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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
ECURITIES 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 of incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of Common Shares outstanding at August 10, 2000:
131,948,847 shares of beneficial interest, $0.01 par value.
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
FORM 10-Q
JUNE 30, 2000
INDEX
Page
----
<S> <C> <C>
PART I Financial Information
---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2000 and December 31,
1999 1
Consolidated Statements of Income - Three and Six Months Ended June
30, 2000 and 1999 2
Consolidated Statements of Cash Flows - Six Months Ended June 30,
2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Securities Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
June 30, December 31,
2000 1999
----------- ------------
(unaudited) (note 1)
<S> <C> <C>
ASSETS
Real estate properties, at cost:
Land $ 353,213 $ 354,173
Buildings and improvements 2,307,412 2,302,171
----------- -----------
2,660,625 2,656,344
Less accumulated depreciation 136,486 106,859
----------- -----------
2,524,139 2,549,485
Real estate mortgages and notes receivable, net 8,161 10,373
Equity investments 305,059 311,113
Cash and cash equivalents 9,674 13,206
Interest and rents receivable 40,145 36,683
Other assets, net 35,957 32,448
----------- -----------
$ 2,923,135 $ 2,953,308
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 169,000 $ 132,000
Senior notes payable, net 930,160 957,586
Mortgage notes payable 54,369 55,441
Convertible subordinated debentures 204,863 204,863
Accounts payable and accrued expenses 46,075 53,851
Deferred rents 8,368 9,005
Security deposits 7,196 7,041
Due to affiliates 10,634 11,054
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, 131,935,847 shares and
131,908,126 shares issued and outstanding at June 30,
2000, and December 31, 1999, respectively 1,319 1,319
Additional paid-in capital 1,971,593 1,971,366
Cumulative net income 733,831 678,676
Distributions (1,205,962) (1,121,533)
Unrealized holding losses on investments (8,311) (7,361)
----------- -----------
Total shareholders' equity 1,492,470 1,522,467
----------- -----------
$ 2,923,135 $ 2,953,308
=========== ===========
</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,
--------------------------- ----------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 100,349 $ 102,022 $ 199,744 $ 203,335
Interest and other income 696 4,529 1,555 7,619
--------- --------- --------- ---------
Total revenues 101,045 106,551 201,299 210,954
--------- --------- --------- ---------
Expenses:
Operating expenses 34,238 26,542 68,065 50,548
Interest 25,310 20,088 50,408 39,525
Depreciation and amortization 16,040 18,483 31,914 37,314
General and administrative 4,332 5,008 9,029 9,849
--------- --------- --------- ---------
Total expenses 79,920 70,121 159,416 137,236
--------- --------- --------- ---------
Income before equity in earnings of equity
investments and gain on sale of properties 21,125 36,430 41,883 73,718
Equity in earnings of equity investments 5,602 2,021 11,294 4,029
Loss on equity transaction of equity investments -- (711) -- (711)
--------- --------- --------- ---------
Income before gain on sale of properties 26,727 37,740 53,177 77,036
Gain on sale of properties, net 1,978 -- 1,978 8,307
--------- --------- --------- ---------
Net income $ 28,705 $ 37,740 $ 55,155 $ 85,343
========= ========= ========= =========
Weighted average shares outstanding 131,935 131,894 131,928 131,778
========= ========= ========= =========
Basic and diluted earnings per common share:
Income before gain on sale of properties $ 0.20 $ 0.29 $ 0.40 $ 0.58
========= ========= ========= =========
Net income $ 0.22 $ 0.29 $ 0.42 $ 0.65
========= ========= ========= =========
</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,
------------------------------
2000 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 55,155 $ 85,343
Adjustments to reconcile net income to cash provided by operating
activities:
Gain on sale of properties, net (1,978) (8,307)
Equity in earnings of equity investments (11,294) (4,029)
Loss on equity transaction of equity investments -- 711
Distributions from equity investments 17,048 5,400
Depreciation 29,769 35,858
Amortization 2,145 1,456
Amortization of bond discounts 74 74
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (9,749) (6,596)
(Decrease) increase in accounts payable and accrued expenses (6,776) 4,073
Decrease in deferred rents (637) (1,653)
Increase in security deposits 155 949
(Decrease) increase in due to affiliates (205) 1,488
--------- ---------
Cash provided by operating activities 73,707 114,767
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (7,602) (143,961)
Proceeds from repayment of real estate mortgages and notes receivable 3,512 68,274
Proceeds from sale of real estate 2,857 22,177
Proceeds from repayment of loans to affiliate -- 1,000
--------- ---------
Cash used for investing activities (1,233) (52,510)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 85,000 271,500
Payments on borrowings (76,572) (217,294)
Deferred finance costs incurred (5) (4,625)
Distributions (84,429) (100,497)
--------- ---------
Cash used for financing activities (76,006) (50,916)
--------- ---------
(Decrease) increase in cash and cash equivalents (3,532) 11,341
Cash and cash equivalents at beginning of period 13,206 15,643
--------- ---------
Cash and cash equivalents at end of period $ 9,674 $ 26,984
========= =========
Supplemental cash flow information:
Interest paid $ 50,634 $ 39,953
========= =========
Non-cash investing activities:
Investment in real estate mortgages receivable $ 1,300 $ 60,000
Issuance of common shares -- 4,959
Non-cash financing activities:
Issuance of common shares $ 227 $ 1,335
</TABLE>
See accompanying notes
3
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 1. Basis of Presentation
The quarterly 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 balance sheet at December 31, 1999, has been derived from the
December 31, 1999, audited financial statements but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
Note 2. Comprehensive Income
The following is a reconciliation of net income to comprehensive income
for the three and six months ended June 30, 2000, and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income $ 28,705 $ 37,740 $ 55,155 $ 85,343
Other comprehensive loss:
Unrealized holding losses on
investments (119) (594) (950) (6,233)
-------- -------- -------- --------
Comprehensive income $ 28,586 $ 37,146 $ 54,205 $ 79,110
======== ======== ======== ========
</TABLE>
At June 30, 2000, the Company's investments in marketable equity
securities were included in other assets and had a fair value of $3,435 and
unrealized holding losses of $8,311. At August 10, 2000, their investments had a
fair value of $5,276 and unrealized holding losses of $6,470.
Note 3. Equity Investments
At June 30, 2000, the Company's financial statements include the
following equity investments:
<TABLE>
<CAPTION>
Equity in Earnings
-------------------------------------------
Three Months Six Months
Ownership Ended June 30, Ended June 30, Equity
Percentage 2000 2000 Investments
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Senior Housing Properties Trust 49.3% $3,583 $7,310 $197,613
Hospitality Properties Trust 7.1% 2,019 3,984 107,446
---------- ---------- -----------
$5,602 $11,294 $305,059
========== ========== ===========
</TABLE>
At June 30, 2000, the Company owned 12,809,237 common shares of Senior
Housing Properties Trust ("SNH") with a carrying value of $197,613 and a fair
value based on quoted market prices of $93,868.
At June 30, 2000, the Company owned 4,000,000 common shares of
Hospitality Properties Trust ("HPT") with a carrying value of $107,446 and a
fair value based on quoted market prices of $90,313.
4
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 4. Real Estate Properties, Mortgages and Notes Receivable, net
During the six months ended June 30, 2000, the Company sold one office
property and a parcel of land for net cash proceeds of $2,857 and recognized a
gain of $1,978. As part of the sale of land, the Company provided a $1,300
mortgage loan secured by the land which is payable in full on May 5, 2001. The
loan bears interest at 10% payable quarterly in arrears. In addition, the
Company funded $7,602 of improvements to its existing properties, received
scheduled principal payments of $10 and repayment of a mortgage secured by one
property totaling $3,502.
In July 2000 the Company announced that it either sold or entered
contracts or letters of intent to sell properties for a total of $72,000. The
announced dispositions are subject to negotiation of final documentation and to
customary closing conditions. The Company's ability to conclude those or other
property dispositions are subject to market conditions and other factors beyond
its control, and the Company cannot give assurances that they will occur or that
the terms of any dispositions which may be available to it in the future will be
favorable to the Company.
Note 5. Indebtedness
In April 2000 the Company retired $27,500 of Remarketed Reset Notes due
2007 (the "Reset Notes") and in July 2000 completed its optional redemption of
the remaining $222,500 of outstanding Reset Notes which bore interest at a rate,
which was subject to periodic resets, at a spread over LIBOR (effective rate of
7.52% per annum immediately prior to the redemption dates). The redemption
prices were 100% of the principal amount of the Reset Notes redeemed, plus
accrued and unpaid interest to the redemption dates. The redemptions were funded
with drawings at an effective interest rate of 7.38% under the Company's
$500,000 revolving bank credit facility, which matures in April 2002. In July
2000 the Company issued unsecured senior notes totaling $30,000, raising net
proceeds of $29,756. The notes bear interest at 8.875% and mature in August
2010. Net proceeds from the notes were used to repay amounts outstanding under
the revolving bank credit facility.
Note 6. Shareholders' Equity
On July 11, 2000, the Company declared a distribution on its shares
with respect to the quarter ended June 30, 2000, of $0.20 per share, which will
be distributed on or about August 25, 2000, to shareholders of record as of July
26, 2000.
In August 2000 13,000 shares were awarded to officers of the Company
and other employees of REIT Management & Research, Inc. ("RMR"), the Company's
investment manager and affiliate, pursuant to the 1992 Incentive Share Award
Plan. During 2000 the Company's three independent trustees were each awarded 500
shares under this plan as part of their annual fee. The shares awarded to the
officers and other employees of RMR vest over a three-year period. The shares
granted to the trustees vest immediately. During the six months ended June 30,
2000, 26,221 shares were issued to RMR as the incentive advisory fee for the
year ended December 31, 1999.
5
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 7. Segment Information
The following is a summary of the Company's reportable segments as of
and for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Six Months Ended June 30, 2000
----------------------------------------- -----------------------------------------
Senior Senior
Housing Office Total Housing Office Total
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 382 $ 100,588 $ 100,970 $ 830 $ 200,336 $ 201,166
Operating expenses -- (34,238) (34,238) -- (68,065) (68,065)
Depreciation -- (14,914) (14,914) -- (29,769) (29,769)
----------------------------------------- -----------------------------------------
Net operating income $ 382 $ 51,436 $ 51,818 $ 830 $ 102,502 $ 103,332
========================================= =========================================
Real estate investments $ 6,861 $ 2,661,925 $ 2,668,786 $ 6,861 $ 2,661,925 $ 2,668,786
Real estate acquired
during the year $-- $ 3,964 $ 3,964 $-- $ 7,602 $ 7,602
<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)
Depreciation (5,750) (11,891) (17,641) (12,046) (23,812) (35,858)
----------------------------------------- -----------------------------------------
Net operating income $ 19,071 $ 42,795 $ 61,866 $ 38,906 $ 84,529 $ 123,435
========================================= =========================================
Real estate investments $ 792,859 $ 2,274,192 $ 3,067,051 $ 792,859 $ 2,274,192 $ 3,067,051
Real estate acquired
during the year $-- $ 141,147 $ 141,147 $-- $ 143,961 $ 143,961
</TABLE>
The following tables reconcile the reported segment information to the
consolidated financial statements for the three and six months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Total per reportable segment $ 100,970 $ 106,049 $ 201,166 $ 209,841
Unallocated other income 75 502 133 1,113
-------------------------- --------------------------
Total consolidated revenues $ 101,045 $ 106,551 $ 201,299 $ 210,954
========================== ==========================
Net operating income:
Total per reportable segment $ 51,818 $ 61,866 $ 103,332 $ 123,435
Unallocated amounts:
Other income 75 502 133 1,113
Interest expense (25,310) (20,088) (50,408) (39,525)
Amortization expense (1,126) (842) (2,145) (1,456)
General and administrative expenses (4,332) (5,008) (9,029) (9,849)
-------------------------- --------------------------
Total consolidated income before equity
in earnings of equity investments
and gain on sale of properties $ 21,125 $ 36,430 $ 41,883 $ 73,718
========================== ==========================
</TABLE>
6
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
On October 12, 1999, the Company spun-off 50.7% of a 100% owned
subsidiary, SNH, to its shareholders (the "Spin-Off"). Prior to the Spin-Off,
SNH owned substantially all of the Company's senior housing properties and the
operating results and investment in SNH were included in the Company's results
of operations and total assets. Since the Spin-Off, the Company's 49.3% retained
interest in SNH has been accounted for using the equity method. Under the equity
method, the Company includes its investment in SNH in equity investments on the
consolidated balance sheets and its share of SNH's results of operations in
equity in earnings of equity investments on the consolidated statements of
income.
Note 8. Pro Forma Information
During 1999 the Company sold 21 nursing homes for gross proceeds of
approximately $96,200. On October 12, 1999, the Company spun-off 50.7% of a 100%
owned subsidiary, SNH, to its shareholders. The following unaudited pro forma
consolidated statements of income for the three and six months ended June 30,
1999, is presented to reflect the effects of the Spin-Off and the disposition of
nursing home assets during 1999, as if these transactions had occurred on
January 1, 1999. This pro forma information does not purport to present actual
results of operations if these transactions had occurred on such date or project
operating results for any future period.
Pro Forma Unaudited Consolidated Statements of Income
(amounts in thousands, except per share amounts)
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
Revenues:
Rental income $ 80,839 $158,205
Interest and other income 1,429 2,803
-------- --------
Total revenues 82,268 161,008
-------- --------
Expenses:
Operating expenses 26,542 50,548
Interest 16,959 32,118
Depreciation and amortization 12,883 25,568
General and administrative 3,762 7,364
-------- --------
Total expenses 60,146 115,598
-------- --------
Income before equity in earnings of equity
investments and gain on sale of properties 22,122 45,410
Equity in earnings of equity investments 7,953 15,927
-------- --------
Income before gain on sale of properties $ 30,075 $ 61,337
======== ========
Weighted average shares outstanding 131,894 131,778
======== ========
Income before gain on sale of properties per
basic share $ 0.23 $ 0.47
======== ========
Pro forma funds from operations, on a diluted basis, were $51,152, or
$0.36 per share, and $103,481, or $0.72 per share, for the three and six months
ended June 30, 1999, respectively.
7
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion presents an analysis of the results of
operations of the properties we owned for the three and six months ended June
30, 2000 and 1999. This discussion includes references to funds from operations.
Funds from operations, or "FFO", as defined in the white paper on funds from
operations which was approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 and as
clarified from time to time, is net income computed in accordance with Generally
Accepted Accounting Principles ("GAAP"), before extraordinary items, plus
depreciation and amortization and after adjustment for unconsolidated
partnerships and joint ventures. We consider FFO to be an appropriate measure of
performance for an equity REIT, along with cash flow from operating activities,
financing activities and investing activities, because it provides investors
with an indication of an equity REIT's ability to incur and service debt, make
capital expenditures, pay distributions and fund other cash needs. We compute
FFO in accordance with the standards established by NAREIT including adjustments
for our pro rata share of FFO of HPT and SNH, gains on sale of properties, and
for non cash items, which may not be comparable to FFO reported by other REITs
that define the term differently. FFO does not represent cash generated by
operating activities in accordance with GAAP and should not be considered as an
alternative to net income, determined in accordance with GAAP, as an indication
of financial performance or the cash flow from operating activities, determined
in accordance with GAAP, or as a measure of liquidity.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000, Compared to Three Months Ended June 30, 1999
Total revenues for the three months ended June 30, 2000, decreased $5.5
million to $101.0 million from $106.6 million for the three months ended June
30, 1999. Revenues from our office segment increased $19.4 million and revenues
from our senior housing segment decreased $24.4 million. The increase in
revenues from our office segment is due to office building acquisitions made
during and after June 1999. The decrease in revenues from our senior housing
segment is due primarily to the Spin-Off of our former subsidiary, SNH, in
October 1999.
For the three months ended June 30, 2000, rental income decreased $1.7
million and interest and other income decreased $3.8 million compared to the
prior period. Rental income decreased primarily because of the Spin-Off of SNH,
offset by acquisitions made during and after June 1999. Interest and other
income decreased primarily as a result of the Spin-Off of SNH.
Total expenses for the three months ended June 30, 2000, increased to
$79.9 million from $70.1 million for the three months ended June 30, 1999.
Operating expenses increased by $7.7 million as a result of our increased
investment in office buildings made during and after June 1999. Interest expense
increased by $5.2 million during 2000 compared to the prior year period,
primarily as a result of increased borrowings outstanding and to a lesser extent
an increase in interest rates on our floating rate debt. Depreciation and
amortization, and general and administrative expenses decreased by $2.4 million
and $676,000, respectively, primarily as a result of the Spin-Off of SNH.
Equity in earnings of equity investments increased in 2000 by $3.6
million from the 1999 period due to the Spin-Off of SNH in October 1999.
Net income decreased to $28.7 million, or $0.22 per basic and diluted
share, for the 2000 period, from $37.7 million, or $0.29 per basic and diluted
share, for the 1999 period. The change in net income is due primarily to the
Spin-Off of SNH, offset by office building acquisitions made during and after
June 1999.
Funds from operations for the three months ended June 30, 2000, were
$46.6 million, or $0.35 per basic share, and $57.6 million, or $0.44 per basic
share, for the 1999 period. Diluted funds from operations for the three months
ended June 30, 2000, were $50.7 million, or $0.35 per diluted share, and $61.7
million, or $0.43 per diluted share, for the same period in 1999. Distributions
declared which relate to the three months ended June 30, 2000 and 1999, were
$26.4 million, or $0.20 per share, and $50.1 million, or $0.38 per share,
respectively. The decrease in distributions reflects the reduction in
distributions from $0.38 per share per quarter to $0.32 per share per quarter
paid after the Spin-Off of SNH. Also, in July 2000 we announced a further
reduction in our distribution rate to $0.20 per share per quarter as further
discussed below.
8
<PAGE>
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Six Months Ended June 30, 2000, Compared to Six Months Ended June 30, 1999
Total revenues for the six months ended June 30, 2000, decreased $9.7
million to $201.3 million from $211.0 million for the six months ended June 30,
1999. Revenues from our office segment increased $41.4 million and revenues from
our senior housing segment decreased $50.1 million. The increase in revenues
from our office segment is due to office building acquisitions made during and
after June 1999. The decrease in revenues from our senior housing segment is due
primarily to the Spin-Off of SNH and the sale of some senior housing properties
in 1999.
For the six months ended June 30, 2000, rental income decreased $3.6
million and interest and other income decreased $6.1 million compared to the
same period in 1999. Rental income decreased primarily because of the Spin-Off
of SNH, offset by acquisitions made during and after June 1999. Interest and
other income decreased primarily as a result of the Spin-Off of SNH and the sale
of some senior housing properties in 1999.
Total expenses for the six months ended June 30, 2000, increased to
$159.4 million from $137.2 million for the six months ended June 30, 1999.
Operating expenses increased by $17.5 million as a result of our increased
investment in office buildings made during and after June 1999. Interest expense
increased by $10.9 million in 2000 compared to the prior year period primarily
as a result of increased borrowings outstanding and to a lesser extent an
increase in interest rates on our floating rate debt. Depreciation and
amortization, and general and administrative expenses decreased by $5.4 million
and $820,000, respectively, primarily as a result of the Spin-Off of SNH.
Equity in earnings of equity investments increased by $7.3 million in
2000 from the 1999 period due to the Spin-Off of SNH in October 1999.
Net income decreased to $55.2 million, or $0.42 per basic and diluted
share, for the 2000 period, from $85.3 million, or $0.65 per basic and diluted
share, for the 1999 period. The change in net income is due primarily to the
Spin-Off of SNH and the sale of some senior housing properties in 1999, offset
by office building acquisitions made during and after June 1999.
Funds from operations for the six months ended June 30, 2000, were
$92.7 million, or $0.70 per basic share, and $117.3 million, or $0.89 per basic
share, for the 1999 period. Diluted funds from operations for the six months
ended June 30, 2000, were $100.8 million, or $0.70 per diluted share, and $125.4
million, or $0.88 per diluted share, for the 1999 period. Distributions declared
which relate to the six months ended June 30, 2000 and 1999, were $68.6 million,
or $0.52 per share, and $100.2 million, or $0.76 per share, respectively. The
decrease in distributions reflects the reduction in distributions from $0.38 per
share per quarter to $0.32 per share per quarter paid after the Spin-Off of SNH.
Also, in July 2000 we announced a further reduction in our distribution rate to
$0.20 per share per quarter as further discussed below.
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended June 30, 2000, Compared to Pro Forma Three Months Ended June
30, 1999
Total revenues for the three months ended June 30, 2000, increased
$18.8 million to $101.0 million from $82.3 million for the pro forma three
months ended June 30, 1999. Rental income increased $19.5 million and interest
and other income decreased $733,000 for the three months ended June 30, 2000,
compared to the pro forma prior year period. Rental income increased due to
acquisitions made during and after June 1999, and interest and other income
decreased primarily due to mortgage repayments received and the reduction in
bank deposit interest.
Total expenses for the three months ended June 30, 2000, increased to
$79.9 million from $60.1 million for the pro forma three months ended June 30,
1999. Operating expenses increased by $7.7 million as a result of our increased
investment in office buildings made during and after June 1999. Interest expense
increased by $8.4 million during 2000 compared to the pro forma prior year
period, primarily as a result of increased borrowings outstanding and to a
lesser extent an increase in interest rates on our floating rate debt.
Depreciation and amortization, and general and administrative expenses increased
by $3.2 million and $570,000, respectively, primarily as a result of office
acquisitions made during and after June 1999.
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Equity in earnings of equity investments decreased in 2000 by $2.4
million from the 1999 period due to the decrease in equity in earnings of SNH.
Net income decreased to $28.7 million, or $0.22 per basic and diluted
share, for the 2000 period from $30.1 million, or $0.23 per basic and diluted
share, for the 1999 pro forma period. The change in net income is due primarily
to the increase in interest expense from increased borrowings, the decrease in
equity in earnings of SNH and the decrease in mortgage interest received, offset
by office building acquisitions made during and after June 1999 and gains on the
sale of properties during 2000.
Funds from operations for the three months ended June 30, 2000, were
$46.6 million, or $0.35 per basic share, and $47.1 million, or $0.36 per basic
share, for the 1999 pro forma period. Diluted funds from operations for the
three months ended June 30, 2000, were $50.7 million, or $0.35 per diluted
share, and $51.2 million, or $0.36 per diluted share, for the 1999 pro forma
period.
Six Months Ended June 30, 2000, Compared to Pro Forma Six Months Ended June 30,
1999
Total revenues for the six months ended June 30, 2000, increased $40.3
million to $201.3 million from $161.0 million for the pro forma six months ended
June 30, 1999. Rental income increased $41.5 million and interest and other
income decreased $1.2 million compared to the pro forma prior year period.
Rental income increased primarily because of acquisitions made during and after
June 1999. Interest and other income decreased primarily as a result of mortgage
repayments received and the reduction in bank deposit interest.
Total expenses for the six months ended June 30, 2000, increased to
$159.4 million from $115.6 million for the pro forma six months ended June 30,
1999. Operating expenses increased by $17.5 million as a result of our increased
investment in office buildings made during and after June 1999. Interest expense
increased by $18.3 million in 2000 compared to the pro forma prior year period
primarily as a result of increased borrowings outstanding and to a lesser extent
an increase in interest rates on our floating rate debt. Depreciation and
amortization, and general and administrative expenses increased by $6.3 million
and $1.7 million, respectively, primarily from acquisitions made during and
after June 1999.
Equity in earnings of equity investments decreased by $4.6 million in
2000 from the 1999 pro forma period due to the decrease in equity in earnings of
SNH.
Net income decreased to $55.2 million, or $0.42 per basic and diluted
share, for the 2000 period from $61.3 million, or $0.47 per basic and diluted
share, for the 1999 pro forma period. The change in net income is due primarily
to the increase in interest expense from increased borrowings, the decrease in
equity in earnings of SNH and the decrease in mortgage interest received, offset
by office building acquisitions made during and after June 1999 and gains on the
sale of properties during 2000.
Funds from operations for the six months ended June 30, 2000, were
$92.7 million, or $0.70 per basic share, and $95.4 million, or $0.72 per basic
share, for the 1999 pro forma period. Diluted funds from operations for the six
months ended June 30, 2000, were $100.8 million, or $0.70 per diluted share, and
$103.5 million, or $0.72 per diluted share, for the 1999 pro forma period.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $2.9 billion at June 30, 2000, compared to $3.0
billion at December 31, 1999.
During the six months ended June 30, 2000, we sold one office property
and a parcel of land for net cash proceeds of $2.9 million and recognized a gain
of $2.0 million. As part of the sale of land, we provided a $1.3 million
mortgage loan secured by the land which is payable in full on May 5, 2001. The
loan bears interest at 10% payable quarterly in arrears. We also funded $7.6
million of improvements to our existing properties, received $10,000 of
regularly scheduled principal payments and received a $3.5 million principal
repayment of a mortgage secured by one property.
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
At June 30, 2000, we owned 12.8 million, or 49.3%, of the common shares
of beneficial interest of SNH with a carrying value of $197.6 million and a
market value of $93.9 million, and 4.0 million, or 7.1%, of the common shares of
beneficial interest of HPT with a carrying value of $107.4 million and a market
value of $90.3 million.
On July 11, 2000, we announced our new distribution rate of $0.20 per
share per quarter ($0.80 per share per year). This new rate represented a
reduction from the distribution rate we previously paid of $0.32 per share per
quarter ($1.28 per share per year). The previous distribution rate was set in
1999 when we distributed to shareholders a majority interest in our subsidiary
SNH, which owns nursing homes and other senior living properties. Two nursing
home company tenants of SNH that were responsible for about half of SNH rents
filed for bankruptcy in early 2000, and in April 2000, SNH reduced its
distribution rate. As a result, the distributions which we receive as a result
of our retained minority interest in SNH were reduced by over $15 million per
year. SNH has announced that it expects to assume operating responsibility for
over 50 nursing homes formerly leased by it, and it is unclear how successful
those future operations may be. We believe that it may be appropriate for us to
consider disposing of our investment in SNH in the future. Our Board of Trustees
adopted what it believes is a conservative distribution pay out percentage of
cash flow at least until the future direction of SNH is clarified and the
results of our current property sales efforts discussed below are known.
SNH also recently announced that it has agreed to sell four independent
living properties to the parent of its tenant for approximately $123 million.
The sale is subject to various closing conditions, and no assurance can be
provided that it will be consummated. SNH has stated that the net proceeds of
the sale would be used to repay debt outstanding under its revolving credit
facility. We believe that the effect of the transaction would be to reduce SNH's
outstanding debt and that SNH's funds from operations will not be materially
affected.
In April 2000 we retired $27.5 million of our Reset Notes due 2007 at
their par value and in July 2000 we completed our optional redemption of the
remaining $222.5 million of outstanding Reset Notes which bore interest at a
rate, which was subject to periodic resets, at a spread over LIBOR (effective
rate of 7.52% per annum immediately prior to the redemption date). The
redemption prices were 100% of the principal amount of the Reset Notes redeemed,
plus accrued and unpaid interest to the redemption dates. The redemptions were
funded with drawings at an effective interest rate of 7.38% under our $500
million revolving bank credit facility, which matures in April 2002.
In July 2000 we issued unsecured senior notes totaling $30 million,
raising net proceeds of $29.8 million. The notes bear interest at 8.875% and
mature in 2010. Net proceeds from the notes were used to repay amounts
outstanding under our revolving bank credit facility.
At June 30, 2000, we had $9.7 million of cash and cash equivalents. At
August 10, 2000, we had $334 million outstanding and $166 million available for
borrowing under our bank credit facility. At August 10, 2000, $2.5 billion was
available on our $3 billion effective shelf registration statement.
In December 1999 we announced a three part business plan, as follows:
first, efforts to sell properties for up to $150-$160 million; second, possible
joint ventures from which we might realize proceeds of $200 million to $400
million; and third, using the proceeds of property sales and joint ventures to
prepay debt, to selectively make new investments and fund a share repurchase
program for up to approximately 14 million common shares.
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
In July 2000 we announced that we either sold or entered contracts or
letters of intent to sell properties for a total of $72 million, and we
currently believe that property sales totaling at least $150-$160 million
projected in December 1999 will be concluded before the end of 2000. The
announced dispositions are subject to negotiation of final documentation and to
customary closing conditions. Our ability to conclude those or other property
dispositions are subject to market conditions and other factors beyond our
control, and we cannot give assurances that they will occur or that the terms of
any dispositions which may be available to us in the future will be favorable to
us. We continue to have preliminary discussions with possible joint venture
investors, but we cannot predict when, if or on what terms any joint ventures
will be consummated. We have not purchased any new properties during the first
six months of 2000 nor have we repurchased any of our shares. While our Board of
Trustees' authorization for a share repurchase program remains in effect, we
have decided that at this time repaying debt should be a priority application
for our available cash. Therefore, we do not expect to complete our share
repurchase program up to the authorized level of 14 million shares or at any
other preset amount during 2000. A determination to repurchase shares will be
dependent on market conditions and on the timing and amounts of property
dispositions or joint venture proceeds.
There can be no assurances that debt or equity financing will be
available to fund future growth, but we do expect that financing will be
available. As of June 30, 2000, our debt as a percentage of total book
capitalization was approximately 48%.
Year 2000
In prior years, we discussed the nature and progress of our plans to
become year 2000 compliant and, in late 1999, we completed our remediation and
testing of systems. We experienced no significant disruptions in our information
and non-information technology systems, and we believe these systems
successfully responded to the year 2000 date change. We are not aware of any
material problems resulting from year 2000 issues by our systems or the systems
of our tenants and vendors, but we will continue to monitor these systems
throughout the year to ensure that any late year 2000 issues that may arise are
addressed promptly. Costs incurred to date and anticipated future costs
regarding year 2000 issues are not material.
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HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. We manage our
exposure to this market risk through our monitoring of available financing
alternatives. Our strategy to manage exposure to changes in interest rates is
unchanged from December 31, 1999. 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, 2000, our total outstanding
fixed rate debt 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:
$3.5 million 9.12% 2004
11.0 million 8.40% 2007
17.6 million 7.02% 2008
11.8 million 8.00% 2008
10.5 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 11 of our office properties and require principal and
interest payments through maturity.
The market prices, if any, of each of our fixed rate obligations as of
June 30, 2000, 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, 2000, and discounted cash flow analyses, a
hypothetical immediate one percentage point change in interest rates would
change the fair value of our fixed rate debt obligations by approximately $37.4
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.
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HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk - continued
At June 30, 2000, we had a $500 million unsecured bank credit facility
that was subject to floating interest rates. We also had unsecured Reset Notes
subject to floating interest rates that were redeemed in full in July 2000 by
drawing on our bank credit facility. Because our bank credit facility is at a
floating rate, changes in interest rates will not affect its value. However,
changes in interest rates will affect our operating results. For example, the
interest rate payable on outstanding borrowings under our bank credit facility
of $169 million at June 30, 2000, was 7.4% per annum. An immediate 10% change in
that interest rate, or 74 basis points, would increase or decrease our costs by
$1.3 million, or $0.01 per share per year:
Impact of Changes in Interest Rates
-----------------------------------------------------
(dollars in thousands)
Total Interest
Interest Rate Outstanding Expense Per
Per Year Debt Year
------------- ----------- -------------
At June 30, 2000 7.40% $169,000 $12,506
10% reduction 6.66% 169,000 11,255
10% increase 8.14% 169,000 13,757
The foregoing table presents a so called "shock" analysis which assumes
that the interest rate change by 10% is in effect for a whole year. If interest
rates were to change gradually over one year the impact would be less.
The foregoing analysis is based upon outstanding amounts under our bank
credit facility on June 30, 2000. As noted above, our Reset Notes outstanding on
June 30, 2000, were repaid in July 2000 with proceeds of increased borrowings
under our bank credit facility. We currently intend to repay a portion of
amounts outstanding under our bank credit facility with the proceeds of asset
sales or new debt issuance. To the extent that floating rate debt outstanding is
greater or less than $169 million, the financial impact of changes in interest
rates would be increased or decreased, respectively.
We borrow in U.S. dollars and our current borrowings under our bank
credit facility are subject to interest at LIBOR plus a premium. Accordingly, we
are vulnerable to changes in U.S. dollar based short term rates, specifically
LIBOR.
During the past year, short-term U.S. dollar based interest rates have
tended to rise. We are unable to predict the direction or amount of interest
rate changes during the next year. We have decided not to purchase an interest
rate cap or other hedge to protect against future rate increases, but we may
enter such agreements in the future. Also, we may incur additional debt at
floating or fixed rates, which would increase our exposure to market changes in
interest rates.
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HRPT PROPERTIES TRUST
Part II Other Information
Item 1. Legal Proceedings
In April 2000 the arbitration panel issued an award in the arbitration
proceeding described in Item 3 of the Company's 1999 Annual Report on Form 10-K,
which arose following the Company's commencement in 1995 of an action in Florida
state court to collect on a secured indemnity agreement from a former tenant and
mortgagor. In its award the arbitration panel dismissed all claims against the
Company and awarded the Company $3.2 million in connection with the Company's
indemnity claims. The Company negotiated and collected $2.5 million of the $3.2
million award plus accrued interest as full settlement of the indemnity claims
in July 2000. Item 3 of the Annual Report also disclosed two related cases filed
against the Company and others by creditors or assignees of the former tenant.
One of these two cases has been dismissed without any award being made against
the Company. The second case remains pending and the outcome of that proceeding
cannot be predicted.
Item 2. Changes in Securities
In May 2000 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 $8 7/16 per common share, the closing price of the common
shares on the New York Stock Exchange on May 9, 2000. 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 the Company's Annual Shareholders Meeting on May 9, 2000, Gerard M.
Martin and Reverend Justinian Manning were re-elected to serve as trustees, each
for a term of three years. There were 121,111,439 and 120,880,654 shares,
respectively, voted in favor of, and 2,597,950 and 2,828,735 shares,
respectively, withheld from voting for the re-election of Mr. Martin and
Reverend Manning. Barry M. Portnoy, Patrick F. Donelan and Frederick N.
Zeytoonjian continue to serve as trustees for terms ending in 2002, 2001 and
2002, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the three
months ended June 30, 2000.
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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 TO SELL
OFFICE BUILDINGS AND OTHER INVESTMENTS, POSSIBLE JOINT VENTURES AND THE EXPECTED
AMOUNT OF PROCEEDS FROM THEM, THE SECURITY AND AMOUNT OF FUTURE DISTRIBUTIONS,
THE FUTURE BUSINESS ACTIVITIES AND PROSPECTS OF SENIOR HOUSING PROPERTIES TRUST,
OUR MINORITY OWNED FORMER SUBSIDIARY, AND OUR POSSIBLE DISPOSITION OF OUR
REMAINING OWNERSHIP INTEREST IN SENIOR HOUSING PROPERTIES TRUST, OUR ACCESS TO
CAPITAL, OUR ABILITY TO MAINTAIN THE RENTS AND CASH FLOW FROM OUR PROPERTIES AND
OTHER MATTERS. READERS ARE CAUTIONED THAT FORWARD LOOKING STATEMENTS ARE NOT
GUARANTEED, 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 PROPERTY SALES 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, 1999, 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. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON FORWARD
LOOKING STATEMENTS.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HRPT PROPERTIES TRUST
By: /s/ John A. Mannix
John A. Mannix
President and Chief Operating Officer
Dated: August 14, 2000
By: /s/ John C. Popeo
John C. Popeo
Treasurer and Chief Financial Officer
Dated: August 14, 2000
17
