BOSTON PROPERTIES 2003 ANNUAL REPORT ON THE COVER CONTENTS 399 PARK AVENUE, NEW YORK, NY IFC COMPANY DESCRIPTION (FOREGROUND) 1 LETTER TO SHAREHOLDERS 10 PROPERTY PORTFOLIO CITIGROUP CENTER AND 12 DIRECTORS AND OFFICERS 599 LEXINGTON AVENUE, NEW YORK, NY 13 FORM 10-K (BACKGROUND) IBC CORPORATE INFORMATION Boston Properties, Inc., a self-administered and develops and manages its properties through full-service self-managed real estate investment trust (REIT), is one of regional offices in Boston, New York City, Washington, the largest owners, managers and developers of first-class D.C., San Francisco and Princeton, New Jersey. Its office properties in the United States, with a significant property portfolio primarily comprises first-class office presence in four core markets: Boston, Washington, D.C., space and also includes hotels and industrial buildings. Midtown Manhattan and San Francisco. Boston Boston Properties is traded on the New York Stock Properties was founded in 1970 in Boston, where it Exchange under the symbol BXP. maintains its headquarters. The Company acquires, 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. MORTIMER B. ZUCKERMAN FFO PER SHARE (DILUTED) CHAIRMAN OF THE BOARD (LEFT) AND DIVIDENDS PER SHARE FFO DIVIDENDS EDWARD H. LINDE $4.09 $4.09 PRESIDENT AND CHIEF EXECUTIVE OFFICER $3.57 $3.31 $2.89 $1.75 $2.04 $2.27 $2.41 $2.50 1999 2000 2001 2002 2003 To Our Shareholders 2003 marked the third year of the current down cycle in the dispositions and related gains in that prior year. Excluding commercial real estate market nationwide. While there are gains on sale and discontinued operations, EPS in 2003 was encouraging signs that declines in demand and achieved rents $2.36 per share, up 6.3% from $2.22 in the prior year. on new leases have now bottomed out, last year still saw slippage G The fifth consecutive year of increase in Boston Properties’ in market rent and occupancy levels. In the context of this quarterly dividend. This year’s 3.3% increase resulted in a challenging environment, we are very pleased to report that in five-year compounded dividend growth rate of 9.3%, while 2003 Boston Properties grew revenue and net operating income the dividend-to-FFO ratio was 61% in 2003, maintaining a and that your Company entered 2004 in extremely strong healthy margin between the dividend pay out and FFO. financial and operating condition and vigorously pursuing new G Approximately 3.9 million square feet of leases executed opportunities. It is particularly satisfying to have provided our during the year and occupancy at year end of 92.1% in our shareholders with a total one-year return, including dividends, office portfolio compared to overall occupancy in the markets of 33.9% measured from January 1, 2003, and to see that the in which we operate of 85.6%, a premium of 6.5%. total return for the five years from January 1, 1999 has been 94.0%. And our leasing experience during the current downturn OUTPERFORMING THE MARKET IN THE DOWN CYCLE reconfirms our confidence in our core real estate strategy—owning Our long-held approach of concentrating on high-grade build- the best assets concentrated in strong, supply-constrained markets ings in select markets, long-term leasing to strong tenants and and emphasizing long-term leases to high-quality tenants —as responsive, hands-on property management has resulted in a yielding the best results in weak periods in the market cycle as well performance during this difficult period that has served the as during periods of resurgent demand. Company and its shareholders very well. The reasons seem clear. Highlights for 2003 include: First, longer lease terms with financially stronger tenants reduce the extent of exposure during such a down cycle. Second, G A new record Net Operating Income of $836 million, up 8.6% from $770 million in 2002. when rents and occupancy levels decline the options for tenants with expiring leases widen and there is a migration to higher G Funds From Operations (FF0) of $4.09 per share, on a fully- diluted basis, sustained at the same level as 2002. quality buildings. Users take this opportunity to upgrade their employees’ work environment by moving to locations and specific G Earnings Per Share (EPS) on a fully diluted basis at $3.71 vs. $4.66 in 2002, due to the greater amount of property buildings not otherwise available at prices they see as providing good value, with a premium also placed on management quality 1 111 HUNTINGTON AVENUE, BOSTON, MA 265 FRANKLIN STREET, BOSTON, MA INCOME DISTRIBUTION BY REGION1 (IN PERCENT) BOSTON 24% NEW YORK CITY 36% SAN FRANCISCO 16% PRINCETON3 WASHINGTON, DC 2 5% 19% 1 GAAP Net Operating Income for 2003 2 Washington, DC region includes Baltimore, MD, and Richmond, VA 3 Princeton region includes E. Brunswick, NJ, and Langhorn, PA and the stability of ownership. This significantly cushions the MAJOR ACCOMPLISHMENTS IN 2003 impact on our properties of the general decline in market condi- Maintaining the highest possible level of occupancy on acceptable tions. Take, for example, the San Francisco region, a market economic terms despite market weakness was our highest priority severely affected by the slump in demand from technology and and most important accomplishment in 2003. At the same time, financial services firms. Boston Properties’ principal asset in that we moved forward in other important ways to add to the value of market, Embarcadero Center, is a unique facility in a highly our assets and set the stage for further growth in earnings and preferred location with the additional advantage of our direct return on investment. property management. Despite 15%-25% vacancy rates throughout the entire region, we have maintained occupancy at Development The Company completed two buildings this year and opened over 90% at this complex at rents that continue to reflect a them 100% leased—the 422,000 SF Two Freedom Square premium over competing buildings. building in Reston, Virginia and the 57,000 SF Shaws A more general validation of our basic real estate strat- Supermarket at the Prudential Center in Boston. Construction egy is evidenced in the market pricing of asset sales over the past continued on 2,030,000 SF of additional office development few years and during 2003 in particular. Despite the difficult brought to 55% leased as of this February, including the 538,000 office leasing environment during this period, investor demand SF building at 901 New York Avenue in Washington, DC (80% for high-quality real estate of the type owned by Boston leased at year end) and the second, 257,000 SF building at our Properties has only further intensified. Very low capitalization New Dominion Office Park in Herndon, Virginia (100% leased rates accepted by buyers for assets directly comparable to proper- to the federal government). The recent acceleration of interest in ties owned by Boston Properties demonstrate the inherent value our 1.2 million SF Times Square Tower in New York City, which of our portfolio. While this pricing has been partly driven by low was 35% leased as of February, confirms our confidence that the interest rates, it also very much reflects the value premium of long-term value of this key asset will be well above its cost. Also high-quality, hard-to-duplicate assets in those cities which have of note, since it occurred in a significantly distressed demonstrated their long-term desirability as centers of economic sub-market, was the initial lease for 144,000 SF in our 251,000 activity. Property investors recognize that while markets in cities SF building at 611 Gateway Boulevard in South San Francisco, like New York, Washington, DC, Boston, San Francisco and the largest new lease in that submarket last year. Princeton may experience significant downturns in the short term, as leading centers for knowledge-based businesses they will recover and prosper in ways that other locations will not match. 4 ONE FREEDOM SQUARE, RESTON, VA CITIGROUP CENTER, NEW YORK, NY TIMES SQUARE TOWER, NEW YORK, NY NOI GROWTH BY PROPERTY LOCATION (IN MILLIONS) CBD SUBURBS $836M $770M $647M $559M $484M 1999 2000 2001 2002 2003 Site Acquisition financing at historically low floating or short-term interest rates. In 2003 we put two major development sites under control in the In this context, we are particularly pleased by our success during CBD of Washington, DC, with the capacity for over 1.3 million 2003 in acquiring $298 million of high-quality real estate at SF of office space, pursued joint ventures for sites in the suburbs attractive levels of return, in part through purchasing the interests of Washington and the Boston CBD providing the opportunity in One and Two Freedom Square and One and Two Discovery to build the office phases of large multi-use projects, and explored Square, comprising 1.2 million SF of our development in Reston, additional site opportunities in all of our regions. We have been Virginia, held by our original development partner in those prop- through many market cycles in the thirty-three years since found- erties, and the balance by acquiring the 320,000 SF building at ing Boston Properties and are confident that, as demand for new 1333 New Hampshire Avenue in downtown Washington, DC. office space returns, we will again have opportunities to use our In this latter case the seller chose to deal only with Boston particular expertise in development to produce enhanced returns Properties to insure the reliability of a transaction that had to be on investment.