As of June 30, 2012, the Company’s portfolio consisted of 150 properties, comprised primarily of Class A office space, one hotel, three residential properties and three retail properties, aggregating approximately 42.8 million square feet, including six properties under construction totaling 2.2 million square feet. In addition, the Company has structured parking for vehicles containing approximately 15.2 million square feet. The overall percentage of leased space for the 141 properties in service (excluding the two in-service residential properties and the hotel) as of June 30, 2012 was 91.6%.
Significant events during the second quarter included:
- On April 2, 2012, the Company used available cash to repay the mortgage loan collateralized by its One Freedom Square property located in Reston, Virginia totaling $65.1 million. The mortgage financing bore interest at a fixed rate of 7.75% per annum and was scheduled to mature on June 30, 2012. There was no prepayment penalty. The Company recognized a gain on early extinguishment of debt totaling approximately $0.3 million related to the acceleration of the remaining balance of the historical fair value debt adjustment.
- On April 30, 2012, the Company fully placed in-service 510 Madison Avenue, a Class A office project with approximately 356,000 net rentable square feet located in New York City. The property is currently 55% leased.
- On May 4, 2012, the Company completed and fully placed in-service One Patriots Park, a Class A office redevelopment project with approximately 268,000 net rentable square feet located in Reston, Virginia. The property is 100% leased.
- On May 14, 2012, an unconsolidated joint venture in which the Company has a 60% interest entered into a lease termination agreement with an existing tenant at its General Motors Building in New York City. Under the agreement, the tenant terminated early its lease for approximately 36,000 square feet at the building and is responsible for certain payments to the unconsolidated joint venture aggregating approximately $28.4 million through May 1, 2014 (of which the Company’s share is approximately $17.0 million). As a result of the termination, the Company recognized termination income totaling approximately $11.8 million (which is net of the write-off of the accrued straight-line rent balance) during the second quarter of 2012, which is included within income from unconsolidated joint ventures on the Company’s consolidated statements of operations.
- On May 17, 2012, the Company completed the sale of its Bedford Business Park properties located in Bedford, Massachusetts for approximately $62.8 million in cash. Net cash proceeds totaled approximately $62.0 million, resulting in a gain on sale of approximately $36.9 million. Bedford Business Park is comprised of two Office/Technical buildings and one Class A office building aggregating approximately 470,000 net rentable square feet.
- On June 11, 2012, the Company’s Operating Partnership completed a public offering of $1.0 billion in aggregate principal amount of its 3.850% senior unsecured notes due 2023. The notes were priced at 99.779% of the principal amount to yield an effective rate (including financing fees) of 3.954% to maturity. The notes will mature on February 1, 2023, unless earlier redeemed. The aggregate net proceeds from the offering were approximately $989.4 million after deducting underwriting discounts and transaction expenses.
- During the second quarter of 2012, the Company utilized its “at the market” (“ATM”) stock offering program to issue an aggregate of 1,298,700 shares of its common stock for gross proceeds of approximately $139.2 million and net proceeds of approximately $137.9 million. As of August 6, 2012, approximately $305.3 million remained available for issuance under this ATM program.
Transactions completed subsequent to June 30, 2012:
- On July 13, 2012, the Company executed an agreement to form a joint venture, which upon closing will own and operate Fountain Square, an approximately 811,000 net rentable square foot office and retail complex located in Reston, Virginia, adjacent to the Company's other Reston properties. The joint venture partner will contribute the property valued at approximately $385.0 million and related mortgage indebtedness totaling approximately $211.3 million for a 50% interest in the joint venture. The Company expects to contribute cash totaling approximately $87.0 million for its 50% interest, which cash will be distributed to the joint venture partner. The Company expects to consolidate this joint venture. The mortgage loan bears interest at fixed rate of 5.71% per annum and matures on October 11, 2016. Pursuant to the joint venture agreement (i) the Company has rights to acquire the partner's 50% interest and (ii) the partner has the right to cause the Company to acquire the partner's interest on January 4, 2016, in each case at a fixed price totaling approximately $102.0 million in cash. The fixed price option rights expire on January 31, 2016. The Company expects to complete the transaction by the end of the third quarter of 2012, however there can be no assurance that the transaction will close on the terms currently contemplated or at all. The Company projects this property’s annualized 2012 Unleveraged FFO Return to be 6.0% and annualized 2012 Unleveraged Cash Return to be 5.6%. The calculation of these returns and related disclosures are presented on the accompanying table entitled “Projected Annualized 2012 Returns on Operating Property Acquisition.” There can be no assurance that actual returns will not differ materially from these projections.
- On July 25, 2012, the Company's Operating Partnership issued notice to redeem the remaining $225.0 million in aggregate principal amount of its 6.25% senior notes due 2013 on August 24, 2012. The Company expects to fund this redemption using available cash. The redemption price will equal the sum of (i) the present values as of the redemption date of the remaining scheduled payments of principal and interest from the redemption date to maturity (excluding any accrued and unpaid interest) discounted on a semi-annual basis at a rate equal to the yield to maturity of a comparable United States Treasury security plus 0.35%, plus (ii) accrued interest to, but excluding, August 24, 2012, as provided in the applicable indenture. The redemption price will be calculated three business days prior to the redemption date and will be payable on August 24, 2012 in accordance with the terms of the applicable indenture. In connection with the redemption, the Company expects (1) to recognize a loss on extinguishment of debt in the third quarter of 2012 of approximately $5.3 million as a result of the redemption premium and (2) a reduction in future interest payments from the redemption date through the stated maturity date of January 15, 2013 of approximately $5.7 million.
EPS and FFO per Share Guidance:The Company’s guidance for the third quarter and full year 2012 for EPS (diluted) and FFO per share (diluted) is set forth and reconciled below. The Company’s revised estimates include termination income in the second quarter of $0.09 per share, $0.03 per share of improvement in portfolio operations, $0.01 per share of additional development and management service income, and $0.01 per share from the expected acquisition of Fountain Square. These items are offset by increased interest expense of ($0.12) per share resulting from its $1.0 billion unsecured senior notes issuance on June 11, 2012 and dilution from the issuance of equity under its ATM program of ($0.02) per share. Except as described below, the estimates reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of the events referenced in this release and otherwise referenced during the conference call referred to below. The estimates do not include possible future gains or losses or the impact on operating results from other possible future property acquisitions or dispositions, other possible capital markets activity or possible future impairment charges. EPS estimates may be subject to fluctuations as a result of several factors, including changes in the recognition of depreciation and amortization expense and any gains or losses associated with disposition activity. The Company is not able to assess at this time the potential impact of these factors on projected EPS. By definition, FFO does not include real estate-related depreciation and amortization, impairment losses or gains or losses associated with disposition activities. There can be no assurance that the Company’s actual results will not differ materially from the estimates set forth below.
|Third Quarter 2012||Full Year 2012|
|Projected EPS (diluted)||$||0.33||-||$||0.35||$||1.98||-||$||2.04|
|Projected Company Share of Real EstateDepreciation and Amortization||0.80||-||0.80||3.19||-||3.19|
|Projected Company Share of Gains onSales/Transfers of Real Estate||0.00||-||0.00||0.32||-||0.32|
|Projected FFO per Share (diluted)||$||1.13||-||$||1.15||$||4.85||-||$||4.91|
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