April 28, 2017 / 6:00 PM / 2 years ago

Fitch Rates Boston Properties' Delayed Draw Term Loan 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 28 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to Boston Properties L.P.'s $500 million senior unsecured delayed draw term loan (DDTL) facility. The company amended its unsecured credit facility to add the DDTL facility, increased the capacity of its revolving facility to $1.5 billion from $1 billion and extended the maturity to April 24, 2022. The term loan ranks pari passu with existing unsecured debt. A full list of Fitch's ratings for Boston Properties L.P. and Boston Properties, Inc. (NYSE: BXP) follows at the end of this release. The incremental borrowing capacity and $2.3 billion GM Building refinancing address near-term liquidity pressures. Pro forma for the GM Building refinancing and credit facility expansion, Fitch estimates the company's base case liquidity coverage ratio for the period Jan. 1, 2017 to Dec. 31, 2018 is 1.3x. 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). KEY RATING DRIVERS BXP's above-average portfolio asset quality of Class A office properties in gateway markets, experienced and cycle tested management and excellent capital access are key factors underpinning Fitch's 'BBB+' IDR. The ratings also reflect BXP's track record of conservative liquidity management and a large portfolio of high-quality unencumbered assets. Several factors balance these positive ratings elements, including the capital-intensive nature of office properties, market and tenant industry concentration risk stemming from BXP's targeted geographic portfolio strategy and execution and liquidity risks associated with the company's development platform. The company has also grown its exposure to joint venture, which generally reduce operating flexibility and financial transparency for REITs. Fitch expects BXP's portfolio operating results and financial policies to conform with the agency's through-the-cycle expectations over the next 12 to 24 months, underpinning the Stable Outlook. APPROPRIATE LEVERAGE AND COVERAGE Fitch expects BXP's leverage to be in the mid 6x to 7x range through 2020, which is adequate for a 'BBB+' rated office REIT with BXP's above-average portfolio asset quality and capital access. The expansion of BXP's non-income producing development pipeline may cause leverage to edge higher in the near term. Successful execution and stabilization of developments should help reduce leverage. Fitch believes the company is unlikely to issue equity to de-lever. Opportunistic asset sales are possible. BXP's leverage for the trailing-12-months (TTM) was 6.1x as of Dec. 31, 2016. Fitch expects BXP's fixed-charge coverage will improve to the mid-3.0x range in 2020, aided by low-single-digit cash same store net operating income (SSNOI) growth, incremental NOI from new developments and lower building capex and second generation leasing costs during the forecast out years. BXP's fixed-charge coverage was 3.3x for the TTM ended Dec. 31, 2016. EXCELLENT PORTFOLIO QUALITY 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 are often leading properties in their submarkets that compete for the highest-profile tenants, and have historically attracted significant investor and lender interest. The latter enhances BXP's contingent liquidity profile, including during challenging property and capital market environments. EXCELLENT CONTINGENT LIQUIDITY BXP holds a large, high-quality pool of unencumbered assets with well above-average financeability and saleability characteristics. As of Dec. 31, 2016, BXP owned or had interests in 152 unencumbered assets that generate annualized cash NOI of approximately $1.3 billion (84.4% of consolidated NOI). The company's unencumbered pool includes a number of trophy assets such as 399 Park Avenue and Times Square Tower in New York, Embarcadero Center in San Francisco, the Prudential Center complex in Boston and the Capital Gallery complex in Washington, D.C., among others. The company's unencumbered assets cover unsecured debt 2.7x based on a direct capitalization approach of unencumbered NOI using a stressed 7.5% capitalization rate. Fitch views this level of coverage as strong for the rating. BXP has maintained UA/UD coverage between 2.6x to 4.0x since 2009. FINANCING ACTIVITY ADDRESSES LIQUIDITY Fitch's ratings for BXP reflect the company' track record of conservative liquidity management, which has included maintaining large cash balances and limited borrowings under its $1.5 billion revolving credit facility and maintaining a well-balanced unsecured debt maturity ladder. BXP strengthened its liquidity position with the GM Building refinancing and incremental capacity under its credit facility. The company's debt maturity schedule is reasonably well staggered, with no significant maturities until November 2018, when $850 million of 3.7% senior notes become due. BXP paid out approximately 85% of its adjusted funds from operations (AFFO) as dividends to common shareholders during 4Q16. The company has historically kept its pay-out ratio below 75%, which Fitch views as a credit positive. BXP's policy is to dividends of at least 100% of taxable net income to avoid paying federal tax and typically retains approximately $150 million to $200 million of cash flow annually. DEVELOPMENT RISK The total estimated investment of BXP's development pipeline was $2.3 billion at Dec. 31, 2016, which represented 9.8% of total assets, with the unfunded portion comprising a smaller 4.3% 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. 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 on both a relative and absolute basis. For example, the pipeline grew to 20.3% of total undepreciated book assets in 2Q08, with the unfunded portion representing 11% of total assets. CONCENTRATION RISK BXP's portfolio is geographically concentrated in Boston, New York, San Francisco/Silicon Valley and Washington D.C. metros. These markets generally benefit from robust local economies, favourable demographics and supply barriers. However, Fitch recognizes the potential for higher cash flow volatility through the cycle due to the company's market concentrations, including the related exposure to business trends for key tenant industry sectors in each market. For example, the company has a high proportion of financial, legal and government-related tenants in its portfolio. Tenants in these segments comprised approximately 26%, 23% and 4% of gross rent, respectively, for a combined total of 53% as of Dec. 31, 2016. Fitch's key assumptions within the rating case for BXP include: --GAAP SSNOI grows at a low single digit rate per annum through 2020; --BXP emphasizes development over acquisitions due to better expected risk-adjusted returns; --BXP successfully executes and stabilizes its $2.3 billion development portfolio; --The company funds its development program with incremental borrowings, rather than asset sales or equity issuance; --Leverage increases towards the midpoint of the company's 6.5x to 7.5x financial policy and returns to around 6.0x as developments are stabilized. RATING SENSITIVITIES Although Fitch does not expect positive rating momentum, the following factors could result in an upgrade to BXP's ratings and/or Outlook: --Fitch's expectation of leverage sustaining below 6.0x for several quarters (leverage was 6.1x for the TTM ended Dec. 31, 2016); --Fitch's expectation of fixed-charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 3.3x for the TTM ended Dec. 31, 2016). 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; --Fitch's expectation of fixed-charge coverage sustaining below 2.0x; --A liquidity coverage ratio sustaining below 1.0x. FULL LIST OF CURRENT RATINGS Fitch currently rates BXP and Boston Properties, L.P. as follows: Boston Properties, Inc. --Long-Term IDR 'BBB+'; --Preferred stock 'BBB-'. Boston Properties, L.P. --Long-term IDR 'BBB+'; --Unsecured revolving credit facility 'BBB+'; --Senior unsecured notes 'BBB+'. Fitch has assigned the following rating: Boston Properties, L.P. --Unsecured term loan 'BBB+'. The Rating Outlook is Stable. Contact: Primary Analyst Stephen Boyd, CFA Senior Director +1-212-908-9153 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Ronald Nirenberg Director +1-212-612-7747 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 Summary of Financial Statement Adjustments: Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected operating EBITDA is adjusted to add back non-cash stock based compensation; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $100 million of cash for working capital purposes which is otherwise unavailable to repay debt. Date of Relevant Rating Committee: April 14, 2017 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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