Document
Table of Contents         

 
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, 2017
¨
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  ¨    


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Boston Properties, Inc.:    
Large accelerated filer  x             Accelerated filer  ¨               Non-accelerated filer  ¨         
Smaller reporting company  ¨     Emerging growth company  ¨
Boston Properties Limited Partnership:
Large accelerated filer  ¨             Accelerated filer  ¨                Non-accelerated filer  x         
Smaller reporting company  ¨    Emerging growth company  ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Boston Properties, Inc. ¨                     Boston Properties Limited Partnership ¨
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
154,317,716
(Registrant)
(Class)
(Outstanding on August 3, 2017)
 

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EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2017 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. Unless stated otherwise or the context requires, 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 June 30, 2017, BXP owned an approximate 89.7% ownership interest in BPLP. The remaining approximate 10.3% 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 credit facilities, 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 $322.7 million, or 2.0% at June 30, 2017 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 6. Derivative Instruments and Hedging Activities;
•Note 8. Noncontrolling Interests;
•Note 9. Stockholders’ Equity / Partners’ Capital; and
•Note 10. 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 12, 31 and 32 calculation of ratios of earnings to fixed charges and 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 June 30, 2017
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.
 
 

Table of Contents         

PART I. FINANCIAL INFORMATION
ITEM 1—Financial Statements.



1

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BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2017
 
December 31, 2016
 
(in thousands, except for share and par value amounts)
ASSETS
 
 
 
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,000,820 and $6,760,078 at June 30, 2017 and December 31, 2016, respectively)
$
20,614,366

 
$
20,147,263

Less: accumulated depreciation (amounts related to VIEs of $(799,299) and $(758,640) at June 30, 2017 and December 31, 2016, respectively)
(4,379,446
)
 
(4,222,235
)
Total real estate
16,234,920

 
15,925,028

Cash and cash equivalents (amounts related to VIEs of $322,574 and $253,999 at June 30, 2017 and December 31, 2016, respectively)
492,435

 
356,914

Cash held in escrows (amounts related to VIEs of $4,360 and $4,955 at June 30, 2017 and December 31, 2016, respectively)
47,345

 
63,174

Investments in securities
26,781

 
23,814

Tenant and other receivables (amounts related to VIEs of $17,950 and $23,525 at June 30, 2017 and December 31, 2016, respectively)
88,687

 
92,548

Accrued rental income (amounts related to VIEs of $227,199 and $224,185 at June 30, 2017 and December 31, 2016, respectively)
820,022

 
799,138

Deferred charges, net (amounts related to VIEs of $267,240 and $290,436 at June 30, 2017 and December 31, 2016, respectively)
658,219

 
686,163

Prepaid expenses and other assets (amounts related to VIEs of $41,819 and $42,718 at June 30, 2017 and December 31, 2016, respectively)
93,985

 
129,666

Investments in unconsolidated joint ventures
819,368

 
775,198

Total assets
$
19,281,762

 
$
18,851,643

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,943,890 and $2,018,483 at June 30, 2017 and December 31, 2016, respectively)
$
2,986,283

 
$
2,063,087

Unsecured senior notes, net
7,250,356

 
7,245,953

Unsecured line of credit
—

 
—

Unsecured term loan
—

 
—

Mezzanine notes payable (amounts related to VIEs of $0 and $307,093 at June 30, 2017 and December 31, 2016, respectively)
—

 
307,093

Outside members’ notes payable (amounts related to VIEs of $0 and $180,000 at June 30, 2017 and December 31, 2016, respectively)
—

 
180,000

Accounts payable and accrued expenses (amounts related to VIEs of $116,413 and $110,457 at June 30, 2017 and December 31, 2016, respectively)
303,559

 
298,524

Dividends and distributions payable
130,432

 
130,308

Accrued interest payable (amounts related to VIEs of $6,706 and $162,226 at June 30, 2017 and December 31, 2016, respectively)
85,172

 
243,933

Other liabilities (amounts related to VIEs of $159,529 and $175,146 at June 30, 2017 and December 31, 2016, respectively)
452,608

 
450,821

Total liabilities
11,208,410

 
10,919,719

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, 2017 and December 31, 2016
200,000

 
200,000

Common stock, $0.01 par value, 250,000,000 shares authorized, 154,386,429 and 153,869,075 issued and 154,307,529 and 153,790,175 outstanding at June 30, 2017 and December 31, 2016, respectively
1,543

 
1,538

Additional paid-in capital
6,363,034

 
6,333,424

Dividends in excess of earnings
(694,320
)
 
(693,694
)
Treasury common stock at cost, 78,900 shares at June 30, 2017 and December 31, 2016
(2,722
)
 
(2,722
)
Accumulated other comprehensive loss
(53,161
)
 
(52,251
)
Total stockholders’ equity attributable to Boston Properties, Inc.
5,814,374

 
5,786,295

Noncontrolling interests:
 
 
 
Common units of Boston Properties Limited Partnership
604,997

 
614,982

Property partnerships
1,653,981

 
1,530,647

Total equity
8,073,352

 
7,931,924

Total liabilities and equity
$
19,281,762

 
$
18,851,643

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

2

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BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for per share amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
520,542

 
$
493,386

 
$
1,024,104

 
$
1,029,514

Recoveries from tenants
89,163

 
85,706

 
178,327

 
175,292

Parking and other
26,462

 
26,113

 
52,072

 
50,938

Total rental revenue
636,167

 
605,205

 
1,254,503

 
1,255,744

Hotel revenue
13,375

 
12,808

 
20,795

 
21,565

Development and management services
7,365

 
5,533

 
13,837

 
12,222

Total revenue
656,907

 
623,546

 
1,289,135

 
1,289,531

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
230,454

 
217,938

 
458,741

 
437,110

Hotel
8,404

 
7,978

 
15,495

 
15,612

General and administrative
27,141

 
25,418

 
58,527

 
54,771

Transaction costs
299

 
913

 
333

 
938

Depreciation and amortization
151,919

 
153,175

 
311,124

 
312,623

Total expenses
418,217

 
405,422

 
844,220

 
821,054

Operating income
238,690

 
218,124

 
444,915

 
468,477

Other income (expense)
 
 
 
 
 
 
 
Income from unconsolidated joint ventures
3,108

 
2,234

 
6,192

 
4,025

Interest and other income
1,504

 
1,524

 
2,118

 
3,029

Gains from investments in securities
730

 
478

 
1,772

 
737

Gains from early extinguishments of debt
14,354

 
—

 
14,354

 
—

Interest expense
(95,143
)
 
(105,003
)
 
(190,677
)
 
(210,312
)
Income before gains on sales of real estate
163,243

 
117,357

 
278,674

 
265,956

Gains on sales of real estate
3,767

 
—

 
3,900

 
67,623

Net income
167,010

 
117,357

 
282,574

 
333,579

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
(15,203
)
 
(6,814
)
 
(19,627
)
 
(17,278
)
Noncontrolling interest—common units of Boston Properties Limited Partnership
(15,473
)
 
(11,357
)
 
(26,933
)
 
(32,771
)
Net income attributable to Boston Properties, Inc.
136,334

 
99,186

 
236,014

 
283,530

Preferred dividends
(2,625
)
 
(2,589
)
 
(5,250
)
 
(5,207
)
Net income attributable to Boston Properties, Inc. common shareholders
$
133,709

 
$
96,597

 
$
230,764

 
$
278,323

Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.87

 
$
0.63

 
$
1.50

 
$
1.81

Weighted average number of common shares outstanding
154,177

 
153,662

 
154,019

 
153,644

Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
 
 
 
 
 
 
 
Net income
$
0.87

 
$
0.63

 
$
1.50

 
$
1.81

Weighted average number of common and common equivalent shares outstanding
154,331

 
153,860

 
154,273

 
153,889

 
 
 
 
 
 
 
 
Dividends per common share
$
0.75

 
$
0.65

 
$
1.50

 
$
1.30


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

3

Table of Contents         

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income
$
167,010

 
$
117,357

 
$
282,574

 
$
333,579

Other comprehensive loss:
 
 
 
 
 
 
 
Effective portion of interest rate contracts
(6,313
)
 
(32,351
)
 
(6,133
)
 
(90,997
)
Amortization of interest rate contracts (1)
1,397

 
628

 
2,703

 
1,255

Other comprehensive loss
(4,916
)
 
(31,723
)
 
(3,430
)
 
(89,742
)
Comprehensive income
162,094

 
85,634

 
279,144

 
243,837

Net income attributable to noncontrolling interests
(30,676
)
 
(18,171
)
 
(46,560
)
 
(50,049
)
Other comprehensive loss attributable to noncontrolling interests
2,738

 
8,681

 
2,520

 
24,108

Comprehensive income attributable to Boston Properties, Inc.
$
134,156

 
$
76,144

 
$
235,104

 
$
217,896

_______________
(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.

4

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
 
 
Equity, December 31, 2016
153,790

 
$
1,538

 
$
200,000

 
$
6,333,424

 
$
(693,694
)
 
$
(2,722
)
 
$
(52,251
)
 
$
2,145,629

 
$
7,931,924

Redemption of operating partnership units to common stock
481

 
5

 
—

 
16,417

 
—

 
—

 
—

 
(16,422
)
 
—

Allocated net income for the year
—

 
—

 
—

 
—

 
236,014

 
—

 
—

 
46,560

 
282,574

Dividends/distributions declared
—

 
—

 
—

 
—

 
(236,368
)
 
—

 
—

 
(26,977
)
 
(263,345
)
Shares issued pursuant to stock purchase plan
3

 
—

 
—

 
373

 
—

 
—

 
—

 
—

 
373

Net activity from stock option and incentive plan
34

 
—

 
—

 
1,980

 
—

 
—

 
—

 
19,188

 
21,168

Cumulative effect of a change in accounting principle
—

 
—

 
—

 
—

 
(272
)
 
—

 
—

 
(1,763
)
 
(2,035
)
Contributions from noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
133,072

 
133,072

Distributions to noncontrolling interests in property partnerships
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(26,949
)
 
(26,949
)
Effective portion of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
(3,301
)
 
(2,832
)
 
(6,133
)
Amortization of interest rate contracts
—

 
—

 
—

 
—

 
—

 
—

 
2,391

 
312

 
2,703

Reallocation of noncontrolling interest
—

 
—

 
—

 
10,840

 
—

 
—

 
—

 
(10,840
)
 
—

Equity, June 30, 2017
154,308

 
$
1,543

 
$
200,000

 
$
6,363,034

 
$
(694,320
)
 
$
(2,722
)
 
$
(53,161
)
 
$
2,258,978

 
$
8,073,352

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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





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

5

Table of Contents         

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                         
 
For the six months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
282,574

 
$
333,579

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
311,124

 
312,623

Non-cash compensation expense
19,237

 
17,647

Income from unconsolidated joint ventures
(6,192
)
 
(4,025
)
Distributions of net cash flow from operations of unconsolidated joint ventures
2,905

 
11,399

Gains from investments in securities
(1,772
)
 
(737
)
Gains from early extinguishments of debt
(14,444
)
 
—

Non-cash portion of interest expense
(11,979
)
 
(19,330
)
Gains on sales of real estate
(3,900
)
 
(67,623
)
Change in assets and liabilities:
 
 
 
Cash held in escrows
7,531

 
632

Tenant and other receivables, net
2,033

 
13,963

Accrued rental income, net
(19,348
)
 
(5,294
)
Prepaid expenses and other assets
36,223

 
62,752

Accounts payable and accrued expenses
(2,608
)
 
9,236

Accrued interest payable
(158,761
)
 
31,789

Other liabilities
(33,093
)
 
(71,805
)
Tenant leasing costs
(37,252
)
 
(40,655
)
Total adjustments
89,704

 
250,572

Net cash provided by operating activities
372,278

 
584,151

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(15,953
)
 
(78,000
)
Construction in progress
(297,747
)
 
(242,944
)
Building and other capital improvements
(100,808
)
 
(48,306
)
Tenant improvements
(107,533
)
 
(116,935
)
Proceeds from sales of real estate
17,049

 
104,816

Proceeds from sales of real estate placed in escrow
(16,640
)
 
(104,696
)
Proceeds from sales of real estate released from escrow
15,844

 
104,696

Cash released from escrow for investing activities
9,004

 
6,694

Cash released from escrow for land sale contracts
—

 
781

Deposit on real estate
—

 
(25,000
)
Capital contributions to unconsolidated joint ventures
(41,491
)
 
(26,040
)
Investments in securities, net
(1,195
)
 
(658
)
Net cash used in investing activities
(539,470
)
 
(425,592
)
 
 
 
 
 
 
 
 
 
 
 
 

6

Table of Contents         

BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the six months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage notes payable
2,300,000

 
—

Repayments of mortgage notes payable
(1,308,708
)
 
(222,535
)
Proceeds from unsecured senior notes
—

 
997,080

Borrowings on unsecured line of credit
430,000

 
—

Repayments of unsecured line of credit
(430,000
)
 
—

Repayments of mezzanine notes payable
(306,000
)
 
—

Repayments of outside members’ notes payable
(70,424
)
 
—

Payments on capital lease obligations
(486
)
 
—

Payments on real estate financing transactions
(1,013
)
 
(4,290
)
Deposit on mortgage note payable interest rate lock
(23,200
)
 
—

Return of deposit on mortgage note payable interest rate lock
23,200

 
—

Deferred financing costs
(43,635
)
 
(8,047
)
Net proceeds from equity transactions
(181
)
 
(666
)
Dividends and distributions
(263,221
)
 
(442,901
)
Contributions from noncontrolling interests in property partnerships
23,496

 
5,040

Distributions to noncontrolling interests in property partnerships
(27,115
)
 
(25,914
)
Net cash provided by financing activities
302,713

 
297,767

Net increase in cash and cash equivalents
135,521

 
456,326

Cash and cash equivalents, beginning of period
356,914

 
723,718

Cash and cash equivalents, end of period
$
492,435

 
$
1,180,044

Supplemental disclosures:
 
 
 
Cash paid for interest
$
388,045

 
$
217,021

Interest capitalized
$
26,628

 
$
19,168

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(86,135
)
 
$
(52,708
)
Additions to real estate included in accounts payable and accrued expenses
$
22,994

 
$
(14,471
)
Real estate acquired through capital lease
$
28,962

 
$
—

Outside members’ notes payable contributed to noncontrolling interests in property partnerships
$
109,576

 
$
—

Dividends and distributions declared but not paid
$
130,432

 
$
113,071

Conversions of noncontrolling interests to stockholders’ equity
$
16,422

 
$
2,664

Issuance of restricted securities to employees
$
35,945

 
$
33,711




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

7

Table of Contents         


BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2017
 
December 31, 2016
 
(in thousands, except for unit amounts)
ASSETS
 
 
 
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,000,820 and $6,760,078 at June 30, 2017 and December 31, 2016, respectively)
$
20,202,321

 
$
19,733,872

Less: accumulated depreciation (amounts related to VIEs of $(799,299) and $(758,640) at June 30, 2017 and December 31, 2016, respectively)
(4,290,112
)
 
(4,136,364
)
Total real estate
15,912,209

 
15,597,508

Cash and cash equivalents (amounts related to VIEs of $322,574 and $253,999 at June 30, 2017 and December 31, 2016, respectively)
492,435

 
356,914

Cash held in escrows (amounts related to VIEs of $4,360 and $4,955 at June 30, 2017 and December 31, 2016, respectively)
47,345

 
63,174

Investments in securities
26,781

 
23,814

Tenant and other receivables (amounts related to VIEs of $17,950 and $23,525 at June 30, 2017 and December 31, 2016, respectively)
88,687

 
92,548

Accrued rental income (amounts related to VIEs of $227,199 and $224,185 at June 30, 2017 and December 31, 2016, respectively)
820,022

 
799,138

Deferred charges, net (amounts related to VIEs of $267,240 and $290,436 at June 30, 2017 and December 31, 2016, respectively)
658,219

 
686,163

Prepaid expenses and other assets (amounts related to VIEs of $41,819 and $42,718 at June 30, 2017 and December 31, 2016, respectively)
93,985

 
129,666

Investments in unconsolidated joint ventures
819,368

 
775,198

Total assets
$
18,959,051

 
$
18,524,123

LIABILITIES AND CAPITAL
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net (amounts related to VIEs of $2,943,890 and $2,018,483 at June 30, 2017 and December 31, 2016, respectively)
$
2,986,283

 
$
2,063,087

Unsecured senior notes, net
7,250,356

 
7,245,953

Unsecured line of credit
—

 
—

Unsecured term loan
—

 
—

Mezzanine notes payable (amounts related to VIEs of $0 and $307,093 at June 30, 2017 and December 31, 2016, respectively)
—

 
307,093

Outside members’ notes payable (amounts related to VIEs of $0 and $180,000 at June 30, 2017 and December 31, 2016, respectively)
—

 
180,000

Accounts payable and accrued expenses (amounts related to VIEs of $116,413 and $110,457 at June 30, 2017 and December 31, 2016, respectively)
303,559

 
298,524

Distributions payable
130,432

 
130,308

Accrued interest payable (amounts related to VIEs of $6,706 and $162,226 at June 30, 2017 and December 31, 2016, respectively)
85,172

 
243,933

Other liabilities (amounts related to VIEs of $159,529 and $175,146 at June 30, 2017 and December 31, 2016, respectively)
452,608

 
450,821

Total liabilities
11,208,410

 
10,919,719

Commitments and contingencies
—

 
—

Noncontrolling interests:
 
 
 
Redeemable partnership units—16,823,685 and 17,079,511 common units and 816,982 and 904,588 long term incentive units outstanding at redemption value at June 30, 2017 and December 31, 2016, respectively
2,170,155

 
2,262,040

Capital:
 
 
 
5.25% Series B cumulative redeemable preferred units, liquidation preference $2,500 per unit, 80,000 units issued and outstanding at June 30, 2017 and December 31, 2016
193,623

 
193,623

Boston Properties Limited Partnership partners’ capital—1,719,482 and 1,717,743 general partner units and 152,588,047 and 152,072,432 limited partner units outstanding at June 30, 2017 and December 31, 2016, respectively
3,732,882

 
3,618,094

Noncontrolling interests in property partnerships
1,653,981

 
1,530,647

Total capital
5,580,486

 
5,342,364

Total liabilities and capital
$
18,959,051

 
$
18,524,123

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

8

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three months ended June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for per unit amounts)
Revenue
 
 
 
 
 
 
 
Rental
 
 
 
 
 
 
 
Base rent
$
520,542

 
$
493,386

 
$
1,024,104

 
$
1,029,514

Recoveries from tenants
89,163

 
85,706

 
178,327

 
175,292

Parking and other
26,462

 
26,113

 
52,072

 
50,938

Total rental revenue
636,167

 
605,205

 
1,254,503

 
1,255,744

Hotel revenue
13,375

 
12,808

 
20,795

 
21,565

Development and management services
7,365

 
5,533

 
13,837

 
12,222

Total revenue
656,907

 
623,546

 
1,289,135

 
1,289,531

Expenses
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Rental
230,454

 
217,938

 
458,741

 
437,110

Hotel
8,404

 
7,978

 
15,495

 
15,612

General and administrative
27,141

 
25,418

 
58,527

 
54,771

Transaction costs
299

 
913

 
333

 
938

Depreciation and amortization
149,834

 
151,191

 
306,892

 
308,652

Total expenses
416,132

 
403,438

 
839,988

 
817,083

Operating income
240,775

 
220,108

 
449,147

 
472,448

Other income (expense)
 
 
 
 
 
 
 
Income from unconsolidated joint ventures
3,108

 
2,234

 
6,192

 
4,025

Interest and other income
1,504

 
1,524

 
2,118

 
3,029

Gains from investments in securities
730

 
478

 
1,772

 
737

Gains from early extinguishments of debt
14,354

 
—

 
14,354

 
—

Interest expense
(95,143
)
 
(105,003
)
 
(190,677
)
 
(210,312
)
Income before gains on sales of real estate
165,328

 
119,341

 
282,906

 
269,927

Gains on sales of real estate
4,344

 
—

 
4,477

 
69,792

Net income
169,672

 
119,341

 
287,383

 
339,719

Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
Noncontrolling interests in property partnerships
(15,203
)
 
(6,814
)
 
(19,627
)
 
(17,278
)
Net income attributable to Boston Properties Limited Partnership
154,469

 
112,527

 
267,756

 
322,441

Preferred distributions
(2,625
)
 
(2,589
)
 
(5,250
)
 
(5,207
)
Net income attributable to Boston Properties Limited Partnership common unitholders
$
151,844

 
$
109,938

 
$
262,506

 
$
317,234

Basic earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.88

 
$
0.64

 
$
1.53

 
$
1.85

Weighted average number of common units outstanding
171,675

 
171,370

 
171,628

 
171,339

Diluted earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
 
 
 
 
 
 
 
Net income
$
0.88

 
$
0.64

 
$
1.53

 
$
1.85

Weighted average number of common and common equivalent units outstanding
171,829

 
171,568

 
171,882

 
171,584

 
 
 
 
 
 
 
 
Distributions per common unit
$
0.75

 
$
0.65

 
$
1.50

 
$
1.30

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

9

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income
$
169,672

 
$
119,341

 
$
287,383

 
$
339,719

Other comprehensive loss:
 
 
 
 
 
 
 
Effective portion of interest rate contracts
(6,313
)
 
(32,351
)
 
(6,133
)
 
(90,997
)
Amortization of interest rate contracts (1)
1,397

 
628

 
2,703

 
1,255

Other comprehensive loss
(4,916
)
 
(31,723
)
 
(3,430
)
 
(89,742
)
Comprehensive income
164,756

 
87,618

 
283,953

 
249,977

Comprehensive income attributable to noncontrolling interests
(12,715
)
 
(793
)
 
(17,211
)
 
(731
)
Comprehensive income attributable to Boston Properties Limited Partnership
$
152,041

 
$
86,825

 
$
266,742

 
$
249,246

_______________
(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.

10

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(Unaudited and in thousands)
 
 
Total Partners’ Capital
Balance at December 31, 2016
$
3,811,717

Contributions
4,682

Net income allocable to general and limited partner units
240,823

Distributions
(236,368
)
Accumulated other comprehensive loss
(910
)
Cumulative effect of a change in accounting principle
(272
)
Unearned compensation
(2,329
)
Conversion of redeemable partnership units
16,422

Adjustment to reflect redeemable partnership units at redemption value
92,740

Balance at June 30, 2017
$
3,926,505

 
 
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
























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


11

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the six months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
287,383

 
$
339,719

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
306,892

 
308,652

Non-cash compensation expense
19,237

 
17,647

Income from unconsolidated joint ventures
(6,192
)
 
(4,025
)
Distributions of net cash flow from operations of unconsolidated joint ventures
2,905

 
11,399

Gains from investments in securities
(1,772
)
 
(737
)
Gains from early extinguishments of debt
(14,444
)
 
—

Non-cash portion of interest expense
(11,979
)
 
(19,330
)
Gains on sales of real estate
(4,477
)
 
(69,792
)
Change in assets and liabilities:
 
 
 
Cash held in escrows
7,531

 
632

Tenant and other receivables, net
2,033

 
13,963

Accrued rental income, net
(19,348
)
 
(5,294
)
Prepaid expenses and other assets
36,223

 
62,752

Accounts payable and accrued expenses
(2,608
)
 
9,236

Accrued interest payable
(158,761
)
 
31,789

Other liabilities
(33,093
)
 
(71,805
)
Tenant leasing costs
(37,252
)
 
(40,655
)
Total adjustments
84,895

 
244,432

Net cash provided by operating activities
372,278

 
584,151

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(15,953
)
 
(78,000
)
Construction in progress
(297,747
)
 
(242,944
)
Building and other capital improvements
(100,808
)
 
(48,306
)
Tenant improvements
(107,533
)
 
(116,935
)
Proceeds from sales of real estate
17,049

 
104,816

Proceeds from sales of real estate placed in escrow
(16,640
)
 
(104,696
)
Proceeds from sales of real estate released from escrow
15,844

 
104,696

Cash released from escrow for investing activities
9,004

 
6,694

Cash released from escrow for land sale contracts
—

 
781

Deposit on real estate
—

 
(25,000
)
Capital contributions to unconsolidated joint ventures
(41,491
)
 
(26,040
)
Investments in securities, net
(1,195
)
 
(658
)
Net cash used in investing activities
(539,470
)
 
(425,592
)
 
 
 
 
 
 
 
 

12

Table of Contents         

BOSTON PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
For the six months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage notes payable
2,300,000

 
—

Repayments of mortgage notes payable
(1,308,708
)
 
(222,535
)
Proceeds from unsecured senior notes
—

 
997,080

Borrowings on unsecured line of credit
430,000

 
—

Repayments of unsecured line of credit
(430,000
)
 
—

Repayments of mezzanine notes payable
(306,000
)
 
—

Repayments of outside members’ notes payable
(70,424
)
 
—

Payments on capital lease obligations
(486
)
 
—

Payments on real estate financing transaction
(1,013
)
 
(4,290
)
Deposit on mortgage note payable interest rate lock
(23,200
)
 
—

Return of deposit on mortgage note payable interest rate lock
23,200

 
—

Deferred financing costs
(43,635
)
 
(8,047
)
Net proceeds from equity transactions
(181
)
 
(666
)
Distributions
(263,221
)
 
(442,901
)
Contributions from noncontrolling interests in property partnerships
23,496

 
5,040

Distributions to noncontrolling interests in property partnerships
(27,115
)
 
(25,914
)
Net cash provided by financing activities
302,713

 
297,767

Net increase in cash and cash equivalents
135,521

 
456,326

Cash and cash equivalents, beginning of period
356,914

 
723,718

Cash and cash equivalents, end of period
$
492,435

 
$
1,180,044

Supplemental disclosures:
 
 
 
Cash paid for interest
$
388,045

 
$
217,021

Interest capitalized
$
26,628

 
$
19,168

Non-cash investing and financing activities:
 
 
 
Write-off of fully depreciated real estate
$
(85,525
)
 
$
(52,708
)
Additions to real estate included in accounts payable and accrued expenses
$
22,994

 
$
(14,471
)
Real estate acquired through capital lease
$
28,962

 
$
—

Outside members’ notes payable contributed to noncontrolling interests in property partnerships
$
109,576

 
$
—

Distributions declared but not paid
$
130,432

 
$
113,071

Conversions of redeemable partnership units to partners’ capital
$
16,422

 
$
2,664

Issuance of restricted securities to employees
$
35,945

 
$
33,711











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

13

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 June 30, 2017 owned an approximate 89.7% (89.5% at December 31, 2016) 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, 2016 and 2017 multi-year, long-term incentive program awards (also referred to 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, 2013 MYLTIP Units and 2014 MYLTIP Units expired on February 6, 2015, February 4, 2016 and February 3, 2017, 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 2015, 2016 and 2017 MYLTIP Units differ from other LTIP Units granted to employees (including the 2012 OPP Units, the 2013 MYLTIP Units and the 2014 MYLTIP Units, which have been earned). Therefore, unless specifically noted otherwise, all references to LTIP Units exclude the 2015, 2016 and 2017 MYLTIP Units. LTIP Units (including the 2012 OPP Units, the 2013 MYLTIP Units and the 2014 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 8, 9 and 11).
At June 30, 2017, 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 the 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 9).
Properties
At June 30, 2017, the Company owned or had interests in a portfolio of 175 commercial real estate properties (the “Properties”) aggregating approximately 48.4 million net rentable square feet of primarily Class A office properties, including nine properties under construction/redevelopment totaling approximately 4.7 million net rentable square feet. At June 30, 2017, the Properties consisted of:

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

14

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, 2016.
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. To the extent that there are outstanding borrowings under the unsecured line of credit, the Company utilizes a discounted cash flow methodology in order to estimate the fair value. To the extent that credit spreads have changed since the origination, the net present value of the difference between future contractual interest payments and future interest payments based on the Company’s estimate of a current market rate would represent the difference between the book value and the fair value. The Company’s estimate of a current market rate is based upon the rate, considering current market conditions and the Company’s specific credit profile, at which it estimates it could obtain similar borrowings. To the extent there are outstanding borrowings, this current market rate is internally estimated and therefore would be primarily based upon a level 3 input.
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 June 30, 2017 and December 31, 2016 (in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
 
 
Estimated
Fair Value
 
Carrying
Amount
 
 
 
Estimated
Fair Value
Mortgage notes payable, net
$
2,986,283

 
  
 
$
3,056,829

 
$
2,063,087

 
  
 
$
2,092,237

Mezzanine notes payable
—

 
 
 
—

 
307,093

 
 
 
308,344

Unsecured senior notes, net
7,250,356

 
  
 
7,516,131

 
7,245,953

 
  
 
7,428,077

Total
$
10,236,639

 
  
 
$
10,572,960

 
$
9,616,133

 
  
 
$
9,828,658

    
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 Accounting Standards Codification (“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. 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)
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, 2017, 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), Times 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 because 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 8). 
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 Dock 72 at the Brooklyn Navy Yard, is a VIE.  The Company does not consolidate this entity because 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.
Recent Accounting Pronouncements
In May 2014, the Financial Standards Accounting Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts 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

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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 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. 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 will adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. The Company’s project team has completed the compilation of the inventory of the sources of revenue that will be impacted by the adoption of ASU 2014-09. The Company expects that executory costs and certain non-lease components of revenue from leases (upon the adoption of ASU 2016-02), tenant service revenue, development and management services revenue, parking revenue and gains on sales of real estate may be impacted by the adoption of ASU 2014-09, although the Company anticipates that the impact will be to the pattern of revenue recognition and not the total revenue recognized over time. The Company is making progress in evaluating the significance of the impact on the changes in the recognition pattern of its revenue and is still completing its assessment of the overall impact of adopting ASU 2014-09.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“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 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 has commenced the process of adopting ASU 2016-02 by forming a project team and beginning to compile an inventory of its leases that will be impacted by the adoption of ASU 2016-02. The Company is still assessing the impact of adopting ASU 2016-02. However, the Company expects that its operating leases where it is the lessor will be accounted for on its balance sheet similar to its current accounting with the underlying leased asset recognized as real estate. The Company expects that executory costs and certain other non-lease components will need to be accounted for separately from the lease component of the lease with the lease component continuing to be recognized on a straight-line basis over the lease term and the executory costs and certain other non-lease components being accounted for under the new revenue recognition guidance in ASU 2014-09. For leases in which the Company is the lessee, primarily consisting of ground leases, the Company expects to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease. In addition, under ASU 2016-02, lessors may only capitalize incremental direct leasing costs. As a result, the Company expects that it will no longer be able to capitalize its internal leasing wages and instead will expense these costs as incurred.
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. On January 1, 2017, the Company adopted ASU 2016-09 and elected to make an accounting policy change to its method of accounting for forfeitures on its awards of stock-based compensation including the issuance of shares of restricted common stock, LTIP Units and MYLTIP Units. The Company now accounts for forfeitures as they occur instead of estimating the number of forfeitures upon the issuance of such awards of stock-based compensation. The adoption resulted in the Company recognizing cumulative effect of a change in accounting principle adjustments to its consolidated balance sheets totaling approximately $0.3 million to Dividends in Excess of Earnings and Partners’ Capital for Boston Properties, Inc. and Boston Properties Limited Partnership, respectively, and approximately $1.8 million to noncontrolling interests - common units of Boston Properties Limited Partnership and noncontrolling interests - redeemable partnership units for Boston Properties, Inc. and Boston Properties Limited Partnership, respectively.

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In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements and shall be applied on a prospective basis. The Company early adopted ASU 2017-01 during the first quarter of 2017. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 updates the definition of an “in substance nonfinancial asset” and clarifies the derecognition guidance for nonfinancial assets to conform with the new revenue recognition standard. The effective date and transition methods of ASU 2017-05 are aligned with ASU 2014-09 described above and are effective for the first interim period within annual reporting periods beginning after December 15, 2017. The Company is currently assessing the potential impact that the adoption of ASU 2017-05 will have on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 is intended to provide clarity and reduce (1) diversity in practice, (2) cost and (3) complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for public entities for fiscal years and interim periods beginning after December 15, 2017. The Company is currently assessing the potential impact that the adoption of ASU 2017-09 will have on its consolidated financial statements.
3. Real Estate
Boston Properties, Inc.
Real estate consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30, 2017
 
December 31, 2016
Land
$
4,880,337

 
$
4,879,020

Land held for future development (1)
250,451

 
246,656

Buildings and improvements
11,960,865

 
11,890,626

Tenant improvements
2,136,739

 
2,060,315

Furniture, fixtures and equipment
37,136

 
32,687

Construction in progress
1,348,838

 
1,037,959

Total
20,614,366

 
20,147,263

Less: Accumulated depreciation
(4,379,446
)
 
(4,222,235
)
 
$
16,234,920

 
$
15,925,028

_______________
(1)
Includes pre-development costs.

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Boston Properties Limited Partnership
Real estate consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30, 2017
 
December 31, 2016
Land
$
4,775,961

 
$
4,774,460

Land held for future development (1)
250,451

 
246,656

Buildings and improvements
11,653,196

 
11,581,795

Tenant improvements
2,136,739

 
2,060,315

Furniture, fixtures and equipment
37,136

 
32,687

Construction in progress
1,348,838

 
1,037,959

Total
20,202,321

 
19,733,872

Less: Accumulated depreciation
(4,290,112
)
 
(4,136,364
)
 
$
15,912,209

 
$
15,597,508

_______________
(1)
Includes pre-development costs.
Development
On April 6, 2017, the Company commenced the development of 145 Broadway, a build-to-suit Class A office project with approximately 485,000 net rentable square feet located in Cambridge, Massachusetts.
On May 27, 2017, the Company completed and fully placed in-service Reservoir Place North, a Class A office redevelopment project with approximately 73,000 net rentable square feet located in Waltham, Massachusetts.
Ground Lease
On June 29, 2017, the Company executed a 99-year ground lease (including extension options), with the right to purchase prior to 10 years after stabilization of the development project as defined in the lease, land adjacent to the MacArthur BART station located in Oakland, California. The Company has commenced development of a 402-unit residential building and supporting retail space on the site. The Company’s option to purchase the land, is considered a bargain purchase option and as a result, the Company has concluded that the lease should be accounted for as a capital lease. At the inception of the ground lease, the Company recorded an approximately $29.0 million capital lease asset and liability, which is reflected within Construction in Progress and Other Liabilities on the Company’s Consolidated Balance Sheets. Capital lease assets and liabilities are accounted for at the lower of fair market value or the present value of future minimum lease payments. This capital lease is for land only, therefore, the Company will not be depreciating the capital lease asset, because land is assumed to have an indefinite life.
As of June 29, 2017, future minimum lease payments related to this capital lease are as follows (in thousands):
Period from June 29, 2017 through December 31, 2017
$
5

2018
10

2019
10

2020
10

2021
13

Thereafter
38,778

Total expected minimum obligations
38,826

Interest portion
(9,864
)
Present value of net expected minimum payments
$
28,962

Acquisitions
On May 15, 2017, the Company acquired 103 Carnegie Center located in Princeton, New Jersey for a purchase price of approximately $15.8 million in cash. 103 Carnegie Center is an approximately 96,000 net rentable square foot Class A office property. The following table summarizes the allocation of the aggregate purchase price, including transaction costs, of 103 Carnegie Center at the date of acquisition (in thousands). 

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Land
$
2,890

Building and improvements
11,229

Tenant improvements
871

In-place lease intangibles
2,389

Below-market lease intangible
(1,426
)
Net assets acquired
$
15,953

The following table summarizes the estimated annual amortization of the acquired below-market lease intangibles and the acquired in-place lease intangibles for 103 Carnegie Center for the remainder of 2017 and each of the next four succeeding fiscal years (in thousands).
 
Acquired In-Place
Lease Intangibles  
 
Acquired Below-
Market Lease Intangibles  
Period from May 15, 2017 through December 31, 2017
$
660

 
$
(248
)
2018
590

 
(363
)
2019
367

 
(337
)
2020
243

 
(308
)
2021
96

 
(105
)

103 Carnegie Center contributed approximately $0.4 million of revenue and approximately $0.2 million of earnings to the Company for the period from May 15, 2017 through June 30, 2017.
Dispositions
On April 19, 2017, the Company completed the sale of an approximately 9.5-acre parcel of land at 30 Shattuck Road located in Andover, Massachusetts for a gross sale price of $5.0 million. Net cash proceeds totaled approximately $5.0 million, resulting in a gain on sale of real estate totaling approximately $3.7 million.
On June 13, 2017, the Company completed the sale of 40 Shattuck Road located in Andover, Massachusetts for a gross sale price of $12.0 million. Net cash proceeds totaled approximately $11.9 million, resulting in a gain on sale of real estate totaling approximately $28,000 for Boston Properties, Inc. and approximately $0.6 million for Boston Properties Limited Partnership. 40 Shattuck Road is an approximately 122,000 net rentable square foot Class A office property. 40 Shattuck Road contributed approximately $19,000 and $(28,000) of net income (loss) to the Company for the period from April 1, 2017 through June 13, 2017 and the period from January 1, 2017 through June 13, 2017, respectively, and contributed approximately $(93,000) and $15,000 of net income (loss) to the Company for the three and six months ended June 30, 2016, respectively.

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4. Investments in Unconsolidated Joint Ventures
The investments in unconsolidated joint ventures consist of the following at June 30, 2017 and December 31, 2016:
 
 
 
 
 
Nominal %
Ownership
 
Carrying Value of Investment (1)
Entity
 
Properties
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
(in thousands)
Square 407 Limited Partnership
 
Market Square North
 
50.0
%
 
$
(7,490
)
 
$
(8,134
)
The Metropolitan Square Associates LLC
 
Metropolitan Square
 
20.0
%
 
2,496

 
2,004