SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

 

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

 

For the fiscal year ended December 31, 20032004

 

OR

 

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

 

For the transition period from              to             

 

Commission file number 1-13087

 

BOSTON PROPERTIES, INC.

(Exact name of Registrant as Specified in its Charter)

 

Delaware 04-2473675

(State or Other Jurisdiction

of Incorporation or Organization)

 (IRS Employer Id. Number)
111 Huntington Avenue  
Boston, Massachusetts 02199
(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (617) 236-3300

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


  Name of Exchange on Which Registered

Common Stock, Par Valuepar value $.01 per share

  New York Stock Exchange

Preferred Stock Purchase Rights

   

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.)     Yes  x    No  ¨

 

As of June 30, 2003,2004, the aggregate market value of the 92,320,1605,821,477 shares of common stock held by non-affiliates of the Registrant was $4,043,623,008$291,539,568 based upon the last reported sale price of $43.80$50.08 per share on the New York Stock Exchange on such date.June 30, 2004. (For this computation, the Registrant has excluded the market value of all shares of Common Stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.)

 

As of February 18, 2004,March 4, 2005, there were 99,636,024110,374,075 shares of Common Stock outstanding.

 

Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held May 5, 2004 are11, 2005 is incorporated by reference in Part III, Items 10, 11, 12, 13 and 14. The Registrant will file such Proxy Statement with the Securities and Exchange Commission not later than 120 days after the end of its fiscal year ended December 31, 2004.

 



TABLE OF CONTENTS

 

Item No.

  

Description


  Page No.

ITEM NO.


  

DESCRIPTION


  PAGE NO.

PART IPART I   

PART I

   
1.  

BUSINESS

  1  

BUSINESS

  1
2.  

PROPERTIES

  25  

PROPERTIES

  27
3.  

LEGAL PROCEEDINGS

  30  

LEGAL PROCEEDINGS

  32
4.  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  30  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  32
PART IIPART II   

PART II

   
5.  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  31  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  32
6.  

SELECTED FINANCIAL DATA

  31  

SELECTED FINANCIAL DATA

  34
7.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  34  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  37
7A.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  67  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  75
8.  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  68  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  76
9.  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  68  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  76
9A.  

CONTROLS AND PROCEDURES

  68  

CONTROLS AND PROCEDURES

  76

9B.

  

OTHER INFORMATION

  76
PART IIIPART III   

PART III

   
10.  

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  69  

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  77
11.  

EXECUTIVE COMPENSATION

  69  

EXECUTIVE COMPENSATION

  77
12.  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  69  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  77
13.  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  70  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  78
14.  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

  70  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

  78
PART IVPART IV   

PART IV

   
15.  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  70  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

  79
  

SIGNATURES

  77


PART I

 

Item 1.Business

 

General

 

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Boston Properties, Inc., a Delaware corporation organized in 1997, individually or together with its subsidiaries, including Boston Properties Limited Partnership, a Delaware limited partnership, and our predecessors. We are a fully integrated self-administered and self-managed real estate investment trust, or “REIT,” and one of the largest owners and developers of office properties in the United States. Our properties are concentrated in four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco. We conduct substantially all of our business through our subsidiary Boston Properties Limited Partnership. At December 31, 2003,2004, we owned or had interests in 140125 properties, totaling approximately 43.944.1 million net rentable square feet and structured parking for 31,270 vehicles containing approximately 9.5 million square feet. Our properties consisted of:

 

131119 office properties comprised of 103102 Class A office properties (including three properties under construction) and 2817 Office/Technical properties;

 

four industrial properties;

three hotels; and

 

two retail properties.properties; and

one industrial property.

 

We own or control undeveloped land totaling approximately 543 acres which will support approximately 11.3 million square feet of development. In addition, we ownhave a 25% interest in the Boston Properties Office Value-Added Fund, L.P., which we refer to as the “Value-Added Fund,” which is a strategic partnership with two institutional investors through which we intend to pursue the acquisition of assets within our existing markets that have deficiencies in property characteristics which provide an opportunity to create value through repositioning, refurbishment or control 43 parcels of land totaling 551.3 acres and structured parking for 31,098 vehicles containing approximately 9.4 million square feet. Subsequent to December 31, 2003, we sold one industrial property and ten office/technical properties, which consisted of a combined net rentable square feet of 222,081. renovation. Our investments through the Value-Added Fund are not included in our portfolio information tables or any other portfolio level statistics.

We consider Class A office properties to be centrally-located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings. The Company considers Office/Technical properties to be properties that support office, research and development and other technical uses. Our definitiondefinitions of Class A office and Office/Technical properties may be different than that ofthose used by other companies.

 

We are a full-service real estate company, with substantial in-house expertise and resources in acquisitions, development, financing, capital markets, construction management, property management, marketing, leasing, accounting, tax and legal services. As of December 31, 2003,2004, we had approximately 662667 employees. Our 2830 senior officers have an average of 24 years experience in the real estate industry and an average of 1516 years tenureof experience with us. Our principal executive office is located at 111 Huntington Avenue, Boston, Massachusetts 02199 and itsour telephone number is (617) 236-3300. In addition, we have regional offices at 401 9th Street, NW, Washington, D.C. 20004; 599 Lexington Avenue, New York, New York 10022; Four Embarcadero Center, San Francisco, California 94111; and 302 Carnegie Center, Princeton, New Jersey 08540.

 

Our Web site is located at http://www.bostonproperties.com. On our Web site, you can obtain a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, (the “SEC”).or the SEC. The name “Boston Properties” and our logo (consisting of a stylized “b”) are registered service marks of the Company.

Boston Properties Limited Partnership

 

Boston Properties Limited Partnership, or BPLP, is a Delaware limited partnership, isand the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. We are the sole general partner and, as of February 18, 2004,March 4, 2005, the owner of approximately 77.1%80.2% of the economic interests in Boston Properties Limited Partnership.BPLP. Economic interest was calculated as the number of

common partnership units of Boston Properties Limited PartnershipBPLP owned by the Company as a percentage of the sum of (1) the actual aggregate number of outstanding common partnership units of Boston Properties Limited Partnership andBPLP, (2) the number of common partnership units issuable upon conversion of outstanding preferred partnership units of Boston Properties Limited Partnership.BPLP and (3) the number of common units issuable upon conversion of all outstanding long term incentive plan units of BPLP, or LTIP units, assuming all conditions have been met for the conversion of the LTIP units. Our general and limited partnership interests in Boston Properties Limited PartnershipBPLP entitle us to share in cash distributions from, and in the profits and losses of, Boston Properties Limited PartnershipBPLP in proportion to our percentage interest and entitle us to vote on all matters requiring a vote of the limited partners. Certain other partners of Boston Properties Limited PartnershipBPLP are persons who contributed their direct or indirect interests in properties to Boston Properties Limited PartnershipBPLP in exchange for common units or preferred units of limited partnership interest in Boston Properties Limited Partnership.BPLP. Under the limited partnership agreement of Boston Properties Limited Partnership,BPLP, unitholders may present their common units of Boston Properties Limited PartnershipBPLP 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 unit for redemption, BPLP must redeem the unit for cash equal to the then value of a share of our common stock. In lieu of a cash redemption by BPLP, however, we may elect to acquire any common units so tendered by issuing shares of our common stock in exchange for the common units. If we so elect, our 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. We currently anticipate that we will elect to issue our common stock in connection with each such presentation for redemption rather than having Boston Properties Limited PartnershipBPLP pay cash. With each such exchange or redemption, our percentage ownership in Boston Properties Limited PartnershipBPLP will increase. In addition, whenever we issue shares of our common stock other than to acquire common units of Boston Properties Limited Partnership, we must contribute any net proceeds we receive to Boston Properties Limited PartnershipBPLP and Boston Properties Limited PartnershipBPLP must issue to us an equivalent number of common units of Boston Properties Limited Partnership.BPLP. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

 

Preferred units of Boston Properties Limited PartnershipBPLP have the rights, preferences and other privileges, including the right to convert into common units of Boston Properties Limited Partnership,BPLP, as are set forth in amendments to the limited partnership agreement of Boston Properties Limited Partnership.BPLP. As of December 31, 20032004 and February 18, 2004, Boston Properties Limited PartnershipMarch 4, 2005, BPLP had one series of its preferred units outstanding. The Series Two preferred units have an aggregate liquidation preference of approximately $270.0$204.1 million. The Series Two preferred units are convertible, at the holder’s election, into common units at a conversion price of $38.10 per common unit (equivalent to a ratio of 1.312336 common units per Series Two preferred unit). Distributions on the Series Two Preferredpreferred units are payable quarterly and, unless the highergreater rate described in the next sentence applies, accrue at 7.0% until May 12, 2009 and 6.0% thereafter. If distributions on the number of common units into which the Series Two Preferredpreferred units are convertible are greater than distributions calculated using the rates described in the preceding sentence for the applicable quarterly period, then the greater distributions are payable instead. To date, with the exception of two quarterly distributions on August 15, 2001 and November 15, 2001, distributions have always been made at the fixed rate, rather than the highergreater rate determined on the basis of distributions paid on the common units into which the Series Two preferred units are convertible. The terms of the Series Two preferred units provide that they may be redeemed for cash in six annual tranches, beginning on May 12, 2009, at our election or at the election of the holders. We also have the right to convert into common units of Boston Properties Limited PartnershipBPLP any Series Two preferred units that are not redeemed when they are eligible for redemption.

 

Significant Transactions During 20032004

 

Real Estate Acquisitions/Dispositions

 

On December 8, 2004, we sold 560 Forbes Boulevard in South San Francisco, California, an industrial property totaling approximately 40,000 square feet, for net proceeds of approximately $3.8 million, resulting in a gain on sale of approximately $1.1 million, net of minority interest share of approximately $2.7 million.

On October 25, 2004, we formed the Value-Added Fund, which is a strategic partnership with two institutional investors, to pursue the acquisition of assets within our existing markets that have deficiencies in property characteristics which provide an opportunity to create value through repositioning, refurbishment or renovation. The Value-Added Fund has total equity commitments of $140 million, of which we have committed $35 million. Assuming an estimated 65% leverage ratio, the Value-Added Fund is anticipated to have up to $400 million of total investments. We will receive asset management, property management, leasing and redevelopment fees and, if certain return thresholds are achieved, will be entitled to an additional promoted interest. On November 7, 2003, we1, 2004, the Value-Added Fund completed the acquisition of Worldgate Plaza, a 322,000 square foot office complex located in Herndon, Virginia for a purchase price of approximately $78.2 million. The acquisition was financed with new mortgage indebtedness totaling $57.0 million and approximately $21.2 million in cash, of which our share was $5.3 million. The mortgage financing bears interest at a variable rate equal to LIBOR plus 0.89% per annum and matures in October 2007, with two one-year extension options. In addition, the Value-Added Fund entered into an agreement to cap the interest rate at 9.5% per annum for a binding contractnominal fee.

On September 28, 2004, we sold 204 Second Avenue in Waltham, Massachusetts, a Class A office property totaling approximately 41,000 square feet, for thenet proceeds of approximately $5.7 million, resulting in a gain on sale of approximately $3.5 million, net of minority interest share of approximately $0.7 million.

On August 1, 2004, we sold Sugarland Business Park—Park- Building Two,One in Herndon, Virginia, an office/technical property totaling approximately 59,00052,000 square feet, locatedfor net proceeds of approximately $7.6 million, resulting in Herndon,a gain on sale of approximately $0.6 million, net of minority interest share of approximately $0.1 million.

On June 10, 2004, we sold a land parcel on Burlington Mall Road in Burlington, Massachusetts, for net proceeds of approximately $1.9 million, resulting in a gain on sale of approximately $1.4 million, net of minority interest share of approximately $0.3 million.

On May 21, 2004, we sold 38 Cabot Boulevard in Langhorne, Pennsylvania, an industrial building totaling approximately 161,000 square feet, for net proceeds of approximately $5.5 million, resulting in a gain on sale of approximately $3.5 million, net of minority interest share of approximately $0.7 million.

On April 1, 2004, we sold The Arboretum in Reston, Virginia, a Class A office property totaling approximately 96,000 square feet, for $7.1net proceeds of approximately $21.1 million, resulting in a gain on sale of approximately $6.6 million, net of minority interest share of approximately $1.4 million. The sale closed on February 10, 2004.

On October 8, 2003,April 1, 2004, we sold Decoverly Two, Three, Six and Seven, consisting of two Class A office properties totaling 155,000 square feet and two land parcels, one of which is subject to a ground lease, for net proceeds of approximately $41.2 million, resulting in a gain on sale of approximately $9.4 million, net of minority interest share of approximately $1.9 million.

On April 1, 2004, we acquired 1333 New Hampshire1330 Connecticut Avenue, an approximately 315,000a 259,000 square foot Class A office property in Washington, D.C., at a purchase price of approximately $111.6$86.6 million. In addition, we paid $1.4 million of closing costs and as of December 31, 2004 we were obligated to fund $7.5 million for tenant and capital improvements during the first two years of ownership. The acquisition was financed with borrowings under our unsecured revolving credit facilitythe assumption of mortgage indebtedness secured by the property totaling $52.4 million, which bears interest at a fixed rate of 7.58% per annum and matures in 2011, and available cash. The property is 100%99% leased.

 

On September 11, 2003, we entered into a joint venture with an unaffiliated third party to pursue the development of a Class A office property at 801 New Jersey Avenue in Washington, D.C. that, if completed as currently planned, will support approximately 1.1 million square feet of commercial development. We made an initial cash contribution of $3.0 million for a 50% interest in the joint venture.

On August 5, 2003, we acquired three parcels of land totaling approximately 5.8 acres in Reston, Virginia for $13.5 million. If completed as currently planned, the site will support approximately 507,000 square feet of commercial development.

On August 5, 2003,March 24, 2004, we acquired the remaining outside interests in the One Freedom Square and Two Freedom Squareour 140 Kendrick Street joint venture properties which together comprise approximately 832,000 square feetlocated in Needham, Massachusetts for cash of Class A office buildings in Reston, Virginia. The acquisition was financed with $36.0$21.6 million of cash and the assumption of the outside partner’s share of the mortgage debt on the properties of approximately $56.4$41.6 million.

On February 10, 2004, we sold Sugarland Business Park- Building Two in Herndon, Virginia, an office/technical property totaling approximately 59,000 square feet, for net proceeds of approximately $6.8 million, resulting in a gain on sale of approximately $2.0 million, net of minority interest share of approximately $0.4 million.

On February 4, 2004, we sold Hilltop Office Center in South San Francisco, consisting of nine office/technical buildings totaling approximately 143,000 square feet, for net proceeds of approximately $11.6 million and $35.4 million, respectively. Subsequent to the acquisition, we repaid in fullassumption by the buyer of the mortgage debt on the Two Freedom Square propertyproperties totaling $70.7$5.2 million, resulting in a gain on sale of approximately $6.8 million, net of minority interest share of approximately $8.7 million.

 

On April 1, 2003,January 16, 2004, we sold 430 Rozzi Place in South San Francisco, an industrial property totaling 20,000 square feet, for net proceeds of approximately $2.4 million, resulting in a gain on sale of approximately $0.5 million, net of minority interest share of approximately $1.6 million.

Developments

During 2004, we placed Times Square Tower in New York City and New Dominion Technology Park, Building Two in Herndon, VA into service, which required a total investment during 2004 of approximately $92.0 million, of which $90.7 million was funded through construction loans. Our total investment, including equity and debt, through December 31, 2004 in these properties was approximately $648.0 million. In January 2004, we refinanced the construction loan secured by Times Square Tower, and in September 2004 we refinanced our New Dominion Technology Park, Building Two property by replacing the construction loan with a fixed rate mortgage.

We continued construction on 901 New York Avenue, in which we have a 25% interest, and incurred approximately $12.8 million of construction costs during 2004, of which $8.2 million was funded through an existing construction loan. In December 2004, we refinanced the property by replacing the construction loan with a fixed rate mortgage.

In September 2004, we commenced the redevelopment of our Capital Gallery property in Washington, D.C. Capital Gallery is a Class A office property totaling approximately 397,000 square feet. The project entails removing a three-story, low-rise section of the property comprised of approximately 100,000 square feet from in-service status and redeveloping it into a 10-story office building resulting in a total complex size of approximately 610,000 square feet upon completion. During 2004, we incurred approximately $4.4 million of construction costs, funded through available cash. We expect the development to be completed by the end of 2005. On February 17, 2005, we obtained construction financing totaling $47.2 million which bears interest at a variable rate equal to LIBOR plus 1.65% per annum and matures in February 2008.

On August 2, 2004, we entered into a joint venture with two unrelated third parties to pursue the development of a Class A office building totaling approximately 305,000 square feet that will be part of a mixed-use development of office, retail and residential properties known as Wisconsin Place located in Chevy Chase, Maryland. The new development will sit above a shared four-story parking garage with over 1,700 parking spaces. We have a 66.67% interest in the office building, a shared interest in the infrastructure, a nominal interest in the retail component and no interest in the residential component. During 2004, we incurred approximately $4.2 million of construction costs related to the infrastructure, funded through available cash. No date has yet been determined for commencement of the office component.

On July 30, 2004, we entered into a lease with a tenant totaling approximately 182,000 square feet related to the development of a build-to-suit office building at 12290 Sunrise Valley in Reston, Virginia. The tenant currently leases more than 500,000 square feet in two buildings within the existing office complex. During 2004, we incurred approximately $6.5 million of construction costs, funded through available cash. We expect the development to be completed in the second quarter of 2006.

In July 2004, we commenced construction of Seven Cambridge Center, a fully-leased, build-to-suit project with approximately 231,000 square feet of office, research laboratory and retail space plus parking for

approximately 800 cars, located in Cambridge, Massachusetts. We signed a lease for 100% of the space with the Massachusetts Institute of Technology for occupancy by its affiliate, the Eli and Edythe L. Broad Institute. During 2004, we incurred approximately $23.0 million of construction costs, funded through available cash. We expect the development to be completed in the first quarter of 2006.

In 2005, we expect to fund future development costs for the development projects begun in 2004 using available cash, our unsecured line of credit and construction loans. The construction costs we expect to incur on our developments can be found within our Contractual Obligations table located on page 72.

Equity Transactions

On March 3, 2004, we completed a public offering of 5,700,000 shares of our common stock at a price to the public of $51.40 per share. The proceeds from this public offering, net of underwriters’ discount and offering costs, totaled approximately $291.1 million. We used the proceeds for the following purposes:

We repaid the mortgage loan collateralized by our One and Two Reston Overlook properties totaling approximately $65.8 million, together with a prepayment penalty totaling approximately $0.7 million. The mortgage loan bore interest at a fixed rate of 7.45% per annum and was scheduled to mature in August 2004.

We repaid the mortgage loans collateralized by our Lockheed Martin and NIMA properties totaling approximately $24.5 million and $20.0 million, respectively, together with prepayment penalties aggregating approximately $5.6 million. The mortgage loans bore interest at fixed rates of 6.61% and 6.51% per annum, respectively, and were scheduled to mature in June 2008.

We acquired the remaining outside interests in the One and Two Discovery Squareour 140 Kendrick Street joint venture properties which together comprise approximately 367,000 square feetlocated in Needham, Massachusetts for cash of Class A office buildings in Reston, Virginia. The acquisition was financed with $18.3$21.6 million of cash and the assumption of the outside partner’s share of the mortgage debt on the property of approximately $32.4$41.6 million. Subsequent to the acquisition, we repaid in full the mortgage debt on the property totaling $64.7 million.

On March 18, 2003, we sold 2300 N Street in Washington, D.C., a Class A office property totaling approximately 289,000 square feet, for net proceeds of approximately $111.5 million, resulting in a gain on sale of approximately $52.7 million (net of minority interest of $11.6 million).

On February 4, 2003, we sold 875 Third Avenue in midtown Manhattan, New York, a Class A office property totaling approximately 712,000 square feet, for net proceeds of approximately $348.9 million, resulting in a gain on sale of approximately $73.6 million (net of minority interest of $16.6 million).

On January 28, 2003, we sold The Candler Building in Baltimore, Maryland, a Class A office property totaling approximately 541,000 square feet, for net proceeds of approximately $61.9 million, resulting in a loss on sale of approximately $0.3 million.

 

The sales mentioned above of 875 Third Avenue, The Candler Building and 2300 N Street were structured as like-kind exchanges. Accordingly, taxable gain for federal income tax purposes was not recognized and the tax attributes (including depreciated tax basis and any tax protection covenants for the benefit of former owners) of these disposed properties have been transferred to 399 Park Avenue as the property for which they were exchanged.

Developments

We placed two Class A office properties and one retail property in-service during 2003, which required a total investment during 2003 of approximately $10.7 million, of which $3.6 million was funded through construction loans. Our total investment, including equity and debt, through December 31, 2003 on these properties was $139.3 million. We continued construction on an additional three office properties, including one property in which we have a joint venture interest, and incurred approximately $192.2 million of construction

costs during 2003, of which $155.0 million was funded through existing construction loans and the remainder of which was funded using borrowings underthe cash proceeds has been retained to fund our unsecured line of credit and available cash.

Unsecured Debt

On January 17, 2003, Boston Properties Limited Partnership closed an unregistered offering of $175.0 million in aggregate principal amount of its 6.25% senior unsecured notes due 2013. The notes are fungible, and form a single series, with the $750.0 million of notes sold in December 2002. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.763% of their face amount to yield 6.28%. We used the net proceeds to repay our unsecured bridge loan, a portion of our unsecured line of credit as well as certain construction loans.

On March 18, 2003, Boston Properties Limited Partnership closed an unregistered offering of $300.0 million in aggregate principal amount of its 5.625% senior unsecured notes due April 15, 2015. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.898% of their face amount to yield 5.636%. We used the net proceeds to refinance the mortgage debt on Five Times Squarecurrent development pipeline, for possible future acquisitions and for other general businesscorporate purposes.

On May 22, 2003, Boston Properties Limited Partnership closed an unregistered offering of $250.0 million in aggregate principal amount of its 5.00% senior unsecured notes due June 1, 2015. The notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The notes were priced at 99.329% of their face amount to yield 5.075%. We used the net proceeds to repay the mortgage loan secured by the property at 2600 Tower Oaks Boulevard in Rockville, Maryland totaling $31.0 million, to repay amounts then outstanding under our unsecured revolving credit facility described below and for other general business purposes.

Our unsecured senior notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus 0.35%, in each case plus accrued and unpaid interest to the redemption date. The indenture under which our senior unsecured notes were issued contains restrictions on incurring debt and using our assets as security in other financing transactions that result in the non-compliance with certain customary financial covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of greater than 1.5, and (4) unencumbered asset value of greater than 150% of our unsecured debt. As of December 31, 2003, we were in compliance with each of these financial restrictions and requirements.

Under registration rights agreements with the initial purchasers of our senior unsecured notes, we agreed to use our reasonable best efforts to register with the SEC offers to exchange new notes issued by us, which we refer to as “exchange notes,” for the original notes. We closed the exchange offers relating to the 6.25% senior unsecured notes due January 15, 2013 on June 20, 2003, and we closed the exchange offer relating to the 5.625% senior unsecured notes due April 15, 2015 and 5.00% senior unsecured notes due June 1, 2015 on September 9, 2003. The exchange notes are in the same aggregate principal amount as and have terms substantially identical to the original notes, but the exchange notes are freely tradable by the holders, while the original notes were subject to resale restrictions. The exchange offers did not generate any cash proceeds for us.

As of February 18, 2004, Boston Properties Limited Partnership had investment grade ratings on its senior unsecured notes, as follows:

Rating Organization


Rating

Moody’s

Baa2 (stable)

Standard & Poor’s

BBB (stable)

FitchRatings

BBB (stable)

The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

Equity Transactions

On August 12, 2003, Boston Properties Limited Partnership completed the redemption of all of its Series One Preferred units by converting the remaining 2,365,301 Series One preferred units into 2,102,480 common units of limited partnership interest.

 

During the year ended December 31, 2003,2004, Boston Properties Limited Partnership redeemed 1,318,327 of its Series Two preferred units by converting them into 1,730,084 common units of limited partnership interest. The common units of limited partnership interest were subsequently presented by the holders for redemption and were redeemed by us in exchange for an equal number of shares of common stock. In addition, during the year ended December 31, 2004, we redeemed an aggregate of 810,368 common units of limited partnership interest, presented by the holders for redemption, in exchange for an equal number of shares of common stock. During the year ended December 31, 2004, we issued 2,452,7913,814,274 shares of common stock as a result of stock options being exercised.

 

Business and Growth Strategies

 

Business Strategy

 

Our primary business objective is to maximize return on investment so as to provide our investors with the greatest possible total return. Our strategy to achieve this objective is:

 

to concentrate on a few carefully selected geographic markets, including Boston, Washington D.C., midtown Manhattan and San Francisco, and to be one of the leading, if not the leading, owners and developers in each of those markets. We select markets and submarkets where tenants have demonstrated a preference for high-quality office buildings and other facilities;

 

to emphasize markets and submarkets within those markets where the lack of available sites and the difficulty of receiving the necessary approvals for development and the necessary financing constitute high barriers to the creation of new supply, and where skill, financial strength and diligence are required to successfully develop, finance and manage high-quality office, research and development and/or industrial space and selected retail space;

high barriers to the creation of new supply, and where skill, financial strength and diligence are required to successfully develop, finance and manage high-quality office, research and development and/or industrial space and selected retail space;

 

to take on complex, technically challenging projects, leveraging the skills of our management team to successfully develop, acquire or reposition properties which other organizations may not have the capacity or resources to pursue;

 

to concentrate on high-quality real estate designed to meet the demands of today’s tenants who require sophisticated telecommunications and related infrastructure and support services, and to manage those facilities so as to become the landlord of choice for both existing and prospective clients;

 

to opportunistically acquire assets which increase our penetration in the markets in which we have chosen to concentrate and which exhibit an opportunity to improve or preserve returns through repositioning (through a combination of capital improvements and shift in marketing strategy), changes in management focus and re-leasing as existing leases terminate;

 

to explore joint venture opportunities primarily with existing owners of land parcels located in desirable locations, who seek to benefit from the depth of development and management expertise we are able to provide, and our access to capital, and/or to explore joint venture opportunities with strategic institutional partners, leveraging our skills as owners, operators and developers of Class A office space;

 

to pursue on a selective basis the sale of properties to take advantage of our value creation and the demand for our premier properties;

 

to seek third-party development contracts, especially during times when our internal development pipeline is lowless active or when new development is less-warranted due to market conditions, to provide us with additional fee income and to enable us to retain and utilize our existing development and construction management staff; and

 

to enhance our capital structure through our access to a variety of sources of capital.

Growth Strategies

 

External Growth

 

We believe that we are well-positioned to realize growth through external asset development and acquisitions. We believe that our development experience and our organizational depth position us to continue to selectively develop a range of property types, from single-story suburban office properties to high-rise urban developments, within budget and on schedule. Other factors that contribute to our competitive position include:

 

our control of sites (including sites under contract or option to acquire) in our markets that will support approximately 11.3 million square feet of new office, hotel and residential development;

 

our reputation gained through 35 years of successful operations and the stability and strength of our existing portfolio of properties;

 

our relationships with leading national corporations and public institutions seeking new facilities and development services;

 

our relationships with nationally recognized financial institutions that provide capital to the real estate industry;

 

our track record and reputation for executing acquisitions efficiently provides comfort to domestic and foreign institutions, private investors and corporations who seek to sell commercial real estate in our market areas;

 

our ability to act quickly on due diligence and financing; and

 

our relationships with institutional buyers and sellers of high-quality real estate assets.

We have targeted three areas of development and acquisition as significant opportunities to execute our external growth strategy:

 

 Pursue development in selected submarkets.As market conditions improve, we believe that development of well-positioned office buildings will be justified in many of our submarkets. We believe in acquiring land after taking into consideration timing factors relating to economic cycles and in response to market conditions that allow for its development at the appropriate time. While we purposely concentrate in markets with high barriers-to-entry, we have demonstrated throughout our more than 30-year35-year history, an ability to make carefully timed land acquisitions in submarkets where we can become one of the market leaders in establishing rent and other business terms. We believe that there are opportunities at key locations in our existing and other markets for a well-capitalized developer to acquire land with development potential.

 

In the past, we have been particularly successful at acquiring sites or options to purchase sites that need governmental approvals.approvals for development. Because of our development expertise, knowledge of the governmental approval process and reputation for quality development with local government regulatory bodies, we generally have been able to secure the permits necessary to allow development and to profit from the resulting increase in land value. We seek out complex projects where we can add value through the efforts of our experienced and skilled management team leading to attractive enhanced returns on investment.

 

Our strong regional relationships and recognized development expertise have enabled us to capitalize on unique build-to-suit opportunities. We intend to seek and expect to continue to be presented with such opportunities in the near term allowing us to earn relatively significant returns on these development opportunities thoughthrough multiple business cycles.

 

 

Acquire assets and portfolios of assets from institutions or individuals.We believe that due to our size, management strength and reputation, we are in an advantageous position to acquire portfolios of assets or individual properties from institutions or individuals. We may acquire properties for cash, but we are also particularly well-positioned to appeal to sellers wishing to convert on a tax-deferred basis their

ownership of property into equity in a diversified real estate operating company that offers liquidity through access to the public equity markets in addition to a quarterly dividend. Our ability to offer common and preferred units of limited partnership in Boston Properties Limited PartnershipBPLP to sellers who would otherwise recognize a taxable gain upon a sale of assets for cash or our common stock may facilitate this type of transaction on a tax-efficient basis. In addition, we may consider mergers with and acquisitions of compatible real estate firms.

 

 Acquire existing underperforming assets and portfolios of assets. We continue to actively pursue opportunities to acquire existing buildings that have the potential for increasing returns in the future as a result of active professional management and improving market conditions. These opportunities may include the acquisition of entire portfolios of properties. We believe that because of our in-depth market knowledge and development experience in each of our markets, our national reputation with brokers, financial institutions and others involved in the real estate market and our access to competitively-priced capital, we are well-positioned to identify and acquire existing, underperforming properties for competitive prices and to add significant additional value to such properties through our effective marketing strategies and a responsive property management program. We have developed this strategy and program for our existing portfolio, where we provide high-quality property management services using our own employees in order to encourage tenants to renew, expand and relocate in our properties. We are able to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house and third-party vendors’ services for marketing, including calls and presentations to prospective tenants, print advertisements, lease negotiation and construction of tenant improvements. Our tenants benefit from cost efficiencies produced by our experienced work force, which is attentive to preventive maintenance and energy management.

Internal Growth

 

We believe that significant opportunities will exist in the long term to increase cash flow from our existing properties because they are of high quality and in desirable locations. In addition, our properties are in markets where, in general, the creation of new supply is limited by the lack of available sites, the difficulty of receiving the necessary approvals for development on vacant land and the difficulty of obtaining financing. Our strategy for maximizing the benefits from these opportunities is two-fold: (1) to provide high qualityhigh-quality property management services using our employees in order to encourage tenants to renew, expand and relocate in our properties, and (2) to achieve speed and transaction cost efficiency in replacing departing tenants through the use of in-house services for marketing, lease negotiation, and construction of tenant improvements. We believe that onceas the current economic conditions improve, our office properties will add to our internal growth because of their desirable locations. In addition, we believe that oncewith the current economic conditions improvecontinued improvement in the business and leisure travel sector, our hotel properties will continue to add to our internal growth because of their desirable locations in the downtown Boston and East Cambridge submarkets. We expect to continue our internal growth as a result of our ability to:

 

 Cultivate existing submarkets and long-term relationships with credit tenants.In choosing locations for our properties, we have paid particular attention to transportation and commuting patterns, physical environment, adjacency to established business centers, proximity to sources of business growth and other local factors.factors.

 

We had an average lease term of 7.07.6 years at December 31, 20032004 and continue to cultivate long-term leasing relationships with a diverse base of high quality, financially stable tenants. Based on leases in place at December 31, 2003,2004, leases with respect to 6.7%5.2% of the total square feet from our Class A office properties will expire in calendar year 2004.2005.

 

 

Directly manage properties to maximize the potential for tenant retention.We provide property management services ourselves, rather than contracting for this service, to maintain awareness of and responsiveness to tenant needs. We and our properties also benefit from cost efficiencies produced by an experienced work force attentive to preventive maintenance and energy management and from our

continuing programs to assure that our property management personnel at all levels remain aware of their important role in tenant relations.

 

 Replace tenants quickly at best available market terms and lowest possible transaction costs. We believe that we are well-positioned to attract new tenants and achieve relatively high rental rates at the higher end of our markets as a result of our well-located, well-designed and well-maintained properties, our reputation for high-quality building services and responsiveness to tenants, and our ability to offer expansion and relocation alternatives within our submarkets.

 

 Extend terms of existing leases to existing tenants prior to expiration.We have also successfully structured early tenant renewals, which have reduced the cost associated with lease downtime while securing the tenancy of our highest quality credit-worthy tenants on a long-term basis and enhancing relationships.

 

Policies with Respect to Certain Activities

 

The discussion below sets forth certain additional information regarding our investment, financing and other policies. These policies have been determined by our Board of Directors and, in general, may be amended or revised from time to time by our Board of Directors.

 

Investment Policies

 

Investments in Real Estate or Interests in Real Estate

 

Our investment objectives are to provide quarterly cash dividends to our securityholders and to achieve long-term capital appreciation through increases in the value of Boston Properties, Inc. We have not established a specific policy regarding the relative priority of these investment objectives.

We expect to continue to pursue our investment objectives primarily through the ownership of our current properties and other acquired properties. We currently intend to continue to invest primarily in developments of properties and acquisitions of existing improved properties or properties in need of redevelopment, and acquisitions of land that we believe have development potential, primarily in our four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco. Future investment or development activities will not be limited to a specified percentage of our assets. We intend to engage in such future investment or development activities in a manner that is consistent with the maintenance of our status as a REIT for federal income tax purposes. In addition, we may purchase or lease income-producing commercial and other types of properties for long-term investment, expand and improve the real estate presently owned or other properties purchased, or sell such real estate properties, in whole or in part, when circumstances warrant. We do not have a policy that restricts the amount or percentage of assets that will be invested in any specific property, however, our investments may be restricted by our debt covenants.

 

We may also continue to participate with third parties in property ownership, through joint ventures or other types of co-ownership. These investments may permit us to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring our portfolio.

 

Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness as may be incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over any distributions with respect to our common stock. Investments are also subject to our policy and therefore, not to be treated as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

Investments in Real Estate Mortgages

 

While our current portfolio consists of, and our business objectives emphasize, equity investments in commercial real estate, we may, at the discretion of the Board of Directors, invest in mortgages and other types

of real estate interests consistent with our qualification as a REIT. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable us to recoup its full investment. We do not presently intend to invest in mortgages or deeds of trust, but may invest in participating or convertible mortgages if we conclude that we may benefit from the cash flow or any appreciation in value of the property. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable us to recoup its full investment.

 

Securities of or Interests in Persons Primarily Engaged in Real Estate Activities

 

Subject to the percentage of ownership limitations and gross income tests necessary for our REIT qualification, we also may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

 

Dispositions

 

Our disposition of properties is based upon management’s periodic review of our portfolio and the determination by the Board of Directors that such action would be in our best interests. Any decision to dispose of a property will be made by our management and approved by a majority of the Board of Directors or a committee there of.thereof. Some holders of limited partnership interests in Boston Properties Limited Partnership,BPLP, including Messrs. Mortimer B. Zuckerman and Edward H. Linde, would incur adverse tax consequences upon the sale of certain of our properties that differ from the tax consequences to us. Consequently, holders of limited partnership interests in Boston Properties Limited PartnershipBPLP may have different objectives regarding the appropriate pricing and timing of any such sale. Such different tax treatment derives in most cases from the fact that we acquired these properties in exchange for partnership interests in contribution transactions structured to allow the prior owners to defer taxable gain. Generally such deferral continues so long as we do not dispose of the properties in a taxable transaction. Unless a sale by us of these properties is structured as a like-kind exchange or in a manner that otherwise allows such deferral to continue, recognition of the deferred tax gain allocable to these prior owners is generally triggered by the sale. Certain assets are subject to tax protection agreements and may limit our ability to dispose such assets.

Financing Policies

 

The agreement of limited partnership of BPLP and our certificate of incorporation and bylaws do not limit the amount or percentage of indebtedness that we may incur. We do not have a policy limiting the amount of indebtedness that we may incur. However, our mortgages, credit facilities and unsecured debt securities contain customary restrictions, requirements and other limitations on our ability to incur indebtedness. In addition, the agreement of limited partnership of Boston Properties Limited Partnership and our Certificate of Incorporation and Bylaws do not limit the amount or percentage of indebtedness that we may incur. We have not established any limit on the number or amount of mortgages that may be placed on any single property or on our portfolio as a whole.

 

Our Board of Directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including the purchase price of properties to be acquired with debt financing, the estimated market value of our properties upon refinancing and the ability of particular properties and Boston Properties Limited PartnershipBPLP as a whole to generate cash flow to cover expected debt service.

 

Policies with Respect to Other Activities

 

As the sole general partner of Boston Properties Limited Partnership,BPLP, we have the authority to issue additional common and preferred units of limited partnership interestsinterest of Boston Properties Limited Partnership.BPLP. We have in the past, and may continue in the future, to issue common or preferred units of limited partnership interestsinterest of Boston Properties Limited PartnershipBPLP to persons who contribute their direct or indirect interests in properties to us in exchange for such common or preferred units of limited partnership interest in Boston Properties Limited Partnership.BPLP. We have not engaged in trading, underwriting or agency distribution or sale of securities of issuers other than Boston Properties Limited PartnershipBPLP and we do not intend to do so. At all times,

we intend to make investments in such a manner as to maintain our qualification as a REIT, unless because of circumstances or changes in the Internal Revenue Code of 1986, as amended (or the Treasury Regulations), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT. We may make loans to third parties, including, without limitation, to joint ventures in which we participate. We intend to make investments in such a way that we will not be treated as an investment company under the 1940 Act. Our policies with respect to these and other activities may be reviewed and modified or amended from time to time by the Board of Directors.

 

Competition

 

We compete in the leasing of office and industrial space with a considerable number of other real estate companies, some of which may have greater marketing and financial resources than are available to us. In addition, our hotel properties compete for guests with other hotels, some of which may have greater marketing and financial resources than are available to us and to the manager of our hotels, Marriott® International, Inc.

 

Principal factors of competition in our primary business of owning, acquiring and developing office properties are the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the relevant market. Additionally, our ability to compete depends upon, among other factors, trends of the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

 

The Hotel Properties

 

We own our three hotel properties through a taxable REIT subsidiary (“TRS”). The TRS, a wholly-owned subsidiary of Boston Properties Limited Partnership,BPLP, is the lessee pursuant to leases for each of the hotel properties. As lessor, Boston Properties Limited PartnershipBPLP is entitled to a percentage of gross receipts from the hotel properties. The hotel leases allow all the economic benefits of ownership to flow to us. Marriott® International, Inc. continues to manage the hotel properties under the Marriott® name and under terms of the existing management agreements. Marriott has been engaged under

separate long-term incentive management agreements to operate and manage each of the hotels on behalf of the TRS. In connection with these arrangements, Marriott has agreed to operate and maintain the hotels in accordance with its system-wide standard for comparable hotels and to provide the hotels with the benefits of its central reservation system and other chain-wide programs and services. Under a separate management agreement for each hotel, Marriott acts as the TRS’ agent to supervise, direct and control the management and operation of the hotel and receives as compensation base management fees that are calculated as a percentage of the hotel’s gross revenues, and supplemental incentive fees if the hotel exceeds negotiated profitability breakpoints. In addition, the TRS compensates Marriott, on the basis of a formula applied to the hotel’s gross revenues, for certain system-wide services provided by Marriott, including central reservations, marketing and training. During 2004, 2003 and 2002, Marriott received an aggregate of approximately $4.0 million, $3.4 million and $5.5 million, respectively, under all three management agreements.

 

Seasonality

 

Our hotel properties traditionally have experienced significant seasonality in their operating income, with weighted-averagethe percentage of net operating income by quarter over the year ended December 31, 20032004 as follows:

 

First Quarter


 

Second Quarter


 

Third Quarter


 

Fourth Quarter


 

Second Quarter


 

Third Quarter


 

Fourth Quarter


12%

 28% 26% 34%
8% 28% 29% 35%

Corporate Governance

 

Since May 2003, we have implemented the following corporate governance initiatives to address certain legal requirements promulgated under the Sarbanes-Oxley ActBoston Properties is currently managed by a ten member Board of 2002, as well as the recently adopted New York Stock Exchange corporate governance listing standards:

We electedDirectors, which is divided into three new independentclasses (Class I, Class II and Class III). Our Board of Directors is currently composed of four Class I directors in May 2003 (Messrs. Lawrence(Mortimer B. Zuckerman, Carol B. Einiger, Alan B. Landis and Richard E. Salomon), three Class II directors (Lawrence S. Bacow, WilliamAlan J. Patricof and Martin Turchin) and three Class III directors (William M. Daley, Edward H. Linde and David A. Twardock);. The members of each class of our Board of Directors serve for three-year terms, and the terms of our current Class I, Class II and Class III directors expire upon the election and qualification of directors at the annual meetings of stockholders held in 2007, 2005 and 2006, respectively. At each annual meeting of stockholders, directors will be re-elected or elected for a full term of three years to succeed those directors whose terms are expiring. Alan B. Landis has resigned from the Board of Directors effective as of immediately prior to the 2005 annual meeting.

Our Board of Directors has the following three committees: (1) Audit, (2) Compensation and (3) Nominating and Corporate Governance. The membership of each of these committees at December 31, 2004 is described below.

Name of Director


Audit

Compensation

Nominating
and

Corporate
Governance


Lawrence S. Bacow

XX

William M. Daley

X*

Carol B. Einiger

X

Alan J. Patricof

X*

Richard E. Salomon

X*X

David A. Twardock

XX

X=Committeemember, *=Chair

Our Board of Directors established and adopted charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. Each committee is comprised of three (3) independent directors. A copy of each of these charters is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance.” On or about April 1, 2005, these charters will be available on our website under the heading “Corporate Governance.” A copy of each of these charters is also available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

Our Board of Directors determined that Alan J. Patricof, the Chairmanadopted Corporate Governance Guidelines, a copy of which is available on our Audit Committee, qualifies as an “audit committee financial expert” as such term is defined under Item 401 of Regulation S-K. Mr. Patricof is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14Awebsite at http://www.bostonproperties.com under the Exchange Act;

Our Audit Committee adoptedheading “Investors” and subheading “Governance.” On or about April 1, 2005 a copy of these guidelines will be available on our Audit and Non-Audit Services Pre-Approval Policy, which sets forthwebsite under the procedures and the conditions pursuantheading “Corporate Governance.” A copy of these guidelines is also available in print to which permissible servicesany stockholder upon written request addressed to be performed by our independent public accountants may be pre-approved.

Our Audit Committee established “Audit Committee Complaint Procedures” for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including the anonymous submission by employees of concerns regarding questionable accounting or auditing matters.Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers and employees. A copy of this code is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and we“Governance.” On or about April 1, 2005 a copy of this code will be available on our website under the heading “Corporate Governance.” We intend to disclose on this website any amendment to, or waiver of, any provision of this Code applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the New York Stock Exchange. A copy of this Code is also available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

 

Our Board of Directors established an Ethics Hotline that employees may use to anonymously report possible violations of the Code of Business Conduct and Ethics, including concerns regarding questionable accounting, internal accounting controls or auditing matters.

 

Our BoardOn May 26, 2004, Edward H. Linde, President and Chief Executive Officer of Directors established and adopted new charters for eachthe Company, submitted to the New York Stock Exchange (the “NYSE”) the Annual Written Affirmation required by Section 303A of its Audit, Compensation and Nominating andthe Corporate Governance Committees. Each committee is comprisedRules of three (3) independent directors. A copythe NYSE certifying that he was not aware of eachany violation by the Company of these charters is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and is available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.

Our Board of Directors adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.bostonproperties.com under the heading “Investors” and subheading “Governance” and is available in print to any stockholder upon written request addressed to Investor Relations, Boston Properties, Inc., 111 Huntington Avenue, Boston, MA 02199.NYSE corporate governance listing standards.

RISK FACTORS

 

Set forth below are the risks that we believe are material to our investors. We refer to the shares of our common stock and the units of limited partnership interest in Boston Properties Limited PartnershipBPLP together as our “securities,” and the investors who own shares and/or units, or both, as our “securityholders.” This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 34.37.

 

Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

 

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our office, industrial and hotel properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our securityholders will be adversely affected. The following factors, among others, may adversely affect the income generated by our office, industrial and hotel properties:

 

downturns in the national, regional and local economic climate;climates;

 

competition from other office, hotel and commercial buildings;

 

local real estate market conditions, such as oversupply or reduction in demand for office, hotel or other commercial space;

 

changes in interest rates and availability of attractive financing;

 

vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

 

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; and

 

declines in the financial condition of our tenants and our ability to collect rents from our tenants.

 

We are dependent upon the economic climates of our four core markets—Boston, Washington, D.C., midtown Manhattan and San Francisco.

 

Over 90% of our revenues in fiscal year 20032004 were derived from properties located in our four core markets: Boston, Washington, D.C., midtown Manhattan and San Francisco. As a result of the continued slowdown in economic activity, there has been an increase in vacancy rates for office properties in these markets compared with historical vacancy rates. A continued downturn in the economies of these markets, or the impact that thea downturn in the overall national economy may have upon these economies, could result in further reduced demand for office space. Because our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio), a decrease in demand for office space in turn could adversely affect our results of operations. Additionally, there are submarkets within our core markets that are dependent upon a limited number of industries. For example, in our Washington, D.C. market we are primarily dependent on leasing office properties to governmental agencies and contractors as well as legal firms, infirms. In our midtown Manhattan market we have historically leased properties to financial, legal and other professional firms and in our suburban Boston submarket we have historically leased office buildings to companies in the technology sector.firms. A significant downturn in one or more of these sectors could adversely affect our results of operations.

Our investment in property development may be more costly than anticipated.

 

We intend to continue to develop and substantially renovate office industrial and hotel properties. Our current and future development and construction activities may be exposed to the following risks:

 

we may be unable to proceed with the development of properties because we cannot obtain financing on favorable terms;terms or at all;

 

we may incur construction costs for a development project which exceed our original estimates due to increases in interest rates and increased materials, labor, leasing or other costs, which could make completion of the project less profitable because market rents may not increase sufficiently to compensate for the increase in construction costs;

 

we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

 

we may abandon development opportunities after we begin to explore them and as a result we may lose deposits or fail to recover expenses already incurred;

 

we may expend funds on and devote management’s time to projects which we do not complete; and

 

we may be unable to complete construction and/or leasing of a property on schedule.

 

Investment returns from our developed properties may be lower than anticipated.

 

Our developed properties may be exposed to the following risks:

 

we may lease developed properties at rental rates that are less than the rates projected at the time we decide to undertake the development; and

 

occupancy rates and rents at newly developed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investmentinvestments being less profitable than we expected or not profitable at all.

 

Our use of joint ventures may limit our flexibility with jointly owned investments.

 

In appropriate circumstances, we intend to develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. We currently have sixseven joint ventures that are not consolidated with our financial statements. Our share of the aggregate revenue of these joint ventures represents 2.3%2.1% of our total revenue (the sum of our total consolidated revenue and our share of such joint venture revenue). WeOur participation in joint ventures is subject to the risks that:

we could become engaged in a dispute with any of our joint venturesventure partners that might affect our ability to develop or operate a property. In addition, property;

our joint venture partners may have different objectives than we dohave regarding the appropriate timing and terms of any sale or refinancing of properties. Finally, in many instances, properties; and

our joint venture partners may have competing interests in our markets that could create conflict of interest issues.

 

In addition, our ability to enter into other joint ventures with third parties to pursue the acquisition of value-added investments similar to those being pursued by the Value-Added Fund is limited by the terms of the Value-Added Fund’s partnership agreement.

We face risks associated with property acquisitions.

 

We have and intend to continue to acquire properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure. Our acquisition activities and their success are subject to the following risks:

 

we may be unable to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs;

we may be unable to obtain financing for acquisitions on favorable terms or at all;

 

acquired properties may fail to perform as expected;

 

the actual costs of repositioning or redeveloping acquired properties may be highergreater than our estimates;

acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and

 

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and this could have an adverse effect on our results of operations and financial condition.

 

We have acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in Boston Properties Limited Partnership.BPLP. This acquisition structure has the effect, among others, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions on dispositions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

 

Acquired properties may expose us to unknown liability.

 

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Unknown liabilities with respect to acquired properties might include:

 

liabilities for clean-up of undisclosed environmental contamination;

 

claims by tenants, vendors or other persons against the former owners of the properties;

 

liabilities incurred in the ordinary course of business; and

 

claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

 

Competition for acquisitions may result in increased prices for properties.

 

We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities with other investors and this competition may adversely affect us by subjecting us to the following risks:

 

we may be unable to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and private REITs, institutional investment funds and other real estate investors;

 

even if we enter into an acquisition agreement for a property, it will likely contain conditions to closing, including completion of due diligence investigations to our satisfaction which mayor other conditions that are not be satisfied; and

within our control, which may not be satisfied, and the failure to complete the acquisition may result in our failure to recoup acquisition-related costs; and

 

even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price.

 

We face potential difficulties or delays renewing leases or re-leasing space.

 

We derive most of our income from rent received from our tenants. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease netnew space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our cash flow could decrease and our ability to make distributions to our securityholders could be adversely affected.

We face potential adverse effects from major tenants’ bankruptcies or insolvencies.

 

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties. Our tenants could file for bankruptcy protection or become insolvent in the future. We cannot evict a tenant solely because of its bankruptcy. On the other hand, a bankrupt tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flow and results of operations.

 

We may have difficulty selling our properties, which may limit our flexibility.

 

Large and high-quality office, industrial and hotel properties like the ones that we own could be difficult to sell. This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions. In addition, federal tax laws limit our ability to sell properties that we have owned for fewer than four years and this may affect our ability to sell properties without adversely affecting returns to our securityholders. These restrictions reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.

 

Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we developed and have owned for a significant period of time or which we acquired through tax deferred contribution transactions in exchange for partnership interests in Boston Properties Limited PartnershipBPLP often have low tax bases. If we dispose of these properties outright in taxable transactions, we may be required to distribute a significant amount of the taxable gain to our securityholders under the requirements of the Internal Revenue Code for REIT’s like us,REITs, which in turn would impact our cash flow. In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for our partnership interests under tax protection agreements with contributors. To dispose of low basis or tax-protected properties efficiently we often use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low bases and other tax attributes (including tax protection covenants).

 

Our properties face significant competition.

 

We face significant competition from developers, owners and operators of office, industrial and other commercial real estate, including sublease space available from our tenants. Substantially all of our properties face competition from similar properties in the same market. SuchThis competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to makelease available space available at lower prices than the space in our properties.

Because we own three hotel properties, we face the risks associated with the hospitality industry.

 

Because the lease payments we receive under the hotel leases are based on a participation in the gross receipts of the hotels, if the hotels do not generate sufficient receipts, our cash flow would be decreased, which could reduce the amount of cash available for distribution to our securityholders. The following factors, among others, are common to the hotel industry, and may reduce the receipts generated by our hotel properties:

 

our hotel properties compete for guests with other hotels, a number of which have greater marketing and financial resources than our hotel-operating business partners;

 

if there is an increase in operating costs resulting from inflation and other factors, our hotel-operating business partners may not be able to offset such increase by increasing room rates;

 

our hotel properties are subject to the fluctuating and seasonal demands of business travelers and tourism; and

our hotel properties are subject to general and local economic and social conditions that may affect demand for travel in general, including war and terrorism.

 

In addition, because all three of our hotel properties are located within a two-mile radius in downtown Boston and Cambridge, they are all subject to the Boston market’s fluctuations in demand, increases in operating costs and increased competition from additions in supply.

 

Because of the ownership structure of our three hotel properties, we face potential adverse effects from changes to the applicable tax laws.

 

We own three hotel properties. However, under the Internal Revenue Code, REITs like us are not allowed to operate hotels directly or indirectly. Accordingly, we lease our hotel properties to our taxable REIT subsidiary, or TRS. As lessor, we are entitled to a percentage of the gross receipts from the operation of the hotel properties. Marriott International, Inc. manages the hotels under the Marriott® name pursuant to a management contract with the TRS as lessee. While the TRS structure allows the economic benefits of ownership to flow to us, the TRS is subject to tax on its income from the operations of the hotels at the federal and state level. In addition, the TRS is subject to detailed tax regulations that affect how it may be capitalized and operated. If the tax laws applicable to TRS’s are modified, we may be forced to modify the structure for owning our hotel properties, and such changes may adversely affect the cash flows from our hotels. In addition, the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, and we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative actionactions may prospectively or retroactively modify the tax treatment of the TRS and, therefore, may adversely affect our after-tax returns from our hotel properties.

 

Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.

 

The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, pursuant tounder the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our securityholders.

 

Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.

Some potential losses are not covered by insurance.

 

We carry insurance coverage on our properties of types and in amounts and with deductibles that we believe are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act, or TRIA, was enacted in November 2002 to require regulated insurers to make available coverage for certified acts of terrorism (as defined by the statute) through December 31, 2004, subjectwhich date was extended to extensionDecember 31, 2005 by the United States Department of Treasury through December 31, 2005. The Federal Terrorism Risk Insurance Acton June 18, 2004. TRIA expires on December 31, 2005, unless extended, and therefore, we cannot currently anticipate whether the Actit will renew upon expiration. In connection with the renewal of coverage for the policy year beginning March 1, 2004, we are currently evaluating coverage on terms and amounts comparable to our existing policies, subject to cost and market availability.be extended. Our current property insurance program provides an $890 million per occurrence limit for both “certified” and “non-certified” acts of terrorism as defined by TRIA. We also carry nuclear, biological and chemical terrorism insurance coverage carries(“NBC Coverage”) with a $640 million per occurrence limit includingfor “certified” acts of terrorism as defined by TRIA, which is provided by IXP, Inc. as a direct insurer. Under TRIA, this NBC Coverage is backstopped by the Federal Government after the payment of the required deductible and 10% coinsurance. This coverage provided by IXP expires on May 1, 2005. We currently intend to extend such coverage for certified actsso long as TRIA is in effect and are evaluating whether to increase the amount of terrorism. Additionally, our 2003 program provides $25 millionthe coverage. In the event TRIA is not extended beyond December 31, 2005, (1) the NBC Coverage provided by IXP will terminate, and (2) we have the right to replace a portion of coverage for acts of terrorism other(other than thoseNBC Coverage) that would have constituted both “certified” underand “non-certified” acts of terrorism had TRIA not expired. We intend to continue to monitor the Federal Terrorism Risk Insurance Act.

scope, nature and cost of available terrorism insurance and maintain insurance in amounts and on terms that are commercially reasonable.

We also currently carry earthquake insurance on our properties located in areas known to be subject to earthquakes in an amount and subject to deductibles and self-insurance that we believe are commercially reasonable. Specifically, we currently carry earthquake insurance which covers our San Francisco portfolio with a $120 million per occurrence limit and a $120 million aggregate limit, $20 million of which is provided by IXP, Inc., as a direct insurer by IXP, Inc.insurer. The amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. As a result of increased costs of coverage and decreasedlimited availability, the amount of third partythird-party earthquake insurance that we may be able to purchase on commercially reasonable terms may be reduced. In addition, we may discontinue earthquake insurance on some or all of our properties in the future if the premiums exceed our estimation of the value of the coverage.

 

In January 2002, we formed a wholly-owned taxable REIT subsidiary, IXP, Inc. (“IXP”), or IXP, to act as a captive insurance company and be one of the elements of our overall insurance program. IXP acts as a primary carrierdirect insurer with respect to a portion of our earthquake insurance coverage for our Greater San Francisco properties.properties and our NBC Coverage for “certified acts of terrorism” under TRIA. Insofar as we own IXP, we are responsible for its liquidity and capital resources, and the accounts of IXP are part of our consolidated financial statements. If we experience a loss and IXP is required to pay under its insurance policy, we would ultimately record the loss to the extent of IXP’s 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 the future IXP may provide additional or different coverage, as a reinsurer or a primary insurer, depending on the availability and cost of third-party insurance in the marketplace and the level of self-insurance that we believe is commercially reasonable.

 

We continue to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism in particular, but we can notcannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars acts of nuclear, biological or chemical terrorism or the presence of mold at our properties, for which we 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 we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that we could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and financial condition and results of operations.

Actual or Threatened Terrorist Attacks may Adversely Affect our Ability to Generate Revenues and the Value of our Properties.

We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or threatened terrorism attacks, including midtown Manhattan, Washington, D.C., Boston and San Francisco. As a result, some tenants in these markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future terrorist activity. This could result in an overall decrease in the demand for office space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “—Some potential losses are not covered by insurance.

 

Potential liability for environmental contamination could result in substantial costs.

 

Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties simply because of our current or past ownership or operation of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our securityholders because:

 

as owner or operator we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;

 

the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;

 

even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and

 

governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

 

These costs could be substantial and in extreme cases could exceed the amount of our insurance or the value of the contaminated property. We currently carry environmental insurance in an amount and subject to deductibles that we believe are commercially reasonable. Specifically, we carry a pollution legal liability policy with a $10 million limit per incident and a policy aggregate limit of $25 million. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property.

In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Changes in laws increasing the potential liability for environmental conditions existing at our properties, or increasing the restrictions on the handling, storage or discharge of hazardous or toxic substances or petroleum products or other actions may result in significant unanticipated expenditures.

 

Environmental laws also govern the presence, maintenance and removal of asbestos. Such laws require that owners or operators of buildings containing asbestos:

 

properly manage and maintain the asbestos;

 

notify and train those who may come into contact with asbestos; and

 

undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

 

Some of our properties are located in urban, industrial and previously developed areas where fill or current or historic industrial uses of the areas have caused site contamination. It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos surveys with respect to our acquisition of properties. These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling. Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usage create a potential environmental problem, and for contamination in groundwater. Even though these environmental assessments are conducted, there is still the risk that:

 

the environmental assessments and updates did not identify all potential environmental liabilities;

 

a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments;

 

new environmental liabilities have developed since the environmental assessments were conducted; and

 

future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us.

 

Inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of the affected property.

We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk.

 

We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow will not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

 

We have agreements with a number of limited partners of Boston Properties Limited PartnershipBPLP who contributed properties in exchange for partnership interests that require Boston Properties Limited PartnershipBPLP to maintain for specified periods of time secured debt on certain of our assets and/or allocate partnership debt to such limited partners to enable them to continue to defer recognition of their taxable gain with respect to the contributed property. These tax protection and debt allocation agreements may restrict our ability to repay or refinance debt.

An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets.

 

As of December 31, 2003,2004, we had approximately $439$424 million, and may incur more, of indebtedness that bears interest at variable rates. Accordingly, if interest rates increase,,so will our interest costs, which wouldcould adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our securityholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures. We may from time to time enter into agreements such as interest rate swaps, caps, floors and other interest rate hedging contracts with respect to a portion of our variable rate debt. While these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable. In addition, an increase in interest rates could decrease the amount third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in respect to changes in economic or other conditions.

 

Covenants in our debt agreements could adversely affect our financial condition.

 

The mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Our unsecured credit facility, unsecured debt securities and secured construction loans contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our continued ability to borrow under our credit facilities is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. Additionally, in the future our ability to satisfy current or prospective lenders’ insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage against acts of terrorism than is available to us in the marketplace or on commercially reasonable terms.terms, particularly if TRIA is not extended beyond December 31, 2005.

 

We rely on debt financing, including borrowings under our unsecured credit facility, issuances of unsecured debt securities and debt secured by individual properties, to finance our acquisition and development activities and for working capital. If we are unable to obtain debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely

affected. If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, our unsecured debt agreements contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

 

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock or debt securities.

 

On February 18, 2004,March 4, 2005, we had approximately $5.1$5.0 billion in total indebtedness outstanding on a consolidated basis (excluding unconsolidated joint venture debt). Debt to market capitalization ratio, which measures total debt as a percentage of the aggregate of total debt plus the market value of outstanding equity securities, is often used by analysts to gauge leverage for equity REITs such as us. Our market value is calculated using the price per share of our common stock. Using the closing stock price of $51.48$61.85 per share of our common stock of Boston Properties, Inc. on February 18, 2004,March 4, 2005, multiplied by the sum of (1) the actual aggregate number of outstanding common partnership units of Boston Properties Limited PartnershipBPLP (including common partnership units held by us) and, (2) the number of common partnership units available upon conversion of all outstanding preferred partnership units of Boston Properties Limited Partnership,BPLP and (3) the number of common units issuable upon conversion of all outstanding LTIP units assuming all conditions have been met for conversion of the LTIP units, our debt to market capitalization ratio was approximately 43.3%37.04% as of February 18, 2004.March 4, 2005.

Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. However, there can be no assurance we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs.costs and/or difficulty in obtaining additional financing. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally. There is a risk that changes in our debt to market capitalization ratio, which is in part a function of our stock price, or our ratio of indebtedness to other measures of asset value used by financial analysts may have an adverse effect on the market price of our equity or debt securities.

 

Further issuances of equity securities may be dilutive to current securityholders.

 

The interests of our existing securityholders could be diluted if additional equity securities are issued to finance future developments, acquisitions, or repay indebtedness. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.

 

Failure to qualify as a real estate investment trust would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of dividends.

 

If we fail to qualify as a real estate investment trust, or REIT, for federal income tax purposes, we will be taxed as a corporation. We believe that we are organized and qualified as a REIT and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

 

In addition, we currently hold certain of our properties, and the Value-Added Fund holds its properties, through a subsidiary that has elected to be taxed as a REIT and we may in the future determine that it is in our best interests to hold one or more of our other properties through one or more subsidiaries that elect to be taxed as REITs. If any of these subsidiaries fails to

qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes.

 

If we fail to qualify as a REIT we will face serious tax consequences that will substantially reduce the funds available for payment of dividends for each of the years involved because:

 

we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes;

 

unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified; and

 

all dividends will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits.

 

In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.

 

In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the real estate investment trustREIT distribution requirements, even if the then prevailing market conditions are not favorable for these borrowings. To qualify as REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may need short-term debt or long-term debt, or proceeds from asset sales, creation of joint ventures or salesales of common stock to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.

 

Limits on changes in control may discourage takeover attempts beneficial to stockholders.

 

Provisions in our certificate of incorporation and bylaws, our shareholder rights agreement and the limited partnership agreement of Boston Properties Limited Partnership,BPLP, as well as provisions of the Internal Revenue Code and Delaware corporate law, may:

 

delay or prevent a change of control over us or a tender offer, even if such action might be beneficial to our stockholdersstockholders; and

 

limit our stockholders’ opportunity to receive a potential premium for their shares of common stock over then-prevailing market prices.

 

Stock Ownership Limit

 

Primarily toTo facilitate maintenance of our qualification as a REIT and to otherwise address concerns relating to concentration of capital stock ownership, our certificate of incorporation generally prohibits ownership, directly, indirectly or beneficially, by any single stockholder of more than 6.6% of the number of outstanding shares of any class or series of our equity stock. We refer to this limitation as the “ownership limit.” Our board of directors may waive or modify the ownership limit with respect to one or more

persons if it is satisfied that ownership in excess of this limit will not jeopardize our status as a REIT for federal income tax purposes. In addition, under our certificate of incorporation each of Mortimer B. Zuckerman and Edward H. Linde, along with their respective families and affiliates, as well as, in general, pension plans and mutual funds, may actually and beneficially own up to 15% of the number of outstanding shares of any class or series of our equity common stock. Shares owned in violation of the ownership limit will be subject to the loss of rights to distributions and voting and other penalties. The ownership limit may have the effect of inhibiting or impeding a change in control.

 

Boston Properties LimitedBPLP’s Partnership Agreement

 

We have agreed in the limited partnership agreement of Boston Properties Limited PartnershipBPLP not to engage in specified extraordinary transactions, including, among others, business combinations, unless limited partners of Boston Properties Limited PartnershipBPLP other than Boston Properties, Inc. receive, or have the opportunity to receive, either (1) the same consideration for their partnership interests as holders of our common stock in the transaction or (2) limited partnership units that, among other things, would entitle the holders, upon redemption of these units, to receive shares of common equity of a publicly traded company or the same consideration as holders of our common stock received in the transaction. If these limited partners would not receive such consideration, we cannot engage in the transaction unless limited partners holding at least 75% of thesethe common units of limited partners votepartnership interest, other than those held by Boston Properties, Inc. or its affiliates, consent to approve the transaction. In addition, we have agreed in the limited partnership agreement of Boston Properties Limited PartnershipBPLP that we will not complete specified extraordinary transactions, including among

others, business combinations, in which we receive the approval of our common stockholders unless these(1) limited partners holding at least 75% of the common units of limited partnership interest, other than those held by Boston Properties, Inc. or its affiliates, consent to the transaction or (2) the limited partners of BPLP are also allowed to vote and the transaction would have been approved had these limited partners been able to vote as common stockholders on the transaction. Therefore, if our common stockholders approve a business combination that requires a vote of stockholders,specified extraordinary transaction, the partnership agreement requires the following before we can complete the transaction:

 

holders of partnership interests in Boston Properties Limited Partnership,BPLP, including Boston Properties, Inc., must vote on the matter;

 

Boston Properties, Inc. must vote its partnership interests in the same proportion as our stockholders voted on the transaction; and

 

the result of the vote of holders of partnership interests in Boston Properties Limited PartnershipBPLP must be such that had such vote been a vote of stockholders, the business combination would have been approved.

 

As a result of these provisions, a potential acquirer may be deterred from making an acquisition proposal, and we may be prohibited by contract from engaging in a proposed extraordinary transaction, including a proposed business combination, even though our stockholders approve of the combination.transaction.

 

Shareholder Rights Plan

 

We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock, because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value, which would substantially reduce the value and influence of the stock owned by the acquiring person. Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.

 

We may change our policies without obtaining the approval of our stockholders.

 

Our operating and financial policies, including our policies with respect to acquisitions orof real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies.

 

Our success depends on key personnel whose continued service is not guaranteed.

 

We depend on the efforts of key personnel, particularly Mortimer B. Zuckerman, Chairman of our boardBoard of directors,Directors, and Edward H. Linde, our President and Chief Executive Officer. Among the reasons that Messrs.

Zuckerman and Linde are important to our success is that each has a national reputation, which attracts business and investment opportunities and assists us in negotiations with lenders. If we lost their services, our relationships with lenders, potential tenants and industry personnel could diminish. Mr. Zuckerman has substantial outside business interests that could interfere with his ability to devote his full time to our business and affairs.

 

Our twothree Executive Vice Presidents Chief Financial Officer and other executive officers that serve as managers of our regional offices also have strong reputations. Their reputations aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit prospects. While we believe that we could find replacements for these key personnel, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, prospective tenants and industry personnel.

Conflicts of interest exist with holders of interests in Boston Properties Limited Partnership.BPLP.

 

Sales of properties and repayment of related indebtedness will have different effects on holders of interests in Boston Properties Limited PartnershipBPLP than on our stockholders.

 

Some holders of interests in Boston Properties Limited Partnership,BPLP, including Messrs. Zuckerman and Linde, would incur adverse tax consequences upon the sale of certain of our properties and on the repayment of related debt which differ from the tax consequences to us and our stockholders. Consequently, these holders of partnership interests in Boston Properties Limited PartnershipBPLP may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While we have exclusive authority under the limited partnership agreement of Boston Properties Limited PartnershipBPLP to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, subject, in the case of certain properties, to the contractual commitments described below, any such decision would require the approval of our board of directors. As directors and executive officers, Messrs. Zuckerman and Linde could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness.

 

Agreement not to sell some propertiesproperties..

 

Under the terms of the limited partnership agreement of Boston Properties Limited Partnership,BPLP, we have agreed not to sell or otherwise transfer some of our properties, prior to specified dates, in any transaction that would trigger taxable income, without first obtaining the consent of Messrs. Zuckerman and Linde. However, we are not required to obtain their consent if, during the applicable period, each of them does not hold at least 30% of his original interests in Boston Properties Limited Partnership,BPLP, or if those properties are transferred in a nontaxable event. In addition, we have entered into similar agreements with respect to other properties that we have acquired in exchange for partnership interests in Boston Properties Limited Partnership.BPLP. Pursuant to those agreements, we are responsible for the reimbursement of tax costs to the prior owners if the subject properties are sold in a taxable sale. Our obligations to the prior owners are generally limited in time and only apply to actual damages suffered. As of December 31, 2003,2004, there were a total of 3328 properties subject to these restrictions, and those properties are estimated to have accounted for approximately 55.1%42.0% of our total revenue for the year ended December 31, 2003.2004.

 

Boston Properties Limited PartnershipBPLP has also entered into agreements providing prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness they guarantee is repaid or reduced, additional and/or substitute indebtedness. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements.

Messrs. Zuckerman and Linde will continue to engage in other activities.

 

Messrs. Zuckerman and Linde have a broad and varied range of investment interests. Either one could acquire an interest in a company which is not currently involved in real estate investment activities but which may acquire real property in the future. However, pursuant to each of their employment agreements, Messrs. Zuckerman and Linde will not, in general, have management control over such companies and, therefore, they may not be able to prevent one or more of such companies from engaging in activities that are in competition with our activities.

 

Changes in market conditions could adversely affect the market price of our common stock.

 

As with other publicly traded equity securities, the value of our common stock depends on various market conditions that may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

 

the extent of investor interest in our securities;

 

the general reputation of real estate investment trustsREITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

our underlying asset value;

 

investor confidence in the stock and bond markets, generally;

 

national economic conditions;

 

changes in tax laws;

 

our financial performance;

 

change in our credit rating; and

 

general stock and bond market conditions.

 

The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends. Consequently, our common stock may trade at prices that are highergreater or lowerless than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish.

 

The number of shares available for future sale could adversely affect the market price of our stock.

 

In connection with and subsequent to our initial public offering, we have completed many private placement transactions in which shares of capital stock of Boston Properties, Inc. or partnership interests in Boston Properties Limited PartnershipBPLP were issued to owners of properties we acquired or to institutional investors. This common stock, or common stock issuable on conversion of preferred stock or in exchange for such partnership interests in Boston Properties Limited Partnership,BPLP, may be sold in the public securities markets over time under registration rights we granted to these investors. Additional common stock reservedissuable under our employee benefit and other incentive plans, including as a result of the grant of stock options and restricted stock,equity securities, may also be sold in the market at some time in the future. Future sales of our common stock in the market could adversely affect the price of our common stock. We cannot predict the effect the perception in the market that such sales may occur will have on the market price of our common stock.

 

We did not obtain new owner’s title insurance policies in connection with properties acquired during our initial public offering.

 

We acquired many of our properties from our predecessors at the completion of our initial public offering in June 1997. Before we acquired these properties each of them was insured by a title insurance policy. We did not

obtain new owner’s title insurance policies in connection with the acquisition of these properties, however,properties. However, to the extent we have financed properties acquired in connection with the IPO, we have obtained new title insurance policies. Nevertheless, because in many instances we acquired these properties indirectly by acquiring ownership of the entity which owned the property and those owners remain in existence as our subsidiaries, some of these title insurance policies may continue to benefit us. Many of these title insurance policies may be for amounts less than the current or future values of the applicable properties. If there was a title defect related to any of these properties, or to any of the properties acquired at the time of our initial public offering, that is no longer covered by a title insurance policy, we could lose both our capital invested in and our anticipated profits from such property. We have obtained title insurance policies for all properties that we have acquired after our initial public offering.offering, however, these policies may be for amounts less than the current or future values of the applicable properties.

 

We face possible adverse changes in tax laws.

 

From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. The shortfall in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income and may be assessed interest and penalties on such additional taxes.income. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends.

We face possible state and local tax audits.

Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits. Although we believe that we have substantial arguments in favor of our positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.

 

Item 2.Properties

 

At December 31, 2003,2004, our portfolio consisted of 140125 properties totaling 43.944.1 million net rentable square feet. Our properties consisted of (1) 131119 office properties, comprised of 103102 Class A office buildings, including three properties under construction and 2817 properties that support both office and technical uses, (2) fourone industrial properties,property, (3) two retail properties, and (4) three hotels. In addition, we own or control 43 parcels543 acres of land for future development. The following table setsset forth below shows information relating to the properties we owned, or in which we had an ownership interest, in, at December 31, 2003:2004. Information relating to properties owned by the Value-Added Fund is not included in our portfolio information tables or any other portfolio level statistics because the Value-Added Fund invests in assets within our existing markets that have deficiencies in property characteristics which provide an opportunity to create value through repositioning, refurbishment or renovation and we believe including such information in our portfolio tables and statistics would render the portfolio information less useful to investors. Information relating to the Value-Added Fund is set forth below separately.

 

Properties


  

Location


  %
Leased


 Number
of
Buildings


  Net
Rentable
Square
Feet


  

Location


  %
Leased


 Number
of
Buildings


  Net
Rentable
Square
Feet


Class A Office

                  

399 Park Avenue

  New York, NY  99.7% 1  1,679,972  New York, NY  100.0% 1  1,681,641

Citigroup Center

  New York, NY  99.9% 1  1,576,803  New York, NY  94.4% 1  1,578,021

Times Square Tower

  New York, NY  84.6% 1  1,234,218

800 Boylston Street at The Prudential Center

  Boston, MA  96.2% 1  1,175,739  Boston, MA  95.6% 1  1,182,299

280 Park Avenue

  New York, NY  98.5% 1  1,170,080  New York, NY  100.0% 1  1,176,391

5 Times Square

  New York, NY  100.0% 1  1,101,779  New York, NY  100.0% 1  1,101,779

599 Lexington Avenue

  New York, NY  98.8% 1  1,018,843  New York, NY  100.0% 1  1,018,793

Embarcadero Center Four

  San Francisco, CA  94.5% 1  936,788  San Francisco, CA  96.0% 1  933,437

Riverfront Plaza

  Richmond, VA  89.2% 1  906,033  Richmond, VA  91.3% 1  909,020

111 Huntington Avenue at The Prudential Center

  Boston, MA  99.3% 1  853,672  Boston, MA  100.0% 1  853,686

Embarcadero Center One

  San Francisco, CA  95.7% 1  836,582  San Francisco, CA  89.6% 1  833,915

Embarcadero Center Two

  San Francisco, CA  85.9% 1  778,712  San Francisco, CA  86.1% 1  777,579

Embarcadero Center Three

  San Francisco, CA  80.0% 1  768,949  San Francisco, CA  73.0% 1  771,948

Democracy Center

  Bethesda, MD  84.6% 3  680,876

100 East Pratt Street

  Baltimore, MD  90.9% 1  637,303

Metropolitan Square (51% ownership)

  Washington, D.C.  99.9% 1  585,446

Reservoir Place

  Waltham, MA  80.3% 1  526,394

601 and 651 Gateway Boulevard

  South San Francisco, CA  54.6% 2  509,194

101 Huntington Avenue at The Prudential Center

  Boston, MA  86.1% 1  504,624

Embarcadero Center West Tower

  San Francisco, CA  77.6% 1  467,793

One and Two Reston Overlook

  Reston, VA  98.5% 2  445,892

Properties


  

Location


  %
Leased


 Number
of
Buildings


  Net
Rentable
Square
Feet


  

Location


  %
Leased


 Number
of
Buildings


  Net
Rentable
Square
Feet


Democracy Center

  Bethesda, MD  81.6% 3  681,062

100 East Pratt Street

  Baltimore, MD  95.1% 1  637,605

Metropolitan Square (51% ownership)

  Washington, D.C.  99.1% 1  585,220

Reservoir Place

  Waltham, MA  81.7% 1  526,165

601 and 651 Gateway Boulevard

  South San Francisco, CA  49.5% 2  509,283

101 Huntington Avenue at The Prudential Center

  Boston, MA  80.9% 1  504,628

Embarcadero Center West Tower

  San Francisco, CA  100.0% 1  473,774

One and Two Reston Overlook

  Reston, VA  94.1% 2  445,354

Two Freedom Square

  Reston, VA  100.0% 1  421,502  Reston, VA  99.4% 1  421,502

One Tower Center

  East Brunswick, NJ  84.1% 1  412,222  East Brunswick, NJ  71.1% 1  412,222

One Freedom Square

  Reston, VA  100.0% 1  410,308  Reston, VA  100.0% 1  410,362

Market Square North (50% ownership)

  Washington, D.C.  100.0% 1  401,279  Washington, D.C.  100.0% 1  401,279

Capital Gallery

  Washington, D.C.  100.0% 1  396,894

140 Kendrick Street (25% ownership)

  Needham, MA  100.0% 3  380,987

140 Kendrick Street

  Needham, MA  100.0% 3  380,987

One and Two Discovery Square

  Reston, VA  98.0% 2  366,939  Reston, VA  100.0% 2  367,018

265 Franklin Street (35% ownership)

  Boston, MA  74.6% 1  344,126  Boston, MA  73.9% 1  344,608

Orbital Science Campus

  Dulles, VA  100.0% 3  337,228  Dulles, VA  100.0% 3  337,228

1333 New Hampshire Avenue Avenue

  Washington, D.C.  100.0% 1  315,363

1333 New Hampshire Avenue

  Washington, D.C.  100.0% 1  315,371

Waltham Weston Corporate Center

  Waltham, MA  66.9% 1  306,801  Waltham, MA  88.5% 1  306,789

Capital Gallery

  Washington, D.C.  100.0% 1  301,647

NIMA Building

  Reston, VA  100.0% 1  263,870  Reston, VA  100.0% 1  263,870

Reston Corporate Center

  Reston, VA  100.0% 2  261,046  Reston, VA  100.0% 2  261,046

Quorum Office Park

  Chelmsford, MA  100.0% 2  259,918  Chelmsford, MA  100.0% 2  259,918

New Dominion Technology Park, Building Two

  Herndon, VA  100.0% 1  257,400

611 Gateway Boulevard

  South San Francisco, CA  0.0% 1  256,302  South San Francisco, CA  100.0% 1  256,302

Lockheed Martin Building

  Reston, VA  100.0% 1  255,244  Reston, VA  100.0% 1  255,244

1330 Connecticut Avenue

  Washington, D.C.  99.4% 1  252,136

200 West Street

  Waltham, MA  100.0% 1  248,048  Waltham, MA  100.0% 1  248,048

500 E Street

  Washington, D.C.  100.0% 1  242,769  Washington, D.C.  100.0% 1  242,769

New Dominion Tech. Park, Building One

  Herndon, VA  100.0% 1  235,201

New Dominion Technology. Park, Building One

  Herndon, VA  100.0% 1  235,201

510 Carnegie Center

  Princeton, NJ  100.0% 1  234,160  Princeton, NJ  100.0% 1  234,160

Cambridge Center One

  Cambridge, MA  91.0% 1  215,385  Cambridge, MA  84.5% 1  215,385

Sumner Square Office

  Washington, D.C.  100.0% 1  207,620  Washington, D.C.  100.0% 1  207,620

University Place

  Cambridge, MA  100.0% 1  195,282  Cambridge, MA  100.0% 1  195,282

1301 New York Avenue

  Washington, D.C.  100.0% 1  188,358  Washington, D.C.  100.0% 1  188,358

2600 Tower Oaks Boulevard

  Rockville, MD  100.0% 1  178,887  Rockville, MD  100.0% 1  178,887

Cambridge Center Eight

  Cambridge, MA  100.0% 1  177,226  Cambridge, MA  100.0% 1  177,226

Newport Office Park

  Quincy, MA  44.6% 1  168,829  Quincy, MA  79.1% 1  169,888

Lexington Office Park

  Lexington, MA  81.1% 2  166,735  Lexington, MA  80.9% 2  166,689

210 Carnegie Center

  Princeton, NJ  88.9% 1  165,042

191 Spring Street

  Lexington, MA  100.0% 1  162,700  Lexington, MA  100.0% 1  162,700

206 Carnegie Center

  Princeton, NJ  100.0% 1  161,763  Princeton, NJ  100.0% 1  161,763

210 Carnegie Center

  Princeton, NJ  100.0% 1  161,112

10 & 20 Burlington Mall Road

  Burlington, MA  97.2% 2  153,048  Burlington, MA  74.1% 2  153,048

Cambridge Center Ten

  Cambridge, MA  100.0% 1  152,664  Cambridge, MA  100.0% 1  152,664

214 Carnegie Center

  Princeton, NJ  95.4% 1  150,416  Princeton, NJ  75.4% 1  150,227

Old Federal Reserve

  San Francisco, CA  99.8% 1  149,592

Old Federal Reserve (1)

  San Francisco, CA  0.8% 1  149,592

212 Carnegie Center

  Princeton, NJ  98.5% 1  148,153  Princeton, NJ  97.6% 1  149,354

506 Carnegie Center

  Princeton, NJ  100.0% 1  136,213  Princeton, NJ  100.0% 1  136,213

508 Carnegie Center

  Princeton, NJ  100.0% 1  131,085  Princeton, NJ  100.0% 1  131,085

Waltham Office Center

  Waltham, MA  91.7% 3  129,041  Waltham, MA  80.4% 3  129,041

202 Carnegie Center

  Princeton, NJ  97.6% 1  128,705  Princeton, NJ  87.3% 1  128,705

101 Carnegie Center

  Princeton, NJ  100.0% 1  123,659  Princeton, NJ  100.0% 1  123,659

504 Carnegie Center

  Princeton, NJ  100.0% 1  121,990

91 Hartwell Avenue

  Lexington, MA  81.8% 1  121,685

Montvale Center

  Gaithersburg, MD  94.7% 1  120,777

40 Shattuck Road

  Andover, MA  88.6% 1  120,000

Properties


  

Location


  %
Leased


 Number
of
Buildings


  Net Rentable
Square Feet


  

Location


  %
Leased


 Number
of
Buildings


  Net Rentable
Square Feet


504 Carnegie Center

  Princeton, NJ  100.0% 1  121,990

91 Hartwell Avenue

  Lexington, MA  79.6% 1  121,486

Montvale Center

  Gaithersburg, MD  88.7% 1  120,861

40 Shattuck Road

  Andover, MA  95.6% 1  120,000

502 Carnegie Center

  Princeton, NJ  95.3% 1  116,374  Princeton, NJ  100.0% 1  116,374

Cambridge Center Three

  Cambridge, MA  100.0% 1  107,484  Cambridge, MA  100.0% 1  107,484

104 Carnegie Center

  Princeton, NJ  78.4% 1  102,830  Princeton, NJ  87.9% 1  102,830

201 Spring Street

  Lexington, MA  100.0% 1  102,500  Lexington, MA  100.0% 1  102,500

The Arboretum

  Reston, VA  100.0% 1  95,584

Bedford Office Park

  Bedford, MA  100.0% 1  90,000  Bedford, MA  100.0% 1  90,000

33 Hayden Avenue

  Lexington, MA  43.3% 1  80,872  Lexington, MA  43.3% 1  80,872

Cambridge Center Eleven

  Cambridge, MA  100.0% 1  79,616  Cambridge, MA  100.0% 1  79,616

Decoverly Two

  Rockville, MD  100.0% 1  77,747

Decoverly Three

  Rockville, MD  83.2% 1  77,040

170 Tracer Lane

  Waltham, MA  56.0% 1  75,073  Waltham, MA  63.7% 1  73,258

105 Carnegie Center

  Princeton, NJ  100.0% 1  69,648  Princeton, NJ  71.5% 1  70,029

32 Hartwell Avenue

  Lexington, MA  100.0% 1  69,154  Lexington, MA  100.0% 1  69,154

302 Carnegie Center

  Princeton, NJ  100.0% 1  65,135  Princeton, NJ  100.0% 1  64,726

195 West Street

  Waltham, MA  100.0% 1  63,500  Waltham, MA  100.0% 1  63,500

100 Hayden Avenue

  Lexington, MA  100.0% 1  55,924  Lexington, MA  100.0% 1  55,924

181 Spring Street

  Lexington, MA  41.2% 1  53,595  Lexington, MA  41.2% 1  53,595

211 Carnegie Center

  Princeton, NJ  0.0% 1  47,025  Princeton, NJ  100.0% 1  47,025

204 Second Avenue

  Waltham, MA  52.7% 1  40,974

92 Hayden Avenue

  Lexington, MA  100.0% 1  31,100  Lexington, MA  100.0% 1  31,100

201 Carnegie Center

  Princeton, NJ  100.0% —    6,500  Princeton, NJ  100.0% —    6,500
     

 
  
     

 
  

Subtotal for Class A Office Properties

     92.6% 100  28,895,735     92.3% 99  30,266,723
     

 
  
     

 
  

Retail

                  

Shops at The Prudential Center

  Boston, MA  95.5% 1  535,818  Boston, MA  95.4% 1  532,414

Shaws Supermarket at the Prudential Center

  Boston, MA  100.00% 1  57,235

Shaws Supermarket at The Prudential Center

  Boston, MA  100.0% 1  57,235
     

 
  
     

 
  

Subtotal for Retail Properties

     95.9% 2  593,053     95.9% 2  589,649
     

 
  
     

 
  
Office/Technical Properties                  

Bedford Office Park

  Bedford, MA  100.0% 2  383,704  Bedford, MA  100.0% 2  383,704

Hilltop Office Center(1)

  South San Francisco, CA  100.0% 9  142,866

Broad Run Business Park, Building E

  Dulles,VA  54.7% 1  127,226  Dulles,VA  73.7% 1  128,646

7601 Boston Boulevard

  Springfield, VA  100.0% 1  103,750  Springfield, VA  100.0% 1  103,750

7435 Boston Boulevard

  Springfield, VA  100.0% 1  103,557  Springfield, VA  100.0% 1  103,557

8000 Grainger Court

  Springfield, VA  36.9% 1  90,465  Springfield, VA  100.0% 1  88,775

7500 Boston Boulevard

  Springfield, VA  100.0% 1  79,971  Springfield, VA  100.0% 1  79,971

7501 Boston Boulevard

  Springfield, VA  100.0% 1  75,756  Springfield, VA  100.0% 1  75,756

Cambridge Center Fourteen

  Cambridge, MA  100.0% 1  67,362  Cambridge, MA  100.0% 1  67,362

164 Lexington Road

  Billerica, MA  100.0% 1  64,140  Billerica, MA  100.0% 1  64,140

7450 Boston Boulevard

  Springfield, VA  100.0% 1  62,402  Springfield, VA  100.0% 1  62,402

Sugarland Business Park, Building Two(2)

  Herndon, VA  65.9% 1  59,215

7374 Boston Boulevard

  Springfield, VA  100.0% 1  57,321  Springfield, VA  100.0% 1  57,321

8000 Corporate Court

  Springfield, VA  100.0% 1  52,539  Springfield, VA  100.0% 1  52,539

Sugarland Business Park, Building One

  Herndon, VA  23.0% 1  52,313

7451 Boston Boulevard

  Springfield, VA  100.0% 1  47,001  Springfield, VA  100.0% 1  47,001

7300 Boston Boulevard

  Springfield, VA  100.0% 1  32,000  Springfield, VA  100.0% 1  32,000

17 Hartwell Avenue

  Lexington, MA  100.0% 1  30,000

7375 Boston Boulevard

  Springfield, VA  100.0% 1  26,865
     

 
  

Subtotal for Office/Technical Properties

     97.6% 17  1,403,789
     

 
  

Industrial Properties

         

40-46 Harvard Street

  Westwood, MA  0.0% 1  152,009
     

 
  

Subtotal for Industrial Properties

     0.0% 1  152,009
     

 
  

Properties


  

Location


  %
Leased


 Number
of
Buildings


  Net Rentable
Square Feet


  

Location


  %
Leased


 Number
of
Buildings


 Net Rentable
Square Feet


17 Hartwell Avenue

  Lexington, MA  100.0% 1  30,000

7375 Boston Boulevard

  Springfield, VA  100.0% 1  26,865
     

 
  

Subtotal for Office/Technical Properties

     89.4% 28  1,658,453
     

 
  

Industrial Properties

         

40-46 Harvard Street

  Westwood, MA  0% 1  169,273

38 Cabot Boulevard

  Langhorne, PA  100.0% 1  161,000

560 Forbes Boulevard

  South San Francisco, CA  100.0% 1  40,000

430 Rozzi Place(3)

  South San Francisco, CA  100.0% 1  20,000
     

 
  

Subtotal for Industrial Properties

     56.6% 4  390,273
     

 
  

Hotel Properties

               

Long Wharf Marriott

  Boston, MA  80.1%(4) 1  420,000  Boston, MA  83.4%(2) 1  420,000

Cambridge Center Marriott

  Cambridge, MA  72.9%(4) 1  330,400  Cambridge, MA  76.8%(2) 1  330,400

Residence Inn by Marriott

  Cambridge, MA  80.8%(4) 1  187,474  Cambridge, MA  83.1%(2) 1  187,474
      
  
      

 

Subtotal for Hotel Properties

      3  937,874      3  937,874
      
  
      

 

Structured Parking

     —      9,388,175      —    9,496,175
     

 
  
      

 

Subtotal for In-Service Properties

     92.1% 137  41,863,563     92.1% 122  42,846,219
     

 
  
     

 

 

Properties Under Construction (Class A Office Properties)

               

Times Square Tower

  New York, NY  35.0%(5) 1  1,234,272

901 New York Avenue (25% ownership)

  Washington, D.C.  80.0% 1  538,463  Washington, D.C.  91.0%(3) 1  539,038

New Dominion Tech. Park, Building Two

  Herndon, VA  100.0% 1  257,400

Capital Gallery Expansion

  Washington, D.C.  27.0%(3) —  (4) 318,557

Cambridge Center Seven

  Cambridge, MA  100.0% 1  231,028

12290 Sunrise Valley

  Reston, VA  100.0% 1  182,000

Wisconsin Place - Infrastructure (23.89% ownership)

  Chevy Chase, MD  n/a  —    —  
     

 
  
     

 

 

Subtotal for Properties Under Construction

     55.2% 3  2,030,135     77.9% 3  1,270,623
     

 
  
     

 

 

Total Portfolio

      140  43,893,698      125  44,116,842
      
  
      

 

(1)Property was sold onOn February 4, 2004.10, 2005, we executed a contract to sell this property.
(2)Property was sold on February 10, 2004.
(3)Property was sold on January 16, 2004.
(4)Represents the weighted averageweighted-average occupancy for the year ended December 31, 2003.2004. Note that this amount isthese amounts are not included in the calculation of the Total Portfolio occupancy rate for In-Service Properties as of December 31, 2003.2004.
(5)(3)Represents percentage leased as of February 24, 2004.March 4, 2005.
(4)Represents the three-story, low-rise section of the property which was taken out of service in September 2004 as part of the redevelopment project. The total project will result in a total complex size of approximately 610,000 square feet.

The following table shows information relating to investments through the Value-Added Fund as of December 31, 2004:

Property


  Location

  % Leased

  Number of
Buildings


  Net Rentable
Square Feet


Worldgate Plaza  Herndon, VA  75.0% 4  322,328
   
  

 
  

Top 20 Tenants by Square Feet

 

  

Tenant


  Square
Feet


 

% of

In Service

Portfolio


   

Tenant


  Square
Feet


 

% of
In-Service

Portfolio


 
1  U.S. Government  1,432,271  4.54%  U.S. Government  1,689,671  5.21%
2  Citibank, N.A.  1,231,068  3.90%  Citibank, N.A.  1,256,173  3.88%
3  Ernst and Young  1,064,939  3.38%  Ernst and Young  1,064,939  3.29%
4  Shearman & Sterling  585,808  1.86%  Shearman & Sterling  585,808  1.81%
5  Lockheed Martin Corporation  567,429  1.80%  Lockheed Martin Corporation  568,265  1.75%
6  Gillette Company  485,932  1.54%  Gillette Company  485,932  1.50%
7  Parametric Technology Corp.  470,987(1) 1.49%  Parametric Technology Corp.  470,987  1.45%
8  Wachovia  453,964  1.44%  Lehman Brothers  436,723  1.35%
9  Lehman Brothers  436,723  1.38%  Wachovia  418,782  1.29%
10  Washington Group International  365,245  1.16%  Washington Group International  365,245  1.13%
11  Deutsche Bank Trust  346,617  1.10%  Deutsche Bank Trust  346,617  1.07%
12  Orbital Sciences Corporation  337,228  1.07%  Kirkland & Ellis  344,540(1) 1.06%
13  T. Rowe Price Associates, Inc.  330,313  1.05%  Orbital Sciences Corporation  337,228  1.04%
14  TRW, Inc.  312,977  0.99%  T. Rowe Price Associates, Inc.  334,404  1.03%
15  Hunton & Williams  305,837  0.97%  Northrop Grumman  326,385  1.01%
16  Akin Gump Strauss Hauer & Feld  301,880  0.96%  Ann Taylor  319,095  0.98%
17  Kirkland & Ellis  294,821(2) 0.93%  O’ Melveny & Myers  318,620  0.98%
18  Digitas  279,182  0.89%  Hunton & Williams  305,837  0.94%
19  Bingham McCutchen  270,824  0.86%  Akin Gump Strauss Hauer & Feld  302,653  0.93%
20  Accenture  265,622  0.84%  Bingham McCutchen  267,905  0.83%
  Total % of portfolio square feet   32.15%  Total % of Portfolio Square Feet   32.53%
  Total % of portfolio revenue   35.80(3)  Total % of Portfolio Revenue   35.32%(2)

(1)Includes 380,987162,165 square feet (or 1.31% of the portfolio) from a property in which we own a 25% joint venture interest.
(2)Includes 159,434 square feet (or 0.55%0.50% of the portfolio) from a property in which we own a 51% joint venture interest.
(3)(2)Includes $16.6$6.4 million or 1.40%(or 0.6% of revenuerevenue) from propertiesa property in which we own a 51% joint venture interests.interest.

Lease Expirations

 

Year of
Lease
Expiration


 

Rentable
Square Feet
Subject to
Expiring Leases


 

Current
Annualized (1)
Contractual Rent
Under Expiring
Leases


 

Current
Annualized (1)
Contractual Rent
Under Expiring
Leases p.s.f.


 

Annualized (1)
Contractual Rent
Under Expiring
Leases with
future

Step-ups


 

Annualized (1)
Contractual Rent
Under Expiring
Leases with
future step-ups
p.s.f.


 

Percentage of
Total Square
Feet


  Rentable
Square Feet
Subject to
Expiring Leases


  Current
Annualized (1)
Contractual
Rent Under
Expiring Leases


  Current
Annualized (1)
Contractual
Rent Under
Expiring Leases
p.s.f.


 

Annualized (1)
Contractual
Rent Under
Expiring Leases
With Future

Step-ups


 Annualized (1)
Contractual
Rent Under
Expiring Leases
With Future
Step-ups p.s.f.


  Percentage of
Total Square
Feet


 

2004

 2,250,242 $83,602,346 $37.15(2) $83,262,285 $37.00 7.1%

2005

 2,604,665 94,910,834 36.44   96,406,914 37.01 8.3%  1,643,929  $62,251,442  $37.87(2) $62,013,997(2) $37.72  5.1%

2006

 2,623,096 108,236,261 41.26   110,273,691 42.04 8.3%  2,283,641   93,982,501   41.15   94,109,147   41.21  7.0%

2007

 2,775,093 99,021,159 35.68   102,022,795 36.76 8.8%  2,432,393   89,724,528   36.89   91,106,851   37.46  7.5%

2008

 1,626,410 68,477,559 42.10   71,378,586 43.89 5.2%  1,698,255   71,998,776   42.40   74,042,289   43.60  5.2%

2009

 2,861,900 109,707,404 38.33   119,058,594 41.60 9.1%  2,838,412   108,207,125   38.12   115,744,124   40.78  8.8%

2010

 1,858,463 77,941,503 41.94   85,964,496 46.26 5.9%  1,933,213   81,164,557   41.98   87,977,232   45.51  6.0%

2011

 2,889,342 116,996,625 40.49   133,008,431 46.03 9.2%  2,677,827   113,362,437   42.33   125,517,241   46.87  8.3%

2012

 2,270,942 103,804,182 45.71   112,484,842 49.53 7.2%  2,616,101   118,973,619   45.48   128,655,748   49.18  8.1%

2013

 525,443 21,194,695 40.34   26,637,400 50.70 1.7%  863,077   31,667,601   36.69   35,112,651   40.68  2.7%

2014

  2,208,252   75,453,893   34.17   84,231,691   38.14  6.8%

Thereafter

 6,796,600 315,948,138 46.49   373,680,426 54.98 21.6%  8,917,631   423,742,700   47.52   506,206,051   56.76  27.5%

(1)Represents the monthly contractual rent under existing leases as of December 31, 20032004 multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.
(2)Includes $1.8$2.1 million of contractual rent from theThe Prudential Center retail kiosks and carts. Each kiosk and cart is allocated one hundred square feet.

Item 3.Legal Proceedings

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

 

Item 4.Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2003.

2004.

PART II

 

Item 5.Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Our common stock is listed on the New York Stock Exchange under the symbol “BXP.” The high and low sales prices for the periods indicated in the table below were:

 

Quarter Ended


  High

  Low

  Distributions

   High

  Low

  Distributions

 

December 31, 2004

  $64.90  $55.15  $.65(1)

September 30, 2004

   56.29   49.86   .65 

June 30, 2004

   55.54   43.63   .65 

March 31, 2004

   54.89   46.69   .63 

December 31, 2003

  $48.47  $43.40  $.63(a)   48.47   43.40   .63 

September 30, 2003

   45.50   41.26   .63    45.50   41.26   .63 

June 30, 2003

   44.83   38.00   .63    44.83   38.00   .63 

March 31, 2003

   39.44   34.80   .61    39.44   34.80   .61 

December 31, 2002

   37.49   33.30   .61 

September 30, 2002

   40.00   32.95   .61 

June 30, 2002

   41.55   37.70   .61 

March 31, 2002

   39.95   35.70   .58 

(a)(1)Paid on January 30, 200431, 2005 to stockholders of record on December 30, 2003.31, 2004.

 

At February 18, 2004,March 4, 2005, we had approximately 1,2721,366 stockholders of record. This does not include beneficial owners for whom Cede & Co. or others act as nominee.

 

In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable income (not including net capital gains). We have adopted a policy of paying regular quarterly distributions on our common stock, and cashwe have adopted a policy of paying regular quarterly distributions on the common units of BPLP. Cash distributions have been paid on our common stock and BPLP’s common units since our initial public offering. Distributions are declared at the discretion of the Board of Directors and depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors the Board of Directors may consider relevant.

 

During the three months ended December 31, 2003,2004, we issued 2,499210,857 shares of common stock in exchange for 2,499210,857 units of limited partnership held by certain limited partners of Boston Properties Limited Partnership.BPLP. These shares were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933. We are relying on the exemption based upon factual representations received from the limited partners who received these shares.

 

(b) None.

(c)

Period


  

(a) Total Number of

Shares of Common
Stock

Purchased (1)


  

(b) Average
Price Paid per

Common Share


  (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs


  (d) Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet be Purchased


October 1, 2004 –

October 31, 2004

  —     —    N/A  N/A

November 1, 2004 –

November 30, 2004

  726  $0.01  N/A  N/A

December 1, 2004 –

December 31, 2004

  —     —    N/A  N/A
   
  

      

Total

  726  $0.01  N/A  N/A

(1)Represents shares of restricted Common Stock that were repurchased in connection with the termination of certain persons’ employment with the Company. Under the terms of the applicable restricted stock agreements, all of such shares were repurchased by the Company at a price of $0.01 per share, which was the amount originally paid by such employees for such shares.

Item 6.Selected Financial Data

 

The following table sets forth our selected financial and operating data on ana historical basis, which has been revised for the reclassification of (1) losses from early extinguishments of debt in accordance with SFAS No. 145, and(2) the disposition of qualifying properties during 20022004, 2003 and 20032002 which have been reclassified as discontinued operations, for the periods presented, in accordance with SFAS No. 144.144 and (3) the restatement of earnings per share to include the effects of participating securities in accordance with EITF 03-6. Refer to Notes 14, 15 and 2220 of the Consolidated Financial Statements. The following data should be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.

Our historical operating results may not be comparable to our future operating results.

 

  For the year ended December 31,

   For the year ended December 31,

 
  2003

 2002

 2001

 2000

 1999

   2004

 2003

 2002

 2001

 2000

 
  (in thousands, except per share data)   (in thousands, except per share data) 

Statement of Operations Information:

      

Total revenue

  $1,309,628  $1,184,915  $985,519  $843,233  $740,116   $1,400,465  $1,299,709  $1,174,004  $975,279  $833,570 
  


 


 


 


 


  


 


 


 


 


Expenses:

      

Rental operating

   400,639   368,047   313,821   264,222   234,932    419,022   397,309   364,926   311,133   261,769 

Hotel operating

   52,250   31,086   —     —     —      55,724   52,250   31,086   —     —   

General and Administrative

   45,359   47,292   38,312   35,659   29,455 

General and administrative

   53,636   45,359   47,292   38,312   35,659 

Interest

   299,436   263,067   211,391   204,900   193,135    306,170   299,436   263,067   211,391   204,900 

Depreciation and Amortization

   210,072   179,726   143,460   127,634   114,137 

Depreciation and amortization

   252,256   208,490   178,163   141,957   126,271 

Net derivative losses

   1,038   11,874   26,488   —     —      —     1,038   11,874   26,488   —   

Loss from early extinguishment of debt

   1,474   2,386   —     433   —   

Loss on investments in securities

   —     4,297   6,500   —     —   

Losses from early extinguishments of debt

   6,258   1,474   2,386   —     433 

Losses on investments in securities

   —     —     4,297   6,500   —   
  


 


 


 


 


  


 


 


 


 


Income before income from unconsolidated joint ventures and minority interests

   299,360   277,140   245,547   210,385   168,457    307,399   294,353   270,913   239,498   204,538 

Income from unconsolidated joint ventures

   6,016   7,954   4,186   1,758   468    3,380   6,016   7,954   4,186   1,758 

Minority interests

   (73,038)  (71,809)  (68,535)  (72,267)  (65,865)   (63,489)  (71,957)  (70,492)  (67,225)  (70,653)
  


 


 


 


 


  


 


 


 


 


Income before gain (loss) on sale of real estate

   232,338   213,285   181,198   139,876   103,060 

Gain (loss) on sale of real estate, net of minority interest

   57,574   186,810   6,505   (234)  6,467 

Gain on sale of land held for development, net of minority interest

   —     3,633   2,584   —     —   

Income before gain (loss) on sales of real estate

   247,290   228,412   208,375   176,459   135,643 

Gain (loss) on sales of real estate, net of minority interest

   8,149   57,574   186,810   6,505   (234)

Gain on sales of land held for development, net of minority interest

   —     —     3,633   2,584   —   
  


 


 


 


 


  


 


 


 


 


Income before discontinued operations

   289,912   403,728   190,287   139,642   109,527    255,439   285,986   398,818   185,548   135,409 

Discontinued operations, net of minority interest

   75,410   40,655   24,512   13,356   10,249    28,578   79,336   45,565   29,251   17,589 
  


 


 


 


 


  


 


 


 


 


Income before cumulative effect of a change in accounting principle

   365,322   444,383   214,799   152,998   119,776    284,017   365,322   444,383   214,799   152,998 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (6,767)  —     —      —     —     —     (6,767)  —   
  


 


 


 


 


  


 


 


 


 


Net income before preferred dividend

   365,322   444,383   208,032   152,998   119,776    284,017   365,322   444,383   208,032   152,998 

Preferred dividend

   —     (3,412)  (6,592)  (6,572)  (5,829)   —     —     (3,412)  (6,592)  (6,572)
  


 


 


 


 


  


 


 


 


 


Net income available to common shareholders

  $365,322  $440,971  $201,440  $146,426  $113,947   $284,017  $365,322  $440,971  $201,440  $146,426 
  


 


 


 


 


  


 


 


 


 


Basic earnings per share:

      

Income before discontinued operations and cumulative effect of a change in accounting principle

  $2.99  $4.30  $2.04  $1.86  $1.57   $2.40  $2.89  $4.08  $1.99  $1.80 

Discontinued operations, net of minority interest

   0.78   0.43   0.27   0.19   0.15    0.27   0.82   0.49   0.33   0.25 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (0.07)  —     —      —     —     —     (0.08)  —   
  


 


 


 


 


  


 


 


 


 


Net Income

  $3.77  $4.73  $2.24  $2.05  $1.72   $2.67  $3.71  $4.57  $2.24  $2.05 
  


 


 


 


 


  


 


 


 


 


Weighted average number of common shares outstanding

   96,900   93,145   90,002   71,424   66,235    106,458   96,900   93,145   90,002   71,424 
  


 


 


 


 


  


 


 


 


 


Diluted earnings per share:

   

Income before discontinued operations and cumulative effect of a change in accounting principle

  $2.94  $4.23  $1.99  $1.83  $1.56 

Discontinued operations, net of minority interest

   0.77   0.43   0.27   0.18   0.15 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (0.07)  —     —   
  


 


 


 


 


Net Income

  $3.71  $4.66  $2.19  $2.01  $1.71 
  


 


 


 


 


Weighted average number of common and common equivalent shares outstanding

   98,486   94,612   92,200   72,741   66,776 
  


 


 


 


 


  December 31,

   For the year ended December 31,

 
  2003

 2002

 2001

 2000

 1999

   2004

 2003

 2002

 2001

 2000

 
  (in thousands, except per share data) 

Diluted earnings per share:

   

Income before discontinued operations and cumulative effect of a change in accounting principle

  $2.35  $2.84  $4.02  $1.94  $1.77 

Discontinued operations, net of minority interest

   0.26   0.81   0.48   0.32   0.24 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     —     (0.07)  —   
  


 


 


 


 


Net Income

  $2.61  $3.65  $4.50  $2.19  $2.01 
  


 


 


 


 


Weighted average number of common and common equivalent shares outstanding

   108,762   98,486   94,612   92,200   72,741 
  (in thousands)   


 


 


 


 


Balance Sheet information:

      

Real estate, gross

  $8,983,260  $8,670,711  $7,457,906  $6,112,779  $5,609,424   $9,291,227  $8,983,260  $8,670,711  $7,457,906  $6,112,779 

Real estate, net

   7,981,825   7,847,778   6,738,052   5,526,060   5,138,833    8,147,858   7,981,825   7,847,778   6,738,052   5,526,060 

Cash

   22,686   55,275   98,067   280,957   12,035    239,344   22,686   55,275   98,067   280,957 

Total assets

   8,551,100   8,427,203   7,253,510   6,226,470   5,434,772    9,063,228   8,551,100   8,427,203   7,253,510   6,226,470 

Total indebtedness

   5,004,720   5,147,220   4,314,942   3,414,891   3,321,584    5,011,814   5,004,720   5,147,220   4,314,942   3,414,891 

Minority interests

   830,133   844,581   844,740   877,715   781,962    786,328   830,133   844,581   844,740   877,715 

Convertible redeemable preferred stock

   —     —     100,000   100,000   100,000    —     —     —     100,000   100,000 

Stockholders’ equity

   2,400,163   2,159,590   1,754,073   1,647,727   1,057,564    2,936,073   2,400,163   2,159,590   1,754,073   1,647,727 
  For the year ended December 31,

 
  2003

 2002

 2001

 2000

 1999

 
  (in thousands, except per share data) 

Other Information:

      

Funds from operations available to common shareholders (1)

  $411,222  $382,770  $323,227  $247,371  $196,101   $459,497  $411,222  $382,770  $323,227  $247,371 

Funds from operations available to common shareholders, as adjusted (1)

   412,073   399,489   337,823   247,371   196,101    459,497   412,073   399,489   337,823   247,371 

Dividends per share

   2.50   2.41   2.27   2.04   1.75 

Dividends declared per share

   2.58   2.50   2.41   2.27   2.04 

Cash flow provided by operating activities

   488,275   437,380   419,403   329,474   303,469    429,506   488,275   437,380   419,403   329,474 

Cash flow provided by (used in) investing activities

   97,496   (1,017,283)  (1,303,622)  (563,173)  (654,996)   (171,014)  97,496   (1,017,283)  (1,303,622)  (563,173)

Cash flow provided by (used in) financing activities

   (618,360)  537,111   701,329   502,621   351,396    (41,834)  (618,360)  537,111   701,329   502,621 

Total square feet at end of year

   43,894   42,411   40,718   37,926   35,621    44,117   43,894   42,411   40,718   37,926 

Leased rate at end of year

   92.1%  93.9%  95.3%  98.9%  98.4%

Percentage leased at end of year

   92.1%  92.1%  93.9%  95.3%  98.9%

(1)Pursuant to the revised definition of Funds from Operations adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), we calculate Funds from Operations, or “FFO,” by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. FFO is a non-GAAP financial measure. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. Amounts represent of our share, which was 82.97%, 82.06%, 81.98%, 81.23%, and 74.76%% and 73.55% for the years ended December 31, 2004, 2003, 2002, 2001 2000 and 1999,2000, respectively.

 

Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after specific and defined supplemental adjustments, including net (1) gains or losses on

derivative lossesinstruments, consisting of changes in fair value and periodic cash settlements that do not qualify for hedge accounting pursuant to the provisions of SFAS No. 133 (“non-qualifying derivative contracts”) and (2) the effects of an early lease surrender. As the impact of the non-qualifying derivative contracts and early

lease surrender adjustments did not extend beyond the year ended December 31, 2003, FFO as adjusted for the year ended December 31, 2004 is the same as FFO computed in accordance with the NAREIT definition.

The adjustments for non-qualifying derivative contracts resulted from interest rate contracts we entered into prior to the effective date of SFAS No. 133 to limit our exposure to fluctuations in interest rates with respect to variable rate debt associated with real estate projects under development. Upon transition to SFAS No. 133 on January 1, 2001, the impacts of these contracts were recorded in current earnings, while prior to that time they were capitalized. Although these adjustments are attributable to a single hedging program, the underlying contracts extended over multiple reporting periods and therefore resulted in adjustments from the first quarter of 2001 through the third quarter of 2003. Management presents FFO before the impact of non-qualifying derivative contracts because economically this interest rate hedging program was consistent with our risk management objective of limiting our exposure to interest rate volatility and the change in accounting under GAAP did not correspond to a substantive difference. Management does not currently anticipate structuring future hedging programs in a manner that would give rise to this kind of adjustment.

The adjustments for early lease surrender resulted from a unique lease transaction related to the surrender of space by a tenant that was accounted for as a termination for GAAP purposes and recorded in income at the time the space was surrendered. However, we continued to collect payments monthly after the surrender of space through the month of July 2002, the date on which the terminated lease would otherwise have expired under its original terms. Management presents FFO after the early surrender lease adjustments. adjustment because economically this transaction impacted periods subsequent to the time the space was surrendered by the tenant and, therefore, recording the entire amount of the lease termination payment in a single period made FFO less useful as an indicator of operating performance. Although these adjustments are attributable to a single lease, the transaction impacted multiple reporting periods and resulted in adjustments for the years ended December 31, 2002 and 2001.

Management uses FFO principally to evaluate the operating performance of our assets from period to period, and therefore it is important that transactions which impact operations over multiple periods be reflected in FFO in accordance with their substance, even if GAAP requires that the income or loss attributable to the transaction be recorded in a particular period. The resulting adjustments to FFO computed in accordance with the NAREIT definition are particularly meaningful when the events in question are substantively equivalent to other similar transactions, but the reporting of those similar transactions under GAAP more closely matches their economic substance.

Although our FFO as adjusted clearly differs from NAREIT’s definition of FFO, as well as that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance.performance because we believe that, by excluding the effects of the non-qualifying derivative contracts and the early lease surrender, management and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO. Additionally, we believe the nature of these adjustments is non-recurring because there were not similar events during the two preceding years, and the events were not reasonably likely to recur and did not, in fact, recur within the succeeding two years. Neither FFO nor FFO as adjusted should not be considered as an alternativealternatives to net income (determined in accordance with GAAP) as an indication of our performance.

Neither FFO does not representnor FFO as adjusted represents cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO and FFO as adjusted should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

A reconciliation of Funds from OperationsFFO, and Funds From Operations,FFO as adjusted, to net income available to common shareholders computed in accordance with GAAP is provided under the heading of “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations.”

 

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

 

Forward LookingForward-Looking Statements

 

This Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business and Growth Strategies,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. SuchThese statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

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

 

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

 

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

 

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

 

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

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

 

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

 

potential liability for uninsured losses and environmental contamination;

 

risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and possible adverse changes in tax and environmental laws; and

 

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

 

the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.”

The risks included here are not exhaustive. Other sections of this report, mayincluding “Part I, Item I—Business—Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

 

Overview

 

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

 

OurImprovement in our industry’s performance is generally predicated on a sustained pattern of job growth. Office market conditions, generally viewed as having bottomed out in 2003, showed further improvement during 2004 in midtown Manhattan, Washington, D.C. and Princeton, New Jersey. In 2003, whileBoston and San Francisco, our two other markets, we are cautiously optimistic that we are seeing the overall United States economy began to demonstrate sustained overall economicbeginning of a recovery in job growth there were few indications that the economy was creating jobs at a pace sufficient to lead to increasedwill generate additional demand for our office space. We continued to operateEven in a periodthose markets where tenants are expanding, however, landlord pricing power is still constrained by the number of weak fundamentals, evidenced by relatively high vacancy and correspondingly lower market rents.

Ourcompetitive alternatives available. In this climate, we believe our corporate strategy of owning and developing high-quality office buildings concentrated in strong, supply-constrained markets and emphasizing long-term leases to creditworthy tenants lessenedhas allowed us to perform well relative to our peers in difficult markets and even better in favorable markets. In addition, we believe our financial strategy of matching long-term fixed-rate debt with our long-term leases insulates us from rising interest costs and, accordingly, we have fixed the overall impactinterest rate on 91% of the weak fundamentals in the operating environment by limiting our lease expiration exposure both from natural lease expirations and from terminations due to tenant defaults. This ameliorated the potential decline in gross revenues even as we renewed or re-let space at lower rents andoutstanding debt.

During 2004, our strategy enabled us to experience only a very slight decline in our portfolio occupancy.

complete more than six million square feet of leasing while managing transactions costs and non-recurring capital expenses. In the faceaddition, we commenced construction on $286.8 million of these challenging market conditions,new developments which we have followed a disciplined approach to managing our operations by focusing primarily on enhancing the value of our existing portfolio through strategic salesexpect will be placed into service during 2006 and successful leasing efforts and by solidifying our capital structure through the refinancing of a significant portion of our variable-rate debt with long-term fixed-rate. At the same time, we continued to selectively pursue new acquisition and development opportunities. The2007. Other highlights of our 20032004 activity reflect this strategy.include the following.

 

We sold three real estate assets for gross sales prices totaling $555 million. completed the construction of two development projects, the 1,234,218 square-foot Times Square Tower building in New York City, New York and the 257,400 square-foot New Dominion Technology Park, Building Two building in Fairfax County, Virginia. Times Square Tower and New Dominion Technology Park, Building Two are currently 87.8% and 100.0% leased, respectively.

We also leveraged our strong relationships to acquire $298$97.2 million of interests in real estate assets in the Washington, D.C. area.area, and we acquired our partner’s interest in a joint venture in the Boston suburbs for $21.6 million in cash and the assumption of our partner’s share of the mortgage debt on the properties of approximately $41.6 million.

We sold eighteen properties totaling 767,000 square feet and three land parcels for sale prices totaling $117 million.

 

On March 3, 2004, we completed a public offering of 5,700,000 shares of our common stock at a price to the public of $51.40 per share. The proceeds from this public offering, net of underwriters’ discount and offering costs, totaled approximately $291.1 million. We completedused the construction and lease-up of two development projects, the 422,000 square-foot Two Freedom Square building in the Washington, D.C. suburb of Reston, Virginia and the 57,000 square footproceeds from this offering to

 

Shaws supermarket atrepay approximately $110.3 million in mortgage indebtedness related to three properties, together with prepayment penalties totaling approximately $6.3 million as well as to acquire the Prudential Centerremaining interest in Boston. These buildings were 100% leased upon completion.one of our joint ventures for approximately $21.6 million.

 

We have three remaining development projects: New Dominion Technology Park, Building Two; Times Square Tower; and 901 New York Avenue. New Dominion Technology Park, Building Twoformed the Value-Added Fund, which is a 257,400 square-foot building locatedstrategic partnership with two institutional investors, to pursue the acquisition of assets within our existing markets that have deficiencies in the Washington D.C. suburb of Herndon, VA andproperty characteristics which provide an opportunity to create value through repositioning, refurbishment or renovation.

Looking ahead, we believe 2005 will follow a pattern similar to that is 100% leased to the General Services Administration. Times Square Tower is a 47 story building with 1.2 million net rentable square feet. Times Square Tower, a portion of which will be placed into service in the spring of 2004, is currently approximately 35% leased. This building was originally 60% pre-leasedwith office rental markets continuing to Arthur Andersen,strengthen, but that lease was terminatedwith improvement coming gradually. We expect allocators of capital to continue to place a premium on high-quality, well located office buildings resulting in the wakelower capitalization rates and higher prices per square foot. As an owner of that firm’s demise. 901 New York Avenue is a 538,500 square foot building located in Washington, D.C. in whichthese types of assets, we have a 25% interest. This building is 80% leased asare pleased with higher valuations and intend to sell non-core properties to realize some of December 31, 2003.

We did not commence construction on any new office developments in 2003 although during the yearthis value. However, these conditions also make it more difficult to acquire assets at what we purchased land and formed joint ventures with land owners that will offer the opportunitybelieve to commence development in 2004 or beyond.

The strengthbe attractive rates of our portfolio supplemented with the acquisitions and new developments that were brought on-line in 2003 allowed us to increase our total revenue by 10.5% in 2003.

return.

We refinanced $725 million of variable-rate debt with unsecured fixed-rate debt at an average interest rate of 5.60% with maturities ranging from 10 to 12 years. We also entered into amended loan agreements with existing lenders on $150.6 million of debt during the year. At the end of 2003, our fixed-rate debt represents 91.2% of our total outstanding debt. Our variable-rate debt at the end of 2003 consisted of our two construction facilities associated with our two remaining development projects and our unsecured revolving credit facility. We believe that the matching of our long-term fixed-rate debt financing with the long duration of our leases represents an appropriately prudent financial structure, but this has come with the short-term cost of greater interest expense than we would have incurred with variable-rate debt financing.

 

We are optimistic that market conditions will not deteriorate further. However, without strong job growth incontinue to be patient as markets recover, demand grows and development proceeds on the significant pre-lease projects underway and stand ready to aggressively capitalize on opportunities with our markets,well-positioned balance sheet where we do not expectcan use our competitive edge to see significant improvement in occupancy or rental rates during 2004. We are well positioned to weather a continuation of the current operating environment and prosper when sustained job growth resumes. If such job growth is accompanied by a rising interest rate environment, we will have a financial platform that will enable us to realize the benefits of our long-term fixed-rate debt.enhance performance.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Real Estate

 

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, above“above-” and below market“below-market” leases, origination costs, acquired in-

placein-place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost. We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenant’stenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

 

We record acquired “above“above-” and below” market“below-market” leases at their fair value; usingvalue (using a discount rate which reflects the risks associated with the leases acquired,acquired) equal to the difference between (1) the contractual amounts

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

 

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, internal wages, property taxes, insurance, and other project costs incurred during the period of development.

 

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An assetimpairment loss is considered impaired whenrecognized if the undiscounted future cash flows arecarrying amount of its assets is not sufficient to recover the asset’s carryingrecoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be “long-lived assets to be held and used” as defined by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date.

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on January 1, 2002, requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) onupon the eventual disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). Following the classification of a property as “held for sale”,sale,” no further depreciation is recorded on the assets.

 

A variety of costs are incurred in the acquisition, development and leasing of our properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited.

Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgement. Our capitalization policy on our development properties is guided by SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalizecapitalizes only those costs associated with the portion under construction.

Investments in Unconsolidated Joint Ventures

 

Except for ownership interests in a variable interest entity,entities, we account for our investments in joint ventures under the equity method of accounting asbecause we exercise significant influence over, but do not control, these entities. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over 40 years.years or the term of the agreement, if shorter. Under the equity method of accounting, our net equity is reflected onwithin the consolidated balance sheets,Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included onwithin the consolidated statementsConsolidated Statements of operations.Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds.

We serve as the development manager for the joint venture at 901 New York Avenue currently under development. The profit on development fees received from this joint venture is recognized to the extent attributable to the outside For ownership interest in variance interest entities, we consolidate those in which we are the joint venture.primary beneficiary.

 

Revenue Recognition

 

Base rental revenue is reported on a straight-line basis over the terms of our respective leases. In accordance with SFAS No. 141, we recognize rental revenue of acquired in-place “above“above-” and below” market“below-market” leases at their fair valuevalues over the terms of the respective leases. Accrued rental income represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements.

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

When assessing tenant credit quality, we:

Review relevant financial information, including:

financial ratios;

net worth;

debt to market capitalization; and

liquidity

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

perform an analysis of the tenant’s industry

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

low risk tenants

the tenant’s credit is such that we require collateral

require security deposit; and

reduce upfront tenant improvement investment

tenant’s credit is below our acceptable parameters

We maintain a rigorous process of monitoring the credit quality of our tenant base. We provide an allowance for doubtful accounts arising from estimated losses that could result from the tenant’s inability to make required current rent payments and an allowance against accrued rental income for future potential tenant credit losses. The credit assessment is based on the estimated accrued rental incomeloses that is recoverablewe deem to be unrecoverable over the term of the lease. We also maintain an

Tenant receivables are assigned a credit rating of 1-4 with a rating of 1 representing the highest possible rating with no allowance for doubtful accounts for estimated losses resulting fromrecorded and a rating of 4 representing the inability of tenants to make required rent payments. The computation of this allowance is based onlowest credit rating, recording a full reserve against the tenants’ receivable balance. Among the factors considered in determining the credit rating include:

payment history and current history;

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

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

tenant financial performance; and

industry or geographicgeographical specific credit considerations. considerations

If our estimates of collectibility differ from the cash received, the timing and amount of our reported revenue could be impacted. The average remaining term of our in-place tenant leases was approximately 7.07.6 years as of December 31, 2003.2004. The credit risk is mitigated by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and continual monitoring of our portfolio to identify potential problem tenants.

 

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

 

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

 

We record our development fees earned on real estate projects on a straight-line basis over the development period, which approximates the percentage of completion method described in SOP 81-1 and provides a more

accurate measurement over the period of fees earned. 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, since such fees are contingent upon the collection of rents.

 

Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” The specific timing of the sale is measured against various criteria in SFAS No.66No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, installment or cost recovery methods, as appropriate, until the sales criteria are met.

 

Depreciation and Amortization

 

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. In accordance with SFAS No. 141, we allocate the acquisition cost of real estate to land, building, tenant improvements, acquired “above-” and “below-” market“below-market” leases, origination costs and acquired in-place leases based on an assessment of their fair value and depreciate or amortize these assets over

their useful lives. The amortization of acquired “above-” and “below-” market“below-market” leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

 

Fair Value of Financial Instruments

 

WeFor purposes of disclosure, we calculate the fair value of our mortgage debt notes payable and unsecured senior notes. We discount the spread between the future contractual interest payments and future interest payments on our mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, we add our estimate of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to our own debt. In addition, we are also required to adjust the carrying values of our derivative contracts on a quarterly basis to their fair values. Because our valuations of our financial instruments are based on these types of estimates, the fair value of our financial instruments may change if our estimates do not prove to be accurate.

 

Results of Operations

 

The following discussion is based on our Consolidated Financial Statements for the years ended December 31, 2004, 2003 2002 and 2001.2002.

 

Commencing during the third quarter of 2002, we began reporting on a consolidated basis the gross operating revenues and expenses associated with the ownership of our hotels through our taxable REIT subsidiary, whereas in the past we had previously only reported net lease payments and real estate taxes. As a result, the reporting of the hotel operations for the year ended December 31, 2003 is not directly comparable to the year ended 2002. Therefore, hotel revenue and hotel expenses have been presented on a net basis for the twelve month period ended

At December 31, 2003 (otherwise entitled “Hotel Net Operating Income”) to provide a basis of comparison to prior periods.

As of December 31, 20032004 and 2002,2003, we owned or had interests in a portfolio of 125 and 140 properties, and 142 properties, respectively (we refer to all of the properties that we own as our(the “Total Property Portfolio”).Our property operations, including property management, development and leasing are regionally aligned with the objective of becoming the dominant landlord in our core markets. Management reviews operating and financial data for each property separately and independently from all other properties. Major decisions regarding the allocation of financing, investing, information technology and capital allocation are made in conjunction with the input of senior management located in our corporate headquarters.

As a result of changes in 2002 within our Total Property Portfolio, the financial data presented below shows significant changes in revenuesrevenue and expenses from period to period. Weperiod-to-period. Accordingly, we do not believe that our period to periodperiod-to-period financial data are comparable due to the changes in our Total Portfolio.comparable. Therefore, the comparison of operating results for the yearsyear ended December 31,2004 and 2003 2002 and 2001 show separately changes resulting fromattributable to the properties that wewere owned forby us throughout each period compared (we refer to this comparison as our(the “Same Property Portfolio” for the applicable period)) and the changes attributable to the Total Property Portfolio.

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

Net operating income, or “NOI,” is a non-GAAP financial measure equal to net income available to common shareholders, the most directly comparable GAAP financial measure, plus minority interest in Operating Partnership, net derivative losses, depreciation and amortization, interest expense, general and administrative expense, losses from early extinguishments of debt and losses on investments in securities, less gains on sales of real estate from discontinued operations (net of minority interest), income from discontinued operations (net of minority interest), gains on sales of real estate and land held for development (net of minority interest), income from unconsolidated joint ventures, minority interest in property partnerships, interest and other income and development and management services income. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.

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

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 112 properties, including three hotels and three properties in which we have joint venture interests, acquired or placed in service on or prior to January 1, 2003 and owned by us through December 31, 2004. The Total Property Portfolio includes the effect of the other properties either, placed in-service, acquired or repositioned after January 1, 2003 or disposed of on or prior to December 31, 2004. This table includes a reconciliation from Same Property Portfolio to Total Property Portfolio by also providing information for the properties which were sold, acquired, placed in-service or placed into servicerepositioned for the years ended December 31, 2004 and 2003. Our net property operating margins, which are defined as rental revenue less operating expenses, exclusive of the three hotel properties, for the year ended December 31, 2004 and 2003, 2002were 69.1% and 2001.69.5%, respectively.

  Same Property Portfolio

  Properties
Sold


 Properties
Acquired


 Properties
Placed In-
Service


 Properties
Repositioned


 Total Property Portfolio

 
(dollars in thousands) 2004

 2003

 

Increase/

(Decrease)


  %
Change


  2004

 2003

 2004

  2003

 2004

 2003

 2004

 2003

 2004

  2003

  

Increase/

(Decrease)


  %
Change


 

Rental Revenue:

                                                     

Rental Revenue

 $1,146,166 $1,147,870 ($1,704) (0.15%) $138 $4,532 $77,893  $24,796 $50,735 $9,455 $14,369 $16,457 $1,289,301  $1,203,110  $86,191  7.17%

Termination Income

  3,724  6,136  (2,412) (39.31%)  —    —    267   —    —    —    —    —    3,991   6,136   (2,145) (34.96%)
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Total Rental Revenue

  1,149,890  1,154,006  (4,116) (0.36%)  138  4,532  78,160   24,796  50,735  9,455  14,369  16,457  1,293,292   1,209,246   84,046  6.95%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Operating Expenses

  390,097  384,574  5,523  1.44%  39  1,222  17,416   5,078  7,199  2,230  4,271  4,205  419,022   397,309   21,713  5.47%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Net Operating Income, excluding hotels

  759,793  769,432  (9,639) (1.25%)  99  3,310  60,744   19,718  43,536  7,225  10,098  12,252  874,270   811,937   62,333  7.68%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Hotel Net Operating Income

  20,618  17,833  2,785  15.62%  —    —    —     —    —    —    —    —    20,618   17,833   2,785  15.62%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Consolidated Net Operating Income (1)

  780,411  787,265  (6,854) (0.87%)  99  3,310  60,744   19,718  43,536  7,225  10,098  12,252  894,888   829,770   65,118  7.85%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Other Revenue:

                                                     

Development and Management services

  —    —    —    —     —    —    —     —    —    —    —    —    20,464   17,347   3,117  17.97%

Interest and Other

  —    —    —    —     —    —    —     —    —    —    —    —    10,367   3,033   7,334  241.81%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Total Other Revenue

  —    —    —    —     —    —    —     —    —    —    —    —    30,831   20,380   10,451  51.28%

Other Expenses:

                                                     

General and administrative

  —    —    —    —     —    —    —     —    —    —    —    —    53,636   45,359   8,277  18.25%

Interest

  —    —    —    —     —    —    —     —    —    —    —    —    306,170   299,436   6,734  2.25%

Depreciation and amortization

  217,002  197,155  19,847  10.07%  22  518  18,947   6,452  11,215  2,506  5,070  1,859  252,256   208,490   43,766  21.00%

Net derivative losses

  —    —    —    —     —    —    —     —    —    —    —    —    —     1,038   (1,038) (100.00%)

Losses from early extinguishments of debt

  —    —    —    —     —    —    —     —    —    —    —    —    6,258   1,474   4,784  324.56%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Total Other Expenses

  217,002  197,155  19,847  10.07%  22  518  18,947   6,452  11,215  2,506  5,070  1,859  618,320   555,797   62,523  11.25%
  

 

 


 

 

 

 


 

 

 

 

 

 


 


 


 

Income before minority interests

  563,409  590,110  (26,701) (4.53%)  77  2,792  41,797   13,266  32,321  4,719  5,028  10,393  307,399   294,353   13,046  4.44%

Income from unconsolidated joint ventures

  3,054  1,903  1,151  60.49%  304  4,113  (33)  —    55  —    —    —    3,380   6,016   (2,636) (43.82%)

Income from discontinued operations, net of minority interest

  —    —    —    —     1,240  6,102  —     —    —    —    —    —    1,240   6,102   (4,862) (79.68%)

Minority interests in property partnerships

                                        4,685   1,827   2,858  156.43%

Minority interest in Operating Partnership

                                        (68,174)  (73,784)  5,610  7.61%

Gains on sales of real estate, net of minority interest

                                        8,149   57,574   (49,425) (85.85%)

Gains on sales of real estate from discontinued operations, net of minority interest

                                        27,338   73,234   (45,896) (62.67%)
                                        


 


 


 

Net Income available to common shareholders

                                       $284,017  $365,322  ($81,305) (22.26%)
                                        


 


 


 


(1)For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see page 71.

Rental Revenue

The increase in rental revenue of $86.2 million in the Total Property Portfolio primarily relates to the purchase of the remaining interests in One and Two Discovery Square as of April 1, 2003, the remaining interests in One and Two Freedom Square as of August 5, 2003, 1333 New Hampshire Avenue on October 8, 2003 and 140 Kendrick Street as of March 24, 2004, as well as the acquisition of 1330 Connecticut Avenue on April 1, 2004. These additions to the portfolio increased revenue by approximately $53.1 million, as detailed below:

Property


  

Date Acquired


  Revenue for the year ended

    2004

  2003

  Change

      (in thousands)

One and Two Discovery Square

  April 1, 2003  $13,131  $9,541  $3,590

One and Two Freedom Square

  August 5, 2003   29,938   11,731   18,207

1333 New Hampshire Avenue

  October 8, 2003   15,480   3,524   11,956

140 Kendrick Street

  March 24, 2004   8,474   —     8,474

1330 Connecticut Avenue

  April 1, 2004   10,870   —     10,870
      

  

  

Total

     $77,893  $24,796  $53,097
      

  

  

In addition, the placing into service of Times Square Tower and New Dominion Technology Park, Building Two during the third quarter of 2004, as well as Shaws Supermarket and Waltham Weston Corporate Center during 2003, increased revenue by approximately $41.3 million for the year ended December 31, 2004, as detailed below:

Property


  

Date Placed in
Service


  Revenue for the year ended

    2004

  2003

  Change

      (in thousands)

Times Square Tower

  3rd Quarter 2004  $36,470  $2,463  $34,007

Waltham Weston Corporate Center

  1st Quarter 2003   6,599   4,613   1,986

Shaws Supermarket

  2nd Quarter 2003   3,263   2,379   884

New Dominion Technology Park, Building Two

  3rd Quarter 2004   4,403   —     4,403
      

  

  

Total

     $50,735  $9,455  $41,280
      

  

  

The aggregate increase in rental revenue was offset by a decrease of approximately $4.4 million due to the sale of 2300 N Street during 2003 and Hilltop Office Center during 2004, both of which have not been classified as discontinued operations due to our continued involvement in the management of the properties. The decrease in the remaining Same Property Portfolio reflects a decrease in straight-line rents of $7.6 million, which was partially offset by an increase in rental revenue, including operating income, parking and other income, of approximately $5.9 million for the year ended December 31, 2004. We anticipate that we will experience a roll down of approximately 15% to 20% in rents in 2005 on our expiring leases which will be partially offset by increased occupancy and greater contributions from newly delivered buildings such as Times Square Tower and New Dominion Technology Park, Building Two.

In September 2004, we commenced the redevelopment of our Capital Gallery property in Washington, D.C. Capital Gallery is a Class A office property totaling approximately 397,000 square feet. The project entails removing a three-story low-rise section of the property comprised of 100,000 square feet from in-service status and developing it into a 10-story office building resulting in a total complex size of approximately 610,000 square feet upon completion. The classification of this property is included in Properties Repositioned for the year ended December 31, 2004. Rental revenue has decreased for the year ended December 31, 2004 due to taking the three-story low rise out of service in September 2004.

Termination Income

Termination income for the year ended December 31, 2004 was related to twenty tenants across the portfolio that terminated their leases and made termination payments totaling approximately $4.0 million. This compared to termination income earned for the year ended December 31, 2003 related to nineteen tenants totaling $6.1 million. We have experienced a reduction in the number of tenants having trouble paying rent and bankruptcy issues. In addition, fewer tenants have been making efforts to terminate or restructure their leases in order to provide them with financial relief.

Interest and Other Income

Interest and other income increased by $7.3 million for the year ended December 31, 2004. In the first quarter of 2004 we recognized a net amount of approximately $7.0 million in connection with the termination by a third-party of an agreement to enter into a ground lease with us. At the end of the fourth quarter of 2004, we had a cash balance of approximately $239.3 million which also contributed to higher interest earnings. To the extent we do not use our cash balance to acquire properties, fund new developments, or reduce outstanding indebtedness, we anticipate interest income to increase slightly based on anticipated increases in interest rates.

Operating Expenses

Property operating expenses in the Total Property Portfolio (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) increased by $21.7 million. Same Property Portfolio real estate tax expense increased approximately $7.4 million for the year end due to increased real estate tax assessments, specifically in New York City. This increase was offset by a decrease of approximately $2.3 million across the portfolio in repairs and maintenance expenses for the year end as well as increases in other expenses of approximately $0.5 million, resulting in a net increase to Same Property Portfolio operating expenses of approximately $5.5 million.

Approximately $12.3 million of the increase in Total Property Portfolio operating expenses primarily relates to the additions of One and Two Discovery Square, One and Two Freedom Square, 1333 New Hampshire Avenue, 140 Kendrick Street and 1330 Connecticut Avenue, as detailed below:

Property


  Date Acquired

  

Operating Expenses for the

year ended


    2004

  2003

  Change

      (in thousands)

One and Two Discovery Square

  April 1, 2003  $2,775  $1,939  $836

One and Two Freedom Square

  August 5, 2003   6,901   2,499   4,402

1333 New Hampshire Avenue

  October 8, 2003   3,541   640   2,901

140 Kendrick Street

  March 24, 2004   1,213   —     1,213

1330 Connecticut Avenue

  April 1, 2004   2,986   —     2,986
      

  

  

Total

     $17,416  $5,078  $12,338
      

  

  

In addition, the placing into service of Times Square Tower and New Dominion Technology Park, Building Two during the third quarter of 2004, as well as Shaws Supermarket and Waltham Weston Corporate Center during 2003, increased operating expenses by approximately $5.0 million, as detailed below:

Property


  

Date Placed in
Service


  

Operating Expenses for the

year ended


    2004

  2003

  Change

      (in thousands)

Times Square Tower

  3rd Quarter 2004  $4,054  $—    $4,054

Waltham Weston Corporate Center

  1st Quarter 2003   2,360   2,022   338

Shaws Supermarket

  2nd Quarter 2003   364   208   156

New Dominion Technology Park, Building Two

  3rdQuarter 2004   421   —     421
      

  

  

Total

     $7,199  $2,230  $4,969
      

  

  

These increases were offset by a decrease of an aggregate of $1.2 million related to the sales of 2300 N Street in 2003 and Hilltop Office Center in 2004, both of which have not been classified as discontinued operations due to our continued involvement in the management of the properties. Our Capital Gallery property in Washington, D.C. has been classified as Properties Repositioned for the year ended December 31, 2004.

Hotel Net Operating Income

Net operating income for the hotel properties increased by approximately $2.8 million, or approximately 15.62%, for the year ended December 31, 2004 compared to the year ended December 31, 2003. On a year to year comparison, the hotels showed improvement and we expect this improvement to continue into 2005.

The following reflects our occupancy and rate information for the three hotel properties for the year ended December 31, 2004 and 2003:

   2004

  2003

  Increase

 

Occupancy

   80.6%  77.3% 4.3%

Average daily rate

  $175.32  $166.40  5.4%

Revenue per available room, REVPAR

  $141.69  $128.78  10.0%

Development and Management Services

Our third-party fee income increased approximately $3.1 million for the year ended 2004 compared to 2003. Our third-party fees in Washington, D.C. with National Institute of Health and in New York at 90 Church Street collectively increased development and management services by $1.6 million for the year ended December 31, 2004. The completion of these projects along with the winding down of other projects is expected to result in a decrease of approximately $10.0 million of third-party management income in 2005. We will continue to pursue new fee services during 2005 and in future years; however, 2005 will be focused on our increased pipeline of development projects which we commenced in 2004. Our management fees increased approximately $1.5 million for the year ended December 31, 2004 compared to 2003.

Other Expenses

General and Administrative

General and administrative expenses in the Total Property Portfolio increased for the year ended December 31, 2004 as compared to the year ended December 31, 2003 by $8.3 million, or 18.25%. An aggregate of approximately $1.8 million of the increase is attributable to changes in the form of long-term equity-based compensation, as further described below. During the fourth quarter we exercised our right to terminate the purchase agreement to acquire the 21-acre site on the Boston waterfront known as Fan Pier. In conjunction with

the termination, we recognized approximately $1.1 million of general and administrative expense consisting of our share of the forfeited deposit of $0.8 million and approximately $0.3 million of related due diligence costs. In addition, we recognized an expense of $0.75 million representing our payment to Alan B. Landis in connection with the amendment to the development agreement, as further detailed in Note 23 to the Consolidated Financial Statements. Other major increases during 2004 included the following: (1) increases in state taxes based on income and net worth of approximately $1.2 million; (2) increases of approximately $0.8 million in professional fees in connection with the Sarbanes-Oxley Act as well as fees related to increased responsibilities of our Board of Directors; and (3) an increase of approximately $2.3 million related to bonus and salaries for the year ended December 31, 2004.

In 2003, we issued restricted stock and/or LTIP Units, as opposed to granting stock options and restricted stock, under the 1997 Stock Option and Incentive Plan as our primary vehicle for employee equity compensation. An LTIP unit is generally the economic equivalent of a share of our restricted stock. Employees vest in restricted stock and LTIP Units over a five-year term (0%, 0%, 25%, 35%, and 40%). Restricted stock and LTIP Units are measured at fair market value on the date of grant based on the number of shares or units granted and the closing price of our common stock on the date of grant as reported on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. To the extent restricted stock or LTIP Units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to “Stock-based compensation.” Stock-based compensation expense associated with restricted stock was approximately $4.0 million for the year ended December 31, 2004. Stock-based compensation expense associated with $6.1 million of restricted stock that was granted in January 2003 will generally be expensed ratably as such restricted stock vests over a five-year vesting period. Stock-based compensation associated with approximately $9.7 million granted in January 2004 and approximately $12.5 million granted in January 2005 of restricted stock and LTIP units will also be incurred ratably as such restricted stock and LTIP Units vest. To the extent we continue to grant restricted stock and LTIP awards, our expenses will continue to increase significantly until 2008 even if there are no future increases in the aggregate value of restricted equity granted each year. This is because we expense the value of the restricted stock and LTIP awards ratably over the five-year vesting period and a full run-rate will not be achieved until 2008.

Interest Expense

Interest expense for the Total Property Portfolio increased approximately $6.7 million. The majority of the increase is due to the cessation of interest capitalization at Times Square Tower and New Dominion Technology Park, Building Two, as well as the acquisition of 140 Kendrick Street and 1330 Connecticut Avenue, which were offset by the repayment of outstanding mortgage debt on One and Two Reston Overlook, as well as the Lockheed Martin building and NIMA building in the beginning of 2004. Our floating rate debt now consists entirely of our refinanced construction loan on Times Square Tower. The following summarizes our outstanding debt as of December 31, 2004 compared with 2003.

   December 31,

 
   2004

  2003

 
   (dollars in thousands) 

Debt Summary:

         

Balance

         

Fixed rate

  $4,588,024  $4,566,188 

Variable rate

   423,790   438,532 
   


 


Total

  $5,011,814  $5,004,720 
   


 


Percent of total debt:

         

Fixed rate

   91.54%  91.24%

Variable rate

   8.46%  8.76%
   


 


Total

   100.00%  100.00%
   


 


Weighted average interest rate at end of period:

         

Fixed rate

   6.66%  6.67%

Variable rate

   3.36%  2.87%
   


 


Total

   6.38%  6.33%
   


 


Depreciation and Amortization

Depreciation and amortization expense for the Total Portfolio increased as a result of the acquisitions of One and Two Discovery Square, One and Two Freedom Square, 1333 New Hampshire Avenue, 140 Kendrick Street and 1330 Connecticut Avenue as well as the properties placed in service during 2003 and 2004. These additions to the portfolio increased depreciation and amortization expense by approximately $21.2 million, as detailed below:

      Depreciation for the year ended

Property


  Acquired/Placed
in Service


  2004

  2003

  Change

      (in thousands)

One and Two Freedom Square

  Acquired  $7,435  $3,004  $4,431

Times Square Tower

  Placed in-service   7,067   —     7,067

1333 New Hampshire Avenue

  Acquired   4,287   1,139   3,148

One and Two Discovery Square

  Acquired   3,364   2,309   1,055

Waltham Weston Corporate Center

  Placed in-service   2,549   2,152   397

1330 Connecticut Avenue

  Acquired   2,292   —     2,292

140 Kendrick Street

  Acquired   1,569   —     1,569

Shaws Supermarket

  Placed in-service   542   354   188

New Dominion Technology Park, Building Two

  Placed in-service   1,057   —     1,057
      

  

  

Total Additions

     $30,162  $8,958  $21,204
      

  

  

In September 2004, we commenced the redevelopment of our Capital Gallery property in Washington, D.C. which is classified as Properties Repositioned for the year ended December 31, 2004. In connection with the redevelopment project, we recognized an accelerated depreciation charge of approximately $2.6 million, which represents the net book value of the portion of the three-story, low-rise portion of the building which will be redeveloped.

Capitalized Costs

Costs directly related to the development of rental properties are not included in our operating results. These costs are capitalized and included in real estate assets and amortized over their useful lives. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the year ended December 31, 2004 and 2003 were $5.9 million and $5.0 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the year ended December 31, 2004 and 2003 was $10.8 million and $19.2 million, respectively. These costs are not included in the interest expense referenced above. During the third quarter of 2004, we placed the development projects comprised of Times Square Tower and New Dominion Technology Park, Building Two into service and ceased capitalizing interest in accordance with our capitalization policy.

Net Derivative Losses

Net derivative losses for the Total Property Portfolio represent the adjustments to fair value and cash settlements of our derivative contract that are not effective for accounting purposes. The fair value of our derivative contract, which was $1.2 million at December 31, 2004, is included within our consolidated balance sheets. As a result of to the expiration of this derivative contract in February 2005, we will have no further earnings volatility on the remaining derivative contract. See Part II-Item 7A- “Quantitative and Qualitative Disclosures about Market Risk.”

Joint Ventures

The decrease in income from unconsolidated joint ventures in the Total Property Portfolio is related to purchasing the remaining interests in 140 Kendrick Street, One and Two Freedom Square and One and Two Discovery Square. 140 Kendrick Street is included in the Total Property Portfolio as of March 24, 2004. One and Two Freedom Square are included in the Total Property Portfolio as of August 5, 2003. One and Two Discovery Square are included in the Total Property Portfolio as of April 1, 2003. The reclassification of these properties caused the overall income from unconsolidated joint ventures to decrease $3.8 million, which was offset by an increase in Same Property Joint Venture income of approximately $1.2 million. Included in our share of Same Property Joint Venture income is termination income of approximately $1.8 million, of which our share is approximately $1.0 million earned in the second quarter of 2004.

Joint Ventures acquired during 2004 include 801 New Jersey Avenue and the Value-Added Fund. Included in the Value-Added Fund is approximately $0.2 million of initial organization costs which resulted in a net loss for the year ended December 31, 2004.

Other

The decrease in income from discontinued operations in the Total Property Portfolio for the year ended December 31, 2004 was a result of properties sold or designated as held for sale during the end of 2003 and beginning of 2004 which are no longer included in our operations as of December 31, 2004. Below is a list of properties included in discontinued operations for the year ended December 31, 2004 and 2003:

Year ended December 31, 2004


Year ended December 31, 2003


Sugarland Business Park-Building One

Sugarland Business Park-Building One

204 Second Avenue

204 Second Avenue

560 Forbes Boulevard

560 Forbes Boulevard

Decoverly Two, Three, Six and Seven

Decoverly Two, Three, Six and Seven

38 Cabot Boulevard

38 Cabot Boulevard

The Arboretum

The Arboretum

430 Rozzi Place

430 Rozzi Place

Sugarland Business Park-Building Two

Sugarland Business Park-Building Two
875 Third Avenue
The Candler Building

Gains on the sales of real estate for the year ended December 31, 2004 in the Total Property Portfolio relate to the sale of Hilltop Office Center and a land parcel in Burlington, MA. Gains on sales of real estate for the year ended December 31, 2003 primarily relate to the sale of 2300 N Street. These properties are not included in discontinued operations due to our continuing involvement in the management, for a fee equivalent to market, of these properties after the sales.

Properties included in our gains on sales of real estate from discontinued operations for the year ended December 31, 2004 and 2003 in the Total Portfolio are shown below:

Year ended December 31, 2004


Date Disposed

Year ended December 31, 2003

Date Disposed

430 Rozzi Place

January 2004The Candler BuildingJanuary 2003

Sugarland Business Park-Building Two

February 2004875 Third AvenueFebruary 2003

Decoverly Two, Three, Six and Seven

April 2004

The Arboretum

April 2004

38 Cabot Boulevard

May 2004

Sugarland Business Park-Building One

August 2004

204 Second Avenue

September 2004

560 Forbes Boulevard

December 2004

 

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

 

The table below shows selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of 122107 properties, including three hotels and fourthree properties in which we have joint venture interests, acquired or placed in service on or prior to January 1, 2002 and owned by us through December 31, 2003. The Total Property Portfolio includes the effect of the other properties either placed in service or acquired after January 1, 2002 or disposed of on or prior to December 31, 2003.2004. This table includes a reconciliation from Same Property Portfolio to Total Property Portfolio, by also providing information for thedetailing properties which were sold, acquired or placed into service for the years ended December 31, 2003 and 2002. Our net property operating margins, which are defined as rental revenue less operating expenses exclusive of the three hotel properties for the year ended December 31, 2003 and 2002, were 67%.approximately 69.5% and 69.1%, respectively.

 Same Property Portfolio

 Properties Sold

 Properties
Acquired


 Properties Placed
In-Service


 Total Property Portfolio

 
 Same Property Portfolio

 Properties Sold

 Properties
Acquired


 Properties Placed
in Service


 Total Portfolio

  2003

 2002

 

Increase/

(Decrease)


 %
Change


 2003

 2002

 2003

 2002

 2003

 2002

 2003

 2002

 

Increase/

(Decrease)


 %
Change


 
(dollars in thousands) 2003 2002 

Increase/

(Decrease)

 %
Change
 2003 2002 2003 2002 2003 2002 2003 2002 

Increase/

(Decrease)

 %
Change
  

Rental Revenue:

  

Rental Revenue

 $925,770 $921,089 $4,681  0.51% $2,893 $46,285 $153,832 $33,885 $130,528 $103,027 $1,213,023  $1,104,286  $108,737  9.85% $911,760 $908,337 $3,423  0.38% $4,532 $48,169 $153,829 $33,886 $132,989 $103,052 $1,203,110  $1,093,444  $109,666  10.03%

Termination Income

  6,142  6,820  (678) -9.94%  —    —    —    —    —    —    6,142   6,820   (678) -9.94%  6,136  6,805  (669) (9.84%)  —    15  —    —    —    —    6,136   6,820   (684) (10.03%)
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Rental Revenue

  931,912  927,909  4,003  0.43%  2,893  46,285  153,832  33,885  130,528  103,027  1,219,165   1,111,106(1)  108,059  9.73%  917,896  915,142  2,754  0.30%  4,532  48,184  153,829  33,886  132,989  103,052  1,209,246   1,100,264(1)  108,982  9.91%
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Operating Expenses

  329,921  320,979  8,942  2.79%  865  11,912  38,496  8,611  31,357  23,359  400,639   364,860(2)  35,779  9.81%  325,535  318,076  7,549  2.35%  1,222  12,300  38,272  8,384  32,280  22,980  397,309   361,740(2)  35,569  9.84%
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Net Operating Income, excluding hotels

  601,991  606,930  (4,939) -0.81%  2,028  34,373  115,336  25,274  99,171  79,668  818,526   746,246   72,280  9.69%  592,361  597,066  (4,705) (0.79%)  3,310  35,884  115,557  25,502  100,709  80,072  811,937   738,524   73,413  9.94%
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Hotel Net Operating Income (3)

  17,833  23,284  (5,451) -23.41%  —    —    — ��  —    —    —    17,833   23,284   (5,451) -23.41%  17,833  23,216  (5,383) (23.19%)  —    —    —    —    —    —    17,833   23,216   (5,383) (23.19%)
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Consolidated Net Operating Income (3)

  619,824  630,214  (10,390) -1.65%  2,028  34,373  115,336  25,274  99,171  79,668  836,359   769,530   66,829  8.68%  610,194  620,282  (10,088) (1.63%)  3,310  35,884  115,557  25,502  100,709  80,072  829,770   761,740   68,030  8.93%
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Other Revenue:

  

Development and Management Services

  17,347   10,748   6,599  61.40%  —    —    —    —     —    —    —    —    —    —    17,347   10,748   6,599  61.40%

Interest and Other

  3,033   5,504   (2,471) -44.89%

Interest and other

  —    —    —    —     —    —    —    —    —    —    3,033   5,504   (2,471) (44.90%)
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Revenue

  20,380   16,252   4,128  25.40%  —    —    —    —     —    —    —    —    —    —    20,380   16,252   4,128  25.40%

Other Expenses:

  

General and administrative

  45,359   47,292   (1,933) -4.09%  —    —    —    —     —    —    —    —    —    —    45,359   47,292   (1,933) (4.09%)

Interest

  299,436   263,067   36,369  13.82%  —    —    —    —     —    —    —    —    —    —    299,436   263,067   36,369  13.83%

Depreciation and amortization

  155,730  147,579  8,151  5.52%  275  4,616  26,120  5,202  27,947  22,329  210,072   179,726   30,346  16.88%  153,693  145,819  7,874  5.40%  518  4,813  26,120  5,202  28,159  22,329  208,490   178,163   30,327  17.03%

Net derivative losses

  1,038   11,874   (10,836) -91.26%  —    —    —    —     —    —    —    —    —    —    1,038   11,874   (10,836) (91.26%)

Loss from early extinguishment of debt

  1,474   2,386   (912) -38.22%

Loss on investments in securities

  —     4,297   (4,297) -100.00%

Losses from early extinguishments of debt

  —    —    —    —     —    —    —    —    —    —    1,474   2,386   (912) (38.23%)

Loss on investment in securities

  —    —    —    —     —    —    —    —    —    —    —     4,297   (4,297) (100.0%)
 

 

 


 

 

 

 

 

 

 

 


 


 


 

 

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Expenses

  155,730  147,579  8,151  5.52%  275  4,616  26,120  5,202  27,947  22,329  557,379   508,642   48,737  9.58%  153,693  145,819  7,874  5.40%  518  4,813  26,120  5,202  28,159  22,329  555,797   507,079   48,718  9.61%
 

 

 


 

 

 

 

 

 

 

 


 


 


 

Income before minority interests

  464,094  482,635  (18,541) -3.84%  1,753  29,757  89,216  20,072  71,224  57,339  299,360   277,140   22,220  8.02%  456,501  474,463  (17,962) (3.79%)  2,792  31,071  89,437  20,300  72,550  57,743  294,353   270,913   23,440  8.66%

Income from unconsolidated joint ventures

 $3,041 $4,738 $(1,697) -35.82%  —    —   $2,975 $3,216  —    —    6,016   7,954   (1,938) -24.37%  1,901  3,111  (1,210) (38.90%)  4,115  4,843  —    —    —    —    6,016   7,954   (1,938) (24.37%)
 

 

 


 

 

 

 

 

 

 

 

Income from discontinued operations, net of minority interest

  2,176   15,310   (13,134) -85.79%  4,170  5,465  (1,295) (23.70%)  1,932  14,755  —    —    —    —    6,102   20,220   (14,118) (69.83%)

Minority interests in property partnerships

  1,604   2,171   (567) -26.12%  1,827   2,408   (581) (24.13%)

Minority interest in Operating Partnership

  (74,642)  (73,980)  (662) 0.89%  (73,784)  (72,900)  (884) (1.22%)

Gains on sales of real estate, net of minority interest

  57,574   186,810   (129,236) -69.18%  57,574   186,810   (129,236) (69.18%)

Gains on sales of land held for development, net of minority interest

  —     3,633   (3,633) -100.00%  —     3,633   (3,633) (100.00%)

Gains on sales of real estate from discontinued operations, net of minority interest

  73,234   25,345   47,889  188.95%  73,234   25,345   47,889  188.95%

Preferred dividend

  —     (3,412)  (3,412) -100.00%  —     (3,412)  3,412  100.00%
 


 


 


 

 


 


 


 

Net Income available to common shareholders

 $365,322  $440,971  $(75,649) -17.16% $365,322  $440,971  ($75,649) (17.16%)
 


 


 


 

 


 


 


 


(1)Excludes Hotel Revenue of $12,771$12,702 for the yearyears ended December 31, 2002. This amount isThese amounts are included as part of Total Revenue on the Consolidated Statements of Operations and hashave been included as part of Hotel Net Operating Income in the table above.
(2)Excludes Hotel Operating Expenses of $3,187$3,186 for the year ended December 31, 2002. This amount isThese amounts are included as part of Hotel Operating Expenses on the Consolidated Statements of Operations and hashave been included as part of Hotel Net Operating Income in the table above.
(3)See Page 39page 43 for a discussion of Hotel Net Operating Income. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see Page 62.page 71.

Rental Revenue

 

The increase in rental revenue of $108.7$109.7 million in the Total Property Portfolio primarily relates to new leases signed and in place in connection with the acquisition of 399 Park Avenue in the third quarter of 2002, the purchase of the remaining interests in One and Two Discovery Square as of April 1, 2003, and the purchase of the remaining interests in One and Two Freedom Square as of August 5, 2003, as well as the purchase of 1333 New Hampshire Avenue.Avenue as of October 8, 2003. These additions to the portfolio increased revenue by approximately $119.9 million, as described below:

 

     Revenue for the year ended

     Revenue for the year ended

Property


  

Date Acquired


  2003

  2002

  Change

  

Date Acquired


  2003

  2002

  Change

     (in thousands)     (in thousands)

399 Park Avenue

  September 25, 2002  $129,033  $33,885  $95,148  September 25, 2002  $129,033  $33,886  $95,147

One and Two Discovery Square

  April 1, 2003   9,542   —     9,542  April 1, 2003   9,541   —     9,541

One and Two Freedom Square

  August 5, 2003   11,732   —     11,732  August 5, 2003   11,731   —     11,731

1333 New Hampshire Ave

  October 8, 2003   3,525   —     3,525  October 8, 2003   3,524   —     3,524
     

  

  

     

  

  

Total Additions

     $153,832  $33,885  $119,947     $153,829  $33,886  $119,943
     

  

  

     

  

  

 

This increase was offset by a decrease of $43.3$43.6 million due to the sale of One and Two Independence Square and 2300 N Street during 2002 and 2003 thatas well as Hilltop Office Center during 2004, all of which have not been classified as discontinued operations due to our continuing involvement in the management of the properties. In addition, the placingDuring 2002 we placed into service of Five Times Square in the first quarterand other properties detailed below. These additions contributed approximately $29.9 million of 2002, continued lease-up of 111 Huntington Avenue, Waltham Weston Corporate Center which was placed into service during 2003 and the addition of Shaws Supermarket in Boston added revenue of $27.5 million. revenue.

      Revenue for the year ended

Property


  

Date Placed in
Service


  2003

  2002

  Change

      (in thousands)

5 Times Square

  1st Quarter 2002  $74,247  $57,807  $16,440

111 Huntington Avenue

  2nd Quarter 2002   49,161   40,917   8,244

Waltham Weston Corporate Center

  1st Quarter 2003   4,614   2,542   2,072

Shaws Supermarket

  2nd Quarter 2003   2,379   —     2,379

Broad Run Business Park

  4th Quarter 2002   1,768   1,073   695

ITT Educational Services

  1st Quarter 2002   820   713   107
      

  

  

Total

     $132,989  $103,052  $29,937
      

  

  

The overall increase in the remaining Same Property Portfolio reflects declining base rents of approximately $6.3 million and a slight decrease in occupancy offset by an increase in straight line rents of approximately $5.6 million resulting from increased free rent periods on renewals during 2003 as well as an increase in operating expense reimbursements related to higher operating expenses. These increases were partially offset by a decrease in rental revenue, including operating income, parking and other income, of approximately $2.2 million and a slight decrease in occupancy.

 

Termination Income

 

Termination income for the year ended December 31, 2003 was related to 21nineteen tenants across the portfolio that terminated their leases and made termination payments totaling approximately $6.1 million. This compared to termination income earned for the year ended December 31, 2002 related to 23twenty three tenants totaling $6.8 million. As

Interest and Other Income

Interest and other income decreased by $2.5 million in the Total Portfolio for the year ended December 31, 2003. Of the total variance, $1.0 million is a result of interest earned on a note receivable related to the sale of real estate in September 2002. In addition, during 2002 there was a one-time refund of approximately $1.3 million, which related to the resolution of a prior-year tax matter.

Operating Expenses

Property operating expenses (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) in the Total Property Portfolio increased by $35.6 million. The additions of 399 Park Avenue, 1333 New Hampshire Avenue, One and Two Discovery Square and One and Two Freedom Square increased operating expenses by approximately $29.9 million, as described below:

        Operating Expenses for the year ended

Property


  

Date Acquired


    2003

    2002

    Change

        (in thousands)

399 Park Avenue

  September 25, 2002    $33,195    $8,384    $24,811

One and Two Discovery Square

  April 1, 2003     1,939     —       1,939

One and Two Freedom Square

  August 5, 2003     2,498     —       2,498

1333 New Hampshire Ave

  October 8, 2003     640     —       640
        

    

    

Total Additions

       $38,272    $8,384    $29,888
        

    

    

The increases were offset by a decrease of $11.1 million related to One and Two Independence Square and 2300 N Street which were sold during 2002 and 2003, as well as the sale of Hilltop Office Center during 2004, all of which have not been classified as discontinued operations due to our continuing involvement in the management of the properties. In addition, the continued lease-up of 111 Huntington Avenue, Five Times Square and the additional properties detailed below contributed approximately $9.3 million of operating expenses:

        Operating Expenses for the year ended

Property


  

Date Placed in
Service


    2003

    2002

    Change

        (in thousands)

5 Times Square

  1st Quarter 2002    $13,697    $8,774    $4,923

111 Huntington Avenue

  2nd Quarter 2002     15,221     12,684     2,537

Waltham Weston Corporate Center

  1st Quarter 2003     2,022     1,096     926

Shaws Supermarket

  2nd Quarter 2003     208     —       208

Broad Run Business Park

  4th Quarter 2002     370     131     239

ITT Educational Services

  1st Quarter 2002     74     54     20

611 Gateway Boulevard

  3rd Quarter 2003     688     241     447
        

    

    

Total

       $32,280    $22,980    $9,300
        

    

    

Property operating expenses in the Same Property Portfolio increased during the year ended December 31, 2003 primarily due to increases in real estate taxes of $6.7 million, or 5.70%, and increases in insurance of $1.4 million, or 13.33%. The increases in real estate taxes are due to higher property tax assessments and rate increases, specifically in New York, which represented $5.1 million of the increase. Increases in insurance premiums in the Same Property Portfolio and Total Portfolio are related to increases in premium rates on existing coverage as well as the increased cost to purchase coverage under the federal Terrorism Risk Insurance Act of 2002. Other decreases were mainly due to an overall decrease in occupancy from 93.9% at December 31, 2002 to 92.1% at December 31, 2003.

Hotel Net Operating Income

Net operating income for the hotel properties decreased by $5.4 million or approximately 23.2% for the year ended December 31, 2003 compared to the year ended December 31, 2002. These decreases were due to the continued downturn experienced in business climate continues to improve, we expect termination income will dissipate to levels belowtravel and the tourism industry in the Boston market.

The following reflects our occupancy and rate information for the three hotel properties for the years ended December 31, 2003 and 2002.2002:

   2003

  2002

  Decrease

 

Occupancy

   77.3%  80.7% (4.2%)

Average daily rate

  $166.40  $181.13  (8.1%)

Revenue per available room, REVPAR

  $128.78  $146.25  (11.9%)

 

Development and Management Services

 

The increase in development and management services income of $6.6 million primarily resulted from the recognition of fees in the current year2003 on certain third-party development projects, some of which began in 2002, and an overall increase in management fees due to the continuing involvement in properties sold during 2003. Development fees increased by $2.8 million on the 90 Church Street project in New York City related to the services provided to remediate damages resulting from the events of September 11, 2001. There was an overall increase of $1.1 million in development fees in Washington, D.C. on the National Institute of Health and 901 New York Avenue projects. During 2003, approximately $1.8 million was recognized as development fees on the construction of the residential building, The Belvidere in Boston, MA. The remaining increases relate to new management agreements entered into with the sale of 2300 N Street and One and Two Independence Square for the year ended December 31, 2003. Our third-party revenue is project specific and highly dependent on our ability to secure third-party development contracts.

 

Interest and Other Income

Interest and other income decreased by $2.5 million in the Total Portfolio for the year ended December 31, 2003. Of the total variance, $1.0 million is a result of interest earned on a note receivable related to the sale of

real estate in September 2002. In addition, during 2002 there was a one-time refund of approximately $1.3 million, which related to the resolution of a prior-year tax matter.

Operating Expenses

Property operating expenses in the Total Portfolio (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) increased by $35.8 million. Approximately $29.8 million of the increase is due to the additions of 399 Park Avenue, 1333 New Hampshire Avenue, One and Two Discovery Square and One and Two Freedom Square. The increases were offset by a decrease of $11.0 million related to One and Two Independence Square and 2300 N Street which were sold during 2002 and 2003 and that have not been classified as discontinued operations due to our continuing involvement in the management of the properties. In addition, the continued lease-up of 111 Huntington Avenue, Five Times Square and Waltham Weston Corporate Center properties which were placed into service during 2002 and the placing into service Shaws Supermarket in Boston added approximately $8.0 million of operating expenses. The remaining increases are due to the overall increase in Same Property Portfolio operating expenses of $8.9 million.

Property operating expenses in the Same Property Portfolio increased during the year ended December 31, 2003 primarily due to increases in real estate taxes of $6.7 million, or 5.7%, and increases in insurance of $2.3 million, or 22.3%. The increases in real estate taxes are due to higher property tax assessments and rate increases, specifically in New York, which represented $5.1 million of the increase. Increases in insurance premiums in the Same Property Portfolio and Total Portfolio are related to increases in premium rates on existing coverage as well as the increased cost to purchase coverage under the federal Terrorism Risk Insurance Act of 2002. Other decreases were mainly due to an overall decrease in occupancy from 93.9% at December 31, 2002 to 92.1% at December 31, 2003.

Hotel Net Operating Income

Net operating income for the hotel properties decreased by $5.5 million or approximately 23.41% for the year ended December 31, 2003 compared to the year ended December 31, 2002. These decreases are due to the ongoing downturn being experienced in business travel and the tourism industry in the Boston market. While our Boston area hotels have yet to show any meaningful improvement, we are cautiously optimistic that they will gradually recover in 2004 with the Democratic National Convention and a number of other city-wide events scheduled to be held in Boston.

The following reflects our occupancy and rate information for the three hotel properties for the years ended December 31, 2003 and 2002:

   2003

  2002

 

Occupancy

   77.3%  80.7%

Average daily rate

  $166.40  $181.13 

Revenue per available room, REVPAR

  $128.78  $146.25 

Other Expenses

 

General and Administrative

 

General and administrative expenses in the Total Property Portfolio decreased during the year ended December 31, 2003 as compared to the year ended December 31, 2002 by $1.9 million or 4.09%. A decrease of $2.8 million is related to the write-off of unrecoverable leasing commissions related to our termination of the lease with Arthur Andersen for 620,947 square feet at the Times Square Tower during the second quarter of 2002. In addition, an increase of $2.2 million is attributed to changes in the form of equity-based compensation, as further described below.

In 2003, we transitioned to using solelyissued restricted stock and/or long-term incentive plan units of limited partnership, or LTIP units, as opposed to granting stock options and restricted stock, under the 1997 Stock Option and Incentive Plan as our primary vehicle for employee equity compensation. Employees vest in restricted stock and LTIP units over a five-year term. Restricted stock and LTIP units are measured at fair market value on the date of grant based on the number of shares or units granted and the closing price of our Common Stock on the date of grant as quotedreported on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. To the extent restricted stock or LTIP units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to “Stock-based compensation.” Stock-based compensation expense associated with restricted stock was $2.2 million during the year ended December 31, 2003. Stock-based compensation associated with $6.1 million of restricted stock that was granted in January 2003 will generally be expensed ratably as such restricted stock vests over a five-year vesting period. Stock-based compensation associated with approximately $9.4$9.7 million of restricted stock and LTIP units that were granted in January 2004 will also be incurred ratably as such restricted stock and LTIP units vest. To the extent we continue our policy of granting restricted equity awards we will continue to experience higher costs associated with equity based compensation until 2008 at which time the incremental increase associated with each year’s award will be fully realized.

 

Interest Expense

 

Interest expense for the Total Portfolio increased as a result of our strategic decision to replace our variable rate debt with primarily unsecured fixed rate debt and a decrease in the amount of capitalized interest on development projects.projects which was instead expensed. This was primarily due to placing into service and cessation of interest capitalization on Five Times Square, 111 Huntington Avenue, Two Freedom Square, Shaw’s

Supermarket and 611 Gateway Boulevard and the issuance of $1.5 billion of unsecured fixed-rate senior notes (including $750 million issued in December 2002). Our total debt outstanding at December 31, 2003 was approximately $5.0 billion compared to $5.1 billion at December 31, 2002.

 

  December 31,

   December 31,

 
  2003

 2002

   2003

 2002

 
  (dollars in thousands)   (dollars in thousands) 

Debt Summary:

      

Balance

      

Fixed rate

  $4,566,188  $3,890,196   $4,566,188  $3,890,196 

Variable rate

   438,532   1,257,024    438,532   1,257,024 
  


 


  


 


Total

  $5,004,720  $5,147,220   $5,004,720  $5,147,220 
  


 


  


 


Percent of total debt:

      

Fixed rate

   91.24%  75.58%   91.24%  75.58%

Variable rate

   8.76%  24.42%   8.76%  24.42%
  


 


  


 


Total

   100.00%  100.00%   100.00%  100.00%
  


 


  


 


Weighted average interest rate at end of period:

      

Fixed rate

   6.67%  6.99%   6.67%  7.17%

Variable rate

   2.87%  3.04%   2.87%  3.04%
  


 


  


 


Total

   6.33%  6.03%   6.33%  6.03%
  


 


  


 


 

Depreciation and Amortization

 

Depreciation and amortization expense for the Total Property Portfolio increased as$30.3 million. Approximately $26.7 million of the increase was a result of the additions and placing into serviceacquisition of Five Times Square, 111 Huntington Avenue, 399 Park Avenue, One and Two Discovery Square, One and Two Freedom Square 611 Gateway,and 1333 New Hampshire Avenue, and otheras well as the properties which

we acquired or placed in service after January 1, 2002. The increases were offset by decreases of $4.3 million related to properties that were sold during 2002 and 2003 that were not classified as discontinued operations.

 

      Depreciation for the year ended

Property


  Acquired/Placed in
Service


  2003

  2002

  Change

      (in thousands)

399 Park Avenue

  Acquired  $19,668  $5,201  $14,467

5 Times Square

  Placed in-service   11,235   10,523   712

One and Two Discovery Square

  Acquired   2,309   —     2,309

One and Two Freedom Square

  Acquired   3,005   —     3,005

1333 New Hampshire Avenue

  Acquired   1,139   —     1,139

Waltham Westin Corporate Center

  Placed in-service   2,152   268   1,884

111 Huntington Avenue

  Placed in-service   12,252   10,426   1,826

Broad Run Business Park

  Placed in-service   559   298   261

Shaws Supermarket

  Placed in-service   354   —     354

ITT Educational Services

  Placed in-service   284   154   130

611 Gateway Boulevard

  Placed in-service   1,322   661   661
      

  

  

Total Additions

     $54,279  $27,531  $26,748
      

  

  

Capitalized Costs

Costs directly related to the development of rental properties are capitalized.not included in our operating results. These costs are capitalized and amortized over their useful lives. Capitalized development costs include interest, wages,

property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the year ended December 31, 2003 and 2002 were $5.0 million and $5.1 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the year ended December 31, 2003 and 2002 was $19.2 million and $22.5 million, respectively. These costs are not included in the interest expense referenced above.

 

Net Derivative Losses

 

Net derivative losses for the Total Portfolio represent the mark-to-market and cash settlements of our derivative contracts, consisting of interest rate swaps, payments that were not effective for accounting purposes. The fair value of our derivative contract, which was $8.2 million at December 31, 2003, is included onwithin our consolidated balance sheets. As a result of ourto the expiration of this derivative contract modification in August 2003February 2005, we will have no further earnings volatility on the remaining derivative contract. See Item 7A—Part II-Item 7A “—Quantitative and Qualitative Disclosures about Market Risk.

 

Joint Ventures

 

The decrease in income from unconsolidated joint ventures in the Total Portfolio as well as the Same Property Portfolio is related to the purchase of the remaining interests in One and Two Discovery Square, and One and Two Freedom Square.Square and 140 Kendrick Street. One and Two Discovery Square are included in the Total Portfolio Revenue as of April 1, 2003. One and Two Freedom Square are included in the Total Portfolio Revenue as of August 5, 2003. 140 Kendrick Street is included in the Total Portfolio as of March 24, 2004. The reclassification of these properties caused the overall income from joint ventures to decrease for the year ended December 31, 2003.

 

Other

The decrease in income from discontinued operations in the Total Portfolio for the year ended December 31, 2003 was a result of properties sold or designated as held for sale during the end of 2002 and beginning of 2003 which are no longer included as of December 31, 2003. Below is a list of properties included in discontinued operations for the year ended December 31, 2003 and 2002:

Year ended December 31, 2003

Year ended December 31, 2002

Sugarland Business Park-Building OneSugarland Business Park-Building One
204 Second Avenue204 Second Avenue
560 Forbes Boulevard560 Forbes Boulevard
Decoverly Two, Three, Six and SevenDecoverly Two, Three, Six and Seven
38 Cabot Boulevard38 Cabot Boulevard
The ArboretumThe Arboretum
430 Rozzi Place430 Rozzi Place
Sugarland Business Park-Building TwoSugarland Business Park-Building Two
875 Third Avenue875 Third Avenue
The Candler BuildingThe Candler Building
Fullerton Square
7600 Boston Boulevard
7700 Boston Boulevard
2391 West Winton Avenue

 

Gains on sales of real estate for the year ended December 31, 2003 related to the sale of 2300 N Street in the first quarter for a gain of $52.9 million. In the second and third quarter, there was a transfer of certain mortgage issuance costs as described in Note 6 to the Consolidated Financial Statements that resulted in a gain of $4.8 million (net of minority interest share of $1.0 million.) Gains on sales of real estate for the year ended December 31, 2002 related to the sale of One and Two Independence Square and were not included in discontinued operations as we have continuing involvement through a third party management agreement after the sale.

The decrease

Properties included in income from discontinued operations for the year ended December 31, 2003 was a result of the discontinued properties being sold during the first quarter of 2003. Accordingly, unlike in 2002 we did not recognize a full quarter of revenue and expenses with respect to those properties for the first, second or third quarter of 2003. In addition, income from discontinued operations for the year ended December 31, 2002 included two properties sold during 2002. For both periods, Sugarland Business Park- Building Two and 430 Rozzi Place are included as part of income from discontinued operations.

Gainsgains on sales of real estate from discontinued operations for the year ended December 31, 2003 primarily related toand 2002 in the gain recognized on the sale of 875 Third Avenue and The Candler Building. The gains on sales for the year ended December 31, 2002Total Portfolio are the result of the dispositions of (1) Fullerton Square, consisting of two office/technical properties totaling 179,453 square feet in Springfield, Virginia and (2) 7600, 7700, and 7702 Boston Boulevard, consisting of three buildings totaling 195,227 square feet in Springfield, Virginia.shown below:

Year ended December 31, 2003

Date Disposed

Year ended December 31, 2002

Date Disposed

The Candler BuildingJanuary 2003Fullerton SquareMarch 2002
875 Third AvenueFebruary 20037600 Boston BoulevardMarch 2002
7700 Boston BoulevardMarch 2002
2391 West Winton AvenueDecember 2002

 

The decrease in our preferred dividend of $3.4 million for the year ended December 31, 2003 was a result of the conversion of 2,000,000 shares of our preferred stock into common stock in July 2002.

Comparison of the year ended December 31, 2002 to the year ended December 31, 2001

 

The table below shows selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of 116 properties, including three hotels and five properties in which we have joint venture interests, acquired or placed in service on or prior to January 1, 2001 and owned by us through December 31, 2003. The Total Property Portfolio includes the effect of the other properties either placed in service or acquired after January 1, 2001 or disposed of on or prior to December 31, 2003. This table includes a reconciliation from Same Property Portfolio to Total Portfolio, detailing properties which were sold, acquired or placed into service for the years ended December 31, 2002 and 2001. Our net property operating margins, which are defined as rental revenue less operating expenses exclusive of the three hotel properties for the year ended December 31, 2002 and 2001 was approximately 67%.

  Same Property Portfolio

  Properties Sold

 Properties
Acquired


 Properties Placed
in Service


 Total Portfolio

 
  2002

 2001

 

Increase/

(Decrease)


  %
Change


  2002

 2001

 2002

 2001

 2002

 2001

 2002

  2001

  

Increase/

(Decrease)


  %
Change


 

(dollars in thousands)

                                              

Rental Revenue:

                                              

Rental Revenue

 $805,202 $791,870 $13,332  1.68% $46,285 $50,239 $131,392 $64,776 $121,407 $13,298 $1,104,286  $920,183  $184,103  20.01%

Termination Income

  6,820  7,230  (410) -5.67%  —    —    —    —    —    1,426  6,820   8,656   (1,836) -21.21%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Rental Revenue

  812,022  799,100  12,922  1.62%  46,285  50,239  131,392  64,776  121,407  14,724  1,111,106(1)  928,839(1)  182,267  19.62%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Operating Expenses

  282,524  270,123  12,401  4.59%  11,912  12,436  43,162  21,668  27,262  3,812  364,860(2)  308,040(2)  56,820  18.45%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Net Operating Income, excluding hotels

  529,498  528,977  521  0.01%  34,373  37,803  88,230  43,108  94,145  10,912  746,246   620,799   125,447  20.21%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Hotel Net Operating Income (3)

  23,284  26,549  (3,265) -12.30%  —    —    —    —    —    —    23,284   26,549   (3,265) -12.30%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Consolidated Net Operating Income (3)

  552,782  555,526  (2,744) -0.49%  34,373  37,803  88,230  43,108  94,145  10,912  769,530   647,348   122,182  18.87%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Other Revenue:

                                              

Development and Management Services

                                 10,748   12,167   (1,419) -11.66%

Interest and Other

                                 5,504   12,183   (6,679) -54.82%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Revenue

                                 16,252   24,350   (8,098) -33.26%

Other Expenses:

                                              

General and administrative

                                 47,292   38,312   8,980  23.44%

Interest

                                 263,067   211,391   51,676  24.45%

Depreciation and amortization

  130,640  125,048  5,592  4.47%  4,617  5,617  18,883  9,431  25,586  3,364  179,726   143,460   36,266  25.28%

Net derivative losses

                                 11,874   26,488   (14,614) -55.17%

Loss from early extinguishments of debt

                                 2,386   —     2,386  100.00%

Loss on investments in securities

                                 4,297   6,500   (2,203) -33.89%
  

 

 


 

 

 

 

 

 

 

 


 


 


 

Total Other Expenses

  130,640  125,048  5,592  4.47%  4,617  5,617  18,883  9,431  25,586  3,364  508,642   426,151   82,491  19.36%

Income before minority interests

  422,142  430,478  (8,336) -1.94%  29,756  32,186  69,347  33,677  68,559  7,548  277,140   245,547   31,593  12.87%

Income from unconsolidated joint ventures

 $5,225 $4,013 $(1,212) -30.20%  —    —    —    —   $2,729 $173  7,954   4,186   3,768  90.01%
  

 

 


 

 

 

 

 

 

 

               

Income from discontinued operations, net of minority interest

 $1,135 $2,829 $(1,694) -59.88% $14,175 $21,683  —    —    —    —    15,310   24,512   (9,202) -37.54%
  

 

 


 

 

 

 

 

 

 

               

Minority interests in property partnerships

                                 2,171   1,194   977  81.83%

Minority interest in Operating Partnership

                                 (73,980)  (69,729)  (4,251) -6.10%

Gains on sales of real estate, net of minority interest

                                 186,810   6,505   180,305  2.,771.79%

Gains on sales of land held for development, net of minority interest

                                 3,633   2,584   1,049  40.60%

Gains on sales of real estate from discontinued operations, net of minority interest

                                 25,345   —     25,345  100.00%

Cumulative effect of a change in accounting principle, net of minority interest

                                 —     (6,767)  6,767  100.00%

Preferred dividend

                                 (3,412)  (6,592)  (3,180) -48.24%
                                 


 


 


 

Net Income available to common shareholders

                                $440,971  $201,440  $239,531  118.91%
                                 


 


 


 


(1)Excludes Hotel Revenue of $12,771 and $32,330 for the years ended December 31, 2002 and 2001, respectively. These amounts are included as part of Total Revenue on the Consolidated Statements of Operations and have been included as part of Hotel Net Operating Income in the table above.
(2)Excludes Hotel Operating Expenses of $3,187 and $5,781 for the years ended December 31, 2002 and 2001, respectively. These amounts are included as part of Hotel Operating Expenses on the Consolidated Statements of Operations and have been included as part of Hotel Net Operating Income in the table above.
(3)See Page 39 for a discussion of Hotel Net Operating Income. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see Page 62.

Rental Revenue

The increase in rental revenue of $184.1 million in the Total Portfolio primarily relates to new leases signed and in place at December 31, 2002 in connection with the acquisition of Citigroup Center in the second quarter of 2001 and the acquisition of 399 Park Avenue in the third quarter of 2002, the commencement of occupancy at 111 Huntington Avenue in the fourth quarter of 2001 and the placing into service of Five Times Square in the first quarter of 2002. These increased revenue by $174.7 million. This increase was offset by a decrease of approximately $4.0 million related to the sale of One and Two Independence Square during 2002 that have not been classified as discontinued operations due to our continuing involvement in the management of these properties after the sale. Properties sold during 2002 included One and Two Independence Square, 2391 West Winton Avenue, Fullerton Square, 875 Third Avenue and 7600, 770 and 7702 Boston Boulevard. The overall increases in the Same Property Portfolio of $13.3 million account for the remaining increase in the total portfolio revenue.

Termination Income

The termination income for the year ended December 31, 2002 was related to twenty-three tenants across the portfolio that terminated their leases and made termination payments totaling approximately $6.8 million. This compared to termination income received in the prior year related primarily to thirty-three tenants throughout our portfolio who terminated their leases in 2001 and made termination payments totaling approximately $8.7 million.

Development and Management Services

The decrease in development and management income of $1.4 million primarily resulted from the completions of projects during 2001, including certain third-party contracts as well as certain of our joint venture projects. This was offset by development fees earned on a new joint venture project which was started in 2002 as well as, an increase in management fees relating to certain of our joint ventures which were placed into service in 2002. Our third party revenue is project specific and highly dependent on our ability to secure third-party development contracts.

Interest and Other Income

The decrease in interest and other income related to the Total Portfolio is a result of less interest earned due to lower average cash balances maintained and lower interest rates on cash balances during the year ended December 31, 2002 as compared to the year ended December 31, 2001. During the year ended December 31, 2001, the higher average cash balance was attributable to unused proceeds from our public offering of common stock in October 2000.

Operating Expenses

Property operating expenses (real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses) in the Total Property portfolio increased by $56.8 million during the year ended December 31, 2002. Approximately $44.9 million of increase in property operating expenses were primarily due to the additions of the Citigroup Center, Five Times Square, 399 Park Avenue and 111 Huntington Avenue properties that we acquired or placed in service after January 1, 2001. The office leases include reimbursements from tenants for a portion of these operating expenses. The increases were offset by a decrease of approximately $1.0 million related to One and Two Independence Square and 2300 N Street which were sold during 2002 and 2003 and that have not been classified as discontinued operations due to our continuing involvement in the management of the properties after the sale, reflected as properties sold in the table above.

Property operating expenses in the Same Property Portfolio increased during the year ended December 31, 2002 primarily due to increases in real estate taxes of $5.2 million, or 5.0%, and increases in insurance of $4.1

million, or 70.6%. The increase in real estate taxes was primarily due to higher property tax assessments. Increases in insurance in the Same Property Portfolio and Total Portfolio are related to increases in rates on existing coverage and the purchase of a separate stand-alone terrorism policy. Overall increases in the same property portfolio of $3.1 million account for the remaining increase in the Same Property portfolio operating expenses.

Hotel Net Operating Income

Net operating income for the hotel properties decreased by $3.3 million or approximately 12.3% for the year ended December 31, 2002 compared to the year ended December 31, 2001. These decreases were related to the general downturn in the economy as well as lasting effects of September 11, 2001.

The following reflects our occupancy and rate information for the three hotel properties for the years ended December 31, 2002 and 2001:

   2002

  2001

 

Occupancy

   80.7%  80.5%

Average daily rate

  $181.13  $197.39 

Revenue per available room, REVPAR

  $146.25  $158.50 

Other Expenses

General and Administrative

General and administrative expenses in the Total Portfolio increased during the year ended December 31, 2002 by approximately $9.0 million, of which $2.8 million related to the write-off in the second quarter of non-recoverable commissions related to the termination of the lease with Arthur Andersen for 620,947 square feet at the Times Square Tower development project. The remaining increase related primarily to increases in compensation and related expenses, specifically an increase of $3.3 million related to bonuses awarded to senior management for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Stock-based compensation associated with restricted stock units was $1.2 million during the year ended December 31, 2002. Additional amounts include a $1.4 million increase related to a decrease in capitalized wages resulting from decreased development activity in 2002 compared to the year ended December 31, 2001, and a $0.5 million increase in costs incurred related to implementing the requirements of the Sarbanes Oxley Act of 2002.

Interest Expense

Interest expense for the Total Portfolio increased as a result of having a higher average outstanding debt balance as compared to the prior period as well as decreased interest capitalization. This was primarily due to placing into service and cessation of interest capitalization on Five Times Square, 111 Huntington Avenue and 611 Gateway and new debt incurred related to the acquisition of Citigroup Center and 399 Park Avenue. Our total debt outstanding at December 31, 2002 was approximately $5.1 billion, compared to $4.3 billion at December 31, 2001.

   December 31,

 
   2002

  2001

 
   (dollars in thousands) 

Debt Summary:

         

Balance

         

Fixed rate

  $3,890,196  $3,448,903 

Variable rate

   1,257,024   866,039 
   


 


Total

  $5,147,220  $4,314,942 
   


 


Percent of total debt:

         

Fixed rate

   75.58%  79.93%

Variable rate

   24.42%  20.07%
   


 


Total

   100.00%  100.00%
   


 


Weighted average interest rate at end of period:

         

Fixed rate

   6.99%  7.27%

Variable rate

   3.04%  3.77%
   


 


Total

   6.03%  6.57%
   


 


Depreciation and Amortization

Depreciation and amortization expense for the Total Portfolio increased as a result of the additions of the Citigroup Center, Five Times Square, 111 Huntington Avenue and 399 Park Avenue properties and other properties that we acquired or placed in service after January 1, 2001. The increases were offset by decreases related to properties that were sold during 2002 that were not included in discontinued operations.

Costs directly related to the development of rental properties are capitalized. Capitalized development costs include interest, wages, property taxes, insurance and other project costs incurred during the period of development. Capitalized wages for the year ended December 31, 2002 and 2001 were $5.1 million and $6.6 million, respectively. These costs are not included in the general and administrative expenses discussed above. Interest capitalized for the year ended December 31, 2002 and 2001 was $22.5 million and $59.3 million, respectively. These costs are not included in the interest expense referenced above.

Net Derivative Losses

Net derivative losses represent the mark-to-market of our derivative contracts and payments that were not effective for accounting purposes. During the year ended December 31, 2002, we recognized a reduction in the fair value of our contracts as a result of generally low interest rates. The fair value of our derivative contracts is included on our balance sheets.

Loss from early extinguishments of debt

The loss from early extinguishment of debt for the year ended December 31, 2002 related to a debt extinguishment charge we incurred in connection with the prepayment of debt in connection with the sale of a property.

Loss on investments in securities

During the year ended December 31, 2002, we recognized losses on our investments in securities of approximately $4.3 million. This loss was related to the write-off of our investment in the securities of a technology company due to the Company’s determination that the decline in the fair value of these securities was an other than temporary decline. The loss on investment of $6.5 million for the year ended December 31, 2001 was related to the write off of investments in securities of two technology companies.

Joint Ventures

Income from unconsolidated joint ventures increased by $3.8 million for the year ended December 31, 2002. The primary result of the increase is related to the completion of the repositioning of 265 Franklin Street during 2001 as well as receiving preferential returns on certain other joint ventures resulting from the achievement of specified investment return thresholds. The additional increase in the total portfolio is related to the placing in service of One and Two Discovery Square. Excluded from Same Property Portfolio is Discovery Square and Two Freedom Square due to their development.

Other

Gains on sales of real estate for the year ended December 31, 2002 related to the sale of One and Two Independence Square which were not included in discontinued operations, as we have continuing involvement through a third party management agreement after the sale.

The decrease in income from discontinued operations for the year ended December 31, 2002 was a result of the discontinued properties being sold prior to December 31, 2002, and therefore, we did not recognize a full year of revenue and expenses as we did in the prior year. Properties included in discontinued operations for the year ended December 31, 2002 included 875 Third Avenue, The Candler Building, Fullerton Square, 2391 West Winton and 7600, 7700 and 7702 Boston Boulevard.

Gains on sales of real estate from discontinued operations for the year ended December 31, 2002 related to the gain recognized on the properties that were sold. These properties included Fullerton Square, 2391 West Winton and 7600, 7700 and 7702 Boston Boulevard.

The decrease in our preferred dividend from $6.6 million for the year ended December 31, 2001 to $3.4 million for the year ended December 31, 2002 was a result of the conversion of 2,000,000 shares of our preferred stock into common stock in July 2002.

Liquidity and Capital Resources

 

General

 

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

 

fund normal recurring expenses;

 

meet debt service requirements including the repayment or refinancing of $65.9$564 million of indebtedness that matures within the twelve month period;period, $279 million of which is due in 2005 and the remainder in the first quarter of 2006;

 

fund capital expenditures, including tenant improvements and leasing costs;

 

fund current development costs not covered under construction loans; and

 

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

 

We believe that these needs will be satisfied using our current cash balance, cash flows generated by operations and provided by financing activities. Rental revenue, recovery income from tenants, and other income from operations are our principal sources of capital used to pay operating expenses, debt service, recurring capital expenditures and the minimum distribution required to maintain our REIT qualification. We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our sources of revenue also include third-party fees generated by our office real estate management, leasing, development and construction businesses. Consequently, we believe our revenue, together with proceeds from financing activities,

will continue to provide the necessary funds for our short-term liquidity needs. However, material changes in these factors may adversely affect our net cash flows. Such changes, in turn, wouldcould adversely affect our ability to fund distributions, debt service payments and tenant improvements. In addition, a material adverse change in our cash provided by operations may affect our ability to comply with the financial performance covenants under our unsecured line of credit and unsecured senior notes. Our failure to comply with financial covenants could adversely impact our ability to access additional financing to fund our operations including distributions, debt service payments and capital expenditures.

 

Our principal liquidity needs for periods beyond twelve months are for the costs of developments, property acquisitions, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements. We expect to satisfy these needs using one or more of the following:

 

construction loans;

 

long-term secured and unsecured indebtedness;

 

income from operations;

 

joint ventures;

sales of real estate;

 

issuances of additional common and Preferred Unitsunits of the Operating Partnership and/or our equity securities; and

 

our unsecured revolving line of credit or other short term bridge facilities.

 

We draw on multiple financing sources to fund our long-term capital needs. Our line of credit is utilized primarily as a bridge facility to fund acquisition opportunities and meet short-term development needs. We fund our development projects with construction loans that may be partially guaranteed by Boston Properties Limited PartnershipBPLP until project completion or lease-up thresholds are achieved. In 2003, we completed three highly successful offerings of unsecured investment grade senior notes and expect to utilize the bond market, asset backed mortgage financing and common and preferred equity as cost-effective capital sources for other long-term capital needs.

 

Cash Flow Summary

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows in “Item 8. Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

 

Cash and cash equivalents were $22.7$239.3 million and $55.3$22.7 million at December 31, 20032004 and December 31, 2002,2003, respectively, representing a decreasean increase of $32.6$216.6 million. The decreaseincrease was a result of the following increases and decreases in cash flows:

 

  Years ended December 31,

   Years ended December 31,

 
  2003

 2002

 Increase
(Decrease)


   2004

 2003

 Increase
(Decrease)


 
  (in thousands)   (in thousands) 

Net cash provided by operating activities

  $488,275  $437,380  $50,895   $429,506  $488,275  $(58,769)

Net cash provided by (used in) investing activities

  $97,496  $(1,017,283) $1,114,779   $(171,014) $97,496  $(268,510)

Net cash provided by (used in ) financing activities

  $(618,360) $537,111  $(1,155,471)

Net cash used in financing activities

  $(41,834) $(618,360) $576,526 

 

Our principal source of cash flow is related to the operation of our office properties. In addition, over the past year, we have recycled capital through the sale of some of our office properties and raised proceeds from secured and unsecured borrowings. We also issued 5,700,000 shares of common stock in a public offering in March 2004. The average term of a tenant lease is approximately 7.07.6 years with occupancy rates historically in the range of 92% to 98%. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend and distribution payment requirements.

Cash is used in investing activities to fund acquisitions, development and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings that meet our investment criteria. Cash provided byused in investing activities for the twelve months ended December 31, 20032004 consisted of the following:

 

  (in thousands)

   (in thousands)

 

Proceeds from the sales of real estate

  $524,264   $107,614 

The cash provided by investing is partially offset by:

   

Investments in unconsolidated joint ventures

   (4,495)

The cash provided by investing is offset by:

   

Net investments in unconsolidated joint ventures

   (944)

Recurring capital expenditures

   (18,514)   (25,101)

Planned non-recurring capital expenditures associated with acquisition properties

   (4,464)   (4,889)

Hotel improvements, equipment upgrades and replacements

   (2,345)   (1,001)

Acquisitions/additions to real estate

   (396,950)   (246,693)
  


  


Net cash provided by investing activities

  $97,496 

Net cash used in investing activities

  $(171,014)
  


  


Cash used in financing activities for the year ended December 31, 20032004 totaled approximately $618.4$41.8 million. This consisted of payments of dividends and distributions to shareholders and unitholders and changes to our existing debt structure, resulting in a net reduction of our total debt, including the net repayment of certain construction loans, certain mortgage loansmortgages, offset by the net proceeds of approximately $291.1 million from our common stock offering in March 2004 and the remaining balance on our unsecured bridge loan utilizing the proceeds from salesthe exercising of real estate assets and through the issuance by Boston Properties Limited Partnership of $725 million of unsecured senior notes.employee stock options. Future debt payments are discussed below under the heading “Capitalization.”

 

Capitalization

 

At December 31, 2003,2004, our total consolidated debt was approximately $5.0 billion. The weighted-average annual interest rate on our consolidated indebtedness was 6.33%6.38% and the weighted-average maturity was approximately 6.35.7 years.

 

Debt to total market capitalization ratio, defined as total consolidated debt as a percentage of the market value of our outstanding equity securities plus our total consolidated debt, is a measure of leverage commonly used by analysts in the REIT sector. Our total market capitalization was approximately $11.2$13.9 billion at December 31, 2003.2004. Total market capitalization was calculated using the December 31, 20032004 closing stock price of $48.19$64.67 per common share and the following: (1) 98,230,177110,320,485 shares of our common stock, (2) 22,365,94221,552,166 outstanding common units of limited partnership of Boston Properties Limited PartnershipBPLP (excluding common units held by Boston Properties, Inc.), (3) an aggregate of 7,087,4875,357,399 common units issuable upon conversion of all outstanding preferred units of limited partnership of Boston Properties Limited Partnership,BPLP, (4) an aggregate of 169,838 common units issuable upon conversion of all outstanding LTIP units, assuming all conditions have been met for the conversion of the LTIP units, and (4)(5) our consolidated debt totaling approximately $5.0 billion. Our total consolidated debt at December 31, 20032004 represented approximately 44.9%36.1% of our total market capitalization. This percentage will fluctuate with changes in the market price of our common stock and does not necessarily reflect our capacity to incur additional debt to finance our activities or our ability to manage our existing debt obligations. However, for a company like ours, whose assets are primarily income-producing real estate, the debt to total market capitalization ratio may provide investors with an alternate indication of leverage, so long as it is evaluated along with other financial ratios and the various components of our outstanding indebtedness.

 

Debt Financing

 

As of December 31, 2003,2004, we had approximately $5.0 billion of outstanding indebtedness, representing 44.9%36.1% of our total market capitalization based on our year-end share price,as calculated above under the heading “Capitalization,” consisting of $1.475$1.471 billion in publicly traded unsecured debt at an average interest rate of 5.95% with maturities of tenranging from 2013 to twelve years, $3.471

2015 and $3.541 billion of property-specific debt and $63 million drawn on our unsecured line of credit.debt. The table below summarizes our mortgage notes payable, our senior unsecured notes, our unsecured bridge loan and our revolving line of credit with Fleet National Bank, as agent,outstanding debt at December 31, 20032004 and 2002:2003:

 

  December 31,

   December 31,

 
  2003

 2002

   2004

 2003

 
  (dollars in thousands)   (dollars in thousands) 

DEBT SUMMARY:

      

Balance

      

Fixed rate

  $4,566,188  $3,890,196   $4,588,024  $4,566,188 

Variable rate

   438,532   1,257,024    423,790   438,532 
  


 


  


 


Total

  $5,004,720  $5,147,220   $5,011,814  $5,004,720 
  


 


  


 


Percent of total debt:

      

Fixed rate

   91.24%  75.58%   91.54%  91.24%

Variable rate

   8.76%  24.42%   8.46%  8.76%
  


 


  


 


Total

   100.00%  100.00%   100.00%  100.00%
  


 


  


 


Weighted average interest rate at end of period:

      

Fixed rate

   6.67%  6.99%   6.66%  6.67%

Variable rate

   2.87%  3.04%   3.36%  2.87%
  


 


  


 


Total

   6.33%  6.03%   6.38%  6.33%
  


 


  


 


The variable rate debt shown above bears interest based on various spreads over the London Interbank Offered Rate or Eurodollar rates.

 

Unsecured Line of Credit

 

On January 17, 2003, we extended our $605.0 million unsecured revolving credit facility (the “Unsecured Line of Credit”) for a three year term expiring on January 17, 2006 with a provision for a one year extension at our option, subject to certain conditions. Outstanding balances under the Unsecured Line of Credit bear interest at a per annum variable rate of Eurodollar +plus 0.70%. In addition, a facility fee equal to 20 basis points per annum is payable in quarterly installments. The interest rate and facility fee are subject to adjustment in the event of a change in Boston Properties Limited Partnership’sBPLP’s senior unsecured debt ratings. The Unsecured Line of Credit contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loan advances to us at a reduced Eurodollar rate. We utilize the Unsecured Line of Credit principally to fund development of properties, land and property acquisitions, and for working capital purposes. Our Unsecured Line of Credit is a recourse obligation of Boston Properties Limited Partnership. The interest rate is subjectBPLP. We intend to adjustmentextend, refinance or replace the Unsecured Line of Credit prior to its maturity in the event of a change in the Boston Properties Limited Partnership unsecured debt ratings.January 2006.

 

Our ability to borrow under our unsecured revolving line of credit is subject to our compliance with a number of customary financial and other covenants on an ongoing basis, including: (1) an unsecured loan-to-value ratio against our total borrowing base not to exceed 60%, unless our leverage ratio exceeds 60%, in which case it is not to exceed 55%, (2) a secured debt leverage ratio not to exceed 55%, (3) a debt service coverage ratio of at least 1.40 for our borrowing base properties, (4) a fixed charge coverage ratio of at least 1.30 and a debt service coverage ratio of at least 1.50, (5) a leverage ratio not to exceed 60%, however for five consecutive quarters (not including the two quarters prior to expiration) the leverage ratio can go to 65%, (6) limitations on additional indebtedness and stockholder distributions, and (7) a minimum net worth requirement. As of December 31, 2003,2004, we were in compliance with these financial restrictions and requirements then applicable.requirements.

 

At December 31, 2003,2004, we had letters of credit totaling $5.7$8.6 million outstanding under our Unsecured Line of Credit and an outstanding draw of $63.0 million, and hadwith the ability to borrow an additional $536.3$596.4 million

under our Unsecured Line of Credit. As of February 18, 2004,March 4, 2005, we had $118.0 million availableno amount outstanding under our Unsecured Line of Credit.

 

Unsecured Senior Notes

 

During 2002, we completed an unregistered offering of $750 million in aggregate principal amount of the Boston Properties Limited Partnership’sBPLP’s 6.25% senior unsecured notes due January 15, 2013. The notes were only offered to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act and to certain institutional investors outside of the United States in reliance on Regulation S under the Securities Act. The notes were priced at 99.65% of their principal amount to yield 6.296%. We used the net proceeds to reduce the amounts outstanding under our unsecured bridge loan that were borrowed in connection with the acquisition of 399 Park Avenue.

 

During 2003, we issued an aggregate of $725 million of unsecured long-term debt at an average interest rate of 5.60% primarily to replace secured and unsecured, variable rate debt in the following offerings:

 

On January 17, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of an additional $175 million aggregate principal amount of the Boston Properties Limited Partnership’sBPLP’s 6.25% senior unsecured notes due January 15, 2013. The notes were priced at 99.763% of their principal amount to yield 6.28%. The additional notes are fungible, and form a single series, with the senior notes issued in December 2002. We used the net proceeds to repay the remaining balance of our unsecured bridge loan totaling approximately $105.7 million and to repay certain construction loans maturing in 2003 totaling approximately $60.0 million.

On March 18, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of $300 million in aggregate principal amount of the Boston Properties Limited Partnership’sBPLP’s 5.625% senior unsecured notes due April 15, 2015. The notes were priced at 99.898% of their principal amount to yield 5.636%. We used the net proceeds to refinance the mortgage debt on Five Times Square and for other general business purposes.

 

On May 22, 2003, we completed an unregistered offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of $250 million in aggregate principal amount of the Boston Properties Limited Partnership’sBPLP’s 5.0% senior unsecured notes due June 1, 2015. The notes were priced at 99.329% of their principal amount to yield 5.075%. We used the net proceeds to repay the mortgage loan secured by the property at 2600 Tower Oaks Boulevard in Maryland, repay in full amounts outstanding under the unsecured lineUnsecured Line of creditCredit and for other general business purposes.

 

Our unsecured senior notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus 35 basis points, in each case plus accrued and unpaid interest to the redemption date. The indenture under which our senior unsecured notes were issued contains restrictions on incurring debt and using our assets as security in other financing transactions and other customary financial and other covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of 1.5, and (4) unencumbered asset value to be no less than 150% of our unsecured debt. As of December 31, 2003,2004, we were in compliance with each of these financial restrictions and requirements.

 

Under registration rights agreements with the initial purchasers of our senior unsecured notes, we agreed to use our reasonable best efforts to register with the SEC offers to exchange new notes issued by us, which we refer to as “exchange notes,” for the original notes. We closed the exchange offers relating to the 6.25% senior unsecured notes due January 15, 2013 on June 20, 2003, and we closed the exchange offer relating to the 5.625% senior unsecured notes due April 15, 2015 and 5.00% senior unsecured notes due June 1, 2015 on September 9, 2003. The exchange notes are in the same aggregate principal amount as and have terms substantially identical to

the original notes, but the exchange notes are freely tradable by the holders, while the original notes were subject to resale restrictions. The exchange offers did not generate any cash proceeds for us.

Boston Properties Limited Partnership’s investment grade ratings on its senior unsecured notes are as follows:

Rating Organization


Rating


Moody’sBaa2 (stable)
Standard & Poor’sBBB (stable)
FitchRatingsBBB (stable)

The security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

 

Unsecured Bridge Loan

 

On September 25, 2002, we obtained unsecured bridge financing totaling $1.0 billion in connection with the acquisition of 399 Park Avenue. During 2002, we repaid approximately $894.3 million with proceeds from the offering of unsecured senior notes and proceeds from the sales of certain real estate properties. At December 31, 2002, the unsecured bridge loan had an outstanding balance of approximately $105.7 million. During January 2003, we repaid all amounts outstanding under our unsecured bridge loan with proceeds from the January 2003 offering of senior unsecured notes.

Mortgage Debt

 

At December 31, 2003,2004, our total consolidated debt was approximately $5.0 billion. The weighted-average annual interest rate on our consolidated indebtedness was 6.33%6.38% and the weighted-average maturity was approximately 6.35.7 years. OurAt December 31, 2004, our variable rate debt now consists almost entirelyconsisted of our outstanding balance underconstruction loan on Times Square Tower. Variable rate debt encompassed only 8.46% of our total debt as of December 31, 2004. We plan on financing our larger development properties with property-specific construction debt because of the time associated with the development of those properties and we plan on utilizing our Unsecured Line of Credit ($63 million) and construction loans on Times Square Tower ($333 million) and New Dominion Two ($43 million). Variable rate debt currently encompasses only 8.76% of our total debt.for available transactions as they occur.

 

The following table sets forth certain information regarding our mortgage notes payable at December 31, 2003:

Properties


  Interest
Rate


  Principal
Amount


  

Maturity Date


   (1)  (in
thousands)
   

Citigroup Center

  7.19% $510,915  May 11, 2011

Times Square Tower

  3.10%  332,890(2) November 29, 2004

Embarcadero Center One, Two and Federal Reserve

  6.70%  300,236  December 10, 2008

Prudential Center

  6.72%  280,091  July 1, 2008

280 Park Avenue

  7.64%  262,394  February 1, 2011

599 Lexington Avenue

  7.00%  225,000(3) July 19, 2005

Embarcadero Center Four

  6.79%  145,459  February 1, 2008

Embarcadero Center Three

  6.40%  140,254  January 1, 2007

Riverfront Plaza

  6.61%  108,190  February 1, 2008

Democracy Center

  7.05%  102,471  April 1, 2009

Embarcadero Center West Tower

  6.50%  93,611  January 1, 2006

100 East Pratt Street

  6.73%  86,805  November 1, 2008

One Freedom Square

  5.33%  83,701(4) June 30, 2012

601 and 651 Gateway Boulevard

  3.50%  81,511(5) September 1, 2006

One and Two Reston Overlook

  7.45%  65,908  August 31, 2004

202, 206 & 214 Carnegie Center

  8.13%  61,222  October 1, 2010

New Dominion Tech. Park, Bldg. One

  7.69%  57,448  January 15, 2021

Reservoir Place

  5.82%  56,103(6) July 1, 2009

Capital Gallery

  8.24%  53,579  August 15, 2006

504, 506 & 508 Carnegie Center

  7.39%  45,639  January 1, 2008

New Dominion Tech. Park, Bldg. Two

  2.55%  42,642(7) December 19, 2005

10 and 20 Burlington Mall Road

  7.25%  38,613(8) October 1, 2011

Ten Cambridge Center

  8.27%  34,194  May 1, 2010

1301 New York Avenue

  7.14%  29,323(9) August 15, 2009

Sumner Square

  7.35%  29,255  September 1, 2013

Eight Cambridge Center

  7.73%  26,995  July 15, 2010

510 Carnegie Center

  7.39%  26,160  January 1, 2008
2004:

Properties


  Interest
Rate


 Principal
Amount


 

Maturity Date


  Interest
Rate


 Principal
Amount


 Maturity Date

  (1) (in
thousands)
   (1) (in
thousands)
 

Lockheed Martin Building

  6.61%  24,639  June 1, 2008

Citigroup Center

  7.19% $504,724  May 11, 2011

Times Square Tower

  3.36%  423,790(2) January 23, 2006

Embarcadero Center One, Two and Federal Reserve

  6.70%  295,426  December 10, 2008

Prudential Center

  6.72%  275,500  July 1, 2008

280 Park Avenue

  7.64%  259,372  February 1, 2011

599 Lexington Avenue

  7.00%  225,000(3) July 19, 2005

Embarcadero Center Four

  6.79%  141,916  February 1, 2008

Embarcadero Center Three

  6.40%  137,903  January 1, 2007

Riverfront Plaza

  6.61%  105,283  February 1, 2008

Democracy Center

  7.05%  100,510  April 1, 2009

Embarcadero Center West Tower

  6.50%  92,065  January 1, 2006

100 East Pratt Street

  6.73%  84,857  November 1, 2008

601 and 651 Gateway Boulevard

  3.50%  81,952(4) September 1, 2006

One Freedom Square

  5.33%  81,909(5) June 30, 2012

New Dominion Technology Park, Bldg. Two

  5.55%  63,000(6) September 30, 2014

140 Kendrick Street

  5.21%  61,201(7) July 1, 2013

202, 206 & 214 Carnegie Center

  8.13%  60,560  October 1, 2010

1330 Connecticut Avenue

  4.65%  59,471(8) February 26, 2011

New Dominion Technology Park, Bldg. One

  7.69%  57,356  January 15, 2021

Reservoir Place

  5.82%  54,714(9) July 1, 2009

Capital Gallery

  8.24%  52,175(10) August 15, 2006

504, 506 & 508 Carnegie Center

  7.39%  44,585  January 1, 2008

10 and 20 Burlington Mall Road

  7.25%  37,919(11) October 1, 2011

Ten Cambridge Center

  8.27%  33,588  May 1, 2010

Sumner Square

  7.35%  28,737  September 1, 2013

1301 New York Avenue

  7.14%  28,008(12) August 15, 2009

Eight Cambridge Center

  7.73%  26,439  July 15, 2010

510 Carnegie Center

  7.39%  25,572  January 1, 2008

University Place

  6.94%  23,463  August 1, 2021  6.94%  22,761  August 1, 2021

Reston Corporate Center

  6.56%  23,233  May 1, 2008  6.56%  22,621  May 1, 2008

NIMA Building

  6.51%  20,129  June 1, 2008

Bedford Business Park

  8.50%  20,008  December 10, 2008  8.50%  19,318  December 10, 2008

191 Spring Street

  8.50%  19,583  September 1, 2006  8.50%  18,953  September 1, 2006

101 Carnegie Center

  7.66%  7,403  April 1, 2006  7.66%  6,995  April 1, 2006

Montvale Center

  8.59%  7,124  December 1, 2006  8.59%  6,951  December 1, 2006

Hilltop Office Center

  6.81%  5,209(10) March 1, 2019
   


    


 

Total

   $3,471,400     $3,541,131  
   


    


 

(1)Some of our mortgage notes and bonds are variable rate and determined by reference to LIBOR and Eurodollar rate contracts. The LIBOR/Eurodollar rate at December 31, 20032004 was 1.12%. Our LIBOR and Eurodollar rate contracts in effect on December 31, 2003 ranged from LIBOR/Eurodollar + 1.40% to LIBOR/Eurodollar + 1.95%.2.40% per annum.

(2)On January 23, 2004, the Company refinanced its $493.5This facility totals $475.0 million construction loan secured by the Times Square Tower property in New York City. The loan bore interest at LIBOR + 1.95% per annum and was scheduled to mature in November 2004. The refinanced loan facility totaling $475.0 million is comprised of two tranches. The first tranche consists of a $300.0 million loan commitment which bears interest at LIBOR +plus 0.90% per annum and matures in January 2006, with2006. The first tranche includes a one yearprovision for a one-year extension at our option. The second tranche consists of a $175.0 million term loan which bears interest at LIBOR +plus 1.00% per annum and matures in January 2007, unless the maturity date of the first tranche is not extended, in which case it will mature in January 2006. As of January 23, 2004 the outstanding balance under the loan was $345.9 million.2007.
(3)At maturity the lender has theThe lender’s option to purchase a 33.33% interest in thisthe property in exchange for the cancellation of the principal balance of $225.0 million.million at maturity has expired and the lender no longer has the ability to acquire a portion of the building.
(4)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon the acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2003 was $74.9 million and the stated interest rate was 7.75%.
(5)The mortgage loan matures on September 1, 2006 with an option held by the lender, subject to certain conditions, to extend the term to October 1, 2010. If extended, the loan will require payments of principal and interest at a fixed interest rate of 8.00% per annum based on a 27-year amortization period. See Note 6 to the Consolidated Financial Statements.
(6)(5)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon the acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 20032004 was $53.3$74.1 million and the stated interest rate was 7.75%.
(6)The mortgage loan requires interest only payments through maturity.
(7)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2004 was $55.1 million and the stated interest rate was 7.51%.
(8)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2004 was $51.8 million and the stated interest rate was 7.58%.
(9)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted upon the acquisition of the property to reflect the fair value of the note. The stated principal balance at December 31, 2004 was $52.4 million and the stated interest rate was 7.0%.
(7)(10)On February 17, 2005, we obtained construction financing for an additional $47.2 million collateralized by this property. The total commitment amount under this construction loan is $65.0 millionfinancing bears interest at a variable rate ofequal to LIBOR + 1.40%.plus 1.65% per annum and matures in February 2008.
(8)(11)Includes outstanding indebtedness secured by 91 Hartwell Avenue.
(9)(12)Includes outstanding principal in the amounts of $19.2$19.0 million, $6.7$6.1 million and $3.4$2.9 million which bear interest at fixed rates of 6.70%, 8.54% and 6.75%, respectively.
(10)This office center, which is comprised

Combined aggregate principal payments of nine buildings, was sold on February 4, 2004.

Our mortgage notes payable at December 31, 2003 will mature2004 are as follows (in thousands):

 

Year


   

2004

  $446,758

2005

   319,713

2006

   305,821

2007

   185,166

2008

   1,010,594

Thereafter

   1,203,348

Of the $446.8 million shown as being payable during 2004, in January 2004 we extended the maturity of $332.9 million of indebtedness related to the construction loan on Times Square Tower to 2006. Of the remaining $113.9 million due in 2004, we expect to fund the scheduled principle payments through cash flows from operations and expect to refinance certain mortgage loans with new debt financing or through borrowings from our Unsecured Line of Credit.

Year


   

2005

  $279,029

2006

   557,123

2007

   362,318

2008

   974,758

2009

   188,278

Thereafter

   1,179,625

 

Market Risk

 

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates, including refinancing risk on our fixed rate debt. Our primary market risk results from our indebtedness, which bears interest at fixed and variable rates. The fair value of our long-term debt obligations is affected by changes in the market interest rates. We manage our market risk, in part, by attempting to match our long-term leases with long-termlong- term fixed rate debt of similar duration. We also utilize certain derivative financial instruments at times to further reduce interest rate risk. Although certain derivative instruments were not effective for accounting purposes, derivatives have been used to convert a portion of our variable rate debt to a fixed rate, or to hedge

anticipated financing transactions. Derivatives are used solely for risk management purposes rather than speculation. Over 91% of our outstanding debt has fixed interest rates, which minimizes the interest rate risk until the maturity of such outstanding debt.

 

For the year ended December 31, 2003,2004, we had a derivative contract in a notional amount of $150 million. Prior to the modification described below, the derivative contract provided for a fixed interest rate of 6.35% when LIBOR is less than 5.80%, 6.70% when LIBOR is between 6.70% and 7.45%, and 7.50% when LIBOR is between 7.51% and 9.00% through February 2005. In August 2003, we modified the contract to provide for the counter party to pay us LIBOR and we are required to pay the counter party LIBOR in arrears +plus 4.55% per annum on the notional amount of $150 million. The derivative contract expiresexpired in February 2005. In accordance with SFAS No.133,No. 133, the derivative agreement is reflected at its fair market value, which was a liability of $8.2$1.2 million at December 31, 2003.2004.

At December 31, 2004, our variable rate debt outstanding was approximately $424 million. At December 31, 2004, the average interest rate on variable rate debt was approximately 3.36%. If market interest rates on our variable rate debt had been 100 basis points greater, total interest would have increased approximately $4.2 million for the year ended December 31, 2004.

 

At December 31, 2003, our variable rate debt outstanding was approximately $439 million. At December 31, 2003, the average interest rate on variable rate debt was approximately 2.87%. Exclusive of our derivative contracts, ifIf market interest rates on our variable rate debt had been 100 basis points greater, total interest would have increased approximately $4.4 million for the year ended December 31, 2003.

 

At December 31, 2002, our variable rate debt outstanding was approximately $1.3 billion. At December 31, 2002, the average interest rate on variable rate debt was approximately 3.04%. Exclusive of our derivative contracts, if market interest rates on our variable rate debt had been 100 basis points greater, total interest would have increased approximately $12.6 million for the year ended December 31, 2002.

These amounts were determined solely by considering the impact of hypothetical interest rates on our financial instruments and not including the effects of our derivative contracts.instruments. Due to the uncertainty of specific actions we may undertake to minimize possible effects of market interest rate increases, this analysis assumes no changes in our financial structure.

Funds from Operations

 

Pursuant to the revised definition of Funds from Operations adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), we calculate Funds from Operations, or “FFO,” by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. FFO is a non-GAAP financial measure. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies.

 

Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after specific and defined supplemental adjustments, including net(1) gains or losses on derivative lossesinstruments, consisting of changes in fair value and periodic cash settlements that do not qualify for hedge accounting pursuant to the provisions of SFAS No. 133 (“non-qualifying derivative contracts”) and (2) the effects of an early lease surrender. As the impact of the non-qualifying derivative contracts and early lease surrender adjustments did not extend beyond the year ended December 31, 2003, FFO as adjusted for the year ended December 31, 2004 is the same as FFO computed in accordance with the NAREIT definition.

The adjustments for non-qualifying derivative contracts resulted from interest rate contracts we entered into prior to the effective date of SFAS No. 133 to limit our exposure to fluctuations in interest rates with respect to variable rate debt associated with real estate projects under development. Upon transition to SFAS No. 133 on January 1, 2001, the impacts of these contracts were recorded in current earnings, while prior to that time they were capitalized. Although these adjustments are attributable to a single hedging program, the underlying contracts extended over multiple reporting periods and therefore resulted in adjustments from the first quarter of 2001 through the third quarter of 2003. Management presents FFO before the impact of non-qualifying derivative contracts because economically this interest rate hedging program was consistent with our risk management objective of limiting our exposure to interest rate volatility and the change in accounting under GAAP did not correspond to a substantive difference. Management does not currently anticipate structuring future hedging programs in a manner that would give rise to this kind of adjustment.

The adjustments for early lease surrender resulted from a unique lease transaction related to the surrender of space by a tenant that was accounted for as a termination for GAAP purposes and recorded in income at the time the space was surrendered. However, we continued to collect payments monthly after the surrender of space through the month of July 2002, the date on which the terminated lease would otherwise have expired under its original terms. Management presents FFO after the early surrender lease adjustments. adjustment because economically this transaction impacted periods subsequent to the time the space was surrendered by the tenant and, therefore, recording the entire amount of the lease termination payment in a single period made FFO less useful as an indicator of operating performance. Although these adjustments are attributable to a single lease, the transaction impacted multiple reporting periods and resulted in adjustments for the years ended December 31, 2002 and 2001.

Management uses FFO principally to evaluate the operating performance of our assets from period to period, and therefore it is important that transactions which impact operations over multiple periods be reflected in FFO in accordance with their substance, even if GAAP requires that the income or loss attributable to the transaction be recorded in a particular period. The resulting adjustments to FFO computed in accordance with the NAREIT definition are particularly meaningful when the events in question are substantively equivalent to other similar transactions, but the reporting of those similar transactions under GAAP more closely matches their economic substance.

Although our FFO as adjusted clearly differs from NAREIT’s definition of FFO, as well as that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance.performance because we believe that, by excluding the effects of the non-qualifying derivative contracts and the early lease surrender, management and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO. Additionally, we believe the nature of these adjustments is non-recurring because there were not similar events during the two preceding years, and the events were not reasonably likely to recur and did not, in fact, recur within the succeeding two years. Neither FFO nor FFO as adjusted should not be considered as an alternativealternatives to net income (determined in accordance with GAAP) as an indication of our performance.

Neither FFO does not representnor FFO as adjusted represents cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO and FFO as adjusted should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

Our fundsThe following table presents a reconciliation of net income available to common shareholders to Funds from operationsOperations for the respective periods is calculated as follows:years ended December 31, 2004, 2003, 2002, 2001, and 2000:

 

  Year ended December 31,

   Year ended December 31,

 
  2003

  2002

  2001

 2000

 1999

   2004

 2003

 2002

 2001

 2000

 
  (in thousands)   (in thousands) 

Net income available to common shareholders

  $365,322  $440,971  $201,440  $146,426  $113,947   $284,017  $365,322  $440,971  $201,440  $146,426 

Add:

            

Preferred dividend

   —     3,412   6,592   6,572   5,829    —     —     3,412   6,592   6,572 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     6,767   —     —      —     —     —     6,767   —   

Minority interest in Operating Partnership

   74,642   73,980   69,729   71,431   61,231    68,174   73,784   72,900   68,634   70,003 

Less:

            

Gains on sales of real estate from discontinued operations, net of minority interest

   73,234   25,345   —     —     —      27,338   73,234   25,345   —     —   

Income from discontinued operations, net of minority interest

   2,176   15,310   24,512   13,356   10,249    1,240   6,102   20,220   29,251   17,589 

Gains on sales of land held for development, net of minority interest

   —     3,633   2,584   —     —      —     —     3,633   2,584   —   

Gains(losses) on sales of real estate and other assets, net of minority interest

   57,574   186,810   6,505   (234)  6,467    8,149   57,574   186,810   6,505   (234)

Income from unconsolidated joint ventures

   6,016   7,954   4,186   1,758   468    3,380   6,016   7,954   4,186   1,758 

Minority interests in property partnerships

   1,604   2,171   1,194   (836)  (4,634)   4,685   1,827   2,408   1,409   (650)
  

  

  


 


 


  


 


 


 


 


Income before minority interests in property partnerships, income from unconsolidated joint ventures, minority interest in Operating Partnership, gains(losses) on sales of real estate and other assets and land held for development, discontinued operations, cumulative effect of a change in accounting principle and preferred dividend

   299,360   277,140   245,547   210,385   168,457    307,399   294,353   270,913   239,498   204,538 

Add:

            

Real estate depreciation and amortization(1)

   216,235   192,574   153,550   134,386   119,583    257,319   216,235   192,574   153,550   134,386 

Income from discontinued operations

   2,759   18,779   30,285   17,961   13,915    1,703   7,766   25,006   36,334   23,808 

Income from unconsolidated joint ventures

   6,016   7,954   4,186   1,758   468    3,380   6,016   7,954   4,186   1,758 

Loss from early extinguishment of debt associated with the sale real estate(1)

   1,474   2,386   —     433   —   

Loss from early extinguishment of debt associated with the sale of real estate (2)

   —     1,474   2,386   —     433 

Less:

            

Minority interests in property partnerships’ share of funds from operations

   3,458   3,223   2,322   1,061   3,681    922   3,458   3,223   2,322   1,061 

Preferred dividends and distributions

   21,249   28,711   33,312   32,994   32,111    15,050   21,249   28,711   33,312   32,994 
  

  

  


 


 


  


 


 


 


 


Funds from operations

   501,137   466,899   397,934   330,868   266,631    553,829   501,137   466,899   397,934   330,868 

Add(subtract):

            

Net derivative losses (SFAS No. 133)

   1,038   11,874   26,488   —     —      —     1,038   11,874   26,488   —   

Early surrender lease adjustment

   —     8,520   (8,520)  —     —      —     —     8,520   (8,520)  —   
  

  

  


 


 


  


 


 


 


 


Funds from operations before net derivative losses (SFAS No. 133) and after early surrender lease adjustment

  $502,175  $487,293  $415,902  $330,868  $266,631   $553,829  $502,175  $487,293  $415,902  $330,868 

Less:

   

Minority interest in Operating Partnership’s share of funds from operations

   94,332   90,102   87,804   78,079   83,497 
  

  

  


 


 


  


 


 


 


 


Funds from operations available to common shareholders before net derivative losses (SFAS No. 133) and after early surrender lease adjustment

  $412,073  $399,489  $337,823  $247,371  $196,101   $459,497  $412,073  $399,489  $337,823  $247,371 
  

  

  


 


 


  


 


 


 


 


Our percentage share of funds from operations—basic

   82.97%  82.06%  81.98%  81.23%  74.76%

Weighted average shares outstanding—basic

   96,900   93,145   90,002   71,424   66,235    106,458   96,900   93,145   90,002   71,424 
  

  

  


 


 


  


 


 


 


 



(1)Real estate depreciation and amortization consists of depreciation and amortization from the Consolidated Statements of Operations of $252,256, $208,490, $178,163, $141,957 and $126,271, our share of unconsolidated joint venture real estate depreciation and amortization of $6,814, $8,475, $8,955, $5,410 and $3,015 and depreciation and amortization from discontinued operations of $685, $1,987, $8,265, $8,206 and $6,879, less corporate related depreciation and amortization of $2,436, $2,717, $2,809, $2,023 and $1,779 for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively.

(2)In accordance with SFAS No. 145, which was adopted on January 1, 2003 and reflected retroactively for all periods presented, we no longer classify losses from the extinguishments of debt as extraordinary items and therefore, under the NAREIT definition of FFO, we no longer add them to net income in calculating FFO. However, our reported FFO for the years ended December 31, 2002, 2001 2000 and 19992000 pre-dated the adoption of SFAS No. 145 and was calculated pursuant to the NAREIT definition based on accounting policies then in effect. Accordingly, we are presenting the reconciliation of FFO for such periods to net income before minority interest and unconsolidated join venture incomeavailable to common shareholders to include an adjustment for losses from the early extinguishments of debt for each period presented.

Reconciliation to Diluted Funds from Operations:

 

 For the years ended December 31,

 For the years ended December 31,

 2003

 2002

 2001

 2000

 1999

 2004

 2003

 2002

 2001

 2000

 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


 Income
(Numerator)


 Shares/Units
(Denominator)


Basic funds from operations before net derivative losses and after early surrender lease adjustment

 $502,175 118,087 $487,293 113,617 $415,904 110,803 $330,868 95,532 $266,631 90,058 $553,829 128,313 $502,175 118,087 $487,293 113,617 $415,904 110,803 $330,868 95,532

Effect of Dilutive Securities:

  

Convertible Preferred Units

  21,249 8,375  25,114 9,821  26,720 11,012  26,422 10,393  26,428 10,360  15,050 6,054  21,249 8,375  25,114 9,821  26,720 11,012  26,422 10,393

Convertible Preferred Stock

  —   —    3,412 1,366  6,592 2,625  6,572 2,625  5,834 2,337  —   —    —   —    3,412 1,366  6,592 2,625  6,572 2,625

Stock Options and other

  —   1,586  185 1,468  —   1,547  —   1,280  —   541  —   2,303  —   1,586  185 1,468  —   1,547  —   1,280
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

Diluted Funds from operations before net derivative losses and after early surrender lease adjustment

 $523,424 128,048 $516,004 126,272 $449,216 125,987 $363,862 109,830 $298,893 103,296 $568,879 136,670 $523,424 128,048 $516,004 126,272 $449,216 125,987 $363,862 109,830

Less: Minority interest in Operating Partnership’s share of diluted funds from operations

  90,970 21,854  86,608 21,187  83,659 20,473  74,170 20,802  79,868 24,107
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

Diluted Funds from operations available to common shareholders before net derivative losses and after early surrender lease adjustment (1)

 $436,816 106,861 $432,345 105,799 $375,046 105,185 $283,994 85,723 $229,961 79,473 $477,909 114,816 $436,816 106,861 $432,345 105,799 $375,046 105,185 $283,994 85,723
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

(1)Our share of diluted funds from operations was 84.01%, 83.45%, 83.79%, 83.49%, and 78.05% and 76.94% for the years ended December 31, 2004, 2003, 2002, 2001 2000 and 1999,2000, respectively.

Net Operating Income

 

Net Operating Income,operating income, or “NOI,” is a non-GAAP financial measure equal to net income available to common shareholders, the most directly comparable GAAP financial measure, plus preferred dividend,minority interest in Operating Partnership, net derivative losses, losses from early extinguishments of debt, losses on investments in securities, cumulative effect of a change in accounting principle (net of minority interest), minority interest in Operating Partnership, loss on investments in securities, loss from early extinguishments of debt, net derivative losses,principles, preferred dividends, depreciation and amortization, interest expense and general and administrative expense, less gains (losses) on sales of real estate from discontinued operations (net of minority interest), income from discontinued operations (net of minority interest), gains on sales of real estate and land held for development (net of minority interest), gains(losses) on sales of real estate and other assets (net of minority interest), income from unconsolidated joint ventures, minority interstinterests in property partnerships, interest and other income and development and management services income. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.

 

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

 

The following sets forth a reconciliation of NOI to net income available to common shareholders for the fiscal years 19992000 through 2003.2004.

 

  Years ended December 31,

  Years ended December 31,

 
  2003

  2002

  2001

  2000

 1999

  2004

 2003

 2002

 2001

 2000

 

Net operating income

  $836,359  $769,530  $647,348  $558,616  $484,282  $894,888 $829,770 $761,740 $639,796 $551,406 

Add:

             

Development and management services

   17,347   10,748   12,167   11,837   14,708   20,464  17,347  10,748  12,167  11,837 

Interest and other

   3,033   5,504   12,183   8,558   6,383   10,367  3,033  5,504  12,183  8,558 

Minority interests in property partnerships

   1,604   2,171   1,194   (836)  (4,634)  4,685  1,827  2,408  1,409  (650)

Income from unconsolidated joint ventures

   6,016   7,954   4,186   1,758   468   3,380  6,016  7,954  4,186  1,758 

Gains(losses) on sales of real estate and other assets, net of minority interest

   57,574   186,810   6,505   (234)  6,467   8,149  57,574  186,810  6,505  (234)

Gains on sales of land held for development, net of minority interest Less:

   —     3,633   2,584   —     —   

Gains on sales of land held for development, net of minority interest

  —    —    3,633  2,584  —   

Income from discontinued operations, net of minority interest

   2,176   15,310   24,512   13,356   10,249   1,240  6,102  20,220  29,251  17,589 

Gains on sales of real estate from discontinued operations, net of minority interest

   73,234   25,345   —     —     —     27,338  73,234  25,345  —    —   

Less:

 

General and administrative

  53,636  45,359  47,292  38,312  35,659 

Interest expense

  306,170  299,436  263,067  211,391  204,900 

Depreciation and amortization

  252,256  208,490  178,163  141,957  126,271 

Net derivative losses

  —    1,038  11,874  26,488  —   

Loss from early extinguishments of debt

  6,258  1,474  2,386  —    433 

Loss on investments in securities

  —    —    4,297  6,500  —   

Minority interest in Operating Partnership

  68,174  73,784  72,900  68,634  70,003 

Cumulative effect of a change in accounting principle, net of minority interest

  —    —    —    6,767  —   

Preferred dividend

  —    —    3,412  6,592  6,572 
 

 

 

 

 


Net income available to common shareholders

 $284,017 $365,322 $440,971 $201,440 $146,426 
 

 

 

 

 


   Years ended December 31,

   2003

  2002

  2001

  2000

  1999

Less:

                    

General and administrative

   45,359   47,292   38,312   35,659   29,455

Interest expense

   299,436   263,067   211,391   204,900   193,135

Depreciation and amortization

   210,072   179,726   143,460   127,634   114,137

Net derivative losses

   1,038   11,874   26,488   —     —  

Loss from early extinguishments of debt

   1,474   2,386   —     433   —  

Loss on investments in securities

   —     4,297   6,500   —     —  

Minority interest in Operating Partnership

   74,642   73,980   69,729   71,431   61,420

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     6,767   —     —  

Preferred dividend

   —     3,412   6,592   6,572   5,829
   

  

  

  

  

Net income available to common shareholders

  $365,322  $440,971  $201,440  $146,426  $113,947
   

  

  

  

  

Contractual Obligations

 

As of December 31, 2003,2004, we were subject to certain contractual payment obligations as described in the table below.

 

  Payments Due by Period

 Payments Due by Period

  Total

  2004

  2005

  2006

  2007

  2008

  Thereafter

 Total

 2005

 2006

 2007

 2008

 2009

 Thereafter

  (Dollars in thousands) (Dollars in thousands)

Contractual Obligations:

                      

Long-term debt

                      

Mortgage debt

  $3,471,400  $446,758  $319,713  $305,821  $185,166  $1,010,594  $1,203,348 $3,541,131 $279,029 $557,123 $362,318 $974,758 $188,278 $1,179,625

Unsecured senior notes

   1,470,320   —     —     —     —     —     1,470,320  1,470,683  —    —    —    —    —    1,470,683

Unsecured line of credit

   63,000   —     —     63,000   —     —     —    —    —    —    —    —    —    —  

Share of mortgage debt of unconsolidated joint ventures

   161,609   20,676   13,757   2,084   2,256   2,440   120,396  196,476  1,757  3,422  37,387  4,567  3,047  146,296

Ground leases

   47,735   2,040   2,060   2,082   2,104   2,127   37,322  49,263  2,185  2,207  2,229  2,252  2,275  38,115

Tenant obligations (1)

   33,958   33,958                 138,592  120,344  11,486  6,762  —    —    —  

Construction contracts on development projects

   101,114   101,114   —     —     —     —     —    233,534  181,126  36,712  12,532  3,164  —    —  
  

  

  

  

  

  

  

 

 

 

 

 

 

 

Total Contractual Obligations

  $5,349,136  $604,546  $335,530  $372,987  $189,526  $1,015,161  $2,831,386 $5,629,679 $584,441 $610,950 $421,228 $984,741 $193,600 $2,834,719
  

  

  

  

  

  

  

 

 

 

 

 

 

 


(1)Committed tenant-related obligations based on executed leases as of December 31, 2003.2004 (tenant improvements and lease commissions).

 

We have various standing or renewable service contracts with vendors related to our property management. In addition, we have certain other utility contracts we enter into in the ordinary course of business which may extend beyond one year, which vary based on usage. These contracts include terms that provide for cancellation with insignificant or no cancellation penalties. Contract terms are generally one year or less.

Off Balance Sheet Arrangements

 

Joint Ventures

 

We have investments in sixseven unconsolidated joint ventures (including our investment in the Value-Added Fund), six of which five have mortgage indebtedness, with our effective ownership interests ranging from 2523.89% to 51%. We exercise significant influence over, but do not control, these entities and therefore they are presently accounted for using the equity method of accounting. See also Note 5 to the Consolidated Financial Statements. At December 31, 2003,2004, our share of the debt related to these investments was equal to approximately $161.6$196.5 million. The table below summarizes our share of the outstanding debt (based on our respective ownership interests) of these joint venture properties at December 31, 2003:2004:

 

Properties


  Interest Rate

 Principal Amount

  Maturity Date

  Interest Rate

 Principal Amount

  Maturity Date

  (in thousands)  (in thousands)

Metropolitan Square (51%)

  8.23% $69,123  May 1, 2010  8.23% $68,358  May 1, 2010

Market Square North (50%)

  7.70%  47,843  December 19, 2010  7.70%  46,984  December 19, 2011

901 New York Avenue (25%)

  5.19%(1)  42,500  January 1,2015

265 Franklin Street (35%)

  2.47%(1)(2)  18,897  October 1, 2004  3.54%(2)  19,250  September 30, 2007

140 Kendrick Street (25%)

  7.51%  13,915  July 1, 2013

901 New York Avenue (25%)

  2.84%(3)(4)  11,831  November 12, 2005

Worldgate Plaza (25%)

  3.28%(3)  14,250  October 1, 2007

Wisconsin Place (23.89%)

  4.38%(4)  5,134  January 1, 2008
  

 

     

 

   

Total

  6.94% $161,609     6.58% $196,476   
  

 

     

 

   

(1)Variable rate debt at LIBOR + 1.30%.
(2)We have a guarantee obligation outstanding totaling approximately $1.4 million related to re-tenanting at this property.
(3)The total commitment amount under this construction loan is $30.0 million (which represents our share) at a variable rate of LIBOR + 1.65%. We can extend the maturity date for one year.
(4)We and our joint venture partner have agreed to guarantee up to $7.5$3.0 million of mortgage financing and $22.5our partner has pledged $9.0 million respectively, ofin a cash escrow account to further secure the loan on behalf of the joint venture entity. The amounts guaranteed and pledged are subject to decrease (and elimination) upon the satisfaction of certain operating performance and financial measures.

(2)The mortgage financing bears interest at a variable rate equal to LIBOR plus 1.10% per annum. At December 31, 2003, we had a guarantee obligation outstanding with a lender totaling approximately $1.4 million related to the re-tenanting of this property. In September 2004, the event our partner’s guarantee obligation was released upon the refinancing of the mortgage loan.
(3)This property is unenforceable, we have agreedowned by the Value-Added Fund. The mortgage financing bears interest at a variable rate equal to satisfy its guarantee obligations. Our partnerLIBOR plus 0.89% per annum and matures in October 2007, with two one-year extension options. In addition, the Value-Added Fund entered into an agreement to cap the interest rate at 9.5% for a nominal fee.
(4)In accordance with EITF 98-1, the principal amount and interest rates shown were adjusted to reflect the fair value of the note. This loan is a seller financed non-interest bearing purchase money mortgage and the total weighted-average interest rates exclude the impact of this loan. The venture has agreed to reimburse us for any amounts we pay in satisfactionguarantee the seller financing totaling $23.5 million on behalf of its guarantee obligations.WP Project Developer LLC.

 

Environmental Matters

 

It is our policy to retain independent environmental consultants to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys in connection with respect to our acquisition of properties. These pre-purchase environmental assessments have not revealed environmental conditions that we believe will have a material adverse effect on our business, assets, financial condition, results of operations or liquidity, and we are not otherwise aware of environmental conditions with respect to our properties that we believe would have such a material adverse effect. However, from time to time pre-existing environmental conditions at our properties have required and may in the future require environmental testing and/or regulatory filings, as well as remedial action.

 

For example, inIn February 1999, one of our affiliateswe (through a joint venture) acquired from Exxon Corporation a property in Massachusetts that was formerly used as a petroleum bulk storage and distribution facility and was known by the state regulatory authority to contain soil and groundwater contamination. We recently completed development ofdeveloped an office park on the property. The affiliateWe engaged a specially licensed environmental consultant to oversee the management of contaminated soil and groundwater that was disturbed in the course of construction. Under the property acquisition agreement, Exxon agreed to (1) bear the liability arising from releases or discharges of oil and hazardous substances which occurred at the site prior to our ownership, (2) continue monitoring and/or remediating such releases and discharges as necessary and appropriate to comply with applicable requirements, and (3) indemnify our affiliateus for certain losses arising from preexisting site conditions. Any indemnity claim may be subject to various defenses, and there can be no assurance that the amounts paid under the indemnity, if any, would be sufficient to cover the liabilities arising from any such releases and discharges.

Environmental investigations at two of our properties in Massachusetts have identified groundwater contamination migrating from off-site source properties. In both cases we engaged a specially licensed environmental consultant to perform the necessary investigations and assessments and to prepare submittals to the state regulatory authority, including Downgradient Property Status Opinions. The environmental consultant concluded that the properties qualify for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site. We also believe that these properties qualify for liability relief under certain statutory amendments regarding upgradient releases. Although we believe that the current or former owners of the upgradient source properties may ultimately be responsiblebear responsibility for some or all of the costs of addressing the identified groundwater contamination, we will take necessary further response actions (if any are required). NoOther than periodic testing, no such additional response actions are anticipated at this time.

 

We own a property in Massachusetts where historic groundwater contamination was identified prior to acquisition. We engaged a specially licensed environmental consultant to perform investigations and to prepare necessary submittals to the state regulatory authority. The environmental consultant has concluded that (1) certain identified groundwater contaminants are migrating to the subject property from an off-site source property and (2) certain other detected contaminants are likely related to a historic release on the subject property. We have filed a Downgradient Property Status Opinion (described above) with respect to

contamination migrating from off-site.off-site and a Response Action Outcome (“RAO”) with respect to the identified historic release. The consultantRAO indicates that regulatory closure has recommended conducting additional investigations, including the installation of off-site monitoring wells, to determine the naturebeen achieved and extent of contamination potentially associated with the historic use of the subject property. We have authorized such additional investigations and will take necessarythat no further response actions (if any are required).action is required at this time.

 

Some of our properties and certain properties owned by our affiliates are located in urban, industrial and other previously developed areas where fill or current or historical uses of the areas have caused site contamination. Accordingly, it is sometimes necessary to institute special soil and/or groundwater handling procedures and/or include particular building design features in connection with development, construction and other property operations in order to achieve regulatory closure andand/or ensure that contaminated materials are addressed in an appropriate manner. In these situations it is our practice to investigate the nature and extent of detected contamination and estimate the costs of required response actions and special handling procedures. We then use this information as part of our decision-making process with respect to the acquisition and/or development of the property. For example, weWe own a parcel in Massachusetts, formerly used as a quarry/asphalt batching facility, which we may develop in the future. Pre-purchase testing indicated that the site contains relatively low levels of certain contaminants. We have engaged a specially licensed environmental consultant to performmonitor environmental conditions at the site and prepare necessary regulatory submittals based on the results of an environmental risk characterization and prepare all necessary regulatory submittals.characterization. We anticipate that additional response actions necessary to achieve regulatory closure (if any) will be performed prior to or in connection with future constructiondevelopment activities. When appropriate, closure documentation will be submitted for public review and comment pursuant to the state regulatory authority’s public information process.

 

We expect that resolution of the environmental matters relating to the above will not have a material impact on our business, assets, financial condition, results of operations or liquidity. However, we cannot assure you that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.

 

Newly Issued Accounting Standards

 

In August 2001,January 2003, the Financial Accounting Standards Board (“FASB”) issued StatementFASB Interpretation No. 46, “Consolidation of Financial Accounting StandardsVariable Interest Entities” (“SFAS”FIN 46”). In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which amended FIN 46. FIN 46R was effective immediately for arrangements entered into after January 31, 2003, and became effective during the first quarter of 2004 for all arrangements entered into before February 1, 2003. FIN 46R requires existing unconsolidated Variable Interest Entities, (“VIEs”) No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requiresto be consolidated by their primary beneficiaries. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership interests, contractual interests, or other pecuniary interests in an entity to record a liability for an obligation associatedthat change with changes in the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carryingfair value of the related asset and depreciating it overentity’s net assets excluding variable interests. Prior to FIN 46R, we included an entity in our consolidated financial statements only if we controlled the remaining useful life of that asset. The standard was effective beginning January 1, 2003.entity through voting interests. The adoption and application of SFAS No. 143 didFIN 46 and FIN 46R has not havehad a material impact on our resultsconsolidated financial statements.

In March 2004, the Emerging Issues Task Force reached a final consensus regarding Issue 03-6, “Participating Securities and the Two-Class Method under FAS 128.” The issue addresses a number of operations, financial position or liquidity.questions regarding the computation of earnings per share by companies that have issued securities other than common stock that participate in dividends and earnings of the issuing entity. Such securities are contractually entitled to receive dividends when and if the entity declares dividends on common stock. The issue also provides further guidance on applying the two-class method of calculating earnings per share once it is determined that a security is participating. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This consensus was effective for the period ended June 30, 2004 and was applied by restating previously reported earnings per share. We have adopted the provisions of EITF 03-6, and have determined that our Series A Preferred Stock and the Series Two and Three Preferred Units of

our Operating Partnership constitute participating securities. The adoption of EITF 03-6 has resulted in a reduction of our earnings per share for those periods in which we and the Operating Partnership had undistributed earnings. Undistributed earnings were allocated to our Series A Preferred Stock and the Series Two and Three Preferred Units based on their contractual rights to share in those earnings as if all the earnings for the period had been distributed.

In April 2002,December 2004, the FASB issued SFAS No. 145, which updates, clarifies, and simplifies certain existing accounting pronouncements beginning at various dates in 2002 and 2003. The statement rescinds 123R, “Share-Based Compensation” (“SFAS No. 4 and123R”). SFAS No. 64, which required net gains or losses from the extinguishments of debt to be classified as extraordinary items in the income statement. We anticipate that these gains and losses will no longer be classified as extraordinary items as they are not unusual and infrequent in nature. During the year ended December 31, 2003, we recorded a loss from continuing operations of approximately $1.5 million relating to the pre-payment of a loan. The changes required by123R replaces SFAS No. 145 are not expected to have a material impact on our financial position or liquidity.

SFAS No. 146,123, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued in July 2002 and became effective for us on January 1, 2003. This statement requires a cost associated with an exit or disposal activity, such as the sale or termination of a line of business, the closure of business activities in a particular location, or a change in management structure,Stock Issued to be recorded as a liability at fair value when it becomes probable that the cost will be incurred and no future economic benefit will be gained by the company for such termination costs, and costs to consolidate facilities or relocate employees. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” which in some cases required certain costs to be recognized before a liability was actually incurred. The adoption of this standard did not have a material impact on our results of operations, financial position, or liquidity.

On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.Employees.” SFAS No. 149 amends123R requires the compensation cost relating to share-based payment transactions be recognized in financial statements and clarifiesbe measured based on the accounting guidancefair value of the equity instrument issued. SFAS No. 123R is effective in fiscal periods beginning after June 15, 2005. Our outstanding stock options became vested on (1) derivative instruments (including certain derivative instruments embeddedJanuary 17, 2005 and we do not expect to have significant unvested stock option awards in other contracts) and (2) hedging activities that fall withinfuture periods. As a result, we do not expect the scopeadoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is123R to be applied prospectively. The adoption of this standard did not have a material impact on our results of operations, financial position, or liquidity.

 

In May 2003,December 2004, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics153, “Exchange of both Liabilities and Equity.” Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities.153”). The amendments made by SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at153 are based on the beginningprinciple that exchanges of the first interim period beginning after September 15, 2003. On November 7, 2003, the FASB deferred the effective date of paragraphs 9 and 10 of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests in order to address a number of interpretation and implementation issues. We have determined that one of our consolidated finite life joint ventures qualifies as a mandatorily redeemable noncontrolling interest. As provided in the joint venture agreement, upon the termination of the partnershipnonmonetary assets should be measured on December 31, 2027, should the parties elect not to further extend the agreement, the net assets of the joint venture will be distributed in proportion to each partners ownership interest. Although no such obligation exists at December 31, 2003, if we were to dissolve the partnership or sell the underlying real estate assets and satisfy any outstanding obligations, we estimate that we would have to pay approximately $12.0 million to the minority interest holder.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed underassets exchanged. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a guarantee. FIN 45 clarifiesbroader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the requirementsadoption of SFAS No. 5, “Accounting for Contingencies,”

relating153 to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. The adoption of FIN 45 did not have a material impact on our results of operations, financial position, or liquidity.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46”). If we determine that an entity is deemed to be a variable interest entity (“VIE”), the enterprise that is deemed to absorb a majority of the expected losses, receive a majority of the entity’s expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in FIN 46. FIN 46 is effective immediately for arrangements entered into after January 31, 2003, and will be applied as of March 31, 2004, to all arrangements entered into before February 1, 2003.

 

Inflation

 

Substantially all of our leases provide for separate real estate tax and operating expense escalations over a base amount. In addition, many of our leases provide for fixed base rent increases or indexed increases. We believe that inflationary increases in costs may be at least partially offset by the contractual rent increases described above.

 

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

 

Approximately $4.6 billion of our borrowings bear interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The following table presents our aggregate fixed rate debt obligations with corresponding weighted-average interest rates sorted by maturity date and our aggregate variable rate debt obligations sorted by maturity date. The average interest rate on the variable rate debt as of December 31, 2003 ranged from LIBOR or Eurodollar plus 0.70% to LIBOR or Eurodollar plus 1.95%2004 was 3.36%.

 

  2005

 2006

 2007

 2008

 2009

 2010+

 Total

 Fair Value

  2004

 2005

 2006

 2007

 2008

 2009+

 Total

 Fair Value

  (dollars in thousands)

Secured debt

      

Fixed Rate

  $113,868  $277,071  $305,821  $185,166  $1,010,594  $1,203,348  $3,095,868  $3,423,605  $279,029  $308,333  $187,318  $974,758  $188,278  $1,179,625  $3,117,341  $3,391,030

Average Interest Rate

   7.29%  7.02%  6.27%  6.59%  6.79%  7.40%  7.00%    7.03%  6.28%  6.61%  6.81%  7.11%  7.36%  6.99% 

Variable Rate

  $332,890  $42,642   —     —     —     —    $375,532  $375,532   —     248,790   175,000   —     —     —     423,790  $423,790

Unsecured debt

      

Fixed Rate

   —     —     —     —     —    $1,470,320  $1,470,320  $1,565,956   —     —     —     —     —    $1,470,683  $1,470,683  $1,537,672

Average Interest Rate

   —     —     —     —     —     5.95%  5.95%    —     —     —     —     —     5.95%  5.95% 

Variable Rate

   —     —    $63,000   —     —     —    $63,000  $63,000   —     —     —     —     —     —     —     —  

For the year ended December 31, 2003,2004, we had a derivative contract for a notional amount of $150 million prior to the modification described below. The derivative contract provided for a fixed interest rate of 6.35% when LIBOR is less than 5.80%, 6.70% when LIBOR is between 6.70% and 7.45%, and 7.50% when LIBOR is between 7.51% and 9.00% through February 2005. In August 2003, we modified the contract to provide for the counter party to pay us LIBOR and we are required to pay the counter party LIBOR + 4.55% on a notional amount of $150 million. The derivative contract expiresexpired in February 2005. In accordance with SFAS No.133, the derivative agreement is reflected at its fair market value within our Consolidated Balance Sheet, which was a liability of $8.2$1.2 million at December 31, 2003.2004.

 

Additional disclosure about market risk is incorporated herein by reference from Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Market Risk” in the market risk section.

Risk.”

Item 8.Financial Statements and Supplementary Data

 

See “Index to Consolidated Financial Statements” on page 7887 of this Form 10-K.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Companyan evaluation was carried out an evaluation under the supervision andby our management, with the participation of the Company’s management, including the Company’sour Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures.procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, theour Chief Executive Officer and Chief Financial Officer concluded that the Company’sthese disclosure controls and procedures arewere effective to ensure that information required to be disclosedas of the end of the period covered by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting.

There wasthis report. In addition, no change in our internal control over financial reporting that(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal quarteryear ended December 31, 20032004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth on pages 88 and 89 of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 9B.Other Information

None.

PART III

 

Item 10.Directors and Executive Officers of the Registrant

 

The information concerning our directors and executive officers required by Item 10 shall be included in the Proxy Statement to be filed relating to our 20042005 Annual Meeting of Stockholders and is incorporated herein by reference.

 

Item 11.Executive Compensation

 

The information concerning our executive compensation required by Item 11 shall be included in the Proxy Statement to be filed relating to our 20042005 Annual Meeting of Stockholders and is incorporated herein by reference.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Equity Compensation Plan Information

Equity Compensation Plan Information

Equity Compensation Plan Information

Plan category


 

Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights


 

Weighted-average exercise
price of outstanding options,
warrants and rights


 

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))


 

Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights


 

Weighted-average exercise
price of outstanding options,
warrants and rights


 

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))


 (a) (b) (c) (a) (b) (c)

Equity compensation plans approved by security holders (1)

 9,439,680(2) $36.08 3,553,755     5,599,874(2) $38.08 4,361,841

Equity compensation plans not approved by security holders (3)

 N/A N/A    204,264 N/A N/A    193,138

Total

 9,439,680     $36.08 3,758,019 5,599,874 $38.08 4,554,979

(1)Includes information related to our 1997 Stock Option and Incentive Plan.
(2)Does not include 300,862326,224 shares of restricted stock, as they have been reflected in our total shares outstanding.
(3)Includes information related to the 1999 Non-Qualified Employee Stock Purchase Plan.

 

The 1999 Non-Qualified Employee Stock Purchase Plan (the “ESPP”)

 

The ESPP was adopted by the Board of Directors on October 29, 1998. The ESPP has not been approved by our shareholders. The ESPP is available to all employees of the Company that are employed on the first day of the purchase period. Under the ESPP, each eligible employee may purchase shares of Boston Properties common stock at semi-annual intervals each year at a purchase price equal to 85% of the average closing prices of Boston Properties common stock on the New York Stock Exchange during the last ten business days of the purchase period. Each eligible employee may contribute no more than $10,000 per year to purchase Boston Properties common stock under the ESPP.

 

Additional information concerning our directorssecurity ownership of certain beneficial owners and executive officersmanagement required by Item 12 shall be included in the Proxy Statement to be filed relating to our 20042005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions

 

The information concerning our directorscertain relationships and executive officersrelated transactions required by Item 13 shall be included in the Proxy Statement to be filed relating to our 20042005 Annual Meeting of Stockholders and is incorporated herein by reference.

 

Item 14.Principal Accountant Fees and Services

 

The information concerning our principal accountant fees and services required by Item 14 shall be included in the Proxy Statement to be filed relating to our 20042005 Annual Meeting of Stockholders and is incorporated herein by reference.

PART IV

 

Item 15.Exhibits, Financial Statement Schedule and Reports on Form 8-K

 

(a) Financial Statements and Financial Statement Schedule

 

See “Index to Consolidated Financial Statements” on page 7887 of this Form 10-K.

 

(b) Reports on Form 8-K

On October 22, 2003, the Company furnished to the Securities and Exchange Commission under Item 12 of Form 8-K a copy of the Company’s Press Release, dated October 22, 2003, as well as supplemental information, regarding the Company’s results of operations for the third quarter of 2003.

On November 6, 2003, the Company furnished to the Securities and Exchange Commission under Item 12 of Form 8-K an amended Press Release dated October 22, 2003, as well as supplemental information, regarding the Company’s results of operations for the third quarter of 2003. On October 29, 2003, the Financial Accounting Standards Board (FASB) deferred the July 1, 2003 effective date for paragraphs 9 and 10 of SFAS No. 150. Accordingly, the Company reissued its press release and made available certain supplemental information reflecting the impact of the deferral of SFAS No. 150.

On December 3, 2003, the Company filed a Form 8-K with the Securities and Exchange Commission under Item 5 to report the establishment of a pre-arranged trading plan for the Executive Vice President and Chief Operating Officer of Boston Properties, Inc., designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

(c) Exhibits

 

Exhibit No.

  

Description


3.1  

Form of Amended and Restated Certificate of Incorporation(1)Incorporation (1)

3.2  

Form of Amended and Restated Bylaws(1)Bylaws (1)

3.3  

Amendment No. 1 to Amended and Restated Bylaws(5)Bylaws (4)

3.4  

Amendment No. 2 to Amended and Restated Bylaws (14)

4.1  

Form of Shareholder Rights Agreement dated as of June 16, 1997 between Boston Properties, Inc. and BankBoston, N.A., as Rights Agent.(1)

4.2  

Form of Certificate of Designations for Series E Junior Participating Cumulative Preferred Stock, par value $.01 per share.(1)

4.3  

Form of Certificate of Designations for the Series A Preferred Stock.(4)(3)

4.4  

Form of Common Stock Certificate.(1)

4.5  

Indenture by and between Boston Properties Limited Partnership and The Bank of New York, as Trustee, dated as of December 13, 2002.(11)(8)

4.6  

Supplemental Indenture No. 1 by and between Boston Properties Limited Partnership and The Bank of New York, as Trustee, dated as of December 13, 2002, including a form of the 6.25% Senior Note due 2013.(11)(8)

4.7  

Supplemental Indenture No. 2 by and between Boston Properties Limited Partnership and The Bank of New York, as Trustee, dated as of January 17, 2003, including a form of the 6.25% Senior Note due 2013.(12)(9)

4.8  

Supplemental Indenture No. 3 dated as of March 18, 2003 by and between Boston Properties Limited Partnership and The Bank of New York, as Trustee, including a form of the 5.625% Senior Note due 2015 (incorporated by reference to Exhibit 4.6 to Boston Properties Limited Partnership Amendment No. 3 to Form 10 filed May 13, 2003).

4.9  

Supplemental Indenture No. 4 dated as of May 22, 2003, by and between Boston Properties Limited Partnership and The Bank of New York, as Trustee, including a form of the 5.00% Senior Note due 2015 (Incorporated by reference to Exhibit 4.2 to Boston Properties Limited Partnership’s Form S-4 filed on June 13, 2003).(14)

10.1  

Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership, dated as of June 29, 1998.(2)

10.2  

Certificate of Designations for the Series One Preferred Units, dated June 30, 1998, constituting an amendment to the Second Amended and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership.(2)

10.3  

Certificate of Designations for the Series Two Preferred Units, dated November 12, 1998, constituting an amendment to the Second Amendment and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership.(4)(3)

Exhibit No.

Description


10.4  

Amended and Restated 1997 Stock Option and Incentive Plan dated May 3, 2000 and forms of option agreements.(7)(15)(5)(12)

10.5  

Amendment #1No. 1 to Amended and Restated 1997 Stock Option and Incentive Plan dated November 14, 2000.(7)(15)(5)(12)

10.6

Amendment No. 2 to Amended and Restated 1997 Stock Option and Incentive Plan dated March 4, 2003. (10) (12)

10.7

Amendment No. 3 to Amended and Restated 1997 Stock Option and Incentive Plan dated October 16, 2003(12) (14)

10.8  

Boston Properties Deferred Compensation Plan effective March 1, 2002(9)(15)2002(7)(12)

Exhibit No.

Description


10.710.9  

Employment Agreement by and between Mortimer B. Zuckerman and Boston Properties, Inc. dated as of January 17, 2002.(15) (16)(12) (13)

10.810.10  

Amended and Restated Employment Agreement by and between Edward H. Linde and Boston Properties, Inc. dated as of November 29, 2002.(15) (16)(12) (13)

10.910.11  

Amended and Restated Employment Agreement by and between Robert E. Burke and Boston Properties, Inc. dated as of November 29, 2002.(15) (16)(12) (13)

10.1010.12  

Employment Agreement by and between Bryan J. Koop and Boston Properties, Inc. dated as of November 29, 2002.(15) (16)(12) (13)

10.1110.13  

Employment Agreement by and between Mitchell S. Landis and Boston Properties, Inc. dated as of November 26, 2002.(15) (16)(12) (13)

10.1210.14  

Employment Agreement by and between Douglas T. Linde and Boston Properties, Inc. dated as of November 29, 2002.(15) (16)(12) (13)

10.1310.15  

Employment Agreement by and between E. Mitchell Norville and Boston Properties, Inc. dated as of November 29, 2002.(15) (16) (12) (13)

10.1410.16  

Employment Agreement by and between Robert E. Pester and Boston Properties, Inc. dated as of December 16, 2002.(15) (16) (12) (13)

10.1510.17  

Amended and Restated Employment Agreement by and between Raymond A. Ritchey and Boston Properties, Inc. dated as of November 29, 2002.(15) (16) (12) (13)

10.1610.18  

Amended and Restated Employment Agreement by and between Robert E. Selsam and Boston Properties, Inc. dated as of November 29, 2002.(15) (16) (12) (13)

10.1710.19  

Senior Executive Severance Agreement by and among Boston Properties, Inc., Boston Properties Limited Partnership and Mortimer B. Zuckerman.(15) (16) (12) (13)

10.1810.20  

Senior Executive Severance Agreement by and among Boston Properties, Inc., Boston Properties Limited Partnership and Edward H. Linde.(15) (16)

10.19Boston Properties, Inc. Senior Executive Severance Plan.(15) (16)
10.20

Boston Properties, Inc. Executive Severance Plan.(15) (16) (12) (13)

10.21  

Boston Properties, Inc. Senior Executive Severance Plan. (12) (13)

10.22

Boston Properties, Inc. Executive Severance Plan. (12) (13)

10.23

Form of Indemnification Agreement betweenby and among Boston Properties, Inc., Boston Properties Limited Partnership and eachcertain officers and directors of its directors and executive officers.(1)the Company. (15)

10.2210.24  

Omnibus Option Agreement by and among Boston Properties Limited Partnership and the Grantors named therein dated as of April 9, 1997.(1)(15) (12)

Exhibit No.

Description


10.2310.25  

Third Amended and Restated Revolving Credit Agreement with Bank of America, formerly Fleet National Bank, as agent, dated as of January 17, 2003.(16) (13)

10.2410.26  

Form of Certificate of Incorporation of Boston Properties Management, Inc.(1)

10.2510.27  

Form of By-laws of Boston Properties Management, Inc.(1)

10.26

Indemnification Agreement between Boston Properties Limited Partnership and Mortimer B. Zuckerman and Edward H. Linde.(1)(15)

10.2710.28  

Compensation Agreement between Boston Properties, Inc. and Robert Selsam, dated as of August 10, 1995 relating to 90 Church Street.(1)(15) (12)

Exhibit No.

Description


10.2810.29  

Contribution and Conveyance Agreement concerning the Carnegie Portfolio, dated June 30, 1998 by and among Boston Properties, Inc., Boston Properties Limited Partnership, and the parties named therein as Landis Parties.(2)

10.2910.30  

Contribution Agreement, dated June 30, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, and the parties named therein as Landis Parties.(2)

10.3010.31  

Non-Competition Agreement, dated as of June 30, 1998, by and between Alan B. Landis and Boston Properties, Inc.(2)

10.3110.32

Agreement dated as of October 21, 2004, by and among Boston Properties Limited Partnership, Boston Properties, Inc., Alan B. Landis, The Landis Group, ABL Capital Corp. and Princeton Land Partners, L.L.C. (16)

10.33

Development Agreement, dated as of June 30, 1998, by and among Boston Properties Limited Partnership, ABL Capital Corp. and Princeton Land Partners, L.L.C. (16)

10.34

First Amendment to Development Agreement, dated as of October 21, 2004, by and among Boston Properties Limited Partnership, ABL Capital Corp. and Princeton Land Partners, L.L.C. (16)

10.35  

Agreement Regarding Directorship, dated as of June 30, 1998, by and between Boston Properties, Inc. and Alan B. Landis.(2)

10.3210.36  

Purchase and Sale Agreement, dated as of November 12, 1998, by and between Two Embarcadero Center West and BP OFR LLC.(4)(3)

10.3310.37  

Contribution Agreement, dated as of November 12, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, Embarcadero Center Investors Partnership and the partners in Embarcadero Center Investors Partnership listed on Exhibit A thereto.(4)(3)

10.3410.38  

Contribution Agreement, dated as of November 12, 1998, by and among Boston Properties, Inc., Boston Properties Limited Partnership, Three Embarcadero Center West and the partners in Three Embarcadero Center West listed on Exhibit A thereto.(4)(3)

10.3510.39  

Three Embarcadero Center West Redemption Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center West, Boston Properties Limited Partnership, BP EC West LLC, The Prudential Insurance Company of America, PIC Realty Corporation and Prudential Realty Securities II, Inc.(4)(3)

10.3610.40  

Three Embarcadero Center West Property Contribution Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center West, The Prudential Insurance Company of America, PIC Realty Corporation, Prudential Realty Securities II, Inc., Boston Properties Limited Partnership, Boston Properties, Inc. and BP EC West LLC.(4)(3)

10.3710.41  

Third Amended and Restated Partnership Agreement of One Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC1 Holdings LLC, as non-managing general partner, and PIC Realty Corporation, as non-managing general partner.(4)(3)

Exhibit No.

Description


10.3810.42  

Third Amended and Restated Partnership Agreement of Embarcadero Center Associates, dated as of November 12, 1998, by and between BP LLC, as managing general partner, BP EC2 Holdings LLC, as non-managing general partner, and PIC Realty Corporation, as non-managingnon—  managing general partner.(4)(3)

10.3910.43  

Second Amended and Restated Partnership Agreement of Three Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC3 Holdings LLC, as non-managing general partner, and The Prudential Insurance Company of America, as non-managing general partner.(4)(3)

10.4010.44  

Second Amended and Restated Partnership Agreement of Four Embarcadero Center Venture, dated as of November 12, 1998, by and between Boston Properties LLC, as managing general partner, BP EC4 Holdings LLC, as non-managing general partner, and The Prudential Insurance Company of America, as non-managing general partner.(4)

10.41

Note Purchase Agreement, dated as of November 12, 1998, by and between Prudential Realty Securities, Inc. and One Embarcadero Center Venture.(4)

Exhibit No.

Description


10.42

Note Purchase Agreement, dated as of November 12, 1998, by and between Prudential Realty Securities, Inc. and Embarcadero Center Associates.(4)

10.43

Note Purchase Agreement, dated November 12, 1998, by and between Prudential Realty Securities, Inc. and Three Embarcadero Center Venture.(4)

10.44

Note Purchase Agreement, dated November 12, 1998, by and between Prudential Realty Securities, Inc. and Four Embarcadero Center Venture.(4)(3)

10.45

Redemption Agreement, dated as of November 12, 1998, by and among One Embarcadero Center Venture, Boston Properties LLC, BP EC1 Holdings LLC and PIC Realty Corporation.(4)

10.46

Redemption Agreement, dated as of November 12, 1998, by and among Embarcadero Center Associates, Boston Properties LLC, BP EC2 Holdings LLC and PIC Realty Corporation.(4)

10.47

Redemption Agreement, dated as of November 12, 1998, by and among Three Embarcadero Center Venture, Boston Properties LLC, BP EC3 Holdings LLC and The Prudential Insurance Company of America.(4)

10.48

Redemption Agreement, dated as on November 12, 1998, by and among Four Embarcadero Center Venture, Boston Properties LLC, BP EC4 Holdings LLC and The Prudential Insurance Company of America.(4)

10.49

Option and Put Agreement, dated as of November 12, 1998, by and between One Embarcadero Center Venture and The Prudential Insurance Company of America.(4)

10.50

Option and Put Agreement, dated as of November 12, 1998, by and between Embarcadero Center Associates and The Prudential Insurance Company of America.(4)

10.51

Option and Put Agreement, dated as of November 12, 1998, by and between Three Embarcadero Center Venture and The Prudential Insurance Company of America.(4)

10.52

Option and Put Agreement, dated as of November 12, 1998, by and between Four Embarcadero Center Venture and The Prudential Insurance Company of America.(4)

10.53

Stock Purchase Agreement, dated as of September 28, 1998, by and between Boston Properties, Inc. and The Prudential Insurance Company of America.(4)

10.54  

Master Agreement by and between New York State Common Retirement Fund and Boston Properties Limited Partnership, dated as of May 12, 2000.(7)(5)

10.5510.46  

Contract of Sale, dated as of February 6, 2001, by and between Dai-Ichi Life Investment Properties, Inc., as seller, and Skyline Holdings LLC, as purchaser.(8)(6)

10.5610.47  

Agreement to Enter Into Assignment and Assumption of Unit Two Contract of Sale, dated as of February 6, 2001, by and between Dai-Ichi Life Investment Properties, Inc., as assignor, and Skyline Holdings II LLC, as assignee.(8)(6)

10.5710.48  

Contract of Sale, dated as of November 22, 2000, by and between Citibank, N.A., as seller, and Dai-Ichi Life Investment Properties, Inc., as purchaser.(8)(6)

10.5810.49  

Assignment and Assumption Agreement, dated as of April 25, 2001, by and between Skyline Holdings LLC, as assignor, and BP/CGCenter I LLC, as assignee.(8)(6)

10.5910.50  

Assignment and Assumption Agreement, dated as of April 25, 2001, by and between Skyline Holdings II LLC, as assignor, and BP/CGCenter II LLC, as assignee.(8)(6)

10.6010.51  

Assignment and Assumption of Contract of Sale, dated as of April 25, 2001, by and among Dai-Ichi Life Investment Properties, Inc., as assignor, BP/CGCenter II LLC, as assignee, and Citibank, N.A., as seller.(8)(6)

Exhibit No.

Description


10.6110.52  

Amended and Restated Operating Agreement of BP/CGCenter Acquisition Co. LLC, a Delaware limited liability company.(8)(6)

10.62

Purchase and Sale Agreement by and between Citibank, N.A. and BP 399 Park Avenue LLC, dated as of August 28, 2002.(10)

10.63

Credit Agreement by and among Boston Properties Limited Partnership, BP 399 Park Avenue LLC, certain other subsidiaries of Boston Properties Limited Partnership and the banks and others that are parties thereto, dated as of September 25, 2002.(10)

10.64

Amendment No. 2 to Amended and Restated 1997 Stock Option and Incentive Plan dated November 14, 2000.(13)(15)

10.6510.53  

Forty-Seventh Amendment to Second Amendment and Restated Agreement of Limited Partnership of Boston Properties Limited Partnership, dated as of April 11, 2003, by Boston Properties, Inc., as general partner.(14)(15) (11) (12)

10.6610.54  

Form of Director Long Term Incentive Plan Unit Vesting Agreement under the Boston Properties, Inc. 1997 Stock Option and Incentive Plan.(14)(15) (11) (12)

10.67

Amendment No. 3 to Amended and Restated 1997 Stock Option and Incentive Plan dated October 16, 2003(15)

10.6810.55  

Form of Employee Long Term Incentive Unit Vesting Agreement under the Boston Properties, Inc. 1997 Stock Option and Incentive Plan.(15) (12) (14)

10.6910.56  

Form of Long Term Incentive Plan Unit Vesting Agreement between each of Messrs. Mortimer B. Zuckerman and Edward H. Linde and Boston Properties, Inc. and Boston Properties Limited Partnership.(15) (12) (14)

10.57

Form of Employee Restricted Stock Award Agreement under the Boston Properties, Inc. 1997 Stock Option and Incentive Plan.(17)

Exhibit No.

Description


10.58

Form of Director Restricted Stock Award Agreement under the Boston Properties, Inc. 1997 Stock Option and Incentive Plan. (17)

10.59

Boston Properties, Inc.   1999 Non-Qualified Employee Stock Purchase Plan.

10.60

First Amendment to the Boston Properties, Inc. 1999 Non-Qualified Employee Stock Purchase Plan.

10.61

Second Amendment to the Boston Properties, Inc. 1999 Non-Qualified Employee Stock Purchase Plan.

12.1  

Statement re: Computation of Ratios.

21.1  

Schedule of Subsidiaries of Boston Properties, Inc.

23.1  

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accountants.

31.1  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2  

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)Incorporated herein by reference to Boston Properties, Inc.’s Registration Statement on Form S-11. (No. 333-25279)

 

(2)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on July 15, 1998.

 

(3)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on July 17,November 25, 1998.

 

(4)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on November 25, 1998.

(5)Incorporated herein by reference to Boston Properties, Inc.’s Annual Report on Form 10-K filed on March 24, 2000.

 

(6)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly Report on Form 10-Q filed on May 15, 2000.

(7)(5)Incorporated herein by reference to Boston Properties, Inc.’s Annual Report on Form 10-K filed on March 30, 2001.

 

(8)(6)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on May 10, 2001.

 

(9)(7)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly Report on Form 10-Q filed on May 15, 2002.

 

(10)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on October 8, 2002.

(11)(8)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K/A filed on December 13, 2002.

 

(12)(9)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on January 23, 2002.

 

(13)(10)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly Report on Form 10-Q filed on May 14, 2003.

 

(14)(11)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly Report on Form 10-Q filed on August 14, 2003.

(15)(12)Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.

 

(16)(13)Incorporated herein by reference to Boston Properties, Inc.’s Annual Report on Form 10-K filed on February 27, 2003.

(14)Incorporated herein by reference to Boston Properties, Inc.’s Annual Report on Form 10-K filed on February 26, 2004.

(15)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly report on Form 10-Q filed on August 9, 2004.

(16)Incorporated herein by reference to Boston Properties, Inc.’s Current Report on Form 8-K filed on October 25, 2004.

(17)Incorporated herein by reference to Boston Properties, Inc.’s Quarterly Report on Form 10-Q filed on November 9, 2004.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Boston Properties, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Boston Properties, Inc.
Date 

By: /s/ Douglas T. Linde


February 25, 2004March 15, 2005 

Douglas T. Linde

Executive Vice President, Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantRegistrant, and in the capacities and on the dates indicated.

 

February 25, 2004March 15, 2005 

By: /s/ Mortimer B. Zuckerman


Mortimer B. Zuckerman

Chairman of the Board of Directors

  

By: /s/ Edward H. Linde


Edward H. Linde

Director, President and Chief Executive Officer

  

By: /s/ Douglas T. LindeLawrence S. Bacow


Douglas T. Linde

Chief Financial Officer

By: /s/ Alan J. Patricof


Alan J. PatricofLawrence S. Bacow

Director

  

By: /s/ William M. Daley


William M. Daley

Director

  

By: /s/ Lawrence S. BacowCarol B. Einiger


Lawrence S. Bacow

Director

By: /s/ Martin Turchin


Martin Turchin

Director

By: /s/ David A. Twardock


David A. TwardockCarol B. Einiger

Director

  

By: /s/ Alan B. Landis


Alan B. Landis

Director

  

By: /s/ Alan J. Patricof


Alan J. Patricof

Director

By: /s/ Richard E. Salomon


Richard E. Salomon

Director

By: /s/ Martin Turchin


Martin Turchin

Director

By: /s/ David A. Twardock


David A. Twardock

Director

By: /s/ Douglas T. Linde


Douglas T. Linde

Executive Vice President, Chief Financial Officer and Principal Financial Officer

By: /s/ Arthur S. Flashman


Arthur S. Flashman

Vice President, Controller and Principal Accounting Officer

BOSTON PROPERTIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page

Management’s Report of Independent Auditorson Internal Control over Financial Reporting

  7988

Report of Independent Registered Public Accounting Firm

89

Consolidated Balance Sheets as of December 31, 20032004 and 20022003

  8091

Consolidated Statements of Operations for the years ended December 31, 2004, 2003 2002 and 20012002

  8192

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 2002 and 20012002

  8293

Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 2002 and 20012002

  8394

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 2002 and 20012002

  84-8595

Notes to Consolidated Financial Statements

  8697

Financial Statement Schedule—Schedule III

  120134

 

All other schedules for which a provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

Management’s Report on Internal Control over

Financial Reporting

 

Management of Boston Properties, Inc. (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of the end of the Company’s 2004 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2004 was effective.

Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on pages 89 and 90, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004.

Report of Independent AuditorsRegistered Public Accounting Firm

 

To the Board of Directors and Stockholders ofShareholders

of Boston Properties, Inc.:

We have completed an integrated audit of Boston Properties, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Boston Properties, Inc. (the “Company”)and its subsidiaries at December 31, 20032004 and 2002,2003, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended December 31, 20032004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; ourmanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditingthe standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussedInternal control over financial reporting

Also, in Note 21our opinion, management’s assessment, included in the accompanying Management’s Report in Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the consolidatedmaintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company,company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on January 1, 2001, adopted Statementthe financial statements.

Because of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted. As discussed in Note 22its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the consolidated financial statements,risk that controls may become inadequate because of changes in conditions, or that the Company, on January 1, 2002, adopted Statementdegree of Financial Accounting Standards No. 144, “Accounting forcompliance with the Impairmentpolicies or Disposal of Long-Lived Assets.”procedures may deteriorate.

 

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Boston, Massachusetts

February 12, 2004

March 14, 2005

BOSTON PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

 

  

December 31,

2003


 

December 31,

2002


 
  (in thousands, except for
share and par value amounts)
   December 31,
2004


 December 31,
2003


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

Real estate:

  $8,983,260  $8,670,711 

Real estate, at cost:

  $9,291,227  $8,983,260 

Less: accumulated depreciation

   (1,001,435)  (822,933)   (1,143,369)  (1,001,435)
  


 


  


 


Total real estate

   7,981,825   7,847,778    8,147,858   7,981,825 

Cash and cash equivalents

   22,686   55,275    239,344   22,686 

Cash held in escrows

   21,321   41,906    24,755   21,321 

Tenant and other receivables (net of allowance for doubtful accounts of $3,157 and $3,682, respectively)

   18,425   20,458 

Accrued rental income (net of allowance of $5,030 and $4,744, respectively)

   189,852   165,321 

Tenant and other receivables (net of allowance for doubtful accounts of $2,879 and $3,157, respectively)

   25,500   18,425 

Accrued rental income (net of allowance of $4,252 and $5,030, respectively)

   251,236   189,852 

Deferred charges, net

   188,855   176,545    254,950   188,855 

Prepaid expenses and other assets

   39,350   18,015    38,630   39,350 

Investments in unconsolidated joint ventures

   88,786   101,905    80,955   88,786 
  


 


  


 


Total assets

  $8,551,100  $8,427,203   $9,063,228  $8,551,100 
  


 


  


 


LIABILITIES AND STOCKHOLDERS’ EQUITY      

Liabilities:

      

Mortgage notes payable

  $3,471,400  $4,267,119   $3,541,131  $3,471,400 

Unsecured senior notes (net of discount of $4,680 and $2,625, respectively)

   1,470,320   747,375 

Unsecured bridge loan

   —     105,683 

Unsecured senior notes (net of discount of $4,317 and $4,680, respectively)

   1,470,683   1,470,320 

Unsecured line of credit

   63,000   27,043    —     63,000 

Accounts payable and accrued expenses

   92,026   73,846    94,451   92,026 

Dividends and distributions payable

   84,569   81,226    91,428   84,569 

Interest rate contracts

   8,191   14,514 

Interest rate contract

   1,164   8,191 

Accrued interest payable

   50,931   25,141    50,670   50,931 

Other liabilities

   80,367   81,085    91,300   80,367 
  


 


  


 


Total liabilities

   5,320,804   5,423,032    5,340,827   5,320,804 
  


 


  


 


Commitments and contingencies

   —     —      —     —   
  


 


  


 


Minority interests

   830,133   844,581    786,328   830,133 
  


 


  


 


Stockholders’ equity:

      

Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding

   —     —      —     —   

Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued or outstanding

   —     —      —     —   

Common stock, $.01 par value, 250,000,000 shares authorized, 98,309,077 and 95,441,890 issued and 98,230,177 and 95,362,990 outstanding in 2003 and 2002, respectively

   982   954 

Common stock, $.01 par value, 250,000,000 shares authorized, 110,399,385 and 98,309,077 issued and 110,320,485 and 98,230,177 outstanding in 2004 and 2003, respectively

   1,103   982 

Additional paid-in capital

   2,104,158   1,982,689    2,633,980   2,104,158 

Earnings in excess of dividends

   320,900   198,586    325,452   320,900 

Treasury common stock at cost, 78,900 shares in 2003 and 2002

   (2,722)  (2,722)

Treasury common stock at cost, 78,900 shares in 2004 and 2003

   (2,722)  (2,722)

Unearned compensation

   (6,820)  (2,899)   (6,103)  (6,820)

Accumulated other comprehensive loss

   (16,335)  (17,018)   (15,637)  (16,335)
  


 


  


 


Total stockholders’ equity

   2,400,163   2,159,590    2,936,073   2,400,163 
  


 


  


 


Total liabilities and stockholders’ equity

  $8,551,100  $8,427,203   $9,063,228  $8,551,100 
  


 


  


 


 

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Year Ended December 31,

 
   2003

  2002

  2001

 
   (In thousands, except for per share
amounts)
 

Revenue

             

Rental:

             

Base rent

  $1,007,422  $931,634  $788,342 

Recoveries from tenants

   157,304   141,416   120,828 

Parking and other

   54,439   50,827   51,999 
   


 


 


Total rental revenue

   1,219,165   1,123,877   961,169 

Hotel revenue

   70,083   44,786   —   

Development and management services

   17,347   10,748   12,167 

Interest and other

   3,033   5,504   12,183 
   


 


 


Total revenue

   1,309,628   1,184,915   985,519 
   


 


 


Expenses

             

Operating

             

Rental

   400,639   368,047   313,821 

Hotel

   52,250   31,086   —   

General and administrative

   45,359   47,292   38,312 

Interest

   299,436   263,067   211,391 

Depreciation and amortization

   210,072   179,726   143,460 

Net derivative losses

   1,038   11,874   26,488 

Loss from early extinguishments of debt

   1,474   2,386   —   

Loss on investments in securities

   —     4,297   6,500 
   


 


 


Total expenses

   1,010,268   907,775   739,972 
   


 


 


Income before minority interests in property partnerships, income from unconsolidated joint ventures, minority interest in Operating Partnership, gains on sales of real estate and other assets and land held for development, discontinued operations, cumulative effect of a change in accounting principle and preferred dividend

   299,360   277,140   245,547 

Minority interests in property partnerships

   1,604   2,171   1,194 

Income from unconsolidated joint ventures

   6,016   7,954   4,186 
   


 


 


Income before minority interest in Operating Partnership, gains on sales of real estate and other assets and land held for development, discontinued operations, cumulative effect of a change in accounting principle and preferred dividend

   306,980   287,265   250,927 

Minority interest in Operating Partnership

   (74,642)  (73,980)  (69,729)
   


 


 


Income before gains on sales of real estate and other assets and land held for development, discontinued operations, cumulative effect of a change in accounting principle and preferred dividend

   232,338   213,285   181,198 

Gains on sales of real estate and other assets, net of minority interest

   57,574   186,810   6,505 

Gains on sales of land held for development, net of minority interest

   —     3,633   2,584 
   


 


 


Income before discontinued operations, cumulative effect of a change in accounting principle and preferred dividend

   289,912   403,728   190,287 

Discontinued operations:

             

Income from discontinued operations, net of minority interest

   2,176   15,310   24,512 

Gains on sales of real estate from discontinued operations, net of minority interest

   73,234   25,345   —   
   


 


 


Income before cumulative effect of a change in accounting principle and preferred dividend

   365,322   444,383   214,799 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (6,767)
   


 


 


Net income before preferred dividend

   365,322   444,383   208,032 

Preferred dividend

   —     (3,412)  (6,592)
   


 


 


Net income available to common shareholders

  $365,322  $440,971  $201,440 
   


 


 


Basic earnings per common share:

             

Income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle

  $2.99  $4.30  $2.04 

Discontinued operations, net of minority interest

   0.78   0.43   0.27 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (0.07)
   


 


 


Net income available to common shareholders

  $3.77  $4.73  $2.24 
   


 


 


Weighted average number of common shares outstanding

   96,900   93,145   90,002 
   


 


 


Diluted earnings per common share:

             

Income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle

  $2.94  $4.23  $1.99 

Discontinued operations, net of minority interest

   0.77   0.43   0.27 

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     (0.07)
   


 


 


Net income available to common shareholders

  $3.71  $4.66  $2.19 
   


 


 


Weighted average number of common and common equivalent shares outstanding

   98,486   94,612   92,200 
   


 


 


  For the Year Ended December 31,

 
  2004

  2003

  2002

 
  (In thousands, except for per share
amounts)
 

Revenue

            

Rental:

            

Base rent

 $1,070,806  $999,535  $922,805 

Recoveries from tenants

  165,173   155,277   139,416 

Parking and other

  57,313   54,434   50,745 
  


 


 


Total rental revenue

  1,293,292   1,209,246   1,112,966 

Hotel revenue

  76,342   70,083   44,786 

Development and management services

  20,464   17,347   10,748 

Interest and other

  10,367   3,033   5,504 
  


 


 


Total revenue

  1,400,465   1,299,709   1,174,004 
  


 


 


Expenses

            

Operating

            

Rental

  419,022   397,309   364,926 

Hotel

  55,724   52,250   31,086 

General and administrative

  53,636   45,359   47,292 

Interest

  306,170   299,436   263,067 

Depreciation and amortization

  252,256   208,490   178,163 

Net derivative losses

  —     1,038   11,874 

Losses from early extinguishments of debt

  6,258   1,474   2,386 

Loss on investments in securities

  —     —     4,297 
  


 


 


Total expenses

  1,093,066   1,005,356   903,091 
  


 


 


Income before minority interests in property partnerships, income from unconsolidated joint ventures, minority interest in Operating Partnership, gains on sales of real estate and other assets and land held for development, discontinued operations and preferred dividend

  307,399   294,353   270,913 

Minority interests in property partnerships

  4,685   1,827   2,408 

Income from unconsolidated joint ventures

  3,380   6,016   7,954 
  


 


 


Income before minority interest in Operating Partnership, gains on sales of real estate and other assets and land held for development, discontinued operations and preferred dividend

  315,464   302,196   281,275 

Minority interest in Operating Partnership

  (68,174)  (73,784)  (72,900)
  


 


 


Income before gains on sales of real estate and other assets and land held for development, discontinued operations and preferred dividend

  247,290   228,412   208,375 

Gains on sales of real estate and other assets, net of minority interest

  8,149   57,574   186,810 

Gains on sales of land held for development, net of minority interest

  —     —     3,633 
  


 


 


Income before discontinued operations and preferred dividend

  255,439   285,986   398,818 

Discontinued operations:

            

Income from discontinued operations, net of minority interest

  1,240   6,102   20,220 

Gains on sales of real estate from discontinued operations, net of minority interest

  27,338   73,234   25,345 
  


 


 


Income before preferred dividend

  284,017   365,322   444,383 

Preferred dividend

  —     —     (3,412)
  


 


 


Net income available to common shareholders

 $284,017  $365,322  $440,971 
  


 


 


Basic earnings per common share:

            

Income available to common shareholders before discontinued operations

 $2.40  $2.89  $4.08 

Discontinued operations, net of minority interest

  0.27   0.82   0.49 
  


 


 


Net income available to common shareholders

 $2.67  $3.71  $4.57 
  


 


 


Weighted average number of common shares outstanding

  106,458   96,900   93,145 
  


 


 


Diluted earnings per common share:

            

Income available to common shareholders before discontinued operations

 $2.35  $2.84  $4.02 

Discontinued operations, net of minority interest

  0.26   0.81   0.48 
  


 


 


Net income available to common shareholders

 $2.61  $3.65  $4.50 
  


 


 


Weighted average number of common and common equivalent shares outstanding

  108,762   98,486   94,612 
  


 


 


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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

   

Additional
Paid-in
Capital


  

Earnings
in excess
of
Dividends


  

Treasury
Stock,
at cost


  

Unearned

Compensation


  

Accumulated
Other
Comprehensive
Loss


  

Total


  Common Stock

 

Additional
Paid-in

Capital


  

Earnings
in excess
of

Dividends


  

Treasury
Stock,

at cost


  

Unearned

Compensation


  

Accumulated
Other
Comprehensive

Loss


  

Total


 
 
 Common Stock

 
Shares

 Amount

  

Stockholders’ Equity, December 31, 2000

 86,630  $866 $1,673,349 $(13,895)$—   $(848)$(11,745)$1,647,727 

Conversion of operating partnership units to Common Stock

 3,765   38  149,588  —    —    —    —    149,626 

Allocation of minority interest

 —     —    (47,852) —    —    —    —    (47,852)

Net income for the year

 —     —    —     201,440   —     —     —     201,440 

Dividends declared

 —     —    —     (205,214)  —     —     —     (205,214)

Shares issued pursuant to stock purchase plan

 8   —    213   —     —     —     —     213 

Stock options exercised

 412   4  12,396   —     —     —     —     12,400 

Treasury stock, at cost

 (79)  —    —     —     (2,722)  —     —     (2,722)

Issuance of restricted stock

 45   —    1,827   —     —     (1,827)  —     —   

Amortization of restricted stock award

 —     —    —     —     —     578   —     578 

Unrealized holding losses

 —     —    —     —     —     —     (2,123)  (2,123)
 

 

 


 


 


 


 


 


 Shares

 Amount

 

Additional
Paid-in

Capital


  

Earnings
in excess
of

Dividends


  

Treasury
Stock,

at cost


  

Unearned

Compensation


  

Accumulated
Other
Comprehensive

Loss


  

Total


 

Stockholders’ Equity, December 31, 2001

 90,781   908  1,789,521   (17,669)  (2,722)  (2,097)  (13,868)  1,754,073  90,781 $908 

Conversion of operating partnership units to Common Stock

 1,566   16  59,962   —     —     —     —     59,978  1,566  16  59,962   —     —     —     —     59,978 

Conversion of preferred stock to Common Stock

 2,625   26  99,974   —     —     —     —     100,000  2,625  26  99,974   —     —     —     —     100,000 

Allocation of minority interest

 —     —    21,062   —     —     —     —     21,062  —    —    21,062   —     —     —     —     21,062 

Net income for the year

 —     —    —     440,971   —     —     —     440,971  —    —    —     440,971   —     —     —     440,971 

Dividends declared

 —     —    —     (224,716)  —     —     —     (224,716) —    —    —     (224,716)  —     —     —     (224,716)

Shares issued pursuant to stock purchase plan

 8   —    284   —     —     —     —     284  8  —    284   —     —     —     —     284 

Stock options exercised

 330   3  9,898   —     —     —     —     9,901  330  3  9,898   —     —     —     —     9,901 

Issuance of restricted stock

 53   1  1,988   —     —     (1,989)  —     —    53  1  1,988   —     —     (1,989)  —     —   

Amortization of restricted stock award

 —     —    —     —     —     1,187   —     1,187  —    —    —     —     —     1,187   —     1,187 

Change in unrealized losses on derivative instruments used in cash flow hedging arrangements

 —     —    —     —     —     —     (3,511)  (3,511) —    —    —     —     —     —     (3,511)  (3,511)

Amortization of interest rate contracts

 —     —    —     —     —     —     361   361  —    —    —     —     —     —     361   361 
 

 

 


 


 


 


 


 


 
 

 


 


 


 


 


 


Stockholders’ Equity, December 31, 2002

 95,363   954  1,982,689   198,586   (2,722)  (2,899)  (17,018)  2,159,590  95,363  954  1,982,689   198,586   (2,722)  (2,899)  (17,018)  2,159,590 

Conversion of operating partnership units to Common Stock

 225   2  9,041   —     —     —     —     9,043  225  2  9,041   —     —     —     —     9,043 

Allocation of minority interest

 —     —    37,285   —     —     —     —     37,285  —    —    37,285   —     —     —     —     37,285 

Net income for the year

 —     —    —     365,322   —     —     —     365,322  —    —    —     365,322   —     —     —     365,322 

Dividends declared

 —     —    —     (243,008)  —     —     —     (243,008) —    —    —     (243,008)  —     —     —     (243,008)

Shares issued pursuant to stock purchase plan

 12   —    367   —     —     —     —     367  12  —    367   —     —     —     —     367 

Stock options exercised

 2,454   24  68,637   —     —     —     —     68,661  2,454  24  68,637   —     —     —     —     68,661 

Issuance of restricted equity

 176   2  6,139   —     —     (6,141)  —     —    176  2  6,139   —     —     (6,141)  —     —   

Amortization of restricted equity awards

 —     —    —     —     —     2,220   —     2,220  —    —    —     —     —     2,220   —     2,220 

Amortization of interest rate contracts

 —     —    —     —     —     —     683   683  —    —    —     —     —     —     683   683 
 

 

 


 


 


 


 


 


 
 

 


 


 


 


 


 


Stockholders’ Equity, December 31, 2003

 98,230  $982 $2,104,158  $320,900  $(2,722) $(6,820) $(16,335) $2,400,163  98,230  982  2,104,158   320,900   (2,722)  (6,820)  (16,335)  2,400,163 

Sale of Common Stock, net of offering costs

 5,700  57  290,959   —     —     —     —     291,016 

Conversion of operating partnership units to Common Stock

 2,540  26  112,526   —     —     —     —     112,552 

Allocation of minority interest

 —    —    (6,482)  —     —     —     —     (6,482)

Net income for the year

 —    —    —     284,017   —     —     —     284,017 

Dividends declared

 —    —    —     (279,465)  —     —     —     (279,465)

Shares issued pursuant to stock purchase plan

 11  —    480   —     —     —     —     480 

Stock options exercised

 3,815  38  130,506   —     —     —     —     130,544 

Net issuances of restricted equity

 24  —    1,833   —     —     (1,833)  —     —   

Amortization of restricted equity awards

 —    —    —     —     —     2,550   —     2,550 

Amortization of interest rate contracts

 —    —    —     —     —     —     698   698 
 

 

 


 


 


 


 


 


 
 

 


 


 


 


 


 


Stockholders’ Equity, December 31, 2004

 110,320 $1,103 $2,633,980  $325,452  $(2,722) $(6,103) $(15,637) $2,936,073 
 
 

 


 


 


 


 


 


 

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

 

   For the year ended December 31,

 
   2003

  2002

  2001

 
   (in thousands) 

Net income before preferred dividend

  $365,322  $444,383  $208,032 

Other comprehensive income (loss):

             

Amortization of interest rate contracts

   683   361   —   

Realized loss on investments in securities included in net income before preferred dividend

   —     —     6,500 

Unrealized gains (losses) on investments in securities:

             

Unrealized holding losses arising during the period

   —     —     (1,608)

Less: reclassification adjustment for the cumulative effect of a change in accounting principle included in net income before preferred dividend

   —     —     6,853 

Unrealized derivative losses:

             

Transition adjustment of interest rate contracts

   —     —     (11,414)

Change in unrealized losses on derivative instruments used in cash flow hedging arrangements

   —     (3,511)  (2,454)
   

  


 


Other comprehensive income (loss)

   683   (3,150)  (2,123)
   

  


 


Comprehensive income

  $366,005  $441,233  $205,909 
   

  


 


   For the year ended December 31,

 
   2004

  2003

  2002

 
   (in thousands) 

Income before preferred dividend

  $284,017  $365,322  $444,383 

Other comprehensive income (loss):

             

Amortization of interest rate contracts

   698   683   361 

Unrealized derivative losses:

             

Change in unrealized losses on derivative instruments used in cash flow hedging arrangements

   —     —     (3,511)
   

  

  


Other comprehensive income (loss)

   698   683   (3,150)
   

  

  


Comprehensive income

  $284,715  $366,005  $441,233 
   

  

  


 

 

 

 

 

The accompanying notes are an integral part of these financial statements

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the year ended December 31,

 
   2003

  2002

  2001

 
   (in thousands) 

Cash flows from operating activities:

             

Net income before preferred dividend

  $365,322  $444,383  $208,032 

Adjustments to reconcile net income before preferred dividend to net cash provided by operating activities:

             

Depreciation and amortization

   210,477   186,429   150,163 

Non-cash portion of interest expense

   5,513   5,558   3,937 

Non-cash compensation expense

   2,220   1,187   578 

Loss on investments in securities

   —     4,297   6,500 

Non-cash portion of derivative losses

   —     1,111   (16,161)

Effective portion of interest rate contracts

   —     (3,511)  —   

Minority interests in property partnerships

   (1,497)  (2,065)  (1,085)

Distributions in excess of earnings from unconsolidated joint ventures

   2,396   738   (1,451)

Minority interests in Operating Partnership

   104,283   124,775   75,878 

Gains on sales of properties

   (154,192)  (263,220)  (11,239)

Losses from early extinguishment of debt

   90   554   —   

Cumulative effect of a change in accounting principle

   —     —     8,432 

Change in assets and liabilities:

             

Cash held in escrows

   585   1,094   4,951 

Tenant and other receivables, net

   2,033   23,027   (16,694)

Accrued rental income, net

   (52,697)  (50,466)  (27,961)

Prepaid expenses and other assets

   (3,200)  1,108   10,154 

Accounts payable and accrued expenses

   434   3,216   29,265 

Interest rate contracts

   (6,323)  3,367   11,147 

Accrued interest payable

   25,790   16,061   3,481 

Other liabilities

   7,649   1,848   8,580 

Tenant leasing costs

   (20,608)  (62,111)  (27,104)
   


 


 


Total adjustments

   122,953   (7,003)  211,371 
   


 


 


Net cash provided by operating activities

   488,275   437,380   419,403 
   


 


 


Cash flows from investing activities:

             

Acquisitions/additions to real estate

   (422,273)  (1,432,302)  (1,322,565)

Investments in unconsolidated joint ventures

   (4,495)  (4,158)  (7,163)

Net proceeds from the sales of real estate

   524,264   419,177   26,106 
   


 


 


Net cash provided by (used in) investing activities

   97,496   (1,017,283)  (1,303,622)
   


 


 


   For the year ended December 31,

 
   2004

  2003

  2002

 
   (in thousands) 

Cash flows from operating activities:

             

Net income before preferred dividend

  $284,017  $365,322  $444,383 

Adjustments to reconcile net income before preferred dividend to net cash provided by operating activities:

             

Depreciation and amortization

   252,941   210,477   186,429 

Non-cash portion of interest expense

   5,604   5,513   5,558 

Non-cash compensation expense

   4,262   2,220   1,187 

Loss on investments in securities

   —     —     4,297 

Non-cash portion of derivative losses

   —     —     1,111 

Effective portion of interest rate contracts

   —     —     (3,511)

Minority interest in property partnerships, net

   6,848   (1,497)  (2,065)

Distributions in excess of earnings from unconsolidated joint ventures

   3,283   2,396   738 

Minority interest in Operating Partnership

   75,738   104,283   124,775 

Gains on sales of properties

   (54,121)  (154,192)  (263,220)

Losses from early extinguishment of debt

   —     90   554 

Net change in assets and liabilities:

             

Cash held in escrows

   (3,434)  585   1,094 

Tenant and other receivables, net

   (7,075)  2,033   23,027 

Accrued rental income, net

   (61,959)  (52,697)  (50,466)

Prepaid expenses and other assets

   (92)  (3,200)  1,108 

Accounts payable and accrued expenses

   (3,197)  434   3,216 

Interest rate contracts

   (7,027)  (6,323)  3,367 

Accrued interest payable

   (261)  25,790   16,061 

Other liabilities

   (6,468)  7,649   1,848 

Tenant leasing costs

   (59,553)  (20,608)  (62,111)
   


 


 


Total adjustments

   145,489   122,953   (7,003)
   


 


 


Net cash provided by operating activities

   429,506   488,275   437,380 
   


 


 


Cash flows from investing activities:

             

Acquisitions/additions to real estate

   (277,684)  (422,273)  (1,432,302)

Net investments in unconsolidated joint ventures

   (944)  (4,495)  (4,158)

Net proceeds from the sales of real estate

   107,614   524,264   419,177 
   


 


 


Net cash provided by (used in) investing activities

   (171,014)  97,496   (1,017,283)
   


 


 


 

 

The accompanying notes are an integral part of these financial statements

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS—(Continued)

 

  For the year ended December 31,

 
  For the year ended December 31,

   2004

 2003

 2002

 
  2003

 2002

 2001

   (in thousands) 

Cash flows from financing activities:

      

Borrowings on unsecured line of credit

   482,663   200,098   111,200    140,000   482,663   200,098 

Repayments of unsecured line of credit

   (446,706)  (173,055)  (111,200)   (203,000)  (446,706)  (173,055)

Repayments of mortgage notes

   (1,210,081)  (417,230)  (229,021)

Proceeds from mortgage notes

   194,615   369,155   1,128,534 

Repayments of mortgage notes payable

   (216,731)  (1,210,081)  (417,230)

Proceeds from mortgage notes payable

   168,517   194,615   369,155 

Proceeds from unsecured senior notes, net of discount

   722,602   747,375   —      —     722,602   747,375 

Proceeds from unsecured bridge loan

   —     1,000,000   —      —     —     1,000,000 

Repayments of unsecured bridge loan

   (105,683)  (894,317)  —      —     (105,683)  (894,317)

Deposits placed in mortgage escrow

   (420,000)  —     —      —     (420,000)  —   

Payments received from mortgage escrow

   420,000   —     —      —     420,000   —   

Mortgage payable proceeds released from escrow

   —     —     57,610 

Dividends and distributions

   (313,811)  (297,331)  (276,538)   (342,815)  (313,811)  (297,331)

Net proceeds from the issuance of common stock

   291,496   —     —   

Proceeds from equity transactions

   69,028   9,774   12,665    130,574   69,028   9,774 

Purchase of treasury common stock

   —     —     (2,722)

Net (distributions) contributions to/from minority interest holder

   —     (1,539)  37,539 

Contributions from minority interest holders

   4,005   —     —   

Distributions to minority interest holders

   (8,848)  —     (1,539)

Deferred financing costs

   (10,987)  (5,819)  (26,738)   (5,032)  (10,987)  (5,819)
  


 


 


  


 


 


Net cash provided by (used in) financing activities

   (618,360)  537,111   701,329    (41,834)  (618,360)  537,111 
  


 


 


  


 


 


Net decrease in cash and cash equivalents

   (32,589)  (42,792)  (182,890)

Cash and cash equivalents, beginning of the year

   55,275   98,067   280,957 

Net increase (decrease) in cash and cash equivalents

   216,658   (32,589)  (42,792)

Cash and cash equivalents, beginning of period

   22,686   55,275   98,067 
  


 


 


  


 


 


Cash and cash equivalents, end of the year

  $22,686  $55,275  $98,067 

Cash and cash equivalents, end of period

  $239,344  $22,686  $55,275 
  


 


 


  


 


 


Supplemental disclosures:

      

Cash paid for interest

  $287,603  $272,576  $275,263   $311,676  $287,603  $272,576 
  


 


 


  


 


 


Interest capitalized

  $19,200  $22,510  $59,292   $10,849  $19,200  $22,510 
  


 


 


  


 


 


Non-cash investing and financing activities:

      

Additions to real estate included in accounts payable

  $17,616  $10,067  $5,547   $5,592  $17,616  $10,067 
  


 


 


  


 


 


Mortgage notes payable assumed in connection with the acquisition of real estate

  $210,620  $—    $—     $107,894  $210,620  $—   
  


 


 


  


 


 


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

  $5,193  $—    $—   
  


 


 


Dividends and distributions declared but not paid

  $84,569  $81,226  $79,561   $91,428  $84,569  $81,226 
  


 


 


  


 


 


Conversions of Minority Interest to Stockholders’ Equity

  $5,045  $30,247  $119,604 

Conversions of Minority Interest to Stockholders' Equity

  $56,843  $5,045  $30,247 
  


 


 


  


 


 


Conversions of Preferred Stock to Stockholders’ Equity

  $—    $100,000  $—   

Conversions of Preferred Stock to Stockholders' Equity

  $—    $—    $100,000 
  


 


 


  


 


 


Basis adjustment in connection with conversions of Minority Interest to Stockholders’ Equity

  $3,998  $29,731  $33,927 

Basis adjustment in connection with conversions of Minority Interest to Stockholders' Equity

  $55,709  $3,998  $29,731 
  


 


 


  


 


 


Deposit received on real estate held for sale escrowed

  $—    $20,000  $—     $—    $—    $20,000 
  


 


 


  


 


 


Issuance of restricted shares to employees

  $6,141  $1,989  $1,827 

Issuance of restricted securities to employees and directors

  $9,924  $6,141  $1,989 
  


 


 


  


 


 


Unrealized loss related to investments in securities

  $—    $—    $1,608 
  


 


 


 

The accompanying notes are an integral part of these financial statements

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Organization and Basis of Presentation

 

Organization

 

Boston Properties, Inc. (the “Company”), a Delaware corporation, is a self-administered and self-managed real estate investment trust (“REIT”). The Company is the sole general partner of Boston Properties Limited Partnership (the “Operating Partnership”) and at December 31, 2003,2004 owned an approximate 76.9% (76.3%80.3% (76.9% at December 31, 2002)2003) general and limited partnership interest in the Operating Partnership. Partnership interests in the Operating Partnership are denominated as “common units of partnership interest” (also referred to as “OP Units”), “long term incentive units of partnership interest” (also referred to as “LTIP Units”) or “preferred units of partnership interest” (also referred to as “Preferred Units”). All

Unless specifically noted otherwise, all references to OP Units and Preferred Units exclude such units held by the Company. A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of the Company (“Common Stock”). In lieu of a cash redemption, the Company may elect to acquire such OP Unit for one share of Common Stock. Because the number of shares of Common Stock outstanding at all times equals the number of OP Units that the Company owns, one share of Common Stock is generally the economic equivalent of one OP Unit, and the quarterly distribution that may be paid to the holder of an OP Unit equals the quarterly dividend that may be paid to the holder of a share of Common Stock. An LTIP Unit is generally the economic equivalent of a share of restricted common stock of the Company. LTIP Units, whether vested or not, will receive the same quarterly per unit distributions as OP Units, which equal per share dividends on Common Stock (See Note 17).

Each series of Preferred Units bears a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be convertibleconverted into OP Units at the election of the holder thereof or the Company, subject toOperating Partnership in accordance with the terms of suchthe series of outstanding Preferred Units. At December 31, 2003,2004, there was one series of Preferred Units outstanding.outstanding (i.e., Series Two Preferred Units).

 

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

 

Properties

 

At December 31, 2003,2004, the Company owned or had interests in a portfolio of 140125 commercial real estate properties (142(140 properties at December 31, 2002)2003) (the “Properties”) aggregating approximately 43.944.1 million net rentable square feet (approximately 42.443.9 million net rentable square feet at December 31, 2002)2003) (unaudited), including three properties under construction and one redevelopment/expansion project collectively totaling approximately 2.01.3 million net rentable square feet. Thefeet (unaudited) and structured parking for approximately 31,270 vehicles containing approximately 9.5 million square feet (unaudited). At December 31, 2004, the Properties consist of:

 

131119 office properties comprised of 103102 Class A office properties (including three properties under construction) and 2817 Office/Technical properties;

 

four industrial properties;

three hotels; and

 

two retail properties.properties; and

 

one industrial property.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company owns or controls undeveloped land parcels totaling approximately 542.8 acres (unaudited). In addition, the Company ownshas a 25% interest in the Boston Properties Office Value-Added Fund, L.P. (the “Value-Added Fund”), which is a strategic partnership with two institutional investors through which the Company intends to pursue the acquisition of value-added investments in assets within its existing markets. The Company’s investments through the Value-Added Fund are not included in its portfolio information or controls 43 parcels of land totaling 551.3 acres and structured parking for 31,098 vehicles containing approximately 9.4 million square feet. any other portfolio level statistics. At December 31, 2004, the Value-Added Fund had an investment in an office complex in Herndon, VA.

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

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Basis of Presentation

 

Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership, nor does it have employees of its own. The Operating Partnership, not Boston Properties, Inc., executes all significant business relationships. Except for variable interest entities, allAll majority-owned subsidiaries and affiliates whereover which the Company has financial and operating control and variable interest entities (“VIE”s) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. ExceptThe Company accounts for variable interest entities in which the Company has determined it is the primary beneficiary, investments in real estateall other unconsolidated joint ventures and companies over which the Company has the ability to exercise significant influence, but over which the Company does not have financial or operating control, are accounted for 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 Company consolidates any variable interest entity of which it has determined that it is the primary beneficiary.

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,”Entities” (“FIN 46”). IfIn December 2003, the Company determines that an entity is deemed to be a variable interest entity (“VIE”), the enterprise that is deemed to absorb a majorityFASB issued FIN 46R, “Consolidation of the expected losses, receive a majority of the entity’s expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined inVariable Interest Entities,” which amended FIN 46. FIN 46 is46R was effective immediately for arrangements entered into after January 31, 2003, and will be applied asbecame effective during the first quarter of March 31, 2004 tofor all arrangements entered into before February 1, 2003. FIN 46R requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership interests, contractual interests, or other pecuniary interests in an entity that change with changes in the fair value of the entity’s net assets excluding variable interests. Prior to FIN 46R, the Company included an entity in its consolidated financial statements only if it controlled the entity through voting interests. The adoption and application of FIN 46 and FIN 46R has not had a material impact on the Company’s consolidated financial statements.

 

2.    Summary of Significant Accounting Policies

 

Real Estate

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, above“above-” and below market“below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141)141, “Business Combinations”), and allocates the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost. The Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and/orand /or capitalization rates, as well as available market information. Estimates of

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenant’s credit quality and expectations of lease renewals. Based on its acquisitions to date, the Company’s allocation to customer relationship intangible assets has been immaterial.

 

The Company records acquired “above“above-” and below” market“below-market” leases at their fair value (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses.

 

The Company reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An assetimpairment loss is considered impaired whenrecognized if the undiscounted future cash flows arecarrying amount of its assets is not sufficient to recover the asset’s carryingrecoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Because cash flows on properties considered to be “long-lived assets to be held and used”used,” as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) are considered on an undiscounted basis to determine whether an asset has been impaired, the Company’s established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If the Company determines that impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date.

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on January 1, 2002, requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and the Company will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) onupon the eventual disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). Following the classification of a property as “held for sale”,sale,” no further depreciation is recorded on the assets.

 

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgement. The Company’s capitalization policy on development properties is guided by SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate Properties”.Properties.” The costs of land and buildings under development include specifically identifiable

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. The Company ceases capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalizes only those costs associated with the portion under construction. Interest costs capitalized for the years ended December 31, 2004, 2003 and 2002 and 2001 were $10.8 million, $19.2 million $22.5 million and $59.3$22.5 million, respectively. Salaries and related costs capitalized for the years ended December 31, 2004, 2003 and 2002 and 2001 were $4.4 million, $3.7 million $4.4 million and $5.8$4.4 million, respectively.

 

The acquisitions of minority interests (i.e., OP Units) for shares of the Company’s Common Stockcommon stock are recorded under the purchase method with assets acquired reflected at the fair market value of the Company’s Common Stockcommon stock on the date of acquisition. The acquisition amounts are allocated to the underlying assets based on their estimated fair values.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Expenditures for repairs and maintenance are charged to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.

 

The Company computes depreciation and amortization on properties using the straight-line method based on estimated useful asset lives. In accordance with SFAS No. 141, the Company allocates the acquisition cost of real estate to land, building, tenant improvements, acquired “above-”and “below-” market“below-market” leases, origination costs and acquired in-place leases based on an assessment of their fair value and depreciates or amortizes these assets (or liabilities) over their useful lives. The amortization of acquired “above-” and “below-” market“below-market” leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

 

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

 

Land improvements

  25 to 40 years

Buildings and improvements

  10 to 40 years

Tenant improvements

  Shorter of useful life or terms of related lease

Furniture, fixtures, and equipment

  3 to 7 years

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on hand and investments with maturities of three months or less from the date of purchase. The majority of the Company’s cash and cash equivalents are held at major commercial banks which may at times exceed the Federal Deposit Insurance Corporation limit of $100,000. The Company has not experienced any losses to date on its invested cash.

 

Cash Held in Escrows

 

Escrows include amounts established pursuant to various agreements for real estate purchase and sale transactions, security deposits, property taxes, insurance and other costs.

 

Investments in Securities

 

The Company accounts for investments in securities of publicly traded companies in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Investments.” Investments in securities of non-publiclynon- publicly traded companies are recorded at cost, as they are not considered marketable under SFAS No. 115.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the yearsyear ended December 31, 2003, 2002, and 2001, the Company realized lossesa loss totaling $0, $4.3 million, and $6.5 million, respectively, related to the write-down of securities of threea technology companies.company. There were no losses realized for the years ended December 31, 2004 and 2003. The Company determined that the decline in the fair value of these securities was other than temporary as defined by SFAS No. 115. At December 31, 20032004 and 2002,2003, the Company had noinsignificant investments in securities.

 

Tenant and other receivables

 

Tenant and other accounts receivable, other than accrued rents receivable, are expected to be collected within one year.

 

Deferred Charges

 

Deferred charges include leasing costs and financing fees. DirectLeasing costs include an allocation for acquired intangible in-place lease values and direct and incremental fees and costs incurred in the successful negotiation of leases, including brokerage, legal, internal leasing employee salaries and other costs which have been deferred and are being amortized on a straight-line basis over the terms of the respective leases. Internal leasing salaries and related costs capitalized for the years ended December 31, 2004, 2003 and 2002 and 2001

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

were $1.5 million, $1.3 million $0.7 million and $0.8$0.7 million, respectively. External fees and costs incurred to obtain long-term financing have been deferred and are being amortized over the terms of the respective loans on a basis that approximates the effective interest method and are included with interest expense. Unamortized financing and leasing costs are charged to expense upon the early repayment or significant modification of the financing or upon the early termination of the lease, respectively. Fully amortized deferred charges are removed from the books upon the expiration of the lease or maturity of the debt.

 

Investments in Unconsolidated Joint Ventures

 

Except for ownership interests in a variable interest entity, the Company accounts for its investments in joint ventures under the equity method of accounting because it exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over 40 years.years or the term of the agreement, if shorter. Under the equity method of accounting, the net equity investment of the Company is reflected onwithin the consolidated balance sheets,Consolidated Balance Sheets, and the Company’s share of net income or loss from the joint ventures is included onwithin the consolidated statementsConsolidated Statements of operations.Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, the Company’s recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, the Company consolidates those in which it is the primary beneficiary.

 

To the extent that the Company contributes assets to a joint venture, the Company’s investment in joint venture is recorded at the Company’s cost basis in the assets that were contributed to the joint venture. To the extent that the Company’s cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related asset and included in the Company’s share of equity in net income of the joint venture. In accordance with the provisions of Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures”,Ventures,” the Company will recognize gains on the contribution of real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the economic substance of the transaction is a sale.

BOSTON PROPERTIES, INC.

 

The Company serves as property manager for the joint ventures. The Company serves as the development manager for the joint venture currently under development. The profit on development fees received from joint ventures is recognized to the extent attributable to the outside interests in the joint ventures. The Company has recognized development and management fee income earned from its joint ventures of approximately $4.7 million, $5.0 million, and $3.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Equity Offering Costs

 

Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in capital.

 

Treasury Stock

 

The Company’s share repurchases are reflected as treasury stock utilizing the cost method of accounting and are presented as a reduction to consolidated stockholders’ equity. The Company did not repurchase any of its shares during the years ended December 31, 2004 and 2003.

 

Dividends

 

Earnings and profits, which determine the taxability of dividends to stockholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of gains on the sale of real property, revenue recognition, compensation expense, and in the estimated useful lives used to compute depreciation. Tax treatment of common distributions represented 76%63%, 98%76% and 100%98% ordinary income, 4%0%, 2%4% and 0%2% capital gain income and 20%37%, 0%,20% and 0% return of capital for federal income tax purposes for the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively.

 

Revenue Recognition

 

Base rental revenue is reported on a straight-line basis over the terms of the respective leases. The impact of the straight-line rent adjustment increased revenue by $61.3 million, $48.5 million $51.0 million and $27.8$51.0 million for the years ended December 31, 2004, 2003 and 2002, respectively, as the revenue recorded exceeded amounts billed. In accordance with SFAS No. 141, the Company recognizes rental revenue of acquired in-place “above-” and 2001, respectively.“below-market” leases at their fair values over the terms of the respective leases. Accrued rental income represents rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements. The Company maintains an allowance against accrued rental income for future potential tenant credit losses. The credit assessment is based on the estimated accrued rental income that is recoverable over the term of the lease. The Company also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants’ payment history and current credit status, as well as certain industry or geographic specific credit considerations.

If the Company’s estimates of collectibility differ from the cash received, then the timing and amount of the Company’s reported revenue could be impacted. The credit risk is mitigated by the high quality of the Company’s existing tenant base, reviews of prospective tenant’s risk profiles prior to lease execution and continual monitoring of the Company’s portfolio to identify potential problem tenants.

 

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with EITF Issue 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” (“Issue 99-19”). Issue 99-19 requires that these reimbursements be recorded gross, as the Company is generally the primary obligor with respect to purchasing goods and services from third- party suppliers, has discretion in selecting the supplier and has credit risk.

 

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

 

The Company records its development fees earned on real estate projects on a straight-line basis over the development period, which approximates the percentage of completion method described in SOP 81-1 and provides a more accurate measurement over the period of fees earned. 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, sincebecause such fees are contingent upon the collection of rents.

BOSTON PROPERTIES, INC.

 

The estimated fair value of warrants received in conjunction with communications license agreements are recognized over the ten-year effective terms of the license agreements.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company recognizes gains on sales of real estate pursuant to the provisions of SFAS No. 66 “Accounting for Sales of Real Estate.” The specific timing of a sale is measured against various criteria in SFAS No. 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, the Company defers gain recognition and accounts for the continued operations of the property by applying the finance, installment or cost recovery methods, as appropriate, until the sales criteria are met.

 

Interest Expense and Interest Rate Protection Agreements

 

Interest expense on fixed rate debt with predetermined periodic rate increases is computed using the effective interest method over the terms of the respective loans.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

From time to time, the Company enters into certain interest rate protection agreements to reduce the impact of changes in interest rates on its variable rate debt or in anticipation of issuing fixed rate debt. The fair value of these agreements is reflected on the Consolidated Balance Sheets. Changes in the fair value of these agreements are recorded in the Consolidated Statements of Operations to the extent the agreements are not effective for accounting purposes.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders, as adjusted for unallocated earnings (if any) of certain securities issued by the Operating Partnership, by the weighted average number of shares of Common Stock outstanding during the year. Diluted EPS reflects the

potential dilution that could occur from shares issuable under stock-based compensation plans, including upon the exercise of stock options, and conversion of the minority interests in the Operating Partnership.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments.

 

TheFor purposes of disclosure, the Company calculates the fair value of mortgage debt and unsecured senior notes. The Company discounts the spread between the future contractual interest payments and future interest payments on mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, the Company adds its estimation of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to its debt.

 

Income Taxes

 

The Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1997. As a result, the Company generally will not be subject to federal corporate income tax on its taxable income that is distributed to its stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income. The Company’s policy is to distribute 100% of its taxable income. Accordingly, the only provision for federal income taxes in the accompanying consolidated financial statements relates to the Company’s consolidated taxable REIT subsidiaries. The Company’s taxable REIT subsidiaries did not have significant tax provisions or deferred income tax items.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In January 2002, the Company formed a taxable REIT subsidiary (“TRS”), IXP, Inc. (IXP) which acts as a captive insurance company to provide earthquake re-insurance coverage forand is one of the Company’s Greater San Francisco properties.elements of its overall insurance program. The accounts of IXP are consolidated within the Company. TheIXP is a captive TRS that is subject to tax at the federal and state level and, accordingly,level. Accordingly, the Company has recorded a tax provision in the Company’s Consolidated Statements of Operations of $0.01 million and $0.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.2002.

 

Effective July 1, 2002, the Company restructured the leases with respect to its ownership of the three hotel properties by forming a TRS. The hotel TRS, a wholly owned subsidiary of the Operating Partnership, is the lessee pursuant to leases for each of the hotel properties. As lessor, the Operating Partnership is entitled to a percentage of gross receipts from the hotel properties. Marriott International, Inc. continues to manage the hotel properties under the Marriott® name and under terms of the existing management agreements. In connection with the restructuring, the revenue and expenses of the hotel properties are being reflected in the Company’s

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Consolidated Statements of Operations. The hotel TRS is subject to tax at the federal and state level and, accordingly, the Company has recorded a tax provision in the Company’s Consolidated Statements of Operations of $0.05 million and $0.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.2002.

 

To assist the Company in maintaining its status as a REIT, the Company had previously leased its three hotel properties, pursuant to leases with a participation in the gross receipts of such hotel properties, to a lessee (“ZL Hotel LLC”) in which Messrs. Zuckerman and Linde, the Chairman of the Board and Chief Executive Officer, respectively, were the sole member-managers. Marriott International, Inc. managed these hotel properties under the Marriott® name pursuant to management agreements with the lessee. Rental revenue from these leases totaled approximately $12.2 million for the six-month period in 2002 prior to the formation of the hotel TRS and $31.3 million for the year ended December 31, 2001.TRS.

 

The net difference between the tax basis and the reported amounts of the Company’s assets and liabilities is approximately $1.6$1.9 billion and $1.7$1.6 billion as of December 31, 20032004 and 2002,2003, respectively.

 

Certain entities included in the Company’s consolidated financial statements are subject to certain state and local taxes. These taxes are recorded as operating expenses in the accompanying consolidated financial statements.

 

The following reconciles GAAP net income to taxable income:

   For the year ended December 31,

 
   2004

  2003

  2002

 
   (in thousands) 

Net income available to common shareholders

  $284,017  $365,322  $440,971 

Straight-line rent adjustments

   (51,692)  (38,867)  (42,030)

Book/Tax differences from depreciation and amortization

   56,041   28,578   34,280 

Book/Tax differences on gains/losses from capital transactions

   (35,129)  (123,526)  (208,801)

Other book/tax differences, net

   (78,567)  (41,008)  430 
   


 


 


Taxable income

  $174,670  $190,499  $224,850 
   


 


 


BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-based employee compensation plan

 

At December 31, 2003,2004, the Company has stock-based employee compensation plans, which are described more fully in Note 18.plans. In 2003, the Company transitioned to granting restricted stock and/or LTIP Units, as opposed to granting stock options, as its primary vehicle for employee equity compensation under its stock-based employee compensation plan. The Company accounts for thoseits stock-based employee compensation plans under the recognition and measurement principles of APBthe Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. All outstanding options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income available to common shareholders and earnings per common share if the Company had applied the fair value recognition provisions of SFASStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, to stock-based employee compensation.

 

   Year Ended December 31,

 
   2003

  2002

  2001

 
   (in thousands, except for per share
amounts)
 

Net income available to common shareholders

  $365,322  $440,971  $201,440 

Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of minority interest

   (5,764)  (7,697)  (9,467)
   


 


 


Pro forma net income available to common shareholders

  $359,558  $433,274  $191,973 
   


 


 


Earnings per share:

             

Basic—as reported

  $3.77  $4.73  $2.24 
   


 


 


Basic—pro forma

  $3.71  $4.65  $2.13 
   


 


 


Diluted—as reported

  $3.71  $4.66  $2.19 
   


 


 


Diluted—pro forma

  $3.65  $4.58  $2.08 
   


 


 


BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   Year Ended December 31,

 
   2004

  2003

  2002

 
   (in thousands, except for per share
amounts)
 

Net income available to common shareholders

  $284,017  $365,322  $440,971 

Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of minority interest

   (1,557)  (5,764)  (7,697)
   


 


 


Pro forma net income available to common shareholders

  $282,460  $359,558  $433,274 
   


 


 


Earnings per share:

             

Basic—as reported

  $2.67  $3.71  $4.57 
   


 


 


Basic—pro forma

  $2.65  $3.65  $4.49 
   


 


 


Diluted—as reported

  $2.61  $3.65  $4.50 
   


 


 


Diluted—pro forma

  $2.60  $3.59  $4.42 
   


 


 


 

Reclassifications

 

Certain prior-year balances have been reclassified in order to conform to the current-year presentation.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates include such items as depreciation and allowances for doubtful accounts. Actual results could differ from those estimates.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3.    Real Estate

 

Real estate consisted of the following at December 31 (in thousands):

 

  2003

 2002

   2004

 2003

 

Land

  $1,696,965  $1,647,808   $1,901,012  $1,696,965 

Land held for future development

   232,098   215,866    222,306   232,098 

Real estate held for sale, net

   5,604   224,585    —     5,604 

Buildings and improvements

   5,963,504   5,669,641    6,560,339   5,963,504 

Tenant improvements

   474,228   395,979    537,917   474,228 

Furniture, fixtures and equipment

   68,261   68,256    34,590   68,261 

Development in process

   542,600   448,576    35,063   542,600 
  


 


  


 


Total

   8,983,260   8,670,711    9,291,227   8,983,260 

Less: Accumulated depreciation

   (1,001,435)  (822,933)   (1,143,369)  (1,001,435)
  


 


  


 


  $7,981,825  $7,847,778   $8,147,858  $7,981,825 
  


 


  


 


 

4.    Deferred Charges

 

Deferred charges consisted of the following at December 31 (in thousands):

 

   2003

  2002

 

Leasing costs

  $230,156  $203,954 

Financing costs

   80,892   75,145 
   


 


    311,048   279,099 

Less: Accumulated amortization

   (122,193)  (102,554)
   


 


   $188,855  $176,545 
   


 


BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   2004

  2003

 

Leasing costs

  $294,405  $230,156 

Financing costs

   95,244   80,892 
   


 


    389,649 �� 311,048 

Less: Accumulated amortization

   (134,699)  (122,193)
   


 


   $254,950  $188,855 
   


 


 

5.    Investments in Unconsolidated Joint Ventures

 

The investments in unconsolidated joint ventures consists of the following at December 31, 2003:2004:

 

Entity


Property


% Ownership

Square 407 Limited PartnershipMarket Square North50%     
The Metropolitan Square Associates LLCMetropolitan Square51% (1)
BP 140 Kendrick Street LLC140 Kendrick Street25% (2)
BP/CRF 265 Franklin Street Holdings LLC265 Franklin Street35%     
BP/CRF 901 New York Avenue LLC901 New York Avenue25% (2)(3)
New Jersey & H Street LLC801 New Jersey Avenue50% (3)

Entity


  

Property


  Nominal        %
Ownership


 
Square 407 Limited Partnership  Market Square North  50.0%     
The Metropolitan Square Associates LLC  Metropolitan Square  51.0% (1)
BP/CRF 265 Franklin Street Holdings LLC  265 Franklin Street  35.0%     
BP/CRF 901 New York Avenue LLC  901 New York Avenue  25.0% (2)(3)
New Jersey & H Street LLC  801 New Jersey Avenue  50.0% (3)
Wisconsin Place Entities  Wisconsin Place  23.9% (3)(4)
Boston Properties Office Value-Added Fund, L.P.  Worldgate Plaza  25.0% (2)

(1)This joint venture is accounted for under the equity method due to participatory rights of the outside partner.
(2)EconomicThe Company’s economic ownership can increase based on the achievement of certain return thresholds.
(3)The property is not in operation (i.e., under construction, partially placed in-service or lease of or a contract to acquire undeveloped land).

BOSTON PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Certain of the Company’s joint venture agreements generally 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.ventures at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

 

On April 1, 2003,March 24, 2004, the Company acquired the remaining 50% outside interestinterests in its Discovery Square140 Kendrick Street joint venture, consisting of twothree Class A office properties totaling 366,939380,987 net rentable square feet located in Reston, Virginia.Needham, Massachusetts. The Company acquired the remaining 50% interestinterests for $18.3$21.6 million of cash and the assumption of the outside partner’s share of the mortgage debt on the properties of approximately $32.4$41.6 million. The accounts of Discovery Square140 Kendrick Street are now consolidated with the accounts of the Company.

 

On August 5, 2003, the Company acquired the remaining outside interests in its One Freedom Square and Two Freedom Square joint ventures, consisting of two Class A office properties totaling 831,810 square feet located in Reston, Virginia. The Company acquired the remaining interests for an aggregate of $36.0 million of cash and the assumption of the outside partner’s share of the mortgage debt of approximately $56.4 million and $35.4 million, respectively. The accounts of One Freedom Square and Two Freedom Square are now consolidated with the accounts of the Company.

On September 11, 2003,2, 2004, the Company entered into a joint ventureventures with an unaffiliatedunrelated third partyparties to pursue the development of a Class A office property at 801 New Jersey Avenue in Washington, D.C. that would supportbuilding totaling approximately 1.1 million305,000 net rentable square feet and retail space that will be part of commercial development.a mixed-use development of office, retail and residential properties known as Wisconsin Place located in Chevy Chase, Maryland. The new development will sit above a shared four-story parking garage with over 1,700 parking spaces. The Company made an initial cash contribution of $3.0 million forhas a 50%66.67% interest in the joint venture.venture entity that will develop and own the office building component of the project (the “Office Entity”). The unaffiliated third party partner contributed its interest as lessee in the ground lease for the property for the remaining 50%Company has a 5.0% interest in the joint venture.venture entity that will develop and own the retail component of the project (the “Retail Entity”). The Company has accounted for its investment in the Retail Entity under the equity method of accounting. The Company does not have an ownership interest in the entity that will develop and own the residential component of the project (the “Residential Entity”). Each of the Office Entity, Retail Entity and Residential Entity owns a 33.33% interest in the entity owning and developing the land and infrastructure components of the project (the “Land and Infrastructure Entity”). The Land and Infrastructure Entity acquired the land for a purchase price of $23.5 million from an unrelated third party and obtained seller financing totaling $23.5 million. The seller financing is non-interest bearing and matures in February 2008. The Land and Infrastructure Entity has recorded the seller financing at its fair value of approximately $21.5 million as of December 31, 2004, using an effective interest rate of 4.38% per annum. The Operating Partnership, with the other third-party joint venture partners, has agreed to guarantee the seller financing on behalf of the Land and Infrastructure Entity.

On September 22, 2004, the Company entered into an agreement, through a joint venture with unrelated third parties, to acquire a 21-acre site located on Boston’s waterfront, known as Fan Pier, for approximately $125.0 million, of which a deposit of $2.5 million was paid by the joint venture to the seller. The mixed-use master plan for Fan Pier included office, retail, residential and civic uses. The Company had a 33.33% interest in the joint venture formed to acquire the site and accounted for its investment under the equity method of accounting. On November 8, 2004, the joint venture exercised its right to terminate the purchase agreement to acquire Fan Pier. The venture forfeited its $2.5 million deposit, of which the Company’s share was $0.8 million. In addition, the Company recognized approximately $0.3 million of related due diligence costs.

On September 30, 2004, the joint venture entity that owns 265 Franklin Street in Boston, Massachusetts refinanced the mortgage loan collateralized by the property. The old mortgage loan totaling $54.0 million bore interest at a floating rate equal to LIBOR plus 1.30% per annum and was scheduled to mature on October 1, 2004. The new mortgage loan facility totaling $70.0 million is comprised of $55.0 million disbursed at closing and an additional $15.0 million available to be drawn to fund future tenant improvement and leasing costs. The

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

new mortgage loan facility requires interest-only payments at a floating rate equal to LIBOR plus 1.10% per annum and matures in September 2007, with two one-year extension options.

On October 25, 2004, the Company formed the Value-Added Fund, with third parties to pursue the acquisition of value-added investments in non-core office assets within the Company’s existing markets. The Value-Added Fund has total equity commitments of $140 million, of which the Company has committed $35 million. The Company will receive asset management, property management, leasing and redevelopment fees, and if certain return thresholds are achieved will be entitled to an additional promoted interest.

On November 1, 2004, the Value-Added Fund completed the acquisition of Worldgate Plaza, a 322,000 square foot office complex located in Herndon, Virginia for a purchase price of approximately $78.2 million. The acquisition was financed with new mortgage indebtedness totaling $57.0 million and approximately $21.2 million in cash, of which the Company’s share was $5.3 million. The mortgage financing bears interest at a variable rate equal to LIBOR plus 0.89% per annum and matures in October 2007, with two one-year extension options. In addition, the Value-Added Fund entered into an agreement to cap the interest rate at 9.5% for a nominal fee.

On December 20, 2004, the joint venture entity that owns 901 New York Avenue located in Washington, D.C. refinanced the construction loan collateralized by the property. The original construction loan had an outstanding balance of $96.7 million, bore interest at LIBOR plus 1.65% per annum and was scheduled to mature in November 2005. The new mortgage loan totaling $170.0 million bears interest at a fixed rate of 5.19% per annum and matures on January 1, 2015. The new mortgage loan requires interest-only payments for the first three years and requires principal and interest payments based on a 30-year amortization for years four through ten.

 

The combined summarized financial information of the unconsolidated joint ventures is as follows (in thousands):

 

  December 31,

  December 31,

Balance Sheets


  2003

  2002

  2004

  2003

Real estate and development in process, net

  $567,924  $753,931  $639,257  $567,924

Other assets

   49,772   59,665   86,756   49,772
  

  

  

  

Total assets

  $617,696  $813,596  $726,013  $617,696
  

  

  

  

Mortgage and construction loans payable (1)

  $388,196  $558,362

Mortgage and Notes payable (1)

  $531,492  $388,196

Other liabilities

   14,749   13,436   10,535   14,749

Partners’ equity

   214,751   241,798

Members’/Partners’ equity

   183,986   214,751
  

  

  

  

Total liabilities and partners’ equity

  $617,696  $813,596

Total liabilities and members’/partners’ equity

  $726,013  $617,696
  

  

  

  

Company’s share of equity

  $85,932  $98,997  $78,177  $85,932

Basis differential (2)

   2,854   2,908   2,778   2,854
  

  

  

  

Carrying value of the Company’s investments in unconsolidated joint ventures

  $88,786  $101,905  $80,955  $88,786
  

  

  

  


(1)At December 31, 2003, and 2002, the Company had a guarantee obligation outstanding with thea lender totaling approximately $1.4 million and $1.7 million, respectively, related to the re-tenanting of 265 Franklin Street. In addition,September 2004, the Company and its joint venture partner have agreed to guarantee up to $7.5 million and $22.5 million, respectively,obligation was released upon the refinancing of the construction loan on behalf of the 901 New York Avenue joint venture entity. The amounts guaranteed are subject to decrease (and elimination) upon the satisfaction of certain operating performance and financial measures. In the event the guarantee of the Company’s partner is unenforceable, the Company has agreed to satisfy its partner’s guarantee obligations. The Company’s partner has agreed to reimburse the Company for any amounts the Company pays in satisfaction of its partner’s guarantee obligations.mortgage loan.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has certain indebtedness guarantee obligations with lenders primarily related to rent shortfalls and re-tenanting costs. The Company and its partner in the 901 New York Avenue venture have agreed to guarantee up to $3.0 million and $9.0 million, respectively, of mortgage financing on behalf of the joint venture entity. The joint venture partner has pledged cash for its $9.0 million guarantee. The amounts guaranteed are subject to decrease (and elimination) upon the satisfaction of certain operating performance and financial measures.

The Company, with the other third-party joint venture partners in the Wisconsin Place ventures, have agreed to guarantee the seller financing totaling $23.5 million on behalf of the Land and Infrastructure Entity. The fair value of the Company’s stand-ready obligation related to the issuance of this guarantee is immaterial. The Company’s recourse under the guarantee is limited to the assets of the joint venture.

 

(2)This amount represents the aggregate difference between the Company’s historical cost basis reflected and the basis reflected at the joint venture level, which is typically amortized over the life of the related asset. Basis differentials occur primarily 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.

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

  Year Ended December 31,

Statements of Operations


  Year Ended December 31,

  2004

  2003

  2002

  2003

  2002

  2001

  (in thousands)  (in thousands)

Total revenue

  $89,027  $94,678  $80,813  $66,755  $89,027  $94,678

Expenses

                  

Operating

   27,212   26,534   23,024   21,241   27,212   26,534

Interest

   29,510   32,964   32,434   21,821   29,510   32,964

Depreciation and amortization

   18,082   17,058   13,557   14,928   18,082   17,058
  

  

  

  

  

  

Total expenses

   74,804   76,556   69,015   57,990   74,804   76,556
  

  

  

  

  

  

Net income

  $14,223  $18,122  $11,798  $8,765  $14,223  $18,122
  

  

  

  

  

  

Company’s share of net income

  $6,016  $7,954  $4,186  $3,380  $6,016  $7,954
  

  

  

  

  

  

 

6.    Mortgage Notes Payable

 

The Company had outstanding mortgage notes payable totaling approximately $3.5 billion and $4.3 billion as of December 31, 20032004 and 2002, respectively,2003, each collateralized by one or more buildings and related land included in real estate assets. The mortgage notes payable are generally due in monthly installments and mature at various dates through August 1, 2021.

 

Fixed rate mortgage notes payable totaled approximately $3.1 billion at December 31, 20032004 and 2002,2003, with interest rates ranging from 3.5% to 8.59% (averaging 7.0% and 7.17% at December 31, 20032004 and 2002,2003, respectively).

 

Variable rate mortgage notes payable (including construction loans payable) totaled approximately $375.5$423.8 million and $1.1 billion$375.5 million at December 31, 20032004 and 2002,2003, respectively, with interest rates ranging from 1.40%0.90% to 1.00% above the London Interbank Offered Rate (“LIBOR”) (LIBOR was 1.12%in 2004 and 1.38% at December 31, 2003 and 2002, respectively)ranging from 1.40% above LIBOR to 1.95% above LIBOR.LIBOR in 2003. As of December 31, 2004 and 2003, the LIBOR rate was 2.40% and 1.12%, respectively.

 

On April 14, 2003,January 23, 2004, the Company refinanced the mortgageits $493.5 million construction loan totaling $376.7 million that wasfacility collateralized by its Fivethe Times Square Tower property in New York City. The original mortgageold construction loan commitment was $420.0 million and the refinancing covered the loan proceeds of $376.7 million that had been advanced through that date. The new financing consisted of (1) approximately $139.7 million of cash borrowed under the Company’s revolving line of credit facility which borrowing was collateralized by the property and subsequently refinanced during May 2003 and (2) a mortgage loan of approximately $237.0 million (which was ultimately increased to $420.0 million in August 2003) which was collateralized by the property and an equivalent amount of the Company’s cash deposited in a cash collateral account with the mortgage lender. During the term of the mortgage loan, the balance in the cash collateral account was required to equal or exceed the outstanding borrowings on the mortgage loan. The mortgage loan bore interest at LIBOR plus 0.25% and was scheduled to mature on April 1, 2004. The refinancing enabled the Company to preserve transferable benefits of certain mortgage issuance costs. During the year ended December 31, 2003, the Company recognized a gain of approximately $4.8 million (net of minority interest share of approximately $1.0 million) in connection with the assumption of the $420.0 million mortgage loan by third parties and the transfer to such third parties of such related benefits. Simultaneously with the transfer of such benefits, the Company was released of its obligation to repay the $420.0 million mortgage loan and $420.0 million in the cash collateral account was paid to the third parties for their assumption of those payment obligations. The gain has been reported in the Company’s Consolidated Statement of Operations under the caption—Gains on Sales of Real Estate and Other Assets, Net of Minority Interest. See also Note 25—“Subsequent Events.”

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On June 30, 2003,plus 1.95% per annum and was scheduled to mature in November 2004. The refinanced construction loan facility totals $475.0 million and is comprised of two tranches. The first tranche of the refinanced construction loan facility consists of a $300.0 million loan commitment which bears interest at LIBOR plus 0.90% per annum and matures in January 2006. The first tranche includes a provision for a one-year extension at the option of the Company. The second tranche consists of a $175.0 million term loan which bears interest at LIBOR plus 1.00% per annum and matures in January 2007. At December 31, 2004, the outstanding balance under the refinanced construction loan facility was $423.8 million. This loan facility involves a syndicate of lenders. Accordingly, for those lenders that participated in both the original loan and the refinancing, the initial direct debt issuance costs and the costs incurred with the refinancing are being amortized over the term of the loan. Furthermore, for those lenders that did not participate in the refinancing, the Company agreed tohas reflected these amounts as an extinguishment, which did not have a modification with its lendersignificant impact on its $62.7 millionthe Company’s consolidated financial statements.

On March 1, 2004, the Company repaid the mortgage loan that is securedcollateralized by the Reservoir Place property in Waltham, Massachusetts.its One and Two Reston Overlook properties totaling approximately $65.8 million, together with a prepayment penalty totaling approximately $0.7 million. The mortgage loan prior to modification, bore interest at a fixed rate of 9.646%7.45% per annum and maturedwas scheduled to mature in November 2006. However, asAugust 2004.

On March 10, 2004, the debt was assumedCompany repaid the mortgage loans collateralized by its Lockheed Martin and recordedNIMA properties totaling approximately $24.5 million and $20.0 million, respectively, together with prepayment penalties aggregating approximately $5.6 million. The mortgage loans bore interest at fair value in connection with the original acquisitionfixed rates of the property, pursuant to the provisions of EITF 98-1, the effective interest rate for accounting purposes was 6.88%6.61% and 6.51% per annum, priorrespectively, and were scheduled to the modification. In connection with the modification, the Company made a principal payment of $9.1 million and incurred an up-front fee of $2.1 million. Following the modification, the mortgage loan bears interest at a fixed rate of 7.0% per annum and matures on July 1, 2009. As the modification was not considered substantially different, the fee and remaining unamortized premium will be amortized over the remaining term of the modified mortgage using the effective interest method.mature in June 2008.

 

In connection with the acquisition of the remaining outside interestsinterest in One Freedom Square and Two Freedom Square140 Kendrick Street in Reston, VirginiaNeedham, Massachusetts on August 5, 2003,March 24, 2004, the Company assumed the outside partner’s share of the mortgage loans securedloan collateralized by the properties of approximately $56.4 million and $35.4 million, respectively.$41.6 million. Immediately following the acquisition, One Freedom Square and Two Freedom Square140 Kendrick Street had total outstanding mortgage debt of $75.2 million and $70.7 million, respectively. Subsequent to the acquisition on August 5, 2003, the Company repaid in full the mortgage loan on the Two Freedom Square property totaling $70.7$55.5 million. Pursuant to the provisions of SFAS No. 141, the assumed mortgage debt assumed on the One Freedom Square property totaling approximately $75.2 million, bearing contractual interest at a fixed rate of 7.75%7.51% per annum was recorded at its fair value of approximately $84.3$62.1 million using an effective interest rate for accounting purposes of 5.33%5.2% per annum.

In connection with the acquisition of 1330 Connecticut Avenue in Washington, D.C. on April 1, 2004, the Company assumed the mortgage loan collateralized by the property of approximately $52.4 million. Pursuant to the provisions of SFAS No. 141 “Business Combinations” (“SFAS No. 141”), the assumed mortgage debt bearing contractual interest at a fixed rate of 7.58% per annum and maturing in February 2011 was recorded at its fair value of approximately $61.0 million using an effective interest rate of 4.65% per annum.

 

On September 4, 2003,24, 2004, the Company restructuredrefinanced the construction loan on its $87.9 million mortgage loan secured by the 601 and 651 Gateway Boulevard propertiesNew Dominion Technology Park, Building Two property located in South San Francisco, California.Herndon, Virginia. The original construction loan had an outstanding balance of $56.9 million, bore interest at 8.40%LIBOR plus 1.25% per annum and was scheduled to mature on October 1, 2010. In connection with the modification, the Company repaid $5.7 million of principal.in December 2005. The restructurednew mortgage loan of $82.2totaling $63.0 million requires monthlyinterest-only payments equal to the net cash flow from the property which will be allocated first to interest based on a rate of 3.50% per annum with the remainder applied to principal. The modified mortgage loan matures on September 1, 2006 with an option held by the lender, subject to certain conditions, to extend the term to October 1, 2010. If extended, the loan will require payments of principal and interest at a fixed interest rate of 8.00%5.55% per annum based on a 27-year amortization period.until it matures in October 2014. The loan provides for the payment of contingent interest up to a maximum of $10.8 million, under certain circumstances, during the extension period. The Company has not recognized any gain or loss as a result of the restructuring, and has accounted for the modified terms prospectively.refinancing as an extinguishment of debt, which did not have a significant impact on the Company’s consolidated financial statements.

 

TwoFour mortgage loans totaling $257.3 million at December 31, 2004 and a two mortgage loans totaling approximately $139.8 million at December 31, 2003 and a mortgage loan totaling approximately $69.3 million at December 31, 2002 have been accounted for at their fair values on the date the mortgage loans were assumed. The impact of using thesethis accounting methodsmethod decreased interest expense by $2.7 million, $1.3 million $2.2 million and $1.7$2.2 million for the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively. The cumulative liability related to these accounting methods was $11.6$24.1 million and $5.8$11.6 million at December 31, 20032004 and 2002,2003, respectively, and is included in mortgage notes payable.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Combined aggregate principal payments of mortgage notes payable at December 31, 20032004 are as follows:

 

   (in thousands)

2004

  $446,758

2005

   319,713

2006

   305,821

2007

   185,166

2008

   1,010,594

Thereafter

   1,203,348

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   (in thousands)

2005

  $279,029

2006

   557,123

2007

   362,318

2008

   974,758

2009

   188,278

Thereafter

   1,179,625

 

7.    Unsecured Senior Notes

 

The following summarizes the unsecured senior notes outstanding as of December 31, 20032004 (dollars in thousands):

 

  Coupon/
Stated Rate


 Effective
Rate (1)


 Principal
Amount


 Maturity
Date


  

Coupon/

Stated Rate


 Effective
Rate (1)


 Principal
Amount


 Maturity
Date (2)


10 Year Unsecured Senior Notes

  6.250% 6.296% $750,000  01/15/13  6.250% 6.296% $750,000  01/15/13

10 Year Unsecured Senior Notes

  6.250% 6.280%  175,000  01/15/13  6.250% 6.280%  175,000  01/15/13

12 Year Unsecured Senior Notes

  5.625% 5.636%  300,000  04/15/15  5.625% 5.636%  300,000  04/15/15

12 Year Unsecured Senior Notes

  5.000% 5.075%  250,000  06/01/15  5.000% 5.075%  250,000  06/01/15
   


    


 

Total principal

    1,475,000      1,475,000  

Net discount

    (4,680)     (4,317) 
   


    


 

Total

   $1,470,320     $1,470,683  
   


    


 

(1)Yield on issuance date including the effects of discounts on the notes.
(2)No principal amounts are due prior to maturity.

 

The indenture relating to the unsecured senior notes contains certain financial restrictions and requirements, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of greater than 1.50, and (4) an unencumbered asset value of not less than 150% of unsecured debt. At December 31, 20032004 and 2002,2003, the Company was in compliance with each of these financial restrictions and requirements.

 

8.    Unsecured Bridge Loan

During 2002, the Company obtained unsecured bridge financing totaling $1.0 billion (the “Unsecured Bridge Loan”) in connection with the acquisition of 399 Park Avenue. The Unsecured Bridge Loan required interest only payments at a per annum variable rate of Eurodollar + 1.45% with a maturity date in September 2003 and was pre-payable at any time prior to its maturity without a prepayment penalty. On January 17, 2003, the Company repaid the remaining balance outstanding under the Unsecured Bridge Loan and has no further ability to borrow additional funds under the Unsecured Bridge Loan.

The terms of the Unsecured Bridge Loan required that the Company maintain a number of customary financial and other covenants on an ongoing basis, including among other things, (1) an unsecured loan-to-value ratio against our total borrowing base not to exceed 55%, unless the Company’s leverage ratio exceeds 60%, in which case it is not to exceed 50%, (2) a secured debt leverage ratio not to exceed 55%, (3) a debt service coverage ratio of 1.40 for the Company’s borrowing base, or 1.50 if the Company’s leverage ratio equals or exceeds 60%, a fixed charge ratio of 1.30, and a debt service coverage ratio of 1.50 (4) a leverage ratio not to exceed 60%, however for five consecutive quarters (not including the two quarters prior to expiration) leverage can go to 65% (5) limitations on additional indebtedness and stockholder distributions, and (6) a minimum net worth requirement.

9.    Unsecured Line of Credit

 

On January 17, 2003, the Company extended its $605.0 million unsecured revolving credit facility (the “Unsecured Line of Credit”) for a three-year term expiring on January 17, 2006 with a provision for a one-year extension at the option of the Company, subject to certain conditions. Outstanding balances under the Unsecured Line of Credit bear interest at a per annum variable rate of Eurodollar +plus 0.70%. In addition, a facility fee equal to 20 basis points per annum is payable in quarterly installments. The interest rate and facility fee are subject to

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

adjustment in the event of a change in the Operating Partnership’s unsecured debt ratings. The Unsecured Line of Credit contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loan advances to the Company at a reduced Eurodollar rate. At December 31, 2004 and 2003, there was $0 and $63.0 million outstanding under the Unsecured Line of Credit. The Company had an outstanding balance on the Unsecured Line of Credit, of $173.9 million at December 31, 2002 of which approximately $146.9 million was collateralized by the Company’s 875 Third Avenue property and was included in Mortgage Notes Payable in the accompanying Consolidated Balance Sheets.respectively. The weighted-average balance outstanding was approximately $28.3$19.0 million and $15.2$28.3 million during the year ended December 31, 2004 and

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2003, and 2002, respectively. The weighted-average interest rate on amounts outstanding was approximately 1.87%1.83% and 3.03%1.87% during the year ended December 31, 20032004 and 2002,2003, respectively.

 

The terms of the Unsecured Line of Credit require that the Company maintain a number of customary financial and other covenants on an ongoing basis, including: (1) an unsecured loan-to-value ratio against our total borrowing base not to exceed 60%, unless our leverage ratio exceeds 60%, in which case it is not to exceed 55%, (2) a secured debt leverage ratio not to exceed 55%, (3) a debt service coverage ratio of at least 1.40 for our borrowing base properties, (4) a fixed charge coverage ratio of at least 1.30 and a debt service coverage ratio of at least 1.50, (5) a leverage ratio not to exceed 60%, however for five consecutive quarters (not including the two quarters prior to expiration) the leverage ratio can go to 65%, (6) limitations on additional indebtedness and stockholder distributions, and (7) a minimum net worth requirement. As of December 31, 20032004 and 2002,2003, the Company was in compliance with each of these financial and other covenant requirements.

 

10.9.    Commitments and Contingencies

General

 

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

 

The Company has letter of credit and performance obligations of approximately $16.5$19.5 million related to lender and development requirements.

The Company, with its other third-party joint venture partners, has agreed to guarantee the seller financing totaling $23.5 million on behalf of WP Project Developer LLC, the Land and Infrastructure Entity at Wisconsin Place.

 

The Company has certain indebtedness guarantee obligations with lenders primarily related to rent shortfalls and re-tenanting costs for certain properties. At December 31, 2003, theThe Company had a guarantee obligation outstanding totaling approximately $1.4 million related to the re-tenanting of an unconsolidated joint venture property. In addition, the Company and one of its joint venture partners havehas agreed to guarantee up to $7.5$3.0 million and $22.5 million, respectively, of a construction loanmortgage financing on behalf of a joint venture entity. The amountsamount guaranteed areis subject to decrease (and elimination) upon the satisfaction of certain operating performance and financial measures. In the event the guarantee of the Company’s partner is unenforceable, the Company has agreed to satisfy its guarantee obligations. The Company’s partner has agreed to reimburse the Company for any amounts the Company pays in satisfaction of its partner’s guarantee obligations.

 

The Company’s agreement for its Citigroup Center joint venture includes a provision whereby, after a certain specified time, the joint venture partner has the right to initiate a purchase or sale of its interest in the joint venture. Under this provision, the Company is compelled to purchase, at fair value, the joint venture partner’s interest. Certain of the Company’s other joint venture agreements generally include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

 

Concentrations of Credit Risk

 

Management of the Company performs ongoing credit evaluations of tenants and may require tenants to provide some form of credit support such as corporate guarantees and/or other financial guarantees. Although the Company’s properties are geographically diverse and the tenants operate in a variety of industries, to the extent

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the Company has a significant concentration of rental revenue from any single tenant, the inability of that tenant to make its lease payments could have an adverse effect on the Company.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

InsuranceSome potential losses are not covered by insurance.

 

The Company carries insurance coverage on its properties of types and in amounts and with deductibles that it believes are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act, or TRIA, was enacted in November 2002 to require regulated insurers to make available coverage for certified acts of terrorism (as defined by the statute) through December 31, 2004, subjectwhich date was extended to extensionDecember 31, 2005 by the United States Department of Treasury through December 31, 2005. The Federal Terrorism Risk Insurance Acton June 18, 2004. TRIA expires on December 31, 2005, unless extended, and therefore, the Company cannot currently anticipate whether the Actit will renew upon expiration. In connection with the renewal of coverage for the policy year beginning March 1, 2004, the Company is currently evaluating coverage on terms and amounts comparable to its existing policies, subject to cost and market availability.be extended. The Company’s current property insurance program provides an $890 million per occurrence limit for both “certified” and “non-certified” acts of terrorism as defined by TRIA. The Company also carries nuclear, biological and chemical terrorism insurance coverage carries(“NBC Coverage”) with a $640 million per occurrence limit includingfor “certified” acts of terrorism as defined by TRIA, which is provided by IXP, Inc. as a direct insurer. Under TRIA, this NBC Coverage is backstopped by the Federal Government after the payment of the required deductible and 10% coinsurance. This coverage provided by IXP expires on May 1, 2005. The Company currently intends to extend such coverage for certified actsso long as TRIA is in effect and is evaluating whether to increase the amount of terrorism. Additionally, the Company’s 2003 program provides $25 millioncoverage. In the event TRIA is not extended beyond December 31, 2005, (1) the NBC Coverage provided by IXP will terminate, and (2) the Company has the right to replace a portion of coverage for acts of terrorism other(other than thoseNBC Coverage) that would have constituted both “certified” underand “non-certified” acts of terrorism had TRIA not expired. The Company intends to continue to monitor the Federal Terrorism Risk Insurance Act.scope, nature and cost of available terrorism insurance and maintain insurance in amounts and on terms that are commercially reasonable.

 

The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes in an amount and subject to deductibles and self-insurance that it believes areis commercially reasonable. Specifically, the Company currently carries earthquake insurance which covers its San Francisco portfolio with a $120 million per occurrence limit and a $120 million aggregate limit, $20 million of which is provided by IXP, Inc., as a direct insurer by IXP, Inc.insurer. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. As a result of increased costs of coverage and decreasedlimited availability, the amount of third-party earthquake insurance that the Company may be able to purchase on commercially reasonable terms may be reduced. In addition, the Company may discontinue earthquake insurance on some or all of its properties in the future if the premiums exceed itsthe Company’s estimation of the value of the coverage.

 

In January 2002, the Company formed a wholly-owned taxable REIT subsidiary, IXP, Inc. (“IXP”), or IXP, to act as a captive insurance company and be one of the elements of the Company’sits overall insurance program. IXP acts as a primary carrierdirect insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco properties.properties and its NBC Coverage for “certified acts of terrorism” under TRIA. 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. 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 IXP’s 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.

 

The Company continues to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism in particular, but it can notcannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars acts of nuclear, biological or chemical terrorism or the presence of mold at the Company’s properties, for which the Companyit 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, it could lose the capital invested in

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the damaged properties, as well as the anticipated future revenuerevenues from those properties. Depending on the specific circumstances of each affected property, it is possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Legal Matters

 

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.

 

State and Local Tax Matters

 

Because the Company is organized and qualifies as a REIT, it is generally not subject to federal income taxes, but is subject to certain state and local taxes. In the normal course of business, certain entities through which the Company owns real estate either have undergone, or are currently undergoing, tax audits. Although the Company believes that it has substantial arguments in favor of its positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on the Company’s results of operations.

 

Environmental Matters

 

It is the Company’s policy to retain independent environmental consultants to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys in connection with respect to itsthe Company’s acquisition of properties. These pre-purchase environmental assessments have not revealed environmental conditions that the Company believes will have a material adverse effect on its business, assets, financial condition, results of operations or liquidity, and the Company is not otherwise aware of environmental conditions with respect to its properties that the Company believes would have such a material adverse effect. However, from time to time pre-existing environmental conditions at the Company’s properties have required and may in the future require environmental testing and/or regulatory filings, as well as remedial action.

 

For example, inIn February 1999, one of the Company’s affiliatesCompany (through a joint venture) acquired from Exxon Corporation a property in Massachusetts that was formerly used as a petroleum bulk storage and distribution facility and was known by the state regulatory authority to contain soil and groundwater contamination. The Company recently completed development ofdeveloped an office park on the property. The Company’s affiliateCompany engaged a specially licensed environmental consultant to oversee the management of contaminated soil and groundwater that was disturbed in the course of construction. Under the property acquisition agreement, Exxon agreed to (1) bear the liability arising from releases or discharges of oil and hazardous substances which occurred at the site prior to the Company’s ownership, (2) continue monitoring and/or remediating such releases and discharges as necessary and appropriate to comply with applicable requirements, and (3) indemnify the Company’s affiliateCompany for certain losses arising from preexisting site conditions. Any indemnity claim may be subject to various defenses, and there can be no assurance that the amounts paid under the indemnity, if any, would be sufficient to cover the liabilities arising from any such releases and discharges.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Environmental investigations at two of the Company’s properties in Massachusetts have identified groundwater contamination migrating from off-site source properties. In both cases the Company engaged a specially licensed environmental consultant to perform the necessary investigations and assessments and to prepare submittals to the state regulatory authority, including Downgradient Property Status Opinions. The environmental consultant concluded that the properties qualify for Downgradient Property Status under the state regulatory program, which eliminates certain deadlines for conducting response actions at a site. The Company also believes that these properties qualify for liability relief under certain statutory amendments regarding upgradient releases. Although the Company believes that the current or former owners of the upgradient source properties may ultimately be responsiblebear responsibility for some or all of the costs of addressing the identified groundwater contamination, the Company will take necessary further response actions (if any are required). NoOther than periodic testing, no such additional response actions are anticipated at this time.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company owns a property in Massachusetts where historic groundwater contamination was identified prior to acquisition. The Company engaged a specially licensed environmental consultant to perform investigations and to prepare necessary submittals to the state regulatory authority. The environmental consultant has concluded that (1) certain identified groundwater contaminants are migrating to the subject property from an off-site source property and (2) certain other detected contaminants are likely related to a historic release on the subject property. The Company has filed a Downgradient Property Status Opinion (described above) with respect to contamination migrating from off-site.off-site and a Response Action Outcome (“RAO”) with respect to the identified historic release. The consultantRAO indicates that regulatory closure has recommended conducting additional investigations, including the installation of off-site monitoring wells, to determine the naturebeen achieved and extent of contamination potentially associated with the historic use of the subject property. The Company has authorized such additional investigations and will take necessarythat no further response actions (if any are required).action is required at this time.

 

Some of the Company’s properties and certain properties owned by the Company’s affiliates are located in urban, industrial and other previously developed areas where fill or current or historical uses of the areas have caused site contamination. Accordingly, it is sometimes necessary to institute special soil and/or groundwater handling procedures and/or include particular building design features in connection with development, construction and other property operations in order to achieve regulatory closure andand/or ensure that contaminated materials are addressed in an appropriate manner. In these situations it is the Company’s practice to investigate the nature and extent of detected contamination and estimate the costs of required response actions and special handling procedures. The Company then uses this information as part of its decision-making process with respect to the acquisition and/or development of the property. For example, theThe Company owns a parcel in Massachusetts, formerly used as a quarry/asphalt batching facility, which the Company may develop in the future. Pre-purchase testing indicated that the site contains relatively low levels of certain contaminants. The Company has engaged a specially licensed environmental consultant to performmonitor environmental conditions at the site and prepare necessary regulatory submittals based on the results of an environmental risk characterization and prepare all necessary regulatory submittals.characterization. The Company anticipates that additional response actions necessary to achieve regulatory closure (if any) will be performed prior to or in connection with future constructiondevelopment activities. When appropriate, closure documentation will be submitted for public review and comment pursuant to the state regulatory authority’s public information process.

 

The Company expects that resolution of the environmental matters relating to the above will not have a material impact on its business, assets, financial condition, results of operations or liquidity. However, the Company cannot assure you that it has identified all environmental liabilities at its properties, that all necessary remediation actions have been or will be undertaken at the Company’s properties or that the Company will be indemnified, in full or at all, in the event that such environmental liabilities arise.

 

Development

The Company has three properties currently under construction. Commitments to complete these projects totaled approximately $183.9 million at December 31, 2003. Of the remaining commitment, $183.3 million of the costs will be covered under its existing construction loans.

Sale of Property

 

The Operating Partnership Agreement provides that, until June 23, 2007, the Operating Partnership may not sell or otherwise transfer three designated properties (or a property acquired pursuant to the disposition of a

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

designated property in a non-taxable transaction) in a taxable transaction without the prior written consent of Mr. Mortimer B. Zuckerman, Chairman of the Board of Directors, and Mr. Edward H. Linde, President and Chief Executive Officer. The Operating Partnership is not required to obtain their consent if each of them does not continue to hold at least a specified percentage30% of their original OP Units.interests in the Operating Partnership, or if those properties are transferred in a non-taxable event. In connection with the acquisition or contribution of 31 other Properties,27 properties, the Company entered into similar agreements for the benefit of the selling or contributing parties which specifically state the Operating Partnership will not sell or otherwise transfer the Properties in a taxable transactionthat until specified dates ranging from JuneNovember 2006 to April 2016, or ifsuch time as the contributors do not hold at least a specified percentage of theirthe OP Units.

BOSTON PROPERTIES, INC.Units owned by such person following the contribution of the properties, the Operating Partnership will not sell or otherwise transfer the properties in a taxable transaction.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.10.    Minority Interests

 

Minority interests relate to the interest in the Operating Partnership not owned by the Company and interests in a property partnershippartnerships not wholly-owned by the Company. As of December 31, 2003,2004, the minority interest in the Operating Partnership consisted of 22,365,94221,552,166 OP Units, 169,838 LTIP Units and 5,400,6614,082,335 Series Two Preferred Units (or 5,357,399 OP Units on an as converted basis) held by parties other than the Company.

 

The minority interestinterests in property partnership consistspartnerships consist of the outside equity interest in the ventureventures that ownsown Citigroup Center. This venture isCenter and the Office Entity at Wisconsin Place. These ventures are consolidated with the financial results of the Company because the Company exercises control over the entityentities that ownsown the property.properties. The equity interestinterests in the ventureventures that isare not owned by the Company, totaling approximately $27.6$26.9 million and $29.9$27.6 million at December 31, 2004 and 2003, and 2002, respectively, isare included in Minority Interests on the accompanying Consolidated Balance Sheets. The minority interest holder’s share of income for Citigroup Center is reflective of the Company’s preferential return on and of its capital.

 

On July 9, 2002, the Company issued 1,066,229 shares of Common Stock with a fair value of approximately $41.2 million on the date of issuance, as a resultMay 4, 2004, 1,070,437 Series Two Preferred Units of the conversion of 812,469Company’s Operating Partnership were converted by the holders into 1,404,772 OP Units. During August 2004 and November 2004, 205,525 and 42,365 Series Two Preferred Units of the Company’s Operating Partnership were converted by the holders into 1,066,229269,717 and 55,595 OP Units, whichrespectively. The OP Units were immediately acquiredsubsequently presented by Boston Properties, Inc.the holders for redemption and were redeemed by the Company in exchange for an equal number of shares of Common Stock. TheseThe aggregate book value of the Preferred Units that were converted, had a book value of approximately $20.8 millionas measured for each Preferred Unit on the date of conversion.its conversion, was approximately $43.6 million. The difference between the effectiveaggregate book value and the purchase price of the minority interest and the book valuethese Preferred Units was approximately $20.4$40.2 million, which increased the recorded value of the underlying real estate.Company’s net assets. In addition, the Company paid the accrued preferred distributions due to the holders of Preferred Units that were converted.

 

The Preferred Units at December 31, 20032004 consist of 5,400,6614,082,335 Series Two Preferred Units of limited partnership in the Operating Partnership (the “Series Two Preferred Units”), which bear a preferred distribution at the greater of the distribution rate payable to common unitholders or an increasing rate, ranging from 5.00% to 7.00% per annum on a liquidation preference of $50.00 per unit, and are convertible into OP Units at a rate of $38.10 per Preferred Unit. Distributions to holders of Preferred Units are recognized on a straight-line basis that approximates the effective interest method.

12.    Stockholders’ Equity

As of December 31, 2003, the Company had 98,230,177 shares of Common Stock and no shares of Series A Convertible Redeemable Preferred Stock (the “Preferred Stock”) outstanding.

On July 9, 2002, the Company issued 2,624,671 shares of Common Stock as a result of the conversion of all of the Company’s 2,000,000 shares of Preferred Stock. In addition, the Company paid the accrued preferred dividends due to the holders of the Preferred Stock.

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13.11.    Stockholders’ Equity

As of December 31, 2004, the Company had 110,320,485 shares of Common Stock outstanding.

On March 3, 2004, the Company completed a public offering of 5,700,000 shares of its Common Stock at a price to the public of $51.40 per share. The proceeds from this public offering, net of underwriters’ discount and offering costs, totaled approximately $291.0 million.

During the years ended December 31, 2004 and 2003, the Company issued 2,540,452 and 225,337 shares of its Common Stock, respectively, as a result of the redemption of OP Units.

During the years ended December 31, 2004 and 2003, the Company issued 3,815,074 and 2,452,791 shares of its Common Stock, respectively, as a result of the exercising of employee stock options.

12.    Future Minimum Rents

 

The Properties are leased to tenants under net operating leases with initial term expiration dates ranging from 20042005 to 2029. The future minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of December 31, 2003,2004, under non-cancelable operating leases (including leases for properties under development), which expire on various dates through 2029, are as follows:

 

Years Ending December 31,


  (in thousands)

2004

  $961,617

2005

   902,180

2006

   829,595

2007

   752,637

2008

   695,550

Thereafter

   3,583,873

The geographic concentration of the future minimum lease payments to be received is detailed as follows:

Location


  (in thousands)

Midtown Manhattan

  $4,050,113

Greater Boston

   1,414,208

Greater Washington, DC

   1,284,159

Greater San Francisco

   705,946

New Jersey and Pennsylvania

   271,026

Years Ending December 31,


  (in thousands)

2005

  $1,033,210

2006

   1,022,277

2007

   961,701

2008

   909,208

2009

   843,608

Thereafter

   4,786,416

 

No onesingle tenant represented more than 10.0% of the Company’s total rental revenue for the years ended December 31, 2004, 2003 2002 and 2001.2002.

BOSTON PROPERTIES, INC.

 

14.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.    Segment Reporting

 

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

 

Asset information by segment is not reported because the Company does not use this measure to assess performance. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income, development and management services, general and administrative expenses, interest expense, depreciation and amortization expense, net derivative losses, losses from early extinguishments of debt and losses from investments in securities are not included in Net Operating Income as the internal reporting addresses these items on a corporate level.

 

Net Operating Income is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate Net Operating Income in the same manner. The Company considers Net Operating Income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of the Company’s properties. During 2003 and 2004, the revenue and expenses of the hotel properties have been included in the operations of the Company. During 2002, the operations of the hotel properties were reflected as a net lease payment in rental revenue and real estate tax expense in property operating expenses.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Information by geographic area and property type (dollars in thousands):

 

For the year ended December 31, 2003:2004:

 

   Greater
Boston


  Greater
Washington,
D.C.


  Midtown
Manhattan


  Greater
San
Francisco


  

New Jersey

and
Pennsylvania


  Total

 

Rental Revenue:

                         

Class A Office

  $279,000  $204,143  $433,664  $206,305  $70,645  $1,193,757 

Office/Technical

   8,724   13,254   —     1,679   —     23,657 

Industrial

   597   —     —     387   767   1,751 

Hotels

   70,083   —     —     —     —     70,083 
   


 


 


 


 


 


Total

   358,404   217,397   433,664   208,371   71,412   1,289,248 

% of Grand Totals

   27.80%  16.86%  33.64%  16.16%  5.54%  100.00%

Rental Expenses:

                         

Class A Office

   101,728   56,180   132,491   77,757   26,378   394,534 

Office/Technical

   2,031   3,115   —     405   —     5,551 

Industrial

   373   —     —     41   140   554 

Hotels

   52,250   —     —     —     —     52,250 
   


 


 


 


 


 


Total

   156,382   59,295   132,491   78,203   26,518   452,889 

% of Grand Totals

   34.53%  13.09%  29.25%  17.27%  5.86%  100.00%
   


 


 


 


 


 


Net operating income

  $202,022  $158,102  $301,173  $130,168  $44,894  $836,359 
   


 


 


 


 


 


% of Grand Totals

   24.16%  18.90%  36.01%  15.56%  5.37%  100.00%

For the year ended December 31, 2002:

  Greater
Boston


 Greater
Washington,
D.C.


 Midtown
Manhattan


 Greater
San
Francisco


 

New Jersey

and
Pennsylvania


 Total

   Greater
Boston


 Greater
Washington,
D.C.


 Midtown
Manhattan


 Greater
San
Francisco


 New
Jersey


 Total

 

Rental Revenue:

      

Class A Office

  $266,930  $217,928  $313,788  $220,153  $66,725  $1,085,524   $286,578  $240,645  $478,652  $195,560  $69,051  $1,270,486 

Office/Technical

   8,230   13,319   —     1,899   —     23,448    8,525   14,144   —     134   —     22,803 

Industrial

   1,019   —     —     421   762   2,202    3   —     —     —     —     3 

Hotels

   57,489   —     —     —     —     57,489    76,342   —     —     —     —     76,342 
  


 


 


 


 


 


  


 


 


 


 


 


Total

   333,668   231,247   313,788   222,473   67,487   1,168,663    371,448   254,789   478,652   195,694   69,051   1,369,634 

% of Grand Totals

   28.55%  19.79%  26.85%  19.04%  5.77%  100.00%   27.12%  18.60%  34.95%  14.29%  5.04%  100.00%

Rental Expenses:

      

Class A Office

   99,653   60,501   97,203   77,222   25,072   359,651    98,480   66,505   147,127   73,894   27,587   413,593 

Office/Technical

   1,787   2,525   —     387   —     4,699    1,997   2,979   —     36   —     5,012 

Industrial

   332   —     —     39   139   510    417   —     —     —     —     417 

Hotels

   34,273   —     —     —     —     34,273    55,724   —     —     —     —     55,724 
  


 


 


 


 


 


  


 


 


 


 


 


Total

   136,045   63,026   97,203   77,648   25,211   399,133    156,618   69,484   147,127   73,930   27,587   474,746 

% of Grand Totals

   34.09%  15.79%  24.35%  19.45%  6.32%  100.00%   32.99%  14.64%  30.99%  15.57%  5.81%  100.00%
  


 


 


 


 


 


  


 


 


 


 


 


Net operating income

  $197,623  $168,221  $216,585  $144,825  $42,276  $769,530   $214,830  $185,305  $331,525  $121,764  $41,464  $894,888 
  


 


 


 


 


 


  


 


 


 


 


 


% of Grand Totals

   25.68%  21.86%  28.15%  18.82%  5.49%  100.00%   24.01%  20.71%  37.04%  13.61%  4.63%  100.00%

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the year ended December 31, 2001:2003:

 

  Greater
Boston


 Greater
Washington,
D.C.


 Midtown
Manhattan


 Greater
San
Francisco


 New Jersey
and
Pennsylvania


 Total

   Greater
Boston


 Greater
Washington,
D.C.


 Midtown
Manhattan


 Greater
San
Francisco


 New
Jersey


 Total

 

Rental Revenue:

      

Class A Office

  $226,573  $216,236  $180,360  $213,950  $65,689  $902,808   $278,033  $196,295  $433,875  $206,534  $70,694  $1,185,431 

Office/Technical

   7,837   13,189   —     2,022   —     23,048    8,603   12,937   —     1,679   —     23,219 

Industrial

   1,199   677   —     383   724   2,983    596   —     —     —     —     596 

Hotels

   32,330   —     —     —     —     32,330    70,083   —     —     —     —     70,083 
  


 


 


 


 


 


  


 


 


 


 


 


Total

   267,939   230,102   180,360   216,355   66,413   961,169    357,315   209,232   433,875   208,213   70,694   1,279,329 

% of Grand Totals

   27.88%  23.94%  18.76%  22.51%  6.91%  100.00%   27.93%  16.35%  33.91%  16.28%  5.53%  100.00%

Rental Expenses:

      

Class A Office

   82,919   57,288   63,659   74,930   23,825   302,621    101,236   53,727   132,492   77,757   26,376   391,588 

Office/Technical

   1,871   2,344   —     357   —     4,572    2,031   2,908   —     404   —     5,343 

Industrial

   425   260   —     40   122   847    378   —     —     —     —     378 

Hotels

   5,781   —     —     —     —     5,781    52,250   —     —     —     —     52,250 
  


 


 


 


 


 


  


 


 


 


 


 


Total

   90,996   59,892   63,659   75,327   23,947   313,821    155,895   56,635   132,492   78,161   26,376   449,559 

% of Grand Totals

   29.00%  19.08%  20.29%  24.00%  7.63%  100.00%   34.68%  12.60%  29.47%  17.39%  5.86%  100.00%
  


 


 


 


 


 


  


 


 


 


 


 


Net operating income

  $176,943  $170,210  $116,701  $141,028  $42,466  $647,348   $201,420  $152,597  $301,383  $130,052  $44,318  $829,770 
  


 


 


 


 


 


  


 


 


 


 


 


% of Grand Totals

   27.33%  26.29%  18.03%  21.79%  6.56%  100.00%   24.28%  18.39%  36.32%  15.67%  5.34%  100.00%

For the year ended December 31, 2002:

   Greater
Boston


  Greater
Washington,
D.C.


  Midtown
Manhattan


  Greater
San
Francisco


  New
Jersey


  Total

 

Rental Revenue:

                         

Class A Office

  $266,098  $210,575  $313,768  $220,162  $66,730  $1,077,333 

Office/Technical

   8,230   12,140   —     1,899   —     22,269 

Industrial

   1,019   —     —     —     —     1,019 

Hotels

   57,131   —     —     —     —     57,131 
   


 


 


 


 


 


Total

   332,478   222,715   313,768   222,061   66,730   1,157,752 

% of Grand Totals

   28.72%  19.24%  27.10%  19.18%  5.76%  100.00%

Rental Expenses:

                         

Class A Office

   99,157   58,199   97,193   77,247   25,071   356,867 

Office/Technical

   1,787   2,366   —     387   —     4,540 

Industrial

   332   —     —     —     —     332 

Hotels

   34,273   —     —     —     —     34,273 
   


 


 


 


 


 


Total

   135,549   60,565   97,193   77,634   25,071   396,012 

% of Grand Totals

   34.23%  15.29%  24.54%  19.61%  6.33%  100.00%
   


 


 


 


 


 


Net operating income

  $196,929  $162,150  $216,575  $144,427  $41,659  $761,740 
   


 


 


 


 


 


% of Grand Totals

   25.85%  21.29%  28.43%  18.96%  5.47%  100.00%

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a reconciliation of net operating income to net income available to common shareholders (in

(in thousands):

 

   Years ended December 31,

   2003

  2002

  2001

Net operating income

  $836,359  $769,530  $647,348

Add:

            

Development and management services

   17,347   10,748   12,167

Interest and other

   3,033   5,504   12,183

Minority interests in property partnerships

   1,604   2,171   1,194

Income from unconsolidated joint ventures

   6,016   7,954   4,186

Gains on sales of real estate and other assets, net of minority interest

   57,574   186,810   6,505

Gains on sales of land held for development, net of minority interest

   —     3,633   2,584

Income from discontinued operations, net of minority interest

   2,176   15,310   24,512

Gains on sales of real estate from discontinued operations, net of minority interest

   73,234   25,345   —  

Less:

            

General and administrative

   45,359   47,292   38,312

Interest expense

   299,436   263,067   211,391

Depreciation and amortization

   210,072   179,726   143,460

Net derivative losses

   1,038   11,874   26,488

Loss from early extinguishments of debt

   1,474   2,386   —  

Loss on investments in securities

   —     4,297   6,500

Minority interest in Operating Partnership

   74,642   73,980   69,729

Cumulative effect of a change in accounting principle, net of minority interest

   —     —     6,767

Preferred dividend

   —     3,412   6,592
   

  

  

Net income available to common shareholders

  $365,322  $440,971  $201,440
   

  

  

BOSTON PROPERTIES, INC.

   Years ended December 31,

   2004

  2003

  2002

Net operating income

  $894,888  $829,770  $761,740

Add:

            

Development and management services

   20,464   17,347   10,748

Interest and other

   10,367   3,033   5,504

Minority interests in property partnerships

   4,685   1,827   2,408

Income from unconsolidated joint ventures

   3,380   6,016   7,954

Gains on sales of real estate and other assets, net of minority interest

   8,149   57,574   186,810

Gains on sales of land held for development, net of minority interest

   —     —     3,633

Income from discontinued operations, net of minority interest

   1,240   6,102   20,220

Gains on sales of real estate from discontinued operations, net of minority interest

   27,338   73,234   25,345

Less:

            

General and administrative

   53,636   45,359   47,292

Interest expense

   306,170   299,436   263,067

Depreciation and amortization

   252,256   208,490   178,163

Net derivative losses

   —     1,038   11,874

Loss from early extinguishments of debt

   6,258   1,474   2,386

Loss on investments in securities

   —     —     4,297

Minority interest in Operating Partnership

   68,174   73,784   72,900

Preferred dividend

   —     —     3,412
   

  

  

Net income available to common shareholders

  $284,017  $365,322  $440,971
   

  

  

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Loss14. Losses from Early Extinguishments of Debt

 

In accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” effective for fiscal years beginning after May 15, 2002, any gain or loss on extinguishments of debt in prior periods that do not meet the criteria in APB Opinion No. 30 for classification as an extraordinary items shall be reclassified. During the years ended December 31, 2004, 2003 and 2002, the Company recognized approximately $6.3 million, $1.5 million and $2.4 million, respectively, related to the early extinguishments of debt, consisting primarily of payments of prepayment fees and the write-off of unamortized deferred financing costs. There were no losses from early extinguishments of debt during the year ended December 31, 2001. These amounts have been reclassified from extraordinary items to “Losses from early extinguishment of debt” in the Consolidated Statements of Operations.

 

16.15. Earnings Per Share

 

Earnings per share (“EPS”) has been computed pursuant to the provisions of SFAS No. 128. The following table provides a reconciliation of both the net income and the number of common shares used in the computation of basic EPS, which utilizesis calculated by dividing net income available to common shareholders by the weighted averageweighted-average number of common shares outstanding without regardduring the period. During the year ended December 31, 2004, the Company adopted EITF 03-6 “Participating Securities and the Two-Class Method under FASB 128” (“EITF 03-6”), which provides further guidance on the definition of participating securities. Pursuant to EITF 03-6, certain of the Operating Partnership’s preferred securities, which are reflected as Minority Interests in the Company’s Consolidated Balance Sheets, are considered participating securities and are included in the computation of basic and diluted earnings per share of both the Company and the Operating Partnership if the effect of applying the if-converted method is dilutive. The preferred securities issued by the Operating Partnership enable the holders to obtain common units of the Operating Partnership, as well as common stock of the Company. Accordingly, for the reporting periods in which the Operating Partnership’s net income is in excess of distributions paid on the OP Units, LTIP Units, Series A Preferred Stock, Series Two Preferred Units and Series Three Preferred Units, such income is allocated to the dilutive potential common shares,OP Units, LTIP Units, Series A Preferred Stock, Series Two Preferred Units and diluted EPS, which includes all shares, as applicable.

   

For the year ended December 31, 2003

(in thousands, except for per share amounts)


 
   Income
(Numerator)


  Shares
(Denominator)


  Per Share
Amount


 

Basic Earnings Per Share:

            

Income available to common shareholders before discontinued operations

  $289,912  96,900  $2.99 

Discontinued operations, net of minority interest

   75,410  —     0.78 
   

  
  


Net income available to common shareholders

   365,322  96,900   3.77 

Effect of Dilutive Securities:

            

Stock Options and Other

   —    1,586   (0.06)
   

  
  


Diluted Earnings Per Share

            

Income available to common shareholders

  $365,322  98,486  $3.71 
   

  
  


   

For the year ended December 31, 2002

(in thousands, except for per share amounts)


 
   Income
(Numerator)


  Shares
(Denominator)


  Per Share
Amount


 

Basic Earnings Per Share:

            

Income available to common shareholders before discontinued operations

  $400,316  93,145  $4.30 

Discontinued operations, net of minority interest

   40,655  —     0.43 
   

  
  


Net income available to common shareholders

   440,971  93,145   4.73 

Effect of Dilutive Securities:

            

Stock Options and Other

   155  1,467   (.07)
   

  
  


Diluted Earnings Per Share

            

Income available to common shareholders

  $441,126  94,612  $4.66 
   

  
  


Series

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

For the year ended December 31, 2001

(in thousands, except for per share amounts)


 
   Income
(Numerator)


  Shares
(Denominator)


  Per Share
Amount


 

Basic Earnings Per Share:

            

Income available to common shareholders before discontinued operations and cumulative effect of a change in accounting principle

  $183,695  90,002  $2.04 

Discontinued operations, net of minority interest

   24,512  —     0.27 

Cumulative effect of a change in accounting principle, net of minority interest

   (6,767) —     (0.07)
   


 
  


Net income available to common shareholders

   201,440  90,002   2.24 

Effect of Dilutive Securities:

            

Stock Options and Other

   244  2,198   (.05)
   


 
  


Diluted Earnings Per Share

            

Income available to common shareholders

  $201,684  92,200  $2.19 
   


 
  


Three Preferred Units in proportion to their respective interests and the impact is included in the Company’s consolidated basic and diluted earnings per share computation due to its holding of the Operating Partnership’s securities. Prior periods of the Operating Partnership and the Company have been restated to conform to the provisions of EITF 03-6. For the years ended December 31, 2003 and 2002, approximately $6.2 million and $15.6 million, respectively, were allocated to the Series A Preferred Stock, Series Two Preferred Units and Series Three Preferred Units, as applicable, in excess of distributions paid during the reporting period and are included in the Operating Partnership’s and the Company’s computation of basic and diluted earnings per share. There were no amounts required to be allocated to the Series Two Preferred Units for the year ended December 31, 2004. Other potentially dilutive common shares, including securities of the Operating Partnership that are convertible into the Company’s common stock, and the related impact on earnings, are considered when calculating diluted EPS.

   For the year ended December 31, 2004

 
   Income  Shares  Per Share 
   (Numerator)

  (Denominator)

  Amount

 
   (in thousands, except for per share amounts) 

Basic Earnings:

            

Income available to common shareholders before discontinued operations and allocation of undistributed earnings of Series Two Preferred Units

  $255,439  106,458  $2.40 

Discontinued operations, net of minority interest

   28,578  —     0.27 

Allocation of undistributed earnings of Series Two Preferred Units

   (58) —     —   
   


 
  


Net income available to common shareholders

   283,959  106,458   2.67 

Effect of Dilutive Securities:

            

Stock Based Compensation

   —    2,304   (0.06)
   


 
  


Diluted Earnings:

            

Net income

  $283,959  108,762  $2.61 
   


 
  


   For the year ended December 31, 2003

 
   Income  Shares  Per Share 
   (Numerator)

  (Denominator)

  Amount

 
   (in thousands, except for per share amounts) 

Basic Earnings:

            

Income available to common shareholders before discontinued operations and allocation of undistributed earnings of Series Two Preferred Units

  $285,986  96,900  $2.95 

Discontinued operations, net of minority interest

   79,336  —     0.82 

Allocation of undistributed earnings of Series Two Preferred Units

   (6,201) —     (0.06)
   


 
  


Net income available to common shareholders

   359,121  96,900   3.71 

Effect of Dilutive Securities:

            

Stock Based Compensation

   —    1,586   (0.06)
   


 
  


Diluted Earnings:

            

Net income

  $359,121  98,486  $3.65 
   


 
  


BOSTON PROPERTIES, INC.

 

17.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   For the year ended December 31, 2002

 
   Income  Shares  Per Share 
   (Numerator)

  (Denominator)

  Amount

 
   (in thousands, except for per share amounts) 

Basic Earnings:

            

Income available to common shareholders before discontinued operations and allocation of undistributed earnings of Series A Preferred Stock and Series Two and Three Preferred Units

  $395,406  93,145  $4.25 

Discontinued operations, net of minority interest

   45,565  —     0.49 

Allocation of undistributed earnings of Series A Preferred Stock and Series Two and Three Preferred Units

   (15,579) —     (0.17)
   


 
  


Net income available to common shareholders

   425,392  93,145   4.57 

Effect of Dilutive Securities:

            

Stock Based Compensation and other

   155  1,467   (0.07)
   


 
  


Diluted Earnings:

            

Net income

  $425,547  94,612  $4.50 
   


 
  


16. Employee Benefit Plan

 

Effective January 1, 1985, the predecessor of the Company adopted a 401(k) Savings Plan (the “Plan”) for its employees. Under the Plan, as amended, employees, as defined, are eligible to participate in the Plan after they have completed three months of service. Upon formation, the Company adopted the Plan and the terms of the Plan.

 

Effective January 1, 2000, the Company amended the Plan by increasing the Company’s matching contribution to 200% of the first 3% from 200% of the first 2% of participant’s eligible earnings contributed (utilizing earnings that are not in excess of $200,000, indexed for inflation) and by eliminating the vesting requirement.

The Plan provides that matching employer contributions are to be determined at the discretion of the Company. The Company’s matching contribution for the years ended December 31, 2004, 2003 and 2002 and 2001 was $2.2 million, $1.9 million $2.0 million and $1.8$2.0 million, respectively.

 

Effective January 1, 2001, the Company amended the Plan to provide a supplemental retirement contribution to employees who have at least ten years of service on January 1, 2001, and who are 40 years of age or older as of January 1, 2001. The maximum supplemental retirement contribution will not exceed the annual limit on contributions established by the Internal Revenue Service. The Company will record an annual supplemental retirement credit for the benefit of each participant. The Company’s supplemental retirement contributionscontribution and credit for the years ended December 31, 2004, 2003 and 2002 was $167,000, $164,000 and 2001 was $56,446, $37,169 and $37,665,$157,000, respectively.

 

The Company also maintains a deferred compensation plan that is designed to allow certain officers of the Company to defer a portion of their current income on a pre-tax basis and receive a tax-deferred return on these deferrals. The Company’s obligation under the plan is that of an unsecured promise to pay the deferred compensation to the plan participants in the future. TheAt December 31, 2004 and 2003, the Company has funded approximately $3.5 million and $2.0 million, respectively, into a separate account, which is currently setting aside funds in ordernot restricted as to meet its future obligations under the plan.

use. The Company’s liability under the plan is equal to the total amount of compensation deferred by the plan participants and earnings on the deferred compensation pursuant to investments elected by the plan participants. The Company’s liability as of December 31, 2004 and 2003 was $3.4 million and 2002 was $2.0 million, and $0.5 million, respectively.respectively, which are included in the accompanying Consolidated Balance Sheets.

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

18.17.    Stock Option and Incentive Plan and Stock Purchase Plan

 

The Company has established a stock option and incentive plan for the purpose of attracting and retaining qualified employees and rewarding them for superior performance in achieving the Company’s business goals and enhancing stockholder value.

 

Under the plan, the number of shares of Common Stock available for issuance is 17,069,66514,699,162 shares plus as of the first day of each calendar quarter after January 1, 2000, 9.5% of any net increase since the first day of the preceding calendar quarter in the total number of shares of Common Stock outstanding, on a fully converted basis (excluding Preferred Stock). At December 31, 2003,2004, the number of shares available for issuance under the plan was 3,553,755.4,361,841.

 

Options granted under the plan becomebecame exercisable over a two, three or five year period and have terms of ten years.years, as determined at the time of the grant. All options were granted at the fair market value of the Company’s Common Stock at the dates of grant. All outstanding options will become vested on January 17, 2005.

 

The Company issued 174,451,32,585, 175,303 and 52,750 and 44,842 shares of restricted stock and 166,430, 3,408 and 0 LTIP Units under the plan during the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively. The shares of restricted stock were valued at approximately $6.0$1.6 million ($35.2049.88 per share)share weighted-average), $6.2 million ($35.23 per share weighted-average) and $2.0 million ($37.70 per share) and $1.8 million ($40.75 per share) for the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively. The LTIP Units were valued at approximately $8.3 million ($49.82 per share weighted-average) and $0.1 million ($41.05 per share) for the years ended December 31, 2004 and 2003, respectively. An LTIP Unit is generally the economic equivalent of a share of restricted stock granted in 2002the Company. The aggregate value of the LTIP Units is not included in Unearned Compensation within Stockholders’ Equity as such securities are those of the Operating Partnership and 2001 vestshave been included in Minority Interests in the Consolidated Balance Sheets. Employees vest in restricted stock and LTIP Units over a five-year period, with one-fifthterm. Restricted stock and LTIP Units are measured at fair value on the date of grant based on the number of shares or units granted and the price of the shares vesting each year and has been recognized net of amortization as unearned compensationCompany’s Common Stock on the consolidated balance sheets. Thedate of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. Dividends paid on both vested and unvested shares of restricted stock grantedare charged directly to Earnings in 2003 will generally be expensed ratably as suchExcess of Dividends in the Consolidated Balance Sheets. Stock-based compensation expense associated with restricted stock vests over the five-year vesting period. Compensation expense related to the restricted stock totaledand LTIP Units was approximately $4.0 million, $2.2 million $1.2 million, and $0.6$1.2 million for the years ended December 31, 2004, 2003 and 2002, and 2001, respectively.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A summary of the status of the Company’s stock options as of December 31, 2004, 2003 2002 and 20012002 and changes during the years ended December 31, 2004, 2003 2002 and 20012002 are presented below:

 

  Shares

 Weighted
Average
Exercise
Price


  Shares

 Weighted
Average
Exercise
Price


Outstanding at January 1, 2001

  8,101,682  $31.15

Granted

  3,247,250  $41.60

Exercised

  (406,371) $30.40

Canceled

  (35,003) $33.60
  

 

Outstanding at December 31, 2001

  10,907,558  $34.28

Outstanding at January 1, 2002

  10,907,558  $34.28

Granted

  1,423,000  $37.73  1,423,000  $37.73

Exercised

  (329,704) $30.28  (329,704) $30.28

Canceled

  (38,509) $37.13  (38,509) $37.13
  

 

  

 

Outstanding at December 31, 2002

  11,962,345  $34.80  11,962,345  $34.80

Granted

  —     —    —     —  

Exercised

  (2,452,791) $29.77  (2,452,791) $29.77

Canceled

  (69,874) $38.60  (69,874) $38.60
  

 

  

 

Outstanding at December 31, 2003

  9,439,680  $36.08  9,439,680  $36.08

Granted

  —     —  

Exercised

  (3,814,274) $33.14

Canceled

  (25,532) $37.26
  

 

  

 

Outstanding at December 31, 2004

  5,599,874  $38.08
  

 

 

There were no options granted during the year ended December 31, 2003. The per share weighted-average fair value of options granted was $3.31 and $5.01 for the yearsyear ended December 31, 2002 and 2001, respectively.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2002. The per share fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2002 and 2001.2002.

 

   2002

  2001

Dividend yield

  6.47%  5.72%

Expected life of option

  6 Years  6 Years

Risk-free interest rate

  3.32%  5.13%

Expected stock price volatility

  20%  20%
2002

Dividend yield

6.47%

Expected life of option

6 Years

Risk-free interest rate

3.32%

Expected stock price volatility

20%

 

The following table summarizes information about stock options outstanding at December 31, 2003:2004:

 

Options Outstanding


Options Outstanding


 

Options Exercisable


Options Outstanding


 

Options Exercisable


Range of Exercise
Prices


 

Number
Outstanding at
12/31/03


 

Weighted-Average
Remaining
Contractual Life


 

Weighted-Average
Exercise Price


 

Number Exercisable
at 12/31/03


 

Weighted-Average
Exercise Price


 

Number
Outstanding at
12/31/04


 

Weighted-Average
Remaining
Contractual Life


 

Weighted-Average
Exercise Price


 

Number Exercisable
at 12/31/04


 

Weighted-Average
Exercise Price


$25.00-$36.81

 5,084,634 4.51 Years $32.29 5,084,634 $32.29 1,821,860 3.88 Years $32.73 1,821,860 $32.73

$37.70-$42.12

 4,355,046 7.36 Years $40.50 2,486,021 $40.97 3,778,014 6.34 Years $40.66 3,374,306 $41.01

 

In addition, the Company had 8,549,1047,570,655 and 4,999,3468,549,104 options exercisable at weighted-average exercise prices of $33.43$35.14 and $31.37$33.43 at December 31, 20022003 and 2001,2002, respectively.

 

The Company adopted the 1999 Non-Qualified Employee Stock Purchase Plan (the “Stock Purchase Plan”) to encourage the ownership of Common Stock by eligible employees. The Stock Purchase Plan became effective on January 1, 1999 with an aggregate maximum of 250,000 shares of Common Stock available for issuance. The Stock Purchase Plan provides for eligible employees to purchase at the end of the biannual purchase periods shares of Common Stock forat a purchase price equal to 85% of the average closing priceprices of the Common Stock during the last ten business days of the purchase period. The Company issued 11,125, 12,383 and 8,595 and 8,538 shares

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

with the weighted average fair value of the purchase rightprice equal to $41.54 per share, $33.24 per share $33.09 per share and $36.02$33.09 per share under the Stock Purchase Plan as of December 31, 2004, 2003 2002 and 2001,2002, respectively.

 

The Company applies Accounting Practice Bulletin Opinion No. 25 and related interpretations in accounting for its stock option and stock purchase plan. Accordingly, no compensation cost has been recognized.

 

The Company’s share of compensation cost under SFAS No. 123, as amended by SFAS No. 148, for the stock performance-based plan would have been $7.0$1.6 million, $9.4$5.8 million and $11.7$7.7 million for the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively. Had compensation cost for the Company’s grants for stock-based compensation plans been determined consistent with SFAS No. 123, as amended by SFAS No. 148, the Company’s net income, and net income per common share for the years ended December 31, 2004, 2003 2002 and 20012002 would approximate the pro forma amounts below:

 

   2003

  2002

  2001

Net income (in thousands)

  $359,558  $433,274  $191,973

Net income per common share—basic

  $3.71  $4.65  $2.13

Net income per common share—diluted

  $3.65  $4.58  $2.08

The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to future anticipated awards.

BOSTON PROPERTIES, INC.

   2004

  2003

  2002

Net income (in thousands)

  $282,460  $359,558  $433,274

Net income per common share—basic

  $2.65  $3.65  $4.49

Net income per common share—diluted

  $2.60  $3.59  $4.42

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19.18.    Selected Interim Financial Information (unaudited)

 

The tables below reflect the Company’s selected quarterly information for the years ended December 31, 20032004 and 2002.2003. Certain 20032004 and 20022003 amounts have been reclassified to conform to the current presentation of discontinued operations.

 

  2003 Quarter Ended

  2004 Quarter Ended

  March 31,

  June 30,

  September 30,

  December 31,

  March 31,

  June 30,

  September 30,

  December 31,

  (in thousands, except for per share amounts)  (in thousands, except for per share amounts)

Total revenue

  $319,414  $323,125  $330,905  $336,184  $333,274  $344,860  $359,716  $362,615

Income before minority interest in Operating Partnership

  $75,202  $78,776  $73,790  $79,212  $73,101  $83,919  $81,296  $77,148

Net income available to common shareholders

  $185,045  $63,236  $56,970  $60,592  $66,048  $87,118  $68,542  $62,254

Income available to common shareholders per share—basic

  $1.93  $0.66  $0.59  $0.62  $0.65  $0.81  $0.63  $0.57

Income available to common shareholder per share—diluted

  $1.91  $0.64  $0.57  $0.61

Income available to common shareholders per share—diluted

  $0.64  $0.79  $0.62  $0.56
  2002 Quarter Ended

  2003 Quarter Ended

  March 31,

  June 30,

  September 30,

  December 31,

  March 31,

  June 30,

  September 30,

  December 31,

  (in thousands, except for per share amounts)  (in thousands, except for per share amounts)

Total revenue

  $267,674  $282,939  $300,971  $333,331  $316,909  $320,780  $328,090  $333,930

Income before minority interest in Operating Partnership

  $65,646  $71,857  $71,042  $78,720  $73,837  $77,589  $72,613  $78,157

Net income available to common shareholders

  $55,365  $54,775  $71,541  $260,146  $185,045  $63,236  $56,970  $60,592

Income available to common shareholders per share—basic

  $0.61  $0.60  $0.75  $2.73  $1.86  $0.66  $0.59  $0.62

Income available to common shareholder per share—diluted

  $0.60  $0.59  $0.74  $2.70

Income available to common shareholders per share—diluted

  $1.84  $0.64  $0.57  $0.61

 

20.    Pro Forma Financial Information (unaudited)

The accompanying unaudited pro forma information for the years ended December 31, 2003 and 2002 is presented as if (1) the acquisition of 399 Park Avenue on September 25, 2002, (2) the dispositions of Fullerton Square on March 4, 2002, 7600, 7700, and 7702 Boston Boulevard on March 4, 2002, One and Two Independence Square on November 22, 2002, 2391 West Winton Avenue on December 2, 2002, the Candler Building on January 28, 2003, 875 Third Avenue on February 4, 2003 and 2300 N Street on March 18, 2003 and (3) the sales of the properties designated as held for sale and qualifying as discontinued operations at December 31, 2003 had occurred prior to January 1, 2002. This pro forma information is based upon the historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto.

This unaudited pro forma information does not purport to represent what the actual results of operations of the Company would have been had the above occurred prior to January 1, 2002, nor do they purport to predict the results of operations of future periods.

Pro Forma


  Year Ended December 31,

(dollars in thousands, except for per share amounts)  2003

  2002

Total revenue

  $1,306,697  $1,229,773

Net income available to common shareholders

  $237,755  $228,565

Basic earnings per share:

        

Net income available to common shareholders

  $2.45  $2.45

Weighted average number of common shares outstanding

   96,900   93,145

Diluted earnings per share:

        

Net income available to common shareholders

  $2.41  $2.42

Weighted average number of common and common equivalent shares outstanding

   98,486   94,612

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21.19.    Derivative Instruments and Hedging Activities

 

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138 (“SFAS No. 133”), as of January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheetsConsolidated Balance Sheets at fair value. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria of SFAS No. 133 are recognized in earnings. For derivatives designated as hedging instruments in qualifying cash flow hedges, the effective portion of changes in fair value of the derivatives are recognized in accumulated other comprehensive income (loss) until the forecasted transactions occur and the ineffective portions are recognized in earnings.

 

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) forecasted transactions. The Company also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.

 

The Company entered into interest rate protection agreements during 2000, generally for the purpose of fixing interest rates on variable rate construction loans in order to reduce the budgeted interest costs on the Company’s development projects, which would translate into higher returns on investment as the development projects come on-line. Amounts included in accumulated other comprehensive income (loss) related to the effective portion of cash flow hedges will be reclassified into earnings over the estimated 40 year life of the constructed asset.

Upon adoption of SFAS No. 133, the Company recorded an asset of approximately $0.2 million (included in prepaid expenses and other assets) and recorded a liability of approximately $11.4 million for the fair values of these agreements. The offset for these entries was to a cumulative effect of a change in accounting principle and accumulated other comprehensive loss, respectively. Finally, the Company wrote-off deferred charges of approximately $1.6 million as a cumulative effect of a change in accounting principle.

The Company’s derivatives also include investments in warrants to purchase shares of common stock of other companies. Based on the terms of the warrant agreements, the warrants meet the definition of a derivative and accordingly must be marked to fair value through earnings. The Company had been recording the warrants at fair value through accumulated other comprehensive loss as available-for-sale securities under SFAS No. 115. Upon adoption of SFAS No. 133, the Company reclassified approximately $6.9 million, the fair value of the warrants, from accumulated other comprehensive loss to a cumulative effect of a change in accounting principle.

During 2001, the Company paid the fair value of the swap arrangement and two hedge contracts that were entered into during 2000 and part of 2001 in order to terminate the contracts. In addition, for the year ended December 31, 2001, the Company recorded unrealized derivative losses through other comprehensive income of approximately $2.5 million, related to the effective portion of interest rate agreements. The Company expects that within the next twelve months it will reclassify into earnings approximately $347,000 of the amount recorded in accumulated other comprehensive income relating to these agreements.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During 2002, the Company entered into treasury rate lock contracts designated and qualifying as a cash flow hedge to reduce its exposure to variability in future cash flows attributable to changes in the Treasury rate relating to a forecasted fixed rate financing. All components of the treasury rate lock agreements were included in the assessment of hedge effectiveness. The amount of hedge ineffectiveness was not material. The Company terminated these contracts upon the issuance of the fixed rate debt, and paid approximately $3.5 million, which is reflected in other comprehensive income (loss). The loss reflected in accumulated other comprehensive income (loss) will be reclassified into earnings over the term of the fixed rate debt. The Company expects that within the next twelve months it will reclassify into earnings approximately $351,000$698,000 of the amount recorded in accumulated other comprehensive income (loss) relating to theseits hedge agreements.

 

On August 26, 2003, the Company modified its remaining derivative contract to provide for the counter-party to pay the Company LIBOR and to require the Company to pay the counter-party LIBOR +plus 4.55% per annum on a notional amount of $150.0 million. The derivative contract expires on February 11, 2005. In accordance with SFAS No.133,No. 133, the derivative contracts are reflected at their fair market value, which was a liability of $8.2$1.2 million and $14.5$8.2 million at December 31, 20032004 and 2002,2003, respectively.

 

For the years ended December 31, 2004, 2003 2002 and 2001,2002, the Company recorded through earnings net derivative losses of approximately $0, $1.0 million $11.9 million and $26.5$11.9 million, respectively, which represented the total ineffectiveness of all cash flow hedges and other non-hedging instruments, the changes in value of the embedded derivatives and the change in value of the warrants.derivatives. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness, except for the time value of option contracts.

BOSTON PROPERTIES, INC.

 

22.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20.    Discontinued Operations

 

Effective January 1, 2002, as required, the Company adopted the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,Assets. which superceded SFAS No. 121. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lesser of book value or fair value less cost to sell. SFAS No. 144 retains the requirements of SFAS No. 121 regarding impairment loss recognition and measurement. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.

During the year ended December 31, 2004, the Company sold the following properties:

(1)430 Rozzi Place, an industrial property totaling 20,000 net rentable square feet located in South San Francisco, California;

(2)Hilltop Office Center, a complex of nine office/technical properties totaling approximately 143,000 net rentable square feet located in South San Francisco, California;

(3)Sugarland Business Park—Building Two, an office/technical property totaling approximately 59,000 net rentable square feet located in Herndon, Virginia;

(4)Decoverly Two, Three, Six and Seven, consisting of Two Class A office properties totaling approximately 155,000 net rentable square feet and two land parcels, one of which is subject to a ground lease, located in Rockville, Maryland;

(5)The Arboretum, a Class A office property totaling approximately 96,000 net rentable square feet located in Reston, Virginia;

(6)38 Cabot Boulevard, an industrial property totaling approximately 161,000 net rentable square feet located in Langhorne, Pennsylvania;

(7)Sugarland Business Park—Building One, an office/technical property totaling approximately 52,000 net rentable square feet located in Herndon, Virginia;

(8)204 Second Avenue, a Class A office property totaling approximately 41,000 net rentable square feet located in Waltham, Massachusetts; and

(9)560 Forbes Boulevard, an industrial property totaling approximately 40,000 net rentable square feet located in South San Francisco, California.

 

During the year ended December 31, 2003, the Company sold 875 Third Avenue, a Class A office property totaling approximately 712,000 net rentable square feet located in New York City, New York and the Candler Building, a Class A office property totaling approximately 541,000 net rentable square feet located in Baltimore, Maryland. At December 31, 2003, the Company had designated as held for sale Sugarland Business Park—Park – Building Two, an office/technical property totaling approximately 59,000 net rentable square feet located in Herndon, Virginia, and 430 Rozzi Place, an industrial property totaling approximately 20,000 net rentable square feet located in South San Francisco, California. The Company has presented these properties as discontinued operations in its statementsConsolidated Statements of operationsOperations for the years ended December 31, 2003 2002 and 2001.2002. In addition, the Company sold 2300 N Street, a Class A office property totaling approximately 289,000 net rentable square feet located in Washington, D.C., and had designated as held for sale Hilltop Office Center, a complex of nine office/technical properties totaling approximately 143,000 net rentable square feet located in South San Francisco, California. Due to the Company’s continuing involvement in the management, for a fee, of the properties listed above through an agreement with the buyers, these properties are not categorized as discontinued operations in the accompanying consolidated statementsConsolidated Statements of operations.Operations. As a result, the gain on sale related to Hilltop Office Center in South San Francisco, totaling approximately $6.8 million (net of minority interests share of approximately $8.7 million) and 2300 N Street in Washington, D.C., totaling approximately $52.8

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$52.8 million (net of minority interest share of approximately $11.5 million), has been reflected under the caption-gains on sales of real estate and other assets in the consolidated statementsConsolidated Statements of operationsOperations for the year ended December 31, 2003.

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)2004 and 2003, respectively.

 

During the year ended December 31, 2002, the Company disposed of the following properties: Fullerton Square and 7600, 7700 and 7702 Boston Boulevard consisting of five office/technical properties totaling 347,680 net rentable square feet in Springfield, Virginia and 2391 West Winton Avenue, an industrial property totaling 220,213 net rentable square feet in Hayward, California. The Company has presented these properties as discontinued operations in its statementsConsolidated Statements of operationsOperations for the yearsyear ended December 31, 2002 and 2001.2002. In addition, the Company sold One and Two Independence Square, two Class A office properties totaling 917,459 net rentable square feet in Washington, D.C. Due to the Company’s continuing involvement in the management, for a fee, of One and Two Independence Square in Washington, DC through an agreement with the buyer, these properties are not categorized as discontinued operations in the accompanying consolidated statementsConsolidated Statements of operations.Operations. As a result, the gain on sale related to One and Two Independence Square in Washington, D.C., totaling approximately $186.8 million (net of minority interest share of approximately $41.1 million), has been reflected under the caption-gains on sales of real estate and other assets in the consolidated statementsConsolidated Statements of operationsOperations for the year ended December 31, 2002.

The following table summarizes income from discontinued operations (net of minority interest)interests) and the related realized gains on sales of real estate from discontinued operations (net of minority interest)interests) for the years ended December 31, 2004, 2003 2002 and 2001:2002:

 

  For the Year Ended December 31,

   For the Year Ended December 31,

 
  2003

 2002

 2001

   2004

 2003

 2002

 
  (in thousands)   (in thousands) 

Total revenue

  $5,474  $51,957  $66,564   $3,260  $15,434  $62,869 

Operating expenses

   (2,014)  (17,858)  (17,578)   (872)  (5,385)  (20,979)

Interest Expense

   (296)  (8,616)  (11,998)   —     (296)  (8,618)

Depreciation and Amortization

   (405)  (6,702)  (6,703)   (685)  (1,987)  (8,266)

Minority interest in property partnership

   (107)  (106)  (109)   (208)  (330)  (343)

Minority interest in Operating Partnership

   (476)  (3,365)  (5,664)   (255)  (1,334)  (4,443)
  


 


 


  


 


 


Income from discontinued operations (net of minority interest)

  $2,176  $15,310  $24,512 
  


 


 


Income from discontinued operations (net of minority interests)

  $1,240  $6,102  $20,220 
  


 


 


Realized gain on sale of real estate

  $89,728  $30,916  $—     $36,970  $89,728  $30,916 

Minority interest in property partnership

   (3,996)  —     —   

Minority interest in Operating Partnership

   (16,494)  (5,571)  —      (5,636)  (16,494)  (5,571)
  


 


 


  


 


 


Realized gain on sale of real estate (net of minority interest in Operating Partnership)

  $73,234  $25,345  $—   

Realized gain on sale of real estate (net of minority interests)

  $27,338  $73,234  $25,345 
  


 


 


  


 


 


 

At December 31, 2004, the Company did not have any properties designated as held for sale. At December 31, 2003, the Company had designated as held for sale the following properties: Hilltop Office Center, a complex of nine office/technical properties totaling approximately 143,000 net rentable square feet located in South San Francisco, California, Sugarland Business Park—Building Two, an office/technical property totaling approximately 59,000 net rentable square feet located in Herndon, Virginia and 430 Rozzi Place, an industrial property totaling approximately 20,000 net rentable square feet located in South San Francisco, California. At December 31, 2002, the Company had 875 Third Avenue, a Class A office property totaling approximately 711,901 net rentable square feet in Midtown Manhattan, New York designated as held for sale. The anticipated sales prices for the properties held for sale exceeded their carrying values. The Company has not categorized Hilltop Office Center located in South San Francisco, California as discontinued operations in the accompanying consolidated statementsConsolidated Statements of operationsOperations due to the Company’s anticipated continuing involvement in the management of these properties after the sale.

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company’s adoptionapplication of SFAS No. 144 resultedresults in the presentation of the net operating results of these qualifying properties sold during 2004, 2003 and 2002, as income from discontinued operations for all periods presented. In addition, SFAS No. 144 resultedresults in the gains on sale of these qualifying properties totaling approximately $27.3 million (net of minority interests share of $9.6 million), $73.2 million (net of minority interest share of approximately $16.5 million) and $25.3 million

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(net (net of minority interest share of approximately $5.6 million) to be reflected as gains on sales of real estate from discontinued operations in the accompanying consolidated statementsConsolidated Statements of operationsOperations for the years ended December 31, 2004, 2003 and 2002, respectively. The adoptionapplication of SFAS No. 144 diddoes not have an impact on net income available to common shareholders. SFAS No. 144 only impactedimpacts the presentation of these properties within the consolidated statementsConsolidated Statements of operations.Operations.

 

21.    Newly23.    Newly Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which amended FIN 46. FIN 46R was effective immediately for arrangements entered into after January 31, 2003, and became effective during the first quarter of 2004 for all arrangements entered into before February 1, 2003. FIN 46R requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership interests, contractual interests, or other pecuniary interests in an entity that change with changes in the fair value of the entity’s net assets excluding variable interests. Prior to FIN 46R, the Company included an entity in its consolidated financial statements only if it controlled the entity through voting interests. The adoption and application of FIN 46 and FIN 46R has not had a material impact on the Company’s consolidated financial statements.

 

In August 2001,March 2004, the Emerging Issues Task Force reached a final consensus regarding Issue 03-6, “Participating Securities and the Two-Class Method under FAS 128.” The issue addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that participate in dividends and earnings of the issuing entity. Such securities are contractually entitled to receive dividends when and if the entity declares dividends on common stock. The issue also provides further guidance on applying the two-class method of calculating earnings per share once it is determined that a security is participating. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This consensus was effective for the period ended June 30, 2004 and was applied by restating previously reported earnings per share. The Company has adopted the provisions of EITF 03-6, and has determined that the Series A Preferred Stock of the Company and the Series Two and Three Preferred Units of the Company’s Operating Partnership constitute participating securities. The adoption of EITF 03-6 has resulted in a reduction of the Company’s earnings per share for those periods in which the Company and the Operating Partnership had undistributed earnings. Undistributed earnings were allocated to the Series A Preferred Stock of the Company and the Series Two and Three Preferred Units based on their contractual rights to share in those earnings as if all the earnings for the period had been distributed.

In December 2004, the FASB issued SFAS No. 143,123R, “Share-Based Compensation” (“SFAS No. 123R”). SFAS No. 123R replaces SFAS No. 123, “Accounting for Asset Retirement Obligations.Stock Issued to Employees.” SFAS No. 143123R requires an entitythe compensation cost relating to record a liability for an obligation associated withshare-based payment transactions be recognized in financial statements and be measured based on the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carryingfair value of the related assetequity instrument issued. SFAS No. 123R is effective in fiscal periods beginning after June 15, 2005. All of the Company’s outstanding stock options became vested on January 17, 2005 and depreciating it overdoes not expect to have significant unvested stock option awards in future periods. As a result, the remaining useful life of that asset. The standard was effective beginning January 1, 2003. The

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company does not expect the adoption of SFAS No. 143 did not123R to have a material impact on the Company’s results of operations, financial position, or liquidity.

 

In April 2002,December 2004, the FASB issued SFAS No. 145, which updates, clarifies, and simplifies certain existing accounting pronouncements beginning at various dates in 2002 and 2003. The statement rescinds 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 4 and SFAS No. 64, which required net gains or losses from the extinguishments of debt to be classified as extraordinary items in the income statement.153”). The Company anticipates that these gains and losses will no longer be classified as extraordinary as they are not unusual and infrequent in nature. The changes requiredamendments made by SFAS No. 145153 are not expected to have a material impactbased on the Company’s financial position or liquidity.

principle that exchanges of nonmonetary assets should be measured on the fair value of assets exchanged. SFAS No. 146, “Accounting153 eliminates the exception for Costs Associatednonmonetary exchanges of similar productive assets and replaces it with Exit or Disposal Activities” was issued in July 2002 and becamea broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for thenonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company on January 1, 2003. This statement requires a cost associated with an exit or disposal activity, such asdoes not expect the sale or termination of a line of business, the closure of business activities in a particular location, or a change in management structure, to be recorded as a liability at fair value when it becomes probable that the cost will be incurred and no future economic benefit will be gained by the company for such termination costs, and costs to consolidate facilities or relocate employees. SFAS No. 146 supersedes EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” which in some cases required certain costs to be recognized before a liability was actually incurred. The adoption of SFAS No. 146 did not153 to have a material impact on the Company’s results of operations, financial position, or liquidity.

 

On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material impact on the Company’s financial position or results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

issuer require classification as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after September 15, 2003. On November 7, 2003, the FASB deferred the effective date of paragraphs 9 and 10 of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests in order to address a number of interpretation and implementation issues. The Company has determined that one of its consolidated finite life joint ventures qualifies as a mandatorily redeemable noncontrolling interest. As provided in the joint venture agreement, upon the termination of the partnership on December 31, 2027, should the parties elect not to further extend the agreement, the net assets of the joint venture will be distributed in proportion to each partner’s ownership interest. Although no such obligation exists at December 31, 2003, if the Company were to dissolve the partnership or sell the underlying real estate assets and satisfy any outstanding obligations, the Company estimates that it would have to pay approximately $12.0 million to the minority interest holder.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. The adoption of FIN 45 did not have a material impact on the Company’s results of operations, financial position, or liquidity.

In January 2003, the FASB issued FIN 46, which provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity’s consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. In December 2003, the FASB reissued FIN 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs commonly referred to as special-purpose entities (SPEs) as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. The Company does not believe that the application of FIN 46, if required, will have a material impact on its financial position, results of operations, or liquidity.

24.22.    Related Party Transactions

 

The Company paid Applied Printing Technologies, a printing company affiliated with Mr. Mortimer B. Zuckerman, approximately $53,000, $79,000 $76,000 and $73,000$76,000 during the years ended December 31, 2004, 2003 2002 and 2001,2002, respectively, for printing services principally relating to the printing of the Company’s annual report to shareholders. The selection of Applied Printing Technologies as the printer for the Company’s annual report to shareholders was made through a bidding process open to multiple printing companies.

 

A firm controlled by Mr. Raymond A. Ritchey’s brother was paid aggregate leasing commissions, respectively,of approximately $626,000, $894,000 $591,000 and $571,000,$591,000 for the years ended December 31, 2004, 2003 and 2002, and 2001respectively, in connection with leases signed at the Broad Run Business Park, Discovery Square and Two Freedom Square properties. These properties were previously owned by joint ventures in which the Company had a 50% interest. The Company acquired the remaining interests during 2003. Mr. Ritchey is an Executive Vice President of Boston Properties, Inc.

 

Mr. Martin Turchin, a member of the Company’s Board of Directors is a non-executive/non-director Vice Chairman of CB Richard Ellis (“CBRE”). Through an arrangement with CBRE and its predecessor, Insignia/

BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ESG, Inc. that has been in place since 1985, Mr. Turchin and Turchin & Associates, an entity owned by Mr. Turchin (95%) and his son (5%), participatesparticipate in brokerage activities for which CBRE is retained as leasing agent, some of which involve leases for space within buildings owned by the Company. Additionally, Mr. Turchin’s son is employed by CBRE and works on transactions for which CBRE earns commission income from the Company. MrMr. Turchin’s son’s compensation from CBRE is in the form of salary and bonus, neither of which is directly tied to CBRE’s transactions with the Company. For the years ended December 31, 2004, 2003 2002 and 2001,2002, Mr. Turchin, directly and through Turchin & Associates, received commission income of $220,000, $169,000 $116,000 and $943,000,$116,000, respectively from commissions earned by CBRE and its predecessor, Insignia/ESG, Inc., from the Company. Pursuant to its arrangement with CBRE, Turchin & Associates has confirmed to the Company that it is paid on the same basis with respect to properties owned by the Company as it is with respect to properties owned by other clients of CBRE. Mr. Turchin does not participate in any discussions or other activities relating to the Company’s contractual arrangements with CBRE either in his capacity as a member of ourthe Company’s Board of Directors or as a Vice Chairman of CBRE.

 

In April 2003, an entity controlled by Mr. Zuckerman acquired from a third party an office building located at 2400 N Street, N.W. in Washington, D.C., in which a company affiliated with Mr. Zuckerman leases 100% of the building. The Company has managed this property under a third-party management contractagreement for many years. The Company entered into a contractan agreement with an entity controlled by Mr. Zuckerman to continue to manage this property on terms comparable with other third-party property management agreements that the Company currently has in place. Under the management agreement, the Company has also agreed to provide consulting services and assistance in connection with a possible sale of this property in exchange for a fee of $100,000 payable upon the closing of the sale of the property. The disinterested members of the Company’s Board of Directors approved Mr. Zuckerman’s acquisition of this building, as well as the management agreement

BOSTON PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

between the Company and Mr. Zuckerman’s affiliate. TheDuring the years ended December 31, 2004 and 2003, the Company received $791,792approximately $777,000 and $681,000, respectively, for reimbursements of building operating costs and earned $135,000 and $111,000, respectively, in management fees under the management contract in 2003.agreement.

 

The Company had a lease with Daily News LP (an entity controlled by Mr. Zuckerman) for office space located at Sumner Square. The Company and Daily News LP agreed to terminate the lease as of September 30, 2003 subject to another unrelated tenant within the building executing an amendment to its existing lease pursuant to which it would agree to lease the office space through December 31, 2005. Daily News LP paid the Company $49,214 in lease termination fees. The disinterested directors of the Company’s Board of Directors approved the lease termination. Daily News LP paid the Company an aggregate of $131,183 in 2003, including the aforementioned termination fees.

 

On June 30, 1998, the Company acquired from entities controlled by Mr. Alan B. Landis a portfolio of properties known as the Carnegie Center Portfolio and Tower Center One and related operations and development rights (collectively, the “Carnegie Center Portfolio”). In connection with the acquisition of the Carnegie Center Portfolio, the Operating Partnership entered into a development agreement (the “Development Agreement”) with affiliates of Mr. Landis providing for up to approximately 2,000,000 square feet of development in or adjacent to the Carnegie Center office complex. An affiliate of Mr. Landis is entitled to a purchase price for each parcel developed under the Development Agreement calculated on the basis of $20 per rentable square foot of property developed. Another affiliate of Mr. Landis could earn a contingent payment for each developed property that achieves a stabilized return in excess of a target annual return ranging between 10.5% and 11%. The Development Agreement also provided that upon negotiated terms and conditions, the Company and Mr. Landis would form a development company to provide development services for these development projects and would share the expenses and profits, if any, of this new company. In addition, in connection with the acquisition of the Carnegie Center Portfolio, Mr. Landis became a director of the Company pursuant to an Agreement Regarding Directorship, dated as of June 30, 1998, with the Company (the “Directorship Agreement”). Under the Directorship Agreement, the Company agreed to nominate Mr. Landis for re-election as a director at each annual meeting of stockholders of the Company in a year in which his term expires, provided that specified conditions are met.

In the past few years, the Operating Partnership and Mr. Landis were unable to agree on terms of ancillary documents that were to be entered into under the Development Agreement and, on October 21, 2004, entered into an agreement (the “2004 Agreement”) to modify several provisions of the Development Agreement. Under the terms of the 2004 Agreement, the Operating Partnership and affiliates of Mr. Landis amended the Development Agreement to limit the rights of Mr. Landis and his affiliates to participate in the development of properties under the Development Agreement. Among other things, Mr. Landis has agreed that (1) Mr. Landis and his affiliates will have no right to participate in any entity formed to acquire land parcels or the development company formed by the Operating Partnership to provide development services under the Development Agreement, (2) Mr. Landis will have no right or obligation to play a role in development activities engaged in by the development company formed by the Operating Partnership under the Development Agreement or receive compensation from the development company and (3) the affiliate of Mr. Landis will have no right to receive a contingent payment for developed properties based on stabilized returns. In exchange, the Company (together with the Operating Partnership) agreed to:

effective as of June 30, 1998, pay Mr. Landis $125,000 on January 1 of each year until the earlier of (A) January 1, 2018, (B) the termination of the Development Agreement or (C) the date on which all development properties under the Development Agreement have been conveyed pursuant to the Development Agreement, with $750,000, representing payments of this annual amount from 1998 to 2004, being paid upon execution of the 2004 Agreement; and

25.    Subsequent EventsBOSTON PROPERTIES, INC.

 

On January 16,NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

pay an affiliate of Mr. Landis, in connection with the development of land parcels acquired under the Development Agreement, an aggregate fixed amount of $10.50 per rentable square foot of property developed (with a portion of this amount (i.e., $5.50) being subject to adjustment, in specified circumstances, based on future increases in the Consumer Price Index) in lieu of a contingent payment based on stabilized returns, which payment could have been greater or less than $10.50 per rentable square foot of property developed.

The Operating Partnership also continues to be obligated to pay an affiliate of Mr. Landis the purchase price of $20 per rentable square foot of property developed for each land parcel acquired as provided in the original Development Agreement. During the 20-year term of the Development Agreement, until such time, if any, as the Operating Partnership elects to acquire a land parcel, an affiliate of Mr. Landis will remain responsible for all carrying costs associated with such land parcel.

In addition, in connection with entering into the 2004 Agreement, Mr. Landis has resigned as a director of the Company effective as of the earlier of (1) immediately prior to the Company’s 2005 annual meeting of stockholders and (2) May 11, 2005, and has agreed that the Company will have no future obligation to nominate Mr. Landis as a director of the Company under the Directorship Agreement or otherwise. Mr. Landis did not resign because of a disagreement with the Company on any matter relating to its operations, policies or practices.

During the year ended December 31, 2004, a joint venture in which the Company has a 35.7% interest sold 430 Rozzi Place, an industrial property totaling 20,000 net rentable square feet, Hilltop Office Center, comprised of nine office/technical properties totaling approximately 20,000143,000 net rentable square feet and 560 Forbes Boulevard, an industrial property totaling 40,000 net rentable square feet located in South San Francisco, California,California. The properties were sold in three separate transactions for $2.5 million. Theaggregate net cash proceeds of approximately $17.8 million and the assumption by the buyer of the mortgage debt on the Hilltop Office Center properties totaling $5.2 million, resulting in aggregate gains on sale to the Company had a 35.7%of approximately $8.4 million (net of minority interest in thisthe property whichpartnership’s share of approximately $11.3 million and net of minority interest in the Operating Partnership’s share of approximately $1.7 million). The joint venture was consolidated in the Company’s financial statements due to the Company’s unilateral control. The outside partners in the joint venture, owning a 64.3% interest, are related parties of Mr. Zuckerman. The related parties were allocated their pro-rata share of the net proceeds from the sale totaling approximately $11.3 million, of which approximately $2.5 million was payable at December 31, 2004 and is included in the accompanying Consolidated Balance Sheets.

In accordance with the Company’s 1997 Stock Option and Incentive Plan, as amended, and as approved by the Board of Directors, each non-employee director has made an election to receive in lieu of cash fees deferred stock units to be settled in shares of common stock upon the cessation of such director’s service on the Board of Directors. As a result of these elections, the aggregate cash fees otherwise payable to a non-employee director during a fiscal quarter are converted into a number of deferred stock units equal to the aggregate cash fees divided by the last reported sales price of a share of the Company’s common stock on the last trading of the applicable fiscal quarter. The deferred stock units are also credited with dividend equivalents. At December 31, 2004, the Company had outstanding 43,552 shares of deferred stock with an aggregate value of approximately $2.1 million, which amounts are included in the accompanying Consolidated Balance Sheets.

23.    Subsequent Events

 

On January 23, 2004,February 8, 2005, the Company refinanced its $493.5 million construction loan secured bytogether with Washington Circle LLC, an affiliate of KSI Services, Inc., a residential developer (collectively, the Times Square Tower property in New York City. The loan bore interest at LIBOR + 1.95% per annum and was scheduled to mature in November 2004. At December 31, 2003, the outstanding balance under the loan was $332.9 million. This loan facility totaling $475.0 million is comprised of two tranches. The first tranche consists of a $300.0 million loan commitment which bears interest at LIBOR + 0.90% per annum and matures in January 2006, with a one year extension option. The second tranche consists of a $175.0 million term loan which bears interest at LIBOR + 1.00% per annum and matures in January 2007, unless the maturity date of the first tranche is not extended, in which case it will mature in January 2006.

On January 26, 2004, the Company“Developer”), executed a contract to acquire 1330 Connecticut Avenue, a 259,000 square foot Class A office property in Washington, D.C. at a purchase price of approximately $86.6 million. InDevelopment Agreement with The George

BOSTON PROPERTIES, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

addition,Washington University, which agreement contemplates the development of a site at Pennsylvania Avenue and Washington Circle in the District of Columbia (the “Site”) as a mixed-use project comprising approximately 539,000 square feet of office, 60,000 square feet of retail and 250,000 square feet of residential space pursuant to ground leases to be entered into between the University and the Developer and subject to a rezoning of the Site to permit such development. The Company will not have an interest in the development of the residential phase of the project. The Site is currently the subject of a pending leaking underground storage tank case opened by the District of Columbia Department of Health. The Development Agreement requires that the Developer conduct certain site remediation activities during construction of this project and obtain closure of the pending leaking underground storage tank case, subject to reimbursement by the University of the costs of such remediation and its indemnity with respect to all pre-existing site contamination. Both ground leases will require that the ground lessee guarantee the obligations of the other ground lessee until such time as the improvements on both ground leased parcels have been completed and are substantially fully-occupied by tenants who are paying rent.

On February 10, 2005, the Company will be obligated to fund an additional $11.0 millionexecuted a contract for tenant and capital improvements during approximately the first two yearssale of ownership. The acquisition will be financed with the assumption of mortgage indebtedness secured by theOld Federal Reserve, a Class A office property totaling approximately $52.0 million bearing interest150,000 net rentable square feet located in San Francisco, California, at a fixed ratesale price of 7.58% per annum and maturing in 2011, borrowings underapproximately $46.8 million. Effective March 11, 2005, the Company’s unsecured revolving credit facility and available cash.Company held a non-refundable deposit from the buyer totalling $5.0 million. There can be no assurance that the acquisitionsale will be completed on the terms currently contemplated or at all.

 

On January 30, 2004,February 17, 2005, the Company obtained construction financing totaling $47.2 million collateralized by the Capital Gallery property in Washington, D.C. Capital Gallery is a third party terminatedClass A office property totaling approximately 397,000 square feet. The purpose of the financing is to fund a portion of the cost of an agreement to enterexpansion project at the property. The expansion project entails removing a three-story low-rise section of the property comprised of 100,000 square feet from in-service status and redeveloping it into a ground lease10-story office building resulting in a total complex size of approximately 610,000 square feet upon completion. The construction financing bears interest at a variable rate equal to LIBOR plus 1.65% per annum and matures in February 2008. The construction financing is with same lender as the existing mortgage loan collateralized by the property, which currently has an outstanding principal balance of approximately $51.9 million, bearing interest at a fixed rate equal to 8.24% per annum and maturing in August 2006. The agreement with the Company, and in connection therewithlender provides an extension provision for the existing loan to coincide with the February 2008 maturity date of the construction financing.

On February 23, 2005, the Company subsequently received considerationsold a parcel of land at the Prudential Center located in Boston, Massachusetts for a net sale price of approximately $7.5$31.5 million and an additional obligation of the buyer to fund an estimated $15.0 million of future costs at the Prudential Center for aggregate proceeds of $46.5 million.

 

On February 4, 2004,28, 2005, the Company sold Hilltop Office Center, comprisedDecoverly Four and Five, consisting of nine office/technical propertiestwo land parcels located in Rockville, Maryland, for net cash proceeds of approximately $5.3 million.

On March 9, 2005, the Company entered into a fifteen year lease with DLA Piper Rudnick Gray Cary US LLP, totaling approximately 143,000230,000 square feet, locatedfor a build-to-suit Class A office building to be developed at 505 9th Street in South San Francisco, California for $18.0 million. TheWashington, D.C. In conjunction with the execution of this lease, the Company hadentered into a 35.7% interest in these properties, which were consolidated injoint venture with the Company’s financial statements dueland owner to develop the Company’s unilateral control.property.

 

On February 10, 2004,March 11, 2005, a joint venture in which the Company sold Sugarland Business Park—Building Two,has an office/technical propertyownership interest obtained construction financing totaling $96.5 million collateralized by the Wisconsin Place development project in Chevy Chase, Maryland. Wisconsin Place is a mixed-use development project consisting of office, retail and residential properties. The construction financing bears interest at a variable rate equal to LIBOR plus 1.50% per annum and matures in March 2009 with a one-year extension option. The Company is guaranteeing approximately 59,000 square feet located in Herndon, Virginia for $7.1 million.$4.6 million of the loan amount on behalf of the joint venture entity.

Boston Properties, Inc.

Schedule 3—Real Estate and Accumulated Depreciation

December 31, 20032004

(dollars in thousands)

 

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 Costs
Capitalized
Subsequent
to
Acquisition


 

Land

and
Improvements


 

Building

and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s) Built/
Renovated


 

Depreciable
Lives
(Years)


  

Type


 

Location


 

Encumbrances


 Original

 

Costs
Capitalized
Subsequent

to
Acquisition


 

Land
and
Improvements


 

Building
and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s) Built/
Renovated


 

Depreciable
Lives
(Years)


 
 Land

 Building

   Land

 Building

 

Embarcadero Center

 Office San Francisco, CA $679,560 $211,297 $996,442 $98,139 $213,133 $1,092,745 $—   $—   $1,305,878 $146,639 1924/1989 (1) Office San Francisco, CA $667,310 $211,297 $996,442 $118,577 $214,600 $1,111,716 $—   $—   $1,326,316 $181,628 1924/1989 (1)

399 Park Avenue

 Office New York, NY  —    339,200  700,358  8,932  340,773  707,717  —    —    1,048,490  22,217 1961 (1) Office New York, NY  —    339,200  700,358  15,500  343,129  711,929  —    —    1,055,058  40,055 1961 (1)

Prudential Center

 Office Boston, MA  280,091  92,077  734,594  151,963  92,758  845,986  39,890  —    978,629  95,199 1965/1993/2002 (1) Office Boston, MA  275,500  92,077  734,594  168,918  93,396  862,954  39,239  —    995,589  122,066 1965/1993/2002 (1)

Citigroup Center

 Office New York, NY  510,915  241,600  494,782  8,995  242,720  502,657  —    —    745,377  33,664 1977/1997 (1) Office New York, NY  504,724  241,600  494,782  17,781  243,999  510,164  —    —    754,163  46,370 1977/1997 (1)

Times Square Tower

 Office New York, NY  423,790  165,413  380,438  7,000  167,329  385,522  —    —    552,851  5,710 2004 (1)

Carnegie Center

 Office Princeton, NJ  140,424  101,772  349,089  24,678  109,665  365,874  —    —    475,539  48,254 1983-1999 (1) Office Princeton, NJ  137,712  101,772  349,089  31,027  97,334  384,554  —    —    481,888  61,121 1983-1999 (1)

Five Times Square

 Office New York, NY  —    158,530  288,589  7,509  158,565  296,063  —    —    454,628  15,362 2002 (1) Office New York, NY  —    158,530  288,589  10,448  159,309  298,258  —    —    457,567  23,967 2002 (1)

280 Park Avenue

 Office New York, NY  262,394  125,288  201,115  42,766  125,869  243,300  —    —    369,169  42,670 1968/95-96 (1) Office New York, NY  259,372  125,288  201,115  47,756  126,739  247,420  —    —    374,159  50,617 1968/95-96 (1)

599 Lexington Avenue

 Office New York, NY  225,000  81,040  100,507  81,294  81,416  181,425  —    —    262,841  94,243 1986 (1) Office New York, NY  225,000  81,040  100,507  83,848  81,979  183,416  —    —    265,395  99,721 1986 (1)

Gateway Center

 Office San Francisco, CA  81,952  28,255  139,245  21,181  29,365  159,316  —    —    188,681  17,004 1984/1986/2002 (1)

Riverfront Plaza

 Office Richmond, VA  108,190  18,000  156,733  3,808  18,359  160,182  —    —    178,541  24,238 1990 (1) Office Richmond, VA  105,283  18,000  156,733  8,640  18,486  164,887  —    —    183,373  28,470 1990 (1)

Gateway Center

 Office San Francisco, CA  81,511  28,255  139,245  6,845  29,164  145,181  —    —    174,344  12,275 1984/1986/2002 (1)

100 East Pratt Street

 Office Baltimore, MD  86,805  27,562  109,662  4,359  27,690  113,893  —    —    141,583  18,426 1975/1991 (1) Office Baltimore, MD  84,857  27,562  109,662  5,088  27,881  114,431  —    —    142,312  20,882 1975/1991 (1)

Reservoir Place

 Office Waltham, MA  54,714  18,207  88,018  15,717  18,418  103,524  —    —    121,942  17,604 1955/1987 (1)

1333 New Hampshire Avenue

 Office Washington, DC  —    34,190  86,361  —    34,190  86,361  —    —    120,550  839 1996 (1) Office Washington, DC  —    34,190  86,361  766  34,426  86,891  —    —    121,317  4,134 1996 (1)

Reservoir Place

 Office Waltham, MA  56,103  18,207  88,018  14,265  18,291  102,199  —    —    120,490  14,753 1955/1987 (1)

Democracy Center

 Office Bethesda, MD  102,471  12,550  50,015  34,113  13,674  83,004  —    —    96,678  37,711 1985-88/94-96 (1)

1330 Connecticut Avenue

 Office Washington, DC  59,471  25,982  82,311  1,401  26,283  83,411  —    —    109,694  1,768 1984 (1)

One Freedom Square

 Office Reston, VA  83,701  9,929  84,504  —    9,929  84,504  —    —    94,433  11,215 2000 (1) Office Reston, VA  81,909  9,929  84,504  7,971  9,997  92,407  —    —    102,404  14,144 2000 (1)

Two Freedom Square

 Office Reston, VA  —    13,930  77,739  —    13,930  77,739  —    —    91,669  2,551 2001 (1) Office Reston, VA  —    13,930  77,739  1,867  14,027  79,509  —    —    93,536  5,329 2001 (1)

Democracy Center

 Office Bethesda, MD  100,510  12,550  50,015  30,873  13,769  79,669  —    —    93,438  34,627 1985-88/94-96 (1)

140 Kendrick Street

 Office Needham, MA  61,201  18,095  66,905  1,104  18,305  67,799  —    —    86,104  1,282 2000 (1)

One and Two Reston Overlook

 Office Reston, VA  65,908  16,456  66,192  1,121  16,532  67,237  —    —    83,770  8,271 1999 (1) Office Reston, VA  —    16,456  66,192  2,888  16,647  68,889  —    —    85,536  9,445 1999 (1)

Discovery Square

 Office Reston, VA  —    11,198  71,782  —    11,198  71,782  —    —    82,980  3,732 2001 (1) Office Reston, VA  —    11,198  71,782  1,582  11,275  73,287  —    —    84,562  6,578 2001 (1)

NIMA Building

 Office Reston, VA  20,129  9,367  67,431  596  9,410  67,984  —    —    77,395  9,974 1987/1988 (1) Office Reston, VA  —    9,367  67,431  6,482  10,664  72,616  —    —    83,280  11,734 1987/1988 (1)

Lockheed Martin Building

 Office Reston, VA  —    9,062  58,884  6,360  10,354  63,952  —    —    74,306  10,251 1987/1988 (1)

Waltham Weston Corporate Center

 Office Waltham, MA  —    10,385  60,694  —    10,385  60,694  —    —    71,079  2,277 Various N/A  Office Waltham, MA  —    10,385  60,694  2,639  10,469  63,249  —    —    73,718  4,636 Various (1)

Lockheed Martin Building

 Office Reston, VA  24,639  9,062  58,884  524  9,103  59,367  —    —    68,470  8,709 1987/1988 (1)

Reston Corporate Center

 Office Reston, VA  22,621  9,135  50,857  1,570  9,606  51,956  —    —    61,562  7,865 1984 (1)

New Dominion Technology Park, Bldg. Two

 Office Herndon, VA  63,000  5,584  51,868  758  5,649  52,561  —    —    58,210  829 2004 (1)

Orbital Sciences

 Office Dulles, VA  —    5,699  51,082  958  5,725  52,014  —    —    57,739  5,404 2000/2001 (1) Office Dulles, VA  —    5,699  51,082  1,265  5,765  52,281  —    —    58,046  7,230 2000/2001 (1)

Capital Gallery

 Office Washington, DC  53,579  4,725  29,560  18,049  4,752  47,582  —    —    52,334  25,902 1981 (1) Office Washington, DC  52,175  4,725  29,560  17,875  4,785  42,986  —    4,389  52,160  25,574 1981 (1)

Reston Corporate Center

 Office Reston, VA  23,233  9,135  41,398  1,059  9,177  42,415  —    —    51,592  6,474 1984 (1)

191 Spring Street

 Office Lexington, MA  18,953  2,850  27,166  19,459  2,883  46,592  —    —    49,475  21,575 1971/1995 (1)

New Dominion Technology Park, Bldg. One

 Office Herndon, VA  57,356  3,880  43,227  1,345  3,925  44,527  —    —    48,452  5,022 2001 (1)

1301 New York Avenue

 Office Washington, DC  28,008  9,250  18,750  18,585  9,357  37,228  —    —    46,585  6,647 1983/1998 (1)

200 West Street

 Office Waltham, MA  —    16,148  24,983  261  16,335  25,057  —    —    41,392  5,343 1999 (1)

University Place

 Office Cambridge, MA  22,761  —    37,091  3,901  27  40,965  —    —    40,992  7,054 1985 (1)

Sumner Square

 Office Washington, DC  28,737  624  28,745  10,827  969  39,227  —    —    40,196  7,570 1985 (1)

Quorum Office Park

 Office Chelmsford, MA  —    3,750  32,454  3,478  4,299  35,383  —    —    39,682  3,015 2001 (1)

2600 Tower Oaks Boulevard

 Office Rockville, MD  —    4,243  31,125  2,550  4,293  33,625  —    —    37,918  4,056 2001 (1)

500 E Street

 Office Washington, DC  —    109  22,420  13,368  1,587  34,310  —    —    35,897  19,024 1987 (1)

Boston Properties, Inc.

Schedule 3—Real Estate and Accumulated Depreciation

December 31, 20032004

(dollars in thousands)

 

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 Costs
Capitalized
Subsequent
to
Acquisition


 

Land

and
Improvements


 

Building

and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s) Built/
Renovated


 

Depreciable
Lives
(Years)


  

Type


 

Location


 

Encumbrances


 Original

 

Costs
Capitalized
Subsequent

to
Acquisition


 

Land
and
Improvements


 

Building
and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s) Built/
Renovated


 

Depreciable
Lives
(Years)


 
 Land

 Building

   Land

 Building

 

191 Spring Street

 Office Lexington, MA 19,583 2,850 27,166 19,201 2,863 46,354 —   —   49,217 19,902 1971/1995 (1)

New Dominion Technology Park, Bldg. One

 Office Herndon, VA 57,448 3,880 43,227 1,077 3,898 44,286 —   —   48,184 3,472 2001 (1)

1301 New York Avenue

 Office Washington, DC 29,323 9,250 18,750 18,110 9,293 36,817 —   —   46,110 5,386 1983/1998 (1)

200 West Street

 Office Waltham, MA —   16,148 24,983 571 16,223 25,479 —   —   41,702 4,879 1999 (1)

University Place

 Office Cambridge, MA 23,463 —   37,091 3,653 27 40,717 —   —   40,744 5,562 1985 (1)

Sumner Square

 Office Washington, DC 29,255 624 28,745 10,066 962 38,473 —   —   39,436 6,015 1985 (1)

Quorum Office Park

 Office Chelmsford, MA —   3,750 32,454 2,472 3,767 34,909 —   —   38,677 1,861 2001 (1)

2600 Tower Oaks Boulevard

 Office Rockville, MD —   4,243 31,125 2,348 4,264 33,452 —   —   37,716 2,709 2001 (1)

500 E Street

 Office Washington, DC —   109 22,420 12,899 1,576 33,852 —   —   35,428 18,036 1987 (1)

One Cambridge Center

 Office Cambridge, MA —   134 25,110 9,314 135 34,423 —   —   34,558 15,574 1987 (1) Office Cambridge, MA —   134 25,110 6,849 136 31,957 —   —   32,093 13,877 1987 (1)

Eight Cambridge Center

 Office Cambridge, MA 26,995 850 25,042 317 854 25,355 —   —   26,209 2,882 1999 (1) Office Cambridge, MA 26,439 850 25,042 454 832 25,514 —   —   26,346 3,526 1999 (1)

Bedford Business Park

 Office Bedford, MA 20,008 534 3,403 19,056 536 22,457 —   —   22,994 12,184 1980 (1) Office Bedford, MA 19,318 534 3,403 19,236 616 22,557 —   —   23,173 13,445 1980 (1)

Ten Cambridge Center

 Office Cambridge, MA 34,194 1,299 12,943 7,920 1,877 20,285 —   —   22,161 9,152 1990 (1)

Newport Office Park

 Office Quincy, MA —   3,500 18,208 295 3,516 18,487 —   —   22,003 2,969 1988 (1) Office Quincy, MA —   3,500 18,208 444 3,541 18,611 —   —   22,152 3,442 1988 (1)

201 Spring Street

 Office Lexington, MA —   2,849 15,303 479 2,862 15,769 —   —   18,631 3,460 1997 (1) Office Lexington, MA —   2,849 15,303 578 2,882 15,848 —   —   18,730 4,148 1997 (1)

Ten Cambridge Center

 Office Cambridge, MA 33,588 1,299 12,943 4,244 1,890 16,596 —   —   18,486 5,918 1990 (1)

10 and 20 Burlington Mall Road

 Office Burlington, MA 21,237 930 6,928 10,289 942 17,205 —   —   18,147 8,585 1984-1989/95-96 (1) Office Burlington, MA 20,855 930 6,928 9,588 660 16,786 —   —   17,446 8,022 1984-1989/95-96 (1)

Broad Run Business Park, Building E

 Office Loudon County, VA —   497 15,131 1,553 503 16,678 —   —   17,181 1,380 2002 (1)

40 Shattuck Road

 Office Andover, MA —   709 14,740 1,313 717 16,045 —   —   16,762 1,709 2001 (1)

Montvale Center

 Office Gaithersburg, MD 7,124 1,574 9,786 5,338 2,410 14,288 —   —   16,698 6,981 1987 (1) Office Gaithersburg, MD 6,951 1,574 9,786 4,308 2,427 13,241 —   —   15,668 6,276 1987 (1)

40 Shattuck Road

 Office Andover, MA —   709 14,740 1,225 712 15,962 —   —   16,675 1,111 2001 (1)

Broad Run Business Park, Building E

 Office Loudon County, VA —   497 15,131 135 499 15,264 —   —   15,763 770 2002 (1)

Three Cambridge Center

 Office Cambridge, MA —   174 12,200 2,120 176 14,318 —   —   14,494 6,218 1987 (1)

Lexington Office Park

 Office Lexington, MA —   998 1,426 12,226 1,078 13,572 —   —   14,650 7,435 1982 (1) Office Lexington, MA —   998 1,426 10,432 1,085 11,771 —   —   12,856 5,788 1982 (1)

The Arboretum

 Office Reston, VA —   2,850 9,025 2,486 2,863 11,498 —   —   14,361 1,985 1999 (1)

Three Cambridge Center

 Office Cambridge, MA —   174 12,200 1,557 175 13,756 —   —   13,930 5,910 1987 (1)

181 Spring Street

 Office Lexington, MA —   1,066 9,520 2,121 1,071 11,636 —   —   12,707 1,299 1999 (1) Office Lexington, MA —   1,066 9,520 2,233 1,078 11,741 —   —   12,819 1,654 1999 (1)

Sugarland Business Park

 Office Herndon, VA —   1,569 5,955 4,658 1,576 10,606 —   —   12,182 2,726 1986/1997 (1)

Decoverly Three

 Office Rockville, MD —   2,650 8,465 728 2,662 9,181 —   —   11,844 1,414 1989 (1)

Decoverly Two

 Office Rockville, MD —   1,994 8,814 181 2,003 8,986 —   —   10,989 1,348 1987 (1)

7501 Boston Boulevard, Building Seven

 Office Springfield, VA —   665 9,273 170 673 9,435 —   —   10,108 1,709 1997 (1)

92-100 Hayden Avenue

 Office Lexington, MA —   594 6,748 3,063 597 9,808 —   —   10,404 4,989 1985 (1) Office Lexington, MA —   594 6,748 2,389 601 9,130 —   —   9,731 4,732 1985 (1)

195 West Street

 Office Waltham, MA —   1,611 6,652 1,074 1,630 7,707 —   —   9,337 3,069 1990 (1)

91 Hartwell Avenue

 Office Lexington, MA 17,376 784 6,464 3,131 788 9,591 —   —   10,378 4,936 1985 (1) Office Lexington, MA 17,064 784 6,464 1,963 793 8,418 —   —   9,211 3,761 1985 (1)

Waltham Office Center

 Office Waltham, MA —   422 2,719 4,956 430 7,667 —   —   8,097 4,235 1968-1970/87-88 (1)

Eleven Cambridge Center

 Office Cambridge, MA —   121 5,535 2,256 122 7,790 —   —   7,912 3,993 1984 (1)

7450 Boston Boulevard, Building Three

 Office Springfield, VA —   1,165 4,681 1,053 1,342 5,557 —   —   6,899 1,194 1987 (1)

8000 Grainger Court, Building Five

 Office Springfield, VA —   366 4,282 2,224 458 6,414 —   —   6,872 2,818 1984 (1)

170 Tracer Lane

 Office Waltham, MA —   398 4,601 1,732 423 6,308 —   —   6,731 3,085 1980 (1)

7435 Boston Boulevard, Building One

 Office Springfield, VA —   392 3,822 2,203 492 5,925 —   —   6,417 2,943 1982 (1)

33 Hayden Avenue

 Office Lexington, MA —   266 3,234 2,183 269 5,414 —   —   5,683 2,274 1979 (1)

7300 Boston Boulevard, Building Thirteen

 Office Springfield, VA —   608 4,814 30 615 4,837 —   —   5,452 773 2002 (1)

32 Hartwell Avenue

 Office Lexington, MA —   168 1,943 3,173 170 5,114 —   —   5,284 4,474 1968-1979/1987 (1)

Fourteen Cambridge Center

 Office Cambridge, MA —   110 4,483 638 111 5,120 —   —   5,231 2,581 1983 (1)

7500 Boston Boulevard, Building Six

 Office Springfield, VA —   138 3,749 1,148 276 4,759 —   —   5,035 2,140 1985 (1)

7601 Boston Boulevard, Building Eight

 Office Springfield, VA —   200 878 3,673 382 4,369 —   —   4,751 2,231 1986 (1)

8000 Corporate Court, Building Eleven

 Office Springfield, VA —   136 3,071 612 695 3,124 —   —   3,819 1,318 1989 (1)

7375 Boston Boulevard, Building Ten

 Office Springfield, VA —   23 2,685 767 48 3,427 —   —   3,475 1,411 1988 (1)

7451 Boston Boulevard, Building Two

 Office Springfield, VA —   249 1,542 927 541 2,177 —   —   2,718 1,119 1982 (1)

Boston Properties, Inc.

Schedule 3—Real Estate and Accumulated Depreciation

December 31, 20032004

(dollars in thousands)

 

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 Costs
Capitalized
Subsequent
to
Acquisition


 

Land

and
Improvements


 

Building

and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s) Built/
Renovated


 

Depreciable
Lives
(Years)


 
    Land

 Building

         

7501 Boston Boulevard, Building Seven

 Office Springfield, VA —   665 9,273 88 668 9,358 —   —   10,026 1,470 1997 (1)

Waltham Office Center

 Office Waltham, MA —   422 2,719 6,297 427 9,011 —   —   9,438 5,442 1968-1970/87-88 (1)

195 West Street

 Office Waltham, MA —   1,611 6,652 1,003 1,618 7,648 —   —   9,267 2,814 1990 (1)

Eleven Cambridge Center

 Office Cambridge, MA —   121 5,535 2,564 122 8,098 —   —   8,219 4,065 1984 (1)

170 Tracer Lane

 Office Waltham, MA —   398 4,601 2,955 420 7,534 —   —   7,954 4,304 1980 (1)

7435 Boston Boulevard, Building One

 Office Springfield, VA —   392 3,822 3,020 488 6,746 —   —   7,234 3,982 1982 (1)

7450 Boston Boulevard, Building Three

 Office Springfield, VA —   1,165 4,681 956 1,333 5,469 —   —   6,803 870 1987 (1)

8000 Grainger Court, Building Five

 Office Springfield, VA —   366 4,282 1,321 455 5,514 —   —   5,969 2,677 1984 (1)

7300 Boston Boulevard, Building Thirteen

 Office Springfield, VA —   608 4,814 1 611 4,812 —   —   5,423 415 2002 (1)

32 Hartwell Avenue

 Office Lexington, MA —   168 1,943 3,136 169 5,078 —   —   5,247 4,211 1968-1979/1987 (1)

Fourteen Cambridge Center

 Office Cambridge, MA —   110 4,483 611 111 5,093 —   —   5,204 2,446 1983 (1)

7500 Boston Boulevard, Building Six

 Office Springfield, VA —   138 3,749 1,276 274 4,889 —   —   5,163 1,935 1985 (1)

7601 Boston Boulevard, Building Eight

 Office Springfield, VA —   200 878 3,577 380 4,275 —   —   4,654 2,040 1986 (1)

33 Hayden Avenue

 Office Lexington, MA —   266 3,234 850 267 4,083 —   —   4,350 2,042 1979 (1)

7451 Boston Boulevard, Building Two

 Office Springfield, VA —   249 1,542 2,149 537 3,403 —   —   3,940 2,256 1982 (1)

8000 Corporate Court, Building Eleven

 Office Springfield, VA —   136 3,071 592 690 3,109 —   —   3,799 1,226 1989 (1)

7375 Boston Boulevard, Building Ten

 Office Springfield, VA —   23 2,685 869 47 3,530 —   —   3,577 1,485 1988 (1)

204 Second Avenue

 Office Waltham, MA —   37 2,402 957 37 3,359 —   —   3,396 1,947 1981/1993 (1)

7374 Boston Boulevard, Building Four

 Office Springfield, VA —   241 1,605 930 304 2,472 —   —   2,776 1,049 1984 (1)

164 Lexington Road

 Office Billerica, MA —   592 1,370 228 595 1,595 —   —   2,190 317 1982 (1)

17 Hartwell Avenue

 Office Lexington, MA —   26 150 645 26 795 —   —   822 721 1968 (1)

Boston Properties, Inc.

Schedule 3—Real Estate and Accumulated Depreciation

December 31, 2003

(dollars in thousands)

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 Costs
Capitalized
Subsequent
to
Acquisition


 

Land

and
Improvements


 

Building

and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s)
Built/
Renovated


 

Depreciable
Lives
(Years)


 
    Land

 Building

         

38 Cabot Boulevard

 Industrial Langhorne, PA —   329 1,238 2,641 331 3,877 —   —   4,208 2,962 1972/1984 (1)

40-46 Harvard Street

 Industrial Westwood, MA —   351 1,782 1,354 353 3,134 —   —   3,487 3,103 1967/1996 (1)

560 Forbes Boulevard

 Industrial San Francisco, CA —   9 120 —   8 121 —   —   129 81 early
1970's
 (1)

Cambridge Center Marriott

 Hotel Cambridge, MA —   478 37,918 13,013 480 50,929 —   —   51,409 19,343 1986 (1)

Long Wharf Marriott

 Hotel Boston, MA —   1,708 31,904 11,991 1,716 43,887 —   —   45,603 22,462 1982 (1)

Residence Inn by Marriott

 Hotel Cambridge, MA —   2,039 22,732 590 2,048 23,313 —   —   25,362 2,608 1999 (1)

Cambridge Center North Garage

 Garage Cambridge, MA —   1,163 11,633 380 1,168 12,008 —   —   13,177 4,267 1990 (1)

12050 Sunset Hills Road

 Garage Reston, VA —   —   9,459 55 363 9,151 —   —   9,514 —   Various N/A 

Hilltop Business Center

 Held for Sale San Francisco, CA 5,209 53 492 1,820 110 2,255 —   —   2,365 1,327 early
1970's
 (1)

430 Rozzi Place

 Held for Sale San Francisco, CA —   9 217 35 9 252 —   —   261 133 early
1970's
 (1)

Times Square Tower

 Development New York, NY 332,890 —   —   490,101 —   —   —   490,101 490,101 —   Various N/A 

New Dominion Technology Park, Bldg. Two

 Development Herndon, VA 42,642 —   —   49,455 —   —   —   49,455 49,455 —   Various N/A 

NIMA Garage

 Development Reston, VA —   —   —   3,044 —   —   —   3,044 3,044 —   Various N/A 

Plaza at Almaden

 Land San Jose, CA —   —   —   36,263 —   —   36,263 —   36,263 —   Various N/A 

Tower Oaks Master Plan

 Land Rockville, MD —   —   —   28,226 —   —   28,226 —   28,226 —   Various N/A 

Weston Corporate Center

 Land Weston, MA —   —   —   21,515 —   —   21,515 —   21,515 —   Various N/A 

Washingtonian North

 Land Gaithersburg, MD —   —   —   17,387 —   —   17,387 —   17,387 —   Various N/A 

77 4th Avenue

 Land Waltham, MA —   —   —   14,401 —   —   14,401 —   14,401 —   Various N/A 

South of Market

 Land Reston, VA —   —   —   13,546 —   —   13,546 —   13,546 —   Various N/A 

Reston Gateway

 Land Reston, VA —   —   —   8,891 —   —   8,891 —   8,891 —   Various N/A 

Reston Eastgate

 Land Reston, VA —   —   —   8,889 —   —   8,889 —   8,889 —   Various N/A 

Crane Meadow

 Land Marlborough, MA —   —   —   8,641 —   —   8,641 —   8,641 —   Various N/A 

One Preserve Parkway

 Land Rockville, MD —   —   —   6,967 —   —   6,967 —   6,967 —   Various N/A 

Broad Run Business Park

 Land Loudon County, VA —   —   —   6,868 —   —   6,868 —   6,868 —   Various N/A 

Decoverly Seven

 Land Rockville, MD —   —   —   5,315 5,315 —   —   —   5,315 —   Various N/A 

20 F Street

 Land Washington, DC —   —   —   4,496 —   —   4,496 —   4,496 —   Various N/A 

Boston Properties, Inc.

Schedule 3—Real Estate and Accumulated Depreciation

December 31, 2003

(dollars in thousands)

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 Costs
Capitalized
Subsequent
to
Acquisition


 

Land

and
Improvements


 

Building

and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s)
Built/
Renovated


 

Depreciable
Lives
(Years)


    Land

 Building

         

12280 Sunrise Valley Drive

 Land Reston, VA  —    —    —    4,225  —    —    4,225  —    4,225  —   Various N/A

Decoverly Six

 Land Rockville, MD  —    —    —    3,914  —    —    3,914  —    3,914  —   Various N/A

Decoverly Five

 Land Rockville, MD  —    —    —    1,840  —    —    1,840  —    1,840  —   Various N/A

Decoverly Four

 Land Rockville, MD  —    —    —    1,812  —    —    1,812  —    1,812  —   Various N/A

Cambridge Master Plan

 Land Cambridge, MA  —    —    —    1,655  —    —    1,655  —    1,655  —   Various N/A

Seven Cambridge Center

 Land Cambridge, MA  —    —    —    1,553  —    —    1,553  —    1,553  —   Various N/A

30 Shattuck Road

 Land Andover, MA  —    —    —    1,119  —    —    1,119  —    1,119  —   Various N/A
      

 

 

 

 

 

 

 

 

 

    
      $3,471,400 $1,669,936 $5,776,934 $1,470,916 $1,697,917 $6,445,171 $232,098 $542,600 $8,917,786 $958,531    
      

 

 

 

 

 

 

 

 

 

    

Property Name


 

Type


 

Location


 

Encumbrances


 Original

 

Costs
Capitalized
Subsequent

to
Acquisition


 

Land
and
Improvements


 

Building
and
Improvements


 

Land Held
for
Development


 

Development
and
Construction
in Progress


 

Total


 

Accumulated
Depreciation


 

Year(s)
Built/
Renovated


 

Depreciable
Lives
(Years)


 
     

Land

  

Building

         

7374 Boston Boulevard, Building Four

 Office Springfield, VA  —    241  1,605  837  307  2,376  —    —    2,683  1,017 1984 (1)

164 Lexington Road

 Office Billerica, MA  —    592  1,370  240  599  1,603  —    —    2,202  370 1982 (1)

17 Hartwell Avenue

 Office Lexington, MA  —    26  150  650  26  800  —    —    826  745 1968 (1)

40-46 Harvard Street

 Industrial Westwood, MA  —    351  1,782  1,218  355  2,996  —    —    3,351  2,960 1967/1996 (1)

Long Wharf Marriott

 Hotel Boston, MA  —    1,708  31,904  21,328  1,728  53,212  —    —    54,940  23,691 1982 (1)

Cambridge Center Marriott

 Hotel Cambridge, MA  —    478  37,918  12,983  484  50,895  —    —    51,379  20,958 1986 (1)

Residence Inn by Marriott

 Hotel Cambridge, MA  —    2,039  22,732  697  2,063  23,405  —    —    25,468  3,249 1999 (1)

Cambridge Center North Garage

 Garage Cambridge, MA  —    1,163  11,633  526  1,176  12,146  —    —    13,322  4,606 1990 (1)

Cambridge Center

 Development Cambridge, MA  —    —    —    23,539  —    —    —    23,539  23,539  —   Various N/A 

12280 Sunrise Valley Drive

 Development Reston, VA  —    —    —    6,516  —    —    —    6,516  6,516  —   Various N/A 

Wisconsin Place

 Development Chevy Chase, MD  —    —    —    619  —    —    —    619  619  —   Various N/A 

Plaza at Almaden

 Land San Jose, CA  —    —    —    36,273  —    —    36,273  —    36,273  —   Various N/A 

Tower Oaks Master Plan

 Land Rockville, MD  —    —    —    28,394  —    —    28,394  —    28,394  —   Various N/A 

Weston Corporate Center

 Land Weston, MA  —    —    —    21,885  —    —    21,885  —    21,885  —   Various N/A 

Washingtonian North

 Land Gaithersburg, MD  —    —    —    17,445  —    —    17,445  —    17,445  —   Various N/A 

77 4th Avenue

 Land Waltham, MA  —    —    —    14,439  —    —    14,439  —    14,439  —   Various N/A 

South of Market

 Land Reston, VA  —    —    —    13,602  —    —    13,602  —    13,602  —   Various N/A 

Reston Gateway

 Land Reston, VA  —    —    —    8,915  —    —    8,915  —    8,915  —   Various N/A 

Reston Eastgate

 Land Reston, VA  —    —    —    8,899  —    —    8,899  —    8,899  —   Various N/A 

Crane Meadow

 Land Marlborough, MA  —    —    —    8,657  —    —    8,657  —    8,657  —   Various N/A 

One Preserve Parkway

 Land Rockville, MD  —    —    —    7,001  —    —    7,001  —    7,001  —   Various N/A 

Broad Run Business Park

 Land Loudon County, VA  —    —    —    6,886  —    —    6,886  —    6,886  —   Various N/A 

20 F Street

 Land Washington, DC  —    —    —    4,439  —    —    4,439  —    4,439  —   Various N/A 

Decoverly Five

 Land Rockville, MD  —    —    —    1,843  —    —    1,843  —    1,843  —   Various N/A 

Decoverly Four

 Land Rockville, MD  —    —    —    1,814  —    —    1,814  —    1,814  —   Various N/A 

Cambridge Master Plan

 Land Cambridge, MA  —    —    —    1,444  —    —    1,444  —    1,444  —   Various N/A 

30 Shattuck Road

 Land Andover, MA  —    —    —    1,131  —    —    1,131  —    1,131  —   Various N/A 
      

 

 

 

 

 

 

 

 

 

     
      $3,541,131 $1,875,510 $6,321,728 $1,059,399 $1,901,012 $7,098,256 $222,306 $35,063 $9,256,637 $1,122,806     
      

 

 

 

 

 

 

 

 

 

     
(1)Depreciation of the buildings and improvements are calculated over lives ranging from the life of the lease to 40 years.
(2)The aggregate cost and accumulated depreciation for tax purposes was approximately $6.3$8.3 billion and $1.1$1.4 billion, respectively.

Boston Properties, Inc.

Real Estate and Accumulated Depreciation

December 31, 20032004

(dollars in thousands)

 

A summary of activity for real estate and accumulated depreciation is as follows:

 

  2003

 2002

 2001

   2004

 2003

 2002

 

Real Estate:

      

Balance at the beginning of the year

  $8,620,697  $7,391,366  $6,054,785   $8,917,786  $8,620,697  $7,391,366 

Additions to and improvements of real estate

   647,977   1,426,026   1,357,543    454,806   647,977   1,426,026 

Assets sold and written-off

   (350,888)  (196,695)  (20,962)   (115,955)  (350,888)  (196,695)
  


 


 


  


 


 


Balance at the end of the year

  $8,917,786  $8,620,697  $7,391,366   $9,256,637  $8,917,786  $8,620,697 
  


 


 


  


 


 


Accumulated Depreciation:

      

Balance at the beginning of the year

  $800,385  $682,921  $553,264   $958,531  $800,385  $682,921 

Depreciation expense

   186,886   164,063   134,019    222,142   186,886   164,063 

Assets sold and written-off

   (28,740)  (46,599)  (4,362)   (57,867)  (28,740)  (46,599)
  


 


 


  


 


 


Balance at the end of the year

  $958,531  $800,385  $682,921   $1,122,806  $958,531  $800,385 
  


 


 


  


 


 


 

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