Fitch Rates Boston Properties, L.P.'s $500MM Sr. Unsecured Notes Due 2023
'BBB'; Outlook Stable
NEW YORK -- April 3, 2013
Fitch Ratings has assigned a credit rating of 'BBB' to the $500 million 3.125%
senior unsecured notes due Sept. 1, 2023 issued by Boston Properties, L.P.,
the operating partnership of Boston Properties, Inc. (NYSE: BXP). The notes
were issued at 99.379% of par to yield 3.196%.
Net proceeds from the offering of $492.5 million will be used for general
corporate purposes including investment opportunities and debt reduction.
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';
--$5.2 billion senior unsecured notes 'BBB';
--$1.2 billion exchangeable senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
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. Fitch assumes that leverage will be unchanged following the offering
as Fitch expects proceeds to be used to repay outstanding unsecured debt.
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 $500
million notes issuance and recent $200 million preferred stock issuance. For
the period Jan. 1, 2013 to Dec. 31, 2014, the company's base case liquidity
coverage ratio is 1.2x. BXP's liquidity coverage would improve to 1.4x
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 1.7x 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 less 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.
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.
PREFERRED STOCK NOTCHING
The two-notch differential between BXP's IDR and its preferred stock rating 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 default.
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 Ratings 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
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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George Hoglund, CFA
Fitch Ratings, Inc.
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New York, NY 10004
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