Edgar Filing: BOSTON PROPERTIES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended June 30, 2016



¨	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.)

Commission File Number: 0-50209 (Boston Properties Limited Partnership)

BOSTON PROPERTIES, INC.

BOSTON PROPERTIES LIMITED PARTNERSHIP

(Exact name of Registrants as specified in its charter)



Boston Properties, Inc.	Delaware	04-2473675
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Boston Properties Limited Partnership	Delaware	04-3372948
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

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

(Address of principal executive offices) (Zip Code)

(617) 236-3300

(Registrants’ 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.

Boston Properties, Inc.: Yes x No ¨ Boston Properties Limited Partnership: 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).

Boston Properties, Inc.: Yes x No ¨ Boston Properties Limited Partnership: 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.

Boston Properties, Inc.:

Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Boston Properties Limited Partnership:

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Boston Properties, Inc.: Yes ¨ No x Boston Properties Limited Partnership: 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.



Boston Properties, Inc.	Common Stock, par value $0.01 per share	153,693,464
(Registrant)	(Class)	(Outstanding on August 2, 2016)

Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2016 of Boston Properties, Inc. and Boston Properties Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “BXP” mean Boston Properties, Inc., a Delaware corporation and real estate investment trust (“REIT”), and references to “BPLP” and the “Operating Partnership” mean Boston Properties Limited Partnership, a Delaware limited partnership. References to the “Company,” “we,” “us” and “our” mean collectively BXP, BPLP and those entities/subsidiaries consolidated by BXP.

BPLP is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. BXP is the sole general partner and also a limited partner of BPLP. As the sole general partner of BPLP, BXP has exclusive control of BPLP’s day-to-day management.

As of June 30, 2016, BXP owned an approximate 89.5% ownership interest in BPLP. The remaining approximate 10.5% interest is owned by limited partners. The other limited partners of BPLP are (1) persons who contributed their direct or indirect interests in properties to BPLP in exchange for common units or preferred units of limited partnership interest in BPLP or (2) recipients of long term incentive plan units of BPLP pursuant to BXP’s Stock Option and Incentive Plans. Under the limited partnership agreement of BPLP, unitholders may present their common units of BPLP for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time, generally one year from issuance). Upon presentation of a common unit for redemption, BPLP must redeem the unit for cash equal to the then value of a share of BXP’s common stock. In lieu of cash redemption by BPLP, however, BXP may elect to acquire any common units so tendered by issuing shares of BXP common stock in exchange for the common units. If BXP so elects, its common stock will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. BXP generally expects that it will elect to issue its common stock in connection with each such presentation for redemption rather than having BPLP pay cash. With each such exchange or redemption, BXP’s percentage ownership in BPLP will increase. In addition, whenever BXP issues shares of its common stock other than to acquire common units of BPLP, BXP must contribute any net proceeds it receives to BPLP and BPLP must issue to BXP an equivalent number of common units of BPLP. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

The Company believes that combining the quarterly reports on Form 10-Q of BXP and BPLP into this single report provides the following benefits:


•	enhances investors’ understanding of BXP and BPLP by enabling investors to view the business as a whole in the same manner as management views and operates the business;


•	eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both BXP and BPLP; and


•	creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

The Company believes it is important to understand the few differences between BXP and BPLP in the context of how BXP and BPLP operate as a consolidated company. The financial results of BPLP are consolidated into the financial statements of BXP. BXP does not have any other significant assets, liabilities or operations, other than its investment in BPLP, nor does it have employees of its own. BPLP, not BXP, generally executes all significant business relationships other than transactions involving the securities of BXP. BPLP holds substantially all of the assets of BXP, including ownership interests in joint ventures. BPLP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by BXP, which are contributed to the capital of BPLP in exchange for common or preferred units of partnership in BPLP, as applicable, BPLP generates all remaining capital required by the Company’s business. These sources include working capital, net cash provided by operating activities, borrowings under the revolving credit facility, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of certain properties and joint ventures.

Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of BXP and BPLP. The limited partners of BPLP are accounted for as partners’ capital in BPLP’s financial statements and as noncontrolling interests in BXP’s financial statements. The noncontrolling interests in BPLP’s financial statements include the interests of unaffiliated partners in various consolidated partnerships and development joint venture partners. The noncontrolling interests in BXP’s financial statements include the same noncontrolling interests at BPLP’s level and limited partners of BPLP. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at BXP and BPLP levels.

Table of Contents

In addition, the consolidated financial statements of BXP and BPLP differ in total real estate assets resulting from previously applied acquisition accounting by BXP for the issuance of common stock in connection with non-sponsor redemptions of common units of BPLP. This accounting resulted in a step-up of the real estate assets at BXP. This resulted in a difference between the net real estate of BXP as compared to BPLP of approximately $335.2 million, or 2.2% at June 30, 2016 and a corresponding difference in depreciation expense and gains on sales of real estate upon the sale of certain properties having an allocation of the real estate step-up. The acquisition accounting was nullified on a prospective basis beginning in 2009 as a result of the Company’s adoption of a new accounting standard requiring any future redemptions to be accounted for solely as an equity transaction.

To help investors better understand the key differences between BXP and BPLP, certain information for BXP and BPLP in this report has been separated, as set forth below:


•	Item 1. Financial Statements (unaudited), which includes the following specific disclosures for BXP and BPLP:

•Note 9. Noncontrolling Interest;

•Note 10. Stockholders’ Equity / Partners’ Capital; and

•Note 11. Earnings Per Share / Common Unit;


•	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable;


•	Item 2. Liquidity and Capital Resources includes separate reconciliations of amounts to each entity’s financial statements, where applicable;

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of BXP and BPLP in order to establish that the requisite certifications have been made and that BXP and BPLP are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

Table of Contents

BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES LIMITED PARTNERSHIP

FORM 10-Q

for the quarter ended June 30, 2016

TABLE OF CONTENTS




		Page

PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)	1

Boston Properties, Inc.
	a) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	1
	b) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	2
	c) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	3
	d) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2016 and 2015	4
	e) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	5

Boston Properties Limited Partnership
	a) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	7
	b) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	8
	c) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	9
	d) Consolidated Statements of Partners’ Capital for the six months ended June 30, 2016 and 2015	10
	e) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	11

Boston Properties, Inc. and Boston Properties Limited Partnership
	Notes to the Consolidated Financial Statements	13

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	79
ITEM 4.	Controls and Procedures	79

PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	81
ITEM 1A.	Risk Factors	81
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
ITEM 3.	Defaults Upon Senior Securities	83
ITEM 4.	Mine Safety Disclosures	83
ITEM 5.	Other Information	83
ITEM 6.	Exhibits	84

SIGNATURES		85

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements.

BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited )

	June 30, 2016			December 31, 2015
	(in thousands, except for share and par value amounts)
ASSETS
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $6,025,213 at June 30, 2016)	$	18,690,403		$	18,465,405
Construction in progress (amounts related to VIEs of $567,609 at June 30, 2016)	865,359			763,935
Land held for future development	241,106			252,195
Less: accumulated depreciation (amounts related to VIEs of ($712,358) at June 30, 2016)	(4,056,716		)	(3,925,894		)
Total real estate	15,740,152			15,555,641
Cash and cash equivalents (amounts related to VIEs of $214,595 at June 30, 2016)	1,180,044			723,718
Cash held in escrows (amounts related to VIEs of $3,527 at June 30, 2016)	65,654			73,790
Investments in securities	21,775			20,380
Tenant and other receivables (amounts related to VIEs of $19,719 at June 30, 2016)	84,861			97,865
Accrued rental income (amounts related to VIEs of $220,277 at June 30, 2016)	776,816			754,883
Deferred charges, net (amounts related to VIEs of $320,317 at June 30, 2016)	697,823			704,867
Prepaid expenses and other assets (amounts related to VIEs of $84,345 at June 30, 2016)	144,222			185,118
Investments in unconsolidated joint ventures	252,618			235,224
Total assets	$	18,963,965		$	18,351,486
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net (amounts related to VIEs of $2,046,828 at June 30, 2016)	$	3,189,013		$	3,435,242
Unsecured senior notes, net	6,257,274			5,264,819
Unsecured line of credit	—			—
Mezzanine notes payable (amounts related to VIEs of $307,797 at June 30, 2016)	307,797			308,482
Outside members' notes payable (amounts related to VIEs of $180,000 at June 30, 2016)	180,000			180,000
Accounts payable and accrued expenses (amounts related to VIEs of $109,038 at June 30, 2016)	287,464			274,709
Dividends and distributions payable	113,071			327,320
Accrued interest payable (amounts related to VIEs of $144,327 at June 30, 2016)	222,175			190,386
Other liabilities (amounts related to VIEs of $195,437 at June 30, 2016)	508,952			483,601
Total liabilities	11,065,746			10,464,559
Commitments and contingencies	—			—
Equity:
Stockholders’ equity attributable to Boston Properties, Inc.:
Excess stock, $0.01 par value, 150,000,000 shares authorized, none issued or outstanding	—			—
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
5.25% Series B cumulative redeemable preferred stock, $0.01 par value, liquidation preference $2,500 per share, 92,000 shares authorized, 80,000 shares issued and outstanding at June 30, 2016 and December 31, 2015	200,000			200,000
Common stock, $0.01 par value, 250,000,000 shares authorized, 153,753,830 and 153,658,866 issued and 153,674,930 and 153,579,966 outstanding at June 30, 2016 and December 31, 2015, respectively	1,537			1,536
Additional paid-in capital	6,316,191			6,305,687
Dividends in excess of earnings	(702,361		)	(780,952		)
Treasury common stock at cost, 78,900 shares at June 30, 2016 and December 31, 2015	(2,722		)	(2,722		)
Accumulated other comprehensive loss	(79,748		)	(14,114		)
Total stockholders’ equity attributable to Boston Properties, Inc.	5,732,897			5,709,435
Noncontrolling interests:
Common units of the Operating Partnership	612,385			603,092
Property partnerships	1,552,937			1,574,400
Total equity	7,898,219			7,886,927
Total liabilities and equity	$	18,963,965		$	18,351,486

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

Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands, except for per share amounts)
Revenue
Rental
Base rent	$	493,386		$	486,609		$	1,029,514		$	977,291
Recoveries from tenants	85,706			86,795			175,292			175,388
Parking and other	26,113			26,552			50,938			51,340
Total rental revenue	605,205			599,956			1,255,744			1,204,019
Hotel revenue	12,808			13,403			21,565			22,488
Development and management services	5,533			4,862			12,222			10,190
Total revenue	623,546			618,221			1,289,531			1,236,697
Expenses
Operating
Rental	217,938			214,464			437,110			435,814
Hotel	7,978			8,495			15,612			16,071
General and administrative	25,418			22,284			54,771			51,075
Transaction costs	913			208			938			535
Depreciation and amortization	153,175			167,844			312,623			322,067
Total expenses	405,422			413,295			821,054			825,562
Operating income	218,124			204,926			468,477			411,135
Other income (expense)
Income from unconsolidated joint ventures	2,234			3,078			4,025			17,912
Interest and other income	1,524			1,293			3,029			2,700
Gains (losses) from investments in securities	478			(24		)	737			369
Interest expense	(105,003		)	(108,534		)	(210,312		)	(217,291		)
Income before gains on sales of real estate	117,357			100,739			265,956			214,825
Gains on sales of real estate	—			—			67,623			95,084
Net income	117,357			100,739			333,579			309,909
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships	(6,814		)	(9,264		)	(17,278		)	(24,472		)
Noncontrolling interest—redeemable preferred units of the Operating Partnership	—			(3		)	—			(6		)
Noncontrolling interest—common units of the Operating Partnership	(11,357		)	(9,394		)	(32,771		)	(29,530		)
Net income attributable to Boston Properties, Inc.	99,186			82,078			283,530			255,901
Preferred dividends	(2,589		)	(2,618		)	(5,207		)	(5,207		)
Net income attributable to Boston Properties, Inc. common shareholders	$	96,597		$	79,460		$	278,323		$	250,694
Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	0.63		$	0.52		$	1.81		$	1.63
Weighted average number of common shares outstanding	153,662			153,450			153,644			153,341
Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	0.63		$	0.52		$	1.81		$	1.63
Weighted average number of common and common equivalent shares outstanding	153,860			153,815			153,889			153,845

Dividends per common share	$	0.65		$	0.65		$	1.30		$	1.30

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

Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands)
Net income	$	117,357		$	100,739		$	333,579		$	309,909
Other comprehensive loss:
Effective portion of interest rate contracts	(32,351		)	15,639			(90,997		)	12,106
Amortization of interest rate contracts (1)	628			628			1,255			1,255
Other comprehensive income (loss)	(31,723		)	16,267			(89,742		)	13,361
Comprehensive income	85,634			117,006			243,837			323,270
Net income attributable to noncontrolling interests	(18,171		)	(18,661		)	(50,049		)	(54,008		)
Other comprehensive income (loss) attributable to noncontrolling interests	8,681			(2,512		)	24,108			(2,209		)
Comprehensive income attributable to Boston Properties, Inc.	$	76,144		$	95,833		$	217,896		$	267,053

_______________

(1) Amounts reclassified from comprehensive income primarily to interest expense within the Boston Properties, Inc.’s Consolidated Statements of Operations.

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

Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited and in thousands)



	Common Stock			Preferred Stock		Additional Paid-in Capital		Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
	Shares	Amount		Preferred Stock		Additional Paid-in Capital		Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
Equity, December 31, 2015	153,580	$	1,536	$	200,000	$	6,305,687	$	(780,952	)	$	(2,722	)	$	(14,114	)	$	2,177,492		$	7,886,927
Redemption of operating partnership units to common stock	78	1		—		2,663		—			—			—			(2,664		)	—
Allocated net income for the year	—	—		—		—		283,530			—			—			50,049			333,579
Dividends/distributions declared	—	—		—		—		(204,939		)	—			—			(23,713		)	(228,652		)
Shares issued pursuant to stock purchase plan	3	—		—		332		—			—			—			—			332
Net activity from stock option and incentive plan	14	—		—		1,772		—			—			—			14,877			16,649
Sale of interests in property partnerships	—	—		—		1,320		—			—			—			(1,320		)	—
Contributions from noncontrolling interests in property partnerships	—	—		—		—		—			—			—			5,040			5,040
Distributions to noncontrolling interests in property partnerships	—	—		—		—		—			—			—			(25,914		)	(25,914		)
Effective portion of interest rate contracts	—	—		—		—		—			—			(66,759		)	(24,238		)	(90,997		)
Amortization of interest rate contracts	—	—		—		—		—			—			1,125			130			1,255
Reallocation of noncontrolling interest	—	—		—		4,417		—			—			—			(4,417		)	—
Equity, June 30, 2016	153,675	$	1,537	$	200,000	$	6,316,191	$	(702,361	)	$	(2,722	)	$	(79,748	)	$	2,165,322		$	7,898,219

Equity, December 31, 2014	153,114	$	1,531	$	200,000	$	6,270,257	$	(762,464	)	$	(2,722	)	$	(9,304	)	$	2,205,638		$	7,902,936
Redemption of operating partnership units to common stock	322	4		—		10,839		—			—			—			(10,843		)	—
Allocated net income for the year	—	—		—		—		255,901			—			—			49,561			305,462
Dividends/distributions declared	—	—		—		—		(204,676		)	—			—			(23,578		)	(228,254		)
Shares issued pursuant to stock purchase plan	2	—		—		313		—			—			—			—			313
Net activity from stock option and incentive plan	36	—		—		3,407		—			—			—			24,155			27,562
Contributions from noncontrolling interests in property partnerships	—	—		—		—		—			—			—			1,089			1,089
Distributions to noncontrolling interests in property partnerships	—	—		—		—		—			—			—			(34,022		)	(34,022		)
Effective portion of interest rate contracts	—	—		—		—		—			—			10,027			2,079			12,106
Amortization of interest rate contracts	—	—		—		—		—			—			1,125			130			1,255
Reallocation of noncontrolling interest	—	—		—		8,740		—			—			—			(8,740		)	—
Equity, June 30, 2015	153,474	$	1,535	$	200,000	$	6,293,556	$	(711,239	)	$	(2,722	)	$	1,848		$	2,205,469		$	7,988,447

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

Table of Contents

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the six months ended June 30,
	2016			2015
	(in thousands)
Cash flows from operating activities:
Net income	$	333,579		$	309,909
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	312,623			322,067
Non-cash compensation expense	17,647			16,480
Income from unconsolidated joint ventures	(4,025		)	(17,912		)
Distributions of net cash flow from operations of unconsolidated joint ventures	11,399			5,769
Gains from investments in securities	(737		)	(369		)
Non-cash portion of interest expense	(19,330		)	(21,852		)
Gains on sales of real estate	(67,623		)	(95,084		)
Change in assets and liabilities:
Cash held in escrows	632			(175		)
Tenant and other receivables, net	13,963			(8,588		)
Accrued rental income, net	(5,294		)	(40,173		)
Prepaid expenses and other assets	62,752			63,545
Accounts payable and accrued expenses	9,236			(5,973		)
Accrued interest payable	31,789			15,016
Other liabilities	(71,805		)	(56,580		)
Tenant leasing costs	(40,655		)	(43,004		)
Total adjustments	250,572			133,167
Net cash provided by operating activities	584,151			443,076
Cash flows from investing activities:
Acquisition of real estate	(78,000		)	—
Construction in progress	(242,944		)	(154,430		)
Building and other capital improvements	(48,306		)	(48,133		)
Tenant improvements	(116,935		)	(51,444		)
Proceeds from sales of real estate	104,816			194,821
Proceeds from sales of real estate placed in escrow	(104,696		)	(200,612		)
Proceeds from sales of real estate released from escrow	104,696			441,903
Cash placed in escrow for land sale contracts	—			(7,111		)
Cash released from escrow for land sale contracts	781			758
Cash released from escrow for investing activities	6,694			—
Deposits on real estate	(25,000		)	(5,000		)
Capital contributions to unconsolidated joint ventures	(26,040		)	(14,989		)
Capital distributions from unconsolidated joint ventures	—			24,527
Investments in securities, net	(658		)	(1,125		)
Net cash provided by (used in) investing activities	(425,592		)	179,165

Table of Contents



BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	For the six months ended June 30,
	2016			2015
	(in thousands)
Cash flows from financing activities:
Repayments of mortgage notes payable	(222,535		)	(12,909		)
Proceeds from unsecured senior notes	997,080			—
Proceeds from real estate financing transaction	—			6,000
Payments on real estate financing transactions	(4,290		)	(1,523		)
Deferred financing costs	(8,047		)	(163		)
Net proceeds from equity transactions	(666		)	332
Redemption of preferred units	—			(633		)
Dividends and distributions	(442,901		)	(997,840		)
Contributions from noncontrolling interests in property partnerships	5,040			1,089
Distributions to noncontrolling interests in property partnerships	(25,914		)	(36,922		)
Net cash provided by (used in) financing activities	297,767			(1,042,569		)
Net increase (decrease) in cash and cash equivalents	456,326			(420,328		)
Cash and cash equivalents, beginning of period	723,718			1,763,079
Cash and cash equivalents, end of period	$	1,180,044		$	1,342,751
Supplemental disclosures:
Cash paid for interest	$	217,021		$	240,942
Interest capitalized	$	19,168		$	16,815
Non-cash investing and financing activities:
Write-off of fully depreciated real estate	$	(52,708	)	$	(17,871	)
Additions to real estate included in accounts payable and accrued expenses	$	(14,471	)	$	17,604
Dividends and distributions declared but not paid	$	113,071		$	112,892
Conversions of noncontrolling interests to stockholders’ equity	$	2,664		$	10,843
Issuance of restricted securities to employees	$	33,711		$	43,363

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

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30, 2016			December 31, 2015
	(in thousands, except for unit amounts)
ASSETS
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $5,945,815 at June 30, 2016)	$	18,272,679		$	18,045,011
Construction in progress (amounts related to VIEs of $567,609 at June 30, 2016)	865,359			763,935
Land held for future development	241,106			252,195
Less: accumulated depreciation (amounts related to VIEs of ($696,690) at June 30, 2016)	(3,974,168		)	(3,846,816		)
Total real estate	15,404,976			15,214,325
Cash and cash equivalents (amounts related to VIEs of $214,595 at June 30, 2016)	1,180,044			723,718
Cash held in escrows (amounts related to VIEs of $3,527 at June 30, 2016)	65,654			73,790
Investments in securities	21,775			20,380
Tenant and other receivables (amounts related to VIEs of $19,719 at June 30, 2016)	84,861			97,865
Accrued rental income (amounts related to VIEs of $220,277 at June 30, 2016)	776,816			754,883
Deferred charges, net (amounts related to VIEs of $320,317 at June 30, 2016)	697,823			704,867
Prepaid expenses and other assets (amounts related to VIEs of $84,345 at June 30, 2016)	144,222			185,118
Investments in unconsolidated joint ventures	252,618			235,224
Total assets	$	18,628,789		$	18,010,170
LIABILITIES AND CAPITAL
Liabilities:
Mortgage notes payable, net (amounts related to VIEs of $2,046,828 at June 30, 2016)	$	3,189,013		$	3,435,242
Unsecured senior notes, net	6,257,274			5,264,819
Unsecured line of credit	—			—
Mezzanine notes payable (amounts related to VIEs of $307,797 at June 30, 2016)	307,797			308,482
Outside members' notes payable (amounts related to VIEs of $180,000 at June 30, 2016)	180,000			180,000
Accounts payable and accrued expenses (amounts related to VIEs of $109,038 at June 30, 2016)	287,464			274,709
Distributions payable	113,071			327,320
Accrued interest payable (amounts related to VIEs of $144,327 at June 30, 2016)	222,175			190,386
Other liabilities (amounts related to VIEs of $195,437 at June 30, 2016)	508,952			483,601
Total liabilities	11,065,746			10,464,559
Commitments and contingencies	—			—
Noncontrolling interests:
Redeemable partnership units—17,184,629 and 16,097,473 common units and 912,605 and 1,831,714 long term incentive units outstanding at redemption value at June 30, 2016 and December 31, 2015, respectively	2,387,025			2,286,689
Capital:
5.25% Series B cumulative redeemable preferred units, liquidation preference $2,500 per unit, 80,000 units issued and outstanding at June 30, 2016 and December 31, 2015	193,623			193,623
Boston Properties Limited Partnership partners’ capital—1,717,722 and 1,715,092 general partner units and 151,957,208 and 151,864,874 limited partner units outstanding at June 30, 2016 and December 31, 2015, respectively	3,429,458			3,490,899
Noncontrolling interests in property partnerships	1,552,937			1,574,400
Total capital	5,176,018			5,258,922
Total liabilities and capital	$	18,628,789		$	18,010,170

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

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands, except for per unit amounts)
Revenue
Rental
Base rent	$	493,386		$	486,609		$	1,029,514		$	977,291
Recoveries from tenants	85,706			86,795			175,292			175,388
Parking and other	26,113			26,552			50,938			51,340
Total rental revenue	605,205			599,956			1,255,744			1,204,019
Hotel revenue	12,808			13,403			21,565			22,488
Development and management services	5,533			4,862			12,222			10,190
Total revenue	623,546			618,221			1,289,531			1,236,697
Expenses
Operating
Rental	217,938			214,464			437,110			435,814
Hotel	7,978			8,495			15,612			16,071
General and administrative	25,418			22,284			54,771			51,075
Transaction costs	913			208			938			535
Depreciation and amortization	151,191			165,846			308,652			318,070
Total expenses	403,438			411,297			817,083			821,565
Operating income	220,108			206,924			472,448			415,132
Other income (expense)
Income from unconsolidated joint ventures	2,234			3,078			4,025			17,912
Interest and other income	1,524			1,293			3,029			2,700
Gains (losses) from investments in securities	478			(24		)	737			369
Interest expense	(105,003		)	(108,534		)	(210,312		)	(217,291		)
Income before gains on sales of real estate	119,341			102,737			269,927			218,822
Gains on sales of real estate	—			—			69,792			95,084
Net income	119,341			102,737			339,719			313,906
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships	(6,814		)	(9,264		)	(17,278		)	(24,472		)
Noncontrolling interest—redeemable preferred units	—			(3		)	—			(6		)
Net income attributable to Boston Properties Limited Partnership	112,527			93,470			322,441			289,428
Preferred distributions	(2,589		)	(2,618		)	(5,207		)	(5,207		)
Net income attributable to Boston Properties Limited Partnership common unitholders	$	109,938		$	90,852		$	317,234		$	284,221
Basic earnings per common unit attributable to Boston Properties Limited Partnership common unitholders
Net income	$	0.64		$	0.53		$	1.85		$	1.66
Weighted average number of common units outstanding	171,370			171,146			171,339			171,116
Diluted earnings per common unit attributable to Boston Properties Limited Partnership common unitholders
Net income	$	0.64		$	0.53		$	1.85		$	1.66
Weighted average number of common and common equivalent units outstanding	171,568			171,511			171,584			171,620

Distributions per common unit	$	0.65		$	0.65		$	1.30		$	1.30

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

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands)
Net income	$	119,341		$	102,737		$	339,719		$	313,906
Other comprehensive loss:
Effective portion of interest rate contracts	(32,351		)	15,639			(90,997		)	12,106
Amortization of interest rate contracts (1)	628			628			1,255			1,255
Other comprehensive income (loss)	(31,723		)	16,267			(89,742		)	13,361
Comprehensive income	87,618			119,004			249,977			327,267
Comprehensive income attributable to noncontrolling interests	(793		)	(10,183		)	(731		)	(25,394		)
Comprehensive income attributable to Boston Properties Limited Partnership	$	86,825		$	108,821		$	249,246		$	301,873

_______________

(1) Amounts reclassified from comprehensive income primarily to interest expense within the Boston Properties Limited Partnership's Consolidated Statements of Operations.

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

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Unaudited and in thousands)



	Total Partners’ Capital
Balance at December 31, 2015	$	3,684,522
Contributions	2,871
Net income allocable to general and limited partner units	289,670
Distributions	(204,939		)
Accumulated other comprehensive loss	(65,634		)
Unearned compensation	553
Conversion of redeemable partnership units	2,664
Adjustment to reflect redeemable partnership units at redemption value	(86,626		)
Balance at June 30, 2016	$	3,623,081

Balance at December 31, 2014	$	3,639,916
Contributions	4,659
Net income allocable to general and limited partner units	259,898
Distributions	(204,676		)
Accumulated other comprehensive income	11,152
Unearned compensation	(939		)
Conversion of redeemable partnership units	10,843
Adjustment to reflect redeemable partnership units at redemption value	148,001
Balance at June 30, 2015	$	3,868,854

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

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	For the six months ended June 30,
	2016			2015
	(in thousands)
Cash flows from operating activities:
Net income	$	339,719		$	313,906
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	308,652			318,070
Non-cash compensation expense	17,647			16,480
Income from unconsolidated joint ventures	(4,025		)	(17,912		)
Distributions of net cash flow from operations of unconsolidated joint ventures	11,399			5,769
Gains from investments in securities	(737		)	(369		)
Non-cash portion of interest expense	(19,330		)	(21,852		)
Gains on sales of real estate	(69,792		)	(95,084		)
Change in assets and liabilities:
Cash held in escrows	632			(175		)
Tenant and other receivables, net	13,963			(8,588		)
Accrued rental income, net	(5,294		)	(40,173		)
Prepaid expenses and other assets	62,752			63,545
Accounts payable and accrued expenses	9,236			(5,973		)
Accrued interest payable	31,789			15,016
Other liabilities	(71,805		)	(56,580		)
Tenant leasing costs	(40,655		)	(43,004		)
Total adjustments	244,432			129,170
Net cash provided by operating activities	584,151			443,076
Cash flows from investing activities:
Acquisition of real estate	(78,000		)	—
Construction in progress	(242,944		)	(154,430		)
Building and other capital improvements	(48,306		)	(48,133		)
Tenant improvements	(116,935		)	(51,444		)
Proceeds from sales of real estate	104,816			194,821
Proceeds from sales of real estate placed in escrow	(104,696		)	(200,612		)
Proceeds from sales of real estate released from escrow	104,696			441,903
Cash placed in escrow for land sale contracts	—			(7,111		)
Cash released from escrow for land sale contracts	781			758
Cash released from escrow for investing activities	6,694			—
Deposits on real estate	(25,000		)	(5,000		)
Capital contributions to unconsolidated joint ventures	(26,040		)	(14,989		)
Capital distributions from unconsolidated joint ventures	—			24,527
Investments in securities, net	(658		)	(1,125		)
Net cash provided by (used in) investing activities	(425,592		)	179,165

Table of Contents

BOSTON PROPERTIES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	For the six months ended June 30,
	2016			2015
	(in thousands)
Cash flows from financing activities:
Repayments of mortgage notes payable	(222,535		)	(12,909		)
Proceeds from unsecured senior notes	997,080			—
Proceeds from real estate financing transaction	—			6,000
Payments on real estate financing transaction	(4,290		)	(1,523		)
Deferred financing costs	(8,047		)	(163		)
Net proceeds from equity transactions	(666		)	332
Redemption of preferred units	—			(633		)
Distributions	(442,901		)	(997,840		)
Contributions from noncontrolling interests in property partnerships	5,040			1,089
Distributions to noncontrolling interests in property partnerships	(25,914		)	(36,922		)
Net cash provided by (used in) financing activities	297,767			(1,042,569		)
Net increase (decrease) in cash and cash equivalents	456,326			(420,328		)
Cash and cash equivalents, beginning of period	723,718			1,763,079
Cash and cash equivalents, end of period	$	1,180,044		$	1,342,751
Supplemental disclosures:
Cash paid for interest	$	217,021		$	240,942
Interest capitalized	$	19,168		$	16,815
Non-cash investing and financing activities:
Write-off of fully depreciated real estate	$	(52,708	)	$	(17,871	)
Additions to real estate included in accounts payable and accrued expenses	$	(14,471	)	$	17,604
Distributions declared but not paid	$	113,071		$	112,892
Conversions of redeemable partnership units to partners’ capital	$	2,664		$	10,843
Issuance of restricted securities to employees	$	33,711		$	43,363

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

Table of Contents

BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES LIMITED PARTNERSHIP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Boston Properties, Inc., a Delaware corporation, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”). Boston Properties, Inc. is the sole general partner of Boston Properties Limited Partnership and at June 30, 2016 owned an approximate 89.5% (89.5% at December 31, 2015) general and limited partnership interest in Boston Properties Limited Partnership. Unless stated otherwise or the context requires, the “Company” refers to Boston Properties, Inc. and its subsidiaries, including Boston Properties Limited Partnership, its operating partnership, and its consolidated subsidiaries. Partnership interests in Boston Properties Limited Partnership include:


•	common units of partnership interest (also referred to as “OP Units”),


•	long term incentive units of partnership interest (also referred to as “LTIP Units”), and


•	preferred units of partnership interest (also referred to as “Preferred Units”).

Unless specifically noted otherwise, all references to OP Units exclude units held by Boston Properties, Inc. A holder of an OP Unit may present such OP Unit to Boston Properties Limited 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, Boston Properties Limited Partnership is obligated to redeem such OP Unit for cash equal to the value of a share of common stock of Boston Properties, Inc. (“Common Stock”) at such time. In lieu of a cash redemption, Boston Properties, Inc. 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 Boston Properties, Inc. 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.

The Company uses LTIP Units as a form of equity-based award for annual long-term incentive equity compensation. The Company has also issued LTIP Units to employees in the form of (1) 2012 outperformance plan awards (“2012 OPP Units”) and (2) 2013, 2014, 2015 and 2016 multi-year, long-term incentive program awards (also referred to as “2013 MYLTIP Units,” “2014 MYLTIP Units,” “2015 MYLTIP Units” and “2016 MYLTIP Units,” respectively, and collectively as “MYLTIP Units”), each of which, upon the satisfaction of certain performance and vesting conditions, is convertible into one OP Unit. The three-year measurement periods for the 2012 OPP Units and 2013 MYLTIP Units expired on February 6, 2015 and February 4, 2016, respectively, and Boston Properties, Inc.’s total stockholder return (“TSR”) was sufficient for employees to earn and therefore become eligible to vest in a portion of the awards. Unless and until they are earned, the rights, preferences and privileges of the 2014, 2015 and 2016 MYLTIP Units differ from other LTIP Units granted to employees (including, as of February 6, 2015, the 2012 OPP Units and, as of February 4, 2016, the 2013 MYLTIP Units). Therefore, unless specifically noted otherwise, all references to LTIP Units exclude the 2014, 2015 and 2016 MYLTIP Units. LTIP Units (including the 2012 OPP Units and the 2013 MYLTIP 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 Notes 9, 10 and 12).

At June 30, 2016, there was one series of Preferred Units outstanding (i.e., Series B Preferred Units). The Series B Preferred Units were issued to Boston Properties, Inc. on March 27, 2013 in connection with issuance of 80,000 shares (8,000,000 depositary shares each representing 1/100th of a share) of 5.25% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”). Boston Properties, Inc. contributed the net proceeds from the offering to Boston Properties Limited Partnership in exchange for 80,000 Series B Preferred Units having terms and preferences generally mirroring those of the Series B Preferred Stock (See Note 10).

Properties

At June 30, 2016, the Company owned or had interests in a portfolio of 168 commercial real estate properties (the “Properties”) aggregating approximately 46.5 million net rentable square feet of primarily Class A office properties, including eight properties under construction/redevelopment totaling approximately 3.8 million net rentable square feet. At June 30, 2016, the Properties consisted of:


•	158 Office properties (including six properties under construction/redevelopment);


•	one hotel;


•	five retail properties; and


•	four residential properties (including two properties under construction).

Table of Contents

The Company owns or controls land parcels totaling approximately 471.6 acres.

The Company considers Class A office properties to be centrally located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings.

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 Boston Properties Limited Partnership, nor does it have employees of its own. Boston Properties Limited Partnership, not Boston Properties, Inc., generally executes all significant business relationships other than transactions involving securities of Boston Properties, Inc. All majority-owned subsidiaries and joint ventures over which the Company has financial and operating control and variable interest entities (“VIEs”) 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 generally accepted accounting principles (“GAAP”) 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 GAAP 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 GAAP. 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, 2015. Beginning on January 1, 2016, the properties that were historically included in the Company’s Office/Technical segment are now included in the Office segment (See Note 13).

Fair Value of Financial Instruments

The Company determines the fair value of its unsecured senior notes using market prices. The inputs used in determining the fair value of the Company’s unsecured senior notes are categorized at a level 1 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized at a level 2 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) if trading volumes are low. The Company determines the fair value of its mortgage notes payable using discounted cash flow analysis by discounting the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt 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 similar maturity dates to its debt. The inputs used in determining the fair value of the Company’s mortgage notes payable and mezzanine notes payable are categorized at a level 3 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company considers the rates used in the valuation techniques to be unobservable inputs.

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, and the Company’s estimated fair values for these instruments as of the end of the applicable reporting period are not necessarily indicative of estimated or actual fair values in future reporting periods. 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, 2016 and December 31, 2015 (in thousands):



	June 30, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgage notes payable, net	$	3,189,013	$	3,243,958	$	3,435,242	$	3,503,746
Mezzanine notes payable	307,797		309,837		308,482		306,103
Unsecured senior notes, net	6,257,274		6,819,623		5,264,819		5,547,738
Total	$	9,754,084	$	10,373,418	$	9,008,543	$	9,357,587

Table of Contents

The Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Variable Interest Entities (VIEs)

On January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 (1) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership and (3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The Company reviewed all of its legal entities in accordance with ASU 2015-02 and concluded that certain of its legal entities, including Boston Properties Limited Partnership, which had been consolidated in accordance with the voting interest model, are now variable interest entities under the VIE model, as discussed below. The adoption of the guidance did not alter any of the Company’s consolidation conclusions, but resulted in additional disclosures.

Consolidated VIEs are those where the Company is considered to be the primary beneficiary of a VIE. The primary beneficiary is the entity that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and 2) the obligation to absorb losses or the right to receive the returns from the VIE that could potentially be significant to the VIE. The Company has determined that it is the primary beneficiary for seven of the eight entities that are VIEs.

Consolidated Variable Interest Entities

As of June 30, 2016, Boston Properties, Inc. has identified seven consolidated VIEs, including Boston Properties Limited Partnership. The VIEs own the following in-service properties: 767 Fifth Avenue (the General Motors Building), Time Square Tower, 601 Lexington Avenue, Atlantic Wharf Office Building and 100 Federal Street, the entity that owns the Salesforce Tower, which is currently under development and Boston Properties Limited Partnership.

The Company consolidates these VIEs as it is the primary beneficiary. The third parties’ interests in these consolidated entities, with the exception of Boston Properties Limited Partnership, are reflected as noncontrolling interest in property partnerships in the accompanying Consolidated Financial Statements (See Note 9).

In addition, Boston Properties, Inc.’s significant asset is its investment in Boston Properties Limited Partnership and, consequently, substantially all of Boston Properties, Inc.’s assets and liabilities are the assets and liabilities of Boston Properties Limited Partnership. All of Boston Properties, Inc.’s debt is an obligation of Boston Properties Limited Partnership.

Variable Interest Entities Not Consolidated

The Company has determined that its BNY Tower Holdings LLC joint venture is a VIE. The Company does not consolidate this entity as the Company does not have the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and, therefore, the Company is not considered to be the primary beneficiary.

Table of Contents

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contract with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s Accounting Standards Codification (“ASC”). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which delayed the effective date of ASU 2014-09 by one year making it effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date. The Company is currently assessing the potential impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and shall be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Early adoption is permitted for financial statements that have not been previously issued. On January 1, 2016, the Company adopted ASU 2015-03 and retrospectively applied the guidance to its Mortgage Notes Payable and Unsecured Senior Notes for all periods presented. Unamortized deferred financing costs, which were previously included in Deferred Charges, Net, totaling approximately $3.0 million and $30.1 million are included in Mortgage Notes Payable, Net and Unsecured Senior Notes, Net, respectively, as of June 30, 2016 and approximately $3.5 million and $24.5 million are included in Mortgage Notes Payable, Net and Unsecured Senior Notes, Net, respectively, as of December 31, 2015.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for the Company for reporting periods beginning after December 15, 2017. Early application is permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. ASU 2016-02 supersedes previous leasing standards. ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), which provides guidance clarifying that a novation of party to a derivative instrument, whereby one of the parties to a derivative instrument is replaced with another party, does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge criteria continue to be met. ASU 2016-05 is effective for the Company for reporting periods beginning after December 15, 2016, with early adoption

Table of Contents

permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-05 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with ASU 2016-09, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for the Company for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-09 will have on its consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). ASU 2016-12 is intended to clarify and provide practical expedients for certain aspects of ASU 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and notes that lease contracts with customers are a scope exception. The Company may elect to adopt ASU 2016-12 as of the original effective date; however, adoption is required for annual reporting periods beginning after December 15, 2017. The Company is currently assessing the potential impact that the adoption of ASU 2016-12 will have on its consolidated financial statements.

3. Real Estate Activity During the Six Months Ended June 30, 2016

Acquisitions

On April 22, 2016, the Company acquired 3625-3635 Peterson Way located in Santa Clara, California for a purchase price of approximately $78.0 million in cash. 3625-3635 Peterson Way is an approximately 218,000 net rentable square foot office property. The property is 100% leased to a single tenant through March 2021. Following the lease expiration, the Company intends to develop the site into a Class A office campus containing an aggregate of approximately 632,000 net rentable square feet. The following table summarizes the allocation of the aggregate purchase price of 3625-3635 Peterson Way at the date of acquisition (in thousands).



Land	$	63,206
Building and improvements	7,210
Tenant improvements	7,669
In-place lease intangibles	4,262
Below-market lease intangible	(4,347		)
Net assets acquired	$	78,000

The following table summarizes the estimated annual amortization of the acquired below-market lease and the acquired in-place lease intangibles for 3625-3635 Peterson Way for each of the five succeeding years (in thousands).



	Acquired In-Place Lease Intangibles		Acquired Below- Market Lease Intangible
Period from April 22, 2016 through December 31, 2016	$	578	$	(589	)
2017	867		(884		)
2018	867		(884		)
2019	867		(884		)
2020	867		(884		)

3625-3635 Peterson Way contributed approximately $1.1 million of revenue and approximately $(94,000) of earnings to the Company for the period from April 22, 2016 through June 30, 2016.

Table of Contents

Dispositions

On February 1, 2016, the Company completed the sale of its 415 Main Street property located in Cambridge, Massachusetts to the tenant for a gross sale price of approximately $105.4 million. Net cash proceeds totaled approximately $104.9 million, resulting in a gain on sale of real estate totaling approximately $60.8 million for Boston Properties, Inc. and approximately $63.0 million for Boston Properties Limited Partnership. As part of its lease signed on July 14, 2004, the tenant was granted a fixed-price option to purchase the building at the beginning of the 11th lease year, which option was exercised by the tenant on October 22, 2014. 415 Main Street is an office property with approximately 231,000 net rentable square feet. 415 Main Street contributed approximately $1.2 million of net income to the Company for the period from January 1, 2016 through January 31, 2016 and contributed approximately $3.7 million and $6.3 million of net income to the Company for the three and six months ended June 30, 2015, respectively.

Development

On May 27, 2016, the Company completed and fully placed in-service 601 Massachusetts Avenue, a Class A office project with approximately 479,000 net rentable square feet located in Washington, DC.

On May 27, 2016, the Company completed and fully placed in-service 804 Carnegie Center, a Class A office project with approximately 130,000 net rentable square feet located in Princeton, New Jersey.

On June 24, 2016, the Company completed and fully placed in-service 10 CityPoint, a Class A office project with approximately 241,000 net rentable square feet located in Waltham, Massachusetts.

Lease Terminations

On February 3, 2016, the Company entered into a lease termination agreement with a tenant for an approximately 85,000 square foot lease at its 250 West 55th Street property located in New York City. The lease was scheduled to expire on February 28, 2035. In consideration for the termination of the lease, the tenant paid the Company approximately $45.0 million, which was recognized as termination income and is included in Base Rent in the accompanying Consolidated Statements of Operations for the six months ended June 30, 2016.

4. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at June 30, 2016 and December 31, 2015:



		Nominal % Ownership			Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			June 30, 2016			December 31, 2015
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(9,005	)	$	(9,951	)
The Metropolitan Square Associates LLC	Metropolitan Square	51.0	%		9,401			9,179
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%	(2)	(11,280		)	(11,958		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	42,533			43,524
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%	(4)	21,424			29,009
540 Madison Venture LLC	540 Madison Avenue	60.0	%		68,729			68,983
500 North Capitol LLC	500 North Capitol Street, NW	30.0	%		(3,644		)	(3,292		)
501 K Street LLC	1001 6th Street	50.0	%	(5)	42,544			42,584
Podium Developer LLC	The Hub on Causeway	50.0	%		27,858			18,508
1265 Main Office JV LLC	1265 Main Street	50.0	%		21,616			11,916
BNY Tower Holdings LLC (6)	Dock72 at the Brooklyn Navy Yard	50.0	%		18,513			11,521
					$	228,689		$	210,023

Table of Contents

_______________


(1)	Investments with deficit balances aggregating approximately $23.9 million and $25.2 million at June 30, 2016 and December 31, 2015, respectively, have been reflected within Other Liabilities on the Company’s Consolidated Balance Sheets.


(2)	The Company’s economic ownership has increased based on the achievement of certain return thresholds.


(3)	The Company’s wholly-owned entity that owns the office component of the project also owns a 33.3% interest in the entity owning the land, parking garage and infrastructure of the project.


(4)	The joint venture owns four in-service buildings and two undeveloped land parcels.


(5)	Under the joint venture agreement for this land parcel, the partner will be entitled to up to two additional payments from the venture based on increases in total entitled square footage of the project above 520,000 square feet and achieving certain project returns at stabilization.


(6)	The entity is a VIE (See Note 2).

Certain of the Company’s unconsolidated 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.

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



	June 30, 2016			December 31, 2015
	(in thousands)
ASSETS
Real estate and development in process, net	$	1,124,267		$	1,072,412
Other assets	237,196			252,285
Total assets	$	1,361,463		$	1,324,697
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	827,987		$	830,125
Other liabilities	47,685			44,549
Members’/Partners’ equity	485,791			450,023
Total liabilities and members’/partners’ equity	$	1,361,463		$	1,324,697
Company’s share of equity	$	255,362		$	237,070
Basis differentials (1)	(26,673		)	(27,047		)
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	228,689		$	210,023

_______________

(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.


(2)	Investments with deficit balances aggregating approximately $23.9 million and $25.2 million at June 30, 2016 and December 31, 2015, respectively, have been reflected within Other Liabilities on the Company’s Consolidated Balance Sheets.

Table of Contents

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



	Three months ended June 30,		Six months ended June 30,
	2016	2015	2016	2015
	(in thousands)
Total revenue (1)