UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-13087
BOSTON PROPERTIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 04-2473675
(State or other jurisdiction (IRS Employer Id. Number)
of incorporation or organization)
8 Arlington Street
Boston, Massachusetts 02116
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 859-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 38,694,041
(Class) (Outstanding on November 14, 1997)
BOSTON PROPERTIES, INC.
FORM 10-Q
for the quarter ended September 30, 1997
TABLE OF CONTENTS
Page(s)
---------
PART 1. FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated and Combined Financial Statements:
a) Condensed Consolidated and Combined Balance Sheets as of September 30, 1997
and December 31, 1996 1
b) Condensed Consolidated and Combined Statements of Operations for the Company for
the period from June 23, 1997 to September 30, 1997 and for the Predecessor Group
for the period from January 1, 1997 to June 22, 1997 and for the nine months ended
September 30, 1996 2
c) Condensed Consolidated and Combined Statements of Operations for the Company for the three
months ended September 30, 1997 and for the Predecessor Group for the three months ended
September 30, 1996 3
d) Condensed Consolidated and Combined Statements of Cash Flows for the Company for the
period from June 23, 1997 to September 30, 1997 and for the Predecessor Group for the
period from January 1, 1997 to June 22, 1997 and for the nine months ended September 30, 1996 4
e) Notes to the Condensed Consolidated and Combined Financial Statements 5-10
ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 11-17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17-18
Signatures
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
The
The Predecessor
Company Group
.................... ....................
September 30, December 31,
1997 1996
.................... ....................
(Unaudited)
ASSETS (in thousands)
Real estate and equipment: $ 1,433,376 $ 1,035,571
Less accumulated depreciation (285,505) (263,911)
----------- -----------
Total real estate and equipment 1,147,871 771,660
Cash and cash equivalents 25,989 8,998
Escrows 10,673 25,474
Tenant and other receivables 13,170 12,049
Accrued rental income 50,377 49,206
Deferred charges 34,707 24,722
Prepaid expenses and other assets 8,933 4,402
Investment in joint venture 3,918 --
----------- -----------
Total assets $ 1,295,638 $ 896,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' AND OWNERS' EQUITY (DEFICIT)
Liabilities:
Mortgage notes payable $ 914,614 $ 1,420,359
Unsecured line of credit 71,000 --
Notes payable - affiliate -- 22,117
Accounts payable and accrued expenses 16,073 13,795
Accrued interest payable 3,639 9,667
Rents received in advance, security
deposits and other liabilities 13,663 7,205
----------- -----------
Total liabilities 1,018,989 1,473,143
----------- -----------
Commitments and contingencies -- --
Minority interest in Operating Partnership 81,168 --
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, none issued or outstanding
Common Stock, $.01 par value, 250,000,000 shares
authorized, 38,693,541 issued and outstanding 387 --
Additional paid in capital 172,315 --
Retained earnings 22,779 --
----------- -----------
Owners' deficit -- (576,632)
----------- -----------
Total stockholders' and owners' equity (deficit) 195,481 (576,632)
----------- -----------
Total liabilities and stockholders' and owners' equity (deficit) $ 1,295,638 $ 896,511
=========== ===========
The accompanying notes are an integral part of these financial statements.
1
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
The Company The Predecessor Group
......................... .......................................
June 23, 1997 January 1, 1997 Nine months
to to ended
September 30, 1997 June 22, 1997 September 30, 1996
....................... ................. ......................
(unaudited and in thousands, except for per share data)
..................................................................
REVENUE
Rental:
Base rent $ 57,892 $ 80,122 $ 127,727
Recoveries from tenants 6,144 10,283 17,401
Parking and other 217 3,397 2,263
--------- --------- ---------
Total rental revenue 64,253 93,802 147,391
Hotel operating -- 31,185 47,458
Development and management services 2,221 3,685 4,880
Interest and other 1,879 1,146 2,590
--------- --------- ---------
Total revenue 68,353 129,818 202,319
--------- --------- ---------
EXPENSES
Rental:
Operating 8,828 13,650 22,332
Real estate taxes 9,065 13,382 21,396
Hotel:
Operating -- 20,938 29,826
Real estate taxes -- 1,514 2,533
General and administrative 3,164 5,116 8,149
Interest 16,091 53,324 82,627
Depreciation and amortization 10,113 17,054 27,008
--------- --------- ---------
Total expenses 47,261 124,978 193,871
--------- --------- ---------
Income before minority interests and extraordinary items 21,092 4,840 8,448
Minority interest in property partnership (69) (235) (288)
--------- --------- ---------
Income before minority interest in Operating Partnership
and extraordinary items 21,023 4,605 8,160
Minority interest in Operating Partnership (6,169) -- --
--------- --------- ---------
Income before extraordinary items 14,854 4,605 8,160
Extraordinary items on early debt extinguishments, net
of minority interest 7,925 -- --
--------- --------- ---------
Net income $ 22,779 $ 4,605 $ 8,160
========= ========= =========
Per share:
Income before extraordinary items $ 0.39 -- --
Extraordinary items:
Gains on early debt extinguishments 0.20 -- --
Net income: $ 0.59 -- --
Weighted average number of common shares
outstanding 38,694 -- --
The accompanying notes are an integral part of these financial statements.
2
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
The Predecessor
The Company Group
..................... .........................
Three months Three months
ended ended
September 30, September 30,
1997 1996
.............................. ...........................
(unaudited and in thousands, except for per share data)
..............................................................
REVENUE
Rental:
Base rent $ 53,433 $ 41,203
Recoveries from tenants 5,656 6,111
Parking and other 162 801
-------- --------
Total rental revenue 59,251 48,115
Hotel operating - 17,586
Development and management services 2,105 1,715
Interest and other 1,633 998
-------- --------
Total revenue 62,989 68,414
-------- --------
EXPENSES
Rental:
Operating 8,071 7,527
Real estate taxes 8,452 7,116
Hotel:
Operating - 10,364
Real estate taxes - 655
General and administrative 2,917 2,962
Interest 14,719 28,153
Depreciation and amortization 9,268 9,231
-------- --------
Total expenses 43,427 66,008
-------- --------
Income before minority interests and extraordinary items 19,562 2,406
Minority interest in property partnership (60) (96)
-------- --------
Income before minority interest in Operating Partnership
and extraordinary items 19,502 2,310
Minority interest in Operating Partnership (5,722) -
-------- --------
Income before extraordinary items 13,780 2,310
Extraordinary items on early debt extinguishments, net
of minority interest (58) -
-------- --------
Net income $ 13,722 $ 2,310
======== ========
Per share:
Income before extraordinary items $ 0.36 -
Extraordinary items:
Losses on early debt extinguishments (0.00) -
Net income: $ 0.36 -
Weighted average number of common shares
outstanding 38,694 -
The accompanying notes are an integral part of these financial statements.
3
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
The Company The Predecessor Group
...................... ...........................................
June 23, 1997 to January 1, 1997 to Nine Months ended
September 30, 1997 June 22, 1997 September 30, 1996
...................... .................... ......................
(unaudited and in thousands)
Cash flows from operating activities:
Net income $ 22,779 $ 4,605 $ 8,160
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,113 17,054 27,008
Non-cash portion of interest expense 173 1,497 483
Extraordinary gain on early debt extinguishments (11,216) - -
Minority interest in Operating Partnership 9,463 - -
Change in assets and liabilities:
Tenant and other receivables 5,993 (7,114) (2,856)
Prepaid expenses and other assets (3,038) (1,494) 759
Accrued rental income (881) (291) 955
Accounts payable and accrued expenses (2,138) 5,220 (2,007)
Accrued interest payable (8,049) 2,021 (3,335)
Rent received in advance, security deposits,
and other liabilities 2,731 3,728 1,942
--------- --------- ---------
Total adjustments 3,151 20,621 22,949
--------- --------- ---------
Net cash provided by operating activities 25,930 25,226 31,109
--------- --------- ---------
Cash flows from investing activities:
Acquisitions/additions to real estate and equipment (366,054) (27,721) (14,606)
Tenant leasing costs 95 (2,550) 599
Escrows - - (28,945)
Investment in Joint Venture (1,345) (2,573) -
Cash from contributed assets 10,510 - -
--------- --------- ---------
Net cash used in investing activities (356,794) (32,844) (42,952)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of common stock 839,209 - -
Owners' contributions - 9,330 5,317
Owners' distributions - (32,125) -
Borrowings on Unsecured Line of Credit 71,000 - -
Proceeds from long term debt 220,000 - -
Repayments on mortgage notes (708,090) (3,799) (1,464)
Accounts receivable - affiliates - (804) -
Accounts payable - affiliates (19,983) 19,983 -
Escrows 14,934 (136) -
Costs related to debt extinguishments (8,512) - -
Proceeds (repayments) from notes payable - affiliate (38,833) 16,716 169
Payment of deferred financing and other costs (12,872) (35) (5,577)
--------- --------- ---------
Net cash provided (used) by financing activities 356,853 9,130 (1,555)
--------- --------- ---------
Net increase (decrease) in cash 25,989 1,512 (13,398)
Cash and cash equivalents, beginning of period - 8,998 25,867
--------- --------- ---------
Cash and cash equivalents, end of period $ 25,989 $ 10,510 $ 12,469
========= ========= =========
Supplemental disclosures:
Cash paid for interest $ 26,032 $ 50,917 -
========= =========
Interest capitalized $ 683 $ 1,111 -
========= =========
Non-cash activities:
Net liabilities assumed in connection with the contribution
of properties $ 592,452 - -
Reallocation of additional paid in capital to minority
interest in Operating Partnership $ 664,856 - -
The accompanying notes are an integral part of these financial statements.
4
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
1. Organization
------------
Boston Properties, Inc. (the "Company") a Delaware corporation, was formed
to succeed to (i) the real estate development, redevelopment, ownership,
acquisition, management, operating and leasing business associated with
Boston Properties, Inc., a Massachusetts corporation founded in 1970, and
(ii) various property partnerships under common control with the predecessor
company (collectively, the "Boston Properties Predecessor Group" or the
"Predecessor"). The Company intends to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended.
On June 23, 1997, the Company commenced operations after completing an
initial public offering of 36,110,000 common shares (including 4,710,000
shares issued as a result of the exercise of an over-allotment option by the
underwriters) (the "Offering"). The 36,110,000 shares of common stock were
issued at a price per share of $25.00, generating gross proceeds of
$902,750,000. The proceeds to the Company, net of underwriters' discount and
offering costs were approximately $839,209,000.
The following transactions occurred simultaneously with the completion of
the Offering (collectively, the "Formation Transactions").
. The Company became the sole general partner of Boston Properties Limited
Partnership (the "Operating Partnership"). Upon completion of the
Offering, the Company contributed substantially all of the net proceeds
of the offering in exchange for an approximate 70.66% interest in the
Operating Partnership.
. The Operating Partnership exercised various option and purchase
agreements whereby it issued units in the Operating Partnership
("Units"), representing an approximate 29.34% limited partnership
interest, to the continuing investors in exchange for interests in
certain properties.
. The Company contributed substantially all of its Greater Washington, D.C.
third-party management business to Boston Properties Management, Inc.
(the "Development and Management Company"), a subsidiary of the Operating
Partnership.
. The Operating Partnership entered into a participating lease with ZL
Hotel LLC. Marriott International, Inc. manages the Company's two hotel
properties under the Marriott(R) name. Messrs. Zuckerman and Linde are
the sole member-managers of the ZL Hotel LLC and own a 9.8% economic
interest in ZL Hotel LLC. ZL Hotel Corp. owns the remaining 90.2%
economic interest in ZL Hotel LLC. Certain public charities own all the
capital stock of ZL Hotel Corp.
. The Company, through the Operating Partnership, entered into a $300
million unsecured credit facility with BankBoston, N.A., as agent (the
"Unsecured Line of Credit"). As of September 30, 1997, $71.0 million was
outstanding under the Unsecured Line of Credit. The Unsecured Line of
Credit is a recourse obligation of the Operating Partnership and is
guaranteed by the Company. The Company's ability to borrow under the
Unsecured Line of Credit is subject to the Company's ongoing compliance
with a number of financial and other covenants.
5
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
(Continued)
. The Operating Partnership utilized $696,236,000 of the proceeds of the
Offering, together with $54,000,000 under the Unsecured Line of Credit,
to repay $707,071,000 of mortgage indebtedness ($47,780,000 of which was
paid on July 1, 1997), $28,843,000 of indebtedness due to Messrs.
Zuckerman and Linde related to development of properties in process and
$14,322,000 to fund the acquisition of an approximately 170,000 square
foot office building in Quincy, Massachusetts.
The Properties:
The Company owns a portfolio of 80 commercial real estate properties (75 and
72 properties at June 30, 1997 and December 31, 1996, respectively) (the
"Properties") aggregating approximately 12.7 million square feet, 83% of
which was developed or substantially redeveloped by the Company. The
properties consist of 67 office properties with approximately 9.6 million
net rentable square feet (including eight office properties under
development containing approximately 1.3 million net rentable square feet)
and approximately 1.3 million additional square feet of structured parking
for 4,222 vehicles, nine industrial properties with approximately 925,000
net rentable square feet, three hotels (including one hotel under
development) with a total of 1,054 rooms (consisting of approximately
937,900 square feet), and a parking garage with 1,170 spaces (consisting of
approximately 330,000 square feet). In addition, the Company owns, has under
contract, or has an option to acquire six parcels of land totaling 39.0
acres, which will support approximately 629,000 square feet of development.
2. Basis of Presentation and Summary of Significant Accounting Policies
--------------------------------------------------------------------
The condensed consolidated financial statements of the Company include all
the accounts of the Company, its majority-owned Operating Partnership and
subsidiaries. The financial statements reflect the properties acquired at
their historical basis of accounting to the extent of the acquisition of
interests from the Predecessor's owners who continued as investors. The
remaining interest acquired for cash from those owners of the Predecessor
who decided to sell their interests have been accounted for as a purchase
and the excess of the purchase price over the related historical cost basis
was allocated to real estate. The condensed combined financial statements of
the Boston Properties Predecessor Group include interests in properties and
the third party commercial real estate development, project management and
property management business of Boston Properties, Inc. The accompanying
condensed combined financial statements for the Boston Properties
Predecessor Group have been presented on a combined basis due to the common
ownership and management; therefore, its combined financial statements are
presented for comparative purposes. All significant intercompany balances
and transactions have been eliminated.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with generally
accepted accounting principles 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 generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely
of normal recurring matters) necessary for a fair presentation 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 the full fiscal year.
6
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
(Continued)
These financial statements should be read in conjunction with the Company's
prospectus dated June 17, 1997 and the combined financial statements and
notes thereto of the Boston Properties Predecessor Group included therein.
Offering Costs:
Underwriting commissions and offering costs incurred in connection with
the Offering have been reflected as a reduction of additional paid in
capital.
Income Taxes:
The Company will elect to be taxed as a REIT under the Internal Revenue
Code commencing with its taxable period ending December 31, 1997. As a
result, the Company will generally not be subject to federal income tax on
its taxable income at corporate rates to the extent it distributes
annually at least 95% of its taxable income to its shareholders and
complies with certain other requirements. Accordingly, no provision has
been made for federal income taxes in the accompanying consolidated
financial statements. Certain subsidiaries are subject to federal and
state income tax on their taxable income at regular corporate rates.
Earnings per share:
Earnings per share is calculated based on the weighted average number of
common shares outstanding. The assumed exercise of outstanding stock
options, using the treasury stock method, is immaterial and, therefore,
such amounts are not presented.
Reclassifications:
Certain amounts from the June 30, 1997 Balance Sheet and the Statement of
Operations for the period from January 1, 1997 to June 22, 1997 and June
23, 1997 to September 30, 1997 have been reclassifed to conform with
current presentation.
3. Newly Issued Accounting Standards
---------------------------------
Financial Accounting Standards Board Statement No. 128 ("FAS 128") "Earnings
Per Share" is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company intends to
adopt the requirements of this pronouncement in its financial statements for
the year ending December 31, 1997. FAS 128 specifies the computation,
presentation and disclosure requirements for net income per share. FAS 128
also requires the presentation of diluted net income per share which the
Company was not previously required to present under generally accepted
accounting principles.
Financial Accounting Standards Board Statement No. 129 ("FAS 129")
"Disclosure of Information about Capital Structure" is effective for
financial statements issued for periods ending after December 31, 1997. FAS
129 establishes standards for disclosure of information about securities,
liquidation preference of preferred stock and redeemable stock.
Financial Accounting Standards Board Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income" is effective for fiscal years beginning
after December 15, 1997, although earlier application is permitted. The
Company intends to adopt the requirements of this pronouncement in its
financial statements for the year ending December 31, 1998. FAS 130
establishes standards for reporting and
7
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
(Continued)
display of comprehensive income and its components in a full set of general-
purpose financial statements. FAS 130 requires that all components of
comprehensive income shall be reported in the financial statements in the
period in which they are recognized. Furthermore, a total amount for
comprehensive income shall be displayed in the financial statement where the
components of other comprehensive income are reported. The Company was not
previously required to present comprehensive income or the components
thereof in its financial statements under generally accepted accounting
principles.
Financial Accounting Standards Board Statement No. 131 ("FAS 131")
"Disclosures about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after
December 15, 1997. FAS 131 requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates.
The Company does not believe that the implementation of FAS 128, FAS 129,
FAS 130 or FAS 131 will have a material impact on its financial statements.
4. Minority Interest in Operating Partnership
------------------------------------------
Minority interest in the Operating Partnership relates to the interest in
the Operating Partnership that is not owned by the Company which, at
September 30, 1997, amounted to 29.34%.
In conjunction with the formation of the Company, persons contributing
interests in properties to the Operating Partnership received Units.
Beginning fourteen months after the completion of the offering, the
Operating Partnership will, at the request of any Unitholder, be obligated
to redeem each Unit held by such Unitholder for, at the option of the
Operating Partnership, (i) cash equal to the fair market value of one share
of the Company's common stock at the time of redemption, or (ii) one share
of the Company's common stock. Such redemptions will cause the Company's
percentage ownership in the Operating Partnership to increase.
5. Real Estate Acquisition
-----------------------
On September 11, 1997, the Company acquired 280 Park Avenue, a Class A
office building located in midtown Manhattan. The 1.2 million square foot
property was acquired for approximately $321.3 million. The acquisition was
funded by a $220 million loan from Chase Manhattan Bank and $101.3 million
of cash.
6. Extinguishment of Indebtedness
------------------------------
Certain mortgage indebtedness aggregating $707,071,000 was repaid in
conjunction with the Offering of which $659,291,000 was repaid at June 23,
1997. These repayments, along with (i) the payment of certain related
prepayment penalties, (ii) the write-off of the related previously
capitalized deferred financing costs, and (iii) the extinguishment of the
excess of the mortgage note payable balance
8
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
(Continued)
over the principal payment required for the 599 Lexington Avenue property
(which was a result of the application of the effective interest method to
this increasing rate loan), generated a gain of $7,983,000, (net of minority
interest share of $3,315,000), which has been reflected as an extraordinary
gain to the Company in the period ended June 30, 1997.
Due to lender requirements, $47,909,000 of the offering proceeds was placed
in escrow at June 23, 1997 and used to retire $47,780,000 of mortgage
indebtedness, and related costs on July 1, 1997. These repayments generated
a loss of $58,000 (net of minority interest share of $24,000) which is
reflected as an extraordinary loss in the Statement of Operations of the
Company for the quarter ended September 30, 1997.
7. Stock Option and Incentive Plan
-------------------------------
The Company has established a stock option and incentive plan for the
purpose of attracting and retaining qualified executives and rewarding them
for superior performance in achieving the Company's business goals and
enhancing stockholder value. In conjunction with the Offering, the Company
granted options with respect to 2,290,000 common shares to directors,
officers and employees. All of such options were issued at an exercise price
of $25.00. The term of each of such options is 10 years from the date of
grant. In general, one-third of each of the options granted to officers and
Mr. Zuckerman are exercisable on each of the third, fourth, and fifth
anniversary of the date of grant, respectively.
One-third of the options granted to employees who are not officers will be
exercisable on each of the first, second and third anniversary of the date
of grant, respectively. Other than the options granted to Mr. Zuckerman,
one-half of the options granted to non-employee directors will be
exercisable on each of the first and second anniversary of the date of
grant, respectively.
As of September 30, 1997, the Company had granted options with respect to
2,290,000 common shares and an additional 2,464,750 common shares were
reserved for issuance under the Company's stock option and incentive plan.
8. Unaudited Pro Forma Condensed Consolidated Financial Information
----------------------------------------------------------------
The accompanying unaudited pro forma information for the three month and
nine month periods ended September 30, 1997 and 1996 are presented as if the
Formation Transactions discussed in Note 1 had occurred on January 1, 1996
and January 1, 1997. In addition to the Formation Transactions, the second
table represents pro forma information for the three month and nine month
periods ended September 30, 1997 and 1996 as if the real estate acquisition
discussed in Note 5 had occurred on January 1, 1997 and 1996. This pro forma
information is based upon the historical consolidated financial statements
of the Company and the Boston Properties Predecessor Group and should be
read in conjunction with the condensed consolidated and combined financial
statements and the notes thereto.
This unaudited pro forma condensed information does not purport to represent
what the actual results of operations of the Company would have been
assuming such Formation Transactions and real
9
Boston Properties, Inc., and
Boston Properties Predecessor Group
Notes to Condensed Consolidated and Combined Financial Statements
(Continued)
estate acquisition had been completed as set forth above, nor do they purport
to predict the results of operations of future periods.
(in thousands except per share data)
** Three Months Three Months Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96 Ended 9/30/97 Ended 9/30/96
(actual) (pro forma) (pro forma) (pro forma)
-------- ----------- ----------- -----------
Total revenue $62,989 $56,146 $177,820 $170,623
Net income 13,722 8,647 36,745 30,997
Net income per share of common stock $0.36 $0.22 $0.95 $0.80
Weighted average number of shares of
common stock outstanding 38,694 38,694 38,694 38,694
** Includes Formation Transactions only
(in thousands except per share data)
**** Three Months Three Months Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96 Ended 9/30/97 Ended 9/30/96
(pro forma) (pro forma) (pro forma) (pro forma)
Total revenue 73,137 $67,076 $208,263 $203,414
Net income 14,009 9,112 37,605 32,391
Net income per share of common stock $0.36 $0.24 $0.97 $0.84
Weighted average number of shares of
common stock outstanding 38,694 38,694 38,694 38,694
**** Includes Formation Transactions and the acquisition during the three months
ended September 30, 1997.
9. Subsequent Event
----------------
On October 23, 1997 the Company acquired 100 East Pratt Street in Baltimore,
Maryland for $137.5 million of cash (including closing costs) and the
issuance of 500 shares of the Company's Common Stock. This Class A office
building consists of 634,829 net rentable square feet and an 8-story
parking garage. The acquisition was funded through a draw-down of $137.5
million under the Unsecured Line of Credit.
On October 29, 1997, the Company declared a dividend of $.44 per share
payable on November 21, 1997 to shareholders of record on November 7, 1997.
This dividend relates to the three months ended September 30, 1997 in the
amount of $.405 per share and the period from June 23, 1997 to June 30, 1997
in the amount of $.035 per share.
10
Boston Properties, Inc., and
Boston Properties Predecessor Group
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
Overview
Management's Discussion and Analysis of Financial Condition and Results of
Operations include certain forward-looking statements about the Company's
business, revenues, expenditures and operating and capital requirements. In
addition, forward-looking statements may be included in various other Company
documents to be issued in the future and in various oral statements by Company
representatives to security analysts and investors from time to time. Any such
statements are subject to risks that could cause the actual results or needs to
vary materially. The risks and uncertainties associated with the forward-
looking information include the strength of the commercial office and industrial
real estate markets in which the Company operates, competitive market
conditions, general economic growth, interest rates and capital market
conditions. The Company discusses such risks in detail in its prospectus dated
June 17, 1997.
Results of Operations
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996:
For discussion purposes, the results of operations for the nine months ended
September 30, 1997 combine the operating results of the Boston Properties
Predecessor Group for the period January 1, 1997 to June 22, 1997 and the
operating results of the Company for the period June 23, 1997 to September 30,
1997. The results of operations for the nine months ended September 30, 1996
represent solely the operating results of the Predecessor. Consequently, the
comparison of the periods provides only limited information regarding the
operations of the Company.
Rental revenue increased $10.7 million or 7.3% to $158.1 million from $147.4
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. Rental revenue for the nine months ended September
30, 1997 includes rental revenue from the hotel leases for the eight-day period
June 23, 1997 to June 30, 1997 and the three months ended September 30, 1997 as
well as rental revenue from the properties acquired during 1997.
Hotel operating revenue decreased $16.3 million or 34.3% to $31.2 million from
$47.5 million for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996. Hotel operating revenue for the nine months
ended September 30, 1997 only includes revenue from January 1, 1997 to June 22,
1997 as a result of the Operating Partnership entering into a participating
lease with ZL Hotel LLC at the time of the Offering.
Third party management and development fee income increased $1.0 million or
20.4% to $5.9 million from $4.9 million for the nine months ended September 30,
1997 compared to the nine months ended September 30, 1996 as a result of
increased fees on existing projects as well as additional projects.
Interest income and other increased $435,000 or 16.7% to $3.0 million from $2.6
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996, primarily due to increasing
11
Boston Properties, Inc., and
Boston Properties Predecessor Group
average cash balances.
Property expenses increased $1.2 million or 2.7% to $44.9 million from $43.7
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996 primarily as a result of real estate acquisitions.
Hotel expenses decreased $10.0 million or 30.9% to $22.4 million from $32.4
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. Hotel expenses for the nine months ended September 30,
1997 only includes expenses from January 1, 1997 to June 22, 1997, as a result
of the participating leases.
General and administrative expenses increased $131,000 or 1.6% to $8.3 million
from $8.2 million for the nine months ended September 30, 1997 compared to the
nine months ended September 30, 1996.
Interest expense decreased $13.2 million or 16.0% to $69.4 million from $82.6
million for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. An increase in interest expense due to increased
indebtedness for the period January 1, 1997 to June 22, 1997 was offset by a
reduction in interest expense for the eight-day period June 23, 1997 to June 30,
1997 and the three months ended September 30, 1997 as a result of the payoff of
approximately $707 million of mortgage indebtedness.
Depreciation and amortization expense increased $200,000 or .74% to $27.2
million from $27.0 million for the nine months ended September 30, 1997 compared
to the nine months ended September 30, 1996.
As a result of the foregoing, net income before minority interests and
extraordinary items increased $17.7 million to $25.9 million from $8.2 million
for the nine months ended September 30, 1997 to the nine months ended September
30, 1996.
Comparison of three months ended September 30, 1997 to the three months ended
September 30, 1996:
The results of operations for the three months ended September 30, 1996
represent solely the operating results of the Predecessor. Consequently, the
comparison of the periods provide only limited information regarding the
operations of the Company.
Rental revenue increased $11.2 million or 23.3% to $59.3 million from $48.1
million for the three months ended September 30, 1997 compared to the three
months ended September 30, 1996. The increase is due to rental revenue earned on
the Company's acquisitions during 1997. Newport Office Park earned rental
revenues for the full three months ended September 30, 1997 and 280 Park Avenue
earned rental revenues for the period from September 11, 1997 to September 30,
1997. Additionally, occupancy at 91 Hartwell Avenue and Democracy Center
increased. In addition, rental revenue for the three months ended September 30,
1997 includes rental revenue from the hotel participating leases.
Hotel operating revenue decreased $17.6 million or 100% to $0 from $17.6 million
for the three months ended September 30, 1997. Hotel revenue for the three
months ended September 30, 1997 does not include any revenue as a result of the
Operating Partnership entering into participating leases with ZL Hotel LLC at
the time of the Offering.
Third party management and development fee income increased $390,000 or 22.9% to
$2.1 million from $1.7 million for the three months ended September 30, 1997
compared to the three months ended September 30, 1996 as a result of increased
fees on existing projects as well as additional projects.
12
Boston Properties, Inc., and
Boston Properties Predecessor Group
Interest income increased $635,000 or 63.6% to $1.6 million from $998,000 for
the three months ended September 30, 1997 compared to the three months ended
September 30, 1996 primarily due to interest income earned on cash reserves.
Property expenses increased $1.9 million or 13.0% to $16.5 million from $14.6
million for the three months ended September 30, 1997 compared to the three
months ended September 30, 1996 primarily as a result of property acquisitions
and increases in real estate taxes.
Hotel expenses decreased $11.0 million or 100% to $0 from $11.0 million for the
three months ended September 30, 1997 compared to the three months ended
September 30, 1996. There were no expenses during the three months ended
September 30, 1997 as a result of the participating leases.
General and administrative expenses decreased $45,000 or 1.5% to $2.9 million
from $3.0 million for the three months ended September 30, 1997 compared to the
three months ended September 30, 1996.
Interest expense decreased $13.5 million or 47.9% to $14.7 million from $28.2
million for the three months ended September 30, 1997 compared to the three
months ended September 30, 1996. This was a result of the payoff of certain
mortgage indebtedness with the proceeds from the Offering.
Depreciation and amortization expense increased $37,000 or 0.4% to $9.3 from
$9.2 million for the three months ended September 30, 1997 compared to the three
months ended September 30, 1996. This was attributed to the property acquisition
at the end of the third quarter.
As a result of the foregoing, net income before minority interests and
extraordinary items increased $17.2 million to $19.6 million from $2.4 million
for the three months ended September 30, 1997 compared to the three months ended
September 30, 1996.
Liquidity and Capital Resources
Upon completion of the Offering, the Company received approximately $839.2
million in net proceeds. The Company used these funds as follows: (i)
approximately $707.1 million to repay certain mortgage indebtedness ($47.8
million of which was paid on July 1, 1997); (ii) approximately $2.7 million for
related prepayment penalties; (iii) approximately $10.4 million to pay transfer
taxes; (iv) approximately $1.6 million to establish the Unsecured Line of
Credit.
The Company closed on the $300 million Unsecured Line of Credit with BankBoston,
N.A., as agent. Upon completion of the Offering, $54.0 million was drawn on the
Unsecured Line of Credit and was used as follows: (i) $38.8 million to repay
notes due Messrs. Zuckerman and Linde (the "Development Loan') in respect of
loans advanced by them to the entities that, prior to the Offering, owned
certain development properties and certain parcels of land, to fund the
development of the development properties and the acquisition of such parcels of
land; (ii) approximately $14.3 million (net of $6.9 million of assumed debt) was
used to acquire the Newport Office Park property and (iii) $0.9 million for
working capital. During the three months ended September 30, 1997, an additional
$17 million was drawn under the Unsecured Line of Credit to pay for certain
properties in development and remaining Offering costs.
The Unsecured Line of Credit, at the Company's election, bears interest at a
floating rate based on a spread over LIBOR ranging from 90 basis points to
13
Boston Properties, Inc., and
Boston Properties Predecessor Group
110 basis points, depending upon the Company's applicable leverage ratio, or the
Line of Credit Bank's prime rate. The Company's ability to borrow under the
Unsecured Line of Credit is subject to the Company's ongoing compliance with a
number of financial and other covenants. The Unsecured Line of Credit requires:
(i) the Company to maintain a ratio of unsecured indebtedness to unencumbered
property value of not more than 60%, (ii) that the unencumbered properties must
generate sufficient net operating income to maintain a debt service coverage
ratio of at least 1.4 to 1, (iii) a total indebtedness to total asset value
ratio of not more than 55%, (iv) that the ratio of EBITDA to debt service plus
estimated capital expenditures and preferred dividends be at lease 1.75 to 1,
and (v) certain other customary covenants and performance requirements.
In addition, the Company closed on a $220 million Term Loan with Chase Manhattan
Bank, as agent. The Company acquired 280 Park Avenue with the proceeds from the
loan along with available cash for $321.3 million. The Term Loan bears interest
at a floating rate based on an available Adjusted LIBOR plus 1%. The available
Adjusted LIBOR consist of a one-month, a two-month, a three-month, and a six-
month Adjusted LIBOR. Interest is due monthly beginning on September 11, 1997.
The Company must pay monthly installments of $733,333 for principal beginning on
September 11, 2000.
The Company's consolidated indebtedness at October 1, 1997 was $985.6 million at
a weighted average interest rate of 7.3%. Based on the Company's total market
capitalization at October 1, 1997 of approximately $2.8 billion, the Company's
consolidated debt represents 35.4% of its total market capitalization.
The following represents the outstanding principal balances due under the
first mortgages at September 30, 1997:
Properties Interest Rate Principal Maturity Date
---------- ------------- --------- -------------
(in thousands)
599 Lexington Avenue 7.00% $225,000 July 19, 2005 (1)
Two Independence Square 7.90 (2) 121,625 February 27, 2003
One Independence Square 7.90 (2) 77,688 August 21, 2001
2300 N Street 6.88 66,000 August 3, 2003
Capital Gallery 8.24 60,164 August 15, 2006
Burlington Mall Road (3) 8.33 37,000 October 1, 2001
Ten Cambridge Center (4) 7.57 40,000 March 29, 2000
191 Spring Street 8.50 23,760 September 1, 2006
Bedford Business Park 8.50 23,184 December 10, 2008
Montvale Center 8.59 7,929 December 1, 2006
Newport Office Park 8.13 6,815 July 1, 2001
Hilltop Business Center 7.13 (5) 4,667 December 15, 1998
14
Boston Properties, Inc., and
Boston Properties Predecessor Group
280 Park Avenue 6.66 (6) 220,000 September 11, 2002
Unsecured Line of Credit 6.69 (7) 71,000 June 22, 2000
--------
Total $984,832
========
(1) At maturity the lender has the option to purchase a 33.33% interest in this
Property in exchange for the cancellation of the principal balance of
approximately $225 million.
(2) The interest rate increases to 8.5% on March 25, 1998 and remains at such
rate through the loan maturity.
(3) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 and
100 Hayden Avenue.
(4) Includes outstanding indebtedness secured by the Cambridge North Garage.
(5) This is a floating interest rate equal to LIBOR + 1.5% (As of September 30,
1997, LIBOR of 5.63% was used to determine such rate).
(6) This is a floating interest rate currently equal to LIBOR + 1.00% (As of
September 30, 1997, LIBOR of 5.63% was used to determine such rate).
(7) This is a floating interest rate currently equal to LIBOR + 1.00% (As of
September 30, 1997, LIBOR of 5.63% was used to determine such rate).
The Company expects to meet its short-term liquidity requirements generally
through its net cash provided by operations. The Company's operating properties
and hotels require periodic investments of capital for tenant-related capital
expenditures and for general capital improvements. For the nine months ended
September 30, 1997, the Company's recurring capital expenditures totaled
approximately $1.0 million.
The Company expects to meet its long-term requirements for the funding of
property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including the
Unsecured Line of Credit) and the issuance of additional equity securities of
the Company.
The Company has development projects currently in process which require
commitments to fund to completion. Commitments under these arrangements totaled
$155 million as of September 30, 1997. The Company expects to fund these
commitments using the Unsecured Line of Credit. In addition, the Company has
options to acquire land that require minimum deposits that the Company will fund
using the Unsecured Line of Credit.
Funds from Operations
Management believes Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations approved by the Board of Governors of NAREIT in 1995, which may
differ from the methodology for calculating Funds from Operations utilized by
other equity REITs, and accordingly, may not be comparable to such other REITs.
The White Paper defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indication of the Company's financial performance
or to cash flows form operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make distributions.
The Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Boston Properties Predecessor Group
and the Company, Funds from Operations should be examined in conjunction with
net income as presented in the consolidated and combined financial statements.
15
Boston Properties, Inc., and
Boston Properties Predecessor Group
The following table presents the Company's Funds from Operations for the three
months ended September 30, 1997:
Income before minority interest and extraordinary item $19,562
Add:
Real estate depreciation and amortization 9,143
Less:
Minority property partnership's share of Funds (117)
from Operations ---
-------
Funds from Operations $28,588
=======
Company's share (70.66%) $20,200
=======
Inflation
The majority of the Company's tenant leases require tenants to pay most
operating expenses, including real estate taxes and insurance, and increases in
common area maintenance expenses, which reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board Statement No. 128 ("FAS 128") "Earning Per
Share" is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company intends to adopt the
requirements of this pronouncement in its financial statements for the year
ending December 31, 1997. FAS 128 specifies the computation, presentation and
disclosure requirements for net income per share. FAS 128 also requires the
presentation of diluted net income per share which the Company was not
previously required to present under generally accepted accounting principles.
Financial Accounting Standards Board Statement No.129 ("FAS 129") "Disclosure of
Information about Capital Structure" is effective for financial statements
issued for periods ending after December 31, 1997. FAS 129 establishes standards
for disclosure of information about securities, liquidation preference of
preferred stock and redeemable stock.
Financial Accounting Standards Board Statement No. 130 ("FAS 130") "Reporting
Comprehensive Income" is effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. The Company intends to adopt
the requirements of this pronouncement in its financial statements for the year
ending December 31, 1998. FAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. FAS 130 requires that all components of
comprehensive income shall be reported in the financial statements in the period
in which they are recognized. Furthermore, a total amount for comprehensive
income shall be displayed in the financial statement where the components of
other comprehensive income are reported. The Company was not previously required
to present comprehensive income or the components thereof in its financial
statements under generally accepted accounting principles.
16
Boston Properties, Inc., and
Boston Properties Predecessor Group
Financial Accounting Standards Board Statement No. 131 ("FAS 131") "Disclosures
about Segments of and Enterprise and Related Information" is effective for
financial statements issued for periods beginning after December 15, 1997. FAS
131 requires disclosures about segments of an enterprise and related information
regarding the different types of business activities in which an enterprise
engages and the different economic environments in which it operates.
The Company does not believe that the implementation of FAS 128, FAS 129, FAS
130 or FAS 131 will have a material impact on its financial statements.
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
(1)2.1 Agreement of Purchase and Sale between Bankers Trust Company as
seller and Boston Properties Limited Partnership, as buyer dated
September 11, 1997.
+10.1 Term loan agreement between Chase Manhattan Bank, as
lender and Boston Properties Limited Partnership, as borrower
dated September 11, 1997.
+10.2 Interest Guarantee and Agreement between Chase Manhattan
Bank, as lender and Boston Properties Limited Partnership, as
borrower, dated September 11, 1997
17
Boston Properties, Inc., and
Boston Properties Predecessor Group
+10.3 Net Cash Flow Shortfall Guarantee and Agreement between
Chase Manhattan Bank, as lender and Boston Properties Limited
Partnership, as borrower, dated September 11, 1997
+10.4 Hazardous Material Guaranty and Indemnification
Agreement between Chase Manhattan Bank, as lender and Boston
Properties Limited Partnership, as borrower, dated September
11, 1997
*10.5 Amended and Restated Real Estate Purchase and Sale Contract
between International Business Machines, as Seller, and Boston
Properties Limited Partnership, as Purchaser, dated October 20,
1997.
27.1 Financial Data Schedule.
-----------
+ Incorporated by reference to the Company's Current Report on
Form 8-K/A, filed November 14, 1997 (amending the Company's Current
Report on Form 8-K filed September 26, 1997).
* Incorporated by reference to the Company's Current Report on Form
8-K/A filed November 14, 1997 (amending the Company's Current
Report on Form 8-K filed November 6, 1997).
(1) To be filed by amendment to the Company's Current Report on
Form 8-K filed September 26, 1997.
(b) Reports on Form 8-K
On September 26, 1997, the Company filed a Form 8-K (dated
September 11, 1997) reporting under Item 2, Acquisitions or
Disposition of Assets, that the Company had acquired 280 Park
Avenue and reporting under Item 5, Other Events, that the Company
had entered into an agreement to acquire 875 Third Avenue, New
York, NY.
On November 6, 1997, the Company filed a Form 8-K (dated October
23, 1997) reporting under Item 2, Acquisitions or Dispositions of
Assets, that the Company had acquired 100 East Pratt Street,
Baltimore, MD.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON PROPERTIES, INC.
November 14, 1997 /s/ David G. Gaw
--------------------------------
David G. Gaw,
Chief Financial Officer
(duly authorized officer and
principal financial officer)
19
5
1,000
3-MOS OTHER
DEC-31-1997 DEC-31-1997
JUL-01-1997 JUN-23-1997
SEP-30-1997 SEP-30-1997
25,989 25,989
0 0
13,170 13,170
0 0
0 0
113,060 113,060
1,433,376 1,433,376
9,268 10,113
1,295,638 1,295,638
33,375 33,375
0 0
0 0
0 0
387 387
195,094 195,094
1,295,638 1,295,638
59,251 64,253
62,989 68,353
0 0
0 0
43,427 47,261
0 0
14,719 16,091
0 0
0 0
13,780 14,854
0 0
(58) 7,925
0 0
13,722 22,779
.36 .59
0 0
