Document
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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 September 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  ¨

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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
153,773,460
(Registrant)
(Class)
(Outstanding on November 2, 2016)
 

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EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 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 BXP conducts substantially all of its business and owns, either directly or through subsidiaries, substantially all of its 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 September 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 concise 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 its 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. 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.

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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 $330.0 million, or 2.1% at September 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 3. Real Estate;
•Note 9. Noncontrolling Interests;
•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; and
•
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 and Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds sections for each of BXP and BPLP, as well as separate Exhibits 31 and 32 certifications for each of BXP and BPLP.


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BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES LIMITED PARTNERSHIP
FORM 10-Q
for the quarter ended September 30, 2016
TABLE OF CONTENTS 
 
 
 
 
 
Page
 
 
 
ITEM 1.
 
 
 
Boston Properties, Inc.
 
 
 
 
 
 
 
 
 
Boston Properties Limited Partnership
 
 
 
 
 
 
 
 
 
Boston Properties, Inc. and Boston Properties Limited Partnership
 
 
 


 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 
 

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PART I. FINANCIAL INFORMATION
ITEM 1—Financial Statements.



BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited )
 
September 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 $6,618,753 at September 30, 2016)
$
19,902,756

 
$
19,481,535

Less: accumulated depreciation (amounts related to VIEs of ($713,454) at September 30, 2016)
(4,113,553
)
 
(3,925,894
)
Total real estate
15,789,203

 
15,555,641

Cash and cash equivalents (amounts related to VIEs of $244,026 at September 30, 2016)
419,323

 
723,718

Cash held in escrows (amounts related to VIEs of $4,988 at September 30, 2016)
63,980

 
73,790

Investments in securities
23,022

 
20,380

Tenant and other receivables (amounts related to VIEs of $19,242 at September 30, 2016)
76,258

 
97,865

Accrued rental income (amounts related to VIEs of $221,031 at September 30, 2016)
785,569

 
754,883

Deferred charges, net (amounts related to VIEs of $304,358 at September 30, 2016)
680,192

 
704,867

Prepaid expenses and other assets (amounts related to VIEs of $76,094 at September 30, 2016)
176,693

 
185,118

Investments in unconsolidated joint ventures
775,659

 
235,224

Total assets
$
18,789,899

 
$
18,351,486

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,032,714 at September 30, 2016)
$
2,077,707

 
$
3,435,242

Unsecured senior notes, net
7,243,767

 
5,264,819

Unsecured line of credit
—

 
—

Mezzanine notes payable (amounts related to VIEs of $307,448 at September 30, 2016)
307,448

 
308,482

Outside members’ notes payable (amounts related to VIEs of $180,000 at September 30, 2016)
180,000

 
180,000

Accounts payable and accrued expenses (amounts related to VIEs of $127,846 at September 30, 2016)
312,979

 
274,709

Dividends and distributions payable
113,038

 
327,320

Accrued interest payable (amounts related to VIEs of $153,012 at September 30, 2016)
234,628

 
190,386

Other liabilities (amounts related to VIEs of $195,245 at September 30, 2016)
461,079

 
483,601

Total liabilities
10,930,646

 
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 September 30, 2016 and December 31, 2015
200,000

 
200,000

Common stock, $0.01 par value, 250,000,000 shares authorized, 153,851,912 and 153,658,866 issued and 153,773,012 and 153,579,966 outstanding at September 30, 2016 and December 31, 2015, respectively
1,538

 
1,536

Additional paid-in capital
6,326,580

 
6,305,687

Dividends in excess of earnings
(725,522
)
 
(780,952
)
Treasury common stock at cost, 78,900 shares at September 30, 2016 and December 31, 2015
(2,722
)
 
(2,722
)
Accumulated other comprehensive loss
(73,943
)
 
(14,114
)
Total stockholders’ equity attributable to Boston Properties, Inc.
5,725,931

 
5,709,435

Noncontrolling interests:
 
 
 
Common units of the Operating Partnership
608,280

 
603,092

Property partnerships
1,525,042

 
1,574,400

Total equity
7,859,253

 
7,886,927

Total liabilities and equity
$
18,789,899

 
$
18,351,486



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

1

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except for per share amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
489,312

 
$
494,300

 
$
1,518,826

 
$
1,471,591

Recoveries from tenants
92,560

 
91,544

 
267,852

 
266,932

Parking and other
24,638

 
25,509

 
75,576

 
76,849

Total rental revenue
606,510

 
611,353

 
1,862,254

 
1,815,372

Hotel revenue
12,354

 
12,619

 
33,919

 
35,107

Development and management services
6,364

 
5,912

 
18,586

 
16,102

Total revenue
625,228

 
629,884

 
1,914,759

 
1,866,581

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
228,560

 
219,796

 
665,670

 
655,610

Hotel
8,118

 
8,125

 
23,730

 
24,196

General and administrative
25,165

 
20,944

 
79,936

 
72,019

Transaction costs
249

 
254

 
1,187

 
789

Impairment loss
1,783

 
—

 
1,783

 
—

Depreciation and amortization
203,748

 
153,015

 
516,371

 
475,082

Total expenses
467,623

 
402,134

 
1,288,677

 
1,227,696

Operating income
157,605

 
227,750

 
626,082

 
638,885

Other income (expense)
 
 
 
 
 
 
 
Income from unconsolidated joint ventures
1,464

 
2,647

 
5,489

 
20,559

Interest and other income
3,628

 
3,637

 
6,657

 
6,337

Gains (losses) from investments in securities
976

 
(1,515
)
 
1,713

 
(1,146
)
Interest expense
(104,641
)
 
(108,727
)
 
(314,953
)
 
(326,018
)
Losses from early extinguishments of debt
(371
)
 
—

 
(371
)
 
—

Losses from interest rate contracts
(140
)
 
—

 
(140
)
 
—

Income before gains on sales of real estate
58,521

 
123,792

 
324,477

 
338,617

Gains on sales of real estate
12,983

 
199,479

 
80,606

 
294,563

Net income
71,504

 
323,271

 
405,083

 
633,180

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
17,225

 
(115,240
)
 
(53
)
 
(139,712
)
Noncontrolling interest—redeemable preferred units of the Operating Partnership
—

 
—

 
—

 
(6
)
Noncontrolling interest—common units of the Operating Partnership
(9,387
)
 
(21,302
)
 
(42,120
)
 
(50,906
)
Net income attributable to Boston Properties, Inc.
79,342

 
186,729

 
362,910

 
442,556

Preferred dividends
(2,589
)
 
(2,647
)
 
(7,796
)
 
(7,854
)
Net income attributable to Boston Properties, Inc. common shareholders
$
76,753

 
$
184,082

 
$
355,114

 
$
434,702

Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.50

 
$
1.20

 
$
2.31

 
$
2.83

Weighted average number of common shares outstanding
153,754

 
153,595

 
153,681

 
153,426

Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.50

 
$
1.20

 
$
2.31

 
$
2.82

Weighted average number of common and common equivalent shares outstanding
154,136

 
153,786

 
153,971

 
153,825

 
 
 
 
 
 
 
 
Dividends per common share
$
0.65

 
$
0.65

 
$
1.95

 
$
1.95


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

2

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income
$
71,504

 
$
323,271

 
$
405,083

 
$
633,180

Other comprehensive income (loss):
 
 
 
 
 
 
 
Effective portion of interest rate contracts
5,712

 
(30,156
)
 
(85,285
)
 
(18,050
)
Amortization of interest rate contracts (1)
1,190

 
627

 
2,445

 
1,882

Other comprehensive income (loss)
6,902

 
(29,529
)
 
(82,840
)
 
(16,168
)
Comprehensive income
78,406

 
293,742

 
322,243

 
617,012

Net income attributable to noncontrolling interests
7,838

 
(136,542
)
 
(42,173
)
 
(190,624
)
Other comprehensive income (loss) attributable to noncontrolling interests
(1,097
)
 
7,056

 
23,011

 
4,847

Comprehensive income attributable to Boston Properties, Inc.
$
85,147

 
$
164,256

 
$
303,081

 
$
431,235

_______________
(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.

3

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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
 
 
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
173

 
2

 
—

 
5,879

 
—

 
—

 
—

 
(5,881
)
 
—

Allocated net income for the year
—

 
—

 
—

 
—

 
362,910

 
—

 
—

 
42,173

 
405,083

Dividends/distributions declared
—

 
—

 
—

 
—

 
(307,480
)
 
—

 
—

 
(35,500
)
 
(342,980
)
Shares issued pursuant to stock purchase plan
6

 
—

 
—

 
730

 
—

 
—

 
—

 
—

 
730

Net activity from stock option and incentive plan
14

 
—

 
—

 
2,870

 
—

 
—

 
—

 
21,420

 
24,290

Sale of interests in property partnerships
—

 
—

 
—

 
1,320

 
—

 
—

 
—

 
(1,320
)
 
—

Contributions from noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,737

 
6,737

Distributions to noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(38,694
)
 
(38,694
)
Effective portion of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
(62,022
)
 
(23,263
)
 
(85,285
)
Amortization of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
2,193

 
252

 
2,445

Reallocation of noncontrolling interest
—

 
—

 
—

 
10,094

 
—

 
—

 
—

 
(10,094
)
 
—

Equity, September 30, 2016
153,773

 
$
1,538

 
$
200,000

 
$
6,326,580

 
$
(725,522
)
 
$
(2,722
)
 
$
(73,943
)
 
$
2,133,322

 
$
7,859,253

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
419

 
5

 
—

 
14,152

 
—

 
—

 
—

 
(14,157
)
 
—

Allocated net income for the year
—

 
—

 
—

 
—

 
442,556

 
—

 
—

 
185,497

 
628,053

Dividends/distributions declared
—

 
—

 
—

 
—

 
(307,146
)
 
—

 
—

 
(35,307
)
 
(342,453
)
Shares issued pursuant to stock purchase plan
6

 
—

 
—

 
780

 
—

 
—

 
—

 
—

 
780

Net activity from stock option and incentive plan
36

 
—

 
—

 
4,600

 
—

 
—

 
—

 
29,307

 
33,907

Acquisition of redeemable noncontrolling interest in property partnership
—

 
—

 
—

 
(1,586
)
 
—

 
—

 
—

 
—

 
(1,586
)
Contributions from noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,758

 
1,758

Distributions to noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(144,468
)
 
(144,468
)
Effective portion of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
(13,008
)
 
(5,042
)
 
(18,050
)
Amortization of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
1,687

 
195

 
1,882

Reallocation of noncontrolling interest
—

 
—

 
—

 
12,577

 
—

 
—

 
—

 
(12,577
)
 
—

Equity, September 30, 2015
153,575

 
$
1,536

 
$
200,000

 
$
6,300,780

 
$
(627,054
)
 
$
(2,722
)
 
$
(20,625
)
 
$
2,210,844

 
$
8,062,759





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

4

Table of Contents         

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                         
 
For the nine months ended September 30,
 
2016
 
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
405,083

 
$
633,180

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
516,371

 
475,082

Impairment loss
1,783

 
—

Non-cash compensation expense
25,290

 
22,825

Income from unconsolidated joint ventures
(5,489
)
 
(20,559
)
Distributions of net cash flow from operations of unconsolidated joint ventures
11,645

 
6,484

Losses (gains) from investments in securities
(1,713
)
 
1,146

Losses from early extinguishments of debt
371

 
—

Non-cash portion of interest expense
(27,386
)
 
(32,818
)
Gains on sales of real estate
(80,606
)
 
(294,563
)
Change in assets and liabilities:
 
 
 
Cash held in escrows
1,675

 
(32,750
)
Tenant and other receivables, net
22,135

 
(19,851
)
Accrued rental income, net
(14,618
)
 
(55,941
)
Prepaid expenses and other assets
4,883

 
20,988

Accounts payable and accrued expenses
16,852

 
(2,937
)
Accrued interest payable
44,242

 
37,384

Other liabilities
(114,321
)
 
(73,370
)
Tenant leasing costs
(62,412
)
 
(55,422
)
Total adjustments
338,702

 
(24,302
)
Net cash provided by operating activities
743,785

 
608,878

Cash flows from investing activities:
 
 
 
Acquisition of real estate
(78,000
)
 
—

Construction in progress
(359,716
)
 
(251,984
)
Building and other capital improvements
(81,842
)
 
(84,644
)
Tenant improvements
(167,762
)
 
(86,052
)
Proceeds from sales of real estate
122,750

 
389,457

Proceeds from sales of real estate placed in escrow
(122,647
)
 
(200,612
)
Proceeds from sales of real estate released from escrow
122,647

 
634,165

Cash placed in escrow for land sale contracts
—

 
(7,111
)
Cash released from escrow for land sale contracts
1,403

 
3,250

Cash released from escrow for investing activities
6,694

 
—

Capital contributions to unconsolidated joint ventures
(546,982
)
 
(20,863
)
Capital distributions from unconsolidated joint ventures
—

 
24,527

Investments in securities, net
(929
)
 
(1,332
)
Net cash provided by (used in) investing activities
(1,104,384
)
 
398,801

 
 
 
 
 
 
 
 
 
 
 
 

5

Table of Contents         

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended September 30,
 
2016
 
2015
 
(in thousands)
Cash flows from financing activities:
 
 
 
Repayments of mortgage notes payable
(1,323,284
)
 
(20,137
)
Proceeds from unsecured senior notes
1,989,790

 
—

Proceeds from real estate financing transaction
—

 
6,000

Payments on real estate financing transactions
(4,712
)
 
(2,364
)
Deferred financing costs
(16,101
)
 
(1,288
)
Net proceeds from equity transactions
(270
)
 
799

Redemption of preferred units
—

 
(633
)
Dividends and distributions
(557,262
)
 
(1,112,019
)
Acquisition of noncontrolling interest
—

 
(108,499
)
Contributions from noncontrolling interests in property partnerships
6,737

 
1,758

Distributions to noncontrolling interests in property partnerships
(38,694
)
 
(147,368
)
Net cash provided by (used in) financing activities
56,204

 
(1,383,751
)
Net decrease in cash and cash equivalents
(304,395
)
 
(376,072
)
Cash and cash equivalents, beginning of period
723,718

 
1,763,079

Cash and cash equivalents, end of period
$
419,323

 
$
1,387,007

Supplemental disclosures:
 
 
 
Cash paid for interest
$
327,053

 
$
347,367

Interest capitalized
$
28,956

 
$
25,915

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(168,861
)
 
$
(33,532
)
Additions to real estate included in accounts payable and accrued expenses
$
11,864

 
$
28,246

Dividends and distributions declared but not paid
$
113,038

 
$
112,912

Mortgage notes payable assigned in connection with the sale of real estate
$
—

 
$
116,993

Conversions of noncontrolling interests to stockholders’ equity
$
5,881

 
$
14,157

Issuance of restricted securities to employees
$
33,711

 
$
43,363







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

6

Table of Contents         


BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2016
 
December 31, 2015
 
(in thousands, except for unit amounts)
ASSETS
 
 
 
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $6,618,753 at September 30, 2016)
$
19,489,365

 
$
19,061,141

Less: accumulated depreciation (amounts related to VIEs of ($713,454) at September 30, 2016)
(4,030,172
)
 
(3,846,816
)
Total real estate
15,459,193

 
15,214,325

Cash and cash equivalents (amounts related to VIEs of $244,026 at September 30, 2016)
419,323

 
723,718

Cash held in escrows (amounts related to VIEs of $4,988 at September 30, 2016)
63,980

 
73,790

Investments in securities
23,022

 
20,380

Tenant and other receivables (amounts related to VIEs of $19,242 at September 30, 2016)
76,258

 
97,865

Accrued rental income (amounts related to VIEs of $221,031 at September 30, 2016)
785,569

 
754,883

Deferred charges, net (amounts related to VIEs of $304,358 at September 30, 2016)
680,192

 
704,867

Prepaid expenses and other assets (amounts related to VIEs of $76,094 at September 30, 2016)
176,693

 
185,118

Investments in unconsolidated joint ventures
775,659

 
235,224

Total assets
$
18,459,889

 
$
18,010,170

LIABILITIES AND CAPITAL
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,032,714 at September 30, 2016)
$
2,077,707

 
$
3,435,242

Unsecured senior notes, net
7,243,767

 
5,264,819

Unsecured line of credit
—

 
—

Mezzanine notes payable (amounts related to VIEs of $307,448 at September 30, 2016)
307,448

 
308,482

Outside members’ notes payable (amounts related to VIEs of $180,000 at September 30, 2016)
180,000

 
180,000

Accounts payable and accrued expenses (amounts related to VIEs of $127,846 at September 30, 2016)
312,979

 
274,709

Distributions payable
113,038

 
327,320

Accrued interest payable (amounts related to VIEs of $153,012 at September 30, 2016)
234,628

 
190,386

Other liabilities (amounts related to VIEs of $195,245 at September 30, 2016)
461,079

 
483,601

Total liabilities
10,930,646

 
10,464,559

Commitments and contingencies
—

 
—

Noncontrolling interests:
 
 
 
Redeemable partnership units—17,096,675 and 16,097,473 common units and 905,494 and 1,831,714 long term incentive units outstanding at redemption value at September 30, 2016 and December 31, 2015, respectively
2,453,516

 
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 September 30, 2016 and December 31, 2015
193,623

 
193,623

Boston Properties Limited Partnership partners’ capital—1,717,752 and 1,715,092 general partner units and 152,055,260 and 151,864,874 limited partner units outstanding at September 30, 2016 and December 31, 2015, respectively
3,357,062

 
3,490,899

Noncontrolling interests in property partnerships
1,525,042

 
1,574,400

Total capital
5,075,727

 
5,258,922

Total liabilities and capital
$
18,459,889

 
$
18,010,170




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


7

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three months ended September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except for per unit amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
489,312

 
$
494,300

 
$
1,518,826

 
$
1,471,591

Recoveries from tenants
92,560

 
91,544

 
267,852

 
266,932

Parking and other
24,638

 
25,509

 
75,576

 
76,849

Total rental revenue
606,510

 
611,353

 
1,862,254

 
1,815,372

Hotel revenue
12,354

 
12,619

 
33,919

 
35,107

Development and management services
6,364

 
5,912

 
18,586

 
16,102

Total revenue
625,228

 
629,884

 
1,914,759

 
1,866,581

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
228,560

 
219,796

 
665,670

 
655,610

Hotel
8,118

 
8,125

 
23,730

 
24,196

General and administrative
25,165

 
20,944

 
79,936

 
72,019

Transaction costs
249

 
254

 
1,187

 
789

Impairment loss
1,783

 
—

 
1,783

 
—

Depreciation and amortization
198,582

 
151,017

 
507,234

 
469,087

Total expenses
462,457

 
400,136

 
1,279,540

 
1,221,701

Operating income
162,771

 
229,748

 
635,219

 
644,880

Other income (expense)
 
 
 
 
 
 
 
Income from unconsolidated joint ventures
1,464

 
2,647

 
5,489

 
20,559

Interest and other income
3,628

 
3,637

 
6,657

 
6,337

Gains (losses) from investments in securities
976

 
(1,515
)
 
1,713

 
(1,146
)
Interest expense
(104,641
)
 
(108,727
)
 
(314,953
)
 
(326,018
)
Losses from early extinguishments of debt
(371
)
 
—

 
(371
)
 
—

Losses from interest rate contracts
(140
)
 
—

 
(140
)
 
—

Income before gains on sales of real estate
63,687

 
125,790

 
333,614

 
344,612

Gains on sales of real estate
12,983

 
199,723

 
82,775

 
294,807

Net income
76,670

 
325,513

 
416,389

 
639,419

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
17,225

 
(115,240
)
 
(53
)
 
(139,712
)
Noncontrolling interest—redeemable preferred units
—

 
—

 
—

 
(6
)
Net income attributable to Boston Properties Limited Partnership
93,895

 
210,273

 
416,336

 
499,701

Preferred distributions
(2,589
)
 
(2,647
)
 
(7,796
)
 
(7,854
)
Net income attributable to Boston Properties Limited Partnership common unitholders
$
91,306

 
$
207,626

 
$
408,540

 
$
491,847

Basic earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.53

 
$
1.21

 
$
2.38

 
$
2.87

Weighted average number of common units outstanding
171,379

 
171,160

 
171,353

 
171,131

Diluted earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.53

 
$
1.21

 
$
2.38

 
$
2.87

Weighted average number of common and common equivalent units outstanding
171,761

 
171,351

 
171,643

 
171,530

 
 
 
 
 
 
 
 
Distributions per common unit
$
0.65

 
$
0.65

 
$
1.95

 
$
1.95

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

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Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income
$
76,670

 
$
325,513

 
$
416,389

 
$
639,419

Other comprehensive income (loss):
 
 
 
 
 
 
 
Effective portion of interest rate contracts
5,712

 
(30,156
)
 
(85,285
)
 
(18,050
)
Amortization of interest rate contracts (1)
1,190

 
627

 
2,445

 
1,882

Other comprehensive income (loss)
6,902

 
(29,529
)
 
(82,840
)
 
(16,168
)
Comprehensive income
83,572

 
295,984

 
333,549

 
623,251

Comprehensive income attributable to noncontrolling interests
16,812

 
(110,784
)
 
16,081

 
(136,178
)
Comprehensive income attributable to Boston Properties Limited Partnership
$
100,384

 
$
185,200

 
$
349,630

 
$
487,073

_______________
(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.

9

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(Unaudited and in thousands)
 
 
Total Partners’ Capital
Balance at December 31, 2015
$
3,684,522

Contributions
3,269

Net income allocable to general and limited partner units
374,216

Distributions
(307,480
)
Accumulated other comprehensive loss
(59,829
)
Unearned compensation
1,651

Conversion of redeemable partnership units
5,881

Adjustment to reflect redeemable partnership units at redemption value
(151,545
)
Balance at September 30, 2016
$
3,550,685

 
 
Balance at December 31, 2014
$
3,639,916

Contributions
5,126

Acquisition of redeemable noncontrolling interest in property partnership
(1,586
)
Net income allocable to general and limited partner units
448,795

Distributions
(307,146
)
Accumulated other comprehensive loss
(11,321
)
Unearned compensation
254

Conversion of redeemable partnership units
14,157

Adjustment to reflect redeemable partnership units at redemption value
216,037

Balance at September 30, 2015
$
4,004,232
























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


10

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the nine months ended September 30,
 
2016
 
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
416,389

 
$
639,419

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
507,234

 
469,087

Impairment loss
1,783

 
—

Non-cash compensation expense
25,290

 
22,825

Income from unconsolidated joint ventures
(5,489
)
 
(20,559
)
Distributions of net cash flow from operations of unconsolidated joint ventures
11,645

 
6,484

Losses (gains) from investments in securities
(1,713
)
 
1,146

Losses from early extinguishments of debt
371

 
—

Non-cash portion of interest expense
(27,386
)
 
(32,818
)
Gains on sales of real estate
(82,775
)
 
(294,807
)
Change in assets and liabilities:
 
 
 
Cash held in escrows
1,675

 
(32,750
)
Tenant and other receivables, net
22,135

 
(19,851
)
Accrued rental income, net
(14,618
)
 
(55,941
)
Prepaid expenses and other assets
4,883

 
20,988

Accounts payable and accrued expenses
16,852

 
(2,937
)
Accrued interest payable
44,242

 
37,384

Other liabilities
(114,321
)
 
(73,370
)
Tenant leasing costs
(62,412
)
 
(55,422
)
Total adjustments
327,396

 
(30,541
)
Net cash provided by operating activities
743,785

 
608,878

Cash flows from investing activities:
 
 
 
Acquisition of real estate
(78,000
)
 
—

Construction in progress
(359,716
)
 
(251,984
)
Building and other capital improvements
(81,842
)
 
(84,644
)
Tenant improvements
(167,762
)
 
(86,052
)
Proceeds from sales of real estate
122,750

 
389,457

Proceeds from sales of real estate placed in escrow
(122,647
)
 
(200,612
)
Proceeds from sales of real estate released from escrow
122,647

 
634,165

Cash placed in escrow for land sale contracts
—

 
(7,111
)
Cash released from escrow for land sale contracts
1,403

 
3,250

Cash released from escrow for investing activities
6,694

 
—

Capital contributions to unconsolidated joint ventures
(546,982
)
 
(20,863
)
Capital distributions from unconsolidated joint ventures
—

 
24,527

Investments in securities, net
(929
)
 
(1,332
)
Net cash provided by (used in) investing activities
(1,104,384
)
 
398,801

 
 
 
 
 
 
 
 

11

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the nine months ended September 30,
 
2016
 
2015
 
(in thousands)
Cash flows from financing activities:
 
 
 
Repayments of mortgage notes payable
(1,323,284
)
 
(20,137
)
Proceeds from unsecured senior notes
1,989,790

 
—

Proceeds from real estate financing transaction
—

 
6,000

Payments on real estate financing transaction
(4,712
)
 
(2,364
)
Deferred financing costs
(16,101
)
 
(1,288
)
Net proceeds from equity transactions
(270
)
 
799

Redemption of preferred units
—

 
(633
)
Acquisition of noncontrolling interest
—

 
(108,499
)
Distributions
(557,262
)
 
(1,112,019
)
Contributions from noncontrolling interests in property partnerships
6,737

 
1,758

Distributions to noncontrolling interests in property partnerships
(38,694
)
 
(147,368
)
Net cash provided by (used in) financing activities
56,204

 
(1,383,751
)
Net decrease in cash and cash equivalents
(304,395
)
 
(376,072
)
Cash and cash equivalents, beginning of period
723,718

 
1,763,079

Cash and cash equivalents, end of period
$
419,323

 
$
1,387,007

Supplemental disclosures:
 
 
 
Cash paid for interest
$
327,053

 
$
347,367

Interest capitalized
$
28,956

 
$
25,915

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(168,861
)
 
$
(33,532
)
Additions to real estate included in accounts payable and accrued expenses
$
11,864

 
$
28,246

Distributions declared but not paid
$
113,038

 
$
112,912

Mortgage notes payable assigned in connection with the sale of real estate
$
—

 
$
116,993

Conversions of redeemable partnership units to partners’ capital
$
5,881

 
$
14,157

Issuance of restricted securities to employees
$
33,711

 
$
43,363
















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

12

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, its operating partnership, and at September 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, 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 September 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 September 30, 2016, the Company owned or had interests in a portfolio of 174 commercial real estate properties (the “Properties”) aggregating approximately 47.7 million net rentable square feet of primarily Class A office properties, including eight properties under construction/redevelopment totaling approximately 4.0 million net rentable square feet. At September 30, 2016, the Properties consisted of:

•
164 Office properties (including six properties under construction/redevelopment);
•
one hotel;
•
five retail properties; and
•
four residential properties (including two properties under construction).

13

Table of Contents         

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 mortgage notes payable, net, mezzanine notes payable and unsecured senior notes, net and the Company’s corresponding estimate of fair value as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
 
 
Estimated
Fair Value
 
Carrying
Amount
 
 
 
Estimated
Fair Value
Mortgage notes payable, net
$
2,077,707

 
  
 
$
2,111,614

 
$
3,435,242

 
  
 
$
3,503,746

Mezzanine notes payable
307,448

 
 
 
309,095

 
308,482

 
 
 
306,103

Unsecured senior notes, net
7,243,767

 
  
 
7,761,908

 
5,264,819

 
  
 
5,547,738

Total
$
9,628,922

 
  
 
$
10,182,617

 
$
9,008,543

 
  
 
$
9,357,587

    

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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 September 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 September 30, 2016, Boston Properties, Inc. has identified seven consolidated VIEs, including Boston Properties Limited Partnership. The VIEs own (1) the following five in-service properties: 767 Fifth Avenue (the General Motors Building), Time Square Tower, 601 Lexington Avenue, Atlantic Wharf Office Building and 100 Federal Street and (2) the entity that owns Salesforce Tower, which is currently under development.
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, which owns Dock72 at the Brooklyn Navy Yard, 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.

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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 $2.5 million and $36.8 million are included in Mortgage Notes Payable, Net and Unsecured Senior Notes, Net, respectively, as of September 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.

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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 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.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The areas addressed in the new guidance related to debt prepayment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned and bank-owned life insurance policies, distributions received from equity method investments, beneficial interest in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for the Company for reporting periods beginning after December 15, 2017, with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently assessing the potential impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.
3. Real Estate
Boston Properties, Inc.
Real estate consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
Land
$
4,879,020

 
$
4,806,021

Land held for future development (1)
243,887

 
252,195

Buildings and improvements
11,792,853

 
11,709,285

Tenant improvements
2,001,259

 
1,920,247

Furniture, fixtures and equipment
31,724

 
29,852

Construction in progress
954,013

 
763,935

Total
19,902,756

 
19,481,535

Less: Accumulated depreciation
(4,113,553
)
 
(3,925,894
)
 
$
15,789,203

 
$
15,555,641

_______________
(1)
Includes pre-development costs.

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Boston Properties Limited Partnership
Real estate consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
Land
$
4,774,460

 
$
4,700,793

Land held for future development (1)
243,887

 
252,195

Buildings and improvements
11,484,022

 
11,394,119

Tenant improvements
2,001,259

 
1,920,247

Furniture, fixtures and equipment
31,724

 
29,852

Construction in progress
954,013

 
763,935

Total
19,489,365

 
19,061,141

Less: Accumulated depreciation
(4,030,172
)
 
(3,846,816
)
 
$
15,459,193

 
$
15,214,325

_______________
(1)
Includes pre-development costs.
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 intangible and the acquired in-place lease intangibles for 3625-3635 Peterson Way for the remainder of 2016 and each of the next four succeeding fiscal 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 $2.4 million of revenue and approximately $6,000 of earnings to the Company for the period from April 22, 2016 through September 30, 2016.

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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 $(35,000) and $6.2 million of net income (loss) to the Company for the three and nine months ended September 30, 2015, respectively.
On August 16, 2016, the Company completed the sale of a parcel of land within its Broad Run Business Park property located in Loudoun County, Virginia for a gross sale price of approximately $18.0 million. Net cash proceeds totaled approximately $17.9 million, resulting in a gain on sale of real estate totaling approximately $13.0 million.
On September 27, 2016, the Company executed a letter of intent for the sale of the remaining parcel of land at its Washingtonian North property located in Gaithersburg, Maryland. The letter of intent caused the Company to reevaluate its strategy for the land and, based on a shorter than expected hold period, the Company reduced the carrying value of the land to the estimated net sales price and recognized an impairment loss of approximately $1.8 million during the three and nine months ended September 30, 2016.
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.
On August 19, 2016, the consolidated entity in which the Company has a 55% interest and that owns 601 Lexington Avenue located in New York City commenced the redevelopment of the six-story low-rise office and retail building component of the complex. The redeveloped portion of the low-rise building will contain approximately 195,000 net rentable square feet of Class A office space and approximately 25,000 net rentable square feet of retail space. The Company will capitalize incremental costs during the redevelopment. Boston Properties, Inc. and Boston Properties Limited Partnership recognized approximately $50.8 million and $47.6 million, respectively, of depreciation expense associated with the acceleration of depreciation on the assets being removed from service and demolished as part of the redevelopment of the property. Approximately $21.4 million of those amounts was allocated to the outside partners and is included within Noncontrolling Interests in Property Partnerships in the Company’s Consolidated Statements of Operations.
On September 16, 2016, the Company partially placed in-service 888 Boylston Street, a Class A office project with approximately 425,000 net rentable square feet located in Boston, 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 Consolidated Statements of Operations for the nine months ended September 30, 2016.

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4. Investments in Unconsolidated Joint Ventures
The investments in unconsolidated joint ventures consist of the following at September 30, 2016 and December 31, 2015:
 
 
 
 
 
Nominal %
Ownership
 
 
Carrying Value of Investment (1)
 
Entity
 
Properties
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
 
(in thousands)
 
Square 407 Limited Partnership
 
Market Square North
 
50.0
%
 
 
$
(8,483
)
 
$
(9,951
)
 
The Metropolitan Square Associates LLC
 
Metropolitan Square
 
51.0
%
 
 
9,552

 
9,179

 
BP/CRF 901 New York Avenue LLC
 
901 New York Avenue
 
25.0
%
(2) 
 
(10,898
)
 </