Edgar Filing: BOSTON PROPERTIES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended March 31, 2018



¨	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, 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 ¨

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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	154,363,964
(Registrant)	(Class)	(Outstanding on May 2, 2018)

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2018 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. 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. Therefore, 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.

As of March 31, 2018, BXP owned an approximate 89.6% ownership interest in BPLP. The remaining approximate 10.4% 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 and/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 a 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 interests in 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

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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.

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 $314.3 million, or 1.9% at March 31, 2018 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 7. Noncontrolling Interests;

•Note 8. Stockholders’ Equity / Partners’ Capital;

•Note 9. Earnings Per Share / Common Unit; and

•Note 11. Segment Information


•	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 March 31, 2018

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		Page

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

Boston Properties, Inc.
	a) Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	2
	b) Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	3
	c) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017	4
	d) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2018 and 2017	5
	e) Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	6

Boston Properties Limited Partnership
	a) Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	8
	b) Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	9
	c) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017	10
	d) Consolidated Statements of Partners’ Capital for the three months ended March 31, 2018 and 2017	11
	e) Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	12

Boston Properties, Inc. and Boston Properties Limited Partnership
	Notes to the Consolidated Financial Statements	14

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	68
ITEM 4.	Controls and Procedures	68

PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	70
ITEM 1A.	Risk Factors	70
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
ITEM 3.	Defaults Upon Senior Securities	71
ITEM 4.	Mine Safety Disclosures	71
ITEM 5.	Other Information	71
ITEM 6.	Exhibits	72

SIGNATURES		73

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PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements.

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BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31, 2018			December 31, 2017
	(in thousands, except for share and par value amounts)
ASSETS
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,278,298 and $7,172,718 at March 31, 2018 and December 31, 2017, respectively)	$	21,316,644		$	21,096,642
Less: accumulated depreciation (amounts related to VIEs of $(883,969) and $(854,172) at March 31, 2018 and December 31, 2017, respectively)	(4,674,838		)	(4,589,634		)
Total real estate	16,641,806			16,507,008
Cash and cash equivalents (amounts related to VIEs of $267,842 and $304,955 at March 31, 2018 and December 31, 2017, respectively)	294,571			434,767
Cash held in escrows (amounts related to VIEs of $6,141 and $6,135 at March 31, 2018 and December 31, 2017, respectively)	160,558			70,602
Investments in securities	29,353			29,161
Tenant and other receivables (amounts related to VIEs of $20,023 and $27,057 at March 31, 2018 and December 31, 2017, respectively)	73,401			92,186
Accrued rental income (amounts related to VIEs of $258,593 and $242,589 at March 31, 2018 and December 31, 2017, respectively)	888,907			861,575
Deferred charges, net (amounts related to VIEs of $272,475 and $281,678 at March 31, 2018 and December 31, 2017, respectively)	681,369			679,038
Prepaid expenses and other assets (amounts related to VIEs of $61,467 and $33,666 at March 31, 2018 and December 31, 2017, respectively)	147,256			77,971
Investments in unconsolidated joint ventures	666,718			619,925
Total assets	$	19,583,939		$	19,372,233
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net (amounts related to VIEs of $2,936,778 and $2,939,183 at March 31, 2018 and December 31, 2017, respectively)	$	2,974,930		$	2,979,281
Unsecured senior notes, net	7,249,383			7,247,330
Unsecured line of credit	115,000			45,000
Unsecured term loan	—			—
Accounts payable and accrued expenses (amounts related to VIEs of $126,300 and $106,683 at March 31, 2018 and December 31, 2017, respectively)	355,002			331,500
Dividends and distributions payable	139,218			139,040
Accrued interest payable (amounts related to VIEs of $6,897 and $6,907 at March 31, 2018 and December 31, 2017, respectively)	96,176			83,646
Other liabilities (amounts related to VIEs of $187,195 and $164,806 at March 31, 2018 and December 31, 2017, respectively)	470,140			443,980
Total liabilities	11,399,849			11,269,777
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 March 31, 2018 and December 31, 2017	200,000			200,000
Common stock, $0.01 par value, 250,000,000 shares authorized, 154,441,203 and 154,404,186 issued and 154,362,303 and 154,325,286 outstanding at March 31, 2018 and December 31, 2017, respectively	1,544			1,543
Additional paid-in capital	6,384,147			6,377,908
Dividends in excess of earnings	(654,879		)	(712,343		)
Treasury common stock at cost, 78,900 shares at March 31, 2018 and December 31, 2017	(2,722		)	(2,722		)
Accumulated other comprehensive loss	(49,062		)	(50,429		)
Total stockholders’ equity attributable to Boston Properties, Inc.	5,879,028			5,813,957
Noncontrolling interests:
Common units of Boston Properties Limited Partnership	619,347			604,739
Property partnerships	1,685,715			1,683,760
Total equity	8,184,090			8,102,456
Total liabilities and equity	$	19,583,939		$	19,372,233

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

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended March 31,
	2018			2017
	(in thousands, except for per share amounts)
Revenue
Rental
Base rent	$	519,507		$	503,562
Recoveries from tenants	95,118			89,164
Parking and other	26,134			25,610
Total rental revenue	640,759			618,336
Hotel revenue	9,102			7,420
Development and management services	8,405			6,472
Direct reimbursements of payroll and related costs from management services contracts	2,885			—
Total revenue	661,151			632,228
Expenses
Operating
Rental	240,329			228,287
Hotel	8,073			7,091
General and administrative	35,894			31,386
Payroll and related costs from management services contracts	2,885			—
Transaction costs	21			34
Depreciation and amortization	165,797			159,205
Total expenses	452,999			426,003
Operating income	208,152			206,225
Other income (expense)
Income from unconsolidated joint ventures	461			3,084
Interest and other income	1,648			614
Gains (losses) from investments in securities	(126		)	1,042
Interest expense	(90,220		)	(95,534		)
Income before gains on sales of real estate	119,915			115,431
Gains on sales of real estate	96,397			133
Net income	216,312			115,564
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships	(17,234		)	(4,424		)
Noncontrolling interest—common units of Boston Properties Limited Partnership	(20,432		)	(11,432		)
Net income attributable to Boston Properties, Inc.	178,646			99,708
Preferred dividends	(2,625		)	(2,625		)
Net income attributable to Boston Properties, Inc. common shareholders	$	176,021		$	97,083
Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	1.14		$	0.63
Weighted average number of common shares outstanding	154,385			153,860
Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	1.14		$	0.63
Weighted average number of common and common equivalent shares outstanding	154,705			154,214

Dividends per common share	$	0.80		$	0.75

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

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended March 31,
	2018			2017
	(in thousands)
Net income	$	216,312		$	115,564
Other comprehensive income:
Effective portion of interest rate contracts	—			180
Amortization of interest rate contracts (1)	1,666			1,306
Other comprehensive income	1,666			1,486
Comprehensive income	217,978			117,050
Net income attributable to noncontrolling interests	(37,666		)	(15,856		)
Other comprehensive income attributable to noncontrolling interests	(299		)	(218		)
Comprehensive income attributable to Boston Properties, Inc.	$	180,013		$	100,976

_______________

(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.

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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		Preferred Stock		Additional Paid-in Capital			Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
Equity, December 31, 2017	154,325	$	1,543	$	200,000	$	6,377,908		$	(712,343	)	$	(2,722	)	$	(50,429	)	$	2,288,499		$	8,102,456
Cumulative effect of a change in accounting principle	—	—		—		—			4,933			—			—			563			5,496
Redemption of operating partnership units to common stock	24	1		—		831			—			—			—			(832		)	—
Allocated net income for the year	—	—		—		—			178,646			—			—			37,666			216,312
Dividends/distributions declared	—	—		—		—			(126,115		)	—			—			(14,351		)	(140,466		)
Shares issued pursuant to stock purchase plan	3	—		—		429			—			—			—			—			429
Net activity from stock option and incentive plan	10	—		—		(185		)	—			—			—			13,805			13,620
Contributions from noncontrolling interests in property partnerships	—	—		—		—			—			—			—			15,267			15,267
Distributions to noncontrolling interests in property partnerships	—	—		—		—			—			—			—			(30,690		)	(30,690		)
Amortization of interest rate contracts	—	—		—		—			—			—			1,367			299			1,666
Reallocation of noncontrolling interest	—	—		—		5,164			—			—			—			(5,164		)	—
Equity, March 31, 2018	154,362	$	1,544	$	200,000	$	6,384,147		$	(654,879	)	$	(2,722	)	$	(49,062	)	$	2,305,062		$	8,184,090

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	23	—		—		793			—			—			—			(793		)	—
Allocated net income for the year	—	—		—		—			99,708			—			—			15,856			115,564
Dividends/distributions declared	—	—		—		—			(118,012		)	—			—			(13,653		)	(131,665		)
Shares issued pursuant to stock purchase plan	3	—		—		373			—			—			—			—			373
Net activity from stock option and incentive plan	33	—		—		996			—			—			—			11,285			12,281
Cumulative effect of a change in accounting principle	—	—		—		—			(272		)	—			—			(1,763		)	(2,035		)
Contributions from noncontrolling interests in property partnerships	—	—		—		—			—			—			—			8,145			8,145
Distributions to noncontrolling interests in property partnerships	—	—		—		—			—			—			—			(13,635		)	(13,635		)
Effective portion of interest rate contracts	—	—		—		—			—			—			97			83			180
Amortization of interest rate contracts	—	—		—		—			—			—			1,171			135			1,306
Reallocation of noncontrolling interest	—	—		—		4,384			—			—			—			(4,384		)	—
Equity, March 31, 2017	153,849	$	1,538	$	200,000	$	6,339,970		$	(712,270	)	$	(2,722	)	$	(50,983	)	$	2,146,905		$	7,922,438

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

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the three months ended March 31,
	2018			2017
	(in thousands)
Cash flows from operating activities:
Net income	$	216,312		$	115,564
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	165,797			159,205
Non-cash compensation expense	14,772			10,802
Income from unconsolidated joint ventures	(461		)	(3,084		)
Distributions of net cash flow from operations of unconsolidated joint ventures	847			1,861
Losses (gains) from investments in securities	126			(1,042		)
Non-cash portion of interest expense	5,299			(7,729		)
Gains on sales of real estate	(96,397		)	(133		)
Change in assets and liabilities:
Tenant and other receivables, net	22,790			19,023
Accrued rental income, net	(26,319		)	(9,158		)
Prepaid expenses and other assets	(66,968		)	(21,197		)
Accounts payable and accrued expenses	(13,913		)	(16,306		)
Accrued interest payable	12,399			22,781
Other liabilities	23,089			(7,104		)
Tenant leasing costs	(31,595		)	(23,631		)
Total adjustments	9,466			124,288
Net cash provided by operating activities	225,778			239,852
Cash flows from investing activities:
Construction in progress	(150,060		)	(154,518		)
Building and other capital improvements	(53,550		)	(43,687		)
Tenant improvements	(47,157		)	(50,810		)
Proceeds from sales of real estate	116,120			133
Capital contributions to unconsolidated joint ventures	(48,823		)	(17,980		)
Investments in securities, net	(318		)	(961		)
Net cash used in investing activities	(183,788		)	(267,823		)

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BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	For the three months ended March 31,
	2018			2017
	(in thousands)
Cash flows from financing activities:
Repayments of mortgage notes payable	(5,333		)	(5,038		)
Borrowings on unsecured line of credit	260,000			175,000
Repayments of unsecured line of credit	(190,000		)	(70,000		)
Payments on capital lease obligations	(3		)	(22		)
Payments on real estate financing transactions	(444		)	(480		)
Deferred financing costs	(16		)	—
Net proceeds from equity transactions	(723		)	(183		)
Dividends and distributions	(140,288		)	(131,555		)
Contributions from noncontrolling interests in property partnerships	15,267			8,145
Distributions to noncontrolling interests in property partnerships	(30,690		)	(13,801		)
Net cash used in financing activities	(92,230		)	(37,934		)
Net decrease in cash and cash equivalents and cash held in escrows	(50,240		)	(65,905		)
Cash and cash equivalents and cash held in escrows, beginning of period	505,369			420,088
Cash and cash equivalents and cash held in escrows, end of period	$	455,129		$	354,183

Reconciliation of cash and cash equivalents and cash held in escrows:
Cash and cash equivalents, beginning of period	$	434,767		$	356,914
Cash held in escrows, beginning of period	70,602			63,174
Cash and cash equivalents and cash held in escrows, beginning of period	$	505,369		$	420,088

Cash and cash equivalents, end of period	$	294,571		$	302,939
Cash held in escrows, end of period	160,558			51,244
Cash and cash equivalents and cash held in escrows, end of period	$	455,129		$	354,183

Supplemental disclosures:
Cash paid for interest	$	89,412		$	92,774
Interest capitalized	$	17,378		$	12,345
Non-cash investing and financing activities:
Write-off of fully depreciated real estate	$	(29,609	)	$	(49,292	)
Additions to real estate included in accounts payable and accrued expenses	$	35,245		$	44,708
Dividends and distributions declared but not paid	$	139,218		$	130,418
Conversions of noncontrolling interests to stockholders’ equity	$	832		$	793
Issuance of restricted securities to employees	$	36,433		$	34,592

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

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BOSTON PROPERTIES LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31, 2018			December 31, 2017
	(in thousands, except for unit amounts)
ASSETS
Real estate, at cost (amounts related to variable interest entities (“VIEs”) of $7,278,298 and $7,172,718 at March 31, 2018 and December 31, 2017, respectively)	$	20,908,406		$	20,685,164
Less: accumulated depreciation (amounts related to VIEs of $(883,969) and $(854,172) at March 31, 2018 and December 31, 2017, respectively)	(4,580,949		)	(4,496,959		)
Total real estate	16,327,457			16,188,205
Cash and cash equivalents (amounts related to VIEs of $267,842 and $304,955 at March 31, 2018 and December 31, 2017, respectively)	294,571			434,767
Cash held in escrows (amounts related to VIEs of $6,141 and $6,135 at March 31, 2018 and December 31, 2017, respectively)	160,558			70,602
Investments in securities	29,353			29,161
Tenant and other receivables (amounts related to VIEs of $20,023 and $27,057 at March 31, 2018 and December 31, 2017, respectively)	73,401			92,186
Accrued rental income (amounts related to VIEs of $258,593 and $242,589 at March 31, 2018 and December 31, 2017, respectively)	888,907			861,575
Deferred charges, net (amounts related to VIEs of $272,475 and $281,678 at March 31, 2018 and December 31, 2017, respectively)	681,369			679,038
Prepaid expenses and other assets (amounts related to VIEs of $61,467 and $33,666 at March 31, 2018 and December 31, 2017, respectively)	147,256			77,971
Investments in unconsolidated joint ventures	666,718			619,925
Total assets	$	19,269,590		$	19,053,430
LIABILITIES AND CAPITAL
Liabilities:
Mortgage notes payable, net (amounts related to VIEs of $2,936,778 and $2,939,183 at March 31, 2018 and December 31, 2017, respectively)	$	2,974,930		$	2,979,281
Unsecured senior notes, net	7,249,383			7,247,330
Unsecured line of credit	115,000			45,000
Unsecured term loan	—			—
Accounts payable and accrued expenses (amounts related to VIEs of $126,300 and $106,683 at March 31, 2018 and December 31, 2017, respectively)	355,002			331,500
Distributions payable	139,218			139,040
Accrued interest payable (amounts related to VIEs of $6,897 and $6,907 at March 31, 2018 and December 31, 2017, respectively)	96,176			83,646
Other liabilities (amounts related to VIEs of $187,195 and $164,806 at March 31, 2018 and December 31, 2017, respectively)	470,140			443,980
Total liabilities	11,399,849			11,269,777
Commitments and contingencies	—			—
Noncontrolling interests:
Redeemable partnership units—16,804,390 and 16,810,378 common units and 1,022,287 and 818,343 long term incentive units outstanding at redemption value at March 31, 2018 and December 31, 2017, respectively	2,196,603			2,292,263
Capital:
5.25% Series B cumulative redeemable preferred units, liquidation preference $2,500 per unit, 80,000 units issued and outstanding at March 31, 2018 and December 31, 2017	193,623			193,623
Boston Properties Limited Partnership partners’ capital—1,721,890 and 1,719,540 general partner units and 152,640,413 and 152,605,746 limited partner units outstanding at March 31, 2018 and December 31, 2017, respectively	3,793,800			3,614,007
Noncontrolling interests in property partnerships	1,685,715			1,683,760
Total capital	5,673,138			5,491,390
Total liabilities and capital	$	19,269,590		$	19,053,430

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

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BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended March 31,
	2018			2017
	(in thousands, except for per unit amounts)
Revenue
Rental
Base rent	$	519,507		$	503,562
Recoveries from tenants	95,118			89,164
Parking and other	26,134			25,610
Total rental revenue	640,759			618,336
Hotel revenue	9,102			7,420
Development and management services	8,405			6,472
Direct reimbursements of payroll and related costs from management services contracts	2,885			—
Total revenue	661,151			632,228
Expenses
Operating
Rental	240,329			228,287
Hotel	8,073			7,091
General and administrative	35,894			31,386
Payroll and related costs from management services contracts	2,885			—
Transaction costs	21			34
Depreciation and amortization	163,853			157,058
Total expenses	451,055			423,856
Operating income	210,096			208,372
Other income (expense)
Income from unconsolidated joint ventures	461			3,084
Interest and other income	1,648			614
Gains (losses) from investments in securities	(126		)	1,042
Interest expense	(90,220		)	(95,534		)
Income before gains on sales of real estate	121,859			117,578
Gains on sales of real estate	98,907			133
Net income	220,766			117,711
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships	(17,234		)	(4,424		)
Net income attributable to Boston Properties Limited Partnership	203,532			113,287
Preferred distributions	(2,625		)	(2,625		)
Net income attributable to Boston Properties Limited Partnership common unitholders	$	200,907		$	110,662
Basic earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
Net income	$	1.17		$	0.64
Weighted average number of common units outstanding	171,867			171,581
Diluted earnings per common unit attributable to Boston Properties Limited Partnership common unitholders:
Net income	$	1.17		$	0.64
Weighted average number of common and common equivalent units outstanding	172,187			171,935

Distributions per common unit	$	0.80		$	0.75

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

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BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended March 31,
	2018			2017
	(in thousands)
Net income	$	220,766		$	117,711
Other comprehensive income:
Effective portion of interest rate contracts	—			180
Amortization of interest rate contracts (1)	1,666			1,306
Other comprehensive income	1,666			1,486
Comprehensive income	222,432			119,197
Comprehensive income attributable to noncontrolling interests	(17,378		)	(4,496		)
Comprehensive income attributable to Boston Properties Limited Partnership	$	205,054		$	114,701

_______________

(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.

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BOSTON PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited and in thousands)



	Total Partners’ Capital
Balance at December 31, 2017	$	3,807,630
Cumulative effect of a change in accounting principle	4,933
Contributions	1,452
Net income allocable to general and limited partner units	183,100
Distributions	(126,115		)
Other comprehensive income	1,367
Unearned compensation	(1,208		)
Conversion of redeemable partnership units	832
Adjustment to reflect redeemable partnership units at redemption value	115,432
Balance at March 31, 2018	$	3,987,423

Balance at December 31, 2016	$	3,811,717
Contributions	4,491
Net income allocable to general and limited partner units	101,855
Distributions	(118,012		)
Other comprehensive income	1,268
Cumulative effect of a change in accounting principle	(272		)
Unearned compensation	(3,122		)
Conversion of redeemable partnership units	793
Adjustment to reflect redeemable partnership units at redemption value	(126,416		)
Balance at March 31, 2017	$	3,672,302

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

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

	For the three months ended March 31,
	2018			2017
	(in thousands)
Cash flows from operating activities:
Net income	$	220,766		$	117,711
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	163,853			157,058
Non-cash compensation expense	14,772			10,802
Income from unconsolidated joint ventures	(461		)	(3,084		)
Distributions of net cash flow from operations of unconsolidated joint ventures	847			1,861
Losses (gains) from investments in securities	126			(1,042		)
Non-cash portion of interest expense	5,299			(7,729		)
Gains on sales of real estate	(98,907		)	(133		)
Change in assets and liabilities:
Tenant and other receivables, net	22,790			19,023
Accrued rental income, net	(26,319		)	(9,158		)
Prepaid expenses and other assets	(66,968		)	(21,197		)
Accounts payable and accrued expenses	(13,913		)	(16,306		)
Accrued interest payable	12,399			22,781
Other liabilities	23,089			(7,104		)
Tenant leasing costs	(31,595		)	(23,631		)
Total adjustments	5,012			122,141
Net cash provided by operating activities	225,778			239,852
Cash flows from investing activities:
Construction in progress	(150,060		)	(154,518		)
Building and other capital improvements	(53,550		)	(43,687		)
Tenant improvements	(47,157		)	(50,810		)
Proceeds from sales of real estate	116,120			133
Capital contributions to unconsolidated joint ventures	(48,823		)	(17,980		)
Investments in securities, net	(318		)	(961		)
Net cash used in investing activities	(183,788		)	(267,823		)

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

	For the three months ended March 31,
	2018			2017
	(in thousands)
Cash flows from financing activities:
Repayments of mortgage notes payable	(5,333		)	(5,038		)
Borrowings on unsecured line of credit	260,000			175,000
Repayments of unsecured line of credit	(190,000		)	(70,000		)
Payments on capital lease obligations	(3		)	(22		)
Payments on real estate financing transaction	(444		)	(480		)
Deferred financing costs	(16		)	—
Net proceeds from equity transactions	(723		)	(183		)
Distributions	(140,288		)	(131,555		)
Contributions from noncontrolling interests in property partnerships	15,267			8,145
Distributions to noncontrolling interests in property partnerships	(30,690		)	(13,801		)
Net cash used in financing activities	(92,230		)	(37,934		)
Net decrease in cash and cash equivalents and cash held in escrows	(50,240		)	(65,905		)
Cash and cash equivalents and cash held in escrows, beginning of period	505,369			420,088
Cash and cash equivalents and cash held in escrows, end of period	$	455,129		$	354,183

Reconciliation of cash and cash equivalents and cash held in escrows:
Cash and cash equivalents, beginning of period	$	434,767		$	356,914
Cash held in escrows, beginning of period	70,602			63,174
Cash and cash equivalents and cash held in escrows, beginning of period	$	505,369		$	420,088

Cash and cash equivalents, end of period	$	294,571		$	302,939
Cash held in escrows, end of period	160,558			51,244
Cash and cash equivalents and cash held in escrows, end of period	$	455,129		$	354,183

Supplemental disclosures:
Cash paid for interest	$	89,412		$	92,774
Interest capitalized	$	17,378		$	12,345
Non-cash investing and financing activities:
Write-off of fully depreciated real estate	$	(29,609	)	$	(49,292	)
Additions to real estate included in accounts payable and accrued expenses	$	35,245		$	44,708
Distributions declared but not paid	$	139,218		$	130,418
Conversions of redeemable partnership units to partners’ capital	$	832		$	793
Issuance of restricted securities to employees	$	36,433		$	34,592

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

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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 March 31, 2018 owned an approximate 89.6% (89.7% at December 31, 2017) 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 the 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, 2017 and 2018 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, 2014 MYLTIP Units and 2015 MYLTIP Units expired on February 6, 2015, February 4, 2016, February 3, 2017 and February 4, 2018, 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 2016, 2017 and 2018 MYLTIP Units differ from other LTIP Units granted to employees (including the 2012 OPP Units, the 2013 MYLTIP Units, the 2014 MYLTIP Units and the 2015 MYLTIP Units, which have been earned). Therefore, unless specifically noted otherwise, all references to LTIP Units exclude the 2016, 2017 and 2018 MYLTIP Units. LTIP Units (including the 2012 OPP Units, the 2013 MYLTIP Units, the 2014 MYLTIP Units and the 2015 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 7, 8 and 10).

At March 31, 2018, 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 8).

Properties

At March 31, 2018, the Company owned or had interests in a portfolio of 179 commercial real estate properties (the “Properties”) aggregating approximately 50.3 million net rentable square feet of primarily Class A office properties, including thirteen properties under construction/redevelopment totaling approximately 6.5 million net rentable square feet. At March 31, 2018, the Properties consisted of:

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•	167 office properties (including nine properties under construction/redevelopment);


•	six residential properties (including four properties under construction);


•	five retail properties and


•	one hotel.

The Company considers Class A office properties to be well-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, 2017.

Fair Value of Financial Instruments

The Company follows the authoritative guidance for fair value measurements when valuing its financial instruments for disclosure purposes. Boston Properties Limited Partnership determines the fair value of its unsecured senior notes using market prices. The inputs used in determining the fair value of Boston Properties Limited Partnership’s unsecured senior notes is categorized at a Level 1 basis (as defined in Accounting Standards Codification ("ASC") 820 "Fair Value Measurements and Disclosures," the accounting standards for Fair Value Measurements and Disclosures) due to the fact that it 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 Boston Properties Limited Partnership'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 estimated and therefore would be primarily based upon a Level 3 input.

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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, unsecured line of credit and unsecured senior notes, net and the Company’s corresponding estimate of fair value as of March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgage notes payable, net	$	2,974,930	$	2,957,054	$	2,979,281	$	3,042,920
Unsecured senior notes, net	7,249,383		7,262,443		7,247,330		7,461,615
Unsecured line of credit	115,000		115,000		45,000		45,000
Total	$	10,339,313	$	10,334,497	$	10,271,611	$	10,549,535

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 nine entities that are VIEs.

Consolidated Variable Interest Entities

As of March 31, 2018, 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) Salesforce Tower, which was partially placed in-service on December 1, 2017.

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 7).

In addition, Boston Properties, Inc.’s only 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.

Variable Interest Entities Not Consolidated

The Company has determined that its 7750 Wisconsin Avenue LLC and Residential Tower Developer LLC joint ventures, which own 7750 Wisconsin Avenue and The Hub on Causeway - Residential, respectively, are VIEs. The Company does not consolidate these entities 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.

New Accounting Pronouncements

New Accounting Pronouncements Adopted

Revenue from Contracts with Customers

In May 2014, the 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, which supersedes 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

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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. The five-step analysis consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. 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 was 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 and notes that lease contracts with customers are a scope exception. ASU 2014-09 was effective for the Company for reporting periods beginning after December 15, 2017.

The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. The Company applied the guidance only to contracts that were not completed as of January 1, 2018. The Company does not have material contract assets and liabilities within the scope of ASC 606. The adoption of ASU 2014-09 resulted in a change to the timing pattern of revenue recognized, but not the total revenue recognized over time for certain of the Company’s development services contracts. As a result, the modified retrospective approach resulted in the Company recognizing on January 1, 2018 the cumulative effect of adopting ASU 2014-09 aggregating approximately $4.9 million to Dividends in Excess of Earnings of Boston Properties, Inc. and Partners’ Capital of Boston Properties Limited Partnership and approximately $0.6 million to Noncontrolling Interests - Common Units of Boston Properties, Inc. and Noncontrolling Interests - Redeemable Partnership Units of Boston Properties Limited Partnership on the corresponding Consolidated Balance Sheets.

The Company disaggregates its revenue by source within its Consolidated Statements of Operations. As an owner and operator of real estate, the Company derives the majority of its revenue from leasing space to tenants at its properties. As a result, the majority of the Company’s revenue is accounted for pursuant to ASC 840 “Leases” (“ASC 840”) and is reflected within Base Rent in the Consolidated Statements of Operations. In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recognized under the guidance within ASC 840 until the adoption of ASC 842 "Leases" in 2019 at which time it may fall within the guidance under ASC 606 pending a final determination from the FASB.

The Company also earns revenue from the following sources; parking and other revenue, hotel revenue and development and management services revenue.

Parking and other revenue is derived primarily from monthly and transient daily parking. In addition, the Company has certain lease arrangements for parking accounted for under the guidance in ASC 840. The monthly and transient daily parking revenue falls within the scope of ASC 606 and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.

Hotel revenue is derived from room rentals and other sources such as charges to guests for telephone service, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenue also falls within the scope of ASC 606 and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.

Development and management services revenue is earned from unconsolidated joint venture entities and third party property owners. The Company determined that the performance obligations associated with its development services contracts are satisfied over time and that the Company would recognize its development services revenue under the output method evenly over time from the development commencement date through the substantial completion date of the development management services project due to the stand-ready nature of the contracts. Significant judgments impacting the amount and timing of revenue recognized from the Company's development services contracts include estimates of total development project costs from which the fees are typically derived and estimates of the period of time until substantial completion of the development project, the period of time over which the development services are required to be performed. As a result, the pattern of

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revenue recognized over time under ASC 606 differs from the Company’s previous accounting. The Company recognizes development fees earned from unconsolidated joint venture projects equal to its cost plus profit to the extent of the third party partners’ ownership interest. Property management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, because such fees are contingent upon the collection of rents. The revenue recognized under property management services contracts is recognized consistent with the Company's previous accounting.

ASU 2014-09 also updates the principal versus agent considerations and as a result the Company determined that amounts reimbursed for payroll and related costs received from unconsolidated joint venture entities and third party property owners in connection with management services contracts should be reflected on a gross basis instead of on a net basis as the Company has determined that it is the principal under these arrangements. During the three months ended March 31, 2018, the Company recognized approximately $2.9 million of expenses consisting of payroll and related costs from management services contracts and recognized corresponding revenue of approximately $2.9 million reflecting the direct reimbursements of such costs from the unconsolidated joint venture entities and third party property owners.

Statement of Cash Flows

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 FASB 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 was 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), and was required to be applied retrospectively to all periods presented. The Company adopted ASU 2016-15 effective January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated financial statements. The adoption of ASU 2016-15 will result in the retrospective classification of debt prepayment costs as a component of financing activities instead of as a component of operating activities in the Company's Consolidated Statements of Cash Flows.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-18”). ASU 2016-18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 also requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalents balances are required to disclose the nature of the restrictions. ASU 2016-18 was effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and is required to be applied retrospectively to all periods presented. The Company adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated financial statements. The retrospective adoption of ASU 2016-18 resulted in a decrease to net cash provided by operating activities totaling approximately $6.7 million, an increase to net cash used in investing activities totaling approximately $5.2 million and a corresponding increase to the net decrease in cash and cash equivalents and cash held in escrows totaling approximately $11.9 million from amounts previously reported for the three months ended March 31, 2017. Cash held in escrows include amounts established pursuant to various agreements for security deposits, property taxes, insurance and other costs. Cash held in escrows also include cash held by qualified intermediaries for possible investments in like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code in connection with sales of the Company’s properties.

Sales of Real Estate

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 were effective for the first interim period within annual reporting periods beginning

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after December 15, 2017. The Company adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2017-05 did not have a material impact on the Company's consolidated financial statements. See also Note 3.

Stock Compensation

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 was effective for public entities for fiscal years and interim periods beginning after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 was issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 also makes certain targeted improvements to simplify the application of the hedge accounting guidance. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted ASU 2017-12 effective January 1, 2018. The adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements. As of March 31, 2018, the Company does not have any outstanding hedges, but continues to reclassify into earnings as an increase primarily to interest expense approximately $1.7 million per quarter relating to previously settled interest rate contracts.

New Accounting Pronouncements Issued but not yet Adopted

Leases

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 will adopt ASU 2016-02 effective January 1, 2019 using the modified retrospective approach. The Company is in the process of evaluating whether it will elect to apply the practical expedients. The Company is in the process of adopting ASU 2016-02, with its project team compiling an inventory of its leases that will be impacted by the adoption of ASU 2016-02. The Company continues to assess the impact of adopting ASU 2016-02. However, the Company will account for operating leases under which it is the lessor on its balance sheet in a manner similar to its current accounting with the underlying leased asset recognized as real estate. In January 2018, the FASB issued a proposed ASU that would allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. If issued, this practical expedient will allow lessors to elect a combined single lease component presentation if (i) the timing and pattern of the revenue recognition of the combined single lease component is the same, and (ii) the related lease component and, the combined single lease component would be classified as an operating lease. If the practical expedient in the proposed ASU is issued, it could allow for tenant recoveries that qualify as non-lease components to be presented under a single lease component presentation. However, without the proposed practical expedient, tenant recoveries would be separated into lease and non-lease components. For leases in which the Company is the lessee, primarily consisting of ground leases, the Company will 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 over the term of the lease. In addition, under ASU 2016-02, lessors will only capitalize incremental direct leasing costs. As a result, the Company will no longer be able to capitalize legal costs and internal leasing wages and instead will be required to expense these and other non-incremental

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costs as incurred. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for ASU 2018-01 are the same as the effective date and transition requirements in ASU 2016-02.

3. Real Estate

Boston Properties, Inc.

Real estate consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018			December 31, 2017
Land	$	5,105,376		$	5,080,679
Land held for future development (1)	204,506			204,925
Buildings and improvements	12,435,573			12,284,164
Tenant improvements	2,266,796			2,219,608
Furniture, fixtures and equipment	41,507			37,928
Construction in progress	1,262,886			1,269,338
Total	21,316,644			21,096,642
Less: Accumulated depreciation	(4,674,838		)	(4,589,634		)
	$	16,641,806		$	16,507,008

_______________


(1)	Includes pre-development costs.

Boston Properties Limited Partnership

Real estate consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018			December 31, 2017
Land	$	5,001,810		$	4,976,303
Land held for future development (1)	204,506			204,925
Buildings and improvements	12,130,901			11,977,062
Tenant improvements	2,266,796			2,219,608
Furniture, fixtures and equipment	41,507			37,928
Construction in progress	1,262,886			1,269,338
Total	20,908,406			20,685,164
Less: Accumulated depreciation	(4,580,949		)	(4,496,959		)
	$	16,327,457		$	16,188,205

_______________


(1)	Includes pre-development costs.

Development

On January 24, 2018, the Company entered into a lease agreement with Leidos for a build-to-suit project with approximately 276,000 net rentable square feet of Class A office space at the Company's 17Fifty Presidents Street development project located in Reston, Virginia. Concurrently with the execution of the lease, the Company commenced development of the project and expects the building to be completed and available for occupancy during the second quarter of 2020.

On January 31, 2018, the Company partially placed in-service its Signature at Reston development project comprised of 508 apartment units and retail space aggregating approximately 515,000 square feet located in Reston, Virginia.

On February 23, 2018, the Company entered into a lease agreement with Fannie Mae to lease approximately 850,000 net rentable square feet of Class A office space at the Company's Reston Gateway development project located in Reston, Virginia. The initial phase of the project will consist of approximately 1.1 million net rentable square feet. The Company expects to begin construction in the second half of 2018 upon receipt of all necessary approvals.

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Dispositions

On January 9, 2018, the Company completed the sale of its 500 E Street, S.W. property located in Washington, DC for a net contract sale price of approximately $118.6 million. Net cash proceeds totaled approximately $116.1 million, resulting in a gain on sale of real estate totaling approximately $96.4 million for Boston Properties, Inc. and approximately $98.9 million for Boston Properties Limited Partnership. 500 E Street, S.W. is an approximately 262,000 net rentable square foot Class A office property. 500 E Street, S.W. contributed approximately $0.1 million of net income to the Company for the period from January 1, 2018 through January 8, 2018 and contributed approximately $1.6 million of net income to the Company for the three months ended March 31, 2017.

4. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at March 31, 2018 and December 31, 2017:



		Nominal % Ownership			Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			March 31, 2018			December 31, 2017
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(7,811	)	$	(8,258	)
The Metropolitan Square Associates LLC	Metropolitan Square	20.0	%		3,372			3,339
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%	(2)	(13,262		)	(13,811		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	39,340			39,710
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%	(4)	17,974			18,381
540 Madison Venture LLC	540 Madison Avenue	60.0	%		66,259			66,179
500 North Capitol Venture LLC	500 North Capitol Street, NW	30.0	%		(4,129		)	(3,876		)
501 K Street LLC	1001 6th Street	50.0	%	(5)	42,636			42,657
Podium Developer LLC	The Hub on Causeway	50.0	%		67,883			67,120
Residential Tower Developer LLC	The Hub on Causeway - Residential	50.0	%	(6)	29,752			28,212
Hotel Tower Developer LLC	The Hub on Causeway - Hotel Air Rights	50.0	%		1,751			1,690
1265 Main Office JV LLC	1265 Main Street	50.0	%		4,539			4,641
BNY Tower Holdings LLC	Dock 72 at the Brooklyn Navy Yard	50.0	%		71,582			72,104
CA-Colorado Center Limited Partnership	Colorado Center	50.0	%		254,226			254,440
7750 Wisconsin Avenue LLC	7750 Wisconsin Avenue	50.0	%	(6)	67,404			21,452
					$	641,516		$	593,980

_______________


(1)	Investments with deficit balances aggregating approximately $25.2 million and $25.9 million at March 31, 2018 and December 31, 2017, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.


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


(3)	The Company’s wholly-owned subsidiary that owns Wisconsin Place Office also owns a 33.3% interest in the joint venture entity that owns the land, parking garage and infrastructure of the project.


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


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


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

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Certain of the Company’s unconsolidated joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exceptions, under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners. Under certain of the Company’s joint venture agreements, if certain return thresholds are achieved, the partners will be entitled to an additional promoted interest or payments.

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



	March 31, 2018		December 31, 2017
	(in thousands)
ASSETS
Real estate and development in process, net	$	1,844,695	$	1,768,996
Other assets	376,127		367,743
Total assets	$	2,220,822	$	2,136,739
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	1,471,762	$	1,437,440
Other liabilities	95,597		99,215
Members’/Partners’ equity	653,463		600,084
Total liabilities and members’/partners’ equity	$	2,220,822	$	2,136,739
Company’s share of equity	$	335,580	$	286,495
Basis differentials (1)	305,936		307,485
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	641,516	$	593,980

_______________

(1)

This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials result from impairments of investments, acquisitions through joint ventures with no change in control and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level. At March 31, 2018 and December 31, 2017, there was an aggregate basis differential of approximately $321.1 million and $322.5 million, respectively, between the carrying value of the Company’s investment in the joint venture that owns Colorado Center and the joint venture’s basis in the assets and liabilities, which differential (excluding land) shall be amortized over the remaining lives of the related assets and liabilities.


(2)	Investments with deficit balances aggregating approximately $25.2 million and $25.9 million at March 31, 2018 and December 31, 2017, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.

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



	Three months ended March 31,
	2018			2017
	(in thousands)
Total revenue (1)	$	56,486		$	54,761
Expenses
Operating	22,849			22,079
Depreciation and amortization	14,725			14,309
Total expenses	37,574			36,388
Operating income	18,912			18,373
Other expense
Interest expense	14,424			9,300
Net income	$	4,488		$	9,073

Company’s share of net income	$	1,826		$	4,323
Basis differential (2)	(1,365		)	(1,239		)
Income from unconsolidated joint ventures	$	461		$	3,084

_______________


(1)	Includes straight-line rent adjustments of approximately $1.8 million and $7.0 million for the three months ended March 31, 2018 and 2017, respectively.


(2)	Includes straight-line rent adjustments of approximately $0.7 million and $0.7 million for the three months ended March 31, 2018 and 2017, respectively. Also includes net above-/below-market rent adjustments of approximately $0.4 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively.

5. Debt

Credit Facility

On April 24, 2017, Boston Properties Limited Partnership amended and restated its unsecured revolving credit agreement (as amended and restated, the "2017 Credit Facility"). Among other things, the 2017 Credit Facility (1) increased the total commitment of the revolving line of credit (the "Revolving Facility") from $1.0 billion to $1.5 billion, (2) extended the maturity date from July 26, 2018 to April 24, 2022, (3) reduced the per annum variable interest rates, and (4) added a $500.0 million delayed draw term loan facility (the "Delayed Draw Facility") that permits Boston Properties Limited Partnership to draw until the first anniversary of the closing date (See Note 12). Based on Boston Properties Limited Partnership’s current credit rating, (1) the applicable Eurocurrency margins for the Revolving Facility and Delayed Draw Facility are 82.5 basis points and 90 basis points, respectively, and (2) the facility fee on the Revolving Facility commitment is 0.125% per annum. The Delayed Draw Facility has a fee on unused commitments equal to 0.15% per annum.

As of March 31, 2018, Boston Properties Limited Partnership had $115.0 million of borrowings and outstanding letters of credit totaling approximately $1.6 million outstanding under the 2017 Credit Facility, with the ability to borrow approximately $1.9 billion.

6. Commitments and Contingencies

General

In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence. In addition, in the normal course of business, the Company guarantees to certain tenants the obligations of its subsidiaries for the payment of tenant improvement allowances and brokerage commissions in connection with their leases and limited costs arising from delays in delivery of their premises.

The Company has letter of credit and performance obligations related to lender and development requirements that total approximately $9.1 million.

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Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exception, under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners. From time to time, under certain of the Company’s joint venture agreements, if certain return thresholds are achieved, the partners will be entitled to an additional promoted interest or payments. See also Note 7.

From time to time, the Company (or ventures in which the Company has an ownership interest) has agreed, and may in the future agree, to (1) guarantee portions of the principal, interest and other amounts in connection with their borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with their borrowings and (3) provide guarantees to lenders and other third parties for the completion of development projects. The Company has agreements with its outside partners whereby the partners agree to reimburse the joint venture for their share of any payments made under the guarantee. In some cases, the Company earns a fee from the applicable joint venture for providing the guarantee.

In connection with the refinancing of 767 Fifth Avenue’s (the General Motors Building) secured loan by the Company’s consolidated joint venture entity, 767 Venture, LLC, the Company guaranteed the consolidated entity’s obligation to fund various reserves for tenant improvement costs and allowances, leasing commissions and free rent obligations in lieu of cash deposits. As of March 31, 2018, the maximum funding obligation under the guarantee was approximately $171.7 million. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee. As of March 31, 2018, no amounts related to the guarantee are recorded as liabilities in the Company’s consolidated financial statements.

Pursuant to the lease agreement with Marriott, the Company has guaranteed the completion of the office building and parking garage on behalf of its 7750 Wisconsin Avenue joint venture and has also agreed to provide any financing guaranty that may be required with respect to third-party construction financing. The Company earns a fee from the joint venture for providing the guarantees and any amounts the Company pays under the guarantee(s) will be deemed to be capital contributions by the Company to the joint venture. The Company has also agreed to fund construction costs through capital contributions to the joint venture in the event of unavailability or insufficiency of third-party construction financing. In addition, the Company has guaranteed to Marriott, as hotel manager, the completion of a hotel being developed by an affiliate of The Bernstein Companies (the Company's partner in the 7750 Wisconsin Avenue joint venture) adjacent to the office property, for which the Company earns a fee from the affiliate of The Bernstein Companies. In addition, the Company entered into agreements with affiliates of The Bernstein Companies whereby the Company could be required to act as a mezzanine and/or mortgage lender and finance the construction of the hotel property. To secure such financing arrangements, affiliates of The Bernstein Companies are required to provide certain security, which varies depending on the specific loan, by pledges of their equity interest in the office property, a fee mortgage on the hotel property, or both. As of March 31, 2018, no amounts related to the contingent aspect of any of the guarantees are recorded as liabilities in the Company’s consolidated financial statements.

In 2009, the Company filed a general unsecured creditor’s claim against Lehman Brothers, Inc. for approximately $45.3 million related to its rejection of a lease at 399 Park Avenue in New York City. On January 10, 2014, the trustee for the liquidation of the business of Lehman Brothers allowed the Company’s claim in the amount of approximately $45.2 million. During 2014, 2015 and 2016, the Company received distributions of approximately $7.7 million, $8.1 million and $1.4 million, respectively. On May 19, 2017, the Company received a fifth interim distribution totaling approximately $0.4 million, leaving a remaining claim of approximately $27.6 million. The Company will continue to evaluate whether to attempt to sell the remaining claim or wait until the trustee distributes proceeds from the Lehman Brothers estate. Given the inherent uncertainties in bankruptcy proceedings, there can be no assurance as to the timing or amount of additional proceeds, if any, that the Company may ultimately realize on the remaining claim, whether by sale to a third party or by one or more distributions from the trustee. Accordingly, the Company has not recorded any estimated recoveries associated with this gain contingency within its Consolidated Financial Statements at March 31, 2018.

Insurance

The Company’s property insurance program per occurrence limits are $1.0 billion for its portfolio insurance program, including coverage for acts of terrorism other than nuclear, biological, chemical or radiological terrorism (“Terrorism Coverage”). The Company also carries $250 million of Terrorism Coverage for 601 Lexington Avenue, New York, New York (“601 Lexington Avenue”) in excess of the $1.0 billion of coverage in the Company’s property

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insurance program. Certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), are currently insured in separate insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are $1.625 billion, including Terrorism Coverage. The Company also currently carries nuclear, biological, chemical and radiological terrorism insurance coverage for acts of terrorism certified under the Federal Terrorism Risk Insurance Act (as amended, “TRIA”) (“NBCR Coverage”), which is provided by IXP as a direct insurer, for the properties in the Company's portfolio, including 767 Fifth Avenue, but excluding certain other properties owned in joint ventures with third parties or which the Company manages. The per occurrence limit for NBCR Coverage is $1.0 billion. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage provided by IXP is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” In 2018, the program trigger is $160 million and the coinsurance is 18%, however, both will increase in subsequent years pursuant to TRIA. If the Federal Government pays out for a loss under TRIA, it is mandatory that the Federal Government recoup the full amount of the loss from insurers offering TRIA coverage after the payment of the loss pursuant to a formula in TRIA. The Company may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if TRIA is not extended after its expiration on December 31, 2020, if there is a change in its portfolio or for any other reason. The Company intends to continue to monitor the scope, nature and cost of available terrorism insurance.

The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes. In addition, this insurance is subject to a deductible in the amount of 3% of the value of the affected property. Specifically, the Company currently carries earthquake insurance which covers its San Francisco and Los Angeles regions with a $240 million per occurrence limit, and a $240 million annual aggregate limit, $20 million of which is provided by IXP, as a direct insurer. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact the Company’s ability to finance properties subject to earthquake risk. The Company may discontinue earthquake insurance or change the structure of its earthquake insurance program on some or all of its properties in the future if the premiums exceed the Company’s estimation of the value of the coverage.

IXP, a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco and Los Angeles properties and the Company’s NBCR Coverage. Insofar as the Company owns IXP, it is responsible for its liquidity and capital resources, and the accounts of IXP are part of the Company’s consolidated financial statements. In particular, if a loss occurs which is covered by the Company’s NBCR Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government. IXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and its insurance policy is maintained after the payout by the Federal Government. If the Company experiences a loss and IXP is required to pay under its insurance policy, the Company would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance. In addition, Boston Properties Limited Partnership has issued a guarantee to cover liabilities of IXP in the amount of $20.0 million.

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

The Company continues to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism and California earthquake risk in particular, but the Company cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars, for which the Company cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if the Company experiences a loss that is uninsured or that exceeds policy limits, the Company could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the

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specific circumstances of each affected property, it is possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.

7. Noncontrolling Interests

Noncontrolling interests relate to the interests in Boston Properties Limited Partnership not owned by Boston Properties, Inc. and interests in consolidated property partnerships not wholly-owned by the Company. As of March 31, 2018, the noncontrolling interests in Boston Properties Limited Partnership consisted of 16,804,390 OP Units, 1,022,287 LTIP Units (including 118,067 2012 OPP Units, 85,042 2013 MYLTIP Units, 25,074 2014 MYLTIP Units and 28,771 2015 MYLTIP Units), 473,360 2016 MYLTIP Units, 400,000 2017 MYLTIP Units and 342,659 2018 MYLTIP Units held by parties other than Boston Properties, Inc.

Noncontrolling Interest—Common Units

During the three months ended March 31, 2018, 24,265 OP Units were presented by the holders for redemption (including 21,265 OP Units issued upon conversion of LTIP Units, 2012 OPP Units, 2013 MYLTIP Units and 2014 MYLTIP Units) and were redeemed by Boston Properties, Inc. in exchange for an equal number of shares of Common Stock.

At March 31, 2018, Boston Properties Limited Partnership had outstanding 473,360 2016 MYLTIP Units, 400,000 2017 MYLTIP Units and 342,659 2018 MYLTIP Units. Prior to the applicable measurement date (February 9, 2019 for 2016 MYLTIP Units, February 6, 2020 for 2017 MYLTIP Units and February 5, 2021 for the 2018 MYLTIP Units), holders of MYLTIP Units will be entitled to receive per unit distributions equal to one-tenth (10%) of the regular quarterly distributions payable on an OP Unit, but will not be entitled to receive any special distributions. After the measurement date, the number of MYLTIP Units, both vested and unvested, that MYLTIP award recipients have earned, if any, based on the establishment of a performance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit.

On February 4, 2018, the measurement period for the Company’s 2015 MYLTIP awards ended and, based on Boston Properties, Inc.’s relative TSR performance, the final awards were determined to be 22.0% of target or an aggregate of approximately $3.6 million (after giving effect to voluntary employee separations). As a result, an aggregate of 337,847 2015 MYLTIP Units that had been previously granted were automatically forfeited.

The following table presents Boston Properties Limited Partnership’s distributions on the OP Units and LTIP Units (including the 2012 OPP Units, 2013 MYLTIP Units and 2014 MYLTIP Units and, after the February 4, 2018 measurement date, the 2015 MYLTIP Units) and its distributions on the 2015 MYLTIP Units (prior to the February 4, 2018 measurement date), 2016 MYLTIP Units, 2017 MYLTIP Units and 2018 MYLTIP Units (after the February 6, 2018 issuance date) paid in 2018:



Record Date	Payment Date	Distributions per OP Unit and LTIP Unit		Distributions per MYLTIP Unit
March 29, 2018	April 30, 2018		$0.80		$0.080
December 29, 2017	January 30, 2018		$0.80		$0.080

A holder of an OP Unit may present the 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 must redeem the OP Unit for cash equal to the then value of a share of common stock of Boston Properties, Inc. Boston Properties, Inc. may, in its sole discretion, elect to assume and satisfy the redemption obligation by paying either cash or issuing one share of Common Stock. The value of the OP Units not owned by Boston Properties, Inc. and LTIP Units (including the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units), assuming that all conditions had been met for the conversion thereof, had all of such units been redeemed at March 31, 2018 was approximately $2.2 billion based on the last reported price of a share of Common Stock on the New York Stock Exchange of $123.22 per share on March 29, 2018.

Table of Content

Boston Properties Limited Partnership

The following table reflects the activity of noncontrolling interests—redeemable partnership units of Boston Properties Limited Partnership for the three months ended March 31, 2018 and 2017 (in thousands):



Balance at December 31, 2017	$	2,292,263
Contributions	34,258
Net income	20,432
Distributions	(14,351		)
Conversion of redeemable partnership units	(832		)
Unearned compensation	(20,453		)
Cumulative effect of a change in accounting principle	563
Other comprehensive income	155
Adjustment to reflect redeemable partnership units at redemption value	(115,432		)
Balance at March 31, 2018	$	2,196,603

Balance at December 31, 2016	$	2,262,040
Contributions	29,918
Net income	11,432
Distributions	(13,653		)
Conversion of redeemable partnership units	(793		)
Unearned compensation	(18,633		)
Cumulative effect of a change in accounting principle	(1,763		)
Other comprehensive income	146
Adjustment to reflect redeemable partnership units at redemption value	126,416
Balance at March 31, 2017	$	2,395,110

Noncontrolling Interests—Property Partnerships

The noncontrolling interests in property partnerships consist of the outside equity interests in ventures that are consolidated with the financial results of the Company because the Company exercises control over the entities that own the properties. The equity interests in these ventures that are not owned by the Company, totaling approximately $1.7 billion at March 31, 2018 and December 31, 2017, are included in Noncontrolling Interests—Property Partnerships in the accompanying Consolidated Balance Sheets.

On May 12, 2016, the partners in the Company’s consolidated entity that owns Salesforce Tower located in San Francisco, California amended the venture agreement. Under the original venture agreement, if the Company elects to fund the construction of Salesforce Tower without a construction loan (or a construction loan of less than 50% of project costs) and the venture has commenced vertical construction of the project, then the partner’s capital funding obligation shall be limited, in which event the Company shall fund up to 2.5% of the total project costs (i.e., 50% of the partner’s 5% interest in the venture) in the form of a loan to the partner. This loan would bear interest at the then prevailing market interest rates for construction loans. Under the amended agreement, the partners have agreed to structure this funding by the Company as preferred equity rather than a loan. The preferred equity contributed by the Company earns a preferred return equal to LIBOR plus 3.00% per annum and is payable to the Company out of any distributions to which the partner would otherwise be entitled until such preferred equity and preferred return have been repaid to the Company. As of March 31, 2018, the Company had contributed an aggregate of approximately $17.2 million of preferred equity to the venture. Also, under the joint venture agreement, (a) from and after the stabilization date, the partner has the right to cause the Company to purchase all (but not less than all) of the partner’s interest and (b) from and after the third anniversary of the stabilization date, the Company has the right to acquire all (but not less than all) of the partner’s interest, in each case at an agreed upon purchase price or appraised value. In addition, if certain threshold returns are achieved the partner will be entitled to receive an additional promoted interest. The term stabilization date is defined in the agreement to generally mean the first date after completion upon which Salesforce Tower is (1) at least 90% leased and (2) 50% occupied by tenants that are paying rent. The stabilization date is expected to occur in the second half of 2018.

Table of Content

The following table reflects the activity of the noncontrolling interests—property partnerships for the three months ended March 31, 2018 and 2017 (in thousands):



Balance at December 31, 2017	$	1,683,760
Capital contributions	15,267
Net income	17,234
Accumulated other comprehensive income	144
Distributions	(30,690		)
Balance at March 31, 2018	$	1,685,715

Balance at December 31, 2016	$	1,530,647
Capital contributions	8,145
Net income	4,424
Accumulated other comprehensive income	72
Distributions	(13,635		)
Balance at March 31, 2017	$	1,529,653

8. Stockholders’ Equity / Partners’ Capital

As of March 31, 2018, Boston Properties, Inc. had 154,362,303 shares of Common Stock outstanding.

As of March 31, 2018, Boston Properties, Inc. owned 1,721,890 general partnership units and 152,640,413 limited partnership units of Boston Properties Limited Partnership.

On June 2, 2017, Boston Properties, Inc. renewed its “at the market” (“ATM”) stock offering program through which it may sell from time to time up to an aggregate of $600.0 million of its common stock through sales agents over a three-year period. This program replaced the Company’s prior $600.0 million ATM stock offering program that was scheduled to expire on June 3, 2017. The Company intends to use the net proceeds from any offering for general business purposes, which may include investment opportunities and debt reduction. No shares of common stock have been issued under this ATM stock offering program.

During the three months ended March 31, 2018, Boston Properties, Inc. issued 24,265 shares of Common Stock in connection with the redemption of an equal number of redeemable OP Units from limited partners.

The following table presents Boston Properties, Inc.’s dividends per share and Boston Properties Limited Partnership’s distributions per OP Unit and LTIP Unit paid in 2018:



Record Date	Payment Date	Dividend (Per Share)	Distribution (Pe