12. Segment Information

The following tables present reconciliations of Net Income Attributable to Boston Properties, Inc. Common Shareholders to Net Operating Income and Net Income Attributable to Boston Properties Limited Partnership Common Unitholders to Net Operating Income for the three and nine months ended September 30, 2017 and 2016.

Boston Properties, Inc.



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
	(in thousands)
Net income attributable to Boston Properties, Inc. common shareholders	$	117,337	$	76,753		$	348,086	$	355,114
Add:
Preferred dividends	2,625		2,589			7,875		7,796
Noncontrolling interest—common units of Boston Properties Limited Partnership	13,402		9,387			40,350		42,120
Noncontrolling interests in property partnerships	14,340		(17,225		)	33,967		53
Interest expense	92,032		104,641			282,709		314,953
Losses from interest rate contracts	—		140			—		140
Depreciation and amortization expense	152,164		203,748			463,288		516,371
Impairment loss	—		1,783			—		1,783
Transaction costs	239		249			572		1,187
General and administrative expense	25,792		25,165			84,319		79,936
Less:
Gains on sales of real estate	2,891		12,983			6,791		80,606
Gains (losses) from early extinguishments of debt	—		(371		)	14,354		(371		)
Gains from investments in securities	944		976			2,716		1,713
Interest and other income	1,329		3,628			3,447		6,657
Income from unconsolidated joint ventures	843		1,464			7,035		5,489
Development and management services revenue	10,811		6,364			24,648		18,586
Net Operating Income	$	401,113	$	382,186		$	1,202,175	$	1,206,773

Boston Properties Limited Partnership



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
	(in thousands)
Net income attributable to Boston Properties Limited Partnership common unitholders	$	132,693	$	91,306		$	395,199	$	408,540
Add:
Preferred distributions	2,625		2,589			7,875		7,796
Noncontrolling interests in property partnerships	14,340		(17,225		)	33,967		53
Interest expense	92,032		104,641			282,709		314,953
Losses from interest rate contracts	—		140			—		140
Depreciation and amortization expense	150,210		198,582			457,102		507,234
Impairment loss	—		1,783			—		1,783
Transaction costs	239		249			572		1,187
General and administrative expense	25,792		25,165			84,319		79,936
Less:
Gains on sales of real estate	2,891		12,983			7,368		82,775
Gains (losses) from early extinguishments of debt	—		(371		)	14,354		(371		)
Gains from investments in securities	944		976			2,716		1,713
Interest and other income	1,329		3,628			3,447		6,657
Income from unconsolidated joint ventures	843		1,464			7,035		5,489
Development and management services revenue	10,811		6,364			24,648		18,586
Net Operating Income	$	401,113	$	382,186		$	1,202,175	$	1,206,773

Net operating income (“NOI”) is a non-GAAP financial measure equal to net income attributable to Boston Properties, Inc. common shareholders and net income attributable to Boston Properties Limited Partnership common unitholders, the most directly comparable GAAP financial measures, plus (1) preferred dividends/distributions, noncontrolling interests, interest expense, losses from interest rate contracts, depreciation and amortization expense, impairment loss, transaction costs and general and administrative expense less (2) gains on sales of real estate, gains (losses) from early extinguishments of debt, gains from investments in securities, interest and other income, income from unconsolidated joint ventures and development and management services revenue. The Company believes NOI is useful to investors as a performance measure and believes it provides useful information to investors regarding its financial condition and results of operations because, when compared across periods, it reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and development activity on an unleveraged basis, providing perspective not immediately apparent from net income attributable to Boston Properties, Inc. common shareholders or net income attributable to Boston Properties Limited Partnership common unitholders. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level as opposed to the property level. Similarly, interest expense may be incurred at the property level even though the financing proceeds may be used at the corporate level (e.g., for other investment activity). In addition, because of historical cost accounting and useful life estimates, depreciation and amortization may distort operating performance measures at the property level. NOI presented by the Company may not be comparable to NOI reported by other REITs or real estate companies that define NOI differently.

Asset information by segment is not reported because the Company does not use this measure to assess performance. Therefore, depreciation and amortization expense is not allocated among segments. Preferred dividends/distributions, noncontrolling interests, gains on sales of real estate, interest expense, losses from interest rate contracts, gains (losses) from early extinguishments of debt, gains from investments in securities, interest and other income, income from unconsolidated joint ventures, depreciation and amortization expense, impairment loss, transaction costs, general and administrative expenses and development and management services revenue are not included in Net Operating Income as internal reporting addresses these items on a corporate level.

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by both geographic area and property type. The Company’s segments by geographic area are Boston, New York, San Francisco and Washington, DC. Segments by property type include: Office, Residential and Hotel.

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

For the three months ended September 30, 2017:



	Boston			New York			San Francisco			Washington, DC			Total
Rental Revenue:
Office	$	196,687		$	242,071		$	87,162		$	103,622		$	629,542
Residential	1,228			—			—			3,067			4,295
Hotel	13,064			—			—			—			13,064
Total	210,979			242,071			87,162			106,689			646,901
% of Grand Totals	32.61		%	37.43		%	13.47		%	16.49		%	100.00		%
Rental Expenses:
Office	76,086			95,775			26,792			37,111			235,764
Residential	512			—			—			1,065			1,577
Hotel	8,447			—			—			—			8,447
Total	85,045			95,775			26,792			38,176			245,788
% of Grand Totals	34.60		%	38.97		%	10.90		%	15.53		%	100.00		%
Net operating income	$	125,934		$	146,296		$	60,370		$	68,513		$	401,113
% of Grand Totals	31.40		%	36.47		%	15.05		%	17.08		%	100.00		%

For the three months ended September 30, 2016:



	Boston			New York			San Francisco			Washington, DC			Total
Rental Revenue:
Office	$	183,975		$	237,262		$	80,235		$	100,666		$	602,138
Residential	1,227			—			—			3,145			4,372
Hotel	12,354			—			—			—			12,354
Total	197,556			237,262			80,235			103,811			618,864
% of Grand Totals	31.92		%	38.34		%	12.96		%	16.78		%	100.00		%
Rental Expenses:
Office	71,254			95,073			26,037			33,973			226,337
Residential	1,141			—			—			1,082			2,223
Hotel	8,118			—			—			—			8,118
Total	80,513			95,073			26,037			35,055			236,678
% of Grand Totals	34.02		%	40.17		%	11.00		%	14.81		%	100.00		%
Net operating income	$	117,043		$	142,189		$	54,198		$	68,756		$	382,186
% of Grand Totals	30.62		%	37.21		%	14.18		%	17.99		%	100.00		%

For the nine months ended September 30, 2017:



	Boston			New York			San Francisco			Washington, DC			Total
Rental Revenue:
Office	$	573,883		$	735,485		$	257,286		$	309,225		$	1,875,879
Residential	3,520			—			—			8,941			12,461
Hotel	33,859			—			—			—			33,859
Total	611,262			735,485			257,286			318,166			1,922,199
% of Grand Totals	31.80		%	38.27		%	13.38		%	16.55		%	100.00		%
Rental Expenses:
Office	225,502			280,569			77,204			108,044			691,319
Residential	1,552			—			—			3,211			4,763
Hotel	23,942			—			—			—			23,942
Total	250,996			280,569			77,204			111,255			720,024
% of Grand Totals	34.86		%	38.97		%	10.72		%	15.45		%	100.00		%
Net operating income	$	360,266		$	454,916		$	180,082		$	206,911		$	1,202,175
% of Grand Totals	29.97		%	37.84		%	14.98		%	17.21		%	100.00		%

For the nine months ended September 30, 2016:



	Boston			New York			San Francisco			Washington, DC			Total
Rental Revenue:
Office	$	540,850		$	773,077		$	235,076		$	300,742		$	1,849,745
Residential	3,578			—			—			8,931			12,509
Hotel	33,919			—			—			—			33,919
Total	578,347			773,077			235,076			309,673			1,896,173
% of Grand Totals	30.50		%	40.77		%	12.40		%	16.33		%	100.00		%
Rental Expenses:
Office	210,695			272,620			75,412			101,514			660,241
Residential	2,174			—			—			3,255			5,429
Hotel	23,730			—			—			—			23,730
Total	236,599			272,620			75,412			104,769			689,400
% of Grand Totals	34.32		%	39.54		%	10.94		%	15.20		%	100.00		%
Net operating income	$	341,748		$	500,457		$	159,664		$	204,904		$	1,206,773
% of Grand Totals	28.32		%	41.47		%	13.23		%	16.98		%	100.00		%