$
|
432,490
|
|
|
$
|
384,222
|
|
Add:
|
|
|
|
Development and management services income
|
6,689
|
|
|
5,328
|
|
Income from unconsolidated joint ventures
|
1,791
|
|
|
14,834
|
|
Interest and other income
|
1,505
|
|
|
1,407
|
|
Gains from investments in securities
|
259
|
|
|
393
|
|
Gains on sales of real estate
|
67,623
|
|
|
95,084
|
|
Less:
|
|
|
|
General and administrative expense
|
29,353
|
|
|
28,791
|
|
Transaction costs
|
25
|
|
|
327
|
|
Depreciation and amortization expense
|
159,448
|
|
|
154,223
|
|
Interest expense
|
105,309
|
|
|
108,757
|
|
Noncontrolling interests in property partnerships
|
10,464
|
|
|
15,208
|
|
Noncontrolling interest—redeemable preferred units of the Operating Partnership
|
—
|
|
|
3
|
|
Noncontrolling interest—common units of the Operating Partnership
|
21,393
|
|
|
20,188
|
|
Preferred dividends
|
2,618
|
|
|
2,589
|
|
Net income attributable to Boston Properties, Inc. common shareholders
|
$
|
181,747
|
|
|
$
|
171,182
|
|
Boston Properties Limited Partnership
The following is a reconciliation of Net Operating Income to net income attributable to Boston Properties Limited Partnership common unitholders:
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Net Operating Income
|
$
|
432,490
|
|
|
$
|
384,222
|
|
Add:
|
|
|
|
Development and management services income
|
6,689
|
|
|
5,328
|
|
Income from unconsolidated joint ventures
|
1,791
|
|
|
14,834
|
|
Interest and other income
|
1,505
|
|
|
1,407
|
|
Gains from investments in securities
|
259
|
|
|
393
|
|
Gains on sales of real estate
|
69,792
|
|
|
95,084
|
|
Less:
|
|
|
|
General and administrative expense
|
29,353
|
|
|
28,791
|
|
Transaction costs
|
25
|
|
|
327
|
|
Depreciation and amortization expense
|
157,461
|
|
|
152,224
|
|
Interest expense
|
105,309
|
|
|
108,757
|
|
Noncontrolling interests in property partnerships
|
10,464
|
|
|
15,208
|
|
Noncontrolling interest—redeemable preferred units
|
—
|
|
|
3
|
|
Preferred distributions
|
2,618
|
|
|
2,589
|
|
Net income attributable to Boston Properties Limited Partnership common unitholders
|
$
|
207,296
|
|
|
$
|
193,369
|
|
13. Subsequent Events
On April 4, 2016, a joint venture in which the Company has a
50%
interest extended the loan collateralized by its Annapolis Junction Building Seven property. At the time of the extension, the outstanding balance of the construction loan totaled approximately
$21.5 million
and was scheduled to mature on April 4, 2016. The extended loan has a total commitment amount of
$22.0 million
, bears interest at a variable rate equal to LIBOR plus
1.65%
per annum and matures on April 4, 2017, with
one
,
one
-year extension option, subject to certain conditions. Annapolis Junction Building Seven is a Class A office property with approximately
127,000
net rentable square feet located in Annapolis, Maryland.
On April 11, 2016, the Company used available cash to repay the mortgage loan collateralized by its Fountain Square property located in Reston, Virginia totaling approximately
$211.3 million
. The mortgage loan bore interest at a fixed rate of
5.71%
per annum and was scheduled to mature on October 11, 2016. There was no prepayment penalty.
On April 11, 2016, a joint venture in which the Company has a
50%
interest received a Notice of Event of Default from the lender for the loan collateralized by its Annapolis Junction Building One property. The Event of Default relates to the loan to value ratio not being in compliance with the loan agreement. The joint venture is currently in discussions with the lender regarding the Event of Default, although there can be no assurance as to the outcome of those discussions. The estimated fair value of the Company’s investment in the unconsolidated joint venture exceeds its carrying value. The loan has an outstanding balance of approximately
$40.0 million
, is non-recourse to the Company, bears interest at a variable rate equal to LIBOR plus
1.75%
per annum and has a stated maturity date of March 31, 2018, with
one
,
three
-year extension option, subject to certain conditions. Annapolis Junction Building One is a Class A office property with approximately
118,000
net rentable square feet located in Annapolis, Maryland.
On April 22, 2016, the Company acquired 3625-35 Peterson Way located in Santa Clara, California for a purchase price of approximately
$78.0 million
in cash. 3625-35 Peterson Way is an approximately
218,000
net rentable square foot office property. The property is
100%
leased to a single tenant through March 2021. Upon the lease expiration, the Company intends to develop the site into a Class A office campus containing an aggregate of approximately
632,000
net rentable square feet.