UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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
Maryland 04-6558834
(State of Incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
617-332-3990
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Shares outstanding
Class at November 4, 2002
- --------------------------------------- -------------------
Common shares of beneficial
interest, $0.01 par value per share 128,825,247
HRPT PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2002
INDEX
PART I Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 1
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Item 4. Controls and Procedures 11
Certain Important Factors 12
PART II Other Information
Item 6. Exhibits and Report on Form 8-K 13
Signatures 14
Certifications 15
HRPT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
September 30, December 31,
2002 2001
-------------- --------------
(unaudited) (audited)
ASSETS
Real estate properties, at cost:
Land $ 320,315 $ 302,601
Buildings and improvements 2,486,624 2,289,886
----------- -----------
2,806,939 2,592,487
Less accumulated depreciation 266,493 219,140
----------- -----------
2,540,446 2,373,347
Equity investments 265,519 273,442
Cash and cash equivalents 185,182 50,555
Restricted cash 7,347 8,582
Rents receivable, net 55,737 46,847
Other assets, net 53,632 52,653
----------- -----------
$ 3,107,863 $ 2,805,426
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings on revolving credit facility $-- $--
Senior notes payable, net 772,843 757,505
Mortgage notes payable, net 337,107 339,712
Accounts payable and accrued expenses 38,548 32,888
Deferred rents 9,994 7,924
Security deposits 7,952 7,334
Due to affiliates 11,103 3,563
Commitments and contingencies -- --
Shareholders' equity:
Preferred shares of beneficial interest, $0.01 par value, 50,000,000
shares authorized:
Series A, 8,000,000 shares issued and outstanding 193,086 193,086
Series B, 12,000,000 and zero shares issued and
outstanding, respectively 290,180 --
Common shares of beneficial interest, $0.01 par value: 150,000,000
shares authorized, 128,825,247 and 128,808,747 shares issued and
outstanding, respectively 1,288 1,288
Additional paid in capital 1,945,753 1,945,610
Cumulative net income 978,931 903,752
Cumulative common distributions (1,449,790) (1,372,503)
Cumulative preferred distributions (29,132) (14,319)
Unrealized holding loss on investments -- (414)
----------- -----------
Total shareholders' equity 1,930,316 1,656,500
----------- -----------
$ 3,107,863 $ 2,805,426
=========== ===========
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,
---------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- --------- ----------
REVENUES:
Rental income $ 100,863 $ 95,589 $ 298,534 $ 289,395
Interest and other income 1,204 1,195 2,937 5,865
--------- --------- --------- ---------
Total revenues 102,067 96,784 301,471 295,260
--------- --------- --------- ---------
EXPENSES:
Operating expenses 37,339 34,247 109,222 104,424
Interest (including amortization of note discounts
and deferred financing fees) 21,346 21,986 64,505 68,654
Depreciation and amortization 16,928 15,371 49,731 45,913
General and administrative 3,916 4,061 11,792 11,794
Reversal of impairment of assets -- -- -- (3,955)
--------- --------- --------- ---------
Total expenses 79,529 75,665 235,250 226,830
--------- --------- --------- ---------
Income before equity in earnings of equity investments
and extraordinary item 22,538 21,119 66,221 68,430
Equity in earnings of equity investments 4,784 4,280 13,842 10,630
Loss on equity transactions of equity investments -- (5,636) (1,421) (5,636)
--------- --------- --------- ---------
Income before extraordinary item 27,322 19,763 78,642 73,424
Extraordinary item - early extinguishment of debt (119) -- (3,463) (2,149)
--------- --------- --------- ---------
Net income 27,203 19,763 75,179 71,275
Preferred distributions (6,250) (4,938) (16,125) (11,905)
--------- --------- --------- ---------
Net income available for common shareholders $ 20,953 $ 14,825 $ 59,054 $ 59,370
========= ========= ========= =========
Weighted average common shares outstanding 128,824 129,937 128,814 130,710
========= ========= ========= =========
Basic and diluted earnings per common share:
Income before extraordinary item $ 0.16 $ 0.11 $ 0.49 $ 0.47
Extraordinary item - early extinguishment of debt -- -- (0.03) (0.02)
--------- --------- --------- ---------
Net income $ 0.16 $ 0.11 $ 0.46 $ 0.45
========= ========= ========= =========
See accompanying notes
2
HRPT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
--------------------------------
2002 2001
----------- -------------
Cash flows from operating activities:
Net income $ 75,179 $ 71,275
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 47,434 44,405
Amortization of note discounts and deferred financing fees 3,980 3,597
Other amortization 2,297 1,508
Reversal of impairment of assets -- (3,955)
Equity in earnings of equity investments (13,842) (10,630)
Loss on equity transactions of equity investments 1,421 5,636
Distributions of earnings from equity investments 13,842 10,630
Extraordinary item 240 2,149
Change in assets and liabilities:
Increase in rents receivable and other assets (14,331) (15,630)
Increase (decrease) in accounts payable and accrued expenses 5,660 (10,178)
Increase (decrease) in deferred rents 2,070 (94)
Increase in security deposits 618 290
Increase (decrease) in due to affiliates 7,540 (4,689)
--------- ---------
Cash provided by operating activities 132,108 94,314
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (215,159) (31,438)
Distributions in excess of earnings from equity investments 6,502 9,338
Proceeds from repayment of real estate mortgages receivable -- 10,404
Proceeds from sale of real estate 740 10,444
Decrease in restricted cash 1,235 16,258
--------- ---------
Cash (used for) provided by investing activities (206,682) 15,006
--------- ---------
Cash flows from financing activities:
Repurchase of common shares -- (20,803)
Proceeds from issuance of preferred shares 290,180 193,086
Proceeds from borrowings 566,768 --
Payments on borrowings (555,289) (205,691)
Deferred finance costs (358) (6,737)
Distributions to common shareholders (77,287) (78,603)
Distributions to preferred shareholders (14,813) (9,382)
--------- ---------
Cash provided by (used for) financing activities 209,201 (128,130)
--------- ---------
Increase (decrease) in cash and cash equivalents 134,627 (18,810)
Cash and cash equivalents at beginning of period 50,555 92,681
--------- ---------
Cash and cash equivalents at end of period $ 185,182 $ 73,871
========= =========
Supplemental cash flow information:
Interest paid (including capitalized interest paid of $2,832 and $603,
respectively) $ 60,214 $ 70,640
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 accompanying consolidated financial statements of HRPT Properties
Trust and its subsidiaries (the "Company") have been prepared without audit.
Certain information and footnote disclosures required by accounting principles
generally accepted in the United States for complete financial statements have
been condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. However, the
accompanying financial statements should be read in conjunction with the
financial statements and notes contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. In the opinion of management, all
adjustments, which include only normal recurring adjustments considered
necessary for a fair presentation, have been included. All intercompany
transactions and balances between HRPT Properties Trust and its subsidiaries
have been eliminated. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year.
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, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2002 2001 2002 2001
------------ ------------- ------------ -----------
Net income $27,203 $19,763 $75,179 $71,275
Other comprehensive income:
Unrealized holding gains (losses) on
investments 1,713 (95) 1,713 4,964
Less: reclassification adjustment for gains
realized in net income (1,299) -- (1,299) --
------------ ------------- ------------ -----------
Net unrealized gains (losses) 414 (95) 414 4,964
------------ ------------- ------------ -----------
Comprehensive income $27,617 $19,668 $75,593 $76,239
============ ============= ============ ===========
During the nine months ended September 30, 2002, the Company sold all
of its marketable equity securities for $12,878 and realized gains of $1,299
that are included in other income on the Company's consolidated statements of
income.
Note 3. Equity Investments
At September 30, 2002, the Company had the following equity investments
in Senior Housing Properties Trust ("SNH") and Hospitality Properties Trust
("HPT") and realized the following equity in earnings from those investments:
Equity Investments Equity in Earnings
-------------------------------- --------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
September 30, December 31, ------------------------------ ----------------------------
2002 2001 2002 2001 2002 2001
-------------- -------------- ------------ ------------- ------------ -----------
SNH $167,283 $171,969 $2,836 $2,343 $8,019 $4,890
HPT 98,236 101,473 1,948 1,937 5,823 5,740
-------------- -------------- ------------ ------------- ------------ -----------
$265,519 $273,442 $4,784 $4,280 $13,842 $10,630
============== ============== ============ ============= ============ ===========
4
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share amounts)
At September 30, 2002, the Company owned 12,809,238 common shares, or
21.9%, of SNH with a carrying value of $167,283 and a market value, based on
quoted market prices, of $143,720, and 4,000,000 common shares, or 6.4%, of HPT
with a carrying value of $98,236 and a market value, based on quoted market
prices, of $132,480. In February 2002 SNH completed a public offering of common
shares. As a result of this transaction, the Company's ownership percentage of
SNH was reduced from 29.5% at December 31, 2001, to 21.9% at September 30, 2002,
and the Company recognized a non cash loss of $1,421 as a result of this sale by
SNH at a price below the Company's carrying value of its SNH shares. The
Company's two managing trustees are also managing trustees of SNH and HPT, and
owners of Reit Management & Research LLC, which is the investment manager to the
Company, SNH and HPT. The Company's investments in SNH and HPT are accounted for
using the equity method of accounting.
Note 4. Real Estate Properties
During the nine months ended September 30, 2002, the Company acquired
13 properties for $176,692 and funded $38,467 of improvements to its existing
properties. The Company also sold one property in January 2002 for net cash
proceeds of $740. One property with an undepreciated book value of $81,367 as of
September 30, 2002, has been undergoing an extensive redevelopment expected to
be substantially complete in the fourth quarter of 2002. This property was
pre-leased and rent is expected to commence prior to the end of 2002. During
redevelopment, no rental income or depreciation is being recognized, and
redevelopment costs, including interest, are being capitalized.
Note 5. Indebtedness
On March 26, 2002, the Company redeemed at par plus a premium, all
$160,000 of its 6.875% senior notes due in August 2002. This redemption was
funded using borrowings under the Company's revolving bank credit facility. In
connection with this redemption, the Company recognized an extraordinary loss of
$3,344 from the prepayment premium and the write-off of deferred financing fees
and a note discount.
In April 2002 the Company issued unsecured senior notes totaling
$200,000, raising net proceeds of $196,768. These notes bear interest at 6.95%,
require semi-annual interest payments and mature in April 2012. The net proceeds
from this offering were used to repay amounts outstanding under the Company's
revolving bank credit facility.
In July 2002 the Company repurchased and retired $21,720 of its
$150,000 6.75% senior notes due in December 2002, at par plus a premium, using
cash on hand and borrowings under its revolving bank credit facility. The
premium paid plus the write-off of deferred financing fees and the unamortized
original issue note discount totaled $119 and was recognized as an extraordinary
loss in the period ending September 30, 2002.
The Company's public debt indentures and credit facility agreement
contain a number of financial and other covenants, including a credit facility
covenant which limits the amount of aggregate distributions on preferred and
common shares to 90% of operating cash flow available for shareholder
distributions as defined in the credit facility.
Note 6. Shareholders' Equity
In July 2002, 15,000 common shares with an aggregate market value of
$130 were granted to officers of the Company and employees of the Company's
investment manager. One-third of these shares vest immediately and the balance
vests over a two-year period. The Company includes the value of granted shares
in general and administrative expenses.
In September 2002 the Company issued 12,000,000 series B cumulative
redeemable preferred shares in a public offering for net proceeds of $290,180.
Each series B preferred share requires dividends of $2.1875 per annum, payable
in equal quarterly payments. Each series B preferred share has a liquidation
preference of $25.00 and is redeemable, at the Company's option, for $25.00 each
plus accrued and unpaid dividends at any time on or after September 12, 2007.
The proceeds from this offering were used to repay amounts outstanding under the
Company's revolving bank credit facility, to prepay debt and to acquire
properties.
5
HRPT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share amounts)
Note 7. New Accounting Prouncements
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145"). The provisions of this standard
eliminate the requirement that a gain or loss from the extinguishment of debt be
classified as an extraordinary item, unless it can be considered unusual in
nature and infrequent in occurrence. The Company will be required to implement
FAS 145 on January 1, 2003. Upon implementation, the Company will reclassify all
extraordinary gains or losses from debt extinguishments in 2002 and prior as
ordinary income/loss from operations.
Note 8. Subsequent Events
In October 2002, the Company declared a distribution on its common
shares with respect to the quarter ended September 30, 2002, of $0.20 per common
share, or $25,800, which will be paid on or about November 22, 2002, to
shareholders of record on October 22, 2002. The Company also announced a
distribution on its series A cumulative redeemable preferred shares of $0.6172
per share, or $4,938 and a partial quarter's distribution on its series B
cumulative redeemable preferred shares of $0.3828 per share, or $4,594 which
will be paid on or about November 15, 2002, to shareholders of record as of
November 1, 2002.
In October 2002 the Company purchased three commercial office
properties for $236,250 plus closing costs, using cash on hand and borrowings
under its revolving bank credit facility.
Also, in October 2002, the Company redeemed at par plus accrued
interest, the outstanding balance of $128,280 of its 6.75% notes due in December
2002. During the fourth quarter of 2002, the Company will realize an
extraordinary loss of $45 as a result of the write off of unamortized issuance
costs in connection with this redemption.
6
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion presents an analysis of our results of operations for
the three and nine months ended September 30, 2002 and 2001, and should be read
in conjunction with our Annual Report on Form 10-K.
Results of Operations
Three Months Ended September 30, 2002, Compared to Three Months Ended September
30, 2001
Total revenues for the three months ended September 30, 2002, increased
to $102.1 million from $96.8 million for the three months ended September 30,
2001. Rental income increased in 2002 by $5.3 million primarily as a result of
our acquisition of 13 properties in 2002 and two properties in 2001. This
increase was partially offset by a decline in rents resulting from the decrease
in property occupancy during the 2002 period compared to the 2001 period.
Total expenses for the three months ended September 30, 2002, increased
to $79.5 million from $75.7 million for the three months ended September 30,
2001, due primarily to increases in operating expenses and depreciation and
amortization, offset by a decrease in interest expense. Operating expenses and
depreciation and amortization expenses increased by $3.1 million and $1.6
million, respectively, primarily as a result of the acquisition of properties in
2002 and 2001. Interest expense decreased by $640,000. The decrease in interest
expense results from lower interest rates and capitalization of interest on debt
allocable to a property being redeveloped during 2002, partially offset by
interest incurred to finance property acquisitions.
Equity in earnings of equity investments increased by $504,000 for the
three months ended September 30, 2002, compared to the same period in 2001 due
primarily to an increase in earnings from Senior Housing Properties Trust
("SNH"). Also, a loss on equity transactions of equity investments of $5.6
million was recognized in the 2001 third quarter, reflecting the issuance of
common shares by SNH at a price below our per share carrying value.
Net income before preferred distributions was $27.2 million for the
2002 period, and $19.8 million for the 2001 period. Net income available for
common shareholders is net income reduced by preferred distributions and was
$21.0 million, or $0.16 per common share, in the 2002 period, compared to $14.8
million, or $0.11 per common share in the 2001 period. The increases in both net
income and net income available for common shareholders is due primarily to
property acquisitions in 2002 and 2001, the decrease in interest expense, the
increase in equity income from our investment in SNH and the prior period loss
recognized from the issuance of common shares by SNH, offset by the decrease in
rents from lower occupancies in continuing properties. Net income available for
common shareholders for the three months ended September 30, 2002, also includes
a partial period deduction for preferred distributions on our series B preferred
shares that were issued in September 2002.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended September
30, 2001
Total revenues for the nine months ended September 30, 2002, increased
to $301.5 million from $295.3 million for the nine months ended September 30,
2001. Rental income increased in 2002 by $9.1 million and interest and other
income decreased in 2002 by $2.9 million, compared to the prior period. Rental
income increased primarily from the acquisition of 13 properties in 2002 and two
properties in 2001, offset by decreases resulting from the sale of four
properties in 2001, and a decline in property occupancy during the 2002 period
from the 2001 period. Interest and other income decreased primarily as a result
of lower cash balances invested in 2002 compared to 2001 and lower interest
rates.
7
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, 2002, increased
to $235.3 million from $226.8 million for the nine months ended September 30,
2001. This increase results from operating expenses and depreciation and
amortization from buildings purchased in 2002 and 2001, and the reversal of an
impairment loss reserve totaling $4.0 million recognized in 2001 offset by a
decrease in interest expense. Interest expense decreased by $4.1 million during
the nine months ended September 30, 2002, compared to the prior year period,
primarily as a result of the repayment of debt during the first quarter of 2001
and capitalization of interest during the 2002 period with respect to debt
allocable to a property being redeveloped, partially offset by interest on debt
incurred to finance acquisitions in 2002.
Equity in earnings of equity investments increased by $3.2 million for
the nine months ended September 30, 2002, compared to the same period in 2001
primarily due to an increase in earnings from SNH. A loss on equity transactions
of equity investments of $1.4 million was recognized in 2002 from the issuance
of common shares by SNH at a price below our per share carrying value, compared
to a loss of $5.6 million recognized in 2001.
Net income before preferred distributions increased to $75.2 million
for the 2002 period, from $71.3 million for the 2001 period. The increase is due
primarily to property acquisitions in 2002 and 2001, capitalized interest on
debt allocable to a property in redevelopment during 2002, a smaller loss
recognized from the issuance of common shares by SNH in 2002 compared to 2001,
and the increase in equity income from our investment in SNH, offset by the
reversal of an impairment loss reserve in 2001, lower interest income on
invested cash balances, the extraordinary loss recognized from the prepayment of
debt in 2002, assets sold during 2001 and a decrease in property occupancy. Net
income available for common shareholders is net income reduced by preferred
distributions and was $59.1 million, or $0.46 per common share, in the 2002
period, compared to $59.4 million, or $0.45 per common share in the 2001 period.
The decrease reflects the foregoing factors, distributions accrued during 2002
on our series B preferred shares which were issued in September 2002 and the
partial period distribution paid during 2001 on our series A preferred shares
issued in February 2001.
Liquidity and Capital Resources
Our Operating Liquidity and Resources
Our principal sources of funds for current expenses and for
distributions to shareholders are our operations, primarily rents from our
properties and, to a lesser extent, distributions received from our equity
investments. Rents are generally received from our non-government tenants
monthly in advance, and from our government tenants monthly in arrears. This
flow of funds has historically been sufficient for us to pay day-to-day
operating expenses, interest and distributions. We believe that our operating
cash flow will be sufficient to meet our operating expenses, interest and
distribution payments for the foreseeable future.
Our Investment and Financing Liquidity and Resources
We have a $425 million unsecured revolving credit facility with a group
of commercial banks, which may be expanded, in certain circumstances, by up to
$200 million. We use this credit facility to fund acquisitions and improvements
and to accommodate occasional cash needs which may result from timing
differences between our receipt of rents and our desire to make distributions or
our need to pay operating expenses. Borrowings under this credit facility bear
interest at LIBOR plus a premium and mature in April 2005. Funds may be drawn,
repaid and redrawn until maturity and no principal payment is due until
maturity.
At September 30, 2002, there were no amounts outstanding and the entire
$425 million was available for borrowing under this credit facility, and we had
cash and cash equivalents of $185.2 million. In October 2002 we used
substantially all of this cash, supplemented by draws of $197 million on our
credit facility, to repay $128.3 million of debt and acquire properties for
$236.3 million. In the future we expect to use existing cash balances,
borrowings under our credit facility and net proceeds of offerings of equity or
debt securities to fund additional property acquisitions and meet substantially
all of our debt principal repayment obligations.
8
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
As of November 4, 2002, we had outstanding commitments aggregating
approximately $28.5 million to acquire office buildings. The acquisition of
these office buildings is subject to various closing conditions customary in
real estate transactions and we do not know when or if these office buildings
will be acquired.
Principal payments due during the next five years required under all of
our debt obligations as of September 30, 2002, are $129.9 million in 2002, $5.6
million in 2003, $9.9 million in 2004, $107.1 million in 2005, $7.7 million in
2006 and $865.1 million thereafter. As noted above, we paid $128.3 million of
our 2002 debt maturities in October 2002.
To the extent we borrow on our credit facility and, as the maturity
dates of our credit facility and term debts approach over the longer term, we
will explore various alternatives for the repayment of amounts due. Such
alternatives in the short term and long term may include borrowings under our
revolving credit facility, incurring additional long term debt and issuing new
equity securities. An effective shelf registration statement allows us to issue
public securities on an expedited basis, but it does not assure that there will
be buyers for such securities. As of September 30, 2002, we had $1.8 billion
available on our effective $3 billion shelf registration statement. Although
there can be no assurance that we will consummate any additional debt or equity
offerings or other financings, we believe we will have access to various types
of financing in the future, including debt or equity securities offerings, with
which to finance future acquisitions and to pay our debt and other obligations.
At September 30, 2002, we owned 12.8 million, or 21.9%, of the common
shares of beneficial interest of SNH with a carrying value of $167.3 million and
a market value of $143.7 million, and 4.0 million, or 6.4%, of the common shares
of beneficial interest of Hospitality Properties Trust ("HPT") with a carrying
value of $98.2 million and a market value of $132.5 million. On November 4,
2002, the market values of our SNH and HPT shares were $133.7 million and $134.1
million, respectively. On July 3, 2002, we filed an application with the
Securities and Exchange Commission to permit the sale of some of our
shareholdings in our former subsidiaries, SNH and HPT, as well as new shares of
ours to a new mutual fund to be organized by a subsidiary of Reit Management &
Research LLC, the investment manager to us, SNH and HPT. The SEC review process
for this application is expected to take several months. The decision as to
whether to proceed with the fund creation and the sale of shares to the fund
will depend upon market conditions if and after the application is approved,
particularly the market price of our shares and of HPT and SNH shares and the
uses of sales proceeds available to us at that time.
Debt Covenants
Our principal unsecured debt obligations at September 30, 2002, are our
unsecured revolving credit facility and our $776.3 million of public debt. Our
public debt is governed by indentures. These indentures and our credit facility
agreement contain a number of financial ratio covenants which generally restrict
our ability to incur debts, including debts secured by mortgages on our
properties in excess of calculated amounts, require us to maintain a minimum net
worth, as defined, and require us to maintain other ratios, as defined. Our
credit facility also includes a covenant which limits the amount of aggregate
distributions on preferred and common shares to 90% of operating cash flow
available for shareholder distributions as defined in the credit facility. At
September 30, 2002, we were in compliance with all of our covenants under our
indentures and our credit agreement.
In addition to our principal unsecured debt obligations, we have $349.0
million of mortgage notes outstanding at September 30, 2002. Our mortgage notes
are secured by 25 of our properties.
None of our indentures, our revolving bank credit facility or our
mortgage notes contain provisions for acceleration which could be triggered by
our debt ratings. However, under our credit agreement, our senior debt rating is
used to determine the fees and interest rate applied to borrowings.
Our public debt indentures contain cross default provisions to any
other debts equal to or in excess of $20 million. Similarly, a default on any of
our public debt indentures would constitute a default under our credit
agreement.
9
HRPT PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
As of September 30, 2002, we have no commercial paper, derivatives,
swaps, hedges, guarantees or joint ventures. None of our debt documentation
requires us to provide collateral security in the event of a ratings downgrade.
We have no "off balance sheet" arrangements.
10
HRPT PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our exposures to market changes
in interest rates or the manner in how we manage our exposures since December
31, 2001, other than an increase in the amount outstanding on our revolving
credit facility, which occurred subsequent to September 30, 2002. The following
table shows the impact a 10% change in interest rates would have on our floating
rate interest expense:
Impact of Changes in Interest Rates
----------------------------------------------------
Total Interest
Interest Rate Outstanding Expense
Per Year Debt Per Year
------------- -------------- ----------------
(dollars in thousands)
At November 4, 2002 2.6% $197,000 $5,122
10% reduction 2.3% $197,000 $4,531
10% increase 2.9% $197,000 $5,713
Item 4. Controls and Procedures
a) Within the 90 days prior to the date of this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of our Managing Trustees, President and Chief Operating
Officer and Treasurer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that
evaluation, the Managing Trustees, President and Chief Operating
Officer and Treasurer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic
SEC filings.
b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those
controls since the Company's evaluation of these controls, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
11
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 PROPERTY ACQUISITIONS, DEBT AND EQUITY FINANCING POSSIBILITIES, INCLUDING THE
REPAYMENT OF DEBT, ACCOUNTING ESTIMATES 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 BUY
PROPERTIES AT ACCEPTABLE PRICES OR TO CONCLUDE DEBT AND EQUITY FINANCINGS ON
ACCEPTABLE TERMS. ALSO, THE FACT THAT THE COMPANY HAS FILED AN APPLICATION WITH
THE SECURITIES AND EXCHANGE COMMISSION ("SEC") TO SELL ITS SHARES AND ITS
SHAREHOLDINGS OF HPT AND SNH TO A FUND DOES NOT MEAN THAT SUCH SALES WILL OCCUR;
THE SEC MAY NOT APPROVE THIS APPLICATION OR THE COMPANY MAY DECIDE NOT TO
PROCEED WITH THIS SALE BECAUSE IT CONSIDERS THE MARKET PRICES OF THE SHARES TOO
LOW, BECAUSE WE DO NOT HAVE AN ATTRACTIVE USE OF PROCEEDS OR FOR OTHER REASONS.
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.
12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Articles Supplementary relating to the 8 3/4% Series
B Cumulative Redeemable Preferred Shares.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Distributions
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated September 4, 2002,
relating to the filing of a preliminary prospectus
supplement to the Company's existing shelf
registration statement for the sale of Series B
cumulative redeemable preferred shares.
2. Current Report on Form 8-K, dated September 6, 2002,
relating to the issuance and sale of 11,000,000
shares of a new series of preferred shares, 8 3/4%
Series B Cumulative Redeemable Preferred Shares, and
filing as exhibits, (a) Purchase Agreement, dated as
of September 6, 2002, between HRPT Properties Trust
and the several underwriters named therein,
pertaining to 11,000,000 8 3/4% Series B Cumulative
Redeemable Preferred Shares, (b) form of Articles
Supplementary relating to the 8 3/4% Series B
Cumulative Redeemable Preferred Shares, (c) Form of
temporary 8 3/4% Series B Cumulative Redeemable
Preferred Share Certificate, (d) Opinion of Sullivan
& Worcester LLP re: tax matters, (e) computation of
Ratio of Earnings to Fixed Charges, (f) computation
of Ratio of Earnings to Combined Fixed Charges and
Preferred Distributions, (g) computation of Pro Forma
Ratio of Earnings to Fixed Charges, (h) computation
of Pro Forma Ratio of Earnings to Combined Fixed
Charges and Preferred Distributions, and (i) Consent
of Sullivan & Worcester LLP.
13
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 12, 2002
By: /s/ John C. Popeo
---------------------------------------
John C. Popeo
Treasurer and Chief Financial Officer
Dated: November 12, 2002
14
I, John A. Mannix, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HRPT
Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ John A. Mannix
----------------------- -----------------------------
John A. Mannix
President and Chief Operating Officer
15
I, John C. Popeo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HRPT
Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ John C. Popeo
---------------------- -------------------------------------
John C. Popeo
Treasurer and Chief Financial Officer
16
I, Barry M. Portnoy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HRPT
Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Barry M. Portnoy
---------------------- -------------------------------------
Barry M. Portnoy
Managing Trustee
17
I, Gerard M. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HRPT
Properties Trust;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Gerard M. Martin
----------------------- ---------------------------------
Gerard M. Martin
Managing Trustee
18