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Table of Content

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
¨
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.)
Commission File Number: 0-50209 (Boston Properties Limited Partnership)
 
 BOSTON PROPERTIES, INC.
BOSTON PROPERTIES LIMITED PARTNERSHIP
(Exact name of Registrants as specified in its charter)
 
Boston Properties, Inc.
Delaware
04-2473675
 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
 
Boston Properties Limited Partnership
Delaware
04-3372948
 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199-8103
(Address of principal executive offices) (Zip Code)
(617) 236-3300
(Registrants’ 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.  
Boston Properties, Inc.:    Yes  x   No  ¨         Boston Properties Limited Partnership:    Yes  x    No  ¨    
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    
Boston Properties, Inc.:    Yes  x    No  ¨         Boston Properties Limited Partnership:    Yes  x    No  ¨    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Boston Properties, Inc.:    
Large accelerated filer  x         Accelerated filer  ¨         Non-accelerated filer  ¨         Smaller reporting company  ¨         Emerging growth company  ¨



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Boston Properties Limited Partnership:
Large accelerated filer  ¨         Accelerated filer  ¨         Non-accelerated filer  x           Smaller reporting company  ¨           Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Boston Properties, Inc. ¨                 Boston Properties Limited Partnership ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Boston Properties, Inc.:    Yes  ¨    No  x        Boston Properties Limited Partnership:    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.
Boston Properties, Inc.
Common Stock, par value $0.01 per share
154,440,500
(Registrant)
(Class)
(Outstanding on November 2, 2018)
 


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EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2018 of Boston Properties, Inc. and Boston Properties Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “BXP” mean Boston Properties, Inc., a Delaware corporation and real estate investment trust (“REIT”), and references to “BPLP” and the “Operating Partnership” mean Boston Properties Limited Partnership, a Delaware limited partnership. BPLP is the entity through which BXP conducts substantially all of its business and owns, either directly or through subsidiaries, substantially all of its assets. BXP is the sole general partner and also a limited partner of BPLP. As the sole general partner of BPLP, BXP has exclusive control of BPLP’s day-to-day management. Therefore, unless stated otherwise or the context requires, references to the “Company,” “we,” “us” and “our” mean collectively BXP, BPLP and those entities/subsidiaries consolidated by BXP.
As of September 30, 2018, BXP owned an approximate 89.7% ownership interest in BPLP. The remaining approximate 10.3% interest is owned by limited partners. The other limited partners of BPLP are (1) persons who contributed their direct or indirect interests in properties to BPLP in exchange for common units or preferred units of limited partnership interest in BPLP and/or (2) recipients of long term incentive plan units of BPLP pursuant to BXP’s Stock Option and Incentive Plans. Under the limited partnership agreement of BPLP, unitholders may present their common units of BPLP for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time, generally one year from issuance). Upon presentation of a common unit for redemption, BPLP must redeem the unit for cash equal to the then value of a share of BXP’s common stock. In lieu of a cash redemption by BPLP, however, BXP may elect to acquire any common units so tendered by issuing shares of BXP common stock in exchange for the common units. If BXP so elects, its common stock will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. BXP generally expects that it will elect to issue its common stock in connection with each such presentation for redemption rather than having BPLP pay cash. With each such exchange or redemption, BXP’s percentage ownership in BPLP will increase. In addition, whenever BXP issues shares of its common stock other than to acquire common units of BPLP, BXP must contribute any net proceeds it receives to BPLP and BPLP must issue to BXP an equivalent number of common units of BPLP. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.
The Company believes that combining the quarterly reports on Form 10-Q of BXP and BPLP into this single report provides the following benefits:
enhances investors’ understanding of BXP and BPLP by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more concise and readable presentation because a substantial portion of the disclosure applies to both BXP and BPLP; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between BXP and BPLP in the context of how BXP and BPLP operate as a consolidated company. The financial results of BPLP are consolidated into the financial statements of BXP. BXP does not have any other significant assets, liabilities or operations, other than its investment in BPLP, nor does it have employees of its own. BPLP, not BXP, generally executes all significant business relationships other than transactions involving the securities of BXP. BPLP holds substantially all of the assets of BXP, including ownership interests in joint ventures. BPLP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by BXP, which are contributed to the capital of BPLP in exchange for common or preferred units of partnership in BPLP, as applicable, BPLP generates all remaining capital required by the Company’s business. These sources include working capital, net cash provided by operating activities, borrowings under its credit facilities, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of certain properties and interests in joint ventures.
Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of BXP and BPLP. The limited partners of BPLP are accounted for as partners’ capital in BPLP’s financial statements and as noncontrolling interests in BXP’s financial statements. The noncontrolling interests in BPLP’s financial statements include the interests of unaffiliated partners in various consolidated partnerships. The noncontrolling interests in BXP’s financial statements include the same


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noncontrolling interests at BPLP’s level and limited partners of BPLP. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at BXP and BPLP levels.
In addition, the consolidated financial statements of BXP and BPLP differ in total real estate assets resulting from previously applied acquisition accounting by BXP for the issuance of common stock in connection with non-sponsor redemptions of common units of BPLP. This accounting resulted in a step-up of the real estate assets at BXP. This resulted in a difference between the net real estate of BXP as compared to BPLP of approximately $308.7 million, or 1.9% at September 30, 2018 and a corresponding difference in depreciation expense and gains on sales of real estate upon the sale of certain properties having an allocation of the real estate step-up. The acquisition accounting was nullified on a prospective basis beginning in 2009 as a result of the Company’s adoption of a new accounting standard requiring any future redemptions to be accounted for solely as an equity transaction.
To help investors better understand the key differences between BXP and BPLP, certain information for BXP and BPLP in this report has been separated, as set forth below:
Item 1. Financial Statements (unaudited), which includes the following specific disclosures for BXP and BPLP:
Note 3. Real Estate;
Note 7. Noncontrolling Interests;
Note 8. Stockholders’ Equity / Partners’ Capital;
Note 9. Earnings Per Share / Common Unit; and
Note 11. Segment Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable; and
Item 2. Liquidity and Capital Resources includes separate reconciliations of amounts to each entity’s financial statements, where applicable.
This report also includes separate Part I - Item 4. Controls and Procedures and Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds sections for each of BXP and BPLP, as well as separate Exhibits 31 and 32 certifications for each of BXP and BPLP.



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BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES LIMITED PARTNERSHIP
FORM 10-Q
for the quarter ended September 30, 2018
TABLE OF CONTENTS 
 
 
 
 
 
Page
 
 
 
ITEM 1.
 
 
 
Boston Properties, Inc.
 
 
 
 
 
 
 
 
 
Boston Properties Limited Partnership
 
 
 
 
 
 
 
 
 
Boston Properties, Inc. and Boston Properties Limited Partnership
 
 
 


 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 
 


Table of Content

PART I. FINANCIAL INFORMATION
ITEM 1—Financial Statements.


BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
 
 
(in thousands, except for share and par value amounts)
ASSETS
 
 
 
 
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,426,998 and $7,172,718 at September 30, 2018 and December 31, 2017, respectively)
 
$
21,687,639

 
$
21,096,642

Less: accumulated depreciation (amounts related to VIEs of $(942,678) and $(854,172) at September 30, 2018 and December 31, 2017, respectively)
 
(4,838,496
)
 
(4,589,634
)
Total real estate
 
16,849,143

 
16,507,008

Cash and cash equivalents (amounts related to VIEs of $284,053 and $304,955 at September 30, 2018 and December 31, 2017, respectively)
 
322,502

 
434,767

Cash held in escrows (amounts related to VIEs of $6,118 and $6,135 at September 30, 2018 and December 31, 2017, respectively)
 
101,282

 
70,602

Investments in securities
 
31,376

 
29,161

Tenant and other receivables (amounts related to VIEs of $42,193 and $27,057 at September 30, 2018 and December 31, 2017, respectively)
 
98,502

 
92,186

Related party note receivable
 
80,000

 

Accrued rental income (amounts related to VIEs of $269,794 and $242,589 at September 30, 2018 and December 31, 2017, respectively)
 
926,274

 
861,575

Deferred charges, net (amounts related to VIEs of $261,951 and $281,678 at September 30, 2018 and December 31, 2017, respectively)
 
669,545

 
679,038

Prepaid expenses and other assets (amounts related to VIEs of $62,325 and $33,666 at September 30, 2018 and December 31, 2017, respectively)
 
133,443

 
77,971

Investments in unconsolidated joint ventures
 
925,431

 
619,925

Total assets
 
$
20,137,498

 
$
19,372,233

LIABILITIES AND EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,931,852 and $2,939,183 at September 30, 2018 and December 31, 2017, respectively)
 
$
2,967,548

 
$
2,979,281

Unsecured senior notes, net
 
7,253,786

 
7,247,330

Unsecured line of credit
 
170,000

 
45,000

Unsecured term loan, net
 
498,368

 

Accounts payable and accrued expenses (amounts related to VIEs of $78,893 and $106,683 at September 30, 2018 and December 31, 2017, respectively)
 
315,462

 
331,500

Dividends and distributions payable
 
165,118

 
139,040

Accrued interest payable (amounts related to VIEs of $6,659 and $6,907 at September 30, 2018 and December 31, 2017, respectively)
 
92,809

 
83,646

Other liabilities (amounts related to VIEs of $200,306 and $164,806 at September 30, 2018 and December 31, 2017, respectively)
 
468,433

 
443,980

Total liabilities
 
11,931,524

 
11,269,777

Commitments and contingencies
 

 

Equity:
 
 
 
 
Stockholders’ equity attributable to Boston Properties, Inc.:
 
 
 
 
Excess stock, $0.01 par value, 150,000,000 shares authorized, none issued or outstanding
 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized;
 
 
 
 
5.25% Series B cumulative redeemable preferred stock, $0.01 par value, liquidation preference $2,500 per share, 92,000 shares authorized, 80,000 shares issued and outstanding at September 30, 2018 and December 31, 2017
 
200,000

 
200,000

Common stock, $0.01 par value, 250,000,000 shares authorized, 154,519,139 and 154,404,186 issued and 154,440,239 and 154,325,286 outstanding at September 30, 2018 and December 31, 2017, respectively
 
1,544

 
1,543

Additional paid-in capital
 
6,400,193

 
6,377,908

Dividends in excess of earnings
 
(677,312
)
 
(712,343
)
Treasury common stock at cost, 78,900 shares at September 30, 2018 and December 31, 2017
 
(2,722
)
 
(2,722
)
Accumulated other comprehensive loss
 
(45,137
)
 
(50,429
)
Total stockholders’ equity attributable to Boston Properties, Inc.
 
5,876,566

 
5,813,957

Noncontrolling interests:
 
 
 
 
Common units of Boston Properties Limited Partnership
 
618,380

 
604,739

Property partnerships
 
1,711,028

 
1,683,760

Total equity
 
8,205,974

 
8,102,456

Total liabilities and equity
 
$
20,137,498

 
$
19,372,233

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

1

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except for per share amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
525,875

 
$
513,269

 
$
1,561,821

 
$
1,537,373

Recoveries from tenants
102,424

 
94,476

 
292,801

 
272,803

Parking and other
26,552

 
26,092

 
79,590

 
78,164

Total rental revenue
654,851

 
633,837

 
1,934,212

 
1,888,340

Hotel revenue
13,664

 
13,064

 
37,373

 
33,859

Development and management services
15,253

 
10,811

 
32,963

 
24,648

Direct reimbursements of payroll and related costs from management services contracts
2,516

 

 
7,371

 

Total revenue
686,284

 
657,712

 
2,011,919

 
1,946,847

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
247,989

 
237,341

 
726,108

 
696,082

Hotel
8,828

 
8,447

 
25,642

 
23,942

General and administrative
29,677

 
25,792

 
94,039

 
84,319

Payroll and related costs from management services contracts
2,516

 

 
7,371

 

Transaction costs
914

 
239

 
1,409

 
572

Depreciation and amortization
157,996

 
152,164

 
480,210

 
463,288

Total expenses
447,920

 
423,983

 
1,334,779

 
1,268,203

Operating income
238,364

 
233,729

 
677,140

 
678,644

Other income (expense)
 
 
 
 
 
 
 
Income (loss) from unconsolidated joint ventures
(4,313
)
 
843

 
(3,083
)
 
7,035

Gains on sales of real estate
7,863

 
2,891

 
122,552

 
6,791

Interest and other income
2,822

 
1,329

 
7,049

 
3,447

Gains from investments in securities
1,075

 
944

 
1,454

 
2,716

Gains from early extinguishments of debt

 

 

 
14,354

Interest expense
(95,366
)
 
(92,032
)
 
(277,790
)
 
(282,709
)
Net income
150,445

 
147,704

 
527,322

 
430,278

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
(14,850
)
 
(14,340
)
 
(46,484
)
 
(33,967
)
Noncontrolling interest—common units of Boston Properties Limited Partnership
(13,852
)
 
(13,402
)
 
(49,128
)
 
(40,350
)
Net income attributable to Boston Properties, Inc.
121,743

 
119,962

 
431,710

 
355,961

Preferred dividends
(2,625
)
 
(2,625
)
 
(7,875
)
 
(7,875
)
Net income attributable to Boston Properties, Inc. common shareholders
$
119,118

 
$
117,337

 
$
423,835

 
$
348,086

Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.77

 
$
0.76

 
$
2.74

 
$
2.26

Weighted average number of common shares outstanding
154,440

 
154,355

 
154,414

 
154,132

Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.77

 
$
0.76

 
$
2.74

 
$
2.26

Weighted average number of common and common equivalent shares outstanding
154,678

 
154,483

 
154,652

 
154,344


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

2

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Net income
$
150,445

 
$
147,704

 
$
527,322

 
$
430,278

Other comprehensive income (loss):
 
 
 
 
 
 
 
Effective portion of interest rate contracts
1,325

 

 
1,325

 
(6,133
)
Amortization of interest rate contracts (1)
1,666

 
1,665

 
4,998

 
4,368

Other comprehensive income (loss)
2,991

 
1,665

 
6,323

 
(1,765
)
Comprehensive income
153,436

 
149,369

 
533,645

 
428,513

Net income attributable to noncontrolling interests
(28,702
)
 
(27,742
)
 
(95,612
)
 
(74,317
)
Other comprehensive (income) loss attributable to noncontrolling interests
(433
)
 
(300
)
 
(1,031
)
 
2,220

Comprehensive income attributable to Boston Properties, Inc.
$
124,301

 
$
121,327

 
$
437,002

 
$
356,416

_______________
(1) Amounts reclassified from comprehensive income primarily to interest expense within the Boston Properties, Inc.’s Consolidated Statements of Operations.































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

3

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited and in thousands)
 
Common Stock
 
Preferred Stock
 
Additional
Paid-in
Capital
 
Dividends in
Excess of
Earnings
 
Treasury
Stock,
at cost
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests
 
Total
 
Shares
 
Amount
 
 
Equity, December 31, 2017
154,325

 
$
1,543

 
$
200,000

 
$
6,377,908

 
$
(712,343
)
 
$
(2,722
)
 
$
(50,429
)
 
$
2,288,499

 
$
8,102,456

Cumulative effect of a change in accounting principle

 

 

 

 
4,933

 

 

 
563

 
5,496

Redemption of operating partnership units to common stock
60

 
1

 

 
2,111

 

 

 

 
(2,112
)
 

Allocated net income for the year

 

 

 

 
431,710

 

 

 
95,612

 
527,322

Dividends/distributions declared

 

 

 

 
(401,612
)
 

 

 
(45,730
)
 
(447,342
)
Shares issued pursuant to stock purchase plan
6

 

 

 
797

 

 

 

 

 
797

Net activity from stock option and incentive plan
49

 

 

 
1,354

 

 

 

 
29,216

 
30,570

Contributions from noncontrolling interests in property partnerships

 

 

 

 

 

 

 
37,148

 
37,148

Distributions to noncontrolling interests in property partnerships

 

 

 

 

 

 

 
(56,796
)
 
(56,796
)
Effective portion of interest rate contracts

 

 

 

 

 

 
1,190

 
135

 
1,325

Amortization of interest rate contracts

 

 

 

 

 

 
4,102

 
896

 
4,998

Reallocation of noncontrolling interest

 

 

 
18,023

 

 

 

 
(18,023
)
 

Equity, September 30, 2018
154,440

 
$
1,544

 
$
200,000

 
$
6,400,193

 
$
(677,312
)
 
$
(2,722
)
 
$
(45,137
)
 
$
2,329,408

 
$
8,205,974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity, December 31, 2016
153,790

 
$
1,538

 
$
200,000

 
$
6,333,424

 
$
(693,694
)
 
$
(2,722
)
 
$
(52,251
)
 
$
2,145,629

 
$
7,931,924

Redemption of operating partnership units to common stock
492

 
5

 

 
16,807

 

 

 

 
(16,812
)
 

Allocated net income for the year

 

 

 

 
355,961

 

 

 
74,317

 
430,278

Dividends/distributions declared

 

 

 

 
(354,734
)
 

 

 
(40,292
)
 
(395,026
)
Shares issued pursuant to stock purchase plan
6

 

 

 
795

 

 

 

 

 
795

Net activity from stock option and incentive plan
34

 

 

 
2,920

 

 

 

 
26,271

 
29,191

Cumulative effect of a change in accounting principle

 

 

 

 
(272
)
 

 

 
(1,763
)
 
(2,035
)
Contributions from noncontrolling interests in property partnerships

 

 

 

 

 

 

 
147,772

 
147,772

Distributions to noncontrolling interests in property partnerships

 

 

 

 

 

 

 
(41,439
)
 
(41,439
)
Effective portion of interest rate contracts

 

 

 

 

 

 
(3,304
)
 
(2,829
)
 
(6,133
)
Amortization of interest rate contracts

 

 

 

 

 

 
3,759

 
609

 
4,368

Reallocation of noncontrolling interest

 

 

 
16,986

 

 

 

 
(16,986
)
 

Equity, September 30, 2017
154,322

 
$
1,543

 
$
200,000

 
$
6,370,932

 
$
(692,739
)
 
$
(2,722
)
 
$
(51,796
)
 
$
2,274,477

 
$
8,099,695







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

4

Table of Content

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                         
 
For the nine months ended September 30,
 
2018
 
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
527,322

 
$
430,278

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
480,210

 
463,288

Non-cash compensation expense
31,700

 
27,260

Loss (income) from unconsolidated joint ventures
3,083

 
(7,035
)
Distributions of net cash flow from operations of unconsolidated joint ventures
3,988

 
8,563

Gains from investments in securities
(1,454
)
 
(2,716
)
Gains from early extinguishments of debt

 
(14,354
)
Non-cash portion of interest expense
15,922

 
(6,667
)
Gains on sales of real estate
(122,552
)
 
(6,791
)
Change in assets and liabilities:
 
 
 
Tenant and other receivables, net
1,578

 
12,528

Accrued rental income, net
(41,519
)
 
(36,012
)
Prepaid expenses and other assets
(51,938
)
 
(13,633
)
Accounts payable and accrued expenses
6,354

 
7,861

Accrued interest payable
8,860

 
(144,833
)
Other liabilities
(1,561
)
 
(65,073
)
Tenant leasing costs
(89,366
)
 
(67,699
)
Total adjustments
243,305

 
154,687

Net cash provided by operating activities
770,627

 
584,965

Cash flows from investing activities:
 
 
 
Acquisition of real estate

 
(15,953
)
Construction in progress
(530,389
)
 
(452,283
)
Building and other capital improvements
(140,969
)
 
(162,395
)
Tenant improvements
(129,450
)
 
(152,749
)
Proceeds from sales of real estate
175,577

 
29,810

Capital contributions to unconsolidated joint ventures
(314,075
)
 
(89,874
)
Capital distributions from unconsolidated joint ventures

 
251,000

Issuance of related party note receivable
(80,000
)
 

Investments in securities, net
(761
)
 
(1,451
)
Net cash used in investing activities
(1,020,067
)
 
(593,895
)
 
 
 
 
 
 
 
 
 
 
 
 

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended September 30,
 
2018
 
2017
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage notes payable

 
2,300,000

Repayments of mortgage notes payable
(14,677
)
 
(1,313,890
)
Borrowings on unsecured line of credit
580,000

 
470,000

Repayments of unsecured line of credit
(455,000
)
 
(470,000
)
Proceeds from unsecured term loan
500,000

 

Repayments of mezzanine notes payable

 
(306,000
)
Repayments of outside members’ notes payable

 
(70,424
)
Payments on capital lease obligations

 
(463
)
Payments on real estate financing transactions
(960
)
 
(1,306
)
Deposit on mortgage note payable interest rate lock

 
(23,200
)
Return of deposit on mortgage note payable interest rate lock

 
23,200

Deferred financing costs
(263
)
 
(44,083
)
Debt prepayment and extinguishment costs

 
(90
)
Net proceeds from equity transactions
(333
)
 
241

Dividends and distributions
(421,264
)
 
(394,900
)
Contributions from noncontrolling interests in property partnerships
37,148

 
38,196

Distributions to noncontrolling interests in property partnerships
(56,796
)
 
(41,605
)
Net cash provided by financing activities
167,855

 
165,676

Net increase (decrease) in cash and cash equivalents and cash held in escrows
(81,585
)
 
156,746

Cash and cash equivalents and cash held in escrows, beginning of period
505,369

 
420,088

Cash and cash equivalents and cash held in escrows, end of period
$
423,784

 
$
576,834

 
 
 
 
Reconciliation of cash and cash equivalents and cash held in escrows:
 
 
 
Cash and cash equivalents, beginning of period
$
434,767

 
$
356,914

Cash held in escrows, beginning of period
70,602

 
63,174

Cash and cash equivalents and cash held in escrows, beginning of period
$
505,369

 
$
420,088

 
 
 
 
Cash and cash equivalents, end of period
$
322,502

 
$
493,055

Cash held in escrows, end of period
101,282

 
83,779

Cash and cash equivalents and cash held in escrows, end of period
$
423,784

 
$
576,834

 
 
 
 
Supplemental disclosures:
 
 
 
Cash paid for interest
$
303,203

 
$
477,189

Interest capitalized
$
51,594

 
$
43,286

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(100,118
)
 
$
(103,972
)
Additions to real estate included in accounts payable and accrued expenses
$
(11,746
)
 
$
36,609

Real estate acquired through capital lease
$

 
$
28,962

Outside members’ notes payable contributed to noncontrolling interests in property partnerships
$

 
$
109,576

Dividends and distributions declared but not paid
$
165,118

 
$
130,434

Conversions of noncontrolling interests to stockholders’ equity
$
2,112

 
$
16,812

Issuance of restricted securities to employees
$
37,342

 
$
35,711

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

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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
 
 
(in thousands, except for unit amounts)
ASSETS
 
 
 
 
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,426,998 and $7,172,718 at September 30, 2018 and December 31, 2017, respectively)
 
$
21,281,726

 
$
20,685,164

Less: accumulated depreciation (amounts related to VIEs of $(942,678) and $(854,172) at September 30, 2018 and December 31, 2017, respectively)
 
(4,741,280
)
 
(4,496,959
)
Total real estate
 
16,540,446

 
16,188,205

Cash and cash equivalents (amounts related to VIEs of $284,053 and $304,955 at September 30, 2018 and December 31, 2017, respectively)
 
322,502

 
434,767

Cash held in escrows (amounts related to VIEs of $6,118 and $6,135 at September 30, 2018 and December 31, 2017, respectively)
 
101,282

 
70,602

Investments in securities
 
31,376

 
29,161

Tenant and other receivables (amounts related to VIEs of $42,193 and $27,057 at September 30, 2018 and December 31, 2017, respectively)
 
98,502

 
92,186

Related party note receivable
 
80,000

 

Accrued rental income (amounts related to VIEs of $269,794 and $242,589 at September 30, 2018 and December 31, 2017, respectively)
 
926,274

 
861,575

Deferred charges, net (amounts related to VIEs of $261,951 and $281,678 at September 30, 2018 and December 31, 2017, respectively)
 
669,545

 
679,038

Prepaid expenses and other assets (amounts related to VIEs of $62,325 and $33,666 at September 30, 2018 and December 31, 2017, respectively)
 
133,443

 
77,971

Investments in unconsolidated joint ventures
 
925,431

 
619,925

Total assets
 
$
19,828,801

 
$
19,053,430

LIABILITIES AND CAPITAL
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,931,852 and $2,939,183 at September 30, 2018 and December 31, 2017, respectively)
 
$
2,967,548

 
$
2,979,281

Unsecured senior notes, net
 
7,253,786

 
7,247,330

Unsecured line of credit
 
170,000

 
45,000

Unsecured term loan, net
 
498,368

 

Accounts payable and accrued expenses (amounts related to VIEs of $78,893 and $106,683 at September 30, 2018 and December 31, 2017, respectively)
 
315,462

 
331,500

Distributions payable
 
165,118

 
139,040

Accrued interest payable (amounts related to VIEs of $6,659 and $6,907 at September 30, 2018 and December 31, 2017, respectively)
 
92,809

 
83,646

Other liabilities (amounts related to VIEs of $200,306 and $164,806 at September 30, 2018 and December 31, 2017, respectively)
 
468,433

 
443,980

Total liabilities
 
11,931,524

 
11,269,777

Commitments and contingencies
 

 

Noncontrolling interests:
 
 
 
 
Redeemable partnership units—16,804,929 and 16,810,378 common units and 992,321 and 818,343 long term incentive units outstanding at redemption value at September 30, 2018 and December 31, 2017, respectively
 
2,190,664

 
2,292,263

Capital:
 
 
 
 
5.25% Series B cumulative redeemable preferred units, liquidation preference $2,500 per unit, 80,000 units issued and outstanding at September 30, 2018 and December 31, 2017
 
193,623

 
193,623

Boston Properties Limited Partnership partners’ capital—1,722,375 and 1,719,540 general partner units and 152,717,864 and 152,605,746 limited partner units outstanding at September 30, 2018 and December 31, 2017, respectively
 
3,801,962

 
3,614,007

Noncontrolling interests in property partnerships
 
1,711,028

 
1,683,760

Total capital
 
5,706,613

 
5,491,390

Total liabilities and capital
 
$
19,828,801

 
$
19,053,430


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

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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except for per unit amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
525,875

 
$
513,269

 
$
1,561,821

 
$
1,537,373

Recoveries from tenants
102,424

 
94,476

 
292,801

 
272,803

Parking and other
26,552

 
26,092

 
79,590

 
78,164

Total rental revenue
654,851

 
633,837

 
1,934,212

 
1,888,340

Hotel revenue
13,664

 
13,064

 
37,373

 
33,859

Development and management services
15,253

 
10,811

 
32,963

 
24,648

Direct reimbursements of payroll and related costs from management services contracts
2,516

 

 
7,371

 

Total revenue
686,284

 
657,712

 
2,011,919

 
1,946,847

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
247,989

 
237,341

 
726,108

 
696,082

Hotel
8,828

 
8,447

 
25,642

 
23,942

General and administrative
29,677

 
25,792

 
94,039

 
84,319

Payroll and related costs from management services contracts
2,516

 

 
7,371

 

Transaction costs
914

 
239

 
1,409

 
572

Depreciation and amortization
156,056

 
150,210

 
474,383

 
457,102

Total expenses
445,980

 
422,029

 
1,328,952

 
1,262,017

Operating income
240,304

 
235,683

 
682,967

 
684,830

Other income (expense)
 
 
 
 
 
 
 
Income (loss) from unconsolidated joint ventures
(4,313
)
 
843

 
(3,083
)
 
7,035

Gains on sales of real estate
9,154

 
2,891

 
126,831

 
7,368

Interest and other income
2,822

 
1,329

 
7,049

 
3,447

Gains from investments in securities
1,075

 
944

 
1,454

 
2,716

Gains from early extinguishments of debt

 

 

 
14,354

Interest expense
(95,366
)
 
(92,032
)
 
(277,790
)
 
(282,709
)
Net income
153,676

 
149,658

 
537,428

 
437,041

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
(14,850
)
 
(14,340
)
 
(46,484
)
 
(33,967
)
Net income attributable to Boston Properties Limited Partnership
138,826

 
135,318

 
490,944

 
403,074

Preferred distributions
(2,625
)
 
(2,625
)
 
(7,875
)
 
(7,875
)
Net income attributable to Boston Properties Limited Partnership common unitholders
$
136,201

 
$
132,693

 
$
483,069

 
$
395,199

Basic earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.79

 
$
0.77

 
$
2.81

 
$
2.30

Weighted average number of common units outstanding
171,928

 
171,691

 
171,904

 
171,649

Diluted earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.79

 
$
0.77

 
$
2.81

 
$
2.30

Weighted average number of common and common equivalent units outstanding
172,166

 
171,819

 
172,142

 
171,861


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

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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Net income
$
153,676

 
$
149,658

 
$
537,428

 
$
437,041

Other comprehensive income (loss):
 
 
 
 
 
 
 
Effective portion of interest rate contracts
1,325

 

 
1,325

 
(6,133
)
Amortization of interest rate contracts (1)
1,666

 
1,665

 
4,998

 
4,368

Other comprehensive income (loss)
2,991

 
1,665

 
6,323

 
(1,765
)
Comprehensive income
156,667

 
151,323

 
543,751

 
435,276

Comprehensive income attributable to noncontrolling interests
(14,994
)
 
(14,484
)
 
(46,916
)
 
(31,695
)
Comprehensive income attributable to Boston Properties Limited Partnership
$
141,673

 
$
136,839

 
$
496,835

 
$
403,581

_______________
(1) Amounts reclassified from comprehensive income primarily to interest expense within the Boston Properties Limited Partnership's Consolidated Statements of Operations.

































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

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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited and in thousands)
 
 
Total Partners’ Capital
Balance at December 31, 2017
$
3,807,630

Cumulative effect of a change in accounting principle
4,933

Contributions
2,039

Net income allocable to general and limited partner units
441,816

Distributions
(401,612
)
Other comprehensive income
5,292

Unearned compensation
112

Conversion of redeemable partnership units
2,112

Adjustment to reflect redeemable partnership units at redemption value
133,263

Balance at September 30, 2018
$
3,995,585

 
 
Balance at December 31, 2016
$
3,811,717

Contributions
4,937

Net income allocable to general and limited partner units
362,724

Distributions
(354,734
)
Other comprehensive income
455

Cumulative effect of a change in accounting principle
(272
)
Unearned compensation
(1,222
)
Conversion of redeemable partnership units
16,812

Adjustment to reflect redeemable partnership units at redemption value
103,556

Balance at September 30, 2017
$
3,943,973
























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


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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the nine months ended September 30,
 
2018
 
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
537,428

 
$
437,041

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
474,383

 
457,102

Non-cash compensation expense
31,700

 
27,260

Loss (income) from unconsolidated joint ventures
3,083

 
(7,035
)
Distributions of net cash flow from operations of unconsolidated joint ventures
3,988

 
8,563

Gains from investments in securities
(1,454
)
 
(2,716
)
Gains from early extinguishments of debt

 
(14,354
)
Non-cash portion of interest expense
15,922

 
(6,667
)
Gains on sales of real estate
(126,831
)
 
(7,368
)
Change in assets and liabilities:
 
 
 
Tenant and other receivables, net
1,578

 
12,528

Accrued rental income, net
(41,519
)
 
(36,012
)
Prepaid expenses and other assets
(51,938
)
 
(13,633
)
Accounts payable and accrued expenses
6,354

 
7,861

Accrued interest payable
8,860

 
(144,833
)
Other liabilities
(1,561
)
 
(65,073
)
Tenant leasing costs
(89,366
)
 
(67,699
)
Total adjustments
233,199

 
147,924

Net cash provided by operating activities
770,627

 
584,965

Cash flows from investing activities:
 
 
 
Acquisition of real estate

 
(15,953
)
Construction in progress
(530,389
)
 
(452,283
)
Building and other capital improvements
(140,969
)
 
(162,395
)
Tenant improvements
(129,450
)
 
(152,749
)
Proceeds from sales of real estate
175,577

 
29,810

Capital contributions to unconsolidated joint ventures
(314,075
)
 
(89,874
)
Capital distributions from unconsolidated joint ventures

 
251,000

Issuance of related party note receivable
(80,000
)
 

Investments in securities, net
(761
)
 
(1,451
)
Net cash used in investing activities
(1,020,067
)
 
(593,895
)
 
 
 
 
 
 
 
 

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BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the nine months ended September 30,
 
2018
 
2017
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage notes payable

 
2,300,000

Repayments of mortgage notes payable
(14,677
)
 
(1,313,890
)
Borrowings on unsecured line of credit
580,000

 
470,000

Repayments of unsecured line of credit
(455,000
)
 
(470,000
)
Proceeds from unsecured term loan
500,000

 

Repayments of mezzanine notes payable

 
(306,000
)
Repayments of outside members’ notes payable

 
(70,424
)
Payments on capital lease obligations

 
(463
)
Payments on real estate financing transaction
(960
)
 
(1,306
)
Deposit on mortgage note payable interest rate lock

 
(23,200
)
Return of deposit on mortgage note payable interest rate lock

 
23,200

Deferred financing costs
(263
)
 
(44,083
)
Debt prepayment and extinguishment costs

 
(90
)
Net proceeds from equity transactions
(333
)
 
241

Distributions
(421,264
)
 
(394,900
)
Contributions from noncontrolling interests in property partnerships
37,148

 
38,196

Distributions to noncontrolling interests in property partnerships
(56,796
)
 
(41,605
)
Net cash provided by financing activities
167,855

 
165,676

Net increase (decrease) in cash and cash equivalents and cash held in escrows
(81,585
)
 
156,746

Cash and cash equivalents and cash held in escrows, beginning of period
505,369

 
420,088

Cash and cash equivalents and cash held in escrows, end of period
$
423,784

 
$
576,834

 
 
 
 
Reconciliation of cash and cash equivalents and cash held in escrows:
 
 
 
Cash and cash equivalents, beginning of period
$
434,767

 
$
356,914

Cash held in escrows, beginning of period
70,602

 
63,174

Cash and cash equivalents and cash held in escrows, beginning of period
$
505,369

 
$
420,088

 
 
 
 
Cash and cash equivalents, end of period
$
322,502

 
$
493,055

Cash held in escrows, end of period
101,282

 
83,779

Cash and cash equivalents and cash held in escrows, end of period
$
423,784

 
$
576,834

 
 
 
 
Supplemental disclosures:
 
 
 
Cash paid for interest
$
303,203

 
$
477,189

Interest capitalized
$
51,594

 
$
43,286

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(100,118
)
 
$
(102,795
)
Additions to real estate included in accounts payable and accrued expenses
$
(11,746
)
 
$
36,609

Real estate acquired through capital lease
$

 
$
28,962

Outside members’ notes payable contributed to noncontrolling interests in property partnerships
$

 
$
109,576

Distributions declared but not paid
$
165,118

 
$
130,434

Conversions of redeemable partnership units to partners’ capital
$
2,112

 
$
16,812

Issuance of restricted securities to employees
$
37,342

 
$
35,711


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

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BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES LIMITED PARTNERSHIP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Boston Properties, Inc., a Delaware corporation, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”). Boston Properties, Inc. is the sole general partner of Boston Properties Limited Partnership, its operating partnership, and at September 30, 2018 owned an approximate 89.7% (89.7% at December 31, 2017) general and limited partnership interest in Boston Properties Limited Partnership. Unless stated otherwise or the context requires, the “Company” refers to Boston Properties, Inc. and its subsidiaries, including Boston Properties Limited Partnership, and its consolidated subsidiaries. Partnership interests in Boston Properties Limited Partnership include:
common units of partnership interest (also referred to as “OP Units”),
long term incentive units of partnership interest (also referred to as “LTIP Units”), and
preferred units of partnership interest (also referred to as “Preferred Units”).
Unless specifically noted otherwise, all references to OP Units exclude units held by Boston Properties, Inc. A holder of an OP Unit may present such OP Unit to Boston Properties Limited 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, Boston Properties Limited Partnership is obligated to redeem the OP Unit for cash equal to the value of a share of common stock of Boston Properties, Inc. (“Common Stock”). In lieu of a cash redemption, Boston Properties, Inc. may elect to acquire the 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 Boston Properties, Inc. 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.
The Company uses LTIP Units as a form of equity-based award for annual long-term incentive equity compensation. The Company has also issued LTIP Units to employees in the form of (1) 2012 outperformance plan awards (“2012 OPP Units”) and (2) 2013, 2014, 2015, 2016, 2017 and 2018 multi-year, long-term incentive program awards (also referred to as “MYLTIP Units”), each of which, upon the satisfaction of certain performance and vesting conditions, is convertible into one OP Unit. The three-year measurement periods for the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units expired on February 6, 2015, February 4, 2016, February 3, 2017 and February 4, 2018, respectively, and Boston Properties, Inc.’s total stockholder return (“TSR”) was sufficient for employees to earn and therefore become eligible to vest in a portion of the awards. Unless and until they are earned, the rights, preferences and privileges of the 2016, 2017 and 2018 MYLTIP Units differ from other LTIP Units granted to employees (including the 2012 OPP Units, the 2013 MYLTIP Units, the 2014 MYLTIP Units and the 2015 MYLTIP Units, which have been earned). Therefore, unless specifically noted otherwise, all references to LTIP Units exclude the 2016, 2017 and 2018 MYLTIP Units. LTIP Units (including the earned 2012 OPP Units, the 2013 MYLTIP Units, the 2014 MYLTIP Units and the 2015 MYLTIP 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 Notes 7, 8 and 10).
At September 30, 2018, there was one series of Preferred Units outstanding (i.e., Series B Preferred Units). The Series B Preferred Units were issued to Boston Properties, Inc. on March 27, 2013 in connection with the issuance of 80,000 shares (8,000,000 depositary shares each representing 1/100th of a share) of 5.25% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”). Boston Properties, Inc. contributed the net proceeds from the offering to Boston Properties Limited Partnership in exchange for 80,000 Series B Preferred Units having terms and preferences generally mirroring those of the Series B Preferred Stock (See Note 8).
Properties
At September 30, 2018, the Company owned or had interests in a portfolio of 200 commercial real estate properties (the “Properties”) aggregating approximately 52.7 million net rentable square feet of primarily Class A office properties, including fourteen properties under construction/redevelopment totaling approximately 7.5 million net rentable square feet. At September 30, 2018, the Properties consisted of:


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180 office properties (including twelve properties under construction/redevelopment);
thirteen retail properties;
six residential properties (including two properties under construction); and
one hotel.
The Company considers Class A office properties to be well-located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings.
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 Boston Properties Limited Partnership, nor does it have employees of its own. Boston Properties Limited Partnership, not Boston Properties, Inc., generally executes all significant business relationships other than transactions involving securities of Boston Properties, Inc. All majority-owned subsidiaries and joint ventures over which the Company has financial and operating control and variable interest entities (“VIEs”) 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 generally accepted accounting principles (“GAAP”) 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 GAAP 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 GAAP.  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, 2017.
Fair Value of Financial Instruments
The Company follows the authoritative guidance for fair value measurements when valuing its financial instruments for disclosure purposes. Boston Properties Limited Partnership determines the fair value of its unsecured senior notes using market prices. The inputs used in determining the fair value of Boston Properties Limited Partnership’s unsecured senior notes is categorized at a Level 1 basis (as defined in Accounting Standards Codification ("ASC") 820 "Fair Value Measurements and Disclosures," the accounting standards for Fair Value Measurements and Disclosures) due to the fact that it uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized at a Level 2 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) if trading volumes are low. The Company determines the fair value of its related party note receivable and mortgage notes payable using discounted cash flow analysis by discounting the spread between the future contractual interest payments and hypothetical future interest payments on note receivables / mortgage debt based on current market rates for similar securities. In determining the current market rates, the Company adds its estimates of market spreads to the quoted yields on federal government treasury securities with similar maturity dates to its debt. The inputs used in determining the fair value of the Company’s related party note receivable and mortgage notes payable are categorized at a Level 3 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company considers the rates used in the valuation techniques to be unobservable inputs. To the extent that there are outstanding borrowings under the unsecured line of credit or unsecured term loan, the Company utilizes a discounted cash flow methodology in order to estimate the fair value. To the extent that credit spreads have changed since the origination, the net present value of the difference between future contractual interest payments and future interest payments based on the Company’s estimate of a current market rate would represent the difference between the book value and the fair value. The Company’s estimate of a current market rate is based upon the rate, considering current market conditions and Boston Properties Limited Partnership's specific credit profile, at which it estimates it could obtain similar borrowings. To the extent there are outstanding borrowings, this current market rate is estimated and therefore would be primarily based upon a Level 3 input.

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Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair values of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate, and the Company’s estimated fair values for these instruments as of the end of the applicable reporting period are not necessarily indicative of estimated or actual fair values in future reporting periods. The following table presents the aggregate carrying value of the Company’s, related party note receivable, mortgage notes payable, net, unsecured line of credit, unsecured term loan, net and unsecured senior notes, net and the Company’s corresponding estimate of fair value as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
 
 
Estimated
Fair Value
 
Carrying
Amount
 
 
 
Estimated
Fair Value
Related party note receivable
$
80,000

 
 
 
$
80,000

 
$

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage notes payable, net
$
2,967,548

 
  
 
$
2,898,871

 
$
2,979,281

 
  
 
$
3,042,920

Unsecured senior notes, net
7,253,786

 
  
 
7,174,434

 
7,247,330

 
  
 
7,461,615

Unsecured line of credit
170,000

 
 
 
170,287

 
45,000

 
 
 
45,000

Unsecured term loan, net
498,368

 
 
 
502,110

 

 
 
 

Total
$
10,889,702

 
  
 
$
10,745,702

 
$
10,271,611

 
  
 
$
10,549,535

    
Variable Interest Entities (VIEs)
Consolidated VIEs are those where the Company is considered to be the primary beneficiary of a VIE. The primary beneficiary is the entity that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and (2) the obligation to absorb losses or the right to receive the returns from the VIE that could potentially be significant to the VIE. The Company has determined that it is the primary beneficiary for seven of the nine entities that are VIEs.
Consolidated Variable Interest Entities
As of September 30, 2018, Boston Properties, Inc. has identified seven consolidated VIEs, including Boston Properties Limited Partnership. The VIEs own (1) the following five in-service properties: 767 Fifth Avenue (the General Motors Building), Times Square Tower, 601 Lexington Avenue, Atlantic Wharf Office Building and 100 Federal Street and (2) Salesforce Tower, which was partially placed in-service on December 1, 2017.
The Company consolidates these VIEs because it is the primary beneficiary.  The third parties’ interests in these consolidated entities, with the exception of Boston Properties Limited Partnership, are reflected as noncontrolling interest in property partnerships in the accompanying Consolidated Financial Statements (See Note 7). 
In addition, Boston Properties, Inc.’s only significant asset is its investment in Boston Properties Limited Partnership and, consequently, substantially all of Boston Properties, Inc.’s assets and liabilities are the assets and liabilities of Boston Properties Limited Partnership.
Variable Interest Entities Not Consolidated
The Company has determined that its 7750 Wisconsin Avenue LLC and Office Tower Developer LLC joint ventures, which own 7750 Wisconsin Avenue and 100 Causeway Street (which is the office component of The Hub on Causeway mixed-use development project), respectively, are VIEs. The Company does not consolidate these entities as the Company does not have the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and, therefore, the Company is not considered to be the primary beneficiary.

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New Accounting Pronouncements
New Accounting Pronouncements Adopted
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which delayed the effective date of ASU 2014-09 by one year making it effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption was permitted as of the original effective date. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). ASU 2016-12 is intended to clarify and provide practical expedients for certain aspects of ASU 2014-09 and notes that lease contracts with customers are a scope exception. ASU 2014-09 was effective for the Company for reporting periods beginning after December 15, 2017.
The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. The Company applied the guidance only to contracts that were not completed as of January 1, 2018. The Company does not have material contract assets and liabilities within the scope of ASC 606. The adoption of ASU 2014-09 resulted in a change to the timing pattern of revenue recognized, but not the total revenue recognized over time for certain of the Company’s development services contracts. As a result, the modified retrospective approach resulted in the Company recognizing on January 1, 2018 the cumulative effect of adopting ASU 2014-09 aggregating approximately $4.9 million to Dividends in Excess of Earnings of Boston Properties, Inc. and Partners’ Capital of Boston Properties Limited Partnership and approximately $0.6 million to Noncontrolling Interests - Common Units of Boston Properties, Inc. and Noncontrolling Interests - Redeemable Partnership Units of Boston Properties Limited Partnership on the corresponding Consolidated Balance Sheets.
The Company disaggregates its revenue by source within its Consolidated Statements of Operations. As an owner and operator of real estate, the Company derives the majority of its revenue from leasing space to tenants at its properties. As a result, the majority of the Company’s revenue is accounted for pursuant to ASC 840 “Leases” (“ASC 840”) and is reflected within Base Rent in the Consolidated Statements of Operations. In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recognized under the guidance within ASC 840 until the adoption of ASC 842 "Leases" in 2019 at which time it may fall within the guidance under ASC 606 (see New Accounting Pronouncements Issued but not yet Adopted "Leases").
The Company also earns revenue from the following sources; parking and other revenue, hotel revenue and development and management services revenue.
Parking and other revenue is derived primarily from monthly and transient daily parking. In addition, the Company has certain lease arrangements for parking accounted for under the guidance in ASC 840. The monthly and transient daily parking revenue falls within the scope of ASC 606 and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.

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Hotel revenue is derived from room rentals and other sources such as charges to guests for telephone service, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenue also falls within the scope of ASC 606 and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.
Development and management services revenue is earned from unconsolidated joint venture entities and third-party property owners. The Company determined that the performance obligations associated with its development services contracts are satisfied over time and that the Company would recognize its development services revenue under the output method evenly over time from the development commencement date through the substantial completion date of the development management services project due to the stand-ready nature of the contracts. Significant judgments impacting the amount and timing of revenue recognized from the Company's development services contracts include estimates of total development project costs from which the fees are typically derived and estimates of the period of time until substantial completion of the development project, the period of time over which the development services are required to be performed. As a result, the pattern of revenue recognized over time under ASC 606 differs from the Company’s previous accounting. The Company recognizes development fees earned from unconsolidated joint venture projects equal to its cost plus profit to the extent of the third party partners’ ownership interest. Property management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, because such fees are contingent upon the collection of rents. The revenue recognized under property management services contracts is recognized consistent with the Company's previous accounting.
ASU 2014-09 also updates the principal versus agent considerations and, as a result, the Company determined that amounts reimbursed for payroll and related costs received from unconsolidated joint venture entities and third party property owners in connection with management services contracts should be reflected on a gross basis instead of on a net basis as the Company has determined that it is the principal under these arrangements. During the three and nine months ended September 30, 2018, the Company recognized approximately $2.5 million and $7.4 million, respectively, of expenses consisting of payroll and related costs from management services contracts and recognized corresponding revenue of approximately $2.5 million and $7.4 million, respectively, reflecting the direct reimbursements of such costs from the unconsolidated joint venture entities and third-party property owners.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The areas addressed in the new guidance related to debt prepayment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned and bank-owned life insurance policies, distributions received from equity method investments, beneficial interest in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 was effective for the Company for reporting periods beginning after December 15, 2017, with early adoption permitted (provided that all of the amendments are adopted in the same period), and was required to be applied retrospectively to all periods presented. The Company adopted ASU 2016-15 effective January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated financial statements. The adoption of ASU 2016-15 will result in the retrospective classification of debt prepayment costs as a component of financing activities instead of as a component of operating activities in the Company's Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-18”). ASU 2016-18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 also requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalents balances are required to disclose the nature of the restrictions. ASU 2016-18 was effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and is required to be applied retrospectively to all periods presented. The Company adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 did not

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have a material impact on the Company’s consolidated financial statements. The retrospective adoption of ASU 2016-18 resulted in a decrease to net cash provided by operating activities totaling approximately $7.7 million, an increase to net cash used in investing activities totaling approximately $28.5 million, a decrease to net cash provided by financing activities totaling approximately $0.2 million, and a corresponding decrease to the net increase in cash and cash equivalents and cash held in escrows totaling approximately $20.6 million from amounts previously reported for the nine months ended September 30, 2017. Cash held in escrows include amounts established pursuant to various agreements for security deposits, property taxes, insurance and other costs. Cash held in escrows also include cash held by qualified intermediaries for possible investments in like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, in connection with sales of the Company’s properties. 
Sales of Real Estate
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 updates the definition of an “in substance nonfinancial asset” and clarifies the derecognition guidance for nonfinancial assets to conform with the new revenue recognition standard. The effective date and transition methods of ASU 2017-05 are aligned with ASU 2014-09 described above and were effective for the first interim period within annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2017-05 did not have a material impact on the Company's consolidated financial statements. See also Note 3.
Stock Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 is intended to provide clarity and reduce (1) diversity in practice, (2) cost and (3) complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 was effective for public entities for fiscal years and interim periods beginning after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 was issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 also makes certain targeted improvements to simplify the application of the hedge accounting guidance. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted ASU 2017-12 effective January 1, 2018. The adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements. As of September 30, 2018, the Company does not have any outstanding hedges, but continues to reclassify into earnings as an increase primarily to interest expense approximately $1.7 million per quarter relating to previously settled interest rate contracts.
New Accounting Pronouncements Issued but not yet Adopted
Leases    
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes previous leasing standards. ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt ASU 2016-02 effective January 1, 2019 using the modified retrospective approach. The Company is in the process of evaluating

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whether it will elect to apply the practical expedients. The Company is in the process of adopting ASU 2016-02 and its project team has compiled an inventory of its leases that will be impacted by the adoption of ASU 2016-02. The Company continues to assess the impact of adopting ASU 2016-02. However, the Company will account for operating leases under which it is the lessor on its balance sheet in a manner similar to its current accounting with the underlying leased asset recognized as real estate. On July 30, 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), that (1) simplifies transition requirements for both lessees and lessors by adding an option that permits an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) allows lessors to elect, as a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (ASC 606) and both of the following are met:
(1) The timing and pattern of transfer of the nonlease component(s) and associated lease components are the same; and
(2) the lease component, if accounted for separately, would be classified as an operating lease.
If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with ASC 606. Certain disclosures are required if applying this practical expedient. The Company’s project team is evaluating this recently issued ASU 2018-11. For leases in which the Company is the lessee, primarily consisting of ground leases, the Company will recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense over the term of the lease. In addition, under ASU 2016-02, lessors will only capitalize incremental direct leasing costs. As a result, the Company will no longer be able to capitalize non-incremental legal costs and internal leasing wages and instead will be required to expense these and other non-incremental costs as incurred. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840.  An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842.  An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.  The effective date and transition requirements for ASU 2018-01 are the same as the effective date and transition requirements in ASU 2016-02. The Company plans to elect this practical expedient and has gathered its inventory and is in the process of drafting procedures and controls.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for the Company for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is assessing the potential impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures required by entities regarding recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for the Company for reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 will not have a material impact on the Company's consolidated financial statements.
Consolidation
In October 2018, the FASB issued ASU 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). ASU 2018-17 is intended to improve the

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accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17 is effective for the Company for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is assessing the potential impact that the adoption of ASU 2018-17 will have on its consolidated financial statements.
3. Real Estate
Boston Properties, Inc.
Real estate consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Land
$
5,108,491

 
$
5,080,679

Land held for future development (1)
205,096

 
204,925

Buildings and improvements
12,949,543

 
12,284,164

Tenant improvements
2,322,552

 
2,219,608

Furniture, fixtures and equipment
44,696

 
37,928

Construction in progress
1,057,261

 
1,269,338

Total
21,687,639

 
21,096,642

Less: Accumulated depreciation
(4,838,496
)
 
(4,589,634
)
 
$
16,849,143

 
$
16,507,008

_______________
(1)
Includes pre-development costs.
Boston Properties Limited Partnership
Real estate consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Land
$
5,005,507

 
$
4,976,303

Land held for future development (1)
205,096

 
204,925

Buildings and improvements
12,646,614

 
11,977,062

Tenant improvements
2,322,552

 
2,219,608

Furniture, fixtures and equipment
44,696

 
37,928

Construction in progress
1,057,261

 
1,269,338

Total
21,281,726

 
20,685,164

Less: Accumulated depreciation
(4,741,280
)
 
(4,496,959
)
 
$
16,540,446

 
$
16,188,205

_______________
(1)
Includes pre-development costs.
Development
On January 24, 2018, the Company entered into a lease agreement with an affilia