Edgar Filing: BOSTON PROPERTIES INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________

FORM 10-Q

___________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13087

___________________________

BOSTON PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

___________________________



Delaware		04-2473675
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Prudential Center, 800 Boylston Street, Suite 1900, Boston, Massachusetts 02199-8103

(Address of principal executive offices) (Zip Code)

(617) 236-3300

(Registrant’s telephone number, including area code)

___________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock, par value $0.01 per share		153,576,272
(Class)		(Outstanding on November 2, 2015)

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BOSTON PROPERTIES, INC.

FORM 10-Q

for the quarter ended September 30, 2015

TABLE OF CONTENTS




		Page

PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)	1
	a) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	1
	b) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014	2
	c) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	3
	d) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2015 and 2014	4
	e) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	5
	f) Notes to the Consolidated Financial Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	70
ITEM 4.	Controls and Procedures	72

PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	73
ITEM 1A.	Risk Factors	73
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
ITEM 3.	Defaults Upon Senior Securities	73
ITEM 4.	Mine Safety Disclosures	73
ITEM 5.	Other Information	73
ITEM 6.	Exhibits	74

SIGNATURES		75

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PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements.

BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited )

	September 30, 2015			December 31, 2014
	(in thousands, except for share and par value amounts)
ASSETS
Real estate, at cost	$	18,412,086		$	18,231,978
Construction in progress	725,601			736,311
Land held for future development	264,598			268,114
Less: accumulated depreciation	(3,833,277		)	(3,547,659		)
Total real estate	15,569,008			15,688,744
Cash and cash equivalents	1,387,007			1,763,079
Cash held in escrows	90,379			487,321
Investments in securities	19,645			19,459
Tenant and other receivables (net of allowance for doubtful accounts of $1,164 and $1,142, respectively)	66,446			46,595
Accrued rental income (net of allowance of $1,558 and $1,499, respectively)	737,145			691,999
Deferred charges, net	749,628			831,744
Prepaid expenses and other assets	143,476			164,432
Investments in unconsolidated joint ventures	217,529			193,394
Total assets	$	18,980,263		$	19,886,767
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	4,132,071		$	4,309,484
Unsecured senior notes (net of discount of $11,092 and $12,296, respectively)	5,288,908			5,287,704
Unsecured line of credit	—			—
Mezzanine notes payable	308,817			309,796
Outside members' notes payable	180,000			180,000
Accounts payable and accrued expenses	245,200			243,263
Dividends and distributions payable	112,912			882,472
Accrued interest payable	200,916			163,532
Other liabilities	448,680			502,255
Total liabilities	10,917,504			11,878,506
Commitments and contingencies	—			—
Noncontrolling interests:
Redeemable preferred units of the Operating Partnership	—			633
Redeemable interest in property partnership	—			104,692
Equity:
Stockholders’ equity attributable to Boston Properties, Inc.:
Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding	—			—
Preferred stock, $.01 par value, 50,000,000 shares authorized;
5.25% Series B cumulative redeemable preferred stock, $.01 par value, liquidation preference $2,500 per share, 92,000 shares authorized, 80,000 shares issued and outstanding at September 30, 2015 and December 31, 2014	200,000			200,000
Common stock, $.01 par value, 250,000,000 shares authorized, 153,653,500 and 153,192,845 issued and 153,574,600 and 153,113,945 outstanding at September 30, 2015 and December 31, 2014, respectively	1,536			1,531
Additional paid-in capital	6,300,780			6,270,257
Dividends in excess of earnings	(627,054		)	(762,464		)
Treasury common stock at cost, 78,900 shares at September 30, 2015 and December 31, 2014	(2,722		)	(2,722		)
Accumulated other comprehensive loss	(20,625		)	(9,304		)
Total stockholders’ equity attributable to Boston Properties, Inc.	5,851,915			5,697,298
Noncontrolling interests:
Common units of the Operating Partnership	620,036			603,171
Property partnerships	1,590,808			1,602,467
Total equity	8,062,759			7,902,936
Total liabilities and equity	$	18,980,263		$	19,886,767

The accompanying notes are an integral part of these consolidated financial statements.

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands, except for per share amounts)
Revenue
Rental
Base rent	$	494,300		$	484,071		$	1,471,591		$	1,402,328
Recoveries from tenants	91,544			90,103			266,932			253,419
Parking and other	25,509			26,236			76,849			76,869
Total rental revenue	611,353			600,410			1,815,372			1,732,616
Hotel revenue	12,619			11,918			35,107			32,478
Development and management services	5,912			6,475			16,102			18,197
Total revenue	629,884			618,803			1,866,581			1,783,291
Expenses
Operating
Rental	219,796			215,179			655,610			624,213
Hotel	8,125			7,585			24,196			21,697
General and administrative	20,944			22,589			72,019			75,765
Transaction costs	254			1,402			789			2,500
Depreciation and amortization	153,015			157,245			475,082			466,143
Total expenses	402,134			404,000			1,227,696			1,190,318
Operating income	227,750			214,803			638,885			592,973
Other income (expense)
Income from unconsolidated joint ventures	2,647			4,419			20,559			10,069
Interest and other income	3,637			3,421			6,337			6,841
Gains (losses) from investments in securities	(1,515		)	(297		)	(1,146		)	651
Interest expense	(108,727		)	(113,308		)	(326,018		)	(337,839		)
Income before gains on sales of real estate	123,792			109,038			338,617			272,695
Gains on sales of real estate	199,479			41,937			294,563			41,937
Net income	323,271			150,975			633,180			314,632
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnerships	(115,240		)	(5,566		)	(139,712		)	(17,473		)
Noncontrolling interest—redeemable preferred units of the Operating Partnership	—			(75		)	(6		)	(1,014		)
Noncontrolling interest—common units of the Operating Partnership	(21,302		)	(14,963		)	(50,906		)	(29,819		)
Net income attributable to Boston Properties, Inc.	186,729			130,371			442,556			266,326
Preferred dividends	(2,647		)	(2,647		)	(7,854		)	(7,854		)
Net income attributable to Boston Properties, Inc. common shareholders	$	184,082		$	127,724		$	434,702		$	258,472

Basic earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	1.20		$	0.83		$	2.83		$	1.69
Weighted average number of common shares outstanding	153,595			153,120			153,426			153,077
Diluted earnings per common share attributable to Boston Properties, Inc. common shareholders:
Net income	$	1.20		$	0.83		$	2.82		$	1.69
Weighted average number of common and common equivalent shares outstanding	153,786			153,273			153,825			153,228

The accompanying notes are an integral part of these consolidated financial statements.

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands)
Net income	$	323,271		$	150,975		$	633,180		$	314,632
Other comprehensive income (loss):
Effective portion of interest rate contracts	(30,156		)	—			(18,050		)	—
Amortization of interest rate contracts (1)	627			628			1,882			1,881
Other comprehensive income (loss)	(29,529		)	628			(16,168		)	1,881
Comprehensive income	293,742			151,603			617,012			316,513
Net income attributable to noncontrolling interests	(136,542		)	(20,604		)	(190,624		)	(48,306		)
Other comprehensive income (loss) attributable to noncontrolling interests	7,056			(65		)	4,847			(191		)
Comprehensive income attributable to Boston Properties, Inc.	$	164,256		$	130,934		$	431,235		$	268,016

_______________

(1) Amounts reclassified from comprehensive income primarily to interest expense within the Company's Consolidated Statements of Operations.

The accompanying notes are an integral part of these consolidated financial statements.

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited and in thousands)



	Common Stock			Preferred Stock		Additional Paid-in Capital			Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
	Shares	Amount		Preferred Stock		Additional Paid-in Capital			Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
Equity, December 31, 2014	153,114	$	1,531	$	200,000	$	6,270,257		$	(762,464	)	$	(2,722	)	$	(9,304	)	$	2,205,638		$	7,902,936
Redemption of operating partnership units to common stock	419	5		—		14,152			—			—			—			(14,157		)	—
Allocated net income for the year	—	—		—		—			442,556			—			—			185,497			628,053
Dividends/distributions declared	—	—		—		—			(307,146		)	—			—			(35,307		)	(342,453		)
Shares issued pursuant to stock purchase plan	6	—		—		780			—			—			—			—			780
Net activity from stock option and incentive plan	36	—		—		4,600			—			—			—			29,307			33,907
Acquisition of redeemable noncontrolling interest in property partnership	—	—		—		(1,586		)	—			—			—			—			(1,586		)
Contributions from noncontrolling interests in property partnerships	—	—		—		—			—			—			—			1,758			1,758
Distributions to noncontrolling interests in property partnerships	—	—		—		—			—			—			—			(144,468		)	(144,468		)
Effective portion of interest rate contracts	—	—		—		—			—			—			(13,008		)	(5,042		)	(18,050		)
Amortization of interest rate contracts	—	—		—		—			—			—			1,687			195			1,882
Reallocation of noncontrolling interest	—	—		—		12,577			—			—			—			(12,577		)	—
Equity, September 30, 2015	153,575	$	1,536	$	200,000	$	6,300,780		$	(627,054	)	$	(2,722	)	$	(20,625	)	$	2,210,844		$	8,062,759

Equity, December 31, 2013	152,983	$	1,530	$	200,000	$	5,662,453		$	(108,552	)	$	(2,722	)	$	(11,556	)	$	1,302,465		$	7,043,618
Redemption of operating partnership units to common stock	70	1		—		2,367			—			—			—			(2,368		)	—
Conversion of redeemable preferred units to common units	—	—		—		—			—			—			—			33,306			33,306
Allocated net income for the year	—	—		—		—			266,326			—			—			38,496			304,822
Dividends/distributions declared	—	—		—		—			(306,340		)	—			—			(34,426		)	(340,766		)
Shares issued pursuant to stock purchase plan	7	—		—		761			—			—			—			—			761
Net activity from stock option and incentive plan	40	—		—		5,177			—			—			—			17,038			22,215
Contributions from noncontrolling interests in property partnerships	—	—		—		—			—			—			—			2,980			2,980
Distributions to noncontrolling interests in property partnerships	—	—		—		—			—			—			—			(21,224		)	(21,224		)
Amortization of interest rate contracts	—	—		—		—			—			—			1,690			191			1,881
Reallocation of noncontrolling interest	—	—		—		13,891			—			—			—			(13,891		)	—
Equity, September 30, 2014	153,100	$	1,531	$	200,000	$	5,684,649		$	(148,566	)	$	(2,722	)	$	(9,866	)	$	1,322,567		$	7,047,593

The accompanying notes are an integral part of these consolidated financial statements.

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BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the nine months ended September 30,
	2015			2014
	(in thousands)
Cash flows from operating activities:
Net income	$	633,180		$	314,632
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	475,082			466,143
Non-cash compensation expense	22,825			22,708
Income from unconsolidated joint ventures	(20,559		)	(10,069		)
Distributions of net cash flow from operations of unconsolidated joint ventures	6,484			3,130
Losses (gains) from investments in securities	1,146			(651		)
Non-cash portion of interest expense	(32,818		)	(28,753		)
Settlement of accreted debt discount on repurchases of unsecured exchangeable senior notes	—			(92,979		)
Gains on sales of real estate	(294,563		)	(41,937		)
Change in assets and liabilities:
Cash held in escrows	(32,750		)	3,957
Tenant and other receivables, net	(19,851		)	16,254
Accrued rental income, net	(55,941		)	(42,180		)
Prepaid expenses and other assets	20,988			(34,804		)
Accounts payable and accrued expenses	(2,937		)	4,237
Accrued interest payable	37,384			14,431
Other liabilities	(73,370		)	(60,795		)
Tenant leasing costs	(55,422		)	(63,647		)
Total adjustments	(24,302		)	155,045
Net cash provided by operating activities	608,878			469,677
Cash flows from investing activities:
Construction in progress	(251,984		)	(305,192		)
Building and other capital improvements	(84,644		)	(57,329		)
Tenant improvements	(86,052		)	(80,692		)
Proceeds from sales of real estate	389,457			103,542
Proceeds from sales of real estate placed in escrow	(200,612		)	(99,917		)
Proceeds from sales of real estate released from escrow	634,165			—
Cash placed in escrow for land sale contracts	(7,111		)	—
Cash released from escrow for land sale contracts	3,250			—
Capital contributions to unconsolidated joint ventures	(20,863		)	(47,767		)
Capital distributions from unconsolidated joint ventures	24,527			641
Investments in securities, net	(1,332		)	(1,542		)
Net cash provided by (used in) investing activities	398,801			(488,256		)

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BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	For the nine months ended September 30,
	2015			2014
	(in thousands)
Cash flows from financing activities:
Repayments of mortgage notes payable	(20,137		)	(82,030		)
Repayment of unsecured exchangeable senior notes	—			(654,521		)
Proceeds from real estate financing transaction	6,000			—
Payments on real estate financing transaction	(2,364		)	—
Deferred financing costs	(1,288		)	(31		)
Net proceeds from equity transactions	799			1,530
Redemption of preferred units	(633		)	(15,984		)
Dividends and distributions	(1,112,019		)	(726,314		)
Acquisition of noncontrolling interest	(108,499		)	—
Contributions from noncontrolling interests in property partnerships	1,758			2,980
Distributions to noncontrolling interests in property partnerships	(147,368		)	(25,524		)
Net cash used in financing activities	(1,383,751		)	(1,499,894		)
Net decrease in cash and cash equivalents	(376,072		)	(1,518,473		)
Cash and cash equivalents, beginning of period	1,763,079			2,365,137
Cash and cash equivalents, end of period	$	1,387,007		$	846,664
Supplemental disclosures:
Cash paid for interest	$	347,367		$	489,949
Interest capitalized	$	25,915		$	44,809
Non-cash investing and financing activities:
Additions to real estate included in accounts payable and accrued expenses	$	28,246		$	20,016
Dividends and distributions declared but not paid	$	112,912		$	112,708
Mortgage notes payable assigned in connection with the sale of real estate	$	116,993		$	—
Conversions of noncontrolling interests to stockholders’ equity	$	14,157		$	2,368
Conversions of redeemable preferred units to common units	$	—		$	33,306
Issuance of restricted securities to employees	$	43,363		$	27,445

The accompanying notes are an integral part of these consolidated financial statements.

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BOSTON PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Boston Properties, Inc. (the “Company”), a Delaware corporation, is a self-administered and self-managed real estate investment trust (“REIT”). The Company is the sole general partner of Boston Properties Limited Partnership (the “Operating Partnership”) and at September 30, 2015 and December 31, 2014 owned an approximate 89.5% general and limited partnership interest in the Operating Partnership. Partnership interests in the Operating Partnership are denominated as “common units of partnership interest” (also referred to as “OP Units”), “long term incentive units of partnership interest” (also referred to as “LTIP Units”) or “preferred units of partnership interest” (also referred to as “Preferred Units”). In addition, in February 2012, the Company issued LTIP Units in connection with the granting to employees of outperformance awards (also referred to as “2012 OPP Units”). On February 6, 2015, the measurement period for the Company’s 2012 OPP Unit awards expired and the Company’s total return to shareholders (“TRS”) was sufficient for employees to earn and therefore become eligible to vest in a portion of the 2012 OPP Unit awards (See Notes 8 and 11). In February 2013, February 2014 and February 2015, the Company issued LTIP Units in connection with the granting to employees of multi-year, long-term incentive program (“MYLTIP”) awards (also referred to as “2013 MYLTIP Units,” “2014 MYLTIP Units” and “2015 MYLTIP Units,” respectively, and collectively as “MYLTIP Units”). Because the rights, preferences and privileges of MYLTIP Units differ from other LTIP Units granted to employees as part of the annual compensation process (including, as of February 6, 2015, the 2012 OPP Units), unless specifically noted otherwise, all references to LTIP Units exclude MYLTIP Units (See Notes 8 and 11).

Unless specifically noted otherwise, all references to OP Units exclude units held by the Company. A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership is obligated to redeem such OP Unit for cash equal to the value of a share of common stock of the Company (“Common Stock”) at such time. In lieu of a cash redemption, the Company may elect to acquire such OP Unit for one share of Common Stock. Because the number of shares of Common Stock outstanding at all times equals the number of OP Units that the Company owns, one share of Common Stock is generally the economic equivalent of one OP Unit, and the quarterly distribution that may be paid to the holder of an OP Unit equals the quarterly dividend that may be paid to the holder of a share of Common Stock. When issued, LTIP Units are not economically equivalent in value to a share of Common Stock, but over time can increase in value to one-for-one parity with Common Stock if there is sufficient appreciation in the value of the Company's assets. LTIP Units, whether vested or not, will receive the same quarterly per unit distributions as OP Units, which equal per share dividends on Common Stock (See Note 9).

At September 30, 2015, there was one series of Preferred Units outstanding (i.e., Series B Preferred Units). The Series B Preferred Units were issued to the Company on March 27, 2013 in connection with the Company's issuance of 80,000 shares (8,000,000 depositary shares each representing 1/100th of a share) of 5.25% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”). The Company contributed the net proceeds from the offering to the Operating Partnership in exchange for 80,000 Series B Preferred Units having terms and preferences generally mirroring those of the Series B Preferred Stock (See Note 9).

All references herein to the Company refer to Boston Properties, Inc. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.

Properties

At September 30, 2015, the Company owned or had interests in a portfolio of 171 commercial real estate properties (the “Properties”) aggregating approximately 46.6 million net rentable square feet, including fourteen properties under construction/redevelopment totaling approximately 4.7 million net rentable square feet. At September 30, 2015, the Properties consisted of:


•	161 office properties, including 130 Class A office properties (including eleven properties under construction/redevelopment) and 31 Office/Technical properties;


•	one hotel;


•	five retail properties (including one property under construction); and


•	four residential properties (including two properties under construction).

The Company owns or controls undeveloped land parcels totaling approximately 479.9 acres.

The Company considers Class A office properties to be centrally located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been

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modernized to compete with newer buildings. The Company considers Office/Technical properties to be properties that support office, research and development, laboratory and other technical uses. The Company’s definitions of Class A Office and Office/Technical properties may be different than those used by other companies.

2. Basis of Presentation and Summary of Significant Accounting Policies

Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership, nor does it have employees of its own. The Operating Partnership, not Boston Properties, Inc., generally executes all significant business relationships other than transactions involving securities of Boston Properties, Inc. All majority-owned subsidiaries and joint ventures over which the Company has financial and operating control and variable interest entities (“VIEs”) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended December 31, 2014.

Fair Value of Financial Instruments

The Company determines the fair value of its unsecured senior notes using market prices. The inputs used in determining the fair value of the Company’s unsecured senior notes are categorized at a level 1 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized at a level 2 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) if trading volumes are low. The Company determines the fair value of its mortgage notes payable using discounted cash flow analyses by discounting the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on current market rates for similar securities. In determining the current market rates, the Company adds its estimates of market spreads to the quoted yields on federal government treasury securities with similar maturity dates to its debt. The inputs used in determining the fair value of the Company’s mortgage notes payable and mezzanine notes payable are categorized at a level 3 basis (as defined in the accounting standards for Fair Value Measurements and Disclosures) due to the fact that the Company considers the rates used in the valuation techniques to be unobservable inputs.

Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair values of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015				December 31, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgage notes payable	$	4,132,071	$	4,240,944	$	4,309,484	$	4,449,541
Mezzanine notes payable	308,817		306,116		309,796		306,156
Unsecured senior notes	5,288,908		5,603,968		5,287,704		5,645,819
Total	$	9,729,796	$	10,151,028	$	9,906,984	$	10,401,516

The Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company

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incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Out-of-Period Adjustment

During the nine months ended September 30, 2014, the Company recorded an additional allocation of net income to the noncontrolling interest holder in its Fountain Square consolidated joint venture totaling approximately $1.9 million related to the cumulative non-cash adjustment to the accretion of the changes in the redemption value of the noncontrolling interest. This resulted in the overstatement of Noncontrolling Interests in Property Partnerships by approximately $1.9 million during the nine months ended September 30, 2014 and in the understatement of Noncontrolling Interests in Property Partnerships in the aggregate amount of approximately $1.9 million in previous periods prior to 2014. Because this adjustment was not material to the prior periods’ consolidated financial statements and the impact of recording the adjustment in 2014 was not material to the Company’s consolidated financial statements, the Company recorded the related adjustment during the nine months ended September 30, 2014. The out-of-period adjustment was identified and recorded during the second quarter of 2014.

Recent Accounting Pronouncements

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 clarifies that discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted, and the Company early adopted ASU 2014-08 during the first quarter of 2014. The Company’s adoption of ASU 2014-08 resulted in the operating results and gains on sales of real estate from the operating properties sold during the nine months ended September 30, 2015 not being reflected as Discontinued Operations in the Company's Consolidated Statements of Operations (See Note 3).

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and shall be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

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3. Real Estate Activity During the Nine Months Ended September 30, 2015

Acquisitions

On July 31, 2015, the Company entered into a 99-year ground and air rights lease (the “Lease”) with the Massachusetts Department of Transportation (“MDOT”) with respect to the parking garage located at 100 Clarendon Street (the “Clarendon Garage”) and the concourse level of the Massachusetts Bay Transportation Authority’s Back Bay Station (the “Station”). The Lease amends and restates the air rights lease which the Company had assumed in 2010 at the time it acquired its interests in both the Clarendon Garage and the office tower located at 200 Clarendon Street (formerly known as the John Hancock Tower). The Lease requires the Company to pay a total of approximately $37.0 million and provides the Company with options to acquire certain air rights above both the Clarendon Garage and the Station with the amount of developable square footage associated with the air rights to be determined at a later date. The previous lease had 45 years remaining in its term. Upon execution of the Lease, the Company made a $5.0 million payment and the Lease requires the Company’s remaining obligation to be used to fund improvements to the Station.

Dispositions

On February 19, 2015, the Company completed the sale of a parcel of land within its Washingtonian North property located in Gaithersburg, Maryland for a gross sale price of $8.7 million. Net cash proceeds totaled approximately $8.3 million, resulting in a gain on sale of real estate totaling approximately $3.7 million. The parcel contains approximately 8.5 acres of the Company's approximately 27 acre property.

On March 17, 2015, the Company completed the sale of its Residences on The Avenue property located in Washington, DC for a gross sale price of $196.0 million. Net cash proceeds totaled approximately $192.5 million, resulting in a gain on sale of real estate totaling approximately $91.4 million. The Company has agreed to provide net operating income support of up to $6.0 million if the property’s net operating income fails to achieve certain thresholds. This amount has been recorded as a reduction to the gain on sale. The Residences on The Avenue is comprised of 335 apartment units and approximately 50,000 net rentable square feet of retail space, subject to a ground lease that expires on February 1, 2068. The Residences on The Avenue contributed approximately $1.1 million of net income to the Company for the period from January 1, 2015 through March 16, 2015 and $0.7 million and $2.4 million for the three and nine months ended September 30, 2014, respectively.

On September 18, 2015, a consolidated entity in which the Company has a 50% interest completed the sale of its 505 9th Street, N.W. property located in Washington, DC for approximately $318.0 million, including the assumption by the buyer of approximately $117.0 million of mortgage indebtedness (See Note 5). 505 9th Street, N.W. is an approximately 322,000 net rentable square foot Class A office building. Net cash proceeds totaled approximately $194.6 million, of which the Company’s share was approximately $97.3 million. The Company recognized a gain on sale of real estate totaling approximately $199.5 million, of which approximately $101.1 million was allocated to the outside partners and is included within Noncontrolling Interests in Property Partnerships in the Company’s Consolidated Statements of Operations (See Note 8). 505 9th Street, N.W. contributed approximately $1.1 million of net income to the Company for the period from July 1, 2015 through September 17, 2015, approximately $2.3 million of net income to the Company for the period from January 1, 2015 through September 17, 2015 and $0.5 million and $1.7 million of net income for the three and nine months ended September 30, 2014, respectively.

Development/Redevelopment

On May 1, 2015, the Company commenced the redevelopment of Reservoir Place North, a Class A office project with approximately 73,000 net rentable square feet located in Waltham, Massachusetts.

On July 23, 2015, the Company commenced construction of its Cambridge Residential project, a residential project aggregating approximately 164,000 square feet comprised of 274 apartment units and approximately 9,000 square feet of retail space located in Cambridge, Massachusetts. On August 13, 2015, the Company acquired an approximately 8,700 square foot parcel of land necessary for the development for a purchase price of approximately $2.0 million.

On July 23, 2015, the Company commenced construction of its Reston Signature Site project, a residential project aggregating approximately 514,000 square feet comprised of 508 apartment units and approximately 24,000 square feet of retail space located in Reston Town Center in Reston, Virginia.

On August 14, 2015, the Company partially placed in-service 601 Massachusetts Avenue, a Class A office project with approximately 478,000 net rentable square feet located in Washington, DC.

On September 10, 2015, the Company partially placed in-service The Point (formerly 99 Third Avenue Retail), a retail project with approximately 17,000 net rentable square feet of retail space located in Waltham, Massachusetts.

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4. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at September 30, 2015 and December 31, 2014:



		Nominal % Ownership			Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			September 30, 2015			December 31, 2014
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(10,046	)	$	(8,022	)
The Metropolitan Square Associates LLC	Metropolitan Square	51.0	%		9,545			8,539
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%	(2)	(12,015		)	(1,080		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	44,111			45,514
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%	(4)	27,851			25,246
540 Madison Venture LLC	540 Madison Avenue	60.0	%		69,364			68,128
500 North Capitol LLC	500 North Capitol Street, NW	30.0	%		(3,015		)	(2,250		)
501 K Street LLC	1001 6th Street	50.0	%	(5)	42,653			41,736
Podium Developer LLC	North Station (Phase I - Air Rights)	50.0	%		9,541			4,231
1265 Main Office JV LLC	1265 Main Street	50.0	%		4,182			N/A
BNY Tower Holdings LLC	Dock72 at the Brooklyn Navy Yard	50.0	%		10,282			N/A
					$	192,453		$	182,042

_______________


(1)	Investments with deficit balances aggregating approximately $25.1 million and $11.4 million at September 30, 2015 and December 31, 2014, respectively, have been reflected within Other Liabilities on the Company's Consolidated Balance Sheets.


(2)	The Company’s economic ownership has increased based on the achievement of certain return thresholds.


(3)	The Company’s wholly-owned entity that owns the office component of the project also owns a 33.3% interest in the entity owning the land, parking garage and infrastructure of the project.


(4)	The joint venture owns three in-service buildings, one building under construction and two undeveloped land parcels.


(5)	Under the joint venture agreement, the partner will be entitled to up to two additional payments from the venture based on increases in total square footage of the project above 520,000 square feet and achieving certain project returns at stabilization.

Certain of the Company’s unconsolidated joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

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The combined summarized balance sheets of the Company's unconsolidated joint ventures are as follows:



	September 30, 2015			December 31, 2014
	(in thousands)
ASSETS
Real estate and development in process, net	$	1,048,836		$	1,034,552
Other assets	240,433			264,097
Total assets	$	1,289,269		$	1,298,649
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable	$	832,958		$	830,075
Other liabilities	32,715			34,211
Members’/Partners’ equity	423,596			434,363
Total liabilities and members’/partners’ equity	$	1,289,269		$	1,298,649
Company’s share of equity	$	219,705		$	209,828
Basis differentials (1)	(27,252		)	(27,786		)
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	192,453		$	182,042

_______________

(1)

This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from impairment of investments and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level.


(2)	Investments with deficit balances aggregating approximately $25.1 million and $11.4 million at September 30, 2015 and December 31, 2014, respectively, have been reflected within Other Liabilities on the Company's Consolidated Balance Sheets.

The combined summarized statements of operations of the Company's unconsolidated joint ventures are as follows:



	For the three months ended September 30,				For the nine months ended September 30,
	2015		2014		2015			2014
	(in thousands)
Total revenue (1)	$	38,197	$	41,958	$	116,881		$	118,429
Expenses
Operating	15,896		15,516		47,995			46,441
Depreciation and amortization	8,832		9,429		26,854			27,688
Total expenses	24,728		24,945		74,849			74,129
Operating income	13,469		17,013		42,032			44,300
Other expense
Interest expense	8,019		7,950		23,985			23,946
Net income	$	5,450	$	9,063	$	18,047		$	20,354

Company’s share of net income	$	2,481	$	4,200	$	20,025	(2)	$	9,403
Basis differential	166		219		534			666
Income from unconsolidated joint ventures	$	2,647	$	4,419	$	20,559		$	10,069

_______________

(1)

Includes straight-line rent adjustments of approximately $(0.3) million and $0.2 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $1.7 million and $1.1 million for the nine months ended September 30, 2015 and 2014, respectively. Includes net above-/below-market rent adjustments of approximately $(24,000) and $(0.1) million for the three months ended September 30, 2015 and 2014, respectively,

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and approximately $(0.2) million and $(0.1) million for the nine months ended September 30, 2015 and 2014, respectively.

(2)

During the nine months ended September 30, 2015, the Company received a distribution of approximately $24.5 million, which was generated from the excess loan proceeds from the refinancing of 901 New York Avenue's mortgage loan to a new 10-year mortgage loan totaling $225.0 million. The Company’s allocation of income and distributions for the nine months ended September 30, 2015 was not proportionate to its nominal ownership interest as a result of the achievement of specified investment return thresholds, as provided for in the joint venture agreement.

On May 8, 2015, the Company entered into a joint venture with an unrelated third party to redevelop an existing building into a Class A office building totaling approximately 115,000 net rentable square feet at 1265 Main Street in Waltham, Massachusetts. The joint venture partner contributed real estate and improvements, with an aggregate fair value of approximately $9.4 million, for its initial 50% interest in the joint venture. For its initial 50% interest, the Company will contribute cash totaling approximately $9.4 million as the joint venture incurs costs. The joint venture has entered into a fifteen-year lease with a tenant to occupy 100% of the building.

On June 26, 2015, the Company entered into a joint venture with an unrelated third party to develop Dock72, an office building totaling approximately 670,000 net rentable square feet located at the Brooklyn Navy Yard in Brooklyn, New York. Each partner contributed cash totaling approximately $9.1 million for their initial 50% interest in the joint venture. The joint venture entered into a 96-year ground lease, comprised of an initial term of 46 years, which may be extended by the joint venture to 2111, subject to certain conditions. The joint venture also entered into a 20-year lease with a tenant to occupy approximately 222,000 net rentable square feet at the building. In addition, the joint venture entered into an option agreement pursuant to which it may lease an additional land parcel at the site, which could support between 600,000 and 1,000,000 net rentable square feet of development. In connection with the execution of the option agreement, the joint venture paid a non-refundable option payment of $1.0 million.

On September 22, 2015, a joint venture in which the Company has a 50% interest completed and fully placed in-service Annapolis Junction Building Seven, a Class A office project with approximately 127,000 net rentable square feet located in Annapolis, Maryland.

On September 30, 2015, a joint venture in which the Company has a 50% interest extended the loan collateralized by its Annapolis Junction Building Six property. At the time of the extension, the outstanding balance of the construction loan totaled approximately $13.4 million and was scheduled to mature on November 17, 2015. The extended loan has a total commitment amount of $15.9 million, bears interest at a variable rate equal to LIBOR plus 2.25% per annum and matures on November 17, 2016. Annapolis Junction Building Six is a Class A office property with approximately 119,000 net rentable square feet located in Annapolis, Maryland.

5. Mortgage Notes Payable

On September 18, 2015, in connection with the sale of 505 9th Street, N.W. located in Washington, DC by a consolidated entity in which the Company has a 50% interest, the consolidated entity assigned to the buyer the mortgage loan collateralized by the property totaling approximately $117.0 million. The assigned mortgage loan bears interest at a fixed rate of 5.73% per annum and matures on November 1, 2017 (See Note 3).

6. Derivative Instruments and Hedging Activities

On February 19, 2015, the Company commenced a planned interest rate hedging program. The Company entered into sixteen forward-starting interest rate swap contracts during the nine months ended September 30, 2015, which fix the 10-year swap rate at a weighted-average rate of approximately 2.437% per annum on notional amounts aggregating $525.0 million. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in September 2016 and maturity in September 2026 (See Note 13). In addition, during the nine months ended September 30, 2015, 767 Fifth Partners LLC, which is the consolidated entity (in which the Company has a 60% interest and owns 767 Fifth Avenue (the General Motors Building) in New York City), entered into nine forward-starting interest rate swap contracts, which fix the 10-year swap rate at a weighted-average rate of approximately 2.801% per annum on notional amounts aggregating $250.0 million. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in June 2017 and maturity in June 2027 (See Note 13). The Company's interest rate swap contracts consisted of the following at September 30, 2015:

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Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	Strike Rate Range					Balance Sheet Location	Fair Value
Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	Low			High		Balance Sheet Location	Fair Value
	(in thousands)										(in thousands)
Boston Properties Limited Partnership:
Interest Rate Swaps	$	475,000	September 1, 2016	September 1, 2026	2.249	%	-	2.571	%	Other Liabilities	$	(9,231	)
Interest Rate Swaps	50,000		September 1, 2016	September 1, 2026	2.238	%	-	2.242	%	Prepaid Expenses and Other Assets	32
	$	525,000									$	(9,199	)
767 Fifth Partners LLC:
Interest Rate Swaps	$	250,000	June 7, 2017	June 7, 2027	2.677	%	-	2.950	%	Other Liabilities	$	(8,851	)
	$	775,000									$	(18,050	)

The Company entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the 10-year swap rate in contemplation of obtaining 10-year fixed-rate financing in September 2016. The Company’s 767 Fifth Partners LLC consolidated entity entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the 10-year swap rate in contemplation of obtaining 10-year fixed-rate financing in June 2017. The Company has formally documented all of its relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. All components of the forward-starting interest rate swap contracts were included in the assessment of hedge effectiveness. The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the Company's indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of September 30, 2015, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk and excludes accrued interest, related to these agreements was approximately $18.1 million. As of September 30, 2015, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2015, it could have been required to settle its obligations under the agreements at their termination value of approximately $18.1 million. The Company accounts for the effective portion of changes in the fair value of a derivative in accumulated other comprehensive loss and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings. During the nine months ended September 30, 2015, the Company has recorded the changes in fair value of the swap contracts related to the effective portion of the interest rate contracts aggregating approximately $18.1 million in Other Liabilities and approximately $32,000 in Prepaid Expenses and Other Assets and Accumulated Other Comprehensive Loss within the Company’s Consolidated Balance Sheets. During the nine months ended September 30, 2015, the Company did not record any hedge ineffectiveness. The Company expects that within the next twelve months it will reclassify into earnings as an increase to interest expense approximately $77,000 of the amounts recorded within Accumulated Other Comprehensive Loss relating to the forward-starting interest rate swap contracts in effect and as of September 30, 2015.

The following table presents the location in the financial statements of the losses recognized related to the Company's cash flow hedges for the three and nine months ended September 30, 2015 and 2014:



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands)
Amount of loss related to the effective portion recognized in other comprehensive loss	$	(30,156	)	$	—		$	(18,050	)	$	—
Amount of loss related to the effective portion subsequently reclassified to earnings (1)	$	(627	)	$	(628	)	$	(1,882	)	$	(1,881	)
Amount of gain (loss) related to the ineffective portion and amount excluded from effectiveness testing	$	—		$	—		$	—		$	—

___________


(1)	Consists of amounts from previous interest rate hedging programs.

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The following table reflects the changes in accumulated other comprehensive loss for the nine months ended September 30, 2015 and 2014 (in thousands):



Balance at December 31, 2014	$	(9,304	)
Effective portion of interest rate contracts	(18,050		)
Amortization of interest rate contracts (1)	1,882
Other comprehensive loss attributable to noncontrolling interests	4,847
Balance at September 30, 2015	$	(20,625	)

Balance at December 31, 2013	$	(11,556	)
Amortization of interest rate contracts (1)	1,881
Other comprehensive income attributable to noncontrolling interests	(191		)
Balance at September 30, 2014	$	(9,866	)

___________


(1)	Consists of amounts from previous interest rate hedging programs.

7. Commitments and Contingencies

General

In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence. In addition, in the normal course of business, the Company guarantees to certain tenants the obligations of its subsidiaries for the payment of tenant improvement allowances and brokerage commissions in connection with their leases and limited costs arising from delays in delivery of their premises.

The Company has letter of credit and performance obligations related to lender and development requirements that total approximately $36.2 million.

Certain of the Company’s joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exception, under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners (See also Note 8). Under certain of the Company's joint venture agreements, if certain return thresholds are achieved the partners will be entitled to an additional promoted interest or payments.

In connection with the assumption of 767 Fifth Avenue’s (the General Motors Building) secured loan by the Company’s consolidated joint venture entity, 767 Venture, LLC, the Company guaranteed the consolidated joint venture’s obligation to fund various escrows, including tenant improvements, taxes and insurance in lieu of cash deposits. As of September 30, 2015, the maximum funding obligation under the guarantee was approximately $13.4 million. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee.

In connection with 767 Fifth Partners LLC entering into interest rate swap contracts (See Note 6), the Company guaranteed 767 Fifth Partners LLC's obligations under the hedging agreements in favor of each hedge counterparty. 767 Fifth Partners LLC is the entity that owns 767 Fifth Avenue (the General Motors Building). It is a subsidiary of 767 Venture, LLC, a consolidated entity in which the Company has a 60% interest. The Company earns a fee from the joint venture for providing the guarantee and has an agreement with the outside partners to reimburse the joint venture for their share of any payments made under the guarantee.

In connection with the mortgage financing collateralized by the Company's 200 Clarendon Street (formerly the John Hancock Tower) property located in Boston, Massachusetts, the Company has agreed to guarantee approximately $21.2 million related to its obligations to provide funds for certain tenant re-leasing costs. In addition, in connection with the execution of the ground and air rights lease with respect to the parking garage at 100 Clarendon Street and the concourse level of the Massachusetts Bay Transportation Authority’s Back Bay Station, the Company has agreed to guarantee its obligations and liabilities under the lease (See Note 3). The mortgage financing will mature on January 6, 2017.

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In connection with the mortgage financing collateralized by the Company's Fountain Square property located in Reston, Virginia, the Company has agreed to guarantee approximately $0.7 million related to its obligation to provide funds for certain tenant re-leasing costs. The mortgage financing will mature on October 11, 2016.

From time to time, the Company (or the applicable joint venture) has also agreed to guarantee portions of the principal, interest or other amounts in connection with other unconsolidated joint venture borrowings. In addition to the financial guarantees referenced above, the Company has agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) on certain of its unconsolidated joint venture loans.

In 2009, the Company filed a general unsecured creditor’s claim against Lehman Brothers, Inc. for approximately $45.3 million related to its rejection of a lease at 399 Park Avenue in New York City. On January 10, 2014, the trustee for the liquidation of the business of Lehman Brothers allowed the Company’s claim in the amount of approximately $45.2 million. During 2014, the Company received an initial distribution totaling approximately $7.7 million, which is included in Base Rent in the accompanying Consolidated Statements of Operations. On March 11, 2015, the Company received a second interim distribution totaling approximately $4.5 million, which is included in Base Rent in the accompanying Consolidated Statements of Operations for the nine months ended September 30, 2015. On September 9, 2015, the Company received a third interim distribution totaling approximately $3.6 million, which is also included in Base Rent in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2015, leaving a remaining claim of approximately $29.4 million. The Company will continue to evaluate whether to attempt to sell the remaining claim or wait until the trustee distributes proceeds from the Lehman Brothers estate. Given the inherent uncertainties in bankruptcy proceedings, there can be no assurance as to the timing or amount of additional proceeds, if any, that the Company may ultimately realize on the remaining claim, whether by sale to a third party or by one or more distributions from the trustee. Accordingly, the Company has not recorded any estimated recoveries associated with this gain contingency within its Consolidated Financial Statements at September 30, 2015.

Insurance

The Company carries insurance coverage on its properties of types and in amounts and with deductibles that it believes are in line with coverage customarily obtained by owners of similar properties. In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act (as amended, “TRIA”) was enacted in November 2002 to require regulated insurers to make available coverage for “certified” acts of terrorism (as defined by the statute). The expiration date of TRIA was extended to December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 and further extended to December 31, 2020 by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), and the Company can provide no assurance that it will be extended further. Currently, the Company’s property insurance program per occurrence limits are $1.0 billion for its portfolio insurance program, including coverage for acts of terrorism other than nuclear, biological, chemical or radiological terrorism (“Terrorism Coverage”). The Company also carries $250 million of Terrorism Coverage for 601 Lexington Avenue, New York, New York (“601 Lexington Avenue”) in excess of the $1.0 billion of coverage in the Company’s property insurance program. Certain properties, including the General Motors Building located at 767 Fifth Avenue in New York, New York (“767 Fifth Avenue”), are currently insured in separate insurance programs. The property insurance program per occurrence limits for 767 Fifth Avenue are $1.625 billion, including Terrorism Coverage. The Company also currently carries nuclear, biological, chemical and radiological terrorism insurance coverage for acts of terrorism certified under TRIA (“NBCR Coverage”), which is provided by IXP as a direct insurer, for the properties in our portfolio, including 767 Fifth Avenue, but excluding certain other properties owned in joint ventures with third parties or which the Company manages. The per occurrence limit for NBCR Coverage is $1.0 billion. Under TRIA, after the payment of the required deductible and coinsurance, the NBCR Coverage provided by IXP is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” In 2015, the program trigger is $100 million and the coinsurance is 15%, however, both will increase in subsequent years pursuant to TRIPRA. If the Federal Government pays out for a loss under TRIA, it is mandatory that the Federal Government recoup the full amount of the loss from insurers offering TRIA coverage after the payment of the loss pursuant to a formula in TRIPRA. The Company may elect to terminate the NBCR Coverage if the Federal Government seeks recoupment for losses paid under TRIA, if there is a change in its portfolio or for any other reason. The Company intends to continue to monitor the scope, nature and cost of available terrorism insurance and maintain terrorism insurance in amounts and on terms that are commercially reasonable.

The Company also currently carries earthquake insurance on its properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that the Company believes is commercially reasonable. In addition, this insurance is subject to a deductible in the amount of 5% of the value of the affected property. Specifically, the Company currently carries earthquake insurance which covers its San Francisco region (excluding Salesforce Tower) with a $170 million per occurrence limit (increased on March 1, 2015 from $120 million), and a $170 million annual aggregate limit (increased on March 1, 2015 from $120 million), $20 million of which is provided by IXP, as a direct insurer. The builders risk policy

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maintained for the development of Salesforce Tower in San Francisco includes a $60 million per occurrence and annual aggregate limit of earthquake coverage. The amount of the Company’s earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the amount of earthquake coverage could impact the Company’s ability to finance properties subject to earthquake risk. The Company may discontinue earthquake insurance or change the structure of its earthquake insurance program on some or all of its properties in the future if the premiums exceed the Company’s estimation of the value of the coverage.

IXP, a captive insurance company which is a wholly-owned subsidiary of the Company, acts as a direct insurer with respect to a portion of the Company’s earthquake insurance coverage for its Greater San Francisco properties and the Company’s NBCR Coverage. Insofar as the Company owns IXP, it is responsible for its liquidity and capital resources, and the accounts of IXP are part of the Company’s consolidated financial statements. In particular, if a loss occurs which is covered by the Company’s NBCR Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government. IXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and its insurance policy is maintained after the payout by the Federal Government. If the Company experiences a loss and IXP is required to pay under its insurance policy, the Company would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance. In addition, the Operating Partnership has issued a guarantee to cover liabilities of IXP in the amount of $20.0 million.

The mortgages on the Company’s properties typically contain requirements concerning the financial ratings of the insurers who provide policies covering the property. The Company provides the lenders on a regular basis with the identity of the insurance companies in the Company’s insurance programs. The ratings of some of the Company’s insurers are below the rating requirements in some of the Company’s loan agreements and the lenders for these loans could attempt to claim that an event of default has occurred under the loan. The Company believes it could obtain insurance with insurers which satisfy the rating requirements. Additionally, in the future, the Company’s ability to obtain debt financing secured by individual properties, or the terms of such financing, may be adversely affected if lenders generally insist on ratings for insurers or amounts of insurance which are difficult to obtain or which result in a commercially unreasonable premium. There can be no assurance that a deficiency in the financial ratings of one or more of the Company’s insurers will not have a material adverse effect on the Company.

The Company continues to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism and California earthquake risk in particular, but the Company cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. There are other types of losses, such as from wars, for which the Company cannot obtain insurance at all or at a reasonable cost. With respect to such losses and losses from acts of terrorism, earthquakes or other catastrophic events, if the Company experiences a loss that is uninsured or that exceeds policy limits, the Company could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties. Depending on the specific circumstances of each affected property, it is possible that the Company could be liable for mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the Company’s business and financial condition and results of operations.

8. Noncontrolling Interests

Noncontrolling interests relate to the interests in the Operating Partnership not owned by the Company and interests in consolidated property partnerships not wholly-owned by the Company. As of September 30, 2015, the noncontrolling interests in the Operating Partnership consisted of 16,097,473 OP Units, 1,837,080 LTIP Units (including 216,854 2012 OPP Units), 309,818 2013 MYLTIP Units, 476,320 2014 MYLTIP Units and 368,415 2015 MYLTIP Units held by parties other than the Company.

Noncontrolling Interest—Redeemable Preferred Units of the Operating Partnership

On June 25, 2015, the Company’s Operating Partnership redeemed the remaining 12,667 Series Four Preferred Units for cash totaling approximately $0.6 million, plus accrued and unpaid distributions. The Series Four Preferred Units bore a preferred distribution equal to 2.00% per annum on a liquidation preference of $50.00 per unit and were not convertible into OP Units. The holders of Series Four Preferred Units had the right, at certain times and subject to certain conditions set forth in the Certificate of Designations establishing the rights, limitations and preferences of the Series Four Preferred Units, to require the Operating Partnership to redeem all of their units for cash at the redemption price of $50.00 per unit. The Operating Partnership also had the right, at certain times and subject to certain conditions, to redeem all of the Series Four Preferred Units for cash at the redemption price of $50.00 per unit. In order to secure the performance of certain post-issuance obligations by the holders, all of such outstanding Series Four Preferred Units were subject to forfeiture pursuant to the terms of a pledge agreement and not eligible for redemption until and unless such security interest was released. On May 19, 2014, the Company's Operating

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Partnership released to the holders 319,687 Series Four Preferred Units that were previously subject to the security interest. On July 3, 2014, the Company's Operating Partnership redeemed such units for cash totaling approximately $16.0 million, plus accrued and unpaid distributions. On October 16, 2014, the Company's Operating Partnership released to the holders 27,773 Series Four Preferred Units that were previously subject to the security interest under the pledge agreement. On November 5, 2014, the Company's Operating Partnership redeemed such units for cash totaling approximately $1.4 million. Due to the holders' redemption option existing outside the control of the Company, the Series Four Preferred Units were presented outside of permanent equity in the Company's Consolidated Balance Sheets.

On February 17, 2015, the Operating Partnership paid a distribution on its outstanding Series Four Preferred Units of $0.25 per unit. On May 15, 2015, the Operating Partnership paid a distribution on its outstanding Series Four Preferred Units of $0.25 per unit.

The following table reflects the activity of the noncontrolling interests—redeemable preferred units of the Operating Partnership for the nine months ended September 30, 2015 and 2014 (in thousands):



Balance at December 31, 2014	$	633
Net income	6
Distributions	(6		)
Redemption of redeemable preferred units (Series Four Preferred Units)	(633		)
Balance at September 30, 2015	$	—

Balance at December 31, 2013	$	51,312
Net income	1,014
Distributions	(1,014		)
Conversion of redeemable preferred units (Series Two Preferred Units) to common units	(33,306		)
Redemption of redeemable preferred units (Series Four Preferred Units)	(15,984		)
Balance at September 30, 2014	$	2,022

Noncontrolling Interest—Redeemable Interest in Property Partnership

On October 4, 2012, the Company completed the formation of a joint venture that owns and operates Fountain Square located in Reston, Virginia. The joint venture partner contributed 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 contributed cash totaling approximately $87.0 million for its 50% interest, which cash was distributed to the joint venture partner. Pursuant to the joint venture agreement (i) the Company had rights to acquire the partner's 50% interest and (ii) the partner had 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 were to expire on January 31, 2016. The Company was consolidating this joint venture due to the Company's right to acquire the partner's 50% interest. The Company recorded the noncontrolling interest at its acquisition-date fair value as temporary equity, due to the redemption option existing outside the control of the Company. The Company was accreting the changes in the redemption value quarterly over the period from the acquisition date to the earliest redemption date using the effective interest method. The Company was recording the accretion after the allocation of net income and distributions of cash flow to the noncontrolling interest account balance.

On August 6, 2015, the parties amended the joint venture agreement to require the Company to acquire its partner's 50% interest on September 15, 2015 for approximately $100.9 million in cash. On September 15, 2015, the Company acquired its partner’s 50% interest in the consolidated entity that owns Fountain Square located in Reston Town Center in Reston, Virginia for cash of approximately $100.9 million plus working capital and closing prorations and the partner's share of assumed mortgage indebtedness totaling approximately $105.6 million.

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The following table reflects the activity of the noncontrolling interest—redeemable interest in property partnership in the Company's Fountain Square consolidated entity for the nine months ended September 30, 2015 and 2014 (in thousands):



Balance at December 31, 2014	$	104,692
Net loss	(7		)
Distributions	(2,900		)
Adjustment to reflect redeemable interest at redemption value	5,128
Acquisition of interest	(106,913		)
Balance at September 30, 2015	$	—

Balance at December 31, 2013	$	99,609
Net loss	(519		)
Distributions	(4,300		)
Adjustment to reflect redeemable interest at redemption value	9,315			(1)
Balance at September 30, 2014	$	104,105

_______________


(1)	Includes an out-of-period adjustment totaling approximately $1.9 million (See Note 2).

Noncontrolling Interest—Common Units of the Operating Partnership

During the nine months ended September 30, 2015, 418,870 OP Units were presented by the holders for redemption (including 59,826 OP Units issued upon conversion of LTIP Units and 2012 OPP Units) and were redeemed by the Company in exchange for an equal number of shares of Common Stock.

At September 30, 2015, the Company had outstanding 309,818 2013 MYLTIP Units, 476,320 2014 MYLTIP Units and 368,415 2015 MYLTIP Units. Prior to the applicable measurement date (February 4, 2016 for 2013 MYLTIP Units, February 3, 2017 for 2014 MYLTIP Units and February 4, 2018 for 2015 MYLTIP Units), holders of MYLTIP Units will be entitled to receive per unit distributions equal to one-tenth (10%) of the regular quarterly distributions payable on an OP Unit, but will not be entitled to receive any special distributions. After the measurement date, the number of MYLTIP Units, both vested and unvested, that MYLTIP award recipients have earned, if any, based on the establishment of a performance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit.

On February 6, 2015, the measurement period for the Company’s 2012 OPP Unit awards ended and the Company’s TRS performance was sufficient for employees to earn and therefore become eligible to vest in a portion of the 2012 OPP Unit awards. The final outperformance pool was determined to be approximately $32.1 million, or approximately 80% of the total maximum outperformance pool of $40.0 million. As a result, 174,549 2012 OPP Units were automatically forfeited.

On January 28, 2015, the Operating Partnership paid a special cash distribution on the OP Units and LTIP Units in the amount of $4.50 per unit, a regular quarterly cash distribution on the OP Units and LTIP Units in the amount of $0.65 per unit, and a regular quarterly distribution on the 2012 OPP Units, 2013 MYLTIP Units and 2014 MYLTIP Units in the amount of $0.065 per unit, to holders of record as of the close of business on December 31, 2014. The special cash distribution was in addition to the regular quarterly distribution on the OP Units and LTIP Units. Unless and until they are earned, holders of OPP Units and MYLTIP Units are not entitled to receive any special distributions. On April 30, 2015, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.65 per unit, a distribution on the 2012 OPP Units in the amount of $0.416 per unit (representing a blended rate for periods prior to and after February 6, 2015, which was the valuation date for the 2012 Outperformance Plan), and a distribution on the 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units in the amount of $0.065 per unit, to holders of record as of the close of business on March 31, 2015. On July 31, 2015, the Operating Partnership paid a distribution on the OP Units and LTIP Units (including the 2012 OPP Units) in the amount of $0.65 per unit and a distribution on the 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units in the amount of $0.065 per unit, to holders of record as of the close of business on June 30, 2015. On September 16, 2015, Boston Properties, Inc., as general partner of the Operating Partnership, declared a distribution on the OP Units and LTIP Units (including the 2012 OPP Units) in the amount of $0.65 per unit and a distribution on the 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units in the amount of $0.065 per unit, in each case payable on October 30, 2015 to holders of record as of the close of business on September 30, 2015.

A holder of an OP Unit may present such OP Unit to the Operating Partnership for redemption at any time (subject to restrictions agreed upon at the time of issuance of OP Units to particular holders that may restrict such redemption right for a

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period of time, generally one year from issuance). Upon presentation of an OP Unit for redemption, the Operating Partnership must redeem such OP Unit for cash equal to the then value of a share of common stock of the Company. The Company may, in its sole discretion, elect to assume and satisfy the redemption obligation by paying either cash or issuing one share of Common Stock. The value of the OP Units not owned by the Company and LTIP Units (including the 2012 OPP Units) assuming that all conditions had been met for the conversion thereof had all of such units been redeemed at September 30, 2015 was approximately $2.1 billion based on the closing price of the Company’s common stock of $118.40 per share on September 30, 2015. The Company's calculation of Noncontrolling Interest - Common Units of the Operating Partnership in the Company's Consolidated Statements of Operations includes OP Units and vested LTIP Units (including vested 2012 OPP Units).

Noncontrolling Interests—Property Partnerships

The noncontrolling interests in property partnerships consist of the outside equity interests in ventures that are consolidated with the financial results of the Company because the Company exercises control over the entities that own the properties. The equity interests in these ventures that are not owned by the Company, totaling approximately $1.6 billion at September 30, 2015 and December 31, 2014, are included in Noncontrolling Interests—Property Partnerships on the accompanying Consolidated Balance Sheets.

The following table reflects the activity of the noncontrolling interests in property partnerships for the nine months ended September 30, 2015 and 2014 (in thousands):



Balance at December 31, 2014	$	1,602,467
Capital contributions	1,758
Net income	134,591
Accumulated other comprehensive loss	(3,540		)
Distributions	(144,468		)
Balance at September 30, 2015	$	1,590,808

Balance at December 31, 2013	$	726,132
Capital contributions	2,980
Net income	8,677
Distributions	(21,224		)
Balance at September 30, 2014	$	716,565

9. Stockholders’ Equity

As of September 30, 2015, the Company had 153,574,600 shares of Common Stock outstanding.

On June 3, 2014, the Company established an “at the market” (“ATM”) stock offering program through which it may sell from time to time up to an aggregate of $600.0 million of its common stock through sales agents over a three-year period. The Company intends to use the net proceeds from any offering for general business purposes, which may include investment opportunities and debt reduction. No shares of common stock have been issued under this ATM stock offering program since its inception.

During the nine months ended September 30, 2015, the Company issued 418,870 shares of Common Stock in connection with the redemption of an equal number of redeemable OP Units from third parties.

During the nine months ended September 30, 2015, the Company issued 11,447 shares of Common Stock in connection with the exercise of options to purchase Common Stock by certain employees.

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On January 28, 2015, the Company paid a special cash dividend and regular quarterly dividend aggregating $5.15 per share of Common Stock to shareholders of record as of the close of business on December 31, 2014. On April 30, 2015, the Company paid a dividend of $0.65 per share of Common Stock to shareholders of record as of the close of business on March 31, 2015. On July 31, 2015, the Company paid a dividend of $0.65 per share of Common Stock to shareholders of record as of the close of business on June 30, 2015. On September 16, 2015, the Company’s Board of Directors declared a dividend of $0.65 per share of Common Stock payable on October 30, 2015 to shareholders of record as of the close of business on September 30, 2015.

Preferred Stock

As of September 30, 2015, the Company had 80,000 shares (8,000,000 depositary shares each representing 1/100th of a share) outstanding of its 5.25% Series B Cumulative Redeemable Preferred Stock with a liquidation preference of $2,500.00 per share ($25.00 per depositary share). The Company pays cumulative cash dividends on the Series B Preferred Stock at a rate of 5.25% per annum of the $2,500.00 liquidation preference per share. The Company may not redeem the Series B Preferred Stock prior to March 27, 2018, except in certain circumstances relating to the preservation of the Company's REIT status. On or after March 27, 2018, the Company, at its option, may redeem the Series B Preferred Stock for a cash redemption price of $2,500.00 per share ($25.00 per depositary share), plus all accrued and unpaid dividends. The Series B Preferred Stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates.

On February 17, 2015, the Company paid a dividend on its outstanding Series B Preferred Stock of $32.8125 per share. On May 15, 2015, the Company paid a dividend on its outstanding Series B Preferred Stock of $32.8125 per share. On August 17, 2015, the Company paid a dividend on its outstanding Series B Preferred Stock of $32.8125 per share. On September 16, 2015, the Company’s Board of Directors declared a dividend of $32.8125 per share of Series B Preferred Stock payable on November 16, 2015 to shareholders of record as of the close of business on November 5, 2015.

10. Earnings Per Share

The following table provides a reconciliation of both the net income attributable to Boston Properties, Inc. common shareholders and the number of common shares used in the computation of basic earnings per share (“EPS”), which is calculated by dividing net income attributable to Boston Properties, Inc. common shareholders by the weighted-average number of common shares outstanding during the period. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are also participating securities. As such, unvested restricted common stock of the Company, LTIP Units, 2012 OPP Units and MYLTIP Units are considered participating securities. Participating securities are included in the computation of basic EPS of the Company using the two-class method. Participating securities are included in the computation of diluted EPS of the Company using the if-converted method if the impact is dilutive. Because the 2012 OPP Units required and the MYLTIP Units require the Company to outperform absolute and relative return thresholds, unless such thresholds have been met by the end of the applicable reporting period, the Company excludes such units from the diluted EPS calculation. Other potentially dilutive common shares, including stock options, restricted stock and other securities of the Operating Partnership that are exchangeable for the Company’s Common Stock, and the related impact on earnings, are considered when calculating diluted EPS.



	For the three months ended September 30, 2015
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	184,082		153,595	$	1.20
Allocation of undistributed earnings to participating securities	(221		)	—	—
Net income attributable to Boston Properties, Inc. common shareholders	$	183,861		153,595	$	1.20
Effect of Dilutive Securities:
Stock Based Compensation	—			191	—
Diluted Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	183,861		153,786	$	1.20

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	For the three months ended September 30, 2014
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	127,724		153,120	$	0.83
Allocation of undistributed earnings to participating securities	(63		)	—	—
Net income attributable to Boston Properties, Inc. common shareholders	$	127,661		153,120	$	0.83
Effect of Dilutive Securities:
Stock Based Compensation	—			153	—
Diluted Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	127,661		153,273	$	0.83

	For the nine months ended September 30, 2015
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	434,702		153,426	$	2.83
Allocation of undistributed earnings to participating securities	(361		)	—	—
Net income attributable to Boston Properties, Inc. common shareholders	$	434,341		153,426	$	2.83
Effect of Dilutive Securities:
Stock Based Compensation	—			399	(0.01		)
Diluted Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	434,341		153,825	$	2.82

	For the nine months ended September 30, 2014
	Income (Numerator)			Shares (Denominator)	Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	258,472		153,077	$	1.69
Effect of Dilutive Securities:
Stock Based Compensation	—			151	—
Diluted Earnings:
Net income attributable to Boston Properties, Inc. common shareholders	$	258,472		153,228	$	1.69

11. Stock Option and Incentive Plan

On January 21, 2015, the Company’s Compensation Committee approved the 2015 MYLTIP awards under the Company's 2012 Stock Option and Incentive Plan (the "2012 Plan") to certain officers and employees of the Company. The

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2015 MYLTIP awards utilize TRS over a three-year measurement period, on an annualized, compounded basis, as the performance metric. Earned awards will be based on the Company's TRS relative to (i) the Cohen & Steers Realty Majors Portfolio Index (50% weight) and (ii) the NAREIT Office Index adjusted to exclude the Company (50% weight). Earned awards will range from $0 to a maximum of approximately $40.8 million depending on the Company's TRS relative to the two indices, with three tiers (threshold: approximately $8.2 million; target: approximately $16.3 million; high: approximately $40.8 million) and linear interpolation between tiers. Earned awards measured on the basis of relative TRS performance are subject to an absolute TRS component in the form of relatively simple modifiers that (A) reduce the level of earned awards in the event the Company’s annualized TRS is less than 0% and (B) cause some awards to be earned in the event the Company’s annualized TRS is more than 12% even though on a relative basis alone the Company’s TRS would not result in any earned awards.

Earned awards (if any) will vest 50% on February 4, 2018 and 50% on February 4, 2019, based on continued employment. Vesting will be accelerated in the event of a change in control, termination of employment by the Company without cause, or termination of employment by the award recipient for good reason, death, disability or retirement. If there is a change of control prior to February 4, 2018, earned awards will be calculated based on TRS performance up to the date of the change of control. The 2015 MYLTIP awards are in the form of LTIP Units issued on the grant date which (i) are subject to forfeiture to the extent awards are not earned and (ii) prior to the performance measurement date are only entitled to one-tenth (10%) of the regular quarterly distributions payable on OP Units.

Under the FASB’s Accounting Standards Codification (“ASC”) 718 “Compensation-Stock Compensation,” the 2015 MYLTIP awards have an aggregate value of approximately $15.7 million, which amount will generally be amortized into earnings over the four-year plan period under the graded vesting method.

During the nine months ended September 30, 2015, the Company issued 34,150 shares of restricted common stock, 190,563 LTIP Units (including 85,962 LTIP Units issued on January 1, 2015 to Mortimer B. Zuckerman, non-executive Chairman of the Board, pursuant to the Transition Benefits Agreement dated March 10, 2013) and 375,000 2015 MYLTIP Units to employees and non-employee directors under the 2012 Plan. Employees and non-employee directors paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit and 2015 MYLTIP Unit. When issued, LTIP Units are not economically equivalent in value to a share of Common Stock, but over time can increase in value to one-for-one parity with Common Stock if there is sufficient appreciation in the value of the Company’s assets. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. Grants of restricted stock and LTIP Units to employees vest in four equal annual installments. Restricted stock is measured at fair value on the date of grant based on the number of shares granted, as adjusted for forfeitures, and the closing price of the Company’s Common Stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. The shares of restricted stock granted during the nine months ended September 30, 2015 were valued at approximately $4.8 million ($140.88 per share weighted-average). The LTIP Units granted (excluding the number issued to Mr. Zuckerman, as discussed above) were valued at approximately $13.5 million ($128.94 per unit weighted-average fair value) using a Monte Carlo simulation method model. The per unit fair values of the LTIP Units granted were estimated on the dates of grant and for a substantial majority of such units were valued using the following assumptions: an expected life of 5.7 years, a risk-free interest rate of 1.47% and an expected price volatility of 26%. The value of the LTIP Units issued to Mr. Zuckerman was expensed between March 2013 and July 2014 in accordance with the vesting schedule set forth in the Transition Benefits Agreement. As the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units are subject to both a service condition and a market condition, the Company recognizes the compensation expense related to the 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units under the graded vesting attribution method. Under the graded vesting attribution method, each portion of the award that vests at a different date is accounted for as a separate award and recognized over the period appropriate to that portion so that the compensation cost for each portion should be recognized in full by the time that portion vests. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Dividends in Excess of Earnings in the Consolidated Balance Sheets. Aggregate stock-based compensation expense associated with restricted stock, non-qualified stock options, LTIP Units, 2012 OPP Units, 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units was approximately $5.9 million and $5.0 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $21.0 million and $21.0 million for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, there was $21.3 million of unrecognized compensation expense related to unvested restricted stock, LTIP Units and 2012 OPP Units and $20.5 million of unrecognized compensation expense related to unvested 2013 MYLTIP Units, 2014 MYLTIP Units and 2015 MYLTIP Units that is expected to be recognized over a weighted-average period of approximately 2.5 years.

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12. Segment Information

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by both geographic area and property type. The Company’s segments by geographic area are Boston, New York, San Francisco and Washington, DC. Segments by property type include: Class A Office, Office/Technical, Residential and Hotel.

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. Interest and other income, development and management services income, general and administrative expenses, transaction costs, interest expense, depreciation and amortization expense, gains (losses) from investments in securities, income from unconsolidated joint ventures, gains on sales of real estate, noncontrolling interests and preferred dividends are not included in Net Operating Income as internal reporting addresses these items on a corporate level.

Net Operating Income is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate Net Operating Income in the same manner. The Company considers Net Operating Income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of the Company’s properties. The Company's management also uses Net Operating Income to evaluate regional property level performance and to make decisions about resource allocations. Further, the Company believes Net Operating Income is useful to investors as a performance measure because, when compared across periods, Net Operating Income reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspectives not immediately apparent from net income attributable to Boston Properties, Inc. common shareholders.

Information by geographic area and property type (dollars in thousands):

For the three months ended September 30, 2015:



	Boston			New York			San Francisco			Washington, DC			Total
Rental Revenue:
Class A Office	$	173,412		$	253,612		$	71,720		$	94,086		$	592,830
Office/Technical	5,866			—			5,595			2,951			14,412
Residential	1,275			—			—			2,836			4,111
Hotel	12,619			—			—			—			12,619
Total	193,172			253,612			77,315			99,873			623,972
% of Grand Totals	30.96		%	40.64		%	12.39		%	16.01		%	100.00		%
Rental Expenses:
Class A Office	70,178			88,496			24,864			30,943			214,481
Office/Technical	1,720			—			1,019			1,042			3,781
Residential	485			—			—			1,049			1,534
Hotel	8,125			—			—			—			8,125
Total	80,508			88,496			25,883			33,034			227,921
% of Grand Totals	35.32		%	38.83		%	11.36		%	14.49		%	100.00		%
Net operating income	$	112,664		$	165,116		$	51,432		$	66,839		$	396,051
% of Grand Totals	28.45		%	41.69		%	12.98		%	16.88		%