TEXT-Fitch affirms Boston Properties IDR at 'BBB'
July 9 - Fitch Ratings has affirmed the credit ratings of Boston Properties, Inc. (NYSE: BXP), and its operating partnership, Boston Properties Limited Partnership, as follows: Boston Properties, Inc. --Issuer Default Rating (IDR) at 'BBB'. Boston Properties, L.P. --IDR at 'BBB'; --$750 million unsecured revolving credit facility at 'BBB'; --$4.9 billion senior unsecured notes at 'BBB'; --$1.2 billion exchangeable senior unsecured notes at 'BBB'. The Rating Outlook is Stable. The ratings are supported by a high-quality portfolio of predominantly central business district (CBD), class A office properties, solid leasing profile, manageable lease expirations, strong liquidity, well-staggered debt maturities, a large unencumbered asset pool which provides solid coverage of unsecured debt, and demonstrated access to a range of capital sources. The ratings are balanced by a fairly concentrated operational footprint, sizable exposure to tenants in the financial services and legal community, moderately weak leverage and fixed-charge coverage for the rating category and a propensity to maintain a large development pipeline. The company's CBD properties compete for the highest profile tenants in their regions, and many of these properties serve as flagship locations for the largest tenants. Further, BXP's net operating income (NOI) is skewed toward properties that have been acquired, developed, or redeveloped by the company in recent years. Many are leading properties in their submarkets, and would likely attract significant investor and lender interest, providing contingent liquidity to the company. Additionally, the company's revenue is supported by long-term leases. The company's in-service portfolio was 92.1% leased at March 31, 2012 and fewer than 10% of rents are scheduled to come due on an annual basis through 2015, which is strong relative to the broader office real estate investment trust (REIT) sector. This lease expiration profile ensures that the company is not overly exposed to leasing risk at any given time, absent tenant bankruptcies. The company maintains a strong liquidity position pro forma for the $1 billion 3.85% senior unsecured notes issued subsequent to quarter-end. For the period April 1, 2012 to Dec. 31, 2013, the company's base case liquidity coverage ratio is 1.6 times (x). BXP's liquidity coverage ratio would improve to 1.8x, assuming the company refinances maturing mortgages at 80% of current balances. Additionally, the largest funding requirement is development expenditures that the company has the ability to suspend in a more challenging economic environment. BXP's liquidity coverage ratio would improve to 2.6x absent these expenditures. Fitch calculates the liquidity coverage ratio 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 asset pool to support its unsecured borrowings. As of March 31, 2012, there were 122 assets in the company's unencumbered pool which generated approximately 66% of company NOI. Capitalizing annualized first quarter 2012 cash NOI generated by the unencumbered pool at a stressed capitalization rate of 7% yields unencumbered asset coverage of approximately 2.3x, which is adequate for the 'BBB' IDR. The company also has manageable debt maturities, with fewer than 11% of total debt maturing in any given year through 2016. The recent $1 billion note issuance reinforces BXP's ability to raise capital in size. The company has elevated exposure to financial and legal tenants in its portfolio. As of March 31, 2012, tenants in these segments represented approximately 27% and 26%, respectively of total portfolio square footage, for a combined total of 53%. The financial sector is facing several challenges most notably lower trading volumes and increased regulatory burden which has driven reduced space needs and delayed leasing decisions. Meanwhile, many of the company's legal tenants are large, high-profile firms and employment within these firms has generally declined over the past three years, increasing the risk that they could seek to reduce their space footprints when leases expire. The combination of high capital expenditures, an elevated level of leased space under free-rent periods, and earnings dilution from idle cash balances continues to pressure fixed-charge coverage which was 2.1x for the trailing 12 months (TTM) ended March 31, 2012, compared to 2.1x in 2011, 1.8x in 2010 and 2.2x in 2009. The company's fixed-charge coverage is adequate for the 'BBB' rating and is expected to improve slightly to 2.2x through 2014 as developments are completed. Fitch defines fixed charge coverage as recurring operating EBITDA less the sum of capital expenditures and straight line rents divided by total interest incurred. Similarly, the company's leverage is toward the high end for the 'BBB' rating. The company's net debt to recurring operating EBITDA for the TTM was 6.6x as of March 31, 2012. Leverage was 6.3x in 2011, 7.7x in 2010 and 5.8x in 2009. Fitch projects leverage to decline to 6.3x in 2014. Lastly, the company has previously demonstrated the willingness to allow development to comprise a large portion of the balance sheet. The total pipeline grew to 20.3% of total assets in second-quarter 2008, with remaining equity needed to complete the pipeline representing 11% of total assets. The current pipeline represents 10.8% of total assets, with 4.1% of remaining funding requirements. Fitch would view cautiously a pipeline that grows close to 20% of total assets or approaching 10% of remaining funding to complete the pipeline. That said, Fitch does not forecast a material acceleration in development starts. The Stable Outlook reflects Fitch's expectations that fixed-charge coverage and leverage will remain at similar levels over the next 12 months. The following factors could result in positive momentum in the ratings and/or Outlook: --Fixed-charge coverage sustaining above 2.5x for several consecutive quarters (coverage was 2.1x for the 12 months ended March 31, 2012); --Net debt to recurring operating EBITDA sustaining below 5.5x (leverage was 6.6x as of end March 31, 2012). Conversely, the following factors may result in negative momentum in the ratings and/or Outlook: --Fixed-charge coverage sustaining below 1.7x; --Net debt to recurring operating EBITDA sustaining above 7.0x; --A liquidity shortfall. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012). --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012); --Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 15, 2011; --'Corporate Rating Methodology' (Aug. 12, 2011); --'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011). Applicable Criteria and Related Research: Recovery Ratings and Notching Criteria for Equity REITs Criteria for Rating U.S. Equity REITs and REOCs Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis Corporate Rating Methodology Parent and Subsidiary Rating Linkage
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