UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[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
OR
[ ] 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 1-9317
HRPT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
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 [ ]
Number of Common Shares outstanding at November 11, 1999:
131,907,626 shares of beneficial interest, $0.01 par value.
<PAGE>
HRPT PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 3
Notes to Consolidated Financial Statement 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II Other Information
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate properties, at cost (including properties leased to
affiliates with a cost of $38,270 and $113,594, respectively):
Land $ 405,286 $ 369,770
Buildings and improvements 2,864,716 2,586,712
----------- -----------
3,270,002 2,956,482
Accumulated depreciation (203,789) (169,811)
----------- -----------
3,066,213 2,786,671
Real estate mortgages and notes receivable, net (including note from
an affiliate of $1,000 in 1998) 49,964 69,228
Investment in Hospitality Properties Trust 110,115 110,554
Cash and cash equivalents 16,749 15,643
Interest and rents receivable 40,991 36,229
Other assets, net 41,181 45,732
----------- -----------
$ 3,325,213 $ 3,064,057
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 240,000 $ 100,000
Senior notes payable, net 957,549 802,439
Mortgage notes payable 27,333 24,779
Convertible subordinated debentures 204,863 204,863
Accounts payable and accrued expenses 49,491 44,446
Deferred rents 32,845 34,162
Security deposits 22,175 18,383
Due to affiliates 13,257 7,192
Shareholders' equity:
Preferred shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, none issued -- --
Common shares of beneficial interest, $0.01 par value:
150,000,000 shares authorized, 131,907,626 shares and
131,547,178 shares issued and outstanding, respectively 1,319 1,315
Additional paid-in capital 1,971,362 1,964,878
Cumulative net income 665,681 564,814
Distributions (853,836) (703,214)
Unrealized holding losses on investments (6,826) --
----------- -----------
Total shareholders' equity 1,777,700 1,827,793
----------- -----------
$ 3,325,213 $ 3,064,057
=========== ===========
</TABLE>
See accompanying notes
1
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 112,475 $ 93,301 $ 315,810 $ 239,045
Interest and other income 2,330 3,659 9,949 13,158
--------- --------- --------- ---------
Total revenues 114,805 96,960 325,759 252,203
--------- --------- --------- ---------
Expenses:
Operating expenses 31,023 21,449 81,571 51,535
Interest 23,488 16,355 63,013 45,788
Depreciation and amortization 19,850 16,366 57,164 43,093
General and administrative 5,287 4,754 15,136 12,354
Impairment of assets 7,000 -- 7,000 --
Senior Housing Properties Trust transaction
costs 14,656 -- 14,656 --
--------- --------- --------- ---------
Total expenses 101,304 58,924 238,540 152,770
--------- --------- --------- ---------
Income before equity in earnings of Hospitality
Properties Trust, gain on sale of properties and
extraordinary item 13,501 38,036 87,219 99,433
Equity in earnings of Hospitality Properties Trust 2,023 2,076 6,052 5,541
(Loss) gain on equity transaction of Hospitality
Properties Trust -- -- (711) 2,470
--------- --------- --------- ---------
Income before gain on sale of properties and
extraordinary item 15,524 40,112 92,560 107,444
Gain on sale of properties -- -- 8,307 --
--------- --------- --------- ---------
Income before extraordinary item 15,524 40,112 100,867 107,444
Extraordinary item - early extinguishment of debt -- -- -- (2,140)
--------- --------- --------- ---------
Net income $ 15,524 $ 40,112 $ 100,867 $ 105,304
========= ========= ========= =========
Weighted average shares outstanding 131,906 131,546 131,821 115,931
========= ========= ========= =========
Basic and diluted earnings per common share:
Income before gain on sale of properties and
extraordinary item $ 0.12 $ 0.30 $ 0.70 $ 0.93
========= ========= ========= =========
Income before extraordinary item $ 0.12 $ 0.30 $ 0.77 $ 0.93
========= ========= ========= =========
Net income $ 0.12 $ 0.30 $ 0.77 $ 0.91
========= ========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 100,867 $ 105,304
Adjustments to reconcile net income to cash provided by operating
activities:
Extraordinary item - early extinguishment of debt -- 2,140
Gain on sale of properties (8,307) --
Loss (gain) on equity transaction of Hospitality Properties Trust 711 (2,470)
Equity in earnings of Hospitality Properties (6,052) (5,541)
Dividends from Hospitality Properties 5,480 5,160
Impairment of assets 7,000 --
Depreciation 54,805 41,713
Amortization 2,359 1,380
Amortization of bond discounts 110 35
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (5,534) (20,405)
Increase in accounts payable and accrued expenses 8,179 6,915
(Decrease) increase in deferred rents (1,317) 4,607
Increase (decrease) in security deposits 3,792 (624)
Increase in due to affiliates 7,378 11,182
----------- -----------
Cash provided by operating activities 169,471 149,396
----------- -----------
Cash flows from investing activities:
Real estate acquisitions and improvements (403,899) (592,188)
Investments in real estate mortgages receivable -- (226,000)
Proceeds from repayment of real estate mortgages and notes receivable 73,690 33,404
Proceeds from sale of real estate 22,177 5,565
Proceeds from repayment of loans to affiliate 1,000 1,365
----------- -----------
Cash used for investing activities (307,032) (777,854)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common shares -- 580,306
Proceeds from borrowings 519,500 1,219,467
Payments on borrowings (225,489) (1,015,930)
Deferred finance costs incurred (4,722) (3,833)
Distributions (150,622) (126,965)
----------- -----------
Cash provided by financing activities 138,667 653,045
----------- -----------
Increase in cash and cash equivalents 1,106 24,587
Cash and cash equivalents at beginning of period 15,643 22,355
----------- -----------
Cash and cash equivalents at end of period $ 16,749 $ 46,942
=========== ===========
Supplemental cash flow information:
Interest paid $ 64,749 $ 41,451
=========== ===========
See accompanying notes
3
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Non-cash investing activities:
Real estate acquisitions $-- $(237,404)
Investments in real estate mortgages receivable 60,000 226,000
Disposition of real estate -- 11,404
Issuance of common shares 4,959 5,705
Non-cash financing activities:
Assumption of mortgage note payable $3,543 $--
Issuance of common shares 1,529 7,958
Conversion of convertible subordinated debentures, net -- (6,629)
</TABLE>
See accompanying notes
4
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Basis of Presentation
The financial statements of HRPT Properties Trust and its subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the full year.
The Financial Accounting Standards Board issued Financial Accounting
Standards Board Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities ("FAS 133") in 1998. FAS 133 must be adopted for 2001. We
anticipate that FAS 133 will not have a significant impact on our financial
condition or results of operations.
Certain prior year amounts have been reclassified to conform to the
current years presentation.
Note 2. Comprehensive Income
The following is a reconciliation of net income to comprehensive income
for the three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
---------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net income $ 15,524 $ 40,112 $ 100,867 $ 105,304
Other comprehensive loss:
Unrealized holding losses (593) -- (6,826) --
--------- --------- --------- ---------
Comprehensive income $ 14,931 $ 40,112 $ 94,041 $ 105,304
========= ========= ========= =========
</TABLE>
Note 3. Shareholders' Equity
During the nine months ended September 30, 1999, 256,246 common shares
were issued in connection with the 1997 acquisition of office buildings leased
to agencies of the United States Government and 89,702 common shares were issued
as the incentive advisory fee relating to the year ended December 31, 1998.
On September 21, 1999, our trustees declared a distribution on our
common shares with respect to the quarter ended September 30, 1999 of $0.32 per
share, or approximately $42,200, which will be distributed on or about November
22, 1999, to shareholders of record as of October 20, 1999.
In July 1999, 13,000 common shares were granted and issued to officers
of the Company and other employees of REIT Management & Research, Inc. ("RMR"),
our investment manager, pursuant to the 1992 Incentive Share Award Plan. RMR is
owned by our two Managing Trustees. During 1999, the three independent trustees
were each granted and issued 500 common shares under this plan as part of their
annual fee. The shares granted to the officers and other employees of RMR vest
over a three-year period. The shares granted to the trustees vest immediately.
Note 4. Real Estate Properties
During the nine months ended September 30, 1999, we purchased 48 office
buildings for approximately $402,823 and funded $4,619 of improvements to our
existing properties, using cash on hand, borrowings under our bank credit
facility and assuming $3,543 of debt. In addition, we disposed of 14 senior
housing properties, including 12 senior housing properties leased to an
affiliate, for $82,737 and recognized a gain of $8,307. As part of the sale of
12 senior housing properties, we provided a $60,000 mortgage loan secured by the
12 senior housing properties which was subsequently paid in June 1999.
5
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
As of September 30,1999, we had outstanding commitments aggregating
approximately $78,707 to acquire office buildings or to provide financing. The
acquisition of these office buildings is subject to various closing conditions
customary in real estate transactions and no assurances can be given as to when
or if these office buildings will be acquired.
Subsequent to September 30, 1999, we purchased two office buildings for
$40,000, using cash on hand, borrowing $20,000 on our revolving credit facility
and assuming $11,123 of debt. Our office buildings are managed by RMR.
Note 5. Investment in Hospitality Properties Trust
At September 30, 1999, we owned four million shares of the common stock
of Hospitality Properties Trust ("HPT") with a carrying value of $110,115 and a
fair value based on quoted market prices, of $88,750. As of September 30, 1999,
our percentage ownership of HPT was 7.1%. During the nine months ended September
30, 1999, HPT completed public stock offerings of common shares. As a result of
these transactions, our percentage ownership in HPT was reduced from 8.8% as of
December 31, 1998, to 7.1% as of September 30, 1999, and we realized a loss of
$711.
Note 6. Real Estate Mortgages and Notes Receivable, net
During the nine months ended September 30, 1999, we received scheduled
principal payments of $478, principal repayments of mortgages secured by seven
senior housing properties totaling $13,212, principal repayment of $1,000 from a
loan to an affiliate and $60,000 as payment of a mortgage loan provided in
connection with the sale of the 12 senior housing properties discussed in note
4. In addition, we established an allowance for the impairment of two mortgage
loans for $5 million.
Note 7. Indebtedness
During 1999, we issued $90,000 unsecured 7 7/8% senior notes due 2009
and $65,000 unsecured 8 3/8% senior notes due 2011. Net proceeds of $150,156
were used to repay amounts outstanding under our revolving credit facility.
These notes are callable at par on April 15, 2002, and June 15, 2003,
respectively. In addition, we assumed a $3,543 secured 9.12% mortgage note
payable due 2004 in connection with the acquisition of one office property
discussed in note 4.
In July 1999, we reset the terms of the Remarketed Reset Notes (the
"Reset Notes") for a period of one year, at LIBOR plus a premium (currently
7.43%). The Reset Notes are redeemable at our option on each quarterly interest
payment date.
6
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 8. Segment Information
The following is a summary of our reportable segments as of or for the
three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
Senior Senior
Housing Office Total Housing Office Total
==================================== ====================================
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 23,180 $ 91,425 $ 114,605 $ 74,132 $ 250,314 $ 324,446
Operating expenses -- 31,023 31,023 -- 81,571 81,571
========== ========== ========== ========== ========== ==========
Net operating income $ 23,180 $ 60,402 $ 83,582 $ 74,132 $ 168,743 $ 242,875
========== ========== ========== ========== ========== ==========
Real estate investments $ 782,359 $2,537,607 $3,319,966 $ 782,359 $2,537,607 $3,319,966
<CAPTION>
Three Months Ended September 30, 1998 Nine Months Ended September 30, 1998
Senior Senior
Housing Office Total Housing Office Total
==================================== ====================================
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 26,802 $ 69,891 $ 96,693 $ 81,404 $ 170,596 $ 252,000
Operating expenses -- 21,449 21,449 -- 51,535 51,535
========== ========== ========== ========== ========== ==========
Net operating income $ 26,802 $ 48,442 $ 75,244 $ 81,404 $ 119,061 $ 200,465
========== ========== ========== ========== ========== ==========
Real estate investments $ 895,343 $1,961,282 $2,856,625 $ 895,343 $1,961,282 $2,856,625
</TABLE>
The following tables reconcile the reported segment information to the
consolidated financial statements for the three and nine months ended September
30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Total per reportable segment $ 114,605 $ 96,693 $ 324,446 $ 252,000
Unallocated other income 200 267 1,313 203
--------- --------- --------- ---------
Total consolidated revenues $ 114,805 $ 96,960 $ 325,759 $ 252,203
========= ========= ========= =========
Net operating income:
Total per reportable segment $ 83,582 $ 75,244 $ 242,875 $ 200,465
Unallocated amounts:
Other income 200 267 1,313 203
Interest expense (23,488) (16,355) (63,013) (45,788)
Depreciation and amortization expense (19,850) (16,366) (57,164) (43,093)
General and administrative expenses (5,287) (4,754) (15,136) (12,354)
Write-down of assets (7,000) -- (7,000) --
Senior Housing Properties Trust
transaction costs (14,656) -- (14,656) --
--------- --------- --------- ---------
Total consolidated income before equity
in earnings of Hospitality Properties
Trust, gain on sale of properties and
extraordinary item $ 13,501 $ 38,036 $ 87,219 $ 99,433
========= ========= ========= =========
</TABLE>
7
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 9. Senior Housing Properties Trust Transaction
In September 1999, the Securities and Exchange Commission declared
effective a registration statement filed by our 100% owned subsidiary, Senior
Housing Properties Trust ("Senior Housing"), to separate our senior housing
properties from our office properties by means of a distribution of Senior
Housing common shares to our shareholders (the "Spin-Off"). Prior to the
Spin-Off, Senior Housing had 26,000,000 common shares outstanding. On October
12, 1999, we completed the 50.7% Spin-off by distributing 13,190,763 Senior
Housing common shares to our shareholders of record on October 8, 1999. The
Senior Housing common shares now trade on the New York Stock Exchange under the
symbol "SNH." In connection with the Spin-Off, we received $200,000 from Senior
Housing which was used to repay amounts outstanding on our bank credit facility.
Included in the accompanying consolidated financial statements are the
net assets and results of operations of 81 senior housing properties and 12
mortgage receivables owned by Senior Housing. Summarized consolidated financial
information for Senior Housing as of September 30, 1999 and for the three and
nine months ended September 30, 1999 and 1998 is as follows and should be read
in conjunction with the Senior Housing Registration Statement dated September
21, 1999, as amended, and the Senior Housing Quarterly Report on Form 10Q for
the quarter ended September 30, 1999:
Consolidated Balance Sheet Data:
As of
September 30,
1999
--------------
Real estate properties, at cost $732,393
Real estate mortgages receivable 37,540
Total assets 670,441
Total indebtedness 200,000
Shareholder's equity 427,452
Consolidated Statements of Income Data:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1999 1998 1999 1998
------------------------- ---------------------------
Total revenues $22,621 $21,711 $67,911 $64,921
Total expenses 11,445 10,699 34,903 31,238
Net income 11,176 11,012 33,008 33,683
8
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 10. Pro Forma Information
On October 12, 1999, we spun-off 50.7% of our 100% owned subsidiary,
Senior Housing, to our shareholders. Also, during 1999 and 1998, we sold 33
nursing homes for gross proceeds of $141,500. The following unaudited pro forma
consolidated statements of income for the three and nine months ended September
30, 1999 and 1998 are presented to reflect the effects of the Spin-Off and the
disposition of nursing home assets during 1999 and 1998, as if these
transactions had occurred on January 1, 1998 and to exclude the effects of
transactions costs associated with the Spin-Off and the write-down of assets
recorded during the period ended September 30, 1999. Comparative pro forma
information is presented due to the significance of the pro forma adjustments on
historical operating results. This pro forma information does not purport to
present actual results of operations if these transactions had occurred on such
date or project operating results for any future period.
Pro Forma Unaudited Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 91,290 $ 69,598 $249,495 $168,160
Interest and other income 875 1,552 3,678 6,132
-------- -------- -------- --------
Total revenues 92,165 71,150 253,173 174,292
-------- -------- -------- --------
Expenses:
Operating expenses 31,023 21,449 81,571 51,535
Interest 20,462 11,702 52,580 31,729
Depreciation and amortization 14,330 11,040 39,898 27,169
General and administrative 4,131 3,421 11,495 8,531
-------- -------- -------- --------
Total expenses 69,946 47,612 185,544 118,964
-------- -------- -------- --------
Income before equity in earnings of
Hospitality Properties Trust and Senior
Housing Properties Trust, gain on sale
of properties and extraordinary item 22,219 23,538 67,629 55,328
Equity in earnings:
Hospitality Properties 2,023 2,076 6,052 5,541
Senior Housing Properties 5,966 5,970 17,864 17,922
-------- -------- -------- --------
Income before gain on sale of properties
and extraordinary item $ 30,208 $ 31,584 $ 91,545 $ 78,791
======== ======== ======== ========
Weighted average shares outstanding 131,906 131,546 131,821 115,931
======== ======== ======== ========
Income before gain on sale of properties
and extraordinary item per basic share $ 0.23 $ 0.24 $ 0.69 $ 0.68
======== ======== ======== ========
</TABLE>
Pro forma funds from operations, on a diluted basis, were $52.6
million, or $0.37 per share for the three months ended September 30, 1999, and
$50.6 million, or $0.35 per share, for the three months ended September 30,
1998. Pro forma funds from operations, on a diluted basis, were $156.0 million,
or $1.09 per share, for the nine months ended September 30, 1999, and $130.0
million, or $1.02 per share, for the nine months ended September 30, 1998.
9
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Versus 1998
Total revenues for the three months ended September 30, 1999, increased
$17.8 million to $114.8 million from $97.0 million for the three months ended
September 30, 1998. Revenues from our office segment increased $21.5 million and
revenues from our senior housing segment decreased $3.6 million. The increase in
revenues from our office segment is due to our increased real estate investment
in office buildings. The decrease in revenues from our senior housing segment is
due to the sale of real estate investments in senior housing properties. During
this period, rental income increased by $19.2 million and interest and other
income decreased by $1.3 million compared to the prior year comparable period.
Rental income increased primarily because of new real estate investments.
Total expenses for the three months ended September 30, 1999, increased
to $101.3 million from $58.9 million for the three months ended September 30,
1998. Included in total expenses for the 1999 period are unusual and
non-recurring items aggregating $21.7 million. Approximately $14.7 million of
these costs were transaction costs from the spin-off of 50.7% of our subsidiary,
Senior Housing Properties Trust ("Senior Housing"), $5 million was for the
write-down to net realizable value in the carrying value of two real estate
mortgages receivable secured by four nursing home properties that were not
spun-off with Senior Housing because of the uncertainty to meet obligations due
to us based on past delinquencies and $2 million was for the write-down in the
carrying value of other assets. The impairment of other assets represents a $1
million reserve for litigation and the recoverability of a deposit for the
acquisition of property, a $500,000 reserve for the impairment of an office
building asset and a $500,000 reserve for litigation and construction expenses
resulting from a dispute with a tenant. Operating expenses increased by $9.6
million as a result of our increased investment in office building real estate
assets. Interest expense increased by $7.1 million as a result of higher
borrowings outstanding during the 1999 period compared to the prior year
comparable period. Depreciation and amortization, and general and administrative
expenses increased by $3.5 million and $533,000, respectively, primarily as a
result of new real estate investments.
Net income decreased to $15.5 million, or $0.12 per basic and diluted
common share, for the 1999 period from $40.1 million, or $0.30 per basic and
diluted common share, for the 1998 period. The change in net income is due
primarily to the unusual and non-recurring items of $21.7 million described
above.
Funds from operations for the three months ended September 30, 1999,
were $58.3 million, or $0.44 per basic common share, and $58.2 million, or $0.44
per basic common share, for the 1998 period. Diluted funds from operations for
the three months ended September 30, 1999, were $62.3 million, or $0.44 per
diluted common share, and $62.2 million, or $0.44 per diluted common share, for
the 1998 period. The distributions declared which relate to the three months
ended September 30, 1999 and 1998, were $42.2 million, or $0.32 per common
share, and $50.0 million, or $0.38 per common share, respectively. The weighted
average shares outstanding were 131.9 million in 1999 and 131.5 million in 1998.
Nine Months Ended September 30, 1999 Versus 1998
Total revenues for the nine months ended September 30, 1999, increased
$73.6 million to $325.8 million from $252.2 million for the nine months ended
September 30, 1998. Revenues from our office segment increased $79.7 million and
revenues from our senior housing segment decreased $7.3 million. The increase in
revenues from our office segment is due to our increased real estate investment
in office buildings. The decrease in revenues from our senior housing segment is
due to the sale of real estate investments in senior housing properties. Rental
income increased by $76.8 million and interest and other income decreased by
$3.2 million. Rental income increased primarily because of new real estate
investments. Interest and other income decreased primarily as a result of a
decrease in mortgage interest income as our mortgage loan investments were
repaid.
Total expenses for the nine months ended September 30, 1999, increased
to $238.5 million from $152.8 million for the nine months ended September 30,
1998. As discussed above, included in total expenses for the 1999 period are
unusual and non-recurring items aggregating $21.7 million. Operating expenses
increased by $30.0 million as a result of our increased investment in office
building real estate assets. Interest expense increased by $17.2 million as a
result of higher borrowings outstanding during the 1999 period. Depreciation and
amortization, and general and administrative expenses increased by $14.1 million
and $2.8 million, respectively, primarily as a result of new real estate
investments.
10
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Net income decreased to $100.9 million, or $0.77 per basic and diluted
common share, for the 1999 period from $105.3 million, or $0.91 per basic and
diluted common share, for the 1998 period. The change in net income is due
primarily to the increase in new real estate investments and the gain on sale of
properties recognized in 1999, offset by the unusual and non-recurring items of
$21.7 million described above.
Funds from operations for the nine months ended September 30, 1999,
were $176.3 million, or $1.34 per basic common share, and $153.2 million, or
$1.32 per basic common share, for the 1998 period. Diluted funds from operations
for the nine months ended September 30, 1999, were $188.4 million, or $1.32 per
diluted common share, and $165.4 million, or $1.30 per diluted common share, for
the 1998 period. The distributions declared which relate to the nine months
ended September 30, 1999 and 1998, were $142.5 million, or $1.08 per common
share, and $140.4 million, or $1.14 per common share, respectively. The weighted
average shares outstanding were 131.8 million in 1999 and 115.9 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, we purchased 48 office
buildings for approximately $402.8 million, using cash on hand, borrowings under
our bank credit facility and assumption of $3.5 million of debt. In addition, we
disposed of 14 senior housing properties for $82.7 million and recognized a gain
of $8.3 million. As part of the sale of 12 of the senior housing properties, we
provided a $60.0 million mortgage loan secured by the 12 senior housing
properties which was paid in June 1999.
During the nine months ended September 30, 1999, we funded $4.6 million
of improvements to our existing properties, received $478,000 of regularly
scheduled principal payments, received $13.2 million representing principal
repayments of mortgages secured by seven senior housing properties, and received
$1.0 million from a loan to an affiliate.
Subsequent to September 30, 1999, we purchased two office buildings for
$40.0 million plus closing costs, using cash on hand, borrowing $20.0 million
under our bank credit facility and assuming $11.1 million of debt.
At September 30, 1999, we owned 4.0 million, or 7.1%, of the common
shares of beneficial interest of HPT with a carrying value of $110.1 million and
a fair value of $88.8 million. During the nine months ended September 30, 1999,
HPT completed public offerings of common shares. As a result of these
transactions, we realized a loss of $711,000.
During the nine months ended September 30, 1999, we issued 256,246
common shares in connection with the 1997 acquisition of office buildings leased
to agencies of the United States Government, 89,702 common shares as the
incentive advisory fee for the year ended December 31, 1998, 1,500 common shares
to our three independent trustees and 13,000 to our officers and employees of
Reit Management & Research, Inc. ("RMR"). RMR is owned by our two Managing
Trustees.
At September 30, 1999, we had $16.7 million of cash and cash
equivalents, as well as $240.0 million outstanding and $260.0 million available
for borrowing under our bank credit facility.
During 1999, we issued $90.0 million unsecured 7 7/8% senior notes due
2009 and $65.0 million unsecured 8 3/8% senior notes due 2011. Net proceeds of
$150.2 million were used to repay amounts outstanding under our revolving credit
facility. These notes are callable at par on April 15, 2002 and June 15, 2003,
respectively. In addition, we assumed a $3.5 million secured 9.12% mortgage note
payable due 2004 in connection with the acquisition of one office property.
In July 1999, we reset the terms of the Reset Notes for a period of one
year, at LIBOR plus a premium. The Reset Notes are callable at our option on
each quarterly interest payment date.
11
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
At September 30, 1999, we had outstanding commitments to purchase
office buildings or provide financing totaling approximately $78.7 million. We
intend to fund these commitments with a combination of cash on hand and amounts
available under our existing credit facility. The acquisition of these office
buildings is subject to various closing conditions customary in real estate
transactions, and no assurances can be given as to when and if these office
buildings will be acquired.
At September 30, 1999, we had $2.5 billion available on our $3 billion
effective shelf registration statement.
In September 1999, the Securities and Exchange Commission ("SEC")
declared effective a registration statement filed by our 100% owned subsidiary,
Senior Housing Properties Trust ("Senior Housing"), to separate our senior
housing properties from our office properties by means of a distribution of
Senior Housing common shares to our shareholders (the "Spin-Off"). Prior to the
Spin-Off, Senior Housing had 26.0 million common shares outstanding. On October
12, 1999, we completed the Spin-Off by distributing 13.2 million Senior Housing
common shares to our shareholders of record on October 8, 1999. In addition, we
received $200.0 million from Senior Housing. The Senior Housing common shares
now trade on the New York Stock Exchange under the symbol "SNH."
We continue to seek new investments to expand and diversify our
portfolio of leased real estate. As of September 30, 1999, our debt as a
percentage of total book capitalization was approximately 45%.
We expect that cash generated by our operations, availability under our
existing credit facility, and other possible issuances of equity or debt
securities under our effective shelf registration will be sufficient to meet our
cash needs for operations, dividends and currently planned expansion investments
in the future.
Year 2000
Our in-house computer systems are limited to software and hardware
developed by third parties and installed, operated and monitored by our
investment advisor, RMR. All of our computer systems, which are limited to
information systems, were installed within the last two years. All of the
critical enterprise wide systems are warrantied in writing to be year 2000
compliant by the manufacturers and have been tested by RMR. These systems
include the network hardware, the network operating system, the desktop
operating system, business application software, financial accounting software
and communication software. Other than those operated by our tenants, we have no
critical non-information technology systems, and no such systems are provided to
us by RMR. All costs associated with our computer systems are borne by RMR.
All of our senior housing properties are leased on a triple net basis
and are not managed by us. Ninety-seven percent of our senior housing tenants,
prior to the Spin-Off, were operated by subsidiaries of public companies which
have filed reports containing year 2000 preparedness information with the SEC.
These leases require the tenants to conduct the daily operations of the
properties and the scope of the tenants' responsibility includes ensuring
preparedness for the year 2000. Because of these leases, the only actions that
we can take with respect to these properties is to inquire of our tenants,
monitor our tenants' SEC filings and evaluate their year 2000 preparedness plans
for all systems, including financial and non-financial systems such as
elevators, heating and ventilation and life safety systems. As of September 30,
1999, six of our nine senior housing tenants that then operated 97% of our
senior housing investments had responded in writing to our inquiries regarding
their preparedness for issues related to the year 2000. Based on these responses
and tenant public disclosures which we have reviewed, we believe that these
tenants are in the process of studying their systems and the systems for their
vendors, suppliers and service providers to ensure preparedness but none of
these tenants have yet reported they are year 2000 compliant. Current levels of
preparedness are varied and include partially completed inventory and assessment
of potential risks, testing, implementation of plans for remediation and
reprogramming. While we believe that the efforts of these tenants described in
their responses and in their public filings will be adequate to address year
2000 concerns, there can be no guarantee that all tenant operations and those of
their vendors and payors, including federal and state Medicare and Medicaid
systems, will be year 2000 compliant on a timely basis and will not have a
material effect on us.
12
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Most of our commercial office buildings and office buildings leased to
the U.S. Government are leased on a gross lease or modified gross lease basis
and are managed by us. In early 1998, we began to identify issues associated
with year 2000 compliance for these managed buildings. We have been contacting
and will continue to contact vendors to gather information to assess vendor
readiness. In addition, managers and engineers at each of our buildings are
responsible for gathering and assessing year 2000 issues affecting specific
building systems including life safety, elevator, garage, security, and energy
management systems. We have also requested our major tenants to provide us with
updates of their year 2000 readiness. We expect to complete an overall
assessment of year 2000 issues and perform necessary system replacements or
upgrades, including testing, prior to December 31, 1999. Overall financial risk
associated with year 2000 readiness for these buildings is not expected to be
material, and most of the costs associated with correcting non-compliance are
expected to be classified as operating expense that may be reimbursable to us
under most tenant leases.
If our efforts and the efforts of our vendors, customers and tenants,
and their customers and vendors to prepare for the year 2000 were ineffective,
our properties could be subject to significant adverse effects, including, but
not limited to, loss of business and growth opportunities, reduced revenues and
increased expenses which might cause operating losses to our tenants as well as
operating losses at our properties. Continued or severe operating losses may
cause one or more of our tenants to default on their leases. Numerous lease
defaults could jeopardize our ability to maintain our financial results of
operations, meet our financial, operating and capital obligations and timely pay
our distributions to our shareholders.
We do not currently have a contingency plan in place in the event we or
our tenants do not successfully remedy year 2000 compliance issues that are
identified in a timely manner or fail to identify any year 2000 issues. We
continue to evaluate the status of our year 2000 compliance plan and determine
whether a contingency plan is necessary.
13
<PAGE>
HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. We manage our
exposure to this market risk through our monitoring of available financing
alternatives. Our strategy to manage exposure to changes in interest rates is
unchanged from December 31, 1998. Furthermore, we do not foresee any significant
changes in our exposure to fluctuations in interest rates or in how this
exposure is managed in the near future. At September 30, 1999, our total
outstanding debt for fixed rate notes consisted of the following:
Amount Coupon Maturity
Unsecured senior notes:
$40.0 million 7.25% 2001
$160.0 million 6.875% 2002
$150.0 million 6.75% 2002
$164.9 million 7.50% 2003
$100.0 million 6.7% 2005
$90.0 million 7.875% 2009
$65.0 million 8.375% 2011
$143.0 million 8.5% 2013
Secured notes:
$12.7 million 8.00% 2008
$11.1 million 7.66% 2009
$3.5 million 9.12% 2004
No principal repayments are due under the unsecured senior notes until
maturity. If, at maturity, the unsecured senior notes were to be refinanced at
interest rates which are 1/2 percentage point higher than shown above, our per
annum interest cost would increase by approximately $4.6 million. The secured
notes are secured by four of our office properties and require principal and
interest payments through maturity.
The market prices, if any, of each of our fixed rate obligations as of
September 30, 1999, are sensitive to changes in interest rates. Typically, if
market rates of interest increase, the current market price of a fixed rate
obligation will decrease. Conversely, if market rates of interest decrease, the
current market price of a fixed rate obligation will typically increase. Based
on the balances outstanding at September 30, 1999 and discounted cash flow
analyses, a hypothetical immediate one percentage point change in interest rates
would change the fair value of our fixed rate debt obligations by approximately
$41.0 million.
Each of our obligations for borrowed money has provisions that allow us
to make repayments earlier than the stated maturity date. In some cases, we are
not allowed to make early repayment prior to a cutoff date and in other cases we
are allowed to make prepayments only at a premium to face value. In any event,
these prepayment rights may afford us the opportunity to mitigate the risk of
refinancing at maturity at higher rates by refinancing at lower rates prior to
maturity.
At September 30, 1999, we had a $500.0 million unsecured bank credit
facility and unsecured Remarketed Reset Notes (the "Reset Notes") that were
subject to floating interest rates. Because these debt instruments are at a
floating rate, changes in interest rates will not affect their value. However,
changes in interest rates will affect our operating results. For example, the
interest rate payable on our Reset Notes of $250.0 million at September 30,
1999, was 6.6% per annum. An immediate 10% change in that interest rate, or 66
basis points, would increase or decrease our costs by $1.8 million, or $0.01 per
share per year:
Impact of Changes in Interest Rates
=================================================
(in 000s)
Total Interest
Interest Rate Outstanding Expense Per
Per Year Debt Year
================ ============ ==============
At September 30, 1999 6.6% $250,000 $16,500
10% reduction 5.9% 250,000 14,750
10% increase 7.3% 250,000 18,250
14
<PAGE>
HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk - continued
The foregoing table presents a so called "shock" analysis which assumes
that the interest rate change by 10% is in effect for a whole year. If interest
rates were to change gradually over one year the impact would be less.
We borrow in U.S. dollars and our current borrowings under our bank
credit facility and our Reset Notes are subject to interest at LIBOR plus a
premium. Accordingly, we are vulnerable to changes in U.S. dollar based short
term rates, specifically LIBOR.
During the past few months, short-term U.S. dollar based interest rates
have tended to rise. We are unable to predict the direction or amount of
interest rate changes during the next year. We have decided not to purchase an
interest rate cap or other hedge to protect against future rate increases, but
we may enter such agreements in the future. Also, we may incur additional debt
at floating or fixed rates, which would increase our exposure to market changes
in interest rates.
At September 30, 1999, we owned mortgages and notes receivable with a
carrying value of $50.0 million. After the October 12, 1999 Spin-Off, our
mortgages and notes receivable balance was $12.4 million. When comparable term
market interest rates decline, the value of these receivables increases; when
comparable term market interest rates rise, the value of these receivables
declines. Using discounted cash flow analyses at a weighted average estimated
per year market rate of 10.75%, the estimated fair value of our mortgages and
notes receivable after the Spin-Off is $12.8 million. An immediate 10% change in
the market rate of interest, or 108 basis points, applicable to our mortgages
and notes receivable after the Spin-Off, would affect the fair value of those
receivables as follows:
Carrying Value of
Interest Rate Mortgage Estimated Fair
Per Year Receivables Value
=======================================================
(in 000s)
Estimated market 10.75% $12,424 $12,774
10% reduction 9.67% 12,424 13,099
10% increase 11.83% 12,424 12,460
If the market rate changes occur gradually over time, the effect of
these changes would be realized gradually. Because our mortgage receivables are
fixed rate instruments, changes in market interest rates will have no effect on
our operating results unless these receivables are sold. At this time, we expect
to hold our existing mortgages to their maturity and not to realize any profit
or loss from trading these mortgage receivables. Also, we do not presently
expect to expand our mortgage investments.
The interest rate changes which affect the valuations of our mortgages
are U.S. dollar long term rates for corporate obligations of companies with
ratings similar to our mortgagors.
15
<PAGE>
HRPT PROPERTIES TRUST
Part II Other Information
Item 2. Changes in Securities.
On July 12, 1999, pursuant to the Company's Incentive Share Award Plan,
the Company granted 13,000 common shares to officers of the Company and certain
employees of RMR, each valued at $14.9375 per common share, the closing price of
the common shares on the New York Stock Exchange on July 12, 1999. The grants
were made pursuant to the exemption from registration contained in Section 4(2)
of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated July 30, 1999 relating to
the separation of the Company's senior housing properties
from its office properties by means of a distribution to the
shareholders of common shares of one of the Company's
subsidiaries, Senior Housing Properties Trust (Item 5).
2. Current Report on Form 8-K, dated September 21, 1999
relating to (a) the separation of the Company's senior
housing properties from its office properties by means of a
distribution to the shareholders of common shares of one of
the Company's subsidiaries, Senior Housing Properties Trust,
and (b) the pro forma consolidated financial statements of
the Company as of and for the six months ended June 30, 1999
and for the year ended December 31, 1998 (Items 5 and 7).
16
<PAGE>
HRPT PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
This Quarterly Report on Form 10-Q contains statements which constitute
forward looking statements within the meaning of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this Form
10-Q and include statements regarding our intent, belief or expectations with
respect to the Spin-Off, the declaration or payment of dividends, the
consummation of additional acquisitions, policies and plans regarding
investments, financings or other matters, our qualification and continued
qualification as a real estate investment trust or trends affecting our or any
of our property's financial condition or results of operations. Readers are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contained in the forward looking statements as a
result of various factors. Such factors include without limitation changes in
financing terms, our ability or inability to complete acquisitions and financing
transactions, results of operations of our properties and general changes in
economic conditions not presently contemplated. The information contained in
this Form 10-Q and our Annual Report on Form 10-K for the year ended December
31, 1998, including the information under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations", identifies other
important factors that could cause differences.
The Amended and Restated Declaration of Trust establishing the Company,
dated July 1, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is duly filed in the Office of the Department of Assessments and
Taxation of the State of Maryland, provides that the name "HRPT Properties
Trust" refers to the trustees under the Declaration collectively as trustees,
but not individually or personally, and that no trustee, officer, shareholder,
employee or agent of the Company shall be held to any personal liability,
jointly or severally, for any obligation of, or claim against, the Company. All
persons dealing with the Company, in any way, shall look only to the assets of
the Company for the payment of any sum or the performance of any obligation.
17
<PAGE>
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.
HRPT PROPERTIES TRUST
By: /s/ John A. Mannix
John A. Mannix
President and Chief Operating Officer
Dated: November 15, 1999
By: /s/ John C. Popeo
John C. Popeo
Treasurer and Chief Financial Officer
Dated: November 15, 1999
18
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<PP&E> 3,270,002
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