10-K 1 d846762d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

OR

 

¨ 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 incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Prudential Center, 800 Boylston Street, Suite 1900

Boston, Massachusetts

  02199-8103
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (617) 236-3300

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

Common Stock, par value $.01 per share

Preferred Stock Purchase Rights

  New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x             Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

As of June 30, 2014, the aggregate market value of the 151,929,402 shares of common stock held by non-affiliates of the Registrant was $17,955,016,728 based upon the last reported sale price of $118.18 per share on the New York Stock Exchange on June 30, 2014. (For this computation, the Registrant has excluded the market value of all shares of Common Stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.)

 

As of February 23, 2015, there were 153,187,903 shares of Common Stock outstanding.

 

Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held May 19, 2015 is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III. The Registrant intends to file such Proxy Statement with the Securities and Exchange Commission not later than 120 days after the end of its fiscal year ended December 31, 2014.

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM NO.

  

DESCRIPTION

  

PAGE NO.

 

PART I

     1   

1.

  

BUSINESS

     1   

1A.

  

RISK FACTORS

     17   

1B.

  

UNRESOLVED STAFF COMMENTS

     36   

2.

  

PROPERTIES

     37   

3.

  

LEGAL PROCEEDINGS

     43   

4.

  

MINE SAFETY DISCLOSURES

     43   

PART II

     44   

5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     44   

6.

  

SELECTED FINANCIAL DATA

     46   

7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48   

7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     115   

8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     116   

9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     172   

9A.

  

CONTROLS AND PROCEDURES

     172   

9B.

  

OTHER INFORMATION

     172   

PART III

     173   

10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     173   

11.

  

EXECUTIVE COMPENSATION

     173   

12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     173   

13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     174   

14.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     174   

PART IV

     175   

15.

  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     175   


Table of Contents

PART I

 

Item 1. Business

 

General

 

As used herein, the terms “we,” “us,” “our” and the “Company” refer to Boston Properties, Inc., a Delaware corporation organized in 1997, individually or together with its subsidiaries, including Boston Properties Limited Partnership, a Delaware limited partnership, and our predecessors. We are a fully integrated, self-administered and self-managed real estate investment trust, or “REIT,” and one of the largest owners and developers of office properties in the United States.

 

Our properties are concentrated in four markets—Boston, New York, San Francisco and Washington, DC. For information concerning the operations of our segments see Note 14 to the Consolidated Financial Statements. We conduct substantially all of our business through our subsidiary, Boston Properties Limited Partnership. At December 31, 2014, we owned or had interests in 169 properties, totaling approximately 45.8 million net rentable square feet, including ten properties under construction totaling approximately 3.3 million net rentable square feet. In addition, we had structured parking for approximately 43,824 vehicles containing approximately 15.0 million square feet. Our properties consisted of:

 

   

160 office properties, including 129 Class A office properties (including nine properties under construction) and 31 Office/Technical properties;

 

   

one hotel;

 

   

five retail properties (including one property under construction); and

 

   

three residential properties.

 

We own or control undeveloped land totaling approximately 490.8 acres, which could support approximately 12.8 million square feet of additional development.

 

We consider Class A office properties to be centrally-located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings. We consider Office/Technical properties to be properties that support office, research and development, laboratory and other technical uses. Our definitions of Class A office and Office/Technical properties may be different than those used by other companies.

 

We are a full-service real estate company, with substantial in-house expertise and resources in acquisitions, development, financing, capital markets, construction management, property management, marketing, leasing, accounting, risk management, tax and legal services. As of December 31, 2014, we had approximately 750 employees. Our thirty-one senior officers have an average of thirty years experience in the real estate industry, including an average of eighteen years of experience with us. Our principal executive office and Boston regional office are located at The Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199 and our telephone number is (617) 236-3300. In addition, we have regional offices at 599 Lexington Avenue, New York, New York 10022; Four Embarcadero Center, San Francisco, California 94111 and 2200 Pennsylvania Avenue NW, Washington, DC 20037.

 

Our Web site is located at http://www.bostonproperties.com. On our Web site, you can obtain a free copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. You may also obtain our reports by accessing the EDGAR database at the SEC’s website at http://www.sec.gov, or we will furnish an electronic or paper copy of these

 

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reports free of charge upon written request to: Investor Relations, Boston Properties, Inc., The Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199. The name “Boston Properties” and our logo (consisting of a stylized “b”) are registered service marks of Boston Properties Limited Partnership.

 

Boston Properties Limited Partnership

 

Boston Properties Limited Partnership, or BPLP or our Operating Partnership, is a Delaware limited partnership, and the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. We are the sole general partner and, as of February 23, 2015, the owner of approximately 89.3% of the economic interests in BPLP. Economic interest was calculated as the number of common partnership units of BPLP owned by the Company as a percentage of the sum of (1) the actual aggregate number of outstanding common partnership units of BPLP, (2) the number of common units issuable upon conversion of all outstanding long term incentive plan units of BPLP, or LTIP Units, other than LTIP Units issued in the form of Multi-Year Long-Term Incentive Plan Awards (“MYLTIP Awards”), assuming all conditions have been met for the conversion of the LTIP Units and (3) the 2012 Outperformance Awards that were issued in the form of LTIP Units and earned as of February 6, 2015. Refer to Note 20 to the Consolidated Financial Statements. An LTIP Unit is generally the economic equivalent of a share of our restricted common stock, although LTIP Units issued in the form of MYLTIP Awards are only entitled to receive one-tenth (1/10th) of the regular quarterly distributions (and no special distributions) prior to being earned. Our general and limited partnership interests in BPLP entitle us to share in cash distributions from, and in the profits and losses of, BPLP in proportion to our percentage interest and entitle us to vote on all matters requiring a vote of the limited partners. The other limited partners of BPLP are persons who contributed their direct or indirect interests in properties to BPLP in exchange for common units or preferred units of limited partnership interest in BPLP or recipients of LTIP Units pursuant to our Stock Option and Incentive Plan. Under the limited partnership agreement of BPLP, unitholders may present their common units of BPLP for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time, generally one year from issuance). Upon presentation of a unit for redemption, BPLP must redeem the unit for cash equal to the then value of a share of our common stock. In lieu of cash redemption by BPLP, however, we may elect to acquire any common units so tendered by issuing shares of our common stock in exchange for the common units. If we so elect, our common stock will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. We generally expect that we will elect to issue our common stock in connection with each such presentation for redemption rather than having BPLP pay cash. With each such exchange or redemption, our percentage ownership in BPLP will increase. In addition, whenever we issue shares of our common stock other than to acquire common units of BPLP, we must contribute any net proceeds we receive to BPLP and BPLP must issue to us an equivalent number of common units of BPLP. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

 

Preferred units of BPLP have the rights, preferences and other privileges as are set forth in an amendment to the limited partnership agreement of BPLP. As of December 31, 2014 and February 23, 2015, BPLP had two series of Preferred Units outstanding consisting of 12,667 Series Four Preferred Units and 80,000 Series B Preferred Units.

 

The Series Four Preferred Units have a liquidation preference of $50.00 per unit (or an aggregate of approximately $0.6 million at December 31, 2014 and February 23, 2015). The Series Four Preferred Units, which bear a preferred distribution equal to 2.00% per annum on a liquidation preference of $50.00 per unit, are not convertible into or exchangeable for any common equity of BPLP or us. In order to secure the performance of certain obligations by the holders, such Series Four Preferred Units are subject to forfeiture pursuant to the terms of a pledge agreement. The holders of Series Four Preferred Units have the right, at certain times and subject to certain conditions set forth in the Certificate of Designations establishing the rights, limitations and preferences of the Series Four Preferred Units, to require our Operating Partnership to redeem all of their units for cash at the redemption price of $50.00 per unit. Our Operating Partnership also has the right, at certain times

 

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and subject to certain conditions, to redeem all of the Series Four Preferred Units for cash at the redemption price of $50.00 per unit. The Series Four Preferred Units that are subject to the security interest under the pledge agreement may not be redeemed until and unless such security interest is released. Due to the holders’ redemption option existing outside our control, the Series Four Preferred Units are presented outside of permanent equity in our Consolidated Balance Sheets (See Note 11 of the Consolidated Financial Statements).

 

The Series B Preferred Units have a liquidation preference of $2,500.00 per share (or an aggregate of approximately $193.6 million at December 31, 2014 and February 23, 2015, after deducting the underwriting discount and transaction expenses). The Series B Preferred Units were issued by our Operating Partnership on March 27, 2013 in connection with our issuance of 80,000 shares (8,000,000 depositary shares each representing 1/100th of a share) of 5.25% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”). We contributed the net proceeds from the offering to our Operating Partnership in exchange for Series B Preferred Units having terms and preferences generally mirroring those of the Series B Preferred Stock. We will pay cumulative cash dividends on the Series B Preferred Stock at a rate of 5.25% per annum of the $2,500.00 liquidation preference per share. We may not redeem the Series B Preferred Stock prior to March 27, 2018, except in certain circumstances relating to the preservation of our REIT status. On or after March 27, 2018, at our option, we may redeem the Series B Preferred Stock for a cash redemption price of $2,500.00 per share, plus all accrued and unpaid dividends. The Series B Preferred Stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates.

 

Transactions During 2014

 

Acquisitions and Option Agreements

 

On November 6, 2014, we entered into an option agreement pursuant to which we have been granted an option to purchase real property located at 425 Fourth Street in San Francisco, California. In connection with the execution of the agreement, we paid a non-refundable option payment to the current owner of $1.0 million. We intend to pursue the entitlements necessary to develop the property. The purchase price has not been determined and is dependent on the entitlements obtained. There can be no assurance that we will be successful in obtaining the desired entitlements or that we will ultimately determine to exercise the option.

 

On November 12, 2014, we completed the acquisition of a parcel of land at 804 Carnegie Center in Princeton, New Jersey for a purchase price of approximately $3.7 million. 804 Carnegie Center is a build-to-suit project with approximately 130,000 net rentable square feet of Class A office space which is currently under construction. We expect that the building will be complete and available for occupancy during the first quarter of 2016.

 

Dispositions

 

On July 29, 2014, we completed the sale of our Mountain View Technology Park properties and Mountain View Research Park Building Sixteen property located in Mountain View, California for an aggregate sale price of approximately $92.1 million. Net cash proceeds totaled approximately $90.6 million, resulting in a gain on sale of real estate totaling approximately $35.9 million. Mountain View Technology Park is a seven-building complex of Office/Technical properties aggregating approximately 135,000 net rentable square feet. Mountain View Research Park Building Sixteen is an Office/Technical property with approximately 63,000 net rentable square feet.

 

On August 20, 2014, a portion of the land parcel at our One Reston Overlook property located in Reston, Virginia was taken by eminent domain. Net cash proceeds totaled approximately $2.6 million, resulting in a gain on sale of real estate totaling approximately $1.2 million.

 

On August 22, 2014, we completed the sale of a parcel of land within our Broad Run Business Park property located in Loudoun County, Virginia for a sale price of approximately $9.8 million. Net cash proceeds totaled

 

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approximately $9.7 million, resulting in a gain on sale of real estate totaling approximately $4.3 million. The parcel is an approximately 15.5 acre land parcel subject to a ground lease that was scheduled to expire on October 31, 2048 with a tenant that exercised its purchase option under the ground lease.

 

On October 2, 2014, we completed the sale of Patriots Park located in Reston, Virginia for a gross sale price of $321.0 million. Patriots Park consists of three Class A office properties aggregating approximately 706,000 net rentable square feet. Net cash proceeds totaled approximately $319.1 million, resulting in a gain on sale of real estate totaling approximately $84.6 million. We have agreed to provide rent support payments to the buyer with a maximum obligation of up to approximately $12.3 million related to the leasing of 17,762 net rentable square feet at the properties, which has been recorded as a reduction to the gain on sale.

 

On October 22, 2014, MIT exercised its right to purchase our 415 Main Street property (formerly Seven Cambridge Center) located in Cambridge, Massachusetts on February 1, 2016. As part of its lease signed on July 14, 2004, MIT was granted an option to purchase the building at the beginning of the 11th lease year for approximately $106 million. 415 Main Street is an Office/Technical property with approximately 231,000 net rentable square feet occupied by the Broad Institute. The sale is subject to the satisfaction of customary closing conditions and there can be no assurance that the sale will be consummated on the terms currently contemplated or at all.

 

On October 24, 2014, we completed the sale of a parcel of land at 130 Third Avenue in Waltham, Massachusetts that is permitted for 129,000 square feet for a sale price of approximately $14.3 million. Net cash proceeds totaled approximately $13.6 million, resulting in a gain on sale of real estate totaling approximately $8.3 million.

 

On October 30, 2014, we completed the sale of a 45% interest in each of 601 Lexington Avenue in New York City and Atlantic Wharf Office Building and 100 Federal Street in Boston for an aggregate gross sale price of approximately $1.827 billion in cash, less the partner’s pro rata share of the indebtedness collateralized by 601 Lexington Avenue. Net cash proceeds totaled approximately $1.497 billion, after the payment of transaction costs. In connection with the sale, we formed a limited liability company for each property with the buyer and will provide customary property management and leasing services to the joint ventures. 601 Lexington Avenue is a 1,669,000 square foot Class A office complex located in Midtown Manhattan. The property consists of a 59-story tower as well as a six-story low-rise office and retail building. The property is subject to existing mortgage indebtedness of approximately $712.9 million. The Atlantic Wharf Office Building is a 791,000 square foot Class A office tower located on Boston’s Waterfront. 100 Federal Street is a 1,323,000 square foot Class A office tower located in Boston’s Financial District. The transaction did not qualify as a sale of real estate for financial reporting purposes as we continue to effectively control these properties and thus will continue to account for the properties on a consolidated basis in our financial statements. We have accounted for the transaction as an equity transaction and have recognized noncontrolling interest in our consolidated balance sheets totaling approximately $849.0 million, which is equal to 45% of the aggregate carrying value of the total equity of the properties immediately prior to the transaction. The difference between the net cash proceeds received and the noncontrolling interest recognized, which was approximately $648.4 million, has been reflected as an increase to additional paid-in capital in our consolidated balance sheets. The change in additional paid-in capital plus the partner’s proportionate share of the indebtedness secured by 601 Lexington Avenue of approximately $320.8 million, aggregating approximately $969.2 million, has not been reflected as a gain on sale of real estate in our Consolidated Statements of Operations.

 

On December 30, 2014, we completed the conveyance to an unrelated third party of a condominium interest in our 75 Ames Street property located in Cambridge, Massachusetts. On May 23, 2011, we had entered into a ground lease for the vacant land parcel at 75 Ames Street and had also entered into a development agreement to serve as project manager for a 250,000 square foot research laboratory building to be developed on the site at the ground lessee’s expense and to also serve, upon completion of development, as property manager. Gross proceeds to us were approximately $56.8 million, including $11.4 million in development fees for our services,

 

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and were received beginning in May 2011. The cash received under the ground lease was initially recognized as unearned revenue and recognized over the 99-year term of the ground lease as ground lease revenue totaling approximately $459,000 per year prior to the conveyance of the condominium interest. The terms of the ground lease required us to form a condominium for the site upon completion of the development, at which time each party would subject their respective interests in the buildings and land to the condominium and would in turn be conveyed a condominium unit comprised of their respective building as well as an undivided ownership interest in the land. As a result of the conveyance and the transfer of title, we recognized a gain on sale of real estate totaling approximately $33.8 million during the year ended December 31, 2014.

 

Developments

 

As of December 31, 2014, we had ten properties under construction comprised of nine office properties and one retail property, which aggregate approximately 3.3 million square feet. We estimate the total investment to complete these projects, in the aggregate, is approximately $2.1 billion of which we had already invested approximately $0.9 billion as of December 31, 2014. The investment through December 31, 2014 and estimated total investment for our properties under construction as of December 31, 2014 are detailed below (in thousands):

 

Construction Properties

  Estimated
Stabilization Date
  Location   Investment
to Date(1)
    Estimated  Total
Investment(1)
    Percentage
leased(2)
 

Annapolis Junction Building Seven (50% ownership)(3)

  Third Quarter, 2015   Annapolis, MD   $ 14,588      $ 17,500        100

690 Folsom Street

  Fourth Quarter, 2015   San Francisco, CA     13,271        17,900        58

Prudential Retail Expansion

  Fourth Quarter, 2015   Boston, MA     336        10,330       

804 Carnegie Center

  First Quarter, 2016   Princeton, NJ     11,178        45,500        100

Annapolis Junction Building Eight (50% ownership)(3)

  First Quarter, 2016   Annapolis, MD     11,651        18,500       

99 Third Avenue Retail

  Second Quarter, 2016   Waltham, MA     10,508        16,900        84

535 Mission Street

  Third Quarter, 2016   San Francisco, CA     176,792        215,000        66

10 CityPoint

  Second Quarter, 2017   Waltham, MA     24,713        100,400        74

601 Massachusetts Avenue

  Fourth Quarter, 2017   Washington, DC     228,910        360,760        83

888 Boylston Street

  Fourth Quarter, 2017   Boston, MA     35,932        271,500        36

Salesforce Tower (95% ownership)

  First Quarter, 2019   San Francisco, CA     348,924        1,073,500        51
     

 

 

   

 

 

   

 

 

 

Total Properties under Construction

      $ 876,803      $ 2,147,790        59
     

 

 

   

 

 

   

 

 

 

 

(1) Represents our share. Includes net revenue during lease up period and approximately $67.4 million of construction cost and leasing commission accruals.
(2) Represents percentage leased as of February 23, 2015, including leases with future commencement dates.
(3) This development project has a construction loan.

 

On February 10, 2014, we completed and fully placed in-service The Avant at Reston Town Center development project comprised of 359 apartment units and retail space aggregating approximately 355,000 square feet located in Reston, Virginia. As of February 23, 2015, including leases with future commencement dates, this property was approximately 84% leased.

 

On April 1, 2014, we commenced construction of our 99 Third Avenue development project totaling approximately 17,000 net rentable square feet of retail space located in Waltham, Massachusetts.

 

On April 3, 2014, we commenced construction of our 690 Folsom Street development project totaling approximately 25,000 net rentable square feet of office and retail space located in San Francisco, California. This project was partially placed in-service on December 2, 2014.

 

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On April 10, 2014, a consolidated joint venture in which we have a 95% interest signed a lease with salesforce.com for 714,000 square feet at the new Salesforce Tower, the 1.4 million square foot, 61-story Class A office development project currently under construction at 415 Mission Street in the South Financial District of San Francisco, California. In conjunction with the lease signing, we commenced construction of the building.

 

On May 20, 2014, we commenced construction of our 888 Boylston Street development project totaling approximately 425,000 net rentable square feet of Class A office space located in Boston, Massachusetts.

 

On May 20, 2014, we commenced construction of our 10 CityPoint development project totaling approximately 245,000 net rentable square feet of Class A office space located in Waltham, Massachusetts.

 

On August 31, 2014, we completed and fully placed in-service 250 West 55th Street, a Class A office project with approximately 988,000 net rentable square feet located in New York City. As of February 23, 2015, including leases with future commencement dates, this property was 79% leased.

 

On September 17, 2014, we completed and fully placed in-service 680 Folsom Street, a Class A office project with approximately 525,000 net rentable square feet located in San Francisco, California. As of February 23, 2015, including leases with future commencement dates, the property was 98% leased.

 

On November 1, 2014, we partially placed in-service 535 Mission Street, a Class A office project with approximately 307,000 net rentable square feet located in San Francisco, California.

 

Secured Debt Transactions

 

On July 1, 2014, we used available cash to repay the mortgage loan collateralized by our New Dominion Technology Park Building Two property located in Herndon, Virginia totaling $63.0 million. The mortgage loan bore interest at a fixed rate of 5.55% per annum and was scheduled to mature on October 1, 2014. There was no prepayment penalty.

 

Unsecured Senior Notes

 

On December 15, 2014, our Operating Partnership used available cash to redeem $300.0 million in aggregate principal amount of its 5.625% senior notes due 2015 (the “5.625% Notes”) and $250.0 million in aggregate principal amount of its 5.000% senior notes due 2015 (the “5.000% Notes”). The redemption price for the 5.625% Notes was determined in accordance with the applicable indenture and totaled approximately $308.0 million. The redemption price included approximately $2.8 million of accrued and unpaid interest to, but not including, the redemption date. Excluding such accrued and unpaid interest, the redemption price was approximately 101.73% of the principal amount being redeemed. The redemption price for the 5.000% Notes was determined in accordance with the applicable indenture and totaled approximately $255.8 million. The redemption price included approximately $0.5 million of accrued and unpaid interest to, but not including, the redemption date. Excluding such accrued and unpaid interest, the redemption price was approximately 102.13% of the principal amount being redeemed. We recognized a loss on early extinguishment of debt totaling approximately $10.6 million, which amount included the payment of the redemption premium totaling approximately $10.5 million.

 

Unsecured Exchangeable Senior Notes

 

On February 18, 2014, our Operating Partnership repaid at maturity the $747.5 million aggregate principal amount of its 3.625% exchangeable senior notes due 2014 plus accrued and unpaid interest thereon.

 

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Equity Transactions

 

On May 19, 2014, our Operating Partnership released to the holders 319,687 Series Four Preferred Units that were previously subject to a security interest under a pledge agreement. On July 3, 2014, our Operating Partnership redeemed such units for cash totaling approximately $16.0 million, plus accrued and unpaid distributions.

 

On October 16, 2014, our Operating Partnership released to the holders 27,773 Series Four Preferred Units that were previously subject to a security interest under a pledge agreement. On November 5, 2014, our Operating Partnership redeemed 27,773 Series Four Preferred Units for cash totaling approximately $1.4 million. An aggregate of 12,667 Series Four Preferred Units remain outstanding and subject to a security interest under a pledge agreement.

 

During the year ended December 31, 2014, we acquired an aggregate of 80,246 common units of limited partnership interest, including 67,857 common units issued upon the conversion of LTIP units presented by the holders for redemption, in exchange for an equal number of shares of common stock. During the year ended December 31, 2014, we issued 21,459 shares of common stock as a result of stock options being exercised.

 

Special Dividend

 

On December 8, 2014, we announced that our Board of Directors declared a special cash dividend of $4.50 per common share payable on January 28, 2015 to shareholders of record as of the close of business on December 31, 2014. The decision to declare a special dividend was primarily a result of the taxable gains associated with the sale of approximately $2.3 billion of assets during 2014 partially offset by our election to deduct costs that were capitalized in prior years that may now be deducted under the new Tangible Property Regulations. The Board of Directors did not make any change in our policy with respect to regular quarterly dividends. Holders of common units of limited partnership interest in our Operating Partnership, as of the close of business on December 31, 2014, received the same distribution on January 28, 2015.

 

Investments in Unconsolidated Joint Ventures

 

On April 10, 2014, we entered into a joint venture with an unrelated third party to acquire a parcel of land located at 1001 6th Street (formerly 501 K Street) in Washington, DC. We anticipate the land parcel may accommodate an approximate 520,000 square foot Class A office property to be developed in the future. The joint venture partner contributed the land for a 50% interest in the joint venture and we initially contributed cash of approximately $39.0 million for our 50% interest. Under the joint venture agreement, the partner will be entitled to up to two additional payments from the venture based on increases in total square footage of the project above 520,000 square feet and achieving certain project returns at stabilization.

 

On April 30, 2014, our partner in our Annapolis Junction joint venture contributed a parcel of land and improvements and we contributed cash of approximately $5.4 million to the joint venture. We have a 50% interest in this joint venture. The joint venture has commenced construction of Annapolis Junction Building Eight, which when completed will consist of a Class A office property with approximately 125,000 net rentable square feet located in Annapolis, Maryland. In addition, on June 23, 2014, the joint venture obtained construction financing collateralized by the development project totaling $26.0 million. The construction financing bears interest at a variable rate equal to LIBOR plus 1.50% per annum and matures on June 23, 2017, with two, one-year extension options, subject to certain conditions.

 

On October 24, 2014, a joint venture in which we have a 50% interest extended the loan collateralized by its Annapolis Junction Building Six property. At the time of the extension, the outstanding balance of the construction loan totaled approximately $13.9 million and bore interest at a variable rate equal to LIBOR plus 1.65% per annum and was scheduled to mature on November 17, 2014. The extended loan has a total

 

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commitment amount of $16.4 million, bears interest at a variable rate equal to LIBOR plus 2.25% per annum and matures on November 17, 2015. Annapolis Junction Building Six is a Class A office property with approximately 119,000 net rentable square feet located in Annapolis, Maryland.

 

On December 17, 2014, a joint venture in which we have a 25% nominal ownership interest refinanced with a new lender its mortgage loan collateralized by 901 New York Avenue located in Washington, DC. The mortgage loan totaling approximately $150.4 million bore interest at a fixed rate of 5.19% per annum and was scheduled to mature on January 1, 2015. The new mortgage loan totaling $225.0 million bears interest at a fixed rate of 3.61% per annum and matures on January 5, 2025.

 

On December 19, 2014, we entered into a joint venture with an unrelated third party to acquire the air rights for the future development of the first phase at North Station, consisting of an atrium hall and podium building containing up to 377,000 net rentable square feet of retail and office space located in Boston, Massachusetts. The joint venture partner contributed air rights parcels and improvements, with a fair value of approximately $13.0 million, for its initial 50% interest in the joint venture. We contributed improvements totaling approximately $4.2 million and will contribute cash totaling approximately $8.8 million for our initial 50% interest. In addition, we entered into an option and development rights agreement with our partner pursuant to which we have the right to develop residential, hotel and office space in future phases, subject to certain terms and conditions including the partner’s right to participate as a venture partner in each phase of the project.

 

Stock Option and Incentive Plan

 

On January 27, 2014, our Compensation Committee approved a new equity-based, multi-year, long-term incentive program (the “2014 MYLTIP”) in lieu of an Outperformance Plan (“OPP”) as a performance-based component of our overall compensation program. Under the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 718 “Compensation—Stock Compensation,” the 2014 MYLTIP has an aggregate grant fair value of approximately $12.7 million, which amount will generally be amortized into earnings over the four-year plan period under the graded vesting method (See Note 17 to the Consolidated Financial Statements).

 

On January 31, 2014, we issued 21,455 shares of restricted common stock and our Operating Partnership issued 109,718 LTIP units under the 2012 Plan to certain of our employees.

 

On January 31, 2014, the measurement period for our 2011 OPP Awards expired and our total return to stockholders (“TRS”) performance was not sufficient for employees to earn and therefore become eligible to vest in any of the 2011 OPP Awards. As a result, we accelerated the then remaining unrecognized compensation expense totaling approximately $1.2 million. Accordingly, all 2011 OPP Awards were automatically forfeited and our Operating Partnership repaid employees an amount equal to $0.25 (which is equal to what they paid upon acceptance of the award) multiplied by the number of 2011 OPP Awards they received.

 

Business and Growth Strategies

 

Business Strategies

 

Our primary business objective is to maximize return on investment so as to provide our investors with the greatest possible total return in all points of the economic cycle. Our strategies to achieve this objective are:

 

   

to target a few carefully selected geographic markets, including Boston, New York, San Francisco and Washington, DC, and to be one of the leading, if not the leading, owners, developers and managers in each of those markets with a full-service office in each market providing property management, leasing, development, construction and legal expertise. We select markets and submarkets with a diverse economic base and a deep pool of prospective tenants in various industries and where tenants have demonstrated a preference for high-quality office buildings and other facilities. We have explored and

 

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may continue to explore for future investment select domestic and international markets that exhibit these same traits;

 

   

to emphasize markets and submarkets within those markets where the lack of available sites and the difficulty of receiving the necessary approvals for development and the necessary financing constitute high barriers to the creation of new supply, and where skill, financial strength and diligence are required to successfully develop, finance and manage high-quality office, research and development space, as well as selected retail and residential space;

 

   

to take on complex, technically challenging development projects, leveraging the skills of our management team to successfully develop, acquire or reposition properties that other organizations may not have the capacity or resources to pursue;

 

   

to own and develop high-quality real estate designed to meet the demands of today’s tenants who require sophisticated telecommunications and related infrastructure, support services, sustainable features and amenities, and to manage those facilities so as to become the landlord of choice for both existing and prospective clients;

 

   

to opportunistically acquire assets which increase our penetration in the markets in which we have chosen to concentrate, as well as potential new markets, which exhibit an opportunity to improve or preserve returns through repositioning (through a combination of capital improvements and shift in marketing strategy), changes in management focus and leasing;

 

   

to explore joint venture opportunities with existing property owners located in desirable locations, who seek to benefit from the depth of development and management expertise we are able to provide and our access to capital, and/or to explore joint venture opportunities with strategic institutional partners, leveraging our skills as owners, operators and developers of Class A office space and mixed-use complexes;

 

   

to pursue on a selective basis the sale of properties or interests therein, including core properties, to either (1) take advantage of the demand for our premier properties and realize the value we have created or (2) pare from our portfolio properties that we believe have slower future growth potential;

 

   

to seek third-party development contracts, which can be a significant source of revenue and enable us to retain and utilize our existing development and construction management staff, especially when our internal development is less active or when new development is less-warranted due to market conditions; and

 

   

to enhance our capital structure through our access to a variety of sources of capital and proactively manage our debt expirations. In the current economic climate with historically low interest rates we have and will continue to attempt to lower the cost of our debt capital and seek opportunities to lock in such low rates through early debt repayment, refinancings and interest rate hedges.

 

Growth Strategies

 

External Growth Strategies

 

We believe that our development experience and our organizational depth position us to continue to selectively develop a range of property types, including high-rise urban developments, mixed-use developments (including residential and retail), low-rise suburban office properties and research and laboratory space, within budget and on schedule. We believe we are also well positioned to achieve external growth through acquisitions. Other factors that contribute to our competitive position include:

 

   

our control of sites (including sites under contract or option to acquire) in our markets that could support approximately 12.8 million additional square feet of new office, retail, and residential development;

 

   

our reputation gained through 45 years of successful operations and the stability and strength of our existing portfolio of properties;

 

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our relationships with leading national corporations, universities and public institutions, including government agencies, seeking new facilities and development services;

 

   

our relationships with nationally recognized financial institutions that provide capital to the real estate industry;

 

   

our track record and reputation for executing acquisitions efficiently provide comfort to domestic and foreign institutions, private investors and corporations who seek to sell commercial real estate in our market areas;

 

   

our ability to act quickly on due diligence and financing;

 

   

our relationships with institutional buyers and sellers of high-quality real estate assets and

 

   

our ability to procure entitlements from multiple municipalities to develop sites and attract land owners to sell or partner with us.

 

Opportunities to execute our external growth strategy fall into three categories:

 

   

Development in selected submarkets. We believe the additional development of well-positioned office buildings and mixed use complexes could be justified in many of our submarkets. We believe in acquiring land after taking into consideration timing factors relating to economic cycles and in response to market conditions that allow for its development at the appropriate time. While we purposely concentrate in markets with high barriers-to-entry, we have demonstrated throughout our 45-year history, an ability to make carefully timed land acquisitions in submarkets where we can become one of the market leaders in establishing rent and other business terms. We believe that there are opportunities at key locations in our existing and other markets for a well-capitalized developer to acquire land with development potential.

 

In the past, we have been particularly successful at acquiring sites or options to purchase sites that need governmental approvals for development. Because of our development expertise, knowledge of the governmental approval process and reputation for quality development with local government regulatory bodies, we generally have been able to secure the permits necessary to allow development and to profit from the resulting increase in land value. We seek complex projects where we can add value through the efforts of our experienced and skilled management team leading to attractive returns on investment.

 

Our strong regional relationships and recognized development expertise have enabled us to capitalize on unique build-to-suit opportunities. We intend to seek and expect to continue to be presented with such opportunities in the near term allowing us to earn relatively significant returns on these development opportunities through multiple business cycles.

 

   

Acquisition of assets and portfolios of assets from institutions or individuals. We believe that due to our size, management strength and reputation, we are well positioned to acquire portfolios of assets or individual properties from institutions or individuals if valuations meet our criteria. In addition, we believe that our market knowledge and our liquidity and access to capital may provide us with a competitive advantage when pursuing acquisitions. There may be enhanced opportunities to purchase assets with near-term financing maturities or possibly provide debt on assets at enhanced yields. Opportunities to acquire properties may also come through the purchase of first mortgage or mezzanine debt. We may also acquire properties for cash, but we are also particularly well-positioned to appeal to sellers wishing to contribute on a tax-deferred basis their ownership of property for equity in a diversified real estate operating company that offers liquidity through access to the public equity markets in addition to a quarterly distribution. Our ability to offer common and preferred units of limited partnership in BPLP to sellers who would otherwise recognize a taxable gain upon a sale of assets or our common stock may facilitate this type of transaction on a tax-efficient basis. In addition, we may consider mergers with and acquisitions of compatible real estate firms.

 

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Acquisition of underperforming assets and portfolios of assets. We believe that because of our in-depth market knowledge and development experience in each of our markets, our national reputation with brokers, financial institutions and others involved in the real estate market and our access to competitively-priced capital, we are well-positioned to identify and acquire existing, underperforming properties for competitive prices and to add significant additional value to such properties through our effective marketing strategies, repositioning/redevelopment expertise and a responsive property management program. We have developed this strategy and program for our existing portfolio, where we provide high-quality property management services using our own employees in order to encourage tenants to renew, expand and relocate in our properties. We are able to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house and third-party vendors’ services for marketing, including calls and presentations to prospective tenants, print advertisements, lease negotiation and construction of tenant improvements. Our tenants benefit from cost efficiencies produced by our experienced work force, which is attentive to preventive maintenance and energy management.

 

Internal Growth Strategies

 

We believe that opportunities will exist to increase cash flow from our existing properties because they are of high quality and in desirable locations within markets where, in general, the creation of new supply is limited by the lack of available sites and the difficulty of obtaining the necessary approvals for development on vacant land and financing. Our strategy for maximizing the benefits from these opportunities is three-fold: (1) to provide high-quality property management services using our employees in order to encourage tenants to renew, expand and relocate in our properties, (2) to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house services for marketing, lease negotiation and construction of tenant improvements and (3) to work with new or existing tenants with space expansion or contraction needs maximizing the cash flow from our assets. We expect to continue our internal growth as a result of our ability to:

 

   

Cultivate existing submarkets and long-term relationships with credit tenants. In choosing locations for our properties, we have paid particular attention to transportation and commuting patterns, physical environment, adjacency to established business centers, proximity to sources of business growth and other local factors.

 

The average lease term of our in-place leases, including unconsolidated joint ventures, was approximately 6.8 years at December 31, 2014 and we continue to cultivate long-term leasing relationships with a diverse base of high-quality, financially stable tenants. Based on leases in place at December 31, 2014, leases with respect to approximately 6.0% of the total square feet in our portfolio, including unconsolidated joint ventures, will expire in calendar year 2015.

 

   

Directly manage our office properties to maximize the potential for tenant retention. We provide property management services ourselves, rather than contracting for this service, to maintain awareness of and responsiveness to tenant needs. We and our properties also benefit from cost efficiencies produced by an experienced work force attentive to preventive maintenance and energy management and from our continuing programs to assure that our property management personnel at all levels remain aware of their important role in tenant relations.

 

   

Replace tenants quickly at best available market terms and lowest possible transaction costs. We believe that we are well-positioned to attract new tenants and achieve relatively high rental rates as a result of our well-located, well-designed and well-maintained properties, our reputation for high-quality building services and responsiveness to tenants, and our ability to offer expansion and relocation alternatives within our submarkets.

 

   

Extend terms of existing leases to existing tenants prior to expiration. We have also successfully structured early tenant renewals, which have reduced the cost associated with lease downtime while securing the tenancy of our highest quality credit-worthy tenants on a long-term basis and enhancing relationships.

 

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Policies with Respect to Certain Activities

 

The discussion below sets forth certain additional information regarding our investment, financing and other policies. These policies have been determined by our Board of Directors and, in general, may be amended or revised from time to time by our Board of Directors.

 

Investment Policies

 

Investments in Real Estate or Interests in Real Estate

 

Our investment objectives are to provide quarterly cash dividends to our securityholders and to achieve long-term capital appreciation through increases in the value of Boston Properties, Inc. We have not established a specific policy regarding the relative priority of these investment objectives.

 

We expect to continue to pursue our investment objectives primarily through the ownership of our current properties, development projects and other acquired properties. We currently intend to continue to invest primarily in developments of properties and acquisitions of existing improved properties or properties in need of redevelopment, and acquisitions of land that we believe have development potential, primarily in our existing markets of Boston, New York, San Francisco and Washington, DC. We have explored and may continue to explore for future investment select domestic and international markets that exhibit these same traits. Future investment or development activities will not be limited to a specified percentage of our assets. We intend to engage in such future investment or development activities in a manner that is consistent with the maintenance of our status as a REIT for federal income tax purposes. In addition, we may purchase or lease income-producing commercial and other types of properties for long-term investment, expand and improve the real estate presently owned or other properties purchased, or sell such real estate properties, in whole or in part, when circumstances warrant. We do not have a policy that restricts the amount or percentage of assets that will be invested in any specific property, however, our investments may be restricted by our debt covenants.

 

We may also continue to participate with third parties in property ownership, through joint ventures or other types of co-ownership, including third parties with expertise in mixed-use opportunities. These investments may permit us to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring our portfolio.

 

Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness as may be incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over any distributions with respect to our common stock. Investments are also subject to our policy not to be treated as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

Investments in Real Estate Mortgages

 

While our current portfolio consists primarily of, and our business objectives emphasize, equity investments in commercial real estate, we may, at the discretion of the Board of Directors, invest in mortgages and other types of real estate interests consistent with our qualification as a REIT. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable us to recoup our full investment. We may invest in participating, convertible or traditional mortgages if we conclude that we may benefit from the cash flow, or any appreciation in value of the property or as an entrance to the fee ownership.

 

Securities of or Interests in Entities Primarily Engaged in Real Estate Activities

 

Subject to the percentage of ownership limitations and gross income and asset tests necessary for our REIT qualification, we also may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

 

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Dispositions

 

Our decision to dispose or partially dispose of properties is based upon the periodic review of our portfolio and the determination by the Board of Directors that such action would be in our best interests. Any decision to dispose of a property will be authorized by the Board of Directors or a committee thereof. Some holders of limited partnership interests in BPLP, including Mortimer B. Zuckerman, could incur adverse tax consequences upon the sale of certain of our properties that differ from the tax consequences to us. Consequently, holders of limited partnership interests in BPLP may have different objectives regarding the appropriate pricing and timing of any such sale. Such different tax treatment derives in most cases from the fact that we acquired these properties in exchange for partnership interests in contribution transactions structured to allow the prior owners to defer taxable gain. Generally this deferral continues so long as we do not dispose of the properties in a taxable transaction. Unless a sale by us of these properties is structured as a like-kind exchange under Section 1031 of the Internal Revenue Code or in a manner that otherwise allows deferral to continue, recognition of the deferred tax gain allocable to these prior owners is generally triggered by a sale. Some of our assets are subject to tax protection agreements, which may limit our ability to dispose of the assets or require us to pay damages to the prior owners in the event of a taxable sale.

 

Financing Policies

 

The agreement of limited partnership of BPLP and our certificate of incorporation and bylaws do not limit the amount or percentage of indebtedness that we may incur. We do not have a policy limiting the amount of indebtedness that we may incur. However, our mortgages, credit facilities and unsecured debt securities contain customary restrictions, requirements and other limitations on our ability to incur indebtedness. We have not established any limit on the number or amount of mortgages that may be placed on any single property or on our portfolio as a whole.

 

Our Board of Directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including the purchase price of properties to be acquired with debt financing, the estimated market value of our properties upon refinancing, the entering into agreements such as interest rate swaps, caps, floors and other interest rate hedging contracts and the ability of particular properties and BPLP as a whole to generate cash flow to cover expected debt service.

 

Policies with Respect to Other Activities

 

As the sole general partner of BPLP, we have the authority to issue additional common and preferred units of limited partnership interest of BPLP. We have in the past, and may in the future, issue common or preferred units of limited partnership interest of BPLP to persons who contribute their direct or indirect interests in properties to us in exchange for such common or preferred units of limited partnership interest in BPLP. We have not engaged in trading, underwriting or agency distribution or sale of securities of issuers other than BPLP and we do not intend to do so. At all times, we intend to make investments in such a manner as to maintain our qualification as a REIT, unless because of circumstances or changes in the Internal Revenue Code of 1986, as amended (or the Treasury Regulations), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT. We may make loans to third parties, including, without limitation, to joint ventures in which we participate or in connection with the disposition of a property. We intend to make investments in such a way that we will not be treated as an investment company under the 1940 Act. Our policies with respect to these and other activities may be reviewed and modified or amended from time to time by the Board of Directors.

 

Sustainability

 

As one of the largest owners and developers of office properties in the United States, we actively work to promote our growth and operations in a sustainable and responsible manner across our four regions. We focus our sustainability initiatives on the design and construction of our new developments, the operation of our existing buildings and our internal corporate practices. Our sustainability initiatives are centered on energy

 

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efficiency, waste reduction and water preservation, as well as making a positive impact on the communities in which we conduct business. Through these efforts we demonstrate that operating and developing commercial real estate can be conducted with a conscious regard for the environment while mutually benefiting our tenants, investors, employees and the communities in which we operate.

 

During 2014, we hired a Sustainability Manager whose sole responsibility is to promote, monitor and disclose our sustainability activities. In addition, for the third straight year the Global Real Estate Sustainability Benchmark (“GRESB”) ranked us in the top quadrant of all companies responding to its sustainability survey. For the 2014 GRESB report, we ranked 17th out of 637 companies surveyed and 2nd out of 32 office companies in GRESB’s United States office peer group. Also during 2014, we received from NAREIT the “2014 Special Recognition—Most Improved Leader in the Light Award” recognizing our sustainable energy use practices.

 

We provide disclosure on our website to increase the transparency of our sustainability program, which we periodically update with current or additional information. You may access our sustainability report on our website at http://www.bostonproperties.com under the heading “Sustainability.”

 

Competition

 

We compete in the leasing of office, retail and residential space with a considerable number of other real estate companies, some of which may have greater marketing and financial resources than are available to us. In addition, our hotel property competes for guests with other hotels, some of which may have greater marketing and financial resources than are available to us and to the manager of our one hotel, Marriott International, Inc.

 

Principal factors of competition in our primary business of owning, acquiring and developing office properties are the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the relevant market. Additionally, our ability to compete depends upon, among other factors, trends of the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, utilities, governmental regulations, legislation and population trends.

 

In addition, although not part of our core strategy, we are currently operating three residential properties (See Note 20 to the Consolidated Financial Statements) and may in the future decide to acquire or develop additional residential properties. As an owner and operator of apartments, we will also face competition for prospective residents from other operators whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the resident seeks. We will also compete against condominiums and single-family homes that are for sale or rent. Because we have limited experience with residential properties, we expect to continue to retain third parties to manage our residential properties.

 

Our Hotel Property

 

We operate our hotel property through a taxable REIT subsidiary. The taxable REIT subsidiary, a wholly-owned subsidiary of BPLP, is the lessee pursuant to a lease for the hotel property. As lessor, BPLP is entitled to a percentage of gross receipts from the hotel property. The hotel lease allows economic benefits of ownership to flow to us. Marriott International, Inc. continues to manage the hotel property under the Marriott name and under terms of the existing management agreements. Marriott has been engaged under a separate long-term incentive management agreement to operate and manage the hotel on behalf of the taxable REIT subsidiary. In connection with these arrangements, Marriott has agreed to operate and maintain our hotel in accordance with its system-wide standard for comparable hotels and to provide the hotel with the benefits of its central reservation system and other chain-wide programs and services. Under a management agreement for the hotel, Marriott acts as the taxable REIT subsidiary’s agent to supervise, direct and control the management and operation of the hotel and

 

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receives as compensation base management fees that are calculated as a percentage of the hotel’s gross revenues, and supplemental incentive fees if the hotel exceeds negotiated profitability breakpoints. In addition, the taxable REIT subsidiary compensates Marriott, on the basis of a formula applied to the hotel’s gross revenues, for certain system-wide services provided by Marriott, including central reservations, marketing and training. During 2014, 2013 and 2012, Marriott received an aggregate of approximately $1.0 million, $1.2 million and $2.0 million, respectively, from our taxable REIT subsidiary.

 

Seasonality

 

Our hotel property traditionally has experienced significant seasonality in its operating income. Below is the net operating income and the percentage of net operating income by quarter for the year ended December 31, 2014.

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

$1.4 million

  $5.0 million   $4.3 million   $3.4 million

10%

  36%   31%   23%

 

Corporate Governance

 

Boston Properties is currently governed by an eleven member Board of Directors. The current members of our Board of Directors are Mortimer B. Zuckerman, Carol B. Einiger, Dr. Jacob A. Frenkel, Joel I. Klein, Douglas T. Linde, Matthew J. Lustig, Alan J. Patricof, Ivan G. Seidenberg, Owen D. Thomas, Martin Turchin and David A. Twardock. All directors stand for election for one-year terms expiring at the next succeeding annual meeting of stockholders.

 

Our Board of Directors has Audit, Compensation and Nominating and Corporate Governance Committees. The membership of each of these committees is described below.

 

Independent Director

  

Audit

 

Compensation

  Nominating
and
Corporate
    Governance    

Carol B. Einiger

     X  

Dr. Jacob A. Frenkel

     X   X*

Joel I. Klein

   X     X

Matthew J. Lustig

      

Alan J. Patricof

   X*     X

Ivan G. Seidenberg **

      

Martin Turchin

      

David A. Twardock

   X   X*  

 

X=Committee member, *=Chair, **=Lead Independent Director

 

   

Our Board of Directors has adopted charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. A copy of each of these charters is available on our website at http://www.bostonproperties.com under the heading “Corporate Governance” and subheading “Committees and Charters.”

 

   

Our Board of Directors has adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.bostonproperties.com under the heading “Corporate Governance” and subheading “Governance Guidelines.”

 

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Our Board of Directors has adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers and employees. A copy of this code is available on our website at http://www.bostonproperties.com under the heading “Corporate Governance” and subheading “Code of Conduct and Ethics.” We intend to disclose on this website any amendment to, or waiver of, any provisions of this Code applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange.

 

   

Our Board of Directors has established an ethics reporting system that employees may use to anonymously report possible violations of the Code of Business Conduct and Ethics, including concerns regarding questionable accounting, internal accounting controls or auditing matters, by telephone or over the internet.

 

   

Our Board of Directors has adopted a Policy on Company Political Spending, a copy of which is available on our website at http://www.bostonproperties.com under the heading “Corporate Governance” and subheading “Policy on Political Spending.”

 

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Item 1A. Risk Factors.

 

Set forth below are the risks that we believe are material to our investors. We refer to the shares of our common stock and the units of limited partnership interest in BPLP together as our “securities,” and the investors who own shares or units, or both, as our “securityholders.” This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 48.

 

Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

 

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our securityholders will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:

 

   

downturns in the national, regional and local economic conditions (particularly increases in unemployment);

 

   

competition from other office, hotel, retail and residential buildings;

 

   

local real estate market conditions, such as oversupply or reduction in demand for office, hotel, retail or residential space;

 

   

changes in interest rates and availability of financing;

 

   

vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

   

changes in space utilization by our tenants due to technology, economic conditions and business culture;

 

   

increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

 

   

civil disturbances, earthquakes and other natural disasters or terrorist acts or acts of war which may result in uninsured or underinsured losses or decrease the desirability to our tenants in impacted locations;

 

   

significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;

 

   

declines in the financial condition of our tenants and our ability to collect rents from our tenants; and

 

   

decreases in the underlying value of our real estate.

 

We are dependent upon the economic climates of our markets—Boston, New York, San Francisco and Washington, DC.

 

All of our revenue is derived from properties located in four markets: Boston, New York, San Francisco and Washington, DC. A downturn in the economies of these markets, or the impact that a downturn in the overall national economy may have upon these economies, could result in reduced demand for office space. Because our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio), a decrease in demand for office space in turn could adversely affect our results of operations. Additionally, there are submarkets within our markets that are dependent upon a limited number of industries. For example, in our Washington, DC market we focus on leasing office properties to governmental agencies and contractors, as well as legal firms. A reduction in spending by the federal government could result in reduced demand for office space and adversely effect our results of operations. In addition, in our New York market we have historically

 

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leased properties to financial, legal and other professional firms. A significant downturn in one or more of these sectors could adversely affect our results of operations.

 

In addition, a significant economic downturn over a period of time could result in an event or change in circumstances that results in an impairment in the value of our properties or our investments in unconsolidated joint ventures. An impairment loss is recognized if the carrying amount of the asset (1) is not recoverable over its expected holding period and (2) exceeds its fair value. There can be no assurance that we will not take charges in the future related to the impairment of our assets or investments. Any future impairment could have a material adverse effect on our results of operations in the period in which the charge is taken.

 

Our investment in property development may be more costly than anticipated.

 

We intend to continue to develop and substantially renovate office, retail and residential properties. Our current and future development and construction activities may be exposed to the following risks:

 

   

we may be unable to proceed with the development of properties because we cannot obtain financing on favorable terms or at all;

 

   

we may incur construction costs for a development project that exceed our original estimates due to increases in interest rates and increased materials, labor, leasing or other costs, which could make completion of the project less profitable because market rents may not increase sufficiently to compensate for the increase in construction costs;

 

   

we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

 

   

we may abandon development opportunities after we begin to explore them and as a result we may lose deposits or fail to recover expenses already incurred;

 

   

we may expend funds on and devote management’s time to projects which we do not complete;

 

   

we may be unable to complete construction and/or leasing of a property on schedule or at all; and

 

   

we may suspend development projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs when the development project is restarted.

 

Investment returns from our developed properties may be less than anticipated.

 

Our developed properties may be exposed to the following risks:

 

   

we may lease developed properties at rental rates that are less than the rates projected at the time we decide to undertake the development;

 

   

operating expenses may be greater than projected at the time of development, resulting in our investment being less profitable than we expected; and

 

   

occupancy rates and rents at newly developed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investments being less profitable than we expected or not profitable at all.

 

We face risks associated with the development of mixed-use commercial properties.

 

We operate, are currently developing, and may in the future develop, properties either alone or through joint ventures with other persons that are known as “mixed-use” developments. This means that in addition to the development of office space, the project may also include space for residential, retail, hotel or other commercial

 

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purposes. We have limited experience in developing and managing non-office and non-retail real estate. As a result, if a development project includes a non-office or non-retail use, we may seek to develop that component ourselves, sell the rights to that component to a third-party developer with experience in that use or we may seek to partner with such a developer. If we do not sell the rights or partner with such a developer, or if we choose to develop the other component ourselves, we would be exposed not only to those risks typically associated with the development of commercial real estate generally, but also to specific risks associated with the development and ownership of non-office and non-retail real estate. In addition, even if we sell the rights to develop the other component or elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected. These include the risk that the other party would default on its obligations necessitating that we complete the other component ourselves (including providing any necessary financing). In the case of residential properties, these risks include competition for prospective residents from other operators whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the resident seeks. We will also compete against condominiums and single-family homes that are for sale or rent. Because we have limited experience with residential properties, we expect to retain third parties to manage our residential properties. If we decide to not sell or participate in a joint venture and instead hire a third party manager, we would be dependent on them and their key personnel who provide services to us and we may not find a suitable replacement if the management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.

 

We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk.

 

We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due. In addition, we may rely on debt to fund a portion of our new investments such as our acquisition and development activity. There is a risk that we may be unable to finance these activities on favorable terms or at all. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future.

 

We have agreements with a number of limited partners of BPLP who contributed properties in exchange for partnership interests that require BPLP to maintain for specified periods of time secured debt on certain of our assets and/or allocate partnership debt to such limited partners to enable them to continue to defer recognition of their taxable gain with respect to the contributed property. These tax protection and debt allocation agreements may restrict our ability to repay or refinance debt.

 

Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to you.

 

Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole, by the local economic conditions in the markets in which our properties are located, including the continuing impact of high unemployment, and by international economic conditions. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, financial condition and ability to pay distributions as a result of the following, among other potential consequences:

 

   

the financial condition of our tenants, many of which are financial, legal and other professional firms, may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

 

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significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;

 

   

our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

 

   

reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;

 

   

the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, a dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors;

 

   

one or more lenders under our line of credit could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all; and

 

   

to the extent we enter into derivative financial instruments, one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.

 

An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets on favorable terms or at all.

 

As of February 23, 2015, we had no outstanding indebtedness, excluding our unconsolidated joint ventures, that bears interest at variable rates, but we may incur such indebtedness in the future. If interest rates increase, then so would the interest costs on our unhedged variable rate debt, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our securityholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures or significantly increase our future interest expense. From time to time, we enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risk that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under guidance included in ASC 815 “Derivatives and Hedging.” In addition, an increase in interest rates could decrease the amounts third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.

 

Covenants in our debt agreements could adversely affect our financial condition.

 

The mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Our unsecured credit facility, unsecured debt securities and certain secured loans contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our continued ability to borrow under our credit facilities is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. Additionally, in the future our ability to satisfy current or prospective

 

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lenders’ insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage against acts of terrorism or losses resulting from earthquakes than is available to us in the marketplace or on commercially reasonable terms.

 

We rely on debt financing, including borrowings under our unsecured credit facility, issuances of unsecured debt securities and debt secured by individual properties, to finance our existing portfolio, our acquisition and development activities and for working capital. If we are unable to obtain debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected. If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, our unsecured debt agreements contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

 

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock or debt securities.

 

On February 23, 2015, our total consolidated debt was approximately $9.9 billion (i.e., excluding unconsolidated joint venture debt). Consolidated debt to total consolidated market capitalization ratio, defined as total consolidated debt as a percentage of the market value of our outstanding equity securities plus our total consolidated debt, is a measure of leverage commonly used by analysts in the REIT sector. Our total consolidated market capitalization was approximately $34.3 billion at February 23, 2015. Total consolidated market capitalization was calculated using the closing stock price of $140.93 per common share and the following: (1) 153,187,903 shares of our common stock, (2) 16,442,774 outstanding common units of limited partnership interest in Boston Properties Limited Partnership (excluding common units held by us), (3) an aggregate of 1,639,695 common units issuable upon conversion of all outstanding LTIP Units, assuming all conditions have been met for the conversion of the LTIP Units, (4) 12,667 Series Four Preferred Units of partnership interest multiplied by the fixed liquidation preference of $50 per unit, (5) 80,000 shares (8,000,000 depositary shares, each representing 1/100th of a share), of our 5.25% Series B Cumulative Redeemable Preferred Stock, at a price of $2,500 per share ($25 per depositary share) (6) 219,380 2012 OPP Units that were issued in the form of LTIP Units and earned as of February 6, 2015 and (7) our consolidated debt totaling approximately $9.9 billion. The calculation of total consolidated market capitalization does not include 312,585 2013 MYLTIP Units, 480,128 2014 MYLTIP Units and 372,007 2015 MYLTIP Units because, unlike other LTIP Units, they are not earned until certain return thresholds are achieved. Our total consolidated debt, which excludes debt collateralized by our unconsolidated joint ventures, at February 23, 2015, represented approximately 28.87% of our total consolidated market capitalization. This percentage will fluctuate with changes in the market price of our common stock and does not necessarily reflect our capacity to incur additional debt to finance our activities or our ability to manage our existing debt obligations. However, for a company like ours, whose assets are primarily income-producing real estate, the consolidated debt to total consolidated market capitalization ratio may provide investors with an alternate indication of leverage, so long as it is evaluated along with other financial ratios and the various components of our outstanding indebtedness.

 

Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. However, there can be no assurance that we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs and/or difficulty in obtaining additional financing. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally. There is a risk that changes in our debt to market capitalization ratio, which is in part a function of our stock price, or our ratio of indebtedness to other measures of asset value used by financial analysts may have an adverse effect on the market price of our equity or debt securities.

 

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We face risks associated with property acquisitions.

 

We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure. Our acquisition activities and their success are subject to the following risks:

 

   

even if we enter into an acquisition agreement for a property, we may be unable to complete that acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs;

 

   

we may be unable to obtain or assume financing for acquisitions on favorable terms or at all;

 

   

acquired properties may fail to perform as expected;

 

   

the actual costs of repositioning, redeveloping or maintaining acquired properties may be greater than our estimates;

 

   

the acquisition agreement will likely contain conditions to closing, including completion of due diligence investigations to our satisfaction or other conditions that are not within our control, which may not be satisfied;

 

   

acquired properties may be located in new markets, either within or outside the United States, where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures;

 

   

we may acquire real estate through the acquisition of the ownership entity subjecting us to the risks of that entity; and

 

   

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and this could have an adverse effect on our results of operations and financial condition.

 

We have acquired in the past and in the future may acquire properties through the acquisition of first mortgage or mezzanine debt. Investments in these loans must be carefully structured to ensure that we satisfy the various asset and income requirements applicable to REITs. If we fail to structure any such acquisition properly, we could fail to qualify as a REIT. In addition, acquisitions of first mortgage or mezzanine loans subject us to the risks associated with the borrower’s default, including potential bankruptcy, and there may be significant delays and costs associated with the process of foreclosure on collateral securing or supporting these investments. There can be no assurance that we would recover any or all of our investment in the event of such a default or bankruptcy.

 

We have acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in BPLP. This acquisition structure has the effect, among others, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

 

Any future international activities will be subject to special risks and we may not be able to effectively manage our international business.

 

We have underwritten, and in the future may acquire, properties, portfolios of properties or interests in real-estate related entities on a strategic or selective basis in international markets that are new to us. If we acquire properties or platforms located in these markets, we will face risks associated with a lack of market knowledge and understanding of the local economy, forging new business relationships in the area and unfamiliarity with

 

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local laws and government and permitting procedures. In addition, our international operations will be subject to the usual risks of doing business abroad such as possible revisions in tax treaties or other laws and regulations, including those governing the taxation of our international income, restrictions on the transfer of funds and uncertainty over terrorist activities. We cannot predict the likelihood that any of these developments may occur. Further, we may in the future enter into agreements with non-U.S. entities that are governed by the laws of, and are subject to dispute resolution in the courts of, another country or region. We cannot accurately predict whether such a forum would provide us with an effective and efficient means of resolving disputes that may arise.

 

Investments in international markets may also subject us to risks associated with funding increasing headcount, integrating new offices, and establishing effective controls and procedures to regulate the operations of new offices and to monitor compliance with U.S. laws and regulations such as the Foreign Corrupt Practices Act and similar foreign laws and regulations.

 

We may be subject to risks from potential fluctuations in exchange rates between the U.S. dollar and the currencies of the other countries in which we invest.

 

If we invest in countries where the U.S. dollar is not the national currency, we will be subject to international currency risks from the potential fluctuations in exchange rates between the U.S. dollar and the currencies of those other countries. A significant depreciation in the value of the currency of one or more countries where we have a significant investment may materially affect our results of operations. We may attempt to mitigate any such effects by borrowing in the currency of the country in which we are investing and, under certain circumstances, by hedging exchange rate fluctuations; however, access to capital may be more restricted, or unavailable on favorable terms or at all, in certain locations. For leases denominated in international currencies, we may use derivative financial instruments to manage the international currency exchange risk. We cannot assure you, however, that our efforts will successfully neutralize all international currency risks.

 

Acquired properties may expose us to unknown liability.

 

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Unknown liabilities with respect to acquired properties might include:

 

   

liabilities for clean-up of undisclosed environmental contamination;

 

   

claims by tenants, vendors or other persons against the former owners of the properties;

 

   

liabilities incurred in the ordinary course of business; and

 

   

claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

 

Competition for acquisitions may result in increased prices for properties.

 

We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities with other investors, and this competition may adversely affect us by subjecting us to the following risks:

 

   

we may be unable to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and private REITs, institutional investment funds and other real estate investors; and

 

   

even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price.

 

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Our use of joint ventures may limit our flexibility with jointly owned investments.

 

In appropriate circumstances, we intend to develop, acquire and recapitalize properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. We currently have joint ventures that are and are not consolidated within our financial statements. Our share of the aggregate revenue from all of our joint ventures represented approximately 19.5% of our total revenue (the sum of our total consolidated revenue and our share of such joint venture revenue) for the three months ended December 31, 2014. Our participation in joint ventures is subject to the risks that:

 

   

we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop, finance or operate a property and could lead to the sale of either parties ownership interest or the property;

 

   

some of our joint ventures are subject to debt and in the current credit markets the refinancing of such debt may require equity capital calls;

 

   

our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves;

 

   

our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any sale or refinancing of properties;

 

   

our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest;

 

   

our joint venture partners may have competing interests in our markets that could create conflicts of interest; and

 

   

our joint ventures may be unable to repay any amounts that we may loan to them.

 

Our properties face significant competition.

 

We face significant competition from developers, owners and operators of office and residential properties and other commercial real estate, including sublease space available from our tenants. Substantially all of our properties face competition from similar properties in the same market. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lease available space at lower rates than the space in our properties.

 

We face potential difficulties or delays renewing leases or re-leasing space.

 

We derive most of our income from rent received from our tenants. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our cash flow could decrease and our ability to make distributions to our securityholders could be adversely affected.

 

We face potential adverse effects from major tenants’ bankruptcies or insolvencies.

 

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties. Our tenants could file for bankruptcy protection or become insolvent in the future. We cannot evict a tenant solely because of its bankruptcy. On the other hand, a bankrupt tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flow and results of operations.

 

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We may have difficulty selling our properties, which may limit our flexibility.

 

Properties like the ones that we own could be difficult to sell. This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions. In addition, federal tax laws limit our ability to sell properties and this may affect our ability to sell properties without adversely affecting returns to our securityholders. These restrictions reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.

 

Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we developed and have owned for a significant period of time or which we acquired through tax deferred contribution transactions in exchange for partnership interests in BPLP often have low tax bases. Furthermore, as a REIT, we may be subject to a 100% “prohibited transactions” tax on the gain from dispositions of property if we are deemed to hold the property primarily for sale to customers in the ordinary course of business, unless the disposition qualifies under a safe harbor exception for properties that have been held for at least two years and with respect to which certain other requirements are met. The potential application of the prohibited transactions tax could cause us to forego potential dispositions of property or other opportunities that might otherwise be attractive to us, or to undertake such dispositions or other opportunities through a taxable REIT subsidiary, which would generally result in income taxes being incurred. If we dispose of these properties outright in taxable transactions, we may be required to distribute a significant amount of the taxable gain to our securityholders under the requirements of the Internal Revenue Code for REITs, which in turn would impact our future cash flow and may increase our leverage. In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for our partnership interests under tax protection agreements with contributors. To dispose of low basis or tax-protected properties efficiently we from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).

 

Because we own a hotel property, we face the risks associated with the hospitality industry.

 

The following factors, among others, are common to the hotel industry, and may reduce the receipts generated by our hotel property:

 

   

our hotel property competes for guests with other hotels, a number of which may have greater marketing and financial resources than our hotel-operating business partners;

 

   

if there is an increase in operating costs resulting from inflation and other factors, our hotel-operating business partners may not be able to offset such increase by increasing room rates;

 

   

our hotel property is subject to the fluctuating and seasonal demands of business travelers and tourism; and

 

   

our hotel property is subject to general and local economic and social conditions that may affect demand for travel in general, including war and terrorism.

 

In addition, because our hotel property is located in Cambridge, Massachusetts, it is subject to the Cambridge market’s fluctuations in demand, increases in operating costs and increased competition from additions in supply.

 

We face risks associated with short-term liquid investments.

 

We continue to have significant cash balances that we invest in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. From time to time, these investments may include (either directly or indirectly):

 

   

direct obligations issued by the U.S. Treasury;

 

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obligations issued or guaranteed by the U.S. government or its agencies;

 

   

taxable municipal securities;

 

   

obligations (including certificates of deposit) of banks and thrifts;

 

   

commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;

 

   

repurchase agreements collateralized by corporate and asset-backed obligations;

 

   

both registered and unregistered money market funds; and

 

   

other highly rated short-term securities.

 

Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our investment, and our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.

 

Failure to qualify as a real estate investment trust would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of dividends.

 

If we fail to qualify as a REIT for federal income tax purposes, we will be taxed as a corporation unless certain relief provisions apply. We believe that we are organized and qualified as a REIT and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

 

In addition, we currently hold certain of our properties through subsidiaries that have elected to be taxed as REITs and we may in the future determine that it is in our best interests to hold one or more of our other properties through one or more subsidiaries that elect to be taxed as REITs. If any of these subsidiaries fails to qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes.

 

If we fail to qualify as a REIT then, unless certain relief provisions apply, we will face serious tax consequences that will substantially reduce the funds available for payment of dividends for each of the years involved because:

 

   

we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified.

 

In addition, if we fail to qualify as a REIT and the relief provisions do not apply, we will no longer be required to pay dividends. As a result of all these factors, our failure to qualify as a REIT could impair our ability

 

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to raise capital and expand our business, and it would adversely affect the value of our common stock. If we fail to qualify as a REIT but are eligible for certain relief provisions, then we may retain our status as a REIT but may be required to pay a penalty tax, which could be substantial.

 

In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.

 

In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains and with certain other adjustments. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may need short-term debt or long-term debt or proceeds from asset sales, creation of joint ventures or sales of common stock to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.

 

Limits on changes in control may discourage takeover attempts beneficial to stockholders.

 

Provisions in our Charter and bylaws, our shareholder rights agreement and the limited partnership agreement of BPLP, as well as provisions of the Internal Revenue Code and Delaware corporate law, may:

 

   

delay or prevent a change of control over us or a tender offer, even if such action might be beneficial to our stockholders; and

 

   

limit our stockholders’ opportunity to receive a potential premium for their shares of common stock over then-prevailing market prices.

 

Stock Ownership Limit

 

To facilitate maintenance of our qualification as a REIT and to otherwise address concerns relating to concentration of stock ownership, our Charter generally prohibits ownership, directly, indirectly or beneficially, by any single stockholder of more than 6.6% of the number of outstanding shares of any class or series of our common stock. We refer to this limitation as the “ownership limit.” Our Board of Directors may waive, in its sole discretion, or modify the ownership limit with respect to one or more persons if it is satisfied that ownership in excess of this limit will not jeopardize our status as a REIT for federal income tax purposes. In addition, under our Charter each of Mortimer B. Zuckerman and the respective families and affiliates of Mortimer B. Zuckerman and Edward H. Linde, as well as, in general, pension plans and mutual funds, may actually and beneficially own up to 15% of the number of outstanding shares of any class or series of our equity common stock. Shares owned in violation of the ownership limit will be subject to the loss of rights to distributions and voting and other penalties. The ownership limit may have the effect of inhibiting or impeding a change in control.

 

BPLP’s Partnership Agreement

 

We have agreed in the limited partnership agreement of BPLP not to engage in specified extraordinary transactions, including, among others, business combinations, unless limited partners of BPLP other than us receive, or have the opportunity to receive, either (1) the same consideration for their partnership interests as holders of our common stock in the transaction or (2) limited partnership units that, among other things, would entitle the holders, upon redemption of these units, to receive shares of common equity of a publicly traded

 

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company or the same consideration as holders of our common stock received in the transaction. If these limited partners would not receive such consideration, we cannot engage in the transaction unless limited partners holding at least 75% of the common units of limited partnership interest, other than those held by Boston Properties, Inc. or its affiliates, consent to the transaction. In addition, we have agreed in the limited partnership agreement of BPLP that we will not complete specified extraordinary transactions, including among others, business combinations, in which we receive the approval of our common stockholders unless (1) limited partners holding at least 75% of the common units of limited partnership interest, other than those held by Boston Properties, Inc. or its affiliates, consent to the transaction or (2) the limited partners of BPLP are also allowed to vote and the transaction would have been approved had these limited partners been able to vote as common stockholders on the transaction. Therefore, if our common stockholders approve a specified extraordinary transaction, the partnership agreement requires the following before we can complete the transaction:

 

   

holders of partnership interests in BPLP, including Boston Properties, Inc., must vote on the matter;

 

   

Boston Properties, Inc. must vote its partnership interests in the same proportion as our stockholders voted on the transaction; and

 

   

the result of the vote of holders of partnership interests in BPLP must be such that had such vote been a vote of stockholders, the business combination would have been approved.

 

As a result of these provisions, a potential acquirer may be deterred from making an acquisition proposal, and we may be prohibited by contract from engaging in a proposed extraordinary transaction, including a proposed business combination, even though our stockholders approve of the transaction.

 

Shareholder Rights Plan

 

We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. This would substantially reduce the value and influence of the stock owned by the acquiring person. Our Board of Directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.

 

Changes in market conditions could adversely affect the market price of our common stock.

 

As with other publicly traded equity securities, the value of our common stock depends on various market conditions that may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

 

   

the extent of investor interest in our securities;

 

   

the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

 

   

our underlying asset value;

 

   

investor confidence in the stock and bond markets, generally;

 

   

national economic conditions;

 

   

changes in tax laws;

 

   

our financial performance;

 

   

changes in our credit ratings; and

 

   

general stock and bond market conditions.

 

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The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends. Consequently, our common stock may trade at prices that are greater or less than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish.

 

Further issuances of equity securities may be dilutive to current securityholders.

 

The interests of our existing securityholders could be diluted if additional equity securities are issued to finance future developments, acquisitions, or repay indebtedness. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.

 

The number of shares available for future sale could adversely affect the market price of our stock.

 

In connection with and subsequent to our initial public offering, we have completed many private placement transactions in which shares of stock of Boston Properties, Inc. or partnership interests in BPLP were issued to owners of properties we acquired or to institutional investors. This common stock, or common stock issuable in exchange for such partnership interests in BPLP, may be sold in the public securities markets over time under registration rights we granted to these investors. Additional common stock issuable under our employee benefit and other incentive plans, including as a result of the grant of stock options and restricted equity securities, may also be sold in the market at some time in the future. Future sales of our common stock in the market could adversely affect the price of our common stock. We cannot predict the effect the perception in the market that such sales may occur will have on the market price of our common stock.

 

We may change our policies without obtaining the approval of our stockholders.

 

Our operating and financial policies, including our policies with respect to acquisitions of real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by our Board of Directors. Accordingly, our securityholders do not control these policies.

 

Our success depends on key personnel whose continued service is not guaranteed.

 

We depend on the efforts of key personnel, particularly Owen D. Thomas, our Chief Executive Officer, Douglas T. Linde, our President, and Raymond A. Ritchey, Executive Vice President, National Director of Acquisitions and Development. Among the reasons that Messrs. Thomas, Linde and Ritchey are important to our success is that each has a national reputation, which attracts business and investment opportunities and assists us in negotiations with lenders, joint venture partners and other investors. If we lost their services, our relationships with lenders, potential tenants and industry personnel could diminish.

 

Our Chief Financial Officer and Regional Managers also have strong reputations. Their reputations aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit prospects. While we believe that we could find replacements for these key personnel, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, prospective tenants and industry personnel.

 

Conflicts of interest exist with holders of interests in BPLP.

 

Sales of properties and repayment of related indebtedness will have different effects on holders of interests in BPLP than on our stockholders.

 

Some holders of interests in BPLP, including Mortimer B. Zuckerman, could incur adverse tax consequences upon the sale of certain of our properties and on the repayment of related debt which differ from

 

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the tax consequences to us and our stockholders. Consequently, such holders of partnership interests in BPLP may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While we have exclusive authority under the limited partnership agreement of BPLP to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, subject, in the case of certain properties, to the contractual commitments described below, any such decision would require the approval of our Board of Directors. While the Board of Directors has a policy with respect to these matters, Mr. Zuckerman, as Chairman, and Mr. D. Linde, as a director and executive officer, could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness.

 

Agreement not to sell some properties.

 

We have entered into agreements with respect to some properties that we have acquired in exchange for partnership interests in BPLP. Pursuant to those agreements, we have agreed not to sell or otherwise transfer some of our properties, prior to specified dates, in any transaction that would trigger taxable income and we are responsible for the reimbursement of certain tax-related costs to the prior owners if the subject properties are sold in a taxable sale. In general, our obligations to the prior owners are limited in time and only apply to actual damages suffered. As of December 31, 2014, there were a total of three properties subject to these restrictions. In the aggregate, these properties accounted for approximately 13% of our total revenue (the sum of our total consolidated revenue and our share of joint venture revenue) for the year ended December 31, 2014.

 

BPLP has also entered into agreements providing prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness they guarantee is repaid or reduced, additional and/or substitute indebtedness. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements.

 

Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.

 

The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our securityholders.

 

Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.

 

Failure to comply with Federal government contractor requirements could result in substantial costs and loss of substantial revenue.

 

We are subject to compliance with a wide variety of complex legal requirements because we are a Federal government contractor. These laws regulate how we conduct business, require us to administer various compliance programs and require us to impose compliance responsibilities on some of our contractors. Our failure to comply with these laws could subject us to fines, penalties and damages, cause us to be in default of our leases and other contracts with the Federal government and bar us from entering into future leases and other

 

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contracts with the Federal government. There can be no assurance that these costs and loss of revenue will not have a material adverse effect on our properties, operations or business.

 

Some potential losses are not covered by insurance.

 

We carry insurance coverage on our properties of types and in amounts and with deductibles that we believe are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act (as amended, “TRIA”) was enacted in November 2002 to require regulated insurers to make available coverage for “certified” acts of terrorism (as defined by the statute). The expiration date of TRIA was extended to December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 and further extended to December 31, 2020 by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), and we can provide no assurance that it will be extended further. Currently, the per occurrence limits of our portfolio property insurance program are $1.0 billion, including coverage for acts of terrorism other than nuclear, biological, chemical or radiological terrorism (“Terrorism Coverage”). We also carry $250 million of Terrorism Coverage for 601 Lexington Avenue, New York, New York (“601 Lexington Avenue”) in excess of the $1.0 billion of Terrorism Coverage in our property insurance program. Certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), are currently insured in separate insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are $1.625 billion, including Terrorism Coverage. Through June 9, 2014, $1.375 billion of the Terrorism Coverage for 767 Fifth Avenue in excess of $250 million was provided by NYXP, LLC (“NYXP”), as a direct insurer. After June 9, 2014, all of the Terrorism Coverage for 767 Fifth Avenue has been provided by third party insurers. We also currently carry nuclear, biological, chemical and radiological terrorism insurance coverage for acts of terrorism certified under TRIA (“NBCR Coverage”), which is provided by IXP, as a direct insurer, for the properties in our portfolio, including 767 Fifth Avenue, but excluding certain other properties owned in joint ventures with third parties or which we manage. The per occurrence limit for NBCR Coverage is $1 billion. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage provided by IXP and the Terrorism Coverage provided by NYXP are backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger. In 2015, the program trigger is $100.0 million and the coinsurance is 15%, however both will increase in subsequent years pursuant to TRIPRA. If the Federal Government pays out for a loss under TRIA, it is mandatory that the Federal Government recoup the full amount of the loss from insurers offering TRIA coverage after the payment of the loss pursuant to a formula in TRIPRA. We may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if there is a change in our portfolio or for any other reason. We intend to continue to monitor the scope, nature and cost of available terrorism insurance and maintain terrorism insurance in amounts and on terms that are commercially reasonable.

 

We also currently carry earthquake insurance on our properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that we believe is commercially reasonable. In addition, this insurance is subject to a deductible in the amount of 5% of the value of the affected property. Specifically, we currently carry earthquake insurance which covers our San Francisco region (excluding Salesforce Tower and through October 22, 2014 excluding 535 Mission Street) with a $170 million per occurrence limit (increased on March 1, 2015 from $120 million) and a $170 million annual aggregate limit (increased on March 1, 2015 from $120 million), $20 million of which is provided by IXP, as a direct insurer. The builders risk policy maintained for the development of 535 Mission Street in San Francisco included a $15 million per occurrence and annual aggregate limit of earthquake coverage through October 22, 2014, after which time 535 Mission Street was included in our portfolio earthquake insurance program. In addition, the builders risk policy maintained for the development of Salesforce Tower in San Francisco includes a $60 million per occurrence and annual aggregate limit of earthquake coverage (increased from $15 million on July 29, 2014). The amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact our ability to finance properties subject to earthquake risk. We may discontinue earthquake insurance or change the structure of our earthquake insurance program on some or all of our properties in the future if the premiums exceed our estimation of the value of the coverage.

 

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IXP, a captive insurance company which is a wholly-owned subsidiary, acts as a direct insurer with respect to a portion of our earthquake insurance coverage for our Greater San Francisco properties and our NBCR Coverage. NYXP, a captive insurance company which is a wholly-owned subsidiary, acted as a direct insurer with respect to a portion of our Terrorism Coverage for 767 Fifth Avenue through June 9, 2014. NYXP only insured losses which exceeded the program trigger under TRIA and NYXP reinsured with a third-party insurance company any coinsurance payable under TRIA. Insofar as we own IXP and NYXP, we are responsible for their liquidity and capital resources, and the accounts of IXP and NYXP are part of our consolidated financial statements. In particular, if a loss occurs which is covered by our NBCR Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government. IXP and NYXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and their insurance policies are maintained after the payout by the Federal Government. If we experience a loss and IXP or NYXP are required to pay under their insurance policies, we would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP and NYXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance. In addition, our Operating Partnership has issued a guarantee to cover liabilities of IXP in the amount of $20.0 million.

 

The mortgages on our properties typically contain requirements concerning the financial ratings of the insurers who provide policies covering the property. We provide the lenders on a regular basis with the identity of the insurance companies in our insurance programs. The ratings of some of our insurers are below the rating requirements in some of our loan agreements and the lenders for these loans could attempt to claim an event of default has occurred under the loan. We believe we could obtain insurance with insurers which satisfy the rating requirements. Additionally, in the future our ability to obtain debt financing secured by individual properties, or the terms of such financing, may be adversely affected if lenders generally insist on ratings for insurers or amounts of insurance which are difficult to obtain or which result in a commercially unreasonable premium. There can be no assurance that a deficiency in the financial ratings of one or more of our insurers will not have a material adverse effect on us.

 

We continue to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism and California earthquake risk in particular, but we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars, for which we cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that we could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and financial condition and results of operations.

 

Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.

 

We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or threatened terrorism attacks, including Boston, New York, San Francisco and Washington, DC. As a result, some tenants in these markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future terrorist activity. This could result in an overall decrease in the demand for office space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “—Some potential losses are not covered by insurance.

 

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We face risks associated with our tenants and contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control.

 

Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Certain of our loan and other agreements require us to comply with OFAC Requirements. We have established a compliance program whereby tenants and others with whom we conduct business are checked against the OFAC list of Prohibited Persons prior to entering into any agreement and on a periodic basis thereafter. Our leases and other agreements, in general, require the other party to comply with OFAC Requirements. If a tenant or other party with whom we contract is placed on the OFAC list we may be required by the OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by the other party that the termination was wrongful.

 

We face possible risks associated with the physical effects of climate change.

 

We cannot assert with certainty whether climate change is occurring and, if so, at what rate. However, the physical effects of climate change could have a material adverse effect on our properties, operations and business. For example, many of our properties are located along the East and West coasts, particularly those in the Central Business Districts of Boston, New York, and San Francisco. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining demand for office space in our buildings or our inability to operate the buildings at all. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy and increasing the cost of snow removal at our properties. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.

 

Potential liability for environmental contamination could result in substantial costs.

 

Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our securityholders, because: as owner or operator we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination; the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination; even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

 

These costs could be substantial and in extreme cases could exceed the amount of our insurance or the value of the contaminated property. We currently carry environmental insurance in an amount and subject to deductibles that we believe are commercially reasonable. Specifically, we carry a pollution legal liability policy with a $20 million limit per incident and a policy aggregate limit of $40 million. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with contamination. Changes in laws, regulations and practices and their implementation increasing the potential liability for environmental conditions existing at our properties, or increasing the restrictions on the handling, storage or discharge of hazardous or toxic substances or petroleum products or other actions may result in significant unanticipated expenditures.

 

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Environmental laws also govern the presence, maintenance and removal of asbestos and other building materials. For example, laws require that owners or operators of buildings containing asbestos:

 

   

properly manage and maintain the asbestos;

 

   

notify and train those who may come into contact with asbestos; and

 

   

undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

 

Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

 

Some of our properties are located in urban and previously developed areas where fill or current or historic industrial uses of the areas have caused site contamination. It is our policy to retain independent environmental consultants to conduct or update Phase I environmental site assessments and asbestos surveys with respect to our acquisition of properties. These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling. Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead and other contaminants in drinking water and, for soil and/or groundwater contamination where underground storage tanks are or were located or where other past site usage creates a potential environmental problem. Even though these environmental assessments are conducted, there is still the risk that:

 

   

the environmental assessments and updates did not identify all potential environmental liabilities;

 

   

a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments;

 

   

new environmental liabilities have developed since the environmental assessments were conducted; and

 

   

future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us.

 

Inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our properties, we may be subject to third-party claims for personal injury, or may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of the affected property.

 

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems.

 

We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number,

 

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intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

 

A security breach or other significant disruption involving our IT networks and related systems could:

 

   

disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;

 

   

result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;

 

   

result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;

 

   

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;

 

   

result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;

 

   

require significant management attention and resources to remedy any damages that result;

 

   

subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or

 

   

damage our reputation among our tenants and investors generally.

 

Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

 

We did not obtain new owner’s title insurance policies in connection with properties acquired during our initial public offering.

 

We acquired many of our properties from our predecessors at the completion of our initial public offering in June 1997. Before we acquired these properties, each of them was insured by a title insurance policy. We did not obtain new owner’s title insurance policies in connection with the acquisition of these properties. To the extent we have financed properties after acquiring them in connection with the initial public offering, we have obtained new title insurance policies, however, the amount of these policies may be less than the current or future value of the applicable properties. Nevertheless, because in many instances we acquired these properties indirectly by acquiring ownership of the entity that owned the property and those owners remain in existence as our subsidiaries, some of these title insurance policies may continue to benefit us. Many of these title insurance policies may be for amounts less than the current or future values of the applicable properties. If there was a title defect related to any of these properties, or to any of the properties acquired at the time of our initial public offering, that is no longer covered by a title insurance policy, we could lose both our capital invested in and our

 

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anticipated profits from such property. We have obtained title insurance policies for all properties that we have acquired after our initial public offering, however, these policies may be for amounts less than the current or future values of the applicable properties.

 

We may be subject to adverse legislative or regulatory tax changes that could negatively impact our financial condition.

 

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended, including with respect to our hotel ownership structure. We cannot predict if or when any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing U.S. federal income tax law, Treasury regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We, our taxable REIT subsidiaries, and our shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, Treasury regulation or administrative interpretation.

 

We face possible adverse state local tax audits and changes in state and local tax law.

 

Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits. Although we believe that we have substantial arguments in favor of our positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.

 

From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for the payment of dividends.

 

Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants.

 

Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the Securities and Exchange Commission, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Proposed changes include, but are not limited to, changes in lease accounting and the adoption of accounting standards likely to require the increased use of “fair-value” measures.

 

These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could affect our tenants’ preferences regarding leasing real estate.

 

Item 1B. Unresolved Staff Comments

 

None.

 

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Item 2. Properties.

 

At December 31, 2014, we owned or had interests in 169 properties, totaling approximately 45.8 million net rentable square feet, including ten properties under construction totaling approximately 3.3 million net rentable square feet. In addition, we had structured parking for approximately 43,824 vehicles containing approximately 15.0 million square feet. Our properties consisted of (1) 160 office properties, including 129 Class A office buildings, including nine properties under construction, and 31 properties that support both office and technical uses, (2) five retail properties (including one under construction), (3) one hotel and (4) three residential properties. In addition, we own or control 490.8 acres of land for future development. The table set forth below shows information relating to the properties we owned, or in which we had an ownership interest, at December 31, 2014.

 

Properties

  Location   %
Leased as of
December 31, 2014
    Number
of
Buildings
    Net
Rentable
Square Feet
 

Class A Office

       

767 Fifth Avenue (The General Motors Building) (60% ownership)

  New York, NY     98.9     1        1,809,775   

John Hancock Tower

  Boston, MA     97.2     1        1,722,102   

399 Park Avenue

  New York, NY     99.0     1        1,710,383   

601 Lexington Avenue (55% ownership)

  New York, NY     99.8     1        1,631,300   

100 Federal Street (55% ownership)

  Boston, MA     89.6     1        1,265,411   

Times Square Tower (55% ownership)

  New York, NY     100.0     1        1,246,731   

800 Boylston Street—The Prudential Center

  Boston, MA     96.4     1        1,227,964   

599 Lexington Avenue

  New York, NY     99.2     1        1,045,128   

Bay Colony Corporate Center

  Waltham, MA     78.7     4        996,317   

250 West 55th Street

  New York, NY     55.1     1        987,800   

Embarcadero Center Four

  San Francisco, CA     92.1     1        934,407   

111 Huntington Avenue—The Prudential Center

  Boston, MA     97.2     1        860,455   

Embarcadero Center One

  San Francisco, CA     93.8     1        830,854   

Atlantic Wharf Office (55% ownership)

  Boston, MA     100.0     1        793,827   

Embarcadero Center Two

  San Francisco, CA     98.4     1        779,800   

Embarcadero Center Three

  San Francisco, CA     97.8     1        774,981   

Capital Gallery

  Washington, DC     95.8     1        631,029   

South of Market

  Reston, VA     100.0     3        623,665   

Metropolitan Square (51% ownership) (1)

  Washington, DC     88.6     1        589,288   

3100-3130 Zanker Road (formerly 3200 Zanker Road)

  San Jose, CA     19.5     4        543,900   

901 New York Avenue (25% ownership) (1)

  Washington, DC     100.0     1        539,679   

Reservoir Place

  Waltham, MA     90.6     1        527,860   

680 Folsom Street

  San Francisco, CA     91.8     2        524,793   

Fountain Square (50% ownership)

  Reston, VA     99.3     2        521,707   

601 and 651 Gateway

  South San Francisco, CA     95.3     2        506,280   

101 Huntington Avenue—The Prudential Center

  Boston, MA     32.6     1        505,249   

2200 Pennsylvania Avenue

  Washington, DC     98.1     1        458,831   

One Freedom Square

  Reston, VA     100.0     1        432,581   

 

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Table of Contents

Properties

  Location   %
Leased as of
December 31, 2014
    Number
of
Buildings
    Net
Rentable
Square Feet
 

Two Freedom Square

  Reston, VA     100.0     1        421,757   

One Tower Center

  East Brunswick, NJ     33.7     1        412,797   

Market Square North (50% ownership) (1)

  Washington, DC     94.0     1        406,797   

140 Kendrick Street

  Needham, MA     99.5     3        380,987   

One and Two Discovery Square

  Reston, VA     100.0     2        366,990   

Weston Corporate Center

  Weston, MA     100.0     1        356,995   

510 Madison Avenue

  New York, NY     82.7     1        355,598   

505 9th Street, N.W. (50% ownership)

  Washington, DC     100.0     1        321,943   

One Reston Overlook

  Reston, VA     100.0     1        319,519   

1333 New Hampshire Avenue

  Washington, DC     93.1     1        315,371   

Waltham Weston Corporate Center

  Waltham, MA     97.2     1        306,687   

230 CityPoint

  Waltham, MA     85.1     1        300,573   

Wisconsin Place Office

  Chevy Chase, MD     100.0     1        299,186   

540 Madison Avenue (60% ownership)(1)

  New York, NY     83.6     1        283,695   

Quorum Office Park

  Chelmsford, MA     90.0     2        267,527   

355 Main Street (formerly Five Cambridge Center)

  Cambridge, MA     100.0     1        264,708   

Reston Corporate Center

  Reston, VA     100.0     2        261,046   

611 Gateway

  South San Francisco, CA     81.2     1        260,337   

Democracy Tower

  Reston, VA     100.0     1        259,441   

New Dominion Technology Park—Building Two

  Herndon, VA     100.0     1        257,400   

200 West Street

  Waltham, MA     96.2     1        256,245   

1330 Connecticut Avenue

  Washington, DC     100.0     1        252,136   

500 E Street, S.W.

  Washington, DC     100.0     1        251,994   

New Dominion Technology Park—Building One

  Herndon, VA     100.0     1        235,201   

510 Carnegie Center

  Princeton, NJ     100.0     1        234,160   

500 North Capitol Street, N.W. (30% ownership) (1)

  Washington, DC     90.9     1        231,411   

90 Broadway (formerly Four Cambridge Center)

  Cambridge, MA     97.1     1        222,656   

255 Main Street (formerly One Cambridge Center)

  Cambridge, MA     100.0     1        215,629   

77 CityPoint

  Waltham, MA     82.8     1        209,707   

Sumner Square

  Washington, DC     98.5     1        208,892   

University Place

  Cambridge, MA     100.0     1        195,282   

300 Binney Street (formerly Seventeen Cambridge Center)

  Cambridge, MA     100.0     1        195,191   

North First Business Park (2)

  San Jose, CA     100.0     5        190,636   

2600 Tower Oaks Boulevard

  Rockville, MD     63.2     1        179,369   

150 Broadway (formerly Eight Cambridge Center)

  Cambridge, MA     100.0     1        177,226   

Lexington Office Park

  Lexington, MA     83.4     2        166,759   

210 Carnegie Center

  Princeton, NJ     79.3     1        162,372   

206 Carnegie Center

  Princeton, NJ     100.0     1        161,763   

191 Spring Street

  Lexington, MA     100.0     1        158,900   

Kingstowne Two

  Alexandria, VA     68.5     1        156,251   

 

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Table of Contents

Properties

  Location   %
Leased as of
December 31, 2014
    Number
of
Buildings
    Net
Rentable
Square Feet
 

105 Broadway (formerly Ten Cambridge Center)

  Cambridge, MA     100.0     1        152,664   

212 Carnegie Center

  Princeton, NJ     89.8     1        151,547   

Kingstowne One

  Alexandria, VA     88.6     1        151,483   

214 Carnegie Center

  Princeton, NJ     77.7     1        150,774   

506 Carnegie Center

  Princeton, NJ     100.0     1        149,110   

2440 West El Camino Real

  Mountain View, CA     100.0     1        141,392   

Two Reston Overlook

  Reston, VA     100.0     1        134,615   

508 Carnegie Center

  Princeton, NJ     92.6     1        134,433   

202 Carnegie Center

  Princeton, NJ     94.2     1        130,582   

101 Carnegie Center

  Princeton, NJ     83.9     1        125,468   

504 Carnegie Center

  Princeton, NJ     100.0     1        121,990   

40 Shattuck Road

  Andover, MA     86.3     1        121,216   

91 Hartwell Avenue

  Lexington, MA     73.2     1        120,458   

701 Carnegie Center

  Princeton, NJ     100.0     1        120,000   

Annapolis Junction Building Six (50% ownership) (1)

  Annapolis, MD     48.9     1        119,339   

Annapolis Junction Building One (50% ownership) (1)

  Annapolis, MD     70.7     1        117,599   

502 Carnegie Center

  Princeton, NJ     93.2     1        117,302   

325 Main Street (formerly Three Cambridge Center)

  Cambridge, MA     100.0     1        115,061   

201 Spring Street

  Lexington, MA     100.0     1        106,300   

104 Carnegie Center

  Princeton, NJ     86.0     1        102,830   

33 Hayden Avenue

  Lexington, MA     100.0     1        80,872   

145 Broadway (formerly Eleven Cambridge Center)

  Cambridge, MA     100.0     1        79,616   

Reservoir Place North

  Waltham, MA     100.0     1        73,258   

105 Carnegie Center

  Princeton, NJ     62.7     1        69,955   

32 Hartwell Avenue

  Lexington, MA     100.0     1        69,154   

302 Carnegie Center

  Princeton, NJ     100.0     1        64,926   

195 West Street

  Waltham, MA     100.0     1        63,500   

100 Hayden Avenue

  Lexington, MA     100.0     1        55,924   

181 Spring Street

  Lexington, MA     100.0     1        55,793   

211 Carnegie Center

  Princeton, NJ     100.0     1        47,025   

92 Hayden Avenue

  Lexington, MA     100.0     1        31,100   

201 Carnegie Center

  Princeton, NJ     100.0            6,500   
   

 

 

   

 

 

   

 

 

 

Subtotal for Class A Office Properties

      91.7     120        38,785,017   
   

 

 

   

 

 

   

 

 

 

Retail

       

Shops at The Prudential Center

  Boston, MA     97.5     1        502,813   

Fountain Square Retail (50% ownership)

  Reston, VA     99.1     1        234,339   

Kingstowne Retail

  Alexandria, VA     100.0     1        88,288   

Star Market at the Prudential Center

  Boston, MA     100.0     1        57,235   
   

 

 

   

 

 

   

 

 

 

Subtotal for Retail Properties

      98.4     4        882,675   
   

 

 

   

 

 

   

 

 

 

Office/Technical Properties

       

Mountain View Research Park

  Mountain View, CA     100.0     15        540,433   

415 Main Street (formerly Seven Cambridge Center)

  Cambridge, MA     100.0     1        231,028   

7601 Boston Boulevard

  Springfield, VA     100.0     1        114,028   

7435 Boston Boulevard

  Springfield, VA     67.1     1        103,557   

 

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Table of Contents

Properties

  Location   %
Leased as of
December 31, 2014
    Number
of
Buildings
    Net
Rentable
Square Feet
 

8000 Grainger Court

  Springfield, VA     37.6     1        88,775   

7500 Boston Boulevard

  Springfield, VA     100.0     1        79,971   

7501 Boston Boulevard

  Springfield, VA     100.0     1        75,756   

250 Binney Street (formerly Fourteen Cambridge Center)

  Cambridge, MA     100.0     1        67,362   

164 Lexington Road

  Billerica, MA         1        64,140   

7450 Boston Boulevard

  Springfield, VA     83.4     1        62,402   

7374 Boston Boulevard

  Springfield, VA     100.0     1        57,321   

8000 Corporate Court

  Springfield, VA     100.0     1        52,539   

7451 Boston Boulevard

  Springfield, VA     67.4     1        45,615   

7300 Boston Boulevard

  Springfield, VA     100.0     1        32,000   

17 Hartwell Avenue

  Lexington, MA         1        30,000   

453 Ravendale Drive

  Mountain View, CA     100.0     1        29,620   

7375 Boston Boulevard

  Springfield, VA     100.0     1        26,865   
   

 

 

   

 

 

   

 

 

 

Subtotal for Office/Technical Properties

      87.7     31        1,701,412   
   

 

 

   

 

 

   

 

 

 

Residential Properties

       

The Avant at Reston Town Center (359 units)

  Reston, VA     72.2 %(3)      1        355,347 (4) 

Residences on The Avenue (335 units) (5)

  Washington, DC     94.1 %(3)      1        323,050 (6) 

The Lofts at Atlantic Wharf (86 units)

  Boston, MA     96.1 %(3)      1        87,097 (7) 
   

 

 

   

 

 

   

 

 

 

Subtotal for Residential Properties

      83.7     3        765,494   
   

 

 

   

 

 

   

 

 

 

Hotel Property

       

Boston Marriott Cambridge (formerly Cambridge Center Marriott) (433 rooms)

  Cambridge, MA     80.9 %(8)      1        334,260 (9) 
   

 

 

   

 

 

   

 

 

 

Subtotal for Hotel Property

      80.9     1        334,260   
   

 

 

   

 

 

   

 

 

 

Subtotal for In-Service Properties

      91.7     159        42,468,858   
   

 

 

   

 

 

   

 

 

 

Structured Parking (43,824 spaces)

          14,985,141   
       

 

 

 

Properties Under Construction (10)

       

Office:

       

Annapolis Junction Building Seven (50% ownership) (1)

  Annapolis, MD     100     1        125,000   

690 Folsom Street (11)

  San Francisco, CA     58     1        25,000   

Prudential Retail Expansion

  Boston, MA                15,000   

804 Carnegie Center

  Princeton, NJ     100     1        130,000   

Annapolis Junction Building Eight (50% ownership) (1)

  Annapolis, MD         1        125,000   

99 Third Avenue Retail

  Waltham, MA     84     1        16,500   

535 Mission Street (12)

  San Francisco, CA     66     1        307,000   

10 CityPoint

  Waltham, MA     74     1        245,000   

601 Massachusetts Avenue

  Washington, DC     83     1        478,000   

888 Boylston Street

  Boston, MA     36     1        425,000   

Salesforce Tower (95% ownership)

  San Francisco, CA     51     1        1,400,000   
   

 

 

   

 

 

   

 

 

 

Subtotal for Properties Under Construction

      59     10        3,291,500   
   

 

 

   

 

 

   

 

 

 

Total Portfolio

        169        60,745,499   
     

 

 

   

 

 

 

 

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Table of Contents

 

(1) Property is an unconsolidated joint venture.
(2) Property held for redevelopment as of December 31, 2014, with the potential to develop a total of approximately 1.6 million square feet at this location.
(3) Note that these amounts are not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(4) Includes 26,179 square feet of retail space which is 100% leased as of December 31, 2014. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(5) See Note 20 to the Consolidated Financial Statements.
(6) Includes 49,528 square feet of retail space which is 100% leased as of December 31, 2014. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(7) Includes 9,617 square feet of retail space which is 100% leased as of December 31, 2014. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(8) Represents the weighted-average room occupancy for the year ended December 31, 2014. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(9) Includes 4,260 square feet of retail space which is 100% leased of December 31, 2014. Note that this amount is not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2014.
(10) Represents percentage leased as of February 23, 2015.
(11) As of February 23, 2015 this property was 58% placed in-service.
(12) As of February 23, 2015 this property was 31% placed in-service.

 

Percentage Leased and Average Annualized Revenue per Square Foot for In-Service Properties

 

The following table sets forth our percentage leased and average annualized revenue per square foot on a historical basis for our In-Service Properties.

 

    December 31,
2010
    December 31,
2011
    December 31,
2012
    December 31,
2013
    December 31,
2014
 

Percentage leased

    93.2     91.3     91.4     93.4     91.7

Average annualized revenue per square foot(1)

  $ 53.21      $ 53.58      $ 55.43      $ 56.36      $ 58.97   

 

(1) Represents the monthly contractual base rents and recoveries from tenants under existing leases as of December 31, 2010, 2011, 2012, 2013 and 2014 multiplied by twelve. These annualized amounts are before rent abatements and include expense reimbursements, which may be estimates as of such date. The aggregate amount of rent abatements per square foot under existing leases as of December 31, 2010, 2011, 2012, 2013 and 2014 for the succeeding twelve month period is $1.11, $1.10, $1.17, $0.58 and $1.05, respectively.

 

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Table of Contents

Top 20 Tenants by Square Feet

 

Our 20 largest tenants by square feet as of December 31, 2014 were as follows:

 

    

Tenant

   Square
Feet
    % of
In-Service
Portfolio
 
1    U.S. Government      1,731,455 (1)      4.19
2    Citibank      1,018,432 (2)      2.46
3    Bank of America      810,764 (3)      1.96
4    Biogen      772,212        1.87
5    Wellington Management      707,568 (4)      1.71
6    Kirkland & Ellis      612,769 (5)      1.48
7    Genentech      570,770        1.38
8    Ropes & Gray      528,931        1.28
9    O’Melveny & Myers      504,902 (6)      1.22
10    Weil Gotshal Manges      479,848 (7)      1.16
11    Shearman & Sterling      472,808        1.14
12    State Street Bank and Trust      408,552        0.99
13    Microsoft      382,532        0.92
14    Finnegan Henderson Farabow      362,405 (8)      0.88
15    Ann Inc. (fka Ann Taylor Corp.)      351,026 (9)      0.85
16    Morgan Lewis Bockius      348,151        0.84
17    PTC      320,655        0.78
18    Google      311,611        0.75
19    Mass Financial Services      301,668        0.73
20    Aramis (Estee Lauder)      295,610 (10)      0.71

 

(1) Includes 92,620 and 104,874 square feet of space in properties in which we have a 51% and 50% interest, respectively.
(2) Includes 472,357, 10,080 and 2,761 square feet of space in properties in which we have a 55%, 60%, and 51% interest, respectively.
(3) Includes 742,552 and 50,887 square feet of space in properties in which we have a 55% and 60% interest, respectively.
(4) Includes 696,809 square feet of space in properties in which we have a 55% interest.
(5) Includes 391,662 and 221,107 square feet of space in properties in which we have a 55% and 51% interest, respectively.
(6) Includes 325,750 square feet of space in a property in which we have a 55% interest.
(7) Includes 451,701 and 28,147 square feet of space in properties in which we have a 60% and 55% interest, respectively.
(8) Includes 292,548 square feet of space in a property in which we have a 25% interest.
(9) Includes 331,209 square feet of space in a property in which we have a 55% interest.
(10) Includes 295,610 square feet of space in a property in which we have a 60% interest.

 

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Table of Contents

Tenant Diversification (Gross Rent)

 

Our tenant diversification as of December 31, 2014 was as follows:

 

Sector

   Percentage
of Gross
Rent
 

Legal Services

     26

Media & Technology

     18

Financial Services—all other

     16

Financial Services—commercial and investment banking

     11

Other

     11

Other Professional Services

     7

Retail

     7

Government / Public Administration

     4

 

Lease Expirations (1)(2)

 

Year of Lease

Expiration

   Rentable
Square Feet
Subject to
Expiring
Leases
     Current
Annualized
Contractual
Rent Under
Expiring Leases
Without Future
Step-Ups(3)
     Current
Annualized
Contractual
Rent Under
Expiring Leases
Without Future
Step-Ups p.s.f.(3)
     Current
Annualized
Contractual
Rent Under
Expiring Leases
With Future
Step-Ups(4)
     Current
Annualized
Contractual Rent
Under Expiring
Leases With
Future

Step-Ups p.s.f.(4)
     Percentage of
Total  Square
Feet
 

2014(5)

     494,753       $ 21,891,689       $ 44.25       $ 21,891,689       $ 44.25         1.2

2015

     2,459,463         119,464,595         48.57         120,055,523         48.81         6.0

2016

     3,346,977         184,086,932         55.00         186,211,984         55.64         8.1

2017

     3,566,417         230,037,403         64.50         235,749,423         66.10         8.6

2018

     1,914,187         119,783,584         62.58         124,759,280         65.18         4.6

2019

     3,737,083         189,968,616         50.83         199,385,821         53.35         9.0

2020

     3,925,140         232,263,492         59.17         250,085,307         63.71         9.5

2021

     2,620,479         138,412,074         52.82         154,290,219         58.88         6.3

2022

     4,011,770         225,417,265         56.19         249,045,678         62.08         9.7

2023

     1,156,181         68,629,015         59.36         79,963,363         69.16         2.8

Thereafter

     10,846,577         711,750,601         65.62         913,475,281         84.22         26.2

 

(1) Includes 100% of unconsolidated joint venture properties. Does not include residential units or the hotel.
(2) Does not include data for leases expiring in a particular year when leases for the same space have already been signed with replacement tenants with future commencement dates. In those cases, the data is included in the year in which the future lease with the replacement tenant expires.
(3) Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2014 multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.
(4) Represents the monthly contractual base rent under expiring leases with future contractual increases upon expiration and recoveries from tenants under existing leases as of December 31, 2014 multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.
(5) Represents leases that expired on December 31, 2014.

 

Item 3. Legal Proceedings

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

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Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Our common stock is listed on the New York Stock Exchange under the symbol “BXP.” The high and low sales prices and dividends for the periods indicated in the table below were:

 

Quarter Ended    High      Low      Dividends
per common
share
 

December 31, 2014

   $ 137.15       $ 115.06       $ 5.15 (1) 

September 30, 2014

     124.04         112.75         0.65   

June 30, 2014

     122.40         113.62         0.65   

March 31, 2014

     115.20         99.55         0.65   

December 31, 2013

     109.83         98.04         2.90 (2) 

September 30, 2013

     112.93         98.21         0.65   

June 30, 2013

     115.85         99.59         0.65   

March 31, 2013

     109.65         99.85         0.65   

 

(1) Paid on January 28, 2015 to stockholders of record as of the close of business on December 31, 2014. Amount includes a $4.50 per common share special dividend.
(2) Paid on January 29, 2014 to stockholders of record as of the close of business on December 31, 2013. Amount includes a $2.25 per common share special dividend.

 

At February 23, 2015, we had approximately 1,387 stockholders of record.

 

In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable income (not including net capital gains and with certain other adjustments). We have adopted a policy of paying regular quarterly distributions on our common stock, and we have adopted a policy of paying regular quarterly distributions on the common units of BPLP. For the year ended December 31, 2014, the decision to declare the special distribution was primarily a result of the taxable gains associated with the sale of approximately $2.3 billion of assets during 2014 partially offset by our election to deduct costs that were capitalized in prior years that may now be deducted under the new Tangible Property Regulations discussed within “Liquidity and Capital Resources—REIT Tax Distribution Considerations—Application of Recent Regulations” within “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Cash distributions have been paid on our common stock and BPLP’s common units since our initial public offering. Distributions are declared at the discretion of the Board of Directors and depend on actual and anticipated cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors the Board of Directors may consider relevant.

 

During the three months ended December 31, 2014, we issued an aggregate of 9,824 shares of common stock in connection with the redemption of 9,824 common units of limited partnership held by certain limited partners of BPLP. Of these shares, 7,835 were issued in reliance on an exemption from registration under Section 4(2). We relied on the exception under Section 4(2) based upon factual representations received from the limited partners who received the shares of common stock.

 

Stock Performance Graph

 

The following graph provides a comparison of cumulative total stockholder return for the period from December 31, 2009 through December 31, 2014, among Boston Properties, the Standard & Poor’s (“S&P”) 500 Index, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) Equity REIT Total

 

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Return Index (the “Equity REIT Index”) and the NAREIT Office REIT Index (the “Office REIT Index”). The Equity REIT Index includes all tax-qualified equity REITs listed on the New York Stock Exchange, the American Stock Exchange and the NASDAQ Stock Market. Equity REITs are defined as those with 75% or more of their gross invested book value of assets invested directly or indirectly in the equity ownership of real estate. The Office REIT Index includes all office REITs included in the Equity REIT Index. Data for Boston Properties, the S&P 500 Index, the Equity REIT Index and the Office REIT Index was provided to us by NAREIT. Upon written request, Boston Properties will provide any stockholder with a list of the REITs included in the Equity REIT Index and the Office REIT Index. The stock performance graph assumes an investment of $100 in each of Boston Properties and the three indices, and the reinvestment of any dividends. The historical information set forth below is not necessarily indicative of future performance. The data shown is based on the share prices or index values, as applicable, at the end of each month shown.

 

LOGO

 

     As of the year ended December 31,  
     2009      2010      2011      2012      2013      2014  

Boston Properties

   $ 100.00       $ 131.60       $ 155.49       $ 168.80       $ 167.86       $ 227.51   

S&P 500

   $ 100.00       $ 115.06       $ 117.49       $ 136.30       $ 180.44       $ 205.14   

Equity REIT Index

   $ 100.00       $ 127.95       $ 138.55       $ 165.84       $ 170.58       $ 218.38   

Office REIT Index

   $ 100.00       $ 122.60       $ 119.63       $ 143.43       $ 140.62       $ 165.76   

 

(b) None.

 

(c) Issuer Purchases of Equity Securities. No repurchases during the fourth quarter.

 

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Item 6. Selected Financial Data

 

The following table sets forth our selected financial and operating data on a historical basis. Certain prior year amounts have been reclassified to conform to the current year presentation. The following data should be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.

 

Our historical operating results may not be comparable to our future operating results.

 

    For the year ended December 31,  
    2014     2013     2012     2011     2010  
    (in thousands, except per share data)  

Statement of Operations Information:

         

Total revenue

  $ 2,396,998      $ 2,135,539      $ 1,847,186      $ 1,722,792      $ 1,515,420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

         

Rental operating

    835,290        742,956        639,088        572,668        479,879   

Hotel operating

    29,236        28,447        28,120        26,128        25,153   

General and administrative

    98,937        115,329        90,129        87,101        87,459   

Transaction costs

    3,140        1,744        3,653        1,987        2,876   

Impairment loss

    —          8,306        —          —          —     

Suspension of development

    —          —          —          —          (7,200

Depreciation and amortization

    628,573        560,637        445,875        429,742        329,749   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,595,176        1,457,419        1,206,865        1,117,626        917,916   

Operating income

    801,822        678,120        640,321        605,166        597,504   

Other income (expense):

         

Income from unconsolidated joint ventures

    12,769        75,074        49,078        85,896        36,774   

Gains on consolidation of joint ventures

    —          385,991        —          —          —     

Interest and other income

    8,765        8,310        10,091        5,358        7,332   

Gains (losses) from investments in securities

    1,038        2,911        1,389        (443     935   

Interest expense

    (455,743     (446,880     (410,970     (391,533     (375,403

Gains (losses) from early extinguishments of debt

    (10,633     122        (4,453     (1,494     (89,670
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    358,018        703,648        285,456        302,950        177,472   

Discontinued operations

    —          137,792        46,683        10,876        10,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before gains on sales of real estate

    358,018        841,440        332,139        313,826        187,593   

Gains on sales of real estate

    168,039        —          —          —          2,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    526,057        841,440        332,139        313,826        190,327   

Net income attributable to noncontrolling interests

    (82,446     (91,629     (42,489     (41,147     (31,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Boston Properties, Inc.

    443,611        749,811        289,650        272,679        159,072   

Preferred dividends

    (10,500     (8,057     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Boston Properties, Inc. common shareholders

  $ 433,111      $ 741,754      $ 289,650      $ 272,679      $ 159,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to Boston Properties, Inc.:

         

Income from continuing operations

  $ 2.83      $ 4.06      $ 1.65      $ 1.80      $ 1.08   

Discontinued operations

    —          0.81        0.28        0.07        0.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 2.83      $ 4.87      $ 1.93      $ 1.87      $ 1.14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding

    153,089        152,201        150,120        145,693        139,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to Boston Properties, Inc.:

         

Income from continuing operations

  $ 2.83      $ 4.05      $ 1.64      $ 1.80      $ 1.08   

Discontinued operations

    —          0.81        0.28        0.06        0.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 2.83      $ 4.86      $ 1.92      $ 1.86      $ 1.14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common and common equivalent shares outstanding

    153,308        152,521        150,711        146,218        140,057   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     December 31,  
     2014     2013     2012     2011     2010  
     (in thousands)  

Balance Sheet information:

          

Real estate, gross

   $ 19,236,403      $ 18,978,765      $ 14,893,328      $ 13,389,472      $ 12,764,935   

Real estate, net

     15,688,744        15,817,194        11,959,168        10,746,486        10,441,117   

Cash and cash equivalents

     1,763,079        2,365,137        1,041,978        1,823,208        478,948   

Total assets

     19,886,767        20,176,264        15,475,065        14,796,839        13,362,050   

Total indebtedness

     9,906,984        11,341,508        8,912,369        8,704,138        7,786,001   

Noncontrolling interests

     105,325        150,921        208,434        55,652        55,652   

Stockholders’ equity attributable to Boston Properties, Inc.

     5,697,298        5,741,153        5,097,065        4,865,998        4,372,643   

Equity noncontrolling interests

     2,205,638        1,302,465        537,789        547,518        591,550   
     For the year ended December 31,  
     2014     2013     2012     2011     2010  
     (in thousands, except per share and percentage data)  

Other Information:

          

Funds from Operations attributable to Boston Properties, Inc. (1)

   $ 807,506      $ 751,464      $ 741,419      $ 710,991      $ 547,356   

Dividends declared per share (2)

     7.10        4.85        2.30        2.05        2.00   

Cash flows provided by operating activities

     695,553        777,926        642,949        606,328        375,893   

Cash flows used in investing activities

     (665,124     (532,640     (1,278,032     (90,096     (1,161,274

Cash flows provided by (used in) financing activities

     (632,487     1,077,873        (146,147     828,028        (184,604

Total square feet at end of year (including development projects and parking)

     60,745        59,840        60,275        57,259        53,557   

In-service percentage leased at end of year

     91.7     93.4     91.4     91.3     93.2

 

(1) Pursuant to the revised definition of Funds from Operations adopted by the Board of Governors of NAREIT, we calculate Funds from Operations, or FFO, by adjusting net income (loss) attributable to Boston Properties, Inc. (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, impairment losses on depreciable real estate of consolidated real estate, impairment losses on investments in unconsolidated joint ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidated joint ventures, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. FFO is a non-GAAP financial measure. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets, impairment losses on depreciable real estate of consolidated real estate, impairment losses on investments in unconsolidated joint ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidated joint ventures and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. Amount represents our share, which was 89.81%, 89.99%, 89.48%, 88.57% and 87.25% for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively, after allocation to the noncontrolling interests.

 

FFO should not be considered as an alternative to net income attributable to Boston Properties, Inc. (determined in accordance with GAAP) as an indication of our performance. FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO should be compared with our reported net income attributable to Boston Properties, Inc. and considered in addition to cash flows in accordance with GAAP, as presented in our Consolidated Financial Statements.

 

A reconciliation of FFO to net income attributable to Boston Properties, Inc. computed in accordance with GAAP is provided under the heading of “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations.”

 

(2) Includes the special dividends of $4.50 per share and $2.25 per share paid on January 28, 2015 and January 29, 2014, respectively, to shareholders of record as of the close of business on December 31, 2014 and 2013, respectively.

 

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Item 7—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.

 

Forward-Looking Statements

 

This Annual Report on Form 10-K, including the documents incorporated by reference, contains forward-looking statements within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. Such statements are contained principally, but not only, under the captions “BusinessBusiness and Growth Strategies,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any such forward-looking statements are based on beliefs and on assumptions made by, and information currently available to, our management. When used, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “result,” “should,” “will” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected by the forward-looking statements. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

   

the continuing impacts of the relatively weak economic recovery, relatively high unemployment and other macroeconomic trends, which are having and may continue to have a negative effect on the following, among other things:

 

   

the fundamentals of our business, including overall market occupancy, tenant space utilization, and rental rates;

 

   

the financial condition of our tenants, many of which are financial, legal and other professional firms, our lenders, counterparties to our derivative financial instruments and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of default by these parties; and

 

   

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis;

 

   

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, tenant space utilization, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

 

   

failure to manage effectively our growth and expansion into new markets and sub-markets or to integrate acquisitions and developments successfully;

 

   

the ability of our joint venture partners to satisfy their obligations;

 

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risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits, tenant accounting considerations that may result in negotiated lease provisions that limit a tenant’s liability during construction and public opposition to such activities);

 

   

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments, including the impact of higher interest rates on the cost and/or availability of financing;

 

   

risks associated with forward interest rate contracts and the effectiveness of such arrangements;

 

   

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

 

   

risks associated with actual or threatened terrorist attacks;

 

   

costs of compliance with the Americans with Disabilities Act and other similar laws;

 

   

potential liability for uninsured losses and environmental contamination;

 

   

risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended;

 

   

possible adverse changes in tax and environmental laws;

 

   

the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results;

 

   

risks associated with possible state and local tax audits; and

 

   

risks associated with our dependence on key personnel whose continued service is not guaranteed.

 

The risks set forth above are not exhaustive. Other sections of this report, including “Part I, Item 1ARisk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can we assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our Quarterly Reports on Form 10-Q for future periods and Current Reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Current Reports on Form 8-K or otherwise, for a discussion of risks and uncertainties that may cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.

 

Overview

 

We are a fully integrated self-administered and self-managed REIT and one of the largest owners and developers of Class A office properties in the United States. Our properties are concentrated in four markets—Boston, New York, San Francisco and Washington, DC. We generate revenue and cash primarily by leasing Class A office space to our tenants. Factors we consider when we lease space include the creditworthiness of the tenant, the length of the lease, the rental rate to be paid at inception and throughout the lease term, the costs of tenant improvements and other landlord concessions, current and anticipated operating costs and real estate taxes, our current and anticipated vacancy, current and anticipated future demand for office space and general economic factors. From time to time, we also generate cash through the sale of assets.

 

Our core strategy has always been to own, operate and develop properties in supply-constrained markets with high barriers-to-entry and to focus on executing long-term leases with financially strong tenants.

 

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Historically, this combination has tended to reduce our exposure in down cycles and enhance revenues as market conditions improve. To be successful in the current leasing environment, we believe all aspects of the tenant-landlord relationship must be considered. In this regard, we believe that our understanding of tenants’ short- and long-term space utilization and amenity needs in the local markets in which we operate, our relationships with local brokers, our reputation as a premier developer, owner and operator of Class A office properties, our financial strength and our ability to maintain high building standards provide us with a competitive advantage.

 

Our portfolio is concentrated in markets and submarkets which include traditional tenants, such as government, financial services and law firms, as well as businesses that are oriented on new ideas, such as technology, advertising, media and information distribution (often referred to as “TAMI”), mobility, life sciences and medical devices. We continue to benefit from this as these segments of the economy are expanding and leasing additional office space. This is particularly true in the San Francisco Central Business District (“CBD”), Silicon Valley, Cambridge, Massachusetts and suburban Boston submarkets where we are seeing increasing levels of leasing activity. However, there continue to be headwinds against more rapid improvements in the overall office business. The strongest force is densification, which occurs as businesses seek to cater to more collaborative work environments and fit people more efficiently into less space. While demand from traditional office tenants in the legal and large financial services sectors is not expanding, we see signs that we may be nearing the end of those industries’ space reductions stemming from densification and downsizing, and small financial firms are expanding and absorbing high-quality space. In addition, markets such as Washington, DC and, to a lesser extent, midtown Manhattan, which are more reliant on traditional tenants, are experiencing relatively lower levels of activity and growth. We are also seeing new construction in our markets accommodating both growing tenant sectors and traditional tenants seeking more efficient space utilization. This may result in an increase in supply and create challenges for us to increase our occupancy and the rents we can realize. We continue to proactively manage our near- and medium-term lease expirations. As our tenants adjust their space needs, we have extended and expect to continue to extend the leases of quality tenants on a long-term basis, invest in tenant improvements to improve space utilization and take back portions of their space to re-lease to other tenants at current rates. In some cases, this may result in an increase in vacancy and foregone revenue in the short-term, but better position us for more stable long-term revenues. Despite these challenges, we remain optimistic about the long-term operating fundamentals in all of our markets.

 

Leasing activity in our portfolio remains strong. During 2014, we signed the highest annual volume of leases in our history encompassing approximately 7.7 million square feet of leases covering vacant space, pre-leasing for our development projects and extensions and expansions. Leasing highlights included an approximately 714,000 square foot lease with salesforce.com at our approximately 1.4 million square foot development project located in San Francisco, California and approximately 1.4 million square feet of early renewals with six law firms. The overall percentage of leased space for the 155 properties in-service (excluding the three in-service residential properties and the hotel) as of December 31, 2014 was 91.7% compared to 93.4% at December 31, 2013. The decrease of 1.7% is primarily due to (1) temporary vacancy at 101 Huntington Avenue in Boston, Massachusetts, which was 32.6% leased at December 31, 2014 but approximately 93.6% committed including an approximately 308,000 square foot tenant that is expected to take occupancy in the second quarter of 2015, and (2) the placing in-service of 250 West 55th Street, our approximately 988,000 square foot office building in New York City, which was approximately 55.1% leased at December 31, 2014 but is currently 79% leased, including leases with future commencement dates.

 

In the New York region, during the year, we completed approximately 1.8 million square feet of leasing in 84 lease transactions, including approximately 1.1 million square feet of early renewals with four law firms at 767 Fifth Avenue (the General Motors Building), 601 Lexington Avenue and 599 Lexington Avenue for lease terms ranging from 12 to 20 years. In addition, we fully placed in-service our 250 West 55th Street development project and ceased interest capitalization on September 1, 2014. We have limited rollover exposure through the end of 2015 of approximately 3.0%. We continue to actively manage our near-term lease expirations and, if we have attractive replacement tenants, we may allow an existing tenant to terminate its lease early so that we may elongate our leasing profile. However, this could result in temporary vacancy and a reduction in cash flows as space is reconfigured.

 

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In our Washington, DC region, the overall leasing activity continues to be slow and public sector and defense contractor demand has been adversely impacted by continued federal budgetary uncertainty, sequestration and the reductions in discretionary spending programs. Although the leasing market is competitive, we are making good progress with activity on our future exposure. Our near-term exposure in the Washington, DC CBD is limited due to our strong office occupancy rate of 95.9%. We are actively engaging our law firm tenants with future lease expirations. We have renewed one law firm tenant for approximately 250,000 square feet and are in discussions with a second for approximately 212,000 square feet, to provide new space configurations in exchange for extended lease terms at market rents. In addition, our suburban Washington, DC assets are 94.1% leased at December 31, 2014, with moderate rollover/exposure through the end of 2015 of approximately 9.2%.

 

In the Boston region, the expansion of the life sciences and technology industry is positively impacting each of the submarkets in which we operate. Our assets in the Boston CBD are 91.3% leased, with approximately 308,000 square feet at 101 Huntington Avenue leased to a tenant that is expected to take occupancy in the second quarter of 2015. Through the end of 2015, leases for approximately 605,000 square feet are scheduled to expire, including two large blocks totaling approximately 445,000 square feet in the John Hancock Tower. This space includes (1) approximately 168,000 square feet at the base of the building where we anticipate creating a new second lobby and rebranding this portion of the building “120 St. James Street” and (2) approximately 277,000 square feet in the tower. While we believe all of this space is highly marketable and current market rents are greater than the expiring rents, we expect much of this space will be vacant during 2015. In conjunction with the construction of our approximately 425,000 square foot development project at 888 Boylston Street, we expect to complete a major renovation of the Prudential Center Food Court and create additional retail space during 2015 which, upon completion, will enhance our revenues and our tenants’ experience at the Prudential Center. The East Cambridge submarket is the strongest submarket in the region and our Cambridge portfolio is approximately 99.6% leased. In the suburbs of Boston along the Route 128 corridor, we are also benefiting from the strong tenant demand in the technology and life sciences industries with the completion of approximately 1.1 million square feet of leases during the year, including an approximately 182,000 square foot lease for our anchor tenant at 10 CityPoint, an approximately 245,000 square foot development project in Waltham, Massachusetts.

 

The San Francisco CBD and Silicon Valley submarkets are two of the strongest in the United States and continue to benefit from business expansion and job growth, particularly in the technology sector, which has resulted in positive absorption, lower vacancy and increasing rental rates. During 2014, we leased approximately 1.7 million square feet, including an approximately 714,000 square foot lease for our Salesforce Tower development project. We have approximately 471,000 square feet of space expiring in the San Francisco region through the end of 2015 at rents that are below current market rates. Construction of 535 Mission Street is complete with initial occupancy occurring in the fourth quarter of 2014 and the project is approximately 66% leased as of February 23, 2015.

 

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The table below details the leases that commenced during the three and twelve months ended December 31, 2014:

 

     Three Months
Ended
December 31, 2014
    Twelve Months
Ended
December 31, 2014
 
     Total Square Feet  

Vacant space available at the beginning of the period

     3,372,895        2,683,647   

Properties placed in-service

     88,096        1,610,553   

Leases expiring or terminated during the period

     989,204        4,293,390   
  

 

 

   

 

 

 

Total space available for lease

     4,450,195        8,587,590   
  

 

 

   

 

 

 

1st generation leases

     127,108        1,209,076   

2nd generation leases with new tenants

     344,349        1,848,533   

2nd generation lease renewals

     536,270        2,087,513   
  

 

 

   

 

 

 

Total space leased

     1,007,727        5,145,122   
  

 

 

   

 

 

 

Vacant space available for lease at the end of the period

     3,442,468        3,442,468   
  

 

 

   

 

 

 

Second generation leasing information: (1)

    

Leases commencing during the period, in square feet

     880,619        3,936,046   

Average Lease Term

     70 Months        70 Months   

Average Free Rent Period

     35 Days        54 Days   

Total Transaction Costs Per Square Foot (2)

   $ 23.64      $ 29.60   

Increase / (decrease) in Gross Rents (3)

     12.12     7.62

Increase / (decrease) in Net Rents (4)

     17.79     10.85

 

(1) Second generation leases are defined as leases for space that had previously been under lease by us. Of the 880,619 and 3,936,046 square feet of second generation leases that commenced during the three and twelve months ended December 31, 2014, respectively, 566,876 and 2,793,051 square feet were signed in prior periods for the three and twelve months ended December 31, 2014, respectively.
(2) Total transaction costs include tenant improvements and leasing commissions and exclude free rent concessions.
(3) Represents the increase/(decrease) in gross rent (base rent plus expense reimbursements) on the new vs. expired leases on the 780,911 and 3,295,755 square feet of second generation leases (1) that had been occupied within the prior 12 months and (2) for which the new lease term is greater than six months, for the three and twelve months ended December 31, 2014, respectively.
(4) Represents the increase/(decrease) in net rent (gross rent less operating expenses) on the new vs. expired leases on the 780,911 and 3,295,755 square feet of second generation leases (1) that had been occupied within the prior 12 months and (2) for which the new lease term is greater than six months, for the three and twelve months ended December 31, 2014, respectively.

 

In the aggregate from December 31, 2014 to December 31, 2015, leases representing approximately 7.2% of the space at our properties will expire. As these leases expire, assuming no change in current market rental rates, we expect that the gross rental rates we are likely to achieve on new leases will on average be greater than the rates that are currently being paid.

 

Although we continue to evaluate opportunities to acquire assets, the abundance of capital and demand for assets has resulted in increasing prices. As a result, in the current environment we are able to develop properties at a cost per square foot that is generally less than the cost at which we can acquire older existing properties, thereby generating relatively better returns with lower annual maintenance expenses and capital costs. Accordingly, we believe the successful lease-up and completion of our development pipeline will enhance our long-term return on equity and earnings growth as these developments are placed in-service through 2019. We believe the development of well-positioned office buildings is justified in many of our submarkets where tenants

 

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have shown demand for high-quality construction, modern design, efficient floor plates and sustainable features. In addition, select first-class residential developments that are part of a mixed-use environment, which combine office, retail and residential uses, have proven successful in our markets. As of December 31, 2014, our current development pipeline, which excludes properties which are fully placed in-service, totals approximately 3.3 million square feet with a total projected investment of approximately $2.1 billion, of which approximately $1.3 billion remains to be funded. Additionally, we are working on several new developments in each of our markets that could commence in 2015 or later.

 

Given investor demand for assets like ours we continue to review our portfolio to identify properties that may have limited opportunities for cash flow growth, no longer fit within our portfolio strategy or can attract premium pricing in the current market environment as potential sales candidates. During 2014, we completed the sale of an aggregate of approximately $2.3 billion (our share) of assets generating $2.0 billion of sale proceeds. Included in this amount is the October 30, 2014 sale of a 45% interest in each of 601 Lexington Avenue in New York City and Atlantic Wharf Office Building and 100 Federal Street in Boston for an aggregate gross sale price of $1.827 billion in cash, less the partner’s pro rata share of indebtedness secured by 601 Lexington Avenue, subject to certain prorations and adjustments. As of January 15, 2015, we have under contract for sale the Residences on The Avenue, our 335 unit residential leasehold at 2221 I Street, N.W., Washington, DC, for a gross sale price of $196 million. The sale is subject to the satisfaction of customary closing conditions and there can be no assurance that the sale will be consummated on the terms currently contemplated or at all. We are also considering additional asset sales and, in total, we project our sales volume for 2015 could be in excess of $750 million.

 

In general, we structure asset sales for possible inclusion in like-kind exchanges within the meaning of Section 1031 of the Internal Revenue Code. The ability to complete a like-kind exchange depends on many factors, including, among others, identifying and acquiring suitable replacement property within limited time periods and the ownership structure of the properties being sold and acquired, and therefore we are not always able to sell an asset as part of a like-kind exchange. When successful, a like-kind exchange enables us to defer the taxable gain on the asset sold and thus limit our REIT distribution requirement and preserve capital. If we are unable to identify and acquire suitable replacement property in a like-kind exchange, then we expect to distribute at least the amount of proceeds necessary to avoid paying a corporate level tax on the gain realized from the sale (See “Liquidity and Capital Resources—REIT Tax Distribution Considerations—Application of Recent Regulations”).

 

We continue to maintain substantial liquidity, including available cash, as of February 23, 2015, of approximately $1.1 billion, which includes approximately $342.2 million of restricted cash which is being held for possible investment in a like-kind exchange in accordance with Section 1031 of the Internal Revenue Code, and approximately $983.5 million available under our Operating Partnership’s $1.0 billion Unsecured Line of Credit. Our more significant future funding requirements include approximately $1.3 billion of our development pipeline that remains to be funded through 2019. We have access to multiple sources of capital, including current cash balances, public debt and equity markets, secured and unsecured debt markets and potential asset sales to fund our future capital requirements.

 

For descriptions of significant transactions that we completed during 2014, see “Item 1. Business—Transactions During 2014.”

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the

 

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financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Real Estate

 

Upon acquisitions of real estate that constitutes a business, which includes the consolidation of previously unconsolidated joint ventures, we assess the fair value of acquired tangible and intangible assets, (including land, buildings, tenant improvements, “above-” and “below-market” leases, leasing and assumed financing origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities) and allocate the purchase price to the acquired assets and assumed liabilities, including land and buildings as if vacant. We assess and consider fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that we deem appropriate, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions.

 

The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

 

We record acquired “above-” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below- market leases. Acquired “above-” and “below-market” lease values have been reflected within Prepaid Expenses and Other Assets and Other Liabilities, respectively, in our Consolidated Balance Sheets. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

 

Management reviews its long-lived assets for impairment every quarter and when there is an event or change in circumstances that indicates an impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such criteria are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding anticipated hold periods, future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be “long-lived assets to be held and used” are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our hold strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that an impairment has occurred, the affected assets must be reduced to their fair value, less cost to sell.

 

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Guidance in Accounting Standards Codification (“ASC”) 360 “Property Plant and Equipment” (“ASC 360”) requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be “held for sale” when the transaction has been approved by our Board of Directors, or a committee thereof, and there are no known significant contingencies relating to the sale, such that a sale of the property within one year is considered probable. Following the classification of a property as “held for sale,” no further depreciation is recorded on the assets, and the asset is written down to the lower of carrying value or fair market value, less cost to sell. On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 clarifies that discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted, and we early adopted ASU No. 2014-08 during the first quarter of 2014. Our adoption of ASU 2014-08 resulted in the operating results and gains on sales of real estate from operating properties sold during the year ended December 31, 2014 not being reflected within Discontinued Operations in our Consolidated Statements of Operations (See Note 3 to the Consolidated Financial Statements).

 

Real estate is stated at depreciated cost. A variety of costs are incurred in the acquisition, development and leasing of properties. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. We expense costs that we incur to effect a business combination such as legal, due diligence and other closing related costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, internal wages, property taxes, insurance, and other project costs incurred during the period of development. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project commences and capitalization begins, and when a development project is substantially complete and held available for occupancy and capitalization must cease, involves a degree of judgment. Our capitalization policy on development properties is guided by guidance in ASC 835-20 “Capitalization of Interest” and ASC 970 “Real Estate-General.” The costs of land and buildings under development include specifically identifiable costs.

 

The capitalized costs include pre-construction costs necessary to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We begin the capitalization of costs during the pre-construction period which we define as activities that are necessary to the development of the property. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed, (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction or (3) if activities necessary for the development of the property have been suspended.

 

Investments in Unconsolidated Joint Ventures

 

We consolidate variable interest entities (“VIEs”) in which we are considered to be the primary beneficiary. VIEs are entities in which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or that the holders of the equity investment at risk do not have a controlling financial interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest

 

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entity’s performance, and (2) the obligation to absorb losses and right to receive the returns from the variable interest entity that would be significant to the variable interest entity. For ventures that are not VIEs we consolidate entities for which we have significant decision making control over the ventures’ operations. Our judgment with respect to our level of influence or control of an entity involves the consideration of various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment (including loans), estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the venture, if applicable. Our assessment of our influence or control over an entity affects the presentation of these investments in our consolidated financial statements. In addition to evaluating control rights, we consolidate entities in which the outside partner has no substantive kick-out rights to remove us as the managing member.

 

Accounts of the consolidated entity are included in our accounts and the non-controlling interest is reflected on the Consolidated Balance Sheets as a component of equity or in temporary equity between liabilities and equity. Investments in unconsolidated joint ventures are recorded initially at cost, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over the life of the related asset. Under the equity method of accounting, our net equity investment is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. We may account for cash distributions in excess of our investment in an unconsolidated joint venture as income when we are not the general partner in a limited partnership and when we have neither the requirement nor the intent to provide financial support to the joint venture. Our investments in unconsolidated joint ventures are reviewed for impairment periodically and we record impairment charges when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than-temporary. The ultimate realization of the investment in unconsolidated joint ventures is dependent on a number of factors, including the performance of each investment and market conditions. We will record an impairment charge if we determine that a decline in the value below the carrying value of an investment in an unconsolidated joint venture is other-than-temporary.

 

To the extent that we contribute assets to a joint venture, our investment in the joint venture is recorded at our cost basis in the assets that were contributed to the joint venture. To the extent that our cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related asset and included in our share of equity in net income of the joint venture. In accordance with the provisions of ASC 970-323 “Investments-Equity Method and Joint Ventures” (“ASC 970-323”), we will recognize gains on the contribution of real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the economic substance of the transaction is a sale.

 

The combined summarized financial information of the unconsolidated joint ventures is disclosed in Note 5 to the Consolidated Financial Statements.

 

Revenue Recognition

 

In general, we commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. Contractual rental revenue is reported on a straight-line basis over the terms of our respective leases. We recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the original term of the respective leases. Accrued rental income as reported on the Consolidated Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements.

 

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For the year ended December 31, 2014, the impact of the net adjustments of rents from “above-” and “below-market” leases increased rental revenue by approximately $48.3 million. For the year ended December 31, 2014, the impact of the straight-line rent adjustment increased rental revenue by approximately $63.1 million. Those amounts exclude the adjustment of rents from “above-” and “below-market” leases and straight-line income from unconsolidated joint ventures, which are disclosed in Note 5 to the Consolidated Financial Statements.

 

Our leasing strategy is generally to secure creditworthy tenants that meet our underwriting guidelines. Furthermore, following the initiation of a lease, we continue to actively monitor the tenant’s creditworthiness to ensure that all tenant related assets are recorded at their realizable value. When assessing tenant credit quality, we:

 

   

review relevant financial information, including:

 

   

financial ratios;

 

   

net worth;

 

   

revenue;

 

   

cash flows;

 

   

leverage; and

 

   

liquidity;

 

   

evaluate the depth and experience of the tenant’s management team; and

 

   

assess the strength/growth of the tenant’s industry.

 

As a result of the underwriting process, tenants are then categorized into one of three categories:

 

  (1) acceptable-risk tenants;

 

  (2) the tenant’s credit is such that we may require collateral, in which case we:

 

   

may require a security deposit; and/or

 

   

may reduce upfront tenant improvement investments; or

 

  (3) the tenant’s credit is below our acceptable parameters.

 

We consistently monitor the credit quality of our tenant base. We provide an allowance for doubtful accounts arising from estimated losses that could result from the tenant’s inability to make required current rent payments and an allowance against accrued rental income for future potential losses that we deem to be unrecoverable over the term of the lease.

 

Tenant receivables are assigned a credit rating of 1 through 4. A rating of 1 represents the highest possible rating and no allowance is recorded. A rating of 4 represents the lowest credit rating, in which case we record a full reserve against the receivable balance. Among the factors considered in determining the credit rating include:

 

   

payment history;

 

   

credit status and change in status (credit ratings for public companies are used as a primary metric);

 

   

change in tenant space needs (i.e., expansion/downsize);

 

   

tenant financial performance;

 

   

economic conditions in a specific geographic region; and

 

   

industry specific credit considerations.

 

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If our estimates of collectability differ from the cash received, the timing and amount of our reported revenue could be impacted. The average remaining term of our in-place tenant leases, including unconsolidated joint ventures, was approximately 6.8 years as of December 31, 2014. The credit risk is mitigated by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants.

 

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized as revenue in the period during which the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with guidance in ASC 605-45 “Principal Agent Considerations” (“ASC 605-45”). ASC 605-45 requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk. We also receive reimbursement of payroll and payroll related costs from third parties which we reflect on a net basis.

 

Our parking revenues are derived from leases, monthly parking and transient parking. We recognize parking revenue as earned.

 

Our hotel revenues are derived from room rentals and other sources such as charges to guests for telephone service, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.

 

We receive management and development fees from third parties. Property management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, because such fees are contingent upon the collection of rents. We review each development agreement and record development fees as earned depending on the risk associated with each project. Profit on development fees earned from joint venture projects are recognized as revenue to the extent of the third-party partners’ ownership interest.

 

Gains on sales of real estate are recognized pursuant to the provisions included in ASC 360-20 “Real Estate Sales” (“ASC 360-20”). The specific timing of the sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, profit sharing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

 

Depreciation and Amortization

 

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. We allocate the acquisition cost of real estate to its components and depreciate or amortize these assets over their useful lives. The amortization of acquired “above-” and “below-market” leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, marketable securities, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments.

 

We follow the authoritative guidance for fair value measurements when valuing our financial instruments for disclosure purposes. We determine the fair value of our unsecured senior notes and unsecured exchangeable

 

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senior notes using market prices. The inputs used in determining the fair value of our unsecured senior notes and unsecured exchangeable senior notes is categorized at a level 1 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that we use quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized at a level 2 basis if trading volumes are low. We determine the fair value of our mortgage notes payable using discounted cash flow analyses by discounting the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on current market rates for similar securities. In determining the current market rates, we add our estimates of market spreads to the quoted yields on federal government treasury securities with similar maturity dates to our debt. The inputs used in determining the fair value of our mortgage notes payable and mezzanine notes payable are categorized at a level 3 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that we consider the rates used in the valuation techniques to be unobservable inputs.

 

Derivative Instruments and Hedging Activities

 

Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the Consolidated Statements of Operations as a component of net income or as a component of comprehensive income and as a component of equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity. We account for the effective portion of changes in the fair value of a derivative in other comprehensive income (loss) and subsequently reclassify the effective portion to earnings over the term that the hedged transaction affects earnings. We account for the ineffective portion of changes in the fair value of a derivative directly in earnings.

 

Recent Accounting Pronouncements

 

On April 10, 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 clarifies that discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted, and the Company early adopted ASU 2014-08 during the first quarter of 2014. Our adoption of ASU 2014-08 resulted in the operating results and gains on sales of real estate from operating properties sold during the year ended December 31, 2014 not being reflected within Discontinued Operations in our Consolidated Statements of Operations (See Note 3 to the Consolidated Financial Statements).

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contract with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s Accounting Standards Codification (“ASC”). ASU 2014-09 is effective for annual reporting periods (including interim periods within that reporting period) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early adoption is not permitted. We are currently assessing the potential impact that the adoption of ASU 2014-09 will have on our consolidated financial statements.

 

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In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, “Compensation—Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not expect the adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our consolidated financial statements.

 

In November 2014, the FASB issued ASU 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity(“ASU 2014-16”). ASU 2014-16 clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features—including the embedded derivative feature being evaluated for bifurcation—in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. ASU 2014-16 is effective for fiscal years and interim periods beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of ASU 2014-16 to have a material impact on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. We are currently assessing the potential impact that the adoption of ASU 2015-02 will have on our consolidated financial statements.

 

Results of Operations

 

The following discussion is based on our Consolidated Statement of Operations for the years ended December 31, 2014, 2013 and 2012.

 

At December 31, 2014, 2013 and 2012, we owned or had interests in a portfolio of 169, 175 and 157 properties, respectively (in each case, the “Total Property Portfolio”). As a result of changes within our Total Property Portfolio, the financial data presented below shows significant changes in revenue and expenses from

 

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period-to-period. Accordingly, we do not believe that our period-to-period financial data with respect to the Total Property Portfolio are necessarily meaningful. Therefore, the comparison of operating results for the years ended December 31, 2014, 2013 and 2012 show separately the changes attributable to the properties that were owned by us and in service throughout each period compared (the “Same Property Portfolio”) and the changes attributable to the properties included in the Placed In-Service, Acquired or Consolidated, Development or Redevelopment or Sold Portfolios.

 

In our analysis of operating results, particularly to make comparisons of net operating income between periods meaningful, it is important to provide information for properties that were in-service and owned by us throughout each period presented. We refer to properties acquired or consolidated or placed in-service prior to the beginning of the earliest period presented and owned by us and in service through the end of the latest period presented as our Same Property Portfolio. The Same Property Portfolio therefore excludes properties placed in-service, acquired or consolidated, repositioned or in development or redevelopment after the beginning of the earliest period presented or disposed of prior to the end of the latest period presented.

 

Net operating income, or NOI, is a non-GAAP financial measure equal to net income attributable to Boston Properties, Inc., the most directly comparable GAAP financial measure, plus income attributable to noncontrolling interests, depreciation and amortization, interest expense, impairment loss, transaction costs, general and administrative expense, less discontinued operations, gains on sales of real estate, gains (losses) from early extinguishments of debt, gains (losses) from investments in securities, gains on consolidation of joint ventures, income from unconsolidated joint ventures, interest and other income and development and management services revenue. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.

 

Our management also uses NOI to evaluate regional property level performance and to make decisions about resource allocations. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspectives not immediately apparent from net income attributable to Boston Properties, Inc. NOI excludes certain components from net income attributable to Boston Properties, Inc. in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level as opposed to the property level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income attributable to Boston Properties, Inc. as presented in our Consolidated Financial Statements. NOI should not be considered as an alternative to net income attributable to Boston Properties, Inc. as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. For a reconciliation of NOI to net income attributable to Boston Properties, Inc., see Note 14 to the Consolidated Financial Statements.

 

Comparison of the year ended December 31, 2014 to the year ended December 31, 2013

 

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 131 properties totaling approximately 35.8 million net rentable square feet of space, excluding unconsolidated joint ventures. The Same Property Portfolio includes properties acquired or consolidated or placed in-service on or prior to January 1, 2013 and owned and in service through December 31, 2014. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or consolidated or in development or redevelopment after January 1, 2013 or disposed of on or prior to December 31, 2014. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the year ended December 31, 2014 and 2013 with respect to the properties which were placed in-service, acquired or consolidated, in development or redevelopment or sold.

 

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    Same Property Portfolio     Properties
Acquired
or Consolidated
Portfolio
    Properties
Placed
In-Service
Portfolio
    Properties
in  Development
or
Redevelopment
Portfolio
    Properties Sold
Portfolio
    Total Property Portfolio  
(dollars in thousands)   2014     2013     Increase/
(Decrease)
    %
Change
    2014     2013     2014     2013     2014     2013     2014     2013     2014     2013     Increase/
(Decrease)
    %
Change
 

Rental Revenue:

                               

Rental Revenue

  $ 1,883,215      $ 1,824,581      $ 58,634        3.21   $ 329,725      $ 179,579      $ 53,407      $ 6,028      $ —        $ 2,248      $ 24,362      $ 27,949      $ 2,290,709      $ 2,040,385      $ 250,324        12.27

Termination Income

    11,162        2,807        8,355        297.65     62        —          171        —          —          —          —          —          11,395        2,807        8,588        305.95
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Rental Revenue

    1,894,377        1,827,388        66,989        3.67     329,787        179,579        53,578        6,028        —          2,248        24,362        27,949        2,302,104        2,043,192        258,912        12.67
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real Estate Operating Expenses

    692,146        664,694        27,452        4.13     101,452        57,199        18,532        1,693        —          421        7,238        6,815        819,368        730,822        88,546        12.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Operating Income, excluding residential and hotel

    1,202,231        1,162,694        39,537        3.40     228,335        122,380        35,046        4,335        —          1,827        17,124        21,134        1,482,736        1,312,370        170,366        12.98
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential Net Operating Income(1)

    8,960        10,395        (1,435     (13.80 )%      —          —          1,311        (207     —          —          —          —          10,271        10,188        83        0.81

Hotel Net Operating Income(1)

    14,149        11,883        2,266        19.07     —          —          —          —          —          —          —          —          14,149        11,883        2,266        19.07
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Net Operating Income(1)

    1,225,340        1,184,972        40,368        3.41     228,335        122,380        36,357        4,128        —          1,827        17,124        21,134        1,507,156        1,334,441        172,715        12.94
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Revenue:

                               

Development and management services

    —          —          —          —          —          —          —          —          —          —          —          —          25,316        29,695        (4,379     (14.75 )% 

Other Expenses:

                               

General and administrative expense

    —          —          —          —          —          —          —          —          —          —          —          —          98,937        115,329        (16,392     (14.21 )% 

Transaction costs

    —          —          —          —          —          —          —          —          —          —          —          —          3,140        1,744        1,396        80.05

Impairment loss

    —          —          —          —          —          —          —          —          —          —          —          —          —          8,306        (8,306     (100.00 )% 

Depreciation and amortization

    469,440        463,906        5,534        1.19     131,907        81,751        20,297        1,900        —          4,579        6,929        8,501        628,573        560,637        67,936        12.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expenses

    469,440        463,906        5,534        1.19     131,907        81,751        20,297        1,900        —          4,579        6,929        8,501