Edgar Filing: BOSTON PROPERTIES INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2012

¨	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 ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

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 $.01 per share		150,762,982
(Class)		(Outstanding on August 2, 2012)

BOSTON PROPERTIES, INC.

FORM 10-Q

for the quarter ended June 30, 2012

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)		1

	a) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		1

	b) Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011		2

	c) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011		3

	d) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2012 and 2011		4

	e) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		5

	f) Notes to the Consolidated Financial Statements		7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		72

ITEM 4.	Controls and Procedures		73

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings		74

ITEM 1A.	Risk Factors		74

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		74

ITEM 3.	Defaults Upon Senior Securities		74

ITEM 4.	Mine Safety Disclosures		74

ITEM 5.	Other Information		74

ITEM 6.	Exhibits		75

SIGNATURES			76

PART 1. FINANCIAL INFORMATION

ITEM

1—Financial Statements.

BOSTON PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for share and par value amounts)


	June 30, 2012			December 31, 2011
ASSETS
Real estate, at cost	$	13,143,487		$	12,303,965
Construction in progress		732,734			818,685
Land held for future development		270,169			266,822
Less: accumulated depreciation		(2,781,218	)		(2,642,986	)

Total real estate		11,365,172			10,746,486
Cash and cash equivalents		1,671,997			1,823,208
Cash held in escrows		31,381			40,332
Investments in securities		11,036			9,548
Tenant and other receivables (net of allowance for doubtful accounts of $1,834 and $1,766, respectively)		43,507			79,838
Related party notes receivable		282,416			280,442
Interest receivable from related party notes receivable		98,866			89,854
Accrued rental income (net of allowance of $2,693 and $2,515, respectively)		559,646			522,675
Deferred charges, net		504,475			445,403
Prepaid expenses and other assets		41,480			75,458
Investments in unconsolidated joint ventures		670,653			669,722

Total assets	$	15,280,629		$	14,782,966

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable	$	2,877,125		$	3,123,267
Unsecured senior notes (net of discount of $11,587 and $9,814, respectively)		4,863,413			3,865,186
Unsecured exchangeable senior notes (net of discount of $2,368 and $3,462, respectively)		1,155,669			1,715,685
Unsecured line of credit		—			—
Accounts payable and accrued expenses		163,496			155,139
Dividends and distributions payable		93,353			91,901
Accrued interest payable		61,947			69,105
Other liabilities		308,354			293,515

Total liabilities		9,523,357			9,313,798

Commitments and contingencies		—			—

Noncontrolling interest:
Redeemable preferred units of the Operating Partnership		51,537			55,652

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, none issued or outstanding		—			—
Common stock, $.01 par value, 250,000,000 shares authorized, 150,794,602 and 148,186,511 issued and 150,715,702 and 148,107,611 outstanding at June 30, 2012 and December 31, 2011, respectively		1,507			1,481
Additional paid-in capital		5,184,710			4,936,457
Dividends in excess of earnings		(34,463	)		(53,080	)
Treasury common stock at cost, 78,900 shares at June 30, 2012 and December 31, 2011		(2,722	)		(2,722	)
Accumulated other comprehensive loss		(14,978	)		(16,138	)

Total stockholders’ equity attributable to Boston Properties, Inc.		5,134,054			4,865,998
Noncontrolling interests:
Common units of the Operating Partnership		573,241			548,581
Property partnerships		(1,560	)		(1,063	)

Total equity		5,705,735			5,413,516

Total liabilities and equity	$	15,280,629		$	14,782,966

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands, except for per share amounts)
Revenue
Rental
Base rent	$	372,285		$	346,515		$	728,376		$	684,122
Recoveries from tenants		57,475			48,255			109,222			93,495
Parking and other		23,524			21,098			45,951			40,159

Total rental revenue		453,284			415,868			883,549			817,776
Hotel revenue		10,049			8,904			16,865			14,852
Development and management services		9,564			9,095			17,710			16,521

Total revenue		472,897			433,867			918,124			849,149

Expenses
Operating
Rental		161,853			143,633			318,299			282,524
Hotel		6,616			6,281			12,715			12,020
General and administrative		19,066			18,721			46,685			43,364
Transaction costs		8			1,361			2,112			1,433
Depreciation and amortization		111,643			110,259			220,583			218,852

Total expenses		299,186			280,255			600,394			558,193

Operating income		173,711			153,612			317,730			290,956
Other income (expense)
Income from unconsolidated joint ventures		21,191			8,882			32,912			16,858
Interest and other income		2,382			1,953			4,028			2,927
Gains (losses) from investments in securities		(186	)		6			615			379
Gains from early extinguishments of debt		274			—			1,041			—
Interest expense		(99,901	)		(94,583	)		(203,138	)		(193,108	)

Income from continuing operations		97,471			69,870			153,188			118,012
Discontinued operations
Income (loss) from discontinued operations		398			(132	)		884			(80	)
Gain on sale of real estate from discontinued operations		36,877			—			36,877			—
Gain on forgiveness of debt from discontinued operations		—			—			17,807			—

Net income		134,746			69,738			208,756			117,932
Net income attributable to noncontrolling interests
Noncontrolling interests in property partnership		(457	)		(503	)		(1,003	)		(1,032	)
Noncontrolling interest—redeemable preferred units of the Operating Partnership		(765	)		(842	)		(1,566	)		(1,665	)
Noncontrolling interest—common units of the Operating Partnership		(10,360	)		(8,194	)		(16,400	)		(14,296	)
Noncontrolling interest in discontinued operations—common units of the Operating Partnership		(4,094	)		15			(6,115	)		10

Net income attributable to Boston Properties, Inc.	$	119,070		$	60,214		$	183,672		$	100,949

Basic earnings per common share attributable to Boston Properties, Inc.:
Income from continuing operations	$	0.57		$	0.41		$	0.90		$	0.70
Discontinued operations		0.22			—			0.33			—

Net income	$	0.79		$	0.41		$	1.23		$	0.70

Weighted average number of common shares outstanding		150,312			145,864			149,328			143,990

Diluted earnings per common share attributable to Boston Properties, Inc.:
Income from continuing operations	$	0.57		$	0.41		$	0.90		$	0.70
Discontinued operations		0.22			—			0.33			—

Net income	$	0.79		$	0.41		$	1.23		$	0.70

Weighted average number of common and common equivalent shares outstanding		150,694			146,695			149,720			144,610

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Net income	$	134,746		$	69,738		$	208,756		$	117,932
Other comprehensive income:
Amortization of interest rate contracts		648			648			1,297			1,297

Other comprehensive income		648			648			1,297			1,297

Comprehensive income		135,394			70,386			210,053			119,229
Net income attributable to noncontrolling interests		(15,676	)		(9,524	)		(25,084	)		(16,983	)
Other comprehensive income attributable to noncontrolling interests		(68	)		(75	)		(137	)		(155	)

Comprehensive income attributable to Boston Properties, Inc.	$	119,650		$	60,787		$	184,832		$	102,091

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)


	Common Stock				Additional Paid-in Capital			Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
	Shares		Amount		Additional Paid-in Capital			Dividends in Excess of Earnings			Treasury Stock, at cost			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total
Equity, December 31, 2011		148,108	$	1,481	$	4,936,457		$	(53,080	)	$	(2,722	)	$	(16,138	)	$	547,518		$	5,413,516
Conversion of operating partnership units to Common Stock		227		2		6,829			—			—			—			(6,831	)		—
Conversion of redeemable preferred units to common units		—		—		—			—			—			—			4,115			4,115
Allocated net income for the year		—		—		—			183,672			—			—			23,518			207,190
Dividends/distributions declared		—		—		—			(165,055	)		—			—			(20,100	)		(185,155	)
Sale of common stock, net of offering costs		2,348		24		247,162			—			—			—			—			247,186
Shares issued pursuant to stock purchase plan		4		—		381			—			—			—			—			381
Net activity from stock option and incentive plan		29		—		4,032			—			—			—			14,673			18,705
Distributions to noncontrolling interests in property partnerships		—		—		—			—			—			—			(1,500	)		(1,500	)
Amortization of interest rate contracts		—		—		—			—			—			1,160			137			1,297
Reallocation of noncontrolling interest		—		—		(10,151	)		—			—			—			10,151			—

Equity, June 30, 2012		150,716	$	1,507	$	5,184,710		$	(34,463	)	$	(2,722	)	$	(14,978	)	$	571,681		$	5,705,735

Equity, December 31, 2010		140,199	$	1,402	$	4,417,162		$	(24,763	)	$	(2,722	)	$	(18,436	)	$	591,550		$	4,964,193
Conversion of operating partnership units to Common Stock		1,650		17		47,534			—			—			—			(47,551	)		—
Allocated net income for the year		—		—		—			100,949			—			—			15,318			116,267
Dividends/distributions declared		—		—		—			(145,723	)		—			—			(19,780	)		(165,503	)
Sale of common stock, net of offering costs		4,229		42		394,675			—			—			—			—			394,717
Shares issued pursuant to stock purchase plan		4		—		312			—			—			—			—			312
Net activity from stock option and incentive plan		305		3		12,950			—			—			—			13,307			26,260
Distributions to noncontrolling interests in property partnerships		—		—		—			—			—			—			(1,000	)		(1,000	)
Amortization of interest rate contracts		—		—		—			—			—			1,142			155			1,297
Reallocation of noncontrolling interest		—		—		(26,630	)		—			—			—			26,630			—

Equity, June 30, 2011		146,387	$	1,464	$	4,846,003		$	(69,537	)	$	(2,722	)	$	(17,294	)	$	578,629		$	5,336,543

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,
	2012			2011
	(in thousands)

Cash flows from operating activities:
Net income	$	208,756		$	117,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		221,623			220,508
Non-cash compensation expense		18,113			17,765
Income from unconsolidated joint ventures		(32,912	)		(16,858	)
Distributions of net cash flow from operations of unconsolidated joint ventures		20,190			17,442
Gains from investments in securities		(615	)		(379	)
Non-cash portion of interest expense		21,881			27,014
Settlement of accreted debt discount on repurchases of unsecured exchangeable senior notes		(68,760	)		—
Gains from early extinguishments of debt		(1,196	)		—
Gain on sale of real estate from discontinued operations		(36,877	)		—
Gain on forgiveness of debt from discontinued operations		(17,807	)		—
Change in assets and liabilities:
Cash held in escrows		8,675			(4,408	)
Tenant and other receivables, net		30,120			16,346
Accrued rental income, net		(39,598	)		(49,195	)
Prepaid expenses and other assets		38,618			(6,505	)
Accounts payable and accrued expenses		(2,710	)		169
Accrued interest payable		(4,977	)		(281	)
Other liabilities		(7,589	)		(28,517	)
Tenant leasing costs		(23,855	)		(20,932	)


Total adjustments		122,324			172,169


Net cash provided by operating activities		331,080			290,101


Cash flows from investing activities:
Acquisitions of real estate		(621,359	)		(41,100	)
Construction in progress		(152,548	)		(137,258	)
Building and other capital improvements		(21,569	)		(13,390	)
Tenant improvements		(72,786	)		(28,290	)
Proceeds from the sale of real estate		61,963			—
Proceeds from land transaction		—			43,887
Deposit on real estate released from escrow		—			10,000
Issuance of notes receivable		(1,974	)		(6,375	)
Capital contributions to unconsolidated joint ventures		(325	)		(16,716	)
Capital distributions from unconsolidated joint ventures		3,057			—
Investments in securities, net		(873	)		(864	)


Net cash used in investing activities		(806,414	)		(190,106	)

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

BOSTON PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,
	2012			2011
	(in thousands)
Cash flows from financing activities:
Proceeds from mortgage notes payable		—			453,306
Repayments of mortgage notes payable		(219,865	)		(468,639	)
Proceeds from unsecured senior notes		997,790			—
Redemption/repurchase of unsecured exchangeable senior notes		(507,434	)		—
Deposit on mortgage loan financing		—			(14,500	)
Deferred financing costs		(7,758	)		(6,220	)
Net proceeds from ATM stock issuances		247,186			394,717
Net proceeds from equity transactions		973			8,807
Dividends and distributions		(185,269	)		(164,830	)
Distributions to noncontrolling interest in property partnership		(1,500	)		(1,000	)

Net cash provided by financing activities		324,123			201,641

Net increase (decrease) in cash and cash equivalents		(151,211	)		301,636
Cash and cash equivalents, beginning of period		1,823,208			478,948

Cash and cash equivalents, end of period	$	1,671,997		$	780,584

Supplemental disclosures:
Cash paid for interest	$	276,494		$	190,851

Interest capitalized	$	21,278		$	23,197

Non-cash investing and financing activities:
Additions to real estate included in accounts payable	$	3,225		$	19,154

Mortgage note payable assumed in connection with the acquisition of real estate	$	—		$	143,900

Mortgage note payable extinguished through foreclosure	$	25,000		$	—

Real estate transferred upon foreclosure	$	8,198		$	—

Dividends and distributions declared but not paid	$	93,353		$	83,369

Conversions of noncontrolling interests to stockholders’ equity	$	6,831		$	47,551

Conversion of redeemable preferred units to common units	$	4,115		$	—

Issuance of restricted securities to employees and directors	$	25,955		$	25,087

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

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 June 30, 2012 owned an approximate 88.5% (87.5% at June 30, 2011) 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 2008, February 2011 and February 2012, the Company issued LTIP Units in connection with the granting to employees of outperformance awards (also referred to as “2008 OPP Units,” “2011 OPP Units” and “2012 OPP Units,” respectively, and collectively as “OPP Units”). Because the rights, preferences and privileges of OPP Units differ from other LTIP Units granted to employees as part of the annual compensation process, unless specifically noted otherwise, all references to LTIP Units exclude OPP Units. On February 5, 2011, the measurement period for the Company’s 2008 OPP Unit awards expired and the Company’s total return to shareholders was not sufficient for employees to earn and therefore become eligible to vest in any of the 2008 OPP Unit awards. Accordingly, all 2008 OPP Unit awards were automatically forfeited (See Notes 9 and 12).

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. An LTIP Unit is generally the economic equivalent of a share of restricted common stock of the Company. 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 12).

At June 30, 2012, there was one series of Preferred Units outstanding (i.e., Series Two Preferred Units). The Series Two Preferred Units bear a distribution that is set in accordance with an amendment to the partnership agreement of the Operating Partnership. Preferred Units may also be converted into OP Units or redeemed for cash at the election of the holder thereof or the Operating Partnership in accordance with the terms and conditions set forth in the applicable amendment to the partnership agreement (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 June 30, 2012, the Company owned or had interests in a portfolio of 150 commercial real estate properties (the “Properties”) aggregating approximately 42.8 million net rentable square feet, including six properties under construction totaling approximately 2.2 million net rentable square feet. In addition, the Company has structured parking for approximately 44,703 vehicles containing approximately 15.2 million square feet. At June 30, 2012, the Properties consist of:

•

143 office properties, including 126 Class A office properties (including five properties under construction) and 17 Office/Technical properties;

•

one hotel;

•

three retail properties; and

•

three residential properties (including one property under construction).

The Company owns or controls undeveloped land parcels totaling approximately 510.5 acres. In addition, the Company has a noncontrolling interest in the Boston Properties Office Value-Added Fund, L.P. (the “Value-Added Fund”), which is a strategic partnership with two institutional investors through which the Company has pursued the acquisition of value-added investments in assets within its existing markets. The Company’s investments through the Value-Added Fund are not included in its portfolio information or any other portfolio level statistics. At June 30, 2012, the Value-Added Fund had investments in 24 buildings comprised of an office property in Chelmsford, Massachusetts and office complexes in Mountain View, California.

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 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., executes all significant business relationships. All majority-owned subsidiaries and affiliates over which the Company has financial and operating control and variable interest entities (“VIE”s) 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, 2011. Certain prior year amounts have been reclassified to conform to the current year presentation.

The Company follows the authoritative guidance for fair value measurements when valuing its financial instruments for disclosure purposes. The Company determines the fair value of its unsecured senior notes and unsecured exchangeable senior notes using market prices. The fair value of the Company’s unsecured senior notes and unsecured exchangeable senior notes is 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 fair value could be categorized at a level 2 basis 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 fair value of the Company’s mortgage notes payable is 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 June 30, 2012 and December 31, 2011 (in thousands):


	June 30, 2012					December 31, 2011
	Carrying Amount			Estimated Fair Value		Carrying Amount			Estimated Fair Value
Mortgage notes payable	$	2,877,125		$	2,985,393	$	3,123,267		$	3,297,903
Unsecured senior notes		4,863,413			5,236,475		3,865,186			4,148,461
Unsecured exchangeable senior notes		1,155,669	(1)		1,328,569		1,715,685	(1)		1,904,115

Total	$	8,896,207		$	9,550,437	$	8,704,138		$	9,350,479

(1)	Includes the net impact of Accounting Standards Codification (“ASC”) ASC 470-20 totaling approximately $39.5 million and $54.5 million at June 30, 2012 and December 31, 2011, respectively.

Out-of-Period Adjustment

During the six months ended June 30, 2012, the Company recorded additional real estate operating expenses totaling approximately $3.2 million related to the cumulative non-cash straight-line adjustment to the ground rent expense of certain ground leases that were not previously recognized on a straight-line basis. This resulted in the overstatement of real estate operating expenses by approximately $3.2 million during the six months ended June 30, 2012 and in the understatement of real estate operating expenses in the aggregate amount of approximately $3.2 million in previous periods. Because this adjustment was not material to the prior years’ consolidated financial statements and the impact of recording the adjustment in the current period is not material to the Company’s consolidated financial statements, the Company recorded the related adjustment during the six months ended June 30, 2012.

3. Real Estate Activity During the Six Months Ended June 30, 2012

Acquisitions

On March 1, 2012, the Company acquired 453 Ravendale Drive located in Mountain View, California for a purchase price of approximately $6.7 million in cash. 453 Ravendale Drive is an approximately 30,000 net rentable square foot Office/Technical property. The following table summarizes the allocation of the aggregate purchase price of 453 Ravendale Drive at the date of acquisition (in thousands).


Land	$	5,477
Building and improvements		974
Tenant improvements		116
In-place lease intangibles		223
Below-market rents		(140	)

Net assets acquired	$	6,650

On March 13, 2012, the Company acquired 100 Federal Street in Boston, Massachusetts for an aggregate investment of approximately $615.0 million in cash. In connection with the transaction, the Company entered into a long-term lease with an affiliate of Bank of America for approximately 735,000 square feet. 100 Federal Street is an approximately 1,264,000 net rentable square foot, 37-story Class A office tower located in Boston, Massachusetts. The following table summarizes the allocation of the aggregate purchase price of 100 Federal Street at the date of acquisition (in thousands).


Land	$	131,067
Building and improvements		387,321
Tenant improvements		48,633
In-place lease intangibles		69,530
Above-market rents		81
Other assets		4,800
Below-market rents		(22,515	)
Accounts payable and accrued expenses		(3,917	)

Net assets acquired	$	615,000

The following table summarizes the estimated amortization of the acquired in-place lease intangibles and the acquired net below-market lease intangibles for 453 Ravendale Drive and 100 Federal Street, collectively, for each of the five succeeding years (in thousands).


	Acquired In-Place Lease Intangibles		Acquired Net Below- Market Lease Intangibles
Period from July 1, 2012 through December 31, 2012	$	5,080	$	1,864
2013		10,084		3,709
2014		7,869		3,374
2015		5,927		2,885
2016		5,199		2,512

100 Federal Street contributed approximately $19.5 million of revenue and approximately $3.3 million of earnings to the Company for the period from March 13, 2012 through June 30, 2012. 453 Ravendale Drive contributed approximately $0.2 million of revenue and approximately $40,000 of earnings to the Company for the period from March 1, 2012 through June 30, 2012.

The accompanying pro forma information for the six months ended June 30, 2012 and 2011 is presented as if the acquisitions of (1) 453 Ravendale Drive on March 1, 2012 and (2) 100 Federal Street on March 13, 2012, had occurred on January 1, 2011. This pro forma information is based upon the historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the above occurred, nor do they purport to predict the results of operations of future periods.


Pro Forma	Six months ended June 30,
(in thousands, except per share data)	2012		2011
Total revenue	$	932,251	$	882,090
Income from continuing operations	$	155,514	$	122,989
Net income attributable to Boston Properties, Inc.	$	185,751	$	105,242
Basic earnings per share:
Net income per share attributable to Boston Properties, Inc.	$	1.24	$	0.73
Diluted earnings per share:
Net income per share attributable to Boston Properties, Inc.	$	1.24	$	0.73

Developments

On January 3, 2012, the Company commenced the redevelopment of Two Patriots Park, a Class A office project with approximately 256,000 net rentable square feet located in Reston, Virginia. The Company will capitalize incremental costs during the redevelopment.

On April 30, 2012, the Company fully placed in-service 510 Madison Avenue, a Class A office project with approximately 356,000 net rentable square feet located in New York City.

On May 4, 2012, the Company completed and fully placed in-service One Patriots Park, a Class A office redevelopment project with approximately 268,000 net rentable square feet located in Reston, Virginia.

Dispositions

On January 31, 2012, the servicer of the non-recourse mortgage loan collateralized by the Company’s Montvale Center property located in Gaithersburg, Maryland foreclosed on the property. During 2011, the Company had notified the master servicer of the non-recourse mortgage loan that the cash flows generated from the property were insufficient to fund debt service payments and capital improvements necessary to lease and operate the property and that the Company was not prepared to fund any cash shortfalls. The Company was not current on making debt service payments and was accruing interest at the default interest rate of 9.93% per annum. The loan was originally scheduled to mature on June 6, 2012. As a result of the foreclosure, the mortgage loan totaling $25.0 million was extinguished and the related obligations were satisfied with the transfer of the real estate and working capital to the servicer. The Company no longer has any equitable or economic ownership interest in the property. The transaction resulted in a gain on forgiveness of debt of approximately $17.8 million. The operating results of the property through the date of foreclosure have been classified as discontinued operations on a historical basis for all periods presented.

On May 17, 2012, the Company completed the sale of its Bedford Business Park properties located in Bedford, Massachusetts for approximately $62.8 million in cash. Net cash proceeds totaled approximately $62.0 million, resulting in a gain on sale of approximately $36.9 million. Bedford Business Park is comprised of two Office/Technical buildings and one Class A office building aggregating approximately 470,000 net rentable square feet.

The following table summarizes the income (loss) from discontinued operations related to Montvale Center and Bedford Business Park and the related gain on sale of real estate and gain on forgiveness of debt for the three and six months ended June 30, 2012 and 2011:


	For the three months ended June 30,						For the six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Total revenue	$	1,091		$	2,584		$	3,748		$	5,177
Expenses
Operating		450			1,242			1,602			2,322
Depreciation and amortization		243			821			1,040			1,656

Total expenses		693			2,063			2,642			3,978
Operating income		398			521			1,106			1,199
Other expense
Interest expense		—			(653	)		(222	)		(1,279	)

Income (loss) from discontinued operations	$	398		$	(132	)	$	884		$	(80	)
Noncontrolling interest in income (loss) from discontinued operations – common units of the Operating Partnership		(42	)		15			(94	)		10

Income (loss) from discontinued operations attributable to Boston Properties, Inc.	$	356		$	(117	)	$	790		$	(70	)

Gain on sale of real estate from discontinued operations	$	36,877		$	—		$	36,877		$	—
Gain on forgiveness of debt from discontinued operations		—			—			17,807			—
Noncontrolling interest in gain on sale of real estate and gain on forgiveness of debt from discontinued operations – common units of the Operating Partnership		(4,052	)		—			(6,021	)		—

Gain on sale of real estate and gain on forgiveness of debt from discontinued operations attributable to Boston Properties, Inc.	$	32,825		$	—		$	48,663		$	—

4. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at June 30, 2012:


Entity	Properties	Nominal % Ownership
Square 407 Limited Partnership	Market Square North		50.0	%
The Metropolitan Square Associates LLC	Metropolitan Square		51.0	%
BP/CRF 901 New York Avenue LLC	901 New York Avenue		25.0	%(1)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure		33.3	%(2)
RBP Joint Venture LLC	Eighth Avenue and 46th Street		50.0	%(3)
Boston Properties Office Value-Added Fund, L.P.	300 Billerica Road and Mountain View Research and Technology Parks		37.6	%(1)(4)
Annapolis Junction NFM, LLC	Annapolis Junction		50.0	%(5)
767 Venture, LLC	The General Motors Building		60.0	%
2 GCT Venture LLC	Two Grand Central Tower		60.0	%(6)
540 Madison Venture LLC	540 Madison Avenue		60.0	%
125 West 55^th Street Venture LLC	125 West 55^th Street		60.0	%
500 North Capitol LLC	500 North Capitol Street, NW		30.0	%(7)

(1)	The Company’s economic ownership can increase based on the achievement of certain return thresholds.

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

(3)	This property is not in operation and consists of assembled land.

(4)	Represents the Company’s effective ownership interest. The Company has a 25.0% interest in the 300 Billerica Road property and a 39.5% interest in the Mountain View Research and Technology Park properties.

(5)	Comprised of one building, one building under construction and two undeveloped land parcels.

(6)	The property was sold on October 25, 2011. As of June 30, 2012, the investment is comprised of working capital and a portion of the sale proceeds.

(7)	This property is under construction.

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 at an agreed upon fair value. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

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


	June 30, 2012			December 31, 2011
	(in thousands)
ASSETS
Real estate and development in process, net	$	4,519,909		$	4,542,594
Other assets		675,191			668,113

Total assets	$	5,195,100		$	5,210,707

LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable	$	3,018,423		$	2,988,894
Other liabilities		822,672			854,257
Members’/Partners’ equity		1,354,005			1,367,556

Total liabilities and members’/partners’ equity	$	5,195,100		$	5,210,707

Company’s share of equity	$	799,513		$	799,479
Basis differentials(1)		(128,860	)		(129,757	)

Carrying value of the Company’s investments in unconsolidated joint ventures	$	670,653		$	669,722

(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.

The combined summarized statements of operations of the joint ventures are as follows:


	For the three months ended June 30,					For the six months ended June 30,
	2012		2011			2012		2011
	(in thousands)
Total revenue(1)	$	156,035	$	144,987		$	295,135	$	290,632
Expenses
Operating		39,261		42,272			78,153		85,114
Depreciation and amortization		42,679		48,243			84,578		98,880

Total expenses		81,940		90,515			162,731		183,994
Operating income		74,095		54,472			132,404		106,638
Other expense
Interest expense		55,909		57,007			111,271		114,768

Net income (loss)	$	18,186	$	(2,535	)	$	21,133	$	(8,130	)

Company’s share of net income (loss)	$	10,641	$	(2,284	)	$	12,012	$	(5,339	)
Basis differential		431		1,759			897		3,515
Elimination of inter-entity interest on partner loan		10,119		9,407			20,003		18,682

Income from unconsolidated joint ventures	$	21,191	$	8,882		$	32,912	$	16,858

(1)

Includes straight-line rent adjustments of $2.8 million and $4.0 million for the three months ended June 30, 2012 and 2011, respectively, and $7.1 million and $8.1 million for the six months ended June 30, 2012 and 2011, respectively. Includes net below-market rent adjustments of $23.2 million and $29.2 million for the three months ended June 30, 2012 and 2011, respectively, and $48.5 million and $58.7 million for the six months ended June 30, 2012 and 2011, respectively. Total revenue for the three and six months ended June 30, 2012 includes termination income totaling approximately $19.6 million (of which the Company’s share is approximately $11.8 million) related to a lease termination with a tenant at the General Motors Building.

5. Mortgage Notes Payable

On March 12, 2012, the Company used available cash to repay the mortgage loan collateralized by its Bay Colony Corporate Center property located in Waltham, Massachusetts totaling $143.9 million. The mortgage financing bore interest at a fixed rate of 6.53% per annum and was scheduled to mature on June 11, 2012. There was no prepayment penalty. The Company recognized a gain on early extinguishment of debt totaling approximately $0.9 million related to the acceleration of the remaining balance of the historical fair value adjustment.

On April 2, 2012, the Company used available cash to repay the mortgage loan collateralized by its One Freedom Square property located in Reston, Virginia totaling $65.1 million. The mortgage financing bore interest at a fixed rate of 7.75% per annum and was scheduled to mature on June 30, 2012. There was no prepayment penalty. The Company recognized a gain on early extinguishment of debt totaling approximately $0.3 million related to the acceleration of the remaining balance of the historical fair value debt adjustment.

6. Unsecured Senior Notes

The following summarizes the unsecured senior notes outstanding as of June 30, 2012 (dollars in thousands):


	Coupon/ Stated Rate			Effective Rate(1)			Principal Amount			Maturity Date(2)
10 Year Unsecured Senior Notes		6.250	%		6.381	%	$	182,432		January 15, 2013(3)
10 Year Unsecured Senior Notes		6.250	%		6.291	%		42,568		January 15, 2013(3)
12 Year Unsecured Senior Notes		5.625	%		5.693	%		300,000		April 15, 2015
12 Year Unsecured Senior Notes		5.000	%		5.194	%		250,000		June 1, 2015
10 Year Unsecured Senior Notes		5.875	%		5.967	%		700,000		October 15, 2019
10 Year Unsecured Senior Notes		5.625	%		5.708	%		700,000		November 15, 2020
10 Year Unsecured Senior Notes		4.125	%		4.289	%		850,000		May 15, 2021
7 Year Unsecured Senior Notes		3.700	%		3.853	%		850,000		November 15, 2018
11 Year Unsecured Senior Notes		3.850	%		3.954	%		1,000,000		February 1, 2023

Total principal								4,875,000
Net unamortized discount								(11,587	)

Total							$	4,863,413

(1)	Yield on issuance date including the effects of discounts on the notes.

(2)	No principal amounts are due prior to maturity.

(3)	On July 25, 2012, the Company’s Operating Partnership issued notice to redeem these notes on August 24, 2012 (See Note 14).

On June 11, 2012, the Company’s Operating Partnership completed a public offering of $1.0 billion in aggregate principal amount of its 3.850% senior unsecured notes due 2023. The notes were priced at 99.779% of the principal amount to yield an effective rate (including financing fees) of 3.954% to maturity. The notes will mature on February 1, 2023, unless earlier redeemed. The aggregate net proceeds from the offering were approximately $989.4 million after deducting underwriting discounts and transaction expenses.

The indenture relating to the unsecured senior notes contains certain financial restrictions and requirements, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 50%, (3) an interest coverage ratio of greater than 1.50, and (4) an unencumbered asset value of not less than 150% of unsecured debt. At June 30, 2012, the Company was in compliance with each of these financial restrictions and requirements.

7. Unsecured Exchangeable Senior Notes

The following summarizes the unsecured exchangeable senior notes outstanding as of June 30, 2012 (dollars in thousands):


	Coupon/ Stated Rate			Effective Rate(1)			Exchange Rate			Principal Amount			First Optional Redemption Date by the Company			Maturity Date
3.625% Exchangeable Senior Notes		3.625	%		4.037	%		8.5051	(2)	$	747,500			N/A		February 15, 2014
3.750% Exchangeable Senior Notes		3.750	%		3.787	%		10.0066	(3)		450,000			May 18, 2013	(4)	May 15, 2036

Total principal											1,197,500
Net unamortized discount											(2,368	)
Adjustment for the equity component allocation, net of accumulated amortization											(39,463	)

Total										$	1,155,669

(1)	Yield on issuance date including the effects of discounts on the notes but excluding the effects of the adjustment for the equity component allocation.

(2)

The initial exchange rate is 8.5051 shares per $1,000 principal amount of the notes (or an initial exchange price of approximately $117.58 per share of Boston Properties, Inc.’s common stock). In addition, the Company entered into capped call transactions with affiliates of certain of the initial purchasers, which are intended to reduce the potential dilution upon future exchange of the notes. The capped call transactions were intended to increase the effective exchange price to the Company of the notes from $117.58 to approximately $137.17 per share (subject to adjustment), representing an overall effective premium of approximately 40% over the closing price on August 13, 2008 of $97.98 per share of Boston Properties, Inc.’s common stock. The net cost of the capped call transactions was approximately $44.4 million. As of June 30, 2012, the effective exchange price was $134.94 per share.

(3)

In connection with the special distribution of $5.98 per share of Boston Properties, Inc.’s common stock declared on December 17, 2007, the exchange rate was adjusted from 9.3900 to 10.0066 shares per $1,000 principal amount of notes effective as of December 31, 2007, resulting in an exchange price of approximately$99.93 per share of Boston Properties, Inc.’s common stock.

(4)

Holders may require the Operating Partnership to repurchase the notes for cash on May 18, 2013 and on May 15 of 2016, 2021, 2026 and 2031 and at any time prior to their maturity upon a fundamental change, in each case at a price equal to 100% of the principal amount of the notes being repurchased plus any accrued and unpaid interest up to, but excluding, the repurchase date.

On January 10, 2012, the Company announced that holders of the 2.875% Exchangeable Senior Notes due 2037 (the “Notes”) issued by its Operating Partnership had the right to surrender their Notes for purchase by the Operating Partnership (the “Put Right”) on February 15, 2012. The opportunity to exercise the Put Right expired at 5:00 p.m., New York City time, on February 8, 2012. On January 10, 2012, the Company also announced that the Operating Partnership issued a notice of redemption to the holders of the Notes to redeem, on February 20, 2012 (the “Redemption Date”), all of the Notes outstanding on the Redemption Date. In connection with the redemption, holders of the Notes had the right to exchange their Notes prior to 5:00 p.m., New York City time, on February 16, 2012. Notes with respect to which the Put Right was not exercised (or with respect to which the Put Right was exercised and subsequently withdrawn prior to the withdrawal deadline) and that were not surrendered for exchange prior to 5:00 p.m., New York City time, on February 16, 2012, were redeemed by the

Operating Partnership on the Redemption Date at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest thereon to, but excluding, the Redemption Date. Holders of an aggregate of $242,735,000 of the Notes exercised the Put Right and the Operating Partnership repurchased such Notes on February 15, 2012. On February 20, 2012, the Operating Partnership redeemed the remaining $333,459,000 of outstanding Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest thereon.

8. Commitments and Contingencies

General

In the normal course of business, the Company guarantees its performance of services or indemnifies third parties against its negligence.

The Company has letter of credit and performance obligations of approximately $16.4 million related to lender and development requirements.

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. Under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners.

In connection with the assumption of the General Motors Building’s secured loan by the Company’s unconsolidated joint venture, 767 Venture, LLC, the Company guaranteed the unconsolidated joint venture’s obligation to fund various escrows, including tenant improvements, taxes and insurance in lieu of cash deposits. As of June 30, 2012, the maximum funding obligation under the guarantee was approximately $20.2 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.

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.

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 (“TRIPRA”). 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 certified under TRIA 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 which is provided by IXP, LLC (“IXP”) as a direct insurer. 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, with $1.375 billion of Terrorism Coverage in excess of $250 million being provided by

NYXP, LLC (“NYXP”), as a direct insurer. 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 the properties owned by the Company’s Value-Added Fund and 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 additional Terrorism Coverage provided by IXP for 601 Lexington Avenue, the NBCR Coverage provided by IXP and the Terrorism Coverage provided by NYXP are backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger.” The program trigger is $100.0 million and the coinsurance is 15%. Under 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 are 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 with a $120 million per occurrence limit and a $120 million annual aggregate limit, $20 million of which is provided by IXP, as a direct insurer. 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 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, the additional Terrorism Coverage for 601 Lexington Avenue and the Company’s NBCR Coverage. The additional Terrorism Coverage provided by IXP for 601 Lexington Avenue only applies to losses which exceed the program trigger under TRIA. NYXP, 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 Terrorism Coverage for 767 Fifth Avenue. Currently, NYXP only insures losses which exceed the program trigger under TRIA and NYXP reinsures with a third-party insurance company any coinsurance payable under TRIA. Insofar as the Company owns IXP and NYXP, it is responsible for their liquidity and capital resources, and the accounts of IXP and NYXP 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 and NYXP would also be responsible for any recoupment charges by the Federal Government in the event losses are paid out and their insurance policies are maintained after the payout by the Federal Government. If the Company experiences a loss and IXP or NYXP are required to pay under their insurance policies, the Company would ultimately record the loss to the extent of the required payment. Therefore, insurance coverage provided by IXP and NYXP 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 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 or the presence of mold at the Company’s properties, 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.

9. Noncontrolling Interests

Noncontrolling interests relate to the interests in the Operating Partnership not owned by the Company and interests in property partnerships not wholly-owned by the Company. As of June 30, 2012, the noncontrolling interests consisted of 16,514,469 OP Units, 1,683,214 LTIP Units, 400,000 2011 OPP Units, 400,000 2012 OPP Units and 1,030,748 Series Two Preferred Units (or 1,352,688 OP Units on an as converted basis) held by parties other than the Company.

Noncontrolling Interest—Redeemable Preferred Units of the Operating Partnership

The Preferred Units at June 30, 2012 consisted solely of 1,030,748 Series Two Preferred Units, which bear a preferred distribution equal to the greater of (1) the distribution which would have been paid in respect of the Series Two Preferred Unit had such Series Two Preferred Unit been converted into an OP Unit (including both regular and special distributions) or (2) 6.00% per annum on a liquidation preference of $50.00 per unit, and are convertible into OP Units at a rate of $38.10 per Preferred Unit (1.312336 OP Units for each Preferred Unit). The holders of Series Two Preferred Units have the right to require the Operating Partnership to redeem their units for cash at the redemption price of $50.00 per unit on May 14, 2013 and May 12, 2014. The maximum number of units that may be required to be redeemed from all holders on each of these dates is 1,007,662, which is one-sixth of the number of Series Two Preferred Units that were originally issued. The holders also had the right to have their Series Two Preferred Units redeemed for cash on May 12, 2009, May 12, 2010, May 12, 2011 and May 14, 2012, although no holder exercised such right. The Company also has the right, subject to certain conditions, to redeem Series Two Preferred Units for cash or to convert into OP Units any Series Two Preferred Units that are not redeemed when they are eligible for redemption.

On February 5, 2012, 82,296 Series Two Preferred Units of the Operating Partnership were converted by the holders into 108,000 OP Units. In addition, the Company paid the accrued preferred distributions due to the holders of Preferred Units that were converted.

On February 15, 2012, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.75616 per unit. On May 15, 2012, the Operating Partnership paid a distribution on its outstanding Series Two Preferred Units of $0.73151 per unit.

The following table reflects the activity of the noncontrolling interests—redeemable preferred units of the Operating Partnership for the six months ended June 30, 2012 and 2011 (in thousands):


Balance at January 1, 2012	$	55,652
Net income		1,566
Distributions		(1,566	)
Conversion of redeemable preferred units to common units		(4,115	)

Balance at June 30, 2012	$	51,537


Balance at January 1, 2011	$	55,652
Net income		1,665
Distributions		(1,665	)

Balance at June 30, 2011	$	55,652

Noncontrolling Interest—Common Units of the Operating Partnership

During the six months ended June 30, 2012, 225,835 OP Units were presented by the holders for redemption (including 108,000 OP Units issued upon conversion of Series Two Preferred Units and 67,256 OP Units issued upon conversion of LTIP Units) and were redeemed by the Company in exchange for an equal number of shares of Common Stock.

At June 30, 2012, the Company had outstanding 400,000 2011 OPP Units and 400,000 2012 OPP Units (See Note 12). Prior to the measurement date (January 31, 2014 for 2011 OPP Units and February 6, 2015 for 2012 OPP Units), holders of OPP 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 OPP Units, both vested and unvested, that OPP award recipients have earned, if any, based on the establishment of an outperformance 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 January 27, 2012, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.55 per unit, and a distribution on the 2011 OPP Units in the amount of $0.055 per unit, to holders of record as of the close of business on December 31, 2011. On April 30, 2012, the Operating Partnership paid a distribution on the OP Units and LTIP Units in the amount of $0.55 per unit, and a distribution on the 2011 OPP Units and 2012 OPP Units in the amount of $0.055 per unit, to holders of record as of the close of business on March 30, 2012. On June 15, 2012, Boston Properties, Inc., as general partner of the Operating Partnership, declared a distribution on the OP Units and LTIP Units in the amount of $0.55 per unit and a distribution on the 2011 OPP Units and 2012 OPP Units in the amount of $0.055 per unit, in each case payable on July 31, 2012 to holders of record as of the close of business on June 29, 2012.

The Series Two Preferred Units may be converted into OP Units at the election of the holder thereof at any time. 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 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 including LTIP Units assuming that all conditions had been met for the conversion thereof) and Series Two Preferred Units (on an as converted basis) had all of such units been redeemed at June 30, 2012 was approximately $1.97 billion and $146.6 million, respectively, based on the closing price of the Company’s common stock of $108.37 per share on June 30, 2012.

Noncontrolling Interest—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) million at June 30, 2012 and approximately $(1.1) million at December 31, 2011, are included in Noncontrolling Interests—Property Partnerships on the accompanying Consolidated Balance Sheets.

10. Stockholders’ Equity

As of June 30, 2012, the Company had 150,715,702 shares of Common Stock outstanding.

During the six months ended June 30, 2012, the Company utilized its $600 million “at the market” (“ATM”) stock offering program to issue an aggregate of 2,347,500 shares of Common Stock for gross proceeds of approximately $249.8 million and net proceeds of approximately $247.2 million. As of June 30, 2012, approximately $305.3 million remained available for issuance under this ATM program.

During the six months ended June 30, 2012, the Company issued 22,823 shares of Common Stock upon the exercise of options to purchase Common Stock by certain employees.

During the six months ended June 30, 2012, the Company issued 225,835 shares of Common Stock in connection with the redemption of an equal number of OP Units.

On January 27, 2012, the Company paid a dividend in the amount of $0.55 per share of Common Stock to shareholders of record as of the close of business on December 31, 2011. On April 30, 2012, the Company paid a dividend in the amount of $0.55 per share of Common Stock to shareholders of record as of the close of business on March 30, 2012. On June 15, 2012, the Company’s Board of Directors declared a dividend in the amount of $0.55 per share of Common Stock payable on July 31, 2012 to shareholders of record as of the close of business on June 29, 2012.

11. Earnings Per Share

The following table provides a reconciliation of both the net income attributable to Boston Properties, Inc. 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. by the weighted-average number of common shares outstanding during the period. The terms of the Series Two Preferred Units enable the holders to obtain OP Units of the Operating Partnership, as well as Common Stock of the Company. As a result, the Series Two Preferred Units are considered participating securities and are included in the computation of basic and diluted earnings per share of the Company if the effect of applying the if-converted method is dilutive. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. As a result, unvested restricted common stock of the Company, LTIP Units and OPP Units are considered participating securities and are included in the computation of basic and diluted earnings per share of the Company if the effect of applying the if-converted method is dilutive. Because the OPP 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 June 30, 2012
	Income (Numerator)		Shares (Denominator)		Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Income from continuing operations attributable to Boston Properties, Inc.	$	85,889		150,312	$	0.57
Discontinued operations attributable to Boston Properties, Inc.		33,181		—		0.22

Net income attributable to Boston Properties, Inc.	$	119,070		150,312	$	0.79
Effect of Dilutive Securities:
Stock Based Compensation and Exchangeable Senior Notes		—		382		—

Diluted Earnings:
Net income	$	119,070		150,694	$	0.79


	For the Three Months Ended June 30, 2011
	Income (Numerator)			Shares (Denominator)		Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Income from continuing operations attributable to Boston Properties, Inc.	$	60,331			145,864	$	0.41
Discontinued operations attributable to Boston Properties, Inc.		(117	)		—		—

Net income attributable to Boston Properties, Inc.	$	60,214			145,864	$	0.41
Effect of Dilutive Securities:
Stock Based Compensation and Exchangeable Senior Notes		—			831		—

Diluted Earnings:
Net income	$	60,214			146,695	$	0.41


	For the six months ended June 30, 2012
	Income (Numerator)		Shares (Denominator)		Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Income from continuing operations attributable to Boston Properties, Inc.	$	134,219		149,328	$	0.90
Discontinued operations attributable to Boston Properties, Inc.		49,453		—		0.33

Net income attributable to Boston Properties, Inc.	$	183,672		149,328	$	1.23
Effect of Dilutive Securities:
Stock Based Compensation and Exchangeable Senior Notes		—		392		—

Diluted Earnings:
Net income	$	183,672		149,720	$	1.23


	For the Six Months Ended June 30, 2011
	Income (Numerator)			Shares (Denominator)		Per Share Amount
	(in thousands, except for per share amounts)
Basic Earnings:
Income from continuing operations attributable to Boston Properties, Inc.	$	101,019			143,990	$	0.70
Discontinued operations attributable to Boston Properties, Inc.		(70	)		—		—

Net income attributable to Boston Properties, Inc.	$	100,949			143,990	$	0.70
Effect of Dilutive Securities:
Stock Based Compensation and Exchangeable Senior Notes		—			620		—

Diluted Earnings:
Net income	$	100,949			144,610	$	0.70

12. Stock Option and Incentive Plan

On January 25, 2012, the Compensation Committee of the Board of Directors of the Company approved outperformance awards under the Company’s 1997 Stock Option and Incentive Plan (the “1997 Plan”) to certain officers of the Company. These awards (the “2012 OPP Awards”) are part of a broad-based, long-term incentive compensation program designed to provide the Company’s management team with the potential to earn equity awards subject to the Company “outperforming” and creating shareholder value in a pay-for-performance structure. 2012 OPP Awards utilize total return to shareholders (“TRS”) over a three-year measurement period as the performance metric and include two years of time-based vesting after the end of the performance measurement period (subject to acceleration in certain events) as a retention tool. Recipients of 2012 OPP Awards will share in an outperformance pool if the Company’s TRS, including both share appreciation and dividends, exceeds absolute and relative hurdles over a three-year measurement period from February 7, 2012 to February 6, 2015, based on the average closing price of a share of the Company’s common stock of $106.69 for the five trading days prior to and including February 7, 2012. The aggregate reward that recipients of all 2012 OPP Awards can earn, as measured by the outperformance pool, is subject to a maximum cap of $40.0 million.

The outperformance pool will consist of (i) two percent (2%) of the excess total return above a cumulative absolute TRS hurdle of 24% over the full three-year measurement period (equivalent to 8% per annum) (the “Absolute TRS Component”) and (ii) two percent (2%) of the excess or deficient excess total return above or below a relative TRS hurdle equal to the total return of the SNL Equity REIT Index over the three-year measurement period (the “Relative TRS Component”). In the event that the Relative TRS Component is potentially positive because the Company’s TRS is greater than the total return of the SNL Equity REIT Index, but the Company achieves a cumulative absolute TRS below 24% over the three-year measurement period (equivalent to 8% per annum), the actual contribution to the outperformance pool from the Relative TRS Component will be subject to a sliding scale factor as follows: (i) 100% of the potential Relative TRS Component will be earned if the Company’s TRS is equal to or greater than a cumulative 24% over three years, (ii) 0% will be earned if the Company’s TRS is 0% or less, and (iii) a percentage from 0% to 100% calculated by linear interpolation will be earned if the Company’s cumulative TRS over three years is between 0% and 24%. For example, if the Company achieves a cumulative absolute TRS of 18% over the full three-year measurement period (equivalent to a 6% absolute annual TRS), the potential Relative TRS Component would be prorated by 75%. The potential Relative TRS Component before application of the sliding scale factor will be capped at $40.0 million. In the event that the Relative TRS Component is negative because the Company’s TRS is less than the total return of the SNL Equity REIT Index, any outperformance reward potentially earned under the Absolute TRS Component will be reduced dollar for dollar, provided that the potential Absolute TRS Component before reduction for any negative Relative TRS Component will be capped at $40.0 million. The algebraic sum of the Absolute TRS Component and the Relative TRS Component determined as described above will never exceed $40.0 million.

Each employee’s 2012 OPP Award was designated as a specified percentage of the aggregate outperformance pool. Assuming the applicable absolute and/or relative TRS thresholds are achieved at the end of the measurement period, the algebraic sum of the Absolute TRS Component and the Relative TRS Component will be calculated and then allocated among the 2012 OPP Award recipients in accordance with each individual’s percentage. If there is a change of control prior to February 6, 2015, the measurement period will end on the change of control date and both the Absolute TRS Component (using a prorated absolute TRS hurdle) and the Relative TRS Component will be calculated and, assuming the applicable absolute and/or relative TRS thresholds are achieved over the shorter measurement period, allocated among the 2012 OPP Award recipients as of that date.

Rewards earned with respect to 2012 OPP Awards (if any) will vest 25% on February 7, 2015, 25% on February 7, 2016 and 50% on February 7, 2017, based on continued employment. Vesting will be accelerated in the event of a change in control of the Company, termination of employment without cause, termination of employment by the award recipient for good reason, death, disability or retirement, although restrictions on transfer will continue to apply in certain of these situations. All determinations, interpretations and assumptions relating to the calculation of performance and vesting relating to 2012 OPP Awards will be made by the Compensation Committee. 2012 OPP Awards will be in the form of LTIP Units. LTIP Units will be issued prior to the determination of the outperformance pool, but will remain subject to forfeiture depending on the extent of rewards earned with respect to 2012 OPP Awards. The number of LTIP Units issued initially to recipients of the 2012 OPP Awards is an estimate of the maximum number of LTIP Units that they could earn, based on certain assumptions. The number of LTIP Units actually earned by each award recipient will be determined at the end of the performance measurement period by dividing his or her share of the outperformance pool by the average closing price of a REIT Share for the 15 trading days immediately preceding the measurement date. Total return for the Company and for the SNL Equity REIT Index over the three-year measurement period and other circumstances will determine how many LTIP Units are earned by each recipient; if they are fewer than the number issued initially, the balance will be forfeited as of the performance measurement date. Prior to the measurement date, LTIP units issued on account of 2012 OPP Awards 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 LTIP Units, both vested and unvested, which 2012 OPP Award recipients have earned based on the establishment of an outperformance pool, will be entitled to receive distributions in an amount per unit equal to distributions, both regular and special, payable on an OP Unit. LTIP Units are designed to qualify as “profits interests” in the Operating Partnership for federal income tax purposes. As a general matter, the profits interests characteristics of the LTIP Units mean that initially they will not be economically equivalent in value to an OP Unit. If and when events specified by applicable tax regulations occur, LTIP Units can over time increase in value up to the point where they are equivalent to OP Units on a one-for-one basis. After LTIP Units are fully vested, and to the extent the special tax rules applicable to profits interests have allowed them to become equivalent in value to OP Units, LTIP Units may be converted on a one-for-one basis into OP Units. OP Units in turn have a one-for-one relationship in value with Boston Properties, Inc. common stock, and are exchangeable on such one-for-one basis for cash or, at the election of the Company, Boston Properties, Inc. common stock.

The 2012 OPP Units were valued, in accordance with ASC 718 “Compensation—Stock Compensation,” at an aggregate of approximately $7.7 million utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the award date. Assumptions used in the valuations included (1) factors associated with the underlying performance of the Company’s stock price and total shareholder return over the term of the performance awards including total stock return volatility and risk-free interest and (2) factors associated with the relative performance of the Company’s stock price and total shareholder return when compared to the SNL Equity REIT Index. The valuation was performed in a risk-neutral framework, so no assumption was made with respect to an equity risk premium. The

fair value of the 2012 OPP Units is based on the sum of: (1) the present value of the expected payoff to the OPP Award on the measurement date, if the TRS over the applicable measurement period exceeds performance hurdles of the Absolute and the Relative Components; and (2) the present value of the distributions payable on the 2012 OPP Units. The ultimate reward realized on account of the OPP Award by the holders of the 2012 OPP Units is contingent on the TRS achieved on the measurement date, both in absolute terms and relative to the TRS of the SNL Equity REIT Index. The per unit fair value of each 2012 OPP Unit was estimated on the date of grant using the following assumptions in the Monte Carlo valuation: expected price volatility for the Company and the SNL Equity REIT index of 31% and 30%, respectively; a risk free rate of 0.35%; and total dividend payments over the measurement period of $7.28 per share.

On February 13, 2012, E. Mitchell Norville announced that he would resign as Executive Vice President, Chief Operating Officer of the Company effective on February 29, 2012. In connection with his resignation, Mr. Norville entered into a separation agreement (the “Separation Agreement”) with the Company. Under the Separation Agreement, the Company agreed to pay Mr. Norville cash payments totaling approximately $1,533,333 (less applicable deductions) in addition to his cash bonus for 2011, which was $950,000. In addition, Mr. Norville agreed to provide consulting services to the Company for at least two months following the effective date of his resignation for which he received $20,000 per month. Under the Separation Agreement, Mr. Norville is entitled to accelerated vesting with respect to 23,502 LTIP units in the Operating Partnership and stock options to purchase 4,464 shares of common stock at an exercise price of $92.71 and 5,117 shares of common stock at an exercise price of $104.47. Mr. Norville will also retain approximately 36% of his 2011 outperformance award, which will remain subject to the performance-based vesting criteria originally established for the 2011 outperformance awards. Mr. Norville agreed to one-year non-competition, non-solicitation and non-interference provisions, and provided the Company with a general release of claims. The Company recognized approximately $4.5 million of expense during the six months ended June 30, 2012 in connection with Mr. Norville’s resignation.

At the Company’s 2012 annual meeting of stockholders held on May 15, 2012, the stockholders of the Company approved the Boston Properties, Inc. 2012 Stock Option and Incentive Plan (the “2012 Plan”). The 2012 Plan replaces the 1997 Plan. The material terms of the 2012 Plan include, among other things: (1) the maximum number of shares of common stock reserved and available for issuance under the 2012 Plan is the sum of (i) 13,000,000 newly authorized shares, plus (ii) the number of shares available for grant under the 1997 Stock Plan immediately prior to the effective date of the 2012 Plan, plus (iii) any shares underlying grants under the 1997 Plan that are forfeited, cancelled or are terminated (other than by exercise) in the future; (2) “full-value” awards (i.e., awards other than stock options) are multiplied by a 2.32 conversion ratio to calculate the number of shares available under the 2012 Plan that are used for each full-value award, as opposed to a 1.0 conversion ratio for each stock option awarded under the 2012 Plan; (3) shares tendered or held back for taxes will not be added back to the reserved pool under the 2012 Plan; (4) stock options may not be re-priced without stockholder approval; and (5) the term of the 2012 Plan is for ten years from the date of stockholder approval.

During the six months ended June 30, 2012, the Company issued 20,756 shares of restricted common stock, 186,007 non-qualified stock options, 174,650 LTIP Units and 400,000 2012 OPP Units to employees and non-employee directors under the 1997 Plan and 2012 Plan. Employees and directors paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit and OPP Unit. An LTIP Unit is generally the economic equivalent of a share of restricted stock in the Company. 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 six months ended June 30, 2012 were valued at approximately $2.2 million ($107.31 per share weighted-average). The non-qualified stock options granted during the six months ended June 30, 2012 had a weighted-average fair value on the date of grant of $19.50 per option, which was computed using the Black-Scholes

option-pricing model utilizing the following weighted-average assumptions: an expected life of 5.4 years, a risk-free interest rate of 0.92%, an expected price volatility of 28.4% and an expected dividend yield of 2.9%. The weighted-average exercise price of the options is $107.23, which was the weighted-average closing price of the Company’s common stock on the date of grant. The LTIP Units granted during the six months ended June 30, 2012 were valued at approximately $17.3 million ($98.83 per unit fair value weighted-average) using a Monte Carlo simulation method model. The weighted-average per unit fair value of each LTIP Unit granted was estimated on the date of grant using the following assumptions: an expected life of 5.8 years, a risk-free interest rate of 0.94% and an expected price volatility of 29.1%. As the 2011 OPP Awards and 2012 OPP Awards are subject to both a service condition and a market condition, the Company recognizes the compensation expense related to the 2011 OPP Awards and 2012 OPP Awards 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, 2008 OPP Units, 2011 OPP Units and 2012 OPP Units was approximately $6.4 million and $5.6 million for the three months ended June 30, 2012 and 2011, respectively, and approximately $17.4 million and $17.2 million for the six months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012, stock-based compensation expense includes approximately $2.7 million consisting of the acceleration of vesting of the Company’s Chief Operating Officer’s stock-based compensation awards associated with his resignation. Upon the conclusion of the three-year measurement period in February 2011, the 2008 OPP Awards were not earned, the program was terminated and the Company accelerated the then remaining unrecognized compensation expense totaling approximately $4.3 million during the six months ended June 30, 2011. At June 30, 2012, there was $29.4 million of unrecognized compensation expense related to unvested restricted stock and LTIP Units and $10.4 million of unrecognized compensation expense related to unvested 2011 OPP Units and 2012 OPP Units that is expected to be recognized over a weighted-average period of approximately 2.8 years.

13. 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, Princeton, 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, general and administrative expenses, transaction costs, interest expense, depreciation and amortization expense, gains (losses) from investments in securities, gains from early extinguishments of debt, income from unconsolidated joint ventures, discontinued operations and noncontrolling interests 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.

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

For the three months ended June 30, 2012:


	Boston			New York			Princeton			San Francisco			Washington, DC			Total
Rental Revenue:
Class A Office	$	157,642		$	122,657		$	15,617		$	53,650		$	88,740		$	438,306
Office/Technical		5,744			—			—			144			4,054			9,942
Residential		1,013			—			—			—			4,023			5,036
Hotel		10,049			—			—			—			—			10,049

Total		174,448			122,657			15,617			53,794			96,817			463,333

% of Grand Totals		37.65	%		26.47	%		3.37	%		11.61	%		20.90	%		100.0	%
Rental Expenses:
Class A Office		60,504			38,936			7,691			21,188			28,306			156,625
Office/Technical		1,652			—			—			38			964			2,654
Residential		367			—			—			—			2,207			2,574
Hotel		6,616			—			—			—			—			6,616

Total		69,139			38,936			7,691			21,226			31,477			168,469

% of Grand Totals		41.04	%		23.11	%		4.57	%		12.60	%		18.68	%		100.0	%

Net operating income	$	105,309		$	83,721		$	7,926		$	32,568		$	65,340		$	294,864

% of Grand Totals		35.71	%		28.39	%		2.69	%		11.05	%		22.16	%		100.0	%

For the three months ended June 30, 2011:


	Boston			New York			Princeton			San Francisco			Washington, DC			Total
Rental Revenue:
Class A Office	$	135,505		$	113,407		$	15,811		$	54,168		$	86,114		$	405,005
Office/Technical		6,337			—			—			—			3,950			10,287
Residential		—			—			—			—			576			576
Hotel		8,904			—			—			—			—			8,904

Total		150,746			113,407			15,811			54,168			90,640			424,772

% of Grand Totals		35.49	%		26.70	%		3.72	%		12.75	%		21.34	%		100.0	%
Rental Expenses:
Class A Office		50,772			37,378			7,487			20,118			24,365			140,120
Office/Technical		1,779			—			—			—			1,011			2,790
Residential		—			—			—			—			723			723
Hotel		6,281			—			—			—			—			6,281

Total		58,832			37,378			7,487			20,118			26,099			149,914

% of Grand Totals		39.25	%		24.93	%		4.99	%		13.42	%		17.41	%		100.0	%

Net operating income	$	91,914		$	76,029		$	8,324		$	34,050		$	64,541		$	274,858

% of Grand Totals		33.44	%		27.66	%		3.03	%		12.39	%		23.48	%		100.0	%

For the six months ended June 30, 2012:


	Boston			New York			Princeton			San Francisco			Washington, DC			Total
Rental Revenue:
Class A Office	$	298,650		$	240,246		$	30,467		$	105,847		$	179,137		$	854,347
Office/Technical		11,343			—			—			196			8,146			19,685
Residential		1,896			—			—			—			7,621			9,517
Hotel		16,865			—			—			—			—			16,865

Total		328,754			240,246			30,467			106,043			194,904			900,414

% of Grand Totals		36.51	%		26.68	%		3.38	%		11.78	%		21.65	%		100.0	%
Rental Expenses:
Class A Office		118,337			77,443			15,049			41,209			55,747			307,785
Office/Technical		3,152			—			—			62			2,011			5,225
Residential		757			—			—			—			4,532			5,289
Hotel		12,715			—			—			—			—			12,715

Total		134,961			77,443			15,049			41,271			62,290			331,014

% of Grand Totals		40.77	%		23.39	%		4.55	%		12.47	%		18.82	%		100.0	%

Net operating income	$	193,793		$	162,803		$	15,418		$	64,772		$	132,614		$	569,400

% of Grand Totals		34.03	%		28.59	%		2.71	%		11.38	%		23.29	%		100.0	%

For the six months ended June 30, 2011:


	Boston			New York			Princeton			San Francisco			Washington, DC			Total
Rental Revenue:
Class A Office	$	262,302		$	226,414		$	32,090		$	107,061		$	168,795		$	796,662
Office/Technical		12,596			—			—			—			7,942			20,538
Residential		—			—			—			—			576			576
Hotel		14,852			—			—			—			—			14,852

Total		289,750			226,414			32,090			107,061			177,313			832,628

% of Grand Totals		34.80	%		27.19	%		3.85	%		12.86	%		21.30	%		100.0	%
Rental Expenses:
Class A Office		98,542			75,092			15,402			39,452			47,533			276,021
Office/Technical		3,647			—			—			—			2,133			5,780
Residential		—			—			—			—			723			723
Hotel		12,020			—			—			—			—			12,020

Total		114,209			75,092			15,402			39,452			50,389			294,544

% of Grand Totals		38.77	%		25.50	%		5.23	%		13.39	%		17.11	%		100.0	%

Net operating income	$	175,541		$	151,322		$	16,688		$	67,609		$	126,924		$	538,084

% of Grand Totals		32.62	%		28.12	%		3.10	%		12.57	%		23.59	%		100.0	%

The following is a reconciliation of Net Operating Income to net income attributable to Boston Properties, Inc.:


	Three months ended June 30,					Six months ended June 30,
	2012		2011			2012			2011
Net Operating Income	$	294,864	$	274,858		$	569,400		$	538,084
Add:
Development and management services income		9,564		9,095			17,710			16,521
Income from unconsolidated joint ventures		21,191		8,882			32,912			16,858
Interest and other income		2,382		1,953			4,028			2,927
Gains from early extinguishments of debt		274		—			1,041			—
Income (loss) from discontinued operations		398		(132	)		884			(80	)
Gain on sale of real estate from discontinued operations		36,877		—			36,877			—
Gain on forgiveness of debt from discontinued operations		—		—			17,807			—
Less:
General and administrative expense		19,066		18,721			46,685			43,364
Transaction costs		8		1,361			2,112			1,433
Depreciation and amortization expense		111,643		110,259			220,583			218,852
Interest expense		99,901		94,583			203,138			193,108
Losses (gains) from investments in securities		186		(6	)		(615	)		(379	)
Noncontrolling interest in property partnerships		457		503			1,003			1,032
Noncontrolling interest—redeemable preferred units of the Operating Partnership		765		842			1,566			1,665
Noncontrolling interest—common units of the Operating Partnership		10,360		8,194			16,400			14,296
Noncontrolling interest in discontinued operations—common units of the Operating Partnership		4,094		(15	)		6,115			(10	)

Net income attributable to Boston Properties, Inc.	$	119,070	$	60,214		$	183,672		$	100,949

14. Subsequent Events

On July 13, 2012, the Company executed an agreement to form a joint venture, which upon closing will own and operate Fountain Square, an approximately 811,000 net rentable square foot office and retail complex located in Reston, Virginia, adjacent to the Company’s other Reston properties. The joint venture partner will contribute the property valued at approximately $385.0 million and related mortgage indebtedness totaling approximately $211.3 million for a 50% interest in the joint venture. The Company expects to contribute cash totaling approximately $87.0 million for its 50% interest, which cash will be distributed to the joint venture partner. The Company expects to consolidate this joint venture. The mortgage loan bears interest at fixed rate of 5.71% per annum and matures on October 11, 2016. Pursuant to the joint venture agreement (i) the Company has rights to acquire the partner’s 50% interest and (ii) the partner has the right to cause the Company to acquire the partner’s interest on January 4, 2016, in each case at a fixed price totaling approximately $102.0 million in cash. The fixed price option rights expire on January 31, 2016.

On July 25, 2012, the Company’s Operating Partnership issued notice to redeem the remaining $225.0 million in aggregate principal amount of its 6.25% senior notes due 2013 on August 24, 2012. The Company expects to fund this redemption using available cash. The redemption price will equal the sum of (i) the present values as of the redemption date of the remaining scheduled payments of principal and interest from the redemption date to maturity (excluding any accrued and unpaid interest) discounted on a semi-annual basis at a rate equal to the yield to maturity of a comparable United States Treasury security plus 0.35%, plus (ii) accrued interest to, but excluding, August 24, 2012, as provided in the applicable indenture. The redemption price will be calculated three business days prior to the redemption date and will be payable on August 24, 2012 in accordance with the terms of the applicable indenture.

ITEM 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “we,” “us,” “our” and the “Company” refer to Boston Properties, Inc., a Delaware corporation organized in 1997, individually or together with its subsidiaries, including Boston Properties Limited Partnership, a Delaware limited partnership, and our predecessors.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “result,” “should,” “will” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected by the forward-looking statements. We caution you that while forward-looking statements reflect our good-faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•

the continuing impact of high unemployment and other macroeconomic trends, which is having and may continue to have a negative effect on the following, among other things:

•

the fundamentals of our business, including overall market occupancy, tenant space utilization, and rental rates;

•

the financial condition of our tenants, many of which are financial, legal and other professional firms, our lenders, counterparties to our derivative financial instruments and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of default by these parties; and

•

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis;

•

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

•

failure to manage effectively our growth and expansion into new markets and sub-markets or to integrate acquisitions and developments successfully;

•

the ability of our joint venture partners to satisfy their obligations;

•

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

•

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments, including the impact of higher interest rates on the cost and/or availability of financing;

•

risks associated with forward interest rate contracts and the effectiveness of such arrangements;

•

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

•

risks associated with actual or threatened terrorist attacks;

•

costs of compliance with the Americans with Disabilities Act and other similar laws;

•

potential liability for uninsured losses and environmental contamination;

•

risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended;

•

possible adverse changes in tax and environmental laws;

•

the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results;

•

risks associated with possible state and local tax audits;

•

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

•

the other risk factors identified in our most recently filed Annual Report on Form 10-K, including those described under the caption “Risk Factors.”

The risks set forth above are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for future periods and Current Reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise, for a discussion of risks and uncertainties that may cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.

Overview

We are a fully integrated self-administered and self-managed REIT and one of the largest owners and developers of Class A office properties in the United States. Our properties are concentrated in five markets-Boston, New York, Princeton, San Francisco and Washington, DC. We generate revenue and cash primarily by leasing our Class A office space to our tenants. Factors we consider when we lease space include the creditworthiness of the tenant, the length of the lease, the rental rate to be paid, the costs of tenant improvements and other landlord concessions, current and anticipated operating costs and real estate taxes, our current and anticipated vacancy, current and anticipated future demand for office space and general economic factors. From time to time, we also generate cash through the sale of assets.

Our core strategy has always been to operate in supply-constrained markets with high barriers to entry and to focus on executing long-term leases with financially strong tenants. Historically, this combination has tended to reduce our exposure in down cycles and enhance revenues as market conditions improve. To be successful in the current leasing environment, we believe all aspects of the tenant-landlord relationship must be considered. In this regard, we believe that our understanding of tenants’ short- and long-term space needs in the local markets, our relationships with local brokers, our reputation as a premier owner and operator of Class A office properties, our financial strength and our ability to maintain high building standards provide us with a competitive advantage

in an increasingly fragmented office market. We expect tenants in our markets to continue to take advantage of the ability to upgrade to high-quality space like ours, particularly those who value our operational expertise and financial stability when making their leasing decisions.

After several strong quarters, leasing velocity slowed during the second quarter in Cambridge, Massachusetts and the Central Business District (CBD) and suburban submarkets of San Francisco. Overall trends in these markets are still positive with higher rental rates, which suggest that there are sectors of the economy driven by innovation that are growing despite the uncertain and challenging macroeconomic issues. In the midtown Manhattan market, leasing activity in the second quarter was less than recent historical averages and the availability rate increased slightly. We continued to see activity in our portfolio as we signed leases for approximately 589,000 square feet during the quarter, including a long-term extension with an existing 487,000 square foot tenant. In Washington, DC, the leasing activity continues to be slow and public sector demand has been adversely impacted by the federal budgetary uncertainty, potential sequestration and the reductions in discretionary spending programs. Our assets in the Boston CBD continue to experience demand with tenants committing to space two to three years in advance of their space needs, while the general market has a vacancy percentage rate in the mid-teens most of which is in low-rise space. During the second quarter absorption was positive and the vacancy rate is modestly improving. The suburbs of Boston along Route 128, where the majority of our suburban assets are located, are also improving modestly with new business creation and technology tenant expansion partially offset by corporate mergers and headcount reductions.

In the second quarter of 2012, leases for approximately 1.0 million square feet of space commenced revenue recognition, including leases for approximately 926,000 square feet of second generation space and leases for approximately 68,000 square feet of first generation space, stemming mostly from completion of development projects. Of the approximately 1.0 million square feet, leases for approximately 196,000 square feet were signed during the second quarter of 2012 and leases for the remainder of this space were signed in prior periods. The second generation leases that commenced revenue recognition in the second quarter of 2012 had an average lease term of approximately 87 months and included an average of approximately 81 days of free rent and total transaction costs, including tenant improvements and leasing commissions, of approximately $40 per square foot. The starting gross rents for the approximately 786,000 square feet of second generation leases that had been occupied within the prior 12 months increased on average by approximately 0.36% compared to the ending gross rents from the previous leases for this space. Lease terms are highly dependent on location (i.e., whether the property is in a CBD or suburban location), whether the lease is a renewal or with a new tenant, and the length of the lease term.

As of June 30, 2012, leases representing approximately 2.8% of the space at our properties expire through December 31, 2012. While rental rates in our markets have stabilized, as leases expire in 2012, assuming no further change in current market rental rates, we expect that the rental rates we are likely to achieve on new leases will generally be slightly less than the rates currently being paid, thereby generally resulting in less revenue from the same space.

We believe the successful lease-up and completion of our development pipeline will enhance our long-term return on equity and earnings growth as these developments are placed in-service through 2015. In 2012, we fully placed in-service 510 Madison Avenue in New York City and One Patriots Park in Reston, Virginia and expect to partially or fully place in-service Annapolis Junction Building Six in Annapolis, Maryland and 500 North Capitol Street, NW in Washington, DC with an aggregate estimated investment of approximately $493 million, which represents our share. In aggregate, these assets are currently 71% leased.

We also continue to actively explore acquisition opportunities. In July 2012, we executed an agreement to form a joint venture to own 50% of and to operate Fountain Square, an approximately 811,000 net rentable square foot office and retail complex located in Reston, Virginia, for an aggregate asset value of $385 million (see Note 14 to the Consolidated Financial Statements). We believe acquisition opportunities will continue to present themselves; however, with the combination of relatively low interest rates and an abundance of capital,

seeking high-quality assets may have a dampening effect on return expectations. While we are primarily focused on opportunities in our existing markets, we are open to investments in new markets both in the United States and possibly outside the United States. We are primarily interested in investing in markets that share common traits with our existing core markets, namely 24-hour world class cities with highly educated work forces, high barriers to entry and a diverse and strong international tenant base, and in which we would expect to establish an operating platform over time. We intend to carefully evaluate the risks inherent in investing in any new markets and maintain our disciplined investment strategy, which focuses on high-quality assets in supply-constrained markets that have historically provided long-term value creation. In addition, we believe that our existing cash balance, availability under our Operating Partnership’s Unsecured Line of Credit and access to a wide range of debt and equity financing alternatives provide us with ample capital to pursue acquisition opportunities.

We continue to review our portfolio for the possible sale of non-core assets where the leasing profile provides an opportunity to maximize value. On May 17, 2012, we completed the sale of our Bedford Business Park properties located in Bedford, Massachusetts for approximately $62.8 million in cash, which was structured for tax purposes as a Like-Kind Exchange.

Transactions during the three months ended June 30, 2012 included the following:

•

On April 2, 2012, we used available cash to repay the mortgage loan collateralized by our One Freedom Square property located in Reston, Virginia totaling $65.1 million. The mortgage financing bore interest at a fixed rate of 7.75% per annum and was scheduled to mature on June 30, 2012. There was no prepayment penalty. We recognized a gain on early extinguishment of debt totaling approximately $0.3 million related to the acceleration of the remaining balance of the historical fair value debt adjustment.

•

On April 30, 2012, we fully placed in-service 510 Madison Avenue, a Class A office project with approximately 356,000 net rentable square feet located in New York City. The property is currently 55% leased.

•

On May 4, 2012, we completed and fully placed in-service One Patriots Park (formerly known as 12310 Sunrise Valley Drive), a Class A office redevelopment project with approximately 268,000 net rentable square feet located in Reston, Virginia. The property is 100% leased.

•

On May 14, 2012, an unconsolidated joint venture in which we have a 60% interest entered into a lease termination agreement with an existing tenant at its General Motors Building in New York City. Under the agreement, the tenant terminated early its lease for approximately 36,000 square feet at the building and is responsible for certain payments to the unconsolidated joint venture aggregating approximately $28.4 million through May 1, 2014 (of which our share is approximately $17.0 million). As a result of the termination, we recognized termination income totaling approximately $11.8 million (which is net of the write-off of the accrued straight-line rent balance) during the second quarter of 2012, which is included within income from unconsolidated joint ventures on our Consolidated Statements of Operations.

•

On May 17, 2012, we completed the sale of our Bedford Business Park properties located in Bedford, Massachusetts for approximately $62.8 million in cash. Net cash proceeds totaled approximately $62.0 million, resulting in a gain on sale of approximately $36.9 million. Bedford Business Park is comprised of two Office/Technical buildings and one Class A office building aggregating approximately 470,000 net rentable square feet. The operating results of the property through the date of sale have been classified as discontinued operations on a historical basis for all periods presented. Refer to Note 3 of the Consolidated Financial Statements for additional details regarding the sale and operating results.

•

On June 11, 2012, our Operating Partnership completed a public offering of $1.0 billion in aggregate principal amount of its 3.850% senior unsecured notes due 2023. The notes were priced at 99.779% of the principal amount to yield an effective rate (including financing fees) of 3.954% to maturity. The notes will mature on February 1, 2023, unless earlier redeemed. The aggregate net proceeds from the offering were approximately $989.4 million after deducting underwriting discounts and transaction expenses.

•

During the second quarter of 2012, we utilized our $600 million “at the market” (“ATM”) stock offering program to issue an aggregate of 1,298,700 shares of our common stock for gross proceeds of approximately $139.2 million and net proceeds of approximately $137.9 million. We intend to use the net proceeds from the sales for general business purposes, which may include investment opportunities and debt reduction. As of June 30, 2012, approximately $305.3 million remained available for issuance under this ATM program.

Transactions completed subsequent to June 30, 2012:

•

On July 13, 2012, we executed an agreement to form a joint venture, which upon closing will own and operate Fountain Square, an approximately 811,000 net rentable square foot office and retail complex located in Reston, Virginia, adjacent to our other Reston properties. The joint venture partner will contribute the property valued at approximately $385.0 million and related mortgage indebtedness totaling approximately $211.3 million for a 50% interest in the joint venture. We expect to contribute cash totaling approximately $87.0 million for our 50% interest, which cash will be distributed to the joint venture partner. We expect to consolidate this joint venture. The mortgage loan bears interest at fixed rate of 5.71% per annum and matures on October 11, 2016. Pursuant to the joint venture agreement (i) we have rights to acquire the partner’s 50% interest and (ii) the partner has the right to cause us to acquire the partner’s interest on January 4, 2016, in each case at a fixed price totaling approximately $102.0 million in cash. The fixed price option rights expire on January 31, 2016. We expect to complete the formation of the joint venture by the end of the third quarter of 2012; however, there can be no assurance that the transaction will close on the terms currently contemplated or at all.

•

On July 25, 2012, our Operating Partnership issued notice to redeem the remaining $225.0 million in aggregate principal amount of its 6.25% senior notes due 2013 on August 24, 2012. Our Operating Partnership expects to fund this redemption using available cash. The redemption price will equal the sum of (i) the present values as of the redemption date of the remaining scheduled payments of principal and interest from the redemption date to maturity (excluding any accrued and unpaid interest) discounted on a semi-annual basis at a rate equal to the yield to maturity of a comparable United States Treasury security plus 0.35%, plus (ii) accrued interest to, but excluding, August 24, 2012, as provided in the applicable indenture. The redemption price will be calculated three business days prior to the redemption date and will be payable on August 24, 2012 in accordance with the terms of the applicable indenture. In connection with the redemption, we expect (1) to recognize a loss on extinguishment of debt in the third quarter of 2012 of approximately $5.3 million as a result of the redemption premium and (2) a reduction in future interest payments from the redemption date through the stated maturity date of January 15, 2013 of approximately $5.7 million.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Real Estate

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings as if vacant. We assess and consider fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that we deem appropriate, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions.

The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

We record acquired “above-” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

Management reviews its long-lived assets used in operations for impairment following the end of each quarter and when there is an event or change in circumstances that indicates an impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such criteria are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Because cash flows on properties considered to be “long-lived assets to be held and used” are considered on an undiscounted basis to determine whether an asset has been impaired, our established strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair value.

Guidance in Accounting Standards Codification (“ASC”) 360 “Property Plant and Equipment” (“ASC 360”) requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as “held for sale,” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be “held for sale” when the transaction has been approved by our Board of Directors, or a committee thereof, and there are no known significant contingencies relating to the sale, such that a sale of the property within one year is considered

probable. Following the classification of a property as “held for sale,” no further depreciation is recorded on the assets, and the asset is written down to the lower of carrying value or fair market value.

Real estate is stated at depreciated cost. A variety of costs are incurred in the acquisition, development and leasing of properties. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Beginning January 1, 2009, we are required to expense costs the acquirer incurs to effect a business combination such as legal, due diligence and other closing related costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, internal wages, property taxes, insurance, and other project costs incurred during the period of development. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project commences and capitalization begins, and when a development project is substantially complete and held available for occupancy and capitalization must cease, involves a degree of judgment. Our capitalization policy on development properties is guided by guidance in ASC 835-20 “Capitalization of Interest” and ASC 970 “Real Estate—General.” The costs of land and buildings under development include specifically identifiable costs.

The capitalized costs include pre-construction costs necessary to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We begin the capitalization of costs during the pre-construction period which we define as activities that are necessary to the development of the property. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed, (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction or (3) if activities necessary for the development of the property have been suspended.

Investments in Unconsolidated Joint Ventures

Except for ownership interests in VIEs for which we are the primary beneficiary, we account for our investments in joint ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. Our judgment with respect to our level of influence or control of an entity and whether we are the primary beneficiary of a VIE involves the consideration of various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment (including loans), estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the venture, if applicable. Our assessment of our influence or control over an entity affects the presentation of these investments in our Consolidated Financial Statements.

These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated joint ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in VIEs, we consolidate those in which we are the primary beneficiary. Our investments in unconsolidated joint ventures are reviewed for impairment periodically and we record impairment charges when events or circumstances change indicating that a decline in the fair value below the carrying values have occurred and such decline is other-than-temporary. The ultimate realization of our investment in unconsolidated joint ventures is dependent on a number of factors, including the performance of each investment and market

conditions. We will record an impairment charge if we determine that a decline in the value of an investment in an unconsolidated joint venture is other than temporary.

To the extent that we contribute assets to a joint venture, our investment in the joint venture is recorded at our cost basis in the assets that were contributed to the joint venture. To the extent that our cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related asset and included in our share of equity in net income of the joint venture. We will recognize gains on the contribution of real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the economic substance of the transaction is a sale.

The combined summarized financial information of the unconsolidated joint ventures is disclosed in Note 4 to the Consolidated Financial Statements.

Revenue Recognition

Contractual rental revenue is reported on a straight-line basis over the terms of our respective leases. We recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective leases. Accrued rental income as reported on the Consolidated Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements.

For the three and six months ended June 30, 2012, the impact of the net adjustments of rents from “above-” and “below-market” leases increased rental revenue by approximately $3.8 million and $6.8 million, respectively. For the three and six months ended June 30, 2012, the impact of the straight-line rent adjustment increased rental revenue by approximately $20.3 million and $39.3 million, respectively. Those amounts exclude the adjustment of rents from “above-” and “below-market” leases and straight-line income from unconsolidated joint ventures, which are disclosed in Note 4 to the Consolidated Financial Statements.

Our leasing strategy is generally to secure creditworthy tenants that meet our underwriting guidelines. Furthermore, following the initiation of a lease, we continue to actively monitor the tenant’s creditworthiness to ensure that all tenant related assets are recorded at their realizable value. When assessing tenant credit quality, we:

•

review relevant financial information, including:

•

financial ratios;

•

net worth;

•

revenue;

•

cash flows;

•

leverage; and

•

liquidity;

•

evaluate the depth and experience of the tenant’s management team; and

•

assess the strength/growth of the tenant’s industry.

As a result of the underwriting process, tenants are then categorized into one of three categories:

(1)

low risk tenants;

(2)

the tenant’s credit is such that we require collateral, in which case we:

•

require a security deposit; and/or

•

reduce upfront tenant improvement investments; or

(3)

the tenant’s credit is below our acceptable parameters.

We consistently monitor the credit quality of our tenant base. We provide an allowance for doubtful accounts arising from estimated losses that could result from the tenant’s inability to make required current rent payments and an allowance against accrued rental income for future potential losses that we deem to be unrecoverable over the term of the lease.

Tenant receivables are assigned a credit rating of 1 through 4. A rating of 1 represents the highest possible rating and no allowance is recorded. A rating of 4 represents the lowest credit rating, in which case we record a full reserve against the receivable balance. Among the factors considered in determining the credit rating include:

•

payment history;

•

credit status and change in status (credit ratings for public companies are used as a primary metric);

•

change in tenant space needs (i.e., expansion/downsize);

•

tenant financial performance;

•

economic conditions in a specific geographic region; and

•

industry specific credit considerations.

If our estimates of collectability differ from the cash received, the timing and amount of our reported revenue could be impacted. The average remaining term of our in-place tenant leases, including unconsolidated joint ventures, was approximately 7.1 years as of June 30, 2012. The credit risk is mitigated by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants.

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized as revenue in the period during which the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with guidance in ASC 605-45 “Principal Agent Considerations” (“ASC 605-45”). ASC 605-45 requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk. We also receive reimbursement of payroll and payroll related costs from third parties which we reflect on a net basis.

Our hotel revenues are derived from room rentals and other sources such as charges to guests for long-distance telephone service, fax machine use, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned.

We receive management and development fees from third parties. Management fees are recorded and earned based on a percentage of collected rents at the properties under management, and not on a straight-line basis, because such fees are contingent upon the collection of rents. We review each development agreement and record development fees as earned depending on the risk associated with each project. Profit on development fees earned from joint venture projects is recognized as revenue to the extent of the third-party partners’ ownership interest.

Gains on sales of real estate are recognized pursuant to the provisions included in ASC 360-20 “Real Estate Sales” (“ASC 360-20”). The specific timing of the sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, profit sharing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Depreciation and Amortization

We compute depreciation and amortization on our properties using the straight-line method based on estimated useful asset lives. We allocate the acquisition cost of real estate to land, building, tenant improvements,

acquired “above-” and “below-market” leases, origination costs and acquired in-place leases based on an assessment of their fair value and depreciate or amortize these assets over their useful lives. The amortization of acquired “above-” and “below-market” leases and acquired in-place leases is recorded as an adjustment to revenue and depreciation and amortization, respectively, in the Consolidated Statements of Operations.

Fair Value of Financial Instruments

For purposes of disclosure, we calculate the fair value of our mortgage notes payable and unsecured senior notes. We discount the spread between the future contractual interest payments and hypothetical future interest payments on our mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, we add our estimate of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to our own debt. Because our valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.

Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the Consolidated Statements of Operations as a component of net income or as a component of comprehensive income and as a component of equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.

Results of Operations

The following discussion is based on our Consolidated Financial Statements for the three and six months ended June 30, 2012 and 2011.

At June 30, 2012 and June 30, 2011, we owned or had interests in a portfolio of 150 and 152 properties, respectively (in each case, the “Total Property Portfolio”). As a result of changes within our Total Property Portfolio, the financial data presented below shows significant changes in revenue and expenses from period-to-period. Accordingly, we do not believe that our period-to-period financial data with respect to the Total Property Portfolio are necessarily meaningful. Therefore, the comparison of operating results for the three and six months ended June 30, 2012 and 2011 show separately the changes attributable to the properties that were owned by us and in service throughout each period compared (the “Same Property Portfolio”) and the changes attributable to the properties included in the Placed In-Service, Acquired or Development or Redevelopment Portfolios.

In our analysis of operating results, particularly to make comparisons of net operating income between periods meaningful, it is important to provide information for properties that were in-service and owned by us throughout each period presented. We refer to properties acquired or placed in-service prior to the beginning of the earliest period presented and owned by us and in service through the end of the latest period presented as our Same Property Portfolio. The Same Property Portfolio therefore excludes properties placed in-service, acquired, repositioned or in development or redevelopment after the beginning of the earliest period presented or disposed of prior to the end of the latest period presented.

Net operating income, or “NOI,” is a non-GAAP financial measure equal to net income attributable to Boston Properties, Inc., the most directly comparable GAAP financial measure, plus income attributable to noncontrolling interests, discontinued operations, depreciation and amortization, interest expense, transaction costs, general and administrative expense, less gains (losses) from investments in securities, gains from early extinguishments of debt, income from unconsolidated joint ventures, interest and other income and development

and management services revenue. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets.

Our management also uses NOI to evaluate regional property level performance and to make decisions about resource allocations. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspective not immediately apparent from net income attributable to Boston Properties, Inc. NOI excludes certain components from net income attributable to Boston Properties, Inc. in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level as opposed to the property level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income attributable to Boston Properties, Inc. as presented in our Consolidated Financial Statements. NOI should not be considered as an alternative to net income attributable to Boston Properties, Inc. as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. For a reconciliation of NOI to net income attributable to Boston Properties, Inc., see Note 13 to the Consolidated Financial Statements.

Comparison of the six months ended June 30, 2012 to the six months ended June 30, 2011.

The table below shows selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of 124 properties totaling approximately 31.6 million net rentable square feet of space, excluding unconsolidated joint ventures. The Same Property Portfolio includes properties acquired or placed in-service on or prior to January 1, 2011 and owned and in service through June 30, 2012. The Total Property Portfolio includes the effects of the other properties either placed in-service, acquired or in development or redevelopment after January 1, 2011 or disposed of on or prior to June 30, 2012. This table includes a reconciliation from the Same Property Portfolio to the Total Property Portfolio by also providing information for the six months ended June 30, 2012 and 2011 with respect to the properties which were placed in-service, acquired or in development or redevelopment.


	Same Property Portfolio										Properties Acquired Portfolio					Properties Placed In-Service Portfolio					Properties in Development or Redevelopment Portfolio						Total Property Portfolio
(dollars in thousands)	2012		2011		Increase/ (Decrease)			% Change			2012		2011			2012		2011			2012			2011			2012		2011		Increase/ (Decrease)		% Change
Rental Revenue:
Rental Revenue	$	784,132	$	775,540	$	8,592			1.11	%	$	33,797	$	8,919		$	58,511	$	25,844		$	(34	)	$	5,259		$	876,406	$	815,562	$	60,844		7.46	%
Termination Income		4,398		2,214		2,184			98.64	%		174		—			—		—			2,571			—			7,143		2,214		4,929		222.63	%

Total Rental Revenue		788,530		777,754		10,776			1.39	%		33,971		8,919			58,511		25,844			2,537			5,259			883,549		817,776		65,773		8.04	%

Real Estate Operating Expenses		278,332		266,538		11,794			4.42	%		15,455		5,229			24,498		9,004			14			1,753			318,299		282,524		35,775		12.66	%

Net Operating Income, excluding hotel		510,198		511,216		(1,018	)		(0.20	)%		18,516		3,690			34,013		16,840			2,523			3,506			565,250		535,252		29,998		5.60	%

Hotel Net Operating Income(1)		4,150		2,832		1,318			46.54	%		—		—			—		—			—			—			4,150		2,832		1,318		46.54	%

Consolidated Net Operating Income(1)		514,348		514,048		300			0.06	%		18,516		3,690			34,013		16,840			2,523			3,506			569,400		538,084		31,316		5.82	%

Other Revenue:
Development and management services		—		—		—			—			—		—			—		—			—			—			17,710		16,521		1,189		7.20	%
Other Expenses:
General and administrative expense		—		—		—			—			—		—			—		—			—			—			46,685		43,364		3,321		7.66	%
Transaction costs		—		—		—			—			—		—			—		—			—			—			2,112		1,433		679		47.38	%
Depreciation and amortization		185,486		182,135		3,351			1.84	%		15,991		6,212			17,223		23,191			1,883			7,314			220,583		218,852		1,731		0.79	%

Total Other Expenses		185,486		182,135		3,351			1.84	%		15,991		6,212			17,223		23,191			1,883			7,314			269,380		263,649		5,731		2.17	%

Operating Income		328,862		331,913		(3,051	)		(0.92	)%		2,525		(2,522	)		16,790		(6,351	)		640			(3,808	)		317,730		290,956		26,774		9.20	%
Other Income:
Income from unconsolidated joint ventures																												32,912		16,858		16,054		95.23	%
Interest and other income																												4,028		2,927		1,101		37.62	%
Gains from investments in securities																												615		379		236		62.27	%
Gains from early extinguishments of debt																												1,041		—		1,041		100.00	%
Other Expenses:
Interest expense