Fitch Rates Boston Properties' Series B Preferred Stock 'BB+'; Outlook Stable

Tue Mar 19, 2013 1:55pm EDT

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(The following statement was released by the rating agency) NEW YORK, March 19 (Fitch) Fitch Ratings has assigned a credit rating of 'BB+' to the $200 million 5.25% series B cumulative redeemable preferred stock issued by Boston Properties, Inc. (NYSE: BXP). Net proceeds from the offering of $193.7 million, before the exercise of the over-allotment option, will be used for general corporate purposes including investment opportunities and debt reduction. The last time the company had preferred stock outstanding was in 2002. Fitch currently rates the company as follows: Boston Properties, Inc. --Issuer Default Rating (IDR) 'BBB'; --$200 million preferred stock 'BB+'. Boston Properties, L.P. --IDR 'BBB'; --$750 million unsecured revolving credit facility 'BBB'; --$4.7 billion senior unsecured notes 'BBB'; --$1.2 billion exchangeable senior unsecured notes 'BBB'. The Rating Outlook is Stable. KEY RATING DRIVERS The 'BB+' rating of the preferred stock (a two-notch differential from the Issuer Default 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 ratings are supported by a high-quality portfolio of predominantly central business district (CBD), class A office properties, appropriate leverage and coverage for the 'BBB' rating level, solid leasing profile, manageable lease expirations, strong liquidity, manageable 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 and legal community, 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. 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. NEW CEO On March 11, 2013, BXP announced that Owen Thomas will succeed Mortimer Zuckerman as CEO and join the Board of Directors, effective April 2, 2013. Mr. Zuckerman will remain Executive Chairman of the Board. Mr. Thomas has an extensive background in senior executive and real estate roles, currently serving as Chairman of the Board of Lehman Brothers Holding, Inc. (the successor company to Lehman Brothers), and previously in various roles at Morgan Stanley including serving as Head of Morgan Stanley Real Estate and as CEO of Morgan Stanley Asia Ltd. Fitch did not anticipate that the company would fill the CEO role from outside the firm; however, it makes sense to deepen an already strong bench given management changes over the past few years. Additionally, Fitch views the separation of the CEO and Chairman roles favorably from a corporate governance perspective. APPROPRIATE LEVERAGE AND COVERAGE BXP's net debt to recurring operating EBITDA for the trailing 12 months (TTM) was 6.8x as of Dec. 31, 2012. Leverage was 6.3x in 2011, 7.7x in 2010 and 5.8x in 2009. Fixed-charge coverage was 2.1x for the TTM ended Dec. 31, 2012, compared to 2.1x in 2011, 1.8x in 2010 and 2.2x in 2009. 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. Long-Term Leases The company's revenue is supported by long-term leases. The company's in-service portfolio was 91.4% leased at Dec. 31, 2012 and fewer than 10% of rents are scheduled to come due on an annual basis through 2016, which is strong relative to the broader office REIT sector. This lease expiration profile ensures that the company is not overly exposed to leasing risk at any given time, absent tenant bankruptcies. ADEQUATE LIQUIDITY The company maintains an adequate liquidity position pro forma the $200 million preferred issuance. For the period Jan. 1, 2013 to Dec. 31, 2014, the company's base case liquidity coverage ratio is 1.0x. BXP's liquidity coverage would improve to 1.2x assuming the company refinances maturing mortgages at 80% of current balances. Additionally, the largest funding requirement is development expenditure, which it can suspend in a more challenging economic environment. BXP's liquidity coverage ratio would improve to 1.4x 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 asset pool to support its unsecured borrowings. As of Dec. 31, 2012, there were 123 assets in the pool which generated approximately 64% of company NOI. Capitalizing annualized fourth quarter 2012 (4Q'12) 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. LADDERED DEBT MATURITIES The company also has manageable debt maturities, with fewer than 9% of total debt maturing in any given year through 2016. However, there are significant mortgage maturities in 2017, totaling $2.5 billion or approximately 25% of total pro rata debt. While significant in magnitude, Fitch views these as manageable given the quality of the properties securing these mortgages (primarily 599 Lexington and the GM Building in Manhattan, and the John Hancock Tower in Boston). Further, Fitch anticipates that the company will refinance a substantial portion of the total prior to 2017. SIGNIFICANT EXPOSURE TO FINANCIAL AND LEGAL TENANTS The company has elevated exposure to financial and legal tenants in its portfolio. As of Dec. 31, 2012, tenants in these segments represented approximately 28% and 26% respectively of gross rent, for a combined total of 54%. 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 BXP's legal tenants are working towards optimizing their space needs and could seek to reduce their office footprints when leases expire. DEVELOPMENT RISK Finally, the company has a propensity to grow the development pipeline to become a large portion of the balance sheet. The total pipeline grew to 20.3% of total assets in 2Q'08, with remaining equity needed to complete the pipeline representing 11% of total assets. The current pipeline represents 9.6% of total assets, with 3.3% of remaining funding. Fitch would view cautiously a pipeline that grows close to 20% of total assets or approaching 10% of remaining funding, absent significant pre-leasing. RATING OUTLOOK The Stable Outlook reflects Fitch's expectations that fixed-charge coverage and leverage will remain at similar levels over the next 12-24 months. RATING SENSITIVITIES 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 2.1x in 2012); --Fitch's expectation of net debt to recurring operating EBITDA sustaining below 5.5x (leverage was 6.8x as of Dec 31, 2012). Conversely, the following factors may result in negative momentum in the ratings and/or Outlook: --Fitch's expectation of fixed-charge coverage sustaining below 1.7x; --Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.0x; --A liquidity shortfall. Contact: Primary Analyst George Hoglund, CFA Associate Director +1-212-908-9149 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Britton Costa Associate Director +1-212-908-0524 Committee Chairperson James Rizzo Managing Director +1-212-908-0548 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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: --Criteria for Rating U.S. Equity REITs and REOCs, Feb. 26, 2013 --Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, Dec. 13, 2012 --Recovery Rating and Notching Criteria for REITs, Nov. 12, 2012 --Corporate Rating Methodology, Aug. 8, 2012 --Parent and Subsidiary Rating Linkage, Aug. 8, 2012 Applicable Criteria and Related Research Parent and Subsidiary Rating Linkage here Corporate Rating Methodology here Recovery Ratings and Notching Criteria for Equity REITs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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