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Credit Report | March 12, 2013 Real Estate Investment Trusts (REITs) S

Investment Advisors LLC.

BOSTON PROPERTIES, Inc.


Real Estate: Focused Office

BXP.GL / CUSIP $121.593


Corporate Note Maturity 10/15/2019 Coupon Rate: 5.875% - Yield: 2.330%

Performance outlook
Market Data (Source S&P, co. report, Bloomberg) Underperform Market Perform Outperform

Market Cap NAV Premium/Discount to NAV Implied Cap Rate Debt/Capitalization Debt/Equity Beta P/E Ratio Annual Dividend Dividend Yield A2012 FFO E2013 FFO Growth FFO Multiple

$18.8 Bil $90.93 15.63% 3.29% 31.33% 49.1% 0.915 55.41x $2.60 2.46% $5.18 (0.2%) 20.3x

Investment Opinion
BPLP has received an overall credit rating of A- from the S&P500 and has maintained their covenants stable since 2009 with a significant cushion of 249% of unencumbered asset maintenance and thus have a very low default risk. For a creditor coming in the unsecured tranche of the capital stack, the quality of the 123 unencumbered assets is good with most of those assets located in CBD areas, fully leased and maintained. This represents 80% of their total assets. Furthermore, BPLP benefits from a solid diversified tenant base with the main tenant as the US Government 5.89% of NLA and a limited sensitivity to financial services. Although, BPLP has an exposure to construction in progress, the management has proven to be effective in managing the portion of development pipeline. A limited amount of debt maturity of 5% is coming due prior to 2019 which makes the creditor position in the capital stack strong. Finally, the unsecured creditors are second in line to receiving proceeds from liquidation with only 12.6% of total assets exposed to a mortgage debt. Although interest rate risk due to inflation is likely to occur within the 5 year holding period, the spike in rates would not be significant (25bps) and impact on value will be limited. In fact with the SPY at all-time high, likelihood for a pullback is high and thus real estate notes are still an efficient way in portfolio management. The current spread BXP.GL is offering compared to their peers and the market is decent at 254bps. We see this spread to remain stable for the next 3 to 4 years hence our recommendation to BUY.

Overall Credit Rating S&P A+ Fitch


AAA

Credit Risk Assessment


B+ B BC D

A-

AA

BBB

BB

Moodys
Aaa
Aa

Below is a qualitative evaluation of the corporation and potential risks their cash flow may be exposed to. Unsecured creditors would mainly be interested in a large diversified pool of unencumbered assets. The unencumbered asset / unsecured debt bond covenants is very key. While the quality of unencumbered assets is important, the quality and tenant base is also essential (24% government). Un-depreciated book value is not necessarily a good proxy for market value. Real Estate returns are higher than prevailing cap rates which means that BPLP can leverage its asset on a value higher than the un-depreciated book value.
Register (1 to 5) 3.00 2.00 5.00 3.00 5.00 5.00 5.00 5.00 2.00 3.00 4.00 4.00 3.83

Baa2

Ba

Risk Real Estate Assets & Industry Construction in Progress Cost Investment Returns from current Asset Mixed-use development Refinancing & Debt exposure Liquidity & property acquisition JV limitation Quality of Leases & renewals Disposition of properties Number of shares for future sales Management Insurance and other
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The risk register is from 1 to 5 with 1 as high risk and 5 low risks.

Weight 15.00% 8.00% 12.00% 5.00% 13.00% 12.00% 5.00% 10.00% 10.00% 5.00% 3.00% 2.00% Total

Index Medium High Very Low Medium Very Low Very Low Very Low Very Low High Medium Low Low Low

News highlights

Investment Note Evaluation


Ticker BXP.GL Coupon Rate 5.875% Payment Terms Semi Annual Maturity 4/15/2019 Offer Size (Millions) $700.000 Offer Price $99.931 Current Price $121.590 Moody's/S&P/Fitch Baa2/A-/BBB

Investment Advisors LLC.

SOHO China's Zhang Xin in talks to buy stake in GM Building in NYC Wall Street Journal March 8, 2013 Boston Properties signs lease for 22,000 square feet in New Jersey Wall Street Journal March 7, 2013 Boston Properties to Participate at Citi's 2013 Global Property CEO Conference Business Wire Feb 27,2013 Boston Properties Seals $71M Buyout Zacks.com - Feb 11, 2013 Boston Properties to Build San Francisco Office Tower Wall Street Journal - Feb 7, 2013 Boston Properties Inc Issues Q1 2013 FFO Guidance Below Analysts' Estimates. Reuters Key Development Jan 29, 2013 Boston Properties Inc Issues Q4 2012 FFO Guidance Below Analysts' Estimates Reuters Key Development Oct 23, 2012

YTM 3.31%

Callable Yes

Offer details On the 9th of October 2009, BPLP issued a 10 year senior unsecured note for sale at the value of $700 Mil which pays a semiannual coupon rate of 5.875% on the 15th day of every April and October as of on 04/15/2010. The bond was offered at par value of $99.931 and had a credit rating of Baa2/A-/BBB according to Moodys, S&P and Fitch respectively. The note maturity date is 10/15/2019 and BPLP has the right to call back the note (partial or fully) at any time prior to maturity Underwriter fee The underwriter fee and associated offer expenses, according to the 2009 10K, stood at $6.3Mil. which represents approximately 0.9% of the offer size. Spread When evaluating the unsecured note it is important to understand the behavior of the yield spread compared to other investments and mainly compared to the risk free treasury notes. The current YTM that this bond is offering as of 03/12/2013 is 3.31% compared to the 5 year Treasury bond yielding 0.77%, the spread would be 254bps. At the time of issuance on 10/09/2009 the YTM of the note was 5.884% and the yield of a 10 year treasury was 3.259% therefore offering a spread of around 262.5bps per annum. We notice that the yields have respectively decreased and thus justifying the increase in the bond price and the spread has also decreased during throughout the period. Therefore we can safely conclude that investors continue to assign the same risk premium to hold BPLPs note and consider this investment a stable investment grade. Unencumbered Asset ($000) As of 31st of December 2012, BPLP had 123 unencumbered properties out of the 156 properties that they currently hold. The total value current book value of those assets is $14,559,649. This represents 65.87% of the total asset value. Additionally, it is important to note that the cover ratio of the book value of those unencumbered assets compared to the total outstanding debt of the corporation is 1.4x which means that BXP has a big cushion in case of default. More information is available in the financial covenants section. Bond Valuation (DCF)
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Date 3/6/2013 4/15/2013 10/15/2013 4/15/2014 10/15/2014 4/15/2015 10/15/2015 4/15/2016 10/15/2016 4/15/2017 10/15/2017 4/15/2018 10/15/2018 4/15/2019 Price ($121.59) Dividend $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 Face Value Total ($121.59) $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $2.94 $102.87 2.454% $5.30

The bond has traded up since it was issued mainly driven by a lower treasury rate due to the quantitative easing policies the fed has applied post 2007 financial crisis. This inverse relationship suggest that should interest rates rise in the near term, bond price are expected to fall and driving the YTM. Considering this symbiotic relationship and since the XNPV is based on the YTM, investors can expected a small cushion of safety. The XIRR on this investment would equal to 2.454%. The duration based on the information would be 7.85 y. above

$99.93

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IRR - Period IRR - Year

1.135% 2.270%

XIRR XNPV (@ YTM)

Capital Structure
Valuation P/E Ratio Price to Revenue Price to Cash flow Price to Book 54.17x 8.66x 47.74x 3.19x

Investment Advisors LLC.

Capital Stack Debt

Section Secured Debt Unsecured Debt

Equity

Equity

Category Mortgage notes payable Unsecured senior notes Unsecured exchangeable senior notes Accounts payable and accrued expenses Dividends and distribution payable Accrued interest payable Other liabilities CS1 Estimated NAV (CS/PS/OPU)

$US '000 3,102,485 4,639,528 1,170,356 199,102 110,488 72,461 324,613 15,482,366

Portion 12.36% 18.48% 4.66% 0.79% 0.44% 0.29% 1.29% 61.68%

Accumul ated % 12.36% 30.84% 35.51% 36.30% 36.74% 37.03% 38.32% 100.00% WACC

Cost of Capital 5.65% 4.49% 6.33% 7.00% 7.00% 7.00% 7.00% 10.51% 8.50%

Mngt Effectiveness ROE ROA ROI 6.50% 2.10% 2.40%

In case of default, the note issued by BPLP will sit in first position after the secured notes. Since we have established that BPLP has 123 unencumbered properties with a ratio to value of 2.49x, this note will have direct access to the proceeds from those assets with a safety margin. The estimated WACC for BPLP is 8.50% which makes them very competitive when looking at acquisitions trading at 7% to 9% cap and gives them more leverage at offering. (Risk free at 1.89%, Beta at 0.915 and market return is 11.31%).

Financial Covenants
Since the notes issued are unsecured, BPLP and all its subsidiaries must maintain four financial in order to ensure the bond holder of the viability of their investment and a certain level of default hedging. Those covenants are: 1) Limitation on Outstanding Debt - BPLP may not incur any debt other than intercompany debt that will cause the Total Outstanding Debt to be higher than 60% of Total Assets. 2) Limitation on Secured Debt BPLP may not incur any debt other than intercompany debt that will cause the aggregate principal amount of all outstanding secured debt to be greater than 50% of Total Assets. 3) Ratio of annualized Consolidated EBITDA to annualized Interest Expense - BPLP may not incur any debt other than intercompany debt that will cause the annualized consolidated EBITDA divided by annualized interest expense to be less than 1.50x. 4) Maintenance of Unencumbered Assets - BPLP will maintain at all times unencumbered assets of not less than 150% of the aggregate principal amount of all outstanding unsecured debt.
Covenant Limitation on Outstanding Debt Limitation on Secured Debt Test <=60% <=50% >=1.50x >=150% 2012 46.90% 20.40% 2.79x 249.00% 2011 48.30% 21.50% 2.66x 243.20% 2010 46.90% 22.00% 2.63x 235.90% 2009 46.00% 22.80% 2.59x 255.70%

Capital Structure Debt to Equity Debt to Assets 174.85% 57.64%

Profitability Opt Margin Net Profit Margin Gross Margin 34.50% 15.68% 63.47%

Ratio of annualized EBITA/Interest Expense Maintenance of Unencumbered Assets

BPLP was able to maintain their covenants stable during the rough times post the recession. We do notice however that their ratio of unencumbered assets has increased with time suggesting that BPLP has acquired additional assets using unsecured notes rather than mortgages. Furthermore this is a direct result of the management experience and their efficiency to navigate treacherous waters. Additionally, BPLP management offloaded a portion of their toxic assets and invested in core assets which led their EBITA to increase. Finally, BPLP realized the benefit of raising bond at a cheaper rate whilst adhering to the covenants rather than taking mortgages on the properties. This explains the decrease in the limitation to secured debt covenant.

Preferred vs Bond Spread


Efficiency Asset Turnover 0.12x

At this stage, BLP has no outstanding preferred stocks however should they decide to issue some, the market price will be $104.51 with an annual dividend of $2.46 and 2.60% yield. With the note XIRR at 2.45%, the spread would be a negative 0.15% in favor of the preferred. This suggests that preferred holders risk adjusted premium is inefficient since they are subordinate in the capital stack.

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Peers

Investment Advisors LLC.

It is essential to understand as a creditor what other alternatives are available within the same sector and in the broader markets. The spread that BPLP offers compared to its counterparty is slightly lower especially when compared to SL Green. However this difference in spread is justified by the time of maturity of the bond as well as the bond size. SL green offer size is almost 3x times less than BPLP which makes it less of an impact on their balance sheet. Furthermore, the credit rating of those notes goes in favor of BPLP which has consistently shown strong liquidity and adherence to the covenants. With regards to the maturity time, the base rate used to compute BPLPs spread would be an adjusted 65 year treasury bill however in the case of SL green, it would be an adjusted 10 year treasury bill. The underlying issue in this comparable is thus linked to the systematic changes in the broad market. As a fixed income investor, BPLP offers a decent adjusted risk return composite compared to the broader market. Their default risk is very low and the values of outstanding debt to unencumbered assets, who mainly have government tenant, is also low.
Company Name/Symbol Boston Properties (BXP) Mack-Cali Realty (CLI) SL Green Realty (SLG) Offer Price $99.931 $99.145 $100.00 Coupon Rate 5.875% 7.750% 7.750% YTM 3.310% 3.482% 4.048% Bond Size $700M $250M $250M Maturity 10/15/2019 08/15/2019 03/15/2020 Payment Terms Semi Semi Semi Callable Y Y Y Current Bond Price $121.59 $124.66 $122.55 Spread 254bps 269bps 327bps

Market Condition
Gosh, where to start! This is probably the most volatile aspect of the discussion. Understanding the different market behavior however would enable us to clearly comprehend how the funds will flow in the broader market. As a fixed income investor the main concerns inflation changes and the impact on the value of investment with dotted line concerns on the equity market performance. The current FED policy of QE is a major flight risk since it is increasing the money supply within the system and would lead to a stagnant increase in inflation. In order to fight this phenomenon, the interest rates were lowered. Although the recession has bottomed out, an economic recovery is yet to be seen with unemployment is still at a 7.7% and consumer index at 74.6. This suggests that the FED will maintain their current policy of easing for the near future. On the other hand, should they loosen their current measure, we could see an increase in interest rates as signal of economic recovery. However such an increase would be at most 25bps in order not to create a shock within the markets. The likelihood of such an event in 5 years is high but the impact this would bring onto the debt market is not devastating and a stable company posed to outperform the index such as BPLP would not be harmed directly on their notes due. On the other hand, the equity market has been over performing and the S&P500 achieved a five year high this month creating a lot of volatility in the market. As a fixed income investor, although the returns seem tempting, in fact this amplifies the position in senior notes for REITs since the risk adjusted return from the equity markets is very volatile. As a result, we believe that the economic climate will remain stable for the foreseen future with no or limited changes to interest rates and thus limited downward impact on the bond price. In fact should the FED continue to maintain their policy, we might see increase in demand on unsecured notes as a hedge against the inflating equity bubble.

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Company Information Boston Properties, Inc. Prudential Center 800 Boylston Street Boston MA, 02199-8103 Tel: +1(617) 236 3300

Company Overview & Strategy

Investment Advisors LLC.

Boston Properties Inc (BXP), headquartered in Boston - MA, is a self-administered and managed Real Estate Investment Trust (REIT) that has significant presence in five markets: Boston, New York, Princeton, San Francisco and Washington DC. Founded originally in 1970 by Zuckerman & Linde as a real estate private equity vehicle and went public in 1997. BXP core competency is to develop core central business district office buildings and in-house manage them to ensure the highest possible services to the tenants. The overall strategy of the management team has been to concentrate on markets with high supply entry barriers, increase presence in the selected markets, and encourage JV partnerships while maximizing the managements expertise and leverage potential, and the disposition of assets at their optimum value. BXPs portfolio is comprised of 156 office buildings of which 128 Class A and 18 technical office, one hotel, three residential properties and four retail properties totaling approximately 60.3 million square feet. Additionally, BXP currently owns and control undeveloped land totaling approximately 510.5 acres which will support 11.4 million square feet of new development.

Management Team
Name Mr. Mort B. Zuckerman Mr. Douglas T. Linde Mr. Micheal E. LaBelle Mr. James J Whalen Mr. Peter V. See Age 75 49 48 52 50 With BXP since 1970 1997 2000 1998 2000 Title Chairman & CEO President & Director CFO, Treasurer & SVP CIO & SVP SVP Property Management

The company employs approximately 700 staff members across all offices and markets.

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Primary credit analyst Ali Haidar, New York +1(347) 348 2346 Ali.haidar@nyu.edu
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