Edgar Filing: BOSTON PROPERTIES INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 of incorporation or organization)		(I.R.S. Employer Identification No.)

Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199-8103

(Address of principal executive offices) (Zip Code)

(617) 236-3300

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, par value $.01 per share		139,348,662
(Class)		(Outstanding on August 2, 2010)

BOSTON PROPERTIES, INC.

FORM 10-Q

for the quarter ended June 30, 2010

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)	1

	a) Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	1

	b) Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009	2

	c) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2010 and 2009	3

	d) Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	4

	e) Notes to the Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	66

ITEM 4.	Controls and Procedures	67

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	68

ITEM 1A.	Risk Factors	68

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

ITEM 3.	Defaults Upon Senior Securities	68

ITEM 4.	(Removed and Reserved)	68

ITEM 5.	Other Information	68

ITEM 6.	Exhibits	69

SIGNATURES		70

PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for share and par value amounts)


	June 30, 2010			December 31, 2009
ASSETS
Real estate, at cost	$	9,984,329		$	9,817,388
Construction in process		632,731			563,645
Land held for future development		732,006			718,525
Less: accumulated depreciation		(2,173,300	)		(2,033,677	)

Total real estate		9,175,766			9,065,881
Cash and cash equivalents		1,703,448			1,448,933
Cash held in escrows		25,382			21,867
Investments in securities		7,026			9,946
Tenant and other receivables (net of allowance for doubtful accounts of $2,097 and $4,125, respectively)		98,602			93,240
Related party note receivable		270,000			270,000
Accrued rental income (net of allowance of $1,983 and $2,645, respectively)		401,054			363,121
Deferred charges, net		289,388			294,395
Prepaid expenses and other assets		22,385			17,684
Investments in unconsolidated joint ventures		794,650			763,636

Total assets	$	12,787,701		$	12,348,703

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	2,608,577		$	2,643,301
Unsecured senior notes (net of discount of $3,091 and $2,611, respectively)		2,871,909			2,172,389
Unsecured exchangeable senior notes (net of discount of $11,007 and $15,529, respectively)		1,748,814			1,904,081
Unsecured line of credit		—			—
Accounts payable and accrued expenses		177,000			220,089
Dividends and distributions payable		80,865			80,536
Accrued interest payable		80,521			76,058
Other liabilities		95,423			127,538

Total liabilities		7,663,109			7,223,992

Commitments and contingencies		—			—

Noncontrolling interest:
Redeemable preferred units of the Operating Partnership		55,652			55,652

Equity:
Stockholders’ equity attributable to Boston Properties, Inc.:
Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding		—			—
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $.01 par value, 250,000,000 shares authorized, 139,352,299 and 138,958,910 issued and 139,273,399 and 138,880,010 outstanding in 2010 and 2009, respectively		1,393			1,389
Additional paid-in capital		4,394,435			4,373,679
Earnings in excess of dividends		70,426			95,433
Treasury common stock at cost, 78,900 shares in 2010 and 2009		(2,722	)		(2,722	)
Accumulated other comprehensive loss		(20,155	)		(21,777	)

Total stockholders’ equity attributable to Boston Properties, Inc.		4,443,377			4,446,002
Noncontrolling interests:
Common units of the Operating Partnership		619,224			617,386
Property partnerships		6,339			5,671

Total equity		5,068,940			5,069,059

Total liabilities and equity	$	12,787,701		$	12,348,703

The accompanying notes are an integral part of these financial statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
	(in thousands, except for per share amounts)
Revenue
Rental:
Base rent	$	305,823		$	304,864		$	608,206		$	598,381
Recoveries from tenants		44,340			49,821			89,884			102,229
Parking and other		16,423			18,416			31,720			35,357

Total rental revenue		366,586			373,101			729,810			735,967
Hotel revenue		8,371			7,396			14,274			13,458
Development and management services		18,884			8,551			27,828			16,847
Interest and other		2,117			442			3,827			762

Total revenue		395,958			389,490			775,739			767,034

Expenses
Real estate operating:
Rental		123,284			124,730			248,269			248,591
Hotel		6,089			5,359			11,357			10,831
General and administrative		17,648			18,532			44,470			35,952
Interest		96,755			78,633			188,784			157,563
Depreciation and amortization		81,400			87,005			164,475			164,375
Loss (gain) from suspension of development		—			—			(7,200	)		27,766
Losses from early extinguishments of debt		6,051			494			8,221			494
Losses (gains) from investments in securities		678			(1,194	)		478			(607	)

Total expenses		331,905			313,559			658,854			644,965

Income before income (loss) from unconsolidated joint ventures, gains on sales of real estate and net income attributable to noncontrolling interests		64,053			75,931			116,885			122,069
Income (loss) from unconsolidated joint ventures		7,465			(351	)		15,375			4,746
Gains on sales of real estate		969			4,493			2,734			7,288

Net income		72,487			80,073			134,994			134,103
Net income attributable to noncontrolling interests:
Noncontrolling interests in property partnerships		(864	)		(691	)		(1,668	)		(1,201	)
Noncontrolling interest—common units of the Operating Partnership		(9,250	)		(10,629	)		(17,114	)		(18,091	)
Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership		(125	)		(629	)		(352	)		(1,032	)
Noncontrolling interest—redeemable preferred units of the Operating Partnership		(836	)		(972	)		(1,728	)		(1,962	)

Net income attributable to Boston Properties, Inc.	$	61,412		$	67,152		$	114,132		$	111,817

Basic earnings per common share attributable to Boston Properties, Inc.:
Net income	$	0.44		$	0.54		$	0.82		$	0.91

Weighted average number of common shares outstanding		139,113			125,267			139,022			123,272

Diluted earnings per common share attributable to Boston Properties, Inc.:
Net income	$	0.44		$	0.53		$	0.82		$	0.91

Weighted average number of common and common equivalent shares outstanding		139,826			125,620			139,712			123,554

The accompanying notes are an integral part of these financial statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
	(in thousands)
Net income	$	72,487		$	80,073		$	134,994		$	134,103
Other comprehensive income:
Effective portion of interest rate contracts		421			—			421			—
Amortization of interest rate contracts		715			738			1,441			1,452

Other comprehensive income		1,136			738			1,862			1,452

Comprehensive income		73,623			80,811			136,856			135,555
Comprehensive income attributable to noncontrolling interests		(11,221	)		(13,024	)		(21,102	)		(22,492	)

Comprehensive income attributable to Boston Properties, Inc.	$	62,402		$	67,787		$	115,754		$	113,063

The accompanying notes are an integral part of these financial statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,
	2010			2009
	(in thousands)
Cash flows from operating activities:
Net income	$	134,994		$	134,103
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		164,475			164,375
Non-cash portion of interest expense		28,594			27,155
Settlement of accreted debt discount on repurchases of unsecured exchangeable senior notes		(13,230	)		—
Non-cash compensation expense		20,345			13,653
Non-cash rental revenue		—			(3,600	)
Losses from early extinguishments of debt		8,221			(6	)
Losses (gains) from investments in securities		478			(607	)
Loss (gain) from suspension of development		(7,200	)		27,766
Income from unconsolidated joint ventures		(15,375	)		(4,746	)
Distributions of net cash flow from operations of unconsolidated joint ventures		4,674			5,905
Gains on sales of real estate		(2,734	)		(7,288	)
Change in assets and liabilities:
Cash held in escrows		(3,515	)		(319	)
Tenant and other receivables, net		10,548			5,714
Accrued rental income, net		(37,933	)		(23,412	)
Prepaid expenses and other assets		(4,701	)		(504	)
Accounts payable and accrued expenses		(34,421	)		7,408
Accrued interest payable		4,463			(669	)
Other liabilities		(29,489	)		(14,902	)
Tenant leasing costs		(17,690	)		(13,089	)

Total adjustments		75,510			182,834

Net cash provided by operating activities		210,504			316,937

Cash flows from investing activities:
Additions to real estate		(251,893	)		(196,503	)
Proceeds from redemptions of investments in securities		2,442			1,024
Capital contributions to unconsolidated joint ventures		(61,105	)		(6,148	)
Capital distributions from unconsolidated joint ventures		24,990			2,662

Net cash used in investing activities		(285,566	)		(198,965	)

The accompanying notes are an integral part of these financial statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,
	2010			2009
	(in thousands)
Cash flows from financing activities:
Repayment of unsecured line of credit		—			(100,000	)
Proceeds from mortgage notes payable		1,464			35,045
Repayments of mortgage notes payable		(36,188	)		(92,058	)
Proceeds from unsecured senior notes		699,237			—
Repurchases of unsecured exchangeable senior notes		(172,294	)		—
Dividends and distributions		(162,045	)		(195,692	)
Net proceeds from equity transactions		6,054			843,601
Distributions to noncontrolling interests in property partnerships		(1,000	)		(3,000	)
Repayment of note payable		—			(25,000	)
Deferred financing costs		(5,651	)		(3,133	)

Net cash provided by financing activities		329,577			459,763

Net increase in cash and cash equivalents		254,515			577,735
Cash and cash equivalents, beginning of period		1,448,933			241,510

Cash and cash equivalents, end of period	$	1,703,448		$	819,245

Supplemental disclosures:
Cash paid for interest	$	186,067		$	155,274

Interest capitalized	$	17,110		$	24,197

Non-cash investing and financing activities:
Additions to real estate included in accounts payable	$	652		$	41,230

Dividends and distributions declared but not paid	$	80,865		$	80,475

Conversions of noncontrolling interests to stockholders’ equity	$	3,981		$	923

Issuance of restricted securities to employees and directors	$	18,768		$	22,964

The accompanying notes are an integral part of these financial statements.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Boston Properties, Inc. (the “Company”), a Delaware corporation, is a self-administered and self-managed real estate investment trust (“REIT”). The Company is the sole general partner of Boston Properties Limited Partnership (the “Operating Partnership”) and at June 30, 2010 owned an approximate 85.9% (85.9% at June 30, 2009) 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”), “long term incentive units of partnership interest” (also referred to as “LTIP Units”) or “preferred units of partnership interest” (also referred to as “Preferred Units”). In addition, in February 2008, the Company issued LTIP Units in connection with the granting to employees of 2008 outperformance awards (also referred to as “2008 OPP Units”). Because the rights, preferences and privileges of 2008 OPP Units differ from other LTIP Units granted to employees as part of the annual compensation process, unless specifically noted otherwise, all references to LTIP Units exclude 2008 OPP Units.

Unless specifically noted otherwise, all references to OP Units exclude 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 time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership is obligated to redeem such OP Unit for cash equal to the then value of a share of common stock of the Company (“Common Stock”). In lieu of a cash redemption, the Company may elect to 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. An LTIP Unit is generally the economic equivalent of a share of restricted common stock of the Company. LTIP Units, whether vested or not, will receive the same quarterly per unit distributions as OP Units, which equal per share dividends on Common Stock (See Note 9).

At June 30, 2010, there was one series of Preferred Units outstanding (i.e., Series Two Preferred Units). The Series Two Preferred Units bear a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be converted into OP Units or redeemed for cash at the election of the holder thereof or the Operating Partnership in accordance with the terms and conditions set forth in the applicable amendment to the partnership agreement (See Note 9).

All references herein to the Company refer to Boston Properties, Inc. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.

Properties

At June 30, 2010, the Company owned or had interests in a portfolio of 144 commercial real estate properties (the “Properties”) aggregating approximately 37.8 million net rentable square feet, including four properties under construction totaling approximately 1.6 million net rentable square feet. In addition, the Company has structured parking for approximately 38,151 vehicles containing approximately 12.8 million square feet. At June 30, 2010, the Properties consist of:

•

138 office properties, including 119 Class A office properties (including two properties under construction) and 19 Office/Technical properties;

•

one hotel;

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

three retail properties; and

•

two residential properties (both of which are under construction).

The Company owns or controls undeveloped land parcels totaling approximately 510.8 acres. In addition, the Company has a noncontrolling interest in the Boston Properties Office Value-Added Fund, L.P. (the “Value-Added Fund”), which is a strategic partnership with two institutional investors through which the Company has pursued the acquisition of value-added investments in assets within its existing markets. The Company accounts for its investment in the Value-Added Fund using the equity method of accounting. The Company’s investments through the Value-Added Fund are not included in its portfolio information or any other portfolio level statistics. At June 30, 2010, the Value-Added Fund had investments in 26 buildings comprised of an office property in Chelmsford, Massachusetts and office complexes in San Carlos, California and Mountain View, California.

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 Office/Technical properties to be properties that support office, research and development, laboratory and other technical uses.

2. Basis of Presentation and Summary of Significant Accounting Policies

Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership, nor does it have employees of its own. The Operating Partnership, not Boston Properties, Inc., executes all significant business relationships. All majority-owned subsidiaries and affiliates over which the Company has financial and operating control and variable interest entities (“VIE”s) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended December 31, 2009.

For purposes of financial reporting disclosures, the Company calculates the fair value of mortgage notes payable, unsecured senior notes and unsecured exchangeable senior notes. The Company discounts the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt and unsecured notes based on current market rates for similar securities. In determining the current market rates, the Company adds its estimates of market spreads to the quoted yields on federal government treasury securities with

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

similar maturity dates to its debt. Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair values of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of June 30, 2010 (in thousands):


	Carrying Amount			Estimated Fair Value
Mortgage notes payable	$	2,608,577		$	2,687,029
Unsecured senior notes		2,871,909			3,155,974
Unsecured exchangeable senior notes		1,748,814	(1)		1,880,036

Total	$	7,229,300		$	7,723,039

(1)	Includes the net impact of the adjustment for the equity component allocation totaling approximately $113.9 million (See Note 7).

3. Real Estate Activity During the Six Months Ended June 30, 2010

Development

On February 6, 2009, the Company announced that it was suspending construction on its 1,000,000 square foot office building at 250 West 55th Street in New York City. During the six months ended June 30, 2009, the Company recognized costs aggregating approximately $27.8 million related to the suspension of development, which amount included a $20.0 million contractual amount due pursuant to a lease agreement. During December 2009, the Company completed the construction of foundations and steel/deck to grade to facilitate a restart of construction in the future and as a result ceased interest capitalization on the project. On January 19, 2010, the Company paid $12.8 million related to the termination of the lease agreement. As a result, the Company recognized approximately $7.2 million of income during the six months ended June 30, 2010.

On June 1, 2010, the Company placed in-service Weston Corporate Center, an approximately 356,000 net rentable square foot Class A office property located in Weston, Massachusetts. The property is 100% leased.

Dispositions

On April 14, 2008, the Company sold a parcel of land located in Washington, DC for approximately $33.7 million. The Company had previously entered into a development management agreement with the buyer to develop a Class A office property on the parcel totaling approximately 165,000 net rentable square feet. Due to the Company’s involvement in the construction of the project, the gain on sale was deferred and has been recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total project costs. During the six months ended June 30, 2010, the Company completed construction of the project and recognized the remaining gain on sale totaling approximately $1.8 million. The Company has recognized a cumulative gain on sale of approximately $23.4 million.

On May 5, 2010, the Company satisfied the requirements of its master lease agreement related to the 2006 sale of 280 Park Avenue in New York City, resulting in the recognition of the remaining deferred gain on sale of real estate totaling approximately $1.0 million. Following the satisfaction of the master lease agreement, the buyer terminated the property management and leasing agreement entered into at the time of the sale, resulting in the recognition of non-cash deferred management fees totaling approximately $12.2 million.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at June 30, 2010:


Entity	Properties	Nominal % Ownership
Square 407 Limited Partnership	Market Square North	50.0	%
The Metropolitan Square Associates LLC	Metropolitan Square	51.0	%
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%(1)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	23.9	%(2)
Wisconsin Place Retail LLC	Wisconsin Place Retail	5.0	%
RBP Joint Venture LLC	Eighth Avenue and 46^thStreet	50.0	%(3)
Boston Properties Office Value-Added Fund, L.P.	300 Billerica Road, One & Two Circle Star Way and Mountain View Research and Technology Parks	36.9	%(1)(4)
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%(5)
767 Venture, LLC	The General Motors Building	60.0	%
2 GCT Venture LLC	Two Grand Central Tower	60.0	%
540 Madison Venture LLC	540 Madison Avenue	60.0	%
125 West 55^thStreet Venture LLC	125 West 55^thStreet	60.0	%
500 North Capitol LLC	500 North Capitol Street, NW	30.0	%

(1)	The Company’s economic ownership can increase based on the achievement of certain return thresholds.

(2)	Represents the Company’s effective ownership interest. The Company has a 66.67%, 5% and 0% interest in the office, retail and residential joint venture entities, respectively, each of which owns a 33.33% interest in the entity owning the land and infrastructure of the project.

(3)	This property is not in operation and consists of assembled land.

(4)	Represents the Company’s effective ownership interest. The Company has a 25.0% interest in the 300 Billerica Road and One & Two Circle Star Way properties and a 39.5% interest in the Mountain View Research and Technology Park properties.

(5)	Two of the three Annapolis Junction land parcels are undeveloped land.

Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The combined summarized balance sheets of the unconsolidated joint ventures are as follows:


	June 30, 2010			December 31, 2009
	(in thousands)
ASSETS
Real estate and development in process, net	$	5,122,287		$	5,149,868
Other assets		760,516			760,001

Total assets	$	5,882,803		$	5,909,869

LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable	$	3,206,238		$	3,217,893
Other liabilities		1,006,435			1,071,904
Members’/Partners’ equity		1,670,130			1,620,072

Total liabilities and members’/partners’ equity	$	5,882,803		$	5,909,869

Company’s share of equity	$	953,405		$	927,184
Basis differentials(1)		(158,755	)		(163,548	)

Carrying value of the Company’s investments in unconsolidated joint ventures	$	794,650		$	763,636

(1)

This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from impairment of investments and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level.

The combined summarized statements of operations of the unconsolidated joint ventures are as follows:


	For the three months ended June 30,						For the six months ended June 30,
	2010			2009			2010			2009
	(in thousands)						(in thousands)
Total revenue(1)	$	151,129		$	151,562		$	302,091		$	296,942
Expenses
Operating		42,833			38,904			84,537			80,637
Interest		59,249			58,037			117,585			114,381
Depreciation and amortization		57,391			60,948			114,215			118,488

Total expenses		159,473			157,889			316,337			313,506

Net loss	$	(8,344	)	$	(6,327	)	$	(14,246	)	$	(16,564	)

Company’s share of net loss	$	(3,775	)	$	(3,143	)	$	(6,720	)	$	(8,445	)
Impairment loss on investment		—			(7,357	)		—			(7,357	)
Basis differential		2,516			2,193			4,793			4,780
Elimination of inter-entity interest on partner loan		8,724			7,956			17,302			15,768

Income (loss) from unconsolidated joint ventures	$	7,465		$	(351	)	$	15,375		$	4,746

(1)

Includes straight-line rent adjustments of $5.6 million and $8.3 million for the three months ended June 30, 2010 and 2009, respectively, and $13.8 million and $13.6 million for the six months ended June 30, 2010 and 2009, respectively. Includes net “above” and “below” market rent adjustments of $30.4 million and $39.4 million for the three months ended June 30, 2010 and 2009, respectively, and $67.2 million and $77.3 million for the six months ended June 30, 2010 and 2009, respectively.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On March 1, 2010, a joint venture in which the Company has a 60% interest refinanced at maturity its mortgage loan collateralized by 125 West 55th Street located in New York City. The mortgage loan totaling $200.0 million bore interest at a fixed rate of 5.75% per annum. The new mortgage loan totaling $207.0 million bears interest at a fixed rate of 6.09% per annum and matures on March 10, 2015. In connection with the new mortgage loan, the Company has guaranteed the joint venture’s obligation to fund an escrow related to certain lease rollover costs in lieu of an initial cash deposit for the full amount. The maximum funding obligation under the guarantee was $21.3 million. At closing, the joint venture funded a $10.0 million cash deposit into the escrow account and the remaining $11.3 million will be further reduced with scheduled monthly deposits into the escrow account from operating cash flows. As of June 30, 2010, the maximum funding obligation under the guarantee was approximately $9.9 million. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee. In addition, on February 25, 2010, the joint venture repaid outstanding mezzanine loans totaling $63.5 million utilizing available cash and cash contributions from the joint venture’s partners on a pro rata basis. The mezzanine loans bore interest at a weighted-average fixed rate of approximately 7.81% per annum and were scheduled to mature on March 1, 2010 (See also Note 14).

On April 1, 2010, the Company acquired a 30% interest in a joint venture entity that owns 500 North Capitol Street, NW located in Washington, DC. 500 North Capitol Street is an approximately 176,000 net rentable square foot office property that is fully-leased to a single tenant through March 2011. On April 1, 2010, the joint venture entity refinanced at maturity the mortgage loan collateralized by the property totaling approximately $26.8 million. The new mortgage loan totaling $22.0 million bears interest at a variable rate equal to the greater of (1) the prime rate, as defined in the loan agreement, or (2) 5.75% per annum. The loan currently bears interest at 5.75% per annum and matures on March 31, 2013. The Company’s investment in the joint venture totaling approximately $1.9 million was financed with cash contributions to the venture totaling approximately $1.4 million and the issuance to the seller of 5,906 OP Units.

On April 9, 2010, a joint venture in which the Company has a 60% interest refinanced its mortgage loan collateralized by Two Grand Central Tower located in New York City. The previous mortgage loan totaling $190.0 million bore interest at a fixed rate of 5.10% per annum and was scheduled to mature on July 11, 2010. The new mortgage loan totaling $180.0 million bears interest at a fixed rate of 6.00% per annum and matures on April 10, 2015. In connection with the refinancing, the joint venture repaid $10.0 million of the previous mortgage loan utilizing cash contributions from the joint venture’s partners on a pro rata basis.

On April 16, 2010, a joint venture in which the Company has a 51% interest refinanced its mortgage loan collateralized by Metropolitan Square located in Washington, DC. The previous mortgage loan totaling approximately $123.6 million bore interest at a fixed rate of 8.23% per annum and was scheduled to mature on May 1, 2010. The new mortgage loan totaling $175.0 million bears interest at a fixed rate of 5.75% per annum and matures on May 5, 2020.

On June 15, 2010, a joint venture in which the Company has a 50% interest repaid the mortgage loan collateralized by land parcels at its site at Eighth Avenue and 46th Street in New York City utilizing cash contributions from the joint venture’s partners on a pro rata basis. In addition, the joint venture completed an exchange of land parcels with a third party and received land parcels and development rights valued at approximately $6.4 million in exchange for a land parcel valued at approximately $5.4 million and cash of approximately $1.0 million.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Mortgage Notes Payable

On June 15, 2010, the Company used available cash to repay the mortgage loan collateralized by its Eight Cambridge Center property located in Cambridge, Massachusetts totaling approximately $22.6 million. The mortgage loan bore interest at a fixed rate of 7.73% per annum and was scheduled to mature on July 15, 2010. There was no prepayment penalty.

6. Unsecured Senior Notes

The following summarizes the unsecured senior notes outstanding as of June 30, 2010 (dollars in thousands):


	Coupon/ Stated Rate		Effective Rate(1)		Principal Amount			Maturity Date(2)
10 Year Unsecured Senior Notes	6.250	%	6.381	%	$	750,000		January 15, 2013
10 Year Unsecured Senior Notes	6.250	%	6.291	%		175,000		January 15, 2013
12 Year Unsecured Senior Notes	5.625	%	5.693	%		300,000		April 15, 2015
12 Year Unsecured Senior Notes	5.000	%	5.194	%		250,000		June 1, 2015
10 Year Unsecured Senior Notes	5.875	%	5.967	%		700,000		October 15, 2019
10 Year Unsecured Senior Notes	5.625	%	5.708	%		700,000		November 15, 2020

Total principal						2,875,000
Net discount						(3,091	)

Total					$	2,871,909

(1)	Yield on issuance date including the effects of discounts on the notes.

(2)	No principal amounts are due prior to maturity.

On April 19, 2010, the Company’s Operating Partnership completed a public offering of $700.0 million in aggregate principal amount of its 5.625% senior notes due 2020. The notes were priced at 99.891% of the principal amount to yield 5.708% to maturity. The aggregate net proceeds to the Operating Partnership, after deducting underwriter discounts and offering expenses, were approximately $693.5 million. The notes mature on November 15, 2020, unless earlier redeemed. On April 7, 2010, in connection with the offering, the Company entered into two treasury lock agreements to fix the 10-year treasury rate at 3.873% per annum on notional amounts aggregating $350.0 million. The Company subsequently cash-settled the treasury lock agreements and received approximately $0.4 million, which amount will be recognized as a reduction to the Company’s interest expense over the term of the notes.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. Unsecured Exchangeable Senior Notes

The following summarizes the unsecured exchangeable senior notes outstanding as of June 30, 2010 (dollars in thousands):


	Coupon/ Stated Rate		Effective Rate(1)		Exchange Rate		Principal Amount			First Optional Redemption Date by Company	Maturity Date
3.625% Exchangeable Senior Notes	3.625	%	4.037	%	8.5051	(2)	$	747,500		N/A	February 15, 2014
2.875% Exchangeable Senior Notes	2.875	%	3.462	%	7.0430	(3)		676,194		February 20, 2012(4)	February 15, 2037
3.750% Exchangeable Senior Notes	3.750	%	3.787	%	10.0066	(5)		450,000		May 18, 2013(6)	May 15, 2036

Total principal								1,873,694
Net discount								(11,007	)
Adjustment for the equity component allocation, net of accumulated amortization								(113,873	)

Total							$	1,748,814

(1)	Yield on issuance date including the effects of discounts on the notes but excluding the effects of the adjustment for the equity component allocation.

(2)

The initial exchange rate is 8.5051 shares per $1,000 principal amount of the notes (or an initial exchange price of approximately $117.58 per share of Boston Properties, Inc.’s common stock). In addition, the Company entered into capped call transactions with affiliates of certain of the initial purchasers, which are intended to reduce the potential dilution upon future exchange of the notes. The capped call transactions were intended to increase the effective exchange price to the Company of the notes from $117.58 to approximately $137.17 per share (subject to adjustment), representing an overall effective premium of approximately 40% over the closing price on August 13, 2008 of $97.98 per share of Boston Properties, Inc.’s common stock. The net cost of the capped call transactions was approximately $44.4 million. As of June 30, 2010, the effective exchange price was $136.34 per share.

(3)

In connection with the special distribution of $5.98 per share of Boston Properties, Inc.’s common stock declared on December 17, 2007, the exchange rate was adjusted from 6.6090 to 7.0430 shares per $1,000 principal amount of notes effective as of December 31, 2007, resulting in an exchange price of approximately $141.98 per share of Boston Properties, Inc.’s common stock.

(4)

Holders may require the Operating Partnership to repurchase the notes for cash on February 15, 2012, 2017, 2022, 2027 and 2032 and at any time prior to their maturity upon a fundamental change, in each case at a price equal to 100% of the principal amount of the notes being repurchased plus any accrued and unpaid interest up to, but excluding, the repurchase date.

(5)

In connection with the special distribution of $5.98 per share of Boston Properties, Inc.’s common stock declared on December 17, 2007, the exchange rate was adjusted from 9.3900 to 10.0066 shares per $1,000 principal amount of notes effective as of December 31, 2007, resulting in an exchange price of approximately $99.93 per share of Boston Properties, Inc.’s common stock.

(6)

Holders may require the Operating Partnership to repurchase the notes for cash on May 18, 2013 and May 15, 2016, 2021, 2026 and 2031 and at any time prior to their maturity upon a fundamental change, in each case at a price equal to 100% of the principal amount of the notes being repurchased plus any accrued and unpaid interest up to, but excluding, the repurchase date.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has separately accounted for the liability and equity components of the Operating Partnership’s $862.5 million of 2.875% exchangeable senior notes due 2037, $450.0 million of 3.75% exchangeable senior notes due 2036 and $747.5 million of 3.625% exchangeable senior notes due 2014 by allocating the initial proceeds from the sale between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Operating Partnership at such time. The Company measured the fair value of the debt components of the 2.875%, 3.75% and 3.625% exchangeable senior notes for the periods presented based on effective interest rates of 5.630%, 5.958% and 6.555%, respectively. The aggregate carrying amount of the debt component was approximately $1.75 billion and $1.90 billion (net of the adjustment for the equity component allocation (net of accumulated amortization) of approximately $113.9 million and $140.4 million) at June 30, 2010 and December 31, 2009, respectively. As a result, the Company attributed an aggregate of approximately $230.3 million of the proceeds to the equity component of the notes, which represents the excess proceeds received over the fair value of the notes at the date of issuance. The Company also reclassified approximately $1.0 million of deferred financing costs to Additional Paid-in Capital, which represented the costs attributable to the equity components of the notes. The equity component of the notes has been reflected within Additional Paid-in Capital in the Consolidated Balance Sheets. The carrying amount of the equity component was approximately $229.3 million at June 30, 2010 and December 31, 2009. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption dates or, in the case of the 2014 notes, the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each debt security will increase in subsequent reporting periods through the first optional redemption date (or, in the case of the 2014 notes, the maturity date) as the debt accretes to its par value over the same period. The aggregate contractual interest expense was approximately $16.8 million and $18.6 million for the three months ended June 30, 2010 and 2009, respectively, and approximately $35.2 million and $37.1 million for the six months ended June 30, 2010 and 2009, respectively. As a result of accounting for the exchangeable senior notes in a manner that reflects the Company’s nonconvertible debt borrowing rate, the Company reported additional non-cash interest expense of approximately $9.3 million and $9.5 million for the three months ended June 30, 2010 and 2009, respectively, and approximately $19.4 million and $18.9 million for the six months ended June 30, 2010 and 2009, respectively.

During the six months ended June 30, 2010, the Company’s Operating Partnership repurchased approximately $186.3 million aggregate principal amount of its 2.875% exchangeable senior notes due 2037, which the holders may require the Operating Partnership to repurchase in February 2012, for approximately $185.5 million. The repurchased notes had an aggregate carrying value of approximately $177.3 million, resulting in the recognition of a loss on extinguishment of approximately $8.2 million during the six months ended June 30, 2010.

8. Commitments and Contingencies

General

In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence.

The Company has letter of credit and performance obligations of approximately $12.8 million related to lender and development requirements.

Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the Company’s assumption of the General Motors Building’s secured loan by the Company’s unconsolidated joint venture, 767 Venture, LLC, the Company guaranteed the unconsolidated joint venture’s obligation to fund various escrows, including tenant improvements, taxes and insurance in lieu of cash deposits. As of June 30, 2010, the maximum funding obligation under the guarantee was approximately $21.1 million. In connection with the Company’s refinancing of the 125 West 55^th Street property’s secured loan by the Company’s unconsolidated joint venture, 125 West 55^th Street Venture LLC, the Company has guaranteed the unconsolidated joint venture’s obligation to fund an escrow related to certain lease rollover costs in lieu of an initial cash deposit for the full amount. The maximum funding obligation under the guarantee was $21.3 million. At closing, the joint venture funded a $10.0 million cash deposit into the escrow account and the remaining $11.3 million will be further reduced with scheduled monthly deposits into the escrow account from operating cash flows. As of June 30, 2010, the maximum funding obligation under the guarantee was approximately $9.9 million. From time to time, the Company (or the applicable joint venture) has also agreed to guarantee portions of the principal, interest or other amounts in connection with other unconsolidated joint venture borrowings. In addition to the financial guarantees referenced above, the Company has agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) on certain of its unconsolidated joint venture loans.

Insurance

The Company carries insurance coverage on its properties of types and in amounts and with deductibles that it believes are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act (as amended, “TRIA”) was enacted in November 2002 to require regulated insurers to make available coverage for “certified” acts of terrorism (as defined by the statute). The expiration date of TRIA was extended to December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). Currently, the Company’s property insurance program per occurrence limits are $1.0 billion for its portfolio insurance program, including coverage for acts of terrorism certified under TRIA. The Company currently insures certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), in separate stand alone insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are $1.625 billion, including coverage for acts of terrorism certified under TRIA, with $1.375 billion of coverage for losses in excess of $250 million being provided by NYXP, LLC, as a direct insurer. The Company also currently carries nuclear, biological, chemical and radiological terrorism insurance coverage (“NBCR Coverage”) for acts of terrorism certified under TRIA, which is provided by IXP, LLC as a direct insurer, for the properties in our portfolio, including 767 Fifth Avenue, but excluding the properties owned by the Company’s Value-Added Fund and certain other properties owned in joint ventures with third parties or which we manage. The per occurrence limit for NBCR Coverage is $1.0 billion. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” The program trigger is $100 million and the coinsurance is 15%. Under TRIPRA, if the Federal Government pays out for a loss under TRIA, it is mandatory that the Federal Government recoup the full amount of the loss from insurers offering TRIA coverage after the payment of the loss pursuant to a formula in TRIPRA. The Company may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if there is a change in its portfolio or for any other reason. The Company intends to continue to monitor the scope, nature and cost of available terrorism insurance and maintain insurance in amounts and on terms that are commercially reasonable.

The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that the Company believes are commercially reasonable. In addition, this insurance is subject to a deductible in the amount of 5% of the value of the affected

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

property. Specifically, the Company currently carries earthquake insurance which covers its San Francisco region with a $120 million per occurrence limit and a $120 million annual aggregate limit, $20 million of which is provided by IXP, LLC, as a direct insurer. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact the Company’s ability to finance properties subject to earthquake risk. The Company may discontinue earthquake insurance on some or all of its properties in the future if the premiums exceed the Company’s estimation of the value of the coverage.

IXP, LLC (“IXP”), a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco properties and the Company’s NBCR Coverage for acts of terrorism certified under TRIA. NYXP, LLC (“NYXP”), a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s coverage for acts of terrorism certified under TRIA for 767 Fifth Avenue. Currently, NYXP only insures losses which exceed the program trigger under TRIA and NYXP reinsures with a third-party insurance company any coinsurance payable under TRIA. Insofar as the Company owns IXP and NYXP, it is responsible for their liquidity and capital resources, and the accounts of IXP and NYXP are part of the Company’s consolidated financial statements. In particular, if a loss occurs which is covered by the Company’s NBCR Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government. IXP and NYXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and their insurance policies are maintained after the payout by the Federal Government. If the Company experiences a loss and IXP or NYXP are required to pay under their insurance policies, the Company would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP and NYXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance.

The mortgages on the Company’s properties typically contain requirements concerning the financial ratings of the insurers who provide policies covering the property. The Company provides the lenders on a regular basis with the identity of the insurance companies in the Company’s insurance programs. The ratings of some of the Company’s insurers are below the rating requirements in some of the Company’s loan agreements and the lenders for these loans could attempt to claim an event of default has occurred under the loan. The Company believes it could obtain insurance with insurers which satisfy the rating requirements. Additionally, in the future, the Company’s ability to obtain debt financing secured by individual properties, or the terms of such financing, may be adversely affected if lenders generally insist on ratings for insurers which are difficult to obtain or which result in a commercially unreasonable premium. There can be no assurance that a deficiency in the financial ratings of one or more of the Company’s insurers will not have a material adverse effect on the Company.

The Company continues to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism and California earthquake risk in particular, but the Company cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars or the presence of mold at the Company’s properties, for which the Company cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if the Company experiences a loss that is uninsured or that exceeds policy limits, the Company could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Noncontrolling Interests

Noncontrolling interests relate to the interests in the Operating Partnership not owned by the Company and interests in property partnerships not wholly-owned by the Company. As of June 30, 2010, the noncontrolling interests consisted of 19,802,223 OP Units, 1,550,249 LTIP Units, 1,080,938 2008 OPP Units and 1,113,044 Series Two Preferred Units (or 1,460,688 OP Units on an as converted basis) held by parties other than the Company.

Noncontrolling Interest—Redeemable Preferred Units of the Operating Partnership

The Preferred Units at June 30, 2010 consisted solely of 1,113,044 Series Two Preferred Units, which bear a preferred distribution equal to the greater of (1) the distribution which would have been paid in respect of the Series Two Preferred Unit had such Series Two Preferred Unit been converted into an OP Unit (including both regular and special distributions) or (2) a 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 (1.312336 OP Units for each Preferred Unit). Distributions on the Series Two Preferred Units are payable quarterly and, unless the greater rate described in the next sentence applies, accrue at 6.0% per annum. If distributions on the number of OP Units into which the Series Two Preferred Units are convertible are greater than distributions calculated using the rates described in the preceding sentence for the applicable quarterly period, then the greater distributions are payable instead. The holders of Series Two Preferred Units have the right to require the Operating Partnership to redeem their units for cash at the redemption price of $50.00 per unit on May 12, 2011, May 14, 2012, May 14, 2013 and May 12, 2014. The maximum number of units that may be required to be redeemed from all holders on each of these dates is 1,007,662, which is one-sixth of the number of Series Two Preferred Units that were originally issued. The holders also had the right to have their Series Two Preferred Units redeemed for cash on May 12, 2009 and May 12, 2010, although no holder exercised such right. The Company also has the right, under certain conditions and at certain times, to redeem Series Two Preferred Units for cash and to convert into OP Units any Series Two Preferred Units that are not redeemed when they are eligible for redemption.

On February 16, 2010, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.75616 per unit. On May 17, 2010, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.73151 per unit.

The following table reflects the activity of the noncontrolling interests—redeemable preferred units of the Operating Partnership for the six months ended June 30, 2010 and 2009 (in thousands):


Balance at January 1, 2010	$	55,652
Net income		1,728
Distributions		(1,728	)

Balance at June 30, 2010	$	55,652


Balance at January 1, 2009	$	55,652
Net income		1,962
Distributions		(1,962	)

Balance at June 30, 2009	$	55,652

Noncontrolling Interest—Common Units of the Operating Partnership

During the six months ended June 30, 2010, 136,692 OP Units were presented by the holders for redemption (including 58,216 OP Units issued upon conversion of LTIP Units) and were redeemed by the Company in exchange for an equal number of shares of Common Stock.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At June 30, 2010, the Company had outstanding 1,080,938 2008 OPP Units. Prior to the measurement date on February 5, 2011, 2008 OPP Units will be entitled to receive per unit distributions equal to one-tenth (10%) of the regular quarterly distributions payable on an OP Unit, but will not be entitled to receive any special distributions. After the measurement date, the number of 2008 OPP Units, both vested and unvested, which 2008 OPP award recipients have earned, if any, based on the establishment of an outperformance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit.

On January 29, 2010, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.50 per unit and a distribution on the 2008 OPP Units in the amount of $0.05 per unit to holders of record as of the close of business on December 31, 2009. On April 30, 2010, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.50 per unit and a distribution on the 2008 OPP Units in the amount of $0.05 per unit to holders of record as of the close of business on March 31, 2010. On June 17, 2010, Boston Properties, Inc., as general partner of the Operating Partnership, declared a distribution on the OP Units and LTIP Units in the amount of $0.50 per unit and a distribution on the 2008 OPP Units in the amount of $0.05 per unit, in each case payable on July 30, 2010 to holders of record as of the close of business on June 30, 2010.

The following table reflects the activity of the noncontrolling interests—common units of the Operating Partnership for the six months ended June 30, 2010 and 2009 (in thousands):


Balance at January 1, 2010	$	617,386
Net income		17,466
Distributions		(21,507	)
Equity compensation		18,752
Reallocation of partnership interest		(12,873	)

Balance at June 30, 2010	$	619,224


Balance at January 1, 2009	$	563,212
Net income		19,123
Distributions		(25,300	)
Equity compensation		12,724
Reallocation of partnership interest		50,993

Balance at June 30, 2009	$	620,752

The Series Two Preferred Units may be converted into OP Units at the election of the holder thereof at any time. 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 time of issuance of OP Units to particular holders that may restrict such redemption 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. The Company may, in its sole discretion, elect to assume and satisfy the redemption obligation by paying either cash or issuing one share of Common Stock. The value of the OP Units (not owned by the Company and including LTIP Units assuming that all conditions have been met for the conversion thereof) and Series Two Preferred Units (on an as converted basis) had all of such units been redeemed at June 30, 2010 was approximately $1.52 billion and $104.2 million, respectively, based on the closing price of the Company’s common stock of $71.34 per share on June 30, 2010.

Noncontrolling Interest—Property Partnerships

The noncontrolling interests in property partnerships consist of the outside equity interests in ventures that are consolidated with the financial results of the Company because the Company exercises control over the

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

entities that own the properties. The equity interests in these ventures that are not owned by the Company, totaling approximately $6.3 million at June 30, 2010, are included in Noncontrolling Interests—Property Partnerships on the accompanying Consolidated Balance Sheets.

The following table reflects the activity of the noncontrolling interests—property partnerships for the six months ended June 30, 2010 and 2009 (in thousands):


Balance at January 1, 2010	$	5,671
Net income		1,668
Distributions		(1,000	)

Balance at June 30, 2010	$	6,339


Balance at January 1, 2009	$	6,900
Net income		1,201
Distributions		(3,000	)

Balance at June 30, 2009	$	5,101

10. Stockholders’ Equity

As of June 30, 2010, the Company had 139,273,399 shares of Common Stock outstanding.

During the six months ended June 30, 2010, the Company issued 172,825 shares of its Common Stock upon the exercise of options to purchase Common Stock by certain employees.

During the six months ended June 30, 2010, the Company issued 136,692 shares of its Common Stock in connection with the redemption of an equal number of OP Units.

On January 29, 2010, the Company paid a dividend in the amount of $0.50 per share of Common Stock to shareholders of record as of the close of business on December 31, 2009. On April 30, 2010, the Company paid a dividend in the amount of $0.50 per share of Common Stock to shareholders of record as of the close of business on March 31, 2010. On June 17, 2010, the Company’s Board of Directors declared a dividend in the amount of $0.50 per share of Common Stock payable on July 30, 2010 to shareholders of record as of the close of business on June 30, 2010.

11. Earnings Per Share

The following table provides a reconciliation of both the net income attributable to Boston Properties, Inc. and the number of common shares used in the computation of basic earnings per share (“EPS”), which is calculated by dividing net income attributable to Boston Properties, Inc. by the weighted-average number of common shares outstanding during the period. The terms of the Series Two Preferred Units enable the holders to obtain OP Units of the Operating Partnership, as well as Common Stock of the Company. As a result, the Series Two Preferred Units are considered participating securities and are included in the computation of basic and diluted earnings per share of the Company if the effect of applying the if-converted method is dilutive. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. As a result, unvested restricted common stock of the Company, LTIP Units and 2008 OPP Units are considered participating securities and are included in the computation of basic and diluted earnings per share

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of the Company if the effect of applying the if-converted method is dilutive. Because the 2008 OPP Units require the Company to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, the Company excludes the 2008 OPP Units from the diluted EPS calculation. For the three and six months ended June 30, 2010 and 2009, the absolute and relative return thresholds for the 2008 OPP Units were not met and as a result the 2008 OPP Units have been excluded from the diluted EPS calculation. Other potentially dilutive common shares, including stock options, restricted stock and other securities of the Operating Partnership that are exchangeable for the Company’s Common Stock, and the related impact on earnings, are considered when calculating diluted EPS.


	For the three months ended June 30, 2010
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc.	$	61,412	139,113	$	0.44
Effect of Dilutive Securities:
Stock Based Compensation		—	713		(0.00	)

Diluted Earnings:
Net income	$	61,412	139,826	$	0.44


	For the three months ended June 30, 2009
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc.	$	67,152	125,267	$	0.54
Effect of Dilutive Securities:
Stock Based Compensation		—	353		(0.01	)

Diluted Earnings:
Net income	$	67,152	125,620	$	0.53


	For the six months ended June 30, 2010
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc.	$	114,132	139,022	$	0.82
Effect of Dilutive Securities:
Stock Based Compensation		—	690		(0.00	)

Diluted Earnings:
Net income	$	114,132	139,712	$	0.82


	For the six months ended June 30, 2009
	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc.	$	111,817	123,272	$	0.91
Effect of Dilutive Securities:
Stock Based Compensation		—	282		(0.00	)

Diluted Earnings:
Net income	$	111,817	123,554	$	0.91

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Stock Option and Incentive Plan

During the six months ended June 30, 2010, the Company issued 69,499 shares of restricted common stock and 252,597 LTIP Units to employees and directors under the 1997 Stock Option and Incentive Plan (the “1997 Plan”). Employees and directors paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit. The shares of restricted stock were valued at approximately $4.5 million ($65.31 per share weighted-average). The LTIP Units were valued at approximately $15.3 million ($60.49 per unit fair value weighted-average) using a Monte Carlo simulation method model. The per unit fair value of each LTIP Unit granted was estimated on the date of grant using the following assumptions: an expected life of 5.7 years, a risk-free interest rate of 2.60% and an expected price volatility of 36.0%. An LTIP Unit is generally the economic equivalent of a share of restricted stock in the Company. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. The restricted stock and LTIP Units granted to employees between January 1, 2004 and November 2006 vest over a five-year term. Grants of restricted stock and LTIP Units made in and after November 2006 vest in four equal annual installments. Restricted stock and LTIP Units are measured at fair value on the date of grant based on the number of shares or units granted, as adjusted for forfeitures, and the closing price of the Company’s Common Stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Earnings in Excess of Dividends in the Consolidated Balance Sheets. Stock-based compensation expense associated with restricted stock, LTIP Units and 2008 OPP Units was approximately $6.1 million and $6.3 million for the three months ended June 30, 2010 and 2009, respectively, and approximately $19.9 million and $13.1 million for the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, stock-based compensation expense includes an aggregate of approximately $5.8 million of remaining previously unvested stock-based compensation granted between 2006 and 2009 to Edward H. Linde, the Company’s former Chief Executive Officer, which expense was accelerated as a result of his passing on January 10, 2010. At June 30, 2010, there was $37.6 million of unrecognized compensation expense related to unvested restricted stock and LTIP Units and $6.0 million of unrecognized compensation expense related to unvested 2008 OPP Units that is expected to be recognized over a weighted-average period of approximately 2.6 years. If upon the conclusion of the three-year measurement period in February 2011, the 2008 OPP Awards are not earned, and therefore the program is terminated, the Company will accelerate the then remaining unrecognized compensation expense totaling approximately $4.3 million during the first quarter of 2011.

13. Segment Information

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by both geographic area and property type. The Company’s segments by geographic area are Greater Boston, Greater Washington, DC, Midtown Manhattan, Greater San Francisco and New Jersey. Segments by property type include: Class A Office, Office/Technical and Hotels.

Asset information by segment is not reported because the Company does not use this measure to assess performance. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, development and management services, general and administrative expenses, interest expense, depreciation and amortization expense, loss (gain) from suspension of development, losses (gains) from investments in securities, losses from early extinguishments of debt, income (loss) from unconsolidated joint ventures, gains on sales of real estate and noncontrolling interests are not included in Net Operating Income as internal reporting addresses these items on a corporate level.

Net Operating Income is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and it is not indicative of

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate Net Operating Income in the same manner. The Company considers Net Operating Income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of the Company’s properties.

Information by geographic area and property type:

Three months ended June 30, 2010 (dollars in thousands):


	Greater Boston			Greater Washington, DC			Midtown Manhattan			Greater San Francisco			New Jersey			Total
Rental Revenue:
Class A	$	91,479		$	82,573		$	110,976		$	53,484		$	16,526		$	355,038
Office/Technical		7,597			3,951			—			—			—			11,548
Hotel		8,371			—			—			—			—			8,371

Total		107,447			86,524			110,976			53,484			16,526			374,957

% of Total		28.66	%		23.07	%		29.60	%		14.26	%		4.41	%		100.00	%
Real Estate Operating Expenses:
Class A		33,919			22,052			36,824			19,621			7,792			120,208
Office/Technical		2,107			969			—			—			—			3,076
Hotel		6,089			—			—			—			—			6,089

Total		42,115			23,021			36,824			19,621			7,792			129,373

% of Total		32.55	%		17.80	%		28.46	%		15.17	%		6.02	%		100.00	%

Net Operating Income	$	65,332		$	63,503		$	74,152		$	33,863		$	8,734		$	245,584

% of Total		26.60	%		25.86	%		30.19	%		13.79	%		3.56	%		100.00	%

Three months ended June 30, 2009 (dollars in thousands):


	Greater Boston			Greater Washington, DC			Midtown Manhattan			Greater San Francisco			New Jersey			Total
Rental Revenue:
Class A	$	90,932		$	78,726		$	120,562		$	55,598		$	15,650		$	361,468
Office/Technical		7,580			4,053			—			—			—			11,633
Hotel		7,396			—			—			—			—			7,396

Total		105,908			82,779			120,562			55,598			15,650			380,497

% of Total		27.83	%		21.76	%		31.69	%		14.61	%		4.11	%		100.00	%
Real Estate Operating Expenses:
Class A		34,229			22,346			36,824			20,704			7,358			121,461
Office/Technical		2,174			1,095			—			—			—			3,269
Hotel		5,359			—			—			—			—			5,359

Total		41,762			23,441			36,824			20,704			7,358			130,089

% of Total		32.10	%		18.02	%		28.31	%		15.91	%		5.66	%		100.00	%

Net Operating Income	$	64,146		$	59,338		$	83,738		$	34,894		$	8,292		$	250,408

% of Total		25.62	%		23.70	%		33.44	%		13.93	%		3.31	%		100.00	%

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Six months ended June 30, 2010 (dollars in thousands):


	Greater Boston			Greater Washington, DC			Midtown Manhattan			Greater San Francisco			New Jersey			Total
Rental Revenue:
Class A	$	179,686		$	166,418		$	220,918		$	106,631		$	33,005		$	706,658
Office/Technical		15,181			7,971			—			—			—			23,152
Hotel		14,274			—			—			—			—			14,274

Total		209,141			174,389			220,918			106,631			33,005			744,084

% of Total		28.11	%		23.44	%		29.69	%		14.33	%		4.43	%		100.00	%
Real Estate Operating Expenses:
Class A		67,399			45,723			74,269			38,731			15,630			241,752
Office/Technical		4,373			2,144			—			—			—			6,517
Hotel		11,357			—			—			—			—			11,357

Total		83,129			47,867			74,269			38,731			15,630			259,626

% of Total		32.02	%		18.43	%		28.61	%		14.92	%		6.02	%		100.00	%

Net Operating Income	$	126,012		$	126,522		$	146,649		$	67,900		$	17,375		$	484,458

% of Total		26.01	%		26.12	%		30.27	%		14.01	%		3.59	%		100.00	%

Six months ended June 30, 2009 (dollars in thousands):


	Greater Boston			Greater Washington, DC			Midtown Manhattan			Greater San Francisco			New Jersey			Total
Rental Revenue:
Class A	$	182,420		$	155,811		$	231,713		$	111,114		$	31,303		$	712,361
Office/Technical		15,437			8,169			—			—			—			23,606
Hotel		13,458			—			—			—			—			13,458

Total		211,315			163,980			231,713			111,114			31,303			749,425

% of Total		28.20	%		21.88	%		30.92	%		14.82	%		4.18	%		100.00	%
Real Estate Operating Expenses:
Class A		69,003			44,602			72,706			40,035			15,214			241,560
Office/Technical		4,840			2,191			—			—			—			7,031
Hotel		10,831			—			—			—			—			10,831

Total		84,674			46,793			72,706			40,035			15,214			259,422

% of Total		32.64	%		18.04	%		28.03	%		15.43	%		5.86	%		100.00	%

Net Operating Income	$	126,641		$	117,187		$	159,007		$	71,079		$	16,089		$	490,003

% of Total		25.84	%		23.92	%		32.45	%		14.51	%		3.28	%		100.00	%

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a reconciliation of Net Operating Income to net income attributable to Boston Properties, Inc.:


	Three months ended June 30,					Six months ended June 30,
	2010		2009			2010			2009
Net Operating Income	$	245,584	$	250,408		$	484,458		$	490,003
Add:
Development and management services income		18,884		8,551			27,828			16,847
Interest and other income		2,117		442			3,827			762
Income (loss) from unconsolidated joint ventures		7,465		(351	)		15,375			4,746
Gains on sales of real estate		969		4,493			2,734			7,288
Less:
General and administrative expense		17,648		18,532			44,470			35,952
Interest expense		96,755		78,633			188,784			157,563
Depreciation and amortization expense		81,400		87,005			164,475			164,375
Loss (gain) from suspension of development		—		—			(7,200	)		27,766
Losses from early extinguishments of debt		6,051		494			8,221			494
Losses (gains) from investments in securities		678		(1,194	)		478			(607	)
Noncontrolling interest in property partnerships		864		691			1,668			1,201
Noncontrolling interest—common units of the Operating Partnership		9,250		10,629			17,114			18,091
Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership		125		629			352			1,032
Noncontrolling interest—redeemable preferred units of the Operating Partnership		836		972			1,728			1,962

Net income attributable to Boston Properties, Inc.	$	61,412	$	67,152		$	114,132		$	111,817

14. Subsequent Events

On July 1, 2010, the Company used available cash to repay the mortgage loans collateralized by its 202, 206 & 214 Carnegie Center properties located in Princeton, New Jersey totaling approximately $55.8 million. The mortgage loans bore interest at a fixed rate of 8.13% per annum and were scheduled to mature on October 1, 2010. There was no prepayment penalty.

On July 1, 2010, the Company acquired the mortgage loan collateralized by a land parcel located in Reston, Virginia for approximately $20.3 million. In connection with the acquisition of the loan, the Company entered into a forbearance agreement pursuant to which it obtained the fee interest in the land by deed in lieu of foreclosure.

On July 23, 2010, an unconsolidated joint venture in which the Company has a 60% interest modified its mortgage loan collateralized by 125 West 55th Street located in New York City. The mortgage loan totaling $207.0 million bears interest at a fixed rate of 6.09% per annum and was scheduled to mature on March 10, 2015. The modification extended the maturity date of the loan to March 10, 2020. All other terms of the mortgage loan remain unchanged.

On July 29, 2010, the Company modified the mortgage loan collateralized by its Reservoir Place property located in Waltham, Massachusetts. The mortgage loan totaling $50.0 million bore interest at a variable rate equal to LIBOR plus 3.85% per annum and matures on July 30, 2014. The modification reduced the interest rate to a variable rate equal to LIBOR plus 2.20% per annum. All other terms of the mortgage loan remain unchanged.

Effective as of August 3, 2010, the maturity date under the Company’s Operating Partnership’s $1.0 billion unsecured revolving credit facility was extended to August 3, 2011. All other terms of the unsecured revolving credit facility remain unchanged.

ITEM 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “we,” “us,” “our” and 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.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “result,” “should,” “will” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected by the forward-looking statements. 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. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•

the continuing impact of the recent, severe economic recession (including the related high unemployment and constrained credit), which is having and may continue to have a negative effect on the following, among other things:

•

the fundamentals of our business, including overall market occupancy and rental rates;

•

the financial condition of our tenants, many of which are financial, legal and other professional firms, our lenders, counterparties to our derivative financial instruments and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of default by these parties;

•

our ability to obtain debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities and refinance existing debt and our future interest expense; and

•

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.

•

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

•

failure to manage effectively our growth and expansion into new markets and sub-markets or to integrate acquisitions and developments successfully;

•

the ability of our joint venture partners to satisfy their obligations;

•

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

•

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments, including the risk associated with interest rates impacting the cost and/or availability of financing;

•

risks associated with interest rate contracts and the effectiveness of such arrangements;

•

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

•

risks associated with actual or threatened terrorist attacks;

•

costs of compliance with the Americans with Disabilities Act and other similar laws;

•

potential liability for uninsured losses and environmental contamination;

•

risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended;

•

possible adverse changes in tax and environmental laws;

•

the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results;

•

risks associated with possible state and local tax audits;

•

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

•

the other risk factors identified in our most recently filed Annual Report on Form 10-K, including those described under the caption “Risk Factors.”

The risks set forth above are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for future periods and Current Reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise, for a discussion of risks and uncertainties that may cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.

Overview

We are a fully integrated self-administered and self-managed REIT and one of the largest owners and developers of Class A office properties in the United States. Our properties are concentrated in five markets—Boston, midtown Manhattan, Washington, DC, San Francisco and Princeton, NJ. We generate revenue and cash primarily by leasing our Class A office space to our tenants. Factors we consider when we lease space include the creditworthiness of the tenant, the length of the lease, the rental rate to be paid, the costs of tenant improvements and other landlord concessions, current and anticipated operating costs and real estate taxes, our current and anticipated vacancy, current and anticipated future demand for office space and general economic factors. From time to time, we also generate cash through the sale of assets.

Our core strategy has always been to operate in supply-constrained markets with high barriers to entry and to focus on executing long-term leases with financially strong tenants. Historically, this combination has tended to reduce our exposure in down cycles and we believe this is proving to be true once again. While the high rate of

unemployment continues to negatively impact the fundamentals of our business, including overall market occupancy and rental rates, we are seeing signs of gradual improvement in select submarkets. There continues to be significant available space in all of the markets in which we operate offering prospective tenants multiple space options that limit landlord pricing power, but we believe that rental rates have stabilized and therefore tenants are less inclined to delay their leasing decisions. This manifested itself in the first half of 2010 as we signed leases for more than 2.5 million square feet of space, with the pace of activity continuing to be steady into the third quarter. However, we continue to believe that general office market conditions are dependent on the impact of a recovery in the labor markets, and we are therefore not predicting strong rental rate growth or markedly fewer landlord concessions in the near-term.

Leases representing approximately 5.3% and 8.6% of the space at our office properties expire during the remainder of 2010 and the full year of 2011, respectively. While rental rates in our markets appear to have bottomed out, as leases expire, assuming no change in current market rental rates, we expect the rental rates we are likely to achieve on any new leases will be less than the rates currently being paid, thereby generally resulting in less revenue from the same space. For example, we estimate that the average rent currently paid by our office tenants for leases that expire during the remainder of 2010 is approximately 8% greater than current market rates for comparable space, and we estimate that the difference for our office leases that expire in 2011 is approximately 12%. Because the individual labor and industry markets may recover at different paces, we may see varying degrees of strength or softness in our core markets. We expect tenants in our markets to continue to take advantage of the ability to upgrade to high-quality space like ours, particularly those who value our operational expertise and financial stability when making their leasing decisions. We expect our occupancy to decline slightly for the remainder of 2010 to approximately 92.5% from 93.0% today.

Given the favorable low interest rate environment and the opportunity to further enhance our capital position we have been active in the capital markets. Since January 1, 2010, four of our unconsolidated joint ventures have refinanced approximately $584 million in secured financings, and in April our Operating Partnership completed a public offering of $700 million aggregate principal amount of 5.625% senior notes due in 2020 that raised aggregate net proceeds of approximately $694 million. As of August 2, 2010, we have available cash of approximately $1.5 billion and borrowing capacity on our Unsecured Line of Credit of approximately $1.0 billion, which we believe is sufficient to meet all of our existing development funding obligations, repay near-term financings and provide significant capital for future investments. We believe the quality of our assets and our strong balance sheet are attractive to lenders’ and equity investors’ current investment selectivity and should enable us to continue to access multiple sources of capital.

Deteriorated market fundamentals, overleveraged real estate assets and existing property owners with insufficient capital resources are beginning to provide opportunities for well capitalized companies and seasoned operators, such as us, to acquire high-quality assets. Opportunities to acquire properties may come through outright property acquisitions, joint venture arrangements or through the purchase of first mortgage, mezzanine or other debt. Potential buyers have become more aggressive about expectations for a recovery as evidenced by the level of interest we are seeing in marketed assets encouraging an increase in the volume of transactional activity. However, the combination of relatively low interest rates and the abundance of capital seeking high-quality assets is having a dampening effect on return expectations. While our management team is actively seeking opportunities, we will maintain our disciplined investment strategy, which focuses on high-quality assets in supply-constrained markets that have historically provided long-term value creation.

We believe the successful lease-up and completion of our development pipeline will enhance our long-term return on equity and earnings growth as these developments are placed in-service in 2010, 2011 and 2012. However, we do not anticipate undertaking new development projects in the foreseeable future without significant pre-leasing commitments from creditworthy tenants.

Transactions during the three months ended June 30, 2010 included the following:

•

On April 1, 2010, we acquired a 30% interest in a joint venture entity that owns 500 North Capitol Street, NW located in Washington, DC. 500 North Capitol Street is an approximately 176,000 net rentable square foot office property that is fully-leased to a single tenant through March 2011. On April 1, 2010, the unconsolidated joint venture entity refinanced at maturity the mortgage loan collateralized by the property totaling approximately $26.8 million. The new mortgage loan totaling $22.0 million bears interest at a variable rate equal to the greater of (1) the prime rate, as defined in the loan agreement, or (2) 5.75% per annum. The loan currently bears interest at 5.75% per annum and matures on March 31, 2013. Our investment in the unconsolidated joint venture totaling approximately $1.9 million was financed with cash contributions to the venture totaling approximately $1.4 million and the issuance to the seller of 5,906 OP Units. The joint venture currently expects that it will remove the property from service and redevelop the property following the expiration of the lease in March 2011.

•

On April 9, 2010, an unconsolidated joint venture in which we have a 60% interest refinanced its mortgage loan collateralized by Two Grand Central Tower located in New York City. The previous mortgage loan totaling $190.0 million bore interest at a fixed rate of 5.10% per annum and was scheduled to mature on July 11, 2010. The new mortgage loan totaling $180.0 million bears interest at a fixed rate of 6.00% per annum and matures on April 10, 2015. In connection with the refinancing, the joint venture repaid $10.0 million of the previous mortgage loan utilizing cash contributions from the joint venture’s partners on a pro rata basis.

•

On April 16, 2010, an unconsolidated joint venture in which we have a 51% interest refinanced its mortgage loan collateralized by Metropolitan Square located in Washington, DC. The previous mortgage loan totaling approximately $123.6 million bore interest at a fixed rate of 8.23% per annum and was scheduled to mature on May 1, 2010. The new mortgage loan totaling $175.0 million bears interest at a fixed rate of 5.75% per annum and matures on May 5, 2020.

•

On April 19, 2010, our Operating Partnership completed a public offering of $700.0 million in aggregate principal amount of its 5.625% senior notes due 2020. The notes were priced at 99.891% of the principal amount to yield 5.708% to maturity. The aggregate net proceeds to our Operating Partnership, after deducting underwriter discounts and offering expenses, were approximately $693.5 million. The notes mature on November 15, 2020, unless earlier redeemed. On April 7, 2010, in connection with the offering, we entered into two treasury lock agreements to fix the 10-year treasury rate at 3.873% per annum on notional amounts aggregating $350.0 million. We subsequently cash-settled the treasury lock agreements and received approximately $0.4 million, which amount will be recognized as a reduction to our interest expense over the term of the notes.

•

On April 21, 2010, we announced that we had established an “at the market” (ATM) stock offering program through which we may sell from time to time up to an aggregate of $400 million of our common stock through sales agents over a three-year period.

•

On May 5, 2010, we satisfied the requirements of our master lease agreement related to the 2006 sale of 280 Park Avenue in New York City, resulting in the recognition of the remaining deferred gain on sale of real estate totaling approximately $1.0 million. Following the satisfaction of the master lease agreement, the buyer terminated the property management and leasing agreement entered into at the time of the sale, resulting in the recognition of non-cash deferred management fees totaling approximately $12.2 million.

•

On June 1, 2010, we placed in-service Weston Corporate Center, an approximately 356,000 net rentable square foot Class A office property located in Weston, Massachusetts. The property is 100% leased.

•

On June 15, 2010, we used available cash to repay the mortgage loan collateralized by our Eight Cambridge Center property located in Cambridge, Massachusetts totaling approximately $22.6 million. The mortgage loan bore interest at a fixed rate of 7.73% per annum and was scheduled to mature on July 15, 2010. There was no prepayment penalty.

•

On June 15, 2010, an unconsolidated joint venture in which we have a 50% interest repaid the mortgage loan collateralized by land parcels at its site at Eighth Avenue and 46th Street in New York City utilizing cash contributions from the joint venture’s partners on a pro rata basis. In addition, the unconsolidated joint venture completed an exchange of land parcels with a third-party and received land parcels and development rights valued at approximately $6.4 million in exchange for a land parcel valued at approximately $5.4 million and cash of approximately $1.0 million.

•

During the second quarter of 2010, our Operating Partnership repurchased approximately $132.8 million aggregate principal amount of its 2.875% exchangeable senior notes due 2037, which the holders may require our Operating Partnership to repurchase in February 2012, for approximately $132.5 million. The repurchased notes had an aggregate carrying value of approximately $126.4 million, resulting in the recognition of a non-cash loss on extinguishment of approximately $6.1 million.

Transactions completed subsequent to June 30, 2010:

•

On July 1, 2010, we used available cash to repay the mortgage loans collateralized by our 202, 206 & 214 Carnegie Center properties located in Princeton, New Jersey totaling approximately $55.8 million. The mortgage loans bore interest at a fixed rate of 8.13% per annum and were scheduled to mature on October 1, 2010. There was no prepayment penalty.

•

On July 1, 2010, we acquired the mortgage loan collateralized by a land parcel located in Reston, Virginia for approximately $20.3 million. In connection with the acquisition of the loan, we entered into a forbearance agreement pursuant to which we obtained the fee interest in the land by deed in lieu of foreclosure.

•

On July 23, 2010, an unconsolidated joint venture in which we have a 60% interest modified its mortgage loan collateralized by 125 West 55th Street located in New York City. The mortgage loan totaling $207.0 million bears interest at a fixed rate of 6.09% per annum and was scheduled to mature on March 10, 2015. The modification extended the maturity date of the loan to March 10, 2020. All other terms of the mortgage loan remain unchanged.

•

On July 29, 2010, we modified the mortgage loan collateralized by our Reservoir Place property located in Waltham, Massachusetts. The mortgage loan totaling $50.0 million bore interest at a variable rate equal to LIBOR plus 3.85% per annum and matures on July 30, 2014. The modification reduced the interest rate to a variable rate equal to LIBOR plus 2.20% per annum. All other terms of the mortgage loan remain unchanged.

•

Effective as of August 3, 2010, the maturity date under our Operating Partnership’s $1.0 billion unsecured revolving credit facility was extended to August 3, 2011. All other terms of the unsecured revolving credit facility remain unchanged.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or

assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Real Estate

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings as if vacant. We assess and consider fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that we deem appropriate, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

We record acquired “above-” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

Management reviews its long-lived assets used in operations for impairment following the end of each quarter and when there is an event or change in circumstances that indicates an impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such criteria are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be “long-lived assets to be held and used” are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair value.

Guidance in Accounting Standards Codification (“ASC”) 360 “Property Plant and Equipment” (“ASC 360”) (formerly known as SFAS No. 144) requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be “held for sale” when the transaction has been approved by our Board of Directors, or a committee thereof, and

there are no known significant contingencies relating to the sale, such that a sale of the property within one year is considered probable. Following the classification of a property as “held for sale,” no further depreciation is recorded on the assets, and the asset is written down to the lower of carrying value or fair market value.

Real estate is stated at depreciated cost. A variety of costs are incurred in the acquisition, development and leasing of properties. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Effective January 1, 2009, we were required to expense costs associated with the acquisition of real property such as legal, due diligence and other closing related costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, internal wages, property taxes, insurance, and other project costs incurred during the period of development. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project commences and capitalization begins, and when a development project is substantially complete and held available for occupancy and capitalization must cease, involves a degree of judgment. Our capitalization policy on development properties is guided by guidance in ASC 835-20 “Capitalization of Interest” and ASC 970 “Real Estate—General” (formerly known as SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Projects”). The costs of land and buildings under development include specifically identifiable costs.

The capitalized costs include pre-construction costs necessary to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We begin the capitalization of costs during the pre-construction period which we define as activities that are necessary to the development of the property. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed, (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction or (3) if activities necessary for the development of the property have been suspended.

Investments in Unconsolidated Joint Ventures

Except for ownership interests in VIEs for which we are the primary beneficiary, we account for our investments in joint ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. Our judgment with respect to our level of influence or control of an entity and whether we are the primary beneficiary of a VIE involves the consideration of various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment (including loans), estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the venture, if applicable. Our assessment of our influence or control over an entity affects the presentation of these investments in our Consolidated Financial Statements.

These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in VIEs, we consolidate those in which we are the primary beneficiary. Our investments in unconsolidated joint ventures are reviewed for impairment periodically and we record impairment charges when events or circumstances change indicating that a decline in the fair value below the carrying values have occurred and such decline is other-than-temporary. The ultimate realization of our investment in unconsolidated joint

ventures is dependent on a number of factors, including the performance of each investment and market conditions. We will record an impairment charge if we determine that a decline in the value of an investment in an unconsolidated joint venture is other than temporary.

To the extent that we contribute assets to a joint venture, our investment in the joint venture is recorded at our cost basis in the assets that were contributed to the joint venture. To the extent that our cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related asset and included in our share of equity in net income of the joint venture. We will recognize gains on the contribution of real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the economic substance of the transaction is a sale.

The combined summarized financial information of the unconsolidated joint ventures is disclosed in Note 4 to the Consolidated Financial Statements.

Revenue Recognition

Contractual rental revenue is reported on a straight-line basis over the terms of our respective leases. We recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective leases. Accrued rental income as reported on the Consolidated Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements.

For the three and six months ended June 30, 2010, we recorded approximately $0.7 million and $1.3 million, respectively of rental revenue representing the net adjustments of rents from “above-” and “below-market” leases. For the three and six months ended June 30, 2010, the impact of the straight-line rent adjustment increased rental revenue by approximately $23.9 million and $48.1 million, respectively. Those amounts exclude the adjustment of rents from “above-” and “below-market” leases and straight-line income from unconsolidated joint ventures, which are disclosed in Note 4 to the Consolidated Financial Statements.

Our leasing strategy is generally to secure creditworthy tenants that meet our underwriting guidelines. Furthermore, following the initiation of a lease, we continue to actively monitor the tenant’s creditworthiness to ensure that all tenant related assets are recorded at their realizable value. When assessing tenant credit quality, we:

•

review relevant financial information, including:

•

financial ratios;

•

net worth;

•

revenue;

•

cash flows;

•

leverage; and

•

liquidity;

•

evaluate the depth and experience of the tenant’s management team; and

•

assess the strength/growth of the tenant’s industry.

As a result of the underwriting process, tenants are then categorized into one of three categories:

(1) low risk tenants;

(2) the tenant’s credit is such that we require collateral, in which case we:

•

require a security deposit; and/or

•

reduce upfront tenant improvement investments; or

(3) the tenant’s credit is below our acceptable parameters.

We consistently monitor the credit quality of our tenant base. We provide an allowance for doubtful accounts arising from estimated losses that could result from the tenant’s inability to make required current rent payments and an allowance against accrued rental income for future potential losses that we deem to be unrecoverable over the term of the lease.

Tenant receivables are assigned a credit rating of 1 through 4. A rating of 1 represents the highest possible rating and no allowance is recorded. A rating of 4 represents the lowest credit rating, in which case we record a full reserve against the receivable balance. Among the factors considered in determining the credit rating include:

•

payment history;

•

credit status and change in status (credit ratings for public companies are used as a primary metric);

•

change in tenant space needs (i.e., expansion/downsize);

•

tenant financial performance;

•

economic conditions in a specific geographic region; and

•

industry specific credit considerations.

If our estimates of collectability differ from the cash received, the timing and amount of our reported revenue could be impacted. The average remaining term of our in-place tenant leases, including unconsolidated joint ventures, was approximately 6.9 years as of June 30, 2010. The credit risk is mitigated by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants.

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized as revenue in the period during which the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with guidance in ASC 605-45 “Principal Agent Considerations” (“ASC 605-45”) (formerly known as Emerging Issues Task Force, or EITF, Issue 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent,” or “Issue 99-19”). ASC 605-45 requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk. We also receive reimbursement of payroll and payroll related costs from third parties which we reflect on a net basis.

Our hotel revenues are derived from room rentals and other sources such as charges to guests for long-distance telephone service, fax machine use, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.

We receive management and development fees from third parties. Management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, because such fees are contingent upon the collection of rents. We review each development agreement and record development fees as earned depending on the risk associated with each project. Profit on development fees earned from joint venture projects is recognized as revenue to the extent of the third-party partners’ ownership interest.

Gains on sales of real estate are recognized pursuant to the provisions included in ASC 360-20 “Real Estate Sales” (“ASC 360-20”) (formerly known as SFAS No. 66, “Accounting for Sales of Real Estate”). The specific timing of the sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, profit sharing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Depreciation and Amortization

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. We allocate the acquisition cost of real estate to land, building, tenant improvements, acquired “above-” and “below-market” leases, origination costs and acquired in-place leases based on an assessment of their fair value and depreciate or amortize these assets over their useful lives. The amortization of acquired “above-” and “below-market” leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

Fair Value of Financial Instruments

For purposes of disclosure, we calculate the fair value of our mortgage notes payable and unsecured senior notes. We discount the spread between the future contractual interest payments and hypothetical future interest payments on our mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, we add our estimate of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to our own debt. Because our valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.

Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the Consolidated Statements of Operations as a component of net income or as a component of comprehensive income and as a component of equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.

Results of Operations

The following discussion is based on our Consolidated Financial Statements for the three and six months ended June 30, 2010 and 2009.

At June 30, 2010 and June 30, 2009, we owned or had interests in a portfolio of 144 and 146 properties, respectively (in each case, the “Total Property Portfolio”). As a result of changes within our Total Property Portfolio, the financial data presented below shows significant changes in revenue and expenses from period-to-period. Accordingly, we do not believe that our period-to-period financial data with respect to the Total Property Portfolio are necessarily meaningful. Therefore, the comparison of operating results for the three and six months ended June 30, 2010 and 2009 show separately the changes attributable to the properties that were owned by us throughout each period compared (the “Same Property Portfolio”) and the changes attributable to the properties included in the Placed In-Service Portfolio.

In our analysis of operating results, particularly to make comparisons of net operating income between periods meaningful, it is important to provide information for properties that were in-service and owned by us throughout each period presented. We refer to properties acquired or placed in-service prior to the beginning of the earliest period presented and owned by us through the end of the latest period presented as our Same Property Portfolio. The Same Property Portfolio therefore excludes properties placed in-service or acquired after the beginning of the earliest period presented or disposed of prior to the end of the latest period presented.

Net operating income, or “NOI,” is a non-GAAP financial measure equal to net income attributable to Boston Properties, Inc., the most directly comparable GAAP financial measure, plus income attributable to noncontrolling interests, losses (gains) from investments in securities, losses from early extinguishments of debt, loss (gain) from suspension of development, depreciation and amortization, interest expense, general and administrative expense,

less gains on sales of real estate, income (loss) from unconsolidated joint ventures, interest and other income and development and management services revenue. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.

Our management also uses NOI to evaluate regional property level performance and to make decisions about resource allocations. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspective not immediately apparent from net income attributable to Boston Properties, Inc. NOI excludes certain components from net income attributable to Boston Properties, Inc. In order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level as opposed to the property level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income attributable to Boston Properties, Inc. as presented in our Consolidated Financial Statements. NOI should not be considered as an alternative to net income attributable to Boston Properties, Inc. as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. For a reconciliation of NOI to net income attributable to Boston Properties, Inc., see Note 13 to the Consolidated Financial Statements.

Comparison of the six months ended June 30, 2010 to the six months ended June 30, 2009.

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 134 properties totaling approximately 34.8 million net rentable square feet of space. The Same Property Portfolio includes properties acquired or placed in-service on or prior to January 1, 2009 and owned through June 30, 2010. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or repositioned after January 1, 2009 or disposed of on or prior to June 30, 2010. There were no properties that were sold or repositioned after January 1, 2009. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the six months ended June 30, 2010 and 2009 with respect to the properties which were placed in-service.


	Same Property Portfolio									Placed In-Service Portfolio						Total Property Portfolio
	2010		2009		Increase/ (Decrease)			% Change		2010		2009		Increase/ (Decrease)		2010			2009			Increase/ (Decrease)			% Change
	(dollars in thousands)
Rental Revenue:
Rental Revenue	$	707,228	$	720,792	$	(13,564	)	(1.88	)%	$	19,201	$	1,969	$	17,232	$	726,429		$	722,761		$	3,668		0.51	%
Termination Income		3,381		13,206		(9,825	)	(74.40	)%		—		—		—		3,381			13,206			(9,825	)	(74.40	)%

Total Rental Revenue		710,609		733,998		(23,389	)	(3.19	)%		19,201		1,969		17,232		729,810			735,967			(6,157	)	(0.84	)%

Real Estate Operating Expenses		244,101		247,724		(3,623	)	(1.46	)%		4,168		867		3,301		248,269			248,591			(322	)	(0.13	)%

Net Operating Income, excluding hotels		466,508		486,274		(19,766	)	(4.06	)%		15,033		1,102		13,931		481,541			487,376			(5,835	)	(1.20	)%

Hotel Net Operating Income(1)		2,917		2,627		290		11.04	%		—		—		—		2,917			2,627			290		11.04	%

Consolidated Net Operating Income(1)		469,425		488,901		(19,476	)	(3.98	)%		15,033		1,102		13,931		484,458			490,003			(5,545	)	(1.13	)%

Other Revenue:
Development and Management Services																	27,828			16,847			10,981		65.18	%
Interest and Other																	3,827			762			3,065		402.23	%

Total Other Revenue																	31,655			17,609			14,046		79.77	%
Other Expenses:
General and administrative expense																	44,470			35,952			8,518		23.69	%
Interest expense																	188,784			157,563			31,221		19.81	%
Depreciation and amortization		159,674		163,777		(4,103	)	(2.51	)%		4,801		598		4,203		164,475			164,375			100		0.06	%
Loss (gain) from suspension of development																	(7,200	)		27,766			(34,966	)	(125.93	)%
Losses from early extinguishments of debt																	8,221			494			7,727		1564.17	%
Losses (gains) from investments in securities																	478			(607	)		1,085		178.75	%

Total Other Expenses		159,674		163,777		(4,103	)	(2.51	)%		4,801		598		4,203		399,228			385,543			13,685		3.55	%

Income before income from unconsolidated joint ventures, gains on sale of real estate and net income attributable to noncontrolling interests	$	309,751	$	325,124	$	(15,373	)	(4.73	)%	$	10,232	$	504	$	9,728	$	116,885		$	122,069		$	(5,184	)	(4.25	)%
Income from unconsolidated joint ventures																	15,375			4,746			10,629		223.96	%
Gains on sales of real estate																	2,734			7,288			(4,554	)	(62.49	)%

Net Income																	134,994			134,103			891		0.66	%
Net Income attributable to noncontrolling interests:
Noncontrolling interests in property partnerships																	(1,668	)		(1,201	)		(467	)	(38.88	)%
Noncontrolling interest—common units of the Operating Partnership																	(17,114	)		(18,091	)		977		5.40	%
Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership																	(352	)		(1,032	)		680		65.89	%
Noncontrolling interest—redeemable preferred units of the Operating Partnership																	(1,728	)		(1,962	)		234		11.93	%

Net Income attributable to Boston Properties, Inc.																$	114,132		$	111,817		$	2,315		2.07	%

(1)

For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see page 34. Hotel Net Operating Income for the six months ended June 30, 2010 and 2009 are comprised of Hotel Revenue of $14,274 and $13,458 less Hotel Expenses of $11,357 and $10,831, respectively, per the Consolidated Statements of Operations.

Same Property Portfolio

Rental Revenue

Rental revenue from the Same Property Portfolio decreased approximately $13.6 million for the six months ended June 30, 2010 compared to 2009. Included in Same Property Portfolio rental revenue are decreases in (1) contractual rental revenue of approximately $17.2 million, (2) recoveries from tenants of approximately $15.0 million and (3) parking and other income of approximately $3.2 million. These decreases were offset by an approximately $21.8 million increase in straight-line rent. The decrease in contractual rental revenue and increase in straight-line revenue are primarily due to new leases at 399 Park Avenue and 601 Lexington Avenue in New York City and a major law firm lease (approximately 480,000 square feet) in Boston being in free rent periods. The free rent periods for new leases in New York City range from six to twelve months, while the law firm’s lease in Boston has twelve months of free rent.

Generally, under each of our leases, we are entitled to recover from the tenant increases in specific operating expenses associated with the leased property above the amount incurred for these operating expenses in the first year of the lease. The decrease in recoveries from tenants is primarily due to the terminations by tenants in New York City and a large lease expiration in Boston. Although the majority of the space was re-leased, the new leases are in their first year during which, generally, no tenant recoveries are due.

Real Estate Operating Expenses

Operating expenses from the Same Property Portfolio decreased approximately $3.6 million for the six months ended June 30, 2010 compared to 2009. Included in Same Property Portfolio operating expenses is an increase in real estate taxes of approximately $2.3 million, or 2.1%, and an increase in insurance of approximately $0.9 million. This was offset by overall savings in repairs and maintenance, property general and administrative expenses and utilities expense of approximately $2.0 million, $1.6 million and $1.2 million, respectively. The remaining decrease of approximately $2.0 million is related to other property-related expenses.

Depreciation and Amortization Expense

Depreciation and amortization expense for the Same Property Portfolio decreased approximately $4.1 million for the six months ended June 30, 2010 compared to 2009. Approximately $8.0 million of the decrease is due to accelerated depreciation related to a lease termination in New York City that occurred during the second quarter of 2009. This decrease was partially offset by an approximately $1.4 million increase due to accelerated depreciation related to our decision in 2010 to reclassify three in-service properties to land held for future development. These three properties total approximately 131,000 square feet, are currently planned for redevelopment and are no longer held available for lease. The remaining increase of approximately $2.5 million is from the other properties in the Same Property Portfolio.

Placed In-Service Portfolio

In addition to the Same Property Portfolio, at June 30, 2010, we had five additional properties totaling approximately 1.2 million square feet that were placed in-service between January 1, 2009 and June 30, 2010.

Rental Revenue

Rental revenue from our Placed In-Service Portfolio increased approximately $17.2 million, as detailed below:


Property	Quarter Placed In-Service	Rental Revenue for the six months ended June 30,
Property	Quarter Placed In-Service	2010		2009		Change
		(in thousands)
One Preserve Parkway	Second Quarter, 2009	$	2,492	$	806	$	1,686
Wisconsin Place Office	Second Quarter, 2009		6,887		1,163		5,724
Democracy Tower	Third Quarter, 2009		6,126		—		6,126
701 Carnegie Center	Fourth Quarter, 2009		2,261		—		2,261
Weston Corporate Center	Second Quarter, 2010		1,435		—		1,435

Total		$	19,201	$	1,969	$	17,232

Real Estate Operating Expenses

Real estate operating expenses from our Placed In-Service Portfolio increased approximately $3.3 million, as detailed below:


Property	Quarter Placed In-Service	Real Estate Operating Expenses for the six months ended June 30,
Property	Quarter Placed In-Service	2010		2009		Change
		(in thousands)
One Preserve Parkway	Second Quarter, 2009	$	680	$	588	$	92
Wisconsin Place Office	Second Quarter, 2009		1,552		279		1,273
Democracy Tower	Third Quarter, 2009		1,118		—		1,118
701 Carnegie Center	Fourth Quarter, 2009		705		—		705
Weston Corporate Center	Second Quarter, 2010		113		—		113

Total		$	4,168	$	867	$	3,301

Depreciation and Amortization Expense

Depreciation and amortization expense for our Placed In-Service Portfolio increased by approximately $4.2 million for the six months ended June 30, 2010 compared to 2009.

Other Income and Expense Items

Termination Income

Termination Income decreased by approximately $9.8 million for the six months ended June 30, 2010 compared to 2009.

Termination income for the six months ended June 30, 2010 was related to twelve tenants across the Total Property Portfolio that terminated their leases totaled approximately $3.4 million, which included approximately $1.6 million of termination income from a small retail tenant in New York City.

Termination income for the six months ended June 30, 2009 was related to ten tenants across the Total Property Portfolio that terminated their leases totaled approximately $13.2 million, which included $7.5 million of cash related to a termination agreement with a tenant at 601 Lexington Avenue. Approximately $3.6 million of our termination income is non-cash and consists of the estimated value of furniture and fixtures that two tenants transferred to us in connection with the terminations.

Hotel Net Operating Income

Net operating income for the Cambridge Center Marriott hotel property increased by approximately $0.3 million for the six months ended June 30, 2010 as compared to 2009. We expect our hotel net operating income for fiscal 2010 to be between $7.0 million and $7.5 million.

The following reflects our occupancy and rate information for the Cambridge Center Marriott hotel for the six months ended June 30, 2010 and 2009.


	2010			2009			Percentage Change
Occupancy		78.4	%		73.6	%	6.5	%
Average daily rate	$	183.18		$	182.97		0.1	%
Revenue per available room, REVPAR	$	143.63		$	134.64		6.7	%

Development and Management Services

Development and management services income increased approximately $11.0 million for the six months ended June 30, 2010 compared to 2009. Management fees increased by approximately $13.7 million for the six months ended June 30, 2010 compared to 2009. On May 5, 2010, we satisfied the requirements of our master lease agreement related to the 2006 sale of 280 Park Avenue in New York City. Following the satisfaction of the master lease agreement, the buyer terminated the property management and leasing agreement entered into at the time of the sale, resulting in the recognition of non-cash deferred management fees totaling approximately $12.2 million. The remaining increase of approximately $1.5 million was due primarily to leasing fees earned at our New York City joint ventures and an increase in work order income. Development fees decreased by approximately $2.7 million for the six months ended June 30, 2010 compared to 2009 due primarily to the completion of our 20 F Street third-party development project. We expect development and management services income for fiscal 2010 to be between $39 million and $42 million.

Interest and Other Income

Interest and other income increased approximately $3.1 million for the six months ended June 30, 2010 compared to 2009 as a result of increased average cash balances offset by the net effect of lower overall interest rates. The average cash balances for the six months ended June 30, 2010 and June 30, 2009 were approximately $1.5 billion and $0.2 billion, respectively. The increase in the average cash balance was primarily due to (1) the aggregate net proceeds of approximately $841.9 million that we received from the public offering of 17,250,000 shares of Common Stock in June 2009, (2) the aggregate net proceeds of approximately $693.7 million that BPLP received from the issuance of $700 million aggregate principal amount of 5.875% unsecured notes due 2019 in October 2009 and (3) the aggregate net proceeds of approximately $693.5 million that BPLP received from the issuance of $700 million aggregate principal amount of its 5.625% unsecured notes due 2020 in April 2010.

Other Expenses

General and Administrative

General and administrative expenses increased approximately $8.5 million for the six months ended June 30, 2010 compared to 2009. The increase was due to an overall increase in payroll expense of approximately $8.1 million, of which approximately $4.9 million represents the accelerated expense of the remaining stock-based compensation granted between 2006 and 2009 to Edward H. Linde, our former Chief Executive Officer, as a result of his passing on January 10, 2010. The remaining increase of approximately $3.2 million in payroll expenses was primarily due to a relatively smaller bonus accrual during the six months ended June 30, 2009 in light of the challenging economic conditions that existed at that time. The remaining increase of approximately $0.4 million relates to an overall increase in other general and administrative expenses. We expect general and administrative expense for fiscal 2010 to be between $82 million and $84 million.

Interest Expense

Interest expense for the Total Property Portfolio increased approximately $31.2 million for the six months ended June 30, 2010 compared to 2009 as detailed below:


Component	Change in interest expense for the six months ended June 30, 2010 and June 30, 2009
	(in thousands)
Increases to interest expense due to:
Issuance by our Operating Partnership of 5.875% senior notes due 2019 on October 9, 2009	$	20,581
Issuance by our Operating Partnership of 5.625% senior notes due 2020 on April 19, 2010		7,984
Decrease in capitalized interest costs		7,087
New mortgage		1,111
Interest expense associated with the adjustment for the equity component allocation of our Operating Partnership’s unsecured exchangeable debt		475

Total increases to interest expense	$	37,238


Decreases to interest expense due to:
Repayment of mortgages	$	(3,317	)
Repurchases by our Operating Partnership of a portion of 2.875% exchangeable senior notes		(1,974	)
Principal amortization of continuing debt and other (excluding senior notes)		(726	)

Total decreases to interest expense	$	(6,017	)

Total change in interest expense	$	31,221

The following property is included in the new mortgage line item: Reservoir Place. The following properties are included in the repayment of mortgages line item: Reservoir Place, Ten Cambridge Center and 1301 New York Avenue.

At June 30, 2010, our variable rate debt consisted of our construction loans at South of Market, Democracy Tower, Wisconsin Place Office and Atlantic Wharf, our Unsecured Line of Credit and our secured financing at Reservoir Place. For a summary of our consolidated debt as of June 30, 2010 and June 30, 2009 refer to the heading “Liquidity and Capital Resources—Capitalization—Debt Financing” within “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Capitalized Costs

Costs directly related to the development of rental properties are not included in our operating results. These costs are capitalized and included in real estate assets on our Consolidated Balance Sheets and amortized over their useful lives. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the six months ended June 30, 2010 and 2009 were $5.2 million and $5.3 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the six months ended June 30, 2010 and 2009 was $17.1 million and $24.2 million, respectively. These costs are not included in the interest expense referenced above. The decrease in capitalized interest is primarily due to the suspension of development at 250 West 55th Street partially offset by an increase in capitalization at our other three development projects.

Loss (Gain) from Suspension of Development

On February 6, 2009, we announced that we were suspending construction on our 1,000,000 square foot office building at 250 West 55th Street in New York City. During the six months ended June 30, 2009, we

recognized costs aggregating approximately $27.8 million related to the suspension of development, which amount included a $20.0 million contractual amount due pursuant to a lease agreement. During December 2009, we completed the construction of foundations and steel/deck to grade to facilitate a restart of construction in the future and as a result ceased interest capitalization on the project. On January 19, 2010, we paid $12.8 million related to the termination of the lease agreement. As a result, we recognized approximately $7.2 million of income during the six months ended June 30, 2010.

Losses from Early Extinguishments of Debt

During the six months ended June 30, 2010, our Operating Partnership repurchased approximately $186.3 million aggregate principal amount of its 2.875% exchangeable senior notes due 2037, which the holders may require our Operating Partnership to repurchase in February 2012, for approximately $185.5 million. The repurchased notes had an aggregate carrying value of approximately $177.3 million, resulting in the recognition of a loss on extinguishment of approximately $8.2 million during the six months ended June 30, 2010.

On June 9, 2009, we used available cash to repay the mortgage loan collateralized by our Reservoir Place property located in Waltham, Massachusetts totaling approximately $47.8 million. There was no prepayment penalty associated with the repayment. In accordance with EITF 98-1, the principal amount had been adjusted upon acquisition of the property to reflect the fair value of the assumed note. Due to the repayment of the mortgage, we recognized a gain of approximately $32,000 related to the write off of the remaining fair value balance.

On June 26, 2009, we used available cash to repay the mortgage loan collateralized by our Ten Cambridge Center property located in Cambridge, Massachusetts totaling approximately $30.1 million. We paid a prepayment penalty totaling $0.5 million in connection with the repayment and wrote off $26,000 of unamortized deferred financing costs.

Losses (Gains) from Investments in Securities

We account for investments in trading securities at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. The designation of trading securities is generally determined at acquisition. During the six months ended June 30, 2009, investment in securities is comprised of an investment in an unregistered money market fund and investments in an account associated with our deferred compensation plan. In December 2007, the unregistered money market fund suspended cash redemptions by investors; investors could elect in-kind redemptions of the underlying securities or maintain their investment in the fund and receive distributions as the underlying securities matured or were liquidated by the fund sponsor. As a result, we retained this investment for a longer term than originally intended, and the valuation of our investment was subject to changes in market conditions. Because interests in this fund were valued at less than their $1.00 par value, we recognized (gains) of approximately $(0.2) million on our investment during the six months ended June 30, 2009. As of December 31, 2009, we no longer had investments in this unregistered money market fund.

The remainder of the losses (gains) from investments in securities for the six months ended June 30, 2010 and 2009 related to investments that we have made to reduce our market risk relating to a deferred compensation plan that we maintain for our officers. Under this deferred compensation plan, each officer who is eligible to participate is permitted to defer a portion of the officer’s current income on a pre-tax basis and receive a tax-deferred return on these deferrals based on the performance of specific investments selected by the officer. In order to reduce our market risk relating to this plan, we typically acquire, in a separate account that is not restricted as to its use, similar or identical investments as those selected by each officer. This enables us to generally match our liabilities to our officers under the deferred compensation plan with equivalent assets and thereby limit our market risk. The performance of these investments is recorded as loss (gain) from investments in securities. During the six months ended June 30, 2010 and 2009, respectively, we recognized losses (gains) of approximately $0.5 million and $(0.4) million on these investments. By comparison, our general and

administrative expense increased (decreased) by approximately $(0.4) million and $0.7 million during the six months ended June 30, 2010 and 2009, respectively, as a result of increases and decreases in our liability under our deferred compensation plan that were associated with the performance of the specific investments selected by our officers participating in the plan.

Income from Unconsolidated Joint Ventures

For the six months ended June 30, 2010 compared to 2009, income from unconsolidated joint ventures increased by approximately $10.6 million. Income from our unconsolidated joint venture Same Property Portfolio increased approximately $11.4 million for the six months ended June 30, 2010 compared to 2009 and approximately $5.1 million of the increase is primarily due to lease extensions of the General Motors Building. Approximately $7.4 million of the increase was from the non-cash impairment charge on our investment in the Value-Added Fund taken in June 2009. This change represented the other-than-temporary decline in the fair values below the carrying value of our investment in the unconsolidated joint venture. In accordance with guidance in ASC 323 “Investments – Equity Method and Joint Ventures” (formerly known as Accounting Principles Board Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock” (APB No. 18)) a loss of an investment under the equity method of accounting, which is other than a temporary decline, must be recognized. If the fair value of our investments deteriorate further, we could recognize additional impairment charges that may be material to our results of operations. The increases were offset by a decrease of approximately $1.1 million related to the other properties in the unconsolidated joint venture Same Property Portfolio.

Income from unconsolidated joint ventures includes a net loss of approximately $0.3 million after our share of depreciation expense of approximately $0.6 million from our unconsolidated joint venture that owns 500 North Capitol Street. On April 1, 2010, we acquired a 30% interest in a joint venture entity that owns 500 North Capitol Street, NW located in Washington, DC. 500 North Capitol Street is an approximately 176,000 net rentable square foot office property which is fully-leased to a single tenant through March 2011. The joint venture currently expects that it will remove the property from service and redevelop the property following the expiration of the lease in March 2011.

Income from unconsolidated joint ventures includes a decrease of approximately $0.5 million from our unconsolidated joint venture that owns the Wisconsin Place Infrastructure which includes a garage and retail space. The Wisconsin Place infrastructure had been placed in-service during 2009.

Gains on sales of real estate

On April 14, 2008, we sold a parcel of land located in Washington, DC for approximately $33.7 million. We had previously entered into a development management agreement with the buyer to develop a Class A office property on the parcel totaling approximately 165,000 net rentable square feet. Due to our involvement in the construction of the project, the gain on sale was deferred and has been recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total project costs. As a result, we recognized a gain on sale during the six months ended June 30, 2009 of approximately $7.3 million. During the six months ended June 30, 2010, we completed construction of the project and recognized the remaining gain on sale totaling approximately $1.8 million. We have recognized a cumulative gain on sale of approximately $23.4 million.

Pursuant to the purchase and sale agreement related to the 2006 sale of 280 Park Avenue, we entered into a master lease agreement with the buyer at closing. Under the master lease agreement, we guaranteed that the buyer will receive at least a minimum amount of base rent from approximately 74,340 square feet of space during the ten-year period following the expiration of the leases for this space. The leases for this space expired at various times between June 2006 and October 2007. The aggregate amount of base rent we guaranteed over the entire period from 2006 to 2017 was approximately $67.3 million. On May 5, 2010, we satisfied the requirements of our master lease agreement, resulting in the recognition of the remaining deferred gain on sale of real estate totaling approximately $1.0 million.

Noncontrolling interests in property partnerships

Noncontrolling interests in property partnerships increased by approximately $0.5 million for the six months ended June 30, 2010 compared to 2009. Noncontrolling interests in property partnerships consist of the outside equity owners’ interests in the income from our 505 9^th Street and our Wisconsin Place Office properties. The increase is primarily due to placing in-service Wisconsin Place Office during the second quarter of 2009.

Noncontrolling interest—common units of the Operating Partnership

Noncontrolling interest—common units of the Operating Partnership decreased by approximately $1.0 million for the six months ended June 30, 2010 compared to 2009 primarily due to an increase in allocable income offset by a decrease in the noncontrolling interest’s ownership percentage.

Comparison of the three months ended June 30, 2010 to the three months ended June 30, 2009.

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 134 properties totaling approximately 34.8 million net rentable square feet of space. The Same Property Portfolio includes properties acquired or placed in-service on or prior to April 1, 2009 and owned through June 30, 2010. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or repositioned after April 1, 2009 or disposed of on or prior to June 30, 2010. There were no properties that were sold or repositioned after April 1, 2009. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the three months ended June 30, 2010 and 2009 with respect to the properties which were placed in-service.


	Same Property Portfolio									Placed In-Service Portfolio						Total Property Portfolio
	2010		2009		Increase/ (Decrease)			% Change		2010		2009		Increase/ (Decrease)		2010			2009			Increase/ (Decrease)			% Change
	(dollars in thousands)
Rental Revenue:
Rental Revenue	$	353,906	$	358,927	$	(5,021	)	(1.40	)%	$	10,334	$	1,574	$	8,760	$	364,240		$	360,501		$	3,739		1.04	%
Termination Income		2,346		12,600		(10,254	)	(81.38	)%		—		—		—		2,346			12,600			(10,254	)	(81.38	)%

Total Rental Revenue		356,252		371,527		(15,275	)	(4.11	)%		10,334		1,574		8,760		366,586			373,101			(6,515	)	(1.75	)%

Real Estate Operating Expenses		121,263		124,181		(2,918	)	(2.35	)%		2,021		549		1,472		123,284			124,730			(1,446	)	(1.16	)%

Net Operating Income, excluding hotels		234,989		247,346		(12,357	)	(5.00	)%		8,313		1,025		7,288		243,302			248,371			(5,069	)	(2.04	)%

Hotel Net Operating Income(1)		2,282		2,037		245		12.03	%		—		—		—		2,282			2,037			245		12.03	%

Consolidated Net Operating Income(1)		237,271		249,383		(12,112	)	(4.86	)%		8,313		1,025		7,288		245,584			250,408			(4,824	)	(1.93	)%

Other Revenue:
Development and Management Services																	18,884			8,551			10,333		120.84	%
Interest and Other																	2,117			442			1,675		378.96	%

Total Other Revenue																	21,001			8,993			12,008		133.53	%
Other Expenses:
General and administrative expense																	17,648			18,532			(884	)	(4.77	)%
Interest expense																	96,755			78,633			18,122		23.05	%
Depreciation and amortization		79,000		86,530		(7,530	)	(8.70	)%		2,400		475		1,925		81,400			87,005			(5,605	)	(6.44	)%
Losses from early extinguishments of debt																	6,051			494			5,557		1124.90	%
Losses (gains) from investments in securities																	678			(1,194	)		1,872		156.78	%

Total Other Expenses		79,000		86,530		(7,530	)	(8.70	)%		2,400		475		1,925		202,532			183,470			19,062		10.39	%

Income before income (loss) from unconsolidated joint ventures, gains on sale of real estate and net income attributable to noncontrolling interests	$	158,271	$	162,853	$	(4,582	)	(2.81	)%	$	5,913	$	550	$	5,363	$	64,053		$	75,931		$	(11,878	)	(15.64	)%
Income (loss) from unconsolidated joint ventures																	7,465			(351	)		7,816		2226.78	%
Gains on sales of real estate																	969			4,493			(3,524	)	(78.43	)%

Net Income																	72,487			80,073			(7,586	)	(9.47	)%
Net Income attributable to noncontrolling interests:
Noncontrolling interests in property partnerships																	(864	)		(691	)		(173	)	(25.04	)%
Noncontrolling interest—common units of the Operating Partnership																	(9,250	)		(10,629	)		1,379		12.97	%
Noncontrolling interest in gains on sales of real estate—common units of the Operating Partnership																	(125	)		(629	)		504		80.13	%
Noncontrolling interest—redeemable preferred units of the Operating Partnership																	(836	)		(972	)		136		13.99	%

Net Income attributable to Boston Properties, Inc.																$	61,412		$	67,152		$	(5,740	)	(8.55	)%

(1)

For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see page 34. Hotel Net Operating Income for the three months ended June 30, 2010 and 2009 are comprised of Hotel Revenue of $8,371 and $7,396 less Hotel Expenses of $6,089 and $5,359, respectively, per the Consolidated Statements of Operations.

Same Property Portfolio

Rental Revenue

Rental revenue from the Same Property Portfolio decreased approximately $5.0 million for the three months ended June 30, 2010 compared to 2009. Included in Same Property Portfolio rental revenue are decreases in (1) contractual rental revenue of approximately $9.4 million, (2) recoveries from tenants of approximately $6.5 million and (3) parking and other income of approximately $2.0 million. These decreases were offset by an approximately $12.9 million increase in straight-line rent. The decrease in contractual rental revenue and increase in straight-line revenue are primarily due to new leases at 399 Park Avenue and 601 Lexington Avenue in New York City and a major law firm lease (approximately 480,000 square feet) in Boston being in free rent periods. The free rent periods for new leases in New York City range from six to twelve months, while the law firm’s lease in Boston has twelve months of free rent.

Real Estate Operating Expenses

Operating expenses from the Same Property Portfolio decreased approximately $2.9 million for the three months ended June 30, 2010 compared to 2009. Included in Same Property Portfolio operating expenses is an increase in real estate taxes of approximately $0.8 million, or 1.6%. This was offset by overall savings in repairs and maintenance, property general and administrative expenses and insurance of approximately $1.0 million, $1.2 million and $0.6 million, respectively. The remaining decrease of approximately $0.9 million related to other property-related expenses.

Depreciation and Amortization Expense

Depreciation and amortization expense for the Same Property Portfolio decreased approximately $7.5 million for the three months ended June 30, 2010 compared to 2009. Approximately $7.9 million of the net decrease was due to accelerated amortization related to a lease termination in New York City offset partially by an increase in the other properties in the Same Property Portfolio.

Placed In-Service Portfolio

Rental Revenue

Rental revenue from our Placed In-Service Portfolio increased approximately $8.8 million, as detailed below:


Property	Quarter Placed In-Service	Rental Revenue for the three months ended June 30,
Property	Quarter Placed In-Service	2010		2009		Change
		(in thousands)
One Preserve Parkway	Second Quarter, 2009	$	1,296	$	411	$	885
Wisconsin Place Office	Second Quarter, 2009		3,458		1,163		2,295
Democracy Tower	Third Quarter, 2009		3,007		—		3,007
701 Carnegie Center	Fourth Quarter, 2009		1,138		—		1,138
Weston Corporate Center	Second Quarter, 2010		1,435		—		1,435

Total		$	10,334	$	1,574	$	8,760

Real Estate Operating Expenses

Real estate operating expenses from our Placed In-Service Portfolio increased approximately $1.5 million, as detailed below:


Property	Quarter Placed In-Service	Real Estate Operating Expenses for the three months ended June 30,
Property	Quarter Placed In-Service	2010		2009		Change
		(in thousands)
One Preserve Parkway	Second Quarter, 2009	$	331	$	332	$	(1	)
Wisconsin Place Office	Second Quarter, 2009		748		217		531
Democracy Tower	Third Quarter, 2009		486		—		486
701 Carnegie Center	Fourth Quarter, 2009		343		—		343
Weston Corporate Center	Second Quarter, 2010		113		—		113

Total		$	2,021	$	549	$	1,472

Depreciation and Amortization Expense

Depreciation and amortization expense for our Placed In-Service Portfolio increased by approximately $1.9 million for the three months ended June 30, 2010 compared to 2009.

Other Income and Expense Items

Termination Income

Termination income decreased approximately $10.3 million for the three months ended June 30, 2010 compared to 2009.

Termination income for the three months ended June 30, 2010 was related to nine tenants across the Total Property Portfolio that terminated their leases totaled approximately $2.3 million, which included approximately $1.6 million of termination income from a small retail tenant in New York City.

Termination income for the three months ended June 30, 2009 was related to six tenants across the Total Property Portfolio that terminated their leases totaled approximately $12.6 million, which included $7.5 million of cash related to a termination agreement with a tenant at 601 Lexington Avenue. Approximately $3.6 million of our termination income is non-cash and consists of the estimated value of furniture and fixtures that two tenants transferred to us in connection with the terminations.

Hotel Net Operating Income

Net operating income for the Cambridge Center Marriott hotel property increased by approximately $0.2 million for the three months ended June 30, 2010 as compared to 2009.

The following reflects our occupancy and rate information for the Cambridge Center Marriott hotel for the three months ended June 30, 2010 and 2009.


	2010			2009			Percentage Change
Occupancy		82.4	%		78.0	%	5.6	%
Average daily rate	$	209.16		$	195.51		7.0	%
Revenue per available room, REVPAR	$	172.39		$	152.59		13.0	%

Development and Management Services

Development and management services income increased approximately $10.3 million for the three months ended June 30, 2010 compared to 2009. Management fees increased by approximately $13.1 million for the three months ended June 30, 2010 compared to 2009. On May 5, 2010, we satisfied the requirements of our master lease agreement related to the 2006 sale of 280 Park Avenue in New York City. Following the satisfaction of the master lease agreement, the buyer terminated the property management and leasing agreement entered into at the time of the sale, resulting in the recognition of non-cash deferred management fees totaling approximately $12.2 million. The remaining increase of approximately $0.9 million was due primarily to leasing fees earned at our New York City joint venture properties and an increase in work order income. Development fees decreased by approximately $2.8 million for the three months ended June 30, 2010 compared to 2009 due primarily to the completion of our 20 F Street third-party development project.

Interest and Other Income

Interest and other income increased approximately $1.7 million for the three months ended June 30, 2010 compared to 2009 as a result of increased average cash balances offset by the net effect of lower overall interest rates. The average cash balances for the three months ended June 30, 2010 and June 30, 2009 were approximately $1.8 billion and $0.2 billion, respectively. The increase in the average cash balance was primarily due to (1) the aggregate net proceeds of approximately $841.9 million that we received from the public offering of 17,250,000 shares of Common Stock in June 2009, (2) the aggregate net proceeds of approximately $693.7 million that BPLP received from the issuance of $700 million aggregate principal amount of 5.875% unsecured notes due 2019 in October 2009 and (3) the aggregate net proceeds of approximately $693.5 million that BPLP received from the issuance of $700 million aggregate principal amount of its 5.625% unsecured notes due 2020 in April 2010.

Other Expenses

General and Administrative

General and administrative expenses decreased approximately $0.9 million for the three months ended June 30, 2010 compared to 2009. The overall decrease was due to a decrease of approximately $0.6 million in payroll expense and $0.3 million in other general and administrative expenses, respectively. The decrease in payroll expense is the net result of a decrease in the value of our deferred compensation plan that is partially offset by a relatively smaller bonus accrual during the three months ended June 30, 2009 in light of the challenging economic conditions that existed at that time.

Interest Expense

Interest expense for the Total Property Portfolio increased approximately $18.1 million for the three months ended June 30, 2010 compared to 2009 as detailed below:


Component	Change in interest expense for the three months ended June 30, 2010 and June 30, 2009
	(in thousands)
Increases to interest expense due to:
Issuance by our Operating Partnership of 5.875% senior notes due 2019 on October 9, 2009	$	10,290
Issuance by our Operating Partnership of 5.625% senior notes due 2020 on April 19, 2010		7,984
Decrease in capitalized interest costs		3,064
New mortgage		569

Total increases to interest expense	$	21,907


Decreases to interest expense due to:
Repurchases by our Operating Partnership of a portion of 2.875% exchangeable senior notes	$	(1,827	)
Repayment of mortgages		(1,504	)
Principal amortization of continuing debt and other (excluding senior notes)		(454	)

Total decreases to interest expense	$	(3,785	)

Total change in interest expense	$	18,122

Capitalized Costs

Costs directly related to the development of rental properties are not included in our operating results. These costs are capitalized and included in real estate assets on our Consolidated Balance Sheets and amortized over their useful lives. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the three months ended June 30, 2010 and 2009 were $2.7 million and $2.9 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the three months ended June 30, 2010 and 2009 was $9.0 million and $12.1 million, respectively. These costs are not included in the interest expense referenced above. The decrease in capitalized interest is primarily due to the suspension of development at 250 West 55th Street partially offset by an increase in capitalization at our other three development projects.

Losses from Early Extinguishments of Debt

Operating Partnership to repurchase in February 2012, for approximately $132.5 million. The repurchased notes had an aggregate carrying value of approximately $126.4 million, resulting in the recognition of a non-cash loss on extinguishment of approximately $6.1 million.

Losses (Gains) from Investments in Securities

We account for investments in trading securities at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. The designation of trading securities is generally determined at acquisition. During the three months ended June 30, 2009, investment in securities is comprised of an investment in an unregistered money market fund and investments in an account associated with our deferred compensation plan. In December 2007, the unregistered money market fund suspended cash redemptions by investors; investors could elect in-kind redemptions of the underlying securities or maintain their investment in the fund and receive distributions as the underlying securities matured or were liquidated by the fund sponsor. As a result, we retained this investment for a longer term than originally intended, and the valuation of our investment was subject to changes in market conditions. Because interests in this fund were valued at less than their $1.00 par value, we recognized (gains) of approximately ($0.2) million on our investment during the three months ended June 30, 2009. As of December 31, 2009, we no longer had investments in this unregistered money market fund.

The remainder of the losses (gains) from investments in securities for the three months ended June 30, 2010 and 2009 related to investments that we have made to reduce our market risk relating to a deferred compensation plan that we maintain for our officers. Under this deferred compensation plan, each officer who is eligible to participate is permitted to defer a portion of the officer’s current income on a pre-tax basis and receive a tax-deferred return on these deferrals based on the performance of specific investments selected by the officer. In order to reduce our market risk relating to this plan, we typically acquire, in a separate account that is not restricted as to its use, similar or identical investments as those selected by each officer. This enables us to generally match our liabilities to our officers under the deferred compensation plan with equivalent assets and thereby limit our market risk. The performance of these investments is recorded as loss (gain) from investments in securities. During the three months ended June 30, 2010 and 2009, respectively, we recognized losses (gains) of approximately $0.7 million and $(1.0) million on these investments. By comparison, our general and administrative expense increased (decreased) by approximately $(0.7) million and $1.1 million during the three months ended June 30, 2010 and 2009, respectively, as a result of increases and decreases in our liability under our deferred compensation plan that were associated with the performance of the specific investments selected by our officers participating in the plan.

Income (Loss) from Unconsolidated Joint Ventures

For the three months ended June 30, 2010 compared to 2009, income (loss) from unconsolidated joint ventures increased by approximately $7.8 million. Income (loss) from our unconsolidated joint venture Same Property Portfolio increased approximately $8.1 million for the three months ended June 30, 2010 compared to 2009 and approximately $7.4 million of the increase was from the non-cash impairment charge on our investment in the Value-Added Fund taken in June 2009. This change represented the other-than-temporary

decline in the fair values below the carrying value of our investment in the unconsolidated joint venture. In accordance with guidance in ASC 323 “Investments – Equity Method and Joint Ventures” (formerly known as Accounting Principles Board Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock” (APB No. 18)) a loss of an investment under the equity method of accounting, which is other than a temporary decline, must be recognized. If the fair value of our investments deteriorate further, we could recognize additional impairment charges that may be material to our results of operations. The remaining increase of approximately $0.7 million related to the other properties in the unconsolidated joint ventures Same Property Portfolio.

Income (loss) from unconsolidated joint ventures includes a net loss of approximately $0.3 million after our share of depreciation expense of approximately $0.6 million from our unconsolidated joint venture that owns 500 North Capitol Street. On April 1, 2010, we acquired a 30% interest in a joint venture entity that owns 500 North Capitol Street, NW located in Washington, DC. 500 North Capitol Street is an approximately 176,000 net rentable square foot office property which is fully-leased to a single tenant through March 2011. The joint venture currently expects that it will remove the property from service and redevelop the property following the expiration of the lease in March 2011.

Gains on sales of real estate

On April 14, 2008, we sold a parcel of land located in Washington, DC for approximately $33.7 million. We had previously entered into a development management agreement with the buyer to develop a Class A office property on the parcel totaling approximately 165,000 net rentable square feet. Due to our involvement in the construction of the project, the gain on sale was deferred and has been recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total project costs. As a result, we recognized a gain on sale during the three months ended June 30, 2009 of approximately $4.5 million.

Noncontrolling interests in property partnerships

Noncontrolling interests in property partnerships increased by approximately $0.2 million for the three months ended June 30, 2010 compared to 2009. Noncontrolling interests in property partnerships consist of the outside equity owners’ interests in the income from our 505 9^th Street and our Wisconsin Place Office properties. The increase is primarily due to placing in-service Wisconsin Place Office during the second quarter of 2009.

Noncontrolling interest—common units of the Operating Partnership

Noncontrolling interest—common units of the Operating Partnership decreased by approximately $1.4 million for the three months ended June 30, 2010 compared to 2009 primarily due to a decrease in allocable income.

Liquidity and Capital Resources

General

Our principal liquidity needs for the next twelve months and beyond are to:

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fund normal recurring expenses;

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meet debt service and principal repayment obligations, including balloon payments on maturing debt;

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fund capital expenditures, including major renovations, tenant improvements and leasing costs;

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fund development costs;

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fund possible property acquisitions; and

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make the minimum distribution required to maintain our REIT qualification under the Internal Revenue Code of 1986, as amended.

We expect to satisfy these needs using one or more of the following:

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cash flow from operations;

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distribution of cash flows from joint ventures;

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cash and cash equivalent balances;

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issuances of our equity securities and/or additional preferred or common units of partnership interest in our Operating Partnership;

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our Unsecured Line of Credit or other short-term bridge facilities;

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construction loans;

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long-term secured and unsecured indebtedness (including unsecured exchangeable indebtedness); and

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sales of real estate.

We draw on multiple financing sources to fund our long-term capital needs. Our Unsecured Line of Credit is utilized primarily as a bridge facility to fund acquisition opportunities, to refinance outstanding indebtedness and to meet short-term development and working capital needs. We generally seek to fund our development projects with construction loans, which may be guaranteed. However, the financing for each particular project ultimately depends on several factors, including, among others, the project’s size and duration, and our available cash and our access to cost effective capital at the given time.

The following table presents information on properties under construction for the period ended June 30, 2010 (dollars in thousands):


Construction Properties	Estimated Stabilization Date	Location	# of Buildings	Square feet	Investment to Date(1)		Estimated Total Investment(1)		Percentage Leased(2)
Atlantic Wharf(3)(4)	First Quarter, 2012	Boston, MA	2	860,000	$	469,804	$	600,000	58	%(5)
2200 Pennsylvania Avenue(6)	Second Quarter, 2012	Washington, DC	2	780,000		160,368		380,000