Fitch Rates Boston Properties, L.P.'s $700MM Sr. Unsecured Notes Due 2024 'BBB'; Outlook Stable
NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a credit rating of 'BBB' to the $700 million 3.80% senior unsecured notes due Feb. 1, 2024 issued by Boston Properties, L.P., the operating partnership of Boston Properties, Inc. (NYSE: BXP; collectively, the company). The notes were issued at 99.694% of par to yield 3.835%. The notes were issued at a 165 basis point spread to Treasuries and net proceeds from the offering of $691.9 million will be used for general corporate purposes including investment opportunities and debt reduction. The ratings are supported by the company's superior asset quality, appropriate leverage and fixed-charge coverage for the rating.
The ratings also reflect BXP's adequate liquidity position that is supported by its large unrestricted cash balance, retained free cash flow, near full availability under its $750 million revolving credit facility and its large unencumbered pool of high quality assets in markets with excellent transaction and financing liquidity characteristics.
Fitch expects that BXP will continue to have access to a wide range of capital sources to help it meet its manageable debt maturity schedule and other financial obligations.
The ratings are balanced by the company's moderately concentrated geographical footprint and related exposure to finance, legal and government and defense industry tenants. Execution and liquidity risk associated with the company's development platform are also a credit concern. BXP owns a high-quality portfolio of predominantly class A office properties located in supply-constrained central business district (CBD) markets. The company's CBD properties compete for the highest profile tenants in their regions and many are leading properties in their submarkets, and would likely attract significant investor and lender interest, providing contingent liquidity to the company. BXP's net debt to recurring operating EBITDA for the trailing 12 months (TTM) was 6.7x as of March 31, 2013. Leverage was 6.8x in 2012, 6.3x in 2011 and 7.6x in 2010. Fitch assumes that leverage will be unchanged following the offering as Fitch expects proceeds to be used to repay outstanding unsecured debt. Fixed-charge coverage was 2.2x for the TTM ended March 31, 2013, compared to 2.1x in 2012, 2.2x in 2011 and 1.8x in 2010. The company's leverage and fixed-charge coverage are appropriate for a 'BBB' rated office REIT with BXP's large size and high asset quality. The company's revenue is supported by long-term leases. The company's in-service portfolio was 91.7% leased at March 31, 2013. BXP's lease profile is strong relative to its office REIT peers, which ensures that the company is not overly exposed to leasing risk at any given time, notwithstanding tenant bankruptcies. Average annual lease expirations comprise less than 8% of annualized base rent through 2022, with a maximum annual maturity of 13% in 2017. The company has historically been proactive in renewing tenants in advance of lease maturities to minimize downtime and leasing costs, which Fitch views as a risk adverse strategy that strengthens the credit by reducing cash flow volatility. The company maintains an adequate liquidity position pro forma the $700 million unsecured notes issuance. For the period April 1, 2013 to Dec. 31, 2014, the company's base case liquidity coverage ratio is 1.5x. BXP's liquidity coverage would improve to 1.7x assuming the company refinances maturing mortgages at 80% of current balances. The $746 million of exchangeable notes that mature in Feb. 2014 represent the company's next largest funding requirement.
Unfunded development commitments were the second largest use of capital at $670 million, not including the Transbay Tower in San Francisco for which Fitch anticipates the company will start below-grade construction in late 2013. BXP likely has some flexibility to defer spending if market conditions weaken unexpectedly and materially. BXP's liquidity coverage ratio would improve to 2.1x absent said expenditures. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the company's unsecured credit facility and expected retained cash flows from operating activities after dividends) divided by uses of liquidity (pro rata debt maturities, expected recurring capital expenditures and development costs).
BXP maintains a large unencumbered pool of 124 assets that comprised 66% of NOI as of March 31, 2013. Fitch views the company's unencumbered asset base as a strong source of contingent liquidity that supports its unsecured obligations. Capitalizing annualized first quarter 2013 (1Q'13) cash NOI generated by the unencumbered pool at a stressed capitalization rate of 7% yields unencumbered asset coverage of approximately 2.1x, which is adequate for the 'BBB' IDR. BXP's debt maturities are generally well-laddered, with less than 10% of total debt maturing in any given year through 2016. The company does have an unusually large 17.2% of consolidated debt maturing in 2017 that increases to 24.2% of total debt maturing when including the $975 million of unconsolidated JV debt maturing at BXP's pro-rata share. Fitch views these maturities as an intermediate-term risk that is mitigated by the quality of the properties securing these mortgages, which include 599 Lexington Avenue and 767 Fifth Avenue (The GM Building) in Manhattan, and the John Hancock Tower in Boston. The company has elevated exposure to financial, legal and government related tenants in its portfolio. Tenants in these segments represented approximately 28%, 25% and 6% of gross rent, respectively, for a combined total of 59% as of March 31, 2013. Lower trading volumes and increased regulation are key issues that are challenging financial services companies resulting in delayed leasing decisions, at best, and, in many instances, led to reductions in space demand. Legal tenants continue to optimize their space needs and are often shrinking their office footprints when leases expire. Finally, the U.S. Government (BXP's largest tenant at 6.4% of leased square feet) and related government contractors are demanding less space due in large part to the impact sequestration, particularly within the Washington D.C. metro area. Development is a key component of BXP's strategy and the company has historically allowed its pipeline of projects under construction to become a large percentage of its portfolio. For example, the total pipeline grew to 20.3% of total assets in 2Q'08, with the unfunded obligation representing 11% of total assets. The total estimated investment of BXP's development pipeline was $1.9 billion at March 31, 2013, which represented 10.1% of total assets with the unfunded portion comprising a materially smaller 3.6% of total assets. Fitch would view cautiously a pipeline that grows close to 20% of total assets or approaching 10% of remaining funding, absent significant pre-leasing. The two-notch differential between BXP's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. Based on Fitch's research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default. The Stable Outlook reflects Fitch's expectations that fixed-charge coverage and leverage will sustain at the current levels over the next 12-24 months. The following factors could result in positive momentum in the ratings and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x for several consecutive quarters (coverage was 2.2x for the TTM ended March 31, 2013); --Fitch's expectation of net debt to recurring operating EBITDA sustaining below 5.5x (leverage was 6.7x as of March 31, 2013).
Conversely, the following factors may result in negative momentum in the ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.0x; --Criteria for Rating U.S. Equity REITs and REOCs, Feb. 26, 2013
Fitch RatingsPrimary AnalystStephen Boyd, CFA, +1 212-908-9153DirectorFitch Ratings, Inc.One State Street PlazaNew York, NY 10004orSecondary AnalystBritton Costa, +1 212-908-0524Associate DirectororCommittee ChairpersonJames Rizzo, +1 212-908-0548Managing DirectororMedia Relations:Sandro Scenga, +1 firstname.lastname@example.org