HEALTH AND RETIREMENT PROPERTIES TRUST
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE 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)
Securities registered pursuant to Section 12(b) of the Act:
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Name of exchange on
Title of each class which registered
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Common Shares of Beneficial Interest New York Stock Exchange
7.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange
7.5% Convertible Subordinated Debentures due 2003, Series A New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the voting stock of the registrant held
by non-affiliates was $1.8 billion based on the $13 3/4 closing price per share
for such stock on the New York Stock Exchange on March 29, 1999. For purposes of
this calculation, 1,134,372 shares held by HRPT Advisors, Inc., 2,463,366 held
by REIT Management & Research, Inc. solely in its capacity as voting trustee
under a voting trust agreement or a proxy, an aggregate of 44,250 shares held by
the Trustees and executive officers of the registrant, 44,851 held by Gerard M.
Martin and 44,851 held by Barry M. Portnoy, have been included in the number of
shares held by affiliates.
Number of the registrant's Common Shares of Beneficial Interest, $.01
par value ("Shares"), outstanding as of March 29, 1999: 131,893,126.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated by
reference from our definitive Proxy Statement for the annual meeting of
shareholders currently scheduled to be held on May 11, 1999.
CERTAIN IMPORTANT FACTORS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of the Securities Litigation
Reform Act of 1995. These statements appear in a number of places in this Form
10-K regarding our intent, belief or expectations with respect to expansion of
our portfolio, our ability to pay dividends, the effect of year 2000 issues,
policies and plans regarding investments, financings and other matters, our tax
status as a real estate investment trust and our access to debt or equity
capital markets or to other sources of funds and statements of assumptions
underlying such statements as to intent, belief or expectations. 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 the status of the economy,
compliance with and changes to regulations and payment and reimbursement
policies within the health care industry, competition within the health care
industry, and changes in federal, state and local legislation. The accompanying
information contained or incorporated by reference in this Annual Report on Form
10-K, including under the heading "Business" and in our Current Report on Form
8-K dated March 5, 1999, under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations", identifies other important
factors that could cause such differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING HRPT
PROPERTIES TRUST, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL
AMENDMENTS THERETO, 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 OF TRUST, COLLECTIVELY AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER,
SHAREHOLDER, EMPLOYEE OR AGENT OF HRPT PROPERTIES TRUST SHALL BE HELD TO ANY
PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM
AGAINST, HRPT PROPERTIES TRUST. ALL PERSONS DEALING WITH HRPT PROPERTIES TRUST,
IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRPT PROPERTIES TRUST FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
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HRPT PROPERTIES TRUST
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Page
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Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 19
Item 3. Legal Proceedings............................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............................. 22
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............ 22
Item 6. Selected Financial Data......................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data..................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 25
Part III
Item 10. Directors and Executive Officers of the Registrant.............................. *
Item 11. Executive Compensation.......................................................... *
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. *
Item 13. Certain Relationships and Related Transactions.................................. *
* Incorporated by reference from our Proxy Statement for the
Annual Meeting of Shareholders currently scheduled to be
held on May 11, 1999, to be filed pursuant to Regulation
14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 25
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References in this Annual Report on Form 10-K to the "Company" or "HRP"
include consolidated subsidiaries, unless the context indicates otherwise.
PART I
Item 1. Business
The Company. HRPT Properties Trust ("HRP" or the "Company") was
organized on October 9, 1986 as a Maryland real estate investment trust
("REIT"). We invest in income producing real estate, including office buildings
and senior housing properties.
As of December 31, 1998, we owned 230 properties for a total investment
of $3.0 billion (at cost), had mortgage investments in 26 properties aggregating
$69.2 million and had an equity investment representing 8.8% of the outstanding
common shares of Hospitality Properties Trust ("HPT") with an approximate
carrying value of $110.6 million, for total real estate investments of
approximately $3.1 billion. The properties are described in "Business
Developments Since January 1, 1998" and "Properties".
Number of Total Investment
State Properties at December 31, 1998
(in thousands)
Alaska 1 $1,000
Arizona 9 64,856
California 30 322,415
Colorado 10 56,154
Connecticut 11 110,891
Delaware 1 44,090
District of Columbia 5 207,521
Florida 10 148,578
Georgia 5 15,286
Illinois 2 98,742
Iowa 7 8,207
Kansas 4 8,477
Louisiana 1 18,992
Maryland 8 191,164
Massachusetts 34 251,535
Michigan 2 9,181
Minnesota 3 40,704
Missouri 3 11,564
Nebraska 10 10,704
New Hampshire 1 3,754
New Jersey 5 42,954
New Mexico 2 11,021
New York 6 185,225
North Carolina 5 9,192
Ohio 4 26,930
Oklahoma 1 24,762
Pennsylvania 17 553,997
Rhode Island 1 8,010
South Dakota 3 7,589
Tennessee 1 22,173
Texas 22 271,441
Vermont 8 29,766
Virginia 7 111,540
Washington 4 40,930
West Virginia 1 4,898
Wisconsin 8 33,904
Wyoming 4 17,563
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Total 256 3,025,710
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Investment in HPT 110,554
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Total Investments $3,136,264
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Our principal executive offices are located at 400 Centre Street,
Newton, Massachusetts 02458, and our telephone number is (617) 332-3990.
Investment Policy and Method of Operation. Our investment goals are
current income for distribution to shareholders, capital growth resulting from
appreciation in the residual value of owned properties, and preservation and
protection of shareholders' capital. Our income is derived primarily from rent
and interest payments under our leases and mortgages.
Our day to day operations are conducted by REIT Management & Research,
Inc. ("RMR"), our investment manager. RMR provides investment, management,
property management and administrative services to us. RMR originates and
presents investment opportunities to our Board of Trustees. In evaluating
potential investments, we consider factors such as: the historical and projected
rents received and likely to be received from the property to meet operational
needs and financing obligations and to provide a competitive market return on
our investments; the historic and expected operating expenses, including real
estate taxes, incurred and expected to be incurred at the properties; the
growth, tax and regulatory environments of the market in which the property is
located; the quality, experience, and credit worthiness of the property's
operator and tenants; an appraisal of the property, if available; occupancy and
demand for similar properties in the same or nearby markets; the construction
quality, physical condition and design of the property; the geographic area and
type of property; and the pricing of comparable properties as evidenced by
recent arms length market sales.
Prior to investing in properties, we obtain title commitments or
policies of title insurance insuring that we hold title to or have mortgage
interests in such properties, free of material liens and encumbrances.
Our investments are structured using leases with minimum and/or
additional rent and escalation provisions, loans with fixed or floating rates,
joint ventures and partnerships with affiliated or unaffiliated parties,
commitments or options to purchase interests in real estate, mergers or any
combination of the foregoing that will best suit the particular investment.
In connection with our current bank credit facility, we have agreed to
obtain lender approval before exceeding investment concentrations based on
certain criteria (see "Borrowing Policy"). Among these are that no more than 40%
of our investments be operated by any single tenant or mortgagor and that no new
hotel investments be made. No limits, other than those in connection with our
bank credit facility, have been set on the number of properties in which we will
seek to invest, or on the concentration of investments involving any one
facility or geographical area; however, our Board of Trustees consider
concentration of investments in determining whether to make new or increase
existing investments.
Our Declaration of Trust and operating policies provide that any
investment in facilities owned by us or operated by RMR, persons expressly
permitted under the Declaration of Trust to own more than 8.5% of our shares, or
any company affiliated with any of the foregoing must be approved by a majority
of the Board of Trustees not affiliated with any of the foregoing.
We have in the past considered and may in the future consider, from
time to time, the acquisition of or merger with other companies engaged in the
same business as us; however, we have no present agreements or understandings
concerning any such acquisition or merger.
Borrowing Policy. In addition to the use of equity, we utilize
short-term and long-term borrowings to finance investments. We have a bank
credit facility of $500 million. In February 1999, the bank credit facility was
amended to permit the possible spin-off of our senior housing properties. The
bank credit facility (which is guaranteed by most of our subsidiaries) is used
for acquisition funding on an interim basis until equity or long-term debt is
raised and for working capital and general business purposes. Outstanding
borrowings under the bank credit facility at December 31, 1998 were $100
million.
Our borrowing guidelines established by our Board of Trustees and
covenants in various debt agreements prohibit us from maintaining a debt to
equity ratio of greater than 1 to 1. At December 31, 1998, our debt to equity
ratio was .62 to 1. Our senior unsecured debt also imposes covenants on us which
may limit our ability to borrow. The Declaration of Trust prohibits us from
incurring secured and unsecured indebtedness which in the aggregate exceeds 300%
of our net assets, unless approved by a majority of the Board of Trustees not
affiliated with us. There can be no assurance that debt capital will in the
future be available at reasonable rates to fund our operations or growth.
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Business Developments Since January 1, 1998
Investments
During 1998, we acquired 48 office properties and five senior housing
properties for an aggregate amount of $981.6 million and provided improvement
funding totaling $17.2 million to our existing properties.
Financing
During 1998, we sold 25,000,000 common shares in a public offering and
sold 6,977,575 common shares in four offerings to unit investment trusts
sponsored by various investment banks, raising gross proceeds of $612.4 million
(net $580.3 million). Proceeds from these offerings were used to repay amounts
outstanding under our revolving bank credit facility, to purchase real estate
and for general business purposes. In addition, we issued 362,217 common shares
due to the conversion of $6.8 million of our convertible subordinated debentures
and issued 286,400 common shares for the purchase of real estate.
Since January 1, 1998, we have issued the following senior unsecured
fixed rate term notes: $100 million of 6.7% Senior Notes due 2005 issued in
February 1998; $160 million of 6-7/8% Senior Notes due 2002 issued in August
1998; $143 million of 8-1/2% Senior Notes due 2013 issued in November 1998; and
$90 million of 7-7/8% Senior Notes due 2009 in March, 1999. In addition, we
issued $50.0 million of senior unsecured remarketed reset notes which are due in
2007 and bear interest at LIBOR plus a premium. The $532.8 million aggregate net
proceeds from these notes were used to repay amounts then outstanding under our
revolving bank credit facility, to purchase real estate and for general business
purposes.
In April 1998, we increased and extended our unsecured revolving bank
credit facility with a group of banks for which Dresdner Bank AG acts as agent.
The new credit facility permits borrowings of up to $500.0 million, matures in
2002 and bears interest at LIBOR plus a premium. We recognized an extraordinary
loss on the early extinguishment of debt for $2.1 million as a result of the
write-off of deferred financing fees associated with our previous bank credit
facility.
Other Developments
Since January 1, 1998, we disposed of one office property and six
senior housing properties for $39.6 million, including two senior housing
properties for $22.5 million in 1999. During this period, we also received full
repayments for $36.0 million of mortgages secured by ten senior housing
properties, including two senior housing properties for $3.0 million in 1999.
In December 1998, we entered an agreement for the disposition of 12
senior housing properties. The net proceeds of this disposition are expected to
be about $65.0 million, and are subject to seller financing. These transactions
are expected to close within the next 30 to 60 days.
In December 1998, we announced a plan for a possible separate financing
which would include a public offering of common shares of one of our
subsidiaries, Senior Housing Properties Trust ("SNH"), and a distribution to our
shareholders of common shares of that subsidiary. The public offering and
distribution constitute one alternative transaction that we are considering with
respect to financing our senior housing real estate investments. The SNH
transaction as described in the SEC filing is not likely to occur under present
market conditions. At this time, we are considering various alternative
transactions which would reposition our senior housing properties into a
separate publicly owned REIT.
On July 1, 1998, we changed our name from "Health and Retirement
Properties Trust" to "HRPT Properties Trust", reflecting our investment in
commercial office properties as well as senior housing real estate.
The Investment Manager
RMR is a Delaware corporation owned by Gerard M. Martin and Barry M.
Portnoy. RMR's principal executive offices are located at 400 Centre Street,
Newton, Massachusetts 02458, and its telephone number is (617) 332-3990. As of
January 1, 1998, we entered into separate investment advisor and property
management agreements with RMR. RMR provides investment, management, property
management services and administrative services to us. In addition, an affiliate
of RMR also provides garage management services to some of our properties. RMR
also acts as the investment manager to HPT and has other business interests. The
Directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty.
The officers of RMR are David J. Hegarty, President and
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Secretary, John G. Murray, Executive Vice President, John Popeo, Treasurer, and
Ajay Saini, John A. Mannix, David Lepore and Thomas M. O'Brien, Vice Presidents.
Gerard M. Martin and Barry M. Portnoy are our managing trustees and David J.
Hegarty, Ajay Saini, John A. Mannix and David M. Lepore are our officers.
Employees
As of March 16, 1999, we had no employees. RMR, which administers our
day-to-day operations, had 177 full-time employees and three active directors as
of that date.
Regulation and Reimbursement
Our tenants and borrowers who operate senior housing properties,
including long-term care facilities, retirement communities and assisted living
centers, must comply with federal, state and local statutes and regulations in
order to operate the properties. The health care industry depends significantly
upon federal and federal/state programs for revenues and, as a result, is
vulnerable to the budgetary policies of both the federal and state governments.
Certificates of Need. Certain of our investments are in senior housing
properties which require certificates of need ("CONs") prior to expansion of
beds or services, certain capital expenditures, and in some states, a change in
ownership. CON requirements are not uniform throughout the United States.
Changes in CON requirements may affect competition, profitability of the
properties and our opportunities for investment in senior housing properties.
Federal and State Regulation and Reimbursement. Our senior housing properties
are affected by a number of federal and state statutes and regulations,
including state licensing laws, laws related to reimbursement of long-term care
facilities under Medicare and Medicaid programs and federal and state anti-fraud
and anti-kickback laws. In order to receive Medicare and Medicaid reimbursement,
our tenants and borrowers who operate long-term care facilities must demonstrate
that the facilities are in substantial compliance with state licensing and
federal certification standards, which include extensive resident care and
physical plant requirements. Federal and state agencies regularly monitor the
quality of care provided and regularly inspect the physical conditions of
long-term care facilities. Medicare and Medicaid laws limit reimbursement for
capital costs and in some circumstances for rental or lease expenses. Under the
Balanced Budget Act of 1997 (Public Law 105-33), (the "BBA"), the federal
Department of Health and Human Services, ("HHS"), has adopted a Medicare
prospective payment system for skilled nursing facilities which includes
capital-related costs and is being phased in over three years beginning July 1,
1998. Many states have adopted Medicaid prospective payment systems. The BBA
also increases states' flexibility in establishing Medicaid rates for nursing
facility services, repeals the Boren Amendment under which Medicaid providers
had the right to challenge the adequacy of Medicaid rates and strengthens the
ability of HHS and the states to exclude providers from the Medicare and
Medicaid programs for health care-related offenses. Reduction in Medicare rates
and Medicaid rates may have a negative effect on some of our tenants or
borrowers and may effect their ability to pay rent or mortgage interest income
to us.
Two federal government studies are currently underway to provide
background information and make recommendations regarding the future regulation
of and the possibility of increased governmental funding for the assisted living
industry. One study is being conducted by the General Accounting Office ("GAO")
for the Senate Special Committee on Aging and is focused upon consumer
protection and quality of care issues. The second study is being conducted by
the HHS's Assistant Secretary for Planning and Evaluation and is expected to
touch upon all aspects of the assisted living industry including quality of care
and financing. A 1998 National Academy for State Health Policy study, which is
part of this second study, found that 22 states had implemented licensing
standards specifically for assisted living and draft rules had been issued in an
additional six states, and predicted that every state will soon have reviewed
their regulations governing residential care settings. These studies are
expected to be completed during 1999. We cannot predict whether these studies
will result in governmental policy changes or new legislation, or what impact
any changes may have. Based upon our analysis of current economic and regulatory
trends, we do not believe that the federal government is likely to have a
material impact upon the current regulatory environment in which the assisted
living industry operates unless it also undertakes expanded funding obligations;
and we do not believe a materially increased financial commitment from the
federal government is presently likely. However, we do anticipate that assisted
living facilities will increasingly be licensed and regulated by the various
states, and that with the absence of federal standards, the states' policies
will continue to vary widely.
HHS's Health Care Financing Administration, ("HCFA"), has begun to
implement an initiative to increase the effectiveness of Medicare/Medicaid
nursing facility survey and enforcement activities by HCFA and the states.
HCFA's initiative follows its July 1998 report to Congress on the effectiveness
of the survey and enforcement system, several March 1999 reports by HCFA's
Office of Inspector General concerning quality of care in nursing homes, a July
1998 GAO report which found inadequate care in a significant proportion of
California nursing
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homes and March 1999 GAO reports which recommended that HCFA and the states
strengthen their enforcement activities to ensure that nursing homes maintain
compliance with federal health care standards. In July 1998 and March 1999 the
Senate Special Committee on Aging held hearings on these issues. HCFA plans to
focus survey and enforcement efforts at nursing facilities with repeat
violations of Medicare/Medicaid standards, including chain-operated facilities
with patterns of noncompliance. HCFA also is requiring state agencies to use
enforcement sanctions and remedies more promptly and effectively when
substandard care is identified, and HCFA is increasing its oversight of state
survey agencies. In addition, HCFA has adopted new regulations expanding the
ability of HCFA and the states to impose civil money penalties in instances of
noncompliance. Medicare/Medicaid survey results for each facility are being
posted on the Internet. A newly-enacted federal law prohibits nursing homes
which reduce their Medicaid participation from evicting Medicaid residents.
Federal efforts to target fraud and abuse and kickback violations by Medicare
and Medicaid providers have also increased. An adverse determination concerning
any operator's licensure or eligibility for government reimbursement or its
compliance with applicable federal or state statutes on regulations may affect
such operator and its affiliates and may affect their ability to pay their rent
or mortgage interest income.
A number of legislative proposals that would affect major reforms of
the health care system have been introduced in Congress, such as additional
Medicare and Medicaid reforms and cost containment measures. We cannot predict
whether any such legislative proposals will be adopted or, if adopted, what
effect, if any, such proposals would have on our business, lessees or
mortgagors.
Competition.
We compete with other real estate investment trusts in that each is
continually seeking attractive investment opportunities in office and senior
housing facilities and other types of real estate. We also compete with banks,
non-bank finance companies, leasing companies and insurance companies.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of federal income tax considerations is based on
existing law, and is limited to investors who own our shares as an investment
asset rather than as inventory or as property used in a trade or business. The
summary does not discuss the particular tax consequences that might be relevant
to you if you are subject to special rules under the federal income tax law, for
example if you are:
- a bank, life insurance company, regulated investment company,
or other financial institution,
- a broker or dealer in securities or foreign currency,
- a person that has a functional currency other than the U.S.
dollar,
- a person who acquires our shares in connection with his
employment or other performance of services,
- a person subject to alternative minimum tax,
- a person who owns our shares as part of a straddle, hedging
transaction, or conversion transaction, or
- except as specifically described in the following summary, a
tax-exempt entity or a foreign person.
The sections of the Internal Revenue Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are complex. The
following summary is thus qualified by applicable Internal Revenue Code
provisions, related rules and regulations and administrative and judicial
interpretations, all of which are subject to change, possibly with retroactive
effect. Thus, future legislative, judicial, or administrative actions or
decisions could affect the accuracy of statements made in this summary. No
ruling has been sought from the Internal Revenue Service with respect to any
matter described in this summary, and there can be no assurance that the IRS or
a court will agree with the statements made in this summary. In addition, the
following summary is not exhaustive of all possible tax considerations, and does
not discuss any state, local, or foreign tax considerations. For all these
reasons, we urge you to consult with your tax advisor about the federal income
tax and other tax consequences of the acquisition, ownership and disposition of
our shares.
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For purposes of this summary, you are a "U.S. shareholder" if you are a
beneficial owner of our shares and for federal income tax purposes are:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity treated as a
corporation or partnership for federal income tax purposes,
that is created or organized in or under the laws of the
United States, any state thereof or the District of Columbia,
unless otherwise provided by Treasury regulations,
(3) an estate the income of which is subject to federal income
taxation regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust, or electing
trusts in existence on August 20, 1996 to the extent provided
in Treasury regulations.
Conversely, you are a "non-U.S. shareholder" if you are a beneficial owner of
our shares and are not a U.S. shareholder.
Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code, commencing with our taxable year ending December 31,
1987. Our REIT election, assuming continuing compliance with the federal income
tax qualification tests summarized below, continues in effect for subsequent
taxable years. Although no assurance can be given, we believe that we are
organized, have operated, and will continue to operate in a manner that
qualifies us to be taxed under the Internal Revenue Code as a REIT.
As a REIT, we generally will not be subject to federal income tax on
our net income distributed as dividends to our shareholders. Distributions to
our shareholders generally will be includable in their income as dividends to
the extent the distributions do not exceed our current or accumulated earnings
and profits. A portion of these dividends may be treated as capital gain
dividends, as explained below. No portion of these dividends will be eligible
for the dividends received deduction for corporate shareholders. Distributions
in excess of our current or accumulated earnings and profits generally will be
treated for federal income tax purposes as a return of capital to the extent of
a shareholder's basis in its shares, and will reduce this basis. Our current or
accumulated earnings and profits will generally be allocated first to
distributions on our outstanding preferred shares, if any, and thereafter to
distributions on our common shares. For tax purposes, our distributions per
common share paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997 and 1998 aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29,
$1.32, $1.37, $1.41, $1.45 and $1.51 respectively, of which $.289, $.065, $.332,
$.267, $.104, $.218, $.335, $.081, $.161, $.350, $.252 and $.096 respectively,
represented a return of capital. The federal income taxation of our
distributions to you is discussed in more detail in the following sections of
this summary.
Our counsel, Sullivan & Worcester LLP, has opined that we have been
organized and have qualified as a REIT under the Internal Revenue Code for our
1987 through 1998 taxable years, and that our current investments and plan of
operation will enable us to continue to meet the requirements for qualification
and taxation as a REIT under the Internal Revenue Code. These opinions are
conditioned upon the assumption that our leases, our declaration of trust and
by-laws, and all other legal documents to which we are or have been a party have
been and will be complied with by all parties to these documents, upon the
accuracy and completeness of the factual matters described in this Annual
Report, and upon representations made by us. The opinion of Sullivan & Worcester
LLP is based on the law as it exists today, but the law may change in the
future, possibly with retroactive effect. Also, an opinion of counsel is not
binding on the Internal Revenue Service or the courts, and the IRS or a court
could take a position different from that expressed by counsel.
Our qualification and taxation as a REIT will depend upon our ability
to meet the various REIT qualification tests imposed under the Internal Revenue
Code and summarized below. While we believe that we have operated and will
continue to operate in a manner to satisfy the various REIT qualification tests,
Sullivan & Worcester LLP has not reviewed and will not review our compliance
with these tests on a continuing basis. If we fail to qualify as a REIT in any
year, we will be subject to federal income taxation as if we were a domestic
corporation, and our shareholders will be taxed like shareholders of ordinary
corporations. In this event, we could be subject to significant tax liabilities,
and the amount of cash available for distribution to our shareholders may be
reduced or eliminated.
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If we qualify for taxation as a REIT and distribute to our shareholders
at least 95% of our "real estate investment trust taxable income," computed by
excluding any net capital gain and before taking into account any dividends paid
deduction for which we are eligible, we generally will not be subject to federal
corporate income taxes on the amount distributed. However, even if we qualify
for federal income taxation as a REIT, we may be subject to federal tax in the
following circumstances:
- We will be taxed at regular corporate rates on any
undistributed "real estate investment trust taxable income,"
including our undistributed net capital gains.
- If our alternative minimum taxable income exceeds our taxable
income, we may be subject to the corporate alternative minimum
tax on items of tax preference.
- If we have (1) net income from the sale or other disposition
of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (2) other
nonqualifying income from foreclosure property, we will be
subject to tax on this income at the highest regular corporate
rate, which is currently 35%.
- If we have net income from prohibited transactions, including
sales or other dispositions of inventory or property held
primarily for sale to customers in the ordinary course of
business other than foreclosure property, this income will be
subject to tax at a 100% rate.
- If we fail to satisfy the 75% gross income test or the 95%
gross income test discussed below, but nonetheless maintain
our qualification as a REIT, we will be subject to tax at a
100% rate on the greater of the amount by which we fail the
75% or the 95% test, multiplied by a fraction intended to
reflect our profitability.
- If we fail to distribute for any calendar year at least the
sum of (1) 85% of our REIT ordinary income for that year, (2)
95% of our REIT capital gain net income for that year, and (3)
any undistributed taxable income from prior periods, we will
be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed.
- If we acquire an asset from a corporation in a transaction in
which our basis in the asset is determined by reference to the
basis of the asset in the hands of a present or former C
corporation, and if we subsequently recognize gain on the
disposition of this asset during the ten-year period beginning
on the date on which the asset ceased to be owned by the C
corporation, then we will pay tax at the highest regular
corporate tax rate, which is currently 35%, on the lesser of
(1) the excess of the fair market value of the asset over the
C corporation's basis in the asset on the date the asset
ceased to be owned by the C corporation or (2) the gain we
recognize in the disposition.
If we invest in properties in foreign countries, our profits from these
investments will generally be subject to tax in the countries where those
properties are located. The nature and amount of this taxation will depend on
the laws of the countries where the properties are located. If we operate as we
currently intend, then our taxable income will be distributed to our
shareholders and we will not pay federal corporate income tax, and thus we
generally cannot recover the cost of foreign taxes imposed on our foreign
investments by claiming foreign tax credits against our federal income tax
liability. We will also not be able to pass through to our shareholders any
foreign tax credits.
If we fail to qualify for federal income taxation as a REIT in any
taxable year, then we will be subject to federal taxes in the same manner as an
ordinary corporation. Distributions to our shareholders in any year in which we
fail to qualify as a REIT will not be deductible by us, nor will these
distributions be required to be made. In that event, to the extent of our
current and accumulated earnings and profits, all distributions to our
shareholders will be taxable as ordinary dividend income, and subject to
limitations in the Internal Revenue Code will be eligible for the dividends
received deduction for corporations. We would also generally be disqualified
from federal income taxation as a REIT for the four taxable years following
disqualification. Failure to qualify for federal income taxation as a REIT for
even one year could result in our incurring substantial indebtedness or
liquidating substantial investments in order to pay the resulting
corporate-level taxes.
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REIT Qualification Requirements
General Requirements. Section 856(a) of the Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the
Internal Revenue Code, as an ordinary domestic corporation;
(4) that is neither a financial institution nor an insurance
company subject to special provisions of the Internal Revenue
Code;
(5) the beneficial ownership of which is held by 100 or more
persons;
(6) that is not "closely held" as defined under the personal
holding company stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and
distributions, all as described below.
Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Section 856(h)(2)
of the Internal Revenue Code provides that conditions (5) and (6) need not be
met for our first taxable year as a REIT. We believe that we have satisfied
conditions (1) to (6), inclusive, during the requisite periods for each of our
taxable years ending on or before December 31, 1998, and that we will continue
to satisfy those conditions.
There can, however, be no assurance in this regard.
By reason of condition (6) above, we will fail to qualify as a REIT for
a taxable year if at any time during the last half of the year more than 50% in
value of our outstanding shares is owned directly or indirectly by five or fewer
individuals. To help comply with condition (6), our declaration of trust
contains provisions restricting transfers of our shares and giving the trustees
the power to redeem our shares. In addition, commencing with our 1998 taxable
year, if we comply with applicable Treasury regulations for ascertaining the
ownership of our outstanding shares and do not know, or exercising reasonable
diligence would not have known, whether we failed condition (6), then we will be
treated as satisfying condition (6). Also, our failure to comply with these
applicable Treasury regulations for ascertaining ownership of our outstanding
shares may result in a penalty to us of $25,000, or $50,000 for intentional
violations. Accordingly, we intend to comply with these applicable Treasury
regulations, and request annually from record holders of significant percentages
of our shares information regarding the ownership of our shares. Under our
declaration of trust, our shareholders are required to respond to these requests
for information.
The rule that an entity will fail to qualify as a REIT for a taxable
year if at any time during the last half of the year more than 50% in value of
its outstanding shares is owned directly or indirectly by five or fewer
individuals is relaxed in the case of pension trusts owning shares in a REIT.
Shares in a REIT held by a pension trust are treated as held directly by the
pension trust's beneficiaries in proportion to their actuarial interests in the
pension trust. Consequently, five or fewer pension trusts could own more than
50% of the interests in an entity without jeopardizing that entity's federal
income tax qualification as a REIT. However, as discussed below, if the REIT is
a "pension-held REIT," each pension trust owning more than 10% of the REIT's
shares by value generally will be taxed on a portion of the dividends received
from the REIT, based on the ratio of (1) the REIT's gross income for the year
that would be unrelated trade or business income if the REIT were a qualified
pension trust to (2) the REIT's total gross income for the year.
Our Wholly-Owned Subsidiaries. Section 856(i) of the Internal Revenue
Code provides that any corporation 100% of whose stock is held by the REIT is a
qualified REIT subsidiary and shall not be treated as a separate corporation.
The assets, liabilities and items of income, deduction, and credit of a
qualified REIT subsidiary are treated as the REIT's. We believe that each of our
direct and indirect wholly-owned subsidiaries is either a qualified REIT
subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or
a noncorporate entity that for federal income tax purposes is not treated as
separate from its owner pursuant to
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regulations under Section 7701 of the Internal Revenue Code. Thus, in applying
all the federal income tax REIT qualification requirements described in this
summary, our direct and indirect wholly-owned subsidiaries are ignored, and all
assets, liabilities and items of income, deduction and credit of our direct and
indirect wholly-owned subsidiaries are treated as ours.
Our Investments through Partnerships. We have invested, and in the
future may invest, in real estate through one or more limited partnerships or
limited liability companies that are treated as partnerships for federal income
tax purposes. In the case of a REIT that is a partner in a partnership,
regulations under the Internal Revenue Code provide that, for purposes of the
REIT qualification requirements regarding income and assets discussed below, the
REIT is deemed to own its proportionate share of the assets of the partnership
corresponding to the REIT's proportionate capital interest in the partnership
and is deemed to be entitled to the income of the partnership attributable to
this proportionate share. In addition, for these purposes, the character of the
assets and gross income of the partnership generally retain the same character
in the hands of the REIT. Accordingly, our proportionate share of the assets,
liabilities, and items of income of each partnership in which we are a partner
are treated as ours for purposes of the income tests and asset tests discussed
below. In contrast, for purposes of the distribution requirement discussed
below, we must take into account as a partner our distributive share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
Income Tests. There have been three gross income requirements for
qualification as a REIT under the Internal Revenue Code, but only the first two
still apply in our current taxable years:
- First, at least 75% of our gross income, excluding gross
income from sales or other dispositions of property held
primarily for sale, must be derived from investments relating
to real property, including "rents from real property" as
defined under Section 856 of the Internal Revenue Code,
mortgages on real property, or shares in other REITs. When we
receive new capital in exchange for our shares or in a public
offering of five-year or longer debt instruments, income
attributable to the temporary investment of this new capital
in stock or a debt instrument, if received or accrued within
one year of our receipt of the new capital, is generally also
qualifying income under the 75% test.
- Second, at least 95% of our gross income, excluding gross
income from sales or other dispositions of property held
primarily for sale, must be derived from a combination of (1)
items of real property income that satisfy the 75% test
described above, (2) dividends, (3) interest, (4) payments
under interest rate swap or cap agreements, options, futures
contracts, forward rate agreements, or similar financial
instruments, and (5) gain from the sale or disposition of
stock, securities, or real property.
- Third, for our 1997 and prior taxable years, less than 30% of
our gross income must have been derived from (1) short-term
gain from the sale or other disposition of stock or
securities, including stock in other REITs or dispositions of
interest rate swap or cap agreements, and (2) gain from
prohibited transactions or other dispositions of real property
held for less than four years, other than involuntary
conversions and sales of foreclosure property.
For purposes of these three requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although we will use
our best efforts to ensure that the income generated by our investments will be
of a type which satisfies both the 75% and 95% gross income tests, there can be
no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of
the Internal Revenue Code, several requirements must be met:
- First, the amount of rent received generally must not be
determined from the income or profits of any person, but may
be based on receipts or sales.
- Second, rents do not qualify if the REIT owns 10% or more of
the tenant, whether directly or after application of
attribution rules. While we intend not to lease property to
any party if rents from that property would not qualify as
rents from real property, application of the 10% ownership
rule is dependent upon complex attribution rules and
circumstances that may be beyond our control. For example,
ownership directly or by attribution by an unaffiliated third
party of more than 10% of our shares and more than 10% of the
stock of one of our lessees would result in this lessee's
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rents not qualifying as rents from real property. Our
declaration of trust provides that transfers or purported
acquisitions, directly or by attribution, of shares that could
result in our disqualification as a REIT under the Internal
Revenue Code are null and void and permits the trustees to
repurchase shares to the extent necessary to maintain our
status as a REIT under the Internal Revenue Code.
Nevertheless, there can be no assurance that these provisions
in our declaration of trust will be effective to prevent our
REIT status under the Internal Revenue Code from being
jeopardized under the 10% lessee affiliate rule. Furthermore,
there can be no assurance that we will be able to monitor and
enforce these restrictions, nor will our shareholders
necessarily be aware of ownership of shares attributed to them
under the Internal Revenue Code's attribution rules.
- Third, in order for rents to qualify, we generally must not
manage the property or furnish or render services to the
tenants of the property, except through an independent
contractor from whom we derive no income. There is an
exception to this rule permitting a REIT to perform customary
tenant services of the sort which a tax-exempt organization
could perform without being considered in receipt of
"unrelated business taxable income" as defined in Section
512(b)(3) of the Internal Revenue Code. In addition, for our
1998 and later taxable years, a de minimis amount of
noncustomary services will not disqualify income as "rents
from real property" so long as the value of the impermissible
services does not exceed 1% of the gross income of the
property.
- Fourth, if rent attributable to personal property leased in
connection with a lease of real property is 15% or less of the
total rent received under the lease, then the rent
attributable to personal property will qualify as rents from
real property; but if this 15% threshold is exceeded, the rent
attributable to personal property will not so qualify. The
portion of rental income treated as attributable to personal
property is determined according to the ratio of the tax basis
of the personal property to the total tax basis of the real
and personal property which is rented.
Substantially all of our gross income has been and is expected to continue to be
attributable to rental income. We believe that all or substantially all our
rents have qualified and will continue to qualify as rents from real property
for purposes of Section 856 of the Internal Revenue Code, but if for some reason
a significant amount of our rents do not so qualify, we may fail the 95% or 75%
gross income tests.
In order to qualify as mortgage interest on real property for purposes
of the 75% test, interest must derive from a mortgage loan secured by real
property with a fair market value at least equal to the amount of the loan. If
the amount of the loan exceeds the fair market value of the real property, the
interest will be treated as interest on a mortgage loan in a ratio equal to the
ratio of the fair market value of the real property to the total amount of the
mortgage loan.
Any gain we realize on the sale of property held as inventory or other
property held primarily for sale to customers in the ordinary course of business
will be treated as income from a prohibited transaction that is subject to a
penalty tax at a 100% rate. This prohibited transaction income also may have an
adverse effect upon our ability to satisfy the 75% and 95% gross income tests
for federal income tax qualification as a REIT. We cannot provide assurances as
to whether or not the IRS might successfully assert that one or more of our
dispositions is subject to the 100% penalty tax. However, we believe that any
occasional disposition of real estate that we might make will not be subject to
the 100% penalty tax, because we intend to: (1) own our real estate assets for
investment with a view to long-term income production and capital appreciation,
(2) engage in the business of developing, owning and operating our existing real
estate assets and acquiring, developing, owning and operating other real estate
assets, and (3) make occasional dispositions of real estate assets consistent
with our long-term investment objectives.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for that year if:
(1) our failure to meet the test was due to reasonable cause and not due to
willful neglect, (2) we report the nature and amount of each item of our income
included in the 75% or 95% gross income tests for that taxable year on a
schedule attached to our tax return, and (3) any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is impossible to
state whether in all circumstances we would be entitled to the benefit of this
relief provision for the 75% and 95% gross income tests. Even if this relief
provision did apply to us, a special tax equal to 100% is imposed upon the
greater of the amount by which we failed the 75% test or the 95% test,
multiplied by a fraction intended to reflect our profitability. No similar
relief provision is available if we failed the 30% gross income test for any
taxable year in which that test was applicable.
Asset Tests. At the close of each quarter of each taxable year, we must
also satisfy three percentage tests relating to the nature of our assets:
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- First, at least 75% of the value of our total assets must
consist of (1) real estate assets, (2) cash and cash items,
(3) shares in other REITs, (4) government securities, and (5)
stock or debt instruments purchased with proceeds of a stock
offering or an offering of our debt with a term of at least
five years, but only for the one-year period commencing with
our receipt of the offering proceeds.
- Second, not more than 25% of our total assets may be
represented by securities other than those securities that
count favorably toward the preceding 75% asset test.
- Third, of the investments included in the preceding 25% asset
class, the value of any one issuer's securities that we own
may not exceed 5% of the value of our total assets, and we may
not own more than 10% of any one issuer's outstanding voting
securities.
When a failure to satisfy the above asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. We have maintained and intend to continue to maintain records of
the value of our assets to document our compliance with the above three asset
tests, and to take actions as may be required to cure any failure to satisfy the
tests within 30 days after the close of any quarter.
Annual Distribution Requirements. In order to qualify for taxation as a
REIT under the Internal Revenue Code, we are required to make annual
distributions other than capital gain dividends to our shareholders in an amount
at least equal to the excess of:
(A) the sum of (1) 95% of our "real estate investment trust
taxable income," as defined in Section 857 of the Internal
Revenue Code, but computed without regard to the dividends
paid deduction and net capital gain, and (2) 95% of our net
income after tax, if any, from property received in
foreclosure, over
(B) the sum of our qualifying noncash income, e.g., imputed rental
income or income from transactions inadvertently failing to
qualify as like-kind exchanges.
These distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for
the earlier taxable year and if paid on or before the first regular distribution
payment after that declaration. Dividends declared in October, November, or
December and paid during the following January will be treated as having been
both paid and received on December 31 of the prior taxable year. A distribution
which is not pro rata within a class of our beneficial interests entitled to a
distribution, or which is not consistent with the rights to distributions
between our classes of beneficial interests, is a preferential distribution that
is not taken into consideration for purposes of the distribution requirement,
and accordingly the payment of a preferential distribution could affect our
ability to meet the distribution requirement. Taking into account our
distribution policies, including our dividend reinvestment plan, we believe that
we have not made and expect that we will not make any preferential
distributions. The distribution requirements may be waived by the IRS if a REIT
establishes that it failed to meet them by reason of distributions previously
made to meet the requirements of the 4% excise tax discussed below. To the
extent that we do not distribute all of our net capital gain and all of our real
estate investment trust taxable income, as adjusted, we will be subject to tax
on undistributed amounts.
In addition, we will be subject to a 4% excise tax to the extent we
fail within a calendar year to make required distributions to our shareholders
of 85% of our ordinary income and 95% of our capital gain net income plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the amount treated as distributed for that preceding calendar
year. For this purpose, the term "grossed up required distribution" for any
calendar year is the sum of our taxable income for the calendar year without
regard to the deduction for dividends paid and all amounts from earlier years
that are not treated as having been distributed under the provision.
If we do not have enough cash or other liquid assets to meet the 95%
distribution requirements, we may find it necessary to arrange for new debt or
equity financing to provide funds for required distributions, or else our REIT
status for federal income tax purposes could be jeopardized. We can provide no
assurance that financing would be available for these purposes on favorable
terms.
If we fail to distribute sufficient dividends for any year, we may be
able to rectify this failure by paying "deficiency dividends" to shareholders in
a later year. These deficiency dividends may be included in our deduction for
dividends paid for the earlier year, but an interest charge would be imposed
upon us for the delay in distribution.
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Although we may be able to avoid being taxed on amounts distributed as
deficiency dividends, we will remain liable for the 4% excise tax discussed
above.
Depreciation and Federal Income Tax Treatment of Leases
For federal income tax purposes, including for purposes of computing
our earnings and profits, we have generally elected to depreciate our real
property on a straight-line basis over 40 years and our personal property over
12 years. We will be entitled to depreciation deductions from our facilities
only if we are treated for federal income tax purposes as the owner of the
facilities. This means that the leases of the facilities must be classified for
federal income tax purposes as true leases, rather than as sales or financing
arrangements. As to approximately 0.7% of our leased facilities which constitute
personal property, it is not entirely clear that we will be treated as the owner
of this personal property.
In the case of sale-leaseback arrangements, the IRS could assert that
we realized prepaid rental income in the year of purchase to the extent that the
value of a leased property exceeds our purchase price for that property. Because
of the lack of clear precedent, we cannot provide assurances as to whether or
not the IRS might successfully assert the existence of prepaid rental income in
our sale-leaseback transactions.
Additionally, Section 467 of the Internal Revenue Code, which concerns
leases with increasing rents, may apply to those of our leases which provide for
rents that increase from one period to the next. Section 467 of the Internal
Revenue Code provides that in the case of a so-called "disqualified leaseback
agreement," rental income must be accrued at a constant rate. Where constant
rent accrual is required, we could recognize rental income from a lease in
excess of cash rents and, as a result, encounter difficulty in meeting the 95%
distribution requirement. "Disqualified leaseback agreements" include leaseback
transactions where a principal purpose for providing increasing rent under the
agreement is the avoidance of federal income tax. Because Section 467 of the
Internal Revenue Code directs the Treasury to issue regulations providing that
rents will not be treated as increasing for tax avoidance purposes where the
increases are based upon a fixed percentage of lessee receipts, and because
regulations proposed to be effective for "disqualified leaseback agreements"
entered into after June 3, 1996 adopt this rule, the additional rent provisions
in our leases that are based on a fixed percentage of lessee receipts generally
should not cause the leases to be "disqualified leaseback agreements." In
addition, the legislative history of Section 467 of the Internal Revenue Code
indicates that the Treasury should issue regulations under which leases
providing for fluctuations in rents by no more than a reasonable percentage from
the average rent payable over the term of the lease will be deemed not motivated
by tax avoidance, and the proposed regulations permit a 10% fluctuation.
Taxation of U.S. Shareholders
As long as we qualify as a REIT for federal income tax purposes, a
distribution by us to our U.S. shareholders that we do not designate as a
capital gain dividend will be treated as an ordinary income dividend to the
extent that it is made out of our current or accumulated earnings and profits.
Distributions made out of our current or accumulated earnings and profits that
we properly designate as capital gain dividends will be taxed as long-term
capital gains, as discussed below, to the extent they do not exceed our actual
net capital gain for the taxable year. However, corporate U.S. shareholders may
be required to treat up to 20% of any capital gain dividend as ordinary income
under Section 291 of the Tax Code. In addition, we may elect to retain net
capital gain income and treat it as constructively distributed. In that case,
(1) we will be taxed at regular corporate capital gains tax rates
on retained amounts,
(2) each U.S. shareholder will be taxed on its designated
proportionate share of our retained net capital gains as
though that amount were distributed and designated a capital
gain dividend,
(3) each U.S. shareholder will receive a credit for its designated
proportionate share of the tax that we pay,
(4) each U.S. shareholder will increase its adjusted basis in our
shares by the excess of the amount of its proportionate share
of these retained net capital gains over its proportionate
share of this tax that we pay, and
(5) both we and our corporate U.S. shareholders will make
commensurate adjustments in our respective earnings and
profits for federal income tax purposes.
If we elect to retain our net capital gain in this fashion, we will notify U.S.
shareholders of the relevant tax information within 60 days after the close of
the affected taxable year. Because we are a REIT, neither our ordinary
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income dividends nor our capital gain dividends will qualify for any dividends
received deduction for our corporate U.S. shareholders.
For noncorporate U.S. shareholders, long-term capital gains are
generally taxed at maximum rates of 20% or 25%, depending upon the type of
property disposed of and the previously claimed depreciation with respect to
this property at the time of disposition. If for any taxable year we designate
as capital gain dividends any portion of the dividends paid or made available
for the year to our shareholders, including our retained capital gains treated
as capital gain dividends, then the portion of the capital gain dividends so
designated that will be allocated to the holders of a particular class of our
shares will on a percentage basis equal the ratio of (1) the amount of the total
dividends paid or made available for the year to the holders of that class of
shares, to (2) the total dividends paid or made available for the year to
holders of all classes of our shares. We will similarly designate the portion of
any capital gain dividend that is to be taxed to noncorporate U.S. shareholders
at the maximum rates of 20% or 25% so that the designations will be proportional
among all classes of our shares.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that they do not exceed
the U.S. shareholder's adjusted basis in our shares, but will reduce the U.S.
shareholder's basis in our shares. To the extent that these excess distributions
exceed the adjusted basis of a U.S. shareholder's shares, they will be included
in income as capital gain, with long-term gain generally taxed to noncorporate
U.S. shareholders at a maximum rate of 20%. No U.S. shareholder may include on
his federal income tax return any of our net operating losses or any of our
capital losses.
Dividends that we declare in October, November or December of a taxable
year to shareholders of record on a date in those months will be deemed to have
been received by shareholders on December 31 of that taxable year, provided we
actually pay these dividends during the following January. Also, items that are
treated differently for regular and alternative minimum tax purposes are to be
allocated between a REIT and its shareholders under Treasury regulations which
are to be prescribed. It is possible that these Treasury regulations would
require tax preference items to be allocated to our shareholders with respect to
any accelerated depreciation or other tax preference items that we claim.
The sale or exchange of our shares will result in recognition of gain
or loss to a U.S. shareholder in an amount equal to the difference between the
amount realized and the U.S. shareholder's adjusted basis in the shares sold or
exchanged. This gain or loss will be capital gain or loss, and will be long-term
capital gain or loss if the U.S. shareholder's holding period in the shares
exceeds one year. Long-term capital gains will generally be taxed to
noncorporate U.S. shareholders at a maximum rate of 20%. In addition, any loss
upon a sale or exchange of our shares by a U.S. shareholder who has held our
shares for six months or less will generally be treated as a long-term capital
loss to the extent of our distributions required to be treated by the U.S.
shareholder as long-term capital gain. The relevant six-month holding period is
determined after applying the holding period rules under Section 857 of the
Internal Revenue Code.
U.S. shareholders other than corporations who borrow funds to finance
their acquisition of our shares could be limited in the amount of deductions
allowed for the interest paid on the indebtedness incurred. Under Section 163(d)
of the Internal Revenue Code, interest paid or accrued on indebtedness incurred
or continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A U.S.
shareholder's net investment income will include ordinary income dividend
distributions and, if an appropriate election is made by the U.S. shareholder,
capital gain dividend distributions received from us; however, distributions
treated as a nontaxable return of the U.S. shareholder's basis will not enter
into the computation of net investment income. Under Section 469 of the Internal
Revenue Code, U.S. shareholders, except for corporations that are other than
closely held C corporations or personal service corporations, generally will not
be entitled to deduct losses from so-called passive activities except to the
extent of their income from passive activities. For purposes of these rules,
distributions received by a U.S. shareholder from us will not be treated as
income from a passive activity and thus will not be available to offset a U.S.
shareholder's passive activity losses.
Taxation of Tax-Exempt U.S. Shareholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
REIT to a tax-exempt employees' pension trust did not constitute "unrelated
business taxable income," even though the REIT may have financed some its
activities with acquisition indebtedness. Although revenue rulings are
interpretive in nature and subject to revocation or modification by the IRS,
based upon the analysis and conclusion of Revenue Ruling 66-106, our
distributions made to U.S. shareholders that are tax-exempt pension plans,
individual retirement accounts, or other qualifying tax-exempt entities should
not constitute unrelated business taxable income, unless the U.S. shareholder
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has financed its acquisition of our shares with "acquisition indebtedness"
within the meaning of the Internal Revenue Code, or our shares are otherwise
used in an unrelated trade or business conducted by the U.S.
shareholder.
Special rules apply to tax-exempt pension trusts, including so-called
401(k) plans but excluding individual retirement accounts or government pension
plans, that own more than 10% by value of a "pension-held REIT" at any time
during a taxable year. The pension trust may be required to treat a percentage
of all dividends received from the pension-held REIT during the year as
unrelated business taxable income. This percentage is equal to the ratio of
(1) the pension-held REIT's gross income derived from the conduct
of unrelated trades or businesses, determined as if the
pension-held REIT were a tax-exempt pension fund, less direct
expenses related to that income, to
(2) the pension-held REIT's gross income from all sources, less
direct expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if (a) the REIT is
"predominantly held" by tax-exempt pension trusts, and (b) the REIT would
otherwise fail to satisfy the "closely held" ownership requirement discussed
above if the stock or beneficial interests in the REIT held by tax-exempt
pension trusts were viewed as held by tax-exempt pension trusts rather than by
their respective beneficiaries. A REIT is predominantly held by tax-exempt
pension trusts if at least one tax-exempt pension trust owns more than 25% by
value of the REIT's stock or beneficial interests, or if one or more tax-exempt
pension trusts, each owning more than 10% by value of the REIT's stock or
beneficial interests, own in the aggregate more than 50% by value of the REIT's
stock or beneficial interests. Because of the restrictions in our declaration of
trust regarding the ownership concentration of our shares, we believe that we
are not and will not be a pension-held REIT. However, because our shares are
publicly traded, we cannot completely control whether or not we are or will
become a pension-held REIT.
Taxation of Non-U.S. Shareholders
The rules governing the federal income taxation of non-U.S.
shareholders are complex, and the following discussion is intended only as a
summary of these rules. If you are a non-U.S. shareholder, you should consult
with your own tax advisor to determine the impact of federal, state, local, and
foreign tax laws, including any tax return filing and other reporting
requirements, with respect to your investment in our shares.
In general, a non-U.S. shareholder will be subject to regular federal
income tax in the same manner as our U.S. shareholders with respect to its
investment in our shares if that investment is effectively connected with the
non-U.S. shareholder's conduct of a trade or business in the United States. In
addition, a corporate non-U.S. shareholder that receives income that is or is
deemed effectively connected with a trade or business in the United States may
also be subject to the 30% branch profits tax under Section 884 of the Tax Code,
which is payable in addition to regular federal corporate income tax. The
balance of this discussion on the federal income taxation of non-U.S.
shareholders addresses only those non-U.S. shareholders whose investment in our
shares is not effectively connected with the conduct of a trade or business in
the United States.
A distribution by us to a non-U.S. shareholder that is not attributable
to gain from the sale or exchange by us of a United States real property
interest and that is not designated by us as a capital gain dividend will be
treated as an ordinary income dividend to the extent that it is made out of
current or accumulated earnings and profits. A distribution of this type will
generally be subject to federal income tax and withholding at the rate of 30%,
or the lower rate that may be specified by a tax treaty if the non-U.S.
shareholder has in the manner prescribed by the IRS demonstrated its entitlement
to benefits under a tax treaty. Because we cannot determine our current and
accumulated earnings and profits until the end of our taxable year, withholding
at the rate of 30% or applicable lower treaty rate will be imposed on the gross
amount of any distribution to a non-U.S. shareholder that we make and do not
designate a capital gain dividend. Notwithstanding this withholding on
distributions in excess of our current and accumulated earnings and profits,
these distributions are a nontaxable return of capital to the extent that they
do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the
nontaxable return of capital will reduce the adjusted basis in these shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed the non-U.S. shareholder's adjusted basis in our shares, the
distributions will give rise to tax liability if the non-U.S. shareholder would
otherwise be subject to tax on any gain from the sale or exchange of our shares,
as discussed below. A non-U.S. shareholder may seek a refund of amounts withheld
on distributions to him in excess of our current and accumulated earnings and
profits, provided that the required information is furnished to the IRS.
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<PAGE>
For any year in which we qualify as a REIT, our distributions that are
attributable to gain from the sale or exchange of a United States real property
interest are taxed to a non-U.S. shareholder as if these distributions were
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will
be taxed on these amounts at the normal capital gain rates applicable to a U.S.
shareholder, subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals; the
non-U.S. shareholder would be required to file a United States federal income
tax return reporting these amounts, even if applicable withholding were imposed
as described below; and corporate non-U.S. shareholders may owe the 30% branch
profits tax under Section 884 of the Tax Code in respect of these amounts. We
will be required to withhold from distributions to non-U.S. shareholders, and
remit to the IRS, 35% of the maximum amount of any distribution that could be
designated by us as a capital gain dividend. In addition, for purposes of this
withholding rule, if we designate prior distributions as capital gain dividends,
then subsequent distributions up to the amount of the designated prior
distributions will be treated as capital gain dividends. The amount of any tax
withheld is creditable against the non-U.S. shareholder's federal income tax
liability, and any amount of tax withheld in excess of that tax liability may be
refunded provided that an appropriate claim for refund is filed with the IRS. If
for any taxable year we designate as capital gain dividends any portion of the
dividends paid or made available for the year to our shareholders, including our
retained capital gains treated as capital gain dividends, then the portion of
the capital gain dividends so designated that will be allocated to the holders
of a particular class of our shares will on a percentage basis equal the ratio
of (1) the amount of the total dividends paid or made available for the year to
the holders of that class of shares, to (2) the total dividends paid or made
available for the year to holders of all classes of our shares.
Tax treaties may reduce the withholding obligations on our
distributions. Under some treaties, however, rates below 30% generally
applicable to ordinary income dividends from United States corporations may not
apply to ordinary income dividends from a REIT. If the amount of tax withheld by
us with respect to a distribution to a non-U.S. shareholder exceeds the
shareholder's federal income tax liability with respect to the distribution, the
non-U.S. shareholder may file for a refund of the excess from the IRS. In this
regard, note that the 35% withholding tax rate on capital gain dividends
corresponds to the maximum income tax rate applicable to corporate non-U.S.
shareholders but is higher than the 20% and 25% maximum rates on capital gains
generally applicable to noncorporate non-U.S. shareholders. Generally effective
with respect to distributions paid after December 31, 1999, new Treasury
regulations alter the information reporting and backup withholding rules
applicable to non-U.S. shareholders and provide presumptions under which a
non-U.S. shareholder is subject to backup withholding and information reporting
until we receive certification from the shareholder of its non-U.S. shareholder
status. The new Treasury regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty, our
distributions to a non-U.S. shareholder that is an entity should be treated as
paid to the entity or to those owning an interest in that entity, and whether
the entity or its owners are entitled to benefits under the tax treaty.
If our shares are not "United States real property interests" within
the meaning of Section 897 of the Tax Code, a non-U.S. shareholder's gain on
sale of our shares generally will not be subject to federal income taxation,
except that a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year will be subject to a 30% tax on
this gain. Our shares will not constitute a United States real property interest
if we are a "domestically controlled REIT." A domestically controlled REIT is a
REIT in which at all times during the preceding five-year period less than 50%
in value of its shares is held directly or indirectly by foreign persons. We
believe that we are and will be a domestically controlled REIT and thus that a
non-U.S. shareholder's gain on sale of our shares will not be subject to federal
income taxation. However, because our shares are publicly traded, we can provide
no assurance that we will be a domestically controlled REIT. If we are not a
domestically controlled REIT, a non-U.S. shareholder's gain on sale of our
shares will not be subject to federal income taxation as a sale of a United
States real property interest, if (1) our shares are "regularly traded," as
defined by applicable Treasury regulations, on an established securities market
such as the New York Stock Exchange, and (2) the non-U.S. shareholder has at all
times during the preceding five years owned 5% or less by value of that class of
our shares. If the gain on the sale of our shares were subject to federal income
taxation, the non-U.S. shareholder would generally be subject to the same
treatment as a U.S. shareholder with respect to its gain, would be required to
file a United States federal income tax return reporting that gain, and in the
case of corporate non-U.S. shareholders might owe branch profits tax under
Section 884 of the Tax Code. In any event, a purchaser of our shares from a
non-U.S. shareholder will not be required to withhold on the purchase price if
the purchased shares are regularly traded on an established securities market or
if we are a domestically controlled REIT. Otherwise, the purchaser of our shares
may be required to withhold 10% of the purchase price paid to the non-U.S.
shareholder and to remit the withheld amount to the IRS.
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<PAGE>
Backup Withholding and Information Reporting Requirements
We will report to our U.S. shareholders and to the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if any.
Under the backup withholding rules, a U.S. shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless the U.S.
shareholder (1) is a corporation or comes within other exempt categories and
when required demonstrates that fact or (2) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding rules and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. shareholder who does not provide us with his correct taxpayer
identification number may be subject to penalties imposed by the IRS. In
addition, we may be required to withhold a portion of capital gain distributions
to any U.S. shareholder who fails to certify his non-foreign status to us.
We will report to our non-U.S. shareholders and to the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any. These information reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. As discussed
above, withholding rates of 30% and 35% may apply to distributions to non-U.S.
shareholders, and new Treasury regulations will when effective alter the
information reporting and withholding rules applicable to non-U.S. shareholders.
The payment of the proceeds from the disposition of our shares to or
through the United States office of a broker will generally be subject to
information reporting and backup withholding at a rate of 31% unless under
penalties of perjury you certify your status as a non-U.S. shareholder or
otherwise establish an exemption. The payment of the proceeds from the
disposition of our shares to or through a non-United States office of a broker
generally will not be subject to backup withholding and information reporting.
Any amounts required to be withheld from payments to you will be
collected by us or other applicable withholding agents for remittance to the
IRS. Amounts withheld are generally not an additional tax and may be refunded or
credited against your federal income tax liability, provided that you furnish
the required information to the IRS. In addition, the absence or existence of
applicable withholding does not necessarily excuse you from filing applicable
United States federal income tax returns.
Other Tax Considerations
You should recognize that our and our shareholders' present federal
income tax treatment may be modified by legislative, judicial, or administrative
actions at any time, which actions may be retroactive in effect. The rules
dealing with federal income taxation are constantly under review by the
Congress, the IRS and the Treasury Department, and statutory changes as well as
promulgation of new regulations, revisions to existing regulations, and revised
interpretations of established concepts occur frequently. No prediction can be
made as to the likelihood of passage of any new tax legislation or other
provisions either directly or indirectly affecting us or our shareholders.
Revisions in federal income tax laws and interpretations of these laws could
adversely affect the tax consequences of an investment in our shares. We and our
shareholders may also be subject to state or local taxation in various state or
local jurisdictions, including those in which we or our shareholders transact
business or reside. State and local tax treatment may not conform to the federal
income tax consequences discussed above.
We thus urge you to consult your own tax advisor regarding the specific
federal, state, local, foreign and other tax consequences to you of the
acquisition, ownership, and disposition of our shares.
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to Title I of the Employee Retirement Income Security Act of 1974
("ERISA") must consider the following:
- whether their investment in our shares satisfies the
diversification requirements of ERISA;
- whether the investment is prudent in light of possible
limitations on the marketability of our shares;
- whether they have authority to acquire our shares under the
applicable governing instrument and Title I of ERISA; and
16
<PAGE>
- whether the investment is otherwise consistent with their
fiduciary responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, these fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of a
violation. Fiduciaries of any Individual Retirement Account, "Keogh Plan" or
other qualified retirement plan not subject to Title I of ERISA should consider
that an IRA or such a plan may only make investments that are authorized by the
appropriate governing instrument. Fiduciary shareholders should consult their
own legal advisors if they have any concern as to whether the investment is
consistent with the foregoing criteria.
Prohibited Transactions
Fiduciaries of ERISA plans and persons making the investment decision
for an IRA or other non-ERISA plan should also consider the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code in
making their investment decision. Sales and other transactions between an ERISA
plan, an IRA, or certain types of non-ERISA plans such as Keogh plans
("Non-ERISA Plans") and persons related to it are prohibited transactions. The
particular facts concerning the sponsorship, operations and other investments of
an ERISA plan, IRA, or other Non-ERISA Plan may cause a wide range of other
persons to be treated as disqualified persons or parties in interest with
respect to it. A prohibited transaction, in addition to imposing potential
personal liability upon fiduciaries of ERISA Plans, may also result in the
imposition of an excise tax under the Internal Revenue Code or a penalty under
ERISA upon the disqualified person or party in interest with respect to the plan
or IRA. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is maintained or his beneficiary, the IRA
may lose its tax-exempt status and its assets may be deemed to have been
distributed to the individual in a taxable distribution on account of the
prohibited transaction but no excise tax will be imposed. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is a prohibited transaction.
Special Fiduciary and Prohibited Transactions Considerations
The Department of Labor, which has administrative responsibility over
ERISA plans as well as over IRAs and other Non-ERISA Plans, has issued a
regulation defining "plan assets." The regulation generally provides that when
an ERISA or Non-ERISA Plan or IRA acquires a security that is an equity interest
in an entity and that security is neither a "publicly offered security" nor a
security issued by an investment company registered under the Investment Company
Act of 1940, the ERISA plan's or Non-ERISA Plan's or IRA's assets include both
the equity interest and an undivided interest in each of the underlying assets
of the entity, unless it is established either that the entity is an operating
company or that equity participation in the entity by benefit plan investors is
not significant.
Each class of our shares--that is, our common shares and any class of
preferred shares that may be outstanding--must be analyzed separately to
ascertain whether it is a publicly offered security. The regulation defines a
publicly offered security as a security that is "widely held," "freely
transferable" and either part of a class of securities registered under the
Securities Exchange Act of 1934, or sold under an effective registration
statement under the Securities Act of 1933, provided the securities are
registered under the Securities Exchange Act of 1934 within 120 days after the
end of the fiscal year of the issuer during which the offering occurred. Each
class of our shares has been registered under the Securities Exchange Act of
1934.
The regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. Our common shares have been widely held and we expect our
common shares to continue to be widely held. We expect the same to be true of
any class of preferred stock that we issue, but we can give no assurance in that
regard.
The regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The regulation further provides that, where a
security is part of an offering in which the minimum investment is $10,000 or
less, some restrictions on transfer ordinarily will not, alone or in
combination, affect a finding that these securities are freely transferable. The
restrictions on transfer enumerated in the regulation as not affecting that
finding include:
- any restriction on or prohibition against any transfer or
assignment which would result in a termination or
reclassification for federal or state tax purposes, or would
otherwise violate any state or federal law or court order;
17
<PAGE>
- any requirement that advance notice of a transfer or
assignment be given to us and any requirement that either the
transferor or transferee, or both, execute documentation
setting forth representations as to compliance with any
restrictions on transfer which are among those enumerated in
the regulation as not affecting free transferability,
including those described in the preceding clause of this
sentence;
- any administrative procedure which establishes an effective
date, or an event prior to which a transfer or assignment will
not be effective; and
- any limitation or restriction on transfer or assignment which
is not imposed by the issuer or a person acting on behalf of
the issuer.
We believe that the restrictions imposed under the declaration of trust
on the transfer of shares do not result in the failure of our shares to be
"freely transferable." Furthermore, we believe that at present there exist no
other facts or circumstances limiting the transferability of our common or
preferred shares which are not included among those enumerated as not affecting
their free transferability under the regulation, and we do not expect or intend
to impose in the future, or to permit any person to impose on our behalf, any
limitations or restrictions on transfer which would not be among the enumerated
permissible limitations or restrictions.
Assuming that each class of our shares will be "widely held" and that
no other facts and circumstances exist which restrict transferability of our
shares, we have received an opinion of counsel that such shares will not fail to
be "freely transferable" for purposes of the regulation due to the restrictions
on transfer of the shares under our declaration of trust and that under the
regulation the shares are publicly offered securities and our assets will not be
deemed to be "plan assets" of any ERISA plan, IRA or Non-ERISA Plan that invests
in our shares.
If our assets are deemed to be plan assets under ERISA, then
- the prudence standards and other provisions of Part 4 of Title
I of ERISA would be applicable to investments made by us;
- the person or persons having investment discretion over the
assets of ERISA plans which invest in us would be liable under
Part 4 of Title I of ERISA for investments made by us which do
not conform to the ERISA standards, unless the investment
decision was made by an advisor that has registered as an
investment adviser under the Investment Advisers Act of 1940
and other applicable conditions are satisfied, in which case
the registered advisor would potentially have such liability;
- transactions that we might enter into in the ordinary course
of its business and operation might constitute "prohibited
transactions" under ERISA and the Internal Revenue Code.
18
<PAGE>
Item 2. Properties
General. At December 31, 1998, approximately 29% of our total
investments were in senior housing properties, 67% were in office buildings and
4% were in hotels through our equity investment in HPT. We believe that the
physical plant of each of the facilities in which we have invested is suitable
and adequate for our present and any currently proposed uses. At December 31,
1998, we had real estate investments totaling $3.0 billion (at cost) in 256
properties that were leased to or operated by over approximately 700 tenants or
mortgagors, plus an investment of approximately $110.6 million (carrying value)
in approximately 8.8% of the common shares of HPT, which has investments in 170
hotel properties. At December 31, 1998, three properties with an aggregate cost
of $45.1 million were secured by two mortgages aggregating $24.8 million.
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<PAGE>
The following table summarizes some information about our properties as of
December 31, 1998. All dollar figures are in thousands.
<TABLE>
<CAPTION>
REAL ESTATE OWNED:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent/Interest (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Housing Properties:
Arizona 6 801 $42,861 $4,152
California 8 1,344 53,879 7,575
Colorado 8 1,011 34,348 4,747
Connecticut 9 1,527 95,566 11,961
Florida 5 1,527 131,990 10,787
Georgia 4 401 12,308 1,354
Illinois 2 704 98,742 7,933
Iowa 7 375 8,207 986
Kansas 1 59 1,320 164
Maryland 1 351 33,080 4,387
Massachusetts 5 762 82,059 10,044
Missouri 2 215 3,788 591
Nebraska 1 80 1,934 230
New Hampshire 1 108 3,754 437
New Jersey 1 150 13,007 1,444
New York 1 103 10,700 1,070
North Carolina 3 309 6,389 1,087
Ohio 2 400 9,872 1,356
Pennsylvania 1 120 15,598 1,951
South Dakota 3 361 7,589 982
Texas 1 145 12,410 1,302
Vermont 8 808 29,766 3,316
Virginia 3 848 57,666 6,284
Washington 2 303 19,542 2,093
Wisconsin 8 1,145 33,021 5,490
Wyoming 3 243 7,246 849
------------------- ------------------ ------------------- ----------------------
Subtotal 96 14,200 826,642 92,572
------------------- ------------------ ------------------- ----------------------
Office Properties:
Alaska 1 -- 1,000 441
Arizona 3 -- 21,995 2,873
California 18 -- 253,771 33,014
Colorado 2 -- 21,806 2,717
Connecticut 2 -- 14,325 2,394
Delaware 1 -- 44,090 4,160
District of Columbia 5 -- 207,521 28,448
Florida 4 -- 11,588 1,066
Georgia 1 -- 2,978 553
Kansas 1 -- 5,949 1,772
Maryland 7 -- 158,084 21,429
Massachusetts 29 -- 169,476 27,765
Minnesota 3 -- 40,704 4,117
Missouri 1 -- 7,776 940
New Jersey 4 -- 29,947 3,637
New Mexico 2 -- 11,021 1,298
New York 5 -- 174,525 32,994
Ohio 1 -- 15,276 2,151
Oklahoma 1 -- 24,762 3,084
Pennsylvania 16 -- 538,399 80,897
Rhode Island 1 -- 8,010 836
Tennessee 1 -- 22,173 2,965
Texas 17 -- 254,187 40,639
Virginia 4 -- 53,874 7,160
Washington 2 -- 21,388 2,426
West Virginia 1 -- 4,898 874
Wyoming 1 -- 10,317 1,288
------------------- ------------------ ------------------- ----------------------
Subtotal 134 -- 2,129,840 311,938
=================== ================== =================== ======================
Total Real Estate 230 14,200 $2,956,482 $404,510
=================== ================== =================== ======================
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<PAGE>
<CAPTION>
MORTGAGE AND NOTE INVESTMENTS:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent/Interest (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Housing Properties:
California 4 688 $14,643 $1,851
Connecticut -- -- 1,000 109
Florida 1 248 5,000 525
Kansas 2 122 1,208 174
Louisiana 1 118 18,992 2,293
Michigan 2 342 9,181 1,146
Nebraska 9 610 8,770 1,007
North Carolina 2 174 2,803 300
Ohio* 1 100 1,782 223
Texas 4 390 4,844 460
Wisconsin -- -- 883 121
------------------- ------------------ ------------------ ----------------------
Subtotal 26 2,792 69,106 8,209
------------------- ------------------ ------------------ ----------------------
Office Properties:
California* -- -- 122 10
------------------- ------------------ ------------------ ----------------------
Subtotal -- -- 122 10
=================== ================== ================== ======================
Total Mortgages and Notes 26 2,792 $69,228 $8,219
=================== ================== ================== ======================
<FN>
* Amounts represent or include notes receivable related to improvements to real estate owned.
(1) Amounts represent obligations due to us for properties owned during the 12 months ended December 31, 1998 and annualized
obligations due to us for properties acquired during 1998, at December 31, 1998.
</FN>
</TABLE>
Item 3. Legal Proceedings
As previously disclosed, in early 1995 we commenced an action in
Florida state court to collect on a secured indemnity agreement from a former
tenant and mortgagor, together with certain related parties (collectively, the
"Former Tenant"). In May 1995 the Former Tenant filed a counterclaim and
third-party complaint against HRP and others including Messrs. Martin and
Portnoy, HRPT Advisors, Inc. and Sullivan & Worcester LLP, seeking, among other
things, to set aside the indemnity agreement and to recover substantial damages.
After a Massachusetts state court ordered the dispute to arbitration and a
Florida court stayed further proceedings pending arbitration, the Former Tenant
brought a separate action against HRP in the United States District Court for
the District of Massachusetts and realleged many of the same allegations made in
the counterclaims and third-party complaints previously brought by them in
response to HRP's original action, and adding allegations of violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and violations of 18 U.S.C ss. 1962 (RICO). In September
1996, the United States District Court for the District of Massachusetts ordered
the case brought by the Former Tenant dismissed and all disputes between the
Former Tenant and HRP referred to arbitration.
The arbitration is proceeding, and although the amount of damages
claimed by the Former Tenant is material, all claims of the Former Tenant
against HRP were dismissed in January of this year, except a basic claim for
common law fraud, which is scheduled for trial before the arbitrators in October
1999. The arbitrators' ruling, dismissing all but one claim against HRP, both
narrows substantially the scope of claims pending against HRP and diminishes
greatly the risk of the Former Tenant being able to hold HRP liable for (i)
attorneys fees and costs, or (ii) multiple damages, should the Former Tenant
prevail on its sole remaining claim against HRP. We continue to pursue our
indemnity claims in the arbitration.
As we have previously disclosed, certain related cases have also been
filed by creditors or assignees of the Former Tenant. The amounts of damages
claimed by the creditors or assignees of the Former Tenant are material. We will
defend the claims of the creditors or assignees of the Former Tenant in these
related proceedings, currently pending in Massachusetts Superior Court. The
outcome of the arbitration and the related pending claims and proceedings cannot
be predicted.
The Declaration of Trust provides that our Trustees shall be
indemnified in certain circumstances by HRP in connection with claims asserted
against them by reason of their status, subject to various limitations contained
in the Declaration of Trust. Were Messrs. Martin and Portnoy to be held liable
in the proceedings described above, they may have a claim for indemnification
from HRP.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our Shares are traded on the New York Stock Exchange (symbol: HRP). The
following table sets forth for the periods indicated the high and low sale
prices for the Shares as reported in the New York Stock Exchange Composite
Transactions reports.
High Low
1997
First Quarter $20 5/8 $18
Second Quarter 19 17 3/4
Third Quarter 19 1/8 17 5/8
Fourth Quarter 20 5/16 18 9/16
1998
First Quarter 20 15/16 19 5/8
Second Quarter 20 1/4 17 7/8
Third Quarter 18 13/16 15 5/8
Fourth Quarter 17 1/8 14
The closing price of the Shares on the New York Stock Exchange on March
29, 1999 was $13 3/4.
As of March 5, 1999, there were approximately 5,951 holders of record of the
Shares, and we estimate that as of such date there were in excess of 145,000
beneficial owners of the Shares.
Dividends declared with respect to each period for the two most recent
fiscal years and the amount of such dividends and the respective annualized
rates are set forth in the following table.
Dividend Annualized
Per Share Dividend Rate
1997
First Quarter $.36 $1.44
Second Quarter .36 1.44
Third Quarter .37 1.48
Fourth Quarter .37 1.48
1998
First Quarter .38 1.52
Second Quarter .38 1.52
Third Quarter .38 1.52
Fourth Quarter .38 1.52
All dividends declared have been paid. We intend to continue to declare
and pay future dividends on a quarterly basis.
In order to qualify for the beneficial tax treatment accorded to REITs
by Sections 856 through 860 of the Internal Revenue Code, we are required to
make distributions to shareholders which annually will be at least 95% of our
taxable income. All distributions will be made by us at the discretion of the
Trustees and will depend on our earnings, our cash flow available for
distribution, our financial condition and other factors that the Trustees deem
relevant. We have in the past distributed, and intend to continue to distribute,
substantially all of our "real estate investment trust taxable income" to our
shareholders.
As previously reported, in 1997 we entered into an Agreement of Merger
(the "Merger Agreement") with Government Property Investors, Inc. ("GPI")
pursuant to which we agreed to acquire up to 30 office buildings
22
<PAGE>
containing approximately 3.4 million square feet, substantially all of which is
leased to various agencies of the United States government. The Merger Agreement
provided for us to acquire these properties in a series of closings in exchange
for our Shares. As of May 1998, the final closing under the Merger Agreement had
occurred, and we had issued 4,271,428 Shares to GPI and its successors and
assigns; however, the final number of Shares issuable in connection with the
Merger Agreement had not been determined. In February, 1999, we issued an
additional 256,246 Shares to GPI pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
Set forth below is selected financial data for the periods and dates
indicated. This data should be read in conjunction with, and is qualified in its
entirety by reference to, the consolidated financial statements and accompanying
notes included in Item 7 of our Current Report on Form 8-K dated March 5, 1999.
Amounts are in thousands, except per Share information.
<TABLE>
<CAPTION>
Income Statement Data: Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Total revenues $356,554 $208,863 $120,183 $113,322 $86,683
Income before gain (loss) on sale of
properties and extraordinary item 146,656 112,204 77,164 61,760 57,878
Income before extraordinary item 146,656 115,102 77,164 64,236 51,872
Net income 144,516 114,000 73,254 64,236 49,919
Funds from operations - basic (1) 211,715 146,312 99,106 84,638 71,851
Funds from operations - diluted (1) 227,904 162,738 103,253 84,638 71,851
Dividends declared (2) 190,341 144,271 94,299 83,954 76,317
Per basic common share amounts:
Income before gain (loss) on sale of
properties and extraordinary item 1.22 1.22 1.16 1.04 1.10
Income before extraordinary item 1.22 1.25 1.16 1.08 .98
Net income 1.21 1.24 1.11 1.08 .95
Funds from operations - basic (1) 1.77 1.59 1.50 1.43 1.36
Funds from operations - diluted (1) 1.74 1.57 1.49 1.43 1.36
Dividends declared (2) 1.52 1.46 1.42 1.38 1.33
Weighted average shares outstanding 119,867 92,168 66,255 59,227 52,738
<CAPTION>
Balance Sheet Data: At December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Real estate properties, at cost $2,956,482 $1,969,023 $1,005,739 $778,211 $673,083
Real estate mortgages and notes 69,228 104,288 150,205 141,307 133,477
Investment in HPT 110,554 111,134 103,062 99,959 --
Total assets 3,064,057 2,135,963 1,229,522 999,677 840,206
Total indebtedness 1,132,081 787,879 492,175 269,759 216,513
Total shareholders' equity 1,827,793 1,266,260 708,048 685,592 602,039
<FN>
(1) Our Funds From Operations ("FFO") represents net income (computed in accordance with generally accepted accounting principles
("GAAP")), before gain or loss on sale of properties and extraordinary items, depreciation and other non-cash items and
includes HRP's pro rata share of HPT's FFO. Management considers FFO to be a measure of the financial performance of an equity
REIT that provides a relevant basis for comparison among REITs. FFO does not represent cash flow from operating activities (as
determined in accordance with GAAP) and should not be considered as an alternative to net income, as an indicator of our
financial performance or to cash flows as a measure of liquidity.
(2) Amounts represent dividends declared with respect to the periods shown. Distributions in excess of net income generally
constitute a return of capital.
</FN>
</TABLE>
23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 5 of our Current Report
on Form 8-K dated March 5, 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to risks associated with interest rate changes. 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, 1997. Furthermore, we do not foresee any
significant changes in our exposure to fluctuations in interest rates or in how
such exposure is managed in the near future. At December 31, 1998, 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
$143.0 million 8.5% 2013
Secured notes:
$13.1 million 8.00% 2008
$11.7 million 7.66% 2009
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 $3.8 million. The secured
notes are secured by three of our office properties and require principal and
interest payments through maturity.
As of December 31, 1998, we had two series of senior unsecured notes
that were subject to floating interest rates; a $500.0 million bank credit
facility and another series of unsecured senior notes totaling $250.0 million.
Our bank credit facility bears interest at floating rates and matures in 2002.
At December 31, 1998, $400.0 million was available for drawing under our line of
credit and $100.0 million was outstanding. Our line of credit is available to
finance our acquisition commitments. As of December 31, 1998, our acquisition
commitments required approximately $21.7 million (plus closing costs) of cash.
Assuming these commitments were all funded with borrowings under our bank credit
facility, and assuming interest rates increased 1/2 percentage point, our
annualized interest cost would increase by approximately $108,500. Our unsecured
senior notes totaling $250.0 million bear interest at floating rates and mature
in 2007. Assuming interest rates increase 1/2 percentage point, our annualized
interest costs would increase by approximately $1.3 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.
From time to time, we may enter into contracts to hedge our interest
rate risk. As of December 31, 1998, we have not entered into any of these
contracts.
The market prices, if any, of each of our fixed rate obligations as of
December 31, 1998 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 typically will increase. Based
on the balances outstanding at December 31, 1998, a hypothetical immediate one
percentage point change in interest rates would change the fair value of our
fixed rate debt obligations by approximately $36.5 million (based on discounted
cash flow analysis).
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference to the consolidated financial statements of HRPT Properties Trust
included in Item 7 of our Current Report on Form 8-K dated March 5, 1999.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
The information in Part III (Items, 10, 11, 12 and 13) is incorporated by
reference to our definitive Proxy Statement, which will be filed not later than
120 days after the end of our fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index to Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
Page
<S> <C>
1) The following consolidated financial statements of HRPT Properties Trust are
incorporated by reference to our Current Report on Form 8-K dated March 5,
1999. Page references are to such Current Report:
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for each of the three years in the
periods ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the periods ended December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for each of the three years in the
periods ended December 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-8
2) The following schedules are filed herewith:
III - Real Estate and Accumulated Depreciation S-1
IV - Mortgage Loans on Real Estate S-9
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, or are inapplicable, and therefore have
been omitted.
(b) Reports on Form 8-K
During the fourth quarter of 1998, we filed the following Current
Reports on Form 8-K:
(i) Current Report on Form 8-K dated November 12, 1998, relating
to unaudited pro forma consolidated financial statements (Item
7).
(ii) Current Report on Form 8-K dated November 24, 1998, filing as
exhibits: (1) Purchase Agreement dated as of November 24, 1998
by and among the Company and the several underwriters named
therein pertaining to $130,000,000 in aggregate principal
amount of 8 1/2% Monthly Income Senior Notes due 2013, (2)
Form of Supplemental Indenture dated as of November 30, 1998
by and between the Company and State Street Bank and Trust
Company pertaining to $130,000,000 in aggregate principal
amount of 8 1/2% Monthly Income Senior Notes due 2013, (3)
Consent of Sullivan & Worcester LLP, and (4) Opinion of
Sullivan & Worcester LLP relating to tax matters (Item 7).
25
<PAGE>
(iii) Current Report on Form 8-K dated December 23, 1998, relating
to a financing plan for senior housing and healthcare real
estate investments which would include a public offering of
common shares of a subsidiary, and a distribution to
shareholders of common shares of that subsidiary (Item 5).
(c) Exhibits
3.1 Composite copy of Third Amendment and Restatement of
Declaration of Trust of the Company dated July 1, 1994, as
amended to date. (incorporated by reference to the Company's
Current Report on Form 8-K, dated July 1, 1998)
3.2 Articles Supplementary dated November 4, 1994 to Third
Amendment and Restatement of Declaration of Trust dated July
1, 1994 creating the Junior Participating Preferred Shares.
(incorporated by reference to the Company's Current Report on
Form 8-K, dated May 27, 1998)
3.3 Articles Supplementary dated May 13, 1997 to Third Amendment
and Restatement of Declaration of Trust dated July 1, 1994
increasing the Junior Participating Preferred Shares.
(incorporated by reference to the Company's Current Report on
Form 8-K, dated May 27, 1998)
3.4 Articles Supplementary dated May 22, 1998 to Third Amendment
and Restatement of Declaration of Trust dated July 1, 1994
increasing the Junior Participating Preferred Shares.
(incorporated by reference to the Company's Current Report on
Form 8-K dated May 27, 1998)
3.5 By-laws of the Company, as amended to date. (incorporated by
reference to the Company's Current Report on Form 8-K, dated
May 27, 1998)
4.1 Form of Common Share Certificate. (incorporated by reference
to the Company's Current Report on Form 8-K dated March 11,
1999)
4.2 Rights Agreement dated October 17, 1994 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including the form of Articles Supplementary relating to the
Junior Participating Preferred Shares annexed as an exhibit
thereto). (incorporated by reference to the Company's
Registration Statement on Form 8-A dated October 24, 1994)
4.3 Indenture, dated as of September 20, 1996, between the Company
and Fleet National Bank ("Fleet"), as trustee. (incorporated
by reference to the Company's Registration Statement on Form
S-3, File No. 333- 02863)
4.4 First Supplemental Indenture, dated as of October 7, 1996,
between the Company and Fleet, as trustee, relating to the
Company's 7.5% Convertible Subordinated Debentures due 2003,
Series A, including form thereof. (incorporated by reference
to the Company's Current Report on Form 8-K dated October 7,
1996)
4.5 Second Supplemental Indenture, dated as of October 7, 1996,
between the Company and Fleet, as trustee, relating to the
Company's 7.5% Convertible Subordinated Debentures due 2003,
Series B, including form thereof. (incorporated by reference
to the Company's Current Report on Form 8-K dated October 7,
1996)
4.6 Third Supplemental Indenture, dated as of October 7, 1996,
between the Company and Fleet, as trustee, relating to the
Company's 7.25% Convertible Subordinated Debentures due 2001,
including form thereof. (incorporated by reference to the
Company's Current Report on Form 8-K dated October 7, 1996)
4.7 Indenture, dated as of July 9, 1997, by and between the
Company and State Street Bank and Trust Company, as Trustee.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
4.8 Supplemental Indenture, dated July 9, 1997, by and between the
Company and State Street Bank and Trust Company, as Trustee,
relating to the Remarketed Reset Notes due July 9, 2007.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
26
<PAGE>
4.9 Supplemental Indenture No. 2 dated as of February 23, 1998
between the Company and State Street Bank and Trust Company,
relating to $50,000,000 in principal amount of Remarketed
Reset Notes due July 9, 2007. (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
4.10 Form of Global Note relating to the Remarketed Reset Notes due
July 9, 2007. (incorporated by reference to the Company's
Current Report on Form 8-K dated July 2, 1997)
4.11 Supplemental Indenture No. 3 dated as of February 23, 1998
between the Company and State Street Bank and Trust Company,
relating to the Company's 6.7% Senior Notes due 2005,
including form thereof. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
4.12 Supplemental Indenture No. 4 dated as of August 26, 1998 by
and between the Company and State Street Bank and Trust
Company, relating to $160,000,000 in aggregate principal
amount of 6 7/8% Senior Notes due 2002, including form
thereof. (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998)
4.13 Supplemental Indenture No. 5 dated as of November 30, 1998 by
and between the Company and State Street Bank and Trust
Company, relating to $130,000,000 in aggregate principal
amount of 8 1/2% Monthly Income Senior Notes due 2013,
including form thereof. (incorporated by reference to the
Company's Current Report on Form 8-K dated March 11, 1999)
4.14 Supplemental Indenture No. 6 dated as of March 24, 1999 by and
between the Company and State Street Bank and Trust Company,
relating to $90,000,000 in aggregate principal amount of 7
7/8% Monthly Income Senior Notes due 2009, including form
thereof. (filed herewith)
4.15 Indenture dated as of December 18, 1997 by and between the
Company and State Street Bank and Trust Company, as Trustee.
(incorporated by reference to the Company's Current Report on
Form 8-K dated December 5, 1997)
4.16 Supplemental Indenture dated as of December 18, 1997 by and
between the Company and State Street Bank and Trust Company,
as Trustee, relating to the Company's 6 3/4% Senior Notes due
2002, including form thereof. (incorporated by reference to
the Company's Current Report on Form 8-K dated December 5,
1997)
4.17 Registration Rights Agreement dated as of December 18, 1997 by
and between the Company and Merrill Lynch & Co. (incorporated
by reference to the Company's Current Report on Form 8-K dated
December 5, 1997)
8.1 Opinion of Sullivan & Worcester, LLP as to certain tax
matters. (filed herewith)
9.1 Amended and Restated AMS Voting Trust Agreement. (incorporated
by reference to the Company's Registration Statement on Form
S-11, File No. 33-55684, dated December 23, 1992, and
amendments thereto)
10.1 Advisory Agreement by and between the Company and HRPT
Advisors, Inc., as amended.(+) (incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
3-16799, dated August 27, 1987, and amendments thereto)
10.2 Second Amendment to the Advisory Agreement by and between the
Company and HRPT Advisors, Inc.(+) (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
10.3 Third Amendment to Advisory Agreement by and between the
Company and HRPT Advisors, Inc., dated June 26, 1997.(+)
(incorporated by reference to the Company's Current Report on
Form 8-K, dated July 2, 1997)
27
<PAGE>
10.4 Advisory Agreement by and between REIT Management & Research,
Inc. and the Company dated as of January 1, 1998.(+)
(incorporated by reference to the Company's Current Report on
Form 8-K, dated February 11, 1998)
10.5 Agreement (for Property Management and Leasing Agent) between
M&P Partners Limited Partnership and various subsidiaries of
the Company, effective as of March 25, 1997, relating to
properties leased to Agencies of the United States Government.
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997)
10.6 Master Management Agreement by and among M&P Partners Limited
Partnership and the parties named therein dated as of December
31, 1997. (incorporated by reference to the Company's Current
Report on Form 8-K, dated February 11, 1998)
10.7 Master Management Agreement by and between the Company and
REIT Management & Research, Inc., dated as of January 1, 1998.
(incorporated by reference to the Company's Current Report on
Form 8-K, dated February 27, 1998)
10.8 Parking Operation Management Agreement by and between HUB
Properties Trust, a subsidiary of the Company, and REIT
Management & Research, Inc., dated as of January 1, 1998.
(incorporated by reference to the Company's Current Report on
Form 8-K, dated February 27, 1998)
10.9 Incentive Share Award Plan.(+) (incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
33-55684, dated December 23, 1992, and amendments thereto)
10.10 AMS Properties Security Agreement. (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.11 AMS Subordination Agreement. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.12 AMS Guaranty. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991)
10.13 AMS Pledge Agreement. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.14 AMS Holding Co. Pledge Agreement. (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.15 Amended and Restated Renovation Funding Agreement dated as of
January 13, 1992 between AMS Properties, Inc. and the Company.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991)
10.16 Amendment to AMS Transaction Documents. (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991)
10.17 GCI Master Lease Document. (incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
33-55684, dated December 23, 1992, and amendments thereto)
10.18 Amended and Restated HRP Shares Pledge Agreement.
(incorporated by reference to the Company's Registration
Statement on Form S-11, File no. 33-55684, dated December 23,
1992, and amendments thereto)
10.19 Guaranty Cross-Default and Cross-Collateralization Agreement.
(incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-55684, dated December 23,
1992, and amendments thereto)
10.20 Connecticut Subacute Corporation II Lease Document Waterbury.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
28
<PAGE>
10.21 Connecticut Subacute Corporation II Lease Document Cheshire.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.22 Connecticut Subacute Corporation II Lease Document New Haven.
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.23 Vermont Subacute/New Hampshire Subacute Corporation Master
Lease Agreement (Chapple). (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
10.24 Amended and Restated Agreement and Plan of Reorganization
(Chapple). (incorporated by reference to the Company's Annual
report on Form 10-K for the year ended December 31, 1995)
10.25 Amended and Restated Promissory Note, dated July 29, 1996,
from Connecticut Subacute Corporation to the Company.
(incorporated by reference to the Company's Current Report on
Form 8-K dated October 1, 1996)
10.26 Note Modification Agreement, dated as of June 30, 1998, by and
between Connecticut Subacute Corporation and the Company.
(incorporated by reference to the Company's Current Report on
Form 8-K dated March 11, 1999)
10.27 Second Amendment to Master Lease Agreement General Terms and
Conditions and Leases Entered Into Pursuant Thereto, dated as
of October 5, 1998, by and between the Company and Connecticut
Subacute Corporation. (incorporated by reference to the
Company's Current Report on Form 8-K dated March 11, 1999)
10.28 Merger Agreement dated February 17, 1997 between the Company
and Government Property Investors, Inc. (including forms of
Escrow Agreement, Investment and Registration Rights
Agreement, Voting Agreement, Information Access Agreement,
Indemnification Agreement, Service Contract, Non-Solicitation
Agreement and Second Closing Escrow Agreement). (incorporated
by reference to the Company's Current Report on Form 8-K,
dated February 17, 1997)
10.29 Amendment No. 1 to Agreement of Merger dated March 25, 1997
between the Company and Government Property Investors, Inc.
(incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-29675) filed with the
Commission on June 20, 1997)
10.30 Remarketing Agreement (including form of Remarketing
Underwriting Agreement) relating to the Remarketed Reset Notes
due July 9, 2007 by and between the Company and Merrill Lynch
& Co., dated as of July 2, 1997. (incorporated by reference to
the Company's Current Report on Form 8-K, dated July 2, 1997)
10.31 Fourth Amended and Restated Revolving Credit Agreement, dated
as of April 2, 1998, among the Company, as borrower, the
lenders named therein, Dresdner Kleinwort Benson North America
LLC, as agent, and Fleet National Bank, as administrative
agent. (incorporated by reference to the Company's Current
Report on Form 8-K, dated April 14, 1998)
12.1 Statement regarding computation of ratio of earning to fixed
charges. (filed herewith)
21.1 Subsidiaries of the Registrant. (filed herewith)
23.1 Consent of Ernst & Young LLP. (filed herewith)
23.2 Consent of Arthur Andersen LLP. (filed herewith)
23.3 Consent of Sullivan & Worcester LLP (included as part of
Exhibit 8.1 hereto)
99.1 Current Report on Form 8-K dated March 5, 1999 (filed
herewith)
(+) Management contract or compensatory plan or arrangement.
29
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Housing Propertiess:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
La Mesa AZ $1,480 $13,320 $-- $1,480 $13,320 $14,800 $680 12/27/96 1985
Phoenix AZ 655 2,525 5 655 2,530 3,185 471 6/30/92 1963
Scottsdale AZ 979 8,807 140 990 8,936 9,926 1,033 5/16/94 1990
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 1,218 6/17/94 1990
Yuma AZ 103 604 1 103 605 708 112 6/30/92 1984
Yuma AZ 223 2,100 3 223 2,103 2,326 386 6/30/92 1984
Fresno CA 738 2,577 188 738 2,765 3,503 646 12/28/90 1963
Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791 3,072 9/9/94 1975
Lancaster CA 601 1,859 1,028 601 2,887 3,488 610 12/28/90 1969
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 592 12/28/90 1962
Stockton CA 382 2,750 4 382 2,754 3,136 507 6/30/92 1968
Tarzana CA 1,277 977 806 1,278 1,782 3,060 403 12/28/90 1969
Thousand Oaks CA 622 2,522 310 622 2,832 3,454 639 12/28/90 1965
Van Nuys CA 716 378 225 718 601 1,319 154 12/28/90 1969
Canon City CO 292 6,228 -- 292 6,228 6,520 201 9/26/97 1970
Colorado Springs CO 245 5,236 -- 245 5,236 5,481 169 9/26/97 1972
Delta CO 167 3,570 -- 167 3,570 3,737 115 9/26/97 1963
Grand Junction CO 204 3,875 329 204 4,204 4,408 650 12/30/93 1968
Grand Junction CO 6 2,583 1,316 136 3,769 3,905 513 12/30/93 1978
Lakewood CO 232 3,766 723 232 4,489 4,721 970 12/28/90 1972
Littleton CO 185 5,043 348 185 5,391 5,576 1,224 12/28/90 1965
Cheshire CT 520 7,380 1,559 520 8,939 9,459 2,626 11/1/87 1963
Forestville CT 465 9,235 3,477 478 12,699 13,177 3,782 12/23/86 1972
Killingly CT 240 5,360 460 240 5,820 6,060 1,970 5/15/87 1972
New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870 3,423 5/11/92 1971
Wallingford CT 557 11,043 2,925 557 13,968 14,525 4,338 12/23/86 1974
Waterbury CT 1,003 9,023 915 1,003 9,938 10,941 2,097 5/11/92 1974
Waterbury CT 514 10,186 3,402 630 13,472 14,102 3,980 12/23/86 1971
Waterford CT 86 4,714 453 86 5,167 5,253 1,814 5/15/87 1965
Willimantic CT 134 3,566 479 166 4,013 4,179 1,307 5/15/87 1965
Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836 4,664 5/20/94 1994
Deerfield Beach FL 1,664 14,972 299 1,690 15,245 16,935 1,762 5/16/94 1986
Fort Myers FL 2,349 21,137 419 2,385 21,520 23,905 2,354 8/16/94 1984
Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863 3,523 5/16/94 1992
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 1,295 5/20/94 1993
College Park GA 300 2,702 23 300 2,725 3,025 220 5/15/96 1985
S-1
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dublin GA 442 3,982 80 442 4,062 4,504 312 5/15/96 1968
Glenwood GA 174 1,564 4 174 1,568 1,742 116 5/15/96 1972
Marietta GA 300 2,702 35 300 2,737 3,037 211 5/15/96 1967
Clarinda IA 77 1,453 293 77 1,746 1,823 254 12/30/93 1968
Council Bluffs IA 225 893 99 225 992 1,217 164 4/1/95 1963
Mediapolis IA 94 1,776 251 94 2,027 2,121 303 12/30/93 1973
Pacific Junction IA 32 306 5 32 311 343 32 4/1/95 1978
Winterset IA 111 2,099 493 111 2,592 2,703 375 12/30/93 1973
Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742 3,550 9/9/94 1986
Chicago IL 6,200 55,800 -- 6,200 55,800 62,000 2,848 12/27/96 1990
Ellinwood KS 130 1,137 53 130 1,190 1,320 126 4/1/95 1972
Boston MA 2,164 20,836 1,978 2,164 22,814 24,978 6,788 5/1/89 1968
Hyannis MA 829 7,463 -- 829 7,463 8,292 1,677 5/11/92 1972
Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523 3,501 5/1/88 1970
North Andover MA 1,448 11,049 -- 1,448 11,049 12,497 2,483 5/11/92 1985
Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769 5,522 5/1/88 1970
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 3,319 7/25/94 1992
St. Joseph MO 111 1,027 195 111 1,222 1,333 154 6/4/93 1976
Tarkio MO 102 1,938 415 102 2,353 2,455 336 12/30/93 1970
Concord NC 90 2,126 -- 90 2,126 2,216 483 9/10/98 1990
Wilson NC 27 2,375 -- 27 2,375 2,402 538 9/10/98 1990
Winston-Salem NC 75 1,696 -- 75 1,696 1,771 381 9/10/98 1990
Grand Island NE 119 1,446 369 119 1,815 1,934 150 4/1/95 1963
Rochester NH 466 3,219 69 466 3,288 3,754 320 1/30/95 1972
Burlington NJ 1,300 11,700 7 1,300 11,707 13,007 952 9/29/95 1994
Rochester NY 1,070 9,630 -- 1,070 9,630 10,700 492 12/27/96 1988
Akron OH 330 5,370 727 330 6,097 6,427 2,200 5/15/87 1971
Grove City OH 332 3,081 32 332 3,113 3,445 430 6/4/93 1965
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 3,622 3/1/91 1985
Huron SD 45 968 1 45 969 1,014 177 6/30/92 1968
Huron SD 144 3,108 4 144 3,112 3,256 567 6/30/92 1968
Sioux Falls SD 253 3,062 4 253 3,066 3,319 561 6/30/92 1960
Bellaire TX 1,223 11,010 177 1,238 11,172 12,410 1,291 5/16/94 1991
Arlington VA 1,859 16,734 296 1,885 17,004 18,889 1,895 7/25/94 1992
Charlottesville VA 2,936 26,422 471 2,976 26,853 29,829 3,048 6/17/94 1991
Virginia Beach VA 881 7,926 141 893 8,055 8,948 931 5/16/94 1990
S-2
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Barre VT 129 3,825 4 129 3,829 3,958 379 1/30/95 1972
Barre VT 261 4,530 133 389 4,535 4,924 449 1/30/95 1979
Bennington VT 160 4,385 5 160 4,390 4,550 434 1/30/95 1971
Burlington VT 791 5,985 410 872 6,314 7,186 621 1/30/95 1968
Springfield VT 50 747 1 50 748 798 74 1/30/95 1976
Springfield VT 89 3,724 157 242 3,728 3,970 369 1/30/95 1971
St. Johnsbury VT 95 3,416 4 95 3,420 3,515 338 1/30/95 1978
St. Albans VT 154 710 1 154 711 865 70 1/30/95 1900
Seattle WA 256 4,869 67 256 4,936 5,192 785 11/1/93 1964
Spokane WA 1,035 13,315 -- 1,035 13,315 14,350 581 5/7/97 1993
Brookfield WI 834 3,849 8,014 834 11,863 12,697 1,928 12/28/90 1964
Clintonville WI 14 1,695 38 14 1,733 1,747 389 12/28/90 1960
Clintonville WI 49 1,625 87 30 1,731 1,761 387 12/28/90 1965
Madison WI 144 1,633 110 144 1,743 1,887 390 12/28/90 1920
Milwaukee WI 232 1,368 1 232 1,369 1,601 281 9/10/98 1970
Milwaukee WI 277 3,883 -- 277 3,883 4,160 769 3/27/92 1969
Pewaukee WI 984 2,432 -- 984 2,432 3,416 518 9/10/98 1963
Waukesha WI 68 3,452 2,232 68 5,684 5,752 1,036 12/28/90 1958
Laramie WY 191 3,632 199 191 3,831 4,022 595 12/30/93 1964
Worland WY 132 2,503 589 132 3,092 3,224 432 12/30/93 1970
--------------------------------------------------------------------------------
Subtotal 74,539 705,504 46,599 75,673 750,969 826,642 114,454
--------------------------------------------------------------------------------
Office Buildings:
Petersburg AK 189 811 -- 189 811 1,000 36 3/31/97 1983
Phoenix AZ 2,687 11,532 231 2,729 11,721 14,450 472 5/15/97 1997
Safford AZ 635 2,729 61 647 2,778 3,425 123 3/31/97 1992
Tuscon AZ 765 3,280 75 779 3,341 4,120 148 3/31/97 1993
Anaheim CA 691 6,223 -- 691 6,223 6,914 234 12/5/97 1992
Anaheim CA 82 735 -- 82 735 817 28 12/5/97 1970
Anaheim CA 133 1,201 -- 133 1,201 1,334 45 12/5/97 1970
Kearney Mesa CA 2,916 12,456 337 2,969 12,740 15,709 565 3/31/97 1994
Los Angeles CA 5,076 49,884 768 5,076 50,652 55,728 2,090 5/15/97 1979
Los Angeles CA 5,055 49,685 765 5,055 50,450 55,505 2,081 5/15/97 1979
Los Angeles CA 1,921 8,242 190 1,955 8,398 10,353 304 7/11/97 1996
Newport Beach CA 1,220 3,307 -- 1,220 3,307 4,527 52 5/26/98 1984
Sacramento CA 644 3,206 77 644 3,283 3,927 359 8/30/94 1984
San Diego CA 294 2,650 201 294 2,851 3,145 161 12/31/96 1984
S-3
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
San Diego CA 2,984 12,859 2,197 3,038 15,002 18,040 616 3/31/97 1996
San Diego CA 502 4,526 342 502 4,868 5,370 276 12/31/96 1984
San Diego CA 4,269 18,316 413 4,347 18,651 22,998 827 3/31/97 1996
San Diego CA 316 2,846 215 316 3,061 3,377 173 12/31/96 1984
San Diego CA 1,228 11,199 41 1,228 11,240 12,468 574 12/5/96 1985
San Diego CA 992 9,040 33 992 9,073 10,065 463 12/5/96 1985
San Diego CA 1,985 18,096 67 1,985 18,163 20,148 927 12/5/96 1985
San Diego CA 313 2,820 213 313 3,033 3,346 172 12/31/96 1984
Aurora CO 1,152 13,272 -- 1,152 13,272 14,424 494 11/14/97 1993
Golden CO 494 152 6,736 495 6,887 7,382 122 3/31/97 1997
Wallingford CT 367 3,301 -- 367 3,301 3,668 3 12/22/98 1988
Wallingford CT 640 10,017 -- 640 10,017 10,657 136 6/1/98 1986
Washington DC 5,975 53,778 223 5,975 54,001 59,976 733 6/23/98 1991
Washington DC 1,851 16,511 197 1,851 16,708 18,559 636 12/19/97 1966
Washington DC 6,979 29,949 871 7,107 30,692 37,799 1,373 3/31/97 1989
Washington DC 12,008 51,528 1,282 12,227 52,591 64,818 2,330 3/31/97 1996
Washington DC 2,485 22,696 1,188 2,485 23,884 26,369 1,405 9/13/96 1976
Wilmington DE 4,409 39,681 -- 4,409 39,681 44,090 455 7/23/98 1986
Miami FL 144 1,297 -- 144 1,297 1,441 27 3/19/98 1987
Orlando FL 256 2,308 -- 256 2,308 2,564 52 2/19/98 1997
Orlando FL 722 6,499 -- 722 6,499 7,221 142 2/19/98 1997
Orlando FL -- 362 -- -- 362 362 -- 2/19/98 1997
Savannah GA 544 2,330 104 553 2,425 2,978 105 3/31/97 1990
Kansas City KS 1,042 4,469 438 1,061 4,888 5,949 239 3/31/97 1990
Boston MA 1,500 13,500 262 1,500 13,762 15,262 1,061 12/18/95 1988
Boston MA 1,447 13,028 45 1,448 13,072 14,520 1,075 9/28/95 1993
Boston MA 3,378 30,397 1,694 3,378 32,091 35,469 2,851 9/28/95 1988
Charlton MA 141 1,269 8 141 1,277 1,418 52 5/15/97 1988
Fitchburg MA 223 2,004 10 223 2,014 2,237 82 5/15/97 1994
Grafton MA 37 336 4 37 340 377 14 5/15/97 1930
Lexington MA 1,054 9,487 -- 1,054 9,487 10,541 228 1/30/98 1994
Milford MA 144 1,297 9 144 1,306 1,450 53 5/15/97 1989
Millbury MA 34 309 4 34 313 347 13 5/15/97 1950
Northbridge MA 32 290 5 32 295 327 12 5/15/97 1962
Paxton MA 24 212 4 24 216 240 9 5/15/97 1984
Quincy MA 2,487 16,645 19 2,487 16,664 19,151 296 4/3/98 1988
S-4
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Quincy MA 1,658 11,097 13 1,658 11,110 12,768 198 4/3/98 1988
Spencer MA 211 1,902 11 211 1,913 2,124 78 5/15/97 1992
Sturbridge MA 83 751 6 83 757 840 31 5/15/97 1986
Webster MA 315 2,834 14 315 2,848 3,163 116 5/15/97 1995
Westborough MA 42 381 5 42 386 428 16 5/15/97 1900
Westborough MA 24 216 4 24 220 244 9 5/15/97 1953
Westborough MA 166 1,498 8 166 1,506 1,672 61 5/15/97 1977
Westborough MA 396 3,562 15 396 3,577 3,973 145 5/15/97 1986
Westwood MA 537 4,960 1 538 4,960 5,498 244 1/8/97 1977
Westwood MA 500 4,562 1 500 4,563 5,063 61 6/8/98 1990
Westwood MA 303 2,740 59 304 2,798 3,102 148 11/26/96 1980
Worcester MA 354 3,189 14 354 3,203 3,557 130 5/15/97 1985
Worcester MA 111 1,000 6 111 1,006 1,117 41 5/15/97 1986
Worcester MA 265 2,385 12 265 2,397 2,662 97 5/15/97 1972
Worcester MA 1,132 10,186 38 1,132 10,224 11,356 415 5/15/97 1989
Worcester MA 158 1,417 7 157 1,425 1,582 58 5/15/97 1992
Worcester MA 895 8,052 41 895 8,093 8,988 328 5/15/97 1990
Baltimore MD 900 8,097 -- 900 8,097 8,997 42 10/15/98 1989
Baltimore MD -- 12,430 73 -- 12,503 12,503 520 11/18/97 1988
College Park MD 9,423 40,433 934 9,595 41,195 50,790 1,830 3/31/97 1994
Gaithersburg MD 4,381 18,798 464 4,461 19,182 23,643 858 3/31/97 1995
Germantown MD 2,305 9,890 263 2,347 10,111 12,458 452 3/31/97 1995
Oxon Hill MD 3,181 13,653 323 3,240 13,917 17,157 619 3/31/97 1992
Rockville MD 3,251 29,258 27 3,251 29,285 32,536 640 2/2/98 1986
Bloomington MN 1,898 17,081 2,150 1,898 19,231 21,129 338 3/19/98 1995
Eagan MN 1,424 12,822 1 1,425 12,822 14,247 254 3/19/98 1986
Mendota Heights MN 533 4,795 -- 533 4,795 5,328 95 3/19/98 1995
Kansas City MO 1,443 6,193 140 1,470 6,306 7,776 280 3/31/97 1995
Florham Park NJ 1,412 12,709 -- 1,412 12,709 14,121 145 7/31/98 1979
Vorhees NJ 1,053 6,625 -- 1,053 6,625 7,678 104 5/26/98 1990
Vorhees NJ 445 2,798 -- 445 2,798 3,243 44 5/26/98 1990
Vorhees NJ 673 4,232 -- 673 4,232 4,905 66 5/26/98 1990
Albequerque NM 493 2,119 58 503 2,167 2,670 96 3/31/97 1984
Sante Fe NM 1,551 6,650 150 1,578 6,773 8,351 300 3/31/97 1987
Brooklyn NY 775 7,054 2 775 7,056 7,831 448 6/6/96 1971
Buffalo NY 4,405 18,899 426 4,485 19,245 23,730 853 3/31/97 1994
S-5
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Irondoquoit NY 1,910 17,189 21 1,910 17,210 19,120 234 6/30/98 1986
New York NY 44,000 66,976 -- 44,000 66,976 110,976 2,080 10/1/97 1989
White Plains NY 1,200 10,870 798 1,200 11,668 12,868 790 2/6/96 1952
Mason OH 1,528 13,748 -- 1,528 13,748 15,276 186 6/10/98 1994
Oklahoma City OK 4,596 19,721 445 4,680 20,082 24,762 890 3/31/97 1992
Fort Washington PA 1,154 7,722 -- 1,154 7,722 8,876 169 1/15/98 1996
FT. Washington PA 1,184 5,559 -- 1,184 5,559 6,743 180 9/22/97 1967
FT. Washington PA 683 3,198 -- 683 3,198 3,881 104 9/22/97 1970
FT. Washington PA 1,872 8,816 -- 1,872 8,816 10,688 286 9/22/97 1960
Greensburg PA 780 7,026 -- 780 7,026 7,806 95 6/3/98 1997
Horsham PA 741 3,611 7 741 3,618 4,359 117 9/22/97 1983
King of Prussia PA 634 3,251 -- 634 3,251 3,885 108 9/22/97 1964
King of Prussia PA 552 2,893 -- 552 2,893 3,445 64 2/2/98 1996
King of Prussia PA 354 3,183 -- 354 3,183 3,537 70 2/2/98 1997
Philadelphia PA 24,753 222,775 103 14,364 233,267 247,631 3,028 6/30/98 1990
Philadelphia PA 7,884 71,002 101 7,884 71,103 78,987 2,675 11/13/97 1987
Philadelphia PA 13,849 101,559 152 13,849 101,711 115,560 2,010 3/30/98 1983
Pittsburg PA 1,663 14,966 8 1,663 14,974 16,637 109 9/14/98 1994
Pittsburg PA 720 9,589 -- 720 9,589 10,309 211 2/27/98 1991
Plymouth PA 1,412 7,415 899 1,412 8,314 9,726 181 1/15/98 1996
Washington PA 631 5,698 -- 631 5,698 6,329 6 12/1/98 1998
Lincoln RI 320 7,690 -- 320 7,690 8,010 287 11/13/97 1997
Memphis TN 2,206 19,856 111 2,206 19,967 22,173 188 8/31/98 1989
Austin TX 2,317 21,037 -- 2,317 21,037 23,354 787 12/5/97 1996
Austin TX 1,529 13,760 -- 1,529 13,760 15,289 157 7/16/98 1993
Austin TX 2,072 18,650 5 2,072 18,655 20,727 97 10/20/98 1997
Austin TX 562 5,054 -- 562 5,054 5,616 26 10/20/98 1997
Austin TX 18,440 -- 21 18,440 21 18,461 0 10/7/98 1968
Austin TX 1,476 13,286 -- 1,476 13,286 14,762 69 10/20/98 1997
Austin TX 1,436 12,927 -- 1,436 12,927 14,363 67 10/7/98 1998
Austin TX 4,878 43,903 34 4,878 43,937 48,815 229 10/7/98 1968
Austin TX 1,226 11,126 -- 1,226 11,126 12,352 416 12/5/97 1997
Austin TX 1,402 12,729 2 1,402 12,731 14,133 476 12/5/97 1997
Austin TX 1,621 14,594 653 1,621 15,247 16,868 609 12/5/97 1997
Austin TX 1,218 11,040 103 1,218 11,143 12,361 420 12/5/97 1986
Austin TX 1,439 6,137 30 1,439 6,167 7,606 121 3/24/98 1975
S-6
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Austin TX 466 4,191 42 466 4,233 4,699 101 1/27/98 1980
Irving TX 542 4,879 -- 542 4,879 5,421 97 3/19/98 1995
Irving TX 846 7,616 -- 846 7,616 8,462 151 3/19/98 1995
Waco TX 2,030 8,708 160 2,060 8,838 10,898 229 12/23/97 1997
Alexandria VA 2,109 18,982 -- 2,109 18,982 21,091 20 12/30/98 1987
Arlington VA 810 7,289 -- 810 7,289 8,099 68 8/26/98 1987
Fairfax VA 569 5,122 84 569 5,206 5,775 275 12/4/96 1990
Falls Church VA 3,456 14,828 625 3,519 15,390 18,909 674 3/31/97 1993
Richland WA 3,970 17,035 383 4,042 17,346 21,388 769 3/31/97 1995
Falling Waters WV 906 3,886 106 922 3,976 4,898 176 3/31/97 1993
Cheyenne WY 1,915 8,217 185 1,950 8,367 10,317 371 3/31/97 1995
----------------------------------------------------------------------------------
Subtotal 303,023 1,797,144 29,673 294,097 1,835,743 2,129,840 55,357
----------------------------------------------------------------------------------
Grand Total $377,562 $2,502,648 $76,272 $369,770 $2,586,712 $2,956,482 $169,811
==================================================================================
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $2,882,104.
(2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years.
</FN>
</TABLE>
S-7
<PAGE>
HRPT PROPERTIES TRUST
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Reconciliation of the carrying amount of real estate and equipment and
accumulated depreciation at the beginning of the period:
Real Estate and Accumulated
Equipment Depreciation
-------------------- ----------------
Balance at January 1, 1996 $778,211 $55,855
Additions 227,528 21,066
-------------------- ----------------
Balance at December 31, 1996 1,005,739 76,921
Additions 998,579 37,619
Disposals (35,295) (2,871)
-------------------- ----------------
Balance at December 31, 1997 1,969,023 111,669
Additions 1,004,523 58,837
Disposals (17,064) (695)
-------------------- ----------------
Balance at December 31, 1998 $2,956,482 $169,811
==================== ================
S-8
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(Dollars in thousands)
(1) Principal Amount of
Final Face Carrying Loans Subject to
Interest Maturity Value of Value of Delinquent Principal
Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest
- ----------------- --------- ----------- --------------------------------------------- --------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,200 $4,200 $--
arrears. $3.8 million due at maturity.
Jacksonville, FL 10.50% 3/31/06 Interest only, payable monthly in arrears. 5,000 5,000 --
$5.0 million due at maturity.
Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 4,981 4,981 --
arrears. $4.5 million due at maturity.
Ainsworth, NE 10.64% 12/31/16 Principal and interest, payable monthly in 5,154 5,154 --
Ashland, NE arrears. $2.8 million due at maturity.
Blue Hill, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Ainsworth, NE 11.00% 12/31/16 Principal and interest, payable monthly in 2,052 2,052 --
Ashland, NE arrears. $1.1 million due at maturity.
Blue Hill, NE
Edgar, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Lyons, NE
Milford, NE
Torrance, CA 12.50% 12/31/02 Principal and interest, payable monthly in 12,233 12,233 232
Torrance, CA arrears. $11.8 million due at maturity.
Anaheim, CA
Arleta, CA 9.96% 9/30/01 Interest only, payable monthly in arrears. 2,410 2,410 79
$2.4 million due at maturity.
S-9
<PAGE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE IV- continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(Dollars in thousands)
(1) Principal Amount of
Final Face Carrying Loans Subject to
Interest Maturity Value of Value of Delinquent Principal
Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest
- ----------------- --------- ----------- --------------------------------------------- --------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Spencer, NC 8.125% 2/1/99 Principal and interest, payable monthly in 2,973 2,803 --
arrears. $3.0 million due at maturity.
Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 18,992 18,992 --
arrears. $13.9 million due at maturity.
8 Mortgages 7.87% - 8/99-12/16 Interest only or principal and interest, 11,109 10,269 --
13.75% payable monthly in arrears.
- ----------------- --------- ----------- --------------------------------------------- --------------- --------- --------------------
$69,104 $68,094 $311
=============== ========= ====================
<FN>
(1) Also represents cost for federal income tax purposes.
</FN>
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
SCHEDULE IV-continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(Dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the beginning of the period:
<S> <C>
Balance at January 1, 1996 $139,248
New mortgage loans 5,918
Collections of principal, net of discounts (7,921)
----------------
Balance at December 31, 1996 137,245
New mortgage loans 1,520
Collections of principal, net of discounts (37,263)
----------------
Balance at December 31, 1997 101,502
Collections of principal, net of discounts (33,408)
----------------
Balance at December 31, 1998 $68,094
================
</TABLE>
S-11
<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/ David J. Hegarty
David J. Hegarty
President and Chief Operating Officer
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, or by their
attorney-in-fact, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David J. Hegarty President and Chief Operating Officer March 31, 1999
- ------------------------------------
David J. Hegarty
/s/ Ajay Saini Treasurer and Chief Financial Officer March 31, 1999
- ------------------------------------
Ajay Saini
/s/ Bruce M. Gans, M.D. Trustee March 31, 1999
- ------------------------------------
Bruce M. Gans, M.D.
/s/ Patrick F. Donelan Trustee March 31, 1999
- ------------------------------------
Patrick F. Donelan
/s/ Justinian Manning, C.P. Trustee March 31, 1999
- ------------------------------------
Rev. Justinian Manning, C.P.
/s/ Gerard M. Martin Trustee March 31, 1999
- ------------------------------------
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 31, 1999
- ------------------------------------
Barry M. Portnoy
</TABLE>
SUPPLEMENTAL INDENTURE NO. 6
by and between
HRPT PROPERTIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
as of March 24, 1999
SUPPLEMENTAL TO THE INDENTURE DATED AS OF JULY 9, 1997
------------------------------------
HRPT PROPERTIES TRUST
7 7/8% Monthly Income Senior Notes due 2009
<PAGE>
This SUPPLEMENTAL INDENTURE NO. 6 (this "Supplemental Indenture") made
and entered into as of March 24, 1999 between HRPT PROPERTIES TRUST, a Maryland
real estate investment trust (the "Company"), and STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust company, as Trustee (the "Trustee").
WITNESSETH THAT:
WHEREAS, the Company and the Trustee have executed and delivered an
Indenture, dated as of July 9, 1997 (the "Indenture"), relating to the Company's
issuance, from time to time, of various series of debt securities; and
WHEREAS, the Company has determined to issue debt securities known as
its 7 7/8% Monthly Income Senior Notes due 2009; and
WHEREAS, the Indenture provides that certain terms and conditions for
each series of debt securities issued by the Company thereunder may be set forth
in an indenture supplemental to the Indenture;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
ARTICLE 1
DEFINED TERMS
Section 1.1 The following definitions supplement, and, to the extent
inconsistent with, replace the definitions in Section 101 of the Indenture:
"Acquired Debt" means Debt of a Person (i) existing at the time such
Person becomes a Subsidiary or (ii) assumed in connection with the acquisition
of assets from such Person, in each case, other than Debt incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary or such
acquisition. Acquired Debt shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Subsidiary.
"Annual Debt Service" as of any date means the maximum amount which is
expensed in any 12- month period for interest on Debt of the Company and its
Subsidiaries.
"Business Day" means any day other than a Saturday or Sunday or a day
on which banking institutions in The City of New York or in the city in which
the Corporate Trust Office of the Trustee is located, are required or authorized
to close.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participation or other ownership
interests (however designated) of such Person and any rights (other than debt
securities convertible into or exchangeable for capital stock), warrants or
options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations of the Company and its Subsidiaries plus amounts which
have been deducted, and minus amounts which have been added, for the following
(without duplication): (i) interest on Debt of the Company and its Subsidiaries,
(ii) provision for taxes of the Company and its Subsidiaries based on income,
(iii) amortization of debt discount and deferred financing costs, (iv)
provisions for gains and losses on properties and property depreciation and
amortization, (v) the effect of any noncash charge resulting from a change in
accounting
<PAGE>
principles in determining Earnings from Operations for such period and (vi)
amortization of deferred charges.
"Debt" of the Company or any Subsidiary means, without duplication, any
indebtedness of the Company or any Subsidiary, whether or not contingent, in
respect of (i) borrowed money or evidenced by bonds, notes, debentures or
similar instruments, (ii) indebtedness for borrowed money secured by any
Encumbrance existing on property owned by the Company or any Subsidiary, to the
extent of the lesser of (x) the amount of indebtedness so secured and (y) the
fair market value of the property subject to such Encumbrance, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued (other than letters of credit issued to
provide credit enhancement or support with respect to other indebtedness of the
Company or any Subsidiary otherwise reflected as Debt hereunder) or amounts
representing the balance deferred and unpaid of the purchase price of any
property or services, except any such balance that constitutes an accrued
expense or trade payable, or all conditional sale obligations or obligations
under any title retention agreement, (iv) the principal amount of all
obligations of the Company or any Subsidiary with respect to redemption,
repayment or other repurchase of any Disqualified Stock, or (v) any lease of
property by the Company or any Subsidiary as lessee which is reflected on the
Company's consolidated balance sheet as a capitalized lease in accordance with
GAAP, to the extent, in the case of items of indebtedness under (i) through
(iii) above, that any such items (other than letters of credit) would appear as
a liability on the Company's consolidated balance sheet in accordance with GAAP,
and also includes, to the extent not otherwise included, any obligation by the
Company or any Subsidiary to be liable for, or to pay, as obligor, guarantor or
otherwise (other than for purposes of collection in the ordinary course of
business), Debt of another Person (other than the Company or any Subsidiary) (it
being understood that Debt shall be deemed to be incurred by the Company or any
Subsidiary whenever the Company or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof).
"Disqualified Stock" means, with respect to any Person, any Capital
Stock of such Person which by the terms of such Capital Stock (or by the terms
of any security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock or shares), (ii) is convertible into or exchangeable or exercisable for
Debt or Disqualified Stock, or (iii) is redeemable at the option of the holder
thereof, in whole or in part (other than Capital Stock which is redeemable
solely in exchange for common stock or shares), in each case on or prior to the
Stated Maturity of the Notes.
"Earnings from Operations" for any period means net earnings excluding
gains and losses on sales of investments, extraordinary items and property
valuation losses, as reflected in the financial statements of the Company and
its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.
"Encumbrance" means any mortgage, lien, charge, pledge or security
interest of any kind.
"Notes" means the Company's 7 7/8% Monthly Income Senior Notes due
2009, issued under this Supplemental Indenture and the Indenture, as amended or
supplemented from time to time.
"Secured Debt" means Debt secured by any mortgage, lien, charge, pledge
or security interest of any kind.
"Subsidiary" means any corporation or other entity of which a majority
of (i) the voting power of the voting equity securities or (ii) the outstanding
equity interests of which are owned, directly or indirectly, by the Company or
one or more other Subsidiaries of the Company. For the purposes of this
definition, "voting equity securities" means equity securities having voting
power for the election of directors, whether at all times or only so long as no
senior class of security has such voting power by reason of any contingency.
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<PAGE>
"Total Assets" as of any date means the sum of (i) the Undepreciated
Real Estate Assets and (ii) all other assets of the Company and its Subsidiaries
determined in accordance with GAAP (but excluding accounts receivable and
intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated
Real Estate Assets not subject to an Encumbrance for borrowed money and (ii) all
other assets of the Company and its Subsidiaries not subject to an Encumbrance
for borrowed money determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the Company
and its Subsidiaries on such date, before depreciation and amortization,
determined on a consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt which is not secured by any of the
properties of the Company or any Subsidiary.
ARTICLE 2
TERMS OF THE NOTES
Section 2.1 Pursuant to Section 301 of the Indenture, the Notes shall
have the following terms and conditions:
(a) Title; Aggregate Principal Amount; Form of Notes. The Notes shall
be Registered Securities under the Indenture and shall be known as the Company's
"7 7/8% Monthly Income Senior Notes due 2009." The Notes will be limited to an
aggregate principal amount of $103,500,000, subject to the right of the Company
to reopen such series for issuances of additional securities of such series and
except as provided in this Section and in Section 306 of the Indenture. The
Notes (together with the Trustee's certificate of authentication) shall be
substantially in the form of Exhibit A hereto, which is hereby incorporated in
and made a part of this Supplemental Indenture.
The Notes will be issued in the form of one or more registered global
securities without coupons ("Global Notes") that will be deposited with, or on
behalf of, The Depository Trust Company ("DTC"), and registered in the name of
DTC's nominee, Cede & Co. Except under the circumstance described below, the
Notes will not be issuable in definitive form. Unless and until it is exchanged
in whole or in part for the individual notes represented thereby, a Global Note
may not be transferred except as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee of DTC
to a successor depositary or any nominee of such successor.
So long as DTC or its nominee is the registered owner of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Note for all purposes under this
Supplemental Indenture. Except as described below, owners of beneficial interest
in Notes evidenced by a Global Note will not be entitled to have any of the
individual Notes represented by such Global Note registered in their names, will
not receive or be entitled to receive physical delivery of any such Notes in
definitive form and will not be considered the owners or holders thereof under
the Indenture or this Supplemental Indenture.
If DTC is at any time unwilling, unable or ineligible to continue as
depositary and a successor depositary is not appointed by the Company within 90
days, the Company will issue individual Notes in exchange for the Global Note or
Global Notes representing such Notes. In addition, the Company may at
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<PAGE>
any time and in its sole discretion, subject to certain limitations set forth in
the Indenture, determine not to have any of such Notes represented by one or
more Global Notes and, in such event, will issue individual Notes in exchange
for the Global Note or Global Notes representing the Notes. Individual Notes so
issued will be issued in denominations of $1,000 and integral multiples thereof.
(b) Interest and Interest Rate. The Notes will bear interest at a rate
of 7 7/8% per annum, from March 24, 1999 (or, in the case of Notes issued upon
the reopening of this series of Notes, from the date designated by the Company
in connection with such reopening) or from the immediately preceding Interest
Payment Date to which interest has been paid or duly provided for, payable
monthly in arrears on the 15th of each month, commencing May 15, 1999 (each of
which shall be an "Interest Payment Date"), to the Persons in whose names the
Notes are registered in the Security Register at the close of business on the
1st of each month (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date (each, a "Regular Record Date").
(c) Principal Repayment; Currency. The Stated Maturity of the Notes is
April 15, 2009, provided, however, the Notes may be earlier redeemed at the
option of the Company as provided in paragraph (d) below. The principal of each
Note payable on its maturity date shall be paid against presentation and
surrender thereof at the Corporate Trust Office of the Trustee, located
initially at Two International Place, Boston, Massachusetts 02110, in such coin
or currency of the United States of America as at the time of payment is legal
tender for the payment of public or private debts. The Company will not pay
Additional Amounts (as defined in the Indenture) on the Notes.
(d) Redemption at the Option of the Company; Acceleration. The Notes
may not be redeemed prior to April 15, 2002. From and after April 15, 2002, the
Notes will be subject to redemption at any time at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' notice to each
Holder of Notes to be redeemed at its address appearing in the Security
Register, at a price equal to the principal amount of the Notes being redeemed,
plus accrued and unpaid interest to but excluding the applicable Redemption
Date. Upon the acceleration of the Notes in accordance with Section 502 of the
Indenture, the principal amount of the Notes, plus accrued and unpaid interest
thereon shall become due and payable immediately.
(e) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Company shall be directed
to it at 400 Centre Street, Newton, Massachusetts 02458, Attention: President;
notices to the Trustee shall be directed to it at Two International Place,
Boston, Massachusetts 02110, Attention: Corporate Trust Department, Re: HRPT
Properties Trust 7 7/8% Monthly Income Senior Notes due 2009; or as to either
party, at such other address as shall be designated by such party in a written
notice to the other party.
(f) Global Note Legend. Each Global Note shall bear the following
legend on the face thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE
OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
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<PAGE>
(g) Applicability of Discharge, Defeasance and Covenant Defeasance
Provisions. The Discharge, Defeasance and Covenant Defeasance provisions in
Article Fourteen of the Indenture will apply to the Notes.
ARTICLE 3
ADDITIONAL COVENANTS
Section 3.1 In addition to the covenants of the Company set forth in
Article Ten of the Indenture, for the benefit of the holders of the Notes:
(a) Limitations on Incurrence of Debt.
(i) The Company will not, and will not permit any Subsidiary
to, incur any Debt if, immediately after giving effect to the
incurrence of such additional Debt and the application of the proceeds
thereof, the aggregate principal amount of all outstanding Debt of the
Company and its Subsidiaries on a consolidated basis determined in
accordance with GAAP is greater than 60% of the sum ("Adjusted Total
Assets") of (without duplication) (i) the Total Assets of the Company
and its Subsidiaries as of the end of the calendar quarter covered in
the Company's Annual Report on Form 10-K, or the Quarterly Report on
Form 10-Q, as the case may be, most recently filed with the Securities
and Exchange Commission (or, if such filing is not permitted under the
Securities Exchange Act of 1934, as amended, with the Trustee) prior to
the incurrence of such additional Debt and (ii) the purchase price of
any real estate assets or mortgages receivable acquired, and the amount
of any securities offering proceeds received (to the extent that such
proceeds were not used to acquire real estate assets or mortgages
receivable or used to reduce Debt), by the Company or any Subsidiary
since the end of such calendar quarter, including those proceeds
obtained in connection with the incurrence of such additional Debt.
(ii) In addition to the foregoing limitations on the
incurrence of Debt, the Company will not, and will not permit any
Subsidiary to, incur any Secured Debt if, immediately after giving
effect to the incurrence of such additional Secured Debt and the
application of the proceeds thereof, the aggregate principal amount of
all outstanding Secured Debt of the Company and its Subsidiaries on a
consolidated basis is greater than 40% of Adjusted Total Assets.
(iii) In addition to the foregoing limitations on the
incurrence of Debt, the Company will not, and will not permit any
Subsidiary to, incur any Debt if the ratio of Consolidated Income
Available for Debt Service to the Annual Debt Service for the four
consecutive fiscal quarters most recently ended prior to the date on
which such additional Debt is to be incurred shall have been less than
1.5 to 1.0, on a pro forma basis after giving effect thereto and to the
application of the proceeds therefrom, and calculated on the assumption
that (i) such Debt and any other Debt incurred by the Company and its
Subsidiaries since the first day of such four-quarter period and the
application of the proceeds therefrom, including to refinance other
Debt, had occurred at the beginning of such period; (ii) the repayment
or retirement of any other Debt by the Company and its Subsidiaries
since the first date of such four-quarter period had been repaid or
retired at the beginning of such period (except that, in making such
computation, the amount of Debt under any revolving credit facility
shall be computed based upon the average daily balance of such Debt
during such period); (iii) in the case of Acquired Debt or Debt
incurred in connection with any acquisition since the first day of such
four-quarter period, the related acquisition had occurred as of the
first day of such period with appropriate adjustments with respect to
such acquisition being included in such pro forma calculation; and (iv)
in the case of any acquisition or disposition by the Company or its
Subsidiaries of any asset or group of assets since the first day of
such four-quarter period, whether by merger,
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<PAGE>
stock purchase or sale, or asset purchase or sale, such acquisition or
disposition or any related repayment of Debt had occurred as of the
first day of such period with the appropriate adjustments with respect
to such acquisition or disposition being included in such pro forma
calculation. If the Debt giving rise to the need to make the foregoing
calculation or any other Debt incurred after the first day of the
relevant four-quarter period bears interest at a floating rate then,
for purposes of calculating the Annual Debt Service, the interest rate
on such Debt shall be computed on a pro forma basis as if the average
interest rate which would have been in effect during the entire such
four-quarter period had been the applicable rate for the entire such
period.
(b) Maintenance of Total Unencumbered Assets. The Company and its
Subsidiaries will maintain at all times Total Unencumbered Assets of not less
than 200% of the aggregate outstanding principal amount of the Unsecured Debt of
the Company and its Subsidiaries on a consolidated basis.
ARTICLE 4
ADDITIONAL EVENTS OF DEFAULT
For purposes of this Supplemental Indenture and the Notes, in addition
to the Events of Default set forth in Section 501 of the Indenture, it shall
also constitute an "Event of Default" if a default under any bond, debenture,
note or other evidence of indebtedness of the Company (including a default with
respect to any other series of securities), or under any mortgage, indenture or
other instrument of the Company under which there may be issued or by which
there may be secured or evidenced any indebtedness for money borrowed by the
Company (or by any Subsidiary, the repayment of which the Company has guaranteed
or for which the Company is directly responsible or liable as obligor or
guarantor) having an aggregate principal amount outstanding of at least
$20,000,000, whether such indebtedness now exists or shall hereafter be incurred
or created, which default shall have resulted in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable, without such indebtedness having been discharged,
or such acceleration having been rescinded or annulled, within a period of ten
days after there shall have been given, by registered or certified mail, to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in principal amount of the outstanding Notes, a written notice
specifying such default and requiring the Company to cause such indebtedness to
be discharged or cause such acceleration to be rescinded or annulled and stating
that such notice is a "Notice of Default" hereunder.
ARTICLE 5
EFFECTIVENESS
This Supplemental Indenture shall be effective for all purposes as of
the date and time this Supplemental Indenture has been executed and delivered by
the Company and the Trustee in accordance with Article Nine of the Indenture. As
supplemented hereby, the Indenture is hereby confirmed as being in full force
and effect.
ARTICLE 6
MISCELLANEOUS
Section 6.1 In the event any provision of this Supplemental Indenture
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof or any provision of the Indenture.
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<PAGE>
Section 6.2 To the extent that any terms of this Supplemental Indenture
or the Notes are inconsistent with the terms of the Indenture, the terms of this
Supplemental Indenture or the Notes shall govern and supersede such inconsistent
terms.
Section 6.3 This Supplemental Indenture shall be governed by and
construed in accordance with the laws of The Commonwealth of Massachusetts.
Section 6.4 This Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
[Remainder of page intentionally left blank.]
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<PAGE>
IN WITNESS WHEREOF, the Company and the Trustee have caused this
Supplemental Indenture to be executed as an instrument under seal in their
respective corporate names as of the date first above written.
HRPT PROPERTIES TRUST
By: /s/ David J. Hegarty
David J. Hegarty
President
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By: /s/ Ruth A. Smith
Name: Ruth A. Smith
Title: Vice President
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<PAGE>
EXHIBIT A
FORM OF NOTE
(Face of Note)
7 7/8% Monthly Income Senior Note due 2009
No. $__________
HRPT PROPERTIES TRUST
promises to pay to ______________________________________ or registered assigns,
the principal sum of ______________________________________ on April 15, 2009.
Interest Payment Dates: the 15th of each month.
Record Dates: the 1st of each month.
CUSIP No.: 40426W AH 4
HRPT PROPERTIES TRUST
Attest:____________________________ By:________________________
[SEAL]
Dated:
CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in the within-mentioned Indenture:
STATE STREET BANK AND TRUST COMPANY, as Trustee
By:________________________________________
Authorized Officer
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<PAGE>
(Back of Note)
HRPT PROPERTIES TRUST
7 7/8% Monthly Income Senior Note due 2009
Capitalized terms used herein have the meanings assigned to them in the
Indenture (as defined below) unless otherwise indicated.
1. Interest. HRPT Properties Trust, a Maryland real estate investment
trust (the "Company"), promises to pay interest on the principal amount of this
Note at the rate and in the manner specified below.
The Company shall pay in cash interest on the principal amount of this
Note at the rate per annum of 7 7/8%. The Company will pay interest monthly in
arrears on the 15th of each month, commencing on May 15, 1999 or if any such day
is not a Business Day (as defined in the Indenture), on the next succeeding
Business Day (each an "Interest Payment Date"), to Holders of record on the
immediately preceding 1st of each month (whether or not a Business Day).
Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Interest shall accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from March 24, 1999.
2. Method of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the record date next preceding the Interest Payment
Date, even if such Notes are canceled after such record date and on or before
such Interest Payment Date. The Company will pay principal and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private debts. The Company, however, may pay principal, premium, if
any, and interest by check payable in such money. It may mail an interest check
to a Holder's registered address.
3. Indenture. The Company issued the Notes under an Indenture, dated as
of July 9, 1997, and a Supplemental Indenture No. 6 thereto, dated as of March
24, 1999 (collectively, the "Indenture"), between the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code
ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture. The Notes are
subject to all such terms, and Holders of the Notes are referred to the
Indenture and such Act for a statement of such terms. The terms of the Indenture
shall govern any inconsistencies between the Indenture and the Notes. The Notes
are unsecured general obligations of the Company limited to $103,500,000 in
aggregate principal amount, except as otherwise provided in the Indenture.
4. Optional Redemption. The Notes may not be redeemed prior to April
15, 2002. From and after April 15, 2002, the Notes will be subject to redemption
at any time at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at a redemption price equal to the
principal amount of the Notes being redeemed, plus accrued and unpaid interest
to but excluding the applicable Redemption Date.
5. Mandatory Redemption. The Company shall not be required to make
sinking fund or redemption payments with respect to the Notes.
6. Notice of Redemption. Notice of redemption shall be mailed at least
30 days but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at its registered address.
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<PAGE>
Notes may be redeemed in part but only in whole multiples of $1,000, unless all
of the Notes held by a Holder are to be redeemed. On and after the Redemption
Date, interest ceases to accrue on Notes or portions of them called for
redemption.
7. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000 in
excess thereof. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Security Registrar and the Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted by the Indenture. The Security Registrar need not exchange or register
the transfer of any Note or portion of a Note selected for redemption. Also, it
need not exchange or register the transfer of any Notes for a period of 15 days
before the mailing of a notice of redemption of Notes, or during the period
between a record date and the corresponding Interest Payment Date.
8. Defaults and Remedies. In case an Event of Default (as defined in
the Indenture) with respect to the Notes shall have occurred and be continuing,
the principal hereof may be declared, and upon such declaration shall become,
due and payable, in the manner, with the effect and subject to the provisions
provided in the Indenture.
9. Actions of Holders. The Indenture contains provisions permitting the
holders of not less than a majority of the aggregate principal amount of the
outstanding Notes, subject to certain exceptions as provided in the Indenture,
on behalf of the holders of all such Notes at a meeting duly called and held as
provided in the Indenture, to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided in
the Indenture to be made, given or taken by the holders of the Notes, including
without limitation, waiving (a) compliance by the Company with certain
provisions of the Indenture, and (b) certain past defaults under the Indenture
and their consequences. Any resolution passed or decision taken at any meeting
of the holders of the Notes in accordance with the provisions of the Indenture
shall be conclusive and binding upon such holders and upon all future holders of
this Note and other Notes issued upon the registration of transfer hereof or in
exchange heretofore or in lieu hereof
10. Persons Deemed Owners. The Company, the Trustee, and any agent of
the Company or the Trustee may deem and treat the Person in whose name this Note
is registered on the Security Register as its absolute owner for all purposes.
11. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
12. Governing Law. THE INTERNAL LAW OF THE COMMONWEALTH OF
MASSACHUSETTS SHALL GOVERN AND BE USED TO CONSTRUE THE INDENTURE AND THE
NOTES.
13. No Personal Liability. THE AMENDED AND RESTATED DECLARATION OF
TRUST OF 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
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<PAGE>
ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY
OBLIGATION.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Request may be made to:
HRPT Properties Trust
400 Centre Street
Newton, MA 02458
Telecopier No.: (617) 332-2261
Attention: President
or such other address as the Company may specify pursuant to the Indenture.
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date: _______________
Your Signature:________________________________
(Sign exactly as your name appears on the face
of this Note)
Signature Guarantee: _____________________________________________
(The signature must be guaranteed by an officer
of a participant in a recognized signature
guarantee program. Notarized or witnessed
signatures are not acceptable.)
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Exhibit 8.1
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, Massachusetts 02109
March 30, 1999
HRPT Properties Trust
400 Centre Street
Newton, Massachusetts 02458
Ladies and Gentlemen:
In connection with the filing by HRPT Properties Trust (f/k/a Health
and Retirement Properties Trust), a Maryland real estate investment trust (the
"Company"), of its Annual Report on Form 10-K for the year ended December 31,
1998 (the "Form 10-K"), under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the following opinion is furnished to you to be filed with
the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Form
10-K.
We have acted as counsel for the Company in connection with the
preparation of its Form 10-K, and we have examined originals or copies,
certified or otherwise identified to our satisfaction, of corporate records,
certificates and statements of officers and accountants of the Company and of
public officials, and such other documents as we have considered relevant and
necessary in order to furnish the opinion hereinafter set forth. Specifically,
and without limiting the generality of the foregoing, we have reviewed: (i) the
declaration of trust, as amended and restated, and the by-laws of the Company;
and (ii) the sections in the Company's Form 10-K captioned "Federal Income Tax
Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement
Accounts." With respect to all questions of fact on which such opinions are
based, we have assumed the accuracy and completeness of and have relied on the
information set forth in the Form 10-K and in the documents incorporated therein
by reference, and on representations made to us by the officers of the Company.
We have not independently verified such information.
The opinion set forth below is based upon the Internal Revenue Code of
1986, as amended, the Treasury Regulations issued thereunder, published
administrative interpretations thereof, and judicial decisions with respect
thereto, all as of the date hereof (collectively the "Tax Laws"), and upon the
Employee Retirement Income Security Act of 1974, as amended,
<PAGE>
HRPT Properties Trust
March 30, 1999
Page 2
the Department of Labor regulations issued thereunder, published administrative
interpretations thereof, and judicial decisions with respect thereto, all as of
the date hereof (collectively, the "ERISA Laws"). No assurance can be given that
the Tax Laws or the ERISA Laws will not change. In preparing the discussions
with respect to the matters in the sections of the Form 10-K captioned "Federal
Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual
Retirement Accounts," we have made certain assumptions and expressed certain
conditions and qualifications therein, all of which assumptions, conditions and
qualifications are incorporated herein by reference.
Based upon and subject to the foregoing, we are of the opinion that the
discussions in the sections of the Form 10-K captioned "Federal Income Tax
Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement
Accounts," in all material respects are accurate and fairly summarize the Tax
Laws issues and ERISA Laws issues addressed therein, and hereby confirm that the
opinions of counsel referred to in said sections represent our opinions on the
subject matter thereof.
We hereby consent to the incorporation of this opinion by reference as
an exhibit to the Form 10-K and to the reference to our firm therein. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or under the rules and regulations of the SEC promulgated
thereunder.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
<TABLE>
<CAPTION>
Exhibit 12.1
HRPT PROPERTIES TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands, except ratio amounts)
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Income before gain on sale of properties
and extraordinary items $146,656 $ 112,204 $ 77,164 $ 61,760 $ 57,878
Fixed charges 66,253 38,564 23,279 26,218 10,096
================ =============== =============== ============== ============
Adjusted Earnings $212,909 $ 150,768 $ 100,443 $ 87,978 $ 67,974
================ =============== =============== ============== ============
Fixed Charges:
Interest expense $ 64,326 $ 36,766 $ 22,545 $ 24,274 $ 8,965
Amortization of deferred financing costs 1,927 1,798 734 1,944 1,131
================ =============== =============== ============== ============
Total Fixed Charges $ 66,253 $ 38,564 $ 23,279 $ 26,218 $ 10,096
================ =============== =============== ============== ============
Ratio of Earnings to Fixed Charges 3.2x 3.9x 4.3x 3.4x 6.7x
================ =============== =============== ============== ============
</TABLE>
Exhibit 21.1
HRPT PROPERTIES TRUST
SUBSIDIARIES OF THE REGISTRANT
1735 Market Street Properties Trust - (Maryland)
Causeway Holdings, Inc. - (Massachusetts)
Church Creek Corporation - (Massachusetts)
EPA Golden, L.P. - (Delaware)
Health and Retirement Properties International, Inc - (Delaware)
Hub Acquisition Trust - (Maryland)
Hub LA Limited Partnership (98%) - (Delaware)
Hub LA Properties Trust - (Maryland)
Hub Management, Inc. - (Delaware)
Hub Properties Trust - (Maryland)
Hub Realty Buffalo, Inc. - (Delaware)
Hub Realty College Park I, LLC - (Maryland)
Hub Realty College Park, Inc - (Delaware)
Hub Realty Funding, Inc.- (Delaware)
Hub Realty Golden, Inc. - (Delaware)
Hub Realty Kansas City, Inc. - (Delaware)
Hub Realty Richland, Inc - (Delaware)
Hub RI Properties Trust - (Maryland)
Hub Woodmont Investment Trust - (Maryland)
Hub Woodmont Limited Liability Company - (Delaware)
Indemnity Collection Corporation - (Delaware)
Nine Penn Center Associates, L.P. - (Pennsylvania)
Nine Penn Center Properties Trust - (Maryland)
Research Park Properties Trust - (Maryland)
Senior Housing Properties Trust - (Maryland)
SPTBROOK Properties Trust - (Maryland)
SPTIHS Properties Trust - (Maryland)
SPTGEN Properties Trust - (Maryland)
SPTMISC Properties Trust - (Maryland)
SPTMNR Properties Trust - (Maryland)
SPTMRT Properties Trust - (Maryland)
SPTSUN Properties Trust - (Maryland)
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of HRPT Properties Trust of our report dated February 5, 1999, included in the
Current Report on form 8-K of HRPT Properties Trust dated March 5, 1999, filed
with the Securities and Exchange Commission.
Our audits also included the financial statement schedules of HRPT Properties
Trust listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 30, 1999
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our reports dated January 15, 1999 on Hospitality Properties Trust into HRPT
Properties Trust's Form 10-K and into the Company's previously filed
Registration Statement File No. 333-56051, 333-47815 and 33-62135.
/s/ Arthur Andersen LLP
Washington, D.C.
March 29, 1999
EXHIBIT 99.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 5, 1999
HRPT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 1-9317 04-6558834
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
400 Centre Street, Newton, MA 02458
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-332-3990
<PAGE>
HRPT PROPERTIES TRUST
THIS CURRENT REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE
SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE REGISTRANT UNDERTAKES NO OBLIGATION TO PUBLISH REVISED
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF.
Item 5. Other Events
a) Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following information is provided in connection with the financial
statements filed as Item 7 to this Current Report and should be read in
conjunction with the financial statements and notes thereto included elsewhere
herein.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues for the year ended December 31, 1998 increased to $356.6
million from $208.9 million for the year ended December 31, 1997. Rental income
increased by $152.9 million and interest and other income decreased by $5.2
million. Rental income increased because of real estate investments made in 1998
and 1997. Interest and other income decreased as a result of the repayment of
our mortgage loan investments.
Total expenses for the year ended December 31, 1998 increased to $219.8
million from $114.5 million for the year ended December 31, 1997. Operating
expenses increased by $50.8 million as a result of our increased investment in
"gross leased" real estate assets during the 1998 and 1997 periods. Interest
expense increased to $64.3 million for the year ended December 31, 1998 from
$36.8 million for the year ended December 31, 1997 as a result of higher
borrowings outstanding in the 1998 period compared to the 1997 period.
Similarly, depreciation and amortization and general and administrative expenses
increased between 1998 and 1997 as a result of new real estate investments in
1998 and 1997.
Net income was $144.5 million, or $1.21 per basic and diluted share for
the 1998 period, compared to $114.0 million, or $1.24 per basic and diluted
share, for the 1997 period. Net income increased primarily as a result of new
real estate investments in 1998 and 1997. On a per share basis, net income
decreased due to the issuance of additional shares in 1998 and 1997.
Our principal business goal is to maximize funds from operations
("FFO") rather than net income. Our Board of Trustees considers FFO, among other
factors, when determining dividends to be paid to shareholders. We have adopted
the National Association of Real Estate Investment Trust's ("NAREIT") definition
of FFO as income before equity in earnings of Hospitality Properties Trust
("HPT"), gain (loss) on HPT's equity transaction, gain (loss) on sale of real
estate and extraordinary items, plus depreciation, other non-cash items and our
proportionate share of HPT's FFO. Funds from operations for the year ended
December 31, 1998, were $227.9 million, or $1.74 per diluted share, versus
$162.7 million, or $1.57 per diluted share, in 1997. The increase is primarily
the result of new investments in 1998 and 1997. Distributions declared for the
years ended December 31, 1998 and 1997 were $190.3 million, or $1.52 per share,
and $144.3 million, or $1.46 per share, respectively. Distributions in excess of
net income constitute a return of capital. For 1998, return of capital was 6.4%
of distributions. Cash flow provided by operating activities and cash available
for distribution may not necessarily equal funds from operations as cash flow is
affected by other factors not included in the funds from operations calculation,
such as changes in assets and liabilities.
Cash flows provided by (used for) operating, investing and financing
activities were $194.3 million, ($947.4) million and $746.3 million,
respectively, for the year ended December 31, 1998 and $185.7 million, ($815.2)
million and $630.0 million, respectively, for the year ended December 31, 1997.
The increases in all three categories are primarily the result of new real
estate investments in 1998 and 1997 and the related financings to fund the
growth.
1
<PAGE>
HRPT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased to $208.9
million from $120.2 million for the year ended December 31, 1996. Rental income
increased by $90.0 million and interest and other income decreased by $1.3
million. Rental income increased because of new real estate investments in 1997,
and partly as a result of our increased investments in "gross leased" real
estate assets as compared to "net leased" assets during the 1997 period as
compared to the 1996 period. As our investment in "gross leased" assets
increases, we anticipate rental income and the corresponding operating expenses
to increase during subsequent periods. Interest and other income decreased
primarily as a result of prepayments and repayments of mortgage investments,
which were offset, in part, by an increase in earnings on our short-term
investments in the 1997 period compared to the 1996 period.
Total expenses for the year ended December 31, 1997 increased to $114.5
million from $55.5 million for the year ended December 31, 1996. Operating
expenses increased by $23.0 million as a result of our increased investment in
"gross leased" real estate assets during the 1997 period as compared to the 1996
period. Interest expense increased by $14.2 million due to higher borrowings
during the 1997 period. Depreciation and amortization, and general and
administrative expenses increased by $17.2 million and $4.6 million,
respectively, primarily as a result of new real estate investments in 1997 and
1996.
Net income increased to $114.0 million, or $1.24 per basic and diluted
share for the 1997 period, from $73.3 million, or $1.11 per basic and diluted
share for the 1996 period. Net income increased primarily as a result of new
investments in 1997 and 1996. In addition, net income increased as a result of a
$2.9 million gain on sale of properties, the recognition of a $9.3 million gain
on equity transaction of HPT during the 1997 period compared to a $3.6 million
gain in the 1996 period, and by an extraordinary loss of $1.1 million during the
1997 period compared to a $3.9 million extraordinary loss during the 1996
period, both resulting from the early extinguishment of debt.
Funds from operations for the year ended December 31, 1997, were $162.7
million, or $1.57 per diluted share, versus $103.3 million, or $1.49 per diluted
share, in 1996. Funds from operations for 1997 increased $59.4 million, or
57.5%, over the prior year. The increase is the result of new investments in
1997 and 1996. Dividends declared for the years ended December 31, 1997 and 1996
were $144.3 million, or $1.46 per basic share, and $94.3 million, or $1.42 per
basic share, respectively. Distributions in excess of net income constitute a
return of capital. For 1997, the return of capital portion reported was 17.4% of
distributions and the long-term capital gain portion was 1.7% of distributions.
Cash flow provided by operating activities and cash available for distribution
may not necessarily equal funds from operations as cash flow is affected by
other factors not included in the funds from operations calculation, such as
changes in assets and liabilities.
Cash flows provided by (used for) operating, investing and financing
activities were $185.7 million, ($815.2) million and $630.0 million,
respectively, for the year ended December 31, 1997 and $98.3 million, ($235.3)
million and $140.2 million, respectively, for the year ended December 31, 1996.
The increases in all three categories are primarily the result of new real
estate investments in 1997 and the related financings to fund the growth.
Liquidity and Capital Resources
Total assets increased to $3.1 billion at December 31, 1998 from $2.1
billion as of December 31, 1997. The increase is primarily attributable to new
real estate investments during 1998.
During 1998, we acquired 38 commercial office properties, 10 medical
office properties and five nursing properties for an aggregate amount of $981.6
million and provided improvement funding totaling $17.2 million to our existing
properties. In addition, we disposed of one office property and four nursing
properties for $17.0 million. No gain or loss was recognized on the disposition
of these properties. During 1998, we received regularly scheduled principal
payments and repayments on real estate mortgages secured by three retirement and
five nursing facilities totaling $35.2 million.
2
<PAGE>
HRPT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
In December 1998, we entered an agreement with an unaffiliated party to
sell 12 nursing facilities, currently leased to affiliates. The sale is expected
to occur in early 1999. The sale of these properties is subject to various
closing conditions customary in real estate transactions and no assurances can
be given as to when or if these properties will be sold.
At December 31, 1998, we owned 4.0 million, or 8.8%, of the common
shares of beneficial interest of HPT with a carrying value of $110.6 million and
a market value of $96.5 million. During 1998, HPT completed public stock
offerings of 6,692,413 common shares of beneficial interest at per share prices
ranging from $26.6875 to $35.00 for total consideration of approximately $208.2
million. As a result of these transactions, our ownership percentage in HPT was
reduced from 10.3% to 8.8% and we realized net gains of $2.2 million. Although
we did not sell any shares, pursuant to our accounting policy, gains and losses
on the issuance of common shares of beneficial interest by HPT are recognized in
our income statement. These amounts are not included in our calculation of FFO.
During 1998, we sold 25,000,000 common shares in a public offering and
sold 6,977,575 common shares in four offerings to unit investment trusts
sponsored by various investment banks, raising gross proceeds of $612.4 million
(net $580.3 million). Proceeds from these offerings were used to repay amounts
outstanding under our revolving bank credit facility, to purchase real estate
and for general business purposes. In addition, we issued 362,217 common shares
due to the conversion of $6.8 million of our convertible subordinated debentures
and issued 286,400 common shares for the purchase of real estate.
During 1998, we issued senior unsecured term notes totaling $403.0
million in three separate transactions. The notes mature between 2002 and 2013
and require interest between 6.7% and 8.5% per annum. In addition, we issued
$50.0 million of senior unsecured remarketed reset notes which are due in 2007
and bear interest at LIBOR plus a premium. Net proceeds from these notes were
used to repay amounts then outstanding under our revolving bank credit facility,
to purchase real estate and for general business purposes.
In April 1998, we entered into a new $500.0 million unsecured revolving
bank credit facility (the "New Credit Facility"). The New Credit Facility
matures in 2002 and bears interest at LIBOR plus a premium. We recognized an
extraordinary loss on the early extinguishment of debt for $2.1 million as a
result of the write-off of deferred financing fees associated with our previous
bank credit facility.
At December 31, 1998, we had $15.6 million of cash and cash equivalents
and had $400.0 million available on our $500.0 million revolving bank credit
facility. In June 1998, we filed a $3.0 billion Shelf Registration Statement
(the "Shelf") that has been declared effective by the Securities and Exchange
Commission ("SEC"). At December 31, 1998, $2.7 billion was available on the
Shelf.
As of December 31, 1998, we had commitments to purchase real estate and
fund or finance improvements to properties leased or mortgaged by us totaling
$21.7 million. We intend to fund these commitments with a combination of cash on
hand, amounts available under our existing credit facility, proceeds of mortgage
prepayments, if any, and/or proceeds of other financings.
In December 1998, we announced a plan for a possible separate financing
which would include a public offering of common shares of one of our
subsidiaries, Senior Housing Properties Trust ("SNH"), and a distribution to our
shareholders of common shares of that subsidiary. The public offering and
distribution constitute one alternative transaction that we are considering with
respect to financing our healthcare real estate investments. The transaction is
highly contingent. There can be no assurance that we will pursue a spin-off or a
public offering of SNH shares or that we will separately finance our healthcare
properties at all.
3
<PAGE>
HRPT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
We continue to seek new investments to expand and diversify our
portfolio of real estate. We believe that the transactions described above will
improve the security of our future funds from operations, cash available for
distribution and dividends. As of December 31, 1998, our debt as a percentage of
total book capitalization was approximately 38%. There can be no assurances that
debt or equity financing will be available to fund our existing commitments or
our future growth, but we expect that financing will be available.
Impact of Inflation
Management believes that we are not adversely affected by modest
inflation. In the real estate market, inflation tends to increase the value of
our underlying real estate which may be realized at the end of fixed lease
terms. In the health care industry, inflation usually increases the lessees'
revenues, thereby increasing our percentage rent or interest.
Year 2000
Our in-house computer systems environment is limited to software and
hardware developed by third parties and installed, operated and monitored by our
investment advisor and property manager. All of our computer systems (which are
limited to financial reporting, property management and accounting systems) were
installed within the last two years and management believes these systems are
year 2000 compliant. All costs associated with our computer systems are borne by
our investment advisor and property manager.
Most of our healthcare properties are leased on a triple net lease
basis and are not managed by us. These triple net leased properties are
dependent upon the efforts of our third party tenants and their affiliates,
which operate these properties. Our leases and other contractual relationships
require these operators to conduct the daily operations of our properties and
the scope of the operators' responsibilities includes ensuring preparedness for
the year 2000. Because of this leasing arrangement, the only actions that we can
take with respect to these properties is to inquire about and monitor public
operators' SEC filings and evaluate our operators' year 2000 preparedness plans.
Some of our triple net leased operators have responded to our inquiries
regarding their preparedness for issues related to the year 2000. Based on
operator responses to our inquiries, we believe that these operators are in the
process of studying their systems and the systems of their vendors, suppliers
and service providers to ensure preparedness. Current levels of preparedness are
varied and include partially completed inventory and assessment of potential
risks, testing, implementation of plans for remediation and reprogramming and
compliance. While we believe the efforts of our tenants described in their
responses will be or are adequate to address year 2000 concerns, there can be no
guarantee that all tenant systems will be year 2000 compliant on a timely basis
and will not have a material effect on us.
Most of our commercial office properties and properties 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 set out to identify issues associated with
year 2000 compliance for these managed properties. 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 properties are
responsible for gathering and assessing year 2000 issues affecting specific
building systems including life safety, elevator, garage, security, and energy
management systems. We will also request our major tenants to provide us with
periodic updates of their year 2000 readiness. We expect to complete an overall
assessment of year 2000 issues by the end of the first quarter 1999 and perform
necessary system replacements or upgrades, including testing, by third quarter
1999. Overall financial risk associated with year 2000 readiness for these
properties 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 is reimbursable to us under most tenant leases.
If our efforts and the efforts of our vendors, customers and tenants 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 gross leased
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 and meet our financial,
operating and capital obligations.
4
<PAGE>
HRPT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
We do not currently have a contingency plan in place in the event we,
or our operators, do not successfully remedy year 2000 compliance issues that
are identified in a timely manner or fail to identify any year 2000 issues. We
will evaluate the status of our year 2000 compliance plan in mid 1999 and
determine whether a plan is necessary.
Certain Considerations
The discussion and analysis of our financial condition and results of
operations requires us to make estimates and assumptions and contains statements
of our beliefs, intent or expectation concerning projections, plans, future
events and performance. The estimates, assumptions and statements, such as those
relating to our ability to expand our portfolio, performance of our assets, the
ability to pay dividends from FFO, our tax status as a "real estate investment
trust" and the ability to access capital markets depends upon various factors
over which we and/or our lessees have or may have limited or no control. Those
factors include, without limitation, the status of the economy, capital markets
(including prevailing interest rates) compliance with and changes to regulations
within the health care industry, competition, changes in federal, state and
local legislation and other factors. We cannot predict the impact of these
factors, if any. However, these factors could cause our actual results for
subsequent periods to be different from those stated, estimated or assumed in
this discussion and analysis of our financial condition and results of
operations. We believe that our estimates and assumptions are reasonable and
prudent at this time.
b) Other Events
As previously reported, in 1997 we entered into an Agreement of Merger
(the "Merger Agreement") with Government Properties Investors, Inc. ("GPI")
pursuant to which we agreed to acquire up to 30 office buildings containing
approximately 3.4 million square feet, substantially all of which is leased to
various agencies of the United States government. The Merger Agreement provided
for us to acquire these properties in a series of closings in exchange for
shares of our common shares of beneficial interest, par value $.01 per share
("Common Share"). As of May 1998, the final closing under the Merger Agreement
had occurred, and we had issued 4,271,428 Common Shares to GPI and its
successors and assigns; however, the final number of Common Shares issuable in
connection with the Merger Agreement had not been determined. In February, 1999,
we issued an additional 256,246 Common Shares to GPI pursuant to the exemption
from registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
5
<PAGE>
HRPT PROPERTIES TRUST
Item 7. Financial Statements and Exhibits
<TABLE>
<CAPTION>
(a) Financial Statements
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................F-1
Report of Arthur Andersen LLP, Independent Public Accountants...........................F-2
Consolidated Balance Sheets as of the years ended December 31, 1998 and 1997............F-3
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1998.....................................................F-4
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 1998.....................................................F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998............................................................F-6
Notes to Consolidated Financial Statements..............................................F-8
</TABLE>
(b) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27. Financial Data Schedule
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of HRPT Properties Trust
We have audited the accompanying consolidated balance sheets of HRPT Properties
Trust as of December 31, 1998 and 1997, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Hospitality Properties Trust (a real estate investment trust in
which the Company has an 8.8% and 10.3% interest as of December 31, 1998 and
1997, respectively) have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the consolidated financial statements
relates to data included for Hospitality Properties Trust, it is based solely on
their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of HRPT Properties Trust
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 5, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Hospitality Properties Trust
We have audited the consolidated balance sheet of Hospitality
Properties Trust and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows (not presented herein) for the years ended December 31, 1998,
1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hospitality
Properties Trust and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997, and 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
January 15, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
---------------------------------
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Real estate properties, at cost (including properties leased to
affiliates with a cost of $113,594 and $112,075, respectively):
Land $ 369,770 $ 256,582
Buildings and improvements 2,586,712 1,712,441
----------- -----------
2,956,482 1,969,023
Less accumulated depreciation 169,811 111,669
----------- -----------
2,786,671 1,857,354
Real estate mortgages and notes, net (including note from an affiliate
of $1,000 and $2,365, respectively) 69,228 104,288
Investment in Hospitality Properties Trust 110,554 111,134
Cash and cash equivalents 15,643 22,355
Interest and rents receivable 36,229 20,455
Other assets, net 45,732 20,377
----------- -----------
$ 3,064,057 $ 2,135,963
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 100,000 $ 200,000
Senior notes payable, net 802,439 349,900
Mortgage notes payable 24,779 26,329
Convertible subordinated debentures 204,863 211,650
Accounts payable and accrued expenses 44,446 27,865
Deferred rents 34,162 30,089
Security deposits 18,383 18,767
Due to affiliates 7,192 5,103
Commitments and contingencies
Shareholders' equity:
Preferred shares of beneficial interest, $.01 par value:
50,000,000 shares authorized, none issued -- --
Common shares of beneficial interest, $.01 par value:
150,000,000 shares and 125,000,000 shares authorized,
respectively, 131,547,178 shares and 98,853,170 shares
issued and outstanding, respectively 1,315 988
Additional paidin capital 1,964,878 1,371,236
Cumulative net income 564,814 420,298
Dividends (703,214) (526,262)
----------- -----------
Total shareholders' equity 1,827,793 1,266,260
----------- -----------
$ 3,064,057 $ 2,135,963
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income $ 340,851 $ 188,000 $ 98,039
Interest and other income 15,703 20,863 22,144
-----------------------------------------------
Total revenues 356,554 208,863 120,183
-----------------------------------------------
Expenses:
Operating expenses 77,536 26,765 3,776
Interest 64,326 36,766 22,545
Depreciation and amortization 60,764 39,330 22,106
General and administrative 17,172 11,670 7,055
-----------------------------------------------
Total expenses 219,798 114,531 55,482
-----------------------------------------------
Income before equity in earnings of Hospitality Properties Trust,
gain on sale of properties and extraordinary item 136,756 94,332 64,701
Equity in earnings of Hospitality Properties Trust 7,687 8,590 8,860
Gain on equity transaction of Hospitality Properties Trust 2,213 9,282 3,603
-----------------------------------------------
Income before gain on sale of properties and
extraordinary item 146,656 112,204 77,164
Gain on sale of properties, net -- 2,898 --
-----------------------------------------------
Income before extraordinary item 146,656 115,102 77,164
Extraordinary item early extinguishment of debt (2,140) (1,102) (3,910)
-----------------------------------------------
Net income $ 144,516 $ 114,000 $ 73,254
===============================================
Weighted average shares outstanding 119,867 92,168 66,255
===============================================
Basic and diluted earnings per common share:
Income before gain on sale of properties and
extraordinary item $ 1.22 $ 1.22 $ 1.16
===============================================
Income before extraordinary item $ 1.22 $ 1.25 $ 1.16
===============================================
Net income $ 1.21 $ 1.24 $ 1.11
===============================================
</TABLE>
See accompanying notes
F-4
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Additional Cumulative
Number of Common Paid-in Net
Shares Shares Capital Income Dividends Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 65,690,166 $657 $775,688 $233,044 $(323,797) $685,592
Issuance of shares 475,000 5 6,985 -- -- 6,990
Conversion of convertible
subordinated debentures, net 679,441 7 11,860 -- -- 11,867
Stock grants 44,310 -- 730 -- -- 730
Net income -- -- -- 73,254 -- 73,254
Dividends -- -- -- -- (70,385) (70,385)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 66,888,917 669 795,263 306,298 (394,182) 708,048
Issuance of shares to
acquire real estate 3,985,028 40 76,521 -- -- 76,561
Issuance of shares 27,025,000 270 482,883 -- -- 483,153
Conversion of convertible
subordinated debentures, net 910,379 9 15,756 -- -- 15,765
Stock grants 43,846 -- 813 -- -- 813
Net income -- -- -- 114,000 -- 114,000
Dividends -- -- -- -- (132,080) (132,080)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 98,853,170 988 1,371,236 420,298 (526,262) 1,266,260
Issuance of shares to
acquire real estate 286,400 3 5,702 -- -- 5,705
Issuance of shares 31,977,575 320 579,986 -- -- 580,306
Conversion of convertible
subordinated debentures, net 362,217 3 6,626 -- -- 6,629
Stock grants 67,816 1 1,328 -- -- 1,329
Net income -- -- -- 144,516 -- 144,516
Dividends -- -- -- -- (176,952) (176,952)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 131,547,178 $1,315 $1,964,878 $564,814 $(703,214) $1,827,793
========================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 144,516 $114,000 $ 73,254
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of properties, net -- (2,898) --
Equity in earnings of Hospitality Properties Trust (7,687) (8,590) (8,860)
Gain on equity transaction of Hospitality Properties Trust (2,213) (9,282) (3,603)
Dividends from Hospitality Properties Trust 10,480 9,800 9,360
Extraordinary item 2,140 1,102 3,910
Depreciation 58,837 37,619 21,265
Amortization 1,927 1,711 841
Amortization of deferred interest costs and bond discounts 72 699 1,444
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (37,127) (5,273) (7,839)
Increase in accounts payable and accrued expenses 16,581 10,832 6,033
Increase in deferred rents 4,073 22,481 689
(Decrease) increase in security deposits (384) 10,380 1,001
Increase in due to affiliates 3,129 3,119 823
----------------------------------------------
Cash provided by operating activities 194,344 185,700 98,318
----------------------------------------------
Cash flows from investing activities:
Real estate acquisitions and improvements (761,414) (548,465) (225,428)
Acquisition of business, less cash acquired -- (337,400) --
Investments in mortgage loans (226,000) (520) (17,191)
Proceeds from repayment of notes and mortgage loans, net 33,095 48,245 8,091
Proceeds from sale of real estate 5,565 22,898 --
Loans to affiliate, net 1,365 -- (800)
----------------------------------------------
Cash used for investing activities (947,389) (815,242) (235,328)
----------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common shares 580,306 483,153 6,990
Proceeds from borrowings 1,520,967 784,900 481,000
Payments on borrowings (1,170,050) (501,261) (247,070)
Deferred finance costs incurred (7,938) (4,668) (7,320)
Dividends paid (176,952) (132,080) (93,377)
----------------------------------------------
Cash provided by financing activities 746,333 630,044 140,223
----------------------------------------------
(Decrease) increase in cash and cash equivalents (6,712) 502 3,213
Cash and cash equivalents at beginning of period 22,355 21,853 18,640
---------------------------------------------
Cash and cash equivalents at end of period $ 15,643 $ 22,355 $ 21,853
==============================================
Supplemental cash flow information:
Interest paid $ 57,179 $ 34,425 $ 19,662
==============================================
</TABLE>
See accompanying notes
F-6
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Non-cash investing activities:
Real estate acquisitions $(237,404) $(11,616) $ --
Disposition of real estate 11,404 11,616 --
Investment in real estate mortgages 226,000 -- --
Acquisition of business, less cash acquired:
Real estate acquisitions $5,705 $439,498 $ --
Working capital, other than cash -- 2,051 --
Liabilities assumed -- (27,588) --
Net cash used to acquire business -- (337,400) --
---------------------------------------------
Issuance of shares $ 5,705 $76,561 $ --
=============================================
Non-cash financing activities:
Issuance of common shares $ 7,958 $ 16,578 $12,597
Conversion of convertible subordinated debentures, net (6,629) (15,765) (11,867)
</TABLE>
See accompanying notes
F-7
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
HRPT Properties Trust (formerly Health and Retirement Properties Trust), a
Maryland real estate investment trust (the "Company"), was organized on October
9, 1986. As of December 31, 1998, the Company had investments in 122 healthcare
properties and 134 office properties located in 36 states and the District of
Columbia. In addition, at December 31, 1998, the Company had an 8.8% equity
investment in Hospitality Properties Trust ("HPT"). At December 31, 1998, HPT
owned 170 hotels in 35 states.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. The consolidated financial statements include the
Company's investment in 100% owned subsidiaries. The Company's investment in 50%
or less owned companies over which it can exercise influence, but does not
control, is accounted for using the equity method. All inter-company
transactions have been eliminated. The Company uses the income statement method
to account for issuance of common shares of beneficial interest by HPT. Under
this method, gains and losses reflecting changes in the value of the Company's
ownership stake on issuance of stock by HPT are recognized in the Company's
income statement.
Real Estate Property and Mortgage Investments. Real estate properties and
mortgages are recorded at cost. Depreciation on real estate investments is
provided for on a straight-line basis over estimated useful lives ranging up to
40 years. Impairment losses on investments are recognized where indicators of
impairment are present and the undiscounted cash flow (net realizable value)
estimated to be generated by the Company's investments is less than the carrying
amount of such investments. The determination of net realizable value includes
consideration of many factors including income to be earned from the investment,
holding costs (exclusive of interest), estimated selling prices, and prevailing
economic and market conditions.
Cash and Cash Equivalents. Cash, over-night repurchase agreements and short
term investments with maturities of three months or less at the date of purchase
are carried at cost plus accrued interest.
Deferred Finance Costs. Issuance costs related to borrowings are capitalized
and amortized over the terms of the respective loans. Accumulated amortization
at December 31, 1998 and 1997 was $2.8 million and $1.8 million, respectively.
Revenue Recognition. Rental income from operating leases is recognized on a
straight-line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Percentage
rent and additional mortgage interest revenue is recognized as earned. For the
years ended December 31, 1998, 1997 and 1996, percentage rent and additional
mortgage interest revenue was $3.1 million, $3.1 million and $3.2 million,
respectively.
Earnings Per Common Share. Basic earnings per common share is computed using
the weighted average number of shares outstanding during the period. At December
31, 1998 and 1997, $204.9 million and $211.7 million of convertible securities
were convertible into 11.4 million and 11.8 million shares of the Company,
respectively. Basic earnings per share equals diluted earnings per share, as the
effect of these convertible securities is anti-dilutive to diluted earnings per
share.
Reclassifications. Reclassifications have been made to the prior years'
financial statements to conform with the current year's presentation.
Federal Income Taxes. The Company is a real estate investment trust under
the Internal Revenue Code of 1986, as amended. Accordingly, the Company expects
not to be subject to federal income taxes provided it distributes its taxable
income and meets other requirements for qualifying as a real estate investment
trust. However, it is subject to some state and local taxes on its income and
property.
Use of Estimates. Preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the amounts reported in these
financial statements and related notes. The actual results could differ from
these estimates.
New Accounting Pronouncements. The Financial Accounting Standards Board has
issued Financial Accounting Standards Board Statement No. 130 "Reporting
Comprehensive Income" ("FAS 130") and Statement No. 131 "Disclosure about
Segments of an Enterprise and Related Information" ("FAS 131") in 1997 and
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities
("FAS 133") in 1998. FAS 130 and FAS 131 were adopted for the Company's 1998
financial statements. FAS 130 and FAS 131 had no impact on the Company's
financial condition or results of operations. FAS 133 must be adopted for the
Company's year 2000 financial statements. The Company anticipates that FAS 133
will have no impact on the Company's reported financial condition or results of
operations.
F-8
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Real Estate Properties
During the year ended December 31, 1998, the Company acquired 48 office
properties and five nursing properties for an aggregate amount of approximately
$981.6 million in 34 separate transactions. In addition, the Company funded
improvements to its existing properties of approximately $17.2 million.
Also during the year ended December 31, 1998, the Company disposed of one
office property and four nursing properties for $17.0 million. No gain or loss
was recognized on the disposition of these properties.
The Company's real estate properties are leased on a gross lease, modified
gross lease or triple net lease basis pursuant to noncancellable, fixed term
operating leases expiring from 1999 to 2019. Generally, the Company's triple net
leases to a single tenant are cross-collateralized, cross-defaulted and
cross-guaranteed and provide for renewal terms at existing rates followed by
several market rate renewal terms. The triple net leases generally require the
lessee to provide all property management services. The Company's gross leases
and modified gross leases require the Company to provide property management
services. The office properties owned by the Company are managed by REIT
Management & Research, Inc. ("RMR"), an affiliate of the Company.
The future minimum lease payments to be received by the Company during the
current terms of the leases as of December 31, 1998, are approximately $333.6
million in 1999, $327.1 million in 2000, $305.1 million in 2001, $277.8 million
in 2002, $256.4 million in 2003 and $1.6 billion thereafter.
In December 1998, the Company entered an agreement with an unaffiliated
party to sell 12 nursing facilities with an aggregate net book value of $60.2
million at December 31, 1998, currently leased to affiliates. The sale is
expected to occur in the first quarter of 1999 and the Company expects to
recognize a gain. The sale of these properties is subject to various closing
conditions customary in real estate transactions and no assurances can be given
as to when or if these properties will be sold.
In February 1999, the Company sold one healthcare property for $10.0 million
and recognized a gain of approximately $5.7 million.
Note 4. Investment in Hospitality Properties Trust
At December 31, 1998, the Company owned 4,000,000 common shares of
beneficial interest of HPT with a carrying value of $110.6 million and a market
value, based on quoted market prices, of $96.5 million. HPT is a real estate
investment trust which invests principally in income producing hotel real
estate. The Company's percentage of ownership of HPT as of December 31, 1998 was
8.8%. During 1998, HPT completed several public stock offerings of common
shares. As a result of these transactions, the Company's ownership percentage in
HPT was reduced from 10.3% to 8.8% in 1998 and the Company realized a gain of
$2.2 million. Although the Company did not sell any shares, pursuant to the
Company's accounting policy, gains and losses on the issuance of common shares
of beneficial interest by HPT are recognized in the Company's income statement.
Summarized financial data of HPT is as follows (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
December 31, Year Ended December 31,
------------------------- ------------------------------------
1998 1997 1998 1997 1996
------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
properties, net $1,774,811 $1,207,868 Revenues $174,961 $114,132 $82,629
Other assets, net 62,827 105,388 Expenses 86,979 54,979 30,965
------------------------- Income before ------------------------------------
$1,837,638 $1,313,256 extraordinary item 87,982 59,153 51,664
========================= Extraordinary item (6,641) -- --
------------------------------------
Security deposits $206,018 $146,662 Net income $81,341 $59,153 $51,664
Other liabilities 457,763 158,701 ====================================
Shareholders'
equity 1,173,857 1,007,893 Average shares 42,317 27,530 23,170
------------------------- ====================================
$1,837,638 $1,313,256 Income before
========================= extraordinary item
per share $2.08 $2.15 $2.23
====================================
Net income per share $1.92 $2.15 $2.23
====================================
</TABLE>
F-9
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Real Estate Mortgages and Notes Receivable, Net
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
--------------------------
(dollars in thousands)
<S> <C> <C>
Mortgage notes receivable, due February 1999 through
December 2016 $30,961 $41,437
Mortgage notes receivable due December 2010 18,992 19,185
Mortgage notes receivable due December 2002 12,233 12,240
Mortgage notes receivable, repaid September 1998 -- 11,466
Mortgage notes receivable, repaid January 1998 -- 11,472
Mortgage notes receivable due December 2016 7,040 7,063
Other collateralized notes receivable due January 1999 12 196
Loan to an affiliate due June 1999 1,000 2,365
--------------------------
70,238 105,424
Less allowance and unamortized discounts 1,010 1,136
--------------------------
$69,228 $104,288
==========================
</TABLE>
During 1998, the Company received regularly scheduled principal payments of
$0.8 million and repayments of mortgages secured by eight healthcare properties
of $34.4 million, including $1.4 million from a loan to an affiliate. In
addition, the Company purchased a mortgage loan secured by a commercial office
property for $226.0 million. Subsequent to the acquisition of the mortgage loan,
the Company acquired the beneficial ownership of the property.
At December 31, 1998, the interest rates on the mortgages and notes
receivable ranged from 7.87% to 13.75% per annum.
Note 6. Shareholders' Equity
During 1998, the Company sold 25,000,000 common shares in a public offering
and sold 6,977,575 common shares in four offerings to separate unit investment
trusts sponsored by various investment banks, raising net proceeds of $580.3
million. The Company also issued 286,400 common shares for the purchase of real
estate, issued 362,217 common shares in exchange for the conversion of $6.8
million of its convertible subordinated debentures due 2003 and issued 52,316
common shares to HRPT Advisors, Inc. (the "Advisor"), an affiliate of the
Company, as the incentive fee earned for the year ended December 31, 1997.
The Company has reserved 1,000,000 shares of the Company's common shares
under the terms of the 1992 Incentive Share Award Plan (the "Award Plan").
During 1998, 1997 and 1996, 13,000, 9,500 and 7,250 shares, respectively, were
granted to officers of the Company and certain employees of RMR and the Advisor.
In addition, the three Independent Trustees, as part of their annual fee, are
each granted 500 common shares annually. Also, 1,000 shares were granted to a
trust for the child of a deceased Trustee. The shares granted to the Trustees
vest immediately. The shares granted to the officers and certain employees of
RMR vest over a three-year period. At December 31, 1998, 789,128 shares of the
Company's common shares remain reserved for issuance under the Award Plan.
In January 1999, the Company declared a dividend of $.38 to be distributed
on or about February 22, 1999. Dividends per share paid by the Company for 1998,
1997 and 1996 were $1.51, $1.45 and $1.41, respectively.
The Company adopted a Shareholders Rights Plan ("Right"). Each Right
entitles the holder to purchase or to receive securities or other assets of the
Company upon the occurrence of certain events. The Rights expire on October 17,
2004 and are redeemable at the Company's option at any time.
Note 7. Commitments and Contingencies
At December 31, 1998, the Company had total commitments aggregating $21.7
million to fund or finance improvements to properties leased or mortgaged by the
Company and to purchase two office properties.
The Company is involved in litigation with a former tenant. Since 1995, the
Company has asserted its claims and rights against the former tenant. The
outcome of the Company's claims and the former tenant's counter claims against
the Company cannot be predicted.
Lessee's and mortgagors' of some of the Company's healthcare properties are
dependent upon compliance with regulations within the health care industry.
Future changes to these regulations may affect the health care industry, the
Company's lessees and mortgagors and, as a result, the Company.
F-10
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Transactions with Affiliates
As of January 1, 1998, the Company entered into an agreement with RMR to
provide investment, management, property management and administrative services
to the Company. During the two years ended December 31, 1997, such services were
provided by the Advisor and M&P Partners Limited Partnership ("M&P"), affiliates
of the Company, on similar terms. RMR is owned by Gerard M. Martin and Barry M.
Portnoy, who also serve as Managing Trustees of the Company. RMR is compensated
at an annual rate equal to .7% of the Company's real estate investments up to
$250.0 million and .5% of such investments thereafter, plus property management
fees equal to three percent of gross rents. RMR is also entitled to an incentive
fee comprised of restricted shares of the Company's common stock based on a
formula. Incentive fees for the years ended December 31, 1998, 1997 and 1996
were $1.4 million, $1.0 million and $0.6 million, which represent approximately
89,702, 52,316 and 32,846 common shares, respectively. At December 31, 1998, the
Advisor owned 1,134,372 common shares.
Messrs. Martin and Portnoy are principal shareholders of Connecticut
Subacute Corporation ("CSC"), Connecticut Subacute Corporation II, New Hampshire
Subacute Corporation ("NHSC") and Vermont Subacute Corporation ("VSC")
(collectively, the "Subacute Entities"). The Subacute Entities are lessees of
the Company. The Company has extended a $4.0 million line of credit to CSC. At
December 31, 1998 and 1997, there was $1.0 million and $2.4 million,
respectively, outstanding under this agreement. The lease and mortgage
transactions with the Subacute Entities are based on market terms and are
generally similar to the Company's lease and mortgage agreements with
unaffiliated companies. The former president of the Company is the president of
the Subacute Entities. As discussed in Note 3, the Company has entered an
agreement to sell the 12 nursing facilities leased to CSC, NHSC and VSC to a
nonaffiliated party.
Amounts resulting from transactions with affiliates are as follows:
Year Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
(dollars in thousands)
Investment advisory fees $13,592 $8,620 $5,349
Dividends 1,694 1,557 1,467
Rent and interest income 13,741 13,616 12,981
Management fees 6,703 2,382 371
Note 9. Indebtedness
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------------------------
(dollars in thousands)
<S> <C> <C>
$500,000 unsecured revolving bank credit facility, due April 2002, at
LIBOR plus a premium (6.5% at December 31, 1998) $100,000 $200,000
Senior Notes, due 2002 at 6.75% 150,000 150,000
Senior Notes, due 2002 at 6.875% 160,000 --
Senior Notes, due 2005 at 6.7% 100,000 --
Monthly Income Senior Notes, due 2013 at 8.5% 143,000 --
Remarketed Reset Notes, due 2007 at LIBOR plus 0.60% (6.0% at
December 31, 1998) 250,000 200,000
Mortgage Notes Payable, due 2008 at 8.00% 13,114 13,958
Mortgage Notes Payable, due 2009 at 7.66% 11,665 12,371
Convertible Subordinated Debentures, due 2003 at 7.50% 164,863 171,650
Convertible Subordinated Debentures, due 2001 at 7.25% 40,000 40,000
---------------------------
1,132,642 787,979
Less unamortized discounts (561) (100)
---------------------------
$1,132,081 $787,879
===========================
</TABLE>
During 1998, the Company issued senior unsecured remarketed reset notes
totaling $50.0 million and issued unsecured senior notes totaling $403.0
million, at a discount ($.5 million), in three separate transactions, raising
net proceeds of $445.6 million. Net proceeds from the notes were used to repay
amounts then outstanding under the Company's revolving bank credit facility, for
property acquisitions and for general business purposes.
F-11
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1998, the Company entered into a new $500.0 million unsecured
revolving bank credit facility (the "New Credit Facility.") The New Credit
Facility matures in 2002 and bears interest at LIBOR plus a premium. The Company
recognized an extraordinary loss on the early extinguishment of debt in 1998 of
$2.1 million as a result of the write-off of deferred financing fees associated
with the previous revolving bank credit facility.
During 1998, approximately $6.8 million of the convertible subordinated
debentures (the "Debentures") due 2003 had been converted into 362,217 common
shares of the Company. The Debentures are callable in October 1999 and are
convertible at any time into common shares of the Company at $18 per share.
At December 31, 1998, three properties with an aggregate net book value of
$43.5 million were secured by mortgages due in 2008 and 2009.
The required principal payments due during the next five years are $1.7
million in 1999, $1.8 million in 2000, $41.9 million in 2001, $412.1 million in
2002, $167.1 million in 2003 and $508.0 million thereafter.
Note 10. Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
mortgage notes receivable, rents receivable, an equity investment, senior notes,
mortgage notes payable, convertible debentures, accounts payable and other
accrued expenses, a letter of credit and security deposits. Except as follows,
the fair values of the financial instruments were not materially different from
their carrying values:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------------------------- ----------------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgages and notes $ 69,228 $ 73,997 $104,288 $110,140
Investment in HPT 110,554 96,500 111,134 131,500
Senior notes, mortgage notes payable and
convertible debentures 1,032,081 1,020,550 587,879 591,190
Commitments -- 21,746 -- 92,096
Letter of credit -- 1,653 -- 1,653
</TABLE>
The fair values of the real estate mortgages, senior notes, mortgage notes
payable and convertible debentures are based on estimates using discounted cash
flow analysis and currently prevailing rates. The fair value of the investment
in HPT is based on the quoted per share prices of $24.125 and $32.875 at
December 31, 1998 and 1997, respectively. The fair value of the commitments and
letter of credit represents the actual amounts committed.
Note 11. Concentration of Credit Risk
The Company's assets are primarily invested in income producing real estate
located throughout the United States. At December 31, 1998, properties leased to
the United States Government represented $431.1 million of net real estate
investments and for the year ended December 31, 1998, provided rental revenue of
$60.3 million. At December 31, 1997, properties leased to the United States
Government, Marriott International, Inc. and Integrated Health Services, Inc.
represented $433.2 million, $299.9 million and $172.8 million of net real estate
investments, respectively, and provided revenue of $43.4 million, $30.4 million
and $27.0 million, respectively.
F-12
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Segment Information
The Company has two reportable segments; healthcare and office properties.
The Company's healthcare properties consist of senior housing, congregate care
communities, assisted living and nursing homes. The Company's office properties
consist of government office, medical office, medical clinics and commercial
office properties.
The Company evaluates its segments based on net operating income. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
The following is a summary of the Company's reportable segments as of
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------
Healthcare Office Total
--------------------------------------------------
<S> <C> <C> <C>
Revenues $110,096 $245,955 $356,051
Operating expenses -- 77,536 77,536
--------------------------------------------------
Net operating income $110,096 $168,419 $278,515
==================================================
Real estate at year end $895,748 $2,129,962 $3,025,710
Real estate acquired during the year 12,924 985,894 998,818
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------
Healthcare Office Total
--------------------------------------------------
<S> <C> <C> <C>
Revenues $113,243 $93,670 $206,913
Operating expenses -- 26,765 26,765
--------------------------------------------------
Net operating income $113,243 $66,905 $180,148
==================================================
Real estate at year end $929,181 $1,144,130 $2,073,311
Real estate acquired during the year 23,003 965,480 988,483
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------
Healthcare Office Total
--------------------------------------------------
<S> <C> <C> <C>
Revenues $102,076 $15,030 $117,106
Operating expenses -- 3,776 3,776
--------------------------------------------------
Net operating income $102,076 $11,254 $113,330
==================================================
</TABLE>
The following tables reconcile the reported segment information to the
consolidated financial statements for the years ended December 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Revenues:
Total per reportable segment $356,051 $206,913 $117,106
Unallocated other income 503 1,950 3,077
--------------------------------------------------
Total consolidated revenues $356,554 $208,863 $120,183
==================================================
Net operating income:
Total per reportable segment $278,515 $180,148 $113,330
Unallocated amounts:
Other net income 503 1,950 3,077
Interest expense (64,326) (36,766) (22,545)
Depreciation and amortization expense (60,764) (39,330) (22,106)
General and administrative expenses (17,172) (11,670) (7,055)
--------------------------------------------------
Total consolidated income before equity in
earnings of HPT, gain on sale of
properties and extraordinary item $136,756 $94,332 $64,701
==================================================
</TABLE>
F-13
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1998 and 1997, revenues from one lessee of
the Company's office segment represented $60.3 million and $43.4 million,
respectively, of the Company's consolidated revenues. For the year ended
December 31, 1997, revenues from two lessees of the Company's healthcare segment
represented $57.4 million of the Company's consolidated revenues. For the year
ended December 31, 1996, revenues from three lessees of the Company's healthcare
segment represented $62.2 million of the Company's consolidated revenues.
Note 13. Senior Housing Properties Transaction
In December 1998, the Company announced a plan for a possible separate
financing which would include a public offering of common shares of the
Company's subsidiary, Senior Housing Properties Trust ("SNH"), and a
distribution to the Company's shareholders of common shares of that subsidiary.
The public offering and distribution constitute one alternative transaction that
the Company is considering with respect to financing its healthcare real estate
investments. The transaction is highly contingent. There can be no assurance
that the Company will pursue the spin-off and public offering rather than other
alternatives or that it will separately finance its healthcare properties at
all.
Note 14. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1998 and 1997. The amounts are in thousands except for per
share amounts.
<TABLE>
<CAPTION>
1998
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 71,952 $ 83,291 $ 96,960 $ 104,351
Income before equity in earnings of HPT, gain on sale of
properties and extraordinary item 28,522 32,875 38,036 37,323
Equity in earnings of HPT 1,327 2,138 2,076 2,146
Gain (loss) on equity transaction of HPT 1,532 938 -- (257)
Income before gain on sale of properties and extraordinary item 31,381 35,951 40,112 39,212
Gain on sale of properties -- -- -- --
Income before extraordinary item 31,381 35,951 40,112 39,212
Extraordinary item - early extinguishment of debt -- (2,140) -- --
Net income 31,381 33,811 40,112 39,212
Per share data:
Income before equity in earnings of HPT, gain on sale of
properties and extraordinary item .28 .29 .29 .28
Income before gain on sale of properties and extraordinary item .31 .31 .30 .30
Income before extraordinary item .31 .31 .30 .30
Net income .31 .30 .30 .30
<CAPTION>
1997
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 35,884 $ 52,507 $ 57,304 $ 63,168
Income before equity in earnings of HPT, gain on sale of
properties and extraordinary item 17,143 25,669 26,186 25,334
Equity in earnings of HPT 2,256 2,189 2,238 1,907
Gain on equity transaction of HPT -- -- -- 9,282
Income before gain on sale of properties and extraordinary item 19,399 27,858 28,424 36,523
Gain on sale of properties -- -- 2,898 --
Income before extraordinary item 19,399 27,858 31,322 36,523
Extraordinary item - early extinguishment of debt -- -- (1,102) --
Net income 19,399 27,858 30,220 36,523
Per share data:
Income before equity in earnings of HPT, gain on sale of
properties and extraordinary item .24 .26 .26 .26
Income before gain on sale of properties and extraordinary item .27 .28 .29 .37
Income before extraordinary item .27 .28 .32 .37
Net income .27 .28 .31 .37
</TABLE>
F-14
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Pro Forma Information (Unaudited)
In 1997 and 1998, the Company acquired 29 office buildings (the "Government
Properties") leased to various agencies of the United States Government through
the acquisition of Government Properties Investors, Inc. ("GPI"). The
acquisition was accounted for as a purchase and the net assets and results of
operations are included in the consolidated financial statements since the date
of acquisition. The acquisition of the Government Properties was funded, in
part, with the proceeds from the issuance of the Company's common shares
pursuant to a public offering, the issuance of common shares of the Company in a
private placement and the assumption of debt.
The following unaudited condensed Pro Forma Statements of Income assumes the
acquisition of GPI had occurred on January 1, 1996.
The pro forma statements of income is not necessarily indicative of the
expected results of operations for any future period. Differences could result
from, but are not limited to, additional property investments, changes in
interest rates and changes in the debt and/or equity structure of the Company.
Condensed Pro Forma Statements of Income (unaudited)
(dollars in thousands, except per share amounts) Years Ended December 31,
------------------------
1997 1996
------------------------
Total revenues $221,051 $176,125
Income before extraordinary item $119,988 $102,711
Net income $118,886 $98,801
Income before extraordinary item per basic share $1.29 $1.46
Net income per basic share $1.28 $1.41
F-15
<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/ Ajay Saini
Ajay Saini, Treasurer and
Chief Financial Officer
Date: March 5, 1999
