UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 November 9, 2000:
131,948,847 shares of beneficial interest, $0.01 par value.
HRPT PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
Page
PART I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 1
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 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 6. Exhibits and Reports on Form 8-K 15
Signatures 18
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
September 30, December 31,
2000 1999
---------------- ---------------
(unaudited) (note 1)
ASSETS
Real estate properties, at cost:
Land $ 349,600 $ 354,173
Buildings and improvements 2,314,262 2,302,171
----------- -----------
2,663,862 2,656,344
Less accumulated depreciation 151,324 106,859
----------- -----------
2,512,538 2,549,485
Real estate mortgages and notes receivable, net 5,746 10,373
Equity investments 302,397 311,113
Cash and cash equivalents 39,530 13,206
Interest and rents receivable 40,990 36,683
Other assets, net 38,046 32,448
----------- -----------
$ 2,939,247 $ 2,953,308
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 351,000 $ 132,000
Senior notes payable, net 757,266 957,586
Mortgage notes payable 54,065 55,441
Convertible subordinated debentures 204,863 204,863
Accounts payable and accrued expenses 46,302 53,851
Deferred rents 8,067 9,005
Security deposits 6,770 7,041
Due to affiliates 13,062 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, 131,948,847 shares and
131,908,126 shares issued and outstanding at September 30,
2000, and December 31, 1999, respectively 1,319 1,319
Additional paid-in capital 1,971,679 1,971,366
Cumulative net income 763,792 678,676
Cumulative distributions (1,232,349) (1,121,533)
Unrealized holding losses on investments (6,589) (7,361)
----------- -----------
Total shareholders' equity 1,497,852 1,522,467
----------- -----------
$ 2,939,247 $ 2,953,308
=========== ===========
See accompanying notes
1
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
Revenues:
Rental income $ 101,755 $ 112,475 $ 301,499 $ 315,810
Interest and other income 1,420 2,330 2,975 9,949
--------- --------- --------- ---------
Total revenues 103,175 114,805 304,474 325,759
--------- --------- --------- ---------
Expenses:
Operating expenses 34,907 31,023 102,972 81,571
Interest 25,441 23,488 75,849 63,013
Depreciation and amortization 15,885 19,850 47,799 57,164
General and administrative 4,482 5,287 13,511 15,136
Impairment of assets -- 7,000 -- 7,000
Spin-off transaction costs -- 14,656 -- 14,656
--------- --------- --------- ---------
Total expenses 80,715 101,304 240,131 238,540
--------- --------- --------- ---------
Income before equity in earnings of equity
investments, gain on sale of properties and
extraordinary item 22,460 13,501 64,343 87,219
Equity in earnings of equity investments 4,091 2,023 15,385 6,052
Loss on equity transaction of equity investment -- -- -- (711)
--------- --------- --------- ---------
Income before gain on sale of properties and
extraordinary item 26,551 15,524 79,728 92,560
Gain on sale of properties, net 4,620 -- 6,598 8,307
--------- --------- --------- ---------
Income before extraordinary item 31,171 15,524 86,326 100,867
Extraordinary item - early extinguishment of debt (1,210) -- (1,210) --
--------- --------- --------- ---------
Net income $ 29,961 $ 15,524 $ 85,116 $ 100,867
========= ========= ========= =========
Weighted average shares outstanding 131,944 131,906 131,934 131,821
========= ========= ========= =========
Basic and diluted earnings per common share:
Income before gain on sale of properties and
extraordinary item $ 0.20 $ 0.12 $ 0.60 $ 0.70
========= ========= ========= =========
Income before extraordinary item $ 0.24 $ 0.12 $ 0.65 $ 0.77
========= ========= ========= =========
Net income $ 0.23 $ 0.12 $ 0.65 $ 0.77
========= ========= ========= =========
See accompanying notes
2
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
--------------------------------
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 85,116 $ 100,867
Adjustments to reconcile net income to cash provided by operating
activities:
Extraordinary item - early extinguishment of debt 1,210 --
Gain on sale of properties, net (6,598) (8,307)
Equity in earnings of equity investments (15,385) (6,052)
Loss on equity transaction of equity investment -- 711
Distributions from equity investments 23,651 8,160
Impairment of assets -- 7,000
Depreciation 44,607 54,805
Amortization 3,192 2,359
Amortization of bond discounts 115 110
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (12,932) (8,214)
(Decrease) increase in accounts payable and accrued expenses (6,549) 8,179
Decrease in deferred rents (938) (1,317)
(Decrease) increase in security deposits (271) 3,792
Increase in due to affiliates 2,223 7,378
--------- ---------
Cash provided by operating activities 117,441 169,471
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (12,600) (403,899)
Proceeds from collection of real estate mortgages and notes receivable 3,517 73,690
Proceeds from sale of real estate 11,777 22,177
Proceeds from collection of loans to affiliate -- 1,000
--------- ---------
Cash provided by (used for) investing activities 2,694 (307,032)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 373,565 519,500
Repayment of borrowings (356,376) (225,489)
Deferred finance costs incurred (184) (4,722)
Distributions (110,816) (150,622)
--------- ---------
Cash (used for) provided by financing activities (93,811) 138,667
--------- ---------
Increase in cash and cash equivalents 26,324 1,106
Cash and cash equivalents at beginning of period 13,206 15,643
--------- ---------
Cash and cash equivalents at end of period $ 39,530 $ 16,749
========= =========
Supplemental cash flow information:
Non-cash investing activities:
Real estate acquired by foreclosure $ 2,410 $--
Investment in real estate mortgages receivable 1,300 60,000
Non-cash financing activities:
Assumption of mortgage note payable $-- $ 3,543
Issuance of common shares 313 6,488
See accompanying notes
3
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Note 1. Basis of Presentation
The unaudited 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 only of normal
recurring adjustments) 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 year's 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 nine months ended September 30, 2000, and 1999:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
--------- ---------- ---------- ---------
Net income $ 29,961 $ 15,524 $ 85,116 $ 100,867
Other comprehensive income:
Unrealized holding gains
(losses) on investments 1,722 (593) 772 (6,826)
--------- --------- --------- ---------
Comprehensive income $ 31,683 $ 14,931 $ 85,888 $ 94,041
========= ========= ========= =========
At September 30, 2000, the Company's investments in marketable equity
securities were included in other assets and had a fair value of $4,750 and
unrealized holding losses of $6,589. At November 9, 2000, these investments had
a fair value of $4,809 and unrealized holding losses of $6,530.
Note 3. Equity Investments
At September 30, 2000, the Company's financial statements included the
following equity investments:
Equity in Earnings
---------------------------------
Three Months Nine Months
Ended Ended
Ownership September 30, September 30, Equity
Percentage 2000 2000 Investments
----------- -------------- ------------- -------------
Senior Housing Properties Trust 49.4% $2,062 $9,372 $195,832
Hospitality Properties Trust 7.1% 2,029 6,013 106,565
-------------- ------------- -------------
$4,091 $15,385 $302,397
============== ============= =============
At September 30, 2000, the Company owned 12,809,237 common shares of
Senior Housing Properties Trust ("SNH") with a carrying value of $195,832 and a
fair value based on quoted market prices of $119,286.
At September 30, 2000, the Company owned 4,000,000 common shares of
Hospitality Properties Trust ("HPT") with a carrying value of $106,565 and a
fair value based on quoted market prices of $93,500.
4
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 nine months ended September 30, 2000, the Company sold one
office property and two land parcels for net cash proceeds of $11,777 and
recognized gains of $6,598. In connection with these sales, the Company provided
a $1,300 mortgage loan secured by one parcel of land which is payable in full on
May 5, 2001. The loan bears interest at 10% payable quarterly in arrears. The
Company funded $12,600 of improvements to its existing properties, received
scheduled principal payments of $15 and received repayment of a mortgage secured
by one property of $3,502.
During July 2000 the Company foreclosed on a $2,410 mortgage receivable
secured by one property located in Arleta, California. The carrying value of
this defaulted mortgage note had previously been partially reserved. In November
2000 the Company sold this property to SNH at its appraised value of
approximately $2,300, and sold one office property located in New York City to a
third party for $128,000. Cash proceeds net of closing costs totaling
approximately $126,000 were used to repay amounts outstanding under the
Company's revolving bank credit facility.
As of November 9, 2000, the Company has entered contracts or letters of
intent to sell properties for a total of $69,000. These dispositions are subject
to negotiation of final documentation and to customary closing conditions. The
Company's ability to conclude these 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
(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
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 by 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 connection with the July
2000 redemption, the Company recognized an extraordinary loss of $1,210 from the
write-off of deferred financing fees.
In July and September 2000 the Company issued unsecured senior notes
aggregating $50,000 in two separate transactions, raising net proceeds of
$49,565. The notes bear interest at rates ranging from 8.625% to 8.875% and
mature in 2010. Net proceeds from the notes were used to repay amounts
outstanding under the revolving bank credit facility.
Note 6. Shareholders' Equity
On October 2, 2000, the Company declared a distribution on its shares
with respect to the quarter ended September 30, 2000, of $0.20 per share, or
approximately $26,400, which will be distributed on or about November 22, 2000,
to shareholders of record as of October 20, 2000.
During 2000 the Company's three independent trustees were each awarded
500 shares under the 1992 Incentive Share Award Plan as part of their annual
fee. The shares awarded to the trustees vest immediately. 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, pursuant
to this plan. The shares awarded to the officers and other employees of RMR vest
over a three-year period. During 2000 26,221 shares were issued to RMR as the
incentive advisory fee for the year ended December 31, 1999.
5
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 periods ended September 30, 2000 and 1999:
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
------------------------------------------ ------------------------------------------
Senior Senior
Housing Office Total Housing Office Total
------------------------------------------ ------------------------------------------
Revenues $ 203 $ 102,143 $ 102,346 $ 1,033 $ 302,479 $ 303,512
Operating expenses -- (34,907) (34,907) -- (102,972) (102,972)
Depreciation -- (14,838) (14,838) -- (44,607) (44,607)
----------- ----------- ----------- ----------- ----------- -----------
Net operating income $ 203 $ 52,398 $ 52,601 $ 1,033 $ 154,900 $ 155,933
=========== =========== =========== =========== =========== ===========
Real estate investments $ 6,856 $ 2,662,752 $ 2,669,608 $ 6,856 $ 2,662,752 $ 2,669,608
Real estate acquired
during the period $-- $ 4,998 $ 4,998 $-- $ 12,600 $ 12,600
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
------------------------------------------ ------------------------------------------
Senior Senior
Housing Office Total Housing Office Total
------------------------------------------ ------------------------------------------
Revenues $ 23,180 $ 91,425 $ 114,605 $ 74,132 $ 250,314 $ 324,446
Operating expenses -- (31,023) (31,023) -- (81,571) (81,571)
Depreciation (5,670) (13,277) (18,947) (17,716) (37,089) (54,805)
Impairment of assets (5,000) (2,000) (7,000) (5,000) (2,000) (7,000)
----------- ----------- ----------- ----------- ----------- -----------
Net operating income $ 12,510 $ 45,125 $ 57,635 $ 51,416 $ 129,654 $ 181,070
=========== =========== =========== =========== =========== ===========
Real estate investments $ 782,359 $ 2,537,607 $ 3,319,966 $ 782,359 $ 2,537,607 $ 3,319,966
Real estate acquired
during the period $-- $ 259,938 $ 259,938 $-- $ 403,899 $ 403,899
The following tables reconcile the reported segment information to the
consolidated financial statements for the periods ended September 30, 2000 and
1999:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------------------------- -------------------------------
Revenues:
Total reportable segments $ 102,346 $ 114,605 $ 303,512 $ 324,446
Unallocated other income 829 200 962 1,313
--------- --------- --------- ---------
Total revenues $ 103,175 $ 114,805 $ 304,474 $ 325,759
========= ========= ========= =========
Net operating income:
Total reportable segments $ 52,601 $ 57,635 $ 155,933 $ 181,070
Unallocated amounts:
Other income 829 200 962 1,313
Interest expense (25,441) (23,488) (75,849) (63,013)
Amortization expense (1,047) (903) (3,192) (2,359)
General and administrative expenses (4,482) (5,287) (13,511) (15,136)
Spin-off transaction costs -- (14,656) -- (14,656)
--------- --------- --------- ---------
Total income before equity in earnings of
equity investments, gain on sale of
properties and extraordinary item $ 22,460 $ 13,501 $ 64,343 $ 87,219
========= ========= ========= =========
6
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 of accounting.
Under the equity method of accounting, 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 nine months ended September
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 Nine Months
Ended Ended
September 30, September 30,
1999 1999
-------------- --------------
Revenues:
Rental income $ 91,290 $249,495
Interest and other income 875 3,678
-------- --------
Total revenues 92,165 253,173
-------- --------
Expenses:
Operating expenses 31,023 81,571
Interest 20,462 52,580
Depreciation and amortization 14,330 39,898
General and administrative 4,131 11,495
-------- --------
Total expenses 69,946 185,544
-------- --------
Income before equity in earnings of equity
investments 22,219 67,629
Equity in earnings of equity investments 7,989 23,916
-------- --------
Net income $ 30,208 $ 91,545
======== ========
Weighted average shares outstanding 131,906 131,821
======== ========
Net income per basic share $ 0.23 $ 0.69
======== ========
7
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 nine months ended
September 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, and excluding unusual and
non-recurring losses, non-cash items, and gains on sales of properties,
including land, 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 September 30, 2000, Compared to Three Months Ended September
30, 1999
Total revenues for the three months ended September 30, 2000, decreased
$11.6 million to $103.2 million from $114.8 million for the three months ended
September 30, 1999. Rental income decreased $10.7 million and interest and other
income decreased $910,000 compared to the prior period. Rental income decreased
primarily because of the Spin-Off of SNH, offset by acquisitions made during and
after July 1999. Interest and other income decreased primarily as a result of
the Spin-Off of SNH. Revenues from our office segment increased $10.7 million
and revenues from our senior housing segment decreased $23.0 million. The
increase in revenues from our office segment is due to office building
acquisitions made during and after July 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.
Total expenses for the three months ended September 30, 2000, decreased
to $80.7 million from $101.3 million for the three months ended September 30,
1999. Included in the 1999 period are unusual and non-recurring items
aggregating $21.7 million: approximately $14.7 million represents Spin-Off
transaction costs and $7 million represents the write down to net realizable
value of the carrying value of two real estate mortgages receivable retained by
us after the Spin-Off and the carrying value of other assets. Operating expenses
increased by $3.9 million primarily as a result of our increased investment in
office buildings made during and after July 1999. Interest expense increased by
$2.0 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 $4.0 million and $805,000,
respectively, primarily as a result of the Spin-Off of SNH.
Equity in earnings of equity investments increased in 2000 by $2.1
million from the 1999 period due to the Spin-Off of SNH in October 1999.
During the third quarter of 2000, we recognized a $4.6 million gain on
the sale of one parcel of land. We also incurred a $1.2 million extraordinary
loss from the write-off of deferred financing fees in connection with the
redemption of our Reset Notes.
8
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Net income increased to $30.0 million, or $0.23 per basic and diluted
share, for the 2000 period, from $15.5 million, or $0.12 per basic and diluted
share, for the 1999 period. The change in net income is due primarily to
Spin-Off transaction costs and the write-down in the carrying value of real
estate mortgages and other assets during the third quarter of 1999, the Spin-Off
of SNH during October 1999 and the resulting equity in earnings of equity
investments, office building acquisitions made during and after July 1999 and
the gain on sale of properties recognized in the 2000 period.
Funds from operations for the three months ended September 30, 2000,
were $46.4 million, or $0.35 per basic share, and $58.3 million, or $0.44 per
basic share, for the 1999 period. Diluted funds from operations for the three
months ended September 30, 2000, were $50.4 million, or $0.35 per diluted share,
and $62.3 million, or $0.44 per diluted share, for the same period in 1999.
Funds from operations for 1999 excludes Spin-Off transaction costs of $14.7
million and the write-down in the carrying value of real estate mortgages and
other assets of $7 million.
Nine Months Ended September 30, 2000, Compared to Nine Months Ended September
30, 1999
Total revenues for the nine months ended September 30, 2000, decreased
$21.3 million to $304.5 million from $325.8 million for the nine months ended
September 30, 1999. Rental income decreased $14.3 million and interest and other
income decreased $7 million compared to the same period in 1999. Rental income
decreased primarily because of the Spin-Off of SNH, offset by acquisitions made
during 1999. Interest and other income decreased primarily as a result of the
Spin-Off of SNH and the sale of properties in 1999. Revenues from our office
segment increased $52.2 million and revenues from our senior housing segment
decreased $73.1 million. The increase in revenues from our office segment is due
to office building acquisitions made during 1999. The decrease in revenues from
our senior housing segment is due primarily to the Spin-Off of SNH and the sale
of properties in 1999.
Total expenses for the nine months ended September 30, 2000, increased
to $240.1 million from $238.5 million for the nine months ended September 30,
1999. Operating expenses increased by $21.4 million primarily as a result of our
increased investment in office buildings made during 1999. Interest expense
increased by $12.8 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 $9.4 million
and $1.6 million, respectively, primarily as a result of the Spin-Off of SNH.
Included in the 1999 period are unusual and non-recurring items aggregating
$21.7 million: approximately $14.7 million represents Spin-Off transaction costs
and $7 million represents the write-down to net realizable value of the carrying
value of two real estate mortgages receivable retained by us after the Spin-Off
and the carrying value of other assets.
Equity in earnings of equity investments increased by $9.3 million in
2000 from the 1999 period due to the Spin-Off of SNH in October 1999.
During the nine months ended September 30, 2000, we sold one office
building and two land parcels and recognized gains on the sales totaling $6.6
million. During the same period we incurred a $1.2 million extraordinary loss
from the write-off of deferred financing fees in connection with the redemption
of our Reset Notes. During the nine months ended September 30, 1999, we
recognized gains totaling $8.3 million on sales of properties.
Net income decreased to $85.1 million, or $0.65 per basic and diluted
share, for the 2000 period, from $100.9 million, or $0.77 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 properties in 1999, office building acquisitions
made during 1999, and Spin-Off transaction costs and the write-down in the
carrying value of real estate mortgages and other assets during 1999.
9
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Funds from operations for the nine months ended September 30, 2000,
were $139.1 million, or $1.05 per basic share, compared to $176.3 million, or
$1.34 per basic share, for the 1999 period. Diluted funds from operations for
the nine months ended September 30, 2000, were $151.2 million, or $1.05 per
diluted share, compared to $188.4 million, or $1.32 per diluted share, for the
1999 period. Funds from operations for 1999 excludes Spin-Off transaction costs
of $14.7 million and the write-down in the carrying value of real estate
mortgages and other assets of $7 million.
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended September 30, 2000, Compared to Pro Forma Three Months Ended
September 30, 1999
Total revenues for the three months ended September 30, 2000, increased
$11.0 million to $103.2 million from $92.2 million for the pro forma three
months ended September 30, 1999. Rental income increased $10.5 million and
interest and other income increased $545,000 for the three months ended
September 30, 2000, compared to the pro forma prior year period. Rental income
increased primarily due to acquisitions made during and after July 1999, and
interest and other income increased primarily due to the increase in dividend
income earned on marketable equity securities.
Total expenses for the three months ended September 30, 2000, increased
to $80.7 million from $69.9 million for the pro forma three months ended
September 30, 1999. Operating expenses increased by $3.9 million as a result of
our increased investment in office buildings made during and after July 1999.
Interest expense increased by $5.0 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 $1.6 million and $351,000, respectively, primarily as a result of office
acquisitions made during and after July 1999.
Equity in earnings of equity investments decreased in 2000 by $3.9
million from the 1999 pro forma period primarily as a result of a reduction in
revenues from some of SNH's properties due to tenant bankruptcies.
Net income decreased to $30.0 million, or $0.23 per basic and diluted
share, for the 2000 period from $30.2 million, or $0.23 per basic and diluted
share, for the 1999 pro forma period. The change in net income is due primarily
to a reduction in revenues from some of SNH's properties due to tenant
bankruptcies, offset by the gain on the sale of land during the third quarter of
2000, and the acquisition of office buildings during and after July 1999.
Funds from operations for the three months ended September 30, 2000,
were $46.4 million, or $0.35 per basic share, and $48.5 million, or $0.37 per
basic share, for the 1999 pro forma period. Diluted funds from operations for
the three months ended September 30, 2000, were $50.4 million, or $0.35 per
diluted share, and $52.6 million, or $0.37 per diluted share, for the 1999 pro
forma period.
Nine Months Ended September 30, 2000, Compared to Pro Forma Nine Months Ended
September 30, 1999
Total revenues for the nine months ended September 30, 2000, increased
$51.3 million to $304.5 million from $253.2 million for the pro forma nine
months ended September 30, 1999. Rental income increased $52.0 million and
interest and other income decreased $703,000 compared to the pro forma prior
year period. Rental income increased primarily because of acquisitions made
during 1999. Interest and other income decreased primarily as a result of
mortgage repayments received.
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Total expenses for the nine months ended September 30, 2000, increased
to $240.1 million from $185.5 million for the pro forma nine months ended
September 30, 1999. Operating expenses increased by $21.4 million as a result of
our increased investment in office buildings made during 1999. Interest expense
increased by $23.3 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 $7.9 million
and $2.0 million, respectively, primarily from acquisitions made during 1999.
Equity in earnings of equity investments decreased in 2000 by $8.5
million from the 1999 pro forma period primarily as a result of a reduction in
revenues from some of SNH's properties due to tenant bankruptcies.
Net income decreased to $85.1 million, or $0.65 per basic and diluted
share, for the 2000 period from $91.5 million, or $0.69 per basic and diluted
share, for the 1999 pro forma period. The change in net income is due primarily
to a decrease in equity in earnings from SNH and an increase in interest expense
from increased borrowings, offset by gains on the sale of properties during 2000
and office building acquisitions made during 1999.
Funds from operations for the nine months ended September 30, 2000,
were $139.1 million, or $1.05 per basic share, and $143.9 million, or $1.09 per
basic share, for the 1999 pro forma period. Diluted funds from operations for
the nine months ended September 30, 2000, were $151.2 million, or $1.05 per
diluted share, and $156.0 million, or $1.09 per diluted share, for the 1999 pro
forma period.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $2.9 billion at September 30, 2000, compared to $3.0
billion at December 31, 1999.
During the nine months ended September 30, 2000, we sold one office
property and two parcels of land for net cash proceeds of $11.8 million and
recognized gains of $6.6 million. Incident to one of these land sales 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. During July 2000 we foreclosed on a $2.4 million mortgage receivable
secured by one senior housing property located in Arleta, California. The
carrying value of this defaulted mortgage note had previously been partially
reserved. In November 2000 we sold this property to SNH at its appraised value
of $2.3 million, and sold one office property located in New York City to a
third party for $128.0 million. We also funded $12.6 million of improvements to
our existing properties, received $15,000 of regularly scheduled principal
payments and received a $3.5 million principal repayment of a mortgage secured
by one property.
At September 30, 2000, we owned 12.8 million, or 49.4%, of the common
shares of beneficial interest of SNH with a carrying value of $195.8 million and
a market value of $119.3 million, and 4.0 million, or 7.1%, of the common shares
of beneficial interest of HPT with a carrying value of $106.6 million and a
market value of $93.5 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 from our
retained minority interest in SNH were reduced by over $15 million per year.
Effective July 1, 2000, SNH assumed operating responsibility for over 50 nursing
homes formerly leased by it, and it is unclear how successful those future
operations may be. 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.
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HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
In April 2000 we retired $27.5 million of our Reset Notes 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 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 connection with the final redemption
of our Reset Notes, we recognized an extraordinary loss of $1.2 million from the
write-off of deferred financing fees.
In July and September 2000 we issued unsecured senior notes totaling
$50 million in two separate transactions, raising net proceeds of $49.6 million.
The notes bear interest at rates ranging from 8.625% to 8.875% and mature in
2010. Net proceeds from the notes were used to repay amounts outstanding under
our revolving bank credit facility.
At November 9, 2000, we had approximately $11 million of cash and cash
equivalents, $180 million outstanding and $320 million available for borrowing
under our bank credit facility, and $2.5 billion available on our $3 billion
effective shelf registration statement.
In December 1999 we announced our intention to sell approximately
$150-$160 million of properties during 2000. During 2000 through November 9th,
we have sold properties for approximately $143 million. As of November 9, 2000,
we have entered contracts or letters of intent to sell additional properties for
approximately $69 million. These contracts and letters of intent are subject to
conditions and contingencies and there can be no assurance if and when these
additional sales will be completed.
In December 1999 we also announced that we were exploring creating
joint venture investments pursuant to which we might receive net proceeds of
$200 million or more from the sale of partial interests in some of our
properties. We have had discussions with several investors concerning joint
ventures but to date we have not concluded any mutually acceptable arrangements.
Although some of these discussions are continuing, we do not believe that we
will realize any joint venture proceeds during 2000.
In December 1999 we announced that our Board of Trustees had authorized
share repurchases for up to 14 million common shares. Although this share
repurchase authorization remains effective, in July 2000 we announced that our
priority use of cash proceeds from property sales or new financing will be to
pay debts which mature within the next few years. Accordingly, we have not
repurchased any shares during 2000 and we are not committed to purchase any
preset amount of shares during 2000. Any future determination to repurchase
shares will be dependent upon the amounts of property sales proceeds, our
ability to pay or refinance our schedule of debt maturities and upon market
conditions.
We have recently issued $50 million of unsecured, 10-year notes and we
are now exploring the possibility of issuing additional amounts of long-term
debt including secured debt. Most of our properties are currently unencumbered,
and we believe issuance of secured debt may be the least costly way for us to
refinance some short term debt maturities, especially if properties which are
encumbered are those we expect to own for extended times.
There can be no assurances that debt or equity financing will be
available to refinance our debt maturities or fund future growth, but we do
expect that financing will be available. As of September 30, 2000, our debt as a
percentage of total book capitalization was approximately 48%.
12
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 will be managed in the near future. At September 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
30.0 million 8.875% 2010
20.0 million 8.625% 2010
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
17.5 million 7.02% 2008
11.8 million 8.00% 2008
10.3 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 $4.8 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
September 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 September 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
$40.0 million.
Each of our obligations for borrowed money has provisions that allow us
to make repayments earlier than the stated maturity date. In some cases, we are
not allowed to make early repayment prior to a cutoff date and in some 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.
13
HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk - continued
At September 30, 2000, we had a $500 million unsecured bank credit
facility that was subject to floating interest rates. 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 $351 million at September 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 $2.6 million, or $0.02 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 September 30, 2000 7.40% $351,000 $25,974
10% reduction 6.66% 351,000 23,377
10% increase 8.14% 351,000 28,571
The foregoing table presents a so called "shock" analysis which assumes
that the interest rate change by 10% is in effect for a whole year. If interest
rates were to change gradually over one year the impact would be less.
We borrow in U.S. dollars and our current borrowings under our bank
credit facility 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. As of September 30, 2000, we had not
purchased an interest rate cap or other hedge to protect against future rate
increases. Also, we may incur additional debt at floating or fixed rates, which
would increase our exposure to market changes in interest rates.
14
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 our 1999 Annual Report on Form 10-K, which
arose following our 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 us and awarded us
$3.2 million in connection with the indemnity claims. We negotiated with
representatives of this former tenant 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 referred to two related cases
filed against us and others by creditors or assignees of the former tenant. One
of these two cases has been dismissed without any award being made against us.
The second case remains pending and we cannot predict the outcome of that
proceeding.
Item 2. Changes in Securities
On August 1, 2000, pursuant to our Incentive Share Award Plan, we
granted 13,000 common shares to our officers and certain employees of RMR, each
valued at $6.625 per common share, the closing price of the common shares on the
New York Stock Exchange on August 1, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Supplemental Indenture No. 8 dated as of July 31, 2000 between
HRPT Properties Trust and State Street Bank and Trust Company
pertaining to $30,000,000 in aggregate principal amount of 8.875%
Senior Notes due 2010 (filed herewith).
10.1 Second Amendment to Loan Agreement dated as of October 24, 2000
among HRPT Properties Trust, the financial institutions listed on
the signature pages thereof, Dresdner Kleinwort Benson North
America LLC and Fleet National Bank (filed herewith).
27. Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated July 10, 2000, relating to, (a)
the Company's new distribution rate, (b) the status of the
Company's business initiatives, and (c) the Company's redemption
of Remarketed Reset Notes (Item 5).
2. Current Report on Form 8-K, dated July 25, 2000, filing as
exhibits, (a) Form of Purchase Agreement dated as of July 25,
2000 between HRPT Properties Trust and Donaldson, Lufkin &
Jenrette Securities Corporation pertaining to $30,000,000 in
aggregate principal amount of 8.875% Senior Notes due 2010, (b)
Form of Supplemental Indenture No. 8 dated as of July 31, 2000
between HRPT Properties Trust and State Street Bank and Trust
Company pertaining to $30,000,000 in aggregate principal amount
of 8.875% Senior Notes due 2010, (c) Opinion of Sullivan &
Worcester LLP re: tax matters, (d) Computation of Ratio of
Earnings to Fixed Charges, and (e) Consent of Sullivan &
Worcester LLP (Item 7).
15
3. Current Report on Form 8-K, dated September 28, 2000, relating
to, (a) an updated description of the Maryland "control share
acquisition" statute, and (b) filing as exhibits, (1) Purchase
Agreement dated as of September 28, 2000 between HRPT Properties
Trust and First Union Securities, Inc. pertaining to $20,000,000
in aggregate principal amount of 8.625% Senior Notes due 2010,
(2) Supplemental Indenture No. 9 dated as of September 29, 2000
between HRPT Properties Trust and State Street Bank and Trust
Company pertaining to $20,000,000 in aggregate principal amount
of 8.625% Senior Notes due 2010, (3) Opinion of Sullivan &
Worcester LLP re: tax matters, (4) Computation of Ratio of
Earnings to Fixed Charges, and (5) Consent of Sullivan &
Worcester LLP (Items 5 and 7).
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HRPT PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD LOOKING
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS foRM 10-Q AND INCLUDE REFERENCES
TO EXPECTED PROPERTY SALES, PROCEEDS OF POSSIBLE JOINT VENTURES, DEBT FINANCING
POSSIBILITIES, POSSIBLE SHARE REPURCHASES AND OTHER MATTERS. THESE FORWARD
LOOKING STATEMENTS ARE BASED UPON OUR CURRENT BELIEFS AND EXPECTATIONS, BUT THEY
ARE NOT GUARANTEED AND THEY MAY NOT OCCUR. FOR EXAMPLE, WE MAY BE UNABLE TO
CONCLUDE PROPERTY SALES OR DEBT FINANCINGS ON ACCEPTABLE TERMS. SIMILARLY WE MAY
DECIDE TO REPURCHASE SHARES AT ANY TIME OR WE MAY DECIDE NEVER TO DO SO.
INVESTORS 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.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HRPT PROPERTIES TRUST
By: /s/ John A. Mannix
John A. Mannix
President and Chief Operating Officer
Dated: November 14, 2000
By: /s/ John C. Popeo
John C. Popeo
Treasurer and Chief Financial Officer
Dated: November 14, 2000
18