Boston Properties’ 3Q Numbers: Zuckerman Focuses Long-Term

mortzuckerman1h Boston Properties 3Q Numbers: Zuckerman Focuses Long TermMort Zuckerman’s Boston Properties held its third-quarter investor call this morning. It was, as such events are these days, a somber affair. But, as far as REITS go, Boston Properties has so far capitalized on the unstable markets better than many, maintaining strong cash reserves and acquiring the GM Building and other distressed Macklowe properties just as the market started to dip.

Mr. Zuckerman expressed confidence that he wouldn’t have to sell any of those assets, or even acquire joint venture partners.

"We sold a lot of buildings, as you know, almost $4.2 billion [of property] in the last half of 2006 and first half of 2007," Mr. Zuckerman said. "There isn’t a building that we own at this stage of the game that we wouldn’t want to hold for the longer term."

Yet, the firm has also suffered some setbacks, most notably its exposure to the collapse of Lehman and the demise of Heller Erhman, tenants at 399 Park Avenue and Times Square Tower, respectively.

Here are some excerpts from the release below:

Funds from Operations (FFO) for the quarter ended September 30, 2008 were $137.9 million, or $1.15 per share basic and $1.13 per share diluted. This compares to FFO for the quarter ended September 30, 2007 of $139.1 million, or $1.17 per share basic and $1.15 per share diluted, after a supplemental adjustment to exclude the loss from early extinguishment of debt associated with the sale of real estate. FFO for the quarter ended September 30, 2008 includes non-cash charges of (1) $0.15 per share on a diluted basis related to the establishment of reserves for the accrued straight-line rent balances associated with the Company’s leases with Lehman Brothers Inc. and the law firm of Heller Ehrman LLP and (2) $0.04 per share on a diluted basis related to the partial ineffectiveness of the Company’s interest rate hedging contracts. FFO for the quarter ended September 30, 2007 includes the write- off of costs related to an abandoned suburban development project of $0.03 per share on a diluted basis. The loss from early extinguishment of debt associated with the sale of real estate was $0.02 per share on a diluted basis for the quarter ended September 30, 2007. The weighted average number of basic and diluted shares outstanding totaled 119,832,474 and 122,830,104, respectively, for the quarter ended September 30, 2008 and 119,010,269 and 122,298,400, respectively, for the quarter ended September 30, 2007.

Net income available to common shareholders was $48.5 million for the quarter ended September 30, 2008, compared to $242.4 million for the quarter ended September 30, 2007. Net income available to common shareholders per share (EPS) for the quarter ended September 30, 2008 was $0.40 basic and $0.40 on a diluted basis. This compares to EPS for the third quarter of 2007 of $2.02 basic and $1.99 on a diluted basis. EPS for the quarter ended September 30, 2007 includes $1.39, on a diluted basis, related to gains on sales of real estate and discontinued operations. The gain on sales of real estate for the quarter ended September 30, 2007 resulted from the sale of Democracy Center for a gross sale price of $280.5 million.

The reported results are unaudited and there can be no assurance that the results will not vary from the final information for the quarter ended September 30, 2008. In the opinion of management, all adjustments considered necessary for a fair presentation of these reported results have been made.

As of September 30, 2008, the Company’s portfolio consisted of 146 properties comprising approximately 48.5 million square feet, including 14 properties under construction totaling 4.4 million square feet and one hotel. The overall percentage of leased space for the 131 properties in service as of September 30, 2008 was 95.0%.

Significant events during the third quarter included:

* On July 21, 2008, the Company’s Operating Partnership utilized an accordion feature under its unsecured revolving credit facility with a consortium of lenders to increase the current maximum borrowing amount under the facility from $923.3 million to $1.0 billion. All other material terms under the facility remain unchanged.

* On July 31, 2008, the Company cash-settled at maturity its two remaining treasury lock contracts and one forward-starting interest rate swap contract with notional amounts aggregating $100.0 million and made aggregate cash payments to the counterparties totaling approximately $3.9 million. On September 2, 2008, the Company cash- settled its remaining forward-starting interest rate swap contracts with notional amounts aggregating $100.0 million and made aggregate cash payments to the counterparties totaling approximately $6.0 million. On September 9, 2008, the Company executed an interest rate lock agreement with lenders at a fixed rate of 6.10% per annum for an eight-year, $375.0 million loan collateralized by its Four Embarcadero Center property located in San Francisco, California. The Company’s interest rate hedging program contemplated a financing with a ten-year term and, as a result, under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, the Company recognized a net derivative loss of approximately $6.3 million representing the partial ineffectiveness of its interest rate contracts. The expected financing is expected to close in the fourth quarter of 2008. There can be no assurance that the financing will close on the terms currently contemplated or at all.

* On August 12, 2008, the Company completed the acquisitions of 540 Madison Avenue and Two Grand Central Tower located in New York City, New York for an aggregate purchase price of approximately $705.0 million, including $309.9 million of assumed indebtedness. On August 13, 2008, the Company completed the acquisition of 125 West 55th Street also located in New York City, New York for a purchase price of approximately $444.0 million, including $263.5 million of assumed indebtedness. Each acquisition was completed through a joint venture among the Company, US Real Estate Opportunities I, L.P., which is a partnership managed by Goldman Sachs, and Meraas Capital LLC, a Dubai-based private equity firm. The Company has a 60% interest in each venture and provides customary property management and leasing services for the ventures. The acquisitions were financed with cash contributions from the ventures’ partners aggregating approximately $575.6 million and the assumption of approximately $573.4 million of secured and mezzanine loans. The debt that was assumed as part of the transactions consists of the following:

o 540 Madison Avenue — two secured loans having an aggregate principal amount of $119.9 million and a weighted-average fixed interest rate of 5.20% per annum, each of which matures in July 2013;

o Two Grand Central Tower — a $190.0 million secured loan having a fixed interest rate of 5.10% per annum, which matures in July 2010; and

o 125 West 55th Street — $263.5 million of secured and mezzanine loans having a weighted-average fixed interest rate of 6.25% per annum, all of which mature in March 2010.

* On August 19, 2008, the Company’s Operating Partnership completed an offering of $747.5 million in aggregate principal amount (including $97.5 million as a result of the exercise by the initial purchasers of their over-allotment option) of its 3.625% exchangeable senior notes due 2014. The notes were priced at 99.0% of their face amount, resulting in aggregate net proceeds to the Company, after deducting the initial purchasers’ discounts and offering expenses, of approximately $731.6 million, resulting in an effective interest rate of approximately 4.057% per annum. The notes mature on February 15, 2014, unless earlier repurchased, exchanged or redeemed. The notes may be exchanged prior to the close of business on the scheduled trading day immediately preceding January 1, 2014 into cash and, at the Operating Partnership’s option, shares of the Company’s common stock at an initial exchange rate of 8.5051 shares per $1,000 principal amount of notes (or an initial exchange price of approximately $117.58 per share of the Company’s common stock). The notes were issued in an offering exempt from registration under the Securities Act of 1933. In addition, in connection with the offering, the Company entered into capped call transactions with affiliates of certain of the initial purchasers, which are intended to reduce the potential dilution upon future exchange of the Notes. The capped call transactions are expected to have the effect of increasing the effective exchange price to the Company of the Notes from $117.58 to approximately $137.17 per share, representing an overall effective premium of approximately 40% over the closing price of $97.98 per share of the Company’s common stock on August 13, 2008. The net cost of the capped call transactions was approximately $44.4 million.

* On September 10, 2008, the Company used available cash to repay the mortgage loan collateralized by its One and Two Embarcadero Center properties located in San Francisco, California totaling approximately $274.8 million. There was no prepayment penalty associated with the repayment. The mortgage loan bore interest at a fixed rate of 6.74% per annum and was scheduled to mature on December 10, 2008.

* On September 26, 2008, the Company acquired from National Public Radio ("NPR") its headquarters building at 635 Massachusetts Avenue (the "NPR Building") comprised of approximately 211,000 net rentable square feet located in Washington, DC for a purchase price of approximately $119.5 million in cash. In addition, the Company and NPR have entered into a development management agreement whereby the Company will act as development manager for NPR’s new headquarters building on NPR-owned land at 1111 North Capitol Street in Washington, DC. NPR and the Company have entered into a lease for the NPR Building for a five-year term at the conclusion of which NPR will occupy its new headquarters. Following the expiration of the lease with NPR, the Company expects to redevelop the NPR Building site into a Class A office property comprised of approximately 450,000 net rentable square feet.

ยท During the quarter ended September 30, 2008, the Company recognized reserves for the full amount of the accrued straight-line rent balances associated with the Company’s leases in New York City with Lehman Brothers Inc. and the law firm of Heller Ehrman LLP, totaling approximately $13.2 million and $7.8 million, respectively.