UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-9317
HRPT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of Common Shares outstanding at August 9, 1999:
131,907,626 shares of beneficial interest, $0.01 par value.
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
FORM 10-Q
JUNE 30, 1999
INDEX
Page
<S> <C> <C>
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income - Three and Six Months Ended June
30, 1999 and 1998 2
Consolidated Statements of Cash Flows - Six Months Ended June 30,
1999 and 1998 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II Other Information
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Securities Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Real estate properties, at cost (including properties leased to
affiliates with a cost of $38,270 and $113,594, respectively):
Land $ 378,714 $ 369,770
Buildings and improvements 2,627,807 2,586,712
----------- -----------
3,006,521 2,956,482
Less accumulated depreciation 184,992 169,811
----------- -----------
2,821,529 2,786,671
Real estate mortgages and notes, net (including note from an affiliate
of $1,000 in 1998) 60,530 69,228
Investment in Hospitality Properties Trust 108,242 110,554
Cash and cash equivalents 26,984 15,643
Interest and rents receivable 38,825 36,229
Other assets, net 46,044 45,732
----------- -----------
$ 3,102,154 $ 3,064,057
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $-- $ 100,000
Senior notes payable, net 957,513 802,439
Mortgage notes payable 23,985 24,779
Convertible subordinated debentures 204,863 204,863
Accounts payable and accrued expenses 43,885 44,446
Deferred rents 32,509 34,162
Security deposits 19,332 18,383
Due to affiliates 7,367 7,192
Shareholders' equity:
Preferred shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, none issued -- --
Common shares of beneficial interest, $0.01 par value:
150,000,000 shares authorized, 131,894,626 shares and
131,547,178 shares issued and outstanding, respectively 1,319 1,315
Additional paid-in capital 1,971,168 1,964,878
Cumulative net income 650,157 564,814
Dividends (803,711) (703,214)
Unrealized holding losses on investments (6,233) --
----------- -----------
Total shareholders' equity 1,812,700 1,827,793
----------- -----------
$ 3,102,154 $ 3,064,057
=========== ===========
</TABLE>
See accompanying notes
1
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 102,022 $ 78,850 $ 203,335 $ 145,744
Interest and other income 4,529 4,441 7,619 9,499
--------- --------- --------- ---------
Total revenues 106,551 83,291 210,954 155,243
--------- --------- --------- ---------
Expenses:
Operating expenses 26,542 16,584 50,548 30,086
Interest 20,088 15,782 39,525 29,433
Depreciation and amortization 18,483 14,069 37,314 26,727
General and administrative 5,008 3,981 9,849 7,600
--------- --------- --------- ---------
Total expenses 70,121 50,416 137,236 93,846
--------- --------- --------- ---------
Income before equity in earnings of Hospitality
Properties Trust, gain on sale of properties and
extraordinary item
36,430 32,875 73,718 61,397
Equity in earnings of Hospitality Properties Trust 2,021 2,138 4,029 3,465
(Loss) gain on equity transaction of Hospitality Properties
Trust (711) 938 (711) 2,470
--------- --------- --------- ---------
Income before gain on sale of properties
and extraordinary item 37,740 35,951 77,036 67,332
Gain on sale of properties -- -- 8,307 --
--------- --------- --------- ---------
Income before extraordinary item 37,740 35,951 85,343 67,332
Extraordinary item - early extinguishment of debt -- (2,140) -- (2,140)
--------- --------- --------- ---------
Net income $ 37,740 $ 33,811 $ 85,343 $ 65,192
========= ========= ========= =========
Weighted average shares outstanding 131,894 114,445 131,778 107,994
========= ========= ========= =========
Basic and diluted earnings per common share:
Income before gain on sale of properties and
extraordinary item $ 0.29 $ 0.31 $ 0.58 $ 0.62
========= ========= ========= =========
Income before extraordinary item $ 0.29 $ 0.31 $ 0.65 $ 0.62
========= ========= ========= =========
Net income $ 0.29 $ 0.30 $ 0.65 $ 0.60
========= ========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
--------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 85,343 $ 65,192
Adjustments to reconcile net income to cash provided by operating
activities:
Extraordinary item - early extinguishment of debt -- 2,140
Gain on sale of properties (8,307) --
Loss (gain) on equity transaction of Hospitality Properties Trust 711 (2,470)
Equity in earnings of Hospitality Properties Trust (4,029) (3,465)
Dividends from Hospitality Properties Trust 5,480 5,160
Depreciation 35,858 25,774
Amortization 1,456 953
Amortization of bond discounts 74 13
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (6,676) (11,353)
Increase in accounts payable and accrued expenses 4,073 8,674
(Decrease) increase in deferred rents (1,653) 3,735
Increase (decrease) in security deposits 949 (798)
Increase in due to affiliates 1,488 3,472
--------- ---------
Cash provided by operating activities 114,767 97,027
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (143,961) (471,470)
Investments in mortgage loans -- (226,000)
Proceeds from repayment of notes and mortgage loans 68,274 18,896
Proceeds from sale of real estate 22,177 5,565
Proceeds from repayment of loans to affiliate 1,000 1,365
--------- ---------
Cash used for investing activities (52,510) (671,644)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares -- 580,306
Proceeds from borrowings 271,500 914,945
Payments on borrowings (217,294) (835,768)
Deferred finance costs incurred (4,625) (2,636)
Dividends paid (100,497) (76,977)
--------- ---------
Cash (used for) provided by financing activities (50,916) 579,870
--------- ---------
Increase in cash and cash equivalents 11,341 5,253
Cash and cash equivalents at beginning of period 15,643 22,355
--------- ---------
Cash and cash equivalents at end of period $ 26,984 $ 27,608
========= =========
Supplemental cash flow information:
Interest paid $ 39,953 $ 26,895
========= =========
See accompanying notes
3
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<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
--------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Non-cash investing activities:
Real estate acquisitions $ -- $(226,000)
Investments in real estate mortgages $ 60,000 226,000
Issuance of common shares 4,959 5,705
Non-cash financing activities:
Issuance of common shares $ 1,335 $ 7,707
Conversion of convertible subordinated debentures, net -- (6,629)
</TABLE>
See accompanying notes
4
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HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Basis of Presentation
The financial statements of HRPT Properties Trust and its subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the full year.
The Financial Accounting Standards Board issued Financial Accounting
Standards Board Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities ("FAS 133") in 1998. FAS 133 must be adopted for the 2001
financial period. We anticipate that FAS 133 will not have a significant impact
on our financial condition or results of operations.
Note 2. Comprehensive Income
The following is a reconciliation of net income to comprehensive income
for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 37,740 $ 33,811 $ 85,343 $ 65,192
Other comprehensive loss:
Unrealized holding losses (594) -- (6,233) --
-------- -------- -------- --------
Comprehensive income $ 37,146 $ 33,811 $ 79,110 $ 65,192
======== ======== ======== ========
</TABLE>
Note 3. Shareholders' Equity
During the six months ended June 30, 1999, 256,246 common shares were
issued in connection with the 1997 acquisition of office buildings leased to
agencies of the United States Government and 89,702 common shares were issued as
the incentive advisory fee for the year ended December 31, 1998.
On July 12, 1999, our trustees declared a dividend on our common shares
with respect to the quarter ended June 30, 1999 of $0.38 per share, or
approximately $50,100, which will be distributed on or about August 20, 1999, to
shareholders of record as of July 26, 1999.
In July 1999, 13,000 common shares were granted and issued to officers
of the Company and other employees of REIT Management & Research, Inc. ("RMR"),
our investment manager and affiliate, pursuant to the 1992 Incentive Share Award
Plan. During 1999, the three independent trustees were each granted and issued
500 common shares under this plan as part of their annual fee. The shares
granted to the officers and other employees of RMR vest over a three-year
period. The shares granted to the trustees vest immediately.
Note 4. Real Estate Properties
During the six months ended June 30, 1999, we purchased 14 office
buildings for approximately $140,885 and funded $3,076 of improvements to our
existing properties, using cash on hand and borrowings under our bank credit
facility. In addition, we disposed of 14 senior housing properties, including 12
senior housing properties leased to an affiliate, for $82,737 and recognized a
gain of $8,307. As part of the sale of 12 senior housing properties, we provided
a $60,000 mortgage loan secured by the 12 senior housing properties which was
subsequently paid in June 1999.
5
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
As of June 30,1999, we had outstanding commitments aggregating
approximately $75,072 to acquire office buildings or to provide financing. The
acquisition of these office buildings is subject to various closing conditions
customary in real estate transactions and no assurances can be given as to when
or if these office buildings will be acquired.
Subsequent to June 30, 1999, we purchased 11 office buildings for
$125,303, using cash on hand and by borrowing $87,000 on our revolving credit
facility. Our office buildings are managed by RMR.
Note 5. Investment in Hospitality Properties Trust
At June 30, 1999, we owned four million shares of the common stock of
Hospitality Properties Trust ("HPT") with a carrying value of $108,242 and a
fair value, based on quoted market prices, of $108,500. As of June 30, 1999, our
percentage ownership of HPT was 7.1%. During the six months ended June 30, 1999,
HPT completed public stock offerings of common shares. As a result of these
transactions, our percentage ownership in HPT was reduced from 8.8% as of
December 31, 1998, to 7.1% as of June 30, 1999, and we realized a loss of $711.
Note 6. Real Estate Mortgages and Notes Receivable, net
During the six months ended June 30, 1999, we received scheduled
principal payments of $301, principal repayments of mortgages secured by three
senior housing properties totaling $7,973 and principal repayment of $1,000 from
a loan to an affiliate. In addition, we received $60,000 as payment of a
mortgage loan provided in connection with the sale of the 12 senior housing
properties discussed in note 3.
Note 7. Indebtedness
During 1999, we issued $90,000 unsecured 7 7/8% senior notes due 2009
and $65,000 unsecured 8 3/8% senior notes due 2011. Net proceeds of $150,156
were used to repay amounts outstanding under our revolving credit facility.
These notes are callable at par on April 15, 2002, and June 15, 2003,
respectively.
In July 1999, we reset the terms of the Remarketed Reset Notes (the
"Reset Notes") for a period of one year, at LIBOR plus a premium (currently
6.56%). The Reset Notes are redeemable at our option on each quarterly interest
payment date.
Note 8. Segment Information
The following is a summary of our reportable segments as of or for the
three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------------------- --------------------------------------------
Senior Senior
Housing Office Total Housing Office Total
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 24,821 $ 81,228 $ 106,049 $ 50,952 $ 158,889 $ 209,841
Operating expenses -- 26,542 26,542 -- 50,548 50,548
---------- ---------- ---------- ---------- ---------- ----------
Net operating income $ 24,821 $ 54,686 $ 79,507 $ 50,952 $ 108,341 $ 159,293
========== ========== ========== ========== ========== ==========
Real estate investments $ 792,859 $2,274,192 $3,067,051 $ 792,859 $2,274,192 $3,067,051
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998
-------------------------------------------- --------------------------------------------
Senior Senior
Housing Office Total Housing Office Total
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 26,447 $ 57,099 $ 83,546 $ 54,602 $ 100,705 $ 155,307
Operating expenses -- 16,584 16,584 -- 30,086 30,086
---------- ---------- ---------- ---------- ---------- ----------
Net operating income $ 26,447 $ 40,515 $ 66,962 $ 54,602 $ 70,619 $ 125,221
========== ========== ========== ========== ========== ==========
Real estate investments $ 909,874 $1,840,591 $2,750,465 $ 909,874 $1,840,591 $2,750,465
</TABLE>
6
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HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The following tables reconcile the reported segment information to the
consolidated financial statements for the three and six months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
Total per reportable segment $ 106,049 $ 83,546 $ 209,841 $ 155,307
Unallocated other income (loss) 502 (255) 1,113 (64)
--------- --------- --------- ---------
Total consolidated revenues $ 106,551 $ 83,291 $ 210,954 $ 155,243
========= ========= ========= =========
Net operating income:
Total per reportable segment $ 79,507 $ 66,962 $ 159,293 $ 125,221
Unallocated amounts:
Other income (loss) 502 (255) 1,113 (64)
Interest expense (20,088) (15,782) (39,525) (29,433)
Depreciation and amortization expense (18,483) (14,069) (37,314) (26,727)
General and administrative expenses (5,008) (3,981) (9,849) (7,600)
--------- --------- --------- ---------
Total consolidated income before equity
in earnings of HPT, gain on sale of
properties and extraordinary item $ 36,430 $ 32,875 $ 73,718 $ 61,397
========= ========= ========= =========
</TABLE>
Note 9. Senior Housing Properties Transaction
In August 1999, we announced a revised plan to separate our senior
housing properties from our office properties by means of a distribution to our
shareholders of common shares of one of our subsidiaries, Senior Housing
Properties Trust (the "Spin-Off"). The Spin-Off is contingent, and there can be
no assurance that we will pursue the Spin-Off.
7
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Versus 1998
Total revenues for the three months ended June 30, 1999, increased
$23.3 million to $106.6 million from $83.3 million for the three months ended
June 30, 1998. Revenues from our office segment increased $24.1 million and
revenues from our senior housing segment decreased $1.6 million. The increase in
revenues from our office segment is due to our increased real estate investment
in office buildings. The decrease in revenues from our senior housing segment is
due to the sale of real estate investments in senior housing properties. During
this period, rental income increased by $23.2 million and interest and other
income increased by $88,000 compared to the prior year comparable period. Rental
income increased primarily because of new real estate investments.
Total expenses for the three months ended June 30, 1999, increased to
$70.1 million from $50.4 million for the three months ended June 30, 1998.
Operating expenses increased by $10.0 million as a result of our increased
investment in office building real estate assets. Interest expense increased by
$4.3 million as a result of higher borrowings outstanding during the 1999 period
compared to the prior year comparable period. Depreciation and amortization, and
general and administrative expenses increased by $4.4 million and $1.0 million,
respectively, primarily as a result of new real estate investments.
Net income increased to $37.7 million, or $0.29 per basic and diluted
common share, for the 1999 period from $33.8 million, or $0.30 per basic and
diluted common share, for the 1998 period. The change in net income is due
primarily to the increase in new real estate investments.
Funds from operations for the three months ended June 30, 1999, were
$58.3 million, or $0.44 per basic common share, and $50.8 million, or $0.44 per
basic common share, for the 1998 period. Diluted funds from operations for the
three months ended June 30, 1999, were $62.4 million, or $0.44 per diluted
common share, and $54.8 million, or $0.44 per diluted common share, for the 1998
period. The dividends declared which relate to the three months ended June 30,
1999 and 1998, were $50.1 million, or $0.38 per common share, and $50.0 million,
or $0.38 per common share, respectively. The weighted average shares outstanding
were 131.9 million in 1999 and 114.4 million in 1998.
Six Months Ended June 30, 1999 Versus 1998
Total revenues for the six months ended June 30, 1999, increased $55.7
million to $211.0 million from $155.2 million for the six months ended June 30,
1998. Revenues from our office segment increased $58.2 million and revenues from
our senior housing segment decreased $3.7 million. The increase in revenues from
our office segment is due to our increased real estate investment in office
buildings. The decrease in revenues from our senior housing segment is due to
the sale of real estate investments in senior housing properties. Rental income
increased by $57.6 million and interest and other income decreased by $1.9
million. Rental income increased primarily because of new real estate
investments. Interest and other income decreased primarily as a result of a
decrease in mortgage interest income as our mortgage loan investments were
repaid.
Total expenses for the six months ended June 30, 1999, increased to
$137.2 million from $93.8 million for the six months ended June 30, 1998.
Operating expenses increased by $20.5 million as a result of our increased
investment in office building real estate assets. Interest expense increased by
$10.1 million as a result of higher borrowings outstanding during the 1999
period. Depreciation and amortization, and general and administrative expenses
increased by $10.6 million and $2.2 million, respectively, primarily as a result
of new real estate investments.
Net income increased to $85.3 million, or $0.65 per basic and diluted
common share, for the 1999 period from $65.2 million, or $0.60 per basic and
diluted common share, for the 1998 period. The change in net income is due
primarily to the increase in new real estate investments, and the gain on sale
of properties recognized in 1999.
8
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Funds from operations for the six months ended June 30, 1999, were
$118.0 million, or $0.90 per basic common share, and $95.1 million, or $0.88 per
basic common share, for the 1998 period. Diluted funds from operations for the
six months ended June 30, 1999, were $126.1 million, or $0.88 per diluted common
share, and $103.2 million, or $0.86 per diluted common share, for the 1998
period. The dividends declared which relate to the six months ended June 30,
1999 and 1998, were $100.2 million, or $0.76 per common share, and $90.4
million, or $0.76 per common share, respectively. The weighted average shares
outstanding were 131.8 million in 1999 and 108.0 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, we purchased 14 office
buildings for approximately $140.9 million. In addition, we disposed of 14
senior housing properties for $82.7 million and recognized a gain of $8.3
million. As part of the sale of 12 of the senior housing properties, we provided
a $60.0 million mortgage loan secured by the 12 senior housing properties which
was paid in June 1999.
During the six months ended June 30, 1999, we funded $3.1 million of
improvements to our existing properties, received $301,000 of regularly
scheduled principal payments, received $8.0 million representing principal
repayments of mortgages secured by three senior housing properties, and received
$1.0 million from a loan to an affiliate.
Subsequent to June 30, 1999, we purchased 11 office buildings for
$125.3 million plus closing costs, using cash on hand and by borrowing $87.0
million under our revolving credit facility.
At June 30, 1999, we owned 4.0 million, or 7.1%, of the common shares
of beneficial interest of HPT with a carrying value of $108.2 million and a fair
value of $108.5 million. During the six months ended June 30, 1999, HPT
completed public offerings of common shares. As a result of these transactions,
we recognized a loss of $711,000 and our ownership percentage was reduced to
7.1%.
During the six months ended June 30, 1999, we issued 256,246 common
shares in connection with the 1997 acquisition of office buildings leased to
agencies of the United States Government, 89,702 common shares as the incentive
advisory fee for the year ended December 31, 1998 and 1,500 common shares to our
three independent trustees.
At June 30, 1999, we had $27.0 million of cash and cash equivalents, as
well as no amounts outstanding and $500.0 million available for borrowing under
our bank credit facility.
During 1999, we issued $90,000 unsecured 7 7/8% senior notes due 2009
and $65,000 unsecured 8 3/8% senior notes due 2011. Net proceeds of $150.2
million were used to repay amounts outstanding under our revolving credit
facility. These notes are callable at par on April 15, 2002 and June 15, 2003,
respectively.
In July 1999, we reset the terms of the Reset Notes for a period of one
year, at LIBOR plus a premium. The Reset Notes are callable at our option on
each quarterly interest payment date.
At June 30, 1999, we had outstanding commitments to purchase office
buildings or provide financing totaling approximately $75.1 million. We intend
to fund these commitments with a combination of cash on hand and amounts
available under our existing credit facility. The acquisition of these office
buildings is subject to various closing conditions customary in real estate
transactions, and no assurances can be given as to when and if these office
buildings will be acquired.
At June 30, 1999, we had $2.5 billion available on our $3 billion
effective shelf registration statement.
In August 1999, we announced a revised plan to separate our senior
housing properties from our office properties by means of a distribution to our
shareholders of common shares of one of our subsidiaries, Senior Housing
Properties Trust. The Spin-Off is contingent, and there can be no assurance that
we will pursue the Spin-Off. If the Spin-Off is successfully completed we expect
to receive about $200 million from this subsidiary.
9
<PAGE>
HRPT PROPERTIES TRUST
Item 2. 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 leased real estate. As of June 30, 1999, our debt as a percentage
of total market capitalization was approximately 37%.
We expect that cash generated by our operations, availability under our
existing credit facilities, the proceeds of the planned Spin-Off and other
possible issuances of equity or debt securities under our effective shelf
registration will be sufficient to meet our cash needs for operations, dividends
and currently planned expansion investments in the future.
Year 2000
Our in-house computer systems 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. We have obtained confirmations from most of
our vendors and we believe these systems are year 2000 compliant. All costs
associated with our computer systems are the responsibility of our investment
advisor and property manager.
All of our senior housing properties are leased on a triple net lease
basis and are not managed by us. Ninety-seven percent of these properties are
operated by public companies which have filed reports containing year 2000
preparedness information with the SEC. 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 these leasing arrangements, the only
actions that we can take with respect to these properties is to inquire about
and monitor the public operators' SEC filings and evaluate our operators' year
2000 preparedness plans for all systems, including financial and nonfinancial
systems such as elevators, heating and ventilation and life safety systems. The
majority of those operators have responded in writing to our inquiries regarding
their preparedness for issues related to the year 2000. Based on these responses
and the tenants' public disclosures which we have reviewed, 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. While we believe the efforts of our tenants described in
their responses and in their public filings will be or are adequate to address
year 2000 concerns, there can be no guarantee that all tenant operations and
those of their vendors and payors, including federal and state Medicare and
Medicaid systems, will be year 2000 compliant on a timely basis and will not
have a material effect on us.
Most of our commercial office buildings and office buildings leased to
the U.S. Government are leased on a gross lease or modified gross lease basis
and are managed by us. In early 1998, we began to identify issues associated
with year 2000 compliance for these managed buildings. We have been contacting
and will continue to contact vendors to gather information to assess vendor
readiness. In addition, managers and engineers at each of our buildings are
responsible for gathering and assessing year 2000 issues affecting specific
building systems including life safety, elevator, garage, security, and energy
management systems. We have also requested our major tenants to provide us with
updates of their year 2000 readiness. We expect to complete an overall
assessment of year 2000 issues by the end of the third quarter of 1999 and
perform necessary system replacements or upgrades, including testing, during the
fourth quarter of 1999. Overall financial risk associated with year 2000
readiness for these buildings is not expected to be material, and most of the
costs associated with correcting non-compliance are expected to be classified as
operating expense that may be reimbursable to us under most tenant leases.
If our efforts and the efforts of our vendors, customers and tenants to
prepare for the year 2000 were ineffective, our properties could be subject to
significant adverse effects, including, but not limited to, loss of business and
growth opportunities, reduced revenues and increased expenses which might cause
operating losses to our tenants as well as operating losses at our properties.
Continued or severe operating losses may cause one or more of our tenants to
default on their leases. Numerous lease defaults could jeopardize our ability to
maintain our financial results of operations and meet our financial, operating
and capital obligations.
10
<PAGE>
HRPT PROPERTIES TRUST
Item 2. 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,
our tenants 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 at the
beginning of the fourth quarter of 1999 and determine whether a plan is
necessary.
11
<PAGE>
HRPT PROPERTIES TRUST
Item 3. 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, 1998. Furthermore, we do not foresee any
significant changes in our exposure to fluctuations in interest rates or in how
this exposure is managed in the near future. At June 30, 1999, our total
outstanding debt for fixed rate notes consisted of the following:
Amount Coupon Maturity
Unsecured senior notes:
$40.0 million 7.25% 2001
$160.0 million 6.875% 2002
$150.0 million 6.75% 2002
$164.9 million 7.50% 2003
$100.0 million 6.7% 2005
$90.0 million 7.875% 2009
$65.0 million 8.375% 2011
$143.0 million 8.5% 2013
Secured notes:
$12.7 million 8.00% 2008
$11.3 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 $4.6 million. The secured
notes are secured by three of our office properties and require principal and
interest payments through maturity.
As of June 30, 1999, the $500.0 million bank credit facility and the
unsecured senior Reset Notes totaling $250.0 million were subject to floating
interest rates. Our bank credit facility matures in 2002 and our Reset Notes
mature in 2007. At June 30, 1999, no amounts were outstanding and $500.0 million
was available for drawing under our bank credit facility. As of June 30, 1999,
our acquisition commitments totaled approximately $75.1 million, plus closing
costs. Assuming these commitments were all funded with borrowings under our bank
credit facility, and assuming interest rates increased 1/2 percentage point, our
annual interest cost would increase by approximately $375,000. Assuming interest
rates on the Reset Notes increase 1/2 percentage point, our annual interest cost
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 June 30, 1999, we have not entered into any of these contracts.
The market prices, if any, of each of our fixed rate obligations as of
June 30, 1999, are sensitive to changes in interest rates. Typically, if market
rates of interest increase, the current market price of a fixed rate obligation
will decrease. Conversely, if market rates of interest decrease, the current
market price of a fixed rate obligation will typically increase. Based on the
balances outstanding at June 30, 1999, a hypothetical immediate one percentage
point change in interest rates would change the fair value of our fixed rate
debt obligations by approximately $42.4 million, based on discounted cash flow
analysis.
12
<PAGE>
HRPT PROPERTIES TRUST
Part II Other Information
Item 2. Changes in Securities.
In May 1999, pursuant to the Company's Incentive Share Award Plan, each
of the Company's three independent trustees received a grant of 500 common
shares valued at $14.8125 per common share, the closing price of the common
shares on the New York Stock Exchange on May 11, 1999. The grants were made
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Securities Holders.
At our Annual Shareholders Meeting on May 11, 1999, Dr. Bruce M. Gans,
M.D. and Barry M. Portnoy were re-elected to serve as trustees, each for a term
of three years. There were 120,018,895 and 120,033,991 shares, respectively,
voted in favor of, and 1,156,985 and 1,141,890 shares, respectively, withheld
from voting for the re-election of Dr. Gans and Mr. Portnoy. The Reverend
Justinian Manning, Patrick F. Donelan and Gerard M. Martin continued to serve as
trustees.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated June 14, 1999, filing as
exhibits, (a) Purchase Agreement, dated as of June 14, 1999,
by and among HRPT Properties Trust and the several
Underwriters named therein pertaining to $65,000,000 in
aggregate principal amount of 8-3/8% Monthly Income Senior
Notes due 2011, (b) Form of Supplemental Indenture No. 7,
dated as of June 17, 1999, by and between HRPT Properties
Trust and State Street Bank and Trust Company, relating to
$65,000,000 in aggregate principal amount of 8-3/8% Monthly
Income Senior Notes due 2011, including form thereof, (c)
opinion of counsel re: tax matters, (d) Computation of Ratio
of Earnings to Fixed Charges, (e) consent of Ernst & Young
LLP and (f) consent of Arthur Andersen LLP (Item 7).
13
<PAGE>
HRPT PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
This Quarterly Report on Form 10-Q contains statements which constitute
forward looking statements within the meaning of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this Form
10-Q and include statements regarding our intent, belief or expectations with
respect to the Spin-Off, the declaration or payment of dividends, the
consummation of additional acquisitions, policies and plans regarding
investments, financings or other matters, our qualification and continued
qualification as a real estate investment trust or trends affecting our or any
of our property's financial condition or results of operations. Readers are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contained in the forward looking statements as a
result of various factors. Such factors include without limitation changes in
financing terms, our ability or inability to complete acquisitions and financing
transactions, results of operations of our properties and general changes in
economic conditions not presently contemplated. The information contained in
this Form 10-Q and our Annual Report on Form 10-K for the year ended December
31, 1998, including the information under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations", identifies other
important factors that could cause differences.
The Amended and Restated Declaration of Trust establishing the Company,
dated July 1, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is duly filed in the Office of the Department of Assessments and
Taxation of the State of Maryland, provides that the name "HRPT Properties
Trust" refers to the trustees under the Declaration collectively as trustees,
but not individually or personally, and that no trustee, officer, shareholder,
employee or agent of the Company shall be held to any personal liability,
jointly or severally, for any obligation of, or claim against, the Company. All
persons dealing with the Company, in any way, shall look only to the assets of
the Company for the payment of any sum or the performance of any obligation.
14
<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: August 13, 1999
By: /s/ Ajay Saini
Ajay Saini
Treasurer and Chief Financial Officer
Dated: August 13, 1999
15
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