<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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 of (IRS Employer Id. Number)
incorporation or organization)
02199
800 Boylston Street (Zip Code)
Boston, Massachusetts
(Address of principal executive
offices)
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.
Common Stock, Par Value $.01 67,904,698
(Class) (Outstanding on November 4, 1999)
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<PAGE>
BOSTON PROPERTIES, INC.
FORM 10-Q
for the quarter ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
a) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......... 1
b) Consolidated Statements of Operations for the nine months ended September 30, 1999
and 1998............................................................................ 2
c) Consolidated Statements of Operations for the three months ended September 30, 1999
and 1998............................................................................ 3
d) Consolidated Statements of Cash Flows for the nine months ended September 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................................................................. 14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............................ 21
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................................... 22
Signatures ...................................................................................... 23
</TABLE>
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
(in thousands, except
share amounts)
ASSETS
------
<S> <C> <C>
Real estate:............................................. $5,505,625 $4,917,193
Less: accumulated depreciation......................... (441,575) (357,384)
---------- ----------
Total real estate.................................... 5,064,050 4,559,809
Cash and cash equivalents................................ 50,415 12,166
Notes receivable......................................... -- 420,143
Escrows.................................................. 25,886 19,014
Tenant and other receivables, net........................ 21,420 40,830
Accrued rental income, net............................... 78,413 64,251
Deferred charges, net.................................... 49,590 46,029
Prepaid expenses and other assets........................ 29,194 26,058
Investments in joint ventures............................ 35,807 46,787
---------- ----------
Total assets......................................... $5,354,775 $5,235,087
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Mortgage notes payable................................. $2,943,763 $2,653,581
Notes payable.......................................... -- 420,143
Unsecured line of credit............................... 334,000 15,000
Accounts payable and accrued expenses.................. 49,070 42,897
Dividends payable...................................... 48,483 40,494
Accrued interest payable............................... 9,611 7,307
Other liabilities...................................... 34,919 27,950
---------- ----------
Total liabilities.................................... 3,419,846 3,207,372
---------- ----------
Commitments and contingencies............................ -- --
---------- ----------
Minority interests....................................... 780,910 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, 67,902,967 and 63,527,819 issued and
outstanding in 1999 and 1998, respectively............ 679 635
Additional paid-in capital............................. 1,068,050 955,711
Dividends in excess of earnings........................ (14,710) (7,865)
---------- ----------
Total stockholders' equity........................... 1,054,019 948,481
---------- ----------
Total liabilities and stockholders' equity......... $5,354,775 $5,235,087
========== ==========
</TABLE>
The accompanying notes are an integral part of those financial statements.
1
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
-------------- --------------
(unaudited and in thousands,
except for per share amounts)
<S> <C> <C>
Revenue
Rental:
Base rent.............................. $ 476,261 $ 286,610
Recoveries from tenants................ 53,878 33,027
Parking and other...................... 34,272 5,880
-------------- --------------
Total rental revenue................. 564,411 325,517
Development and management services...... 11,364 8,893
Interest and other....................... 5,710 9,410
-------------- --------------
Total revenue........................ 581,485 343,820
-------------- --------------
Expenses
Operating................................ 184,321 97,188
General and administrative............... 21,345 16,750
Interest................................. 151,446 81,926
Depreciation and amortization............ 88,315 51,212
-------------- --------------
Total expenses....................... 445,427 247,076
-------------- --------------
Income before minority interests and joint
venture income............................ 136,058 96,744
Minority interests in property
partnerships.............................. (4,473) (390)
Income from unconsolidated joint ventures.. 648 --
-------------- --------------
Income before minority interest in
Operating Partnership..................... 132,233 96,354
Minority interest in Operating
Partnership............................... (48,483) (25,025)
-------------- --------------
Income before extraordinary item........... 83,750 71,329
Extraordinary gain, net.................... -- 3,564
-------------- --------------
Net income before preferred dividend....... 83,750 74,893
Preferred dividend......................... (4,175) --
-------------- --------------
Net income available to common
shareholders.............................. $ 79,575 $ 74,893
============== ==============
Basic earnings per share:
Income before extraordinary gain......... $ 1.21 $ 1.19
Extraordinary gain, net.................. -- 0.06
-------------- --------------
Net income available to common
shareholders............................ $ 1.21 $ 1.25
============== ==============
Weighted average number of common shares
outstanding............................. 65,672 60,101
============== ==============
Diluted earnings per share:
Income before extraordinary gain......... $ 1.20 $ 1.17
Extraordinary gain, net.................. -- 0.06
-------------- --------------
Net income available to common
shareholders............................ $ 1.20 $ 1.23
============== ==============
Weighted average number of common and
common equivalent shares outstanding.... 66,280 60,744
============== ==============
</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
September 30, September 30,
1999 1998
-------------- --------------
(unaudited and in thousands,
except for per share amounts)
<S> <C> <C>
Revenue
Rental:
Base rent.............................. $ 166,582 $ 119,535
Recoveries from tenants................ 19,212 13,665
Parking and other...................... 11,261 3,174
-------------- --------------
Total rental revenue................. 197,055 136,374
Development and management services...... 3,706 2,734
Interest and other....................... 1,444 1,069
-------------- --------------
Total revenue........................ 202,205 140,177
-------------- --------------
Expenses
Operating................................ 66,665 43,255
General and administrative............... 7,383 6,129
Interest................................. 51,768 33,183
Depreciation and amortization............ 31,078 21,523
-------------- --------------
Total expenses....................... 156,894 104,090
-------------- --------------
Income before minority interests and joint
venture income............................ 45,311 36,087
Minority interests in property
partnership............................... (179) (161)
Income from unconsolidated joint ventures.. 206 --
-------------- --------------
Income before minority interest in
Operating Partnership..................... 45,338 35,926
Minority interest in Operating
Partnership............................... (16,266) (10,585)
-------------- --------------
Net income before preferred dividend....... 29,072 25,341
Preferred dividend......................... (1,654) --
-------------- --------------
Net income available to common
shareholders.............................. $ 27,418 $ 25,341
============== ==============
Basic earnings per share:
Net income available to common
shareholders............................ $ 0.40 $ 0.40
============== ==============
Weighted average number of common shares
outstanding............................. 67,901 63,468
============== ==============
Diluted earnings per share:
Net income available to common
shareholders............................ $ 0.40 $ 0.40
============== ==============
Weighted average number of common and
common equivalent shares outstanding.... 68,484 63,991
============== ==============
</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 nine months ended
---------------------------
September 30, September 30,
1999 1998
------------- -------------
(unaudited and in
thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividend.............. $ 83,750 $ 74,893
Adjustments to reconcile net income before
preferred dividend to
net cash provided by operating activities:
Depreciation and amortization..................... 88,315 51,212
Non-cash portion of interest expense.............. 1,676 349
Extraordinary gain on early debt extinguishment... -- (4,641)
Income from investments in unconsolidated joint
ventures......................................... (648) --
Minority interests................................ 45,595 24,598
Change in assets and liabilities:
Escrows........................................... (6,872) (8,702)
Tenant and other receivables, net................. 19,410 (2,839)
Accrued rental income............................. (14,162) (5,490)
Prepaid expenses and other assets................. (3,136) (12,502)
Accounts payable and accrued expenses............. 3,766 17,680
Accrued interest payable.......................... 2,304 (1,797)
Other liabilities................................. 6,969 14,715
-------- ----------
Total adjustments............................... 143,217 72,583
-------- ----------
Net cash provided by operating activities....... 226,967 147,476
-------- ----------
Cash flows from investing activities:
Acquisitions/additions to real estate............. (554,430) (1,168,281)
Tenant leasing costs.............................. (7,440) (12,018)
Investments in joint ventures..................... 11,628 (28,993)
-------- ----------
Net cash used in investing activities........... (550,242) (1,209,292)
-------- ----------
Cash flows from financing activities:
Net proceeds from sales of common and preferred
stock............................................ 241,003 819,326
Payment of offering costs......................... (254) --
Borrowings on unsecured line of credit............ 589,000 195,000
Repayment of unsecured line of credit............. (270,000) (233,000)
Repayments of mortgage notes...................... (24,697) (150,488)
Proceeds from mortgage notes...................... 287,039 517,800
Repayment of notes payable........................ (328,143) --
Dividends and distributions....................... (130,451) (88,579)
Proceeds from exercise of stock options........... 815 --
Deferred financing and other costs................ (2,788) (259)
-------- ----------
Net cash provided by financing activities....... 361,524 1,059,800
-------- ----------
Net increase in cash............................... 38,249 (2,016)
Cash and cash equivalents, beginning of period..... 12,166 17,560
-------- ----------
Cash and cash equivalents, end of period........... $ 50,415 $ 15,544
======== ==========
Supplemental disclosures:
Cash paid for interest............................ $158,652 $ 87,186
======== ==========
Interest capitalized.............................. $ 11,186 $ 3,812
======== ==========
Non-cash activities:
Investing and Financing activities:
Additions to real estate included in accounts
payable.......................................... $ 2,407 $ --
======== ==========
Mortgage notes payable assumed in connection with
acquisitions..................................... $ 28,331 $ 246,626
======== ==========
Issuance of minority interest in connection with
acquisitions..................................... $ 2,888 $ 305,797
======== ==========
Dividends and distributions declared but not
paid............................................. $ 48,483 $ --
======== ==========
Notes receivable assigned in connection with an
acquisition...................................... $420,143 $ --
======== ==========
Notes payable assigned in connection with an
acquisition...................................... $(92,000) $ --
======== ==========
Common stock issued in connection with an
acquisition...................................... $ -- $ 5,000
======== ==========
</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 September 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(R) 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 that 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 that
qualifies as rental income under the REIT requirements.
As of September 30, 1999, the Company and the Operating Partnership had
67,902,967 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
and the Operating Partnership had 8,713,131 Preferred Units outstanding.
The Properties:
The Company owns a portfolio of 132 commercial real estate properties (121
and 114 properties at December 31, 1998 and September 30, 1998, respectively)
(the "Properties") aggregating over 35.3 million square feet. The properties
consist of 119 office properties with approximately 27.2 million net rentable
square feet (including 10 properties under development expected to contain
approximately 3.5 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 45 parcels of land totaling 465.6 acres,
which will support approximately 10.0 million square feet of development.
5
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
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
September 30, 1999
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. This property is part of the Carnegie Center Portfolio. The
acquisition was funded with available cash.
On August 13, 1999, the Company acquired 302 Carnegie Center, a parcel of
land in Princeton, New Jersey for approximately $1.3 million. This parcel is
part of the Carnegie Center Portfolio. The acquisition was funded with
available cash.
On August 16, 1999, the Company acquired the leasehold interest and ground
rent credits in the 5 Times Square development site in New York City for
approximately $152.5 million. The acquisition was funded with a draw down from
the Company's Unsecured Line of Credit. The development site will support an
approximately 1.1 million square foot, 37 story Class A office tower, which is
currently 100% pre-leased.
On August 31, 1999, the Company acquired The Gateway, consisting of two
Class A office buildings containing approximately 487,453 square feet, and two
development parcels located in South San Francisco, California for
approximately $117.6 million. The acquisition was funded through a draw down
of approximately $113.1 million from the Company's Unsecured Line of Credit
and a $4.5 million promissory note.
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 owns and
operates a residential apartment building and 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.
6
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
The combined summarized balance sheets of the joint ventures are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate and development in progress........... $235,612 $172,417
Other assets...................................... 12,867 10,032
-------- --------
Total assets.................................. $248,479 $182,449
======== ========
LIABILITIES AND PARTNERS EQUITY
Mortgage and construction loans payable........... $153,875 $ 55,638
Other liabilities................................. 15,945 20,595
-------- --------
Total liabilities............................. 169,820 76,233
Partners' equity.................................. 78,659 106,216
-------- --------
Total liabilities and partners' equity........ $248,479 $182,449
======== ========
Company's Share of Equity......................... $ 35,807 $ 46,787
======== ========
</TABLE>
The summarized statements of operations consist of One and Two Reston
Overlook and the residential building at Market Square North, the joint
ventures placed in service during 1999:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Total revenue.................................... $3,564 $8,002
Total expenses................................... 2,490 5,152
------ ------
Net income....................................... $1,074 $2,850
====== ======
Company's Share of Net Income.................... $ 206 $ 648
====== ======
</TABLE>
5. Mortgage Notes Payable
On July 15, 1999, the Company obtained mortgage financing totaling $29.0
million collateralized by Eight Cambridge Center in Waltham, Massachusetts.
Such financing bears interest at a rate of 7.73% and matures in July 2010.
On July 26, 1999, the Company obtained mortgage financing totaling $26.0
million collateralized by University Place in Cambridge, Massachusetts. Such
financing bears interest at a rate of 6.94% and matures in August 2021.
On August 6, 1999, the Company obtained additional mortgage financing
totaling $9.0 million collateralized by 1301 New York Avenue in Washington,
DC. Such financing bears interest at a rate of 8.54% and matures in August
2009.
7
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
On August 23, 1999, the Company obtained construction financing totaling
$27.0 million collateralized by the Orbital Sciences Phase I development
project in Loudon, Virginia. Such financing bears interest at a rate of LIBOR
+ 1.65% and matures in August 2002. As of September 30, 1999, the Company had
drawn approximately $4.6 million of this construction loan.
On September 27, 1999, the Company obtained construction financing totaling
$203.0 million collateralized by the 111 Huntington Avenue development project
in Boston, Massachusetts. Such financing bears interest at a rate of LIBOR +
2.00% and matures in September 2002. As of September 30, 1999, the Company had
drawn approximately $7.4 million of this construction loan.
On September 30, 1999, the Company obtained mortgage financing totaling
$75.0 million collateralized by the Gateway in San Francisco, California. Such
financing bears interest at a rate of LIBOR + 1.60% and matures in September
2000 (7.2% at September 30, 1999).
6. 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 September 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 August 16, 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 $0.68562 per unit.
On September 16, 1999, Boston Properties, Inc., as general partner of the
Operating Partnership determined a distribution on the OP Units in the amount
of $0.45 per OP Unit payable on October 28, 1999 to OP Unit holders of record
on September 30, 1999.
7. Redeemable Preferred Stock and Stockholders' Equity
On August 16, 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 $0.68562 per share. In
addition, on September 16, 1999, the Board of Directors of the Company
declared a dividend of $0.68562 per share on the Preferred Stock payable on
November 15, 1999 to shareholders of record on September 30, 1999. These
shares of Preferred Stock are not classified as equity as in certain instances
they are redeemable for cash or convertible into shares of Common Stock at the
election of the holder after May 12, 2009.
On September 16, 1999, the Board of Directors of the Company declared a
third quarter dividend in the amount of $0.45 per share of Common Stock
payable on October 28, 1999 to shareholders of record on September 30, 1999.
8
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
8. Earnings Per Share
<TABLE>
<CAPTION>
For the quarter ended September 30, 1999
--------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) amount
--------------- ---------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Basic Earnings:
Income available to
common shareholders.. $ 27,418 67,901 $ 0.40
Effect of Dilutive
Securities:
Stock Options......... -- 583 --
--------------- -------------- -------------
Diluted Earnings:
Net income............ $ 27,418 68,484 $ 0.40
=============== ============== =============
<CAPTION>
For the nine months ended September 30, 1999
--------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) amount
--------------- ---------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Basic Earnings:
Income available to
common shareholders $ 79,575 65,672 $ 1.21
Effect of Dilutive
Securities:
Stock Options......... -- 608 (.01)
--------------- -------------- -------------
Diluted Earnings:
Net income............ $ 79,575 66,280 $ 1.20
=============== ============== =============
<CAPTION>
For the quarter ended September 30, 1998
--------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) amount
--------------- ---------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Basic Earnings:
Income available to
common shareholders.. $ 25,341 63,468 $ 0.40
Effect of Dilutive
Securities:
Convertible OP Units
related to 875 Third
Avenue............... -- 92 --
Stock Options......... -- 431 --
--------------- -------------- -------------
Diluted Earnings:
Net Income............ $ 25,341 63,991 $ 0.40
=============== ============== =============
<CAPTION>
For the nine months ended September 30, 1998
--------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) amount
--------------- ---------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Basic Earnings:
Income available to
common shareholders.. $ 74,893 60,101 $ 1.25
Effect of Dilutive
Securities:
Convertible OP Units
related to 875 Third
Avenue............... -- 92 --
Stock Options......... -- 551 (0.02)
--------------- -------------- -------------
Diluted Earnings:
Net Income............ $ 74,893 60,744 $ 1.23
=============== ============== =============
</TABLE>
9
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
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.
Information by Geographic Area and Property Type:
For the nine months ended September 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................ $116,722 $150,840 $102,515 $115,235 $29,652 $514,964
R&D.................... 4,655 13,967 -- 1,332 -- 19,954
Industrial............. 1,251 1,062 -- 905 525 3,743
Hotels................. 23,999 -- -- -- -- 23,999
Garage................. 1,751 -- -- -- -- 1,751
-------- -------- -------- -------- ------- --------
Total.................. 148,378 165,869 102,515 117,472 30,177 564,411
-------- -------- -------- -------- ------- --------
% of Grand Totals...... 26.29% 29.39% 18.16% 20.81% 5.35% 100.00%
-------- -------- -------- -------- ------- --------
Rental Expenses
Class A................ 46,520 41,500 35,341 42,398 8,895 174,654
R&D.................... 1,369 2,731 -- 331 -- 4,431
Industrial............. 388 300 -- 173 86 947
Hotels................. 3,682 -- -- -- -- 3,682
Garage................. 607 -- -- -- -- 607
-------- -------- -------- -------- ------- --------
Total.................. 52,566 44,531 35,341 42,902 8,981 184,321
-------- -------- -------- -------- ------- --------
% of Grand Totals...... 28.52% 24.16% 19.17% 23.28% 4.87% 100.00%
-------- -------- -------- -------- ------- --------
Net Operating Income.... $ 95,812 $121,338 $ 67,174 $ 74,570 $21,196 $380,090
======== ======== ======== ======== ======= ========
% of Grand Totals...... 25.21% 31.92% 17.67% 19.62% 5.58% 100.00%
======== ======== ======== ======== ======= ========
</TABLE>
10
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
For the nine months ended September 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................ $56,350 $122,095 $95,899 $ -- $8,734 $283,078
R&D.................... 4,491 12,405 -- 1,074 -- 17,970
Industrial............. 1,216 1,084 -- 976 595 3,871
Hotels................. 19,277 -- -- -- -- 19,277
Garage................. 1,321 -- -- -- -- 1,321
------- -------- ------- ------ ------ --------
Total.................. 82,655 135,584 95,899 2,050 9,329 325,517
------- -------- ------- ------ ------ --------
% of Grand Totals...... 25.39% 41.65% 29.46% 0.63% 2.87% 100.00%
------- -------- ------- ------ ------ --------
Rental Expenses
Class A................ 21,254 31,879 33,195 -- 2,816 89,144
R&D.................... 1,378 2,664 -- 337 -- 4,379
Industrial............. 428 231 -- 218 55 932
Hotels................. 2,356 -- -- -- -- 2,356
Garage................. 377 -- -- -- -- 377
------- -------- ------- ------ ------ --------
Total.................. 25,793 34,774 33,195 555 2,871 97,188
------- -------- ------- ------ ------ --------
% of Grand Totals...... 26.54% 35.78% 34.16% 0.57% 2.95% 100.00%
------- -------- ------- ------ ------ --------
Net Operating Income.... $56,862 $100,810 $62,704 $1,495 $6,458 $228,329
======= ======== ======= ====== ====== ========
% of Grand Totals...... 24.90% 44.16% 27.46% 0.65% 2.83% 100.00%
======= ======== ======= ====== ====== ========
</TABLE>
The following is a reconciliation of net operating income to income before
minority interests and joint venture income:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Net Operating Income.................................. $ 380,090 $228,329
Add:
Development and management services................. 11,364 8,893
Interest and other.................................. 5,710 9,410
Less:
General and administrative.......................... (21,345) (16,750)
Interest expense.................................... (151,446) (81,926)
Depreciation and amortization....................... (88,315) (51,212)
--------- --------
Income before minority interests and joint venture
income............................................... $ 136,058 $ 96,744
========= ========
</TABLE>
11
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
Information by Geographic Area and Property Type:
For the three months ended September 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................ $41,445 $51,082 $34,381 $40,398 $10,644 $177,950
R&D.................... 1,489 4,869 -- 497 -- 6,855
Industrial............. 432 361 -- 287 171 1,251
Hotels................. 10,299 -- -- -- -- 10,299
Garage................. 700 -- -- -- -- 700
------- ------- ------- ------- ------- --------
Total.................. 54,365 56,312 34,381 41,182 10,815 197,055
------- ------- ------- ------- ------- --------
% of Grand Totals...... 27.59% 28.57% 17.45% 20.90% 5.49% 100.00%
------- ------- ------- ------- ------- --------
Rental Expenses
Class A................ 16,551 15,375 12,321 15,687 3,468 63,402
R&D.................... 420 942 -- 129 -- 1,491
Industrial............. 122 85 -- 51 23 281
Hotels................. 1,287 -- -- -- -- 1,287
Garage................. 204 -- -- -- -- 204
------- ------- ------- ------- ------- --------
Total.................. 18,584 16,402 12,321 15,867 3,491 66,665
------- ------- ------- ------- ------- --------
% of Grand Totals...... 27.88% 24.60% 18.48% 23.80% 5.24% 100.00%
------- ------- ------- ------- ------- --------
Net Operating Income.... $35,781 $39,910 $22,060 $25,315 $ 7,324 $130,390
======= ======= ======= ======= ======= ========
% of Grand Totals...... 27.44% 30.61% 16.92% 19.41% 5.62% 100.00%
======= ======= ======= ======= ======= ========
</TABLE>
Information by Geographic Area and Property Type:
For the three months ended September 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................ $32,664 $46,995 $32,315 $ -- $8,636 $120,610
R&D.................... 1,503 4,461 -- 373 -- 6,337
Industrial............. 410 366 -- 327 202 1,305
Hotels................. 7,692 -- -- -- -- 7,692
Garage................. 430 -- -- -- -- 430
------- ------- ------- ----- ------ --------
Total.................. 42,699 51,822 32,315 700 8,838 136,374
------- ------- ------- ----- ------ --------
% of Grand Totals...... 31.31% 38.00% 23.70% 0.51% 6.48% 100.00%
------- ------- ------- ----- ------ --------
Rental Expenses
Class A................ 13,373 13,073 11,239 -- 2,785 40,470
R&D.................... 458 970 -- 94 -- 1,522
Industrial............. 146 73 -- 60 32 311
Hotels................. 825 -- -- -- -- 825
Garage................. 127 -- -- -- -- 127
------- ------- ------- ----- ------ --------
Total.................. 14,929 14,116 11,239 154 2,817 43,255
------- ------- ------- ----- ------ --------
% of Grand Totals...... 34.52% 32.63% 25.98% 0.36% 6.51% 100.00%
------- ------- ------- ----- ------ --------
Net Operating Income.... $27,770 $37,706 $21,076 $ 546 $6,021 $ 93,119
======= ======= ======= ===== ====== ========
% of Grand Totals...... 29.82% 40.49% 22.63% 0.59% 6.47% 100.00%
======= ======= ======= ===== ====== ========
</TABLE>
12
<PAGE>
BOSTON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited and in thousands)
The following is a reconciliation of net operating income to income before
minority interests and joint venture income:
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net Operating Income.................................. $ 130,390 $ 93,119
Add:
Development and management services................. 3,706 2,734
Interest and other.................................. 1,444 1,069
Less:
General and administrative.......................... (7,383) (6,129)
Interest expense.................................... (51,768) (33,183)
Depreciation and amortization....................... (31,078) (21,523)
--------- --------
Income before minority interests and joint venture
income............................................... $ 45,311 $ 36,087
========= ========
</TABLE>
10. Unaudited Pro Forma Consolidated Financial Information
The accompanying unaudited pro forma information for the nine months ended
September 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>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(pro forma) (pro forma)
------------------ ------------------
(in thousands, except per share data)
<S> <C> <C>
Total revenue........................ $581,485 $477,511
Net income available to common
shareholders........................ 79,575 78,096
Net income per share available to
common--basic....................... $ 1.23 $ 1.23
Weighted average Common Shares
outstanding--basic.................. 64,539 63,370
Net income per share available to
common shareholders--diluted........ $ 1.22 $ 1.22
Weighted average Common Shares
outstanding--diluted................ 65,147 63,974
</TABLE>
11. Subsequent Events
On October 25, 1999, the Company obtained construction financing totaling
$48.6 million collateralized by the New Dominion Technology development
project in Herndon, Virginia. Such financing bears interest at a rate of LIBOR
+ 1.60% and matures in August 2000.
13
<PAGE>
BOSTON PROPERTIES, INC.
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 nine months ended September 30, 1999 to the nine months
ended September 30, 1998.
Rental revenue increased $238.9 million or 73.4% to $564.4 million from
$325.5 million for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. The increase is primarily due to rental
revenue earned totaling approximately $222.0 million on the operations of
properties acquired and placed in service since September 30, 1998.
Development and Management Services revenue increased $2.5 million or 27.8%
to $11.4 million from $8.9 million for the nine months ended September 30,
1999 compared to the nine months ended September 30, 1998. The increase is due
to new contracts earning fees during the first nine months of 1999.
Interest and other revenue decreased $3.7 million or 39.3% to $5.7 million
from $9.4 million for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. The decrease is the result of interest
earned during the nine months ended September 30, 1998 related to higher cash
balances resulting from the proceeds from a follow-on public offering of
common stock in January 1998.
Operating expenses increased $87.1 million or 89.7% to $184.3 million from
$97.2 million for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. This is primarily a result of
approximately $79.2 million of expenses related to the operations of
properties acquired and placed in service since September 30, 1998.
General and Administrative expenses increased $4.6 million or 27.4% to $21.3
million from $16.8 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998 as a result of payroll
and other related costs of the new employees hired to support the operations
of additional properties acquired and placed in service since September 30,
1998.
Interest expense increased $69.5 million or 84.9% to $151.4 million from
$81.9 million for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998 as a result of interest expense of
approximately $62.2 million on debt related to the properties acquired
subsequent to September 30, 1998.
Depreciation and Amortization expense increased $37.1 million or 72.5% to
$88.3 million from $51.2 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. This was primarily
attributed to approximately $33.2 million of depreciation expense related to
the operations of properties acquired subsequent to September 30, 1998.
As a result of the foregoing, net income before minority interest in the
Operating Partnership increased $35.9 million to $132.2 million from $96.4
million for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998.
14
<PAGE>
BOSTON PROPERTIES, INC.
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998.
Rental revenue increased $60.7 million or 44.5% to $197.1 million from
$136.4 million for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. The increase is primarily due to rental
revenue earned totaling approximately $51.8 million on the operations of
properties acquired and placed in service since September 30, 1998.
Development and Management Services revenue increased $1.0 million or 35.6%
to $3.7 million from $2.7 million for the three months ended September 30,
1999 compared to the three months ended September 30, 1998. The increase is
due to fees earned on new contracts entered into subsequent to September 30,
1998.
Interest and other revenue increased $0.4 million or 35.1% to $1.4 million
from $1.0 million for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998. The increase is primarily due to
interest income earned totaling approximately $0.4 million on properties
acquired and placed in service since September 30, 1998.
Operating expenses increased $23.4 million or 54.1% to $66.7 million from
$43.3 million for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. This is primarily a result of
approximately $19.3 million of expenses related to the operations of
properties acquired and placed in service since September 30, 1998 as well as
a full quarter of operating expenses recognized in 1999 on the properties
acquired during the quarter ended September 30, 1998.
General and Administrative expenses increased $1.3 million or 20.5% to $7.4
million from $6.1 million for the three months ended September 30, 1999
compared to the three months ended September 30, 1998 as a result of payroll
and other related costs of the new employees hired to support the operations
of additional properties acquired and placed in service since September 30,
1998.
Interest expense increased $18.6 million or 56.0% to $51.8 million from
$33.2 million for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998 as a result of interest expense of
approximately $14.9 million on debt related to the properties acquired
subsequent to September 30, 1998 and a full quarter of interest expense
recognized in 1999 on the debt associated with the properties acquired during
the quarter ended September 30, 1998.
Depreciation and Amortization expense increased $9.6 million or 44.4% to
$31.1 million from $21.5 million for the three months ended September 30, 1999
compared to the three months ended September 30, 1998. This was primarily
attributed to approximately $9.0 million of depreciation expense related to
the operations of properties acquired subsequent to September 30, 1998 as well
as a full quarter of depreciation and amortization expense recognized in 1999
on the properties acquired during the quarter ended September 30, 1998.
As a result of the foregoing, net income before minority interest in the
Operating Partnership increased $9.4 million to $45.3 million from $35.9
million for the three months ended September 30, 1999 compared to the three
months ended September 30, 1998.
Liquidity and Capital Resources
The Company's consolidated indebtedness at September 30, 1999 was
approximately $3.3 billion and bore interest at a weighted average interest
rate of 7.01% per annum. Based on the Company's total market capitalization at
September 30, 1999 of approximately $6.5 billion, the Company's consolidated
debt represents 50.5% of its total market capitalization.
15
<PAGE>
BOSTON PROPERTIES, INC.
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 November 4, 1999, the Company had $334.0 million outstanding
under the Unsecured Line of Credit.
The following represents the outstanding principal balances due under the
first mortgages at September 30, 1999:
<TABLE>
<CAPTION>
Properties Interest Rate Principal Amount Maturity Date
- ---------- ------------- ---------------- ------------------
(in thousands)
<S> <C> <C> <C>
Prudential Center 6.72% $ 296,512 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% 158,720 December 10, 2008
Embarcadero Center Two 6.70% 158,720 December 10, 2008
Embarcadero Center Four 6.79% 158,127 February 1, 2008
875 Third Ave 8.00% 153,175 (3) December 31, 2002
Embarcadero Center Three 6.40% 148,729 January 1, 2007
Two Independence Square 8.09% 118,811 (4) February 27, 2003
Riverfront Plaza 6.61% 118,429 January 21, 2008
Democracy Center 7.05% 109,424 April 9, 2009
Metropolitan Square 6.75% 105,701 (5) June 1, 2000
Embarcadero Center West
Tower 6.50% 99,168 January 1, 2006
100 East Pratt Street 6.73% 93,723 November 1, 2008
Reservoir Place 6.88% 75,959 (6) November 1, 2006
One Independence Square 8.12% 75,682 (4) August 21, 2001
The Gateway 7.20% 75,000 (7) September 30, 2000
2300 N Street 6.88% 66,000 August 3, 2003
Capital Gallery 8.24% 58,412 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 (8) October 1, 2001
1301 New York Avenue (9) 33,783 August 15, 2009
Eight Cambridge Center 7.73% 28,968 July 15, 2010
510 Carnegie Center 7.39% 28,239 January 1, 2008
Lockheed Martin Building 6.61% 26,900 June 1, 2008
University Place 6.94% 25,916 August 1, 2021
Reston Corporate Center 6.56% 25,394 May 1, 2008
191 Spring Street 8.50% 23,215 September 1, 2006
Bedford Business Park 8.50% 22,329 December 10, 2008
NIMA Building 6.51% 22,001 June 1, 2008
212 Carnegie Center 7.25% 20,763 December 31, 2000
Sumner Square 6.44% 20,000 April 22, 2004
202 Carnegie Center 7.25% 19,280 December 31, 2000
214 Carnegie Center 8.19% 13,474 (10) October 31, 2000
101 Carnegie Center 7.66% 8,714 April 1, 2006
Montvale Center 8.59% 7,707 December 1, 2006
111 Huntington Avenue (11) 7.40% 7,392 September 27, 2002
Newport Office Park 8.13% 6,271 July 1, 2001
Hilltop Business Center 6.81% 5,940 March 1, 2019
Orbital Sciences (12) 6.60% 4,647 August 19, 2002
201 Carnegie Center 7.08% 538 February 1, 2010
----------
Total $2,943,763
==========
</TABLE>
16
<PAGE>
BOSTON PROPERTIES, INC.
- --------
(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 September 30,
1999 was $150,000 and the interest rate was 8.75%.
(4) The principal amount and interest rate shown has been adjusted to reflect
the effective rates on the loans. The actual principal balances at
September 30, 1999 were $118,719 and $75,688, 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 September 30,
1999 was $104,040 and the 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 September 30,
1999 was $66,260 and the interest rate was 9.09%.
(7) Outstanding principal bears interest at a floating rate equal to LIBOR +
1.60%.
(8) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92
and 100 Hayden Avenue.
(9) Includes outstanding principal in the amounts of $20,000, $9,000 and
$4,783 which bear interest at fixed rates of 6.70%, 8.54% and 6.75%,
respectively.
(10) The principal amount and interest rate shown has been adjusted to reflect
the effective rate on the loan. The actual principal balance at September
30, 1999 was $13,450 and the interest rate was 9.13%.
(11) Total construction loan in the amount of $203.0 million at a variable
rate of LIBOR + 2.00%.
(12) Total construction loan in the amount of $27.0 million at a variable rate
of LIBOR + 1.65%.
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 September 30, 1999, the Company's
recurring capital expenditures totaled $2.7 million.
The Company expects to meet its long-term requirements for the funding of
property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including
the Unsecured Line of Credit) and the issuance of additional equity securities
of the Company.
The Company has development projects currently in process, which require
commitments to fund to completion. Commitments under these arrangements
totaled $714.5 million as of September 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 or
the Unsecured Line of Credit.
Funds from Operations
Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. The Company computes
Funds from Operations in accordance with standards established by the White
Paper on Funds from Operations approved by the Board of Governors of NAREIT in
1995, which may differ from the methodology for calculating Funds from
Operations utilized by other equity REITs, and accordingly, may not be
comparable to such other REITs. The White Paper defines Funds from Operations
as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
17
<PAGE>
BOSTON PROPERTIES, INC.
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 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 September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Income before minority interests............... $45,311 $36,087
Add:
Real estate depreciation and amortization.... 30,882 21,359
Income from unconsolidated joint ventures.... 206 --
Less:
Gain on sale of land......................... (68) --
Minority property partnership's share of
Funds from Operations....................... (211) (178)
preferred dividends and distributions........ (8,303) (1,505)
------- -------
Funds from Operations.......................... $67,817 $55,763
======= =======
Company's share................................ $50,207 $41,053
======= =======
</TABLE>
Reconciliation to Diluted Funds from Operations:
<TABLE>
<CAPTION>
For the three months For the three months
ended ended
September 30, 1999 September 30, 1998
------------------------- -------------------------
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Funds from Operations... $67,817 91,718 $55,763 86,208
Effect of Dilutive
Securities
Convertible Preferred
Units................ 6,649 10,377 -- --
Convertible Preferred
Stock................ 1,654 2,625 -- --
Stock options......... -- 583 -- 524
------- ------- ------- ------
Diluted Funds from
Operations............. $76,120 105,303 $55,763 86,732
======= ======= ======= ======
Company's share of
Diluted Funds
From Operations (77.38%
and
76.79%, respectively).. $58,902 81,485 $41,142 63,991
======= ======= ======= ======
</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 following factors, among others, could cause actual
results, performance or achievements of the Company
18
<PAGE>
BOSTON PROPERTIES, INC.
to differ materially from those set forth or contemplated in the forward-
looking statements made in this report: 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 the Company's
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); 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 the Company's 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; risks associated with
the Company's dependence on key personnel whose continued service is not
guaranteed; and risks associated with Year 2000 computer problems.
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 that 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 from 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 all
vendors that were sent a request.
In Phase I, correspondence was 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.
19
<PAGE>
BOSTON PROPERTIES, INC.
Phase II began in September 1998 and was largely completed by June 30, 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 with the
exception of buildings where the tenant has taken full responsibility for
specific building systems per the lease. Buildings where tenants have taken
responsibility for building systems are typically industrial or research and
development properties and include 17 Hartwell Street in Lexington,
Massachusetts, Fourteen Cambridge Center in Cambridge, Massachusetts, Virginia
95 Office Park in Springfield, Virginia, Hilltop Business Center in South San
Francisco, California, 2391 West Winton Avenue in Hayward, California and 560
Forbes Boulevard in South San Francisco, California.
As a result of Phase II assessment and testing, the Company found building-
card access, energy management and garage access systems to commonly require
remediation. All remediation work for building systems was completed by
October 31, 1999.
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 has conducted organized tests of several
internal systems and components 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 and audits by the end of November 1999. In addition, the Information
Systems Department continues to take action on any Year 2000 notices or
updates provided by the Company's 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 with the
exception of buildings where the tenant takes full responsibility for building
systems per the lease.
The Company has hosted 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, Bell
Atlantic, Pacific Gas & Electric and the San Francisco Police Department.
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 personnel
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 that excludes costs for all
internal personnel working on the project. To date, the Company has incurred
100% of these costs. In most cases, the upgrade of non-compliant systems will
represent an acceleration of a planned replacement date.
20
<PAGE>
BOSTON PROPERTIES, INC.
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 September 30, 1999 ranged from LIBOR plus 1.00% to
LIBOR plus 2.00%.
<TABLE>
<CAPTION>
Mortgage debt, including current portion
----------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------ -------- -------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate.............. $7,751 $228,583 $150,011 $393,521 $212,874 $1,836,984 $2,829,724 $2,829,72 4
Average Interest Rate... 7.0% 7.1% 7.9% 7.4% 7.5% 6.9%
Variable Rate........... -- $ 79,647 -- $ 14,392 -- $ 20,000 $ 114,039 $ 114,039
</TABLE>
21
<PAGE>
BOSTON PROPERTIES, INC.
PART II. OTHER INFORMATION
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 July 29, 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
June 30, 1999.
22
<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.
BOSTON PROPERTIES, INC.
November 5, 1999 /s/ David G. Gaw
_____________________________________
David G. Gaw,
Chief Financial Officer
(duly authorized officer and
principal financial officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 50,415
<SECURITIES> 0
<RECEIVABLES> 21,420
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,064,050
<DEPRECIATION> 31,078
<TOTAL-ASSETS> 5,354,775
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
100,000
<COMMON> 679
<OTHER-SE> 1,0
<TOTAL-LIABILITY-AND-EQUITY> 5,354,775
<SALES> 197,055
<TOTAL-REVENUES> 202,205
<CGS> 0
<TOTAL-COSTS> 66,665
<OTHER-EXPENSES> 38,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,768
<INCOME-PRETAX> 27,418
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,418
<EPS-BASIC> .40
<EPS-DILUTED> .40
</TABLE>
