SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________ to _________ Commission file number 1-13087 BOSTON PROPERTIES, INC. (Exact name of Registrant as Specified in its Charter) Delaware 04-2473675 (State or Other Jurisdiction (IRS Employer Id. Number) of Incorporation or Organization) 800 Boylston Street Boston, Massachusetts 02199 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 236-3300 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, Par Value $.01 New York Stock Exchange Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of March 14, 2001, the aggregate market value of the 85,291,023 shares of common stock held by non-affiliates of the Registrant was $3,389,465,254 based upon the closing price of $39.74 on the New York Stock Exchange composite tape on such date. (For this computation, the Registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.) As of March 14, 2001, there were 89,701,122 shares of Common Stock outstanding. Certain information contained in the Registrant's Proxy Statement relating to its Annual Meeting of Stockholders to be held May 2, 2001 are incorporated by reference in Part III, Items 10, 11, 12 and 13.
TABLE OF CONTENTS ITEM NO. DESCRIPTION PAGE NO. PART I 1. BUSINESS ......................................................... 1 2. PROPERTIES ....................................................... 26 3. LEGAL PROCEEDINGS ................................................ 28 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............................................. 29 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............................................. 29 6. SELECTED FINANCIAL DATA .......................................... 30 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 32 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................................ 46 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................................. 46 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................. 46 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................................... 47 11. EXECUTIVE COMPENSATION ........................................... 47 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................................... 47 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 47 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ............................................. 48 SIGNATURES ....................................................... 53
PART I Item 1. Business General As used herein, the terms "we," "us," "our" or the "Company" refer to Boston Properties, Inc., a Delaware corporation organized in 1997, individually or together with its subsidiaries, including Boston Properties Limited Partnership, a Delaware limited partnership, and our predecessors. We are a fully integrated self-administered and self-managed real estate investment trust or "REIT" and one of the largest owners and developers of office properties in the United States. Our properties are concentrated in four core markets - Boston, Washington, D.C., midtown Manhattan and San Francisco. We conduct substantially all our business through Boston Properties Limited Partnership. At December 31, 2000 we owned 145 properties, totaling 37.9 million net rentable square feet. Our properties consisted of 134 office properties, comprised of 103 Class A office buildings and 31 properties that support both office and technical uses, including 15 properties under construction, eight industrial properties and three hotels. We consider Class A office buildings to be centrally located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings. We have a $605 million unsecured revolving line of credit with Fleet National Bank, as agent, which expires in March 2003. As of March 14, 2001, zero was outstanding under our unsecured revolving line of credit. You should refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional information regarding our unsecured revolving line of credit and our other indebtedness. We are a full service real estate company, with substantial in-house expertise and resources in acquisitions, development, financing, construction management, property management, marketing, leasing, accounting, tax and legal services. As of December 31, 2000, we had over 600 employees. Our 25 senior officers, together with Mr. Mortimer Zuckerman, Chairman of our board of directors, have an average of 24 years experience in the real estate industry and an average of 14 years tenure with us. Our principal executive office is located at 800 Boylston Street, Boston, Massachusetts 02199 and its telephone number is (617) 236-3300. In addition, we have regional offices at 401 9th Street, NW, Washington, D.C. 20004; 599 Lexington Avenue, New York, New York 10022; Four Embarcadero Center, San Francisco, California 94111; and 502 Carnegie Center, Princeton, New Jersey 08540. Boston Properties Limited Partnership Boston Properties Limited Partnership, a Delaware limited partnership, is the entity through which we conduct substantially all of our business and own (either directly or through subsidiaries) substantially all of our assets. We are the sole general partner and, as of March 14, 1
2001, the owner of approximately 74.3% of the economic interests in Boston Properties Limited Partnership. This structure is commonly referred to as an umbrella partnership REIT or "UPREIT". Our general and limited partnership interests in Boston Properties Limited Partnership entitle us to share in cash distributions from, and in the profits and losses of, Boston Properties Limited Partnership in proportion to our percentage interest therein and entitle us to vote on all matters requiring a vote of the limited partners. The other partners of Boston Properties Limited Partnership are persons who contributed their direct or indirect interests in certain properties to Boston Properties Limited Partnership in exchange for common units of limited partnership interest in Boston Properties Limited Partnership or preferred units of limited partnership interest in Boston Properties Limited Partnership. Pursuant to the limited partnership agreement of Boston Properties Limited Partnership, as amended, unitholders may tender their common units of Boston Properties Limited Partnership for cash equal to the value of an equivalent number of shares of our common stock. In lieu of delivering cash, however, we may, at our option, choose to acquire any units so tendered by issuing common stock in exchange for the units. Our common stock will be exchanged for units on a one-for-one basis. This one-for- one exchange ratio may be adjusted to prevent dilution. We currently anticipate that we will elect to issue our common stock in connection with each such presentation for redemption rather than having Boston Properties Limited Partnership pay cash. With each such exchange or redemption, our percentage ownership in Boston Properties Limited Partnership will increase. In addition, whenever we issue shares of our common stock other than to acquire common units of Boston Properties Limited Partnership, we must contribute any net proceeds we receive to Boston Properties Limited Partnership and Boston Properties Limited Partnership must issue to us an equivalent number of common units of Boston Properties Limited Partnership. Preferred units of Boston Properties Limited Partnership have the rights, preferences and other privileges (including the right to convert into common units of Boston Properties Limited Partnership) as are set forth in amendments to the limited partnership agreement of Boston Properties Limited Partnership. Boston Properties Limited Partnership currently has four series of its preferred units (excluding preferred units held by Boston Properties, Inc.). The Series One preferred units have an aggregate liquidation preference of approximately $85 million and bear a preferred distribution at a rate of 7.25% per annum, payable quarterly. Series One units are convertible into common units at the rate of $38.25 per common unit at the holder's election at any time. We also have the right to convert into common units of Boston Properties Limited Partnership all or part of the Series One units on or after June 3, 2003, if our common stock at the time of our election is trading at a price of at least $42.08 per share. The Series Two and Series Three preferred units, which together have an aggregate liquidation preference of approximately $311 million, have, between each other, similar economic terms. On and after December 31, 2002, the Series Two and Series Three units will be convertible, at the holder's election, into common units at a conversion price of $38.10 per common unit. Distributions on the Series Two and Series Three units are payable quarterly and generally accrue at rates of: 5.0% per annum through March 31, 1999; 5.5% through December 31, 1999; 5.625% through December 2000; 6.0% through December 31, 2001; 6.5% through December 31, 2002; 7.0% until May 12, 2009; and 6.0% thereafter. The terms of the Series Two and Series Three units provide that they may be redeemed for cash in six annual tranches, 2
beginning on May 12, 2009, at the election of us or the holders. We also have the right to convert into common units of Boston Properties Limited Partnership any Series Two and Series Three units that are not redeemed when they are entitled to redemption. The Series Z preferred units have an aggregate liquidation preference of the greater of the value of our common stock or $37.25 per unit. The Series Z preferred units are not entitled to receive any distributions until after August 11, 2001. From August 11, 2001 until February 11, 2002, each Series Z preferred unit entitles its holder to receive one-half of any distributions paid on a common unit. After February 11, 2002, to the extent that any Series Z preferred units are still outstanding, each Series Z preferred unit entitles its holder to receive an amount equal to 100% of any distributions paid on a common unit. The Series Z preferred units will automatically convert into common units on February 11, 2002 or, if later, the date on which we register with the Securities and Exchange Commission the shares of our common stock issuable in exchange for the common units into which the Series Z units are convertible. Real Estate Acquisitions during 2000 On January 12, 2000, we acquired our joint venture partner's 75% interest in One and Two Reston Overlook, an unconsolidated joint venture, for cash of approximately $15.2 million and the assumption of approximately $69.0 million in debt. On March 1, 2000, we acquired three Class A office buildings totaling approximately 408,163 square feet at Carnegie Center in Princeton, New Jersey, under the terms of the original Carnegie Center Portfolio acquisition. The properties were acquired from a related party for approximately $66.5 million, which was funded through the assumption of debt of approximately $49.0 million at a rate of 7.39% and the issuance of 577,817 common units of partnership interest in Boston Properties Limited Partnership valued at approximately $17.5 million. The acquisition was approved by a vote of our independent directors. On August 22, 2000, we acquired the remaining 50% interest in the development rights at the Prudential Center in Boston, Massachusetts for approximately $18.2 million, which was funded through the issuance of 439,059 shares of our common stock. On December 1, 2000, we acquired the leasehold interest and ground rent credits at the site of the future Times Square Tower in midtown Manhattan, for approximately $165.1 million in cash. This development will consist of a 47- floor, 1.2 million square foot office tower. Developments Placed in Service during 2000 In the second quarter of 2000, the Orbital Sciences project was placed-in-service. This project consists of two Class A office buildings totaling approximately 174,832 square feet and is located in Dulles, VA. We developed this project, in which we have a 100% interest, at a total cost to us of approximately $30.5 million. In the fourth quarter of 2000, the 140 Kendrick Street project was placed-in-service. This 3
project consists of three Class A office buildings totaling approximately 381,000 square feet and is located in Needham, Massachusetts. We developed the project, in which we have a 25% interest, at a total cost to us of approximately $18.8 million. In the fourth quarter of 2000, the Market Square North project was placed-in-service. This project consists of a Class A office building totaling approximately 401,255 square feet and is located in Washington, D.C. We developed the project, in which we have a 50% interest, at a total cost to us of approximately $59.2 million. New Joint Venture with Financial Partner during 2000 On May 12, 2000, we entered into a joint venture with the New York State Common Retirement Fund. The initial term of the joint venture agreement runs for three years or until the New York State Common Retirement Fund's equity commitment of $270 million is met, although it has the right to increase its financial commitment prior to the end of the third year. During the term of the joint venture agreement, New York State Common Retirement Fund has the right to participate in our acquisition opportunities and development projects that we pursue with an institutional partner. We will manage the development and operation of all joint venture properties. On May 12, 2000, pursuant to the joint venture agreement, the New York State Common Retirement Fund acquired partial interests in two properties that we previously owned in their entirety. We retained a 51% interest in the first property, Metropolitan Square, a 582,194-square foot office property in Washington, D.C. and a 25% interest in the second property, 140 Kendrick Street, a 381,000-square foot build-to-suit development property in Needham, Massachusetts. The interests in the properties were acquired for cash of approximately $46.7 million and the assumption of debt of approximately $88.2 million and resulted in a gain to us of $0.4 million. On September 13, 2000, we acquired a 35% interest in 265 Franklin Street, a 325,699 square foot office property in Boston, Massachusetts through our joint venture with the New York State Common Retirement Fund, which acquired 65% of this property. Our interest in this property was acquired with cash and new debt financing totaling approximately $34.3 million. On December 8, 2000, we agreed with the New York State Common Retirement Fund to develop 901 New York Avenue, a Class A office building in Washington, D.C. totaling 550,000 square feet. We have a 25% interest and manage the development of the property, while the New York State Common Retirement Fund owns a 75% interest. Equity Financing Activities during 2000 On August 22, 2000, we issued 439,059 shares of common stock, valued at approximately $18.2 million, in connection with the acquisition of the remaining 50% interest in the development rights at the Prudential Center in Boston, Massachusetts. 4
On October 31, 2000, we completed a public offering of 17,110,000 shares of our common stock at a price per share of $39.0625 (including 2,110,000 shares issued as a result of the exercise of an overallotment option by the underwriters) resulting in net proceeds to us of approximately $633.8 million. Business and Growth Strategies Business Strategy Our primary business objective is to maximize return on investment so as to provide our stockholders with the greatest possible total return. Our strategy to achieve this objective is: o to concentrate on a few carefully selected markets and to be one of, if not the leading, owner and developer in each of those markets. We select markets and submarkets where tenants have demonstrated a preference for high quality office buildings and other facilities. o to emphasize markets and submarkets within those markets where there are barriers to the creation of new supply and where skill, financial strength and diligence are required to successfully develop and manage high quality office, research and development and/or industrial space. o to take on complex, technically challenging projects, leveraging the skills of our management team to successfully develop, acquire or reposition properties which other organizations may not have the capacity or resources to pursue. o to concentrate on high quality, state-of-the-art real estate designed to meet the demands of today's knowledge-based tenants and to manage those facilities so as to become the landlord of choice for both existing and prospective clients. o to opportunistically acquire assets which increase our penetration in the markets in which we have chosen to concentrate and which exhibit an opportunity to improve returns through repositioning, changes in management focus and re-leasing as existing leases terminate. 5
Growth Strategies External Growth We believe that we are well positioned to realize significant growth through external asset development and acquisition. We believe that our development experience and our organizational depth position us to continue to develop a range of property types, from single-story suburban office properties to high-rise urban developments, within budget and on schedule. Other factors that contribute to our competitive position include: o the significant increase in demand for new, high quality office space in our core markets; o our control of sites (including sites under contract or option to acquire) in our core markets that will support approximately 10.6 million square feet of new office development; o our reputation gained through the stability and strength of our existing portfolio of properties; o our relationships with leading national corporations and public institutions seeking new facilities and development services; o our relationships with nationally recognized financial institutions that provide capital to the real estate industry; and o the substantial amount of commercial real estate owned by domestic and foreign institutions, private investors, and corporations who are seeking to sell these assets in our market areas. We have targeted three areas of development and acquisition as significant opportunities to execute our external growth strategy: o Pursue development in selected submarkets. We believe that development of well-positioned office buildings is and will continue to be justified in many of our submarkets. We believe in acquiring land in response to market conditions that allow for its development in the relative near term. While we purposely concentrate in markets with high barriers to entry, we have demonstrated over our 30 year history an ability to make carefully timed land acquisitions in submarkets where we can become one of the market leaders in establishing rent and other business terms. We believe that there are opportunities in our existing and other markets for a well capitalized developer to acquire land with development potential at key locations. In the past, we have been particularly successful at acquiring sites or options to purchase sites that need governmental approvals. Because of our development expertise, knowledge of the governmental approval process and reputation for quality development with local government approval regulatory bodies, we generally have been able to secure the permits necessary to allow development, and profit from the 6
resulting increase in land value. We seek out complex projects where we can add value through the efforts of our experienced and skilled management team leading to significantly enhanced returns on investment. o Acquire assets and portfolios of assets from institutions or individuals. We believe that due to our size, management strength and reputation, we are in an advantageous position to acquire portfolios of assets or individual properties from institutions or individuals. We may acquire properties for cash, but we believe that we are particularly well positioned to appeal to sellers wishing to convert on a tax-deferred basis their ownership of property to the ownership of equity in a diversified real estate operating company that offers liquidity through access to the public equity markets. In addition, we may pursue mergers with and acquisitions of compatible real estate firms. Our ability to offer units in Boston Properties Limited Partnership to sellers who would otherwise recognize a gain upon a sale of assets for cash or our common stock may facilitate this type of transaction on a tax-efficient basis. o Acquire existing underperforming assets and portfolios of assets. We continue to actively pursue opportunities to acquire existing buildings that, while currently generating income, are either underperforming the market due to poor management or are currently leased at below market rents with anticipated roll-over of space. These opportunities may include the acquisition of entire portfolios of properties. We believe that because of our in-depth market knowledge and development experience in each of our markets, our national reputation with brokers, financial institutions and others involved in the real estate market and our access to competitively-priced capital, we are well-positioned to identify and acquire existing, underperforming properties for competitive prices and to add significant additional value to such properties through our effective marketing strategies and responsive property management program. Internal Growth We believe that significant opportunities exist to increase cash flow from our existing properties because they are of high quality and in desirable locations in markets that, in general, are experiencing rising rents, low vacancy rates and increasing demand for office and industrial space. In addition, our properties are in markets where, in general, supply is limited by the lack of available sites and the difficulty of receiving the necessary approvals for development on vacant land. Our strategy for maximizing the benefits from these opportunities is two-fold: (1) to provide high quality property management services using our own employees in order to encourage tenants to renew, expand and relocate in our properties, and (2) to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house services for marketing, lease negotiation, and design and construction of tenant improvements. In addition, we believe that our hotel properties will add to our internal growth because of their desirable locations in the downtown Boston and East Cambridge submarkets, which are experiencing high occupancy rates and continued growth in room rates. The effective management of Marriott International, Inc., has resulted in high occupancy, guest satisfaction and growth in room rates 7
while limiting increases in operating costs. We expect to continue our internal growth as a result of our ability to: o Cultivate existing submarkets. In choosing locations for our properties, we have paid particular attention to transportation and commuting patterns, physical environment, adjacency to established business centers, proximity to sources of business growth and other local factors. Many of these submarkets are experiencing increasing rents and, as a result, current market rates often exceed the rents being paid by our tenants. Based on leases in place at December 31, 2000, leases with respect to 7.27% of our office properties and 13.95% of our industrial properties will expire in calendar year 2001. We believe that leases expiring over the next three years in these submarkets will be renewed, or space re-let, at higher rents than previously in effect. o Directly manage properties to maximize the potential for tenant retention. We provide property management services ourselves, rather than contracting for this service, to maintain awareness of and responsiveness to tenant needs. We and our properties also benefit from cost efficiencies produced by an experienced work force attentive to preventive maintenance and energy management and from our continuing programs to assure that our property management personnel at all levels remain aware of their important role in tenant relations. Our philosophy has not been to invest significant capital in technology, but to form alliances to provide better tenant service and realize potential incremental revenues with little additional capital investment. o Replace tenants quickly at best available market terms and lowest possible transaction costs. We believe that we have a competitive advantage in attracting new tenants and achieving rental rates at the higher end of our markets as a result of our well located, well designed and well maintained properties, our reputation for high quality building services and responsiveness to tenants, and our ability to offer expansion and relocation alternatives within our submarkets. The Hotel Properties To assist in maintaining our status as a REIT, we lease our three hotel properties to ZL Hotel LLC pursuant to a lease that entitles us to a percentage of the gross receipts of our hotel properties. Mr. Mortimer B. Zuckerman, the Chairman of our board of directors, and Edward H. Linde, our President and Chief Executive Officer, are the sole member-managers of, and have a 9.8% economic interest in, ZL Hotel LLC; two unaffiliated public charities own the remaining 90.2% economic interest. Marriott International, Inc. manages our hotel properties under the Marriott(R) name pursuant to a management agreement with ZL Hotel LLC. Under the REIT requirements, revenues from a hotel are not considered to be rental income for purposes of certain income tests, which a REIT must meet. Accordingly, in order to maintain our qualification as a REIT, we have entered into the participating leases with ZL Hotel LLC described above to provide revenue that qualifies as rental income under the REIT requirements. 8
Competition We compete in the leasing of office and industrial space with a considerable number of other real estate companies, some of which may have greater marketing and financial resources. In addition, our hotel properties compete for guests with other hotels, some of which may have greater marketing and financial resources than are available to us and Marriott International, Inc. Seasonality Our hotel properties traditionally have experienced significant seasonality in their operating income, with weighted average net operating income by quarter over the three years 1998 through 2000 as follows: First Quarter Second Quarter Third Quarter Fourth Quarter - ------------- -------------- ------------- -------------- 14% 29% 32% 25% Our other properties have not traditionally experienced significant seasonality. 9
RISK FACTORS Set forth below are the risks that we believe are material to our stockholders. We refer to the shares of our common and preferred stock and the units of limited partnership interest in Boston Properties Limited Partnership together as our "securities," and the investors who own shares and/or units as our "securityholders." This section includes or refers to certain forward-looking statements. You should refer to the explanation of the qualifications and limitations on such forward-looking statements beginning on page 32. We may be unable to manage effectively our rapid growth and expansion into new markets. We have grown rapidly since our initial public offering in June 1997 and have entered or significantly expanded our real estate holdings in new markets. If we do not effectively manage our rapid growth, we may not be able to make expected distributions to our securityholders and the value of our securities may decline. Our performance and value are subject to risks associated with our real estate assets and with the real estate industry. Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our office, industrial, and hotel properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our securityholders will be adversely affected. The following factors, among others, may adversely affect the revenues generated by our office, industrial, and hotel properties: o downturns in the national, regional and local economic climate; o competition from other office, industrial, hotel and other commercial buildings; o local real estate market conditions, such as oversupply or reduction in demand for office, industrial, hotel or other commercial space; o changes in interest rates and availability of financing; o vacancies or inability to rent spaces on favorable terms; o increased operating costs, including insurance premiums, utilities, and real estate taxes; and o civil disturbances, earthquakes and other natural disasters or acts of God that may result in uninsured or underinsured losses. 10
Significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in revenues from a property. We are dependent upon the economic climates of our four core markets-Boston, Washington, D.C., midtown Manhattan and San Francisco. A majority of our revenues are derived from properties located in our four core markets- Boston, Washington, D.C., midtown Manhattan and San Francisco. A downturn in the economies of these core markets, or the impact that a downturn in the overall national economy may have upon these economies, could result in reduced demand for office space. Because our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio), a decrease in demand for office space in turn could adversely affect our result from operations. Additionally, there are submarkets within our core markets that are dependent upon a limited number of industries and a significant downturn in one or more of these industries could also adversely affect our results from operations. Our investment in property development may be more costly than anticipated. We have a significant development pipeline and intend to continue to develop and substantially renovate office, industrial and hotel properties. Our current and future development and construction activities may be exposed to the following risks: o we may be unable to proceed with the development of properties because we cannot obtain financing with favorable terms; o we may incur construction costs for a development project which exceed our original estimates due to increased materials, labor or other costs, which could make completion of the project uneconomical because we may not be able to increase rents to compensate for the increase in construction costs; o we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project; o we may abandon development opportunities after we begin to explore them and as a result we may fail to recover expenses already incurred; o we may expend funds on and devote management's time to projects which we do not complete; o we may be unable to complete construction and leasing of a property on schedule, resulting in increased debt service expense and construction or renovation costs; 11
o we may lease developed properties at below expected rental rates; and o occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable. Our use of joint ventures may limit our flexibility with jointly owned investments. We intend to develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of this structure. The use of a joint venture vehicle creates a risk of a dispute with our joint venturer's and a risk that we will have to acquire a joint venturer's interest in a development for a price at which or at a time when we would otherwise not purchase such interest. Our joint venture partners may have different objectives from us regarding the appropriate timing and pricing of any sale or refinancing of properties. In 2000, we entered into a joint venture with the New York State Common Retirement Fund which has agreed to contribute up to $270 million to acquire and develop properties with us. During the three-year term of this joint venture, the New York State Common Retirement Fund has the right to participate in all of our acquisition opportunities that meet agreed criteria and any development projects that we choose to pursue with an institutional partner. We face risks associated with property acquisitions. Since our initial public offering, we have made large acquisitions of properties and portfolios of properties. We intend to continue to acquire properties and portfolios of properties, including large portfolios that could continue to significantly increase our size and alter our capital structure. Our acquisition activities and their success may be exposed to the following risks: o we may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including both publicly traded real estate investment trusts and institutional investment funds; o even if we enter into an acquisition agreement for a property, it is usually subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction; o even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price; o we may be unable to finance acquisitions on favorable terms; 12
o acquired properties may fail to perform as we expected in analyzing our investments; o our estimates of the costs of repositioning or redeveloping acquired properties may be inaccurate; o acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and o we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result our results of operations and financial condition could be adversely affected. We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Unknown liabilities with respect to properties acquired might include: o liabilities for clean-up of undisclosed environmental contamination; o claims by tenants, vendors or other persons dealing with the former owners of the properties; o liabilities incurred in the ordinary course of business; and o claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties. We face potential difficulties or delays renewing leases or re-leasing space. We derive most of our income from rent received from our tenants. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases, we may not be able to relet the space. Even if tenants decide to renew, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable than current lease terms. As a result, our cash flow could decrease and our ability to make distributions to our securityholders could be adversely affected. We face potential adverse effects from major tenants' bankruptcies or insolvencies. The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties. Although we have not experienced material losses from tenant 13
bankruptcies or insolvencies in the past, our tenants could file for bankruptcy protection or become insolvent in the future. We cannot evict a tenant solely because of its bankruptcy. On the other hand, a court might authorize the tenant to reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flow and results from operations. We may have difficulty selling our properties which may limit our flexibility. Large and high quality office, industrial and hotel properties like the ones that we own can be hard to sell, especially if local market conditions are poor. This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions. In addition, federal tax laws limit our ability to sell properties that we have owned for fewer than four years, and this may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations. Our properties face significant competition. We face significant competition from developers, owners and operators of office, industrial and other commercial real estate. Substantially all of our properties face competition from similar properties in the same market. Such competition may effect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties. Because we own three hotel properties, we face the risks associated with the hospitality industry. We own three hotel properties. We lease these hotel properties to ZL Hotel LLC, in which Mortimer B. Zuckerman, Chairman of our board of directors, and Edward H. Linde, our President and Chief Executive Officer, are the sole member-managers and have a 9.8% economic interest; two unaffiliated public charities have a 90.2% economic interest in ZL Hotel LLC. Marriott International, Inc. manages these hotel properties under the Marriott(R) name pursuant to a management agreement with ZL Hotel LLC. ZL Hotel LLC pays us a percentage of the gross receipts that the hotel properties receive. Because the lease payments we receive are based on a participation in the gross receipts of the hotels, if the hotels do not generate sufficient receipts, our cash flow would be decreased, which could reduce the amount of cash available for distribution to our securityholders. The following factors, among others, are common to the hotel industry, and may reduce the receipts generated by our hotel properties: o our hotel properties compete for guests with other hotels, a number of which have greater marketing and financial resources than our hotel-operating business partners; 14
o if there is an increase in operating costs resulting from inflation and other factors, our hotel-operating business partners may not be able to offset such increase by increasing room rates; o our hotel properties are subject to the fluctuating and seasonal demands of business travelers and tourism; and o our hotel properties are subject to general and local economic conditions that may affect demand for travel in general. Compliance or failure to comply with the Americans with Disabilities Act and other similar laws could result in substantial costs. The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in imposition of fines by the federal government or the award of damages to private litigants. If, pursuant to the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our securityholders. We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We believe that our properties are currently in material compliance with all of these regulatory requirements. However, we do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results from operations. Some potential losses are not covered by insurance. We carry comprehensive liability, fire, flood, extended coverage and rental loss insurance, as applicable, on our properties. We believe our coverage is of the type and amount customarily obtained for or by an owner of similar properties. We believe all of our properties are adequately insured. However, there are certain types of losses, such as from wars or catastrophic acts of nature, for which we cannot obtain insurance or for which we cannot obtain insurance at a reasonable cost. In the event of an uninsured loss or a loss in excess of our insurance limits, we could lose both the revenues generated from the affected property and the capital we have invested in the affected property. We would, however, remain obligated to repay any mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and financial condition and results of operations. We carry earthquake insurance on our properties located in areas known to be subject to earthquakes in an amount and subject to deductions which we believe are commercially 15
reasonable. However, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, we may discontinue earthquake insurance on some or all of our properties in the future if the premiums exceed our estimation of the value of the coverage discounted for the risk of loss. If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future revenue from those properties. Moreover, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable. Any such loss could materially and adversely affect our business and financial condition and results from operations. Potential liability for environmental contamination could result in substantial costs. Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility, simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments which could adversely affect our cash flow and our ability to make distributions to our securityholders because: o as owner or operator we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination; o the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination; o even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and o governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs. These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Environmental laws also govern the presence, maintenance and removal of asbestos. Such laws require that owners or operators of buildings containing asbestos: o properly manage and maintain the asbestos; o notify and train those who may come into contact with asbestos; and 16
o undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. Some of our properties are located in urban and industrial areas where fill or current or historic industrial uses of the areas have caused site contamination. Independent environmental consultants have conducted Phase I environmental site assessments at all of our properties. These assessments included, at a minimum, a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents. Where appropriate, on a property-by-property basis, these consultants have conducted additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usages create a potential environmental problem, and for contamination in groundwater. Even though these environmental assessments have been conducted, there is still the risk that: o the environmental assessments and updates did not identify all potential environmental liabilities; o a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments; o new environmental liabilities have developed since the environmental assessments were conducted; and o future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us. We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk. We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow will not be sufficient to repay all maturing debt in years when significant "balloon" payments come due. 17
Rising interest rates would increase our interest costs. We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our cash flow, our ability to service debt and our ability to make distributions to our securityholders. We have no corporate limitation on the amount of debt we can incur. Our management and board of directors have discretion under our certificate of incorporation and bylaws to increase the amount of our outstanding debt. Our decisions with regard to the incurrence and maintenance of debt are based on available investment opportunities for which capital is required, the cost of debt in relation to such investment opportunities, whether secured or unsecured debt is available, the effect of additional debt on existing financial ratios and the maturity of the proposed new debt relative to maturities of existing debt. We could become more highly leveraged, resulting in increased debt service costs that could adversely affect our cash flow and the amount available for payment of dividends. If we increase our debt we may also increase the risk we will be unable to repay our debt. Our financial covenants could adversely affect our financial condition. The mortgages on our properties contain customary negative covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. In addition, our credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to assets ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our ability to borrow under our credit facilities is subject to compliance with our financial and other covenants. We rely on borrowings under our credit facilities to finance acquisitions and development activities and for working capital, and if we are unable to borrow under our credit facilities, or to refinance existing indebtedness our financial condition and results of operations would likely be adversely impacted. If we breach covenants in our debt agreements, the lender can declare a default and require us to repay the debt immediately and, if the debt is secured, can immediately take possession of the property securing the loan. In addition, our credit facilities are cross-defaulted to our other indebtedness, which would give the lenders under our other credit facilities the right also to declare a default and require immediate repayment. Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock. Debt to Market Capitalization Ratio is a measure of our total debt as a percentage of the aggregate of our total debt plus the market value of our outstanding securities. Our Debt to Market Capitalization Ratio was approximately 38.7% as of December 31, 2000. To the extent that our board of directors uses our Debt to Market Capitalization Ratio as a measure of 18
appropriate leverage, the total amount of our debt could increase as our common stock price increases, even if we may not have a corresponding increase in our ability to service or repay the debt. Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally. There is a risk that changes in our Debt to Market Capitalization Ratio, which is in part a function of our stock price, or our ratio of indebtedness to other measures of asset value used by financial analysts may have an adverse effect on the market price of our common stock. Further issuances of equity securities may be dilutive to current stockholders. The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future developments and acquisitions instead of incurring additional debt. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. Failure to qualify as a real estate investment trust would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of dividends. If we fail to qualify as a real estate investment trust for federal income tax purposes, we will be taxed as a corporation. We believe that we are organized and qualified as a real estate investment trust, and intend to operate in a manner that will allow us to continue to qualify as a real estate investment trust. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there are only limited judicial and administrative interpretations, and involves the determination of facts and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a real estate investment trust for federal income tax purposes or the federal income tax consequences of such qualification. If we fail to qualify as a real estate investment trust we will face serious tax consequences that will substantially reduce the funds available for payment of dividends for each of the years involved because: o we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates; o we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; 19
o unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a real estate investment trust for four taxable years following the year during which we were disqualified; and o all dividends will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits. In addition, if we fail to qualify as a real estate investment trust, we will no longer be required to pay dividends. As a result of all these factors, our failure to qualify as a real estate investment trust could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock. In order to maintain our real estate investment trust status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions. In order to maintain our real estate investment trust status, we may need to borrow funds on a short-term basis to meet the real estate investment trust distribution requirements, even if the then prevailing market conditions are not favorable for these borrowings. To qualify as a real estate investment trust, we generally must distribute to our stockholders at least 95% of our net taxable income each year, excluding capital gains. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may need short-term debt to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Limits on changes in control may discourage takeover attempts beneficial to stockholders. Provisions in our certificate of incorporation and bylaws, our shareholder rights agreement and the limited partnership agreement of Boston Properties Limited Partnership, as well as provisions of the Internal Revenue Code and Delaware corporate law, may: o delay or prevent a change of control over us or a tender offer, even if such action might be beneficial to our stockholders; and o limit our stockholders' opportunity to receive a potential premium for their shares of common stock over then-prevailing market prices. Stock Ownership Limit Primarily to facilitate maintenance of our qualification as a real estate investment trust, our corporate charter generally prohibits ownership, directly, indirectly or beneficially, by any single stockholder of more than 6.6% of the number of outstanding shares of any class or series of our equity stock. We refer to this limitation as the "ownership limit." Our board of directors 20
may waive or modify the ownership limit with respect to one or more persons if it is satisfied that ownership in excess of this limit will not jeopardize our status as a real estate investment trust for federal income tax purposes. In addition, under our corporate charter each of Messrs. Zuckerman and Linde, along with their family and affiliates, as well as, in general, pension plans and mutual funds, may actually and beneficially own up to 15% of the number of outstanding shares of any class or series of our equity common stock. Shares owned in violation of the ownership limit will be subject to the loss of rights to distributions and voting and other penalties. The ownership limit may have the effect of inhibiting or impeding a change in control. Boston Properties Limited Partnership Agreement We have agreed in the limited partnership agreement of Boston Properties Limited Partnership not to engage in business combinations unless limited partners of Boston Properties Limited Partnership other than Boston Properties, Inc. receive, or have the opportunity to receive, the same consideration for their partnership interests as holders of our common stock in the transaction. If these limited partners do not receive such consideration, we cannot engage in the transaction unless 75% of these limited partners vote to approve the transaction. In addition, we have agreed in the limited partnership agreement of Boston Properties Limited Partnership that we will not consummate business combinations in which we received the approval of our stockholders unless these limited partners are also allowed to vote and the transaction would have been approved had these limited partners been able to vote as stockholders on the transaction. Therefore, if our stockholders approve a business combination that requires a vote of stockholders, the partnership agreement requires the following before we can consummate the transaction: o holders of interests in Boston Properties Limited Partnership (including Boston Properties, Inc.) must vote on the matter; o Boston Properties, Inc. must vote its partnership interests in the same proportion as our stockholders voted on the transaction; and o the result of the vote of holders of interests in Boston Properties Limited Partnership must be such that had such vote been a vote of stockholders, the business combination would have been approved. As a result of these provisions, a potential acquirer may be deterred from making an acquisition proposal and we may be prohibited by contract from engaging in a proposed business combination even though our stockholders approve of the combination. Shareholder Rights Plan We have adopted a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock, because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase 21
securities from us at a price that is less than their then fair market value, which would substantially reduce the value and influence of the stock owned by the acquiring person. Our board of directors can prevent the plan from operating by approving of the transaction, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in us. We may change our policies without obtaining the approval of our stockholders. Our operating and financial policies, including our policies with respect to acquisitions, growth, operations, indebtedness, capitalization and dividends, are determined by our board of directors. Accordingly, as a stockholder, you will have little direct control over these policies. Our success depends on key personnel whose continued service is not guaranteed. We depend on the efforts of key personnel, particularly Mortimer B. Zuckerman, Chairman of our board of directors, and Edward H. Linde, our President and Chief Executive Officer. Among the reasons that Messrs. Zuckerman and Linde are important to our success is that each has a national reputation which attracts business and investment opportunities and assists us in negotiations with lenders. If we lost their services, our relationships with lenders, potential tenants and industry personnel would diminish. Our other executive officers who serve as managers of our offices have strong regional reputations. Their reputations aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit prospects. While we believe that we could find replacements for these key personnel, the loss of their services could materially and adversely effect our operations because of diminished relationships with lenders, prospective tenants and industry personnel. Mr. Zuckerman has substantial outside business interests, including serving as trustee for New York University, a trustee of Memorial Sloan-Kettering Cancer Institute, a trustee of the Institute for Advanced Studies at Princeton and a member of the Council on Foreign Relations and the International Institute for Strategic Studies. He is also Chairman and Editor-in-Chief of U.S. News & World Report, Chairman and Co-Publisher of the New York Daily News and Chairman of the Board of Applied Graphics Technologies and a member of the Board of Directors of Chase Manhattan Corporation National Advisory Board, Loews Cineplex and WNET/Channel. Such outside business interests could interfere with his ability to devote time to our business and affairs. Over the last twenty years, Mr. Zuckerman has devoted a significant portion, although not a majority, of his business time to the affairs of Boston Properties and its predecessors. We have no assurance that he will continue to devote any specific portion of his time to us, although at present, he has no commitments which would prevent him from maintaining his current level of involvement with our business. 22
Conflicts of interest exist with holders of interests in Boston Properties Limited Partnership. Sales of properties and repayment of related indebtedness will have different effects on holders of interests in Boston Properties Limited Partnership than on our stockholders. Some holders of interests in Boston Properties Limited Partnership, including Messrs. Zuckerman and Linde, would incur adverse tax consequences upon the sale of certain of our properties and on the repayment of related debt which differ from the tax consequences to us and our stockholders. Consequently, such holders of interests in Boston Properties Limited Partnership may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While we have exclusive authority under the limited partnership agreement of Boston Properties Limited Partnership to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, subject, in the case of certain properties, to the contractual commitments described below, any such decision would require the approval of our board of directors. As directors and executive officers, Messrs. Zuckerman and Linde have substantial influence with respect to any such decision. Their influence could be exercised in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness. Agreement not to sell some properties. Under the terms of the limited partnership agreement of Boston Properties Limited Partnership, we have agreed not to sell or otherwise transfer some of our properties, prior to specified dates, in any transaction that would trigger taxable income, without first obtaining the consent of Messrs. Zuckerman and Linde. However, we are not required to obtain their consent if, during the applicable period, each of them does not hold at least 30% of his original interests in Boston Properties Limited Partnership. In addition, we have entered into similar agreements with respect to other properties that we have acquired in exchange for interests in Boston Properties Limited Partnership. There are a total of 35 properties subject to these restrictions, and those 35 properties are estimated to have accounted for approximately 55% of our total revenue for the year ended December 31, 2000. Boston Properties Limited Partnership has also entered into agreements providing Messrs. Zuckerman and Linde and others with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness they guarantee is repaid or reduced, additional and/or substitute indebtedness. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements. 23
Messrs. Zuckerman and Linde will continue to engage in other activities. Messrs. Zuckerman and Linde have a broad and varied range of investment interests. Either one could acquire an interest in a company which is not currently involved in real estate investment activities but which may acquire real property in the future. However, pursuant to Mr. Linde's employment agreement and Mr. Zuckerman's non-compete agreement, Messrs. Zuckerman and Linde will not, in general, have management control over such companies and, therefore, they may not be able to prevent one or more such companies from engaging in activities that are in competition with our activities. Changes in market conditions could adversely affect the market price of our common stock. As with other publicly traded equity securities, the value of our common stock depends on various market conditions which may change from time to time. Among the market conditions that may affect the value of our common stock are the following: o the extent of investor interest in us; o the general reputation of real estate investment trusts and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies; o our financial performance; and o general stock and bond market conditions. The market value of our common stock is based primarily upon the market's perception of our growth potential and our current and potential future earnings and cash dividends. Consequently, our common stock may trade at prices that are higher or lower than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish. Market interest rates may have an effect on the value of our common stock. One of the factors that investors may consider important in deciding whether to buy or sell shares of a real estate investment trust is the dividend with respect to such real estate investment trust's shares as a percentage of the price of such shares, relative to market interest rates. If market interest rates go up, prospective purchasers of shares of our common stock may expect a higher distribution rate on our common stock. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to go down. 24
The number of shares available for future sale could adversely affect the market price of our stock. As part of our initial public offering and since then we have completed many private placement transactions where shares of capital stock of Boston Properties, Inc. or interests in Boston Properties Limited Partnership were issued to owners of properties we acquired or to institutional investors. This common stock, or common stock issuable on conversion of our preferred stock or in exchange for such interests in Boston Properties Limited Partnership, may be sold in the public market over time pursuant to registration rights we granted to these investors. Additional common stock reserved under our employee benefit and other incentive plans, including stock options, may also be sold in the public at some time in the future. Future sales of our common stock in the public securities markets could adversely affect the price of our common stock. We cannot predict the effect the perception in the market that such sales may occur will have on the market price of our common stock. We did not obtain new owner's title insurance policies in connection with properties acquired during our initial public offering. We acquired many of our properties from our predecessors at the completion of our initial public offering in June 1997. Before we acquired these properties each of them was insured by a title insurance policy. We did not, however, obtain new owner's title insurance policies in connection with the acquisition of such properties. Nevertheless, because in many instances we acquired these properties indirectly by acquiring ownership of the entity which owned the property and those owners remain in existence as our subsidiaries, some of these title insurance policies may continue to benefit us. Many of these title insurance policies may be for amounts less than the current values of the applicable properties. If there was a title defect related to any of these properties, or to any of the properties acquired at the time of our initial public offering, that is no longer covered by a title insurance policy, we could lose both our capital invested in and our anticipated profits from such property. We have obtained title insurance policies for all properties that we have acquired after our initial public offering. We face possible adverse changes in tax and environmental laws. Generally, we pass through to our tenants costs resulting from increases in real estate taxes. However, we generally do not pass through to our tenants increases in income, service or transfer taxes. Similarly, changes in laws increasing the potential liability for environmental conditions existing on our properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures. These increased costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends. 25
Item 2. Properties At December 31, 2000, our portfolio consisted of 145 properties totaling 37.9 million net rentable square feet, including 15 properties under construction. Our properties consisted of 134 office properties, including 103 Class A office buildings and 31 properties that support both office and technical uses; eight industrial properties; and three hotels. In addition, we own or control an additional 49 parcels of land for future development. The following table sets forth information relating to the properties we owned at December 31, 2000: <TABLE> <CAPTION> Number of Net Rentable Properties Location Buildings Square Feet - ---------- -------- ---------- ----------- <S> <C> <C> <C> Class A Office The Prudential Center Boston, MA 3 2,140,832 280 Park Avenue New York, NY 1 1,160,622 599 Lexington Avenue New York, NY 1 1,000,497 Embarcadero Center Four San Francisco, CA 1 935,519 Riverfront Plaza Richmond, VA 1 894,015 Embarcadero Center One San Francisco, CA 1 821,009 Embarcadero Center Two San Francisco, CA 1 779,172 Embarcadero Center Three San Francisco, CA 1 770,969 875 Third Avenue New York, NY 1 690,126 Democracy Center Bethesda, MD 3 680,475 100 East Pratt Street Baltimore, MD 1 635,323 Two Independence Square Washington, D.C. 1 579,665 Metropolitan Square (51% ownership) Washington, D.C. 1 578,340 Candler Building Baltimore, MD 1 537,363 Reservoir Place Waltham, MA 1 529,991 The Gateway South San Francisco, CA 2 506,395 West Tower San Francisco, CA 1 475,120 One Tower Center East Brunswick, NJ 1 417,903 One Freedom Square (25% ownership) Reston, VA 1 408,773 Market Square North (50% ownership) Washington, D.C. 1 401,255 Capital Gallery Washington, D.C. 1 396,776 140 Kendrick Street (25% ownership) Needham, MA 3 381,000 One Independence Square Washington, D.C. 1 337,794 265 Franklin Street (35% ownership) Boston, MA 1 325,699 One Reston Overlook Reston, VA 1 312,685 2300 N Street Washington, D.C. 1 276,930 NIMA Building Reston, VA 1 263,870 Reston Corporate Center Reston, VA 2 261,046 Lockheed Martin Building Reston, VA 1 255,244 200 West Street Waltham, MA 1 248,341 500 E Street, N. W. Washington, D.C. 1 242,769 510 Carnegie Center Princeton, NJ 1 234,160 One Cambridge Center Cambridge, MA 1 215,385 Sumner Square Washington, D.C. 1 209,507 University Place Cambridge, MA 1 195,282 Eight Cambridge Center Cambridge, MA 1 177,226 Orbital Sciences, Buildings One and Three Dulles, VA 2 174,832 Newport Office Park Quincy, MA 1 168,829 1301 New York Avenue Washington, D.C. 1 168,371 </TABLE> 26
<TABLE> <CAPTION> Number of Net Rentable Properties Location Buildings Square Feet - ---------- -------- ---------- ----------- <S> <C> <C> <C> Lexington Office Park Lexington, MA 2 167,293 191 Spring Street Lexington, MA 1 162,700 206 Carnegie Center Princeton, NJ 1 161,763 210 Carnegie Center Princeton, NJ 1 158,610 10 & 20 Burlington Mall Road Burlington, MA 2 156,416 Ten Cambridge Center Cambridge, MA 1 152,664 214 Carnegie Center Princeton, NJ 1 152,214 506 Carnegie Center Princeton, NJ 1 150,888 212 Carnegie Center Princeton, NJ 1 150,069 Federal Reserve San Francisco, CA 1 149,592 Two Reston Overlook Reston, VA 1 131,594 Waltham Office Center Waltham, MA 3 131,479 508 Carnegie Center Princeton, NJ 1 131,085 202 Carnegie Center Princeton, NJ 1 128,885 101 Carnegie Center Princeton, NJ 1 124,049 91 Hartwell Avenue Lexington, MA 1 122,135 504 Carnegie Center Princeton, NJ 1 121,990 Montvale Center Gaithersburg, MD 1 120,815 502 Carnegie Center Princeton, NJ 1 116,374 Three Cambridge Center Cambridge, MA 1 107,484 104 Carnegie Center Princeton, NJ 1 102,758 201 Spring Street Lexington, MA 1 102,500 The Arboretum Reston, VA 1 95,584 Bedford Business Park Bedford, MA 1 90,000 Eleven Cambridge Center Cambridge, MA 1 79,616 33 Hayden Avenue Lexington, MA 1 79,564 Decoverly Two Rockville, MD 1 77,747 Decoverly Three Rockville, MD 1 77,040 170 Tracer Lane Waltham, MA 1 73,203 105 Carnegie Center Princeton, NJ 1 69,648 32 Hartwell Avenue Lexington, MA 1 69,154 195 West Street Waltham, MA 1 63,500 100 Hayden Avenue Lexington, MA 1 55,924 181 Spring Street Lexington, MA 1 53,595 211 Carnegie Center Princeton, NJ 1 47,025 204 Second Avenue Waltham, MA 1 40,974 92 Hayden Avenue Lexington, MA 1 30,980 201 Carnegie Center Princeton, NJ - 6,500 ---------- ------------ Subtotal for Class A Office Properties: 89 23,802,521 Research & Development Bedford Business Park Bedford, MA 2 383,704 Fullerton Square Springfield, VA 2 178,294 Hilltop Office Center South San Francisco, CA 9 144,366 7601 Boston Boulevard Springfield, VA 1 103,750 7435 Boston Boulevard Springfield, VA 1 103,557 8000 Grainger Court Springfield, VA 1 90,465 7700 Boston Boulevard Springfield, VA 1 82,224 7500 Boston Boulevard Springfield, VA 1 79,971 7501 Boston Boulevard Springfield, VA 1 75,756 7600 Boston Boulevard Springfield, VA 1 69,832 Fourteen Cambridge Center Cambridge, MA 1 67,362 164 Lexington Road Billerica, MA 1 64,140 7450 Boston Boulevard Springfield, VA 1 60,827 Sugarland Business Park, Building Two Herndon, VA 1 59,215 7374 Boston Boulevard Springfield, VA 1 57,321 Sugarland Business Park, Building One Herndon, VA 1 52,797 8000 Corporate Court Springfield, VA 1 52,539 </TABLE> 27
<TABLE> <CAPTION> Number of Net Rentable Properties Location Buildings Square Feet - ---------- -------- ---------- ----------- <S> <C> <C> <C> 7451 Boston Boulevard Springfield, VA 1 47,001 17 Hartwell Avenue Lexington, MA 1 30,000 7375 Boston Boulevard Springfield, VA 1 28,780 ---------- ------------ Subtotal for Research and Development Properties: 30 1,831,901 Industrial 2391 West Winton Hayward, CA 1 220,213 40-46 Harvard Street Westwood, MA 1 169,273 38 Cabot Boulevard Bucks County, PA 1 161,000 6201 Columbia Park Road Landover, MD 1 100,337 2000 South Club Drive Landover, MD 1 83,608 25-33 Dartmouth Road Westwood, MA 1 78,045 560 Forbes Blvd South San Francisco, CA 1 40,000 430 Rozzi Place South San Francisco, CA 1 20,000 ---------- ------------ Subtotal for Industrial Properties: 8 872,476 ---------- ------------ Subtotal for In-Service Class A Office, Research and Development and Industrial Properties: 127 26,506,898 ---------- ------------ Properties Under Construction 5 Times Square New York, NY 1 1,099,154 111 Huntington Avenue Boston, MA 1 890,000 Two Freedom Square Reston, VA 1 417,113 One and Two Discovery Square Reston, VA 2 362,868 Waltham Weston Corporate Center Waltham, MA 1 295,000 Quorum Office Park Chelmsford, MA 2 259,918 611 Gateway Boulevard South San Francisco, CA 1 249,732 New Dominion Technology Park - Building One Herndon, VA 1 235,201 2600 Tower Oaks Boulevard Rockville, MD 1 178,216 Orbital Sciences Phase II - Building 2 Dulles, VA 1 160,502 Broad Run Business Park - Building E Dulles, VA 1 124,650 Andover Office Park - Building 1 Andover, MA 1 120,000 302 Carnegie Center Princeton, NJ 1 64,565 ---------- ------------ Subtotal for Properties Under Construction: 15 4,456,919 ---------- ------------ Hotel Properties Long Wharf Marriott Boston, MA 1 420,000 Cambridge Center Marriott Cambridge, MA 1 330,400 Residence Inn by Marriott Cambridge, MA 1 187,474 ---------- ------------ Subtotal for Hotel Properties: 3 937,874 ---------- ------------ Structured Parking 6,017,423 ------------ Total for all properties: 145 37,919,114 ========== ============ </TABLE> Item 3. Legal Proceedings Neither we, nor our affiliates, are presently subject to any material litigation or, to our knowledge, have any litigation threatened against us or our affiliates other than routine actions and administrative proceedings substantially all of which are expected to be covered by liability or other insurance and in the aggregate are not expected to have a material adverse effect on our business or financial condition. 28
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2000. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock is listed on the New York Stock Exchange under the symbol "BXP". The high and low closing sales prices for the periods indicated in the table below were: Quarter Ended High Low Distributions ------------- ---- --- ------------- December 31, 2000 $44 3/4 $38 7/8 $.530 (a) September 30, 2000 43 1/4 37 9/16 .530 June 30, 2000 38 31/32 31 3/4 .530 March 31, 2000 32 3/8 29 13/16 .450 December 31, 1999 31 1/8 27 1/2 .450 September 30, 1999 35 5/8 30 5/16 .450 June 30, 1999 37 1/8 31 1/4 .425 March 31, 1999 34 11/16 30 5/16 .425 (a) Paid on January 29, 2001 to stockholders of record on December 29, 2000. At March 14, 2001, we had approximately 468 shareholders of record. This does not include beneficial owners for whom Cede & Co. or others act as nominee. We have adopted a policy of paying regular quarterly distributions on our common stock and cash distributions have been paid on our common stock since our initial public offering. In order to maintain our qualification as a REIT, we must make annual distributions to our shareholders of at least 95% of our taxable income (not including net capital gains). We intend that any dividend paid in respect of our common stock during the last quarter of each year will, if necessary, be adjusted to satisfy the REIT requirement that at least 95% of taxable income for such taxable year be distributed. 29
Item 6. Selected Financial Data The following sets forth our selected financial and operating data for Boston Properties, Inc., and Boston Properties Limited Partnership, together with their subsidiaries on a historical consolidated basis and for our predecessor business on a historical combined basis. The following data should be read in conjunction with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. Historical operating results for Boston Properties, Inc., and Boston Properties Limited Partnership, together with their subsidiaries and for our predecessor business, including net income, may not be comparable to our future operating results. <TABLE> <CAPTION> The Company --------------------------------------------------------- For the year ended December 31, -------------------------------------------------------- (in thousands, except per share data) 2000 1999 1998 ================================================================================================================================ <S> <C> <C> <C> Statement of Operations Information Total revenue $ 879,353 $ 786,564 $ 513,847 ----------- ----------- ----------- Expenses: Property 264,701 249,268 150,490 Hotel -- -- -- General and administrative 35,659 29,455 22,504 Interest 217,064 205,410 124,860 Depreciation and amortization 133,150 120,059 75,418 ----------- ----------- ----------- Income before minority interests and unconsolidated joint venture income 228,779 182,372 140,575 Income from unconsolidated joint ventures 1,758 468 -- Minority interests (76,971) (69,531) (41,982) ----------- ----------- ----------- Income before gain (loss) on sale of real estate 153,566 113,309 98,593 Gain (loss) on sale of real estate, net of minority interest (234) 6,467 -- ----------- ----------- ----------- Income before extraordinary items 153,332 119,776 98,593 Extraordinary gain (loss), net of minority interest (334) -- (5,481) ----------- ----------- ----------- Net income before preferred dividend 152,998 119,776 93,112 Preferred dividend (6,572) (5,829) -- ----------- ----------- ----------- Net income available to common shareholders $ 146,426 $ 113,947 $ 93,112 =========== =========== =========== Basic earnings per share: Income before extraordinary items $ 2.05 $ 1.72 $ 1.62 Extraordinary gain (loss), net of minority interest -- -- (0.09) ----------- ----------- ----------- Net income $ 2.05 $ 1.72 $ 1.53 =========== =========== =========== Weighted average number of common shares outstanding 71,424 66,235 60,776 Diluted earnings per share: Income before extraordinary items $ 2.01 $ 1.71 $ 1.61 Extraordinary gain (loss), net of minority interest -- -- (0.09) ----------- ----------- ----------- Net income $ 2.01 $ 1.71 $ 1.52 =========== =========== =========== Weighted average number of common and common equivalent shares outstanding 72,741 66,776 61,308 Balance Sheet Information: Real estate, gross $ 6,112,779 $ 5,609,424 $ 4,917,193 Real estate, net 5,526,060 5,138,833 4,559,809 Cash 280,957 12,035 12,166 Total assets 6,226,470 5,434,772 5,235,087 Total indebtedness 3,414,891 3,321,584 3,088,724 Minority interests 877,715 781,962 1,079,234 Convertible Redeemable Preferred Stock 100,000 100,000 -- Stockholders' and owners' equity (deficit) 1,647,727 1,057,564 948,481 Other Information: Funds from operations 247,371 196,101 153,045 Dividends per share 2.04 1.75 1.64 Cash flow provided by operating activities 339,664 303,469 215,287 Cash flow used in investing activities (573,363) (654,996) (2,179,215) Cash flow provided by (used in) financing activities 502,621 351,396 1,958,534 Total square feet at end of year 37,926 35,621 31,077 Occupancy rate at end of year 98.9% 98.4% 97.1% <CAPTION> ------------------------------------- The Company The Predecessor Group ------------------ ------------------------------------- Period from Period from June 23, 1997 January 1, 1997 Year ended to to December 31, (in thousands, except per share data) December 31, 1997 June 22, 1997 1996 ================================================================================================================================ <S> <C> <C> <C> Statement of Operations Information Total revenue $ 145,643 $ 129,818 $ 269,933 ----------- --------- ---------- Expenses: Property 40,093 27,032 58,195 Hotel -- 22,452 46,734 General and administrative 6,689 5,116 10,754 Interest 38,264 53,324 109,394 Depreciation and amortization 21,719 17,054 36,199 ----------- --------- ---------- Income before minority interests and unconsilidated joint venture income 38,878 4,840 8,657 Income from unconsolidated joint ventures -- -- -- Minority interests (11,652) (235) (384) ----------- --------- ---------- Income before gain (loss) on sale of real estate 27,226 4,605 8,273 Gain (loss) on sale of real estate, net of minority interest -- -- -- ----------- --------- ---------- Income before extraordinary items 27,226 4,605 8,273 Extraordinary gain (loss), net of minority interest 7,925 -- (994) ----------- --------- ---------- Net income before preferred dividend 35,151 4,605 7,279 Preferred dividend -- -- -- ----------- --------- ---------- Net income available to common shareholders $ 35,151 $ 4,605 $ 7,279 =========== ========= ========== Basic earnings per share: Income before extraordinary items $ 0.70 -- -- Extraordinary gain (loss), net of minority interest 0.21 -- -- ----------- --------- ---------- Net income $ 0.91 -- -- =========== ========= ========== Weighted average number of common shares outstanding 38,694 -- -- Diluted earnings per share: Income before extraordinary items $ 0.70 -- -- Extraordinary gain (loss), net of minority interest 0.20 -- -- ----------- --------- ---------- Net income $ 0.90 -- -- =========== ========= ========== Weighted average number of common and common equivalent shares outstanding 39,108 -- -- Balance Sheet Information: Real estate, gross $ 1,796,500 -- $1,035,571 Real estate, net 1,502,282 -- 771,660 Cash 17,560 -- 8,998 Total assets 1,672,521 -- 896,511 Total indebtedness 1,332,253 -- 1,442,476 Minority interests 100,636 -- -- Convertible Redeemable Preferred Stock -- -- -- Stockholders' and owners' equity (deficit) 175,048 -- (576,632) Other Information: Funds from operations 42,258 -- -- Dividends per share 1.62 a -- -- Cash flow provided by operating activities 46,146 25,090 55,907 Cash flow used in investing activities (519,743) (32,844) (34,315) Cash flow provided by (used in) financing activities 491,157 9,266 (38,461) Total square feet at end of year 16,101 -- 10,424 Occupancy rate at end of year 98.4% -- 94.2% </TABLE> a - annualized 30
(1) The White Paper on Funds from Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts in March 1995 defines funds from operations as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. During 1999, the National Association of Real Estate Investment Trusts clarified the definition of funds from operations to include non-recurring events, except for those that are defined as "extraordinary items" under accounting principles generally accepted in the United States and gains and losses from sales of depreciable operating properties. This clarification is effective for periods ending subsequent to January 1, 2000. We adopted this definition for the quarters ending on or after March 31, 2000. We believe that funds from operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute funds from operations in accordance with standards established by the National Association of Real Estate Investment Trusts which may not be comparable to funds from operations reported by other REITs that do not define the term in accordance with the current National Association of Real Estate Investment Trusts definition or that interpret the current National Association of Real Estate Investment Trusts definition differently. Funds from operations does not represent cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States and should not be considered as an alternative to net income (determined in accordance with accounting principles generally accepted in the United States) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our funds from operations for the respective periods is calculated as follows: <TABLE> <CAPTION> The Company -------------------------------------------------------- Year ended December 31, Period from ----------------------------------- June 23, 1997 to (in thousands) 2000 1999 1998 December 31, 1997 ====================================================================================================================== <S> <C> <C> <C> <C> Income before minority interests and unconsolidated joint venture income $ 228,779 $ 182,372 $ 140,575 $ 38,878 Add: Real estate depreciation and amortization 134,386 119,583 74,649 21,417 Income from unconsolidated joint ventures 1,758 468 -- Less: Minority property partnership's share of funds from operations (1,061) (3,681) (4,185) (287) Preferred dividends and distributions (32,994) (32,111) (5,830) -- Non-recurring item - significant lease termination fee -- -- -- -- --------- --------- --------- --------- Funds from operations $ 330,868 $ 266,631 $ 205,209 $ 60,008 ========= ========= ========= ========= Funds from operations available to common shareholders $ 247,371 $ 196,101 $ 153,045 $ 42,258 ========= ========= ========= ========= Weighted average shares outstanding - basic 71,424 66,235 60,776 38,694 ========= ========= ========= ========= <CAPTION> The Predecessor Group -------------------------------- Period from Year ended January 1, 1997 December 31, (in thousands) to June 22, 1997 1996 ============================================================================================== <S> <C> <C> Income before minority interests and unconsolidated joint venture income $ 4,840 $ 8,657 Add: Real estate depreciation and amortization 16,808 35,643 Income from unconsolidated joint ventures Less: Minority property partnership's share of funds from operations (198) (479) Preferred dividends and distributions -- -- Non-recurring item - significant lease termination fee -- (7,503) --------- --------- Funds from operations $ 21,450 $ 36,318 ========= ========= Funds from operations available to common shareholders -- -- ========= ========= Weighted average shares outstanding - basic -- -- ========= ========= </TABLE> Reconciliation to Diluted Funds from Operations: <TABLE> <CAPTION> For the year ended For the year ended December 31, 2000 December 31, 1999 ---------------------------- ---------------------------- Income Shares/Units Income Shares/Units (in thousands) (Numerator) (Denominator) (Numerator) (Denominator) - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Basic Funds from Operations $ 330,868 95,532 $ 266,631 90,058 Effect of Dilutive Securities Convertible Preferred Units 26,422 10,393 26,428 10,360 Convertible Preferred Stock 6,572 2,625 5,834 2,337 Stock Options -- 1,280 -- 541 --------- ------- --------- ------- Diluted Funds from Operations $ 363,862 109,830 $ 298,893 103,296 ========= ======= ========= ======= Company's share of Diluted Funds from Operations $ 283,994 85,723 $ 229,961 79,473 ========= ======= ========= ======= <CAPTION> For the period from For the year ended June 23, 1997 to December 31, 1998 December 31, 1997 --------------------------- ---------------------------- Income Shares/Units Income Shares/Units (in thousands) (Numerator) (Denominator) (Numerator) (Denominator) - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Basic Funds from Operations $ 205,209 81,487 $ 60,008 54,950 Effect of Dilutive Securities Convertible Preferred Units 2,819 1,135 -- -- Convertible Preferred Stock -- -- -- -- Stock Options -- 532 -- 414 --------- ------ -------- ------ Diluted Funds from Operations $ 208,028 83,154 $ 60,008 55,364 ========= ====== ======== ====== Company's share of Diluted Funds from Operations $ 156,215 62,443 $ 42,258 39,108 ========= ====== ======== ====== </TABLE> 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the selected financial data and the historical consolidated and combined financial statements and related notes thereto. Forward-Looking Statements Statements made under the caption "Risk Factors," elsewhere in this Form 10-K, in our press releases, and in oral statements we make by or with the approval of our authorized executives are "forward-looking statements" within the meaning of federal securities laws. When we use the words "anticipate," "assume," "believe," "estimate," "expect," "intend" and other similar expressions, they generally identify forward-looking statements. Forward-looking statements include, for example, statements relating to acquisitions and related financial information, development activities, business strategy and prospects, future capital expenditures, sources and availability of capital, environmental and other regulations, and competition. You should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and could materially affect our actual results, performance or achievements. Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following: o we are subject to general risks affecting the real estate industry, such as the need to enter into new leases or renew leases on favorable terms to generate rental revenues, and dependence on our tenants' financial condition; o we may fail to identify, acquire, construct or develop additional properties; we may develop properties that do not produce a desired yield on invested capital; or we may fail to effectively integrate acquisitions of properties or portfolios of properties; o financing may not be available, or may not be available on favorable terms; o we need to make distributions to our stockholders for us to qualify as a real estate investment trust, and if we need to borrow the funds to make such distributions such borrowings may not be available on favorable terms; o we depend on the primary markets where our properties are located and these markets may be adversely affected by local economic and market conditions which are beyond our control; o we are subject to potential environmental liabilities; o we are subject to complex regulations relating to our status as a real estate investment 32
trust and would be adversely affected if we failed to qualify as a real estate investment trust; and o market interest rates could adversely affect the market prices for our common stock, as well as our performance and cash flow. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Overview We are a fully integrated, self-administered and self-managed real estate investment trust or "REIT" and are one of the largest owners and developers of office and industrial properties in the United States. Our properties are concentrated in four core markets - Boston, Washington, D.C., midtown Manhattan and San Francisco. We conduct substantially all of our business through Boston Properties Limited Partnership. At December 31, 2000, we owned 145 properties totaling 37.9 million net rentable square feet, including 15 properties under construction. The properties consisted of 134 office properties, including 103 Class A office buildings and 31 properties that support both office and technical uses; eight industrial properties; and three hotels. In 2000, we continued to identify and complete attractive acquisitions and development transactions. During 2000, we added 2.1 million net rentable square feet to our portfolio by completing acquisitions totaling approximately $167.7 million and completing developments totaling approximately $108.5 million. In addition, as of December 31, 2000, we had construction in progress representing a total anticipated investment of approximately $1.3 billion and a total of approximately 4.5 million net rentable square feet. We are focused on increasing the cash flow from our existing portfolio of properties by maintaining high occupancy levels and increasing effective rents. On the 3.8 million net-rentable square feet of second generation space renewed or re-leased during the year, new net rents were on average approximately 47.1% higher than the expiring net rents. At December 31 2000, our portfolio of office and industrial properties was 98.9% occupied. We also continue to strengthen our balance sheet. In October 2000, we raised $633.8 million, net of expenses, in equity capital by completing a public offering of our common stock. In 2000 we also issued shares of our common stock and common and preferred units in Boston Properties Limited Partnership that were valued when issued at $62.9 million to acquire properties and development sites. Results of Operations The following discussion is based on our Consolidated Financial Statements for the years ended December 31, 2000, 1999 and 1998. 33
From January 1, 1998 through December 31, 2000, we increased our total from 92 properties to 145 properties and from 16.1 million net rentable square feet to 37.9 million net rentable square feet. As a result of this rapid growth of our total portfolio, the financial data presented below shows significant changes in revenues and expenses from period to period. We do not believe our period to period financial data are comparable. Therefore, the comparison of operating results for the years ended December 30, 2000, 1999 and 1998 show changes resulting from properties that we owned for each period compared (for which each comparison we refer to as our "Same Property Portfolio") and the changes attributable to our total portfolio. Comparison of the year ended December 31, 2000 to the year ended December 31, 1999 The table below shows selected operating information for our total portfolio and the 106 buildings acquired or placed in service on or prior to January 1, 1999 and that remained in the total portfolio through December 31, 2000 (which comprise the Same Property Portfolio for the years ended December 31, 2000 and 1999): <TABLE> <CAPTION> Same Property Portfolio ---------------------------------------------- Increase/ (dollars in thousands) 2000 1999 (Decrease) % Change - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Rental Revenue $ 766,141 $ 717,654 $ 48,487 6.76% Development and management services -- -- -- -- Interest and other -- -- -- -- --------- --------- -------- ---- Total revenue 766,141 717,654 48,487 6.76% --------- --------- -------- ---- Expenses: Operating 237,107 230,178 6,929 3.01% General and administrative -- -- -- -- Interest -- -- -- -- Depreciation and amortization 117,863 112,463 5,400 4.80% --------- --------- -------- ---- Total expenses 354,970 342,641 12,329 3.60% --------- --------- -------- ---- Income before minority interests and unconsolidated joint venture income $ 411,171 $ 375,013 $ 36,158 9.64% ========= ========= ======== ==== <CAPTION> Total Portfolio ---------------------------------------------- Increase/ (dollars in thousands) 2000 1999 (Decrease) % Change - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Rental Revenue $ 858,942 $ 765,417 $ 93,525 12.22% Development and management services 11,837 14,708 (2,871) -19.52% Interest and other 8,574 6,439 2,135 33.16% --------- --------- -------- ----- Total revenue 879,353 786,564 92,789 11.80% --------- --------- -------- ----- Expenses: Operating 264,701 249,268 15,433 6.19% General and administrative 35,659 29,455 6,204 21.06% Interest 217,064 205,410 11,654 5.67% Depreciation and amortization 133,150 120,059 13,091 10.90% --------- --------- -------- ----- Total expenses 650,574 604,192 46,382 7.68% --------- --------- -------- ----- Income before minority interests and unconsolidated joint venture income $ 228,779 $ 182,372 $ 46,407 25.45% ========= ========= ======== ====== </TABLE> The increase in rental revenues in our Same Property Portfolio for these years is primarily a result of an overall increase in rental rates on new leases and rollovers, in addition to an increase in occupancy from year to year and an increase in termination fees from $2.3 million to $3.3 million. The occupancy for our Same Property Portfolio increased from 97.4% as of December 31, 1999 to 98.8% as of December 31, 2000. The increase in rental revenues in our total portfolio is primarily the result of properties we acquired or placed-in-service after January 1, 1998. The decrease in development and management services income in the total portfolio is mainly due to contracts expiring during 1999 and 2000. The increase in interest and other income in the total portfolio is a result of interest earned on proceeds received from the public offering of our common stock in October 2000. Property operating expenses (real estate taxes, utilities, repairs and maintenance, cleaning and other property-related expenses) in our Same Property Portfolio increased mainly due to increases in real estate taxes of $4.0 million, or 4.2%. Small increases in other property-related expenses account for the remaining increase. Property operating expenses in our total portfolio 34
increased due to properties we acquired or placed-in-service after January 1, 1999 as well as increases in other property-related expenses. General and administrative expenses increased due to increases in the overall size of our total portfolio since January 1, 1999. In addition, we incurred a $3.0 million charge related to the departure of two senior employees, which included a non-cash charge of approximately $2.0 million. Interest expense for our total portfolio increased due to net increase in mortgage indebtedness and our unsecured revolving line of credit with Fleet National Bank, as agent, from $3.3 billion to $3.4 billion. Depreciation and amortization expense for our Same Property Portfolio increased as a result of capital and tenant improvements made during 2000. Depreciation and amortization expense for our total portfolio increased as a result of properties we acquired or placed-in-service after January 1, 2000 and that remained in our total portfolio through December 31, 2000 and related capital and tenant improvements. Comparison of the year ended December 31, 1999 to the year ended December 31, 1998: The table below shows selected operating information for our total portfolio and the 76 buildings acquired or placed in service on or prior to January 1, 1998 and that remained in the total portfolio through December 31, 1999 (which comprise the Same Property Portfolio for the years ended December 31, 1999 and 1998): <TABLE> <CAPTION> Same Property Portfolio ---------------------------------------------- Increase/ (dollars in thousands) 1999 1998 (Decrease) % Change - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Rental Revenue $ 353,470 $ 337,886 $ 15,584 4.61% Development and management services -- -- -- -- Interest and other -- -- -- -- --------- --------- -------- ---- Total revenue 353,470 337,886 15,584 4.61% --------- --------- -------- ---- Expenses: Operating 104,048 100,726 3,322 3.30% General and administrative -- -- -- -- Interest -- -- -- -- Depreciation and amortization 51,494 50,083 1,411 2.82% --------- --------- -------- ---- Total expenses 155,542 150,809 4,733 3.14% --------- --------- -------- ---- Income before minority interests and unconsolidated joint venture income $ 197,928 $ 187,077 $ 10,851 5.80% ========= ========= ======== ==== <CAPTION> Total Portfolio ----------------------------------------------- Increase/ (dollars in thousands) 1999 1998 (Decrease) % Change - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Rental Revenue $ 765,417 $ 487,577 $ 277,840 56.98% Development and management services 14,708 12,411 2,297 18.51% Interest and other 6,439 13,859 (7,420) -53.54% --------- --------- -------- ------ Total revenue 786,564 513,847 272,717 53.07% --------- --------- -------- ------ Expenses: Operating 249,268 150,490 98,778 65.64% General and administrative 29,455 22,504 6,951 30.89% Interest 205,410 124,860 80,550 64.51% Depreciation and amortization 120,059 75,418 44,641 59.19% --------- --------- -------- ------ Total expenses 604,192 373,272 230,920 61.86% --------- --------- -------- ------ Income before minority interests and unconsolidated joint venture income $ 182,372 $ 140,575 $ 41,797 29.73% ========= ========= ======== ====== </TABLE> The increase in rental revenues in our Same Property Portfolio for these years is primarily a result of an overall increase in rental rates on new leases and rollovers as well as an increase in termination fees from $0.7 million to $2.3 million, offset by a small decrease in occupancy from year to year. The occupancy for our Same Property Portfolio decreased from 97.8% as of December 31, 1998 to 97.4% as of December 31, 1999. The increase in rental revenues in our total portfolio is primarily the result of properties we acquired or placed-in-service after January 1, 1998. 35
The increase in development and management services income in our total portfolio is a result of fees earned on new projects begun during the year, and increased fees on projects in progress. The decrease in interest and other income in our total portfolio is a result of less cash and cash equivalents on deposit during 1999. During 1998, our average cash balances were higher due to $765.0 million of net proceeds received from a public offering of our common stock in January 1998. Property operating expenses (real estate taxes, utilities, repairs and maintenance, cleaning and other property-related expenses) in our Same Property Portfolio increased mainly due to real estate taxes. Real estate taxes increased approximately $1.0 million due to higher property tax assessments. Small increases in other property-related expenses account for the remaining increase. Property operating expenses in our total portfolio increased mainly due to properties we acquired or placed-in service after January 1, 1998. General and administrative expenses increased due to the significant increase in the size of our total portfolio since January 1, 1998. We hired additional employees as a result of acquisitions. Interest expense for our total portfolio increased due to an increase in mortgage indebtedness and an increase in borrowing under our unsecured revolving line of credit with Fleet National Bank, as agent. Depreciation and amortization expense for our Same Property Portfolio increased as a result of capital and tenant improvements made during 1999. Depreciation and amortization expense for our total portfolio increased primarily as a result of properties we acquired or placed- in-service after January 1, 1998 and related capital and tenant improvements. Liquidity and Capital Resources Cash and cash equivalents were $281.0 million and $12.0 million at December 31, 2000 and December 31, 1999, respectively. The increase was a result of the following increases and decreases in cash flows: <TABLE> <CAPTION> Year Ended December 31, (in millions) 2000 1999 $ Change ---- ---- -------- <S> <C> <C> <C> Cash Provided by Operating Activities $339.7 $303.5 $ 36.2 Cash Used for Investing Activities ($573.4) ($655.0) $ 81.6 Cash Provided by Financing Activities $502.6 $351.4 $151.2 </TABLE> The increase in cash provided by operating activities is primarily due to the increase in net income resulting from the 1999 and 2000 property acquisitions and developments placed-in- service and our 2000 Same Property Portfolio. Net cash used for investing activities decreased from $655.0 million for the year ended 36
December 31, 1999 to $573.4 million for the year ended December 31, 2000 mainly due to fewer property acquisitions during 2000. The cash and capital used in the 2000 investing activities was primarily for the following transactions: Acquisitions, Dispositions and Development Transactions o On January 12, 2000, we acquired our joint venture partner's 75% interest in One and Two Reston Overlook, for cash of approximately $15.2 million and the assumption of approximately $69.0 million in debt. o On March 1, 2000, we acquired three Class A office buildings totaling approximately 408,163 square feet at Carnegie Center in Princeton, New Jersey, under the terms of the original Carnegie Center Portfolio acquisition entered into in June 1998. We acquired the properties from a related party for approximately $66.5 million, which was funded through the assumption of debt of approximately $49.0 million at a rate of 7.39% and the issuance of 577,817 common units of partnership interest in Boston Properties Limited Partnership valued at approximately $17.5 million. The acquisition was reviewed and approved by a vote of our independent directors. o On May 12, 2000, an unrelated third party acquired partial interests in two properties that we previously owned in their entirety. We retained a 51% interest in the first property, Metropolitan Square, a 582,194-square foot office property in Washington, DC and a 25% interest in the second property, 140 Kendrick Street, a 381,000-square foot build-to-suit development property in Needham, Massachusetts. The interests in the properties were acquired for cash of approximately $46.7 million and the assumption of debt of approximately $88.2 million and resulted in a gain to us of $0.4 million. o On August 22, 2000, we acquired the remaining 50% interest in the development rights at the Prudential Center in Boston, Massachusetts for approximately $18.2 million, which was funded through the issuance of 439,059 shares of our common stock. o On September 13, 2000, we acquired a 35% interest in 265 Franklin Street, a 325,699 square foot office property in Boston, Massachusetts through a joint venture. Our interest in this property was acquired with cash of approximately $10.6 million and new debt financing of approximately $23.8 million. o On September 29, 2000, we sold 910 and 930 Clopper Road, two office/technical use properties totaling 240,596 square feet in Gaithersburg, Maryland for approximately $24.1 million. This sale resulted in a loss to us of approximately $0.8 million. o On October 13, 2000, we sold 1950 Stanford Court, a single story industrial building totaling 53,250 square feet, and an adjacent parcel of land totaling approximately 2 acres in Landover, Maryland, for approximately $2.2 million. This sale resulted in a gain to us of approximately $0.1 million. o On December 1, 2000, we acquired the leasehold interest and ground rent credits at the site of the future Times Square Tower in midtown Manhattan, for approximately $165.1 million in cash. This development will consist of a 47-floor, 1.2 million square foot office tower. o We acquired additional land parcels in Greater Boston, Greater Washington, D.C. and Greater San Francisco for potential future developments for an aggregate amount of 37
approximately $39.7 million, of which approximately $12.5 million was funded with cash and approximately $27.2 million was funded through the issuance of common and preferred units of Boston Properties Limited Partnership. o We placed six Class A office buildings in service which resulted in a total investment during 2000 of approximately $43.4 million. We began or continued construction on additional Class A office buildings and incurred approximately $319.6 million of construction costs during 2000. Our properties under construction as of December 31, 2000 were as follows: <TABLE> <CAPTION> # of Properties Under Construction Location Buildings Square feet - ----------------------------- -------- --------- ----------- <S> <C> <C> Class A Office Buildings 302 Carnegie Center Princeton, NJ 1 64,565 New Dominion Tech Park - Building 1 Herndon, VA 1 235,201 2600 Tower Oaks Boulevard Rockville, MD 1 178,216 Broad Run Business Park- Building E Dulles, VA 1 124,650 Orbital Sciences Phase II - Building 2 Dulles, VA 1 160,502 Quorum Office Park Chelmsford, MA 2 259,918 111 Huntington Avenue - Prudential Center Boston, MA 1 890,000 5 Times Square New York, NY 1 1,099,154 One and Two Discovery Square (50% ownership) Reston, VA 2 362,868 Waltham Weston Corporate Center Waltham, MA 1 295,000 Andover Office Park, Building 1 Andover, MA 1 120,000 611 Gateway Boulevard S. San Francisco, CA 1 249,732 Two Freedom Square (50% ownership) Reston, VA 1 417,113 -------- -------------- Total Construction Properties 15 4,456,919 ======== ============== <CAPTION> Anticipated Investment Total Properties Under Construction to Date Investment - ----------------------------- ------- ---------- <S> <C> <C> Class A Office Buildings 302 Carnegie Center $ 10,085,110 $ 13,435,000 New Dominion Tech Park - Building 1 41,870,052 48,770,000 2600 Tower Oaks Boulevard 26,314,660 38,295,000 Broad Run Business Park- Building E 6,531,465 14,696,000 Orbital Sciences Phase II - Building 2 13,641,517 27,618,000 Quorum Office Park 16,164,660 41,747,000 111 Huntington Avenue - Prudential Center 164,195,234 291,637,000 5 Times Square 281,044,727 536,115,000 One and Two Discovery Square (50% ownership) 10,609,713 42,587,000 (1) Waltham Weston Corporate Center 20,533,037 95,446,000 Andover Office Park, Building 1 8,380,612 17,381,000 611 Gateway Boulevard 8,664,576 77,523,240 Two Freedom Square (50% ownership) 8,896,757 49,336,000 (1) --------------- --------------- Total Construction Properties $ 616,932,120 $1,294,586,240 =============== =============== </TABLE> (1) Represents our share of the investment. In addition, we incurred costs of approximately $37.0 million on properties in the preconstruction phase of the development process. Cash provided by financing activities increased by $151.2 million for 2000, compared to the year ended 1999. During 2000, we received proceeds from new debt totaling approximately $976.4 million. This was offset by $525.2 million of paydowns and principal payments during 2000. The remaining increase is mainly due to the increase in proceeds received from the public offering described below. Recent Equity Financing On October 31, 2000, we completed a public offering of 17,110,000 shares of our common stock (including 2,110,000 shares issued pursuant to the exercise of the underwriters' overallotment option) at a price per share of $39.0625. Our proceeds from this public offering, net of underwriter's discount and offering costs, were approximately $633.8 million. Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Our primary market risk results from our long-term indebtedness, which bears interest at fixed and variable rates. The fair value of our long-term debt obligation is affected by changes in the market interest rates. We manage our market risk by matching long-term leases with long-term fixed rate non-recourse debt of similar duration. In 38
addition, we maintain a major unencumbered portion of our portfolio. We continue to follow a conservative strategy of pre-leasing development projects on a long-term basis to strong tenants in order to achieve the most favorable construction and permanent financing terms. Approximately 85% of our outstanding debt has fixed interest rates, which minimizes the interest rate risk until the maturity of such outstanding debt. We have entered into hedging arrangements with financial institutions. Our primary objective when undertaking hedging transactions and derivative positions is to reduce our floating rate exposure, which, in turn, reduces the risks that the variability of cash flows imposes on variable rate debt. Our strategy protects us against future increases in interest rates. At December 31, 2000, we had hedge contracts totaling $450.0 million. The hedging agreements provide for a fixed interest rate when the London Interbank Offered Rate ("LIBOR") is less than 5.76% and when LIBOR is greater than 6.35% or 7.95% for terms ranging from three to five years per the individual hedging agreements. In addition, we have an interest rate swap agreement for a total of $213.0 million which provides for a fixed interest rate of 6.0% through September 11, 2002. We will consider entering into additional hedging agreements with respect to all or a portion of our variable rate debt. We may borrow additional money with variable rates in the future. Increases in interest rates could increase interest expense, which in turn, could affect cash flow and our ability to service our debt. As a result of the hedging agreements, decreases in interest rates could increase interest expense as compared to the underlying variable rate debt and could result in us making payments to unwind such agreements. At December 31, 2000, our variable rate debt outstanding was approximately $404.1 million. At December 31, 2000, the average interest rate on variable rate debt was approximately 8.56%. Taking the hedging contracts into consideration, if market interest rates on our variable rate debt were to increase by ten percent (approximately 86 basis points), total interest would increase approximately $1.7 million. These amounts were determined solely by considering the impact of hypothetical interest rates on our financial instruments. Due to the uncertainty of specific actions we may undertake to minimize possible effects of market interest rate increases, this analysis assume no changes in our financial structure. Capitalization At December 31, 2000, our total consolidated debt was approximately $3.4 billion. The weighted average rate of our consolidated indebtedness was 7.37% and the weighted average maturity was approximately 6.2 years. Our total market capitalization was approximately $8.8 billion at December 31, 2000. Total market capitalization was calculated using the December 31, 2000 closing stock price of $43.50 per share and includes the following: (1) 86,630,089 shares of our common stock, (2) 23,862,206 of common units of Boston Properties Limited Partnership (excluding common units held by Boston Properties, Inc.), (3) an aggregate of 11,021,064 common units issuable upon conversion of all Series One, Two, Three and Z preferred units, (4) 2,624,672 shares of our common stock issuable upon conversion of all 2,000,000 shares of our Series A preferred stock, 39
and (5) our consolidated debt. Our total consolidated debt at December 31, 2000 represented approximately 38.7% of our total market capitalization. Debt Financing The table below summarizes our mortgage notes and bonds payable and our unsecured revolving line of credit with Fleet Boston, as agent, at December 31, 2000 and 1999: December 31, ------------------------ 2000 1999 ---- ---- (dollars in thousands) DEBT SUMMARY: Balance Fixed rate $3,010,760 $2,820,650 Variable rate 404,131 500,934 ---------- ---------- Total $3,414,891 $3,321,584 ========== ========== Percent of total debt: Fixed rate 88.17% 84.92% Variable rate 11.83% 15.08% ---------- ---------- Total 100.00% 100.00% ========== ========== Weighted average interest rate: Fixed rate 7.21% 7.06% Variable rate 8.56% 7.61% ---------- ---------- Total 7.37% 7.14% ========== ========== The variable rate debt shown above bears interest based on various spreads over LIBOR or Eurodollar rates. We utilize our $605.0 million unsecured revolving line of credit principally to fund development of properties, other land and property acquisitions and for working capital purposes. Our unsecured revolving line of credit is a recourse obligation of Boston Properties Limited Partnership. Our ability to borrow under our unsecured revolving line of credit is subject to our compliance with a number of customary financial and other covenants on an ongoing basis, including: (1) loan-to-value ratio against our total borrowing base not to exceed 55%, unless our leverage ratio exceeds 60%, in which case it is not to exceed 50%, (2) a loan-to-value ratio against the total secured borrowing base not to exceed 55%, (3) debt service coverage ratio of 1.40 for our borrowing base, or 1.50 if our leverage ratio equals or exceeds 60%, and 1.30 for us as a whole for full fixed charges, (4) a leverage ratio not to exceed 60%, however five consecutive quarters (not including the two quarters prior to expiration) can go to 65% (5) an interest rate applicable to any amounts drawn under our unsecured revolving line of credit for Eurodollar based loans shall be equal to a floating rate based on a spread over Eurodollar equal to 105 to 170 basis points, (6) limitations on additional indebtedness and stockholder distributions, and (7) a minimum net worth requirement. At December 31, 2000, we had issued letters of credit totaling $3.3 million and had the ability to borrow an additional $601.7 million under our unsecured revolving line of credit. As of March 14, 2001 there was zero outstanding under our unsecured revolving line of credit. 40
The following table sets forth certain information regarding our mortgage notes and bonds payable at December 31, 2000: <TABLE> <CAPTION> Interest Properties Rate Principal Amount Maturity Date ---------- ---- ---------------- ------------- (in thousands) <S> <C> <C> <C> Embarcadero Center One, Two and Federal Reserve 6.70% $312,876 December 12, 2008 Prudential Center 6.72% 291,896 July 1,2008 280 Park Avenue 7.65% 270,000 December 31, 2009 599 Lexington Avenue (1) 7.00% 225,000 July 19, 2005 5 Times Square (2) 8.66% 184,157 January 26, 2003 Embarcadero Center Four 6.79% 154,549 February 1, 2008 875 Third Avenue (3) 8.00% 150,959 December 31, 2002 Embarcadero Center Three 6.40% 146,313 January 1, 2007 Two Independence Square (4) 8.09% 116,377 February 27, 2003 Riverfront Plaza 6.61% 115,647 February 1, 2008 Democracy Center 7.05% 107,717 April 1, 2009 New Dominion Technology Park, Building 1 (5) 98,142 (5) Embarcadero Center West Tower 6.50% 97,587 January 1, 2006 100 East Pratt Street 6.73% 91,851 November 1, 2008 601 and 651 Gateway Boulevard 8.40% 89,888 October 1, 2010 111 Huntington Avenue (6) 8.69% 76,041 September 27, 2002 One Independence Square (4) 8.12% 74,114 August 21, 2001 Reservoir Place (7) 6.88% 73,858 November 1, 2006 One & Two Reston Overlook 7.45% 68,190 September 1, 2004 2300 N Street 6.88% 66,000 August 3, 2003 202, 206, 214 Carnegie Center 8.13% 62,917 October 1, 2001 Capital Gallery 8.24% 57,161 August 15, 2006 504,506,508 Carnegie Center 7.39% 48,312 January 1, 2008 10 and 20 Burlington Mall Road (8) 8.33% 37,000 October 1, 2001 10 Cambridge Center 8.27% 35,741 May 1, 2010 1301 New York Avenue (9) 32,710 August 15, 2009 Eight Cambridge Center 7.73% 28,412 July 15, 2010 Sumner Square (10) 8.38% 28,298 April 22, 2004 510 Carnegie Center 7.39% 27,653 January 1, 2008 Lockheed Martin Building 6.61% 26,289 June 1, 2008 Orbital Sciences - Buildings One and Three (11) 8.35% 25,761 August 9, 2002 University Place 6.94% 25,253 August 1, 2021 Reston Corporate Center 6.56% 24,809 May 1, 2008 191 Spring Street 8.50% 22,797 September 1, 2006 Bedford Business Park 8.50% 21,717 December 10, 2008 NIMA Building 6.51% 21,495 June 1, 2008 2600 Tower Oaks Boulevard (12) 8.59% 18,083 October 10, 2002 Quorum Office Park (13) 8.34% 11,111 August 30, 2003 101 Carnegie Center 7.66% 8,348 April 1, 2006 </TABLE> 41
<TABLE> <CAPTION> Interest Properties Rate Principal Amount Maturity Date ---------- ---- ---------------- ------------- (in thousands) <S> <C> <C> <C> Orbital Sciences - Phase 2 (14) 8.35% 8,032 June 13, 2003 Montvale Center 8.59% 7,564 December 1, 2006 40 Shattuck Road (15) 8.53% 6,224 December 4, 2003 Newport Office Park 8.13% 5,923 July 1, 2001 302 Carnegie Center (16) 8.61% 5,893 March 15, 2003 Hilltop Business Center 6.81% 5,738 March 1, 2019 201 Carnegie Center 7.08% 488 February 1, 2010 ---------- Total $3,414,891 ========== </TABLE> (1) At maturity the lender has the option to purchase a 33.33% interest in this property in exchange for the cancellation of the principal balance of $225.0 million. (2) Total construction loan in the amount of $420.0 million at a variable rate of Eurodollar + 2.00%. (3) The principal amount and interest rate shown have been adjusted to reflect the fair value of the note. The stated principal balance at December 31, 2000 was $150.0 million and the interest rate was 8.75%. (4) The principal amount and interest rate shown have been adjusted to reflect the effective rates on the loans. The stated principal balances at December 31, 2000 were $116.8 million and $74.4 million, respectively. The stated interest rates are 8.50% and continue at such rates through the loan expiration. (5) Includes construction loan in the amount of $48.6 million which was paid off on January 31, 2001 and $57.6 million of bond financing which was being held in escrow until the New Dominion project was completed. The bond financing bears interest at a rate of 7.70% and matures in January 2021. (6) Total construction loan in the amount of $203.0 million at a variable rate of LIBOR + 2.00%. (7) The principal amount and interest rate shown have been adjusted to reflect the fair value of the note. The stated principal balance at December 31, 2000 was $65.5 million and the interest rate was 9.09%. (8) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 and 100 Hayden Avenue. (9) Includes outstanding principal in the amounts of $19.9 million, $8.4 million and $4.4 million which bear interest at fixed rates of 6.70%, 8.54% and 6.75%, respectively. (10) Outstanding principal bears interest at a floating rate equal to Eurodollar + 1.50% (11) Total construction loan in the amount of $27.0 million at a variable rate of Eurodollar + 1.65%. (12) Total construction loan in the amount of $32.0 million at a variable rate of LIBOR + 1.90%. (13) Total construction loan in the amount of $16.0 million at a variable rate of LIBOR + 1.75%. (14) Total construction loan in the amount of $25.1 million at a variable rate of Eurodollar + 1.65%. (15) Total construction loan in the amount of $16.0 million at a variable rate of LIBOR + 1.75%. (16) Total construction loan in the amount of $10.0 million at a variable rate of LIBOR + 1.90%. NOTE: LIBOR and Eurodollar rate contracts in effect on December 31, 2000 ranged from 6.56% to 6.82%. The LIBOR and Eurodollar rates at December 31, 2000 were 6.57% and 6.58%, respectively. We have determined that our estimated cash flows and available sources of liquidity are adequate to meet liquidity needs for the next twelve months. We believe that our principal liquidity needs for the next twelve months are to fund normal recurring expenses, debt service requirements, current development costs not covered under construction loans and the minimum distribution required to maintain our REIT qualifications under the Internal Revenue Code of 1986, as amended. We believe that these needs will be fully funded from cash flows provided by operating and financing activities. We expect to meet liquidity requirements for periods beyond twelve months for the costs of development, property acquisitions, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements through construction loans, the incurrence of long-term secured and unsecured indebtedness, income from operations and sales of real estate and possibly the issuance of additional common and preferred units of Boston Properties Limited Partnership and equity securities of Boston Properties, Inc. In addition, we may finance the development, redevelopment or acquisition of additional properties by using our unsecured 42
revolving line of credit. Rental revenues, operating expense reimbursement income from tenants, and income from the operations are our principal sources of capital used to pay operating expenses, debt service and recurring capital expenditures. We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our sources of revenue include third party fees generated by our office and industrial real estate management, leasing, development and construction businesses. Consequently, we believe our revenue will continue to provide the necessary funds for operating expenses, debt service and recurring capital expenditures. During the year ended December 31, 2000, we paid or declared quarterly dividends totaling $2.04 per common share (consisting of $.45 related to the quarter ended March 31, 2000 and $.53 related to each of the quarters ended June 30, 2000, September 30, 2000 and December 31, 2000). We intend to continue paying dividends quarterly. Funds from Operations Pursuant to the National Association of Real Estate Investment Trusts revised definition of Funds from Operations, we calculate Funds From Operations by adjusting net income (loss) (computed in accordance with accounting principles generally accepted in the United States, including non-recurring items), for gains (or losses) from debt restructuring and sales of properties (except gains and losses from sales of depreciable operating properties), real estate related depreciation and amortization and unconsolidated partnerships and joint ventures. We believe that Funds From Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute Funds From Operations in accordance with standards established by the National Association of Real Estate Investment Trusts which may not be comparable to Funds From Operations reported by other REITs that do not define the term in accordance with the current National Association of Real Estate Investment Trusts or that interpret the definition differently. Funds From Operations does not represent cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States and should not be considered as an alternative to net income (determined in accordance with accounting principles generally accepted in the United States) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. Environmental Matters Some of our properties are located in urban and industrial areas where fill or current or historical industrial uses of the areas have caused site contamination. With respect to all of our properties, independent environmental consultants have been retained in the past to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys. These environmental assessments have not revealed any environmental conditions that we believe will have a material adverse 43
effect on our business, assets or results of operations, and we are not aware of any other environmental condition with respect to any of our properties which we believe would have such a material adverse effect. However, we are aware of environmental conditions at three of our properties that may require remediation: On January 15, 1992, a property in Massachusetts was listed by the state regulatory authority as an unclassified Confirmed Disposal Site in connection with groundwater contamination. We engaged a specially licensed environmental consultant to perform the necessary investigation and assessment and to prepare submittals to the state regulatory authority. On August 1, 1997, our consultant submitted to the state regulatory authority a Phase I - Limited Site Investigation Report and Downgradient Property Status Opinion. This Opinion concluded that the property qualifies for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site and may qualify us for liability relief under recent statutory amendments. Although we believe that the current or former owners of the upgradient source properties may ultimately be responsible for some or all of the costs of such response actions, we will take any necessary further response actions. An investigation at another property in Massachusetts identified groundwater contamination. We engaged a specially licensed environmental consultant to perform the necessary investigation and assessment and to prepare submittals to the state regulatory authority. On March 11, 1998, our consultant submitted to the state regulatory authority a Release Notification and Downgradient Property Status Opinion. This Opinion concluded that the property qualifies for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site and may qualify us for liability relief under recent statutory amendments. Although we believe that the current or former owners of the upgradient source properties may ultimately be responsible for some or all of the costs of such response actions, we will take any necessary further response actions. In February 1999, one of our affiliates acquired from Exxon Corporation a property in Massachusetts that was formerly used as a petroleum bulk storage and distribution facility and was known by the state regulatory authority to contain soil and groundwater contamination. We anticipate development of an office park on the property. Pursuant to the property acquisition agreement, Exxon has agreed to (1) bear the liability arising from releases or discharges of oil and hazardous substances which occurred at the site prior to our ownership, (2) continue remediating such releases and discharges as necessary and appropriate to comply with applicable requirements, and (3) indemnify our affiliate for certain losses arising from preexisting site conditions, including up to $500,000 for the premium costs associated with construction-related management of contaminated soil not otherwise subject to remediation by Exxon. Any indemnity claim may be subject to various defenses. Our affiliate has engaged a specially licensed environmental consultant to oversee the management of contaminated soil that may be disturbed in the course of construction. We expect that any resolution of the environmental matters relating the above will not have a material impact on our financial position, results of operations or liquidity. 44
Newly Issued Accounting Standard As of January 1, 2001, we adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and No. 138 ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in our consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS No. 133 are required to be reported in earnings. For derivatives designated as hedging instruments in qualifying cash flow hedges, the effective portion of changes in fair value of the derivatives are recognized in accumulated other comprehensive loss until the forecasted transactions occur and the ineffective portions are recognized in earnings. The nature of our derivatives include investments in warrants to purchase shares of common stock of other companies and interest rate agreements to protect against changes in interest rates for variable rate debt. Based on the terms of the warrant agreements, the warrants meet the definition of a derivative and accordingly, must be marked to fair value through earnings. We had been recording the warrants at fair value through other comprehensive loss as available for sale securities under SFAS No. 115. We estimate that upon adoption of SFAS No. 133, we will reclass approximately $6.8 million, the fair value of the warrants, from accumulated other comprehensive loss to a cumulative effect of a change in accounting principle. Our interest rate protection agreements will be designated as hedging instruments in qualifying cash flow hedges. As such, we estimate that, upon adoption of SFAS No. 133, we will record an asset of approximately $0.2 million and record a liability of approximately $11.4 million for the fair values of these agreements. The offset for these entries will be to a cumulative effect of a change in accounting principle and accumulated other comprehensive loss, respectively. Finally, we estimate we will write-off deferred charges of approximately $1.6 million as a cumulative effect of a change in accounting principle. Inflation Substantially all of our leases provide for separate real estate tax and operating expense escalations over a base amount. In addition, many of our leases provide for fixed base rent increases or indexed increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases described above. 45
Item 7a. Quantitative and Qualitative Disclosures about Market Risk Approximately $3.0 billion of our long-term debt bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The following table presents principal cash flows based upon maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt. The interest rate on the variable rate debt as of December 31, 2000 ranged from LIBOR or Eurodollar plus 1.50% to LIBOR or Eurodollar plus 2.00%. <TABLE> <CAPTION> Mortgage debt, including current portion (in thousands) --------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006+ Total Fair Value ---- ---- ---- ---- ---- ----- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed Rate .......... $153,415 186,338 218,925 106,666 269,378 2,076,038 $3,010,760 $3,010,760 Average Interest Rate 7.93% 7.76% 7.54% 7.30% 7.01% 7.09% 7.21% -- Variable Rate ....... $ 40,532 119,885 215,416 28,298 -- -- $ 404,131 $ 404,131 </TABLE> Item 8. Financial Statements and Supplementary Data See "Index to Financial Statements" on page 54 this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. 46
PART III Item 10. Directors and Executive Officers of the Registrant The information concerning our directors and executive officers required by Item 10 shall be included in the Proxy Statement to be filed relating to the 2001 Annual Meeting of our stockholders and is incorporated herein by reference. Item 11. Executive Compensation The information concerning our executive compensation required by Item 11 shall be included in the Proxy Statement to be filed relating to the 2001 Annual Meeting of our stockholders and is incorporated herein by reference. Item 12. Security Ownership of Beneficial Owners and Management The information concerning our directors and executive officers required by Item 12 shall be included in the Proxy Statement to be filed relating to the 2001 Annual Meeting of our stockholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information concerning our directors and executive officers required by Item 13 shall be included in the Proxy Statement to be filed relating to the 2001 Annual Meeting of our stockholders and is incorporated herein by reference. 47
PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) Financial Statements and Financial Statement Schedule See "Index to Financial Statements" on page 54 of this Form 10-K. (b) Reports on Form 8-K We filed a report on Form 8-K on October 16, 2000 which included information regarding Item 5. We filed this Form 8-K in connection with our press release regarding our third quarter 2000 earnings and information presented to investors and analysts. (c) Exhibits Exhibit No. Description - ----------- ----------- 3.1 Form of Amended and Restated Certificate of Incorporation of Boston Properties, Inc. (2) 3.2 Form of Amended and Restated Bylaws of Boston Properties, Inc. (2) 3.3 Amendment No. 1 to Amended and Restated Bylaws of Boston Properties, Inc. 4.1 Form of Shareholder Rights Agreement dated as of June , 1997 between Boston Properties, Inc. and BankBoston, N.A., as Rights Agent. (2) 4.2 Form of Certificate of Designation for Series E Junior Participating Cumulative Preferred Stock, par value $.01 per share. (2) 4.3 Form of Certificate of Designations for the Series A Preferred Stock. (9) 4.4 Form of Common Stock Certificate. (2) 10.1 Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership, dated as of June 29, 1998. (6) 48
10.2 Certificate of Designations for the Series One Preferred Units, dated June 30, 1998, constituting an amendment to the Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership. (6) 10.3 Certificate of Designations for the Series Two Preferred Units, dated November 12, 1998, constituting an amendment to the Second Amendment and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership. (9) 10.4 Certificate of Designations for the Series Three Preferred Units, dated November 12, 1998, constituting an amendment to the Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership. (9) 10.5 Certificate of Designations for the Series Z Preferred Units, dated December 11, 2000, constituting an amendment to the Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership. 10.6 Amended and Restated 1997 Stock Option and Incentive Plan dated May 3, 2000 and forms of option agreements. 10.7 Amendment #1 to Amended and Restated 1997 Stock Option and Incentive Plan dated November 14, 2000. 10.8 Form of Noncompetition Agreement between Boston Properties, Inc. and Mortimer B. Zuckerman. (2) 10.9 Form of Employment and Noncompetition Agreement between Boston Properties, Inc. and Edward H. Linde. (2) 10.10 Form of Employment Agreement between Boston Properties, Inc. and certain executive officers. (2) 10.11 Form of Indemnification Agreement between Boston Properties, Inc. and each of its directors and executive officers. (2) 10.12 Omnibus Option Agreement by and among Boston Properties Limited Partnership and the Grantors named therein dated as of April 9, 1997. (2) 10.13 Second Amended and Restated Revolving Credit Agreement with Fleet National Bank, as agent, dated as of March 31, 2000. (10) 10.14 Amendment #1 to Second Amended and Restated Revolving Credit Agreement with Fleet National Bank, as agent, dated as of September 20, 2000. 10.15 Form of Registration Rights Agreement among Boston Properties, Inc. and the holders named therein. (2) 10.16 Form of Lease Agreement dated as of June , 1997 between Edward H. Linde and Mortimer B. Zuckerman, as Trustees of Downtown Boston Properties Trust, and ZL Hotel LLC. (2) 10.17 Form of Lease Agreement dated as of June , 1997 between Edward H. Linde and Mortimer B. Zuckerman, as Trustees of Two Cambridge Center Trust, and ZL Hotel LLC. (2) 10.18 Form of Certificate of Incorporation of Boston Properties Management, Inc. (2) 10.19 Form of By-laws of Boston Properties Management, Inc. (2) 10.20 Form of Limited Liability Agreement of ZL Hotel LLC. (2) 10.21 Indemnification Agreement between Boston Properties Limited Partnership and Mortimer B. Zuckerman and Edward H. Linde. (2) 10.22 Compensation Agreement between Boston Properties, Inc. and Robert Selsam, dated as of August 10, 1995 relating to 90 Church Street.(2) 10.23 Contribution and Conveyance Agreement concerning the Carnegie Portfolio, dated June 30, 1998 by and among Boston Properties, Inc., Boston Properties Limited Partnership, and the parties named therein as Landis Parties. (6) 49
10.24 Contribution Agreement, dated June 30, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, and the parties named therein as Landis Parties. (6) 10.25 Registration Rights and Lock-Up Agreement, dated June 30, 1998 by and among Boston Properties, Inc., Boston Properties Limited Partnership and the parties named therein as Holders. (6) 10.26 Non-Competition Agreement, dated as of June 30, 1998, by and between Alan B. Landis and Boston Properties, Inc. (6) 10.27 Agreement Regarding Directorship, dated as of June 30, 1998, by and between Boston Properties, Inc. and Alan B. Landis. (6) 10.28 Purchase and Sale Agreement, dated May 7, 1998, by and between The Prudential Insurance Company of America and Boston Properties Limited Partnership. (7) 10.29 Contribution Agreement, dated as of May 7, 1998, by and between The Prudential Insurance Company of America and Boston Properties Limited Partnership. (7) 10.30 Registration Rights Agreement, dated as of July 2, 1998, by and among the Registrant, Strategic Value Investors II, LLC and The Prudential Insurance Company of America. (7) 10.31 Purchase and Sale Agreement, dated as of November 12, 1998, by and between Two Embarcadero Center West and BP OFR LLC. (9) 10.32 Contribution Agreement, dated as of November 12, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, Embarcadero Center Investors Partnership and the partners in Embarcadero Center Investors Partnership listed on Exhibit A thereto. (9) 10.33 Contribution Agreement, dated as of November 12, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, Three Embarcadero Center West and the partners in Three Embarcadero Center West listed on Exhibit A thereto. (9) 10.34 Three Embarcadero Center West Redemption Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center West, Boston Properties Limited Partnership, BP EC West LLC, The Prudential Insurance Company of America, PIC Realty Corporation and Prudential Realty Securities II, Inc.(9) 10.35 Three Embarcadero Center West Property Contribution Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center West, The Prudential Insurance Company of America, PIC Realty Corporation, Prudential Realty Securities II, Inc., Boston Properties Limited Partnership, Boston Properties, Inc. and BP EC West LLC. (9) 10.36 Registration Rights and Lock-Up Agreement, dated November 12, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership and the Holders named therein.(9) 10.37 Third Amended and Restated Partnership Agreement of One Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC1 Holdings LLC, as non-managing general partner, and PIC Realty Corporation, as non-managing general partner. (9) 10.38 Third Amended and Restated Partnership Agreement of Embarcadero Center Associates, dated as of November 12, 1998, by and between BP LLC, as managing general partner, BP EC2 Holdings LLC, as non-managing general partner, and PIC Realty Corporation, as non- managing general partner. (9) 50
10.39 Second Amended and Restated Partnership Agreement of Three Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC3 Holdings LLC, as non- managing general partner, and The Prudential Insurance Company of America, as non-managing general partner. (9) 10.40 Second Amended and Restated Partnership Agreement of Four Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC4 Holdings LLC, as non- managing general partner, and The Prudential Insurance Company of America, as non-managing general partner. (9) 10.41 Note Purchase Agreement, dated as of November 12, 1998, by and between Prudential Realty Securities, Inc. and One Embarcadero Center Venture. (9) 10.42 Note Purchase Agreement, dated as of November 12, 1998, by and between Prudential Realty Securities, Inc. and Embarcadero Center Associates. (9) 10.43 Note Purchase Agreement, dated November 12, 1998, by and between Prudential Realty Securities, Inc. and Three Embarcadero Center Venture. (9) 10.44 Note Purchase Agreement, dated November 12, 1998, by and between Prudential Realty Securities, Inc. and Four Embarcadero Center Venture. (9) 10.45 Redemption Agreement, dated as of November 12, 1998, by and among One Embarcadero Center Venture, Boston Properties LLC, BP EC1 Holdings LLC and PIC Realty Corporation. (9) 10.46 Redemption Agreement, dated as of November 12, 1998, by and among Embarcadero Center Associates, Boston Properties LLC, BP EC2 Holdings LLC and PIC Realty Corporation. (9) 10.47 Redemption Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center Venture, Boston Properties LLC, BP EC3 Holdings LLC and The Prudential Insurance Company of America. (9) 10.48 Redemption Agreement, dated as on November 12, 1998, by and among Four Embarcadero Center Venture, Boston Properties LLC, BP EC4 Holdings LLC and The Prudential Insurance Company of America. (9) 10.49 Option and Put Agreement, dated as of November 12, 1998, by and between One Embarcadero Center Venture and The Prudential Insurance Company of America. (9) 10.50 Option and Put Agreement, dated as of November 12, 1998, by and between Embarcadero Center Associates and The Prudential Insurance Company of America. (9) 10.51 Option and Put Agreement, dated as of November 12, 1998, by and between Three Embarcadero Center Venture and The Prudential Insurance Company of America. (9) 10.52 Option and Put Agreement, dated as of November 12, 1998, by and between Four Embarcadero Center Venture and The Prudential Insurance Company of America. (9) 10.53 Stock Purchase Agreement, dated as of September 28, 1998, by and between Boston Properties, Inc. and The Prudential Insurance Company of America. (9) 10.54 Master Agreement by and between New York State Common Retirement Fund and Boston Properties Limited Partnership, dated as of May 12, 2000. 21.1 Schedule of Subsidiaries of Boston Properties, Inc. (2) 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants (1) Incorporated herein by reference to Boston Properties, Inc.'s Registration Statement on Form S-11 (No. 333-41449). 51
(2) Incorporated herein by reference to Boston Properties, Inc.'s Registration Statement on Form S-11 (No. 333-25279). (3) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on November 25, 1997. (4) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8- K/A filed on November 14, 1997. (5) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on November 26, 1997. (6) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on July 15, 1998. (7) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on July 17, 1998. (8) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on July 27, 1998. (9) Incorporated herein by reference to Boston Properties, Inc.'s Current Report on Form 8-K filed on November 25, 1998. (10) Incorporated herein by reference to Boston Properties, Inc.'s Report on Form 10-Q filed on May 15, 2000. 52
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Boston Properties, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Boston Properties, Inc. Date By: /s/ Douglas T. Linde March 29, 2001 -------------------------- Douglas T. Linde Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 29, 2001 By: /s/ Mortimer B. Zuckerman -------------------------- Mortimer B. Zuckerman Chairman of the Board of Directors By: /s/ Edward H. Linde -------------------------- Edward H. Linde President and Chief Executive Officer By: /s/ Douglas T. Linde -------------------------- Douglas T. Linde Chief Financial Officer By: /s/Alan J. Patricof -------------------------- Alan J. Patricof Director By: /s/ Ivan G. Seidenberg -------------------------- Ivan G. Seidenberg Director By: /s/ Martin Turchin -------------------------- Martin Turchin Director By: /s/ Alan B. Landis -------------------------- Alan B. Landis Director By: /s/ Richard E. Salomon -------------------------- Richard E. Salomon Director 53
BOSTON PROPERTIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants ....................................... 55 Consolidated Balance Sheets as of December 31, 2000 and 1999 ............ 56 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 ...................................... 57 Consolidated Statements of Stockholder's Equity for the years ended December 31, 2000, 1999 and 1998 .................. 58 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ...................................... 59-60 Notes to Consolidated Financial Statements .............................. 61 Financial Statement Schedule - Schedule III ............................. 80-83 All other schedules for which a provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 54
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Boston Properties, Inc.: In our opinion, the accompanying consolidated financial statements and the financial statement schedule listed in the accompanying index present fairly, in all material respects, the financial position of Boston Properties, Inc. (the "Company") at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial statement schedule, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts January 24, 2001 55
BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, -------------------------------------- 2000 1999 ----------- ----------- (in thousands, except for share amounts) <S> <C> <C> ASSETS Real estate: $ 6,112,779 $ 5,609,424 Less: accumulated depreciation (586,719) (470,591) ----------- ----------- Total real estate 5,526,060 5,138,833 Cash and cash equivalents 280,957 12,035 Escrows 85,561 40,254 Investments in securities 7,012 14,460 Tenant and other receivables (net of allowance for doubtful 26,852 28,259 accounts of $2,112 and $3,254, respectively) Accrued rental income (net of allowance of $3,300 and 91,684 82,228 $3,300, respectively) Deferred charges, net 77,319 53,733 Prepaid expenses and other assets 41,154 28,452 Investments in unconsolidated joint ventures 89,871 36,518 ----------- ----------- Total assets $ 6,226,470 $ 5,434,772 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes and bonds payable $ 3,414,891 $ 2,955,584 Unsecured line of credit -- 366,000 Accounts payable and accrued expenses 57,338 66,780 Dividends and distributions payable 71,274 50,114 Accrued interest payable 5,599 8,486 Other liabilities 51,926 48,282 ----------- ----------- Total liabilities 3,601,028 3,495,246 ----------- ----------- Commitments and contingencies -- -- ----------- ----------- Minority interests 877,715 781,962 ----------- ----------- Series A Convertible Redeemable Preferred Stock, liquidation preference $50.00 per share, 2,000,000 shares issued and outstanding 100,000 100,000 ----------- ----------- Stockholders' equity: Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding -- -- Common stock, $.01 par value, 250,000,000 shares authorized, 86,630,089 and 67,910,434 issued and outstanding in 2000 and 1999, respectively 866 679 Additional paid-in capital 1,673,349 1,067,778 Dividends in excess of earnings (13,895) (10,893) Unearned compensation (848) -- Accumulated other comprehensive loss (11,745) -- ----------- ----------- Total stockholders' equity 1,647,727 1,057,564 ----------- ----------- Total liabilities and stockholders' equity $ 6,226,470 $ 5,434,772 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. 56
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Year ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (in thousands, except for per share amounts) <S> <C> <C> <C> Revenue Rental: Base rent $ 715,358 $ 646,924 $ 419,756 Recoveries from tenants 92,692 72,742 48,718 Parking and other 50,892 45,751 19,103 --------- --------- --------- Total rental revenue 858,942 765,417 487,577 Development and management services 11,837 14,708 12,411 Interest and other 8,574 6,439 13,859 --------- --------- --------- Total revenue 879,353 786,564 513,847 --------- --------- --------- Expenses Operating 264,701 249,268 150,490 General and administrative 35,659 29,455 22,504 Interest 217,064 205,410 124,860 Depreciation and amortization 133,150 120,059 75,418 --------- --------- --------- Total expenses 650,574 604,192 373,272 --------- --------- --------- Income before minority interests and joint venture income 228,779 182,372 140,575 Minority interest in property partnerships (932) (4,614) (2,554) Income from unconsolidated joint ventures 1,758 468 -- --------- --------- --------- Income before minority interest in Operating Partnership 229,605 178,226 138,021 Minority interest in Operating Partnership (76,039) (64,917) (39,428) --------- --------- --------- Income before gain (loss) on sale of real estate 153,566 113,309 98,593 Gain (loss) on sale of real estate, net of minority interest (234) 6,467 -- --------- --------- --------- Income before extraordinary items 153,332 119,776 98,593 Extraordinary loss, net of minority interest (334) -- (5,481) --------- --------- --------- Net income before preferred dividend 152,998 119,776 93,112 Preferred dividend (6,572) (5,829) -- --------- --------- --------- Net income available to common shareholders $ 146,426 $ 113,947 $ 93,112 ========= ========= ========= Basic earnings per share: Income before extraordinary items $ 2.05 $ 1.72 $ 1.62 Extraordinary loss, net of minority interest -- -- (0.09) --------- --------- --------- Net income available to common shareholders $ 2.05 $ 1.72 $ 1.53 ========= ========= ========= Weighted average number of common shares outstanding 71,424 66,235 60,776 ========= ========= ========= Diluted earnings per share: Income before extraordinary items $ 2.01 $ 1.71 $ 1.61 Extraordinary loss, net of minority interest -- -- (0.09) --------- --------- --------- Net income available to common shareholders $ 2.01 $ 1.71 $ 1.52 ========= ========= ========= Weighted average number of common and common equivalent shares outstanding 72,741 66,776 61,308 ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 57
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) <TABLE> <CAPTION> Common Stock Additional Dividends ------------ Paid-in in excess of Shares Amount Capital Earnings ------ ------ ------- -------- <S> <C> <C> <C> <C> Stockholders' Equity, December 31, 1997 38,694 $ 387 $ 172,347 $ 2,314 Sale of Common Stock net of offering costs 23,000 230 764,760 Unregistered Common Stock issued 1,823 18 58,819 Conversion of operating partnership units to Common Stock 10 -- 250 Allocation of minority interest (40,490) Net income for the year 93,112 Dividends declared (103,291) Stock options exercised 1 -- 25 ------ ----- ----------- --------- Stockholders' Equity, December 31, 1998 63,528 635 955,711 (7,865) Sale of Common Stock net of offering costs 4,000 40 140,648 Unregistered Common Stock issued 343 4 12,321 Conversion of operating partnership units to Common Stock 10 -- 260 Allocation of minority interest (41,965) Net income for the year 113,947 Dividends declared (116,975) Shares issued pursuant to stock purchase plan 5 -- 181 Stock options exercised 24 -- 622 ------ ----- ----------- --------- Stockholders' Equity, December 31, 1999 67,910 679 1,067,778 (10,893) Sale of Common Stock net of offering costs 17,110 171 633,591 Unregistered Common Stock issued 439 4 18,156 Conversion of operating partnership units to Common Stock 614 6 20,239 Allocation of minority interest (85,809) Net income for the year 146,426 Dividends declared (149,428) Shares issued pursuant to stock purchase plan 11 -- 374 Stock options exercised 511 5 17,961 Issuance of restricted stock 35 1 1,059 Amortization of restricted stock award Unrealized holding losses ------ ----- ----------- --------- Stockholders' Equity, December 31, 2000 86,630 $ 866 $ 1,673,349 $ (13,895) ====== ===== =========== ========= <CAPTION> Accumulated Other Unearned Comprehensive Compensation Loss Total ------------ ---- ----- <S> <C> <C> <C> Stockholders' Equity, December 31, 1997 $ 175,048 Sale of Common Stock net of offering costs 764,990 Unregistered Common Stock issued 58,837 Conversion of operating partnership units to Common Stock 250 Allocation of minority interest (40,490) Net income for the year 93,112 Dividends declared (103,291) Stock options exercised 25 ------ --------- ----------- Stockholders' Equity, December 31, 1998 948,481 Sale of Common Stock net of offering costs 140,688 Unregistered Common Stock issued 12,325 Conversion of operating partnership units to Common Stock 260 Allocation of minority interest (41,965) Net income for the year 113,947 Dividends declared (116,975) Shares issued pursuant to stock purchase plan 181 Stock options exercised 622 ------ --------- ----------- Stockholders' Equity, December 31, 1999 1,057,564 Sale of Common Stock net of offering costs 633,762 Unregistered Common Stock issued 18,160 Conversion of operating partnership units to Common Stock 20,245 Allocation of minority interest (85,809) Net income for the year 146,426 Dividends declared (149,428) Shares issued pursuant to stock purchase plan 374 Stock options exercised 17,966 Issuance of restricted stock $(1,060) -- Amortization of restricted stock award 212 212 Unrealized holding losses $ (11,745) (11,745) ------- --------- ----------- Stockholders' Equity, December 31, 2000 $ (848) $ (11,745) $ 1,647,727 ======= ========= =========== </TABLE> The accompanying notes are an integral part of these financial statements. 58
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the year ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (in thousands) <S> <C> <C> <C> Cash flows from operating activities: Net income before preferred dividend $ 152,998 $ 119,776 $ 93,112 Adjustments to reconcile net income before preferred dividend to net cash provided by operating activities: Depreciation and amortization 133,150 120,059 75,418 Non-cash portion of interest expense 3,693 2,364 247 Loss (gain) on sale of real estate 314 (8,736) -- Extraordinary loss 433 -- 7,743 Distributions in excess of earnings from unconsolidated joint ventures 90 (468) -- Compensation related to restricted shares 212 -- -- Non-cash compensation 1,958 -- -- Minority interests 75,860 67,186 38,760 Change in assets and liabilities: Escrows 12,303 (21,240) (4,836) Tenant and other receivables, net 1,407 12,571 (16,372) Accrued rental income, net (14,509) (17,977) (9,061) Prepaid expenses and other assets (12,702) (10,354) (5,833) Accounts payable and accrued expenses (14,300) 23,277 19,075 Accrued interest payable (2,887) 1,179 726 Other liabilities 1,644 15,832 16,308 ----------- ----------- ----------- Total adjustments 186,666 183,693 122,175 ----------- ----------- ----------- Net cash provided by operating activities 339,664 303,469 215,287 ----------- ----------- ----------- Cash flows from investing activities: Acquisitions/additions to real estate (604,164) (661,007) (1,697,449) Tenant leasing costs (21,032) (11,329) (17,979) Investments in unconsolidated joint ventures (16,582) 10,737 (43,644) Net proceeds from sales of real estate 70,712 13,103 -- Investments in securities (2,297) (6,500) -- Notes receivable -- -- (420,143) ----------- ----------- ----------- Net cash used in investing activities (573,363) (654,996) (2,179,215) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from the issuance of common and preferred stock 633,762 240,688 819,103 Borrowings on unsecured line of credit 184,000 696,000 322,000 Repayments of unsecured line of credit (550,000) (345,000) (540,000) Repayments of mortgage notes (525,241) (33,362) (159,714) Proceeds from mortgage notes 976,390 307,525 1,226,717 Proceeds from (repayments of) notes payable -- (328,143) 420,143 Dividends and distributions (209,723) (181,493) (127,307) Proceeds from exercise of stock options 16,008 622 -- Proceeds from employee stock purchase plan 374 181 -- Deferred financing costs (22,949) (5,622) (2,408) ----------- ----------- ----------- Net cash provided by financing activities 502,621 351,396 1,958,534 ----------- ----------- ----------- Net increase (decrease) in cash 268,922 (131) (5,394) Cash and cash equivalents, beginning of period 12,035 12,166 17,560 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 280,957 $ 12,035 $ 12,166 =========== =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements 59
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED <TABLE> <CAPTION> For the year ended December 31, --------------------------------- 2000 1999 1998 --------- --------- --------- (in thousands) <S> <C> <C> <C> Supplemental disclosures: Cash paid for interest $ 253,971 $ 218,820 $ 46,422 ========= ========= ========= Interest capitalized $ 37,713 $ 16,953 $ 6,933 ========= ========= ========= Non-cash investing and financing activities: Additions to real estate included in accounts payable $ 4,858 $ 606 $ 6,198 ========= ========= ========= Mortgage notes payable assumed in connection with acquisitions $ 117,831 $ 28,331 $ 496,926 ========= ========= ========= Mortgage notes payable assigned in connection with the sale of real estate $ 166,547 $ -- $ -- ========= ========= ========= Bonds payable proceeds escrowed $ 57,610 $ -- $ -- ========= ========= ========= Issuance of minority interest in connection with acquisitions $ 44,712 $ 2,063 $ 941,318 ========= ========= ========= Dividends and distributions declared but not paid $ 71,274 $ 50,114 $ 40,494 ========= ========= ========= Notes receivable assigned in connection with an acquisition $ -- $ 420,143 $ -- ========= ========= ========= Notes payable assigned in connection with an acquisition $ -- $ 92,000 $ -- ========= ========= ========= Common Stock issued in connection with an acquisition of real estate $ 2,660 $ 12,325 $ 5,000 ========= ========= ========= Common Stock issued in connection with an acquisition of minority interest $ 15,500 $ -- $ -- ========= ========= ========= Conversion of Operating Partnership Units to Common Stock $ 20,245 $ 260 $ 250 ========= ========= ========= Real estate contributed to joint ventures $ 36,999 $ -- $ -- ========= ========= ========= Unrealized loss related to investments in securities $ 11,745 $ -- $ -- ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements 60
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 1. Organization and Basis of Presentation Organization Boston Properties, Inc. (the "Company"), a Delaware corporation, is a self-administered and self-managed real estate investment trust ("REIT"). Boston Properties, Inc. is the sole general partner of Boston Properties Limited Partnership (the "Operating Partnership") and at December 31, 2000, owned an approximate 71.9% general and limited partnership interest in the Operating Partnership. Partnership interests in the Operating Partnership are denominated as "common units of partnership interest" (also referred to as "OP Units") or "preferred units of partnership interest" (also referred to as "Preferred Units"). All references to OP Units and Preferred Units exclude such units held by the Company. A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the issuance of OP Units to particular holders that may restrict such right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of the Company ("Common Stock"), except that, the Company may, at its election, in lieu of a cash redemption, acquire such OP Unit for one share of Common Stock. Because the number of shares of Common Stock outstanding at all times equals the number of OP Units that the Company owns, one share of Common Stock is generally the economic equivalent of one OP Unit, and the quarterly distribution that may be paid to the holder of an OP Unit equals the quarterly dividend that may be paid to the holder of a share of Common Stock. Each series of Preferred Units bears a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be convertible into OP Units at the election of the holder thereof or the Company, subject to the terms of such Preferred Units. All references to the Company hereafter refer to Boston Properties, Inc. and its subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires. Properties At December 31, 2000, the Company owned a portfolio of 145 commercial real estate properties (136 properties at December 31, 1999) (the "Properties") aggregating more than 37.9 million net rentable square feet (including 15 properties under construction totaling approximately 4.5 million net rentable square feet). The Properties consist of 134 office properties, including 103 Class A office properties and 31 Research and Development properties; eight industrial properties; three hotels; and structured parking for 17,179 vehicles containing approximately 6.0 million square feet. In addition, the Company owns or controls 49 parcels of land totaling 558.3 acres (which will support approximately 10.6 million net rentable square feet of development). The Company considers Class A office properties to be centrally located buildings that are professionally managed and maintained, that attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings. The Company considers Research and Development properties to be properties that support office, research and development and other technical uses. 61
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) Basis of Presentation The consolidated financial statements of the Company include all the accounts of the Company, its majority-owned Operating Partnership, and subsidiaries. All significant intercompany balances and transactions have been eliminated. 2. Summary of Significant Accounting Policies Real Estate Real estate is stated at depreciated cost. The Company periodically reviews its properties to determine if its carrying costs will be recovered from future operating cash flows. If the Company determines that an impairment has occurred, those assets shall be reduced to fair value. No such impairment losses have been recognized to date. The cost of buildings and improvements include the purchase price of property, legal fees and acquisition costs. The costs of buildings under development include the capitalization of interest, property taxes and other costs incurred during the period of development. Expenditures for repairs and maintenance are charged to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets as follows: Land improvements 25 to 40 years Buildings and improvements 10 to 40 years Tenant improvements Shorter of useful life or terms of related lease Furniture, fixtures, and equipment 3 to 7 years Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and investments with maturities of three months or less from the date of purchase. The majority of the Company's cash and cash equivalents are held at major commercial banks. The Company has not experienced any losses to date on its invested cash. Escrows Escrows include amounts established pursuant to various agreements for security deposits, property taxes, insurance and other costs. At December 31, 2000, proceeds of $57.6 million from the permanent financing of a development property have been deposited into an escrow account and recorded in mortgage notes and bonds payable until the completion of construction on the development property, at which time the construction loan will be repaid and the proceeds will be available to the Company. 62
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) Investments in Securities The Company accounts for investments in securities of publicly traded companies in accordance with Statement of Financial Accounting Standard ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Investments" and has classified the securities as available-for-sale. Investments in securities of non-publicly traded companies are recorded at cost as they are not considered marketable under SFAS 115. As of December 31, 2000, the fair value of the investments in common stocks and warrants was approximately $7.0 million. The gross unrealized holding loss of approximately $11.7 million is included in accumulated other comprehensive loss on the consolidated balance sheets. At December 31, 1999, the investments in securities were reflected at cost in the consolidated balance sheet, as they were not considered marketable under SFAS No. 115. Deferred Charges Deferred charges include leasing costs and financing fees. Fees and costs incurred in the successful negotiation of leases, including brokerage, legal and other costs have been deferred and are being amortized on a straight-line basis over the terms of the respective leases. Fees and costs incurred to obtain long-term financing have been deferred and are being amortized over the terms of the respective loans on a basis that approximates the effective interest method and are included with interest expense. Unamortized financing and leasing costs are charged to expense upon the early repayment of financing or upon the early termination of the lease. Fully amortized deferred charges are removed from the books upon the expiration of the lease or maturity of the debt. Investments in Unconsolidated Joint Ventures The Company accounts for its investments in joint ventures, which it does not control, using the equity method of accounting. Under the equity method of accounting, the net equity investment of the Company is reflected on the consolidated balance sheets, and the Company's share of net income or loss from the joint ventures is included on the consolidated statements of operations. The Company serves as the development manager for the joint ventures currently under development. The profit on development fees received from joint ventures is recognized to the extent attributable to the outside interests in the joint ventures. Offering Costs Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in capital. Dividends Earnings and profits, which determine the taxability of dividends to shareholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes primarily in the estimated useful lives used to compute depreciation. Dividends declared represented 100% ordinary income for federal income tax purposes for the 63
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) years ended December 31, 2000, 1999 and 1998. Revenue Recognition Base rental revenue is reported on a straight-line basis over the terms of the respective leases. The impact of the straight-line rent adjustment increased revenue by $13,071, $17,044, and $18,510 for the years ended December 31, 2000, 1999 and 1998, respectively. Property operating cost reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs are recognized in the period the expenses are incurred. Accrued rental income represents rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements, net of an allowance for doubtful accounts. Development fees are recognized ratably over the period of development. Management fees are recognized as revenue as they are earned. The estimated fair value of warrants received in conjunction with communications license agreements are recognized over the ten-year effective terms of the license agreements. Interest Expense and Interest Rate Protection Agreements Interest expense on fixed rate debt with predetermined periodic rate increases is computed using the effective interest method over the terms of the respective loans. The Company has entered into certain interest rate protection agreements to reduce the impact of changes in interest rates on its variable rate debt. Amounts paid for the agreements are amortized over the lives of the agreements on a basis that approximates the effective interest method. Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the year. Diluted EPS reflects the potential dilution that could occur from shares issuable through stock-based compensation including stock options, conversion of the minority interests in the Operating Partnership and conversion of the preferred stock of the Company. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments. Mortgage notes payable have aggregate carrying values that approximate their estimated fair values based upon the remaining maturities for certain debt and interest rates for debt with similar terms and remaining maturities. The fair value of these financial instruments were not materially different from their carrying or contract values. Income Taxes The Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year 64
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) ended December 31, 1997. As a result, the Company generally will not be subject to federal corporate income tax on its taxable income that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its annual taxable income (90% effective January 1, 2001). The Company's policy is to distribute 100% of its taxable income. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. To assist the Company in maintaining its status as a REIT, the Company leases its three in-service hotel properties, pursuant to leases with a participation in the gross receipts of such hotel properties, to a lessee ("ZL Hotel LLC") in which Messrs. Zuckerman and Linde, the Chairman of the Board and Chief Executive Officer, respectively, are the sole member-managers. Marriott International, Inc. manages these hotel properties under the Marriott(R) name pursuant to management agreements with the lessee. Rental revenue from these leases totaled approximately $38.1 million, $32.1 million and $25.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. The net difference between the tax basis and the reported amounts of the Company's assets and liabilities is approximately $1.2 billion as of December 31, 2000 and 1999. Certain entities included in the Company's consolidated financial statements are subject to District of Columbia franchise taxes. Franchise taxes are recorded as operating expenses in the accompanying consolidated financial statements. Reclassifications Certain prior-year balances have been reclassified in order to conform to current-year presentation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates include such items as depreciation, allowances for doubtful accounts and accrued rent. Actual results could differ from those estimates. 65
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 3. Real Estate Real estate consisted of the following at December 31: 2000 1999 ---------- ---------- Land $ 965,140 $ 956,222 Land held for future development 107,005 127,508 Buildings and improvements 3,939,857 3,962,789 Tenant improvements 225,305 186,878 Furniture, fixtures and equipment 57,994 38,537 Development in process 817,478 337,490 ---------- ---------- Total 6,112,779 5,609,424 Less: Accumulated depreciation (586,719) (470,591) ---------- ---------- $5,526,060 $5,138,833 ========== ========== 4. Deferred Charges Deferred charges consisted of the following at December 31: 2000 1999 -------- -------- Leasing costs $ 88,681 $ 69,530 Financing costs 51,453 33,954 -------- -------- 140,134 103,484 Less: Accumulated amortization (62,815) (49,751) -------- -------- $ 77,319 $ 53,733 ======== ======== 5. Investments in Unconsolidated Joint Ventures The investments in unconsolidated joint ventures consists of the following: <TABLE> <CAPTION> % Entity Property Ownership ---------------------------------------- ------------------------ ------------ <S> <C> <C> One Freedom Square LLC One Freedom Square 25% (1) Square 407 LP Market Square North 50% The Metropolitan Square Associates LLC Metropolitan Square 51% BP 140 Kendrick Street LLC 140 Kendrick Street 25% (1) BP/CRF 265 Franklin Street Holdings LLC 265 Franklin Street 35% Discovery Square LLC Discovery Square (2) 50% BP/CRF 901 New York Avenue LLC 901 New York Avenue (3) 25% (1) Two Freedom Square LLC Two Freedom Square (2) 50% </TABLE> (1) Ownership can increase based on certain return hurdles (2) Property is currently under development (3) Land held for development 66
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) The combined summarized financial information of the unconsolidated joint ventures are as follows: <TABLE> <CAPTION> December 31, ------------------------- Balance Sheets 2000 1999 -------- -------- <S> <C> <C> Real estate and development in process, net $640,688 $236,995 Other assets 30,919 10,473 -------- -------- Total assets $671,607 $247,468 ======== ======== Mortgage and construction loans payable $446,520 $164,185 Other liabilities 10,904 6,770 Partners' equity 214,183 76,513 -------- -------- Total liabilities and partners' equity $671,607 $247,468 ======== ======== Company's share of equity $89,871 $36,518 ======== ======== <CAPTION> Statements of Operations (1) Year Ended December 31, ------------------------- 2000 1999 -------- -------- <S> <C> <C> Total revenue $42,754 $12,836 Total expenses 37,978 10,383 -------- -------- Net income $4,776 $2,453 ======== ======== Company's share of net income $1,758 $468 ======== ======== </TABLE> (1) There were no in-service joint ventures during the year ended December 31, 1998. 6. Mortgage Notes and Bonds Payable The Company had outstanding mortgage notes and bonds payable totaling $3,414,891 and $2,955,584 as of December 31, 2000 and 1999, respectively, each collateralized by one or more buildings and related land included in real estate assets. The mortgage notes payable are generally due in monthly installments and mature at various dates through August 1, 2021. Fixed rate mortgage notes and bonds payable totaled approximately $3,010,760 and $2,820,650 at December 31, 2000 and 1999, respectively, with interest rates ranging from 6.40% to 8.59% (averaging 7.21% and 7.06% at December 31, 2000 and 1999, respectively). Variable rate mortgage notes payable (including construction loans payable) totaled approximately $404,131 and $134,934 at December 31, 2000 and 1999, respectively, with interest rates ranging from 1.00% above the London Interbank Offered Rate ("LIBOR") (6.57% and 5.82% at December 31, 2000 and 1999, respectively) to 2.00% above LIBOR. At December 31, 2000, the Company had hedge contracts totaling $450.0 million. The hedging agreements provide for a fixed interest rate when LIBOR is less than 5.76% and when LIBOR is greater than 6.35% or 7.95% for terms remaining from two to four years per the individual hedging agreements. In addition, the Company has an interest rate swap agreement for a total of $213.0 million which provides for a fixed interest rate of 6.0% through September 11, 2002. Mortgage notes payable aggregating approximately $190,492 and $207,132 at December 67
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 31, 2000 and 1999, respectively, are subject to periodic scheduled interest rate increases. Interest expense for these mortgage notes payable is computed using the effective interest method. Mortgage notes payable aggregating approximately $224,818 and $320,110 at December 31, 2000 and 1999, respectively, have been accounted for at their fair value on the date the mortgage loans were assumed. The impact of using these accounting methods decreased interest expense by $3,579, $4,742 and $2,656 for the years ended December 31, 2000, 1999 and 1998, respectively. The cumulative liability related to these accounting methods was $9,642 and $13,575 at December 31, 2000 and 1999, respectively, and is included in mortgage notes and bonds payable. Combined aggregate principal payments of mortgage notes and bonds payable at December 31, 2000 are as follows: 2001 $ 193,947 2002 $ 306,223 2003 $ 434,342 2004 $ 134,964 2005 $ 269,378 Thereafter $2,076,037 7. Unsecured Line of Credit As of December 31, 2000, the Company has an agreement for a $605,000 unsecured revolving credit facility (the "Unsecured Line of Credit") maturing in March 2003. Outstanding balances under the Unsecured Line of Credit currently bear interest at a floating rate based on an increase over Eurodollar from 105 to 170 basis points, depending upon the Company's applicable leverage ratio, or the lender's prime rate. The Unsecured Line of Credit requires monthly payments of interest only. The outstanding balance of the Unsecured Line of Credit was $0 and $366,000 at December 31, 2000 and 1999, respectively. The weighted average balance outstanding was approximately $233,052 and $256,685 during the year ended December 31, 2000 and 1999, respectively. The weighted-average interest rate on amounts outstanding was approximately 7.65% and 6.50% during the year ended December 31, 2000 and 1999, respectively. The Company's ability to borrow under the Unsecured Line of Credit is subject to the Company's ongoing compliance with a number of financial and other covenants, including, but not limited to, maintaining a certain ratio of secured indebtedness to total asset value, as defined. 8. Commitments and Contingencies Concentrations of Credit Risk Management of the Company performs ongoing credit evaluations of tenants and may require tenants to provide some form of credit support such as corporate guarantees and/or other financial guarantees. Although the Company's properties are geographically diverse and the tenants operate in a variety of industries, to the extent the Company has a significant 68
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) concentration of rental revenue from any single tenant, the inability of that tenant to make its lease payments could have an adverse effect on the Company. Legal Matters The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. Environmental Matters Some of the Properties are located in urban and industrial areas where fill or current or historical industrial uses of the areas have caused site contamination. With respect to all of the Properties, independent environmental consultants have been retained in the past to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys on all of the Properties. These environmental assessments have not revealed any environmental conditions that the Company believes will have a material adverse effect on its business, assets or results of operations, and the Company is not aware of any other environmental condition with respect to any of the Properties which the Company believes would have such a material adverse effect. On January 15, 1992, a property in Massachusetts was listed by the state regulatory authority as an unclassified Confirmed Disposal Site in connection with groundwater contamination. The Company engaged a specially licensed environmental consultant to perform the necessary investigation and assessment and to prepare submittals to the state regulatory authority. On August 1, 1997, such consultant submitted to the state regulatory authority a Phase I - Limited Site Investigation Report and Downgradient Property Status Opinion. This Opinion concluded that the property qualifies for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site and may qualify the Company for liability relief under recent statutory amendments. Although the Company believes that the current or former owners of the upgradient source properties may ultimately be responsible for some or all of the costs of such response actions, the Company will take any necessary further response actions. An investigation at an additional property in Massachusetts identified groundwater contamination. The Company engaged a specially licensed environmental consultant to perform the necessary investigation and assessment and to prepare submittals to the state regulatory authority. On March 11, 1998, the consultant submitted to the state regulatory authority a Release Notification and Downgradient Property Status Opinion. This Opinion concluded that the property qualifies for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site and may qualify the Company for liability relief under recent statutory amendments. Although the Company believes that the current or former owners of the upgradient source properties may ultimately be responsible for some or all of the costs of such response actions, the Company will take any necessary further response actions. 69
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) In February 1999, an affiliate of the Company acquired from Exxon Corporation a property in Massachusetts that was formerly used as a petroleum bulk storage and distribution facility and was known by the state regulatory authority to contain soil and groundwater contamination. The Company anticipates development of an office park on the property. Pursuant to the property acquisition agreement, Exxon has agreed to (1) bear the liability arising from releases or discharges of oil and hazardous substances which occurred at the site prior to the Company's ownership, (2) continue remediating such releases and discharges as necessary and appropriate to comply with applicable requirements, and (3) indemnify the purchaser for certain losses arising from preexisting site conditions, including up to $500,000 for the premium costs associated with construction-related management of contaminated soil not otherwise subject to remediation by Exxon. Any indemnity claim may be subject to various defenses. The affiliate has engaged a specially licensed environmental consultant to perform necessary pre-construction assessment activities and to oversee the management of contaminated soil that may be disturbed in the course of construction. The Company expects that any resolution of the environmental matters relating to the above will not have a material impact on the financial position, results of operations or liquidity of the Company. Development The Company has entered into contracts for the construction and renovation of properties currently under construction. Commitments under these arrangements totaled approximately $677,654 and $759,501 at December 31, 2000 and 1999, respectively. Sale of Property The Operating Partnership Agreement provides that, until June 23, 2007, the Operating Partnership may not sell or otherwise transfer four designated properties in a taxable transaction without the prior written consent of the Chairman and Chief Executive Officer. In connection with the acquisition or contribution of 31 other Properties, the Company entered into similar agreements for the benefit of the selling or contributing parties which specifically state the Company will not sell or otherwise transfer the Properties in a taxable transaction until a period ranging from June 2002 to November 2008. The Operating Partnership is not required to obtain the consent from a party protected thereby if such party does not continue to hold at least a specified percentage of such party's original OP Units. 9. Minority Interests Minority interests primarily relate to the interests of the Company in the Operating Partnership. As of December 31, 2000, the minority interest in the Operating Partnership consisted of 23,862,206 OP Units and 9,357,536 Preferred Units held by parties other than the Company. On March 1, 2000, the Operating Partnership issued 577,817 OP Units valued at approximately $17.5 million in connection with the acquisition of three office properties at Carnegie Center in Princeton, New Jersey. 70
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) On June 19, 2000, the Operating Partnership issued 82,215 OP Units valued at approximately $3.0 million in connection with the acquisition of a land parcel in Chelmsford, Massachusetts. On December 11, 2000, the Operating Partnership issued 650,876 Series Z Preferred Units of limited partnership of the Operating Partnership (the "Series Z Preferred Units"), valued at approximately $24.2 million, in connection with the acquisition of a 3.7-acre site known as the Plaza at Almaden in San Jose, California. The Preferred Units at December 31, 2000 consist of 2,493,529 Series One Preferred Units of limited partnership in the Operating Partnership (the "Series One Preferred Units"), which bear a preferred distribution of 7.25% per annum on a liquidation preference of $34.00 per unit and are convertible into OP Units at a rate of $38.25 per Preferred Unit; 6,213,131 Series Two and Three Preferred Units of limited partnership in the Operating Partnership (the "Series Two and Three Preferred Units"), which bear a preferred distribution at an increasing rate, ranging from 5.00% to 7.00% per annum on a liquidation preference of $50.00 per unit and are convertible into OP Units at a rate of $38.10 per Preferred Unit; and 650,876 Series Z Preferred Units, which bear distributions at a rate ranging from zero to the distribution rate of an OP Unit, with a liquidation preference of $37.25 per unit and are convertible into OP Units at a rate equal to the greater of (1) one for one or (2) $37.25 divided by the fair market value of an OP Unit. Distributions to holders of Preferred Units are recognized on a straight-line basis that approximates the effective interest method. 10. Redeemable Preferred Stock and Stockholders' Equity On August 22, 2000, the Company issued 439,059 unregistered shares of Common Stock for approximately $18.2 million, in connection with its acquisition of the remaining 50% interest in the development rights associated with the Prudential Center in Boston, Massachusetts. On October 31, 2000, the Company completed a public offering of 17,110,000 shares of Common Stock at a price per share to the public of $39.0625 (including 2,110,000 shares issued as a result of the exercise of an overallotment option by the underwriters on November 2, 2000), resulting in net proceeds to the Company, net of underwriter's discount and offering costs, of approximately $633.8 million. As of December 31, 2000, the Company had 86,630,089 shares of Common Stock and 2,000,000 shares of Series A Convertible Redeemable Preferred Stock (the "Preferred Stock") outstanding. The Preferred Stock bears a preferred dividend at an increasing rate, ranging from 5.00% to 7.00% per annum on a liquidation preference of $50.00 per share and are convertible into Common Stock at a rate of $38.10 per share. The preferred dividend is recognized on a straight-line basis that approximates the effective interest method. These shares of Preferred Stock are not classified as equity in certain instances as they are convertible into shares of Common Stock at the election of the holder after December 31, 2002 or are redeemable for cash at the election of the holder in six annual tranches commencing on May 12, 2009. 71
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 11. Future Minimum Rents The Properties are leased to tenants under net operating leases with initial term expiration dates ranging from 2001 to 2029. The future minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of December 31, 2000, under non-cancelable operating leases, are as follows: Years Ending December 31, (in thousands) 2001 $ 706,952 2002 696,506 2003 679,060 2004 623,224 2005 547,914 Thereafter 2,509,988 The geographic concentration of the future minimum lease payments to be received is detailed as follows: Location (in thousands) ------------------ -------------- Greater Boston $1,243,948 Greater Washington, DC 1,532,001 New Jersey and Pennsylvania 382,014 Midtown Manhattan 1,651,524 Greater San Francisco 954,157 No one tenant represented more than 10.0% of the Company's total rental income for the years ended December 31, 2000, 1999 and 1998. 12. Segment Reporting The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which classifies its operations by both geographic area and property type. The Company's reportable segments by geographic area are: Greater Boston, Greater Washington, DC, Midtown Manhattan, Greater San Francisco, and New Jersey and Pennsylvania. Segments by property type include: Class A Office, R&D, Industrial, Hotel and Garage. Asset information by reportable segment is not reported, since the Company does not use this measure to assess performance; therefore, the depreciation and amortization expenses are not allocated among segments. Development and management services revenue, interest and other revenue, general and administrative expenses and interest expense are not included in operating 72
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) income, as the internal reporting addresses these on a corporate level. Information by Geographic Area and Property Type: For the year ended December 31, 2000: <TABLE> <CAPTION> New Jersey Greater Greater Midtown Greater San and Boston Washington, DC Manhattan Francisco Pennsylvania Total <S> <C> <C> <C> <C> <C> <C> Rental Revenue: Class A $187,426 $212,512 $141,400 $182,657 $59,442 $783,437 R&D 5,912 19,846 0 1,851 0 27,609 Industrial 1,921 1,348 0 1,736 714 5,719 Hotels 38,703 0 0 0 0 38,703 Garage 3,474 0 0 0 0 3,474 Total 237,436 233,706 141,400 186,244 60,156 858,942 % of Grand Totals 27.64% 27.21% 16.46% 21.68% 7.01% 100.00% Rental Expenses: Class A 66,688 56,078 47,537 62,940 18,255 251,498 R&D 2,315 3,498 0 334 0 6,147 Industrial 553 452 0 224 117 1,346 Hotels 4,694 0 0 0 0 4,694 Garage 1,016 0 0 0 0 1,016 Total 75,266 60,028 47,537 63,498 18,372 264,701 % of Grand Totals 28.43% 22.68% 17.96% 23.99% 6.94% 100.00% Net Operating Income $162,170 $173,678 $93,863 $122,746 $41,784 $594,241 % of Grand Totals 27.29% 29.23% 15.79% 20.66% 7.03% 100.00% </TABLE> For the year ended December 31, 1999: <TABLE> <CAPTION> New Jersey Greater Greater Midtown Greater San and Boston Washington, DC Manhattan Francisco Pennsylvania Total <S> <C> <C> <C> <C> <C> <C> Rental Revenue: Class A $159,661 $202,323 $136,814 $158,127 $41,852 $698,777 R&D 5,892 18,727 0 1,672 0 26,291 Industrial 1,671 1,433 0 1,220 675 4,999 Hotels 32,902 0 0 0 0 32,902 Garage 2,448 0 0 0 0 2,448 Total 202,574 222,483 136,814 161,019 42,527 765,417 % of Grand Totals 26.47% 29.06% 17.87% 21.04% 5.56% 100.00% Rental Expenses: Class A 62,676 55,346 46,938 59,076 12,695 236,731 R&D 1,744 3,568 0 381 0 5,693 Industrial 506 450 0 215 83 1,254 Hotels 4,773 0 0 0 0 4,773 Garage 817 0 0 0 0 817 Total 70,516 59,364 46,938 59,672 12,778 249,268 % of Grand Totals 28.28% 23.82% 18.83% 23.94% 5.13% 100.00% Net Operating Income $132,058 $163,119 $89,876 $101,347 $29,749 $516,149 % of Grand Totals 25.59% 31.60% 17.41% 19.64% 5.76% 100.00% </TABLE> 73
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) For the year ended December 31, 1998: <TABLE> <CAPTION> New Jersey Greater Greater Midtown Greater San and Boston Washington, DC Manhattan Francisco Pennsylvania Total <S> <C> <C> <C> <C> <C> <C> Rental Revenue: Class A $94,284 $169,882 $129,644 $18,914 $17,407 $430,131 R&D 5,955 17,121 0 1,502 0 24,578 Industrial 1,611 1,431 0 1,349 789 5,180 Hotels 25,944 0 0 0 0 25,944 Garage 1,744 0 0 0 0 1,744 Total 129,538 188,434 129,644 21,765 18,196 487,577 % of Grand Totals 26.57% 38.65% 26.59% 4.46% 3.73% 100.00% Rental Expenses: Class A 36,591 45,156 44,787 7,099 5,663 139,296 R&D 1,808 3,644 0 395 0 5,847 Industrial 525 316 0 305 107 1,253 Hotels 3,562 0 0 0 0 3,562 Garage 532 0 0 0 0 532 Total 43,018 49,116 44,787 7,799 5,770 150,490 % of Grand Totals 28.59% 32.64% 29.76% 5.18% 3.83% 100.00% Net Operating Income $86,520 $139,318 $84,857 $13,966 $12,426 $337,087 % of Grand Totals 25.67% 41.33% 25.17% 4.14% 3.69% 100.00% </TABLE> The following is a reconciliation of net operating income to income before minority interests and joint venture income: <TABLE> <CAPTION> 2000 1999 1998 -------- -------- -------- <S> <C> <C> <C> Net operating income $594,241 $516,149 $337,087 Add: Development and management services 11,837 14,708 12,411 Interest and other 8,574 6,439 13,859 Less: General and administrative 35,659 29,455 22,504 Interest expense 217,064 205,410 124,860 Depreciation and amortization 133,150 120,059 75,418 -------- -------- -------- Income before minority interests and joint venture income $228,779 $182,372 $140,575 ======== ======== ======== </TABLE> 13. Gain on Sale of Real Estate and Extraordinary Items The Company realized a loss of $0.2 million (net of minority interest share of $0.1 million) for the year ended December 31, 2000 related to the sales of various properties. The Company realized a gain of $6.5 million (net of minority interest share of $2.2 million) for the year ended December 31, 1999 from the sale of a property. The Company incurred an extraordinary loss of $0.3 million (net of minority interest share of $0.1 million) for the year ended December 31, 2000 from the write-off of unamortized deferred financing costs related to the early extinguishment of a mortgage note payable. The Company incurred an extraordinary loss of $5.5 million (net of minority interest share of $2.2 74
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) million) for the year ended December 31, 1998 primarily related to fees incurred in connection with the repayment of certain mortgage notes payable in connection with a property acquisition. 14. Earnings Per Share Earnings per share is computed as follows: <TABLE> <CAPTION> For the year ended December 31, 2000 Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ <S> <C> <C> <C> Basic Earnings Per Share: Income available to common shareholders $146,426 71,424 $2.05 Effect of Dilutive Securities: Stock Options and other -- 1,317 (.04) ---------------------------------------------------------- Diluted Earnings Per Share: Income available to common shareholders $146,426 72,741 $2.01 ========================================================== <CAPTION> For the year ended December 31, 1999 Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ <S> <C> <C> <C> Basic Earnings Per Share: Income available to common shareholders $113,947 66,235 $1.72 Effect of Dilutive Securities: Stock Options -- 541 (.01) ---------------------------------------------------------- Diluted Earnings Per Share: Income available to common shareholders $113,947 66,776 $1.71 ========================================================== <CAPTION> For the year ended December 31, 1998 Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ <S> <C> <C> <C> Basic Earnings Per Share: Income available to common shareholders $93,112 60,776 $1.53 Effect of Dilutive Securities: Stock Options -- 532 (.01) ---------------------------------------------------------- Diluted Earnings Per Share: Income available to common shareholders $93,112 61,308 $1.52 ========================================================== </TABLE> 75
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 15. Employee Benefit Plan Effective January 1, 1985, the predecessor to the Company adopted a 401(k) Savings Plan (the "Plan") for its employees. Under the Plan, as amended, employees as defined, are eligible to participate in the Plan after they have completed three months of service. In addition, participants may elect to make an after-tax contribution of up to 10% of their wages. Upon formation, the Company adopted the Plan and the terms of the Plan. In November 1999, the Company amended the Plan by increasing the Company's matching contribution to 200% of the first 3% from 200% of the first 2% of participant's pay contributed (utilizing pay that is not in excess of $100) and by eliminating the vesting requirement. The effective date of these changes was January 1, 2000. The Plan provides that matching employer contributions are to be determined at the discretion of the Company. The Company's matching contribution for the years ended December 31, 2000, 1999 and 1998 was $1,702, $889 and $583, respectively. 16. Stock Option and Incentive Plan The Company has established a stock option and incentive plan for the purpose of attracting and retaining qualified executives and rewarding them for superior performance in achieving the Company's business goals and enhancing stockholder value. Under the plan, the number of shares available for option grant is 14,699,162 shares plus as of the first day of each calendar quarter after January 1, 2000, 9.5% of any net increase since the first day of the preceding calendar quarter in the total number of shares of Common Stock outstanding, on a fully converted basis (excluding Preferred Stock). The strike price on the shares granted is equal to the market price of the Company's Common Stock on the grant date. Shares granted under the plan vest over three or five years. The term of each option is ten years from the date of grant. During the year ended December 31, 2000, the Company issued 34,822 shares of restricted stock valued at approximately $1.0 million ($30.4375 per share). The restricted stock vests over a five-year period, with one-fifth of the shares vesting each year and has been recognized net of amortization as unearned compensation on the consolidated balance sheets. There was no restricted stock issued prior to the year 2000. A summary of the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and changes during the years ended December 31, 2000, 1999 and 1998 are presented below: 76
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) Weighted Average Shares Exercise Price ------ -------------- Outstanding at January 1, 1998 2,284,100 $25.00 Granted 3,621,663 $34.13 Exercised (1,034) $25.00 Canceled (66,779) $31.61 --------- ------ Outstanding at December 31, 1998 5,837,950 $30.58 Granted 1,777,408 $33.20 Exercised (24,023) $25.87 Canceled (35,877) $33.38 --------- ------ Outstanding at December 31, 1999 7,555,458 $31.20 Granted 1,072,750 $30.60 Exercised (511,281) $30.59 Canceled (15,245) $33.20 --------- ------ Outstanding at December 31, 2000 8,101,682 $31.15 ========= ====== The per share weighted average fair value of options granted was $3.79, $3.98 and $5.49 for the years ended December 31, 2000, 1999 and 1998, respectively. The per share fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2000, 1999 and 1998. <TABLE> <CAPTION> 2000 1999 1998 -------------- ------------- -------------- <S> <C> <C> <C> Dividend yield 6.90% 6.08% 4.80% Expected life of option 6 Years 6 Years 6 Years Risk-free interest rate 6.51% 5.07% 5.58% Expected stock price volatility 20% 20% 20% </TABLE> The following table summarizes information about stock options outstanding at December 31, 2000: <TABLE> <CAPTION> Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted Average Number Weighted Range of Outstanding at Remaining Weighted Average Exercisable at Average Exercise Prices 12/31/00 Contractual Life Exercise Price 12/31/00 Exercise Price - --------------- -------- ---------------- -------------- -------- -------------- <S> <C> <C> <C> <C> <C> $25.00 - $36.81 8,101,682 7.47 $31.15 3,397,714 $32.11 </TABLE> 77
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) The Company applies Accounting Practice Bulletin 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized. The compensation cost under SFAS 123 for the stock performance-based plan would have been $11,993, $10,443 and $6,847 for the years ended December 31, 2000, 1999 and 1998, respectively. Had compensation cost for the Company's grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income, and net income per common share for 2000, 1999 and 1998 would approximate the pro forma amounts below: 2000 1999 1998 -------- -------- ------- Net income $134,433 $103,504 $86,265 Net income per common share - basic $ 1.88 $ 1.56 $ 1.42 Net income per common share - diluted $ 1.85 $ 1.55 $ 1.41 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to future anticipated awards. 17. Employee Stock Purchase Plan The Company adopted the 1999 Non-Qualified Employee Stock Purchase Plan (the "Stock Purchase Plan") to encourage the ownership of Common Stock by eligible employees. The Stock Purchase Plan became effective on January 1, 1999 with an aggregate maximum of 250,000 shares of Common Stock available for issuance. The Stock Purchase Plan provides for eligible employees to purchase at the end of the biannual purchase periods shares of Common Stock for 85% of the average closing price during the valuation period, as defined. The Company issued 11,105 and 5,115 shares under the Stock Purchase Plan as of December 31, 2000 and 1999, respectively. No shares were issued in 1998. 18. Selected Interim Financial Information (unaudited) <TABLE> <CAPTION> 2000 Quarter Ended ------------------------------------------------------------------------ March 31, June 30, September 30, December 31, ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Total revenue $210,254 $217,259 $223,313 $228,527 Income before minority interest in Operating Partnership 50,172 56,419 58,404 64,610 Income before gain on sale 32,620 37,030 38,777 45,139 Net income available to common shareholders 30,977 35,684 36,530 43,235 Income before gain on sale per share - - basic .46 .52 .54 .54 Income before gain on sale per share - - diluted .45 .51 .53 .52 </TABLE> 78
BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) <TABLE> <CAPTION> 1999 Quarter Ended ------------------------------------------------------------------------ March 31, June 30, September 30, December 31, ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Total revenue $187,640 $191,640 $202,137 $205,147 Income before minority interest in Operating Partnership 41,485 45,410 45,270 46,061 Income before gain on sale 25,773 28,905 29,022 29,609 Net income available to common shareholders 24,934 27,223 27,418 34,372 Income before gain on sale per share - - basic .39 .42 .40 .41 Income before gain on sale per share - - diluted .39 .41 .40 .41 </TABLE> 19. Newly Issued Accounting Standard As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company's consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS No. 133 are required to be reported in earnings. For derivatives designated as hedging instruments in qualifying cash flow hedges, the effective portion of changes in fair value of the derivatives are recognized in accumulated other comprehensive loss until the forecasted transactions occur and the ineffective portions are recognized in earnings. The nature of the Company's derivatives includes investments in warrants to purchase shares of common stock of other companies and interest rate agreements to protect against changes in interest rates for variable rate debt. Based on the terms of the warrant agreements, the warrants meet the definition of a derivative and accordingly must be marked to fair value through earnings. The Company has been recording the warrants at fair value through accumulated other comprehensive loss as available-for-sale securities under SFAS No. 115. The Company estimates that, upon adoption of SFAS No. 133, it will reclass approximately $6.8 million, the fair value of the warrants, from accumulated other comprehensive loss to a cumulative effect of a change in accounting principle. The Company's interest rate protection agreements will be designated as hedging instruments in qualifying cash flow hedges. As such, the Company estimates that upon adoption of SFAS No. 133, it will record an asset of approximately $0.2 million and record a liability of approximately $11.4 million for the fair values of these agreements. The offset for these entries will be to a cumulative effect of a change in accounting principle and accumulated other comprehensive loss, respectively. Finally, the Company estimates it will write-off deferred charges of approximately $1.6 million as a cumulative effect of a change in accounting principle. 79
Boston Properties, Inc. Schedule 3 - Real Estate and Accumulated Depreciation December 31, 2000 (dollars in thousands) <TABLE> <CAPTION> Property Name Type Location Encumbrances Land - ------------- ---- -------- ------------ ---- <S> <C> <C> <C> <C> Embarcadero Center Office San Francisco, CA $711,325 $211,297 Prudential Center Office Boston, MA 367,937 77,850 Carnegie Center Office Princeton, NJ 153,611 100,434 280 Park Avenue Office New York, NY 270,000 125,288 599 Lexington Avenue Office New York, NY 225,000 81,040 875 Third Avenue Office New York, NY 150,959 74,880 Riverfront Plaza Office Richmond, VA 115,647 18,000 100 East Pratt Street Office Baltimore, MD 91,851 27,562 Gateway Center Office San Francisco, CA 89,888 21,516 Reservoir Place Office Waltham, MA 73,858 18,207 Democracy Center Office Bethesda, MD 107,717 12,550 Two Independence Square Office Washington, DC 116,377 14,053 One and Two Reston Overlook Office Reston, VA 68,190 16,456 NIMA Building Office Reston, VA 21,495 10,567 Lockheed Martin Building Office Reston, VA 26,289 10,210 Candler Building Office Baltimore, MD - 12,500 One Independence Square Office Washington, DC 74,114 9,356 2300 N Street Office Washington, DC 66,000 16,509 Reston Corporate Center Office Reston, VA 24,809 9,135 Capital Gallery Office Washington, DC 57,161 4,725 191 Spring Street Office Lexington, MA 22,797 2,850 1301 New York Avenue Office Washington, DC 32,710 9,250 200 West Street Office Waltham, MA - 16,148 Sumner Square Office Washington, DC 28,298 624 University Place Office Cambridge, MA 25,253 - 500 E Street Office Washington, DC - 109 One Cambridge Center Office Cambridge, MA - 134 Orbital Sciences, Phase One Office Dulles, VA 25,761 3,150 Eight Cambridge Center Office Cambridge, MA 28,412 921 Ten Cambridge Center Office Cambridge, MA 35,741 1,299 Newport Office Park Office Quincy, MA 5,923 3,500 Bedford Business Park Office Bedford, MA 21,717 534 <CAPTION> Costs Capitalized Subsequent Land to Land and Building and Held for Property Name Building Acquisition Improvements Improvements Development - ------------- -------- ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> Embarcadero Center $996,442 $37,979 $212,149 $1,033,569 $ - Prudential Center 443,180 234,421 77,850 479,060 28,095 Carnegie Center 340,259 14,814 107,415 338,486 - 280 Park Avenue 201,115 31,912 125,288 233,027 - 599 Lexington Avenue 100,507 71,381 81,040 171,888 - 875 Third Avenue 139,151 7,756 74,880 146,907 - Riverfront Plaza 156,733 827 18,274 157,286 - 100 East Pratt Street 109,662 2,515 27,562 112,177 - Gateway Center 86,395 14,517 22,290 87,537 193 Reservoir Place 88,018 5,130 18,207 93,148 - Democracy Center 50,015 24,735 13,689 73,611 - Two Independence Square 59,883 9,171 15,039 68,068 - One and Two Reston Overlook 66,192 - 16,456 66,192 - NIMA Building 67,431 2 10,567 67,433 - Lockheed Martin Building 58,884 - 10,210 58,884 - Candler Building 48,734 1,166 12,555 49,845 - One Independence Square 33,701 17,504 9,634 50,927 - 2300 N Street 22,415 13,284 16,509 35,699 - Reston Corporate Center 41,398 748 9,135 42,146 - Capital Gallery 29,560 14,507 4,730 44,062 - 191 Spring Street 27,166 18,775 2,850 45,941 - 1301 New York Avenue 18,750 16,961 9,250 35,711 - 200 West Street 24,983 5 16,148 24,988 - Sumner Square 28,745 10,349 958 38,760 - University Place 37,091 973 27 38,037 - 500 E Street 22,420 11,448 1,569 32,408 - One Cambridge Center 25,110 7,200 134 32,310 - Orbital Sciences, Phase One 26,229 18 3,150 26,247 - Eight Cambridge Center 25,042 262 1,101 25,124 - Ten Cambridge Center 12,943 7,593 1,868 19,967 - Newport Office Park 18,208 22 3,500 18,230 - Bedford Business Park 3,403 16,135 534 19,538 - <CAPTION> Development and Year(s) Construction Accumulated Built Depreciable Property Name in Progress Total Depreciation Renovated Lives (Years) - ------------- ----------- ----- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> Embarcadero Center $ - $1,245,718 $57,032 1924/1989 (1) Prudential Center 170,446 755,451 29,552 1965/1993 (1) Carnegie Center 9,606 455,507 17,414 1983-1999 (1) 280 Park Avenue - 358,315 20,698 1968/95-96 (1) 599 Lexington Avenue - 252,928 79,874 1986 (1) 875 Third Avenue - 221,787 10,833 1982 (1) Riverfront Plaza - 175,560 11,372 1990 (1) 100 East Pratt Street - 139,739 9,454 1975/1991 (1) Gateway Center 12,408 122,428 2,938 1984/1986 (1) Reservoir Place - 111,355 5,184 1955/1987 (1) Democracy Center - 87,300 28,590 1985-88/94-96 (1) Two Independence Square - 83,107 16,791 1992 (1) One and Two Reston Overlook - 82,648 2,455 1999 (1) NIMA Building - 78,000 4,917 1987/1988 (1) Lockheed Martin Building - 69,094 4,293 1987/1988 (1) Candler Building - 62,400 2,832 1911/1990 (1) One Independence Square - 60,561 16,958 1991 (1) 2300 N Street - 52,208 13,094 1986 (1) Reston Corporate Center - 51,281 3,105 1984 (1) Capital Gallery - 48,792 21,395 1981 (1) 191 Spring Street - 48,791 15,093 1971/1995 (1) 1301 New York Avenue - 44,961 1,938 1983/1998 (1) 200 West Street - 41,136 1,270 1999 (1) Sumner Square - 39,718 1,452 1985 (1) University Place - 38,064 2,327 1985 (1) 500 E Street - 33,977 15,328 1987 (1) One Cambridge Center - 32,444 11,909 1987 (1) Orbital Sciences, Phase One - 29,397 526 2000 (1) Eight Cambridge Center - 26,225 986 1999 (1) Ten Cambridge Center - 21,835 7,479 1990 (1) Newport Office Park - 21,730 1,594 1988 (1) Bedford Business Park - 20,072 8,606 1980 (1) </TABLE>
Boston Properties, Inc. Schedule 3 - Real Estate and Accumulated Depreciation December 31, 2000 (dollars in thousands) <TABLE> <CAPTION> Property Name Type Location Encumbrances Land - ------------- ---- -------- ------------ ---- <S> <C> <C> <C> <C> 201 Spring Street Office Lexington, MA - 2,849 10 and 20 Burlington Mall Road Office Burlington, MA 16,613 930 Montvale Center Office Gaithersburg, MD 7,564 1,574 Fullerton Square Office Springfield, VA - 3,045 The Arboretum Office Reston, VA - 2,850 Three Cambridge Center Office Cambridge, MA - 174 Lexington Office Park Office Lexington, MA - 998 181 Spring Street Office Lexington, MA - 1,066 Sugarland Business Park Office Herndon, VA - 1,569 Decoverly Three Office Rockville, MD - 2,650 Decoverly Two Office Rockville, MD - 1,994 7700 Boston Boulevard, Building Twelve Office Springfield, VA - 1,105 7501 Boston Boulevard, Building Seven Office Springfield, VA - 665 91 Hartwell Avenue Office Lexington, MA 11,322 784 92-100 Hayden Avenue Office Lexington, MA 9,065 594 195 West Street Office Waltham, MA - 1,611 Waltham Office Center Office Waltham, MA - 422 Eleven Cambridge Center Office Cambridge, MA - 121 7435 Boston Boulevard, Building One Office Springfield, VA - 392 170 Tracer Lane Office Waltham, MA - 398 7450 Boston Boulevard, Building Three Office Springfield, VA - 1,165 8000 Grainger Court, Building Five Office Springfield, VA - 366 Fourteen Cambridge Center Office Cambridge, MA - 110 32 Hartwell Avenue Office Lexington, MA - 168 7600 Boston Boulevard, Building Nine Office Springfield, VA - 127 7601 Boston Boulevard, Building Eight Office Springfield, VA - 200 7500 Boston Boulevard, Building Six Office Springfield, VA - 138 33 Hayden Avenue Office Lexington, MA - 266 8000 Corporate Court, Building Eleven Office Springfield, VA - 136 7375 Boston Boulevard, Building Ten Office Springfield, VA - 23 7451 Boston Boulevard, Building Two Office Springfield, VA - 249 204 Second Avenue Office Waltham, MA - 37 7374 Boston Boulevard, Building Four Office Springfield, VA - 241 <CAPTION> Costs Capitalized Subsequent Land to Land and Building and Held for Property Name Building Acquisition Improvements Improvements Development - ------------- -------- ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> 201 Spring Street 15,303 63 2,849 15,366 - 10 and 20 Burlington Mall Road 6,928 9,320 938 16,240 - Montvale Center 9,786 4,361 2,399 13,322 - Fullerton Square 11,522 622 3,045 12,144 - The Arboretum 9,025 2,380 2,850 11,405 - Three Cambridge Center 12,200 1,257 174 13,457 - Lexington Office Park 1,426 11,088 1,073 12,439 - 181 Spring Street 9,520 1,924 1,066 11,444 - Sugarland Business Park 5,955 4,108 1,569 10,063 - Decoverly Three 8,465 40 2,650 8,505 - Decoverly Two 8,814 94 1,994 8,908 - 7700 Boston Boulevard, Building Twelve 9,077 259 1,105 9,336 - 7501 Boston Boulevard, Building Seven 9,273 9 665 9,282 - 91 Hartwell Avenue 6,464 2,420 784 8,884 - 92-100 Hayden Avenue 6,748 2,229 594 8,977 - 195 West Street 6,652 622 1,611 7,274 - Waltham Office Center 2,719 5,290 425 8,006 - Eleven Cambridge Center 5,535 2,316 121 7,851 - 7435 Boston Boulevard, Building One 3,822 2,277 486 6,005 - 170 Tracer Lane 4,601 1,396 418 5,977 - 7450 Boston Boulevard, Building Three 4,681 248 1,327 4,767 - 8000 Grainger Court, Building Five 4,282 995 453 5,190 - Fourteen Cambridge Center 4,483 569 110 5,052 - 32 Hartwell Avenue 1,943 2,741 168 4,684 - 7600 Boston Boulevard, Building Nine 2,839 1,743 189 4,520 - 7601 Boston Boulevard, Building Eight 878 3,506 378 4,206 - 7500 Boston Boulevard, Building Six 3,749 323 273 3,937 - 33 Hayden Avenue 3,234 181 266 3,415 - 8000 Corporate Court, Building Eleven 3,071 153 271 3,089 - 7375 Boston Boulevard, Building Ten 2,685 630 47 3,291 - 7451 Boston Boulevard, Building Two 1,542 1,510 535 2,766 - 204 Second Avenue 2,402 822 37 3,224 - 7374 Boston Boulevard, Building Four 1,605 439 303 1,982 - <CAPTION> Development and Year(s) Construction Accumulated Built Depreciable Property Name in Progress Total Depreciation Renovated Lives (Years) - ------------- ----------- ----- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> 201 Spring Street - 18,215 1,620 1997 (1) 10 and 20 Burlington Mall Road - 17,178 6,829 1984-1989/95-96 (1) Montvale Center - 15,721 5,462 1987 (1) Fullerton Square - 15,189 866 1987 (1) The Arboretum - 14,255 709 1999 (1) Three Cambridge Center - 13,631 4,522 1987 (1) Lexington Office Park - 13,512 5,661 1982 (1) 181 Spring Street - 12,510 264 1999 (1) Sugarland Business Park - 11,632 1,517 1986/1997 (1) Decoverly Three - 11,155 548 1989 (1) Decoverly Two - 10,902 656 1987 (1) 7700 Boston Boulevard, Building Twelve - 10,441 902 1997 (1) 7501 Boston Boulevard, Building Seven - 9,947 772 1997 (1) 91 Hartwell Avenue - 9,668 4,040 1985 (1) 92-100 Hayden Avenue - 9,571 3,521 1985 (1) 195 West Street - 8,885 2,142 1990 (1) Waltham Office Center - 8,431 3,831 1968-1970/87-88 (1) Eleven Cambridge Center - 7,972 2,974 1984 (1) 7435 Boston Boulevard, Building One - 6,491 2,853 1982 (1) 170 Tracer Lane - 6,395 3,542 1980 (1) 7450 Boston Boulevard, Building Three - 6,094 333 1987 (1) 8000 Grainger Court, Building Five - 5,643 2,148 1984 (1) Fourteen Cambridge Center - 5,162 2,067 1983 (1) 32 Hartwell Avenue - 4,852 3,497 1968-1979/1987 (1) 7600 Boston Boulevard, Building Nine - 4,709 1,957 1987 (1) 7601 Boston Boulevard, Building Eight - 4,584 1,711 1986 (1) 7500 Boston Boulevard, Building Six - 4,210 1,597 1985 (1) 33 Hayden Avenue - 3,681 1,709 1979 (1) 8000 Corporate Court, Building Eleven - 3,360 983 1989 (1) 7375 Boston Boulevard, Building Ten - 3,338 1,207 1988 (1) 7451 Boston Boulevard, Building Two - 3,301 2,028 1982 (1) 204 Second Avenue - 3,261 1,645 1981/1993 (1) 7374 Boston Boulevard, Building Four - 2,285 896 1984 (1) </TABLE>
Boston Properties, Inc. Schedule 3 - Real Estate and Accumulated Depreciation December 31, 2000 (dollars in thousands) <TABLE> <CAPTION> Property Name Type Location Encumbrances Land - ------------- ---- -------- ------------ ---- <S> <C> <C> <C> <C> 164 Lexington Road Office Billerica, MA - 592 Hilltop Business Center Office San Francisco, CA 5,738 53 17 Hartwell Avenue Office Lexington, MA - 26 6201 Columbia Park Road, Building Two Industrial Landover, MD - 505 38 Cabot Boulevard Industrial Langhorne, PA - 329 40-46 Harvard Street Industrial Westwood, MA - 351 2000 South Club Drive, Building Three Industrial Landover, MD - 465 25-33 Dartmouth Street Industrial Westwood, MA - 273 2391 West Winton Avenue Industrial Hayward, CA - 182 430 Rozzi Place Industrial San Francisco, CA - 9 560 Forbes Boulevard Industrial San Francisco, CA - 9 Cambridge Center Marriott Hotel Cambridge, MA - 478 Long Wharf Marriott Hotel Boston, MA - 1,752 Residence Inn by Marriott Hotel Cambridge, MA - 2,307 Cambridge Center North Garage Garage Cambridge, MA - 1,163 Five Times Square Development New York, NY 184,157 - Times Square Tower Development New York, NY - - New Dominion Technology Park, One Development Herndon, VA 98,142 - Plaza at Almaden Development San Jose, CA - - 2600 Tower Oaks Boulevard Development Rockville, MD 18,083 - Waltham/Weston Corporate Center Development Waltham, MA - - Quorum Office Park Development Chelmsford, MA 11,111 - Orbital Sciences, Phase Two Development Dulles, VA 8,032 - One Preserve Parkway Development Rockville, MD - - 40 Shattuck Road Development Andover, MA 6,224 - Broad Run Business Park, Building E Development Loudon County, VA - - Decoverly Seven Development Rockville, MD - - ITT Educational Services Building Development Springfield, VA - - Tower Oaks Master Plan Land Rockville, MD - - Washingtonian North Land Gaithersburg, MD - - Crane Meadow Land Marlborough, MA - - Broad Run Business Park Land Loudon County, VA - - 12050 Sunset Hills Road Land Reston, VA - - <CAPTION> Costs Capitalized Subsequent Land to Land and Building and Held for Property Name Building Acquisition Improvements Improvements Development - ------------- -------- ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> 164 Lexington Road 1,370 132 592 1,502 - Hilltop Business Center 492 1,504 109 1,940 - 17 Hartwell Avenue 150 587 26 737 - 6201 Columbia Park Road, Building Two 2,746 1,227 960 3,518 - 38 Cabot Boulevard 1,238 2,608 329 3,846 - 40-46 Harvard Street 1,782 1,327 351 3,109 - 2000 South Club Drive, Building Three 2,125 740 859 2,471 - 25-33 Dartmouth Street 1,596 503 273 2,099 - 2391 West Winton Avenue 1,217 615 182 1,832 - 430 Rozzi Place 217 33 9 250 - 560 Forbes Boulevard 120 - 9 120 - Cambridge Center Marriott 37,918 7,806 478 45,724 - Long Wharf Marriott 31,904 9,302 1,752 41,206 - Residence Inn by Marriott 22,732 75 2,307 22,807 - Cambridge Center North Garage 11,633 147 1,163 11,780 - Five Times Square - 273,773 - - - Times Square Tower - 175,724 - - - New Dominion Technology Park, One - 41,870 - - - Plaza at Almaden - 26,956 - - - 2600 Tower Oaks Boulevard - 26,315 - - - Waltham/Weston Corporate Center - 20,533 - - - Quorum Office Park - 16,165 - - - Orbital Sciences, Phase Two - 13,642 - - - One Preserve Parkway - 9,057 - - - 40 Shattuck Road - 8,381 - - - Broad Run Business Park, Building E - 6,531 - - - Decoverly Seven - 5,290 - - - ITT Educational Services Building - 781 - - - Tower Oaks Master Plan - 19,195 - - 19,195 Washingtonian North - 16,175 - - 16,175 Crane Meadow - 7,760 - - 7,760 Broad Run Business Park - 5,575 - - 5,575 12050 Sunset Hills Road - 5,529 - - 5,529 <CAPTION> Development and Year(s) Construction Accumulated Built Depreciable Property Name in Progress Total Depreciation Renovated Lives (Years) - ------------- ----------- ----- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> 164 Lexington Road - 2,094 199 1982 (1) Hilltop Business Center - 2,049 914 early 1970's (1) 17 Hartwell Avenue - 763 579 1968 (1) 6201 Columbia Park Road, Building Two - 4,478 1,650 1986 (1) 38 Cabot Boulevard - 4,175 2,581 1972/1984 (1) 40-46 Harvard Street - 3,460 3,100 1967/1996 (1) 2000 South Club Drive, Building Three - 3,330 987 1988 (1) 25-33 Dartmouth Street - 2,372 1,564 1966/1996 (1) 2391 West Winton Avenue - 2,014 1,101 1974 (1) 430 Rozzi Place - 259 52 early 1970's (1) 560 Forbes Boulevard - 129 74 early 1970's (1) Cambridge Center Marriott - 46,202 15,196 1986 (1) Long Wharf Marriott - 42,958 18,909 1982 (1) Residence Inn by Marriott - 25,114 735 1999 (1) Cambridge Center North Garage - 12,943 3,325 1990 (1) Five Times Square 273,773 273,773 - Various N/A Times Square Tower 175,724 175,724 - Various N/A New Dominion Technology Park, One 41,870 41,870 - Various N/A Plaza at Almaden 26,956 26,956 - Various N/A 2600 Tower Oaks Boulevard 26,315 26,315 - Various N/A Waltham/Weston Corporate Center 20,533 20,533 - Various N/A Quorum Office Park 16,165 16,165 - Various N/A Orbital Sciences, Phase Two 13,642 13,642 - Various N/A One Preserve Parkway 9,057 9,057 - Various N/A 40 Shattuck Road 8,381 8,381 - Various N/A Broad Run Business Park, Building E 6,531 6,531 - Various N/A Decoverly Seven 5,290 5,290 - Various N/A ITT Educational Services Building 781 781 - Various N/A Tower Oaks Master Plan - 19,195 - Various N/A Washingtonian North - 16,175 - Various N/A Crane Meadow - 7,760 - Various N/A Broad Run Business Park - 5,575 - Various N/A 12050 Sunset Hills Road - 5,529 - Various N/A </TABLE>
Boston Properties, Inc. Schedule 3 - Real Estate and Accumulated Depreciation December 31, 2000 (dollars in thousands) <TABLE> <CAPTION> Property Name Type Location Encumbrances Land - ------------- ---- -------- ------------ ---- <S> <C> <C> <C> <C> 12280 Sunrise Valley Drive Land Reston, VA - - New Dominion Technology Park, Two Land Herndon, VA - - 599 Van Buren Street Land Herndon, VA - - Decoverly Six Land Rockville, MD - - Cambridge Master Plan Land Cambridge, MA - - Decoverly Five Land Rockville, MD - - Decoverly Four Land Rockville, MD - - Seven Cambridge Center Land Cambridge, MA - - 30 Shattuck Road Land Andover, MA - - Virginia Master Plan Land Springfield, VA - - ---------- -------- $3,414,891 $948,165 ========== ======== <CAPTION> Costs Capitalized Subsequent Land to Land and Building and Held for Property Name Building Acquisition Improvements Improvements Development - ------------- -------- ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> 12280 Sunrise Valley Drive - 3,902 - - 3,902 New Dominion Technology Park, Two - 3,827 - - 3,827 599 Van Buren Street - 3,640 - - 3,640 Decoverly Six - 3,624 - - 3,624 Cambridge Master Plan - 2,969 - - 2,969 Decoverly Five - 1,806 - - 1,806 Decoverly Four - 1,785 - - 1,785 Seven Cambridge Center - 1,157 - - 1,157 30 Shattuck Road - 1,007 - - 1,007 Virginia Master Plan - 766 - - 766 ---------- ---------- -------- ---------- -------- $3,718,234 $1,388,386 $965,140 $4,165,162 $107,005 ========== ========== ======== ========== ======== <CAPTION> Development and Year(s) Construction Accumulated Built Depreciable Property Name in Progress Total Depreciation Renovated Lives (Years) - ------------- ----------- ----- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> 12280 Sunrise Valley Drive - 3,902 - Various N/A New Dominion Technology Park, Two - 3,827 - Various N/A 599 Van Buren Street - 3,640 - Various N/A Decoverly Six - 3,624 - Various N/A Cambridge Master Plan - 2,969 - Various N/A Decoverly Five - 1,806 - Various N/A Decoverly Four - 1,785 - Various N/A Seven Cambridge Center - 1,157 - Various N/A 30 Shattuck Road - 1,007 - Various N/A Virginia Master Plan - 766 - Various N/A -------- ---------- -------- $817,478 $6,054,785 $553,264 ======== ========== ======== </TABLE> (1) Depreciation of the buildings and improvements are calculated over lives ranging from the life of the lease to 40 years. (2) The aggregate cost and accumulated depreciation for tax purposes was approximately $4,900,000 and $820,000, respectively.
Boston Properties, Inc. Real Estate and Accumulated Depreciation December 31, 2000 (dollars in thousands) A summary of activity for real estate and accumulated depreciation is as follows: <TABLE> <CAPTION> 2000 1999 1998 ----------- ----------- ----------- <S> <C> <C> <C> Real Estate: Balance at the beginning of the year $ 5,570,887 $ 4,881,483 $ 1,754,780 Additions to and improvements of real estate 759,540 691,199 3,129,121 Assets sold and written-off (275,642) (1,795) (2,418) ----------- ----------- ----------- Balance at the end of the year $ 6,054,785 $ 5,570,887 $ 4,881,483 =========== =========== =========== Accumulated Depreciation: Balance at the beginning of the year $ 445,138 $ 336,165 $ 266,987 Depreciation expense 118,748 110,768 71,596 Assets sold and written-off (10,622) (1,795) (2,418) ----------- ----------- ----------- Balance at the end of the year $ 553,264 $ 445,138 $ 336,165 =========== =========== =========== </TABLE>