Boston Properties (BXP) 10-Q 2001 Q2 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2001
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 (State or other jurisdiction of incorporation or organization)	04-2473675 (IRS Employer Identification No.)
800 Boylston Street Boston, Massachusetts	02199
(Address of principal executive offices)	(zip code)

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

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

    Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common Stock, Par Value $.01
(Class) 90,548,004
(Outstanding on August 10, 2001)

BOSTON PROPERTIES, INC.
FORM 10-Q
for the quarter ended June 30, 2001

TABLE OF CONTENTS

		Page
PART 1.	FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements:
	a) Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000	3
	b) Consolidated Statements of Operations for the six months ended June 30, 2001 and 2000	4
	c) Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000	5
	d) Consolidated Statements of Comprehensive Income for the six months and three months ended June 30, 2001 and 2000	6
	e) Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000	7
	f) Notes to the Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	28
PART II.	OTHER INFORMATION
ITEM 2.	Changes in Securities	29
ITEM 4.	Submission of Matters to a Vote of Security Holders	29
ITEM 6.	Exhibits and Reports on Form 8-K	29
Signatures		30

2

BOSTON PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

				June 30, 2001			December 31, 2000
				(unaudited)
				(in thousands, except for share amounts)
ASSETS
Real estate:				$	7,165,977		$	6,112,779
	Less: accumulated depreciation				(647,881	)		(586,719	)
		Total real estate			6,518,096			5,526,060
Cash and cash equivalents					165,764			280,957
Escrows					31,577			85,561
Investments in securities					4,297			7,012
Tenant and other receivables					26,337			26,852
Accrued rental income					104,304			91,684
Deferred charges, net					100,804			77,319
Prepaid expenses and other assets					47,962			41,154
Investments in unconsolidated joint ventures					94,155			89,871
		Total assets		$	7,093,296		$	6,226,470
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Mortgage notes and bonds payable			$	4,177,670		$	3,414,891
	Accounts payable and accrued expenses				61,248			57,338
	Dividends and distributions payable				78,241			71,274
	Interest rate contracts				19,045			—
	Accrued interest payable				12,067			5,599
	Other liabilities				53,365			51,926
		Total liabilities			4,401,636			3,601,028
Commitments and contingencies					—			—
Minority interests					851,868			877,715
Series A Convertible Redeemable Preferred Stock, liquidation preference $50.00 per share, 2,000,000 shares issued and outstanding					100,000			100,000
Stockholders' equity:
	Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding				—			—
	Common stock, $.01 par value, 250,000,000 shares authorized, 90,350,510 and 86,630,089 issued and outstanding in 2001 and 2000, respectively				904			866
	Additional paid-in capital				1,774,335			1,673,349
	Dividends in excess of earnings				(19,193	)		(13,895	)
	Unearned compensation				(2,386	)		(848	)
	Accumulated other comprehensive loss				(13,868	)		(11,745	)
		Total stockholders' equity			1,739,792			1,647,727
			Total liabilities and stockholders' equity	$	7,093,296		$	6,226,470

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

3

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

				Six months ended June 30,
				2001			2000
				(unaudited and in thousands, except for per share amounts)
Revenue
	Rental:
		Base rent		$	393,762		$	348,290
		Recoveries from tenants			53,444			46,070
		Parking and other			27,279			25,297
			Total rental revenue		474,485			419,657
		Development and management services			6,507			5,739
		Interest and other			8,733			2,117
			Total revenue		489,725			427,513
Expenses
	Operating				147,208			129,212
	General and administrative				19,830			15,997
	Interest				103,723			111,458
	Depreciation and amortization				71,415			64,626
	Loss on investments in securities				6,500			—
			Total expenses		348,676			321,293
Income before net derivative losses, minority interests and income from unconsolidated joint ventures					141,049			106,220
Net derivative losses					(7,788	)		—
Minority interests in property partnerships					255			(436	)
Income from unconsolidated joint ventures					1,844			807
Income before minority interest in Operating Partnership					135,360			106,591
Minority interest in Operating Partnership					(37,162	)		(37,745	)
Income before gain on sales of real estate					98,198			68,846
Gain on sales of real estate, net of minority interest					6,505			297
Income before cumulative effect of a change in accounting principle					104,703			69,143
Cumulative effect of a change in accounting principle, net of minority interest					(6,767	)		—
Net income before preferred dividend					97,936			69,143
Preferred dividend					(3,291	)		(3,286	)
Net income available to common shareholders				$	94,645		$	65,857
Basic earnings per share:
	Income before gain on sales of real estate and cumulative effect of a change in accounting principle			$	1.06		$	0.97
	Gain on sales of real estate, net of minority interest				0.07			—
	Cumulative effect of a change in accounting principle, net of minority interest				(0.07	)		—
	Net income available to common shareholders			$	1.06		$	0.97
	Weighted average number of common shares outstanding				89,365			67,973
Diluted earnings per share:
	Income before gain on sales of real estate and cumulative effect of a change in accounting principle			$	1.03		$	0.96
	Gain on sales of real estate, net of minority interest				0.07			—
	Cumulative effect of a change in accounting principle, net of minority interest				(0.07	)		—
	Net income available to common shareholders			$	1.03		$	0.96
	Weighted average number of common and common equivalent shares outstanding				91,739			69,157

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

4

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

				Three months ended June 30,
				2001			2000
				(unaudited and in thousands, except for per share amounts)
Revenue
	Rental:
		Base rent		$	208,071		$	177,953
		Recoveries from tenants			27,266			22,734
		Parking and other			13,533			12,289
			Total rental revenue		248,870			212,976
	Development and management services				3,110			2,876
	Interest and other				4,289			1,407
			Total revenue		256,269			217,259
Expenses
	Operating				76,865			64,035
	General and administrative				9,880			8,589
	Interest				55,870			56,243
	Depreciation and amortization				36,675			32,395
	Loss on investments in securities				6,500			—
			Total expenses		185,790			161,262
Income before net derivative losses, minority interests and income from unconsolidated joint ventures					70,479			55,997
Net derivative losses					(4,733	)		—
Minority interests in property partnerships					510			(240	)
Income from unconsolidated joint ventures					717			662
Income before minority interest in Operating Partnership					66,973			56,419
Minority interest in Operating Partnership					(18,138	)		(20,193	)
Income before gain on sales of real estate					48,835			36,226
Gain on sales of real estate, net of minority interest					1,851			297
Net income before preferred dividend					50,686			36,523
Preferred dividend					(1,648	)		(1,643	)
Net income available to common shareholders				$	49,038		$	34,880
Basic earnings per share:
	Income before gain on sales of real estate			$	0.52		$	0.50
	Gain on sales of real estate, net of minority interest				0.02			0.01
	Net income available to common shareholders			$	0.54		$	0.51
	Weighted average number of common shares outstanding				89,990			67,991
Diluted earnings per share:
	Income before gain on sales of real estate			$	0.51		$	0.50
	Gain on sales of real estate, net of minority interest				0.02			—
	Net income available to common shareholders			$	0.53		$	0.50
	Weighted average number of common and common equivalent shares outstanding				92,274			69,582

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

5

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Three months ended June 30,						Six months ended June 30,
			2001			2000			2001			2000
			(unaudited and in thousands)
Net income available to common shareholders			$	49,038		$	34,880		$	94,645		$	65,857
Other comprehensive income (loss):
	Realized loss on investments in securities included in net income available to common shareholders			6,500			—			6,500			—
	Unrealized gains (losses) on investments in securities:
		Unrealized holding gains (losses) arising during the period		(971	)		(49,035	)		(1,608	)		9,528
		Less: reclassification adjustment for the cumulative effect of a change in accounting principle included in net income available to common shareholders		—			—			6,853			—
	Unrealized derivative losses:
		Transition adjustment of interest rate contracts		—			—			(11,414	)		—
		Effective portion of interest rate contracts		—			—			(2,454	)		—
Other comprehensive income (loss)				5,529			(49,035	)		(2,123	)		9,528
Comprehensive income (loss)			$	54,567		$	(14,155	)	$	92,522		$	75,385

The accompanying notes are an integral part of these financial statements

6

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the six months ended June 30,
				2001			2000
				(unaudited and in thousands)
Cash flows from operating activities:
	Net income before preferred dividend			$	97,936		$	69,143
	Adjustments to reconcile net income before preferred dividend to net cash provided by operating activities:
		Depreciation and amortization			71,415			64,626
		Non-cash portion of interest expense			1,818			1,989
		Gain on sales of real estate			(8,079	)		(403	)
		Cumulative effect of a change in accounting principle			8,432			—
		Loss on investments in securities			6,500			—
		Non-cash portion of derivative losses			4,707			—
		Earnings in excess of distributions from unconsolidated joint ventures			(1,360	)		(807	)
		Non-cash compensation expense			289			106
		Minority interest in Operating Partnership			37,071			37,851
		Minority interest in property partnerships			(255	)		436
	Change in assets and liabilities:
		Escrows			(3,626	)		7,229
		Tenant and other receivables			515			(3,978	)
		Accrued rental income			(12,771	)		(6,915	)
		Prepaid expenses and other assets			(2,986	)		2,165
		Accounts payable and accrued expenses			4,201			(14,534	)
		Accrued interest payable			6,468			(2,359	)
		Other liabilities			1,439			2,215
		Tenant leasing costs			(9,903	)		(11,131	)
			Total adjustments		103,875			76,490
			Net cash provided by operating activities		201,811			145,633
Cash flows from investing activities:
	Acquisitions/additions to real estate				(1,029,984	)		(200,506	)
	Deposits on real estate, net				(4,251	)		(13,223	)
	Investments in unconsolidated joint ventures				(2,924	)		4,742
	Net proceeds from the sales of real estate				14,187			46,713
	Investments in securities				—			(2,295	)
			Net cash used in investing activities		(1,022,972	)		(164,569	)

The accompanying notes are an integral part of these financial statements

7

			For the six months ended June 30,
			2001			2000
			(unaudited and in thousands)
Cash flows from financing activities:
	Borrowings on unsecured line of credit			111,200			96,000
	Repayments of unsecured line of credit			(111,200	)		(224,000	)
	Repayments of mortgage notes			(67,452	)		(161,092	)
	Proceeds from mortgage notes			829,881			411,662
	Bonds payable proceeds released from escrow			57,610			—
	Dividends and distributions			(132,267	)		(96,578	)
	Proceeds from stock transactions			3,657			1,284
	Contributions from minority interest holder			39,383			—
	Deferred financing costs			(24,844	)		(14,056	)
		Net cash provided by financing activities		705,968			13,220
Net decrease in cash and cash equivalents				(115,193	)		(5,716	)
Cash and cash equivalents, beginning of period				280,957			12,035
Cash and cash equivalents, end of period			$	165,764		$	6,319
Supplemental disclosures:
	Cash paid for interest		$	127,250		$	128,498
	Interest capitalized		$	31,813		$	17,039
Non-cash investing and financing activities:
	Additions to real estate included in accounts payable		$	(1,208	)	$	1,788
	Mortgage notes payable assumed in connection with the acquisition of real estate		$	—		$	117,831
	Mortgage notes payable assigned in connection with the sale of real estate		$	—		$	166,547
	Issuance of minority interest in connection with the acquisition of real estate		$	—		$	20,467
	Dividends and distributions declared but not paid		$	78,241		$	59,812
	Conversions of Minority Interest to Stockholders' Equity		$	112,069		$	116
	Basis adjustment in connection with conversions of Minority Interest to Stockholders' Equity		$	32,432		$	—
	Issuance of restricted shares to employees		$	1,827		$	1,060
	Unrealized gain related to investments in securities		$	—		$	9,528

The accompanying notes are an integral part of these financial statements

8

BOSTON PROPERTIES, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited and in thousands)

1.  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 June 30, 2001, owned an approximate 75% 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") or "preferred units of partnership interest" (also referred to as "Preferred Units"). 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 the 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"), except that, the Company may, at its election, in lieu of a cash redemption, 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. Each series of Preferred Units bear a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be convertible into OP Units at the election of the holder thereof or the Company.

    All references to the Company refer to Boston Properties, Inc. and its subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.

    To assist the Company in maintaining its status as a REIT, the Company leases its three hotel properties, pursuant to a lease 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, are the sole member-managers. Messrs. Zuckerman and Linde have a 9.8% economic interest in such lessee and one or more unaffiliated public charities have a 90.2% economic interest. Marriott International, Inc. manages these hotel properties under the Marriott® name pursuant to a management agreement with the lessee. Under the REIT requirements, revenue from a hotel are not considered to be rental income for purposes of certain income tests that a REIT must meet. Accordingly, in order to maintain its qualification as a REIT, the Company has entered into the participating leases described above to provide revenue that qualifies as rental income under the REIT requirements.

    As of June 30, 2001, the Company and the Operating Partnership had 90,350,510 and 20,382,462 shares of Common Stock and OP Units outstanding, respectively. In addition, the Company had 2,000,000 shares of Preferred Stock and the Operating Partnership had 9,346,033 Preferred Units outstanding.

    The Properties:

    As of June 30, 2001, the Company owns a portfolio of 145 commercial real estate properties (145 and 142 properties at December 31, 2000 and June 30, 2000, respectively) (the "Properties") aggregating over 40.6 million square feet. The properties consist of 137 office properties with

9

approximately 33.0 million net rentable square feet (including 13 properties under development expected to contain approximately 5.1 million net rentable square feet) and approximately 6.0 million additional square feet of structured parking for 17,645 vehicles, five industrial properties with approximately 0.6 million net rentable square feet, and three hotels with a total of 1,054 rooms (consisting of approximately 1.0 million square feet). In addition, the Company owns, has under contract, or has an option to acquire 48 parcels of land totaling approximately 556.9 acres, which will support approximately 9.6 million square feet of development.

2.  Basis of Presentation and Summary of Significant Accounting Policies

    The consolidated financial statements of the Company include all the accounts of the Company, its majority-owned Operating Partnership and subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's annual report on Form 10-K for its fiscal year ended December 31, 2000.

    The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year.

    Certain prior-year balances have been reclassified in order to conform to the current-year presentation.

3.  Real Estate Activity During the Quarter Ended June 30, 2001

    On April 25, 2001, the Company closed on the acquisition of the approximately 1.6 million square foot office tower in New York City known as Citigroup Center. The acquisition was completed through a venture with a third party private real estate investment company. The total acquisition cost of approximately $755 million, was funded through new mortgage financing totaling $525 million, equity contributions of $195 million from Boston Properties and the balance from the third party private real estate investment company. This venture is consolidated as the Company exercises control over the entity that owns the property

    On June 29, 2001, the Company disposed of Maryland Industrial Park, Buildings Two and Three, consisting of two industrial buildings totaling approximately 183,945 square feet, for net proceeds of approximately $7.6 million, resulting in a gain on sale of approximately $1.9 million (net of minority interest share of approximately $0.4 million).

    During the quarter ended June 30, 2001, the Company placed in service two development projects consisting of an approximately 120,000 square foot office building in the Andover Office Park in

10

Andover, Massachusetts and an approximately 178,216 square foot office building known as 2600 Tower Oaks Boulevard in Rockville, Maryland.

4.  Investments in Unconsolidated Joint Ventures

    The investments in unconsolidated joint ventures consists of the following:

Entity	Property	% Ownership
One Freedom Square LLC	One Freedom Square	25	%	(1	)
Square 407 LP	Market Square North	50	%
The Metropolitan Square Associates LLC	Metropolitan Square	51	%
BP 140 Kendrick Street LLC	140 Kendrick Street	25	%	(1	)
BP/CRF 265 Franklin Street Holdings LLC	265 Franklin Street	35	%
Discovery Square LLC	Discovery Square (2)	50	%
BP/CRF 901 New York Avenue LLC	901 New York Ave. (3)	25	%	(1	)
Two Freedom Square LLC	Two Freedom Square (2)	50	%

(1)

Ownership can increase based on certain return thresholds

(2)

Property is currently under development

(3)

Land held for development

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

		June 30, 2001		December 31, 2000
		(unaudited)
ASSETS
Real estate, net		$	666,388	$	640,688
Other assets			36,220		30,919
	Total assets	$	702,608	$	671,607
LIABILITIES AND PARTNERS' EQUITY
Mortgage and construction loans payable		$	467,563	$	446,520
Other liabilities			11,631		10,904
Partners' equity			223,414		214,183
	Total liabilities and partners' equity	$	702,608	$	671,607
Company's share of equity		$	94,155	$	89,871

11

    The summarized statements of operations of the joint ventures are as follows:

			For the six months ended June 30,				For the three months ended June 30,
			2001		2000		2001		2000
			(unaudited)
Total revenue			$	39,960	$	12,608	$	19,482	$	8,626
Expenses
	Operating			11,454		3,786		5,692		2,333
	Interest			16,830		4,185		8,291		2,987
	Depreciation and amortization			6,651		2,207		3,512		1,376
Total expenses				34,935		10,178		17,495		6,696
		Net income	$	5,025	$	2,430	$	1,987	$	1,930
Company's share of net income			$	1,844	$	807	$	717	$	662

5.  Investments in Securities

    The Company accounts for investments in securities in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and has classified the securities as available-for-sale. During the quarter ended June 30, 2001, the Company realized a loss totaling $6.5 million related to the write-down of securities of two publicly traded telecommunications companies. The Company determined that the decline in the fair value of these securities was other than temporary as defined by SFAS No. 115.

6.  Mortgage Notes and Bonds Payable

    On April 25, 2001, the Company obtained new mortgage financing totaling approximately $525 million collateralized by the Citigroup Center property in New York City, New York. Such financing bears interest at a fixed rate equal to 7.1855% and matures on May 11, 2011.

    On May 24, 2001, the Company repaid the mortgage loan on Newport Office Park totaling approximately $5.8 million.

    On May 29, 2001, the Company obtained construction financing totaling $493.5 million collateralized by the Times Square Tower development project in New York City, New York. Such financing bears interest at a rate equal to Eurodollar + 1.95% and matures on November 29, 2004.

7.  Minority Interests

    Minority interests in the Company relate to the interest in the Operating Partnership not owned by Boston Properties, Inc. and an interest in a property partnership that is not owned by the Company. As of June 30, 2001, the minority interest in the Operating Partnership consisted of 20,382,462 OP Units and 9,346,033 Preferred Units held by parties other than Boston Properties, Inc.

    On April 25, 2001, the Company acquired Citigroup Center through a venture with a private real estate investment company. This venture is consolidated as the Company exercises control over the

12

entity that owns the property. The equity interest in the venture that is not owned by the Company, totaling approximately $37.6 million at June 30, 2001, is included in Minority Interests on the accompanying Consolidated Balance Sheet.

    On May 2, 2001, Boston Properties, Inc., as general partner of the Operating Partnership, determined a distribution on the OP Units in the amount of $0.58 per OP Unit payable on July 30, 2001 to OP Unit holders of record on June 29, 2001.

    On May 15, 2001, the Operating Partnership paid a distribution on 2,482,026 Series One Preferred Units at $0.61625 per unit, based on an annual distribution of $2.465 per unit and paid a distribution on the 6,213,131 Series Two and Three Preferred Units of $0.73151 per unit.

8.  Redeemable Preferred Stock and Stockholders' Equity

    On May 2, 2001, the Board of Directors of the Company declared a second quarter dividend in the amount of $0.58 per share of Common Stock payable on July 30, 2001 to shareholders of record on June 29, 2001.

    On May 15, 2001, the Company paid a dividend on the 2,000,000 shares of Series A Convertible Redeemable Preferred Stock (the "Preferred Stock"), $50 liquidation preference per share, of approximately $0.73151 per share. In addition, on May 2, 2001, the Board of Directors of the Company declared a dividend of $0.75616 per share on the Preferred Stock payable on August 15, 2001 to shareholders of record on June 29, 2001. These shares of Preferred Stock are not classified as equity as in certain instances they are convertible into shares of Common Stock at the election of the holder after December 31, 2002 or are redeemable for cash at the election of the holder in six annual tranches commencing on May 12, 2009.

13

BOSTON PROPERTIES, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited and in thousands)

9.  Earnings Per Share

		For the Three Months Ended June 30, 2001
		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings:
	Income available to common shareholders	$	49,038	89,990	$	0.54
Effect of Dilutive Securities:
	Stock Options and other		—	2,284		(.01	)
Diluted Earnings:
	Net income	$	49,038	92,274	$	0.53

		For the Three Months Ended June 30, 2000
		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings:
	Income available to common shareholders	$	34,880	67,991	$	0.51
Effect of Dilutive Securities:
	Stock Options and other		244	1,591		(.01	)
Diluted Earnings:
	Net income	$	35,124	69,582	$	0.50

		For the Six Months Ended June 30, 2001
		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings:
	Income available to common shareholders	$	94,645	89,365	$	1.06
Effect of Dilutive Securities:
	Stock Options and other		—	2,374		(0.03	)
Diluted Earnings:
	Net income	$	94,645	91,739	$	1.03

		For the Six Months Ended June 30, 2000
		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings:
	Income available to common shareholders	$	65,857	67,973	$	0.97
Effect of Dilutive Securities:
	Stock Options and other		479	1,184		(0.01	)
Diluted Earnings:
	Net income	$	66,336	69,157	$	0.96

14

10.  Segment Information

    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. Segments by property type include: Class A Office, Office/Technical, Industrial and Hotels.

    Asset information by segment is not reported since the Company does not use this measure to assess performance, therefore, depreciation and amortization expense is not allocated among segments. Interest income, management and development services, interest expense and general and administrative expenses are not included in net operating income as the internal reporting addresses these on a corporate level.

    Information by geographic area and property type:

    Three months ended June 30, 2001:

			Greater Boston			Greater Washington, D.C.			Midtown Manhattan			Greater San Francisco			New Jersey/ Pennsylvania			Total
Rental Revenue:
	Class A		$	52,697		$	55,888		$	53,191		$	53,542		$	15,612		$	230,930
	Office/Technical			2,108			4,477			—			502			—			7,087
	Industrial			254			327			—			352			211			1,144
	Hotels			9,709			—			—			—			—			9,709
		Total		64,768			60,692			53,191			54,396			15,823			248,870
% of Total				26.02	%		24.39	%		21.37	%		21.86	%		6.36	%		100.00	%
Rental Expenses:
	Class A			18,112			13,949			18,221			18,266			5,113			73,661
	Office/Technical			639			773			—			99			—			1,511
	Industrial			93			112			—			78			30			313
	Hotels			1,380			—			—			—			—			1,380
		Total		20,224			14,834			18,221			18,443			5,143			76,865
% of Total				26.31	%		19.30	%		23.71	%		23.99	%		6.69	%		100.00	%
Net Operating Income			$	44,544		$	45,858		$	34,970		$	35,953		$	10,680		$	172,005
% of Total				25.90	%		26.66	%		20.33	%		20.90	%		6.21	%		100.00	%

15

    Three months ended June 30, 2000:

			Greater Boston			Greater Washington, D.C.			Midtown Manhattan			Greater San Francisco			New Jersey/ Pennsylvania			Total
Rental Revenue:
	Class A		$	46,262		$	53,031		$	35,176		$	44,304		$	15,116		$	193,889
	Office/Technical			1,381			4,952			—			466			—			6,799
	Industrial			469			364			—			561			173			1,567
	Hotels			10,721			—			—			—			—			10,721
		Total		58,833			58,347			35,176			45,331			15,289			212,976
% of Total				27.62	%		27.40	%		16.52	%		21.28	%		7.18	%		100.00	%
Rental Expenses:
	Class A			16,228			13,984			11,428			15,002			4,861			61,503
	Office/Technical			401			893			—			97			—			1,391
	Industrial			132			103			—			38			39			312
	Hotels			829			—			—			—			—			829
		Total		17,590			14,980			11,428			15,137			4,900			64,035
% of Total				27.47	%		23.39	%		17.85	%		23.64	%		7.65	%		100.00	%
Net Operating Income			$	41,243		$	43,367		$	23,748		$	30,194		$	10,389		$	148,941
% of Total				27.69	%		29.12	%		15.94	%		20.27	%		6.98	%		100.00	%

    The following is a reconciliation of net operating income to income before net derivative losses, minority interests and income from unconsolidated joint ventures:

		Three Months Ended June 30,
		2001			2000
Net operating income		$	172,005		$	148,941
Add:
	Development and management services		3,110			2,876
	Interest and other		4,289			1,407
Less:
	General and administrative		(9,880	)		(8,589	)
	Interest expense		(55,870	)		(56,243	)
	Depreciation and amortization		(36,675	)		(32,395	)
	Loss on investments in securities		(6,500	)		—
Income before net derivative losses, minority interests and income from unconsolidated joint ventures		$	70,479		$	55,997

16

    Information by geographic area and property type:

    Six months ended June 30, 2001:

			Greater Boston			Greater Washington, D.C.			Midtown Manhattan			Greater San Francisco			New Jersey/ Pennsylvania			Total
Rental Revenue:
	Class A		$	104,259		$	110,810		$	89,603		$	105,197		$	32,320		$	442,189
	Office/Technical			3,810			8,778			—			1,013			—			13,601
	Industrial			687			678			—			750			362			2,477
	Hotels			16,218			—			—			—			—			16,218
		Total		124,974			120,266			89,603			106,960			32,682			474,485
% of Total				26.34	%		25.35	%		18.88	%		22.54	%		6.89	%		100.00	%
Rental Expenses:
	Class A			36,237			28,209			30,821			35,315			10,202			140,784
	Office/Technical			1,165			1,693			—			181			—			3,039
	Industrial			260			260			—			134			60			714
	Hotels			2,671			—			—			—			—			2,671
		Total		40,333			30,162			30,821			35,630			10,262			147,208
% of Total				27.40	%		20.49	%		20.94	%		24.20	%		6.97	%		100.00	%
Net Operating Income			$	84,641		$	90,104		$	58,782		$	71,330		$	22,420		$	327,277
% of Total				25.86	%		27.53	%		17.96	%		21.80	%		6.85	%		100.00	%

17

    Six months ended June 30, 2000:

			Greater Boston			Greater Washington, D.C.			Midtown Manhattan			Greater San Francisco			New Jersey/ Pennsylvania			Total
Rental Revenue:
	Class A		$	91,802		$	108,376		$	70,128		$	87,557		$	28,243		$	386,106
	Office/Technical			2,942			9,659			—			893			—			13,494
	Industrial			915			725			—			903			353			2,896
	Hotels			17,161			—			—			—			—			17,161
		Total		112,820			118,760			70,128			89,353			28,596			419,657
% of Total				26.88	%		28.30	%		16.71	%		21.29	%		6.82	%		100.00	%
Rental Expenses:
	Class A			33,206			28,553			23,331			29,776			8,792			123,658
	Office/Technical			847			1,867			—			163			—			2,877
	Industrial			295			217			—			85			67			664
	Hotels			2,013			—			—			—			—			2,013
		Total		36,361			30,637			23,331			30,024			8,859			129,212
% of Total				28.13	%		23.71	%		18.06	%		23.24	%		6.86	%		100.00	%
Net Operating Income			$	76,459		$	88,123		$	46,797		$	59,329		$	19,737		$	290,445
% of Total				26.32	%		30.34	%		16.11	%		20.43	%		6.80	%		100.00	%

    The following is a reconciliation of net operating income to income before net derivative losses, minority interests and income from unconsolidated joint ventures:

		Six Months Ended June 30,
		2001			2000
Net operating income		$	327,277		$	290,445
Add:
	Development and management services		6,507			5,739
	Interest and other		8,733			2,117
Less:
	General and administrative		(19,830	)		(15,997	)
	Interest expense		(103,723	)		(111,458	)
	Depreciation and amortization		(71,415	)		(64,626	)
	Loss on investments in securities		(6,500	)		—
Income before net derivative losses, minority interests and income from unconsolidated joint ventures		$	141,049		$	106,220

18

11.  Unaudited Pro Forma Consolidated Financial Information

    The accompanying unaudited pro forma information for the six months ended June 30, 2001 and 2000 is presented as if the follow-on offering of 17,110,000 shares of Common Stock issued on October 31, 2000 and the acquisition of Citigroup Center on April 25, 2001 had occurred on January 1, 2000. 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, nor do they purport to predict the results of operations of future periods.

	Six Months Ended June 30,
Pro Forma (in thousands, except per share data)
	2001		2000
Total revenue	$	516,527	$	473,217
Income before cumulative effect of a change in accounting principle	$	102,086	$	74,258
Net income available to common shareholders	$	95,319	$	74,258
Basic earnings per share:
Income before cumulative effect of a change in accounting principle	$	1.14	$	0.87
Net income available to common shareholders	$	1.07	$	0.87
Weighted average number of common shares outstanding		89,365		85,083
Diluted earnings per share:
Income before cumulative effect of a change in accounting principle	$	1.11	$	0.86
Net income available to common shareholders	$	1.04	$	0.86
Weighted average number of common and common equivalent shares outstanding		91,739		86,267

19

ITEM 2—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. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section below entitled "Certain Factors Affecting Future Operating Results" and elsewhere in this report.

    Since January 1, 2000, the Company has increased its in-service portfolio from 136 properties to 145 properties (the "Total Portfolio"). As a result of the growth in the Company's Total Portfolio, the financial data presented below shows significant changes in revenues and expenses from period to period. The Company does not believe that its period-to-period financial data are comparable. Therefore, the comparison of operating results for the three and six months ended June 30, 2001 and 2000 show separately changes attributable to the properties that were owned by the Company for all of each period compared (the "Same Property Portfolio") and the changes attributable to the Total Portfolio.

Results of Operations

Comparison of the six months ended June 30, 2001 to the six months ended June 30, 2000.

    The table below reflects selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of the 113 properties acquired or placed in service on or prior to January 1, 2000.

			SAME PROPERTY PORTFOLIO
(Dollars in thousands)			2001		2000		INCREASE/ (DECREASE)		% CHANGE
Revenue:
	Rental revenue		$	436,029	$	398,367	$	37,662	9.5	%
	Development and management services			—		—		—	—
	Interest and other			—		—		—	—
		Total revenue		436,029		398,367		37,662	9.5	%
Expenses:
	Operating			136,717		123,979		12,738	10.3	%
Net Operating Income				299,312		274,388		24,924	9.1	%
	General and administrative			—		—		—	—
	Interest			—		—		—	—
	Depreciation and amortization			65,118		61,744		3,374	5.5	%
Income before net derivative losses, minority interests and income from unconsolidated joint ventures			$	234,194	$	212,644	$	21,550	10.1	%

20

			TOTAL PORTFOLIO
(Dollars in thousands)			2001		2000		INCREASE/ (DECREASE)			% CHANGE
Revenue:
	Rental revenue		$	474,485	$	419,657	$	54,828		13.1	%
	Development and management services			6,507		5,739		768		13.4	%
	Interest and other			8,733		2,117		6,616		312.5	%
		Total revenue		489,725		427,513		62,212		14.6	%
Expenses:
	Operating			147,208		129,212		17,996		13.9	%
Net Operating Income				342,517		298,301		44,216		14.8	%
	General and administrative			19,830		15,997		3,833		24.0	%
	Interest			103,723		111,458		(7,735	)	-6.9	%
	Depreciation and amortization			71,415		64,626		6,789		10.5	%
	Loss from investments in securities			6,500		—		6,500		—
Income before net derivative losses, minority interests and income from unconsolidated joint ventures			$	141,049	$	106,220	$	34,829		32.8	%

    The increase in rental revenues in the Same Property Portfolio is primarily a result of an overall increase in rental rates on new leases and rollovers offset by a small decrease in occupancy. The additional increase in rental revenues for the Total Portfolio is primarily a result of the revenues earned on the properties acquired or placed-in-service after January 1, 2000.

    The increase in development and management services revenue in the Total Portfolio is mainly due to a $0.5 million incentive fee earned during the first quarter of 2001.

    The increase in interest and other revenue in the Total Portfolio is primarily due to an increase in interest earned as a result of higher average cash balances resulting from the remaining proceeds from the public offering in October 2000.

    Property operating expenses (real estate taxes, utilities, repairs and maintenance, cleaning and other property related expenses) in the Same Property Portfolio increased mainly due to increases in real estate taxes and utilities. Additional increases in property operating expenses for the Total Portfolio were mainly due to the properties acquired or placed-in-service after January 1, 2000.

    General and administrative expenses in the Total Portfolio increased due to an overall increase in compensation and $0.7 million of write-offs related to abandoned project costs in the first quarter of 2001.

    Interest expense in the Total Portfolio decreased due to a decrease in weighted average interest rates on the Company's floating rate debt from 8.12% to 7.05%, as well as the decreased use of the Company's unsecured revolving line of credit (the "Unsecured Line of Credit").

    Depreciation and amortization expense for the Same Property Portfolio increased as a result of capital and tenant improvements made since June 30, 2000. Additional increases in depreciation and amortization expense for the Total Portfolio were mainly due to the properties acquired or placed-in-service after January 1, 2000.

21

Comparison of the three months ended June 30, 2001 to the three months ended June 30, 2000.

    The table below reflects selected operating information for the Same Property Portfolio and the Total Portfolio. The Same Property Portfolio consists of the 118 properties acquired or placed in service on or prior to April 1, 2000.

			SAME PROPERTY PORTFOLIO
(Dollars in thousands)			2001		2000		INCREASE/ (DECREASE)	% CHANGE
Revenue:
	Rental revenue		$	226,304	$	207,801	18,503	8.9	%
	Development and management services			—		—	—	—
	Interest and other			—		—	—	—
		Total revenue		226,304		207,801	18,503	8.9	%
Expenses:
	Operating			70,136		62,916	7,220	11.5	%
Net Operating Income				156,168		144,885	11,283	7.8	%
	General and administrative			—		—	—	—
	Interest			—		—	—	—
	Depreciation and amortization			32,876		31,920	956	3.0	%
Income before net derivative losses, minority interests and income from unconsolidated joint ventures				123,292		112,965	10,327	9.1	%

			TOTAL PORTFOLIO
(Dollars in thousands)			2001		2000		INCREASE/ (DECREASE)			% CHANGE
Revenue:
	Rental revenue		$	248,870	$	212,976	$	35,894		16.9	%
	Development and management services			3,110		2,876		234		8.1	%
	Interest and other			4,289		1,407		2,882		204.8	%
		Total revenue		256,269		217,259		39,010		18.0	%
Expenses:
	Operating			76,865		64,035		12,830		20.0	%
Net Operating Income				179,404		153,224		26,180		17.1	%
	General and administrative			9,880		8,589		1,291		15.0	%
	Interest			55,870		56,243		(373	)	-0.7	%
	Depreciation and amortization			36,675		32,395		4,280		13.2	%
	Loss on investments in securities			6,500		—		6,500		—
Income before net derivative losses, minority interests and income from unconsolidated joint ventures			$	70,479	$	55,997		14,482		25.9	%

    The increase in rental revenues in the Same Property Portfolio is primarily a result of an overall increase in rental rates on new leases and rollovers and an increase in lease termination fees from $0.3 million to $2.5 million offset by a small decrease in occupancy. The additional increase in rental revenues for the Total Portfolio is primarily a result of the properties acquired or placed-in-service after April 1, 2000 offset by a small decrease due to the sale of two properties during the quarter.

22

    The increase in development and management services revenue for the Total Portfolio is due to revenues earned on new management agreements in 2001.

    The increase in interest and other revenue for the Total Portfolio is primarily due to an increase in interest earned as a result of higher average cash balances resulting from the remaining proceeds from the public offering in October 2000.

    Property operating expenses (real estate taxes, utilities, repairs and maintenance, cleaning and other property related expenses) in the Same Property Portfolio increased mainly due to increases in real estate taxes and utilities. Additioanl increases in property operating expenses for the Total Portfolio were mainly due to the properties acquired or placed-in-service after April 1, 2000.

    General and administrative expenses for the Total Portfolio increased due to an overall increase in compensation.

    Interest expense for the Total Portfolio decreased due to a decrease in weighted average interest rates on the Company's floating rate debt from 8.12% to 7.05%, as well as the decreased use of the Company's unsecured revolving line of credit (the "Unsecured Line of Credit").

    Depreciation and amortization expense for the Same Property Portfolio increased as a result of capital and tenant improvements made since June 30, 2000. Additional increases in depreciation and amortization expense for the Total Portfolio were mainly due to the properties acquired or placed-in-service after April 1, 2000.

Liquidity and Capital Resources

    The Company's consolidated indebtedness at June 30, 2001 was approximately $4.2 billion and bore interest at a weighted average interest rate of approximately 7.05% per annum. Based on the Company's total market capitalization at June 30, 2001 of approximately $9.3 billion, the Company's consolidated debt represents 45.1% of its total market capitalization.

    The Company has a $605.0 million unsecured revolving line of credit (the "Unsecured Line of Credit") with Fleet Bank, as agent. The Company uses the Unsecured Line of Credit principally to facilitate its development and acquisition activities and for working capital purposes. As of August 7, 2001, the Company had no amounts outstanding under the Unsecured Line of Credit.

23

    The following represents the outstanding principal balances due under the first mortgages at June 30, 2001:

Properties	Interest Rate		Principal Amount (in thousands)			Maturity Date
Citigroup Center	7.19	%	$	524,586		May 11, 2011
Embarcadero Center One, Two and Federal Reserve	6.70	%		310,942		December 10, 2008
Prudential Center	6.72	%		289,957		July 1, 2008
280 Park Avenue	7.64	%		269,014		February 1, 2011
5 Times Square	7.05	%		233,029	(1)	January 26, 2003
599 Lexington Avenue	7.00	%		225,000	(2)	July 19, 2005
Embarcadero Center Four	6.79	%		153,075		February 1, 2008
875 Third Avenue	8.00	%		149,996	(3)	January 1, 2003
Embarcadero Center Three	6.40	%		145,352		January 1, 2007
Times Square Tower	5.93	%		135,820		November 29,2004
111 Huntington Avenue	7.06	%		126,963	(4)	September 27, 2002
Two Independence Square	8.09	%		115,735	(5)	February 27, 2003
Riverfront Plaza	6.61	%		114,468		February 1, 2008
Democracy Center	7.05	%		106,810		April 1, 2009
Embarcadero Center West Tower	6.50	%		96,957		January 1, 2006
100 East Pratt Street	6.73	%		91,057		November 1, 2008
601 and 651 Gateway Boulevard	8.23	%		89,544		October 1, 2010
One Independence Square	8.12	%		73,857	(5)	August 21, 2001
Reservoir Place	6.88	%		72,907	(6)	November 1, 2006
One and Two Reston Overlook	7.45	%		67,844		September 1, 2004
2300 N Street	6.88	%		66,000		August 3, 2003
202, 206 & 214 Carnegie Center	8.13	%		62,662		October 1, 2010
New Dominion Technology Park	7.70	%		57,610	(7)	January 15, 2021
Capital Gallery	8.24	%		56,624		August 16, 2006
504, 506 & 508 Carnegie Center	7.39	%		47,877		January 1, 2008
10 and 20 Burlington Mall Road	8.33	%		37,000	(8)	October 1, 2001
Ten Cambridge Center	8.27	%		35,470		May 1, 2010
1301 New York Avenue	6.70	%		32,158	(9)	August 15, 2009
Waltham Weston Corporate Center	6.77	%		29,293	(10)	February 13, 2004
Sumner Square	6.81	%		28,899	(11)	April 22, 2002
Eight Cambridge Center	7.73	%		28,195		July 15, 2010
510 Carnegie Center	7.39	%		27,412		January 1, 2008
Lockheed Martin Building	6.61	%		26,068		June 1, 2008
Orbital Sciences, Buildings One and Three	6.80	%		25,761	(12)	August 19, 2002
2600 Tower Oaks Boulevard	6.91	%		25,160	(13)	September 20, 2002
University Place	6.94	%		24,971		August 1, 2021
Reston Corporate Center	6.56	%		24,597		May 1, 2008
191 Spring Street	8.50	%		22,627		September 1, 2006
Quorum Office Park	6.63	%		22,019	(14)	August 25, 2003
Bedford Business Park	8.50	%		21,453		December 10, 2008
NIMA Building	6.51	%		21,311		June 1, 2008
Orbital Sciences, Building Two	6.80	%		19,127	(15)	June 13, 2003
Andover Office Park, Building One	6.77	%		13,655	(16)	October 21, 2003
101 Carnegie Center	7.66	%		8,200		April 1, 2006
Montvale Center	8.59	%		7,499		December 1, 2006
302 Carnegie Center	7.04	%		6,969	(17)	April 1, 2003
Hilltop Business Center	6.81	%		5,671		March 1, 2019
201 Carnegie Center	7.08	%		469		February 1, 2010
Total			$	4,177,670

(1)

Total construction loan in the amount of $420.0 million at a variable rate of Eurodollar + 1.75%.

(2)

At maturity the lender has the option to purchase a 33.33% interest in this Property in exchange for the cancellation of the principal balance of approximately $225 million.

24

(3)

The principal amount and interest rate shown has been adjusted to reflect the fair value of the note at its inception. The actual principal balance at June 30, 2001 was $148.4 million and the interest rate was 8.75%.

(4)

Total construction loan in the amount of $203.0 million at a variable rate of LIBOR + 2.00%.

(5)

The principal amount and interest rate shown has been adjusted to reflect the effective rates on the loans. The actual principal balances at June 30, 2001 were $116.1 million and $73.9 million, respectively. The actual interest rates are 8.50% and continue at such rates through the loan expiration.

(6)

The principal amount and interest rate shown has been adjusted to reflect the fair value of the note. The actual principal balance at June 30, 2001 was $65.1 and the interest rate was 9.09%.

(7)

Includes outstanding bonds in the amounts of $49.8 million and $7.8 million, which bear interest at fixed rates of 7.72% and 7.48%, respectively. Semi-annual payments are due until maturity.

(8)

Includes outstanding indebtedness collateralized by 91 Hartwell Avenue and 92 and 100 Hayden Avenue.

(9)

Includes outstanding principal in the amounts of $19.8 million, $8.1 million and $4.2 million which bear interest at fixed rates of 6.70%, 8.54% and 6.75%, respectively.

(10)

Total construction loan in the amount of $70.0 million at a variable rate of LIBOR + 1.70%.

(11)

The outstanding principal bears interest at a rate equal to Eurodollar + 1.50%.

(12)

Total construction loan in the amount of $27.0 million at a variable rate of LIBOR + 1.65%.

(13)

Total construction loan in the amount of $32.0 million at a variable rate of LIBOR + 1.90%.

(14)

Total construction loan in the amount of $32.25 million at a variable rate of LIBOR + 1.65%.

(15)

Total construction loan in the amount of $25.1 million at a variable rate of Eurodollar + 1.65%.

(16)

Total construction loan in the amount of $16.0 million at a variable rate of LIBOR + 1.75%.

(17)

Total construction loan in the amount of $10.0 million at a variable rate of LIBOR + 1.85%.

    The Company has determined that its estimated cash flows and available sources of liquidity are adequate to meet liquidity needs for the next twelve months. The Company believes that its principal liquidity needs for the next twelve months are to fund normal recurring expenses, debt service requirements, current development costs not covered under construction loans and the minimum distribution required to maintain its REIT qualifications under the Internal Revenue Code of 1986, as amended. The Company believes that these needs will be fully funded from cash flows provided by operating and financing activities. The Company's operating properties and hotels require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. For the three months ended June 30, 2001, the Company's recurring capital expenditures totaled $3.4 million, $4.1 million, and $6.0 million for general capital expenditures, hotel capital expenditures, and tenant improvement and leasing commissions, respectively.

    The Company expects to meet its liquidity requirements for periods beyond twelve months for the cost of property developments, property acquisitions, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements through construction loans, the incurrence of long-term secured and unsecured indebtedness, income from operations and sales of real estate and possibly the issuance of additional common and preferred units of Boston Properties Limited Partnership and/or equity securities of Boston Properties, Inc. In addition, the Company may finance the development, redevelopment or acquisition of additional properties by using the Unsecured Line of Credit.

    The Company has development projects currently in process, which require commitments to fund to completion. Commitments under these arrangements totaled approximately $905.2 million as of June 30, 2001. The Company expects to fund these commitments using available cash, construction loans and the Unsecured Line of Credit. In addition, the Company has options to acquire land that require minimum deposits that the Company will fund using available cash or the Unsecured Line of Credit.

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    The Company has investments in securities of approximately $4.3 million at June 30, 2001 related to non-publicly traded companies. These investments have been recorded at cost as they are not considered marketable under Statement of Financial Accounting Standard No 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115"). During the quarter ended June 30, 2001, in accordance with SFAS 115, the Company wrote down its remaining investments in securities, as the Company believes the loss in value to be "other than temporary". The loss on investments totaled $6.5 million for the quarter ended June 30, 2001.

Funds from Operations

    Management believes that Funds from Operations ("FFO") is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. In accordance with the National Association of Real Estate Investment Trusts ("NAREIT") revised definition of FFO, the Company calculated FFO by adjusting net income (loss) (computed in accordance with accounting principles generally accepted in the United States, including non-recurring items), for gains (or losses) from sales of properties (except gains and losses from sales of depreciable operating properties), real estate related depreciation and amortization and unconsolidated partnerships and joint ventures. The Company's FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States and should not be considered as an alternative to cash flows or net income (determined in accordance with accounting principles generally accepted in the United States) as a measure of the Company's liquidity or performance, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions.

    The following table presents the Company's Funds from Operations for the three months ended June 30, 2001 and 2000:

		Three Months Ended June 30, 2001			Three Months Ended June 30, 2000
Income before minority interests and joint venture income		$	70,479		$	55,997
Add:
	Real estate depreciation and amortization		37,599			32,497
	Income from unconsolidated joint ventures		717			662
Less:
	Net derivative losses		(4,733	)
	Minority property partnerships' share of Funds from Operations		(411	)		(266	)
	Preferred dividends and distributions		(8,260	)		(8,250	)
Funds from Operations			95,391		$	80,640
	Add: Net derivative losses		4,733			—
Funds from Operations before net derivative losses		$	100,124		$	80,640
Funds from Operations Available to Common Shareholders before net derivative losses (81.31% and 73.60%, respectively)		$	81,410		$	59,347

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    Reconciliation to Diluted Funds from Operations:

		Three Months Ended June 30, 2001			Three Months Ended June 30, 2000
		Income (Numerator)		Shares (Denominator)	Income (Numerator)		Shares (Denominator)
Funds from Operations		$	100,124	110,676	$	80,640	92,385
Effect of Dilutive Securities
	Convertible Preferred Units		6,612	11,011		6,607	10,376
	Convertible Preferred Stock		1,648	2,625		1,643	2,625
	Stock Options and other		—	1,633		316	1,589
Diluted Funds from Operations		$	108,384	125,945	$	89,206	106,975
Company's share of Diluted Funds From Operations (83.58% and 77.20%, respectively)		$	90,581	105,259	$	68,864	82,583

Certain Factors Affecting Future Operating Results

    This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the Company's business, strategies, revenues, expenditures and operating and capital requirements. The following factors, among others, could cause actual results, performance or achievements of the Company to differ materially from those set forth or contemplated in the forward-looking statements made in this report: 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 the Company's 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 the Company's 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 the Company's dependence on key personnel whose continued service is not guaranteed.

Inflation

    Substantially all of the office leases provide for separate real estate tax and operating expense escalations over a base amount. In addition, many of the leases provide for fixed base rent increases or indexed increases. The Company believes that inflationary increases may be at least partially offset by the contractual rent increases described above.

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ITEM 3—Quantitative and Qualitative Disclosures about Market Risk

    Market risk is the risk of loss from adverse changes in market prices and interest rates. The primary market risk facing the Company is mortgage debt, which bears interest primarily at fixed rates, and therefore, the fair value of these instruments is affected by changes in the market interest rates. The following table presents principal cash flows based upon maturity dates of the debt obligations and the related weighted average interest rates by expected maturity dates for the fixed rate debt. The interest rate of the variable rate debt as of June 30, 2001 ranged from LIBOR plus 1.00% to LIBO plus 2.00%. At June 30, 2001, the Company was a party to three hedge contracts for a total of $450.0 million and a swap arrangement for $213.0 million. The hedge contracts provide for a fixed interest rate when LIBOR is less than 5.76% and when LIBOR is greater than 6.35% or 7.95% for terms remaining of two to four years. The swap agreement provides for a fixed interest rate of 6.0% through September 11, 2002.

										Mortgage Debt (in thousands)
	2001			2002			2003			2004			2005			Thereafter			Total			Fair Value
Fixed Rate	$	130,833		$	192,179		$	255,017		$	113,451		$	276,605		$	2,572,890		$	3,510,975		$	3,510,975
Weighted Average Interest Rate		8.06	%		8.41	%		7.56	%		7.36	%		7.04	%		7.18	%		7.30	%
Variable Rate	$	244		$	206,539		$	294,799		$	165,113			—			—		$	666,695		$	666,695

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PART II.  OTHER INFORMATION

ITEM 2—Changes in Securities

On April 25, 2001, the Company issued 26,821 OP Units. Such OP Units were issued to accredited investors in a transaction that was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of such Act.

ITEM 4—Submission of Matters to a Vote of Security Holders

The Company held its annual meeting of stockholders on May 2, 2001. The stockholders voted to elect Mortimer B. Zuckerman, Alan B. Landis and Richard E. Salomon as Class I Directors of the Company to serve until 2004. 66,245,247, 74,011,565 and 73,742,570 votes were cast for the elections of Mr. Zuckerman, Mr. Landis and Mr. Salomon, respectively, and 8,632,998, 866,679 and 1,135,675 votes were withheld, respectively. Alan J. Patricof and Martin Turchin will continue to serve as Class II Directors and Edward H. Linde and Ivan G. Seidenberg will continue to serve as Class III Directors until their present terms expire in 2002 and 2003, respectively, and their successors are duly elected.

The stockholders voted on a shareholder proposal concerning the annual election of directors. 40,580,594 votes were cast for the proposal, 24,871,662 votes were cast against the proposal, and 210,127 votes abstained from this proposal.

The stockholders voted on a shareholder proposal concerning the shareholder rights plan. 46,602,690 votes were cast for the proposal, 18,771,889 votes were cast against the proposal, and 287,804 votes abstained from this proposal.

The stockholders also voted to ratify the Board of Directors' selection of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending December 31, 2001. 71,809,141 votes were cast for this proposal, 3,019,007 votes were cast against this proposal, and 50,096 votes abstained from this proposal.

ITEM 6—Exhibits and Reports on Form 8-K

(b)

Reports on Form 8-K

A Form 8-K dated April 25, 2001 was filed with the Securities and Exchange Commission to report under Item 5 of such report the information presented to investors and analysts and the Company's press release for the quarter ended March 31, 2001.

A Form 8-K dated May 10, 2001 was filed with the Securities and Exchange Commission to report under Item 2 of such report the acquisition of Citigroup Center.

A Form 8-K dated June 6, 2001 was filed with the Securities and Exchange Commission to report under Item 5 of such report the information to be used in an investor presentation.

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BOSTON PROPERTIES, INC.
August 13, 2001	/s/ DOUGLAS T. LINDE   Douglas T. Linde Chief Financial Officer (duly authorized officer and principal financial officer)

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QuickLinks

BOSTON PROPERTIES, INC. FORM 10-Q for the quarter ended June 30, 2001
TABLE OF CONTENTS
BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
BOSTON PROPERTIES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited and in thousands)
PART II. OTHER INFORMATION
SIGNATURES