<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-13087
------------------------
BOSTON PROPERTIES, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 04-2473675
(State or other jurisdiction (IRS Employer Id. Number)
of incorporation or organization)
800 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02199
---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 236-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
<TABLE>
<S> <C>
COMMON STOCK 67,902,034
(CLASS) (OUTSTANDING ON AUGUST 2, 1999)
</TABLE>
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<PAGE>
BOSTON PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
a) Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998................... 1
b) Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998... 2
c) Consolidated Statements of Operations for the three months ended June 30, 1999 and
1998.................................................................................... 3
d) Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998... 4
e) Notes to the Consolidated Financial Statements.......................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations..... 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................. 23
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities...................................................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders........................................ 24
ITEM 6. Exhibits and Reports on Form 8-K........................................................... 24
Signatures.............................................................................................. 25
</TABLE>
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1999 1998
--------- -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
Real estate:........................................................ $5,127,469 $4,917,193
Less: accumulated depreciation.................................... (411,705) (357,384)
--------- -----------
Total real estate............................................. 4,715,764 4,559,809
Cash and cash equivalents........................................... 32,225 12,166
Notes receivable.................................................... -- 420,143
Escrows............................................................. 24,082 19,014
Tenant and other receivables, net................................... 53,059 40,830
Accrued rental income, net.......................................... 72,535 64,251
Deferred charges, net............................................... 50,946 46,029
Prepaid expenses and other assets................................... 28,142 26,058
Investments in joint ventures....................................... 42,077 46,787
--------- -----------
Total assets.................................................. $5,018,830 $5,235,087
--------- -----------
--------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Mortgage notes payable............................................ $2,799,507 $2,653,581
Notes payable..................................................... -- 420,143
Unsecured line of credit.......................................... 142,000 15,000
Accounts payable and accrued expenses............................. 61,860 42,897
Dividends payable................................................. 45,559 40,494
Accrued interest payable.......................................... 7,837 7,307
Other liabilities................................................. 22,946 27,950
--------- -----------
Total liabilities............................................. 3,079,709 3,207,372
--------- -----------
Commitments and contingencies....................................... -- --
--------- -----------
Minority interests.................................................. 781,999 1,079,234
--------- -----------
Series A Convertible Redeemable Preferred Stock, liquidation
preference $50.00 per share, 2,000,000 shares issued and
outstanding....................................................... 100,000 --
--------- -----------
Stockholders' equity:
Excess stock, $.01 par value, 150,000,000 shares authorized, none
issued or outstanding........................................... -- --
Common stock, $.01 par value, 250,000,000 shares authorized,
67,893,386 and 63,527,819 issued and outstanding in 1999 and
1998, respectively.............................................. 678 635
Additional paid-in capital........................................ 1,068,016 955,711
Dividends in excess of earnings................................... (11,572) (7,865)
--------- -----------
Total stockholders' equity...................................... 1,057,122 948,481
--------- -----------
Total liabilities and stockholders' equity.................... $5,018,830 $5,235,087
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
----------- -----------
(UNAUDITED AND IN
THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C>
Revenue
Rental:
Base rent................................................... $ 309,679 $ 167,075
Recoveries from tenants..................................... 34,666 19,362
Parking and other........................................... 23,011 2,706
----------- -----------
Total rental revenue...................................... 367,356 189,143
Development and management services........................... 7,658 6,159
Interest and other............................................ 4,266 8,341
----------- -----------
Total revenue............................................. 379,280 203,643
----------- -----------
Expenses
Operating..................................................... 117,656 53,933
General and administrative.................................... 13,962 10,621
Interest...................................................... 99,678 48,743
Depreciation and amortization................................. 57,237 29,689
----------- -----------
Total expenses.............................................. 288,533 142,986
----------- -----------
Income before minority interests and joint venture income....... 90,747 60,657
Minority interests in property partnerships..................... (4,294) (229)
Income from unconsolidated joint venture........................ 442 --
----------- -----------
Income before minority interest in Operating Partnership........ 86,895 60,428
Minority interest in Operating Partnership...................... (32,217) (14,440)
----------- -----------
Income before extraordinary item................................ 54,678 45,988
Extraordinary gain, net......................................... -- 3,564
----------- -----------
Net income before preferred dividend............................ 54,678 49,552
Preferred dividend.............................................. (2,521) --
----------- -----------
Net income available to common shareholders..................... $ 52,157 $ 49,552
----------- -----------
----------- -----------
Basic earnings per common share:
Income before extraordinary gain.............................. $ 0.81 $ 0.79
Extraordinary gain, net....................................... -- 0.06
----------- -----------
Net income available to common shareholders................... $ 0.81 $ 0.85
----------- -----------
----------- -----------
Weighted average number of common shares outstanding.......... 64,539 58,009
----------- -----------
----------- -----------
Diluted earnings per common share:
Income before extraordinary gain.............................. $ 0.80 $ 0.79
Extraordinary gain, net....................................... -- 0.06
----------- -----------
Net income available to common shareholders................... $ 0.80 $ 0.85
----------- -----------
----------- -----------
Weighted average number of common and common equivalent shares
outstanding................................................. 65,161 58,613
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
(UNAUDITED AND IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
Revenue
Rental:
Base rent.................................................................... $ 158,070 $ 87,806
Recoveries from tenants...................................................... 17,252 9,805
Parking and other............................................................ 12,087 1,595
------------- -------------
Total rental revenue....................................................... 187,409 99,206
Development and management services............................................ 3,611 4,383
Interest and other............................................................. 620 4,452
------------- -------------
Total revenue.............................................................. 191,640 108,041
------------- -------------
Expenses
Operating...................................................................... 60,306 27,403
General and administrative..................................................... 7,352 5,800
Interest....................................................................... 49,219 23,814
Depreciation and amortization.................................................. 29,443 16,594
------------- -------------
Total expenses............................................................. 146,320 73,611
------------- -------------
Income before minority interests and joint venture income........................ 45,320 34,430
Minority interests in property partnership....................................... (139) (106)
Income from unconsolidated joint venture......................................... 229 --
------------- -------------
Income before minority interest in Operating Partnership......................... 45,410 34,324
Minority interest in Operating Partnership....................................... (16,505) (7,967)
------------- -------------
Income before extraordinary item................................................. 28,905 26,357
Extraordinary gain, net.......................................................... -- 3,564
------------- -------------
Net income before preferred dividend............................................. 28,905 29,921
Preferred dividend............................................................... (1,682) --
------------- -------------
Net income available to common shareholders...................................... $ 27,223 $ 29,921
------------- -------------
------------- -------------
Basic earnings per common share:
Income before extraordinary gain............................................... $ 0.42 $ 0.42
Extraordinary gain, net........................................................ -- 0.06
------------- -------------
Net income available to common shareholders.................................... $ 0.42 $ 0.48
------------- -------------
------------- -------------
Weighted average number of common shares outstanding........................... 65,534 61,694
------------- -------------
------------- -------------
Diluted earnings per common share:
Income before extraordinary gain............................................... $ 0.41 $ 0.42
Extraordinary gain, net........................................................ -- 0.06
------------- -------------
Net income available to common shareholders.................................... $ 0.41 $ 0.48
------------- -------------
------------- -------------
Weighted average number of common and common equivalent shares outstanding..... 66,337 62,284
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividend.............................................................. $ 54,678 $ 49,552
Adjustments to reconcile net income before preferred dividend to net cash provided by operating
activities:
Depreciation and amortization................................................................... 57,237 29,689
Non-cash portion of interest expense............................................................ (1,037) 211
Extraordinary gain on early debt extinguishment................................................. -- (4,641)
Income from investment in unconsolidated joint venture.......................................... (442) --
Minority interests.............................................................................. 29,329 15,518
Change in assets and liabilities:
Escrows......................................................................................... (5,068) (3,655)
Tenant and other receivables, net............................................................... (12,229) (309)
Accrued rental income........................................................................... (8,284) (7,583)
Prepaid expenses and other assets............................................................... (2,084) (2,696)
Accounts payable and accrued expenses........................................................... 18,122 38,298
Accrued interest payable........................................................................ 530 (3,305)
Other liabilities............................................................................... (5,004) 5,753
------------- -------------
Total adjustments............................................................................. 71,070 67,280
------------- -------------
Net cash provided by operating activities..................................................... 125,748 116,832
------------- -------------
Cash flows from investing activities:
Acquisitions/additions to real estate............................................................. (178,216) (543,430)
Tenant leasing costs.............................................................................. (7,299) (6,087)
Investments in joint ventures..................................................................... 5,152 (4,531)
------------- -------------
Net cash used in investing activities......................................................... (180,363) (554,048)
------------- -------------
Cash flows from financing activities:
Net proceeds from sales of common and preferred stock............................................. 241,003 765,563
Payment of other offering costs................................................................... (51) --
Borrowings on unsecured line of credit............................................................ 387,000 --
Repayment of unsecured line of credit............................................................. (260,000) (233,000)
Repayments of mortgage notes...................................................................... (15,973) (146,968)
Proceeds from mortgage notes...................................................................... 136,000 197,800
Repayment of notes payable........................................................................ (328,143) --
Dividends and distributions....................................................................... (83,799) (54,777)
Proceeds from exercise of stock options........................................................... 566 --
Deferred financing and other costs................................................................ (1,929) --
------------- -------------
Net cash provided by financing activities..................................................... 74,674 528,618
------------- -------------
Net increase in cash................................................................................ 20,059 91,402
Cash and cash equivalents, beginning of period...................................................... 12,166 17,560
------------- -------------
Cash and cash equivalents, end of period............................................................ $ 32,225 $ 108,962
------------- -------------
------------- -------------
Supplemental disclosures:
Cash paid for interest............................................................................ $ 106,906 $ 50,930
------------- -------------
------------- -------------
Interest capitalized.............................................................................. $ 6,721 $ 1,986
------------- -------------
------------- -------------
Non-cash activities:
Operating activity:
Non-cash portion of interest expense............................................................ $ (1,037) $ 211
------------- -------------
------------- -------------
Additions to real estate included in accounts payable........................................... $ 841 $ --
------------- -------------
------------- -------------
Investing and Financing activities:
Mortgage notes payable assumed in connection with acquisitions.................................. $ 28,331 $ 118,251
------------- -------------
------------- -------------
Issuance of minority interest in connection with acquisitions................................... $ 2,888 $ 153,438
------------- -------------
------------- -------------
Dividends and distributions declared but not paid............................................... $ 45,559 $ --
------------- -------------
------------- -------------
Notes receivable assigned in connection with an acquistion...................................... $ 420,143 $ --
------------- -------------
------------- -------------
Notes payable assigned in connection with an acquisition........................................ $ (92,000) $ --
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
1. ORGANIZATION
Boston Properties, Inc. (the "Company"), a Delaware corporation, is a
self-administered and self-managed real estate investment trust ("REIT"). Boston
Properties, Inc. is the sole general partner of Boston Properties Limited
Partnership (the "Operating Partnership") and at June 30, 1999, owned an
approximate 67.35% general and limited partnership interest in the Operating
Partnership. Partnership interests in the Operating Partnership are denominated
as "common units of partnership interest" (also referred to as "OP Units") or
"preferred units of partnership interest" (also referred to as "Preferred
Units"). All references to OP Units and Preferred Units exclude such units held
by the Company. A holder of an OP Unit may present such OP Unit to the Operating
Partnership for redemption at any time (subject to restrictions agreed upon the
issuance of OP Units to particular holders that may restrict such right for a
period of time, generally one year from issuance). Upon presentation of an OP
Unit for redemption, the Operating Partnership must redeem such OP Unit for cash
equal to the then value of a share of common stock, except that, the Company
may, at its election, in lieu of a cash redemption, acquire such OP Unit for one
share of common stock of the Company ("Common Stock"). Because the number of
shares of Common Stock outstanding at all times equals the number of OP Units
that the Company owns, one share of Common Stock is generally the economic
equivalent of one OP Unit, and the quarterly distribution that may be paid to
the holder of an OP Unit equals the quarterly dividend that may be paid to the
holder of a share of Common Stock. Each series of Preferred Units bear a
distribution that is set in accordance with an amendment to the partnership
agreement of the Operating Partnership. Preferred Units may also be convertible
into OP Units at the election of the holder thereof or the Company.
All references to the Company refer to Boston Properties, Inc. and its
subsidiaries, including the Operating Partnership, collectively, unless the
context otherwise requires.
To assist the Company in maintaining its status as a REIT, the Company
leases its three in-service hotel properties, pursuant to a lease with a
participation in the gross receipts of such hotel properties, to a lessee ("ZL
Hotel LLC") in which Messrs. Zuckerman and Linde, the Chairman of the Board and
Chief Executive Officer, respectively, are the sole member-managers. Messrs.
Zuckerman and Linde have a 9.8% economic interest in such lessee and one or more
unaffiliated public charities have a 90.2% economic interest. Marriott
International, Inc. manages these hotel properties under the
Marriott-Registered Trademark- name pursuant to a management agreement with the
lessee. Under the REIT requirements, revenues from a hotel are not considered to
be rental income for purposes of certain income tests which a REIT must meet.
Accordingly, in order to maintain its qualification as a REIT, the Company has
entered into the participating leases described above to provide revenue which
qualifies as rental income under the REIT requirements.
As of June 30, 1999, the Company and the Operating Partnership had
67,893,386 and 23,816,811 shares of Common Stock and OP Units outstanding,
respectively. In addition, the Company had 2,000,000 shares of Preferred Stock
outstanding and the Operating Partnership had 8,713,131 Preferred Units
outstanding.
THE PROPERTIES:
The Company owns a portfolio of 127 commercial real estate properties (121
and 108 properties at December 31, 1998 and June 30, 1998, respectively) (the
"Properties") aggregating over 33.4 million square feet. The properties consist
of 114 office properties with approximately 25.4 million net rentable
5
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
1. ORGANIZATION (CONTINUED)
square feet (including eight properties under development expected to contain
approximately 2.3 million net rentable square feet) and approximately 5.9
million additional square feet of structured parking for 16,726 vehicles, nine
industrial properties with approximately 925,000 net rentable square feet, three
hotels with a total of 1,054 rooms (consisting of approximately 938,000 square
feet), and a parking garage with 1,170 spaces (consisting of approximately
330,000 square feet). In addition, the Company owns, has under contract, or has
an option to acquire 47 parcels of land totaling 478.4 acres, which will support
approximately 10.6 million square feet of development.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership and
subsidiaries. The financial statements reflect the properties acquired at their
historical basis of accounting to the extent of the acquisition of interests
from the Predecessor's owners who continued as investors. The remaining
interests acquired for cash from those owners of the Predecessor who decided to
sell their interests have been accounted for as a purchase and the excess of the
purchase price over the related historical cost basis was allocated to real
estate. All significant intercompany balances and transactions have been
eliminated. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto contained in the Company's
annual report on Form 10-K for its fiscal year ended December 31, 1998.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in conjunction with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these interim
periods have been included. The results of operations for the interim periods
are not necessarily indicative of the results to be obtained for other interim
periods or for the full fiscal year.
3. REAL ESTATE ACQUIRED AND PLACED IN SERVICE DURING THE QUARTER ENDED JUNE 30,
1999
On April 30, 1999, the Company acquired 510 Carnegie Center, a 234,160
square-foot, Class A office building located in Princeton, New Jersey for
approximately $48.0 million. This property is part of the Carnegie Center
Portfolio. The acquisition was funded through the assumption of debt of
approximately $28.4 million, the issuance of 57,778 Series One Preferred Units
valued at approximately $2.0 million and cash of approximately $17.6 million.
On May 1, 1999, the Company placed in service the Arboretum, a 95,584
square-foot, Class A office building located in Reston, Virginia developed at a
total cost of approximately $13.7 million.
On May 1, 1999, the Company placed in service 200 West Street, a 248,341
square-foot, Class A office building located in Waltham, Massachusetts developed
at a total cost of approximately $40.0 million.
6
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
3. REAL ESTATE ACQUIRED AND PLACED IN SERVICE DURING THE QUARTER ENDED JUNE 30,
1999 (CONTINUED)
On May 17, 1999, the Company acquired, for cash of approximately $3.6
million, parcels of land located in Loudon, Virginia that are currently under
development and will support two Class A office buildings containing
approximately 185,000 square feet.
On May 24, 1999, the Company placed in service Eight Cambridge Center, a
177,226 square-foot, Class A office building located in Cambridge, Massachusetts
developed at a total cost of approximately $23.8 million.
On May 24, 1999, the Company acquired the remaining 50% interest in the
development rights associated with 111 Huntington Avenue at the Prudential
Center in Boston, Massachusetts for approximately $12.3 million, which was
funded through the issuance of 343,077 shares of the Company's Common Stock
valued at $12.3 million. 111 Huntington Avenue will consist of an 890,000
square-foot, Class A office building, for which construction commenced on April
27, 1999.
4. INVESTMENTS IN JOINT VENTURES
The investments in joint ventures represent (i) a 25% interest in a joint
venture which owns and operates two office buildings in Reston, Virginia, (ii) a
25% interest in a joint venture which is developing one office building in
Reston, Virginia, and (iii) a 50% interest in a joint venture which is
developing an office building in Washington, D.C. The Company also serves as
development manager for the two joint ventures still under development. Under
the equity method of accounting, the net equity investment is reflected on the
consolidated balance sheets.
The combined summarized balance sheets of the joint ventures are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Real estate and development in progress........................... $ 219,100 $ 172,417
Other assets...................................................... 10,586 10,032
----------- ------------
Total assets................................................ $ 229,686 $ 182,449
----------- ------------
----------- ------------
LIABILITIES AND PARTNERS EQUITY
Construction loans payable........................................ $ 119,426 $ 55,638
Other liabilities................................................. 14,173 20,595
----------- ------------
Total liabilities........................................... 133,599 76,233
Partners' equity.................................................. 96,087 106,216
----------- ------------
Total liabilities and partners' equity...................... $ 229,686 $ 182,449
----------- ------------
----------- ------------
Company's Share of Equity......................................... $ 42,077 $ 46,787
----------- ------------
----------- ------------
</TABLE>
7
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
4. INVESTMENTS IN JOINT VENTURES (CONTINUED)
The summarized statements of operations consist of One and Two Reston
Overlook, the joint venture placed in service during the first quarter of 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------- -----------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Total revenue........................................ $ 2,647 $ 4,438
Total expenses....................................... 1,723 2,662
------ ------
Net income........................................... $ 924 $ 1,776
------ ------
------ ------
Company's Share of Net Income........................ $ 229 $ 442
------ ------
------ ------
</TABLE>
5. MINORITY INTERESTS
Minority interests in the Company relate to the interest in the Operating
Partnership not owned by Boston Properties, Inc. and interests in property
partnerships that are not owned by the Company. As of June 30, 1999, the
minority interest in the Operating Partnership consisted of 23,816,811 OP Units
and 8,713,131 Preferred Units held by parties other than Boston Properties, Inc.
On April 30, 1999, the Operating Partnership issued 57,778 Series One
Preferred Units in connection with the acquisition of 510 Carnegie Center.
On May 17, 1999, the Operating Partnership paid a distribution on the
2,500,000 Series One Preferred Units of $0.61625 per unit, based on an annual
distribution of $2.465 per unit and paid a distribution on the 6,213,131 units
of Series Two and Three Preferred Units of $0.64795 per unit.
On June 21, 1999, Boston Properties, Inc., as general partner of the
Operating Partnership, determined a distribution on the OP Units in the amount
of $0.425 per OP Unit payable on July 28, 1999 to OP Unit holders of record on
June 30, 1999.
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
On May 17, 1999, the Company paid a dividend on the 2,000,000 shares of
Series A Convertible Redeemable Preferred Stock (the "Preferred Stock"), $50
liquidation preference per share, of approximately $0.64795 per share. In
addition, on June 21, 1999, the Board of Directors of the Company declared a
dividend of $0.68562 per share on the Preferred Stock payable on August 16, 1999
to shareholders of record on June 30, 1999. The Preferred Stock is not
classified as equity as the shares may be redeemed for cash at the election of
the holder at various dates commencing on May 12, 2009.
On May 24, 1999, the Company issued 343,077 shares of Common Stock in
connection with its acquisition of the remaining 50% interest in the development
rights associated with 111 Huntington Avenue at the Prudential Center.
On May 25, 1999, the Company completed an offering of 4,000,000 shares of
Common Stock at a price per share of $37.25. The proceeds to the Company, net of
underwriter's discount and offering costs was approximately $141.0 million.
8
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
On June 21, 1999, the Board of Directors of the Company declared a second
quarter dividend in the amount of $0.425 per share of Common Stock payable on
July 28, 1999 to shareholders of record on June 30, 1999.
7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1999
------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings:
Income available to common shareholders............ $ 27,223 65,534 $ 0.42
Effect of Dilutive Securities:
Stock Options...................................... -- 803 (.01)
------------ ------ -----
Diluted Earnings:
Net income available to common shareholders........ $ 27,223 66,337 $ 0.41
------------ ------ -----
------------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings:
Income available to common shareholders............ $ 52,157 64,539 $ 0.81
Effect of Dilutive Securities:
Stock Options...................................... -- 622 (.01)
------------ ------ -----
Diluted Earnings:
Net income available to common shareholders........ $ 52,157 65,161 $ 0.80
------------ ------ -----
------------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1998
------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings:
Income available to common shareholders............ $ 29,921 61,694 $ 0.48
Effect of Dilutive Securities:
Stock Options...................................... -- 590 --
------------ ------ -----
Diluted Earnings:
Net Income available to common shareholders........ $ 29,921 62,284 $ 0.48
------------ ------ -----
------------ ------ -----
</TABLE>
9
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
7. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings:
Income available to common shareholders............ $ 49,552 58,009 $ 0.85
Effect of Dilutive Securities:
Stock Options...................................... -- 604 --
------------ ------ -----
Diluted Earnings:
Net Income available to common shareholders........ $ 49,552 58,613 $ 0.85
------------ ------ -----
------------ ------ -----
</TABLE>
8. STOCK OPTION AND INCENTIVE PLAN
During the quarter ended June 30, 1999, the Company issued 35,000 options at
a weighted average price of $35.64 per share. The options vest over a three-year
period, with 1/3 of the options vesting each year. As of June 30, 1999, the
Company has outstanding options with respect to 7,487,293 common shares and an
additional 2,242,849 common shares reserved for issuance under the Company's
stock option and incentive plan.
9. SEGMENT INFORMATION
The Company's segments are based on the Company's method of internal
reporting, which classifies its operations by both geographic area and property
type. The Company's segments by geographic area are: Greater Boston, Greater
Washington, D.C., midtown Manhattan, Greater San Francisco, and New Jersey and
Pennsylvania. Segments by property type include: Class A Office, R&D,
Industrial, Hotels and Garage.
Asset information by segment is not reported, since the Company does not use
this measure to assess performance: therefore, the depreciation and amortization
expenses are not allocated among segments. Interest income, management and
development services, interest expense and general and administrative expenses
are not included in net operating income, as the internal reporting addresses
these on a corporate level.
10
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
9. SEGMENT INFORMATION (CONTINUED)
INFORMATION BY GEOGRAPHIC AREA AND PROPERTY TYPE:
For the six months ended June 30, 1999:
<TABLE>
<CAPTION>
GREATER GREATER NEW JERSEY
GREATER WASHINGTON MIDTOWN SAN AND
BOSTON DC MANHATTAN FRANCISCO PENNSYLVANIA TOTAL
--------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenue
Class A....................................... $ 75,277 $ 99,758 $ 68,134 $ 74,837 $ 19,008 $ 337,014
R&D........................................... 3,166 9,098 -- 835 -- 13,099
Industrial.................................... 819 701 -- 618 354 2,492
Hotels........................................ 13,700 -- -- -- -- 13,700
Garage........................................ 1,051 -- -- -- -- 1,051
--------- ----------- ----------- ----------- ------------ ----------
Total........................................... 94,013 109,557 68,134 76,290 19,362 367,356
--------- ----------- ----------- ----------- ------------ ----------
% of Grand Totals............................. 25.59% 29.82% 18.55% 20.77% 5.27% 100.00%
--------- ----------- ----------- ----------- ------------ ----------
Rental Expenses
Class A....................................... $ 29,969 $ 26,125 $ 23,020 $ 26,711 $ 5,427 $ 111,252
R&D........................................... 949 1,789 -- 202 -- 2,940
Industrial.................................... 266 215 -- 122 63 666
Hotels........................................ 2,395 -- -- -- -- 2,395
Garage........................................ 403 -- -- -- -- 403
--------- ----------- ----------- ----------- ------------ ----------
Total........................................... 33,982 28,129 23,020 27,035 5,490 117,656
--------- ----------- ----------- ----------- ------------ ----------
% of Grand Totals............................. 28.87% 23.91% 19.57% 22.98% 4.67% 100.00%
--------- ----------- ----------- ----------- ------------ ----------
Net Operating Income............................ $ 60,031 $ 81,428 $ 45,114 $ 49,255 $ 13,872 $ 249,700
--------- ----------- ----------- ----------- ------------ ----------
--------- ----------- ----------- ----------- ------------ ----------
% of Grand Totals............................. 24.04% 32.60% 18.07% 19.73% 5.56% 100.00%
--------- ----------- ----------- ----------- ------------ ----------
--------- ----------- ----------- ----------- ------------ ----------
</TABLE>
11
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
9. SEGMENT INFORMATION (CONTINUED)
For the six months ended June 30, 1998:
<TABLE>
<CAPTION>
GREATER GREATER NEW JERSEY
GREATER WASHINGTON MIDTOWN SAN AND
BOSTON DC MANHATTAN FRANCISCO PENNSYLVANIA TOTAL
--------- ----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenue
Class A....................................... $ 23,686 $ 75,100 $ 63,584 $ -- $ 98 $ 162,468
R&D........................................... 2,988 7,944 -- 701 -- 11,633
Industrial.................................... 806 718 -- 649 393 2,566
Hotels........................................ 11,585 -- -- -- -- 11,585
Garage........................................ 891 -- -- -- -- 891
--------- ----------- ----------- ----- ----- ----------
Total........................................... 39,956 83,762 63,584 1,350 491 189,143
--------- ----------- ----------- ----- ----- ----------
% of Grand Totals............................. 21.12% 44.28% 33.62% 0.71% 0.27% 100.00%
--------- ----------- ----------- ----- ----- ----------
Rental Expenses
Class A....................................... $ 7,881 $ 18,806 $ 21,956 $ -- $ 31 $ 48,674
R&D........................................... 920 1,694 -- 243 -- 2,857
Industrial.................................... 282 158 -- 158 23 621
Hotels........................................ 1,531 -- -- -- -- 1,531
Garage........................................ 250 -- -- -- -- 250
--------- ----------- ----------- ----- ----- ----------
Total........................................... 10,864 20,658 21,956 401 54 53,933
--------- ----------- ----------- ----- ----- ----------
% of Grand Totals............................. 20.14% 38.30% 40.72% 0.74% 0.10% 100.00%
--------- ----------- ----------- ----- ----- ----------
Net Operating Income............................ $ 29,092 $ 63,104 $ 41,628 $ 949 $ 437 $ 135,210
--------- ----------- ----------- ----- ----- ----------
--------- ----------- ----------- ----- ----- ----------
% of Grand Totals............................. 21.52% 46.67% 30.79% 0.70% 0.32% 100.00%
--------- ----------- ----------- ----- ----- ----------
--------- ----------- ----------- ----- ----- ----------
</TABLE>
The following is a reconcilition of net operating income to income before
minority interests and joint venture income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Net Operating Income...................................................................... $ 249,700 $ 135,210
Add:
Development and management services..................................................... 7,658 6,159
Interest and other...................................................................... 4,266 8,341
Less:
General and administrative.............................................................. (13,962) (10,621)
Interest expense........................................................................ (99,678) (48,743)
Depreciation and amortization........................................................... (57,237) (29,689)
---------- ----------
Income before minority interests and joint venture income................................. $ 90,747 $ 60,657
---------- ----------
---------- ----------
</TABLE>
12
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
9. SEGMENT INFORMATION (CONTINUED)
INFORMATION BY GEOGRAPHIC AREA AND PROPERTY TYPE:
For the three months ended June 30, 1999:
<TABLE>
<CAPTION>
GREATER GREATER NEW JERSEY
GREATER WASHINGTON MIDTOWN SAN AND
BOSTON DC MANHATTAN FRANCISCO PENNSYLVANIA TOTAL
--------- ----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenue
Class A....................................... $ 38,322 $ 50,827 $ 33,943 $ 37,644 $ 9,551 $ 170,287
R&D........................................... 1,483 4,565 -- 386 -- 6,434
Industrial.................................... 413 378 -- 344 174 1,309
Hotels........................................ 8,849 -- -- -- -- 8,849
Garage........................................ 530 -- -- -- -- 530
--------- ----------- ----------- ----------- ------ ----------
Total........................................... 49,597 55,770 33,943 38,374 9,725 187,409
--------- ----------- ----------- ----------- ------ ----------
% of Grand Totals............................. 26.46% 29.76% 18.11% 20.48% 5.19% 100.00%
--------- ----------- ----------- ----------- ------ ----------
Rental Expenses
Class A....................................... $ 14,816 $ 13,486 $ 11,719 $ 14,084 $ 2,904 $ 57,009
R&D........................................... 421 819 -- 114 -- 1,354
Industrial.................................... 124 127 -- 72 35 358
Hotels........................................ 1,371 -- -- -- -- 1,371
Garage........................................ 214 -- -- -- -- 214
--------- ----------- ----------- ----------- ------ ----------
Total........................................... 16,946 14,432 11,719 14,270 2,939 60,306
--------- ----------- ----------- ----------- ------ ----------
% of Grand Totals............................. 28.11% 23.93% 19.43% 23.66% 4.87% 100.00%
--------- ----------- ----------- ----------- ------ ----------
Net Operating Income............................ $ 32,651 $ 41,338 $ 22,224 $ 24,104 $ 6,786 $ 127,103
--------- ----------- ----------- ----------- ------ ----------
--------- ----------- ----------- ----------- ------ ----------
% of Grand Totals............................. 25.69% 32.52% 17.49% 18.96% 5.34% 100.00%
--------- ----------- ----------- ----------- ------ ----------
--------- ----------- ----------- ----------- ------ ----------
</TABLE>
13
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
9. SEGMENT INFORMATION (CONTINUED)
For the three months ended June 30, 1998:
<TABLE>
<CAPTION>
GREATER GREATER NEW JERSEY
GREATER WASHINGTON MIDTOWN SAN AND
BOSTON DC MANHATTAN FRANCISCO PENNSYLVANIA TOTAL
--------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenue
Class A......................................... $ 12,021 $ 39,853 $ 31,898 $ -- $ 98 $ 83,870
R&D............................................. 1,349 4,215 -- 386 -- 5,950
Industrial...................................... 398 372 -- 345 191 1,306
Hotels.......................................... 7,630 -- -- -- -- 7,630
Garage.......................................... 450 -- -- -- -- 450
--------- ----------- ----------- ----- ----- ---------
Total............................................. 21,848 44,440 31,898 731 289 99,206
--------- ----------- ----------- ----- ----- ---------
% of Grand Totals............................... 22.02% 44.80% 32.14% 0.74% 0.30% 100.00%
--------- ----------- ----------- ----- ----- ---------
Rental Expenses
Class A......................................... $ 3,840 $ 9,878 $ 10,782 $ -- $ 31 $ 24,531
R&D............................................. 390 1,022 -- 153 -- 1,565
Industrial...................................... 132 75 -- 78 23 308
Hotels.......................................... 873 -- -- -- -- 873
Garage.......................................... 126 -- -- -- -- 126
--------- ----------- ----------- ----- ----- ---------
Total............................................. 5,361 10,975 10,782 231 54 27,403
--------- ----------- ----------- ----- ----- ---------
% of Grand Totals............................... 19.56% 40.05% 39.35% 0.84% 0.20% 100.00%
--------- ----------- ----------- ----- ----- ---------
Net Operating Income.............................. $ 16,487 $ 33,465 $ 21,116 $ 500 $ 235 $ 71,803
--------- ----------- ----------- ----- ----- ---------
--------- ----------- ----------- ----- ----- ---------
% of Grand Totals............................... 22.96% 46.60% 29.41% 0.70% 0.33% 100.00%
--------- ----------- ----------- ----- ----- ---------
--------- ----------- ----------- ----- ----- ---------
</TABLE>
The following is a reconcilition of net operating income to income before
minority interests and joint venture income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Net Operating Income....................................................................... $ 127,103 $ 71,803
Add:
Development and management services...................................................... 3,611 4,383
Interest income.......................................................................... 620 4,452
Less:
General and administrative............................................................... (7,352) (5,800)
Interest expense......................................................................... (49,219) (23,814)
Depreciation and amortization............................................................ (29,443) (16,594)
---------- ---------
Income before minority interests and joint venture income.................................. $ 45,320 $ 34,430
---------- ---------
---------- ---------
</TABLE>
14
<PAGE>
BOSTON PROPERTIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
10. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the six months ended
June 30, 1999 and 1998 are presented as if the following real estate
acquisitions had occurred on January 1, 1998: Riverfront Plaza, the
Mulligan/Griffin Portfolio, the Carnegie Center portfolio, Metropolitan Square,
The Prudential Center, University Place, Reservoir Place and Embarcadero Center.
This pro forma information is based upon the historical consolidated financial
statements and should be read in conjunction with the consolidated financial
statements and the notes thereto.
This unaudited pro forma information does not purport to represent what the
actual results of operations of the Company would have been had the above
occurred, nor do they purport to predict the results of operations of future
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
6/30/99 6/30/98
(PRO FORMA) (PRO FORMA)
----------------- -----------------
(UNAUDITED AND IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Total revenue........................................... $ 379,280 $ 357,976
Net income available to common shareholders............. $ 54,292 $ 52,755
Net income per share available to common shareholders-
basic................................................. $ 0.84 $ 0.83
Common shares outstanding--basic........................ 64,539 63,370
Net income per share available to common
shareholders--diluted................................. $ 0.83 $ 0.82
Common shares outstanding--diluted...................... 65,161 63,974
</TABLE>
11. SUBSEQUENT EVENTS
On July 9, 1999, the Company acquired 206 Carnegie Center, a 161,763 square
foot, Class A office property in Princeton, New Jersey for approximately $27.0
million in cash.
On July 15, 1999, the Company obtained mortgage financing totaling $29.0
million secured by Eight Cambridge Center in Waltham, Massachusetts. Such
financing bears interest at a rate of 7.73% and matures in July 2010.
On July 20, 1999, the Company obtained mortgage financing totaling $26.0
million secured by University Place in Cambridge, Massachusetts. Such financing
bears interest at a rate of 6.94% and matures in August 2021.
15
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. This Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results or developments could differ
materially from those projected in such statements as a result of certain
factors set forth in the section below entitled "Certain Factors Affecting
Future Operating Results" and elsewhere in this report.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED JUNE
30, 1998.
Rental revenue increased $178.2 million or 94.2% to $367.4 million from
$189.1 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998. The increase is primarily due to rental revenue earned
totaling approximately $170.2 million on the operations of properties acquired
and placed in service since June 30, 1998.
Development and Management Services revenue increased $1.5 million or 24.3%
to $7.7 million from $6.2 million for the six months ended June 30, 1999
compared to the six months ended June 30, 1998. The increase is due to new
contracts earning fees during the first six months of 1999.
Interest and other revenue decreased $4.1 million or 48.9% to $4.3 million
from $8.3 million for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. The decrease is the result of interest earned during
the six months ended June 30, 1998 related to the proceeds from a follow-on
public offering of Common Stock in January 1998.
Operating expenses increased $63.7 million or 118.2% to $117.7 million from
$53.9 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998. This is primarily a result of approximately $59.9 million
of expenses related to the operations of properties acquired and placed in
service since June 30, 1998.
General and Administrative expenses increased $3.3 million or 31.5% to $14.0
million from $10.6 million for the six months ended June 30, 1999 compared to
the six months ended June 30, 1998 as a result payroll and other related costs
of new employees hired in Boston, Washington, D.C., New York and San Francisco
to support the operations of additional properties acquired and placed in
service since June 30, 1998.
Interest expense increased $50.9 million or 104.5% to $99.7 million from
$48.7 million for the six months ended June 30, 1999 compared to the six months
ended June 30, 1998 as a result of interest expense of approximately $47.3
million on debt related to the properties acquired subsequent to June 30, 1998.
Depreciation and Amortization expense increased $27.5 million or 92.8% to
$57.2 million from $29.7 million for the six months ended June 30, 1999 compared
to the six months ended June 30, 1998. This was primarily attributed to
approximately $24.2 million of depreciation expense related to the operations of
properties acquired subsequent to June 30, 1998.
As a result of the foregoing, income before minority interest in the
Operating Partnership increased $26.5 million to $86.9 million from $60.4
million for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998.
16
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED
JUNE 30, 1998.
Rental revenue increased $88.2 million or 88.9% to $187.4 million from $99.2
million for the three months ended June 30, 1999 compared to the three months
ended June 30, 1998. The increase is primarily due to rental revenue earned
totaling approximately $86.1 million on the operations of properties acquired
and placed in service since June 30, 1998.
Development and Management Services revenue decreased $0.8 million or 17.6%
to $3.6 million from $4.4 million for the three months ended June 30, 1999
compared to the three months ended June 30, 1998. The decrease is primarily the
result of a leasing commission of approximately $2.1 million earned on third
party managed properties during the three months ended June 30, 1998, offset by
increases in new contracts earning fees during the three months ended June 30,
1999.
Interest and Other revenue decreased $3.8 million or 86.1% to $0.6 million
from $4.5 million for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998. The decrease is the result of interest earned during
the three months ended June 30, 1998 related to the proceeds from the follow-on
offering of Common Stock in January 1998.
Operating expenses increased $32.9 million or 120.1% to $60.3 million from
$27.4 million for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998. This is primarily a result of approximately $31.6
million of expenses related to the operations of properties acquired and placed
in service since June 30, 1998.
General and Administrative expenses increased $1.6 million or 26.8% to $7.4
million from $5.8 million for the three months ended June 30, 1999 compared to
the three months ended June 30, 1998 as a result payroll and other related costs
of new employees hired in Boston, Washington, D.C., New York and San Francisco
to support the operations of additional properties acquired and placed in
service since June 30, 1998.
Interest expense increased $25.4 million or 106.7% to $49.2 million from
$23.8 million for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998 as a result of interest expense of approximately
$22.3 million on debt related to the properties acquired subsequent to June 30,
1998.
Depreciation and Amortization expense increased $12.8 million or 77.4% to
$29.4 million from $16.6 million for the three months ended June 30, 1999
compared to the three months ended June 30, 1998. This was primarily attributed
to approximately $11.5 million of depreciation expense related to the operations
of properties acquired subsequent to June 30, 1998.
As a result of the foregoing, income before minority interest in the
Operating Partnership increased $11.1 million to $45.4 million from $34.3
million for the three months ended June 30, 1999 compared to the three months
ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated indebtedness at June 30, 1999 was approximately
$2.9 billion at a weighted average interest rate of 6.98%. Based on the
Company's total market capitalization at June 30, 1999 of approximately $6.7
billion, the Company's consolidated debt represents 43.9% of its total market
capitalization.
The Company has a $500 million unsecured revolving line of credit (the
"Unsecured Line of Credit") with BankBoston, N.A., as agent, that expires in
June 2000. The Company uses the Unsecured Line of Credit principally to
facilitate its development and acquisition activities and for working capital
purposes. As of July 30, 1999, the Company had $142.0 million outstanding under
the Unsecured Line of Credit.
17
<PAGE>
The following represents the outstanding principal balances due under the
first mortgages at June 30, 1999:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PROPERTIES INTEREST RATE ---------------- MATURITY DATE
- ------------------------------------------------------ ------------- (IN THOUSANDS) ----------------------
<S> <C> <C> <C>
Prudential Center..................................... 6.72% $ 297,003 July 1, 2008
599 Lexington Avenue.................................. 7.00% 225,000(1) July 19, 2005
280 Park Avenue....................................... 7.00% 220,000(2) September 11, 2002
Embarcadero Center One................................ 6.70% 159,154 December 10, 2008
Embarcadero Center Two................................ 6.70% 159,154 December 10, 2008
Embarcadero Center Four............................... 6.79% 158,742 February 1, 2008
875 Third Ave......................................... 8.00% 153,390(3) December 31, 2002
Embarcadero Center Three.............................. 6.40% 149,159 January 1, 2007
Riverfront Plaza...................................... 6.61% 118,959 January 21, 2008
Two Independence Square............................... 8.09% 118,916(4) February 27, 2003
Democracy Center...................................... 7.05% 109,771 April 9, 2009
Metropolitan Square................................... 6.80% 106,272(5) June 1, 2000
Embarcadero Center West Tower......................... 6.50% 99,450 January 1, 2006
100 East Pratt Street................................. 6.73% 93,962 November 1, 2008
Reservoir Place....................................... 6.88% 76,435(6) November 1, 2006
One Independence Square............................... 8.12% 75,992(4) August 21, 2001
2300 N Street......................................... 6.88% 66,000 August 3, 2003
Capital Gallery....................................... 8.24% 58,608 August 15, 2006
Ten Cambridge Center and North Garage................. 7.57% 40,000 March 29, 2000
10 and 20 Burlington Mall Road........................ 8.33% 37,000(7) October 1, 2001
510 Carnegie Center................................... 7.39% 28,331 January 1, 2008
Lockheed Martin Building.............................. 6.61% 27,013 June 1, 2008
Reston Corporate Center............................... 6.56% 25,502 May 1, 2008
1301 New York Avenue.................................. 6.70% 24,886 August 15, 2009
191 Spring Street..................................... 8.50% 23,288 September 1, 2006
Bedford Business Park................................. 8.50% 22,445 December 10, 2008
NIMA Building......................................... 6.51% 22,095 June 1, 2008
212 Carnegie Center................................... 7.25% 20,756 December 31, 2000
Sumner Square......................................... 6.44% 20,000 April 22, 2004
202 Carnegie Center................................... 7.25% 19,325 December 31, 2000
214 Carnegie Center................................... 8.19% 13,538(8) October 31, 2000
101 Carnegie Center................................... 7.66% 8,758 April 1, 2006
Montvale Center....................................... 8.59% 7,745 December 1, 2006
Newport Office Park................................... 8.13% 6,341 July 1, 2001
Hilltop Business Center............................... 6.81% 5,976 March 1, 2019
201 Carnegie Center................................... 7.08% 541 February 1, 2010
----------------
Total................................................. $ 2,799,507
----------------
----------------
</TABLE>
- ------------------------
(1) At maturity the lender has the option to purchase a 33.33% interest in this
Property in exchange for the cancellation of the principal balance of
approximately $225 million.
(2) Outstanding principal of $213,000 bears interest at a fixed rate of 7.00%.
The remaining $7,000 bears interest at a floating rate equal to LIBOR +
1.00%.
(3) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at June 30, 1999
was $150,000 and the interest rate was 8.75%.
18
<PAGE>
(4) The principal amount and interest rate shown has been adjusted to reflect
the effective rates on the loans. The actual principal balances at June 30,
1999 were $119,094 and $75,938, respectively. The actual interest rates are
8.50% and continue at such rates through the loan expiration.
(5) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at June 30, 1999
was $104,040 and interest rate was 9.13%.
(6) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at June 30, 1999
was $66,444 and the interest rate was 9.09%.
(7) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 and
100 Hayden Avenue.
(8) The principal amount and interest rate shown has been adjusted to reflect
the effective rate on the loan. The actual principal balance at June 30,
1999 was $13,515 and the interest rate was 9.13%.
The Company expects to meet its short-term liquidity requirements generally
through its existing working capital and net cash provided by operations. The
Company's operating properties and hotels require periodic investments of
capital for tenant-related capital expenditures and for general capital
improvements. For the three months ended June 30, 1999, the Company's recurring
capital expenditures totaled $2.6 million.
The Company expects to meet its long-term requirements for the funding of
property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including the
Unsecured Line of Credit) and the issuance of additional equity securities of
the Company. During the quarter ended June 30, 1999, the Company received $20.0
million of mortgage financing secured by Sumner Square.
The Company has development projects currently in process, which require
commitments to fund to completion. Commitments under these arrangements totaled
$493.3 million as of June 30, 1999. The Company expects to fund these
commitments using available cash, construction loans and the Unsecured Line of
Credit. In addition, the Company has options to acquire land that require
minimum deposits that the Company will fund using available cash and the
Unsecured Line of Credit.
FUNDS FROM OPERATIONS
Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations approved by the Board of Governors of NAREIT in 1995, which may
differ from the methodology for calculating Funds from Operations utilized by
other equity REITs, and accordingly, may not be comparable to such other REITs.
The White Paper defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indication of the Company's financial performance
or to cash flows from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make distributions.
The Company believes that in order to facilitate a clear understanding of the
historical operating results of
19
<PAGE>
the Company. Funds from Operations should be examined in conjunction with net
income as presented in the consolidated financial statements.
The following table presents the Company's Funds from Operations for the
three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------- -------------------
<S> <C> <C>
Income before minority interests.................... $ 45,320 $ 34,430
Add:
Real estate depreciation and amortization......... 29,238 16,415
Income from unconsolidated joint venture.......... 229 --
Less:
Minority property partnership's share of Funds
from Operations................................. (128) (138)
Preferred dividends and distributions............. (8,293) --
------- -------
Funds from Operations............................... $ 66,366 $ 50,707
------- -------
------- -------
Company's share..................................... $ 48,673 $ 38,938
------- -------
------- -------
</TABLE>
Reconciliation to Diluted Funds from Operations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
------------ ------------- ------------ ---------------
Funds from Operations................................. $ 66,366 89,352 $ 50,707 80,344
Effect of Dilutive Securities
Convertible Preferred Units......................... 6,611 10,364 -- --
Convertible Preferred Stock......................... 1,682 2,625 -- --
Stock options....................................... -- 806 -- 590
------------ ------------- ------------ ------
Diluted Funds from Operations......................... $ 74,659 103,147 $ 50,707 80,934
------------ ------------- ------------ ------
------------ ------------- ------------ ------
Company's share of Diluted Funds
from Operations (76.91% and 76.96%, respectively)... $ 57,419 79,329 $ 38,938 62,284
------------ ------------- ------------ ------
------------ ------------- ------------ ------
</TABLE>
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, regarding the Company's
business, strategies, revenues, expenditures and operating and capital
requirements. The words "believe," "expect," "anticipate," "intend," "estimate,"
"assume," and other similar expressions which are predictions of or indicate
future events and trends and which do not relate solely to historical matters
identify forward-looking statements. Caution should be exercised in interpreting
such forward-looking statements, and undue reliance should not be placed on such
statements, because they involve known and unknown risks, uncertainties and
other factors, which are in some cases beyond the control of the Company and may
cause the actual results, performance or achievements of the Company to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Such forward-looking
statements are necessarily dependent on assumptions, data or methods that may be
incorrect or imprecise and they may be incapable of being realized. The
following factors, among others, could cause actual results and future events to
differ materially from those set forth or contemplated in the
20
<PAGE>
forward-looking statements made in this report: default under or non-renewal of
leases by tenants, increased interest rates and operating costs, failure to
obtain necessary outside financing, difficulties in identifying properties to
acquire and completing acquisitions, failure to successfully integrate acquired
properties into the Company's operations, 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), failure to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,
environmental uncertainties, risks related to natural disasters, financial
market fluctuations, changes in real estate and zoning laws and increases in
real property tax rates. The Company's success also generally depends upon
national and regional economic trends. The Company assumes no obligation to
update forward-looking statements.
INFLATION
Substantially all of the office leases provide for separate real estate tax
and operating expense escalations over a base amount. In addition, many of the
leases provide for fixed base rent increases or indexed increases. The Company
believes that inflationary increases may be at least partially offset by the
contractual rent increases described above.
YEAR 2000 COMPLIANCE
The Year 2000 issue relates to how computer systems and programs will
recognize and process dates after the year 1999. Most computer systems and
programs, which use two digits to specify a year, if not modified prior to the
year 2000, will be unable to distinguish between the year 1900 and the year
2000. This could result in system failures or miscalculations which could result
in disruptions of normal business operations. The Year 2000 issue can also
affect embedded technology systems and programs of a building such as elevator,
security, energy, fire and safety systems. The Year 2000 issue affects virtually
all companies and organizations.
In March 1998, the Company formed a Year 2000 project team that consists of
Company personnel. The team includes a coordinator for Property Management in
each of its regions and a representative from Legal, Risk Management and
Information Systems. The project team conducts monthly meetings to coordinate a
common work plan, to share information and to review the progress of activities
in each region.
The Year 2000 Project encompasses a review of compliance risks for the
Company's computer information and building systems and is divided into three
phases.
Phase I targeted the discovery of issues, an inventory of all building and
internal systems, and an initial assessment of risks. Correspondence has been
sent to vendors, including equipment manufacturers, service providers,
maintenance and utility companies, requesting letters regarding Year 2000
compliance for specific systems. To date responses have been received from over
98% of the vendors with the remaining responses due mostly from vendors doing
business with the Company's most recently acquired properties.
In Phase I, correspondence has been sent to tenants highlighting the Year
2000 issue and providing a general statement of the Company's progress. The
Company has decided not to survey its tenant base other than its largest tenant
(the General Services Administration), as no single tenant represents more than
5% of the Company's annual revenues. Due to the Company's large tenant base, the
success of the Company is not closely tied to one particular tenant. As a
result, the Company does not believe there should be a material adverse effect
on the Company's financial condition and results of operations if a limited
number of the Company's tenants were unable to pay rent on a timely basis due to
Year 2000 related problems.
21
<PAGE>
Phase II began in September 1998 and was largely completed in June 1999. It
consisted of the following:
- Continued assessment of risks, including follow up with vendor responses
deemed inadequate (if any)
- Remediation of identified compliance problems by June 30, 1999
- Testing of building systems
The Year 2000 project team adopted a test protocol and procedure. Property
managers, working with service vendors, conducted tests of building systems. As
of June 30, 1999, successful tests have been carried out and documented for
critical building systems at every property in the portfolio.
As a result of the above activities, the Company found building-card access,
energy management and garage access systems to commonly require remediation. The
Company has four exceptions to its objective to complete all remediation work
for building systems by June 30, 1999. The replacement of energy management and
card access systems at Embarcadero Center in San Francisco is scheduled to be
completed in October 1999 while the replacement of energy management systems at
the Candler building in Baltimore, Maryland and Riverfront Plaza in Richmond,
Virginia is scheduled to be completed in July 1999 and October 1999,
respectively.
Recent upgrades to desktop computers and internal networks throughout the
organization combined with the replacement of the electronic mail and the
accounting systems during 1998 has addressed Year 2000 compliance issues with
core operating systems. The Company will conduct an organized test of several
internal systems and components in September 1999 to validate vendor
certifications. The Information Systems Department of the Company continues the
upgrade of work order processing software at several properties and is scheduled
to complete all work by the end of the September 1999. In addition, the
Information Systems Department continues to take action on any Year 2000 notices
or updates provided by its hardware and software vendors.
Phase III began in July 1999 and will prepare a contingency plan for each
property in the portfolio. A standard planning document is being used across the
portfolio. The Company is assessing the security and support requirements of
tenants for the night and weekend of December 31, 1999 and the required on-site
staffing presence of Company personnel. Most systems supporting the operation of
a building can revert to manual operation if necessary.
The Company has instituted a no-vacation policy for all personnel deemed
critical to the operation of each building including management and engineering
staff. The Company plans to have a staff presence at every property in its
portfolio on the night and weekend of December 31st.
The Company is also hosting Year 2000 information sessions for its tenants
in several locations that include presentations by representatives of the
Company and outside utilities such as Con Edison in New York, Boston Edison and
Bell Atlantic.
All work to date has been performed by current employees of the Company. No
third parties have been used during this process nor has the Company hired an
employee specifically for Year 2000 issues, and as a result, the costs incurred
to date relate only to internal payroll costs, which at this time are not
material.
The total costs associated with the Year 2000 issue are not expected to be
material to the Company's financial position. The estimated cost of remediation
efforts is approximately $1.2 million which excludes costs for all internal
personnel working on the project. To date, the Company has incurred
approximately $0.9 million of these costs. In most cases, the upgrade of
non-compliant systems will represent an acceleration of a planned replacement
date.
22
<PAGE>
The discussion above regarding the Company's Year 2000 Project contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's assessment of the impact of the Year 2000 issue may
prove to be inaccurate due to a number of factors which cannot be determined
with certainty, including the receipt of inaccurate compliance certification
from third party vendors, inaccurate testing or assessments by Company personnel
of Company equipment or systems, and inaccurate projections by the Company of
the cost of remediation and/or replacement of affected equipment and systems. A
failure by the Company to adequately remediate or replace affected equipment or
systems due to the factors cited above or for other reasons, a material increase
in the actual cost of such remediation or replacement, or a failure by a third
party vendor to remediate Year 2000 problems in systems that are vital to the
operation of the Company's properties or financial systems, could cause a
material disruption to the Company's business and adversely affect its results
of operations and financial condition.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The primary market risk facing the Company is mortgage debt,
which bears interest at fixed rates, and therefore, the fair value of these
instruments is affected by changes in the market interest rates. The following
table presents principal cash flows (in thousands) based upon maturity dates of
the debt obligations and the related weighted average interest rates by expected
maturity dates for the fixed rate debt. The interest rate of the variable rate
debt as of June 30, 1999 was LIBOR plus 1.00%.
<TABLE>
<CAPTION>
MORTGAGE DEBT, INCLUDING CURRENT PORTION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- ---------- --------- ---------- ------------ ------------
Fixed Rate......... $ 33,186 121,460 154,384 385,234 217,056 1,881,187 $ 2,792,507 $ 2,792,507
Average Interest
Rate............. 7.1% 7.1% 7.9% 7.4% 7.5% 6.8%
Variable Rate...... -- -- -- $ 7,000 -- -- $ 7,000 $ 7,000
</TABLE>
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES
On April 30, 1999, the Company acquired 510 Carnegie Center for
consideration that included the issuance of 57,778 Series One Preferred Units.
Such Preferred Units were issued to accredited investors in a transaction that
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) of such Act.
On May 24, 1999, the Company acquired the remaining 50% interest in the
development rights of 111 Huntington Avenue at the Prudential Center for
consideration that included 343,077 shares of Common Stock. Such Common Stock
was issued to accredited investors in a transaction that was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of such
Act.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 5, 1999. The
stockholders voted to elect Alan J. Patricof and Martin Turchin as a Class II
Directors of the Company to serve until 2002. 51,609,204 and 51,612,373 votes
were cast for the elections of Mr. Patricof and Mr. Turchin, respectively and
199,543 and 196,374 votes were cast against. Mortimer B. Zuckerman will continue
to serve as Class I Director until his present term expires in 2001 and his
successor is duly elected. Edward H. Linde and Ivan G. Seidenberg will continue
as Class III Directors until their present terms expire in 2000 and their
successors are duly elected.
The Stockholders also voted to ratify the Board of Directors' selection of
PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal
year ending December 31, 1999. 51,764,213 votes were cast for, 28,168 votes were
cast against, and 16,366 votes abstained from this proposal.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A Form 8-K dated April 27, 1999 was filed with the Securities and
Exchange Commission to report under Item 5 of such report the information
presented to investors and analysts and the Company's press release for the
quarter ended March 31, 1999.
A Form 8-K dated May 25, 1999 was filed with the Securities and Exchange
Commission to report under Item 5 of such report that the Company had
completed an offering of 4,000,000 shares of Common Stock on May 25, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
BOSTON PROPERTIES, INC.
/s/ DAVID G. GAW
------------------------------------------
David G. Gaw,
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
August 5, 1999 PRINCIPAL FINANCIAL OFFICER)
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,225
<SECURITIES> 0
<RECEIVABLES> 53,059
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 303,066
<PP&E> 4,715,764
<DEPRECIATION> 57,237
<TOTAL-ASSETS> 5,018,830
<CURRENT-LIABILITIES> 1,188,442
<BONDS> 0
0
100,000
<COMMON> 678
<OTHER-SE> 1,056,444
<TOTAL-LIABILITY-AND-EQUITY> 5,018,830
<SALES> 187,409
<TOTAL-REVENUES> 191,640
<CGS> 0
<TOTAL-COSTS> 146,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,219
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,223
<EPS-BASIC> .44
<EPS-DILUTED> .41
</TABLE>
