BOSTON PROPERTIES 2002 ANNUAL REPORT 00 On the cover (clockwise from upper left): Prudential Center, Boston, MA Citigroup Center, New York,NY Freedom Square, Reston,VA Embarcadero Center, San Francisco, CA Facing page: 5 Times Square, New York,NY Contents 1 Company Description 2 Letter to Shareholders 10 Property Portfolio 12 Directors and Officers 13 Form 10-K BACK COVER Corporate Information This Annual Report contains “forward-looking statements” within the meaning of the federal securities laws. See the discussion under “Forward-Looking Statements” in this report for matters to be considered in this regard. BOSTON PROPERTIES, INC., a self-administered and self-managed real estate investment trust (REIT), is one of the largest owners, managers and developers of first-class office properties in the United States, with a significant presence in four core markets: Boston, Washington, D.C., Midtown Manhattan and San Francisco. Boston Properties was founded in 1970 in Boston, where it maintains its headquarters. The Company acquires, develops and manages its properties through full-service regional offices in Boston, New York City,Washington, D.C., San Francisco and Princeton, New Jersey. Its property portfolio primarily comprises first-class office space and also includes hotels and industrial buildings. Boston Properties is traded on the New York Stock Exchange under the symbol BXP. 1 00 MORTIMER B. ZUCKERMAN Chairman of the Board (left) EDWARD H. LINDE President and Chief Executive Officer TO OUR SHAREHOLDERS: over 2001, and FFO per share of $4.09 was up 14.6% year-to-year. We are pleased to report that even in the face of continued ● Year-end occupancy at 94.1% in our total office portfolio, weakness in the national economy and in office markets reflecting a vacancy rate less than half the average in the Class throughout the country,and specifically in the regions in which A office markets in which we operate and one-third of the we operate, Boston Properties has had another year of very national average. strong performance. We produced higher MAJOR ACCOMPLISHMENTS IN 2002 earnings and Funds From Operations, FFO PER SHARE (DILUTED) maintained relatively high occupancy rates AND DIVIDENDS PER SHARE Boston Properties’ accomplishments in 2002 and positioned the Company for continued ● FFO further strengthened its position as a preemi- economic success through the strategic pur- ● DIVIDENDS nent office Real Estate Investment Trust chase and sale of assets and continued focused on high-quality buildings in the best $4.09 improvements in management and systems. $3.57 long-term office markets. We also significantly enhanced our capital $3.31 $2.89 Significant achievements included: structure by raising long-term debt at fixed $2.50 rates, replacing short-term debt at floating Completing Major New Developments. rates. This year demonstrated again that our Seven new buildings, containing more than basic real estate strategy—concentrating on 2.8 million SF of first class office space, were high-quality office properties in select markets put in service and/or brought to stabilized that have proven long-term fundamentals and occupancy during 2002. Most notable are high barriers to entry, and emphasizing major developments at key locations in three longer-term leases to higher-credit tenants— important markets —5 Times Square in New $1.64 $1.75 $2.04 $2.24 $2.41 York City, 111 Huntington Avenue in Boston provides the foundation for superior operating 1998 1999 2000 2001 2002 results in weak markets as well as strong ones. and One and Two Discovery Square in National economic conditions will present Reston,Virginia—where the Company built further challenges in the year ahead, but your outstanding new buildings representing an Company is in very strong condition and ready to take investment of $867 million with 2.4 million SF of space brought advantage of opportunities that the markets will also present. to an average 97.4% occupancy by the end of 2002. Acquiring a Prime Asset. In September 2002, Boston Properties Highlights for 2002 include: purchased 399 Park Avenue, a 1.7 million SF full-block ● Record net operating income of $818 million, a 13.5% complex considered one of New York City’s premier office increase over 2001. building assets. 399 Park Avenue has an outstanding tenant ● The fifth straight year of significant increases in Earnings Per roster and is 100% leased, with no significant lease expirations Share and Funds From Operations (FFO). Earnings Per Share, until 2006 and over 80% of the space leased to 2012 and excluding gains on asset sales, were $2.38, an increase of 13.9% beyond. The Company’s success in securing this highly prized FACING PAGE: 399 PARK AVENUE | NEW YORK, NY 3 00 EIGHT CAMBRIDGE CENTER | CAMBRIDGE, MA (left) 181 SPRING STREET | LEXINGTON, MA asset, at a yield we believe above that achieved by other buyers step in stabilizing the Company’s capital structure by replacing of high-quality Midtown Manhattan office buildings in 2002, floating-rate debt with fixed-rate debt, as previously our only reflects the competitive advantage of our demonstrated ability unsecured borrowing source was our floating-rate revolving to meet a seller’s tight schedule for evaluating, negotiating, line of credit. Publicly traded unsecured bonds add a new financing and closing on the purchase of a major property. long-term financing alternative to our traditional use of debt Reaping the Value of Appreciated Assets. secured by individual real estate assets, so that While the Company has sold properties in the we now have greater flexibility in raising INCOME DISTRIBUTION1 capital through a balance of five different past, the type and magnitude of asset disposi- BY REGION (IN PERCENT) tions completed or put under contract during sources of funding—common equity, pre- 2 2002 represents another significant milestone. WASHINGTON, D.C. NEW YORK CITY ferred equity, line of credit debt, asset-backed It demonstrates Boston Properties’ ability and 22% 30% mortgage financing and unsecured corporate willingness to harvest the value it has created debt. Moody’s, Standard & Poors and Fitch all by selling properties when those assets com- provided investment grade ratings, attesting to mand premium prices and the Company can the company’s financial strength, conservative deploy the proceeds more productively. Two balance sheet and proven business model. major property dispositions involved 875 Refining Management Systems. In addition BOSTON Third Avenue in New York City and One and 25% to these property-specific and financial struc- Two Independence Square in Washington, PRINCETON3 SAN FRANCISCO ture achievements, the Company continued DC, selected for sale to pay down the bridge 5% 18% its focus on management and systems loan used for the $1.06 billion acquisition of enhancements. Particularly noteworthy was 1 GAAP Net Operating Income for 2002 399 Park Avenue. These properties were sold 2 Washington, D.C. region includes the further deployment of several web-based for $715 million at yields to the buyers signif- Baltimore, MD and Richmond, VA management and control systems providing 3 Princeton region includes E. Brunswick, icantly lower than the return to the Company NJ, and Langhorn, PA managers at all levels with current information on the acquisition of 399 Park Avenue.These on leasing status, revenues and operating dispositions were structured as Like Kind expenses. And in 2002 we substantially Exchanges to minimize the amount of taxable gain we recog- increased the proportion of tenant requests handled entirely nized, allowing the company to recycle equity capital on a tax through our proprietary online service and work order system efficient basis. that is accessed directly by on-site property management Enhancing Our Capital Structure. In 2002 Boston Properties personnel, with 45% of approximately 70,000 tenant service became a rated company qualified to issue unsecured debt and requests entered directly into the system by tenants (up from in December 2002 and January 2003 successfully issued 24% in 2001), shortening response time, improving tenant $925 million of senior unsecured 10-year notes at a very satisfaction and reducing paperwork and labor costs. competitive all-in fixed yield of 6.29%.This was an important FACING PAGE: THE PRUDENTIAL CENTER | BOSTON, MA 5 6 MARKET SQUARE NORTH | W ASHINGTON, DC (left) TWO DISCOVERY SQUARE | RESTON, VA THE CHALLENGES IN 2003 Square Tower, a 47 story,1.2 million SF building currently under While it is quite gratifying to review the Company’s accom- construction in New York City at the heart of Times Square, plishments in 2002, looking forward presents a more complex which has become one of the most important business addresses challenge. The difficulties and uncertainties characterizing the in the country. Arthur Andersen had originally been secured as economy since 2001 still prevail, and there is no sign yet of the lead tenant for this outstanding property, which is now being job growth necessary for increasing office actively re-marketed after the termination of the Andersen lease in the wake of that firm’s space demand. It is worth noting that, in this NOI GROWTH BY PROPERTY real estate cycle, previous over-commitments LOCATION (IN MILLIONS) demise last year. A 207,000 SF lease with a major law firm was signed this January,and we to space by tenants, particularly among tech- ● CBD nology companies, had an unprecedented ● SUBURBS are very encouraged by the considerable addi- role in subsequently rising vacancy rates while tional active tenant interest in this outstanding property, but with initial occupancy not excessive speculative construction played a $801m scheduled until 2004 it will not contribute to much lesser role, and that the market responded $698m 2003 earnings. quickly to declining demand with a halt in $597m almost all new construction. $534m We also need to recognize that the While this bodes well for the future, we Company’s successful issuance of unsecured do not foresee a significant improvement in $344m long-term debt, while beneficial overall, the market in 2003.