--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--IDR to 'BBB+' from 'BBB';
The Rating Outlook is Stable.
The upgrade reflects the strong qualitative elements in BXP's credit profile. Examples include the above average quality of BXP's largely unencumbered operating portfolio and its cycle-tested management team that has extensive real estate and capital markets experience. The upgrade also considers the consistency of the company's portfolio and balance sheet strategy, its demonstrated commitment to an unsecured borrowing strategy and proven access to multiple sources of debt and equity capital in varied capital markets environments.
The ratings reflect BXP's appropriate coverage for a 'BBB+' rated REIT. Moreover, BXP maintains an adequate liquidity position that is supported by its large unrestricted cash balance, meaningful retained free cash flow and near full availability under its
Execution and liquidity risk associated with the company's development platform and its concentrated geographical footprint and related exposure to finance, legal and government and defense industry tenants are credit concerns that balance BXP's ratings. BXP's size and asset and management quality help offset its above-average leverage relative to its similarly rated REITs.
SUPERIOR ASSET QUALITY
BXP owns a high-quality portfolio of predominantly class A office properties located in supply-constrained central business district (CBD) markets. The company's CBD properties are often leading properties in their submarkets that compete for the highest profile tenants, and have historically attracted significant investor and lender interest. The latter enhances BXP's contingent liquidity profile, including during challenging property and capital market environments.
QUALITATIVE ELEMENTS BALANCE ELEVATED LEVERAGE
Fitch expects BXP's leverage to be in the low 7.0x range through 2016, which is elevated for a 'BBB+' rated REIT. However, BXP's large size, superior portfolio asset quality and excellent track record of capital access and financial discipline balance this credit concern. BXP's net debt to recurring operating EBITDA for the trailing 12 months (TTM) ended
Fitch expects BXP's fixed charge coverage should sustain in the mid-2.0x range through 2016, aided by mid-single digit cash same store net operating income (NOI) growth and incremental NOI from new developments. Fixed-charge coverage was 2.4x for the TTM ended
The seven-year weighted average term to maturity of BXP's leases provides stability to the company's cash flows. The company's in-service portfolio was 92.4% leased at
BXP maintains an adequate liquidity position. For the period
Unfunded development commitments of approximately
BXP paid out approximately 67% of its adjusted funds from operations (AFFO) as dividends to common shareholders during 1Q'14. The company has historically kept its payout ratio below 75% - a credit positive. BXP's dividend policy is to pay out 100% of taxable net income. As such, BXP retains approximately
EXCELLENT CONTINGENT LIQUIDITY
BXP has a large, high quality pool of unencumbered assets with above average financeability and salability characteristics. As of
Fitch expects the quality of BXP's unencumbered portfolio to improve further over the rating horizon through the addition of
The company's unencumbered assets cover its net unsecured debt by 2.9x based on a direct capitalization approach of unencumbered NOI using a stressed 7.5% capitalization rate. Fitch views this level of coverage as adequate for the rating. BXP has maintained UA/UD coverage in the high 2.0x range during the past five years.
ELEVATED 2017 DEBT MATURITIES
BXP's debt maturity schedule is reasonably well staggered, with the exception of 2017 when 29% of its pro rata debt matures. The company has historically been able to go to market with sizable notes offerings to refinance its debt maturities. BXP management endeavors to keep annual bond issuance within a range of
The unusually high level of maturing debt in 2017 is principally related to mortgages inherited through opportunistic property acquisitions during the last downcycle including the
BXP proactively renegotiated and expanded its unsecured revolving line of credit in
Fitch calculates BXP's leverage by deconsolidating its consolidated joint ventures. Virtually all of the company's pro rata JV debt is nonrecourse to BXP. Although BXP has contributed equity to right-size mortgages at times, it has also been willing to offer deeds in lieu of foreclosure on assets where it feels the value of the assets is permanently impaired below the value of the mortgage. The
TENANT INDUSTRY CONCENTRATION RISK
The company has a high proportion of financial, legal and government related tenants in its portfolio. Tenants in these segments comprised approximately 28%, 25% and 5% of gross rent, respectively, for a combined total of 58% as of
Development is a key component of BXP's strategy and the company has historically allowed its pipeline of projects under construction to become a large percentage of its portfolio on both a relative and absolute basis. For example, the pipeline grew to 20.3% of total undepreciated book assets in 2Q'08, with the unfunded portion representing 11% of total assets. The total estimated investment of BXP's development pipeline was
BELOW AVERAGE SAME-STORE GROWTH
Fitch expects BXP's cash same-store NOI growth to accelerate to the mid-single digits during 2014 compared with 2.6% during 2013. BXP's same-store NOI growth averaged 1.4% between 2007 and 2013, trailing a selected group of office REIT peers by approximately 30 basis points. Fitch attributes the underperformance to outsized exposure to financial services and government related tenants due to the company's portfolio overweights in
PREFERRED STOCK NOTCHING
The two-notch differential between BXP's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch's research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
STABLE RATING OUTLOOK
The Stable Outlook reflects Fitch's expectations that fixed-charge coverage and leverage will sustain at the current levels over the next 12-24 months.
Fitch expects BXP to continue to pursue a portfolio and balance sheet strategy that is consistent with a 'BBB+' rating. Although upward rating momentum is unlikely, the following factors could collectively or individually result in an upgrade to BXP's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 6.0x for several quarters. (leverage was 6.8x for the TTM ended
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x for several consecutive quarters (coverage was 2.4x for the TTM ended
Conversely, the following factors may result in negative momentum in the ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (
--'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis' (
--'Recovery Ratings and Notching Criteria for Equity REITs' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Source: Fitch Ratings
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