BXP Writes Down Asset Values, Modifies Loans As It Seeks To Hold On For Office Recovery

As sentiment surrounding the commercial real estate market continues to sour, the largest publicly traded U.S. office landlord still has hope that a recovery is on the horizon.

Boston Properties revealed in its third-quarter earnings report that it took a $272.6M impairment charge due to value reductions for four properties in New York, San Jose, California, and Seattle, and that charge contributed to it reporting a quarterly net loss of $112M. But its executives said it isn’t giving up on those buildings.

“Given the cyclical nature of the real estate business, the value of assets like these will recover in the future when interest rates normalize and corporate economic conditions improve, and we expect to hold these assets through their recovery,” Boston Properties Chief Financial Officer Mike LaBelle said during the REIT’s Thursday morning earnings call.

Although the Fed has hiked interest rates and signaled that they aren’t coming down anytime soon, the economy has seen some positive signs, like job gains and GDP growth. However, Boston Properties CEO Owen Thomas said these strong economic factors haven’t helped the commercial real estate sector.

“This rosy economic picture is misleading, as it does not accurately reflect the market tone and operating environment for many of our clients,” Thomas said. “Job creation has been in the leisure and hospitality, healthcare, education and government sectors, not in the office-seizing sectors such as information and financial services.”

The impairment charge Boston Properties paid was for its joint venture investments in Platform 16 in San Jose, 360 Park Ave. S and 200 Fifth Ave. in New York, and Safeco Plaza in Seattle. The largest charge came from its 1M SF, three-building Platform 16 project, on which Boston Properties paused construction in August due to worsening market conditions.

“From our perspective, this is an accounting adjustment that we felt we needed to make,” LaBelle said. “I don't think it necessarily reflects a meaningful change in the prospects of these assets — other than Platform 16, which we talked about last quarter, where we're stopping construction.”

While some landlords have handed back the keys to office buildings that reach their debt maturity dates, Boston Properties has made a series of investments and loan modifications that signal it is looking to hold on to its assets for the long term.

In October, D.C.’s Metropolitan Square changed hands from Blackstone and Boston Properties to Artemis Real Estate Partners through a deed-in-lieu-of-foreclosure transaction. Rather than walking away from the property, Boston Properties agreed to invest new money, in partnership with Artemis.

The company last quarter modified a number of its loans that were set to mature in 2023 and 2024, it revealed in its earnings report. It negotiated a one-year extension on the $336.6M outstanding balance for a loan on the 634K SF 100 Causeway property in Boston and secured a loan modification for its Hub on Causeway property that now matures on Sept. 8, 2025.

The company also closed on a $600M collateralized loan last quarter for its 325 Main St., 355 Main St. and 90 Broadway properties in Cambridge. The earnings report says it plans to use the proceeds from this loan to repay an unsecured $700M unsecured note that is due Feb. 1, 2024.

Though Boston Properties has made modifications to its upcoming maturing debt, the company says that it is getting much higher interest rates than it previously had. LaBelle said that the company’s new financing is at an average rate of 7%, double the 3.5% it had been able to sure.

“Given the significant recent move in interest rates, we are happy with the timing of our last couple of bond deals, both of which have been below market coupons today,” LaBelle said.

Despite the economic headwinds that the REIT said have slowed down leasing activity, Boston Properties executed 1.1M SF of leases and is on track to surpass its 3M SF leasing target, according to its earnings supplemental. The company also delivered two projects at 140 Kendrick St. in Newton, Massachusetts, and 751 Gateway in San Francisco.

Boston Properties also said it has raised $4.1B in gross funding and has $2.7B in liquidity that it will use to seek out new acquisition opportunities that are set to come as more distressed properties enter the marketplace.

Thomas said some of the company’s best assets like the General Motors Building, 200 Clarendon St., 100 Federal St. and 510 Madison were all acquired during the last major downturn at attractive prices.

“In anticipation of the current market distress in our sector, we have been positioning BXP to play offense for the past year,” Thomas said. “In search of opportunities, we're maintaining continuous dialogue with lenders that are foreclosing on or restructuring assets as well as owners seeking to reduce their office exposure.”