Segment Information

9 Months Ended

Sep. 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 nine months ended September 30, 2019 and 2018.

Boston Properties, Inc.



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019		2018
	(in thousands)
Net income attributable to Boston Properties, Inc. common shareholders	$	107,771		$	119,118		$	370,200	$	423,835
Add:
Preferred dividends	2,625			2,625			7,875		7,875
Noncontrolling interest—common units of Boston Properties Limited Partnership	12,504			13,852			43,133		49,128
Noncontrolling interests in property partnerships	18,470			14,850			54,782		46,484
Interest expense	106,471			95,366			309,837		277,790
Loss from early extinguishment of debt	28,010			—			28,010		—
Impairment loss	—			—			24,038		—
Net operating income from unconsolidated joint ventures	23,065			22,511			73,129		54,798
Depreciation and amortization expense	165,862			157,996			507,867		480,210
Transaction costs	538			914			1,415		1,409
Payroll and related costs from management services contracts	2,429			2,516			8,227		7,371
General and administrative expense	31,147			29,677			107,980		94,039
Less:
Net operating income attributable to noncontrolling interests in property partnerships	46,249			43,068			138,896		132,026
Gains from investments in securities	106			1,075			4,240		1,454
Interest and other income	7,178			2,822			14,546		7,049
Gains (losses) on sales of real estate	(15		)	7,863			766		122,552
Income (loss) from unconsolidated joint ventures	(649		)	(4,313		)	47,528		(3,083		)
Direct reimbursements of payroll and related costs from management services contracts	2,429			2,516			8,227		7,371
Development and management services revenue	10,303			15,253			29,566		32,963
Company’s share of Net Operating Income	$	433,291		$	391,141		$	1,292,724	$	1,142,607

Boston Properties Limited Partnership



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019		2018
	(in thousands)
Net income attributable to Boston Properties Limited Partnership common unitholders	$	122,117		$	136,201		$	421,214	$	483,069
Add:
Preferred distributions	2,625			2,625			7,875		7,875
Noncontrolling interests in property partnerships	18,470			14,850			54,782		46,484
Interest expense	106,471			95,366			309,837		277,790
Loss from early extinguishment of debt	28,010			—			28,010		—
Impairment loss	—			—			22,272		—
Net operating income from unconsolidated joint ventures	23,065			22,511			73,129		54,798
Depreciation and amortization expense	164,020			156,056			501,901		474,383
Transaction costs	538			914			1,415		1,409
Payroll and related costs from management services contracts	2,429			2,516			8,227		7,371
General and administrative expense	31,147			29,677			107,980		94,039
Less:
Net operating income attributable to noncontrolling interests in property partnerships	46,249			43,068			138,896		132,026
Gains from investments in securities	106			1,075			4,240		1,454
Interest and other income	7,178			2,822			14,546		7,049
Gains (losses) on sales of real estate	(15		)	9,154			915		126,831
Income (loss) from unconsolidated joint ventures	(649		)	(4,313		)	47,528		(3,083		)
Direct reimbursements of payroll and related costs from management services contracts	2,429			2,516			8,227		7,371
Development and management services revenue	10,303			15,253			29,566		32,963
Company’s share of Net Operating Income	$	433,291		$	391,141		$	1,292,724	$	1,142,607

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, loss from early extinguishment of debt, 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 (losses) on sales of real estate, income (loss) 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 (loss) 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, loss from early extinguishment of debt, 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 September 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 September 30, 2019:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	224,345		$	—		$	251,806		$	136,290		$	95,370		$	707,811
Residential	3,809			—			—			—			6,187			9,996
Hotel	13,014			—			—			—			—			13,014
Total	241,168			—			251,806			136,290			101,557			730,821
% of Grand Totals	33.00		%	—		%	34.45		%	18.65		%	13.90		%	100.00		%
Rental Expenses:
Office	81,278			—			98,698			45,900			35,716			261,592
Residential	1,244			—			—			—			2,767			4,011
Hotel	8,743			—			—			—			—			8,743
Total	91,265			—			98,698			45,900			38,483			274,346
% of Grand Totals	33.27		%	—		%	35.97		%	16.73		%	14.03		%	100.00		%
Net operating income	$	149,903		$	—		$	153,108		$	90,390		$	63,074		$	456,475
% of Grand Totals	32.84		%	—		%	33.54		%	19.80		%	13.82		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(10,379		)	—			(35,870		)	—			—			(46,249		)
Add: Company’s share of net operating income from unconsolidated joint ventures	1,686			14,702			(27		)	—			6,704			23,065
Company’s share of net operating income	$	141,210		$	14,702		$	117,211		$	90,390		$	69,778		$	433,291
% of Grand Totals	32.60		%	3.39		%	27.05		%	20.86		%	16.10		%	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 September 30, 2018:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	210,277		$	—		$	237,944		$	102,035		$	98,275		$	648,531
Residential	1,905			—			—			—			4,415			6,320
Hotel	13,664			—			—			—			—			13,664
Total	225,846			—			237,944			102,035			102,690			668,515
% of Grand Totals	33.78		%	—		%	35.60		%	15.26		%	15.36		%	100.00		%
Rental Expenses:
Office	78,089			—			96,795			34,016			35,365			244,265
Residential	1,159			—			—			—			2,565			3,724
Hotel	8,828			—			—			—			—			8,828
Total	88,076			—			96,795			34,016			37,930			256,817
% of Grand Totals	34.30		%	—		%	37.68		%	13.25		%	14.77		%	100.00		%
Net operating income	$	137,770		$	—		$	141,149		$	68,019		$	64,760		$	411,698
% of Grand Totals	33.46		%	—		%	34.29		%	16.52		%	15.73		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(8,332		)	—			(34,723		)	(13		)	—			(43,068		)
Add: Company’s share of net operating income from unconsolidated joint ventures	781			13,246			1,698			—			6,786			22,511
Company’s share of net operating income	$	130,219		$	13,246		$	108,124		$	68,006		$	71,546		$	391,141
% of Grand Totals	33.29		%	3.39		%	27.64		%	17.39		%	18.29		%	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 nine months ended September 30, 2019:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	659,717		$	—		$	761,993		$	391,851		$	288,201		$	2,101,762
Residential	9,732			—			—			—			16,978			26,710
Hotel	36,796			—			—			—			—			36,796
Total	706,245			—			761,993			391,851			305,179			2,165,268
% of Grand Totals	32.62		%	—		%	35.19		%	18.10		%	14.09		%	100.00		%
Rental Expenses:
Office	238,438			—			292,478			130,733			107,535			769,184
Residential	3,729			—			—			—			8,178			11,907
Hotel	25,686			—			—			—			—			25,686
Total	267,853			—			292,478			130,733			115,713			806,777
% of Grand Totals	33.20		%	—		%	36.26		%	16.20		%	14.34		%	100.00		%
Net operating income	$	438,392		$	—		$	469,515		$	261,118		$	189,466		$	1,358,491
% of Grand Totals	32.27		%	—		%	34.56		%	19.22		%	13.95		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(29,783		)	—			(108,665		)	(448		)	—			(138,896		)
Add: Company’s share of net operating income from unconsolidated joint ventures	3,276			45,864			3,455			—			20,534			73,129
Company’s share of net operating income	$	411,885		$	45,864		$	364,305		$	260,670		$	210,000		$	1,292,724
% of Grand Totals	31.87		%	3.55		%	28.18		%	20.16		%	16.24		%	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 nine months ended September 30, 2018:



	Boston			Los Angeles			New York			San Francisco			Washington, DC			Total
Rental Revenue: (1)
Office	$	623,084		$	—		$	714,348		$	285,410		$	296,092		$	1,918,934
Residential	4,252			—			—			—			11,026			15,278
Hotel	37,373			—			—			—			—			37,373
Total	664,709			—			714,348			285,410			307,118			1,971,585
% of Grand Totals	33.71		%	—		%	36.23		%	14.48		%	15.58		%	100.00		%
Rental Expenses:
Office	235,560			—			282,395			92,858			106,386			717,199
Residential	2,379			—			—			—			6,530			8,909
Hotel	25,642			—			—			—			—			25,642
Total	263,581			—			282,395			92,858			112,916			751,750
% of Grand Totals	35.06		%	—		%	37.57		%	12.35		%	15.02		%	100.00		%
Net operating income	$	401,128		$	—		$	431,953		$	192,552		$	194,202		$	1,219,835
% of Grand Totals	32.88		%	—		%	35.41		%	15.79		%	15.92		%	100.00		%
Less: Net operating income attributable to noncontrolling interests in property partnerships	(24,879		)	—			(107,420		)	273			—			(132,026		)
Add: Company’s share of net operating income from unconsolidated joint ventures	2,096			27,222			5,065			—			20,415			54,798
Company’s share of net operating income	$	378,345		$	27,222		$	329,598		$	192,825		$	214,617		$	1,142,607
% of Grand Totals	33.11		%	2.38		%	28.85		%	16.88		%	18.78		%	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.