SEC Filing

- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 September 30, 1999 [_]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 (IRS Employer Id. Number) incorporation or organization) 02199 800 Boylston Street (Zip Code) Boston, Massachusetts (Address of principal executive offices) Registrant's telephone number, including area code: (617) 236-3300 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, Par Value $.01 67,904,698 (Class) (Outstanding on November 4, 1999) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------

BOSTON PROPERTIES, INC. FORM 10-Q for the quarter ended September 30, 1999 TABLE OF CONTENTS Page(s) ------- PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements: a) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......... 1 b) Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998............................................................................ 2 c) Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998............................................................................ 3 d) Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............................................................................ 4 e) Notes to the Consolidated Financial Statements..................................... 5 ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations................................................................. 14 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............................ 21 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K...................................................... 22 Signatures ...................................................................................... 23

BOSTON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS September 30, December 31, 1999 1998 ------------- ------------ (unaudited) (in thousands, except share amounts) ASSETS ------ Real estate:............................................. $5,505,625 $4,917,193 Less: accumulated depreciation......................... (441,575) (357,384) ---------- ---------- Total real estate.................................... 5,064,050 4,559,809 Cash and cash equivalents................................ 50,415 12,166 Notes receivable......................................... -- 420,143 Escrows.................................................. 25,886 19,014 Tenant and other receivables, net........................ 21,420 40,830 Accrued rental income, net............................... 78,413 64,251 Deferred charges, net.................................... 49,590 46,029 Prepaid expenses and other assets........................ 29,194 26,058 Investments in joint ventures............................ 35,807 46,787 ---------- ---------- Total assets......................................... $5,354,775 $5,235,087 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Mortgage notes payable................................. $2,943,763 $2,653,581 Notes payable.......................................... -- 420,143 Unsecured line of credit............................... 334,000 15,000 Accounts payable and accrued expenses.................. 49,070 42,897 Dividends payable...................................... 48,483 40,494 Accrued interest payable............................... 9,611 7,307 Other liabilities...................................... 34,919 27,950 ---------- ---------- Total liabilities.................................... 3,419,846 3,207,372 ---------- ---------- Commitments and contingencies............................ -- -- ---------- ---------- Minority interests....................................... 780,910 1,079,234 ---------- ---------- Series A Convertible Redeemable Preferred Stock, liquidation preference $50.00 per share, 2,000,000 shares issued and outstanding........................... 100,000 -- ---------- ---------- Stockholders' equity: Excess stock, $.01 par value, 150,000,000 shares authorized, none issued or outstanding................ -- -- Common stock, $.01 par value, 250,000,000 shares authorized, 67,902,967 and 63,527,819 issued and outstanding in 1999 and 1998, respectively............ 679 635 Additional paid-in capital............................. 1,068,050 955,711 Dividends in excess of earnings........................ (14,710) (7,865) ---------- ---------- Total stockholders' equity........................... 1,054,019 948,481 ---------- ---------- Total liabilities and stockholders' equity......... $5,354,775 $5,235,087 ========== ========== The accompanying notes are an integral part of those financial statements. 1

BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Nine months Nine months ended ended September 30, September 30, 1999 1998 -------------- -------------- (unaudited and in thousands, except for per share amounts) Revenue Rental: Base rent.............................. $ 476,261 $ 286,610 Recoveries from tenants................ 53,878 33,027 Parking and other...................... 34,272 5,880 -------------- -------------- Total rental revenue................. 564,411 325,517 Development and management services...... 11,364 8,893 Interest and other....................... 5,710 9,410 -------------- -------------- Total revenue........................ 581,485 343,820 -------------- -------------- Expenses Operating................................ 184,321 97,188 General and administrative............... 21,345 16,750 Interest................................. 151,446 81,926 Depreciation and amortization............ 88,315 51,212 -------------- -------------- Total expenses....................... 445,427 247,076 -------------- -------------- Income before minority interests and joint venture income............................ 136,058 96,744 Minority interests in property partnerships.............................. (4,473) (390) Income from unconsolidated joint ventures.. 648 -- -------------- -------------- Income before minority interest in Operating Partnership..................... 132,233 96,354 Minority interest in Operating Partnership............................... (48,483) (25,025) -------------- -------------- Income before extraordinary item........... 83,750 71,329 Extraordinary gain, net.................... -- 3,564 -------------- -------------- Net income before preferred dividend....... 83,750 74,893 Preferred dividend......................... (4,175) -- -------------- -------------- Net income available to common shareholders.............................. $ 79,575 $ 74,893 ============== ============== Basic earnings per share: Income before extraordinary gain......... $ 1.21 $ 1.19 Extraordinary gain, net.................. -- 0.06 -------------- -------------- Net income available to common shareholders............................ $ 1.21 $ 1.25 ============== ============== Weighted average number of common shares outstanding............................. 65,672 60,101 ============== ============== Diluted earnings per share: Income before extraordinary gain......... $ 1.20 $ 1.17 Extraordinary gain, net.................. -- 0.06 -------------- -------------- Net income available to common shareholders............................ $ 1.20 $ 1.23 ============== ============== Weighted average number of common and common equivalent shares outstanding.... 66,280 60,744 ============== ============== The accompanying notes are an integral part of these financial statements. 2

BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three months Three months ended ended September 30, September 30, 1999 1998 -------------- -------------- (unaudited and in thousands, except for per share amounts) Revenue Rental: Base rent.............................. $ 166,582 $ 119,535 Recoveries from tenants................ 19,212 13,665 Parking and other...................... 11,261 3,174 -------------- -------------- Total rental revenue................. 197,055 136,374 Development and management services...... 3,706 2,734 Interest and other....................... 1,444 1,069 -------------- -------------- Total revenue........................ 202,205 140,177 -------------- -------------- Expenses Operating................................ 66,665 43,255 General and administrative............... 7,383 6,129 Interest................................. 51,768 33,183 Depreciation and amortization............ 31,078 21,523 -------------- -------------- Total expenses....................... 156,894 104,090 -------------- -------------- Income before minority interests and joint venture income............................ 45,311 36,087 Minority interests in property partnership............................... (179) (161) Income from unconsolidated joint ventures.. 206 -- -------------- -------------- Income before minority interest in Operating Partnership..................... 45,338 35,926 Minority interest in Operating Partnership............................... (16,266) (10,585) -------------- -------------- Net income before preferred dividend....... 29,072 25,341 Preferred dividend......................... (1,654) -- -------------- -------------- Net income available to common shareholders.............................. $ 27,418 $ 25,341 ============== ============== Basic earnings per share: Net income available to common shareholders............................ $ 0.40 $ 0.40 ============== ============== Weighted average number of common shares outstanding............................. 67,901 63,468 ============== ============== Diluted earnings per share: Net income available to common shareholders............................ $ 0.40 $ 0.40 ============== ============== Weighted average number of common and common equivalent shares outstanding.... 68,484 63,991 ============== ============== The accompanying notes are an integral part of these financial statements. 3

BOSTON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended --------------------------- September 30, September 30, 1999 1998 ------------- ------------- (unaudited and in thousands) Cash flows from operating activities: Net income before preferred dividend.............. $ 83,750 $ 74,893 Adjustments to reconcile net income before preferred dividend to net cash provided by operating activities: Depreciation and amortization..................... 88,315 51,212 Non-cash portion of interest expense.............. 1,676 349 Extraordinary gain on early debt extinguishment... -- (4,641) Income from investments in unconsolidated joint ventures......................................... (648) -- Minority interests................................ 45,595 24,598 Change in assets and liabilities: Escrows........................................... (6,872) (8,702) Tenant and other receivables, net................. 19,410 (2,839) Accrued rental income............................. (14,162) (5,490) Prepaid expenses and other assets................. (3,136) (12,502) Accounts payable and accrued expenses............. 3,766 17,680 Accrued interest payable.......................... 2,304 (1,797) Other liabilities................................. 6,969 14,715 -------- ---------- Total adjustments............................... 143,217 72,583 -------- ---------- Net cash provided by operating activities....... 226,967 147,476 -------- ---------- Cash flows from investing activities: Acquisitions/additions to real estate............. (554,430) (1,168,281) Tenant leasing costs.............................. (7,440) (12,018) Investments in joint ventures..................... 11,628 (28,993) -------- ---------- Net cash used in investing activities........... (550,242) (1,209,292) -------- ---------- Cash flows from financing activities: Net proceeds from sales of common and preferred stock............................................ 241,003 819,326 Payment of offering costs......................... (254) -- Borrowings on unsecured line of credit............ 589,000 195,000 Repayment of unsecured line of credit............. (270,000) (233,000) Repayments of mortgage notes...................... (24,697) (150,488) Proceeds from mortgage notes...................... 287,039 517,800 Repayment of notes payable........................ (328,143) -- Dividends and distributions....................... (130,451) (88,579) Proceeds from exercise of stock options........... 815 -- Deferred financing and other costs................ (2,788) (259) -------- ---------- Net cash provided by financing activities....... 361,524 1,059,800 -------- ---------- Net increase in cash............................... 38,249 (2,016) Cash and cash equivalents, beginning of period..... 12,166 17,560 -------- ---------- Cash and cash equivalents, end of period........... $ 50,415 $ 15,544 ======== ========== Supplemental disclosures: Cash paid for interest............................ $158,652 $ 87,186 ======== ========== Interest capitalized.............................. $ 11,186 $ 3,812 ======== ========== Non-cash activities: Investing and Financing activities: Additions to real estate included in accounts payable.......................................... $ 2,407 $ -- ======== ========== Mortgage notes payable assumed in connection with acquisitions..................................... $ 28,331 $ 246,626 ======== ========== Issuance of minority interest in connection with acquisitions..................................... $ 2,888 $ 305,797 ======== ========== Dividends and distributions declared but not paid............................................. $ 48,483 $ -- ======== ========== Notes receivable assigned in connection with an acquisition...................................... $420,143 $ -- ======== ========== Notes payable assigned in connection with an acquisition...................................... $(92,000) $ -- ======== ========== Common stock issued in connection with an acquisition...................................... $ -- $ 5,000 ======== ========== The accompanying notes are an integral part of these financial statements. 4

BOSTON PROPERTIES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited and in thousands) 1. Organization Boston Properties, Inc. (the "Company"), a Delaware corporation, is a self- administered and self-managed real estate investment trust ("REIT"). Boston Properties, Inc. is the sole general partner of Boston Properties Limited Partnership (the "Operating Partnership") and at September 30, 1999, owned an approximate 67.35% 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") or "preferred units of partnership interest" (also referred to as "Preferred Units"). All references to OP Units and Preferred Units exclude such 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 the issuance of OP Units to particular holders that may restrict such 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, except that, the Company may, at its election, in lieu of a cash redemption, acquire such OP Unit for one share of common stock of the Company ("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. Each series of 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 convertible into OP Units at the election of the holder thereof or the Company. All references to the Company refer to Boston Properties, Inc. and its subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires. To assist the Company in maintaining its status as a REIT, the Company leases its three in-service hotel properties, pursuant to a lease with a participation in the gross receipts of such hotel properties, to a lessee ("ZL Hotel LLC") in which Messrs. Zuckerman and Linde, the Chairman of the Board and Chief Executive Officer, respectively, are the sole member-managers. Messrs. Zuckerman and Linde have a 9.8% economic interest in such lessee and one or more unaffiliated public charities have a 90.2% economic interest. Marriott International, Inc. manages these hotel properties under the Marriott(R) name pursuant to a management agreement with the lessee. Under the REIT requirements, revenues from a hotel are not considered to be rental income for purposes of certain income tests that a REIT must meet. Accordingly, in order to maintain its qualification as a REIT, the Company has entered into the participating leases described above to provide revenue that qualifies as rental income under the REIT requirements. As of September 30, 1999, the Company and the Operating Partnership had 67,902,967 and 23,816,811 shares of Common Stock and OP Units outstanding, respectively. In addition, the Company had 2,000,000 shares of Preferred Stock and the Operating Partnership had 8,713,131 Preferred Units outstanding. The Properties: The Company owns a portfolio of 132 commercial real estate properties (121 and 114 properties at December 31, 1998 and September 30, 1998, respectively) (the "Properties") aggregating over 35.3 million square feet. The properties consist of 119 office properties with approximately 27.2 million net rentable square feet (including 10 properties under development expected to contain approximately 3.5 million net rentable square feet) and approximately 5.9 million additional square feet of structured parking for 16,726 vehicles, nine industrial properties with approximately 925,000 net rentable square feet, three hotels with a total of 1,054 rooms (consisting of approximately 938,000 square feet), and a parking garage with 1,170 spaces (consisting of approximately 330,000 square feet). In addition, the Company owns, has under contract, or has an option to acquire 45 parcels of land totaling 465.6 acres, which will support approximately 10.0 million square feet of development. 5

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) 2. Basis of Presentation and Summary of Significant Accounting Policies The consolidated financial statements of the Company include all the accounts of the Company, its majority-owned Operating Partnership and subsidiaries. The financial statements reflect the properties acquired at their historical basis of accounting to the extent of the acquisition of interests from the Predecessor's owners who continued as investors. The remaining interests acquired for cash from those owners of the Predecessor who decided to sell their interests have been accounted for as a purchase and the excess of the purchase price over the related historical cost basis was allocated to real estate. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's annual report on Form 10-K for its fiscal year ended December 31, 1998. The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation 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. 3. Real Estate Acquired and Placed in Service During the Quarter Ended September 30, 1999 On July 9, 1999, the Company acquired 206 Carnegie Center, a 161,763 square foot, Class A office property in Princeton, New Jersey for approximately $27.0 million. This property is part of the Carnegie Center Portfolio. The acquisition was funded with available cash. On August 13, 1999, the Company acquired 302 Carnegie Center, a parcel of land in Princeton, New Jersey for approximately $1.3 million. This parcel is part of the Carnegie Center Portfolio. The acquisition was funded with available cash. On August 16, 1999, the Company acquired the leasehold interest and ground rent credits in the 5 Times Square development site in New York City for approximately $152.5 million. The acquisition was funded with a draw down from the Company's Unsecured Line of Credit. The development site will support an approximately 1.1 million square foot, 37 story Class A office tower, which is currently 100% pre-leased. On August 31, 1999, the Company acquired The Gateway, consisting of two Class A office buildings containing approximately 487,453 square feet, and two development parcels located in South San Francisco, California for approximately $117.6 million. The acquisition was funded through a draw down of approximately $113.1 million from the Company's Unsecured Line of Credit and a $4.5 million promissory note. 4. Investments in Joint Ventures The investments in joint ventures represent (i) a 25% interest in a joint venture which owns and operates two office buildings in Reston, Virginia, (ii) a 25% interest in a joint venture which is developing one office building in Reston, Virginia, and (iii) a 50% interest in a joint venture which owns and operates a residential apartment building and is developing an office building in Washington, D.C. The Company also serves as development manager for the two joint ventures still under development. Under the equity method of accounting, the net equity investment is reflected on the consolidated balance sheets. 6

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) The combined summarized balance sheets of the joint ventures are as follows: September 30, December 31, 1999 1998 ------------- ------------ (unaudited) ASSETS Real estate and development in progress........... $235,612 $172,417 Other assets...................................... 12,867 10,032 -------- -------- Total assets.................................. $248,479 $182,449 ======== ======== LIABILITIES AND PARTNERS EQUITY Mortgage and construction loans payable........... $153,875 $ 55,638 Other liabilities................................. 15,945 20,595 -------- -------- Total liabilities............................. 169,820 76,233 Partners' equity.................................. 78,659 106,216 -------- -------- Total liabilities and partners' equity........ $248,479 $182,449 ======== ======== Company's Share of Equity......................... $ 35,807 $ 46,787 ======== ======== The summarized statements of operations consist of One and Two Reston Overlook and the residential building at Market Square North, the joint ventures placed in service during 1999: Three Months Nine Months Ended Ended September 30, September 30, 1999 1999 ------------- ------------- (unaudited) (unaudited) Total revenue.................................... $3,564 $8,002 Total expenses................................... 2,490 5,152 ------ ------ Net income....................................... $1,074 $2,850 ====== ====== Company's Share of Net Income.................... $ 206 $ 648 ====== ====== 5. Mortgage Notes Payable On July 15, 1999, the Company obtained mortgage financing totaling $29.0 million collateralized by Eight Cambridge Center in Waltham, Massachusetts. Such financing bears interest at a rate of 7.73% and matures in July 2010. On July 26, 1999, the Company obtained mortgage financing totaling $26.0 million collateralized by University Place in Cambridge, Massachusetts. Such financing bears interest at a rate of 6.94% and matures in August 2021. On August 6, 1999, the Company obtained additional mortgage financing totaling $9.0 million collateralized by 1301 New York Avenue in Washington, DC. Such financing bears interest at a rate of 8.54% and matures in August 2009. 7

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) On August 23, 1999, the Company obtained construction financing totaling $27.0 million collateralized by the Orbital Sciences Phase I development project in Loudon, Virginia. Such financing bears interest at a rate of LIBOR + 1.65% and matures in August 2002. As of September 30, 1999, the Company had drawn approximately $4.6 million of this construction loan. On September 27, 1999, the Company obtained construction financing totaling $203.0 million collateralized by the 111 Huntington Avenue development project in Boston, Massachusetts. Such financing bears interest at a rate of LIBOR + 2.00% and matures in September 2002. As of September 30, 1999, the Company had drawn approximately $7.4 million of this construction loan. On September 30, 1999, the Company obtained mortgage financing totaling $75.0 million collateralized by the Gateway in San Francisco, California. Such financing bears interest at a rate of LIBOR + 1.60% and matures in September 2000 (7.2% at September 30, 1999). 6. Minority Interests Minority interests in the Company relate to the interest in the Operating Partnership not owned by Boston Properties, Inc. and interests in property partnerships that are not owned by the Company. As of September 30, 1999, the minority interest in the Operating Partnership consisted of 23,816,811 OP Units and 8,713,131 Preferred Units held by parties other than Boston Properties, Inc. On August 16, 1999, the Operating Partnership paid a distribution on the 2,500,000 Series One Preferred Units of $0.61625 per unit, based on an annual distribution of $2.465 per unit and paid a distribution on the 6,213,131 units of Series Two and Three Preferred Units of $0.68562 per unit. On September 16, 1999, Boston Properties, Inc., as general partner of the Operating Partnership determined a distribution on the OP Units in the amount of $0.45 per OP Unit payable on October 28, 1999 to OP Unit holders of record on September 30, 1999. 7. Redeemable Preferred Stock and Stockholders' Equity On August 16, 1999, the Company paid a dividend on the 2,000,000 shares of Series A Convertible Redeemable Preferred Stock (the "Preferred Stock"), $50 liquidation preference per share, of approximately $0.68562 per share. In addition, on September 16, 1999, the Board of Directors of the Company declared a dividend of $0.68562 per share on the Preferred Stock payable on November 15, 1999 to shareholders of record on September 30, 1999. These shares of Preferred Stock are not classified as equity as in certain instances they are redeemable for cash or convertible into shares of Common Stock at the election of the holder after May 12, 2009. On September 16, 1999, the Board of Directors of the Company declared a third quarter dividend in the amount of $0.45 per share of Common Stock payable on October 28, 1999 to shareholders of record on September 30, 1999. 8

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) 8. Earnings Per Share For the quarter ended September 30, 1999 -------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) amount --------------- ---------------- ------------- (in thousands, except per share amounts) Basic Earnings: Income available to common shareholders.. $ 27,418 67,901 $ 0.40 Effect of Dilutive Securities: Stock Options......... -- 583 -- --------------- -------------- ------------- Diluted Earnings: Net income............ $ 27,418 68,484 $ 0.40 =============== ============== ============= For the nine months ended September 30, 1999 -------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) amount --------------- ---------------- ------------- (in thousands, except per share amounts) Basic Earnings: Income available to common shareholders $ 79,575 65,672 $ 1.21 Effect of Dilutive Securities: Stock Options......... -- 608 (.01) --------------- -------------- ------------- Diluted Earnings: Net income............ $ 79,575 66,280 $ 1.20 =============== ============== ============= For the quarter ended September 30, 1998 -------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) amount --------------- ---------------- ------------- (in thousands, except per share amounts) Basic Earnings: Income available to common shareholders.. $ 25,341 63,468 $ 0.40 Effect of Dilutive Securities: Convertible OP Units related to 875 Third Avenue............... -- 92 -- Stock Options......... -- 431 -- --------------- -------------- ------------- Diluted Earnings: Net Income............ $ 25,341 63,991 $ 0.40 =============== ============== ============= For the nine months ended September 30, 1998 -------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) amount --------------- ---------------- ------------- (in thousands, except per share amounts) Basic Earnings: Income available to common shareholders.. $ 74,893 60,101 $ 1.25 Effect of Dilutive Securities: Convertible OP Units related to 875 Third Avenue............... -- 92 -- Stock Options......... -- 551 (0.02) --------------- -------------- ------------- Diluted Earnings: Net Income............ $ 74,893 60,744 $ 1.23 =============== ============== ============= 9

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) 9. 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: Greater Boston, Greater Washington, D.C., Midtown Manhattan, Greater San Francisco, and New Jersey and Pennsylvania. Segments by property type include: Class A Office, R&D, Industrial, Hotels and Garage. Asset information by segment is not reported, since the Company does not use this measure to assess performance: therefore, the depreciation and amortization expenses are not allocated among segments. Interest income, management and development services, interest expense and general and administrative expenses are not included in net operating income, as the internal reporting addresses these on a corporate level. Information by Geographic Area and Property Type: For the nine months ended September 30, 1999: Greater Greater New Jersey Greater Washington Midtown San and Boston DC Manhattan Francisco Pennsylvania Total -------- ---------- --------- --------- ------------ -------- Rental Revenue CLASS A................ $116,722 $150,840 $102,515 $115,235 $29,652 $514,964 R&D.................... 4,655 13,967 -- 1,332 -- 19,954 Industrial............. 1,251 1,062 -- 905 525 3,743 Hotels................. 23,999 -- -- -- -- 23,999 Garage................. 1,751 -- -- -- -- 1,751 -------- -------- -------- -------- ------- -------- Total.................. 148,378 165,869 102,515 117,472 30,177 564,411 -------- -------- -------- -------- ------- -------- % of Grand Totals...... 26.29% 29.39% 18.16% 20.81% 5.35% 100.00% -------- -------- -------- -------- ------- -------- Rental Expenses Class A................ 46,520 41,500 35,341 42,398 8,895 174,654 R&D.................... 1,369 2,731 -- 331 -- 4,431 Industrial............. 388 300 -- 173 86 947 Hotels................. 3,682 -- -- -- -- 3,682 Garage................. 607 -- -- -- -- 607 -------- -------- -------- -------- ------- -------- Total.................. 52,566 44,531 35,341 42,902 8,981 184,321 -------- -------- -------- -------- ------- -------- % of Grand Totals...... 28.52% 24.16% 19.17% 23.28% 4.87% 100.00% -------- -------- -------- -------- ------- -------- Net Operating Income.... $ 95,812 $121,338 $ 67,174 $ 74,570 $21,196 $380,090 ======== ======== ======== ======== ======= ======== % of Grand Totals...... 25.21% 31.92% 17.67% 19.62% 5.58% 100.00% ======== ======== ======== ======== ======= ======== 10

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) For the nine months ended September 30, 1998: Greater Greater New Jersey Greater Washington Midtown San and Boston DC Manhattan Francisco Pennsylvania Total ------- ---------- --------- --------- ------------ -------- Rental Revenue Class A................ $56,350 $122,095 $95,899 $ -- $8,734 $283,078 R&D.................... 4,491 12,405 -- 1,074 -- 17,970 Industrial............. 1,216 1,084 -- 976 595 3,871 Hotels................. 19,277 -- -- -- -- 19,277 Garage................. 1,321 -- -- -- -- 1,321 ------- -------- ------- ------ ------ -------- Total.................. 82,655 135,584 95,899 2,050 9,329 325,517 ------- -------- ------- ------ ------ -------- % of Grand Totals...... 25.39% 41.65% 29.46% 0.63% 2.87% 100.00% ------- -------- ------- ------ ------ -------- Rental Expenses Class A................ 21,254 31,879 33,195 -- 2,816 89,144 R&D.................... 1,378 2,664 -- 337 -- 4,379 Industrial............. 428 231 -- 218 55 932 Hotels................. 2,356 -- -- -- -- 2,356 Garage................. 377 -- -- -- -- 377 ------- -------- ------- ------ ------ -------- Total.................. 25,793 34,774 33,195 555 2,871 97,188 ------- -------- ------- ------ ------ -------- % of Grand Totals...... 26.54% 35.78% 34.16% 0.57% 2.95% 100.00% ------- -------- ------- ------ ------ -------- Net Operating Income.... $56,862 $100,810 $62,704 $1,495 $6,458 $228,329 ======= ======== ======= ====== ====== ======== % of Grand Totals...... 24.90% 44.16% 27.46% 0.65% 2.83% 100.00% ======= ======== ======= ====== ====== ======== The following is a reconciliation of net operating income to income before minority interests and joint venture income: Nine months ended September 30, ------------------- 1999 1998 --------- -------- Net Operating Income.................................. $ 380,090 $228,329 Add: Development and management services................. 11,364 8,893 Interest and other.................................. 5,710 9,410 Less: General and administrative.......................... (21,345) (16,750) Interest expense.................................... (151,446) (81,926) Depreciation and amortization....................... (88,315) (51,212) --------- -------- Income before minority interests and joint venture income............................................... $ 136,058 $ 96,744 ========= ======== 11

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) Information by Geographic Area and Property Type: For the three months ended September 30, 1999: Greater Greater New Jersey Greater Washington Midtown San and Boston DC Manhattan Francisco Pennsylvania Total ------- ---------- --------- --------- ------------ -------- Rental revenue Class A................ $41,445 $51,082 $34,381 $40,398 $10,644 $177,950 R&D.................... 1,489 4,869 -- 497 -- 6,855 Industrial............. 432 361 -- 287 171 1,251 Hotels................. 10,299 -- -- -- -- 10,299 Garage................. 700 -- -- -- -- 700 ------- ------- ------- ------- ------- -------- Total.................. 54,365 56,312 34,381 41,182 10,815 197,055 ------- ------- ------- ------- ------- -------- % of Grand Totals...... 27.59% 28.57% 17.45% 20.90% 5.49% 100.00% ------- ------- ------- ------- ------- -------- Rental Expenses Class A................ 16,551 15,375 12,321 15,687 3,468 63,402 R&D.................... 420 942 -- 129 -- 1,491 Industrial............. 122 85 -- 51 23 281 Hotels................. 1,287 -- -- -- -- 1,287 Garage................. 204 -- -- -- -- 204 ------- ------- ------- ------- ------- -------- Total.................. 18,584 16,402 12,321 15,867 3,491 66,665 ------- ------- ------- ------- ------- -------- % of Grand Totals...... 27.88% 24.60% 18.48% 23.80% 5.24% 100.00% ------- ------- ------- ------- ------- -------- Net Operating Income.... $35,781 $39,910 $22,060 $25,315 $ 7,324 $130,390 ======= ======= ======= ======= ======= ======== % of Grand Totals...... 27.44% 30.61% 16.92% 19.41% 5.62% 100.00% ======= ======= ======= ======= ======= ======== Information by Geographic Area and Property Type: For the three months ended September 30, 1998: Greater Greater New Jersey Greater Washington Midtown San and Boston DC Manhattan Francisco Pennsylvania Total ------- ---------- --------- --------- ------------ -------- Rental Revenue Class A................ $32,664 $46,995 $32,315 $ -- $8,636 $120,610 R&D.................... 1,503 4,461 -- 373 -- 6,337 Industrial............. 410 366 -- 327 202 1,305 Hotels................. 7,692 -- -- -- -- 7,692 Garage................. 430 -- -- -- -- 430 ------- ------- ------- ----- ------ -------- Total.................. 42,699 51,822 32,315 700 8,838 136,374 ------- ------- ------- ----- ------ -------- % of Grand Totals...... 31.31% 38.00% 23.70% 0.51% 6.48% 100.00% ------- ------- ------- ----- ------ -------- Rental Expenses Class A................ 13,373 13,073 11,239 -- 2,785 40,470 R&D.................... 458 970 -- 94 -- 1,522 Industrial............. 146 73 -- 60 32 311 Hotels................. 825 -- -- -- -- 825 Garage................. 127 -- -- -- -- 127 ------- ------- ------- ----- ------ -------- Total.................. 14,929 14,116 11,239 154 2,817 43,255 ------- ------- ------- ----- ------ -------- % of Grand Totals...... 34.52% 32.63% 25.98% 0.36% 6.51% 100.00% ------- ------- ------- ----- ------ -------- Net Operating Income.... $27,770 $37,706 $21,076 $ 546 $6,021 $ 93,119 ======= ======= ======= ===== ====== ======== % of Grand Totals...... 29.82% 40.49% 22.63% 0.59% 6.47% 100.00% ======= ======= ======= ===== ====== ======== 12

BOSTON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (unaudited and in thousands) The following is a reconciliation of net operating income to income before minority interests and joint venture income: Three months ended September 30, -------------------- 1999 1998 --------- --------- Net Operating Income.................................. $ 130,390 $ 93,119 Add: Development and management services................. 3,706 2,734 Interest and other.................................. 1,444 1,069 Less: General and administrative.......................... (7,383) (6,129) Interest expense.................................... (51,768) (33,183) Depreciation and amortization....................... (31,078) (21,523) --------- -------- Income before minority interests and joint venture income............................................... $ 45,311 $ 36,087 ========= ======== 10. Unaudited Pro Forma Consolidated Financial Information The accompanying unaudited pro forma information for the nine months ended September 30, 1999 and 1998 are presented as if the following real estate acquisitions had occurred on January 1, 1998: Riverfront Plaza, the Mulligan/Griffin Portfolio, the Carnegie Center portfolio, Metropolitan Square, The Prudential Center, University Place, Reservoir Place and Embarcadero Center. This pro forma information is based upon the historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and the notes thereto. This unaudited 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. Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 (pro forma) (pro forma) ------------------ ------------------ (in thousands, except per share data) Total revenue........................ $581,485 $477,511 Net income available to common shareholders........................ 79,575 78,096 Net income per share available to common--basic....................... $ 1.23 $ 1.23 Weighted average Common Shares outstanding--basic.................. 64,539 63,370 Net income per share available to common shareholders--diluted........ $ 1.22 $ 1.22 Weighted average Common Shares outstanding--diluted................ 65,147 63,974 11. Subsequent Events On October 25, 1999, the Company obtained construction financing totaling $48.6 million collateralized by the New Dominion Technology development project in Herndon, Virginia. Such financing bears interest at a rate of LIBOR + 1.60% and matures in August 2000. 13

BOSTON PROPERTIES, INC. ITEM 2--Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section below entitled "Certain Factors Affecting Future Operating Results" and elsewhere in this report. Results of Operations Comparison of the nine months ended September 30, 1999 to the nine months ended September 30, 1998. Rental revenue increased $238.9 million or 73.4% to $564.4 million from $325.5 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. The increase is primarily due to rental revenue earned totaling approximately $222.0 million on the operations of properties acquired and placed in service since September 30, 1998. Development and Management Services revenue increased $2.5 million or 27.8% to $11.4 million from $8.9 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. The increase is due to new contracts earning fees during the first nine months of 1999. Interest and other revenue decreased $3.7 million or 39.3% to $5.7 million from $9.4 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. The decrease is the result of interest earned during the nine months ended September 30, 1998 related to higher cash balances resulting from the proceeds from a follow-on public offering of common stock in January 1998. Operating expenses increased $87.1 million or 89.7% to $184.3 million from $97.2 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. This is primarily a result of approximately $79.2 million of expenses related to the operations of properties acquired and placed in service since September 30, 1998. General and Administrative expenses increased $4.6 million or 27.4% to $21.3 million from $16.8 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 as a result of payroll and other related costs of the new employees hired to support the operations of additional properties acquired and placed in service since September 30, 1998. Interest expense increased $69.5 million or 84.9% to $151.4 million from $81.9 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 as a result of interest expense of approximately $62.2 million on debt related to the properties acquired subsequent to September 30, 1998. Depreciation and Amortization expense increased $37.1 million or 72.5% to $88.3 million from $51.2 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. This was primarily attributed to approximately $33.2 million of depreciation expense related to the operations of properties acquired subsequent to September 30, 1998. As a result of the foregoing, net income before minority interest in the Operating Partnership increased $35.9 million to $132.2 million from $96.4 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. 14

BOSTON PROPERTIES, INC. Comparison of the three months ended September 30, 1999 to the three months ended September 30, 1998. Rental revenue increased $60.7 million or 44.5% to $197.1 million from $136.4 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. The increase is primarily due to rental revenue earned totaling approximately $51.8 million on the operations of properties acquired and placed in service since September 30, 1998. Development and Management Services revenue increased $1.0 million or 35.6% to $3.7 million from $2.7 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. The increase is due to fees earned on new contracts entered into subsequent to September 30, 1998. Interest and other revenue increased $0.4 million or 35.1% to $1.4 million from $1.0 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. The increase is primarily due to interest income earned totaling approximately $0.4 million on properties acquired and placed in service since September 30, 1998. Operating expenses increased $23.4 million or 54.1% to $66.7 million from $43.3 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. This is primarily a result of approximately $19.3 million of expenses related to the operations of properties acquired and placed in service since September 30, 1998 as well as a full quarter of operating expenses recognized in 1999 on the properties acquired during the quarter ended September 30, 1998. General and Administrative expenses increased $1.3 million or 20.5% to $7.4 million from $6.1 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998 as a result of payroll and other related costs of the new employees hired to support the operations of additional properties acquired and placed in service since September 30, 1998. Interest expense increased $18.6 million or 56.0% to $51.8 million from $33.2 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998 as a result of interest expense of approximately $14.9 million on debt related to the properties acquired subsequent to September 30, 1998 and a full quarter of interest expense recognized in 1999 on the debt associated with the properties acquired during the quarter ended September 30, 1998. Depreciation and Amortization expense increased $9.6 million or 44.4% to $31.1 million from $21.5 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. This was primarily attributed to approximately $9.0 million of depreciation expense related to the operations of properties acquired subsequent to September 30, 1998 as well as a full quarter of depreciation and amortization expense recognized in 1999 on the properties acquired during the quarter ended September 30, 1998. As a result of the foregoing, net income before minority interest in the Operating Partnership increased $9.4 million to $45.3 million from $35.9 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. Liquidity and Capital Resources The Company's consolidated indebtedness at September 30, 1999 was approximately $3.3 billion and bore interest at a weighted average interest rate of 7.01% per annum. Based on the Company's total market capitalization at September 30, 1999 of approximately $6.5 billion, the Company's consolidated debt represents 50.5% of its total market capitalization. 15

BOSTON PROPERTIES, INC. The Company has a $500 million unsecured revolving line of credit (the "Unsecured Line of Credit") with BankBoston, N.A., as agent, that expires in June 2000. The Company uses the Unsecured Line of Credit principally to facilitate its development and acquisition activities and for working capital purposes. As of November 4, 1999, the Company had $334.0 million outstanding under the Unsecured Line of Credit. The following represents the outstanding principal balances due under the first mortgages at September 30, 1999: Properties Interest Rate Principal Amount Maturity Date - ---------- ------------- ---------------- ------------------ (in thousands) Prudential Center 6.72% $ 296,512 July 1, 2008 599 Lexington Avenue 7.00% 225,000 (1) July 19, 2005 280 Park Avenue 7.00% 220,000 (2) September 11, 2002 Embarcadero Center One 6.70% 158,720 December 10, 2008 Embarcadero Center Two 6.70% 158,720 December 10, 2008 Embarcadero Center Four 6.79% 158,127 February 1, 2008 875 Third Ave 8.00% 153,175 (3) December 31, 2002 Embarcadero Center Three 6.40% 148,729 January 1, 2007 Two Independence Square 8.09% 118,811 (4) February 27, 2003 Riverfront Plaza 6.61% 118,429 January 21, 2008 Democracy Center 7.05% 109,424 April 9, 2009 Metropolitan Square 6.75% 105,701 (5) June 1, 2000 Embarcadero Center West Tower 6.50% 99,168 January 1, 2006 100 East Pratt Street 6.73% 93,723 November 1, 2008 Reservoir Place 6.88% 75,959 (6) November 1, 2006 One Independence Square 8.12% 75,682 (4) August 21, 2001 The Gateway 7.20% 75,000 (7) September 30, 2000 2300 N Street 6.88% 66,000 August 3, 2003 Capital Gallery 8.24% 58,412 August 15, 2006 Ten Cambridge Center and North Garage 7.57% 40,000 March 29, 2000 10 and 20 Burlington Mall Road 8.33% 37,000 (8) October 1, 2001 1301 New York Avenue (9) 33,783 August 15, 2009 Eight Cambridge Center 7.73% 28,968 July 15, 2010 510 Carnegie Center 7.39% 28,239 January 1, 2008 Lockheed Martin Building 6.61% 26,900 June 1, 2008 University Place 6.94% 25,916 August 1, 2021 Reston Corporate Center 6.56% 25,394 May 1, 2008 191 Spring Street 8.50% 23,215 September 1, 2006 Bedford Business Park 8.50% 22,329 December 10, 2008 NIMA Building 6.51% 22,001 June 1, 2008 212 Carnegie Center 7.25% 20,763 December 31, 2000 Sumner Square 6.44% 20,000 April 22, 2004 202 Carnegie Center 7.25% 19,280 December 31, 2000 214 Carnegie Center 8.19% 13,474 (10) October 31, 2000 101 Carnegie Center 7.66% 8,714 April 1, 2006 Montvale Center 8.59% 7,707 December 1, 2006 111 Huntington Avenue (11) 7.40% 7,392 September 27, 2002 Newport Office Park 8.13% 6,271 July 1, 2001 Hilltop Business Center 6.81% 5,940 March 1, 2019 Orbital Sciences (12) 6.60% 4,647 August 19, 2002 201 Carnegie Center 7.08% 538 February 1, 2010 ---------- Total $2,943,763 ========== 16

BOSTON PROPERTIES, INC. - -------- (1) At maturity the lender has the option to purchase a 33.33% interest in this Property in exchange for the cancellation of the principal balance of approximately $225 million. (2) Outstanding principal of $213,000 bears interest at a fixed rate of 7.00%. The remaining $7,000 bears interest at a floating rate equal to LIBOR + 1.00%. (3) The principal amount and interest rate shown has been adjusted to reflect the fair value of the note. The actual principal balance at September 30, 1999 was $150,000 and the interest rate was 8.75%. (4) The principal amount and interest rate shown has been adjusted to reflect the effective rates on the loans. The actual principal balances at September 30, 1999 were $118,719 and $75,688, respectively. The actual interest rates are 8.50% and continue at such rates through the loan expiration. (5) The principal amount and interest rate shown has been adjusted to reflect the fair value of the note. The actual principal balance at September 30, 1999 was $104,040 and the interest rate was 9.13%. (6) The principal amount and interest rate shown has been adjusted to reflect the fair value of the note. The actual principal balance at September 30, 1999 was $66,260 and the interest rate was 9.09%. (7) Outstanding principal bears interest at a floating rate equal to LIBOR + 1.60%. (8) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 and 100 Hayden Avenue. (9) Includes outstanding principal in the amounts of $20,000, $9,000 and $4,783 which bear interest at fixed rates of 6.70%, 8.54% and 6.75%, respectively. (10) The principal amount and interest rate shown has been adjusted to reflect the effective rate on the loan. The actual principal balance at September 30, 1999 was $13,450 and the interest rate was 9.13%. (11) Total construction loan in the amount of $203.0 million at a variable rate of LIBOR + 2.00%. (12) Total construction loan in the amount of $27.0 million at a variable rate of LIBOR + 1.65%. The Company expects to meet its short-term liquidity requirements generally through its existing working capital and net cash provided by operations. The Company's operating properties and hotels require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. For the three months ended September 30, 1999, the Company's recurring capital expenditures totaled $2.7 million. The Company expects to meet its long-term requirements for the funding of property development, property acquisitions and other non-recurring capital improvements through long-term secured and unsecured indebtedness (including the Unsecured Line of Credit) and the issuance of additional equity securities of the Company. The Company has development projects currently in process, which require commitments to fund to completion. Commitments under these arrangements totaled $714.5 million as of September 30, 1999. The Company expects to fund these commitments using available cash, construction loans and the Unsecured Line of Credit. In addition, the Company has options to acquire land that require minimum deposits that the Company will fund using available cash or the Unsecured Line of Credit. Funds from Operations Management believes Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt and make capital expenditures. The Company computes Funds from Operations in accordance with standards established by the White Paper on Funds from Operations approved by the Board of Governors of NAREIT in 1995, which may differ from the methodology for calculating Funds from Operations utilized by other equity REITs, and accordingly, may not be comparable to such other REITs. The White Paper defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated 17

BOSTON PROPERTIES, INC. partnerships and joint ventures. Further, Funds from Operations does not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. Funds from Operations should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The Company believes that in order to facilitate a clear understanding of the historical operating results of the Company, Funds from Operations should be examined in conjunction with net income as presented in the consolidated financial statements. The following table presents the Company's Funds from Operations for the three months ended September 30, 1999 and 1998: Three months Three months ended ended September 30, September 30, 1999 1998 ------------- ------------- Income before minority interests............... $45,311 $36,087 Add: Real estate depreciation and amortization.... 30,882 21,359 Income from unconsolidated joint ventures.... 206 -- Less: Gain on sale of land......................... (68) -- Minority property partnership's share of Funds from Operations....................... (211) (178) preferred dividends and distributions........ (8,303) (1,505) ------- ------- Funds from Operations.......................... $67,817 $55,763 ======= ======= Company's share................................ $50,207 $41,053 ======= ======= Reconciliation to Diluted Funds from Operations: For the three months For the three months ended ended September 30, 1999 September 30, 1998 ------------------------- ------------------------- Income Shares Income Shares (Numerator) (Denominator) (Numerator) (Denominator) ----------- ------------- ----------- ------------- Funds from Operations... $67,817 91,718 $55,763 86,208 Effect of Dilutive Securities Convertible Preferred Units................ 6,649 10,377 -- -- Convertible Preferred Stock................ 1,654 2,625 -- -- Stock options......... -- 583 -- 524 ------- ------- ------- ------ Diluted Funds from Operations............. $76,120 105,303 $55,763 86,732 ======= ======= ======= ====== Company's share of Diluted Funds From Operations (77.38% and 76.79%, respectively).. $58,902 81,485 $41,142 63,991 ======= ======= ======= ====== Certain Factors Affecting Future Operating Results This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the Company's business, strategies, revenues, expenditures and operating and capital requirements. The following factors, among others, could cause actual results, performance or achievements of the Company 18

BOSTON PROPERTIES, INC. to differ materially from those set forth or contemplated in the forward- looking statements made in this report: 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); risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments; failure to manage effectively the Company's growth and expansion into new markets or to integrate acquisitions successfully; 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 downturns in the national and local economies, increases in interest rates, and volatility in the securities markets; costs of compliance with the Americans with Disabilities Act and other similar laws; potential liability for uninsured losses and environmental contamination; risks associated with the Company's potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended, and possible adverse changes in tax and environmental laws; risks associated with the Company's dependence on key personnel whose continued service is not guaranteed; and risks associated with Year 2000 computer problems. Inflation Substantially all of the office leases provide for separate real estate tax and operating expense escalations over a base amount. In addition, many of the leases provide for fixed base rent increases or indexed increases. The Company believes that inflationary increases may be at least partially offset by the contractual rent increases described above. Year 2000 Compliance The Year 2000 issue relates to how computer systems and programs will recognize and process dates after the year 1999. Most computer systems and programs, which use two digits to specify a year, if not modified prior to the year 2000, will be unable to distinguish between the year 1900 and the year 2000. This could result in system failures or miscalculations that could result in disruptions of normal business operations. The Year 2000 issue can also affect embedded technology systems and programs of a building such as elevator, security, energy, fire and safety systems. The Year 2000 issue affects virtually all companies and organizations. In March 1998, the Company formed a Year 2000 project team that consists of Company personnel. The team includes a coordinator from Property Management in each of its regions and a representative from Legal, Risk Management and Information Systems. The project team conducts monthly meetings to coordinate a common work plan, to share information and to review the progress of activities in each region. The Year 2000 Project encompasses a review of compliance risks for the Company's computer information and building systems and is divided into three phases. Phase I targeted the discovery of issues, an inventory of all building and internal systems, and an initial assessment of risks. Correspondence has been sent to vendors, including equipment manufacturers, service providers, maintenance and utility companies, requesting letters regarding Year 2000 compliance for specific systems. To date responses have been received from all vendors that were sent a request. In Phase I, correspondence was sent to tenants highlighting the Year 2000 issue and providing a general statement of the Company's progress. The Company has decided not to survey its tenant base; other than its largest tenant (the General Services Administration), as no single tenant represents more than 5% of the Company's annual revenues. Due to the Company's large tenant base, the success of the Company is not closely tied to one particular tenant. As a result, the Company does not believe there should be a material adverse effect on the Company's financial condition and results of operations if a limited number of the Company's tenants were unable to pay rent on a timely basis due to Year 2000 related problems. 19

BOSTON PROPERTIES, INC. Phase II began in September 1998 and was largely completed by June 30, 1999. It consisted of the following: .Continued assessment of risks, including follow up with vendor responses deemed inadequate (if any) .Remediation of identified compliance problems by June 30, 1999 .Testing of building systems The Year 2000 project team adopted a test protocol and procedure. Property managers, working with service vendors, conducted tests of building systems. As of June 30, 1999, successful tests have been carried out and documented for critical building systems at every property in the portfolio with the exception of buildings where the tenant has taken full responsibility for specific building systems per the lease. Buildings where tenants have taken responsibility for building systems are typically industrial or research and development properties and include 17 Hartwell Street in Lexington, Massachusetts, Fourteen Cambridge Center in Cambridge, Massachusetts, Virginia 95 Office Park in Springfield, Virginia, Hilltop Business Center in South San Francisco, California, 2391 West Winton Avenue in Hayward, California and 560 Forbes Boulevard in South San Francisco, California. As a result of Phase II assessment and testing, the Company found building- card access, energy management and garage access systems to commonly require remediation. All remediation work for building systems was completed by October 31, 1999. Recent upgrades to desktop computers and internal networks throughout the organization combined with the replacement of the electronic mail and the accounting systems during 1998 has addressed Year 2000 compliance issues with core operating systems. The Company has conducted organized tests of several internal systems and components to validate vendor certifications. The Information Systems Department of the Company continues the upgrade of work order processing software at several properties and is scheduled to complete all work and audits by the end of November 1999. In addition, the Information Systems Department continues to take action on any Year 2000 notices or updates provided by the Company's hardware and software vendors. Phase III began in July 1999 and will prepare a contingency plan for each property in the portfolio. A standard planning document is being used across the portfolio. The Company is assessing the security and support requirements of tenants for the night and weekend of December 31, 1999 and the required on- site staffing presence of Company personnel. Most systems supporting the operation of a building can revert to manual operation if necessary. The Company has instituted a no-vacation policy for all personnel deemed critical to the operation of each building including management and engineering staff. The Company plans to have a staff presence at every property in its portfolio on the night and weekend of December 31st with the exception of buildings where the tenant takes full responsibility for building systems per the lease. The Company has hosted Year 2000 information sessions for its tenants in several locations that include presentations by representatives of the Company and outside utilities such as Con Edison in New York, Boston Edison, Bell Atlantic, Pacific Gas & Electric and the San Francisco Police Department. All work to date has been performed by current employees of the Company. No third parties have been used during this process nor has the Company hired an employee specifically for Year 2000 issues, and as a result, the personnel costs incurred to date relate only to internal payroll costs, which at this time are not material. The total costs associated with the Year 2000 issue are not expected to be material to the Company's financial position. The estimated cost of remediation efforts is approximately $1.2 million that excludes costs for all internal personnel working on the project. To date, the Company has incurred 100% of these costs. In most cases, the upgrade of non-compliant systems will represent an acceleration of a planned replacement date. 20

BOSTON PROPERTIES, INC. The discussion above regarding the Company's Year 2000 Project contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's assessment of the impact of the Year 2000 issue may prove to be inaccurate due to a number of factors which cannot be determined with certainty, including the receipt of inaccurate compliance certification from third party vendors, inaccurate testing or assessments by Company personnel of Company equipment or systems, and inaccurate projections by the Company of the cost of remediation and/or replacement of affected equipment and systems. A failure by the Company to adequately remediate or replace affected equipment or systems due to the factors cited above or for other reasons, a material increase in the actual cost of such remediation or replacement, or a failure by a third party vendor to remediate Year 2000 problems in systems that are vital to the operation of the Company's properties or financial systems, could cause a material disruption to the Company's business and adversely affect its results of operations and financial condition. ITEM 3--Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. The primary market risk facing the Company is mortgage debt, which bears interest at fixed rates, and therefore, the fair value of these instruments is affected by changes in the market interest rates. The following table presents principal cash flows (in thousands) based upon maturity dates of the debt obligations and the related weighted average interest rates by expected maturity dates for the fixed rate debt. The interest rate of the variable rate debt as of September 30, 1999 ranged from LIBOR plus 1.00% to LIBOR plus 2.00%. Mortgage debt, including current portion ---------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ------ -------- -------- -------- -------- ---------- ---------- ----------- Fixed Rate.............. $7,751 $228,583 $150,011 $393,521 $212,874 $1,836,984 $2,829,724 $2,829,72 4 Average Interest Rate... 7.0% 7.1% 7.9% 7.4% 7.5% 6.9% Variable Rate........... -- $ 79,647 -- $ 14,392 -- $ 20,000 $ 114,039 $ 114,039 21

BOSTON PROPERTIES, INC. PART II. OTHER INFORMATION ITEM 6--Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K A Form 8-K dated July 29, 1999 was filed with the Securities and Exchange Commission to report under Item 5 of such report the information presented to investors and analysts and the Company's press release for the quarter ended June 30, 1999. 22

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOSTON PROPERTIES, INC. November 5, 1999 /s/ David G. Gaw _____________________________________ David G. Gaw, Chief Financial Officer (duly authorized officer and principal financial officer) 23

5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 50,415 0 21,420 0 0 0 5,064,050 31,078 5,354,775 0 0 0 100,000 679 1,0 5,354,775 197,055 202,205 0 66,665 38,461 0 51,768 27,418 0 0 0 0 0 27,418 .40 .40