Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 2009

 

¨ 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)   (IRS Employer Id. Number)

Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199-8103

(Address of Principal Executive Offices) (Zip Code)

(617) 236-3300

(Registrant’s telephone number, including area code)

 

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition 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  ¨ (Do not check if a smaller reporting company)    Smaller reporting company  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, par value $.01 per share   138,583,615
(Class)   (Outstanding on August 3, 2009)

 

 

 


Table of Contents

BOSTON PROPERTIES, INC.

FORM 10-Q

for the quarter ended June 30, 2009

TABLE OF CONTENTS

 

          Page

PART I. FINANCIAL INFORMATION

  

ITEM 1.

  

Financial Statements (unaudited).

  
  

a) Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

   1
  

b) Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

   2
  

c) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2009 and 2008

   3
  

d) Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

   4
  

e) Notes to the Consolidated Financial Statements

   6

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26

ITEM 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   68

ITEM 4.

  

Controls and Procedures

   69

PART II. OTHER INFORMATION

  

ITEM 1.

  

Legal Proceedings

   70

ITEM 1A.

  

Risk Factors

   70

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   70

ITEM 3.

  

Defaults Upon Senior Securities

   70

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   70

ITEM 5.

  

Other Information

   72

ITEM 6.

  

Exhibits

   72

SIGNATURES

   73


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for share and par value amounts)

 

     June 30,
2009
    December 31,
2008
 
ASSETS     

Real estate, at cost

   $ 9,687,069      $ 9,560,924   

Construction in process

     934,397        835,983   

Land held for future development

     240,377        228,300   

Less: accumulated depreciation

     (1,901,558     (1,768,785
                

Total real estate

     8,960,285        8,856,422   

Cash and cash equivalents

     819,245        241,510   

Cash held in escrows

     22,289        21,970   

Investments in securities

     11,173        11,590   

Tenant and other receivables (net of allowance for doubtful accounts of $4,618 and $4,006, respectively)

     78,495        68,743   

Related party note receivable

     270,000        270,000   

Accrued rental income (net of allowance of $2,698 and $15,440, respectively)

     340,123        316,711   

Deferred charges, net

     283,830        325,369   

Prepaid expenses and other assets

     22,905        22,401   

Investments in unconsolidated joint ventures

     772,319        782,760   
                

Total assets

   $ 11,580,664      $ 10,917,476   
                
LIABILITIES AND EQUITY     

Liabilities:

    

Mortgage notes payable

   $ 2,603,597      $ 2,660,642   

Unsecured senior notes (net of discount of $2,383 and $2,625, respectively)

     1,472,617        1,472,375   

Unsecured exchangeable senior notes (net of discount of $18,387 and $21,101, respectively)

     1,881,482        1,859,867   

Unsecured line of credit

     —          100,000   

Accounts payable and accrued expenses

     223,909        171,791   

Dividends and distributions payable

     80,475        97,162   

Accrued interest payable

     66,463        67,132   

Other liabilities

     126,560        173,750   
                

Total liabilities

     6,455,103        6,602,719   
                

Commitments and contingencies

     —          —     
                

Noncontrolling interest:

    

Redeemable preferred units of the Operating Partnership

     55,652        55,652   
                

Equity:

    

Stockholders’ equity attributable to Boston Properties, Inc.:

    

Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding

     —          —     

Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued or outstanding

     —          —     

Common stock, $.01 par value, 250,000,000 shares authorized, 138,627,561 and 121,259,555 issued and 138,548,661 and 121,180,655 outstanding in 2009 and 2008, respectively

     1,385        1,212   

Additional paid-in capital

     4,358,830        3,565,466   

Earnings in excess of dividends

     115,027        154,953   

Treasury common stock at cost, 78,900 shares in 2009 and 2008

     (2,722     (2,722

Accumulated other comprehensive loss

     (28,464     (29,916
                

Total stockholders’ equity attributable to Boston Properties, Inc.

     4,444,056        3,688,993   

Noncontrolling interests:

    

Common units of the Operating Partnership

     620,752        563,212   

Property partnerships

     5,101        6,900   
                

Total equity

     5,069,909        4,259,105   
                

Total liabilities and equity

   $ 11,580,664      $ 10,917,476   
                

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  
     (in thousands, except for per share amounts)  

Revenue

        

Rental:

        

Base rent

   $ 304,864      $ 281,072      $ 598,381      $ 562,466   

Recoveries from tenants

     49,821        49,848        102,229        98,732   

Parking and other

     18,416        17,317        35,357        33,818   
                                

Total rental revenue

     373,101        348,237        735,967        695,016   

Hotel revenue

     7,396        9,708        13,458        16,232   

Development and management services

     8,551        6,460        16,847        11,937   

Interest and other

     442        4,275        762        16,927   
                                

Total revenue

     389,490        368,680        767,034        740,112   
                                

Expenses

        

Real estate operating:

        

Rental

     124,730        119,103        248,591        236,836   

Hotel

     5,359        6,449        10,831        12,346   

General and administrative

     18,532        17,467        35,952        37,055   

Interest

     78,633        69,302        157,563        141,798   

Depreciation and amortization

     87,005        74,389        164,375        149,060   

Loss from suspension of development

     —          —          27,766        —     

Net derivative losses (gains)

     —          (257     —          3,531   

Losses from early extinguishments of debt

     494        —          494        —     

Losses (gains) from investments in securities

     (1,194     160        (607     1,033   
                                

Total expenses

     313,559        286,613        644,965        581,659   
                                

Income before income (loss) from unconsolidated joint ventures, gains on sales of real estate and net income attributable to noncontrolling interests

     75,931        82,067        122,069        158,453   

Income (loss) from unconsolidated joint ventures

     (351     1,855        4,746        2,897   

Gains on sales of real estate

     4,493        6,203        7,288        29,641   
                                

Net income

     80,073        90,125        134,103        190,991   

Net income attributable to noncontrolling interests:

        

Noncontrolling interests in property partnerships

     (691     (420     (1,201     (1,045

Noncontrolling interest—common units of the Operating Partnership

     (10,629     (12,251     (18,091     (23,580

Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership

     (629     (900     (1,032     (4,310

Noncontrolling interest—redeemable preferred units of the Operating Partnership

     (972     (1,071     (1,962     (2,098
                                

Net income attributable to Boston Properties, Inc.

   $ 67,152      $ 75,483      $ 111,817      $ 159,958   
                                

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

        

Net income

   $ 0.54      $ 0.63      $ 0.91      $ 1.34   
                                

Weighted average number of common shares outstanding

     125,267        119,753        123,272        119,644   
                                

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

        

Net income

   $ 0.53      $ 0.62      $ 0.91      $ 1.32   
                                

Weighted average number of common shares outstanding—diluted

     125,620        121,315        123,554        121,168   
                                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Net income

   $ 80,073      $ 90,125      $ 134,103      $ 190,991   

Other comprehensive income (loss):

        

Net effective portion of interest rate contracts

     —          11,321        —          (12,481

Amortization of interest rate contracts

     738        (98     1,452        (196
                                

Other comprehensive income (loss)

     738        11,223        1,452        (12,677
                                

Comprehensive income

     80,811        101,348        135,555        178,314   

Comprehensive income attributable to noncontrolling interests

     (13,024     (16,270     (22,492     (29,189
                                

Comprehensive income attributable to Boston Properties, Inc.

   $ 67,787      $ 85,078      $ 113,063      $ 149,125   
                                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the six months ended
June 30,
 
     2009     2008  
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 134,103      $ 190,991   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     164,375        149,060   

Non-cash portion of interest expense

     27,155        15,818   

Non-cash compensation expense

     13,653        11,064   

Non-cash rental revenue

     (3,600     —     

Losses from early extinguishments of debt

     (6     —     

Net derivative losses

     —          3,531   

Losses (gains) from investments in securities

     (607     862   

Loss from suspension of development

     27,766        —     

Income from unconsolidated joint ventures

     (4,746     (2,897

Distributions of net cash flow from operations of unconsolidated joint ventures

     5,905        3,061   

Gains on sales of real estate

     (7,288     (29,641

Change in assets and liabilities:

    

Cash held in escrows

     (319     874   

Tenant and other receivables, net

     5,714        17,773   

Accrued rental income, net

     (23,412     (25,555

Prepaid expenses and other assets

     (504     (6,752

Accounts payable and accrued expenses

     7,408        (838

Accrued interest payable

     (669     1,492   

Other liabilities

     (14,902     (45,631

Tenant leasing costs

     (13,089     (32,227
                

Total adjustments

     182,834        59,994   
                

Net cash provided by operating activities

     316,937        250,985   
                

Cash flows from investing activities:

    

Acquisitions/additions to real estate

     (196,503     (232,243

Proceeds from redemptions of investments in securities

     1,024        9,657   

Net investments in unconsolidated joint ventures

     (3,486     (517,003

Net proceeds from the sale/financing of real estate released from escrow

     —          126,321   

Issuance of note receivable

     —          (270,000

Proceeds from note receivable

     —          123,000   

Net proceeds from the sales of real estate

     —          128,258   
                

Net cash used in investing activities

     (198,965     (632,010
                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the six months ended
June 30,
 
     2009     2008  
     (in thousands)  

Cash flows from financing activities:

    

Borrowings on unsecured line of credit

     —          629,000   

Repayments of unsecured line of credit

     (100,000     (429,000

Proceeds from mortgage notes payable

     35,045        106,462   

Repayments of mortgage notes payable

     (92,058     (297,093

Payments on real estate financing transactions

     —          (3,065

Advance from joint venture partners

     —          30,000   

Dividends and distributions

     (195,692     (1,041,884

Net proceeds from equity transactions

     843,601        (1,226

Distributions to noncontrolling interests in property partnerships, net

     (3,000     (2,202

Repayment of note payable

     (25,000     —     

Deferred financing costs

     (3,133     (4,778
                

Net cash provided by (used in) in financing activities

     459,763        (1,013,786
                

Net increase (decrease) in cash and cash equivalents

     577,735        (1,394,811

Cash and cash equivalents, beginning of period

     241,510        1,506,921   
                

Cash and cash equivalents, end of period

   $ 819,245      $ 112,110   
                

Supplemental disclosures:

    

Cash paid for interest

   $ 155,274      $ 145,332   
                

Interest capitalized

   $ 24,197      $ 19,221   
                

Non-cash investing and financing activities:

    

Additions to real estate included in accounts payable

   $ 41,230      $ 13,412   
                

Dividends and distributions declared but not paid

   $ 80,475      $ 96,451   
                

Issuance of OP Units in connection with the acquisition of real estate

   $ —        $ 15,000   
                

Issuance of OP Units in connection with an investment in an unconsolidated joint venture

   $ —        $ 10,000   
                

Conversions of Noncontrolling interests to Stockholders’ equity

   $ —        $ 4,743   
                

Basis adjustment to real estate in connection with conversions of Noncontrolling interests to Stockholders’ equity

   $ —        $ 11,713   
                

Note receivable issued in connection with the transfer of real estate

   $ —        $ 123,000   
                

Issuance of restricted securities to employees and directors

   $ 22,964      $ 43,283   
                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Boston Properties, Inc. (the “Company”), a Delaware corporation, is a self-administered and self-managed real estate investment trust (“REIT”). The Company is the sole general partner of Boston Properties Limited Partnership (the “Operating Partnership”) and at June 30, 2009 owned an approximate 85.9% (84.1% at June 30, 2008) general and limited partnership interest in the Operating Partnership. Partnership interests in the Operating Partnership are denominated as “common units of partnership interest” (also referred to as “OP Units”), “long term incentive units of partnership interest” (also referred to as “LTIP Units”) or “preferred units of partnership interest” (also referred to as “Preferred Units”). In addition, in February 2008, the Company issued LTIP Units in connection with the granting to employees of 2008 outperformance awards (also referred to as “2008 OPP Units”). Because the rights, preferences and privileges of 2008 OPP Units differ from other LTIP Units granted to employees as part of the annual compensation process, unless specifically noted otherwise, all references to LTIP Units exclude 2008 OPP Units.

Unless specifically noted otherwise, all references to OP Units exclude units held by the Company. A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of the Company (“Common Stock”). In lieu of a cash redemption, the Company may elect to acquire such OP Unit for one share of Common Stock. Because the number of shares of Common Stock outstanding at all times equals the number of OP Units that the Company owns, one share of Common Stock is generally the economic equivalent of one OP Unit, and the quarterly distribution that may be paid to the holder of an OP Unit equals the quarterly dividend that may be paid to the holder of a share of Common Stock. An LTIP Unit is generally the economic equivalent of a share of restricted common stock of the Company. LTIP Units, whether vested or not, will receive the same quarterly per unit distributions as OP Units, which equal per share dividends on Common Stock (See Note 8).

At June 30, 2009, there was one series of Preferred Units outstanding (i.e., Series Two Preferred Units). The Series Two Preferred Units bear a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be converted into OP Units or redeemed for cash at the election of the holder thereof or the Operating Partnership in accordance with the terms and conditions set forth in the applicable amendment to the partnership agreement (See Note 8).

All references herein to the Company refer to Boston Properties, Inc. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.

Properties

At June 30, 2009, the Company owned or had interests in a portfolio of 146 commercial real estate properties (compared to 147 and 142 properties at December 31, 2008 and June 30, 2008, respectively) (the “Properties”) aggregating approximately 49.1 million net rentable square feet (compared to approximately 49.8 million and 46.8 million net rentable square feet at December 31, 2008 and June 30, 2008, respectively), including seven properties under construction totaling approximately 2.3 million net rentable square feet, and structured parking for approximately 36,151 vehicles containing approximately 11.5 million square feet. At June 30, 2009, the Properties consist of:

 

   

142 office properties, including 122 Class A office properties (including seven properties under construction) and 20 Office/Technical properties;

 

   

one hotel; and

 

   

three retail properties.

 

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Table of Contents

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company owns or controls undeveloped land parcels totaling approximately 509.3 acres. In addition, the Company has a noncontrolling interest in the Boston Properties Office Value-Added Fund, L.P. (the “Value-Added Fund”), which is a strategic partnership with two institutional investors through which the Company has pursued the acquisition of value-added investments in assets within its existing markets. The Company accounts for its investment in the Value-Added Fund using the equity method of accounting. The Company’s investments through the Value-Added Fund are not included in its portfolio information or any other portfolio level statistics. At June 30, 2009, the Value-Added Fund had investments in 26 buildings comprised of an office property in Chelmsford, Massachusetts and office complexes in San Carlos, California and Mountain View, California.

The Company considers Class A office properties to be centrally located buildings that are professionally managed and maintained, that attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings. The Company considers Office/Technical properties to be properties that support office, research and development, laboratory and other technical uses.

2. Basis of Presentation and Summary of Significant Accounting Policies

Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership, nor does it have employees of its own. The Operating Partnership, not Boston Properties, Inc., executes all significant business relationships. All majority-owned subsidiaries and affiliates over which the Company has financial and operating control and variable interest entities (“VIE”s) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended December 31, 2008.

Revenue Recognition

Contractual rental revenue is reported on a straight-line basis over the terms of the Company’s 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. The accrued rental income balance includes a reduction of the allowance totaling approximately $13.3 million due to the termination of the Company’s lease with Lehman Brothers, Inc. On April 30, 2009, Lehman Brothers, Inc., the Company’s tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in its 399 Park Avenue property, rejected its lease in bankruptcy. During 2008, the Company had established a reserve for the full amount of the Lehman Brothers, Inc. accrued straight-line rent balance.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reclassifications and Adoption of New Accounting Pronouncements

Certain prior year amounts have been reclassified to conform to the current year presentation. In addition, certain prior year amounts have been revised as a result of the adoption on January 1, 2009 of (1) FASB Staff Position (“FSP”) No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”) (See Note 6), (2) SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”) and EITF Topic No. D-98 “Classification and Measurement of Redeemable Securities” (Amended) (See Note 8) and (3) FSP EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-06-1”) (See Note 10).

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP No. FAS 107-1”). FSP No. FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair-value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements. FSP No. FAS 107-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. FSP No. FAS 107-1 was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. For purposes of financial reporting disclosures, the Company calculates the fair value of mortgage notes payable, unsecured senior notes and unsecured exchangeable senior notes. The Company discounts the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, the Company adds its estimation of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to its debt. Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair value of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of June 30, 2009 (in thousands):

 

     Carrying
Amount
   Estimated
Fair Value

Mortgage notes payable

   $ 2,603,597    $ 2,472,484

Unsecured senior notes

     1,472,617      1,384,165

Unsecured exchangeable senior notes

     1,881,482      1,790,121
             

Total

   $ 5,957,696    $ 5,646,770
             

3. Real Estate Activity During the Six Months Ended June 30, 2009

Development

On January 16, 2009, the Company acquired the development rights for the site at 17 Cambridge Center in Cambridge, Massachusetts for approximately $11.4 million.

On February 6, 2009, the Company announced that it was suspending construction on its 1,000,000 square foot office building at 250 West 55th Street in New York City. The Company intends to complete the construction of foundations and steel/deck to grade to facilitate a restart of construction in the future and therefore anticipates that most construction activity on this project will be completed by the end of the fourth quarter of 2009. During the six months ended June 30, 2009, the Company recognized aggregate costs of approximately $27.8 million related to the suspension of development.

On April 1, 2009, the Company placed in-service One Preserve Parkway, an approximately 184,000 net rentable square foot Class A office property located in Rockville, Maryland. The property is 20% leased.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On May 31, 2009, a consolidated joint venture in which the Company has a 66.67% interest placed in-service the Offices at Wisconsin Place, an approximately 299,000 net rentable square foot Class A office property located in Chevy Chase, Maryland. The property is 91% leased.

Dispositions

On April 14, 2008, the Company sold a parcel of land located in Washington, DC for approximately $33.7 million. The Company had previously entered into a development management agreement with the buyer to develop a Class A office property on the parcel totaling approximately 165,000 net rentable square feet. Due to the Company’s involvement in the construction of the project, the gain on sale had been deferred and is being recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total project costs. As a result, the Company recognized a gain on sale during the six months ended June 30, 2009 of approximately $7.3 million. The Company has recognized a cumulative gain on sale of approximately $17.2 million.

4. Investments in Unconsolidated Joint Ventures

The Company’s investments in unconsolidated joint ventures consist of the following at June 30, 2009:

 

Entity

 

Properties

   Nominal %
Ownership
 

Square 407 Limited Partnership

  Market Square North    50.0

The Metropolitan Square Associates LLC

  Metropolitan Square    51.0 %(1) 

BP/CRF 901 New York Avenue LLC

  901 New York Avenue    25.0 %(2) 

WP Project Developer LLC

  Wisconsin Place Land and Infrastructure    23.9 %(3) 

Wisconsin Place Retail LLC

  Wisconsin Place Retail    5.0 %(4) 

Eighth Avenue and 46th Street Entities

  Eighth Avenue and 46th Street    50.0 %(4) 

Boston Properties Office Value-Added Fund, L.P.

  300 Billerica Road, One & Two Circle Star Way and Mountain View Research and Technology Parks    36.9 %(2)(5) 

Annapolis Junction NFM, LLC

  Annapolis Junction    50.0

767 Venture, LLC

  The General Motors Building    60.0 %(1) 

2 GCT Venture LLC

  Two Grand Central Tower    60.0 %(1) 

540 Madison Venture LLC

  540 Madison Avenue    60.0 %(1) 

125 West 55th Street Venture LLC

  125 West 55th Street    60.0 %(1) 

 

(1) The Company has determined that these entities are not VIEs and that its joint venture partners have substantive participating rights with respect to the assets and operations of the properties, pursuant to the joint venture agreements.
(2) The Company’s economic ownership can increase based on the achievement of certain return thresholds.
(3) Represents the Company’s effective ownership interest. The Company has a 66.67%, 5% and 0% interest in the office, retail and residential joint venture entities, respectively, each of which owns a 33.33% interest in the entity developing and owning the land and infrastructure of the project.
(4) These properties have been partially placed in-service or are not in operation (i.e., under construction or assembled land).
(5) Represents the Company’s effective ownership interest. The Company has a 25.0% interest in the 300 Billerica Road and One & Two Circle Star Way properties and a 39.5% interest in the Mountain View Research and Technology Park properties.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

The combined summarized balance sheets of the unconsolidated joint ventures are as follows:

 

     June 30,
2009
    December 31,
2008
 
     (in thousands)  
ASSETS     

Real estate and development in process, net

   $ 5,210,046      $ 5,235,149   

Other assets

     761,415        824,232   
                

Total assets

   $ 5,971,461      $ 6,059,381   
                
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY     

Mortgage and notes payable

   $ 3,205,044      $ 3,189,549   

Other liabilities

     1,116,268        1,215,849   

Members’/Partners’ equity

     1,650,149        1,653,983   
                

Total liabilities and members’/partners’ equity

   $ 5,971,461      $ 6,059,381   
                

Company’s share of equity

   $ 940,358      $ 948,222   

Basis differentials(1)

     (168,039     (165,462
                

Carrying value of the Company’s investments in unconsolidated joint ventures

   $ 772,319      $ 782,760   
                

 

(1) This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from impairment of investments and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The combined summarized statements of operations of the unconsolidated joint ventures are as follows:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
         2009             2008             2009             2008    
     (in thousands)     (in thousands)

Total revenue(1)

   $ 151,562      $ 51,554      $ 296,942      $ 81,894

Expenses

        

Operating

     38,904        16,182        80,637        26,767

Interest

     58,037        18,654        114,381        28,469

Depreciation and amortization

     60,948        17,623        118,488        26,229

Losses from early extinguishments of debt

     —          112        —          152
                              

Total expenses

     157,889        52,571        313,506        81,617
                              

Net income (loss)

   $ (6,327   $ (1,017   $ (16,564   $ 277
                              

Company’s share of net income (loss)

   $ (3,143   $ 40      $ (8,445   $ 1,082

Impairment loss on investment

     (7,357     —          (7,357     —  

Basis differential

     2,193        —          4,780        —  

Elimination of inter-entity interest on partner loan

     7,956        1,815        15,768        1,815
                              

Income (loss) from unconsolidated joint ventures

   $ (351   $ 1,855      $ 4,746      $ 2,897
                              

 

(1) Includes straight-line rent adjustments of $8.3 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and $13.6 million and $0.6 million for the six months ended June 30, 2009 and 2008, respectively. Includes “above” and “below” market rent adjustments of $39.4 million and $5.6 million for the three months ended June 30, 2009 and 2008, respectively, and $77.3 million and $6.0 million for the six months ended June 30, 2009 and 2008, respectively.

During June 2009, the Company recognized a non-recurring non-cash impairment charge which represented the other-than-temporary decline in the fair value below the carrying value of the Company’s investment in its Value-Added Fund. In accordance with Accounting Principles Board Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock” (APB No. 18), a loss in value of an investment under the equity method of accounting, which is other than a temporary decline, must be recognized. Unlike SFAS No. 144, impairments under APB No. 18 result from fair values derived based on discounted cash flows and other valuation techniques that are more sensitive to current market conditions. As a result, the Company recognized a non-recurring non-cash impairment charge of approximately $7.4 million on its investment in the Company’s Value-Added Fund. The Company has determined that its valuation of these investments was categorized within Level 3 of the fair value hierarchy in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), as it utilized significant unobservable inputs in its assessment. The equity method investments represent the Company’s only Level 3 assets for the six months ended June 30, 2009. The following table reflects the activity of its investments in unconsolidated joint ventures for the six months ended June 30, 2009 (in thousands):

 

Balance at January 1, 2009:

   $ 782,760   

Net loss

     (3,665

Impairment loss

     (7,357

Contributions

     6,148   

Distributions

     (5,567
        

Balance at June 30, 2009:

   $ 772,319   
        

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. Mortgage Notes Payable

On April 21, 2009, the Company obtained construction financing totaling $215.0 million collateralized by its Atlantic Wharf development project located at 280 Congress Street in Boston, Massachusetts. Atlantic Wharf, formerly known as Russia Wharf, is a mixed-use project totaling approximately 815,000 net rentable square feet. Wellington Management Company, LLP has leased approximately 450,000 square feet of the office space in the development commencing in the first quarter of 2011. The construction financing bears interest at a variable rate equal to LIBOR plus 3.00% per annum and matures on April 21, 2012 with two, one-year extension options.

On June 9, 2009, the Company used available cash to repay the mortgage loan collateralized by its Reservoir Place property located in Waltham, Massachusetts totaling approximately $47.8 million. The mortgage loan bore interest at a fixed rate of 7.00% and was scheduled to mature on July 1, 2009. There was no prepayment penalty.

On June 26, 2009, the Company used available cash to repay the mortgage loan collateralized by its Ten Cambridge Center property located in Cambridge, Massachusetts totaling approximately $30.1 million. The mortgage loan bore interest at a fixed rate of 8.27% and was scheduled to mature on May 1, 2010. The Company paid a prepayment penalty totaling $0.5 million in connection with the repayment.

6. Unsecured Exchangeable Senior Notes

The following summarizes the unsecured exchangeable senior notes outstanding as of June 30, 2009 (dollars in thousands):

 

    Coupon/
Stated Rate
    Effective
Rate(1)
    Exchange
Rate
    Principal
Amount
    First Optional
Redemption Date by
Company
   Maturity Date

3.625% Exchangeable Senior Notes

  3.625   4.037   8.5051 (2)    $ 747,500      N/A    February 15, 2014

2.875% Exchangeable Senior Notes

  2.875   3.462   7.0430 (3)      862,500      February 20, 2012    February 15, 2037

3.750% Exchangeable Senior Notes

  3.750   3.787   10.0066 (4)      450,000      May 18, 2013    May 15, 2036
                  

Total principal

          2,060,000        

Net discount

          (18,387     

FSP No. APB 14-1 Adjustment, net of accumulated amortization

          (160,131     
                  

Total

        $ 1,881,482        
                  

 

(1) Yield on issuance date including the effects of discounts on the notes and excluding the effects of FSP No. APB 14-1.
(2)

The initial exchange rate is 8.5051 shares per $1,000 principal amount of the notes (or an initial exchange price of approximately $117.58 per share of Boston Properties, Inc.’s Common Stock). In addition, we 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 us of the notes from $117.58 to approximately $137.17 per share, representing an overall effective premium of approximately 40% over the closing price

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

on August 13, 2008 of $97.98 per share of Boston Properties, Inc.’s Common Stock. The net cost of the capped call transactions was approximately $44.4 million.

(3) In connection with the special distribution of $5.98 per share of Boston Properties, Inc.’s Common Stock declared on December 17, 2007, the exchange rate was adjusted from 6.6090 to 7.0430 shares per $1,000 principal amount of notes effective as of December 31, 2007, resulting in an exchange price of approximately $141.98 per share of Boston Properties, Inc.’s Common Stock.
(4) In connection with the special distribution of $5.98 per share of Boston Properties, Inc.’s Common Stock declared on December 17, 2007, the exchange rate was adjusted from 9.3900 to 10.0066 shares per $1,000 principal amount of notes effective as of December 31, 2007, resulting in an exchange price of approximately $99.93 per share of Boston Properties, Inc.’s Common Stock.

FSP No. APB 14-1 requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP No. APB 14-1 requires that the initial proceeds from the sale of the Operating Partnership’s $862.5 million of 2.875% exchangeable senior notes due 2037, $450.0 million of 3.75% exchangeable senior notes due 2036 and $747.5 million of 3.625% exchangeable senior notes due 2014 be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt. The Company measured the fair value of the debt components of the 2.875%, 3.75% and 3.625% exchangeable senior notes for the periods presented based on effective interest rates of 5.630%, 5.958% and 6.555%, respectively. The aggregate carrying amount of the debt component was approximately $1.88 billion and $1.86 billion (net of the FSP No. 14-1 adjustment of approximately $160.1 million and $179.0 million) at June 30, 2009 and December 31, 2008, respectively. As a result, the Company attributed an aggregate of approximately $230.3 million of the proceeds to the equity component of the notes, which represents the excess proceeds received over the fair value of the notes at the date of issuance. The equity component of the notes has been reflected within Additional Paid-in Capital in the Consolidated Balance Sheets. The Company reclassified approximately $1.0 million of deferred financing costs to Additional Paid-in Capital, which represented the costs attributable to the equity components of the notes. The carrying amount of the equity component was approximately $229.3 million at June 30, 2009 and December 31, 2008. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption dates or, in the case of the 2014 notes, the maturity date) as additional non-cash interest expense. The additional non-cash interest expense will increase in subsequent reporting periods through the first optional redemption dates (or, in the case of the 2014 notes, the maturity date) as the debt accretes to its par value over the same period. The aggregate contractual interest expense was approximately $18.6 million and $11.5 million for the three months ended June 30, 2009 and 2008, respectively, and approximately $37.1 million and $22.7 million for the six months ended June 30, 2009 and 2008, respectively. As a result of applying FSP No. APB 14-1, the Company reported additional non-cash interest expense of approximately $9.5 million and $5.6 million for the three months ended June 30, 2009 and 2008, respectively, and approximately $18.9 million and $11.0 million for the six months ended June 30, 2009 and 2008, respectively. FSP No. APB 14-1 requires companies to retrospectively apply the requirements of the pronouncement to all periods presented. As a result, the revised diluted earnings per share was reduced by $0.04 and $0.07 for the three and six months ended June 30, 2008, respectively.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7. Commitments and Contingencies

General

In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence.

The Company has letter of credit and performance obligations of approximately $19.4 million related to lender and development requirements.

Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

In connection with the Company’s assumption of the General Motors Building’s secured loan by the Company’s unconsolidated joint venture, 767 Venture, LLC, the Company guaranteed the unconsolidated joint venture’s obligation to fund various escrows, including tenant improvements, taxes and insurance in lieu of cash deposits. As of June 30, 2009, the maximum funding obligation under the guarantee was approximately $34.8 million. From time to time, the Company (or the applicable joint venture) has also agreed to guarantee portions of the principal, interest or other amounts in connection with other unconsolidated joint venture borrowings. In addition to the financial guarantees referenced above, the Company has agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) on certain of its unconsolidated joint venture loans.

Insurance

The Company carries insurance coverage on its properties of types and in amounts and with deductibles that it believes 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 (“TRIPRA”). Currently, the Company’s property insurance program per occurrence limits are $1.0 billion for its portfolio insurance program, including coverage for acts of terrorism certified under TRIA. The Company currently insures certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), in separate stand alone insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are $1.625 billion, including coverage for acts of terrorism certified under TRIA, with $1.375 billion of coverage for losses in excess of $250 million being provided by NYXP, LLC, as a direct insurer. The Company also currently carries nuclear, biological, chemical and radiological terrorism insurance coverage (“NBCR Coverage”) for acts of terrorism certified under TRIA, which is provided by IXP, LLC as a direct insurer, for the properties in our portfolio, including 767 Fifth Avenue, but excluding the properties owned by the Company’s Value-Added Fund and certain other properties owned in joint ventures with third parties or which we manage. The per occurrence limit for NBCR Coverage is $1.0 billion. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” The program trigger is $100 million and the coinsurance is 15%. Under 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. The Company may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if there is a change in its portfolio or for any other reason. The Company intends to continue to monitor the scope, nature and cost of available terrorism insurance and maintain insurance in amounts and on terms that are commercially reasonable.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that the Company believes are commercially reasonable. In addition, this insurance is subject to a deductible in the amount of 5% of the value of the affected property. Specifically, the Company currently carries earthquake insurance which covers its San Francisco region with a $120 million per occurrence limit and a $120 million annual aggregate limit, $20 million of which is provided by IXP, LLC, as a direct insurer. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact the Company’s ability to finance properties subject to earthquake risk. The Company may discontinue earthquake insurance on some or all of its properties in the future if the premiums exceed the Company’s estimation of the value of the coverage.

IXP, LLC (“IXP”), a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco properties and the Company’s NBCR Coverage for acts of terrorism certified under TRIA. NYXP, LLC (“NYXP”), a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s coverage for acts of terrorism certified under TRIA for 767 Fifth Avenue. Currently, NYXP only insures losses which exceed the program trigger under TRIA and NYXP reinsures with a third-party insurance company any coinsurance payable under TRIA. Insofar as the Company owns IXP and NYXP, it is responsible for their liquidity and capital resources, and the accounts of IXP and NYXP are part of the Company’s consolidated financial statements. In particular, if a loss occurs which is covered by the Company’s 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 the Company experiences a loss and IXP or NYXP are required to pay under their insurance policies, the Company 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.

The mortgages on the Company’s properties typically contain requirements concerning the financial ratings of the insurers who provide policies covering the property. The Company provides the lenders on a regular basis with the identity of the insurance companies in the Company’s insurance programs. The ratings of some of the Company’s insurers are below the rating requirements in some of the Company’s loan agreements and the lenders for these loans could attempt to claim an event of default has occurred under the loan. The Company believes it could obtain insurance with insurers which satisfy the rating requirements. Additionally, in the future, the Company’s 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 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 the Company’s insurers will not have a material adverse effect on the Company.

The Company continues 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 the Company 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 or the presence of mold at the Company’s properties, for which the Company 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 the Company experiences a loss that is uninsured or that exceeds policy limits, the Company 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

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.

8. Noncontrolling Interests

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”) and EITF Topic No. D-98 “Classification and Measurement of Redeemable Securities” (Amended), under which noncontrolling interests of the Company (previously known as “minority interests”) are classified either as a component of equity or in the mezzanine section of the balance sheet as temporary equity depending on the terms of such noncontrolling interests. As a result of the adoption of SFAS No. 160, the Company reclassified the noncontrolling interests in consolidated property partnerships from the mezzanine section of its Consolidated Balance Sheets to equity. The reclassification totaled approximately $6.9 million as of December 31, 2008. In addition, the Company reclassified the noncontrolling interests related to the common units of the Operating Partnership not owned by the Company from the mezzanine section of its Consolidated Balance Sheets to equity. The reclassification totaled approximately $563.2 million as of December 31, 2008. Noncontrolling interests related to redeemable preferred units of the Operating Partnership continue to be classified in the mezzanine section of the Consolidated Balance Sheets.

Under SFAS No. 160, net income encompasses the total income of all consolidated subsidiaries and there is a separate disclosure of the attribution of that income between controlling and noncontrolling interests. The implementation of this standard had no effect on the Company’s results of operations. As a result of the adoption of SFAS No. 160, net income attributable to noncontrolling interests is now deducted from net income in the determination of net income attributable to the Company for all periods presented. In addition, other comprehensive income (loss) attributable to noncontrolling interests is now deducted from comprehensive income in the determination of comprehensive income attributable to the Company for all periods presented.

Noncontrolling interests relate to the interests in the Operating Partnership not owned by the Company and interests in property partnerships not wholly-owned by the Company. As of June 30, 2009, the noncontrolling interests consisted of 19,875,443 OP Units, 1,459,840 LTIP Units, 1,080,938 2008 OPP Units and 1,113,044 Series Two Preferred Units (or 1,460,688 OP Units on an as converted basis) held by parties other than the Company.

Noncontrolling Interest—Redeemable Preferred Units of the Operating Partnership

The Preferred Units at June 30, 2009 consisted solely of 1,113,044 Series Two Preferred Units, which bear a preferred distribution equal to the greater of (1) the distribution which would have been paid in respect of the Series Two Preferred Unit had such Series Two Preferred Unit been converted into an OP Unit (including both regular and special distributions) or (2) a rate ranging from 5.00% to 7.00% per annum on a liquidation preference of $50.00 per unit, and are convertible into OP Units at a rate of $38.10 per Preferred Unit (1.312336 OP Units for each Preferred Unit). Distributions on the Series Two Preferred Units are payable quarterly and, unless the greater rate described in the next sentence applies, accrue at 7.0% until May 12, 2009 and 6.0% thereafter. If distributions on the number of OP Units into which the Series Two Preferred Units are convertible are greater than distributions calculated using the rates described in the preceding sentence for the applicable quarterly period, then the greater distributions are payable instead. The holders of Series Two Preferred Units have the right to require the Operating Partnership to redeem their units for cash at the redemption price of $50.00 per unit on May 12, 2009, May 12, 2010, May 12, 2011, May 14, 2012, May 14, 2013 and May 12, 2014.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The maximum number of units that may be required to be redeemed from all holders on each of these dates is 1,007,662, which is one-sixth of the number of Series Two Preferred Units that were originally issued. No holder exercised its right to have its Series Two Preferred Units redeemed for cash as of May 12, 2009. The Company also has the right, under certain conditions and at certain times, to redeem Series Two Preferred Units for cash and to convert into OP Units any Series Two Preferred Units that are not redeemed when they are eligible for redemption.

On February 17, 2009, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.89239 per unit. On May 15, 2009, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.89239 per unit.

The following table reflects the activity of the noncontrolling interests—redeemable preferred units of the Operating Partnership for the six months ended June 30, 2009 and 2008 (in thousands):

 

Balance at January 1, 2009:

   $ 55,652   

Net income

     1,962   

Distributions

     (1,962
        

Balance at June 30, 2009:

   $ 55,652   
        

 

Balance at January 1, 2008:

   $ 55,652   

Net income

     2,098   

Distributions

     (2,098
        

Balance at June 30, 2008:

   $ 55,652   
        

Noncontrolling Interest—Common Units of the Operating Partnership

During the six months ended June 30, 2009, 34,235 OP Units were presented by the holders for redemption and were redeemed by the Company in exchange for an equal number of shares of Common Stock.

At June 30, 2009, the Company had outstanding 1,080,938 2008 OPP Units. Prior to the measurement date on February 5, 2011, 2008 OPP Units will be entitled to receive per unit distributions equal to one-tenth (10%) of the regular quarterly distributions payable on an OP Unit, but will not be entitled to receive any special distributions. After the measurement date, the number of 2008 OPP Units, both vested and unvested, which 2008 OPP award recipients have earned, if any, based on the establishment of an outperformance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit.

On January 30, 2009, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.68 per unit and a distribution on the 2008 OPP Units in the amount of $0.068 per unit to holders of record as of the close of business on December 31, 2008. On April 30, 2009, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.68 per unit and a distribution on the 2008 OPP Units in the amount of $0.068 per unit to holders of record as of the close of business on March 31, 2009. On June 17, 2009, Boston Properties, Inc., as general partner of the Operating Partnership, declared a distribution on the OP Units and LTIP Units in the amount of $0.50 per unit and a distribution on the 2008 OPP Units in the amount of $0.05 per unit, in each case payable on July 31, 2009 to holders of record as of the close of business on June 30, 2009.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table reflects the activity of the noncontrolling interests—common units of the Operating Partnership for the six months ended June 30, 2009 and 2008 (in thousands):

 

Balance at January 1, 2009:

   $ 563,212   

Net income

     19,123   

Distributions

     (25,300

Equity compensation

     12,724   

Reallocation of partnership interest

     50,993   
        

Balance at June 30, 2009:

   $ 620,752   
        

 

Balance at January 1, 2008:

   $ 589,770   

Net income

     27,890   

Distributions

     (28,803

Contributions

     25,000   

Equity compensation

     10,512   

Reallocation of partnership interest

     (25,261
        

Balance at June 30, 2008:

   $ 599,108   
        

The Series Two Preferred Units may be converted into OP Units at the election of the holder thereof at any time. A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of the Company. The Company may, in its sole discretion, elect to assume and satisfy the redemption obligation by paying either cash or issuing one share of Common Stock. The value of the OP Units (not owned by the Company and including LTIP Units assuming that all conditions have been met for the conversion thereof) and Series Two Preferred Units had all of such units been redeemed at June 30, 2009 was approximately $1,017.7 million and $69.7 million, respectively, based on the closing price of the Company’s common stock of $47.70 per share on June 30, 2009.

Noncontrolling Interest—Property Partnerships

The noncontrolling interests in property partnerships consist of the outside equity interests in ventures that are consolidated with the financial results of the Company because the Company exercises control over the entities that own the properties. The equity interests in these ventures that are not owned by the Company, totaling approximately $5.1 million at June 30, 2009, are included in Noncontrolling Interests—Property Partnerships on the accompanying Consolidated Balance Sheets.

On January 5, 2009, the Company paid $25.0 million in connection with the agreement entered into in May 2006 to redeem the outside members’ equity interests in the limited liability company that owns 601 Lexington Avenue (formerly known as Citigroup Center).

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table reflects the activity of the noncontrolling interests—property partnerships for the six months ended June 30, 2009 and 2008 (in thousands):

 

Balance at January 1, 2009:

   $ 6,900   

Net income

     1,201   

Distributions

     (3,000
        

Balance at June 30, 2009:

   $ 5,101   
        

 

Balance at January 1, 2008:

   $ 25,805   

Net income

     1,045   

Distributions

     (2,202
        

Balance at June 30, 2008:

   $ 24,648   
        

9. Stockholders’ Equity

As of June 30, 2009, the Company had 138,548,661 shares of Common Stock outstanding.

On June 10, 2009, the Company completed a public offering of 17,250,000 shares of its Common Stock (including 2,250,000 shares issued as a result of the exercise of an overallotment option by the underwriters) at a price to the public of $50.00 per share. The proceeds from this public offering, net of underwriters’ discounts and offering costs, totaled approximately $842.0 million.

During the six months ended June 30, 2009, the Company issued 34,235 shares of its Common Stock in connection with the redemption of an equal number of OP Units.

On January 30, 2009, the Company paid a dividend in the amount of $0.68 per share of Common Stock to shareholders of record as of the close of business on December 31, 2008. On April 30, 2009, the Company paid a dividend in the amount of $0.68 per share of Common Stock to shareholders of record as of the close of business on March 31, 2009. On June 17, 2009, the Company’s Board of Directors declared a dividend in the amount of $0.50 per share of Common Stock payable on July 31, 2009 to shareholders of record as of the close of business on June 30, 2009.

10. Earnings Per Share

Earnings per share (“EPS”) has been computed pursuant to the provisions of SFAS No. 128. During 2004, the Company adopted EITF 03-6 “Participating Securities and the Two-Class Method under FASB 128” (“EITF 03-6”), which provides further guidance on the definition of participating securities. Pursuant to EITF 03-6, the Operating Partnership’s Series Two Preferred Units, which are reflected as Noncontrolling Interests—Redeemable Preferred Units of the Operating Partnership in the Company’s Consolidated Balance Sheets, are considered participating securities and are included in the computation of basic and diluted earnings per share of the Company if the effect of applying the if-converted method is dilutive. The terms of the Series Two Preferred Units enable the holders to obtain OP Units of the Operating Partnership, as well as Common Stock of the Company. In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF 03-6-1 requires the retrospective adjustment of all prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of the FSP. Early application was not permitted. As a result, the Company’s

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

unvested restricted stock, LTIP Units and 2008 OPP Units are considered participating securities and are included in the computation of basic and diluted earnings per share of the Company if the effect of applying the if-converted method is dilutive. The adoption of FSP 03-6-1 on January 1, 2009 did not have a material impact on the Company’s computation of EPS. Because the 2008 OPP Units require the Company to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, the Company excludes all contingently issuable units from the diluted EPS calculation. For the three and six months ended June 30, 2009 and 2008, the absolute and relative return thresholds for the 2008 OPP Units were not met and as a result the 2008 OPP Units have been excluded from the diluted EPS calculation. Other potentially dilutive common shares, including stock options, restricted stock and other securities of the Operating Partnership that are exchangeable for the Company’s Common Stock, and the related impact on earnings, are considered when calculating diluted EPS. The following table provides a reconciliation of both the net income attributable to Boston Properties, Inc. and the number of common shares used in the computation of basic EPS, which is calculated by dividing net income attributable to Boston Properties, Inc. by the weighted-average number of common shares outstanding during the period.

 

     For the three months ended June 30, 2009  
   Income
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
   (in thousands, except for per share amounts)  

Basic Earnings:

        

Net income attributable to Boston Properties, Inc.

   $ 67,152    125,267    $ 0.54   

Effect of Dilutive Securities:

        

Stock Based Compensation

     —      353      (0.01
                    

Diluted Earnings:

        

Net income

   $ 67,152    125,620    $ 0.53   
                    
     For the three months ended June 30, 2008  
     Income
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
     (in thousands, except for per share amounts)  

Basic Earnings:

        

Net income attributable to Boston Properties, Inc.

   $ 75,483    119,753    $ 0.63   

Effect of Dilutive Securities:

        

Stock Based Compensation

     —      1,562      (0.01
                    

Diluted Earnings:

        

Net income

   $ 75,483    121,315    $ 0.62   
                    
     For the six months ended June 30, 2009  
     Income
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
     (in thousands, except for per share amounts)  

Basic Earnings:

        

Net income attributable to Boston Properties, Inc.

   $ 111,817    123,272    $ 0.91   

Effect of Dilutive Securities:

        

Stock Based Compensation

     —      282      (0.00
                    

Diluted Earnings:

        

Net income

   $ 111,817    123,554    $ 0.91   
                    

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     For the six months ended June 30, 2008  
     Income
(Numerator)
    Shares
(Denominator)
   Per Share
Amount
 
     (in thousands, except for per share amounts)  

Basic Earnings:

       

Income attributable to Boston Properties, Inc. before allocation of undistributed earnings to participating securities

   $ 159,958      119,644    $ 1.34   

Allocation of undistributed earnings of participating securities

     (11   —        (0.00
                     

Net income attributable to Boston Properties, Inc.

     159,947      119,644      1.34   

Effect of Dilutive Securities:

       

Stock Based Compensation

     —        1,524      (0.02
                     

Diluted Earnings:

       

Net income

   $ 159,947      121,168    $ 1.32   
                     

11. Stock Option and Incentive Plan

During the six months ended June 30, 2009, the Company issued 62,876 shares of restricted common stock and 515,007 LTIP Units to employees and directors under the 1997 Stock Option and Incentive Plan (the “1997 Plan”). Employees paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit. The shares of restricted stock were valued at approximately $2.8 million ($43.89 per share weighted-average). The LTIP Units were valued at approximately $21.1 million ($41.05 per unit fair value weighted-average) using a Monte Carlo simulation method model in accordance with the provisions of SFAS No. 123R. The per unit fair value of each LTIP Unit granted was estimated on the date of grant using the following assumptions: an expected life of 5.6 years, a risk-free interest rate of 1.87% and an expected price volatility of 40.0%. An LTIP Unit is generally the economic equivalent of a share of restricted stock in the Company. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. The restricted stock and LTIP Units granted to employees between January 1, 2004 and November 2006 vest over a five-year term. Grants of restricted stock and LTIP Units made in and after November 2006 vest in four equal annual installments. Restricted stock and LTIP Units are measured at fair value on the date of grant based on the number of shares or units granted, as adjusted for forfeitures, and the closing price of the Company’s common stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Earnings in Excess of Dividends in the Consolidated Balance Sheets. Stock-based compensation expense associated with restricted stock, LTIP Units and 2008 OPP Units was approximately $6.3 million and $5.4 million for the three months ended June 30, 2009 and 2008, respectively, and approximately $13.1 million and $10.6 million for the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009, there was $44.6 million of unrecognized compensation cost related to unvested restricted stock and LTIP Units and $11.6 million of unrecognized compensation cost related to unvested 2008 OPP Units that is expected to be recognized over a weighted-average period of approximately 2.9 years.

12. Segment Information

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by both geographic area and property type. The Company’s segments by geographic area are Greater Boston, Greater Washington, D.C., Midtown Manhattan, Greater San Francisco and New Jersey. Segments by property type include: Class A Office, Office/Technical and Hotel.

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Asset information by segment is not reported because the Company does not use this measure to assess performance. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, development and management services, general and administrative expenses, interest expense, depreciation and amortization expense, loss from suspension of development, noncontrolling interests, income (loss) from unconsolidated joint ventures, gains on sales of real estate, net derivative losses (gains), losses from early extinguishments of debt and losses (gains) from investments in securities are not included in Net Operating Income as the internal reporting addresses these items on a corporate level.

Net Operating Income is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate Net Operating Income in the same manner. The Company considers Net Operating Income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of the Company’s properties.

Information by geographic area and property type:

Three months ended June 30, 2009 (dollars in thousands):

 

     Greater
Boston
    Greater
Washington, D.C.
    Midtown
Manhattan
    Greater
San Francisco
    New
Jersey
    Total  

Rental Revenue:

            

Class A

   $ 90,932      $ 78,726      $ 120,562      $ 55,598      $ 15,650      $ 361,468   

Office/Technical

     7,580        4,053        —          —          —          11,633   

Hotel

     7,396        —          —          —          —          7,396   
                                                

Total

     105,908        82,779        120,562        55,598        15,650        380,497   
                                                

% of Total

     27.83     21.76     31.69     14.61     4.11     100.00

Real Estate Operating Expenses:

            

Class A

     34,229        22,346        36,824        20,704        7,358        121,461   

Office/Technical

     2,174        1,095        —          —          —          3,269   

Hotel

     5,359        —          —          —          —          5,359   
                                                

Total

     41,762        23,441        36,824        20,704        7,358        130,089   
                                                

% of Total

     32.10     18.02     28.31     15.91     5.66     100.00
                                                

Net Operating Income

   $ 64,146      $ 59,338      $ 83,738      $ 34,894      $ 8,292      $ 250,408   
                                                

% of Total

     25.62     23.70     33.44     13.93     3.31     100.00

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Three months ended June 30, 2008 (dollars in thousands):

 

     Greater
Boston
    Greater
Washington, D.C.
    Midtown
Manhattan
    Greater
San Francisco
    New
Jersey
    Total  

Rental Revenue:

            

Class A

   $ 89,075      $ 70,891      $ 110,902      $ 50,273      $ 15,830      $ 336,971   

Office/Technical

     7,528        3,738        —          —          —          11,266   

Hotel

     9,708        —          —          —          —          9,708   
                                                

Total

     106,311        74,629        110,902        50,273        15,830        357,945   
                                                

% of Total

     29.70     20.85     30.98     14.05     4.42     100.00

Real Estate Operating Expenses:

            

Class A

     33,978        20,043        34,442        19,541        7,881        115,885   

Office/Technical

     2,312        906        —          —          —          3,218   

Hotel

     6,449        —          —          —          —          6,449   
                                                

Total

     42,739        20,949        34,442        19,541        7,881        125,552   
                                                

% of Total

     34.04     16.69     27.43     15.56     6.28     100.00
                                                

Net Operating Income

   $ 63,572      $ 53,680      $ 76,460      $ 30,732      $ 7,949      $ 232,393   
                                                

% of Total

     27.36     23.10     32.90     13.22     3.42     100.00

Six months ended June 30, 2009 (dollars in thousands):

 

     Greater
Boston
    Greater
Washington, D.C.
    Midtown
Manhattan
    Greater
San Francisco
    New
Jersey
    Total  

Rental Revenue:

            

Class A

   $ 182,420      $ 155,811      $ 231,713      $ 111,114      $ 31,303      $ 712,361   

Office/Technical

     15,437        8,169        —          —          —          23,606   

Hotel

     13,458        —          —          —          —          13,458   
                                                

Total

     211,315        163,980        231,713        111,114        31,303        749,425   
                                                

% of Total

     28.20     21.88     30.92     14.82     4.18     100.00

Real Estate Operating Expenses:

            

Class A

     69,003        44,602        72,706        40,035        15,214        241,560   

Office/Technical

     4,840        2,191        —          —          —          7,031   

Hotel

     10,831        —          —          —          —          10,831   
                                                

Total

     84,674        46,793        72,706        40,035        15,214        259,422   
                                                

% of Total

     32.64     18.04     28.03     15.43     5.86     100.00
                                                

Net Operating Income

   $ 126,641      $ 117,187      $ 159,007      $ 71,079      $ 16,089      $ 490,003   
                                                

% of Total

     25.84     23.92     32.45     14.51     3.28     100.00

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Six months ended June 30, 2008 (dollars in thousands):

 

     Greater
Boston
    Greater
Washington, D.C.
    Midtown
Manhattan
    Greater
San Francisco
    New
Jersey
    Total  

Rental Revenue:

            

Class A

   $ 177,316      $ 137,459      $ 220,628      $ 104,498      $ 32,521      $ 672,422   

Office/Technical

     15,123        7,471        —          —          —          22,594   

Hotel

     16,232        —          —          —          —          16,232   
                                                

Total

     208,671        144,930        220,628        104,498        32,521        711,248   
                                                

% of Total

     29.34     20.38     31.02     14.69     4.57     100.00

Real Estate Operating Expenses:

            

Class A

     67,431        39,661        69,032        38,680        15,369        230,173   

Office/Technical

     4,907        1,756        —          —          —          6,663   

Hotel

     12,346        —          —          —          —          12,346   
                                                

Total

     84,684        41,417        69,032        38,680        15,369        249,182   
                                                

% of Total

     33.99     16.62     27.70     15.52     6.17     100.0
                                                

Net Operating Income

   $ 123,987      $ 103,513      $ 151,596      $ 65,818      $ 17,152      $ 462,066   
                                                

% of Total

     26.83     22.40     32.81     14.25     3.71     100.00

The following is a reconciliation of Net Operating Income to net income attributable to Boston Properties, Inc.:

 

     Three months ended
June 30
    Six months ended
June 30,
 
   2009     2008     2009     2008  

Net Operating Income

   $ 250,408      $ 232,393      $ 490,003      $ 462,066   

Add:

        

Development and management services income

     8,551        6,460        16,847        11,937   

Interest and other income

     442        4,275        762        16,927   

Income (loss) from unconsolidated joint ventures

     (351     1,855        4,746        2,897   

Gains on sales of real estate

     4,493        6,203        7,288        29,641   

Less:

        

General and administrative expense

     (18,532     (17,467     (35,952     (37,055

Interest expense

     (78,633     (69,302     (157,563     (141,798

Depreciation and amortization expense

     (87,005     (74,389     (164,375     (149,060

Loss from suspension of development

     —          —          (27,766     —     

Net derivative losses (gains)

     —          257       —          (3,531 )

Losses from early extinguishments of debt

     (494 )     —          (494 )     —     

Losses (gains) from investments in securities

     1,194        (160     607        (1,033

Noncontrolling interest in property partnerships

     (691     (420 )     (1,201     (1,045 )

Noncontrolling interest—common units of the Operating Partnership

     (10,629     (12,251     (18,091     (23,580

Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership

     (629     (900     (1,032     (4,310

Noncontrolling interest—redeemable preferred units of the Operating Partnership

     (972     (1,071     (1,962     (2,098
                                

Net income attributable to Boston Properties, Inc.

   $ 67,152      $ 75,483      $ 111,817      $ 159,958   
                                

 

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13. Newly Issued Accounting Standards

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF No. 07-5). EITF No. 07-5 requires entities to apply a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock. EITF No. 07-5 was effective on January 1, 2009. The adoption of EITF No. 07-5 did not have a material impact on the Company.

In April 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which modifies the approach to determining the primary beneficiary of a variable interest entity (“VIE”) and requires companies to more frequently assess whether they must consolidate a VIE. SFAS No. 167 is effective on the first annual reporting period that begins after November 15, 2009. The Company is currently assessing the potential impact that the adoption of SFAS No. 167 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162” (“SFAS No. 168”), which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 is not expected to have a material impact on the Company.

14. Subsequent Events

In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. SFAS No. 165 was effective for interim or annual periods beginning after June 15, 2009. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on Form 10-Q on August 6, 2009.

On July 30, 2009, the Company obtained mortgage financing totaling $50.0 million collateralized by its Reservoir Place property located in Waltham, Massachusetts. The mortgage financing initially bears interest at a variable rate equal to LIBOR plus 3.85% per annum and matures on July 30, 2014.

On August 3, 2009, the Company used available cash to repay the mortgage loans collateralized by its 1301 New York Avenue property located in Washington, DC aggregating approximately $20.5 million. The mortgage loans bore interest at a weighted-average fixed rate of 6.91% and were scheduled to mature on August 15, 2009. There were no prepayment penalties.

 

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ITEM 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, 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 impact of the current credit crisis and global economic slowdown, which is having and may continue to have a negative effect on the following, among other things:

 

   

the fundamentals of our business, including overall market occupancy 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;

 

   

our ability to obtain debt financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue acquisition and development opportunities and refinance existing debt; 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, 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;

 

   

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits 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 and refinancing existing debt, including the risk associated with interest rates impacting the cost and/or availability of financing;

 

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risks associated with interest rate hedging 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;

 

   

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

 

   

the other risk factors identified in our most recently filed Annual Report on Form 10-K, including those described under the caption “Risk Factors.”

The risks set forth above are not exhaustive. Other sections of this report may 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 it 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 most recent Annual Report on Form 10-K and 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 Forms 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 five markets—Boston, midtown Manhattan, Washington, DC, San Francisco and Princeton, NJ. We generate revenue and cash primarily by leasing our 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, the costs of tenant improvements, current and anticipated operating costs and real estate taxes, our current and anticipated vacancy, current and anticipated future demand for office space generally and general economic factors. From time to time, we also generate cash through the sale of assets, which may be either non-core assets or core assets that command premiums from real estate investors.

The impact of the current state of the economy, including the high rate of unemployment, constrained capital and the deleveraging of the financial system, continues to adversely impact the fundamentals of our business, including overall market occupancy and rental rates. Our core strategy has always been to operate in supply constrained markets with high barriers to entry and to focus on executing long-term leases with financially strong tenants. Historically, this combination has tended to reduce our exposure to down cycles. However, the current recession and financial crisis have caused many unanticipated adverse events, including the

 

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failures of historically large tenants (i.e., Lehman Brothers and General Motors Corporation) who have filed for bankruptcy protection and terminated leases. We expect tenants in our markets to continue to face financial pressure for the foreseeable future which will likely lead to increased supply through subletting or tenant defaults and challenging market conditions.

Although leasing activity has improved in selected markets, we believe that overall demand for office space will continue to be lackluster due to significant job losses in the financial and professional services industries and that market rents will remain under pressure for the foreseeable future. While it is not clear how long these trends will persist, our experiences in past recessions suggest that we will not see unemployment peak and job growth begin until the later stages of a broad economic recovery (although certain of our markets may begin to see job growth sooner than the nation as a whole). Despite this, we believe there will be leasing opportunities because transactions tend to be driven by specific tenants’ space needs originating from lease expirations, expansions, mergers and other considerations, including a “flight to quality” such as that provided by our properties. We expect our leasing strategies will be successful, but, in general, the negotiations are likely to take more time to complete and the transactions will likely be evidenced by greater than historical transaction costs.

Given the uncertainty in the overall economy and volatility in the capital markets, we believe that it is prudent to maintain maximum flexibility. As such, we have taken steps to reduce our leverage, generate additional liquidity and enhance our access to capital. Since the beginning of 2009, (1) we reduced our quarterly dividend to $0.50 per share thereby increasing our retained capital by approximately $68 million on an annualized basis, including the impact of additional shares from our stock offering, and (2) we suspended our development of 250 West 55th Street in New York City, which reduced our future capital commitments by approximately $500 million. In addition, in June 2009 we completed a public offering of 17,250,000 shares of common stock, which raised approximately $842 million of net proceeds. During the quarter ended June 30, 2009, we used a portion of the net proceeds from the offering to repay approximately $130.1 million of outstanding indebtedness and expect to repay or extend our remaining indebtedness that is scheduled to mature in 2009. Our combination of available cash and borrowing capacity on our Unsecured Line of Credit is sufficient to meet all of our existing development funding obligations and foreseeable operating needs. If we determine that it is appropriate to raise additional debt capital, however, we currently have access to the unsecured debt markets, and we believe the quality of our assets and our strong balance sheet align ourselves well with lenders’ current investment selectivity and should enable us to access the secured credit markets even in the current difficult environment.

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 in 2009, 2010 and 2011. We do not anticipate undertaking any new development projects in the foreseeable future without significant pre-leasing commitments from creditworthy tenants. We are actively monitoring our markets and may seek opportunities to selectively acquire high-quality real estate.

Transactions during the three months ended June 30, 2009 included the following:

 

   

On April 1, 2009, we placed in-service One Preserve Parkway, an approximately 184,000 net rentable square foot Class A office property located in Rockville, Maryland. The property is 20% leased.

 

   

On April 21, 2009, we obtained construction financing totaling $215.0 million collateralized by our Atlantic Wharf development project located at 280 Congress Street in Boston, Massachusetts. Atlantic Wharf, formerly known as Russia Wharf, is a mixed-use project totaling approximately 815,000 net rentable square feet. Wellington Management Company, LLP has leased approximately 450,000 square feet of the office space in the development commencing in the first quarter of 2011. The construction financing bears interest at a variable rate equal to LIBOR plus 3.00% per annum and matures on April 21, 2012 with two, one-year extension options.

 

   

On April 30, 2009, Lehman Brothers, Inc., which was then our tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in our 399 Park Avenue property, rejected its lease in bankruptcy. We had previously established a reserve for the full amount of the Lehman Brothers, Inc.

 

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accrued straight-line rent balance during the third quarter of 2008. Lehman Brothers, Inc. paid rent through the month of April 2009 for all of its space and continued to occupy approximately 180,000 net rentable square feet through June 22, 2009, for which we received an aggregate of approximately $6.5 million in the second quarter of 2009. As of June 23, 2009, Lehman Brothers, Inc. ceased to occupy or lease any space from us. Lehman Brothers, Inc. had contributed approximately $44.9 million per year on a contractual basis to our revenues from this lease. As of June 30, 2009, we have signed leases with tenants for approximately 37,000 net rentable square feet of the vacated space.

 

   

On May 31, 2009, a consolidated joint venture in which we have a 66.67% interest placed in-service the Offices at Wisconsin Place, an approximately 299,000 net rentable square foot Class A office property located in Chevy Chase, Maryland. The property is 91% leased.

 

   

On June 1, 2009, General Motors Corporation filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. At that time, we leased approximately 120,000 square feet of office space to General Motors Corporation at 601 Lexington Avenue (formerly known as Citigroup Center). Rent commencement for the lease at 601 Lexington Avenue began on June 1, 2009 and the lease was scheduled to expire on May 31, 2019. However, on June 12, 2009, General Motors Corporation rejected the lease in bankruptcy effective as of June 30, 2009. The contribution from this lease, on a contractual basis, from July 1, 2009 through December 31, 2009, was projected to be approximately $6.6 million.

In addition, the unconsolidated joint venture that owns the General Motors Building (of which we own 60%) currently leases approximately 101,000 square feet of space to General Motors Corporation. General Motors Corporation currently occupies the space (other than approximately 7,000 square feet that is subleased to a third party) and the lease expires on March 31, 2010.

 

   

On June 9, 2009, we used available cash to repay the mortgage loan collateralized by our Reservoir Place property located in Waltham, Massachusetts totaling approximately $47.8 million. The mortgage loan bore interest at a fixed rate of 7.00% and was scheduled to mature on July 1, 2009. There was no prepayment penalty.

 

   

On June 10, 2009, we completed a public offering of 17,250,000 shares of our common stock (including 2,250,000 shares issued as a result of the exercise of an overallotment option by the underwriters) at a price to the public of $50.00 per share. The proceeds from this public offering, net of underwriters’ discounts and offering costs, totaled approximately $842.0 million. We used $100.0 million of the net proceeds to repay the outstanding balance of our Unsecured Line of Credit and approximately $30.1 million to repay our mortgage loan collateralized by our Ten Cambridge Center property, discussed below.

 

   

On June 17, 2009, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.50 per share of common stock for the period April 1, 2009 to June 30, 2009 payable on July 31, 2009 to shareholders of record as of the close of business on June 30, 2009.

 

   

On June 26, 2009, we used available cash to repay the mortgage loan collateralized by our Ten Cambridge Center property located in Cambridge, Massachusetts totaling approximately $30.1 million. The mortgage loan bore interest at a fixed rate of 8.27% and was scheduled to mature on May 1, 2010. We paid a prepayment penalty totaling $0.5 million.

Transactions completed subsequent to June 30, 2009:

 

   

On July 30, 2009, we obtained mortgage financing totaling $50.0 million collateralized by our Reservoir Place property located in Waltham, Massachusetts. The mortgage financing initially bears interest at a variable rate equal to LIBOR plus 3.85% per annum and matures on July 30, 2014.

 

   

On August 3, 2009, we used available cash to repay the mortgage loans collateralized by our 1301 New York Avenue property located in Washington, DC aggregating approximately $20.5 million. The mortgage loans bore interest at a weighted-average fixed rate of 6.91% and were scheduled to mature on August 15, 2009. There were no prepayment penalties.

 

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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 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, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost. 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. 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.

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition 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.

Management reviews its long-lived assets used in operations for impairment following the end of each 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 impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the

 

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asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding 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” as defined by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) 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 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 impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date.

SFAS No. 144 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 the property sale 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.

A variety of costs are incurred in the acquisition, development and leasing of properties. 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 SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Projects.” 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 and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.

Investments in Unconsolidated Joint Ventures

Except for ownership interests in variable interest entities, we account for our investments in joint ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. Our judgment with respect to our level of influence or control of an entity and whether we are the primary beneficiary of a variable interest 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.

These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as

 

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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 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. For ownership interests in variable interest entities, we consolidate those in which we are the primary beneficiary. 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 value below the carrying values have occurred and such decline is other-than-temporary. The ultimate realization of our 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 of an investment in an unconsolidated joint venture is other than temporary.

The combined summarized financial information of the unconsolidated joint ventures is disclosed in Note 4 to the Consolidated Financial Statements.

Revenue Recognition

Contractual rental revenue is reported on a straight-line basis over the terms of our respective leases. In accordance with SFAS No. 141(R), we recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms 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.

For the three and six months ended June 30, 2009, we recorded approximately $1.2 million and $2.4 million, respectively, of rental revenue representing the adjustments of rents from “above-” and “below-market” leases in accordance with SFAS No. 141(R). For the three and six months ended June 30, 2009, the impact of the straight-line rent adjustment increased rental revenue by approximately $8.1 million and $21.1 million, respectively. Those amounts exclude SFAS No. 141(R) and straight-line income from unconsolidated joint ventures, which are disclosed in Note 4 of 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) low risk tenants;

 

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

 

   

require a security deposit; and/or

 

   

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.

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 6.9 years as of June 30, 2009. 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 Emerging Issues Task Force, or EITF, Issue 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent,” or Issue 99-19. Issue 99-19 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 in accordance with Issue 99-19.

Our hotel revenues are derived from room rentals and other sources such as charges to guests for long-distance telephone service, fax machine use, 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. 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 is 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 of SFAS No. 66, “Accounting for Sales of Real Estate.” The specific timing of the sale is measured against various criteria in SFAS No. 66 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 criteria for the full accrual method are not met, we defer the gain.

 

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Depreciation and Amortization

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. In accordance with SFAS No. 141(R), we allocate the acquisition cost of real estate to land, building, tenant improvements, acquired “above-” and “below-market” leases, origination costs and acquired in-place leases based on an assessment of their fair value 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

For purposes of disclosure, we calculate the fair value of our mortgage notes payable and unsecured senior notes. We discount the spread between the future contractual interest payments and hypothetical future interest payments on our mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, we add our estimate of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to our own debt. Because our valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.

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.

Results of Operations

The following discussion is based on our Consolidated Financial Statements for the three and six months ended June 30, 2009 and 2008.

At June 30, 2009 and June 30, 2008, we owned or had interests in a portfolio of 146 and 142 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 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 three and six months ended June 30, 2009 and 2008 show separately the changes attributable to the properties that were owned by us throughout each period compared (the “Same Property Portfolio”) and the changes attributable to the properties included in Properties Acquired, Sold and Placed In-Service.

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 placed in-service prior to the beginning of the earliest period presented and owned by us through the end of the latest period presented as our Same Property Portfolio. The Same Property Portfolio therefore excludes properties placed in-service or acquired 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, losses (gains) from investments in securities, losses from early extinguishments of debt,

 

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net derivative losses (gains), loss from suspension of development, depreciation and amortization, interest expense, general and administrative expense, less gains on sales of real estate, income (loss) 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 perspective 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.

Comparison of the six months ended June 30, 2009 to the six months ended June 30, 2008.

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 126 properties totaling approximately 30.1 million net rentable square feet of space. The Same Property Portfolio includes properties acquired or placed in-service on or prior to January 1, 2008 and owned through June 30, 2009. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or repositioned after January 1, 2008 or disposed of on or prior to June 30, 2009. There were no properties that were repositioned after January 1, 2008. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the six months ended June 30, 2009 and 2008 with respect to the properties which were acquired, placed in-service or sold.

 

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    Same Property Portfolio     Properties
Sold
  Properties
Acquired
  Properties
Placed
In-Service
  Total Property Portfolio  
    2009   2008   Increase/
(Decrease)
    %
Change
    2009   2008   2009   2008   2009     2008   2009     2008     Increase/
(Decrease)
    %
Change
 
    (dollars in thousands)  

Rental Revenue:

                           

Rental Revenue

  $ 688,509   $ 672,855   $ 15,654      2.33   $ —     $ 90   $ 3,460   $ —     $ 30,792      $ 18,691   $ 722,761      $ 691,636      $ 31,125      4.50

Termination Income

    13,206     3,380     9,826      290.71     —       —       —       —       —          —       13,206        3,380        9,826      290.71
                                                                                             

Total Rental Revenue

    701,715     676,235     25,480      3.77     —       90     3,460     —       30,792        18,691     735,967        695,016        40,951      5.89
                                                                                             

Real Estate Operating Expenses

    239,040     232,482     6,558      2.82     —       46     482     —       9,069        4,308     248,591        236,836        11,755      4.96
                                                                                             

Net Operating Income, excluding hotels

    462,675     443,753     18,922      4.26     —       44     2,978     —       21,723        14,383     487,376        458,180        29,196      6.37
                                                                                             

Hotel Net Operating Income(1)

    2,627     3,886     (1,259   (32.40 )%      —       —       —       —       —          —       2,627        3,886        (1,259   (32.40 )% 
                                                                                             

Consolidated Net Operating Income(1)

    465,302     447,639     17,663      3.95     —       44     2,978     —       21,723        14,383     490,003        462,066        27,937      6.05
                                                                                             

Other Revenue:

                           

Development and Management Services

                        16,847        11,937        4,910      41.13

Interest and Other

                        762        16,927        (16,165   (95.50 )% 
                                                                                             

Total Other Revenue

                        17,609        28,864        (11,255   (38.99 )% 

Other Expenses:

                           

General and administrative expense

                        35,952        37,055        (1,103   (2.98 )% 

Interest expense

                        157,563        141,798        15,765      11.12

Depreciation and amortization

    154,341     145,292     9,049      6.23     —       —       2,506     —       7,528        3,768     164,375        149,060        15,315      10.27

Loss from suspension of development

                        27,766        —          27,766      100.00

Net derivative losses (gains)

                        —          3,531        (3,531   (100.00 )% 

Loss from early extinguishments of debt

                        494        —          494      100.00

Losses (gains) from investments in securities

                        (607     1,033        (1,640   (158.76 )% 
                                                                                             

Total Other Expenses

    154,341     145,292     9,049      6.23     —       —       2,506     —       7,528        3,768     385,543        332,477        53,066      15.96
                                                                                             

Income before income (loss) from unconsolidated joint ventures, gains on sale of real estate and net income attributable to noncontrolling interest

  $ 310,961   $ 302,347   $ 8,614      2.85   $ —     $ 44   $ 472   $ —     $ 14,195      $ 10,615   $ 122,069      $ 158,453      $ (36,384   (22.96 )% 

Income (loss) from unconsolidated joint ventures

  $ 961   $ 2,867   $ (1,906   (66.48 )%    $ —     $ —     $ 4,813   $ 30   $ (1,028   $ —       4,746        2,897        1,849      63.82

Gains on sales of real estate

                        7,288        29,641        (22,353   (75.41 )% 
                                                 

Net Income

                        134,103        190,991        (56,888   (29.79 )% 

Net Income attributable to non controlling interest:

                           

Noncontrolling interests in property partnerships

                        (1,201     (1,045     (156   (14.93 )% 

Noncontrolling interest—common units of the Operating Partnership

                        (18,091     (23,580     5,489      23.28

Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership

                        (1,032     (4,310     3,278      76.06

Noncontrolling interest—redeemable preferred units of the Operating Partnership

                        (1,962     (2,098     136      6.48
                                                 

Net Income attributable to Boston Properties, Inc.

                      $ 111,817      $ 159,958      $ (48,141   (30.10 )% 
                                                 

 

(1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see page 34. Hotel Net Operating Income for the six months ended June 30, 2009 and 2008 are comprised of Hotel Revenue of $13,458 and $16,232 less Hotel Expenses of $10,831 and $12,346, respectively, per the Consolidated Statement of Operations.

 

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Rental Revenue

The increase of approximately $31.1 million in the Total Property Portfolio Rental Revenue is comprised of increases and decreases within the four categories that comprise our Total Property Portfolio. Rental revenue from the Same Property Portfolio increased approximately $15.6 million, Properties Sold decreased approximately $0.1 million, Properties Acquired increased approximately $3.5 million and Properties Placed In-Service increased approximately $12.1 million.

Rental revenue from the Same Property Portfolio increased approximately $15.6 million for the six months ended June 30, 2009 compared to 2008. Included in Same Property Portfolio rental revenue is an overall increase in contractual rental revenue and straight-line rent of approximately $14.3 million. Approximately $0.5 million of the increase from the Same Property Portfolio was due to an increase in recoveries from tenants which correlates with the increase in operating expenses. The remaining increase of approximately $0.8 million relates to parking and other income of which, approximately $1.0 million related to a contractual settlement agreement.

On April 30, 2009, Lehman Brothers, Inc., which was then our tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in our 399 Park Avenue property, rejected its lease in bankruptcy. During the third quarter of 2008, we established a reserve for the full amount of the accrued straight-line rent balance. Lehman Brothers, Inc. paid rent through the month of April 2009 for all of its space and continued to occupy approximately 180,000 net rentable square feet through June 22, 2009. As of June 23, 2009, Lehman Brothers, Inc. ceased to occupy or lease any space from us. Lehman Brothers, Inc. contributed approximately $17.7 million to our contractual rental revenue for the six months ended June 30, 2009. On June 12, 2009, General Motors Corporation with approximately 120,000 square feet of office space leased at 601 Lexington Avenue rejected its lease in bankruptcy. Rent commenced for General Motors Corporation on June 1, 2009 and therefore it contributed approximately $1.1 million to our contractual rental revenue for the six months ended June 30, 2009. Lehman Brothers’ rent had contributed approximately $44.9 million per year on a contractual basis to our revenues and the lease rejected by General Motors Corporation was projected to contribute $6.6 million on a contractual basis from July 1, 2009 through December 31, 2009 to our revenues. We expect to incur downtime prior to re-leasing this space and current market rental rates in New York City are significantly less than the rental rates that would have been paid by each of Lehman Brothers and General Motors Corporation.

Revenue from Properties Sold decreased by approximately $0.1 million due to the transfer of Mountain View Research Park and Mountain View Technology Park to the Value-Added Fund on January 7, 2008. These properties have not been classified as discontinued operations due to our continuing involvement as the property manager for the properties and our continued ownership interest.

The acquisition of 635 Massachusetts Avenue on September 26, 2008 increased rental revenue from Properties Acquired by approximately $3.5 million for the six months ended June 30, 2009.

The increase in rental revenue from Properties Placed In-Service relates to fully placing in-service our 505 9th Street development project in the first quarter of 2008, our 77 CityPoint and South of Market development projects during the fourth quarter of 2008 and our One Preserve Parkway and Wisconsin Place Office development projects during the second quarter of 2009. Rental revenue from Properties Placed In-Service increased approximately $12.1 million, as detailed below:

Property

   Date Placed In-Service    Rental Revenue for the six
months ended June 30,
      2009    2008    Change
          (in thousands)

505 9th Street

   First Quarter, 2008    $ 11,075    $ 9,512    $ 1,563

South of Market

   Fourth Quarter, 2008      13,307      8,190      5,117

77 CityPoint

   Fourth Quarter, 2008      4,441      629      3,812

One Preserve Parkway

   Second Quarter, 2009      806      360      446

Wisconsin Place Office

   Second Quarter, 2009      1,163      —        1,163
                       

Total

      $ 30,792    $ 18,691    $ 12,101
                       

 

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Termination Income

Termination income for the six months ended June 30, 2009 was related to ten tenants across the Total Property Portfolio that terminated their leases and we recognized termination income totaling approximately $13.2 million, which included $7.5 million of cash related to a termination agreement with a tenant at 601 Lexington Avenue. Approximately $3.6 million of our termination income is non-cash and consists of the estimated value of furniture and fixtures that two tenants transferred to us in connection with the terminations. This compared to termination income of approximately $3.4 million for the six months ended June 30, 2008 related to nine tenants.

Real Estate Operating Expenses

The $11.8 million increase in operating expenses (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) in the Total Property Portfolio is comprised of increases and decreases within the four categories that comprise our Total Property Portfolio. Operating expenses for the Same Property Portfolio increased approximately $6.6 million, Properties Sold decreased approximately $0.1 million, Properties Acquired increased approximately $0.5 million and Properties Placed In-Serviced increased approximately $4.8 million.

Operating expenses from the Same Property Portfolio increased approximately $6.6 million for the six months ended June 30, 2009 compared to 2008. Included in Same Property Portfolio operating expenses is an increase in real estate taxes of approximately $9.4 million, or 10.0%, of which approximately $5.3 million related to a tax rate increase in New York City and an approximately $0.3 million increase in other property-related expenses. This was offset by an overall decrease in utilities expense of approximately $3.1 million, which was due in part to a colder than normal spring.

A decrease of approximately $0.1 million in the Total Property Portfolio operating expenses was due to the transfer of Mountain View Research Park and Mountain View Technology Park to the Value-Added Fund on January 7, 2008. These properties have not been classified as discontinued operations due to our continuing involvement as the property manager for the properties and our continued ownership interest.

The acquisition of 635 Massachusetts Avenue on September 26, 2008 increased operating expense from Properties Acquired by approximately $0.5 million for the six months ended June 30, 2009.

The increase in operating expenses from Properties Placed In-Service relates to fully placing in-service our 505 9th Street development project in the first quarter of 2008, our 77 CityPoint and South of Market development projects during the fourth quarter of 2008 and our One Preserve Parkway and Wisconsin Place Office development projects during the second quarter of 2009. Operating Expenses from Properties Placed In-Service increased approximately $4.8 million, as detailed below:

 

Property

   Date Placed In-Service    Real Estate Operating Expenses
for the six months ended June 30,
          2009            2008            Change    
          (in thousands)

505 9th Street

   First Quarter, 2008    $ 3,497    $ 2,615    $ 882

South of Market

   Fourth Quarter, 2008      3,591      1,321      2,270

77 CityPoint

   Fourth Quarter, 2008      1,114      265      849

One Preserve Parkway

   Second Quarter, 2009      588      107      481

Wisconsin Place Office

   Second Quarter, 2009      279      —        279
                       

Total

      $ 9,069    $ 4,308    $ 4,761
                       

 

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Hotel Net Operating Income

Net operating income for the Cambridge Center Marriott hotel property decreased by approximately $1.3 million for the six months ended June 30, 2009 as compared to 2008. We expect our hotel net operating income for fiscal 2009 to between $5.5 million and $6.5 million.

The following reflects our occupancy and rate information for the Cambridge Center Marriott hotel for the six months ended June 30, 2009 and 2008.

 

     2009     2008     Percentage
Change
 

Occupancy

     73.6     76.2   (3.3 )% 

Average daily rate

   $ 182.97      $ 208.59      (12.3 )% 

Revenue per available room, REVPAR

   $ 134.64      $ 161.32      (16.5 )% 

Development and Management Services

Development and management services income increased approximately $4.9 million for the six months ended June 30, 2009 compared to 2008. The increase is primarily attributed to $3.4 million of ongoing management fees and leasing fees from our joint ventures that acquired the General Motors Building, 540 Madison Avenue, Two Grand Central Tower and 125 West 55th Street in New York City, as well as development fees of approximately $3.7 million for our 20 F Street third-party development project, offset by a decrease of approximately $0.7 million related to the leasing fees we earned in 2008 under our purchase and sales agreement for 280 Park Avenue and a decrease of approximately $1.5 million in other management fees and service income. We expect third-party fee income for fiscal 2009 to be between $30 million and $32 million.

Interest and Other Income

Interest and other income decreased approximately $16.2 million for the six months ended June 30, 2009 compared to 2008 as a result of lower overall interest rates and decreased average cash balances. The average cash balances for the six months ended June 30, 2009 and June 30, 2008 were approximately $167.8 million and $742.9 million, respectively. In addition, the average interest rate for the six months ended June 30, 2009 compared to June 30, 2008 decreased by approximately 2.40%.

Other Expenses

General and Administrative

General and administrative expenses decreased approximately $1.1 million for the six months ended June 30, 2009 compared to 2008. The decrease was related to approximately $1.6 million of expense that was recognized during the six months ended June 30, 2008 relating to abandoned projects, a decrease of approximately $0.9 million related to other general and administrative expense and an overall increase in payroll expense of approximately $1.8 million, of which $1.5 million related to the increase in the value of our deferred compensation plan. We anticipate our general and administrative expense for fiscal 2009 to be between $72 million and $74 million.

 

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Interest Expense

Interest expense for the Total Property Portfolio increased approximately $15.8 million for the six months ended June 30, 2009 compared to 2008 as detailed below:

 

Component

   Interest Expense for the
six months ended June 30,
 
   2009     2008     Change  
     (in thousands)  

Decreases to interest expense due to:

      

Repayment of mortgages

   $ 2,568     $ 17,324      $ (14,756

Increase in capitalized interest costs

     (24,197     (20,844     (3,353

Principal amortization of continuing debt and other (excluding exchangeable senior notes)

     66,158        67,805        (1,647
                        

Total decreases to interest expense

   $ 44,529      $ 64,285      $ (19,756

Increases to interest expense due to:

      

New mortgages

   $ 13,157      $ —        $ 13,157   

Exchangeable senior notes (excluding the FSP No. APB 14-1 interest expense)

     80,977        66,495        14,482   

FSP No. APB 14-1 interest expense

     18,900        11,018        7,882   
                        

Total increases to interest expense

   $ 113,034      $ 77,513      $ 35,521   
                        

Total interest expense

   $ 157,563      $ 141,798      $ 15,765   
                        

We anticipate our net interest expense to be between approximately $300 million and $305 million for fiscal 2009. This projection includes approximately $38 million of non-cash interest expense associated with FSP No. APB 14-1 and excludes deferred financing costs of approximately $7.5 million to $8.5 million for fiscal 2009.

Effective January 1, 2009, we adopted FSP No. APB 14-1 that requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. See Note 6 to the Consolidated Financial Statements. FSP No. APB 14-1 requires companies to retrospectively apply the requirements of the pronouncement to all periods presented. The incremental interest expense excluding the impact of capitalized interest for each reporting period is as follows:

 

For the year ended December 31:

   Approximate
Amount
     (in thousands)

2006

   $ 4,200

2007

     19,300

2008

     27,700

2009

     38,600

2010

     41,200

2011

     43,900

2012

     29,800

2013

     23,000

2014

     2,500

 

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At June 30, 2009, our variable rate debt consisted of our construction loans at South of Market, Democracy Tower (formerly South of Market Phase II), Wisconsin Place Office and Atlantic Wharf (formerly Russia Wharf) construction projects, as well as our Unsecured Line of Credit. The following summarizes our outstanding consolidated debt as of June 30, 2009 and June 30, 2008:

 

     June 30,  
   2009     2008  
   (dollars in thousands)  

Debt Summary:

    

Balance

    

Fixed rate

   $ 5,637,158      $ 4,971,716   

Variable rate

     320,538        429,385   
                

Total

   $ 5,957,696      $ 5,401,101   
                

Percent of total debt:

    

Fixed rate

     94.62     92.05

Variable rate

     5.38     7.95
                

Total

     100.00     100.00
                

GAAP weighted-average interest rate at end of period:

    

Fixed rate

     6.14     6.08

Variable rate

     1.81     4.31
                

Total

     5.91     5.94
                

Coupon/Stated weighted-average interest rate at end of period:

    

Fixed rate

     5.39     5.61

Variable rate

     1.58     3.92
                

Total

     5.18     5.48
                

Depreciation and Amortization

Depreciation and amortization expense for the Total Property Portfolio increased approximately $15.3 million for the six months ended June 30, 2009 compared to 2008. Approximately $9.0 million related to an increase in the Same Property Portfolio which was predominately due to accelerated amortization related to terminations in New York City, approximately $2.5 million related to an increase due to Properties Acquired and the remaining increase of approximately $3.8 million was attributed to Properties Placed In-Service.

Capitalized Costs

Costs directly related to the development of rental properties are not included in our operating results. These costs are capitalized and included in real estate assets on our Consolidated Balance Sheets and amortized over their useful lives. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the six months ended June 30, 2009 and 2008 were $5.3 million and $6.2 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the six months ended June 30, 2009 and 2008 was $24.2 million and $20.9 million, respectively. These costs are not included in the interest expense referenced above. At our 250 West 55th Street development we expect to capitalize approximately $25.0 million of capitalized interest for fiscal 2009. We expect that most construction activity on this project will be completed by the end of the fourth quarter of 2009, and we will therefore cease capitalizing interest on the project at that time. We expect capitalized interest for fiscal 2009 to be between $45 million and $50 million.

 

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Loss from Suspension of Development

On February 6, 2009, we announced that we are suspending construction on our 1,000,000 square foot office building at 250 West 55th Street in New York City. We intend to complete the construction of foundations and steel/deck to grade to facilitate a restart of construction in the future and therefore anticipate that most construction activity on this project will be completed by the end of the fourth quarter of 2009. During the first quarter of 2009, we recognized aggregate costs of approximately $27.8 million related to the suspension of development. No additional costs were recognized during the second quarter of 2009 related to the suspension of development. For the remainder of fiscal 2009, we expect to recognize an additional $2.7 million of costs related to the suspension of development.

Net Derivative Losses (Gains)

During the six months ended June 30, 2008, we modified the estimated date with respect to our anticipated financings under our interest rate hedging program. As a result, we recognized a net derivative loss of approximately $3.5 million representing the partial ineffectiveness of our interest rate contracts.

Loss from Early Extinguishments of Debt

On June 9, 2009, we used available cash to repay the mortgage loan collateralized by our Reservoir Place property located in Waltham, Massachusetts totaling approximately $47.8 million. There was no prepayment penalty associated with the repayment. In accordance with EITF 98-1, the principal amount had been adjusted upon acquisition of the property to reflect the fair value of the assumed note. Due to the repayment of the mortgage, we recognized a gain of approximately $32,000 related to the write off of the remaining fair value balance.

On June 26, 2009, we used available cash to repay the mortgage loan collateralized by our Ten Cambridge Center property located in Cambridge, Massachusetts totaling approximately $30.1 million. We paid a prepayment penalty totaling $0.5 million in connection with the repayment and wrote off $26,000 of unamortized deferred financing costs.

Losses (Gains) from Investments in Securities

We account for investments in trading securities at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. The designation of trading securities is generally determined at acquisition. At June 30, 2009, investment in securities is comprised of an investment, totaling approximately $3.3 million, in an unregistered money market fund. The investment was previously included in Cash and Cash Equivalents. In December 2007, the fund suspended cash redemptions by investors; investors may elect in-kind redemptions of the underlying securities or maintain their investment in the fund and receive distributions as the underlying securities mature or are liquidated by the fund sponsor. As a result, we expect to retain this investment for a longer term than originally intended, and the valuation of our investment is subject to changes in market conditions. Because interests in this fund are now valued at less than their $1.00 par value, we recognized losses (gains) of approximately $(0.2) million and $0.3 million on our investment during the six months ended June 30, 2009 and 2008, respectively. We also maintain a deferred compensation plan that is designed to allow our officers to defer a portion of their current income on a pre-tax basis and receive a tax-deferred return on these deferrals. Our obligation under the plan is that of an unsecured promise to pay the deferred compensation to the plan participants in the future. We recognized losses (gains) of approximately $(0.4) million and $0.8 million on the investments in the account associated with our deferred compensation plan during the six months ended June 30, 2009 and 2008, respectively.

Income (Loss) from Unconsolidated Joint Ventures

For the six months ended June 30, 2009 compared to 2008, income from unconsolidated joint ventures increased by $1.8 million. During June 2009, we recognized a non-cash impairment charge on our investment in

 

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the Value-Added Fund, which represented the other-than-temporary decline in the fair values below the carrying value of our investment in the unconsolidated joint venture. In accordance with Accounting Principles Board Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock” (APB No. 18) a loss of an investment under the equity method of accounting, which is other than a temporary decline, must be recognized. As a result, we recognized a non-cash impairment charge of approximately $7.4 million related to our investment in the Value-Added Fund. If the fair value of our investments deteriorate further, we could recognize additional impairment charges that may be material to our results of operations.

On June 9, 2008, we completed the acquisition of the General Motors Building for a purchase price of approximately $2.8 billion. On August 12, 2008, we 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. On August 13, 2008, we completed the acquisition of 125 West 55th Street located in New York City, New York for an aggregate purchase price of $444.0 million. Each acquisition was completed through a joint venture among us, 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. We have a 60% interest in each venture and provide customary property management and leasing services for each venture.

The following table presents actual combined financial information for the joint ventures for the six months ended June 30, 2009 for The General Motors Building and 540 Madison Avenue, Two Grand Central Tower and 125 West 55th Street, respectively. These acquisitions will impact our income from unconsolidated joint ventures in future periods.

 

     The General Motors
Building

for the six months
ended June 30, 2009
    540 Madison Avenue,
Two Grand

Central Tower, 125
West 55th Street

for the six months
ended June 30, 2009
     (in thousands)     (in thousands)

Base rent and recoveries from tenants

   $ 94,779      $ 48,764

Termination income

     558        3,965

Straight-line rent

     7,190        5,798

Fair value lease revenue

     71,045        5,176

Parking and other

     1,020        1,859
              

Total rental revenue

     174,592        65,562

Operating expenses

     37,278        19,631
              

Revenue less operating expenses

     137,314        45,931

Interest expense

     73,680        16,052

Fair value interest expense

     4,060        2,608

Depreciation and amortization

     78,062        24,012
              

Income (Loss) before elimination of inter-entity interest on partner loan

     (18,488     3,259
              

Our share of net income (loss) (60%)

     (11,093     1,955

Basis differential

     —          4,483

Elimination of inter-entity interest on partner loan

     15,768        —  
              

Our share of net income (60%)

   $ 4,675      $ 6,438
              

Gains on sales of real estate

Pursuant to the purchase and sale agreement related to the sale of 280 Park Avenue, we entered into a master lease agreement with the buyer at closing. Under the master lease agreement, we guaranteed that the buyer will receive at least a minimum amount of base rent from approximately 74,340 square feet of space

 

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during the ten-year period following the expiration of the leases for this space. The leases for this space expired at various times between June 2006 and October 2007. The aggregate amount of base rent we guaranteed over the entire period from 2006 to 2017 is approximately $67.3 million. During the six months ended June 30, 2008, we signed new qualifying leases for approximately 17,454 net rentable square feet of the remaining master lease obligation, resulting in the recognition of approximately $23.4 million

On April 14, 2008, we sold a parcel of land located in Washington, D.C. for approximately $33.7 million. We had previously entered into a development management agreement with the buyer to develop a Class A office property on the parcel totaling approximately 165,000 net rentable square feet. Due to our involvement in the construction of the project, the gain on sale estimated to total $23.4 million has been deferred and will be recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total project costs. As a result, we recognized a gain on sale during the six months ended June 30, 2009 and June 30, 2008 of approximately $7.3 million and $6.2 million, respectively.

Noncontrolling interest in Property Partnerships

Noncontrolling interest in property partnerships for the six months ended June 30, 2009 consist of the outside equity owners’ interests in the income from our 505 9th Street and our Wisconsin Place Office properties.

Noncontrolling interest—common units of the Operating Partnership

Noncontrolling interest—common units of the Operating Partnership decreased by approximately $5.5 million for the six months ended June 30, 2009 compared to 2008 primarily due to decreases in allocable income.

Comparison of the three months ended June 30, 2009 to the three months ended June 30, 2008.

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 127 properties totaling approximately 30.4 million net rentable square feet of space. The Same Property Portfolio includes properties acquired or placed in-service on or prior to April 1, 2008 and owned through June 30, 2009. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or repositioned after April 1, 2008 or disposed of on or prior to June 30, 2009. There were no properties that were sold or repositioned after April 1, 2008. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the three months ended June 30, 2009 and 2008 with respect to the properties which were acquired, placed in-service or sold.

 

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    Same Property Portfolio     Properties
Acquired
  Properties
Placed
In-Service
  Total Property Portfolio  
    2009     2008   Increase/
(Decrease)
    %
Change
    2009   2008   2009     2008   2009     2008     Increase/
(Decrease)
    %
Change
 
    (dollars in thousands)  

Rental Revenue:

                       

Rental Revenue

  $ 348,439      $ 342,069   $ 6,370      1.86   $ 1,675   $ —     $ 10,387      $ 6,168   $ 360,501      $ 348,237      $ 12,264      3.52

Termination Income

    12,600        —       12,600      100.00     —       —       —          —       12,600        —          12,600      100.00
                                                                                   

Total Rental Revenue

    361,039        342,069     18,970      5.55     1,675     —       10,387        6,168     373,101        348,237        24,864      7.14
                                                                                   

Real Estate Operating Expenses

    121,609        117,868     3,741      3.17     190     —       2,931        1,235     124,730        119,103        5,627      4.72
                                                                                   

Net Operating Income, excluding hotels

    239,430        224,201     15,229      6.79     1,485     —       7,456        4,933     248,371        229,134        19,237      8.40
                                                                                   

Hotel Net Operating Income(1)

    2,037        3,259     (1,222   (37.50 )%      —       —       —          —       2,037        3,259        (1,222   (37.50 )% 
                                                                                   

Consolidated Net Operating Income(1)

    241,467        227,460     14,007      6.16     1,485     —       7,456        4,933     250,408        232,393        18,015      7.75
                                                                                   

Other Revenue:

                       

Development and Management Services

                    8,551        6,460        2,091      32.37

Interest and Other

                    442        4,275        (3,833   (89.66 )% 
                                                                                   

Total Other Revenue

                    8,993        10,735        (1,742   (16.23 )% 

Other Expenses:

                       

General and administrative expense

                    18,532        17,467        1,065      6.10

Interest expense

                    78,633        69,302        9,331      13.46

Depreciation and amortization

    82,737        73,058     9,679      13.25     1,203     —       3,065        1,331     87,005        74,389        12,616      16.96

Net derivative losses (gains)

                    —          (257     257      100.00

Loss from early extinguishments of debt

                    494        —          494      100.00

Losses (gains) from investments in securities

                    (1,194     160        (1,354   (846.25 )% 
                                                                                   

Total Other Expenses

    82,737        73,058     9,679      13.25     1,203     —       3,065        1,331     183,470        161,061        22,409      13.91
                                                                                   

Income before income (loss) from unconsolidated joint ventures, gains on sale of real estate and net income attributable to noncontrolling interest

  $ 158,730      $ 154,402   $ 4,328      2.80   $ 282   $ —     $ 4,391      $ 3,602   $ 75,931      $ 82,067      $ (6,136   (7.48 )% 

Income (loss) from unconsolidated joint ventures

  $ (6,359   $ 1,825   $ (8,184   (448.44 )%    $ 6,393   $ 30   $ (385   $ —       (351     1,855        (2,206   (118.92 )% 

Gains on sales of real estate

                    4,493        6,203        (1,710   (27.57 )% 
                                             

Net Income

                    80,073        90,125        (10,052   (11.15 )% 

Net Income attributable to non controlling interest:

                       

Noncontrolling interests in property partnerships

                    (691     (420     (271   (64.52 )% 

Noncontrolling interest—common units of the Operating Partnership

                    (10,629     (12,251     1,622      13.24

Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership

                    (629     (900     271      30.11

Noncontrolling interest—redeemable preferred units of the Operating Partnership

                    (972     (1,071     99      9.24
                                             

Net Income attributable to Boston Properties, Inc.

                  $ 67,152      $ 75,483      $ (8,331   (11.04 )% 
                                             

 

(1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see page 34. Hotel Net Operating Income for the three months ended June 30, 2009 and 2008 are comprised of Hotel Revenue of $7,396 and $9,708 less Hotel Expenses of $5,359 and $6,449, respectively, per the Consolidated Statement of Operations.

 

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Rental Revenue

The increase of approximately $12.3 million in the Total Property Portfolio Rental Revenue is comprised of increases within the three categories that comprise our Total Property Portfolio. Rental revenue from the Same Property Portfolio increased approximately $6.4 million, Properties Acquired increased approximately $1.7 million and Properties Placed In-Service increased approximately $4.2 million.

Rental revenue from the Same Property Portfolio increased approximately $6.4 million for the three months ended June 30, 2009 compared to 2008. Included in Same Property Portfolio rental revenue is an overall increase in contractual rental revenue and straight-line rent of approximately $6.3 million. This was offset by a decrease of approximately $0.9 million in recoveries from tenants. The remaining increase of approximately $1.0 million relates to a contractual settlement agreement.

On April 30, 2009, Lehman Brothers, Inc., which was then our tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in our 399 Park Avenue property, rejected its lease in bankruptcy. During the third quarter of 2008, we established a reserve for the full amount of the accrued straight-line rent balance. Lehman Brothers, Inc. paid rent through the month of April 2009 for all of its space and continued to occupy approximately 180,000 net rentable square feet through June 22, 2009. As of June 23, 2009, Lehman Brothers, Inc. ceased to occupy or lease any space from us. Lehman Brothers, Inc. contributed approximately $6.5 million to our contractual rental revenue for the three months ended June 30, 2009. On June 12, 2009, General Motors Corporation with approximately 120,000 square feet of office space leased at 601 Lexington Avenue rejected its lease in bankruptcy. Rent commenced for General Motors Corporation on June 1, 2009 and therefore it contributed approximately $1.1 million to our contractual rental revenue for the three months ended June 30, 2009. Lehman Brothers’ rent had contributed approximately $44.9 million per year on a contractual basis to our revenues and the lease rejected by General Motors Corporation was projected to contribute $6.6 million on a contractual basis from July 1, 2009 through December 31, 2009 to our revenues. We expect to incur downtime prior to re-leasing this space and current market rental rates in New York City are significantly less than the rental rates that would have been paid by each of Lehman Brothers and General Motors Corporation.

The acquisition of 635 Massachusetts Avenue on September 26, 2008 increased rental revenue from Properties Acquired by approximately $1.7 million for the three months ended June 30, 2009.

The increase in rental revenue from Properties Placed In-Service relates to fully placing in-service our 77 CityPoint and South of Market development projects during the fourth quarter of 2008 and our One Preserve Parkway and Wisconsin Place Office development projects during the second quarter of 2009. Rental Revenue from Properties Placed In-Service increased approximately $4.2 million, as detailed below:

 

Property

   Date Placed In-Service    Rental Revenue for the three
months ended June 30,
          2009            2008            Change    
          (in thousands)

South of Market

   Fourth Quarter, 2008    $ 6,617    $ 5,399    $ 1,218

77 CityPoint

   Fourth Quarter, 2008      2,196      409      1,787

One Preserve Parkway

   Second Quarter, 2009      411      360      51

Wisconsin Place Office

   Second Quarter, 2009      1,163      —        1,163
                       

Total

      $ 10,387    $ 6,168    $ 4,219
                       

Termination Income

Termination income for the three months ended June 30, 2009 was related to six tenants across the Total Property Portfolio that terminated their leases and we recognized termination income totaling approximately $12.6 million, which included $7.5 million of cash related to a termination agreement with a tenant at 601 Lexington Avenue. Approximately $3.6 million of our termination income is non-cash and consists of the

 

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estimated value of furniture and fixtures that two tenants transferred to us in connection with the terminations. This compared to no termination income for the three months ended June 30, 2008.

Real Estate Operating Expenses

The $5.6 million increase in operating expenses (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) in the Total Property Portfolio is comprised of increases and decreases within the four categories that comprise our Total Property Portfolio. Operating expenses for the Same Property Portfolio increased approximately $3.7 million, Properties Acquired increased approximately $0.2 million and Properties Placed In-Serviced increased approximately $1.7 million.

Operating expenses from the Same Property Portfolio increased approximately $3.7 million for the three months ended June 30, 2009 compared to 2008. Included in Same Property Portfolio operating expenses is an increase in real estate taxes of approximately $4.9 million, or 10.4%, of which approximately $2.7 million related to a tax rate increase in New York City. This was offset by an overall decrease of approximately $1.2 million related to other property-related expenses.

The acquisition of 635 Massachusetts Avenue on September 26, 2008 increased operating expense from Properties Acquired by approximately $0.2 million for the three months ended June 30, 2009.

The increase in operating expenses from Properties Placed In-Service relates to fully placing in-service our 77 CityPoint and South of Market development projects during the fourth quarter of 2008 and our One Preserve Parkway and Wisconsin Place Office development projects during the second quarter of 2009. Operating Expenses from Properties Placed In-Service increased approximately $1.7 million, as detailed below:

 

Property

   Date Placed In-Service    Real Estate Operating Expenses
for the three months ended June 30,
          2009            2008            Change    
          (in thousands)

South of Market

   Fourth Quarter, 2008    $ 1,780    $ 931    $ 849

77 CityPoint

   Fourth Quarter, 2008      602      199      403

One Preserve Parkway

   Second Quarter, 2009      332      105      227

Wisconsin Place Office

   Second Quarter, 2009      217      —        217
                       

Total

      $ 2,931    $ 1,235    $ 1,696
                       

Hotel Net Operating Income

Net operating income for the Cambridge Center Marriott hotel property decreased by approximately $1.2 million for the three months ended June 30, 2009 as compared to 2008.

The following reflects our occupancy and rate information for the Cambridge Center Marriott hotel for the three months ended June 30, 2009 and 2008.

 

     2009     2008     Percentage
Change
 

Occupancy

     78.0     83.7   (6.8 )% 

Average daily rate

   $ 195.61      $ 236.58      (17.4 )% 

Revenue per available room, REVPAR

   $ 152.59      $ 197.94      (22.9 )% 

 

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Development and Management Services

Development and management services income increased approximately $2.1 million for the three months ended June 30, 2009 compared to 2008. The increase is primarily attributed to $1.3 million of ongoing management fees and leasing fees from our joint ventures that acquired the General Motors Building, 540 Madison Avenue, Two Grand Central Tower and 125 West 55th Street in New York City, as well as development fees of approximately $1.9 million for our 20 F Street third-party development project, offset by a decrease of approximately $1.1 million in other management fees and service income.

Interest and Other Income

Interest and other income decreased approximately $3.8 million for the three months ended June 30, 2009 compared to 2008 as a result of lower overall interest rates and decreased average cash balances. The average cash balances for the three months ended June 30, 2009 and June 30, 2008 were approximately $215.3 million and $432.3 million, respectively. In addition, the average interest rate for the three months ended June 30, 2009 compared to June 30, 2008 decreased by approximately 2.25%.

Other Expenses

General and Administrative

General and administrative expenses increased approximately $1.1 million for the three months ended June 30, 2009 compared to 2008 due primarily to an approximately $1.3 million increase in the value of our deferred compensation plan.

Interest Expense

Interest expense for the Total Property Portfolio increased approximately $9.3 million for the three months ended June 30, 2009 compared to 2008 as detailed below:

 

Component

   Interest Expense for the
three months ended June 30,
 
       2009             2008             Change      
     (in thousands)  

Decreases to interest expense due to:

      

Repayment of mortgages

   $ 1,134      $ 6,423      $ (5,289

Increase in capitalized interest costs

     (12,087     (10,550     (1,537

Principal amortization of continuing debt and other (excluding exchangeable senior notes)

     33,002        34,492        (1,490
                        

Total decreases to interest expense

   $ 22,049      $ 30,365      $ (8,316

Increases to interest expense due to:

      

New mortgages

   $ 6,591      $ —        $ 6,591   

Exchangeable senior notes (excluding the FSP No. APB 14-1 interest expense)

     40,523        33,385        7,138   

FSP No. APB 14-1 interest expense

     9,470        5,552        3,918   
                        

Total increases to interest expense

   $ 56,584      $ 38,937      $ 17,647   
                        

Total interest expense

   $ 78,633      $ 69,302<