FORM 10-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003

 

OR

 

¨ 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

of Incorporation or Organization)

  (IRS Employer Id. Number)
111 Huntington Avenue    
Boston, Massachusetts   02199
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (617) 236-3300

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


   Name of Exchange on Which Registered

Common Stock, Par Value $.01

   New York Stock Exchange

Preferred Stock Purchase Rights

    

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.    Yes  x    No  ¨

 

As of June 30, 2003, the aggregate market value of the 92,320,160 shares of common stock held by non-affiliates of the Registrant was $4,043,623,008 based upon the last reported sale price of $43.80 per share on the New York Stock Exchange on such date. (For this computation, the Registrant has excluded the market value of all shares of Common Stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.)

 

As of February 18, 2004, there were 99,636,024 shares of Common Stock outstanding.

 

Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held May 5, 2004 are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.

 



Table of Contents

TABLE OF CONTENTS

 

Item No.

  

Description


   Page No.

PART I     
1.   

BUSINESS

   1
2.   

PROPERTIES

   25
3.   

LEGAL PROCEEDINGS

   30
4.   

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   30
PART II     
5.   

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   31
6.   

SELECTED FINANCIAL DATA

   31
7.   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   34
7A.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   67
8.   

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   68
9.   

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   68
9A.   

CONTROLS AND PROCEDURES

   68
PART III     
10.   

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   69
11.   

EXECUTIVE COMPENSATION

   69
12.   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   69
13.   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   70
14.   

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   70
PART IV     
15.   

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

   70
    

SIGNATURES

   77


Table of Contents

PART I

 

Item 1. Business

 

General

 

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Boston Properties, Inc., a Delaware corporation organized in 1997, individually or together with its subsidiaries, including Boston Properties Limited Partnership, a Delaware limited partnership, and our predecessors. We are a fully integrated self-administered and self-managed real estate investment trust, or “REIT,” and one of the largest owners and developers of office properties in the United States. Our properties are concentrated in four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco. We conduct substantially all of our business through our subsidiary Boston Properties Limited Partnership. At December 31, 2003, we owned or had interests in 140 properties, totaling approximately 43.9 million net rentable square feet. Our properties consisted of:

 

  131 office properties comprised of 103 Class A office properties (including three properties under construction) and 28 Office/Technical properties;

 

  four industrial properties;

 

  three hotels; and

 

  two retail properties.

 

In addition, we own or control 43 parcels of land totaling 551.3 acres and structured parking for 31,098 vehicles containing approximately 9.4 million square feet. Subsequent to December 31, 2003, we sold one industrial property and ten office/technical properties, which consisted of a combined net rentable square feet of 222,081. We consider 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. The Company considers Office/Technical properties to be properties that support office, research and development and other technical uses. Our definition of Class A office and Office/Technical properties may be different than that of other companies.

 

We are a full-service real estate company, with substantial in-house expertise and resources in acquisitions, development, financing, capital markets, construction management, property management, marketing, leasing, accounting, tax and legal services. As of December 31, 2003, we had approximately 662 employees. Our 28 senior officers have an average of 24 years experience in the real estate industry and an average of 15 years tenure with us. Our principal executive office is located at 111 Huntington Avenue, Boston, Massachusetts 02199 and its telephone number is (617) 236-3300. In addition, we have regional offices at 401 9th Street, NW, Washington, D.C. 20004; 599 Lexington Avenue, New York, New York 10022; Four Embarcadero Center, San Francisco, California 94111; and 302 Carnegie Center, Princeton, New Jersey 08540.

 

Our Web site is located at http://www.bostonproperties.com. On our Web site, you can obtain a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). The name “Boston Properties” and our logo (consisting of a stylized “b”) are registered service marks of the Company.

 

Boston Properties Limited Partnership

 

Boston Properties Limited Partnership, a Delaware limited partnership, is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. We are the sole general partner and, as of February 18, 2004, the owner of approximately 77.1% of the economic interests in Boston Properties Limited Partnership. Economic interest was calculated as the number of

 

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common partnership units of Boston Properties Limited Partnership owned by the Company as a percentage of the sum of (1) the actual aggregate number of outstanding common partnership units of Boston Properties Limited Partnership and (2) the number of common partnership units issuable upon conversion of outstanding preferred partnership units of Boston Properties Limited Partnership. Our general and limited partnership interests in Boston Properties Limited Partnership entitle us to share in cash distributions from, and in the profits and losses of, Boston Properties Limited Partnership in proportion to our percentage interest and entitle us to vote on all matters requiring a vote of the limited partners. Certain other partners of Boston Properties Limited Partnership are persons who contributed their direct or indirect interests in properties to Boston Properties Limited Partnership in exchange for common units or preferred units of limited partnership interest in Boston Properties Limited Partnership. Under the limited partnership agreement of Boston Properties Limited Partnership, unitholders may present their common units of Boston Properties Limited Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time, generally one year from issuance). Upon presentation of a unit for redemption, BPLP must redeem the unit for cash equal to the then value of a share of our common stock. In lieu of a cash redemption we may elect to acquire any common units so tendered by issuing common stock in exchange for the common units. If we so elect, our common stock will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. We currently anticipate that we will elect to issue our common stock in connection with each such presentation for redemption rather than having Boston Properties Limited Partnership pay cash. With each such exchange or redemption, our percentage ownership in Boston Properties Limited Partnership will increase. In addition, whenever we issue shares of our common stock other than to acquire common units of Boston Properties Limited Partnership, we must contribute any net proceeds we receive to Boston Properties Limited Partnership and Boston Properties Limited Partnership must issue to us an equivalent number of common units of Boston Properties Limited Partnership. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

 

Preferred units of Boston Properties Limited Partnership have the rights, preferences and other privileges, including the right to convert into common units of Boston Properties Limited Partnership, as are set forth in amendments to the limited partnership agreement of Boston Properties Limited Partnership. As of December 31, 2003 and February 18, 2004, Boston Properties Limited Partnership had one series of its preferred units outstanding. The Series Two preferred units have an aggregate liquidation preference of approximately $270.0 million. The Series Two preferred units are convertible, at the holder’s election, into common units at a conversion price of $38.10 per common unit (equivalent to a ratio of 1.312336 common units per Series Two preferred unit). Distributions on the Series Two Preferred units are payable quarterly and, unless the higher rate described in the next sentence applies, accrue at 7.0% until May 12, 2009 and 6.0% thereafter. If distributions on the number of common units into which the Series Two Preferred units are convertible are greater than distributions calculated using the rates described in the preceding sentence for the applicable quarterly period, then the greater distributions are payable instead. To date, with the exception of two quarterly distributions on August 15, 2001 and November 15, 2001, distributions have always been made at the fixed rate, rather than the higher rate determined on the basis of distributions paid on the common units into which the Series Two preferred units are convertible. The terms of the Series Two units provide that they may be redeemed for cash in six annual tranches, beginning on May 12, 2009, at our election or at the election of the holders. We also have the right to convert into common units of Boston Properties Limited Partnership any Series Two preferred units that are not redeemed when they are eligible for redemption.

 

Significant Transactions During 2003

 

Real Estate Acquisitions/Dispositions

 

On November 7, 2003, we entered into a binding contract for the sale of Sugarland Business Park—Building Two, an office/technical property totaling approximately 59,000 square feet located in Herndon, Virginia for $7.1 million. The sale closed on February 10, 2004.

 

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On October 8, 2003, we acquired 1333 New Hampshire Avenue, an approximately 315,000 square foot Class A office property in Washington, D.C. at a purchase price of approximately $111.6 million. The acquisition was financed with borrowings under our unsecured revolving credit facility and available cash. The property is 100% leased.

 

On September 11, 2003, we entered into a joint venture with an unaffiliated third party to pursue the development of a Class A office property at 801 New Jersey Avenue in Washington, D.C. that, if completed as currently planned, will support approximately 1.1 million square feet of commercial development. We made an initial cash contribution of $3.0 million for a 50% interest in the joint venture.

 

On August 5, 2003, we acquired three parcels of land totaling approximately 5.8 acres in Reston, Virginia for $13.5 million. If completed as currently planned, the site will support approximately 507,000 square feet of commercial development.

 

On August 5, 2003, we acquired the remaining outside interests in the One Freedom Square and Two Freedom Square joint venture properties, which together comprise approximately 832,000 square feet of Class A office buildings in Reston, Virginia. The acquisition was financed with $36.0 million of cash and the assumption of the outside partner’s share of the mortgage debt on the properties of approximately $56.4 million and $35.4 million, respectively. Subsequent to the acquisition, we repaid in full the mortgage debt on the Two Freedom Square property totaling $70.7 million.

 

On April 1, 2003, we acquired the remaining outside interests in the One and Two Discovery Square joint venture properties, which together comprise approximately 367,000 square feet of Class A office buildings in Reston, Virginia. The acquisition was financed with $18.3 million of cash and the assumption of the outside partner’s share of the mortgage debt on the property of approximately $32.4 million. Subsequent to the acquisition, we repaid in full the mortgage debt on the property totaling $64.7 million.

 

On March 18, 2003, we sold 2300 N Street in Washington, D.C., a Class A office property totaling approximately 289,000 square feet, for net proceeds of approximately $111.5 million, resulting in a gain on sale of approximately $52.7 million (net of minority interest of $11.6 million).

 

On February 4, 2003, we sold 875 Third Avenue in midtown Manhattan, New York, a Class A office property totaling approximately 712,000 square feet, for net proceeds of approximately $348.9 million, resulting in a gain on sale of approximately $73.6 million (net of minority interest of $16.6 million).

 

On January 28, 2003, we sold The Candler Building in Baltimore, Maryland, a Class A office property totaling approximately 541,000 square feet, for net proceeds of approximately $61.9 million, resulting in a loss on sale of approximately $0.3 million.

 

The sales mentioned above of 875 Third Avenue, The Candler Building and 2300 N Street were structured as like-kind exchanges. Accordingly, taxable gain for federal income tax purposes was not recognized and the tax attributes (including depreciated tax basis and any tax protection covenants for the benefit of former owners) of these disposed properties have been transferred to 399 Park Avenue as the property for which they were exchanged.

 

Developments

 

We placed two Class A office properties and one retail property in-service during 2003, which required a total investment during 2003 of approximately $10.7 million, of which $3.6 million was funded through construction loans. Our total investment, including equity and debt, through December 31, 2003 on these properties was $139.3 million. We continued construction on an additional three office properties, including one property in which we have a joint venture interest, and incurred approximately $192.2 million of construction

 

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costs during 2003, of which $155.0 million was funded through existing construction loans and the remainder of which was funded using borrowings under our unsecured line of credit and available cash.

 

Unsecured Debt

 

On January 17, 2003, Boston Properties Limited Partnership closed an unregistered offering of $175.0 million in aggregate principal amount of its 6.25% senior unsecured notes due 2013. The notes are fungible, and form a single series, with the $750.0 million of notes sold in December 2002. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.763% of their face amount to yield 6.28%. We used the net proceeds to repay our unsecured bridge loan, a portion of our unsecured line of credit as well as certain construction loans.

 

On March 18, 2003, Boston Properties Limited Partnership closed an unregistered offering of $300.0 million in aggregate principal amount of its 5.625% senior unsecured notes due April 15, 2015. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.898% of their face amount to yield 5.636%. We used the net proceeds to refinance the mortgage debt on Five Times Square and for other general business purposes.

 

On May 22, 2003, Boston Properties Limited Partnership closed an unregistered offering of $250.0 million in aggregate principal amount of its 5.00% senior unsecured notes due June 1, 2015. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.329% of their face amount to yield 5.075%. We used the net proceeds to repay the mortgage loan secured by the property at 2600 Tower Oaks Boulevard in Rockville, Maryland totaling $31.0 million, to repay amounts then outstanding under our unsecured revolving credit facility described below and for other general business purposes.

 

Our unsecured senior notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus 0.35%, in each case plus accrued and unpaid interest to the redemption date. The indenture under which our senior unsecured notes were issued contains restrictions on incurring debt and using our assets as security in other financing transactions that result in the non-compliance with certain customary financial covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of greater than 1.5, and (4) unencumbered asset value of greater than 150% of our unsecured debt. As of December 31, 2003, we were in compliance with each of these financial restrictions and requirements.

 

Under registration rights agreements with the initial purchasers of our senior unsecured notes, we agreed to use our reasonable best efforts to register with the SEC offers to exchange new notes issued by us, which we refer to as “exchange notes,” for the original notes. We closed the exchange offers relating to the 6.25% senior unsecured notes due January 15, 2013 on June 20, 2003, and we closed the exchange offer relating to the 5.625% senior unsecured notes due April 15, 2015 and 5.00% senior unsecured notes due June 1, 2015 on September 9, 2003. The exchange notes are in the same aggregate principal amount as and have terms substantially identical to the original notes, but the exchange notes are freely tradable by the holders, while the original notes were subject to resale restrictions. The exchange offers did not generate any cash proceeds for us.

 

As of February 18, 2004, Boston Properties Limited Partnership had investment grade ratings on its senior unsecured notes, as follows:

 

Rating Organization


   Rating

Moody’s

   Baa2 (stable)

Standard & Poor’s

   BBB (stable)

FitchRatings

   BBB (stable)

 

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The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

 

Equity Transactions

 

On August 12, 2003, Boston Properties Limited Partnership completed the redemption of all of its Series One Preferred units by converting the remaining 2,365,301 Series One preferred units into 2,102,480 common units of limited partnership interest.

 

During the year ended December 31, 2003, we issued 2,452,791 shares of common stock as a result of stock options being exercised.

 

Business and Growth Strategies

 

Business Strategy

 

Our primary business objective is to maximize return on investment so as to provide our investors with the greatest possible total return. Our strategy to achieve this objective is:

 

  to concentrate on a few carefully selected geographic markets, including Boston, Washington D.C., midtown Manhattan and San Francisco, and to be one of the leading, if not the leading, owners and developers in each of those markets. We select markets and submarkets where tenants have demonstrated a preference for high-quality office buildings and other facilities;

 

  to emphasize markets and submarkets within those markets where the lack of available sites and the difficulty of receiving the necessary approvals for development and the necessary financing constitute high barriers to the creation of new supply, and where skill, financial strength and diligence are required to successfully develop, finance and manage high-quality office, research and development and/or industrial space and selected retail space;

 

  to take on complex, technically challenging projects, leveraging the skills of our management team to successfully develop, acquire or reposition properties which other organizations may not have the capacity or resources to pursue;

 

  to concentrate on high-quality real estate designed to meet the demands of today’s tenants who require sophisticated telecommunications and related infrastructure and support services, and to manage those facilities so as to become the landlord of choice for both existing and prospective clients;

 

  to opportunistically acquire assets which increase our penetration in the markets in which we have chosen to concentrate and which exhibit an opportunity to improve or preserve returns through repositioning (through a combination of capital improvements and shift in marketing strategy), changes in management focus and re-leasing as existing leases terminate;

 

  to explore joint venture opportunities primarily with existing owners of land parcels located in desirable locations, who seek to benefit from the depth of development and management expertise we are able to provide, and our access to capital, and/or to explore joint venture opportunities with strategic institutional partners, leveraging our skills as owners, operators and developers of Class A office space;

 

  to pursue on a selective basis the sale of properties to take advantage of our value creation and the demand for our premier properties;

 

  to seek third-party development contracts, especially during times when our internal development pipeline is low or when new development is less-warranted due to market conditions, to provide us with additional fee income and to enable us to retain and utilize our existing development and construction management staff; and

 

  to enhance our capital structure through our access to a variety of sources of capital.

 

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Growth Strategies

 

External Growth

 

We believe that we are well-positioned to realize growth through external asset development and acquisitions. We believe that our development experience and our organizational depth position us to continue to selectively develop a range of property types, from single-story suburban office properties to high-rise urban developments, within budget and on schedule. Other factors that contribute to our competitive position include:

 

  our control of sites (including sites under contract or option to acquire) in our markets that will support approximately 11.3 million square feet of new office, hotel and residential development;

 

  our reputation gained through the stability and strength of our existing portfolio of properties;

 

  our relationships with leading national corporations and public institutions seeking new facilities and development services;

 

  our relationships with nationally recognized financial institutions that provide capital to the real estate industry;

 

  our track record and reputation for executing acquisitions efficiently provides comfort to domestic and foreign institutions, private investors and corporations who seek to sell commercial real estate in our market areas;

 

  our ability to act quickly on due diligence and financing; and

 

  our relationships with institutional buyers and sellers of high-quality real estate assets.

 

We have targeted three areas of development and acquisition as significant opportunities to execute our external growth strategy:

 

  Pursue development in selected submarkets. As market conditions improve, we believe that development of well-positioned office buildings will be justified in many of our submarkets. We believe in acquiring land after taking into consideration timing factors relating to economic cycles and in response to market conditions that allow for its development at the appropriate time. While we purposely concentrate in markets with high barriers-to-entry, we have demonstrated throughout our more than 30-year history, an ability to make carefully timed land acquisitions in submarkets where we can become one of the market leaders in establishing rent and other business terms. We believe that there are opportunities at key locations in our existing and other markets for a well-capitalized developer to acquire land with development potential.

 

In the past, we have been particularly successful at acquiring sites or options to purchase sites that need governmental approvals. Because of our development expertise, knowledge of the governmental approval process and reputation for quality development with local government regulatory bodies, we generally have been able to secure the permits necessary to allow development and to profit from the resulting increase in land value. We seek out complex projects where we can add value through the efforts of our experienced and skilled management team leading to attractive enhanced returns on investment.

 

Our strong regional relationships and recognized development expertise have enabled us to capitalize on unique build-to-suit opportunities. We intend to seek and expect to continue to be presented with such opportunities in the near term allowing us to earn relatively significant returns on these development opportunities though multiple business cycles.

 

 

Acquire assets and portfolios of assets from institutions or individuals. We believe that due to our size, management strength and reputation, we are in an advantageous position to acquire portfolios of assets or individual properties from institutions or individuals. We may acquire properties for cash, but we are also particularly well-positioned to appeal to sellers wishing to convert on a tax-deferred basis their

 

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ownership of property into equity in a diversified real estate operating company that offers liquidity through access to the public equity markets in addition to a quarterly dividend. Our ability to offer common and preferred units of limited partnership in Boston Properties Limited Partnership to sellers who would otherwise recognize a taxable gain upon a sale of assets for cash or our common stock may facilitate this type of transaction on a tax-efficient basis. In addition, we may consider mergers with and acquisitions of compatible real estate firms.

 

  Acquire existing underperforming assets and portfolios of assets. We continue to actively pursue opportunities to acquire existing buildings that have the potential for increasing returns in the future as a result of active professional management and improving market conditions. These opportunities may include the acquisition of entire portfolios of properties. We believe that because of our in-depth market knowledge and development experience in each of our markets, our national reputation with brokers, financial institutions and others involved in the real estate market and our access to competitively-priced capital, we are well-positioned to identify and acquire existing, underperforming properties for competitive prices and to add significant additional value to such properties through our effective marketing strategies and a responsive property management program. We have developed this strategy and program for our existing portfolio, where we provide high-quality property management services using our own employees in order to encourage tenants to renew, expand and relocate in our properties. We are able to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house and third-party vendors’ services for marketing, including calls and presentations to prospective tenants, print advertisements, lease negotiation and construction of tenant improvements. Our tenants benefit from cost efficiencies produced by our experienced work force, which is attentive to preventive maintenance and energy management.

 

Internal Growth

 

We believe that significant opportunities will exist in the long term to increase cash flow from our existing properties because they are of high quality and in desirable locations. In addition, our properties are in markets where, in general, the creation of new supply is limited by the lack of available sites, the difficulty of receiving the necessary approvals for development on vacant land and the difficulty of obtaining financing. Our strategy for maximizing the benefits from these opportunities is two-fold: (1) to provide high quality property management services using our employees in order to encourage tenants to renew, expand and relocate in our properties, and (2) to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house services for marketing, lease negotiation, and construction of tenant improvements. We believe that once the current economic conditions improve, our office properties will add to our internal growth because of their desirable locations. In addition, we believe that once the current economic conditions improve in the business and leisure travel sector, our hotel properties will add to our internal growth because of their desirable locations in the downtown Boston and East Cambridge submarkets. We expect to continue our internal growth as a result of our ability to:

 

  Cultivate existing submarkets and long-term relationships with credit tenants. In choosing locations for our properties, we have paid particular attention to transportation and commuting patterns, physical environment, adjacency to established business centers, proximity to sources of business growth and other local factors.

 

We had an average lease term of 7.0 years at December 31, 2003 and continue to cultivate long-term leasing relationships with a diverse base of high quality, financially stable tenants. Based on leases in place at December 31, 2003, leases with respect to 6.7% of the total square feet from our Class A office properties will expire in calendar year 2004.

 

 

Directly manage properties to maximize the potential for tenant retention. We provide property management services ourselves, rather than contracting for this service, to maintain awareness of and responsiveness to tenant needs. We and our properties also benefit from cost efficiencies produced by an experienced work force attentive to preventive maintenance and energy management and from our

 

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continuing programs to assure that our property management personnel at all levels remain aware of their important role in tenant relations.

 

  Replace tenants quickly at best available market terms and lowest possible transaction costs. We believe that we are well-positioned to attract new tenants and achieve rental rates at the higher end of our markets as a result of our well-located, well-designed and well-maintained properties, our reputation for high-quality building services and responsiveness to tenants, and our ability to offer expansion and relocation alternatives within our submarkets.

 

  Extend terms of existing leases to existing tenants prior to expiration. We have also successfully structured early tenant renewals, which have reduced the cost associated with lease downtime while securing the tenancy of our highest quality credit-worthy tenants on a long-term basis and enhancing relationships.

 

Policies with Respect to Certain Activities

 

The discussion below sets forth certain additional information regarding our investment, financing and other policies. These policies have been determined by our Board of Directors and, in general, may be amended or revised from time to time by our Board of Directors.

 

Investment Policies

 

Investments in Real Estate or Interests in Real Estate

 

Our investment objectives are to provide quarterly cash dividends to our securityholders and to achieve long-term capital appreciation through increases in the value of Boston Properties, Inc. We have not established a specific policy regarding the relative priority of these investment objectives.

 

We expect to continue to pursue our investment objectives primarily through the ownership of our current properties and other acquired properties. We currently intend to continue to invest primarily in developments of properties and acquisitions of existing improved properties or properties in need of redevelopment, and acquisitions of land that we believe have development potential, primarily in our four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco. Future investment or development activities will not be limited to a specified percentage of our assets. We intend to engage in such future investment or development activities in a manner that is consistent with the maintenance of our status as a REIT for federal income tax purposes. In addition, we may purchase or lease income-producing commercial and other types of properties for long-term investment, expand and improve the real estate presently owned or other properties purchased, or sell such real estate properties, in whole or in part, when circumstances warrant. We do not have a policy that restricts the amount or percentage of assets that will be invested in any specific property, however, our investments may be restricted by our debt covenants.

 

We may also continue to participate with third parties in property ownership, through joint ventures or other types of co-ownership. These investments may permit us to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring our portfolio.

 

Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness as may be incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over any distributions with respect to our common stock. Investments are also subject to our policy and therefore, not to be treated as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

Investments in Real Estate Mortgages

 

While our current portfolio consists of, and our business objectives emphasize, equity investments in commercial real estate, we may, at the discretion of the Board of Directors, invest in mortgages and other types

 

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of real estate interests consistent with our qualification as a REIT. We do not presently intend to invest in mortgages or deeds of trust, but may invest in participating or convertible mortgages if we conclude that we may benefit from the cash flow or any appreciation in value of the property. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable us to recoup its full investment.

 

Securities of or Interests in Persons Primarily Engaged in Real Estate Activities

 

Subject to the percentage of ownership limitations and gross income tests necessary for our REIT qualification, we also may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

 

Dispositions

 

Our disposition of properties is based upon management’s periodic review of our portfolio and the determination by the Board of Directors that such action would be in our best interests. Any decision to dispose of a property will be made by our management and approved by a majority of the Board of Directors or a committee there of. Some holders of limited partnership interests in Boston Properties Limited Partnership, including Messrs. Mortimer B. Zuckerman and Edward H. Linde, would incur adverse tax consequences upon the sale of certain of our properties that differ from the tax consequences to us. Consequently holders of limited partnership interests in Boston Properties Limited Partnership may have different objectives regarding the appropriate pricing and timing of any such sale. Such different tax treatment derives in most cases from the fact that we acquired these properties in exchange for partnership interests in contribution transactions structured to allow the prior owners to defer taxable gain. Generally such deferral continues so long as we do not dispose of the properties in a taxable transaction. Unless a sale by us of these properties is structured as a like-kind exchange or in a manner that otherwise allows such deferral to continue, recognition of the deferred tax gain allocable to these prior owners is generally triggered by the sale.

 

Financing Policies

 

We do not have a policy limiting the amount of indebtedness that we may incur. However, our mortgages, credit facilities and unsecured debt securities contain customary restrictions, requirements and other limitations on our ability to incur indebtedness. In addition, the agreement of limited partnership of Boston Properties Limited Partnership and our Certificate of Incorporation and Bylaws do not limit the amount or percentage of indebtedness that we may incur. We have not established any limit on the number or amount of mortgages that may be placed on any single property or on our portfolio as a whole.

 

Our Board of Directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including the purchase price of properties to be acquired with debt financing, the estimated market value of our properties upon refinancing and the ability of particular properties and Boston Properties Limited Partnership as a whole to generate cash flow to cover expected debt service.

 

Policies with Respect to Other Activities

 

As the sole general partner of Boston Properties Limited Partnership, we have the authority to issue additional common and preferred units of limited partnership interests of Boston Properties Limited Partnership. We have in the past, and may continue in the future, to issue common or preferred units of limited partnership interests of Boston Properties Limited Partnership to persons who contribute their direct or indirect interests in properties to us in exchange for such common or preferred units of limited partnership interest in Boston Properties Limited Partnership. We have not engaged in trading, underwriting or agency distribution or sale of securities of issuers other than Boston Properties Limited Partnership and we do not intend to do so. At all times,

 

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we intend to make investments in such a manner as to maintain our qualification as a REIT, unless because of circumstances or changes in the Internal Revenue Code of 1986, as amended (or the Treasury Regulations), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT. We may make loans to third parties, including, without limitation, to joint ventures in which we participate. We intend to make investments in such a way that we will not be treated as an investment company under the 1940 Act. Our policies with respect to these and other activities may be reviewed and modified or amended from time to time by the Board of Directors.

 

Competition

 

We compete in the leasing of office and industrial space with a considerable number of other real estate companies, some of which may have greater marketing and financial resources than are available to us. In addition, our hotel properties compete for guests with other hotels, some of which may have greater marketing and financial resources than are available to us and to the manager of our hotels, Marriott ® International, Inc.

 

Principal factors of competition in our primary business of, owning, acquiring and developing office properties, are the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the relevant market. Additionally, our ability to compete depends upon, among other factors, trends of the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

 

The Hotel Properties

 

We own our three hotel properties through a taxable REIT subsidiary (“TRS”). The TRS, a wholly-owned subsidiary of Boston Properties Limited Partnership, is the lessee pursuant to leases for each of the hotel properties. As lessor, Boston Properties Limited Partnership is entitled to a percentage of gross receipts from the hotel properties. The hotel leases allow all the economic benefits of ownership to flow to us. Marriott® International, Inc. continues to manage the hotel properties under the Marriott® name and under terms of the existing management agreements. Marriott has been engaged under separate long-term incentive management agreements to operate and manage each of the hotels on behalf of the TRS. In connection with these arrangements, Marriott has agreed to operate and maintain the hotels in accordance with its system-wide standard for comparable hotels and to provide the hotels with the benefits of its central reservation system and other chain-wide programs and services. Under a separate management agreement for each hotel, Marriott acts as the TRS’ agent to supervise, direct and control the management and operation of the hotel and receives as compensation base management fees that are calculated as a percentage of the hotel’s gross revenues, and supplemental incentive fees if the hotel exceeds negotiated profitability breakpoints. In addition, the TRS compensates Marriott, on the basis of a formula applied to the hotel’s gross revenues, for certain system-wide services provided by Marriott, including central reservations, marketing and training. During 2003 and 2002, Marriott received an aggregate of approximately $3.4 million and $5.5 million, respectively, under all three management agreements.

 

Seasonality

 

Our hotel properties traditionally have experienced significant seasonality in their operating income, with weighted-average net operating income by quarter over the year ended December 31, 2003 as follows:

 

First Quarter


 

Second Quarter


 

Third Quarter


 

Fourth Quarter


12%

  28%   26%   34%

 

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Corporate Governance

 

Since May 2003, we have implemented the following corporate governance initiatives to address certain legal requirements promulgated under the Sarbanes-Oxley Act of 2002, as well as the recently adopted New York Stock Exchange corporate governance listing standards:

 

  We elected three new independent directors in May 2003 (Messrs. Lawrence S. Bacow, William M. Daley and David A. Twardock);

 

  Our Board of Directors determined that Alan J. Patricof, the Chairman of our Audit Committee, qualifies as an “audit committee financial expert” as such term is defined under Item 401 of Regulation S-K. Mr. Patricof is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act;

 

  Our Audit Committee adopted our Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which permissible services to be performed by our independent public accountants may be pre-approved.

 

  Our Audit Committee established “Audit Committee Complaint Procedures” for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including the anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

 

  Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers and employees. A copy of this code is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and we intend to disclose on this website any amendment to, or waiver of, any provision of this Code applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange. A copy of this Code is also available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

  Our Board of Directors established an Ethics Hotline that employees may use to anonymously report possible violations of the Code of Business Conduct and Ethics, including concerns regarding questionable accounting, internal accounting controls or auditing matters.

 

  Our Board of Directors established and adopted new charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. Each committee is comprised of three (3) independent directors. A copy of each of these charters is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and is available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

  Our Board of Directors adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and is available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

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RISK FACTORS

 

Set forth below are the risks that we believe are material to our investors. We refer to the shares of our common stock and the units of limited partnership interest in Boston Properties Limited Partnership together as our “securities,” and the investors who own shares and/or units as our “securityholders.” This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 34.

 

Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

 

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our office, industrial, and hotel properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our securityholders will be adversely affected. The following factors, among others, may adversely affect the income generated by our office, industrial and hotel properties:

 

  downturns in the national, regional and local economic climate;

 

  competition from other office, hotel and commercial buildings;

 

  local real estate market conditions, such as oversupply or reduction in demand for office, hotel or other commercial space;

 

  changes in interest rates and availability of financing;

 

  vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

  increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

 

  civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

  significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; and

 

  declines in the financial condition of our tenants and our ability to collect rents from our tenants.

 

We are dependent upon the economic climates of our four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco.

 

Over 90% of our revenues in fiscal year 2003 were derived from properties located in our four core markets: Boston, Washington, D.C., midtown Manhattan and San Francisco. As a result of the continued slowdown in economic activity, there has been an increase in vacancy rates for office properties in these markets compared with historical vacancy rates. A continued downturn in the economies of these markets, or the impact that the downturn in the overall national economy may have upon these economies, could result in further reduced demand for office space. Because our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio), a decrease in demand for office space in turn could adversely affect our results of operations. Additionally, there are submarkets within our core markets that are dependent upon a limited number of industries. For example in our Washington, D.C. market, we are primarily dependent on leasing office properties to governmental agencies and legal firms, in our midtown Manhattan market we have historically leased properties to financial, legal and other professional firms and in our suburban Boston submarket we have historically leased office buildings to companies in the technology sector. A significant downturn in one or more of these sectors could adversely affect our results of operations.

 

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Our investment in property development may be more costly than anticipated.

 

We intend to continue to develop and substantially renovate office, industrial and hotel properties. Our current and future development and construction activities may be exposed to the following risks:

 

  we may be unable to proceed with the development of properties because we cannot obtain financing on favorable terms;

 

  we may incur construction costs for a development project which exceed our original estimates due to increases in interest rates and increased materials, labor, leasing or other costs, which could make completion of the project less profitable because market rents may not increase sufficiently to compensate for the increase in construction costs;

 

  we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

 

  we may abandon development opportunities after we begin to explore them and as a result we may fail to recover expenses already incurred;

 

  we may expend funds on and devote management’s time to projects which we do not complete; and

 

  we may be unable to complete construction and/or leasing of a property on schedule.

 

Investment returns from our developed properties may be lower than anticipated.

 

Our developed properties may be exposed to the following risks:

 

  we may lease developed properties at rental rates that are less than the rates projected at the time we decide to undertake the development; and

 

  occupancy rates and rents at newly developed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment being less profitable than we expected or not profitable at all.

 

Our use of joint ventures may limit our flexibility with jointly owned investments.

 

In appropriate circumstances, we intend to develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. We currently have six joint ventures that are not consolidated with our financial statements. Our share of the aggregate revenue of these joint ventures represents 2.3% of our total revenue (the sum of our total consolidated revenue and our share of such joint venture revenue). We could become engaged in a dispute with any of our joint ventures that might affect our ability to operate a property. In addition, our joint venture partners may have different objectives than we do regarding the appropriate timing and terms of any sale or refinancing of properties. Finally, in many instances, our joint venture partners have competing interests in our markets that could create conflict of interest issues.

 

We face risks associated with property acquisitions.

 

We have and intend to continue to acquire properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure. Our acquisition activities and their success are subject to the following risks:

 

  we may be unable to obtain financing for acquisitions on favorable terms or at all;

 

  acquired properties may fail to perform as expected;

 

  the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;

 

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  acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and

 

  we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and this could have an adverse effect on our results of operations and financial condition.

 

We have acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in Boston Properties Limited Partnership. This acquisition structure has the effect, among others, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases.

 

Acquired properties may expose us to unknown liability.

 

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our results of operations and cash flow. Unknown liabilities with respect to acquired properties might include:

 

  liabilities for clean-up of undisclosed environmental contamination;

 

  claims by tenants, vendors or other persons against the former owners of the properties;

 

  liabilities incurred in the ordinary course of business; and

 

  claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

 

Competition for acquisitions may result in increased prices for properties.

 

We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities with other investors and this competition may adversely affect us by subjecting us to the following risks:

 

  we may be unable to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and private REITs, institutional investment funds and other real estate investors;

 

  even if we enter into an acquisition agreement for a property, it will likely contain conditions to closing, including completion of due diligence investigations to our satisfaction, which may not be satisfied; and

 

  even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price.

 

We face potential difficulties or delays renewing leases or re-leasing space.

 

We derive most of our income from rent received from our tenants. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease net space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our cash flow could decrease and our ability to make distributions to our securityholders could be adversely affected.

 

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We face potential adverse effects from major tenants’ bankruptcies or insolvencies.

 

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties. Our tenants could file for bankruptcy protection or become insolvent in the future. We cannot evict a tenant solely because of its bankruptcy. On the other hand, a bankrupt tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flow and results of operations.

 

We may have difficulty selling our properties, which may limit our flexibility.

 

Large and high-quality office, industrial and hotel properties like the ones that we own could be difficult to sell. This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions. In addition, federal tax laws limit our ability to sell properties that we have owned for fewer than four years and this may affect our ability to sell properties without adversely affecting returns to our securityholders. These restrictions reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.

 

Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we developed and have owned for a significant period of time or which we acquired through tax deferred contribution transactions in exchange for partnership interests in Boston Properties Limited Partnership often have low tax bases. If we dispose of these properties outright in taxable transactions, we may be required to distribute a significant amount of the taxable gain to our securityholders under the requirements of the Internal Revenue Code for REIT’s like us, which in turn would impact our cash flow. In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for our partnership interests under tax protection agreements with contributors. To dispose of low basis or tax-protected properties efficiently we often use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low bases and other tax attributes (including tax protection covenants).

 

Our properties face significant competition.

 

We face significant competition from developers, owners and operators of office, industrial and other commercial real estate, including sublease space available from our tenants. Substantially all of our properties face competition from similar properties in the same market. Such competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties.

 

Because we own three hotel properties, we face the risks associated with the hospitality industry.

 

Because the lease payments we receive under the hotel leases are based on a participation in the gross receipts of the hotels, if the hotels do not generate sufficient receipts, our cash flow would be decreased, which could reduce the amount of cash available for distribution to our securityholders. The following factors, among others, are common to the hotel industry, and may reduce the receipts generated by our hotel properties:

 

  our hotel properties compete for guests with other hotels, a number of which have greater marketing and financial resources than our hotel-operating business partners;

 

  if there is an increase in operating costs resulting from inflation and other factors, our hotel-operating business partners may not be able to offset such increase by increasing room rates;

 

  our hotel properties are subject to the fluctuating and seasonal demands of business travelers and tourism; and

 

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  our hotel properties are subject to general and local economic and social conditions that may affect demand for travel in general, including war and terrorism.

 

In addition, because all three of our hotel properties are located within a two-mile radius in downtown Boston and Cambridge, they are all subject to the Boston market’s fluctuations in demand, increases in operating costs and increased competition from additions in supply.

 

Because of the ownership structure of our three hotel properties, we face potential adverse effects from changes to the applicable tax laws.

 

We own three hotel properties. However, under the Internal Revenue Code, REITs like us are not allowed to operate hotels directly or indirectly. Accordingly, we lease our hotel properties to our taxable REIT subsidiary, or TRS. As lessor, we are entitled to a percentage of the gross receipts from the operation of the hotel properties. Marriott International, Inc. manages the hotels under the Marriott® name pursuant to a management contract with the TRS as lessee. While the TRS structure allows the economic benefits of ownership to flow to us, the TRS is subject to tax on its income from the operations of the hotels at the federal and state level. In addition, the TRS is subject to detailed tax regulations that affect how it may be capitalized and operated. If the tax laws applicable to TRS’s are modified, we may be forced to modify the structure for owning our hotel properties, and such changes may adversely affect the cash flows from our hotels. In addition, the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, and we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative action may prospectively or retroactively modify the tax treatment of the TRS and, therefore, may adversely affect our after-tax returns from our hotel properties.

 

Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.

 

The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, pursuant to the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our securityholders.

 

Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.

 

Some potential losses are not covered by insurance.

 

We carry insurance coverage on our properties of types and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act was enacted in November 2002 to require regulated insurers to make available coverage for certified acts of terrorism (as defined by the statute) through December 31, 2004, subject to extension by the United States Department of Treasury through December 31, 2005. The Federal Terrorism Risk Insurance Act expires on December 31, 2005, unless extended, and therefore, we cannot currently anticipate whether the Act will renew upon expiration. In connection with the renewal of coverage for the policy year beginning March 1, 2004, we are currently evaluating coverage on terms and amounts comparable to our existing policies, subject to cost and market availability. Our current property insurance coverage carries a $640 million per occurrence limit, including coverage for certified acts of terrorism. Additionally, our 2003 program provides $25 million of coverage for acts of terrorism other than those “certified” under the Federal Terrorism Risk Insurance Act.

 

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We also carry earthquake insurance on our properties located in areas known to be subject to earthquakes in an amount and subject to deductibles and self-insurance that we believe are commercially reasonable. Specifically, we carry earthquake insurance which covers our San Francisco portfolio with a $120 million per occurrence limit and a $120 million aggregate limit, $20 million of which is provided as a direct insurer by IXP, Inc. The amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. As a result of increased costs of coverage and decreased availability, the amount of third party earthquake insurance we may be able to purchase on commercially reasonable terms may be reduced. In addition, we may discontinue earthquake insurance on some or all of our properties in the future if the premiums exceed our estimation of the value of the coverage.

 

In January 2002, we formed a wholly-owned taxable REIT subsidiary, IXP, Inc. (“IXP”), to act as a captive insurance company and be one of the elements of our overall insurance program. IXP acts as a primary carrier with respect to a portion of our earthquake insurance coverage for our Greater San Francisco properties. Insofar as we own IXP, we are responsible for its liquidity and capital resources, and the accounts of IXP are part of our consolidated financial statements. If we experience a loss and IXP is required to pay under its insurance policy, we would ultimately record the loss to the extent of IXP’s required payment. Therefore, insurance coverage provided by IXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance. In the future IXP may provide additional or different coverage, as a reinsurer or a primary insurer, depending on the availability and cost of third-party insurance in the marketplace and the level of self-insurance that we believe is commercially reasonable.

 

We continue to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism in particular, but we can not anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars, acts of nuclear, biological or chemical terrorism or the presence of mold at our properties, for which we cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that we could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and financial condition and results of operations.

 

Potential liability for environmental contamination could result in substantial costs.

 

Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our securityholders because:

 

  as owner or operator we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;

 

  the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;

 

  even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and

 

  governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

 

These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property.

 

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In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Changes in laws increasing the potential liability for environmental conditions existing at our properties, or increasing the restrictions on the handling, storage or discharge of hazardous or toxic substances or petroleum products or other actions may result in significant unanticipated expenditures.

 

Environmental laws also govern the presence, maintenance and removal of asbestos. Such laws require that owners or operators of buildings containing asbestos:

 

  properly manage and maintain the asbestos;

 

  notify and train those who may come into contact with asbestos; and

 

  undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

 

Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

 

Some of our properties are located in urban, industrial and previously developed areas where fill or current or historic industrial uses of the areas have caused site contamination. It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos surveys with respect to our acquisition of properties. These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling. Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usage create a potential environmental problem, and for contamination in groundwater. Even though these environmental assessments are conducted, there is still the risk that:

 

  the environmental assessments and updates did not identify all potential environmental liabilities;

 

  a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments;

 

  new environmental liabilities have developed since the environmental assessments were conducted; and

 

  future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us.

 

Inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of the affected property.

 

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We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk.

 

We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

 

We have agreements with a number of limited partners of Boston Properties Limited Partnership who contributed properties in exchange for partnership interests that require Boston Properties Limited Partnership to maintain for specified periods of time secured debt on certain of our assets and/or allocate partnership debt to such limited partners to enable them to continue to defer recognition of their taxable gain with respect to the contributed property. These tax protection and debt allocation agreements may restrict our ability to repay or refinance debt.

 

An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets.

 

As of December 31, 2003, we had approximately $439 million, and may incur more, of indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our securityholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures. We may from time to time enter into agreements such as interest rate swaps, caps, floors and other interest rate hedging contracts with respect to a portion of our variable rate debt. While these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable. In addition, an increase in interest rates could decrease the amount third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in respect to changes in economic or other conditions.

 

Covenants in our debt agreements could adversely affect our financial condition.

 

The mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Our unsecured credit facility, unsecured debt securities and secured construction loans contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our continued ability to borrow under our credit facilities is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. Additionally, in the future our ability to satisfy current or prospective lenders’ insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage against acts of terrorism than is available to us in the marketplace or on commercially reasonable terms.

 

We rely on debt financing, including borrowings under our unsecured credit facility, issuances of unsecured debt securities and debt secured by individual properties, to finance our acquisition and development activities and for working capital. If we are unable to obtain debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely

 

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affected. If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, our unsecured debt agreements contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

 

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock or debt securities.

 

On February 18, 2004, we had approximately $5.1 billion in total indebtedness outstanding on a consolidated basis (excluding unconsolidated joint venture debt). Debt to market capitalization ratio, which measures total debt as a percentage of the aggregate of total debt plus the market value of outstanding equity securities, is often used by analysts to gauge leverage for equity REITs such as us. Our market value is calculated using the price per share of our common stock. Using the closing stock price of $51.48 per share of our common stock of Boston Properties, Inc. on February 18, 2004, multiplied by the sum of (1) the actual aggregate number of outstanding common partnership units of Boston Properties Limited Partnership (including common partnership units held by us) and (2) the number of common partnership units available upon conversion of preferred partnership units of Boston Properties Limited Partnership, our debt to market capitalization ratio was approximately 43.3% as of February 18, 2004.

 

Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. However, there can be no assurance we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally.

 

Further issuances of equity securities may be dilutive to current securityholders.

 

The interests of our existing securityholders could be diluted if additional equity securities are issued to finance future developments, acquisitions, or repay indebtedness. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.

 

Failure to qualify as a real estate investment trust would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of dividends.

 

If we fail to qualify as a real estate investment trust, or REIT, for federal income tax purposes, we will be taxed as a corporation. We believe that we are organized and qualified as a REIT and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there are only limited judicial and administrative interpretations, and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

 

In addition, we currently hold certain of our properties through a subsidiary that has elected to be taxed as a REIT and we may in the future determine that it is in our best interests to hold one or more of our other properties through one or more subsidiaries that elect to be taxed as REITs. If any of these subsidiaries fails to

 

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qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes.

 

If we fail to qualify as a REIT we will face serious tax consequences that will substantially reduce the funds available for payment of dividends for each of the years involved because:

 

  we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

  we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes;

 

  unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified; and

 

  all dividends will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits.

 

In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

 

In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.

 

In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the real estate investment trust distribution requirements, even if the then prevailing market conditions are not favorable for these borrowings. To qualify as REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may need short-term debt or long-term debt, proceeds from asset sales, creation of joint ventures or sale of common stock to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

 

Limits on changes in control may discourage takeover attempts beneficial to stockholders.

 

Provisions in our certificate of incorporation and bylaws, our shareholder rights agreement and the limited partnership agreement of Boston Properties Limited Partnership, as well as provisions of the Internal Revenue Code and Delaware corporate law, may:

 

  delay or prevent a change of control over us or a tender offer, even if such action might be beneficial to our stockholders and

 

  limit our stockholders’ opportunity to receive a potential premium for their shares of common stock over then-prevailing market prices.

 

Stock Ownership Limit

 

Primarily to facilitate maintenance of our qualification as a REIT, our certificate of incorporation generally prohibits ownership, directly, indirectly or beneficially, by any single stockholder of more than 6.6% of the number of outstanding shares of any class or series of our equity stock. We refer to this limitation as the “ownership limit.” Our board of directors may waive or modify the ownership limit with respect to one or more

 

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persons if it is satisfied that ownership in excess of this limit will not jeopardize our status as a REIT for federal income tax purposes. In addition, under our certificate of incorporation each of Mortimer B. Zuckerman and Edward H. Linde, along with their respective families and affiliates, as well as, in general, pension plans and mutual funds, may actually and beneficially own up to 15% of the number of outstanding shares of any class or series of our equity common stock. Shares owned in violation of the ownership limit will be subject to the loss of rights to distributions and voting and other penalties. The ownership limit may have the effect of inhibiting or impeding a change in control.

 

Boston Properties Limited Partnership Agreement

 

We have agreed in the limited partnership agreement of Boston Properties Limited Partnership not to engage in business combinations unless limited partners of Boston Properties Limited Partnership other than Boston Properties, Inc. receive, or have the opportunity to receive, the same consideration for their partnership interests as holders of our common stock in the transaction. If these limited partners would not receive such consideration, we cannot engage in the transaction unless 75% of these limited partners vote to approve the transaction. In addition, we have agreed in the limited partnership agreement of Boston Properties Limited Partnership that we will not complete business combinations in which we receive the approval of our stockholders unless these limited partners are also allowed to vote and the transaction would have been approved had these limited partners been able to vote as stockholders on the transaction. Therefore, if our stockholders approve a business combination that requires a vote of stockholders, the partnership agreement requires the following before we can complete the transaction:

 

  holders of partnership interests in Boston Properties Limited Partnership, including Boston Properties, Inc., must vote on the matter;

 

  Boston Properties, Inc. must vote its partnership interests in the same proportion as our stockholders voted on the transaction; and

 

  the result of the vote of holders of partnership interests in Boston Properties Limited Partnership must be such that had such vote been a vote of stockholders, the business combination would have been approved.

 

As a result of these provisions, a potential acquirer may be deterred from making an acquisition proposal and we may be prohibited by contract from engaging in a proposed business combination even though our stockholders approve of the combination.

 

Shareholder Rights Plan

 

We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock, because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value, which would substantially reduce the value and influence of the stock owned by the acquiring person. Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.

 

We may change our policies without obtaining the approval of our stockholders.

 

Our operating and financial policies, including our policies with respect to acquisitions or real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies.

 

Our success depends on key personnel whose continued service is not guaranteed.

 

We depend on the efforts of key personnel, particularly Mortimer B. Zuckerman, Chairman of our board of directors, and Edward H. Linde, our President and Chief Executive Officer. Among the reasons that Messrs.

 

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Zuckerman and Linde are important to our success is that each has a national reputation, which attracts business and investment opportunities and assists us in negotiations with lenders. If we lost their services, our relationships with lenders, potential tenants and industry personnel could diminish. Mr. Zuckerman has substantial outside business interests that could interfere with his ability to devote his full time to our business and affairs.

 

Our two Executive Vice Presidents, Chief Financial Officer and other executive officers that serve as managers of our regional offices also have strong reputations. Their reputations aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit prospects. While we believe that we could find replacements for these key personnel, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, prospective tenants and industry personnel.

 

Conflicts of interest exist with holders of interests in Boston Properties Limited Partnership.

 

Sales of properties and repayment of related indebtedness will have different effects on holders of interests in Boston Properties Limited Partnership than on our stockholders.

 

Some holders of interests in Boston Properties Limited Partnership, including Messrs. Zuckerman and Linde, would incur adverse tax consequences upon the sale of certain of our properties and on the repayment of related debt which differ from the tax consequences to us and our stockholders. Consequently, these holders of partnership interests in Boston Properties Limited Partnership may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While we have exclusive authority under the limited partnership agreement of Boston Properties Limited Partnership to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, subject, in the case of certain properties, to the contractual commitments described below, any such decision would require the approval of our board of directors. As directors and executive officers, Messrs. Zuckerman and Linde could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness.

 

Agreement not to sell some properties.

 

Under the terms of the limited partnership agreement of Boston Properties Limited Partnership, we have agreed not to sell or otherwise transfer some of our properties, prior to specified dates, in any transaction that would trigger taxable income, without first obtaining the consent of Messrs. Zuckerman and Linde. However, we are not required to obtain their consent if, during the applicable period, each of them does not hold at least 30% of his original interests in Boston Properties Limited Partnership, or if those properties are transferred in a nontaxable event. In addition, we have entered into similar agreements with respect to other properties that we have acquired in exchange for partnership interests in Boston Properties Limited Partnership. Pursuant to those agreements, we are responsible for the reimbursement of tax costs to the prior owners if the subject properties are sold in a taxable sale. Our obligations to the prior owners are generally limited in time and only apply to actual damages suffered. As of December 31, 2003, there were a total of 33 properties subject to these restrictions, and those properties are estimated to have accounted for approximately 55.1% of our total revenue for the year ended December 31, 2003.

 

Boston Properties Limited Partnership has also entered into agreements providing prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness they guarantee is repaid or reduced, additional and/or substitute indebtedness. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements.

 

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Messrs. Zuckerman and Linde will continue to engage in other activities.

 

Messrs. Zuckerman and Linde have a broad and varied range of investment interests. Either one could acquire an interest in a company which is not currently involved in real estate investment activities but which may acquire real property in the future. However, pursuant to each of their employment agreements, Messrs. Zuckerman and Linde will not, in general, have management control over such companies and, therefore, they may not be able to prevent one or more such companies from engaging in activities that are in competition with our activities.

 

Changes in market conditions could adversely affect the market price of our common stock.

 

As with other publicly traded equity securities, the value of our common stock depends on various market conditions that may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

 

  the extent of investor interest in our securities;

 

  the general reputation of real estate investment trusts and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

 

  our underlying asset value;

 

  investor confidence in the stock and bond markets, generally;

 

  national economic conditions;

 

  changes in tax laws;

 

  our financial performance;

 

  change in our credit rating; and

 

  general stock and bond market conditions.

 

The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends. Consequently, our common stock may trade at prices that are higher or lower than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish.

 

The number of shares available for future sale could adversely affect the market price of our stock.

 

In connection with and subsequent to our initial public offering, we have completed many private placement transactions in which shares of capital stock of Boston Properties, Inc. or partnership interests in Boston Properties Limited Partnership were issued to owners of properties we acquired or to institutional investors. This common stock, or common stock issuable on conversion of preferred stock or in exchange for such partnership interests in Boston Properties Limited Partnership, may be sold in the public securities markets over time under registration rights we granted to these investors. Additional common stock reserved under our employee benefit and other incentive plans, including stock options and restricted stock, may also be sold in the market at some time in the future. Future sales of our common stock in the market could adversely affect the price of our common stock. We cannot predict the effect the perception in the market that such sales may occur will have on the market price of our common stock.

 

We did not obtain new owner’s title insurance policies in connection with properties acquired during our initial public offering.

 

We acquired many of our properties from our predecessors at the completion of our initial public offering in June 1997. Before we acquired these properties each of them was insured by a title insurance policy. We did not

 

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obtain new owner’s title insurance policies in connection with the acquisition of these properties, however, to the extent we have financed properties acquired in connection with the IPO, we have obtained new title insurance policies. Nevertheless, because in many instances we acquired these properties indirectly by acquiring ownership of the entity which owned the property and those owners remain in existence as our subsidiaries, some of these title insurance policies may continue to benefit us. Many of these title insurance policies may be for amounts less than the current values of the applicable properties. If there was a title defect related to any of these properties, or to any of the properties acquired at the time of our initial public offering, that is no longer covered by a title insurance policy, we could lose both our capital invested in and our anticipated profits from such property. We have obtained title insurance policies for all properties that we have acquired after our initial public offering.

 

We face possible adverse changes in tax laws.

 

From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. The shortfall in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income and may be assessed interest and penalties on such additional taxes. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends.

 

Item 2. Properties

 

At December 31, 2003, our portfolio consisted of 140 properties totaling 43.9 million net rentable square feet. Our properties consisted of (1) 131 office properties, comprised of 103 Class A office buildings, including three properties under construction and 28 properties that support both office and technical uses, (2) four industrial properties, (3) two retail properties, and (4) three hotels. In addition, we own or control 43 parcels of land for future development. The following table sets forth information relating to the properties we owned, or had an ownership interest in, at December 31, 2003:

 

Properties


  

Location


   %
Leased


    Number
of
Buildings


   Net
Rentable
Square
Feet


Class A Office

                    

399 Park Avenue

   New York, NY    99.7 %   1    1,679,972

Citigroup Center

   New York, NY    99.9 %   1    1,576,803

800 Boylston Street at The Prudential Center

   Boston, MA    96.2 %   1    1,175,739

280 Park Avenue

   New York, NY    98.5 %   1    1,170,080

5 Times Square

   New York, NY    100.0 %   1    1,101,779

599 Lexington Avenue

   New York, NY    98.8 %   1    1,018,843

Embarcadero Center Four

   San Francisco, CA    94.5 %   1    936,788

Riverfront Plaza

   Richmond, VA    89.2 %   1    906,033

111 Huntington Avenue at The Prudential Center

   Boston, MA    99.3 %   1    853,672

Embarcadero Center One

   San Francisco, CA    95.7 %   1    836,582

Embarcadero Center Two

   San Francisco, CA    85.9 %   1    778,712

Embarcadero Center Three

   San Francisco, CA    80.0 %   1    768,949

 

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Table of Contents

Properties


  

Location


   %
Leased


    Number
of
Buildings


   Net
Rentable
Square
Feet


Democracy Center

   Bethesda, MD    81.6 %   3    681,062

100 East Pratt Street

   Baltimore, MD    95.1 %   1    637,605

Metropolitan Square (51% ownership)

   Washington, D.C.    99.1 %   1    585,220

Reservoir Place

   Waltham, MA    81.7 %   1    526,165

601 and 651 Gateway Boulevard

   South San Francisco, CA    49.5 %   2    509,283

101 Huntington Avenue at The Prudential Center

   Boston, MA    80.9 %   1    504,628

Embarcadero Center West Tower

   San Francisco, CA    100.0 %   1    473,774

One and Two Reston Overlook

   Reston, VA    94.1 %   2    445,354

Two Freedom Square

   Reston, VA    100.0 %   1    421,502

One Tower Center

   East Brunswick, NJ    84.1 %   1    412,222

One Freedom Square

   Reston, VA    100.0 %   1    410,308

Market Square North (50% ownership)

   Washington, D.C.    100.0 %   1    401,279

Capital Gallery

   Washington, D.C.    100.0 %   1    396,894

140 Kendrick Street (25% ownership)

   Needham, MA    100.0 %   3    380,987

One and Two Discovery Square

   Reston, VA    98.0 %   2    366,939

265 Franklin Street (35% ownership)

   Boston, MA    74.6 %   1    344,126

Orbital Science Campus

   Dulles, VA    100.0 %   3    337,228

1333 New Hampshire Avenue Avenue

   Washington, D.C.    100.0 %   1    315,363

Waltham Weston Corporate Center

   Waltham, MA    66.9 %   1    306,801

NIMA Building

   Reston, VA    100.0 %   1    263,870

Reston Corporate Center

   Reston, VA    100.0 %   2    261,046

Quorum Office Park

   Chelmsford, MA    100.0 %   2    259,918

611 Gateway Boulevard

   South San Francisco, CA    0.0 %   1    256,302

Lockheed Martin Building

   Reston, VA    100.0 %   1    255,244

200 West Street

   Waltham, MA    100.0 %   1    248,048

500 E Street

   Washington, D.C.    100.0 %   1    242,769

New Dominion Tech. Park, Building One

   Herndon, VA    100.0 %   1    235,201

510 Carnegie Center

   Princeton, NJ    100.0 %   1    234,160

Cambridge Center One

   Cambridge, MA    91.0 %   1    215,385

Sumner Square Office

   Washington, D.C.    100.0 %   1    207,620

University Place

   Cambridge, MA    100.0 %   1    195,282

1301 New York Avenue

   Washington, D.C.    100.0 %   1    188,358

2600 Tower Oaks Boulevard

   Rockville, MD    100.0 %   1    178,887

Cambridge Center Eight

   Cambridge, MA    100.0 %   1    177,226

Newport Office Park

   Quincy, MA    44.6 %   1    168,829

Lexington Office Park

   Lexington, MA    81.1 %   2    166,735

191 Spring Street

   Lexington, MA    100.0 %   1    162,700

206 Carnegie Center

   Princeton, NJ    100.0 %   1    161,763

210 Carnegie Center

   Princeton, NJ    100.0 %   1    161,112

10 & 20 Burlington Mall Road

   Burlington, MA    97.2 %   2    153,048

Cambridge Center Ten

   Cambridge, MA    100.0 %   1    152,664

214 Carnegie Center

   Princeton, NJ    95.4 %   1    150,416

Old Federal Reserve

   San Francisco, CA    99.8 %   1    149,592

212 Carnegie Center

   Princeton, NJ    98.5 %   1    148,153

506 Carnegie Center

   Princeton, NJ    100.0 %   1    136,213

508 Carnegie Center

   Princeton, NJ    100.0 %   1    131,085

Waltham Office Center

   Waltham, MA    91.7 %   3    129,041

202 Carnegie Center

   Princeton, NJ    97.6 %   1    128,705

101 Carnegie Center

   Princeton, NJ    100.0 %   1    123,659

 

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Table of Contents

Properties


  

Location


   %
Leased


    Number
of
Buildings


   Net Rentable
Square Feet


504 Carnegie Center

   Princeton, NJ    100.0 %   1    121,990

91 Hartwell Avenue

   Lexington, MA    79.6 %   1    121,486

Montvale Center

   Gaithersburg, MD    88.7 %   1    120,861

40 Shattuck Road

   Andover, MA    95.6 %   1    120,000

502 Carnegie Center

   Princeton, NJ    95.3 %   1    116,374

Cambridge Center Three

   Cambridge, MA    100.0 %   1    107,484

104 Carnegie Center

   Princeton, NJ    78.4 %   1    102,830

201 Spring Street

   Lexington, MA    100.0 %   1    102,500

The Arboretum

   Reston, VA    100.0 %   1    95,584

Bedford Office Park

   Bedford, MA    100.0 %   1    90,000

33 Hayden Avenue

   Lexington, MA    43.3 %   1    80,872

Cambridge Center Eleven

   Cambridge, MA    100.0 %   1    79,616

Decoverly Two

   Rockville, MD    100.0 %   1    77,747

Decoverly Three

   Rockville, MD    83.2 %   1    77,040

170 Tracer Lane

   Waltham, MA    56.0 %   1    75,073

105 Carnegie Center

   Princeton, NJ    100.0 %   1    69,648

32 Hartwell Avenue

   Lexington, MA    100.0 %   1    69,154

302 Carnegie Center

   Princeton, NJ    100.0 %   1    65,135

195 West Street

   Waltham, MA    100.0 %   1    63,500

100 Hayden Avenue

   Lexington, MA    100.0 %   1    55,924

181 Spring Street

   Lexington, MA    41.2 %   1    53,595

211 Carnegie Center

   Princeton, NJ    0.0 %   1    47,025

204 Second Avenue

   Waltham, MA    52.7 %   1    40,974

92 Hayden Avenue

   Lexington, MA    100.0 %   1    31,100

201 Carnegie Center

   Princeton, NJ    100.0 %   —      6,500
         

 
  

Subtotal for Class A Office Properties

        92.6 %   100    28,895,735
         

 
  

Retail

                    

Shops at The Prudential Center

   Boston, MA    95.5 %   1    535,818

Shaws Supermarket at the Prudential Center

   Boston, MA    100.00 %   1    57,235
         

 
  

Subtotal for Retail Properties

        95.9 %   2    593,053
         

 
  
Office/Technical Properties                     

Bedford Office Park

   Bedford, MA    100.0 %   2    383,704

Hilltop Office Center(1)

   South San Francisco, CA    100.0 %   9    142,866

Broad Run Business Park, Building E

   Dulles,VA    54.7 %   1    127,226

7601 Boston Boulevard

   Springfield, VA    100.0 %   1    103,750

7435 Boston Boulevard

   Springfield, VA    100.0 %   1    103,557

8000 Grainger Court

   Springfield, VA    36.9 %   1    90,465

7500 Boston Boulevard

   Springfield, VA    100.0 %   1    79,971

7501 Boston Boulevard

   Springfield, VA    100.0 %   1    75,756

Cambridge Center Fourteen

   Cambridge, MA    100.0 %   1    67,362

164 Lexington Road

   Billerica, MA    100.0 %   1    64,140

7450 Boston Boulevard

   Springfield, VA    100.0 %   1    62,402

Sugarland Business Park, Building Two(2)

   Herndon, VA    65.9 %   1    59,215

7374 Boston Boulevard

   Springfield, VA    100.0 %   1    57,321

8000 Corporate Court

   Springfield, VA    100.0 %   1    52,539

Sugarland Business Park, Building One

   Herndon, VA    23.0 %   1    52,313

7451 Boston Boulevard

   Springfield, VA    100.0 %   1    47,001

7300 Boston Boulevard

   Springfield, VA    100.0 %   1    32,000

 

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Table of Contents

Properties


  

Location


   %
Leased


    Number
of
Buildings


   Net Rentable
Square Feet


17 Hartwell Avenue

   Lexington, MA    100.0 %   1    30,000

7375 Boston Boulevard

   Springfield, VA    100.0 %   1    26,865
         

 
  

Subtotal for Office/Technical Properties

        89.4 %   28    1,658,453
         

 
  

Industrial Properties

                    

40-46 Harvard Street

   Westwood, MA    0 %   1    169,273

38 Cabot Boulevard

   Langhorne, PA    100.0 %   1    161,000

560 Forbes Boulevard

   South San Francisco, CA    100.0 %   1    40,000

430 Rozzi Place(3)

   South San Francisco, CA    100.0 %   1    20,000
         

 
  

Subtotal for Industrial Properties

        56.6 %   4    390,273
         

 
  

Hotel Properties

                    

Long Wharf Marriott

   Boston, MA    80.1 %(4)   1    420,000

Cambridge Center Marriott

   Cambridge, MA    72.9 %(4)   1    330,400

Residence Inn by Marriott

   Cambridge, MA    80.8 %(4)   1    187,474
               
  

Subtotal for Hotel Properties

              3    937,874
               
  

Structured Parking

        —            9,388,175
         

 
  

Subtotal for In-Service Properties

        92.1 %   137    41,863,563
         

 
  

Properties Under Construction (Class A Office Properties)

                    

Times Square Tower

   New York, NY    35.0 %(5)   1    1,234,272

901 New York Avenue (25% ownership)

   Washington, D.C.    80.0 %   1    538,463

New Dominion Tech. Park, Building Two

   Herndon, VA    100.0 %   1    257,400
         

 
  

Subtotal for Properties Under Construction

        55.2 %   3    2,030,135
         

 
  

Total Portfolio

              140    43,893,698
               
  

(1) Property was sold on February 4, 2004.
(2) Property was sold on February 10, 2004.
(3) Property was sold on January 16, 2004.
(4) Represents the weighted average occupancy for the year ended December 31, 2003. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2003.
(5) Represents percentage leased as of February 24, 2004.

 

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Top 20 Tenants by Square Feet

 

    

Tenant


   Square
Feet


   

% of

In Service

Portfolio


 
1    U.S. Government    1,432,271     4.54 %
2    Citibank, N.A.    1,231,068     3.90 %
3    Ernst and Young    1,064,939     3.38 %
4    Shearman & Sterling    585,808     1.86 %
5    Lockheed Martin Corporation    567,429     1.80 %
6    Gillette Company    485,932     1.54 %
7    Parametric Technology Corp.    470,987 (1)   1.49 %
8    Wachovia    453,964     1.44 %
9    Lehman Brothers    436,723     1.38 %
10    Washington Group International    365,245     1.16 %
11    Deutsche Bank Trust    346,617     1.10 %
12    Orbital Sciences Corporation    337,228     1.07 %
13    T. Rowe Price Associates, Inc.    330,313     1.05 %
14    TRW, Inc.    312,977     0.99 %
15    Hunton & Williams    305,837     0.97 %
16    Akin Gump Strauss Hauer & Feld    301,880     0.96 %
17    Kirkland & Ellis    294,821 (2)   0.93 %
18    Digitas    279,182     0.89 %
19    Bingham McCutchen    270,824     0.86 %
20    Accenture    265,622     0.84 %
     Total % of portfolio square feet          32.15 %
     Total % of portfolio revenue          35.80 (3)

(1) Includes 380,987 square feet (or 1.31% of the portfolio) from a property in which we own a 25% joint venture interest.
(2) Includes 159,434 square feet (or 0.55% of the portfolio) from a property in which we own a 51% joint venture interest.
(3) Includes $16.6 million or 1.40% of revenue from properties in which we own joint venture interests.

 

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Table of Contents

Lease Expirations

 

Year of
Lease
Expiration


 

Rentable
Square Feet
Subject to
Expiring Leases


 

Current
Annualized (1)
Contractual Rent
Under Expiring
Leases


 

Current
Annualized (1)
Contractual Rent
Under Expiring
Leases p.s.f.


 

Annualized (1)
Contractual Rent
Under Expiring
Leases with
future

Step-ups


 

Annualized (1)
Contractual Rent
Under Expiring
Leases with
future step-ups
p.s.f.


 

Percentage of
Total Square
Feet


2004

  2,250,242   $83,602,346   $37.15(2)   $83,262,285   $37.00   7.1%

2005

  2,604,665   94,910,834   36.44     96,406,914   37.01   8.3%

2006

  2,623,096   108,236,261   41.26     110,273,691   42.04   8.3%

2007

  2,775,093   99,021,159   35.68     102,022,795   36.76   8.8%

2008

  1,626,410   68,477,559   42.10     71,378,586   43.89   5.2%

2009

  2,861,900   109,707,404   38.33     119,058,594   41.60   9.1%

2010

  1,858,463   77,941,503   41.94     85,964,496   46.26   5.9%

2011

  2,889,342   116,996,625   40.49     133,008,431   46.03   9.2%

2012

  2,270,942   103,804,182   45.71     112,484,842   49.53   7.2%

2013

  525,443   21,194,695   40.34     26,637,400   50.70   1.7%

Thereafter

  6,796,600   315,948,138   46.49     373,680,426   54.98   21.6%

(1) Represents the monthly contractual rent under existing leases as of December 31, 2003 multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.
(2) Includes $1.8 million of contractual rent from the Prudential Center retail kiosks and carts. Each kiosk and cart is allocated one hundred square feet.

 

Item 3. Legal Proceedings

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2003.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock is listed on the New York Stock Exchange under the symbol “BXP.” The high and low sales prices for the periods indicated in the table below were:

 

Quarter Ended


   High

   Low

   Distributions

 

December 31, 2003

   $ 48.47    $ 43.40    $ .63 (a)

September 30, 2003

     45.50      41.26      .63  

June 30, 2003

     44.83      38.00      .63  

March 31, 2003

     39.44      34.80      .61  

December 31, 2002

     37.49      33.30      .61  

September 30, 2002

     40.00      32.95      .61  

June 30, 2002

     41.55      37.70      .61  

March 31, 2002

     39.95      35.70      .58  

(a) Paid on January 30, 2004 to stockholders of record on December 30, 2003.

 

At February 18, 2004, we had approximately 1,272 stockholders of record. This does not include beneficial owners for whom Cede & Co. or others act as nominee.

 

In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable income (not including net capital gains). We have adopted a policy of paying regular quarterly distributions on our common stock, and cash distributions have been paid on our common stock since our initial public offering. Distributions are declared at the discretion of the Board of Directors and depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors the Board of Directors may consider relevant.

 

During the three months ended December 31, 2003, we issued 2,499 shares of common stock in exchange for 2,499 units of limited partnership held by certain limited partners of Boston Properties Limited Partnership. These shares were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933. We are relying on the exemption based upon factual representations received from the limited partners who received these shares.

 

Item 6. Selected Financial Data

 

The following table sets forth our selected financial and operating data on an historical basis, which has been revised for the reclassification of losses from early extinguishments of debt, in accordance with SFAS No. 145 and the disposition of properties during 2002 and 2003 which have been reclassified as discontinued operations, for the periods presented, in accordance with SFAS No. 144. Refer to Notes 15 and 22 of the Consolidated Financial Statements. The following data should be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.

 

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Our historical operating results may not be comparable to our future operating results.

 

     For the year ended December 31,

 
     2003

    2002

    2001

    2000

    1999

 
     (in thousands, except per share data)  

Statement of Operations Information:

                                        

Total revenue

   $ 1,309,628     $ 1,184,915     $ 985,519     $ 843,233     $ 740,116  
    


 


 


 


 


Expenses:

                                        

Rental operating

     400,639       368,047       313,821       264,222       234,932  

Hotel operating

     52,250       31,086       —         —         —    

General and Administrative

     45,359       47,292       38,312       35,659       29,455  

Interest

     299,436       263,067       211,391       204,900       193,135  

Depreciation and Amortization

     210,072       179,726       143,460       127,634       114,137  

Net derivative losses

     1,038       11,874       26,488       —         —    

Loss from early extinguishment of debt

     1,474       2,386       —         433       —    

Loss on investments in securities

     —         4,297       6,500       —         —    
    


 


 


 


 


Income before income from unconsolidated joint ventures and minority interests

     299,360       277,140       245,547       210,385       168,457  

Income from unconsolidated joint ventures

     6,016       7,954       4,186       1,758       468  

Minority interests

     (73,038 )     (71,809 )     (68,535 )     (72,267 )     (65,865 )
    


 


 


 


 


Income before gain (loss) on sale of real estate

     232,338       213,285       181,198       139,876       103,060  

Gain (loss) on sale of real estate, net of minority interest

     57,574       186,810       6,505       (234 )     6,467  

Gain on sale of land held for development, net of minority interest

     —         3,633       2,584       —         —    
    


 


 


 


 


Income before discontinued operations

     289,912       403,728       190,287       139,642       109,527  

Discontinued operations, net of minority interest

     75,410       40,655       24,512       13,356       10,249  
    


 


 


 


 


Income before cumulative effect of a change in accounting principle

     365,322       444,383       214,799       152,998       119,776  

Cumulative effect of a change in accounting principle, net of minority interest

     —         —         (6,767 )     —         —    
    


 


 


 


 


Net income before preferred dividend

     365,322       444,383       208,032       152,998       119,776  

Preferred dividend

     —         (3,412 )     (6,592 )     (6,572 )     (5,829 )
    


 


 


 


 


Net income available to common shareholders

   $ 365,322     $ 440,971     $ 201,440     $ 146,426     $ 113,947  
    


 


 


 


 


Basic earnings per share:

                                        

Income before discontinued operations and cumulative effect of a change in accounting principle

   $ 2.99     $ 4.30     $ 2.04     $ 1.86     $ 1.57  

Discontinued operations, net of minority interest

     0.78       0.43       0.27       0.19       0.15  

Cumulative effect of a change in accounting principle, net of minority interest

     —         —         (0.07 )     —         —    
    


 


 


 


 


Net Income

   $ 3.77     $ 4.73     $ 2.24     $ 2.05     $ 1.72  
    


 


 


 


 


Weighted average number of common shares outstanding

     96,900       93,145       90,002       71,424       66,235  
    


 


 


 


 


Diluted earnings per share:

                                        

Income before discontinued operations and cumulative effect of a change in accounting principle

   $ 2.94     $ 4.23     $ 1.99     $ 1.83     $ 1.56  

Discontinued operations, net of minority interest

     0.77       0.43       0.27       0.18       0.15  

Cumulative effect of a change in accounting principle, net of minority interest

     —         —         (0.07 )     —         —    
    


 


 


 


 


Net Income

   $ 3.71     $ 4.66     $ 2.19     $ 2.01     $ 1.71  
    


 


 


 


 


Weighted average number of common and common equivalent shares outstanding

     98,486       94,612       92,200       72,741       66,776  
    


 


 


 


 


 

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     December 31,

 
     2003

    2002

    2001

    2000

    1999

 
     (in thousands)  

Balance Sheet information:

                                        

Real estate, gross

   $ 8,983,260     $ 8,670,711     $ 7,457,906     $ 6,112,779     $ 5,609,424  

Real estate, net

     7,981,825       7,847,778       6,738,052       5,526,060       5,138,833  

Cash

     22,686       55,275       98,067       280,957       12,035  

Total assets

     8,551,100       8,427,203       7,253,510       6,226,470       5,434,772  

Total indebtedness

     5,004,720       5,147,220       4,314,942       3,414,891       3,321,584  

Minority interests

     830,133       844,581       844,740       877,715       781,962  

Convertible redeemable preferred stock

     —         —         100,000       100,000       100,000  

Stockholders’ equity

     2,400,163       2,159,590       1,754,073       1,647,727       1,057,564  
     For the year ended December 31,

 
     2003

    2002

    2001

    2000

    1999

 
     (in thousands, except per share data)  

Other Information:

                                        

Funds from operations available to common shareholders (1)

   $ 411,222     $ 382,770     $ 323,227     $ 247,371     $ 196,101  

Funds from operations available to common shareholders, as adjusted (1)

     412,073       399,489       337,823       247,371       196,101  

Dividends per share

     2.50       2.41       2.27       2.04       1.75  

Cash flow provided by operating activities

     488,275       437,380       419,403       329,474       303,469  

Cash flow provided by (used in) investing activities

     97,496       (1,017,283 )     (1,303,622 )     (563,173 )     (654,996 )

Cash flow provided by (used in) financing activities

     (618,360 )     537,111       701,329       502,621       351,396  

Total square feet at end of year

     43,894       42,411       40,718       37,926       35,621  

Leased rate at end of year

     92.1 %     93.9 %     95.3 %     98.9 %     98.4 %

(1) Pursuant to the revised definition of Funds from Operations adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), we calculate Funds from Operations, or “FFO,” by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. FFO is a non-GAAP financial measure. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. Amounts represent our share, which was 82.06%, 81.98%, 81.23%, 74.76%% and 73.55% for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

 

Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after specific supplemental adjustments, including net derivative losses and early

 

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surrender lease adjustments. Although our FFO as adjusted clearly differs from NAREIT’s definition of FFO, as well as that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO and FFO as adjusted should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

 

A reconciliation of Funds from Operations and Funds From Operations, as adjusted, to net income available to common shareholders computed in accordance with GAAP is provided under the heading of “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations.”

 

Item 7. 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.

 

Forward Looking Statements

 

This Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business and Growth Strategies,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

  general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

 

  risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

 

  failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

 

  risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

 

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Table of Contents
  risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

 

  costs of compliance with the Americans with Disabilities Act and other similar laws;

 

  potential liability for uninsured losses and environmental contamination;

 

  risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and possible adverse changes in tax and environmental laws; and

 

  risks associated with our dependence on key personnel whose continued service is not guaranteed.

 

The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

 

Overview

 

We are a fully integrated self-administered and self-managed REIT and one of the largest owners and developers of Class A office properties in the United States. Our properties are concentrated in four core markets—Boston, midtown Manhattan, Washington, D.C. and San Francisco. We generate revenue and cash primarily by leasing our Class A office space to our tenants. Factors we consider when we lease space include creditworthiness of the tenant, the length of the lease, the rental rate to be paid, costs of tenant improvements, operating costs and real estate taxes, vacancy and general economic factors.

 

Our industry’s performance is generally predicated on a sustained pattern of job growth. In 2003, while the overall United States economy began to demonstrate sustained overall economic growth, there were few indications that the economy was creating jobs at a pace sufficient to lead to increased demand for our office space. We continued to operate in a period of weak fundamentals, evidenced by relatively high vacancy and correspondingly lower market rents.

 

Our corporate strategy of owning high-quality office buildings concentrated in strong, supply-constrained markets and emphasizing long-term leases to creditworthy tenants lessened the overall impact of the weak fundamentals in the operating environment by limiting our lease expiration exposure both from natural lease expirations and from terminations due to tenant defaults. This ameliorated the potential decline in gross revenues even as we renewed or re-let space at lower rents and enabled us to experience only a very slight decline in our portfolio occupancy.

 

In the face of these challenging market conditions, we have followed a disciplined approach to managing our operations by focusing primarily on enhancing the value of our existing portfolio through strategic sales and successful leasing efforts and by solidifying our capital structure through the refinancing of a significant portion of our variable-rate debt with long-term fixed-rate. At the same time, we continued to selectively pursue new acquisition and development opportunities. The highlights of our 2003 activity reflect this strategy.

 

  We sold three real estate assets for gross sales prices totaling $555 million. We also leveraged our strong relationships to acquire $298 million of interests in real estate assets in the Washington, D.C. area.

 

 

We completed the construction and lease-up of two development projects, the 422,000 square-foot Two Freedom Square building in the Washington, D.C. suburb of Reston, Virginia and the 57,000 square foot

 

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Shaws supermarket at the Prudential Center in Boston. These buildings were 100% leased upon completion.

 

  We have three remaining development projects: New Dominion Technology Park, Building Two; Times Square Tower; and 901 New York Avenue. New Dominion Technology Park, Building Two is a 257,400 square-foot building located in the Washington D.C. suburb of Herndon, VA and that is 100% leased to the General Services Administration. Times Square Tower is a 47 story building with 1.2 million net rentable square feet. Times Square Tower, a portion of which will be placed into service in the spring of 2004, is currently approximately 35% leased. This building was originally 60% pre-leased to Arthur Andersen, but that lease was terminated in the wake of that firm’s demise. 901 New York Avenue is a 538,500 square foot building located in Washington, D.C. in which we have a 25% interest. This building is 80% leased as of December 31, 2003.

 

  We did not commence construction on any new office developments in 2003 although during the year we purchased land and formed joint ventures with land owners that will offer the opportunity to commence development in 2004 or beyond.

 

  The strength of our portfolio supplemented with the acquisitions and new developments that were brought on-line in 2003 allowed us to increase our total revenue by 10.5% in 2003.

 

  We refinanced $725 million of variable-rate debt with unsecured fixed-rate debt at an average interest rate of 5.60% with maturities ranging from 10 to 12 years. We also entered into amended loan agreements with existing lenders on $150.6 million of debt during the year. At the end of 2003, our fixed-rate debt represents 91.2% of our total outstanding debt. Our variable-rate debt at the end of 2003 consisted of our two construction facilities associated with our two remaining development projects and our unsecured revolving credit facility. We believe that the matching of our long-term fixed-rate debt financing with the long duration of our leases represents an appropriately prudent financial structure, but this has come with the short-term cost of greater interest expense than we would have incurred with variable-rate debt financing.

 

We are optimistic that market conditions will not deteriorate further. However, without strong job growth in our markets, we do not expect to see significant improvement in occupancy or rental rates during 2004. We are well positioned to weather a continuation of the current operating environment and prosper when sustained job growth resumes. If such job growth is accompanied by a rising interest rate environment, we will have a financial platform that will enable us to realize the benefits of our long-term fixed-rate debt.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Real Estate

 

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-

 

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place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost. We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenant’s credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

 

We record acquired “above and below” market leases at their fair value; using a discount rate which reflects the risks associated with the leases acquired, equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

 

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, internal wages, property taxes, insurance, and other project costs incurred during the period of development.

 

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset’s carrying value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be “long-lived assets to be held and used” as defined by SFAS No. 144 are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date.

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on January 1, 2002, requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) on the eventual disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). Following the classification of a property as “held for sale”, no further depreciation is recorded on the assets.

 

A variety of costs are incurred in the acquisition, development and leasing of our properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited.

 

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Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgement. Our capitalization policy on our development properties is guided by SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction.

 

Investments in Unconsolidated Joint Ventures

 

Except for ownership interests in a variable interest entity, we account for our investments in joint ventures under the equity method of accounting as we exercise significant influence, but do not control these entities. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over 40 years. Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss from the joint ventures is included on the consolidated statements of operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds.

 

We serve as the development manager for the joint venture at 901 New York Avenue currently under development. The profit on development fees received from this joint venture is recognized to the extent attributable to the outside interest in the joint venture.

 

Revenue Recognition

 

Base rental revenue is reported on a straight-line basis over the terms of our respective leases. In accordance with SFAS No. 141, we recognize rental revenue of acquired in-place “above and below” market leases at their fair value over the terms of the respective leases. Accrued rental income represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements. We maintain an allowance against accrued rental income for future potential tenant credit losses. The credit assessment is based on the estimated accrued rental income that is recoverable over the term of the lease. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants’ payment history and current credit status, as well as certain industry or geographic specific credit considerations. If our estimates of collectibility differ from the cash received, the timing and amount of our reported revenue could be impacted. The average remaining term of our in-place tenant leases was approximately 7.0 years as of December 31, 2003. The credit risk is mitigated by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and continual monitoring of our portfolio to identify potential problem tenants.

 

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with Emerging Issues Task Force, or EITF, Issue 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”, or Issue 99-19. Issue 99-19 requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk.

 

Our hotel revenues are derived from room rentals and other sources such as charges to guests for long-distance telephone service, fax machine use, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.

 

We record our development fees earned on real estate projects on a straight-line basis over the development period, which approximates the percentage of completion method described in SOP 81-1 and provides a more

 

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accurate measurement over the period of fees earned. Management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, since such fees are contingent upon the collection of rents.

 

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” The specific timing of the sale is measured against various criteria in SFAS No.66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, installment or cost recovery methods, as appropriate, until the sales criteria are met.

 

Depreciation and Amortization

 

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. In accordance with SFAS No. 141, we allocate the acquisition cost of real estate to land, building, tenant improvements, acquired “above-” and “below-” market leases, origination costs and acquired in-place leases based on an assessment of their fair value and depreciate or amortize these assets over their useful lives. The amortization of acquired “above-” and “below-” market leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

 

Fair Value of Financial Instruments

 

We calculate the fair value of our mortgage debt notes payable and unsecured senior notes. We discount the spread between the future contractual interest payments and future interest payments on our mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, we add a market spread to the quoted yields on federal government treasury securities with similar maturity dates to our own debt. In addition, we are also required to adjust the carrying values of our derivative contracts on a quarterly basis to their fair values. Because our valuations of our financial instruments are based on these types of estimates, the fair value of our financial instruments may change if our estimates do not prove to be accurate.

 

Results of Operations

 

The following discussion is based on our Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001.

 

Commencing during the third quarter of 2002, we began reporting on a consolidated basis the gross operating revenues and expenses associated with the ownership of our hotels through our taxable REIT subsidiary, whereas in the past we only reported net lease payments and real estate taxes. As a result the reporting of the hotel operations for the year ended December 31, 2003 is not directly comparable to the year ended 2002. Therefore, hotel revenue and hotel expenses have been presented on a net basis for the twelve month period ended December 31, 2003 (otherwise entitled “Hotel Net Operating Income”) to provide a basis of comparison to prior periods.

 

As of December 31, 2003 and 2002, we owned 140 properties and 142 properties, respectively (we refer to all of the properties that we own as our “Total Portfolio”). Our property operations, including property management, development and leasing are regionally aligned with the objective of becoming the dominant landlord in our core markets. Management reviews operating and financial data for each property separately and independently from all other properties. Major decisions regarding the allocation of financing, investing, information technology and capital allocation are made in conjunction with the input of senior management located in our corporate headquarters.

 

 

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As a result of changes in 2002 within our Total Portfolio, the financial data presented below shows significant changes in revenues and expenses from period to period. We do not believe our period to period financial data are comparable due to the changes in our Total Portfolio. Therefore, the comparison of operating results for the years ended December 31, 2003, 2002 and 2001 show changes resulting from properties that we owned for each period compared (we refer to this comparison as our “Same Property Portfolio” for the applicable period) and the changes attributable to our Total Portfolio. This table includes a reconciliation from Same Property Portfolio to Total Portfolio by also providing information for the properties which were sold, acquired or placed into service for the years ended December 31, 2003, 2002 and 2001.

 

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

 

The table below shows selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of 122 properties, including three hotels and four properties in which we have joint venture interests, acquired or placed in service on or prior to January 1, 2002 and owned by us through December 31, 2003. The Total Property Portfolio includes the effect of the other properties either placed in service or acquired after January 1, 2002 or disposed of on or prior to December 31, 2003. This table includes a reconciliation from Same Property Portfolio to Total Portfolio by also providing information for the properties which were sold, acquired or placed into service for the years ended December 31, 2003 and 2002. Our net property operating margins, which are defined as rental revenue less operating expenses exclusive of the three hotel properties for the year ended December 31, 2003 and 2002 were 67%.

 

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    Same Property Portfolio

    Properties Sold

  Properties
Acquired


  Properties Placed
in Service


  Total Portfolio

 
(dollars in thousands)   2003   2002  

Increase/

(Decrease)

    %
Change
    2003   2002   2003   2002   2003   2002   2003     2002    

Increase/

(Decrease)

    %
Change
 

Rental Revenue:

                                                                                           

Rental Revenue

  $ 925,770   $ 921,089   $ 4,681     0.51 %   $ 2,893   $ 46,285   $ 153,832   $ 33,885   $ 130,528   $ 103,027   $ 1,213,023     $ 1,104,286     $ 108,737     9.85 %

Termination Income

    6,142     6,820     (678 )   -9.94 %     —       —       —       —       —       —       6,142       6,820       (678 )   -9.94 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Rental Revenue

    931,912     927,909     4,003     0.43 %     2,893     46,285     153,832     33,885     130,528     103,027     1,219,165       1,111,106 (1)     108,059     9.73 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Operating Expenses

    329,921     320,979     8,942     2.79 %     865     11,912     38,496     8,611     31,357     23,359     400,639       364,860 (2)     35,779     9.81 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Net Operating Income, excluding hotels

    601,991     606,930     (4,939 )   -0.81 %     2,028     34,373     115,336     25,274     99,171     79,668     818,526       746,246       72,280     9.69 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Hotel Net Operating Income (3)

    17,833     23,284     (5,451 )   -23.41 %     —       —       —       —       —       —       17,833       23,284       (5,451 )   -23.41 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Consolidated Net Operating Income (3)

    619,824     630,214     (10,390 )   -1.65 %     2,028     34,373     115,336     25,274     99,171     79,668     836,359       769,530       66,829     8.68 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Other Revenue:

                                                                                           

Development and Management Services

                                                                  17,347       10,748       6,599     61.40 %

Interest and Other

                                                                  3,033       5,504       (2,471 )   -44.89 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Revenue

                                                                  20,380       16,252       4,128     25.40 %

Other Expenses:

                                                                                           

General and administrative

                                                                  45,359       47,292       (1,933 )   -4.09 %

Interest

                                                                  299,436       263,067       36,369     13.82 %

Depreciation and amortization

    155,730     147,579     8,151     5.52 %     275     4,616     26,120     5,202     27,947     22,329     210,072       179,726       30,346     16.88 %

Net derivative losses

                                                                  1,038       11,874       (10,836 )   -91.26 %

Loss from early extinguishment of debt

                                                                  1,474       2,386       (912 )   -38.22 %

Loss on investments in securities

                                                                  —         4,297       (4,297 )   -100.00 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Expenses

    155,730     147,579     8,151     5.52 %     275     4,616     26,120     5,202     27,947     22,329     557,379       508,642       48,737     9.58 %

Income before minority interests

    464,094     482,635     (18,541 )   -3.84 %     1,753     29,757     89,216     20,072     71,224     57,339     299,360       277,140       22,220     8.02 %

Income from unconsolidated joint ventures

  $ 3,041   $ 4,738   $ (1,697 )   -35.82 %     —       —     $ 2,975   $ 3,216     —       —       6,016       7,954       (1,938 )   -24.37 %
   

 

 


 

 

 

 

 

 

 

                             

Income from discontinued operations, net of minority interest

                                                                  2,176       15,310       (13,134 )   -85.79 %

Minority interests in property partnerships

                                                                  1,604       2,171       (567 )   -26.12 %

Minority interest in Operating Partnership

                                                                  (74,642 )     (73,980 )     (662 )   0.89 %

Gains on sales of real estate, net of minority interest

                                                                  57,574       186,810       (129,236 )   -69.18 %

Gains on sales of land held for development, net of minority interest

                                                                  —         3,633       (3,633 )   -100.00 %

Gains on sales of real estate from discontinued operations, net of minority interest

                                                                  73,234       25,345       47,889     188.95 %

Preferred dividend

                                                                  —         (3,412 )     (3,412 )   -100.00 %
                                                                 


 


 


 

Net Income available to common shareholders

                                                                $ 365,322     $ 440,971     $ (75,649 )   -17.16 %
                                                                 


 


 


 


(1) Excludes Hotel Revenue of $12,771 for the year ended December 31, 2002. This amount is included as part of Total Revenue on the Consolidated Statements of Operations and has been included as part of Hotel Net Operating Income in the table above.
(2) Excludes Hotel Operating Expenses of $3,187 for the year ended December 31, 2002. This amount is included as part of Hotel Operating Expenses on the Consolidated Statements of Operations and has been included as part of Hotel Net Operating Income in the table above.
(3) See Page 39 for a discussion of Hotel Net Operating Income. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see Page 62.

 

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Rental Revenue

 

The increase in rental revenue of $108.7 million in the Total Portfolio primarily relates to new leases signed and in place in connection with the acquisition of 399 Park Avenue in the third quarter of 2002, the purchase of the remaining interests in One and Two Discovery Square as of April 1, 2003 and the purchase of the remaining interests in One and Two Freedom Square as of August 5, 2003, as well as the purchase of 1333 New Hampshire Avenue. These additions to the portfolio increased revenue by approximately $119.9 million, as described below:

 

          Revenue for the year ended

Property


  

Date Acquired


   2003

   2002

   Change

          (in thousands)

399 Park Avenue

   September 25, 2002    $ 129,033    $ 33,885    $ 95,148

One and Two Discovery Square

   April 1, 2003      9,542      —        9,542

One and Two Freedom Square

   August 5, 2003      11,732      —        11,732

1333 New Hampshire Ave

   October 8, 2003      3,525      —        3,525
         

  

  

Total Additions

        $ 153,832    $ 33,885    $ 119,947
         

  

  

 

This increase was offset by a decrease of $43.3 million due to the sale of One and Two Independence Square and 2300 N Street during 2002 and 2003 that have not been classified as discontinued operations due to our continuing involvement in the management of the properties. In addition, the placing into service of Five Times Square in the first quarter of 2002, continued lease-up of 111 Huntington Avenue, Waltham Weston Corporate Center which was placed into service during 2003 and the addition of Shaws Supermarket in Boston added revenue of $27.5 million. The overall increase in the remaining Same Property Portfolio reflects declining base rents of approximately $6.3 million and a slight decrease in occupancy offset by an increase in straight line rents of $5.6 million resulting from increased free rent periods on renewals during 2003 as well as an increase in operating expense reimbursements related to higher operating expenses.

 

Termination Income

 

Termination income for the year ended December 31, 2003 was related to 21 tenants across the portfolio that terminated their leases and made termination payments totaling approximately $6.1 million. This compared to termination income earned for the year ended December 31, 2002 related to 23 tenants totaling $6.8 million. As the business climate continues to improve, we expect termination income will dissipate to levels below 2003 and 2002.

 

Development and Management Services

 

The increase in development and management services income of $6.6 million primarily resulted from the recognition of fees in the current year on certain third-party development projects, some of which began in 2002, and an overall increase in management fees due to the continuing involvement in properties sold during 2003. Development fees increased by $2.8 million on the 90 Church Street project in New York City related to the services provided to remediate damages resulting from the events of September 11, 2001. There was an overall increase of $1.1 million in development fees in Washington, D.C. on the National Institute of Health and 901 New York Avenue projects. During 2003, approximately $1.8 million was recognized as development fees on the construction of the residential building, The Belvidere in Boston, MA. The remaining increases relate to new management agreements entered into with the sale of 2300 N Street and One and Two Independence Square for the year ended December 31, 2003. Our third-party revenue is project specific and highly dependent on our ability to secure third-party development contracts.

 

Interest and Other Income

 

Interest and other income decreased by $2.5 million in the Total Portfolio for the year ended December 31, 2003. Of the total variance, $1.0 million is a result of interest earned on a note receivable related to the sale of

 

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real estate in September 2002. In addition, during 2002 there was a one-time refund of approximately $1.3 million, which related to the resolution of a prior-year tax matter.

 

Operating Expenses

 

Property operating expenses in the Total Portfolio (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) increased by $35.8 million. Approximately $29.8 million of the increase is due to the additions of 399 Park Avenue, 1333 New Hampshire Avenue, One and Two Discovery Square and One and Two Freedom Square. The increases were offset by a decrease of $11.0 million related to One and Two Independence Square and 2300 N Street which were sold during 2002 and 2003 and that have not been classified as discontinued operations due to our continuing involvement in the management of the properties. In addition, the continued lease-up of 111 Huntington Avenue, Five Times Square and Waltham Weston Corporate Center properties which were placed into service during 2002 and the placing into service Shaws Supermarket in Boston added approximately $8.0 million of operating expenses. The remaining increases are due to the overall increase in Same Property Portfolio operating expenses of $8.9 million.

 

Property operating expenses in the Same Property Portfolio increased during the year ended December 31, 2003 primarily due to increases in real estate taxes of $6.7 million, or 5.7%, and increases in insurance of $2.3 million, or 22.3%. The increases in real estate taxes are due to higher property tax assessments and rate increases, specifically in New York, which represented $5.1 million of the increase. Increases in insurance premiums in the Same Property Portfolio and Total Portfolio are related to increases in premium rates on existing coverage as well as the increased cost to purchase coverage under the federal Terrorism Risk Insurance Act of 2002. Other decreases were mainly due to an overall decrease in occupancy from 93.9% at December 31, 2002 to 92.1% at December 31, 2003.

 

Hotel Net Operating Income

 

Net operating income for the hotel properties decreased by $5.5 million or approximately 23.41% for the year ended December 31, 2003 compared to the year ended December 31, 2002. These decreases are due to the ongoing downturn being experienced in business travel and the tourism industry in the Boston market. While our Boston area hotels have yet to show any meaningful improvement, we are cautiously optimistic that they will gradually recover in 2004 with the Democratic National Convention and a number of other city-wide events scheduled to be held in Boston.

 

The following reflects our occupancy and rate information for the three hotel properties for the years ended December 31, 2003 and 2002:

 

     2003

    2002

 

Occupancy

     77.3 %     80.7 %

Average daily rate

   $ 166.40     $ 181.13  

Revenue per available room, REVPAR

   $ 128.78     $ 146.25  

 

Other Expenses

 

General and Administrative

 

General and administrative expenses in the Total Portfolio decreased during the year ended December 31, 2003 as compared to the year ended December 31, 2002 by $1.9 million or 4.09%. A decrease of $2.8 million is related to the write-off of unrecoverable leasing commissions related to our termination of the lease with Arthur Andersen for 620,947 square feet at the Times Square Tower during the second quarter of 2002. In addition, an increase of $2.2 million is attributed to changes in the form of equity-based compensation, as further described below.

 

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In 2003, we transitioned to using solely restricted stock and/or long-term incentive plan units of limited partnership, or LTIP units, as opposed to granting stock options and restricted stock, under the 1997 Stock Option and Incentive Plan as our primary vehicle for employee equity compensation. Employees vest in restricted stock and LTIP units over a five-year term. Restricted stock and LTIP units are measured at fair value on the date of grant based on the number of shares or units granted and the price of our Common Stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. To the extent restricted stock or LTIP units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to “Stock-based compensation.” Stock-based compensation expense associated with restricted stock was $2.2 million during the year ended December 31, 2003. Stock-based compensation associated with $6.1 million of restricted stock that was granted in January 2003 will generally be expensed ratably as such restricted stock vests over a five-year vesting period. Stock-based compensation associated with approximately $9.4 million of restricted stock and LTIP units that were granted in January 2004 will also be incurred ratably as such restricted stock and LTIP units vest. To the extent we continue our policy of granting restricted equity awards we will continue to experience higher costs associated with equity based compensation until 2008 at which time the incremental increase associated with each year’s award will be fully realized.

 

Interest Expense

 

Interest expense for the Total Portfolio increased as a result of our strategic decision to replace our variable rate debt with primarily unsecured fixed rate debt and a decrease in the amount of capitalized interest on development projects. This was primarily due to placing into service and cessation of interest capitalization on Five Times Square, 111 Huntington Avenue, Two Freedom Square, Shaw’s Supermarket and 611 Gateway and the issuance of $1.5 billion of unsecured fixed-rate senior notes (including $750 million issued in December 2002). Our total debt outstanding at December 31, 2003 was approximately $5.0 billion compared to $5.1 billion at December 31, 2002.

 

     December 31,

 
     2003

    2002

 
     (dollars in thousands)  

Debt Summary:

                

Balance

                

Fixed rate

   $ 4,566,188     $ 3,890,196  

Variable rate

     438,532       1,257,024  
    


 


Total

   $ 5,004,720     $ 5,147,220  
    


 


Percent of total debt:

                

Fixed rate

     91.24 %     75.58 %

Variable rate

     8.76 %     24.42 %
    


 


Total

     100.00 %     100.00 %
    


 


Weighted average interest rate at end of period:

                

Fixed rate

     6.67 %     6.99 %

Variable rate

     2.87 %     3.04 %
    


 


Total

     6.33 %     6.03 %
    


 


 

Depreciation and Amortization

 

Depreciation and amortization expense for the Total Portfolio increased as a result of the additions and placing into service of Five Times Square, 111 Huntington Avenue, 399 Park Avenue, One and Two Discovery Square, One and Two Freedom Square, 611 Gateway, 1333 New Hampshire Avenue and other properties which

 

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we acquired or placed in service after January 1, 2002. The increases were offset by decreases of $4.3 million related to properties that were sold during 2002 and 2003 that were not classified as discontinued operations.

 

Costs directly related to the development of rental properties are capitalized. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the year ended December 31, 2003 and 2002 were $5.0 million and $5.1 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the year ended December 31, 2003 and 2002 was $19.2 million and $22.5 million, respectively. These costs are not included in the interest expense referenced above.

 

Net Derivative Losses

 

Net derivative losses for the Total Portfolio represent the mark-to-market and cash settlements of our derivative contracts, consisting of interest rate swaps, payments that were not effective for accounting purposes. The fair value of our derivative contract which was $8.2 million at December 31, 2003, is included on our balance sheets. As a result of our contract modification in August 2003 we will have no further earnings volatility on the remaining derivative contract. See Item 7A—Quantitative and Qualitative Disclosures about Market Risk.

 

Joint Ventures

 

The decrease in income from unconsolidated joint ventures in the Total Portfolio as well as the Same Property Portfolio is related to the purchase of the remaining interests in One and Two Discovery Square and One and Two Freedom Square. One and Two Discovery Square are included in the Total Portfolio Revenue as of April 1, 2003. One and Two Freedom Square are included in the Total Portfolio Revenue as of August 5, 2003. The reclassification of these properties caused the overall income from joint ventures to decrease for the year ended December 31, 2003.

 

Other

 

Gains on sales of real estate for the year ended December 31, 2003 related to the sale of 2300 N Street in the first quarter for a gain of $52.9 million. In the second and third quarter, there was a transfer of certain mortgage issuance costs, as described in Note 6 to the Consolidated Financial Statements that resulted in a gain of $4.8 million (net of minority interest share of $1.0 million.) Gains on sales of real estate for the year ended December 31, 2002 related to the sale of One and Two Independence Square were not included in discontinued operations as we have continuing involvement through a third party management agreement after the sale.

 

The decrease in income from discontinued operations for the year ended December 31, 2003 was a result of the discontinued properties being sold during the first quarter of 2003. Accordingly, unlike in 2002 we did not recognize a full quarter of revenue and expenses with respect to those properties for the first, second or third quarter of 2003. In addition, income from discontinued operations for the year ended December 31, 2002 included two properties sold during 2002. For both periods, Sugarland Business Park- Building Two and 430 Rozzi Place are included as part of income from discontinued operations.

 

Gains on sales of real estate from discontinued operations for the year ended December 31, 2003 primarily related to the gain recognized on the sale of 875 Third Avenue and The Candler Building. The gains on sales for the year ended December 31, 2002 are the result of the dispositions of (1) Fullerton Square, consisting of two office/technical properties totaling 179,453 square feet in Springfield, Virginia and (2) 7600, 7700, and 7702 Boston Boulevard, consisting of three buildings totaling 195,227 square feet in Springfield, Virginia.

 

The decrease in our preferred dividend of $3.4 million for the year ended December 31, 2003 was a result of the conversion of 2,000,000 shares of our preferred stock into common stock in July 2002.

 

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Comparison of the year ended December 31, 2002 to the year ended December 31, 2001

 

The table below shows selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of 116 properties, including three hotels and five properties in which we have joint venture interests, acquired or placed in service on or prior to January 1, 2001 and owned by us through December 31, 2003. The Total Property Portfolio includes the effect of the other properties either placed in service or acquired after January 1, 2001 or disposed of on or prior to December 31, 2003. This table includes a reconciliation from Same Property Portfolio to Total Portfolio, detailing properties which were sold, acquired or placed into service for the years ended December 31, 2002 and 2001. Our net property operating margins, which are defined as rental revenue less operating expenses exclusive of the three hotel properties for the year ended December 31, 2002 and 2001 was approximately 67%.

 

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Table of Contents

 

    Same Property Portfolio

    Properties Sold

  Properties
Acquired


  Properties Placed
in Service


  Total Portfolio

 
    2002

  2001

 

Increase/

(Decrease)


    %
Change


    2002

  2001

  2002

  2001

  2002

  2001

  2002

    2001

   

Increase/

(Decrease)


    %
Change


 

(dollars in thousands)

                                                                                           

Rental Revenue:

                                                                                           

Rental Revenue

  $ 805,202   $ 791,870   $ 13,332     1.68 %   $ 46,285   $ 50,239   $ 131,392   $ 64,776   $ 121,407   $ 13,298   $ 1,104,286     $ 920,183     $ 184,103     20.01 %

Termination Income

    6,820     7,230     (410 )   -5.67 %     —       —       —       —       —       1,426     6,820       8,656       (1,836 )   -21.21 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Rental Revenue

    812,022     799,100     12,922     1.62 %     46,285     50,239     131,392     64,776     121,407     14,724     1,111,106 (1)     928,839 (1)     182,267     19.62 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Operating Expenses

    282,524     270,123     12,401     4.59 %     11,912     12,436     43,162     21,668     27,262     3,812     364,860 (2)     308,040 (2)     56,820     18.45 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Net Operating Income, excluding hotels

    529,498     528,977     521     0.01 %     34,373     37,803     88,230     43,108     94,145     10,912     746,246       620,799       125,447     20.21 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Hotel Net Operating Income (3)

    23,284     26,549     (3,265 )   -12.30 %     —       —       —       —       —       —       23,284       26,549       (3,265 )   -12.30 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Consolidated Net Operating Income (3)

    552,782     555,526     (2,744 )   -0.49 %     34,373     37,803     88,230     43,108     94,145     10,912     769,530       647,348       122,182     18.87 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Other Revenue:

                                                                                           

Development and Management Services

                                                                  10,748       12,167       (1,419 )   -11.66 %

Interest and Other

                                                                  5,504       12,183       (6,679 )   -54.82 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Revenue

                                                                  16,252       24,350       (8,098 )   -33.26 %

Other Expenses:

                                                                                           

General and administrative

                                                                  47,292       38,312       8,980     23.44 %

Interest

                                                                  263,067       211,391       51,676     24.45 %

Depreciation and amortization

    130,640     125,048     5,592     4.47 %     4,617     5,617     18,883     9,431     25,586     3,364     179,726       143,460       36,266     25.28 %

Net derivative losses

                                                                  11,874       26,488       (14,614 )   -55.17 %

Loss from early extinguishments of debt

                                                                  2,386       —         2,386     100.00 %

Loss on investments in securities

                                                                  4,297       6,500       (2,203 )   -33.89 %
   

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Expenses

    130,640     125,048     5,592     4.47 %     4,617     5,617     18,883     9,431     25,586     3,364     508,642       426,151       82,491     19.36 %

Income before minority interests

    422,142     430,478     (8,336 )   -1.94 %     29,756     32,186     69,347     33,677     68,559     7,548     277,140       245,547       31,593     12.87 %

Income from unconsolidated joint ventures

  $ 5,225   $ 4,013   $ (1,212 )   -30.20 %     —       —       —       —     $ 2,729   $ 173     7,954       4,186       3,768     90.01 %
   

 

 


 

 

 

 

 

 

 

                             

Income from discontinued operations, net of minority interest

  $ 1,135   $ 2,829   $ (1,694 )   -59.88 %   $ 14,175   $ 21,683     —       —       —       —       15,310       24,512       (9,202 )   -37.54 %
   

 

 


 

 

 

 

 

 

 

                             

Minority interests in property partnerships

                                                                  2,171       1,194       977     81.83 %

Minority interest in Operating Partnership

                                                                  (73,980 )     (69,729 )     (4,251 )   -6.10 %

Gains on sales of real estate, net of minority interest

                                                                  186,810       6,505       180,305     2.,771.79 %

Gains on sales of land held for development, net of minority interest

                                                                  3,633       2,584       1,049     40.60 %

Gains on sales of real estate from discontinued operations, net of minority interest

                                                                  25,345       —         25,345     100.00 %

Cumulative effect of a change in accounting principle, net of minority interest

                                                                  —         (6,767 )     6,767     100.00 %

Preferred dividend

                                                                  (3,412 )     (6,592 )     (3,180 )   -48.24 %
                                                                 


 


 


 

Net Income available to common shareholders

                                                                $ 440,971     $ 201,440     $ 239,531     118.91 %
                                                                 


 


 


 


(1) Excludes Hotel Revenue of $12,771 and $32,330 for the years ended December 31, 2002 and 2001, respectively. These amounts are included as part of Total Revenue on the Consolidated Statements of Operations and have been included as part of Hotel Net Operating Income in the table above.
(2) Excludes Hotel Operating Expenses of $3,187 and $5,781 for the years ended December 31, 2002 and 2001, respectively. These amounts are included as part of Hotel Operating Expenses on the Consolidated Statements of Operations and have been included as part of Hotel Net Operating Income in the table above.
(3) See Page 39 for a discussion of Hotel Net Operating Income. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see Page 62.

 

 

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Rental Revenue

 

The increase in rental revenue of $184.1 million in the Total Portfolio primarily relates to new leases signed and in place at December 31, 2002 in connection with the acquisition of Citigroup Center in the second quarter of 2001 and the acquisition of 399 Park Avenue in the third quarter of 2002, the commencement of occupancy at 111 Huntington Avenue in the fourth quarter of 2001 and the placing into service of Five Times Square in the first quarter of 2002. These increased revenue by $174.7 million. This increase was offset by a decrease of approximately $4.0 million related to the sale of One and Two Independence Square during 2002 that have not been classified as discontinued operations due to our continuing involvement in the management of these properties after the sale. Properties sold during 2002 included One and Two Independence Square, 2391 West Winton Avenue, Fullerton Square, 875 Third Avenue and 7600, 770 and 7702 Boston Boulevard. The overall increases in the Same Property Portfolio of $13.3 million account for the remaining increase in the total portfolio revenue.

 

Termination Income

 

The termination income for the year ended December 31, 2002 was related to twenty-three tenants across the portfolio that terminated their leases and made termination payments totaling approximately $6.8 million. This compared to termination income received in the prior year related primarily to thirty-three tenants throughout our portfolio who terminated their leases in 2001 and made termination payments totaling approximately $8.7 million.

 

Development and Management Services

 

The decrease in development and management income of $1.4 million primarily resulted from the completions of projects during 2001, including certain third-party contracts as well as certain of our joint venture projects. This was offset by development fees earned on a new joint venture project which was started in 2002 as well as, an increase in management fees relating to certain of our joint ventures which were placed into service in 2002. Our third party revenue is project specific and highly dependent on our ability to secure third-party development contracts.

 

Interest and Other Income

 

The decrease in interest and other income related to the Total Portfolio is a result of less interest earned due to lower average cash balances maintained and lower interest rates on cash balances during the year ended December 31, 2002 as compared to the year ended December 31, 2001. During the year ended December 31, 2001, the higher average cash balance was attributable to unused proceeds from our public offering of common stock in October 2000.

 

Operating Expenses

 

Property operating expenses (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) in the Total Property portfolio increased by $56.8 million during the year ended December 31, 2002. Approximately $44.9 million of increase in property operating expenses were primarily due to the additions of the Citigroup Center, Five Times Square, 399 Park Avenue and 111 Huntington Avenue properties that we acquired or placed in service after January 1, 2001. The office leases include reimbursements from tenants for a portion of these operating expenses. The increases were offset by a decrease of approximately $1.0 million related to One and Two Independence Square and 2300 N Street which were sold during 2002 and 2003 and that have not been classified as discontinued operations due to our continuing involvement in the management of the properties after the sale, reflected as properties sold in the table above.

 

Property operating expenses in the Same Property Portfolio increased during the year ended December 31, 2002 primarily due to increases in real estate taxes of $5.2 million, or 5.0%, and increases in insurance of $4.1

 

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million, or 70.6%. The increase in real estate taxes was primarily due to higher property tax assessments. Increases in insurance in the Same Property Portfolio and Total Portfolio are related to increases in rates on existing coverage and the purchase of a separate stand-alone terrorism policy. Overall increases in the same property portfolio of $3.1 million account for the remaining increase in the Same Property portfolio operating expenses.

 

Hotel Net Operating Income

 

Net operating income for the hotel properties decreased by $3.3 million or approximately 12.3% for the year ended December 31, 2002 compared to the year ended December 31, 2001. These decreases were related to the general downturn in the economy as well as lasting effects of September 11, 2001.

 

The following reflects our occupancy and rate information for the three hotel properties for the years ended December 31, 2002 and 2001:

 

     2002

    2001

 

Occupancy

     80.7 %     80.5 %

Average daily rate

   $ 181.13     $ 197.39  

Revenue per available room, REVPAR

   $ 146.25     $ 158.50  

 

Other Expenses

 

General and Administrative

 

General and administrative expenses in the Total Portfolio increased during the year ended December 31, 2002 by approximately $9.0 million, of which $2.8 million related to the write-off in the second quarter of non-recoverable commissions related to the termination of the lease with Arthur Andersen for 620,947 square feet at the Times Square Tower development project. The remaining increase related primarily to increases in compensation and related expenses, specifically an increase of $3.3 million related to bonuses awarded to senior management for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Stock-based compensation associated with restricted stock units was $1.2 million during the year ended December 31, 2002. Additional amounts include a $1.4 million increase related to a decrease in capitalized wages resulting from decreased development activity in 2002 compared to the year ended December 31, 2001, and a $0.5 million increase in costs incurred related to implementing the requirements of the Sarbanes Oxley Act of 2002.

 

Interest Expense

 

Interest expense for the Total Portfolio increased as a result of having a higher average outstanding debt balance as compared to the prior period as well as decreased interest capitalization. This was primarily due to placing into service and cessation of interest capitalization on Five Times Square, 111 Huntington Avenue and 611 Gateway and new debt incurred related to the acquisition of Citigroup Center and 399 Park Avenue. Our total debt outstanding at December 31, 2002 was approximately $5.1 billion, compared to $4.3 billion at December 31, 2001.

 

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     December 31,

 
     2002

    2001

 
     (dollars in thousands)  

Debt Summary:

                

Balance

                

Fixed rate

   $ 3,890,196     $ 3,448,903  

Variable rate

     1,257,024       866,039  
    


 


Total

   $ 5,147,220     $ 4,314,942  
    


 


Percent of total debt:

                

Fixed rate

     75.58 %     79.93 %

Variable rate

     24.42 %     20.07 %
    


 


Total

     100.00 %     100.00 %
    


 


Weighted average interest rate at end of period:

                

Fixed rate

     6.99 %     7.27 %

Variable rate

     3.04 %     3.77 %
    


 


Total

     6.03 %     6.57 %
    


 


 

Depreciation and Amortization

 

Depreciation and amortization expense for the Total Portfolio increased as a result of the additions of the Citigroup Center, Five Times Square, 111 Huntington Avenue and 399 Park Avenue properties and other properties that we acquired or placed in service after January 1, 2001. The increases were offset by decreases related to properties that were sold during 2002 that were not included in discontinued operations.

 

Costs directly related to the development of rental properties are capitalized. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the year ended December 31, 2002 and 2001 were $5.1 million and $6.6 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the year ended December 31, 2002 and 2001 was $22.5 million and $59.3 million, respectively. These costs are not included in the interest expense referenced above.

 

Net Derivative Losses

 

Net derivative losses represent the mark-to-market of our derivative contracts and payments that were not effective for accounting purposes. During the year ended December 31, 2002, we recognized a reduction in the fair value of our contracts as a result of generally low interest rates. The fair value of our derivative contracts is included on our balance sheets.

 

Loss from early extinguishments of debt

 

The loss from early extinguishment of debt for the year ended December 31, 2002 related to a debt extinguishment charge we incurred in connection with the prepayment of debt in connection with the sale of a property.

 

Loss on investments in securities

 

During the year ended December 31, 2002, we recognized losses on our investments in securities of approximately $4.3 million. This loss was related to the write-off of our investment in the securities of a technology company due to the Company’s determination that the decline in the fair value of these securities was an other than temporary decline. The loss on investment of $6.5 million for the year ended December 31, 2001 was related to the write off of investments in securities of two technology companies.

 

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Joint Ventures

 

Income from unconsolidated joint ventures increased by $3.8 million for the year ended December 31, 2002. The primary result of the increase is related to the completion of the repositioning of 265 Franklin Street during 2001 as well as receiving preferential returns on certain other joint ventures resulting from the achievement of specified investment return thresholds. The additional increase in the total portfolio is related to the placing in service of One and Two Discovery Square. Excluded from Same Property Portfolio is Discovery Square and Two Freedom Square due to their development.

 

Other

 

Gains on sales of real estate for the year ended December 31, 2002 related to the sale of One and Two Independence Square which were not included in discontinued operations, as we have continuing involvement through a third party management agreement after the sale.

 

The decrease in income from discontinued operations for the year ended December 31, 2002 was a result of the discontinued properties being sold prior to December 31, 2002, and therefore, we did not recognize a full year of revenue and expenses as we did in the prior year. Properties included in discontinued operations for the year ended December 31, 2002 included 875 Third Avenue, The Candler Building, Fullerton Square, 2391 West Winton and 7600, 7700 and 7702 Boston Boulevard.

 

Gains on sales of real estate from discontinued operations for the year ended December 31, 2002 related to the gain recognized on the properties that were sold. These properties included Fullerton Square, 2391 West Winton and 7600, 7700 and 7702 Boston Boulevard.

 

The decrease in our preferred dividend from $6.6 million for the year ended December 31, 2001 to $3.4 million for the year ended December 31, 2002 was a result of the conversion of 2,000,000 shares of our preferred stock into common stock in July 2002.

 

Liquidity and Capital Resources

 

General

 

Our principal liquidity needs for the next twelve months are to:

 

  fund normal recurring expenses;

 

  meet debt service requirements including the repayment or refinancing of $65.9 million of indebtedness that matures within the twelve month period;

 

  fund capital expenditures, including tenant improvements and leasing costs;

 

  fund current development costs not covered under construction loans; and

 

  make the minimum distribution required to maintain our REIT qualification under the Internal Revenue Code of 1986, as amended.

 

We believe that these needs will be satisfied using cash flows generated by operations and provided by financing activities. Rental revenue, recovery income from tenants, and other income from operations are our principal sources of capital used to pay operating expenses, debt service, recurring capital expenditures and the minimum distribution required to maintain our REIT qualification. We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our sources of revenue also include third-party fees generated by our office real estate management, leasing, development and construction businesses. Consequently, we believe our revenue, together with proceeds from financing activities,

 

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will continue to provide the necessary funds for our short-term liquidity needs. However, material changes in these factors may adversely affect our net cash flows. Such changes, in turn, would adversely affect our ability to fund distributions, debt service payments and tenant improvements. In addition, a material adverse change in our cash provided by operations may affect the financial performance covenants under our unsecured line of credit and unsecured senior notes.

 

Our principal liquidity needs for periods beyond twelve months are for the costs of developments, property acquisitions, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements. We expect to satisfy these needs using one or more of the following:

 

  construction loans;

 

  long-term secured and unsecured indebtedness;

 

  income from operations;

 

  joint ventures;

 

  sales of real estate;

 

  issuances of additional common and Preferred Units and/or our equity securities; and

 

  our unsecured revolving line of credit or other short term bridge facilities.

 

We draw on multiple financing sources to fund our long-term capital needs. Our line of credit is utilized primarily as a bridge facility to fund acquisition opportunities and meet short-term development needs. We fund our development projects with construction loans that may be partially guaranteed by Boston Properties Limited Partnership until project completion or lease-up thresholds are achieved. In 2003 we completed three highly successful offerings of unsecured investment grade senior notes and expect to utilize the bond market, asset backed mortgage financing and common and preferred equity as cost-effective capital sources for other long-term capital needs.

 

Cash Flow Summary

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows in “Item 8. Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

 

Cash and cash equivalents were $22.7 million and $55.3 million at December 31, 2003 and December 31, 2002, respectively, representing a decrease of $32.6 million. The decrease was a result of the following increases and decreases in cash flows:

 

     Years ended December 31,

 
     2003

    2002

    Increase
(Decrease)


 
     (in thousands)  

Net cash provided by operating activities

   $ 488,275     $ 437,380     $ 50,895  

Net cash provided by (used in) investing activities

   $ 97,496     $ (1,017,283 )   $ 1,114,779  

Net cash provided by (used in ) financing activities

   $ (618,360 )   $ 537,111     $ (1,155,471 )

 

Our principal source of cash flow is related to the operation of our office properties. In addition, over the past year, we have recycled capital through the sale of some of our office properties and raised proceeds from secured and unsecured borrowings. The average term of a tenant lease is approximately 7.0 years with occupancy rates historically in the range of 92% to 98%. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend and distribution payment requirements.

 

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Cash is used in investing activities to fund acquisitions, development and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings that meet our investment criteria. Cash provided by investing activities for the twelve months ended December 31, 2003 consisted of the following:

 

     (in thousands)

 

Proceeds from the sales of real estate

   $ 524,264  

The cash provided by investing is partially offset by:

        

Investments in unconsolidated joint ventures

     (4,495 )

Recurring capital expenditures

     (18,514 )

Planned non-recurring capital expenditures associated with acquisition properties

     (4,464 )

Hotel improvements, equipment upgrades and replacements

     (2,345 )

Acquisitions/additions to real estate

     (396,950 )
    


Net cash provided by investing activities

   $ 97,496  
    


 

Cash used in financing activities for the year ended December 31, 2003 totaled approximately $618.4 million. This consisted of payments of dividends and distributions to shareholders and unitholders and changes to our existing debt structure resulting in a net reduction of our total debt, including the repayment of certain construction loans, certain mortgage loans and the remaining balance on our unsecured bridge loan utilizing the proceeds from sales of real estate assets and through the issuance by Boston Properties Limited Partnership of $725 million of unsecured senior notes. Future debt payments are discussed below under the heading “Capitalization.”

 

Capitalization

 

At December 31, 2003, our total consolidated debt was approximately $5.0 billion. The weighted-average annual interest rate on our consolidated indebtedness was 6.33% and the weighted-average maturity was approximately 6.3 years.

 

Debt to total market capitalization ratio, defined as total consolidated debt as a percentage of the market value of our outstanding equity securities plus our total consolidated debt, is a measure of leverage commonly used by analysts in the REIT sector. Our total market capitalization was approximately $11.2 billion at December 31, 2003. Total market capitalization was calculated using the December 31, 2003 closing stock price of $48.19 per common share and the following: (1) 98,230,177 shares of our common stock, (2) 22,365,942 common units of limited partnership of Boston Properties Limited Partnership (excluding common units held by Boston Properties, Inc.), (3) an aggregate of 7,087,487 common units issuable upon conversion of all outstanding preferred units of limited partnership of Boston Properties Limited Partnership, and (4) our consolidated debt totaling approximately $5.0 billion. Our total consolidated debt at December 31, 2003 represented approximately 44.9% of our total market capitalization. This percentage will fluctuate with changes in the market price of our common stock and does not necessarily reflect our capacity to incur additional debt to finance our activities or our ability to manage our existing debt obligations. However, for a company like ours, whose assets are primarily income-producing real estate, the debt to total market capitalization ratio may provide investors with an alternate indication of leverage, so long as it is evaluated along with other financial ratios and the various components of our outstanding indebtedness.

 

Debt Financing

 

As of December 31, 2003, we had approximately $5.0 billion of outstanding indebtedness, representing 44.9% of our total market capitalization based on our year-end share price, consisting of $1.475 billion in publicly traded unsecured debt at an average interest rate of 5.95% with maturities of ten to twelve years, $3.471

 

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billion of property-specific debt and $63 million drawn on our unsecured line of credit. The table below summarizes our mortgage notes payable, our senior unsecured notes, our unsecured bridge loan and our revolving line of credit with Fleet National Bank, as agent, at December 31, 2003 and 2002:

 

     December 31,

 
     2003

    2002

 
     (dollars in thousands)  

DEBT SUMMARY:

                

Balance

                

Fixed rate

   $ 4,566,188     $ 3,890,196  

Variable rate

     438,532       1,257,024  
    


 


Total

   $ 5,004,720     $ 5,147,220  
    


 


Percent of total debt:

                

Fixed rate

     91.24 %     75.58 %

Variable rate

     8.76 %     24.42 %
    


 


Total

     100.00 %     100.00 %
    


 


Weighted average interest rate at end of period:

                

Fixed rate

     6.67 %     6.99 %

Variable rate

     2.87 %     3.04 %
    


 


Total

     6.33 %     6.03 %
    


 


 

The variable rate debt shown above bears interest based on various spreads over the London Interbank Offered Rate or Eurodollar rates.

 

Unsecured Line of Credit

 

On January 17, 2003, we extended our $605.0 million unsecured revolving credit facility (the “Unsecured Line of Credit”) for a three year term expiring on January 17, 2006 with a provision for a one year extension at our option, subject to certain conditions. Outstanding balances under the Unsecured Line of Credit bear interest at a per annum variable rate of Eurodollar + 0.70%. In addition, a facility fee equal to 20 basis points per annum is payable in quarterly installments. The interest rate and facility fee are subject to adjustment in the event of a change in Boston Properties Limited Partnership’s senior unsecured debt ratings. The Unsecured Line of Credit contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loan advances to us at a reduced Eurodollar rate. We utilize the Unsecured Line of Credit principally to fund development of properties, land and property acquisitions, and for working capital purposes. Our Unsecured Line of Credit is a recourse obligation of Boston Properties Limited Partnership. The interest rate is subject to adjustment in the event of a change in the Boston Properties Limited Partnership unsecured debt ratings.

 

Our ability to borrow under our unsecured revolving line of credit is subject to our compliance with a number of customary financial and other covenants on an ongoing basis, including: (1) an unsecured loan-to-value ratio against our total borrowing base not to exceed 60%, unless our leverage ratio exceeds 60%, in which case it is not to exceed 55%, (2) a secured debt leverage ratio not to exceed 55%, (3) a debt service coverage ratio of at least 1.40 for our borrowing base properties, (4) a fixed charge coverage ratio of at least 1.30 and a debt service coverage ratio of at least 1.50, (5) a leverage ratio not to exceed 60%, however for five consecutive quarters (not including the two quarters prior to expiration) the leverage ratio can go to 65%, (6) limitations on additional indebtedness and stockholder distributions, and (7) a minimum net worth requirement. As of December 31, 2003, we were in compliance with financial restrictions and requirements then applicable.

 

At December 31, 2003, we had letters of credit totaling $5.7 million outstanding under our Unsecured Line of Credit and an outstanding draw of $63.0 million, and had the ability to borrow an additional $536.3 million

 

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under our Unsecured Line of Credit. As of February 18, 2004, we had $118.0 million available under our Unsecured Line of Credit.

 

Unsecured Senior Notes

 

During 2002, we completed an unregistered offering of $750 million in aggregate principal amount of the Boston Properties Limited Partnership’s 6.25% senior unsecured notes due January 15, 2013. The notes were only offered to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act and to certain institutional investors outside of the United States in reliance on Regulation S under the Securities Act. The notes were priced at 99.65% of their principal amount to yield 6.296%. We used the net proceeds to reduce the amounts outstanding under our unsecured bridge loan that were borrowed in connection with the acquisition of 399 Park Avenue.

 

During 2003, we issued an aggregate of $725 million of unsecured long-term debt at an average interest rate of 5.60% primarily to replace secured and unsecured, variable rate debt in the following offerings:

 

  On January 17, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of an additional $175 million aggregate principal amount of the Boston Properties Limited Partnership’s 6.25% senior unsecured notes due January 15, 2013. The notes were priced at 99.763% of their principal amount to yield 6.28%. The additional notes are fungible, and form a single series, with the senior notes issued in December 2002. We used the net proceeds to repay the remaining balance of our unsecured bridge loan totaling approximately $105.7 million and to repay certain construction loans maturing in 2003 totaling approximately $60.0 million.

 

  On March 18, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of $300 million in aggregate principal amount of the Boston Properties Limited Partnership’s 5.625% senior unsecured notes due April 15, 2015. The notes were priced at 99.898% of their principal amount to yield 5.636%. We used the net proceeds to refinance the mortgage debt on Five Times Square and for other general business purposes.

 

  On May 22, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of $250 million in aggregate principal amount of the Boston Properties Limited Partnership’s 5.0% senior unsecured notes due June 1, 2015. The notes were priced at 99.329% of their principal amount to yield 5.075%. We used the net proceeds to repay the mortgage loan secured by the property at 2600 Tower Oaks Boulevard in Maryland, repay in full amounts outstanding under the unsecured line of credit and for other general business purposes.

 

Our unsecured senior notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus 35 basis points, in each case plus accrued and unpaid interest to the redemption date. The indenture under which our senior unsecured notes were issued contains restrictions on incurring debt and using our assets as security in other financing transactions and other customary financial and other covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of 1.5, and (4) unencumbered asset value to be no less than 150% of our unsecured debt. As of December 31, 2003, we were in compliance with each of these financial restrictions and requirements.

 

Under registration rights agreements with the initial purchasers of our senior unsecured notes, we agreed to use our reasonable best efforts to register with the SEC offers to exchange new notes issued by us, which we refer to as “exchange notes,” for the original notes. We closed the exchange offers relating to the 6.25% senior unsecured notes due January 15, 2013 on June 20, 2003, and we closed the exchange offer relating to the 5.625% senior unsecured notes due April 15, 2015 and 5.00% senior unsecured notes due June 1, 2015 on September 9, 2003. The exchange notes are in the same aggregate principal amount as and have terms substantially identical to

 

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the original notes, but the exchange notes are freely tradable by the holders, while the original notes were subject to resale restrictions. The exchange offers did not generate any cash proceeds for us.

 

Unsecured Bridge Loan

 

On September 25, 2002, we obtained unsecured bridge financing totaling $1.0 billion in connection with the acquisition of 399 Park Avenue. During 2002, we repaid approximately $894.3 million with proceeds from the offering of unsecured senior notes and proceeds from the sales of certain real estate properties. At December 31, 2002, the unsecured bridge loan had an outstanding balance of approximately $105.7 million. During January 2003, we repaid all amounts outstanding under our unsecured bridge loan with proceeds from the January 2003 offering of senior unsecured notes.

 

Mortgage Debt

 

At December 31, 2003, our total consolidated debt was approximately $5.0 billion. The weighted-average annual interest rate on our consolidated indebtedness was 6.33% and the weighted-average maturity was approximately 6.3 years. Our variable rate debt now consists almost entirely of our outstanding balance under our Unsecured Line of Credit ($63 million) and construction loans on Times Square Tower ($333 million) and New Dominion Two ($43 million). Variable rate debt currently encompasses only 8.76% of our total debt.

 

The following table sets forth certain information regarding our mortgage notes payable at December 31, 2003:

Properties


   Interest
Rate


    Principal
Amount


   

Maturity Date


     (1)     (in
thousands)
     

Citigroup Center

   7.19 %   $ 510,915     May 11, 2011

Times Square Tower

   3.10 %     332,890 (2)   November 29, 2004

Embarcadero Center One, Two and Federal Reserve

   6.70 %     300,236     December 10, 2008

Prudential Center

   6.72 %     280,091     July 1, 2008

280 Park Avenue

   7.64 %     262,394     February 1, 2011

599 Lexington Avenue

   7.00 %     225,000 (3)   July 19, 2005

Embarcadero Center Four

   6.79 %     145,459     February 1, 2008

Embarcadero Center Three

   6.40 %     140,254     January 1, 2007

Riverfront Plaza

   6.61 %     108,190     February 1, 2008

Democracy Center

   7.05 %     102,471     April 1, 2009

Embarcadero Center West Tower

   6.50 %     93,611     January 1, 2006

100 East Pratt Street

   6.73 %     86,805     November 1, 2008

One Freedom Square

   5.33 %     83,701 (4)   June 30, 2012

601 and 651 Gateway Boulevard

   3.50 %     81,511 (5)   September 1, 2006

One and Two Reston Overlook

   7.45 %     65,908     August 31, 2004

202, 206 & 214 Carnegie Center

   8.13 %     61,222     October 1, 2010

New Dominion Tech. Park, Bldg. One

   7.69 %     57,448     January 15, 2021

Reservoir Place

   5.82 %     56,103 (6)   July 1, 2009

Capital Gallery

   8.24 %     53,579     August 15, 2006

504, 506 & 508 Carnegie Center

   7.39 %     45,639     January 1, 2008

New Dominion Tech. Park, Bldg. Two

   2.55 %     42,642 (7)   December 19, 2005

10 and 20 Burlington Mall Road

   7.25 %     38,613 (8)   October 1, 2011

Ten Cambridge Center

   8.27 %     34,194     May 1, 2010

1301 New York Avenue

   7.14 %     29,323 (9)   August 15, 2009

Sumner Square

   7.35 %     29,255     September 1, 2013

Eight Cambridge Center

   7.73 %     26,995     July 15, 2010

510 Carnegie Center

   7.39 %     26,160     January 1, 2008

 

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Properties


   Interest
Rate


    Principal
Amount


   

Maturity Date


     (1)     (in
thousands)
     

Lockheed Martin Building

   6.61 %     24,639     June 1, 2008

University Place

   6.94 %     23,463     August 1, 2021

Reston Corporate Center

   6.56 %     23,233     May 1, 2008

NIMA Building

   6.51 %     20,129     June 1, 2008

Bedford Business Park

   8.50 %     20,008     December 10, 2008

191 Spring Street

   8.50 %     19,583     September 1, 2006

101 Carnegie Center

   7.66 %     7,403     April 1, 2006

Montvale Center

   8.59 %     7,124     December 1, 2006

Hilltop Office Center

   6.81 %     5,209 (10)   March 1, 2019
          


   

Total

         $ 3,471,400      
          


   

(1) Some of our mortgage notes and bonds are variable rate and determined by reference to LIBOR and Eurodollar rate contracts. The LIBOR/Eurodollar rate at December 31, 2003 was 1.12%. Our LIBOR and Eurodollar rate contracts in effect on December 31, 2003 ranged from LIBOR/Eurodollar + 1.40% to LIBOR/Eurodollar + 1.95%.
(2) On January 23, 2004, the Company refinanced its $493.5 million construction loan secured by the Times Square Tower property in New York City. The loan bore interest at LIBOR + 1.95% per annum and was scheduled to mature in November 2004. The refinanced loan facility totaling $475.0 million is comprised of two tranches. The first tranche consists of a $300.0 million loan commitment which bears interest at LIBOR + 0.90% per annum and matures in January 2006, with a one year extension option. The second tranche consists of a $175.0 million term loan which bears interest at LIBOR + 1.00% per annum and matures in January 2007, unless the maturity date of the first tranche is not extended, in which case it will mature in January 2006. As of January 23, 2004 the outstanding balance under the loan was $345.9 million.
(3) 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 $225.0 million.
(4) In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon the acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2003 was $74.9 million and the stated interest rate was 7.75%.
(5) The mortgage loan matures on September 1, 2006 with an option held by the lender, subject to certain conditions, to extend the term to October 1, 2010. If extended, the loan will require payments of principal and interest at a fixed interest rate of 8.00% per annum based on a 27-year amortization period. See Note 6 to the Consolidated Financial Statements.
(6) In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon the acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2003 was $53.3 million and the stated interest rate was 7.0%.
(7) The total commitment amount under this construction loan is $65.0 million at a variable rate of LIBOR + 1.40%.
(8) Includes outstanding indebtedness secured by 91 Hartwell Avenue.
(9) Includes outstanding principal in the amounts of $19.2 million, $6.7 million and $3.4 million which bear interest at fixed rates of 6.70%, 8.54% and 6.75%, respectively.
(10) This office center, which is comprised of nine buildings, was sold on February 4, 2004.

 

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Our mortgage notes payable at December 31, 2003 will mature as follows (in thousands):

 

Year


    

2004

   $ 446,758

2005

     319,713

2006

     305,821

2007