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Fitch Affirms Boston Properties' IDR at 'BBB'; Outlook Stable

^{Published on 2010-07-14 13:45:32 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the ratings on Boston Properties Inc. (NYSE: BXP) and Boston Properties L.P. (together BXP or the company) as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Unsecured revolving credit facility at 'BBB';

--Senior unsecured notes at 'BBB';

--Exchangeable senior unsecured notes at 'BBB';

--Preferred Stock (indicative) at 'BB+'.

The Rating Outlook is Stable.

The rating affirmation is supported by a strong management track record, a high quality portfolio of assets, manageable lease expirations, a good liquidity position, sizable pool of unencumbered assets, reasonable leverage, and good access to a range of capital sources. The ratings are balanced by challenging market fundamentals, a projected decline in fixed charge coverage in 2010, and sizable exposure to tenants in the legal community. The company also maintains a fairly concentrated operational footprint with some asset concentration, which provides some additional inherent risk.

The company's CBD properties compete for the highest profile tenants in the regions in which they operate and many of these properties serve as flagship locations for the largest tenants. The occupancy rates on high quality properties tend to remain above prevailing market occupancies throughout cycles, as some tenants look to take advantage of relatively weak market conditions to improve the quality of their office space. BXP's in-service portfolio was 92.9% leased at March 31, 2010.

Additionally, the company's revenue is supported by long-term leases in place. Over the next several years, between 5% and 8% of rents are scheduled to expire annually, ensuring that the company is not overly exposed to leasing risk at any given time, absent tenant bankruptcies.

The company maintains a good liquidity position. Pro forma for the company's $700 million senior unsecured notes offering in April 2010 and assuming the refinancing of 80% of pro rata JV secured debt, for the period April 1, 2010 through Dec. 31, 2011, the company's sources of liquidity (unrestricted cash, availability under the company's credit facilities and expected retained cash flows from operating activities after dividends) divided by uses of liquidity (debt maturities, recurring capital expenditures and development costs) result in a liquidity coverage ratio of 1.4 times (x), assuming BXP's unsecured revolving credit facility with a final maturity date in August 2011 is reduced by one-third.

The company maintains a sizable unencumbered asset pool that includes properties from across the portfolio to support its unsecured borrowings. As of March 31, 2010, there were 100 assets in the company's unencumbered pool. Capitalizing 2010 annualized cash NOI generated by the unencumbered pool at a stressed capitalization rate of 8% yielded unencumbered asset coverage of approximately 1.7x at March 31, 2010. On a net unsecured debt basis, which subtracts the company's excess cash from its unsecured debt, the ratio improves to 2.3x.

The company's leverage is in a range that is reasonable for the ratings. Using trailing 12 months recurring operating EBITDA on a GAAP basis, Fitch calculated the company's net debt to recurring operating EBITDA to be 5.9x. However, Fitch projects that this ratio will increase to between 6.0x and 7.0x in 2011 as recurring operating EBITDA declines over the next 18 months. Fitch anticipates that this ratio will decline to closer to 6.0x in 2012 as newly developed space is placed in service.

The company has continued to demonstrate its ability to raise capital in size. Since June 2008, BXP has raised approximately $5.5 billion of debt and equity capital for its own account and on behalf of its joint ventures, demonstrating strong interest from both lenders and equity investors. While the company has elevated unsecured debt maturities in 2013 when 22.1% of its pro rata share of debt matures, the maturity schedule is manageable.

While showing some improvement in late 2009 and the first half of 2010, office market fundamentals generally remain fairly challenging and these conditions have pressured the terms of both new and renewal leases. This is illustrated in the level of free rent as well as tenant improvement and leasing commission costs that the company is providing to tenants. Fitch projects that BXP's 2010 capital expenditures, which are disproportionately driven by leasing-related costs and are affected by the length of the lease term, to roughly double as a percentage of recurring operating EBITDA over 2009 levels.

The combination of high capital expenditures, a sizable level of leased space remaining under free rent periods in 2010, and increased interest expense from newly issued debt is expected to pressure Fitch-defined fixed charge coverage (defined as recurring EBITDA less the sum of capital expenditures and straight line rents divided by total interest incurred) ratios in 2010. Fitch projects that this ratio will be approximately 1.6x in 2010, before rising to 1.9x in 2011 and 2.2x in 2012 as free rent, capital expenditures, and cash interest expense decline, while newly developed space is added to the portfolio. Continued pressure on this metric beyond 2010 could signal potential negative rating momentum.

The company also has a fairly high proportion of legal tenants in its portfolio. As of March 31, 2010, tenants in this segment represented approximately 27% of total portfolio square footage. While many of the company's largest tenants are high profile firms, employment within these firms has generally declined over the past two years, increasing the risk that they could seek to reduce their space footprints when leases expire.

Notably, the company is also exposed to asset concentration risk. The company generates over 40% of its pro rata cash NOI from eight assets in New York, including four wholly owned assets and four assets that are held in joint ventures in which the company holds a 60% interest. These large assets expose the company to performance issues at individual assets.

The following factors may have a positive impact on the ratings and/or Outlook:

--Fitch-defined fixed charge coverage sustaining above 2.5x (coverage was 2.1x and 1.2x for the trailing 12 months and quarter ended March 31, 2010, respectively);

--Net debt to recurring operating EBITDA sustaining below 5.3x (leverage was 5.9x as of ended March 31, 2010);

--A meaningful increase in the size and asset diversity of the portfolio.

The following factors may have a negative impact on the ratings and/or Outlook:

--Fitch-defined fixed charge coverage sustaining below 1.7x;

--Net debt to recurring operating EBITDA sustaining above 7.0x;

--A liquidity shortfall.

These rating actions reflect the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--'Criteria for Rating U.S. Equity REITs and REOCs' (April 16, 2010)

--'Equity Credit for Hybrids & Other Capital Securities- Amended' (Dec. 29, 2009);

--'Rating Hybrid Securities' (Dec. 29, 2009);

--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Evaluating Corporate Governance' (Dec. 12, 2007);

--'Parent and Subsidiary Rating Linkage' (June 19, 2007).

Boston Properties is a $12.3 billion (total book assets) equity REIT headquartered in Boston, MA that acquires, develops, and manages high quality office space in five markets. As of March 31, 2010, the company owned or had interests in a portfolio of 143 properties, including 115 office properties, 19 office/technical properties, one hotel, three retail properties, and five properties under development totaling 50.4 million rentable square feet. The company also owns 367 acres and maintains options on 143 acres of undeveloped land for future development.

Additional information is available at '[ www.fitchratings.com ]'.

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