Segment Information

6 Months Ended

Jun. 30, 2019

12. Segment Information

The following tables present reconciliations of Net Income Attributable to Boston Properties, Inc. Common Shareholders to the Company’s share of Net Operating Income and Net Income Attributable to Boston Properties Limited Partnership Common Unitholders to the Company’s share of Net Operating Income for the three and six months ended June 30, 2019 and 2018.

Boston Properties, Inc.



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
	(in thousands)
Net income attributable to Boston Properties, Inc. common shareholders	$	164,318	$	128,681	$	262,431	$	304,682
Add:
Preferred dividends	2,625		2,625		5,250		5,250
Noncontrolling interest—common units of Boston Properties Limited Partnership	19,036		14,859		30,627		35,311
Noncontrolling interests in property partnerships	17,482		14,400		36,312		31,634
Interest expense	102,357		92,204		203,366		182,424
Impairment loss	—		—		24,038		—
Net operating income from unconsolidated joint ventures	24,715		16,227		50,064		32,287
Depreciation and amortization expense	177,411		156,417		342,005		322,214
Transaction costs	417		474		877		495
Payroll and related costs from management services contracts	2,403		1,970		5,798		4,855
General and administrative expense	35,071		28,468		76,833		64,362
Less:
Net operating income attributable to noncontrolling interests in property partnerships	45,562		43,049		92,647		88,958
Gains from investments in securities	1,165		505		4,134		379
Interest and other income	3,615		2,579		7,368		4,227
Gains on sales of real estate	1,686		18,292		781		114,689
Income from unconsolidated joint ventures	47,964		769		48,177		1,230
Direct reimbursements of payroll and related costs from management services contracts	2,403		1,970		5,798		4,855
Development and management services revenue	9,986		9,305		19,263		17,710
Company’s share of Net Operating Income	$	433,454	$	379,856	$	859,433	$	751,466

Boston Properties Limited Partnership



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
	(in thousands)
Net income attributable to Boston Properties Limited Partnership common unitholders	$	185,715	$	145,961	$	299,097	$	346,868
Add:
Preferred distributions	2,625		2,625		5,250		5,250
Noncontrolling interests in property partnerships	17,482		14,400		36,312		31,634
Interest expense	102,357		92,204		203,366		182,424
Impairment loss	—		—		22,272		—
Net operating income from unconsolidated joint ventures	24,715		16,227		50,064		32,287
Depreciation and amortization expense	175,199		154,474		337,881		318,327
Transaction costs	417		474		877		495
Payroll and related costs from management services contracts	2,403		1,970		5,798		4,855
General and administrative expense	35,071		28,468		76,833		64,362
Less:
Net operating income attributable to noncontrolling interests in property partnerships	45,562		43,049		92,647		88,958
Gains from investments in securities	1,165		505		4,134		379
Interest and other income	3,615		2,579		7,368		4,227
Gains on sales of real estate	1,835		18,770		930		117,677
Income from unconsolidated joint ventures	47,964		769		48,177		1,230
Direct reimbursements of payroll and related costs from management services contracts	2,403		1,970		5,798		4,855
Development and management services revenue	9,986		9,305		19,263		17,710
Company’s share of Net Operating Income	$	433,454	$	379,856	$	859,433	$	751,466

Net operating income (“NOI”) is a non-GAAP financial measure equal to net income attributable to Boston Properties, Inc. common shareholders and net income attributable to Boston Properties Limited Partnership common unitholders, as applicable, the most directly comparable GAAP financial measures, plus (1) preferred dividends/distributions, net income attributable to noncontrolling interests, interest expense, impairment loss, depreciation and amortization expense, transaction costs, payroll and related costs from management services contracts and corporate general and administrative expense less (2) gains from investments in securities, interest and other income, gains on sales of real estate, income from unconsolidated joint ventures, direct reimbursements of payroll and related costs from management services contracts and development and management services revenue. The Company believes NOI is useful to investors as a performance measure and believes it provides useful information to investors regarding the Company’s results of operations and financial condition because, when compared across periods, it 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 attributable to Boston Properties, Inc. common shareholders and net income attributable to Boston Properties Limited Partnership common unitholders. 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. Similarly, interest expense may be incurred at the property level even though the financing proceeds may be used at the corporate level (e.g., used for other investment activity). In addition, depreciation and amortization expense, because of historical cost accounting and useful life estimates, may distort operating performance measures at the property level. NOI presented by the Company may not be comparable to NOI reported by other REITs or real estate companies that define NOI differently.

The Company’s internal reporting utilizes its share of NOI, which includes its share of NOI from consolidated and unconsolidated joint ventures, which is a non-GAAP financial measure that is calculated as the consolidated amount, plus the Company’s share of the amount from the Company’s unconsolidated joint ventures (calculated based upon the Company’s percentage ownership interest and, in some cases, after priority allocations), minus the Company’s partners’ share of the amount from the Company’s consolidated joint ventures (calculated based upon the partners’ percentage ownership interests and, in some cases, after priority allocations, income allocation to private REIT shareholders and their share of fees due to the Company). The Company’s share of NOI from unconsolidated joint ventures does not include its share of gains on sale of real estate from unconsolidated joint ventures which is included within income from unconsolidated joint ventures in the Company’s Consolidated Statements of Operations. Management utilizes its share of NOI in assessing its performance as the Company has several significant joint ventures and, in some cases, the Company exercises significant influence over, but does not control, the joint venture, in which case GAAP requires that the Company account for the joint venture entity using the equity method of accounting and the Company does not consolidate it for financial reporting purposes. In other cases, GAAP requires that the Company consolidate the venture even though the Company’s partner(s) owns a significant percentage interest. As a result, the presentations of the Company’s share of NOI should not be considered a substitute for, and should only be considered together with and as a supplement to, the Company’s financial information presented in accordance with GAAP.

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. Preferred dividends/distributions, interest expense, impairment loss, depreciation and amortization expense, transaction costs, payroll and related costs from management services contracts, corporate general and administrative expense, gains from investments in securities, interest and other income, gains on sales of real estate, direct reimbursements of payroll and related costs from management services contracts and development and management services revenue are not included in NOI and are provided as reconciling items to the Company’s reconciliations of its share of NOI to net income attributable to common shareholders/unitholders.

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by geographic area. The Company’s segments by geographic area are Boston, Los Angeles, New York, San Francisco and Washington, DC. The Company also presents information for each segment by property type including Office, Residential and Hotel.

Beginning in 2019, the Company modified the presentation of its geographic area classification for all periods presented to include the Los Angeles geographic area to align with its method of internal reporting. The Company expanded its presence in the Los Angeles geographic area with its equity method investment in Santa Monica Business Park located in Santa Monica, California. As of June 30, 2019, the Company has equity interests in a portfolio of 27 office and retail properties in the Los Angeles geographic area aggregating approximately 2.3 million net rentable square feet, all of which are owned through investments in unconsolidated joint ventures. The Company is presenting the Los Angeles geographic area as a reportable segment to align with its method of internal reporting given the increased significance as a result of commencing a full reporting period of ownership of the Santa Monica Business Park portfolio. The inclusion of the Los Angeles geographic area has also resulted in a change in the reported measure of segment profit or loss from NOI to the Company’s share of NOI. This change has been reflected in all periods presented and the impact of the change can been seen within the tables below. The Company has not presented rental revenue and rental expenses for properties owned through investments in unconsolidated joint ventures, including those in the Los Angeles geographic area, as the Company accounts for these properties using the equity method of accounting.

Information by geographic area (dollars in thousands):

For the three months ended June 30, 2019:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	217,961		$	—		$	251,556		$	131,506		$	96,486		$	697,509
Residential	3,222			—			—			—			5,777			8,999
Hotel	14,844			—			—			—			—			14,844
Total	236,027			—			251,556			131,506			102,263			721,352
% of Grand Totals	32.72		%	—		%	34.87		%	18.23		%	14.18		%	100.00		%
Rental Expenses:
Office	77,660			—			96,809			43,708			35,672			253,849
Residential	1,279			—			—			—			2,843			4,122
Hotel	9,080			—			—			—			—			9,080
Total	88,019			—			96,809			43,708			38,515			267,051
% of Grand Totals	32.96		%	—		%	36.25		%	16.37		%	14.42		%	100.00		%
Net operating income	$	148,008		$	—		$	154,747		$	87,798		$	63,748		$	454,301
% of Grand Totals	32.58		%	—		%	34.06		%	19.33		%	14.03		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(10,031		)	—			(35,531		)	—			—			(45,562		)
Add: Company’s share of net operating income from unconsolidated joint ventures	818			15,454			1,696			—			6,747			24,715
Company’s share of net operating income	$	138,795		$	15,454		$	120,912		$	87,798		$	70,495		$	433,454
% of Grand Totals	32.01		%	3.57		%	27.90		%	20.26		%	16.26		%	100.00		%

_______________


(1)	Rental Revenue is equal to Total Revenue per the Company’s Consolidated Statements of Operations, less Development and Management Services Revenue and Direct Reimbursements of Payroll and Related Costs from Management Services Contracts Revenue per the Consolidated Statements of Operations.

For the three months ended June 30, 2018:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	207,810		$	—		$	234,006		$	93,482		$	98,505		$	633,803
Residential	1,195			—			—			—			3,604			4,799
Hotel	14,607			—			—			—			—			14,607
Total	223,612			—			234,006			93,482			102,109			653,209
% of Grand Totals	34.23		%	—		%	35.83		%	14.31		%	15.63		%	100.00		%
Rental Expenses:
Office	77,147			—			91,838			31,214			34,678			234,877
Residential	706			—			—			—			2,207			2,913
Hotel	8,741			—			—			—			—			8,741
Total	86,594			—			91,838			31,214			36,885			246,531
% of Grand Totals	35.12		%	—		%	37.26		%	12.66		%	14.96		%	100.00		%
Net operating income	$	137,018		$	—		$	142,168		$	62,268		$	65,224		$	406,678
% of Grand Totals	33.69		%	—		%	34.96		%	15.31		%	16.04		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(8,418		)	—			(34,751		)	120			—			(43,049		)
Add: Company’s share of net operating income from unconsolidated joint ventures	781			6,902			1,706			—			6,838			16,227
Company’s share of net operating income	$	129,381		$	6,902		$	109,123		$	62,388		$	72,062		$	379,856
% of Grand Totals	34.06		%	1.82		%	28.73		%	16.42		%	18.97		%	100.00		%

_______________


(1)	Rental Revenue is equal to Total Revenue per the Company’s Consolidated Statements of Operations, less Development and Management Services Revenue and Direct Reimbursements of Payroll and Related Costs from Management Services Contracts Revenue per the Consolidated Statements of Operations.

For the six months ended June 30, 2019:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	435,372		$	—		$	510,187		$	255,561		$	192,831		$	1,393,951
Residential	5,923			—			—			—			10,791			16,714
Hotel	23,782			—			—			—			—			23,782
Total	465,077			—			510,187			255,561			203,622			1,434,447
% of Grand Totals	32.42		%	—		%	35.56		%	17.82		%	14.20		%	100.00		%
Rental Expenses:
Office	157,160			—			193,780			84,833			71,819			507,592
Residential	2,485			—			—			—			5,411			7,896
Hotel	16,943			—			—			—			—			16,943
Total	176,588			—			193,780			84,833			77,230			532,431
% of Grand Totals	33.17		%	—		%	36.39		%	15.93		%	14.51		%	100.00		%
Net operating income	$	288,489		$	—		$	316,407		$	170,728		$	126,392		$	902,016
% of Grand Totals	31.98		%	—		%	35.08		%	18.93		%	14.01		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(19,404		)	—			(72,795		)	(448		)	—			(92,647		)
Add: Company’s share of net operating income from unconsolidated joint ventures	1,590			31,162			3,482			—			13,830			50,064
Company’s share of net operating income	$	270,675		$	31,162		$	247,094		$	170,280		$	140,222		$	859,433
% of Grand Totals	31.49		%	3.63		%	28.75		%	19.81		%	16.32		%	100.00		%

_______________


(1)	Rental Revenue is equal to total Revenue per the Company’s Consolidated Statements of Operations, less Development and Management Services Revenue and Direct Reimbursements of Payroll and Related Costs from Management Services Contracts Revenue per the Consolidated Statements of Operations.

For the six months ended June 30, 2018:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	412,807		$	—		$	476,404		$	183,375		$	197,817		$	1,270,403
Residential	2,347			—			—			—			6,611			8,958
Hotel	23,709			—			—			—			—			23,709
Total	438,863			—			476,404			183,375			204,428			1,303,070
% of Grand Totals	33.68		%	—		%	36.56		%	14.07		%	15.69		%	100.00		%
Rental Expenses:
Office	157,471			—			185,600			58,842			71,021			472,934
Residential	1,220			—			—			—			3,965			5,185
Hotel	16,814			—			—			—			—			16,814
Total	175,505			—			185,600			58,842			74,986			494,933
% of Grand Totals	35.46		%	—		%	37.50		%	11.89		%	15.15		%	100.00		%
Net operating income	$	263,358		$	—		$	290,804		$	124,533		$	129,442		$	808,137
% of Grand Totals	32.59		%	—		%	35.98		%	15.41		%	16.02		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(16,547		)	—			(72,697		)	286			—			(88,958		)
Add: Company’s share of net operating income from unconsolidated joint ventures	1,315			13,976			3,367			—			13,629			32,287
Company’s share of net operating income	$	248,126		$	13,976		$	221,474		$	124,819		$	143,071		$	751,466
% of Grand Totals	33.02		%	1.86		%	29.47		%	16.61		%	19.04		%	100.00		%

_______________

(1)

Rental Revenue is equal to total Revenue per the Company’s Consolidated Statements of Operations, less Development and Management Services Revenue and Direct Reimbursements of Payroll and Related Costs from Management Services Contracts Revenue per the Consolidated Statements of Operations.