- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 1998
[_] 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
(IRS EMPLOYER ID. NUMBER)
(STATE OR OTHER JURISDICTIONOF
INCORPORATION OR ORGANIZATION)
8 ARLINGTON STREET BOSTON, 02116
MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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, PAR VALUE $.01 63,516,785
(CLASS) (OUTSTANDING ON AUGUST 14, 1998)
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BOSTON PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated and Combined Financial Statements:
1. Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997...................................... 1
2. Consolidated and Combined Statements of Operations for
the Company for the six months ended June 30, 1998 and
for the period from June 23, 1997 to June 30, 1997 and
for the Predecessor Group for the period from January
1, 1997 to June 22, 1997............................... 2
3. Consolidated and Combined Statements of Operations for
the Company for the three months ended June 30, 1998
and for the period from June 23, 1997 to June 30, 1997
and for the Predecessor Group for the period from April
1, 1997 to June 22, 1997............................... 3
4. Consolidated and Combined Statements of Cash Flows for
the Company for the six months ended June 30, 1998 and
for the period from June 23, 1997 to June 30, 1997 and
for the Predecessor Group for the period from January
1, 1997 to June 22, 1997............................... 4
5. Notes to the Consolidated and Combined Financial
Statements............................................. 5
ITEM 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations...................... 9
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities...................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders........ 16
ITEM 6. Exhibits and Reports on Form 8-K........................... 16
Signatures........................................................... 18
BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
------
Real estate: $2,675,418 $1,796,500
Less: accumulated depreciation...................... (319,414) (294,218)
---------- ----------
Total real estate................................. 2,356,004 1,502,282
Cash and cash equivalents............................. 108,962 17,560
Escrows............................................... 17,833 14,178
Tenant and other receivables, net..................... 24,767 24,458
Accrued rental income, net............................ 62,773 55,190
Deferred charges, net................................. 36,949 35,485
Prepaid expenses and other assets..................... 22,921 20,225
Investment in joint ventures.......................... 7,674 3,143
---------- ----------
Total assets...................................... $2,637,883 $1,672,521
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgage notes payable.............................. $1,327,575 $1,099,253
Unsecured line of credit............................ -- 233,000
Accounts payable and accrued expenses............... 62,120 23,822
Dividends payable................................... -- 22,539
Accrued interest payable............................ 3,276 6,581
Other liabilities................................... 17,395 11,642
---------- ----------
Total liabilities................................. 1,410,366 1,396,837
---------- ----------
Commitments and contingencies......................... -- --
---------- ----------
Minority interest in Operating Partnership............ 352,790 100,636
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, none issued or outstanding............. -- --
Excess stock, $.01 par value, 150,000,000 shares
authorized, none issued or outstanding............. -- --
Common stock, $.01 par value, 250,000,000 shares
authorized, 61,694,041 issued and outstanding...... 617 387
Additional paid-in capital.......................... 847,090 172,347
Earnings in excess of dividends..................... 27,020 2,314
---------- ----------
Total stockholders' equity........................ 874,727 175,048
---------- ----------
Total liabilities and stockholders' equity...... $2,637,883 $1,672,521
========== ==========
The accompanying notes are an integral part of these financial statements.
1
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
THE PREDECESSOR
THE COMPANY GROUP
--------------------------- ---------------
PERIOD FROM PERIOD FROM
SIX MONTHS JUNE 23, 1997 JANUARY 1, 1997
ENDED TO TO
JUNE 30, 1998 JUNE 30, 1997 JUNE 22, 1997
------------- ------------- ---------------
(UNAUDITED AND IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenue
Rental:
Base rent..................... $167,075 $ 4,459 $ 80,122
Recoveries from tenants....... 19,362 487 10,283
Parking and other............. 2,706 55 3,397
-------- ------- --------
Total rental revenue........ 189,143 5,001 93,802
Hotel operating................. -- -- 31,185
Development and management
services....................... 6,159 116 3,685
Interest and other.............. 8,341 246 1,146
-------- ------- --------
Total revenue............... 203,643 5,363 129,818
-------- ------- --------
Expenses
Rental:
Operating..................... 26,793 757 13,650
Real estate taxes............. 27,140 613 13,382
Hotel:
Operating..................... -- -- 20,938
Real estate taxes............. -- -- 1,514
General and administrative...... 10,621 247 5,116
Interest........................ 48,743 1,371 53,324
Depreciation and amortization... 29,689 846 17,054
-------- ------- --------
Total expenses.............. 142,986 3,834 124,978
-------- ------- --------
Income before minority interests.. 60,657 1,529 4,840
Minority interest in property
partnership...................... (229) (9) (235)
-------- ------- --------
Income before minority interest in
Operating Partnership............ 60,428 1,520 4,605
Minority interest in Operating
Partnership...................... (14,440) (446) --
-------- ------- --------
Income before extraordinary gain.. 45,988 1,074 4,605
Extraordinary gain on early debt
extinguishments, net............. 3,564 7,983 --
-------- ------- --------
Net income........................ $ 49,552 $ 9,057 $ 4,605
======== ======= ========
Basic earnings per share:
Income before extraordinary
gain........................... $ 0.79 $ 0.03 --
Extraordinary gain, net......... 0.06 0.20 --
-------- -------
Net income...................... $ 0.85 $ 0.23 --
======== =======
Weighted average number of common
shares outstanding............... 58,009 38,694 --
======== =======
Diluted earnings per share:
Income before extraordinary
gain........................... $ 0.79 $ 0.03 --
Extraordinary gain, net......... 0.06 0.20 --
-------- -------
Net income...................... $ 0.85 $ 0.23 --
======== =======
Weighted average number of common
shares outstanding............... 58,613 38,831 --
======== =======
The accompanying notes are an integral part of these financial statements.
2
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
THE
PREDECESSOR
THE COMPANY GROUP
-------------------------- -------------
THREE MONTHS PERIOD FROM PERIOD FROM
ENDED JUNE 23, 1997 APRIL 1, 1997
JUNE 30, TO TO
1998 JUNE 30, 1997 JUNE 22, 1997
------------ ------------- -------------
(UNAUDITED AND IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenue
Rental:
Base rent........................ $ 87,806 $ 4,459 $38,211
Recoveries from tenants.......... 9,805 487 4,781
Parking and other................ 1,595 55 2,408
-------- ------- -------
Total rental revenue........... 99,206 5,001 45,400
Hotel operating.................... -- -- 18,389
Development and management
services.......................... 4,383 116 1,872
Interest and other................. 4,452 246 702
-------- ------- -------
Total revenue.................. 108,041 5,363 66,363
-------- ------- -------
Expenses
Rental:
Operating........................ 13,794 757 6,542
Real estate taxes................ 13,609 613 6,485
Hotel:
Operating........................ -- -- 11,661
Real estate taxes................ -- -- 790
General and administrative......... 5,800 247 2,449
Interest........................... 23,814 1,371 25,605
Depreciation and amortization...... 16,594 846 8,213
-------- ------- -------
Total expenses................. 73,611 3,834 61,745
-------- ------- -------
Income before minority interests..... 34,430 1,529 4,618
Minority interest in property
partnership......................... (106) (9) (109)
-------- ------- -------
Income before minority interest in
Operating Partnership............... 34,324 1,520 4,509
Minority interest in Operating
Partnership......................... (7,967) (446) --
-------- ------- -------
Income before extraordinary gain..... 26,357 1,074 4,509
Extraordinary gain on early debt
extinguishments, net................ 3,564 7,983 --
-------- ------- -------
Net income........................... $ 29,921 $ 9,057 $ 4,509
======== ======= =======
Basic earnings per share:
Income before extraordinary gain... $ 0.42 $ 0.03 --
Extraordinary gain, net............ 0.06 0.20 --
-------- -------
Net income......................... $ 0.48 $ 0.23 --
======== =======
Weighted average number of common
shares outstanding.................. 61,694 38,694 --
======== =======
Diluted earnings per share:
Income before extraordinary gain... $ 0.42 $ 0.03 --
Extraordinary gain, net............ 0.06 0.20 --
-------- -------
Net income......................... $ 0.48 $ 0.23 --
======== =======
Weighted average number of common
shares outstanding.................. 62,284 38,831 --
======== =======
The accompanying notes are an integral part of these financial statements.
3
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
THE PREDECESSOR
THE COMPANY GROUP
------------------------------ ---------------
PERIOD FROM PERIOD FROM
JUNE 23, 1997 JANUARY 1, 1997
SIX MONTHS ENDED TO TO
JUNE 30, 1998 JUNE 30, 1997 JUNE 22, 1997
---------------- ------------- ---------------
(UNAUDITED AND IN THOUSANDS)
Cash flows from operating
activities:
Net income..................... $ 49,552 $ 9,057 $ 4,605
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization.................. 29,689 846 17,054
Non-cash portion of interest
expense....................... 211 41 1,497
Extraordinary gain on early
debt extinguishment........... (4,641) (11,298) --
Minority interest in Operating
Partnership................... 15,518 3,765 --
Change in assets and
liabilities:
Tenant and other receivables... (309) 5,994 (7,114)
Prepaid expenses and other
assets........................ (2,696) (2,337) (1,494)
Escrows........................ (3,655) -- --
Accrued rental income.......... (7,583) (1) (291)
Accounts payable and accrued
expenses...................... 38,298 7,698 5,220
Accrued interest payable....... (3,305) (10,630) 2,021
Other liabilities.............. 5,753 1,099 3,728
--------- --------- --------
Total adjustments............ 67,280 (4,823) 20,621
--------- --------- --------
Net cash provided by
operating activities........ 116,832 4,234 25,226
--------- --------- --------
Cash flows from investing
activities:
Acquisitions/additions to real
estate........................ (543,430) (24,936) (27,721)
Tenant leasing costs........... (6,087) -- (2,550)
Investment in joint ventures... (4,531) -- (2,573)
Cash from contributed assets... -- 10,510 --
--------- --------- --------
Net cash used in investing
activities.................. (554,048) (14,426) (32,844)
--------- --------- --------
Cash flows from financing
activities:
Net proceeds from sale of
common stock.................. 765,563 839,209 --
Owners' contributions.......... -- -- 9,330
Owners' distributions.......... -- -- (30,565)
Repayment of Unsecured Line of
Credit........................ (233,000) -- --
Repayment of long term debt.... (142,327) -- --
Proceeds from long term debt... 197,800 54,000 --
Repayments on mortgage notes... (4,641) (659,291) (3,799)
Accounts payable--affiliate.... -- (13,519) 17,619
Proceeds from notes payable--
affiliate..................... -- (28,843) 16,716
Dividends and distributions
paid.......................... (54,777) -- --
Escrows........................ -- (31,966) (136)
Deferred financing and other
costs......................... -- (12,713) (35)
--------- --------- --------
Net cash provided by
financing activities........ 528,618 146,877 9,130
--------- --------- --------
Net increase in cash............ 91,402 136,685 1,512
Cash and cash equivalents,
beginning of period............ 17,560 -- 8,998
--------- --------- --------
Cash and cash equivalents, end
of period...................... $ 108,962 $ 136,685 $ 10,510
========= ========= ========
Supplemental disclosures:
Cash paid for interest......... $ 50,930 $ 11,895 $ 50,917
========= ========= ========
Interest capitalized........... $ 1,986 $ 38 $ 1,111
========= ========= ========
Non-cash activities:
Operating activity:
Non-cash portion of interest
expense....................... $ 211 $ 41 $ 1,497
========= ========= ========
Investing and Financing
activities:
Fair value of mortgage notes
payable assumed in connection
with acquisitions............. $ 118,251 -- --
=========
Issuance of minority interest
in connection with
acquisitions ................. $ 153,438 -- --
=========
The accompanying notes are an integral part of these financial statements.
4
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Boston Properties, Inc. was formed under the laws of the State of Delaware,
to be a self-administered and self-managed real estate investment trust
("REIT"). Boston Properties, Inc. is the sole general partner of Boston
Properties Limited Partnership (the "Operating Partnership") and at June 30,
1998, owned an approximately 76.43% general and limited partnership interest
in the Operating Partnership. All references to the Company refer to Boston
Properties, Inc. and its subsidiaries, including the Operating Partnership,
collectively, unless the context otherwise requires.
The Company has been formed to succeed to substantially all of the interests
of Boston Properties, Inc., a Massachusetts corporation, and its affiliates
(the "Predecessor Group") in (i) a portfolio of office, industrial and hotel
properties and (ii) the acquisition, property management, leasing, development
and construction businesses of the Predecessor Group and its affiliates. The
acquisition, property management, leasing, development and construction
businesses are being carried out by the Operating Partnership and the
Company's majority-owned affiliate, Boston Properties Management, Inc.
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 36,110,000 shares of common stock were issued at a price
per share of $25.00, generating gross proceeds of $902.8 million. The proceeds
to the Company, net of underwriters' discount and offering costs, were
approximately $839.2 million.
On January 26, 1998, the Company completed a follow-on public offering of
23,000,000 common shares at a price of $35.125 per share (including 3,000,000
shares issued as a result of the exercise of an over-allotment option by the
underwriters). The proceeds to the Company, net of underwriters' discount and
offering costs were approximately $765.6 million.
As of June 30, 1998, the Company owned a portfolio of 108 commercial real
estate properties (82 properties at December 31, 1997) (the "Properties")
aggregating over 20 million square feet (including ten properties currently
under development). The Properties consist of 95 office properties, including
64 Class A office properties and 31 Research and Development properties; nine
industrial properties; three hotels; and one parking garage. 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
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership, and its
subsidiaries. The financial statements reflect the properties acquired at
their historical accounting basis to the extent of the acquisition of
interests from the Predecessor's owners who continued as investors. The
remaining interests 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 combined financial statements of the Predecessor
Group include interests in properties and the third party commercial real
estate development, project management and property management business. The
accompanying combined financial statements for the 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. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto contained in the Company's
annual report on Form 10-K for its fiscal year ended December 31, 1997.
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
5
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
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 other interim periods or for the full fiscal year.
3. NEWLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133 ("FAS 133")
"Accounting for Derivative Instruments and Hedging Activities" is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999,
although earlier application is encouraged. FAS 133 established standards
related to the Company's financial risks associated with its activity as it
relates to financial activities with respect to derivative instruments and
hedging. The Company currently does not engage in and has no plans to engage
in the practice of using financial derivative instruments and hedging
activities. The Company does not believe that the implementation of FAS 133
will have a material impact on the Company's financial position or results of
operations.
4. REAL ESTATE ACQUISITIONS DURING THE QUARTER ENDED JUNE 30, 1998
On April 1, 1998, the Company acquired a parcel of land in Reston, Virginia
for cash of approximately $2.6 million that is currently under development and
will support an approximately 96,000 square foot Class A office property.
On April 2, 1998, the Company acquired six parcels of land in Dulles,
Virginia consisting of approximately 91.1 improved acres for approximately
$5.4 million in cash that can support approximately 1.2 million square feet of
development.
On May 28, 1998, the Company acquired approximately 84.2 acres of land in
Rockville, Maryland known as Tower Oaks for approximately $24.5 million. The
acquisition was funded through the issuance of 592,916 units of limited
partnership interest in the Operating Partnership ("OP Units") valued at
approximately $20.4 million and cash of approximately $4.1 million. At anytime
after May 29, 1999, each unit may be redeemed for either one share of common
stock, or, at the option of the Company, cash equal to the fair market value
of a share of common stock at the time of redemption. The land can support
approximately 1.1 million square feet of development. The Company is currently
developing one parcel into an approximately 185,000 square foot Class A office
property.
On June 1, 1998, the Company acquired Decoverly III for cash of
approximately $11.1 million. Decoverly III is a 77,040 square foot, Class A
office property located in Rockville, Maryland.
On June 16, 1998, the Company acquired 7450 Boston Boulevard for cash of
approximately $5.8 million. 7450 Boston Boulevard is a 60,537 square foot,
Class A office property located in Springfield, Virginia.
On June 25, 1998, the Company acquired University Place for cash of
approximately $37.0 million. University Place is a 196,007 square foot, Class
A office property located in Cambridge, Massachusetts.
On June 30, 1998, the Company acquired a portfolio of properties known as
the Carnegie Center Portfolio and Tower Center One for approximately $276.0
million. The portfolio consists of nine Class A office properties with
approximately 1.3 million net rentable square feet located in Princeton and
East Brunswick, New Jersey. The acquisition was funded through the assumption
of debt of approximately $64.4 million, the issuance of 2,442,222 preferred
units of limited partnership (the "Preferred Units") in the Operating
Partnership with a liquidation preference of $34.0 per unit and an aggregate
value of $83.0 million, and cash of $128.6 million. The
6
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Preferred Units bear a preferred distribution of 7.25% per annum and are
convertible into common OP Units at a rate of $38.25 per Preferred Unit. At
anytime after July 10, 1999, any common OP Units issued upon conversion of
such Preferred Units may be redeemed for either one share of common stock, or
at the option of the Company, cash equal to the fair market value of a share
of common stock at the time of redemption.
5. MORTGAGE NOTES PAYABLE
During the quarter, the Company repaid $30.0 million of its $180.0 million
mortgage note payable related to 875 Third Avenue.
As a result of the acquisition of the Mulligan/Griffin portfolio, the
Company repaid the total amounts outstanding under the related mortgages
(approximately $112.0 million). The prepayment resulted in a extraordinary
gain of $4.6 million. Additionally, the Company received proceeds in the
amount of $76.0 million on new financing secured by certain of the
Mulligan/Griffin properties. The debt is comprised of three separate loans at
fixed interest rates ranging from 6.51% to 6.61%. The new debt matures on May
1 and June 1, 2008, respectively.
6. 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 June 30,
1998, amounted to approximately 23.57%.
7. STOCK OPTION AND INCENTIVE PLAN
As of June 30, 1998, the Company has outstanding options with respect to
6,227,470 common shares. An additional 1,384,198 common shares were reserved
for issuance under the Company's stock option and incentive plan.
8. EARNINGS PER SHARE
FOR THE QUARTER ENDED JUNE 30, 1998
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic Earnings Per Share:
Income available to common
shareholders........................ $29,921 61,694 $0.48
Effective of Dilutive Securities:
Stock Options........................ -- 590 --
------- ------ -----
Diluted Earnings Per Share:
Income available to common
shareholders........................ $29,921 62,284 $0.48
======= ====== =====
9. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the three month and six
month periods ended June 30, 1998 is presented as if the initial offering
discussed in Note 1 had occurred on January 1, 1997. The pro forma information
does not reflect adjustments related to the follow-on offering or new property
acquisitions. This pro forma information is based upon the historical
consolidated financial statements of the Company and the Predecessor Group and
should be read in conjunction with the consolidated and combined financial
statements and the notes thereto.
7
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
This unaudited pro forma condensed information does not purport to represent
what the actual results of operations, nor do they purport to predict the
results of operations of future periods.
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED 6/30/98 ENDED 6/30/97 ENDED 6/30/98 ENDED 6/30/97
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
Total revenue........... $108,041 $60,635 $203,643 $114,831
Net income.............. $ 29,921 $13,479 $ 49,552 $ 22,619
Basic earnings per share
of common stock........ $ 0.48 $ 0.35 $ 0.85 $ .58
Weighted average number
of shares of common
stock outstanding...... 61,694 38,694 58,009 38,694
10. SUBSEQUENT EVENTS
On July 2, 1998, the Company acquired The Prudential Center, located in
Boston, Massachusetts. The complex, consisting of two Class A office towers
totaling approximately 1.7 million square feet, and a retail complex totaling
approximately 475,000 square feet, was acquired for approximately $519.0
million. Additionally, the Company paid $27.0 million for a 50% interest in
the rights to develop certain portions of The Prudential Center.
On July 2, 1998, the Company sold 1,675,846 shares of common stock to
Strategic Value Investors II for an aggregate value of approximately $55.5
million.
On July 10, 1998, the Company acquired Metropolitan Square, a 596,543 square
foot, Class A office property in Washington, D.C. for approximately $175.0
million.
On July 21, 1997, the Company acquired The Candler Building, a 550,183
square foot, Class A office property in Baltimore, Maryland for approximately
$63.0 million.
8
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 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 January 26,
1998 as filed with the Securities and Exchange Commission.
Results of Operations
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED JUNE 30,
1997
For discussion purposes, the results of operations for the six months ended
June 30, 1998 represent solely the operating results of the Company. The
results of operations for the six months ended June 30, 1997 combine
the operating results of the Boston Properties Predecessor Group for the
period from January 1, 1997 to June 22, 1997 and the operating results of the
Company for the period from June 23, 1997 to June 30, 1997. Consequently, the
comparison of the periods provides only limited information regarding the
operations of the Company.
Rental revenue increased $90.3 million or 91.4% to $189.1 million from $98.8
million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. The increase is primarily due to rental revenue earned
totaling approximately $73.3 million on the properties acquired since the
initial offering and from the participating leases to operate the hotels.
Hotel Operating revenue decreased $31.2 million or 100.0% to $0.0 from $31.2
million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. Hotel revenue for the six months ended June 30, 1998 does
not include any revenue as a result of the Operating Partnership entering into
participating leases to operate the hotels.
Development and Management Services revenue increased $2.4 million or 62.0%
to $6.2 million from $3.8 million for the six months ended June 30, 1998
compared to the six months ended June 30, 1997 primarily as a result of
leasing commissions of $2.1 million earned on properties managed for a third
party.
Interest and Other revenue increased $6.9 million or 499.2% to $8.3 million
from $1.4 million for the six months ended June 30, 1998 compared to the six
months ended June 30, 1997 due to interest income earned on the proceeds from
the follow-on offering.
Rental expenses increased $25.5 million or 89.9% to $53.9 million from $28.4
million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997 primarily as a result of approximately $22.4 million of
expenses related to property acquisitions.
Hotel expenses decreased $22.5 million or 100.0% to $0.0 from $22.5 million
for the six months ended June 30, 1998 compared to the six months ended June
30, 1997. There were no expenses during the six months ended June 30, 1998 as
a result of the participating leases.
9
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
General and Administrative expenses increased $5.3 million or 98.0% to $10.6
million from $5.4 million for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997 primarily as a result of increased payroll
costs associated with property acquisitions and costs associated with being a
public company.
Interest expense decreased $6.0 million or 10.9% to $48.7 million from $54.7
million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. This was a result of the payoff of certain mortgage
indebtedness totaling approximately $707.0 million with the proceeds from the
initial offering offset by increases in mortgage indebtedness from property
acquisitions resulting in approximately $22.9 million of interest expense.
Depreciation and Amortization expense increased $11.8 million or 65.9% to
$29.7 million from $17.9 million for the six months ended June 30, 1998
compared to the six months ended June 30, 1997. This was primarily attributed
to approximately $10.2 million of depreciation expense related to property
acquisitions since the initial offering.
As a result of the foregoing, income before minority interests increased
$54.3 million to $60.7 million from $6.4 million for the six months ended June
30, 1998 compared to the six months ended June 30, 1997.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS ENDED JUNE
30, 1997
For discussion purposes, the results of operations for the three months
ended June 30, 1998 represent solely the operating results of the Company. The
results of operations for the three months ended June 30, 1997 combine the
operating results of the Boston Properties Predecessor Group for the period
from April 1, 1997 to June 22, 1997 and the operating results of the Company
for the period from June 23, 1997 to June 30, 1997. Consequently, the
comparison of the periods provides only limited information regarding the
operations of the Company.
Rental revenue increased $48.8 million or 96.8% to $99.2 million from $50.4
million for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997. The increase is primarily due to rental revenue of
approximately $39.1 million earned on the properties acquired since the
initial offering and from the participating leases to operate the hotels.
Hotel Operating revenue decreased $18.4 million or 100.0% to $0.0 from $18.4
million for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997. Hotel revenue for the three months ended June 30, 1998
does not include any revenue as a result of the Operating Partnership entering
into participating leases to operate the hotels.
Development and Management Services revenue increased $2.4 million or 120.5%
to $4.4 million from $2.0 million for the three months ended June 30, 1998
compared to the three months ended June 30, 1997 primarily as a result of
leasing commissions of $2.1 million earned on properties managed for a third
party.
Interest and Other revenue increased $3.5 million or 369.6% to $4.5 million
from $0.9 million for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997 due to interest income earned on the proceeds
from the follow-on offering.
Rental expenses increased $13.0 million or 90.3% to $27.4 million from $14.4
million for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997 primarily due to rental expenses of approximately $11.6
million incurred as a result of property acquisitions.
Hotel expenses decreased $12.5 million or 100.0% to $0.0 from $12.5 million
for the three months ended June 30, 1998 compared to the three months ended
June 30, 1997. There were no expenses during the three months ended June 30,
1998 as a result of the participating leases.
10
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
General and Administrative expenses increased $3.1 million or 115.1% to $5.8
million from $2.7 million for the three months ended June 30, 1998 compared to
the three months ended June 30, 1997 primarily as a result of increased
payroll costs associated with property acquisitions and costs associated with
being a public company.
Interest expense decreased $3.2 million or 11.7% to $23.8 million from $27.0
million for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997. This was a result of the payoff of certain mortgage
indebtedness totaling approximately $707.0 million with the proceeds from the
initial offering offset by increases in mortgage indebtedness from property
acquisitions resulting in approximately $11.3 million of interest expense.
Depreciation and Amortization expense increased $7.5 million or 83.2% to
$16.6 million from $9.1 million for the three months ended June 30, 1998
compared to the three months ended June 30, 1997. This was primarily
attributed to depreciation expense of $5.6 million related to property
acquisitions since the initial offering.
As a result of the foregoing, income before minority interests increased
$28.3 million to $34.4 million from $6.1 million for the three months ended
June 30, 1998 compared to the three months ended June 30, 1997.
Liquidity and Capital Resources
The Company's consolidated indebtedness at June 30, 1998 was $1.3 billion at
a weighted average interest rate of 7.4%. Based on the Company's total debt
and equity market capitalization at June 30, 1998 of approximately $4.2
billion, the Company's consolidated debt represents approximately 32.0% of its
total debt and equity market capitalization.
11
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
The following represents the outstanding principal balances due under the
first mortgages at June 30, 1998:
PROPERTIES INTEREST RATE PRINCIPAL MATURITY DATE
- ---------- ------------- -------------- --------------------
(IN THOUSANDS)
599 Lexington Avenue 7.00% $ 225,000 July 19, 2005(1)
280 Park Avenue 7.00 220,000 September 11, 2002(2)
875 Third Avenue 8.00 155,067 December 31, 2002(3)
Two Independence Square 8.09 121,148 February 27, 2003(4)
Riverfront Plaza 6.61 120,992 January 21, 2008
One Independence Square 8.12 77,186 August 21, 2001(4)
2300 N Street 6.88 66,000 August 3, 2003
Capital Gallery 8.24 59,541 August 15, 2006
Ten Cambridge Center &
North Garage 7.57 40,000 March 29, 2000
10 & 20 Burlington Mall
Road 8.33 37,000 October 1, 2001(5)
The Lockheed Martin
Building 6.61 27,462 June 1, 2008(6)
Reston Town Center
Office Complex 6.56 25,932 May 1, 2008(6)
191 Spring Street 8.50 23,544 September 1, 2006
Bedford Business Park 8.50 22,881 December 10, 2008
The National Imagery &
Mapping Agency Bldg. 6.51 22,468 June 1, 2008(6)
212 Carnegie Center 7.25 21,166 December 31, 2000(7)
202 Carnegie Center 7.25 19,686 December 31, 2000(7)
214 Carnegie Center 8.17 13,925 October 31, 2000(7), (8)
101 Carnegie Center 7.66 9,027 April 1, 2006(7)
Montvale Center 8.59 7,845 December 1, 2006
Newport Office Park 8.13 6,629 July 1, 2001
Hilltop Business Center LIBOR + 1.50 4,500 December 15, 1998
201 Carnegie Center 7.08 576 February 1, 2010(7)
----------
Total $1,327,575
==========
- --------
(1) At maturity the lender has the option to purchase a 33.33% interest in
this Property in exchange for the cancellation of the loan indebtedness.
(2) Outstanding principal of $213,000 bears interest at a fixed rate of 7.00%.
The remaining $7,000 bears interest at a floating rate equal to LIBOR +
1.00%.
(3) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at June 30, 1998
was $150,000 and the interest rate was 8.75%. During the three months
ended June 30, 1998, the Company made a $30,000 principal payment on this
loan.
(4) The principal amount and interest rate shown has been adjusted to reflect
the effective rates on the loans. The actual principal balances at June
30, 1998 were $120,594 and $76,938, respectively. The actual interest
rates on the loans are 8.50%.
(5) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 &
100 Hayden Avenue.
(6) These mortgage loans were partially repaid as part of the refinancing with
a new lender during the quarter ended June 30, 1998.
(7) These mortgage loans were assumed by the Company through the acquisition
of the Carnegie Center Portfolio.
(8) The interest rate shown has been adjusted to reflect the effective rates
on the loans. The actual interest rate on the loans range from 7.90% to
8.40%.
12
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
Net cash provided by operating activities increased $87.4 million to $116.8
million for the six months ended June 30, 1998, when compared to the same
period in 1997. The increase was primarily due to revenues received during the
quarter ended June 30, 1998 from the properties acquired subsequent to June
30, 1997, as well as interest reductions as a result of the payoff of certain
mortgage loans in connection with the initial public offering. This was offset
by an increase in depreciation as a result of the property acquisitions. Net
cash used in investing activities was $554.0 million for the six months ended
June 30, 1998 which resulted from property acquisitions during the period.
Net cash provided by financing activities for the six months ended June 30,
1998 was $528.6 million, primarily as a result of proceeds received from the
follow-on offering completed during January 1998. This was offset by
repayments on the Unsecured Line of Credit as well as certain mortgage loans,
in addition to proceeds received on new mortgage financing. Dividends paid
during the six months also offset the proceeds from the follow-on offering.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and 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 three months ended June 30, 1998, the Company's
recurring capital expenditures totaled $796.
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 $260.7 million as of June 30, 1998. The Company expects to fund and
has funded these commitments using available cash or the Unsecured Line of
Credit. In addition, the Company has options to acquire land that require
minimum deposits that the Company will fund using available cash or 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 from
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.
13
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
The following table presents the Company's Funds from Operations for the
three months ended June 30, 1998:
THREE MONTHS ENDED
JUNE 30, 1998
------------------
Income before minority interests........................ $34,430
Add:
Real estate depreciation and amortization............. 16,415
Less:
Minority property partnership's share of Funds from
Operations........................................... (138)
-------
Funds from Operations................................... $50,707
=======
Company's share......................................... $38,938
=======
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.
Newly Issued Accounting Standards
Financial Accounting Standards Board Statement No. 133 ("FAS 133")
"Accounting for Derivative Instruments and Hedging Activities" is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999,
although earlier application is encouraged. FAS 133 established standards
related to the Company's financial risks associated with its activity as it
relates to financial activities with respect to derivative instruments and
hedging. The Company currently does not engage in and has no plans to engage
in the practice of using financial derivative instruments and hedging
activities. The Company does not believe that the implementation of FAS 133
will have a material impact on the Company's financial position or results of
operations.
Year 2000 Compliance
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions
of operations. The Year 2000 issue affects virtually all companies and all
organizations. The Company recognizes the importance of ensuring that its
business operations are not disrupted as a result of Year 2000 related
computer system and software issues.
The Company has conducted an assessment of its core internal and external
computer information systems and is now taking the further necessary steps to
understand the nature and extent of the work required to make its systems, in
those situations in which the Company is required to do so, Year 2000
compliant. These steps may require the Company to modify, upgrade or replace
some of its internal financial and operational systems. In addition, the
Company is currently evaluating and assessing those computer systems that do
not relate to information technology (such as systems designed to operate a
building, which typically include embedded technology such as microcontrollers
that may be harder to test, and may require complete replacement because they
cannot be repaired), including, without limitation, its telecommunication
systems, security systems (such as card-access door lock systems), energy
management systems and elevator systems. Because this assessment is ongoing,
the total cost of bringing all internal systems, equipment and operation into
Year 2000 compliance has not been fully quantified. While these efforts
involve additional costs, the Company believes, based on available
information, that these costs will not have a material adverse effect on its
business, financial condition or results
14
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
of operations. While the Company believes it will be Year 2000 compliant by
December 31, 1999, if these efforts are not completed on time or if the cost
of updating or replacing the Company's information systems exceeds the
Company's current estimates, the Year 2000 issue could have a material impact
on the Company's ability to meet its financial and reporting requirements. The
Company is currently evaluating the consequences of a potential failure to
remediate these matters and is in the process of developing contingency plans
regarding these matters. The Company currently believes that it will be in a
position to make such an evaluation and have such plans by December 31, 1998,
and that it will have completed its remedial measures and become Year 2000
compliant by December 31, 1999.
Further, no estimates can be made as to any potential adverse impact
resulting from the failure of third-party service providers, (including,
without limitation, its banks, its payroll processor and its
telecommunications providers) vendors and tenants to prepare for the Year
2000. The Company is attempting to identify those risks as well as to receive
compliance certificates from all third-parties that have a material impact on
the Company's operations. Although the Company is in the process of working
with such third-parties in order to attempt to eliminate its Year 2000
concerns the cost and timing of the third-party Year 2000 compliance is not
within the Company's control and no assurance can be given with respect to the
cost or timing of such efforts or the potential effects of any failure to
comply.
To date, the Company has not expended significant funds to assess its Year
2000 issues, as the Company's evaluation of its Year 2000 concerns has been
conducted by its own personnel at routine staffing levels and without any out-
of-pocket expenses for consultants. The Company's evaluation has not been
subject to any independent verification or review process. Because the Company
is still evaluating the nature of its Year 2000 issues, the Company cannot yet
estimate the amount of additional future expenditures on the Year 2000
problem, but currently believes that it will be able to do so by December 31,
1998.
15
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
PART II. OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES
On May 28, 1998, the Company acquired Tower Oaks for consideration that
included the issuance of 592,916 OP Units. Such OP Units were issued to six
accredited investors in a transaction that was exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) of such Act. Under terms
of the Operating Partnership's agreement of limited partnership and an
agreement with the recipients of such OP Units, at any time after May 29, 1999
the Operating Partnership is obligated to redeem each such OP Unit at the
request of the holder thereof for cash equal to the fair market value of a
share of Common Stock at the time of such redemption, provided that the
Company at its option may elect to acquire any such OP Unit presented for
redemption for one share of Common Stock.
On June 30, 1998, the Company acquired a portfolio of properties known as
The Carnegie Center and Tower Center One for consideration that included the
issuance of 2,442,222 Series One Preferred Units of Limited Partnership of the
Operating Partnership. Such Preferred Units were issued to 16 accredited
investors in a transaction that was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of such Act and Regulation D
thereunder. Under terms of the Operating Partnership's agreement of limited
partnership and an agreement with the recipients of such OP Units, at any time
after July 10, 1999 the Operating Partnership is obligated to redeem each such
common OP Unit at the request of the holder thereof for cash equal to the fair
market value of a share of Common Stock at the time of such redemption,
provided that the Company at its option may elect to acquire any such common
OP Unit presented for redemption for one share of Common Stock.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 6, 1998. The
stockholders voted to elect Mortimer B. Zuckerman as a Class I Director of the
Company to serve until 2001. 54,662,907 votes were cast for the election of
Mr. Zuckerman and 112,653 votes were withheld. Alan J. Patricof and Martin
Turchin will continue to serve as Class II Directors until their present terms
expire in 1999 and their successors are duly elected. Edward H. Linde and Ivan
G. Seidenberg will continue as Class III Directors until their present terms
expire in 2000 and their successors are duly elected.
The Stockholders also voted to ratify the Board of Directors' selection of
PricewaterhouseCoopers LLP as the Company's independent auditors for the
fiscal year ending December 31, 1998. 54,695,916 votes were cast for, 23,677
votes were cast against, and 55,967 votes abstained from this proposal.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated June 9, 1998 was filed with the Securities and Exchange
Commission to report under Item 3 of such report certain information to be
presented to investors throughout the week of June 9, 1998.
A Form 8-K dated June 30, 1998 was filed with the Securities and Exchange
Commission to report under Item 5 of such report that the Company had acquired
a portfolio of properties in Princeton and East Brunswick, New Jersey.
16
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
A Form 8-K dated July 2, 1998 was filed with the Securities and Exchange
Commission to report under Item 5 of such report that the Company had acquired
the Prudential Center in Boston, Massachusetts.
A Form 8-K dated July 10, 1998 was filed with the Securities and Exchange
Commission to report under Item 5 of such report that the Company had acquired
Metropolitan Square in Washington, D.C.
17
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.
/s/ David G. Gaw
_____________________________________
David G. Gaw,
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
August 14, 1998
18
5
1,000
3-MOS
DEC-31-1998
APR-01-1998
JUN-30-1998
108,962
0
24,767
0
0
244,930
2,356,004
14,855
2,637,883
0
0
0
0
617
874,110
2,637,883
99,206
108,041
0
0
73,611
0
23,814
0
0
26,357
0
3,564
0
29,921
.48
.48
