Fitch Ratings has affirmed the ratings on Boston Properties Inc. (NYSE:
BXP) and Boston Properties L.P. (together BXP or the company) as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Exchangeable senior unsecured notes at 'BBB';
--Preferred Stock (indicative) at 'BB+'.
The Rating Outlook is Stable.
The rating affirmation is supported by a strong management track record,
a high quality portfolio of assets, manageable lease expirations, a good
liquidity position, sizable pool of unencumbered assets, reasonable
leverage, and good access to a range of capital sources. The ratings are
balanced by challenging market fundamentals, a projected decline in
fixed charge coverage in 2010, and sizable exposure to tenants in the
legal community. The company also maintains a fairly concentrated
operational footprint with some asset concentration, which provides some
additional inherent risk.
The company's CBD properties compete for the highest profile tenants in
the regions in which they operate and many of these properties serve as
flagship locations for the largest tenants. The occupancy rates on high
quality properties tend to remain above prevailing market occupancies
throughout cycles, as some tenants look to take advantage of relatively
weak market conditions to improve the quality of their office space.
BXP's in-service portfolio was 92.9% leased at March 31, 2010.
Additionally, the company's revenue is supported by long-term leases in
place. Over the next several years, between 5% and 8% of rents are
scheduled to expire annually, ensuring that the company is not overly
exposed to leasing risk at any given time, absent tenant bankruptcies.
The company maintains a good liquidity position. Pro forma for the
company's $700 million senior unsecured notes offering in April 2010 and
assuming the refinancing of 80% of pro rata JV secured debt, for the
period April 1, 2010 through Dec. 31, 2011, the company's sources of
liquidity (unrestricted cash, availability under the company's credit
facilities and expected retained cash flows from operating activities
after dividends) divided by uses of liquidity (debt maturities,
recurring capital expenditures and development costs) result in a
liquidity coverage ratio of 1.4 times (x), assuming BXP's unsecured
revolving credit facility with a final maturity date in August 2011 is
reduced by one-third.
The company maintains a sizable unencumbered asset pool that includes
properties from across the portfolio to support its unsecured
borrowings. As of March 31, 2010, there were 100 assets in the company's
unencumbered pool. Capitalizing 2010 annualized cash NOI generated by
the unencumbered pool at a stressed capitalization rate of 8% yielded
unencumbered asset coverage of approximately 1.7x at March 31, 2010. On
a net unsecured debt basis, which subtracts the company's excess cash
from its unsecured debt, the ratio improves to 2.3x.
The company's leverage is in a range that is reasonable for the ratings.
Using trailing 12 months recurring operating EBITDA on a GAAP basis,
Fitch calculated the company's net debt to recurring operating EBITDA to
be 5.9x. However, Fitch projects that this ratio will increase to
between 6.0x and 7.0x in 2011 as recurring operating EBITDA declines
over the next 18 months. Fitch anticipates that this ratio will decline
to closer to 6.0x in 2012 as newly developed space is placed in service.
The company has continued to demonstrate its ability to raise capital in
size. Since June 2008, BXP has raised approximately $5.5 billion of debt
and equity capital for its own account and on behalf of its joint
ventures, demonstrating strong interest from both lenders and equity
investors. While the company has elevated unsecured debt maturities in
2013 when 22.1% of its pro rata share of debt matures, the maturity
schedule is manageable.
While showing some improvement in late 2009 and the first half of 2010,
office market fundamentals generally remain fairly challenging and these
conditions have pressured the terms of both new and renewal leases. This
is illustrated in the level of free rent as well as tenant improvement
and leasing commission costs that the company is providing to tenants.
Fitch projects that BXP's 2010 capital expenditures, which are
disproportionately driven by leasing-related costs and are affected by
the length of the lease term, to roughly double as a percentage of
recurring operating EBITDA over 2009 levels.
The combination of high capital expenditures, a sizable level of leased
space remaining under free rent periods in 2010, and increased interest
expense from newly issued debt is expected to pressure Fitch-defined
fixed charge coverage (defined as recurring EBITDA less the sum of
capital expenditures and straight line rents divided by total interest
incurred) ratios in 2010. Fitch projects that this ratio will be
approximately 1.6x in 2010, before rising to 1.9x in 2011 and 2.2x in
2012 as free rent, capital expenditures, and cash interest expense
decline, while newly developed space is added to the portfolio.
Continued pressure on this metric beyond 2010 could signal potential
negative rating momentum.
The company also has a fairly high proportion of legal tenants in its
portfolio. As of March 31, 2010, tenants in this segment represented
approximately 27% of total portfolio square footage. While many of the
company's largest tenants are high profile firms, employment within
these firms has generally declined over the past two years, increasing
the risk that they could seek to reduce their space footprints when
leases expire.
Notably, the company is also exposed to asset concentration risk. The
company generates over 40% of its pro rata cash NOI from eight assets in
New York, including four wholly owned assets and four assets that are
held in joint ventures in which the company holds a 60% interest. These
large assets expose the company to performance issues at individual
assets.
The following factors may have a positive impact on the ratings and/or
Outlook:
--Fitch-defined fixed charge coverage sustaining above 2.5x (coverage
was 2.1x and 1.2x for the trailing 12 months and quarter ended March 31,
2010, respectively);
--Net debt to recurring operating EBITDA sustaining below 5.3x (leverage
was 5.9x as of ended March 31, 2010);
--A meaningful increase in the size and asset diversity of the portfolio.
The following factors may have a negative impact on the ratings and/or
Outlook:
--Fitch-defined fixed charge coverage sustaining below 1.7x;
--Net debt to recurring operating EBITDA sustaining above 7.0x;
--A liquidity shortfall.
These rating actions reflect the application of Fitch's current criteria
which are available at 'www.fitchratings.com'
and specifically include the following reports:
--'Criteria for Rating U.S. Equity REITs and REOCs' (April 16, 2010)
--'Equity Credit for Hybrids & Other Capital Securities- Amended' (Dec.
29, 2009);
--'Rating Hybrid Securities' (Dec. 29, 2009);
--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Evaluating Corporate Governance' (Dec. 12, 2007);
--'Parent and Subsidiary Rating Linkage' (June 19, 2007).
Boston Properties is a $12.3 billion (total book assets) equity REIT
headquartered in Boston, MA that acquires, develops, and manages high
quality office space in five markets. As of March 31, 2010, the company
owned or had interests in a portfolio of 143 properties, including 115
office properties, 19 office/technical properties, one hotel, three
retail properties, and five properties under development totaling 50.4
million rentable square feet. The company also owns 367 acres and
maintains options on 143 acres of undeveloped land for future
development.
Additional information is available at 'www.fitchratings.com'.
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SOURCE: Fitch Ratings
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Fitch Ratings, New York
Janice Svec, 212-908-0304
Linda Hammel, 212-908-0303
or
Media Relations:
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Email: brian.bertsch@fitchratings.com
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