Fitch Rates Boston Properties' Series B Preferred Stock 'BB+'; Outlook
NEW YORK -- March 19, 2013
Fitch Ratings has assigned a credit rating of 'BB+' to the $200 million 5.25%
series B cumulative redeemable preferred stock issued by Boston Properties,
Inc. (NYSE: BXP).
Net proceeds from the offering of $193.7 million, before the exercise of the
over-allotment option, will be used for general corporate purposes including
investment opportunities and debt reduction. The last time the company had
preferred stock outstanding was in 2002.
Fitch currently rates the company as follows:
Boston Properties, Inc.
--Issuer Default Rating (IDR) 'BBB';
--$200 million preferred stock 'BB+'.
Boston Properties, L.P.
--$750 million unsecured revolving credit facility 'BBB';
--$4.7 billion senior unsecured notes 'BBB';
--$1.2 billion exchangeable senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'BB+' rating of the preferred stock (a two-notch differential from the
Issuer Default Rating [IDR]) is consistent with Fitch's criteria for corporate
entities with an IDR of 'BBB'. Based on Fitch's research on 'Treatment and
Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' these
preferred securities are deeply subordinated and have loss absorption elements
that would likely result in poor recoveries in the event of a corporate
The ratings are supported by a high-quality portfolio of predominantly central
business district (CBD), class A office properties, appropriate leverage and
coverage for the 'BBB' rating level, solid leasing profile, manageable lease
expirations, strong liquidity, manageable debt maturities, a large
unencumbered asset pool which provides solid coverage of unsecured debt, and
demonstrated access to a range of capital sources. The ratings are balanced by
a fairly concentrated operational footprint, sizable exposure to tenants in
the financial and legal community, and a propensity to maintain a large
The company's CBD properties compete for the highest profile tenants in their
regions, and many of these properties serve as flagship locations for the
largest tenants. BXP's net operating income (NOI) is skewed toward properties
that have been acquired, developed, or redeveloped by the company in recent
years. Many are leading properties in their submarkets, and would likely
attract significant investor and lender interest, providing contingent
liquidity to the company.
On March 11, 2013, BXP announced that Owen Thomas will succeed Mortimer
Zuckerman as CEO and join the Board of Directors, effective April 2, 2013. Mr.
Zuckerman will remain Executive Chairman of the Board. Mr. Thomas has an
extensive background in senior executive and real estate roles, currently
serving as Chairman of the Board of Lehman Brothers Holding, Inc. (the
successor company to Lehman Brothers), and previously in various roles at
Morgan Stanley including serving as Head of Morgan Stanley Real Estate and as
CEO of Morgan Stanley Asia Ltd. Fitch did not anticipate that the company
would fill the CEO role from outside the firm; however, it makes sense to
deepen an already strong bench given management changes over the past few
years. Additionally, Fitch views the separation of the CEO and Chairman roles
favorably from a corporate governance perspective.
APPROPRIATE LEVERAGE AND COVERAGE
BXP's net debt to recurring operating EBITDA for the trailing 12 months (TTM)
was 6.8x as of Dec. 31, 2012. Leverage was 6.3x in 2011, 7.7x in 2010 and 5.8x
in 2009. Fixed-charge coverage was 2.1x for the TTM ended Dec. 31, 2012,
compared to 2.1x in 2011, 1.8x in 2010 and 2.2x in 2009. The company's
leverage and fixed-charge coverage are appropriate for a 'BBB' rated office
REIT with BXP's large size and high asset quality.
The company's revenue is supported by long-term leases. The company's
in-service portfolio was 91.4% leased at Dec. 31, 2012 and fewer than 10% of
rents are scheduled to come due on an annual basis through 2016, which is
strong relative to the broader office REIT sector. This lease expiration
profile ensures that the company is not overly exposed to leasing risk at any
given time, absent tenant bankruptcies.
The company maintains an adequate liquidity position pro forma the $200
million preferred issuance. For the period Jan. 1, 2013 to Dec. 31, 2014, the
company's base case liquidity coverage ratio is 1.0x. BXP's liquidity coverage
would improve to 1.2x assuming the company refinances maturing mortgages at
80% of current balances. Additionally, the largest funding requirement is
development expenditure, which it can suspend in a more challenging economic
environment. BXP's liquidity coverage ratio would improve to 1.4x absent said
expenditures. Fitch defines liquidity coverage as sources of liquidity
(unrestricted cash, availability under the company's unsecured credit facility
and expected retained cash flows from operating activities after dividends)
divided by uses of liquidity (pro rata debt maturities, expected recurring
capital expenditures and development costs).
BXP maintains a large unencumbered asset pool to support its unsecured
borrowings. As of Dec. 31, 2012, there were 123 assets in the pool which
generated approximately 64% of company NOI. Capitalizing annualized fourth
quarter 2012 (4Q'12) cash NOI generated by the unencumbered pool at a stressed
capitalization rate of 7% yields unencumbered asset coverage of approximately
2.1x, which is adequate for the 'BBB' IDR.
LADDERED DEBT MATURITIES
The company also has manageable debt maturities, with fewer than 9% of total
debt maturing in any given year through 2016. However, there are significant
mortgage maturities in 2017, totaling $2.5 billion or approximately 25% of
total pro rata debt. While significant in magnitude, Fitch views these as
manageable given the quality of the properties securing these mortgages
(primarily 599 Lexington and the GM Building in Manhattan, and the John
Hancock Tower in Boston). Further, Fitch anticipates that the company will
refinance a substantial portion of the total prior to 2017.
SIGNIFICANT EXPOSURE TO FINANCIAL AND LEGAL TENANTS
The company has elevated exposure to financial and legal tenants in its
portfolio. As of Dec. 31, 2012, tenants in these segments represented
approximately 28% and 26% respectively of gross rent, for a combined total of
54%. The financial sector is facing several challenges, most notably lower
trading volumes and increased regulatory burden which has driven reduced space
needs and delayed leasing decisions. Meanwhile, many of BXP's legal tenants
are working towards optimizing their space needs and could seek to reduce
their office footprints when leases expire.
Finally, the company has a propensity to grow the development pipeline to
become a large portion of the balance sheet. The total pipeline grew to 20.3%
of total assets in 2Q'08, with remaining equity needed to complete the
pipeline representing 11% of total assets. The current pipeline represents
9.6% of total assets, with 3.3% of remaining funding. Fitch would view
cautiously a pipeline that grows close to 20% of total assets or approaching
10% of remaining funding, absent significant pre-leasing.
The Stable Outlook reflects Fitch's expectations that fixed-charge coverage
and leverage will remain at similar levels over the next 12-24 months.
The following factors could result in positive momentum in the ratings and/or
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x for
several consecutive quarters (coverage was 2.1x in 2012);
--Fitch's expectation of net debt to recurring operating EBITDA sustaining
below 5.5x (leverage was 6.8x as of Dec 31, 2012).
Conversely, the following factors may result in negative momentum in the
ratings and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining below 1.7x;
--Fitch's expectation of net debt to recurring operating EBITDA sustaining
--A liquidity shortfall.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Criteria for Rating U.S. Equity REITs and REOCs, Feb. 26, 2013
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis, Dec. 13, 2012
--Recovery Rating and Notching Criteria for REITs, Nov. 12, 2012
--Corporate Rating Methodology, Aug. 8, 2012
--Parent and Subsidiary Rating Linkage, Aug. 8, 2012
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
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Fitch Ratings, Inc.
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