HEALTH AND RETIREMENT PROPERTIES TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-9317 HRPT PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-6558834 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 400 Centre Street, Newton, Massachusetts 02458 (Address of principal executive offices) (Zip Code) 617-332-3990 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: <TABLE> <CAPTION> Name of exchange on Title of each class which registered - -------------------------------------------------------------------- ------------------------------------------- <S> <C> Common Shares of Beneficial Interest New York Stock Exchange 7.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange 7.5% Convertible Subordinated Debentures due 2003, Series A New York Stock Exchange </TABLE> Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by non-affiliates was $1.8 billion based on the $13 3/4 closing price per share for such stock on the New York Stock Exchange on March 29, 1999. For purposes of this calculation, 1,134,372 shares held by HRPT Advisors, Inc., 2,463,366 held by REIT Management & Research, Inc. solely in its capacity as voting trustee under a voting trust agreement or a proxy, an aggregate of 44,250 shares held by the Trustees and executive officers of the registrant, 44,851 held by Gerard M. Martin and 44,851 held by Barry M. Portnoy, have been included in the number of shares held by affiliates. Number of the registrant's Common Shares of Beneficial Interest, $.01 par value ("Shares"), outstanding as of March 29, 1999: 131,893,126. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 11, 1999. CERTAIN IMPORTANT FACTORS This Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K regarding our intent, belief or expectations with respect to expansion of our portfolio, our ability to pay dividends, the effect of year 2000 issues, policies and plans regarding investments, financings and other matters, our tax status as a real estate investment trust and our access to debt or equity capital markets or to other sources of funds and statements of assumptions underlying such statements as to intent, belief or expectations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contained in the forward looking statements as a result of various factors. Such factors include the status of the economy, compliance with and changes to regulations and payment and reimbursement policies within the health care industry, competition within the health care industry, and changes in federal, state and local legislation. The accompanying information contained or incorporated by reference in this Annual Report on Form 10-K, including under the heading "Business" and in our Current Report on Form 8-K dated March 5, 1999, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING HRPT PROPERTIES TRUST, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HRPT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST, COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRPT PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRPT PROPERTIES TRUST. ALL PERSONS DEALING WITH HRPT PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRPT PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
<TABLE> <CAPTION> HRPT PROPERTIES TRUST 1998 FORM 10-K ANNUAL REPORT Table of Contents Part I Page <S> <C> <C> Item 1. Business........................................................................ 1 Item 2. Properties...................................................................... 19 Item 3. Legal Proceedings............................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders............................. 22 Part II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............ 22 Item 6. Selected Financial Data......................................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24 Item 8. Financial Statements and Supplementary Data..................................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 25 Part III Item 10. Directors and Executive Officers of the Registrant.............................. * Item 11. Executive Compensation.......................................................... * Item 12. Security Ownership of Certain Beneficial Owners and Management.................. * Item 13. Certain Relationships and Related Transactions.................................. * * Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 11, 1999, to be filed pursuant to Regulation 14A. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 25 </TABLE>
References in this Annual Report on Form 10-K to the "Company" or "HRP" include consolidated subsidiaries, unless the context indicates otherwise. PART I Item 1. Business The Company. HRPT Properties Trust ("HRP" or the "Company") was organized on October 9, 1986 as a Maryland real estate investment trust ("REIT"). We invest in income producing real estate, including office buildings and senior housing properties. As of December 31, 1998, we owned 230 properties for a total investment of $3.0 billion (at cost), had mortgage investments in 26 properties aggregating $69.2 million and had an equity investment representing 8.8% of the outstanding common shares of Hospitality Properties Trust ("HPT") with an approximate carrying value of $110.6 million, for total real estate investments of approximately $3.1 billion. The properties are described in "Business Developments Since January 1, 1998" and "Properties". Number of Total Investment State Properties at December 31, 1998 (in thousands) Alaska 1 $1,000 Arizona 9 64,856 California 30 322,415 Colorado 10 56,154 Connecticut 11 110,891 Delaware 1 44,090 District of Columbia 5 207,521 Florida 10 148,578 Georgia 5 15,286 Illinois 2 98,742 Iowa 7 8,207 Kansas 4 8,477 Louisiana 1 18,992 Maryland 8 191,164 Massachusetts 34 251,535 Michigan 2 9,181 Minnesota 3 40,704 Missouri 3 11,564 Nebraska 10 10,704 New Hampshire 1 3,754 New Jersey 5 42,954 New Mexico 2 11,021 New York 6 185,225 North Carolina 5 9,192 Ohio 4 26,930 Oklahoma 1 24,762 Pennsylvania 17 553,997 Rhode Island 1 8,010 South Dakota 3 7,589 Tennessee 1 22,173 Texas 22 271,441 Vermont 8 29,766 Virginia 7 111,540 Washington 4 40,930 West Virginia 1 4,898 Wisconsin 8 33,904 Wyoming 4 17,563 --- ---------- Total 256 3,025,710 === Investment in HPT 110,554 ---------- Total Investments $3,136,264 ========== 1
Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 332-3990. Investment Policy and Method of Operation. Our investment goals are current income for distribution to shareholders, capital growth resulting from appreciation in the residual value of owned properties, and preservation and protection of shareholders' capital. Our income is derived primarily from rent and interest payments under our leases and mortgages. Our day to day operations are conducted by REIT Management & Research, Inc. ("RMR"), our investment manager. RMR provides investment, management, property management and administrative services to us. RMR originates and presents investment opportunities to our Board of Trustees. In evaluating potential investments, we consider factors such as: the historical and projected rents received and likely to be received from the property to meet operational needs and financing obligations and to provide a competitive market return on our investments; the historic and expected operating expenses, including real estate taxes, incurred and expected to be incurred at the properties; the growth, tax and regulatory environments of the market in which the property is located; the quality, experience, and credit worthiness of the property's operator and tenants; an appraisal of the property, if available; occupancy and demand for similar properties in the same or nearby markets; the construction quality, physical condition and design of the property; the geographic area and type of property; and the pricing of comparable properties as evidenced by recent arms length market sales. Prior to investing in properties, we obtain title commitments or policies of title insurance insuring that we hold title to or have mortgage interests in such properties, free of material liens and encumbrances. Our investments are structured using leases with minimum and/or additional rent and escalation provisions, loans with fixed or floating rates, joint ventures and partnerships with affiliated or unaffiliated parties, commitments or options to purchase interests in real estate, mergers or any combination of the foregoing that will best suit the particular investment. In connection with our current bank credit facility, we have agreed to obtain lender approval before exceeding investment concentrations based on certain criteria (see "Borrowing Policy"). Among these are that no more than 40% of our investments be operated by any single tenant or mortgagor and that no new hotel investments be made. No limits, other than those in connection with our bank credit facility, have been set on the number of properties in which we will seek to invest, or on the concentration of investments involving any one facility or geographical area; however, our Board of Trustees consider concentration of investments in determining whether to make new or increase existing investments. Our Declaration of Trust and operating policies provide that any investment in facilities owned by us or operated by RMR, persons expressly permitted under the Declaration of Trust to own more than 8.5% of our shares, or any company affiliated with any of the foregoing must be approved by a majority of the Board of Trustees not affiliated with any of the foregoing. We have in the past considered and may in the future consider, from time to time, the acquisition of or merger with other companies engaged in the same business as us; however, we have no present agreements or understandings concerning any such acquisition or merger. Borrowing Policy. In addition to the use of equity, we utilize short-term and long-term borrowings to finance investments. We have a bank credit facility of $500 million. In February 1999, the bank credit facility was amended to permit the possible spin-off of our senior housing properties. The bank credit facility (which is guaranteed by most of our subsidiaries) is used for acquisition funding on an interim basis until equity or long-term debt is raised and for working capital and general business purposes. Outstanding borrowings under the bank credit facility at December 31, 1998 were $100 million. Our borrowing guidelines established by our Board of Trustees and covenants in various debt agreements prohibit us from maintaining a debt to equity ratio of greater than 1 to 1. At December 31, 1998, our debt to equity ratio was .62 to 1. Our senior unsecured debt also imposes covenants on us which may limit our ability to borrow. The Declaration of Trust prohibits us from incurring secured and unsecured indebtedness which in the aggregate exceeds 300% of our net assets, unless approved by a majority of the Board of Trustees not affiliated with us. There can be no assurance that debt capital will in the future be available at reasonable rates to fund our operations or growth. 2
Business Developments Since January 1, 1998 Investments During 1998, we acquired 48 office properties and five senior housing properties for an aggregate amount of $981.6 million and provided improvement funding totaling $17.2 million to our existing properties. Financing During 1998, we sold 25,000,000 common shares in a public offering and sold 6,977,575 common shares in four offerings to unit investment trusts sponsored by various investment banks, raising gross proceeds of $612.4 million (net $580.3 million). Proceeds from these offerings were used to repay amounts outstanding under our revolving bank credit facility, to purchase real estate and for general business purposes. In addition, we issued 362,217 common shares due to the conversion of $6.8 million of our convertible subordinated debentures and issued 286,400 common shares for the purchase of real estate. Since January 1, 1998, we have issued the following senior unsecured fixed rate term notes: $100 million of 6.7% Senior Notes due 2005 issued in February 1998; $160 million of 6-7/8% Senior Notes due 2002 issued in August 1998; $143 million of 8-1/2% Senior Notes due 2013 issued in November 1998; and $90 million of 7-7/8% Senior Notes due 2009 in March, 1999. In addition, we issued $50.0 million of senior unsecured remarketed reset notes which are due in 2007 and bear interest at LIBOR plus a premium. The $532.8 million aggregate net proceeds from these notes were used to repay amounts then outstanding under our revolving bank credit facility, to purchase real estate and for general business purposes. In April 1998, we increased and extended our unsecured revolving bank credit facility with a group of banks for which Dresdner Bank AG acts as agent. The new credit facility permits borrowings of up to $500.0 million, matures in 2002 and bears interest at LIBOR plus a premium. We recognized an extraordinary loss on the early extinguishment of debt for $2.1 million as a result of the write-off of deferred financing fees associated with our previous bank credit facility. Other Developments Since January 1, 1998, we disposed of one office property and six senior housing properties for $39.6 million, including two senior housing properties for $22.5 million in 1999. During this period, we also received full repayments for $36.0 million of mortgages secured by ten senior housing properties, including two senior housing properties for $3.0 million in 1999. In December 1998, we entered an agreement for the disposition of 12 senior housing properties. The net proceeds of this disposition are expected to be about $65.0 million, and are subject to seller financing. These transactions are expected to close within the next 30 to 60 days. In December 1998, we announced a plan for a possible separate financing which would include a public offering of common shares of one of our subsidiaries, Senior Housing Properties Trust ("SNH"), and a distribution to our shareholders of common shares of that subsidiary. The public offering and distribution constitute one alternative transaction that we are considering with respect to financing our senior housing real estate investments. The SNH transaction as described in the SEC filing is not likely to occur under present market conditions. At this time, we are considering various alternative transactions which would reposition our senior housing properties into a separate publicly owned REIT. On July 1, 1998, we changed our name from "Health and Retirement Properties Trust" to "HRPT Properties Trust", reflecting our investment in commercial office properties as well as senior housing real estate. The Investment Manager RMR is a Delaware corporation owned by Gerard M. Martin and Barry M. Portnoy. RMR's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 332-3990. As of January 1, 1998, we entered into separate investment advisor and property management agreements with RMR. RMR provides investment, management, property management services and administrative services to us. In addition, an affiliate of RMR also provides garage management services to some of our properties. RMR also acts as the investment manager to HPT and has other business interests. The Directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of RMR are David J. Hegarty, President and 3
Secretary, John G. Murray, Executive Vice President, John Popeo, Treasurer, and Ajay Saini, John A. Mannix, David Lepore and Thomas M. O'Brien, Vice Presidents. Gerard M. Martin and Barry M. Portnoy are our managing trustees and David J. Hegarty, Ajay Saini, John A. Mannix and David M. Lepore are our officers. Employees As of March 16, 1999, we had no employees. RMR, which administers our day-to-day operations, had 177 full-time employees and three active directors as of that date. Regulation and Reimbursement Our tenants and borrowers who operate senior housing properties, including long-term care facilities, retirement communities and assisted living centers, must comply with federal, state and local statutes and regulations in order to operate the properties. The health care industry depends significantly upon federal and federal/state programs for revenues and, as a result, is vulnerable to the budgetary policies of both the federal and state governments. Certificates of Need. Certain of our investments are in senior housing properties which require certificates of need ("CONs") prior to expansion of beds or services, certain capital expenditures, and in some states, a change in ownership. CON requirements are not uniform throughout the United States. Changes in CON requirements may affect competition, profitability of the properties and our opportunities for investment in senior housing properties. Federal and State Regulation and Reimbursement. Our senior housing properties are affected by a number of federal and state statutes and regulations, including state licensing laws, laws related to reimbursement of long-term care facilities under Medicare and Medicaid programs and federal and state anti-fraud and anti-kickback laws. In order to receive Medicare and Medicaid reimbursement, our tenants and borrowers who operate long-term care facilities must demonstrate that the facilities are in substantial compliance with state licensing and federal certification standards, which include extensive resident care and physical plant requirements. Federal and state agencies regularly monitor the quality of care provided and regularly inspect the physical conditions of long-term care facilities. Medicare and Medicaid laws limit reimbursement for capital costs and in some circumstances for rental or lease expenses. Under the Balanced Budget Act of 1997 (Public Law 105-33), (the "BBA"), the federal Department of Health and Human Services, ("HHS"), has adopted a Medicare prospective payment system for skilled nursing facilities which includes capital-related costs and is being phased in over three years beginning July 1, 1998. Many states have adopted Medicaid prospective payment systems. The BBA also increases states' flexibility in establishing Medicaid rates for nursing facility services, repeals the Boren Amendment under which Medicaid providers had the right to challenge the adequacy of Medicaid rates and strengthens the ability of HHS and the states to exclude providers from the Medicare and Medicaid programs for health care-related offenses. Reduction in Medicare rates and Medicaid rates may have a negative effect on some of our tenants or borrowers and may effect their ability to pay rent or mortgage interest income to us. Two federal government studies are currently underway to provide background information and make recommendations regarding the future regulation of and the possibility of increased governmental funding for the assisted living industry. One study is being conducted by the General Accounting Office ("GAO") for the Senate Special Committee on Aging and is focused upon consumer protection and quality of care issues. The second study is being conducted by the HHS's Assistant Secretary for Planning and Evaluation and is expected to touch upon all aspects of the assisted living industry including quality of care and financing. A 1998 National Academy for State Health Policy study, which is part of this second study, found that 22 states had implemented licensing standards specifically for assisted living and draft rules had been issued in an additional six states, and predicted that every state will soon have reviewed their regulations governing residential care settings. These studies are expected to be completed during 1999. We cannot predict whether these studies will result in governmental policy changes or new legislation, or what impact any changes may have. Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also undertakes expanded funding obligations; and we do not believe a materially increased financial commitment from the federal government is presently likely. However, we do anticipate that assisted living facilities will increasingly be licensed and regulated by the various states, and that with the absence of federal standards, the states' policies will continue to vary widely. HHS's Health Care Financing Administration, ("HCFA"), has begun to implement an initiative to increase the effectiveness of Medicare/Medicaid nursing facility survey and enforcement activities by HCFA and the states. HCFA's initiative follows its July 1998 report to Congress on the effectiveness of the survey and enforcement system, several March 1999 reports by HCFA's Office of Inspector General concerning quality of care in nursing homes, a July 1998 GAO report which found inadequate care in a significant proportion of California nursing 4
homes and March 1999 GAO reports which recommended that HCFA and the states strengthen their enforcement activities to ensure that nursing homes maintain compliance with federal health care standards. In July 1998 and March 1999 the Senate Special Committee on Aging held hearings on these issues. HCFA plans to focus survey and enforcement efforts at nursing facilities with repeat violations of Medicare/Medicaid standards, including chain-operated facilities with patterns of noncompliance. HCFA also is requiring state agencies to use enforcement sanctions and remedies more promptly and effectively when substandard care is identified, and HCFA is increasing its oversight of state survey agencies. In addition, HCFA has adopted new regulations expanding the ability of HCFA and the states to impose civil money penalties in instances of noncompliance. Medicare/Medicaid survey results for each facility are being posted on the Internet. A newly-enacted federal law prohibits nursing homes which reduce their Medicaid participation from evicting Medicaid residents. Federal efforts to target fraud and abuse and kickback violations by Medicare and Medicaid providers have also increased. An adverse determination concerning any operator's licensure or eligibility for government reimbursement or its compliance with applicable federal or state statutes on regulations may affect such operator and its affiliates and may affect their ability to pay their rent or mortgage interest income. A number of legislative proposals that would affect major reforms of the health care system have been introduced in Congress, such as additional Medicare and Medicaid reforms and cost containment measures. We cannot predict whether any such legislative proposals will be adopted or, if adopted, what effect, if any, such proposals would have on our business, lessees or mortgagors. Competition. We compete with other real estate investment trusts in that each is continually seeking attractive investment opportunities in office and senior housing facilities and other types of real estate. We also compete with banks, non-bank finance companies, leasing companies and insurance companies. FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares as an investment asset rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under the federal income tax law, for example if you are: - a bank, life insurance company, regulated investment company, or other financial institution, - a broker or dealer in securities or foreign currency, - a person that has a functional currency other than the U.S. dollar, - a person who acquires our shares in connection with his employment or other performance of services, - a person subject to alternative minimum tax, - a person who owns our shares as part of a straddle, hedging transaction, or conversion transaction, or - except as specifically described in the following summary, a tax-exempt entity or a foreign person. The sections of the Internal Revenue Code that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. The following summary is thus qualified by applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Thus, future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. No ruling has been sought from the Internal Revenue Service with respect to any matter described in this summary, and there can be no assurance that the IRS or a court will agree with the statements made in this summary. In addition, the following summary is not exhaustive of all possible tax considerations, and does not discuss any state, local, or foreign tax considerations. For all these reasons, we urge you to consult with your tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. 5
For purposes of this summary, you are a "U.S. shareholder" if you are a beneficial owner of our shares and for federal income tax purposes are: (1) a citizen or resident of the United States, (2) a corporation, partnership or other entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations, (3) an estate the income of which is subject to federal income taxation regardless of its source, or (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996 to the extent provided in Treasury regulations. Conversely, you are a "non-U.S. shareholder" if you are a beneficial owner of our shares and are not a U.S. shareholder. Taxation as a REIT We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1987. Our REIT election, assuming continuing compliance with the federal income tax qualification tests summarized below, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code as a REIT. As a REIT, we generally will not be subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally will be includable in their income as dividends to the extent the distributions do not exceed our current or accumulated earnings and profits. A portion of these dividends may be treated as capital gain dividends, as explained below. No portion of these dividends will be eligible for the dividends received deduction for corporate shareholders. Distributions in excess of our current or accumulated earnings and profits generally will be treated for federal income tax purposes as a return of capital to the extent of a shareholder's basis in its shares, and will reduce this basis. Our current or accumulated earnings and profits will generally be allocated first to distributions on our outstanding preferred shares, if any, and thereafter to distributions on our common shares. For tax purposes, our distributions per common share paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997 and 1998 aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29, $1.32, $1.37, $1.41, $1.45 and $1.51 respectively, of which $.289, $.065, $.332, $.267, $.104, $.218, $.335, $.081, $.161, $.350, $.252 and $.096 respectively, represented a return of capital. The federal income taxation of our distributions to you is discussed in more detail in the following sections of this summary. Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1987 through 1998 taxable years, and that our current investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. These opinions are conditioned upon the assumption that our leases, our declaration of trust and by-laws, and all other legal documents to which we are or have been a party have been and will be complied with by all parties to these documents, upon the accuracy and completeness of the factual matters described in this Annual Report, and upon representations made by us. The opinion of Sullivan & Worcester LLP is based on the law as it exists today, but the law may change in the future, possibly with retroactive effect. Also, an opinion of counsel is not binding on the Internal Revenue Service or the courts, and the IRS or a court could take a position different from that expressed by counsel. Our qualification and taxation as a REIT will depend upon our ability to meet the various REIT qualification tests imposed under the Internal Revenue Code and summarized below. While we believe that we have operated and will continue to operate in a manner to satisfy the various REIT qualification tests, Sullivan & Worcester LLP has not reviewed and will not review our compliance with these tests on a continuing basis. If we fail to qualify as a REIT in any year, we will be subject to federal income taxation as if we were a domestic corporation, and our shareholders will be taxed like shareholders of ordinary corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated. 6
If we qualify for taxation as a REIT and distribute to our shareholders at least 95% of our "real estate investment trust taxable income," computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, we generally will not be subject to federal corporate income taxes on the amount distributed. However, even if we qualify for federal income taxation as a REIT, we may be subject to federal tax in the following circumstances: - We will be taxed at regular corporate rates on any undistributed "real estate investment trust taxable income," including our undistributed net capital gains. - If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on items of tax preference. - If we have (1) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (2) other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, which is currently 35%. - If we have net income from prohibited transactions, including sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, this income will be subject to tax at a 100% rate. - If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, multiplied by a fraction intended to reflect our profitability. - If we fail to distribute for any calendar year at least the sum of (1) 85% of our REIT ordinary income for that year, (2) 95% of our REIT capital gain net income for that year, and (3) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. - If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten-year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of (1) the excess of the fair market value of the asset over the C corporation's basis in the asset on the date the asset ceased to be owned by the C corporation or (2) the gain we recognize in the disposition. If we invest in properties in foreign countries, our profits from these investments will generally be subject to tax in the countries where those properties are located. The nature and amount of this taxation will depend on the laws of the countries where the properties are located. If we operate as we currently intend, then our taxable income will be distributed to our shareholders and we will not pay federal corporate income tax, and thus we generally cannot recover the cost of foreign taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. We will also not be able to pass through to our shareholders any foreign tax credits. If we fail to qualify for federal income taxation as a REIT in any taxable year, then we will be subject to federal taxes in the same manner as an ordinary corporation. Distributions to our shareholders in any year in which we fail to qualify as a REIT will not be deductible by us, nor will these distributions be required to be made. In that event, to the extent of our current and accumulated earnings and profits, all distributions to our shareholders will be taxable as ordinary dividend income, and subject to limitations in the Internal Revenue Code will be eligible for the dividends received deduction for corporations. We would also generally be disqualified from federal income taxation as a REIT for the four taxable years following disqualification. Failure to qualify for federal income taxation as a REIT for even one year could result in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. 7
REIT Qualification Requirements General Requirements. Section 856(a) of the Internal Revenue Code defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as an ordinary domestic corporation; (4) that is neither a financial institution nor an insurance company subject to special provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not "closely held" as defined under the personal holding company stock ownership test, as described below; and (7) that meets other tests regarding income, assets and distributions, all as described below. Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Section 856(h)(2) of the Internal Revenue Code provides that conditions (5) and (6) need not be met for our first taxable year as a REIT. We believe that we have satisfied conditions (1) to (6), inclusive, during the requisite periods for each of our taxable years ending on or before December 31, 1998, and that we will continue to satisfy those conditions. There can, however, be no assurance in this regard. By reason of condition (6) above, we will fail to qualify as a REIT for a taxable year if at any time during the last half of the year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust contains provisions restricting transfers of our shares and giving the trustees the power to redeem our shares. In addition, commencing with our 1998 taxable year, if we comply with applicable Treasury regulations for ascertaining the ownership of our outstanding shares and do not know, or exercising reasonable diligence would not have known, whether we failed condition (6), then we will be treated as satisfying condition (6). Also, our failure to comply with these applicable Treasury regulations for ascertaining ownership of our outstanding shares may result in a penalty to us of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these applicable Treasury regulations, and request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. The rule that an entity will fail to qualify as a REIT for a taxable year if at any time during the last half of the year more than 50% in value of its outstanding shares is owned directly or indirectly by five or fewer individuals is relaxed in the case of pension trusts owning shares in a REIT. Shares in a REIT held by a pension trust are treated as held directly by the pension trust's beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity's federal income tax qualification as a REIT. However, as discussed below, if the REIT is a "pension-held REIT," each pension trust owning more than 10% of the REIT's shares by value generally will be taxed on a portion of the dividends received from the REIT, based on the ratio of (1) the REIT's gross income for the year that would be unrelated trade or business income if the REIT were a qualified pension trust to (2) the REIT's total gross income for the year. Our Wholly-Owned Subsidiaries. Section 856(i) of the Internal Revenue Code provides that any corporation 100% of whose stock is held by the REIT is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction, and credit of a qualified REIT subsidiary are treated as the REIT's. We believe that each of our direct and indirect wholly-owned subsidiaries is either a qualified REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner pursuant to 8
regulations under Section 7701 of the Internal Revenue Code. Thus, in applying all the federal income tax REIT qualification requirements described in this summary, our direct and indirect wholly-owned subsidiaries are ignored, and all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours. Our Investments through Partnerships. We have invested, and in the future may invest, in real estate through one or more limited partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the Internal Revenue Code provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT's proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner are treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our distributive share of the partnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Internal Revenue Code. Income Tests. There have been three gross income requirements for qualification as a REIT under the Internal Revenue Code, but only the first two still apply in our current taxable years: - First, at least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including "rents from real property" as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test. - Second, at least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of (1) items of real property income that satisfy the 75% test described above, (2) dividends, (3) interest, (4) payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and (5) gain from the sale or disposition of stock, securities, or real property. - Third, for our 1997 and prior taxable years, less than 30% of our gross income must have been derived from (1) short-term gain from the sale or other disposition of stock or securities, including stock in other REITs or dispositions of interest rate swap or cap agreements, and (2) gain from prohibited transactions or other dispositions of real property held for less than four years, other than involuntary conversions and sales of foreclosure property. For purposes of these three requirements, income derived from a "shared appreciation provision" in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type which satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard. In order to qualify as "rents from real property" under Section 856 of the Internal Revenue Code, several requirements must be met: - First, the amount of rent received generally must not be determined from the income or profits of any person, but may be based on receipts or sales. - Second, rents do not qualify if the REIT owns 10% or more of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, ownership directly or by attribution by an unaffiliated third party of more than 10% of our shares and more than 10% of the stock of one of our lessees would result in this lessee's 9
rents not qualifying as rents from real property. Our declaration of trust provides that transfers or purported acquisitions, directly or by attribution, of shares that could result in our disqualification as a REIT under the Internal Revenue Code are null and void and permits the trustees to repurchase shares to the extent necessary to maintain our status as a REIT under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent our REIT status under the Internal Revenue Code from being jeopardized under the 10% lessee affiliate rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code's attribution rules. - Third, in order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income" as defined in Section 512(b)(3) of the Internal Revenue Code. In addition, for our 1998 and later taxable years, a de minimis amount of noncustomary services will not disqualify income as "rents from real property" so long as the value of the impermissible services does not exceed 1% of the gross income of the property. - Fourth, if rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as rents from real property; but if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. The portion of rental income treated as attributable to personal property is determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented. Substantially all of our gross income has been and is expected to continue to be attributable to rental income. We believe that all or substantially all our rents have qualified and will continue to qualify as rents from real property for purposes of Section 856 of the Internal Revenue Code, but if for some reason a significant amount of our rents do not so qualify, we may fail the 95% or 75% gross income tests. In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan. Any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may have an adverse effect upon our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that any occasional disposition of real estate that we might make will not be subject to the 100% penalty tax, because we intend to: (1) own our real estate assets for investment with a view to long-term income production and capital appreciation, (2) engage in the business of developing, owning and operating our existing real estate assets and acquiring, developing, owning and operating other real estate assets, and (3) make occasional dispositions of real estate assets consistent with our long-term investment objectives. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if: (1) our failure to meet the test was due to reasonable cause and not due to willful neglect, (2) we report the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return, and (3) any incorrect information on the schedule was not due to fraud with intent to evade tax. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply to us, a special tax equal to 100% is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, multiplied by a fraction intended to reflect our profitability. No similar relief provision is available if we failed the 30% gross income test for any taxable year in which that test was applicable. Asset Tests. At the close of each quarter of each taxable year, we must also satisfy three percentage tests relating to the nature of our assets: 10
- First, at least 75% of the value of our total assets must consist of (1) real estate assets, (2) cash and cash items, (3) shares in other REITs, (4) government securities, and (5) stock or debt instruments purchased with proceeds of a stock offering or an offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds. - Second, not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. - Third, of the investments included in the preceding 25% asset class, the value of any one issuer's securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one issuer's outstanding voting securities. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. We have maintained and intend to continue to maintain records of the value of our assets to document our compliance with the above three asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter. Annual Distribution Requirements. In order to qualify for taxation as a REIT under the Internal Revenue Code, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of: (A) the sum of (1) 95% of our "real estate investment trust taxable income," as defined in Section 857 of the Internal Revenue Code, but computed without regard to the dividends paid deduction and net capital gain, and (2) 95% of our net income after tax, if any, from property received in foreclosure, over (B) the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges. These distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. Dividends declared in October, November, or December and paid during the following January will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions between our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirement, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirement. Taking into account our distribution policies, including our dividend reinvestment plan, we believe that we have not made and expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts. In addition, we will be subject to a 4% excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the "grossed up required distribution" for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. If we do not have enough cash or other liquid assets to meet the 95% distribution requirements, we may find it necessary to arrange for new debt or equity financing to provide funds for required distributions, or else our REIT status for federal income tax purposes could be jeopardized. We can provide no assurance that financing would be available for these purposes on favorable terms. If we fail to distribute sufficient dividends for any year, we may be able to rectify this failure by paying "deficiency dividends" to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. 11
Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above. Depreciation and Federal Income Tax Treatment of Leases For federal income tax purposes, including for purposes of computing our earnings and profits, we have generally elected to depreciate our real property on a straight-line basis over 40 years and our personal property over 12 years. We will be entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements. As to approximately 0.7% of our leased facilities which constitute personal property, it is not entirely clear that we will be treated as the owner of this personal property. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property exceeds our purchase price for that property. Because of the lack of clear precedent, we cannot provide assurances as to whether or not the IRS might successfully assert the existence of prepaid rental income in our sale-leaseback transactions. Additionally, Section 467 of the Internal Revenue Code, which concerns leases with increasing rents, may apply to those of our leases which provide for rents that increase from one period to the next. Section 467 of the Internal Revenue Code provides that in the case of a so-called "disqualified leaseback agreement," rental income must be accrued at a constant rate. Where constant rent accrual is required, we could recognize rental income from a lease in excess of cash rents and, as a result, encounter difficulty in meeting the 95% distribution requirement. "Disqualified leaseback agreements" include leaseback transactions where a principal purpose for providing increasing rent under the agreement is the avoidance of federal income tax. Because Section 467 of the Internal Revenue Code directs the Treasury to issue regulations providing that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts, and because regulations proposed to be effective for "disqualified leaseback agreements" entered into after June 3, 1996 adopt this rule, the additional rent provisions in our leases that are based on a fixed percentage of lessee receipts generally should not cause the leases to be "disqualified leaseback agreements." In addition, the legislative history of Section 467 of the Internal Revenue Code indicates that the Treasury should issue regulations under which leases providing for fluctuations in rents by no more than a reasonable percentage from the average rent payable over the term of the lease will be deemed not motivated by tax avoidance, and the proposed regulations permit a 10% fluctuation. Taxation of U.S. Shareholders As long as we qualify as a REIT for federal income tax purposes, a distribution by us to our U.S. shareholders that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate U.S. shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Tax Code. In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case, (1) we will be taxed at regular corporate capital gains tax rates on retained amounts, (2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend, (3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay, (4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay, and (5) both we and our corporate U.S. shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. If we elect to retain our net capital gain in this fashion, we will notify U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year. Because we are a REIT, neither our ordinary 12
income dividends nor our capital gain dividends will qualify for any dividends received deduction for our corporate U.S. shareholders. For noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 20% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property at the time of disposition. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of our shares will on a percentage basis equal the ratio of (1) the amount of the total dividends paid or made available for the year to the holders of that class of shares, to (2) the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 20% or 25% so that the designations will be proportional among all classes of our shares. Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the U.S. shareholder's adjusted basis in our shares, but will reduce the U.S. shareholder's basis in our shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder's shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses. Dividends that we declare in October, November or December of a taxable year to shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations would require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. The sale or exchange of our shares will result in recognition of gain or loss to a U.S. shareholder in an amount equal to the difference between the amount realized and the U.S. shareholder's adjusted basis in the shares sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the U.S. shareholder's holding period in the shares exceeds one year. Long-term capital gains will generally be taxed to noncorporate U.S. shareholders at a maximum rate of 20%. In addition, any loss upon a sale or exchange of our shares by a U.S. shareholder who has held our shares for six months or less will generally be treated as a long-term capital loss to the extent of our distributions required to be treated by the U.S. shareholder as long-term capital gain. The relevant six-month holding period is determined after applying the holding period rules under Section 857 of the Internal Revenue Code. U.S. shareholders other than corporations who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the Internal Revenue Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor's net investment income. A U.S. shareholder's net investment income will include ordinary income dividend distributions and, if an appropriate election is made by the U.S. shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the U.S. shareholder's basis will not enter into the computation of net investment income. Under Section 469 of the Internal Revenue Code, U.S. shareholders, except for corporations that are other than closely held C corporations or personal service corporations, generally will not be entitled to deduct losses from so-called passive activities except to the extent of their income from passive activities. For purposes of these rules, distributions received by a U.S. shareholder from us will not be treated as income from a passive activity and thus will not be available to offset a U.S. shareholder's passive activity losses. Taxation of Tax-Exempt U.S. Shareholders In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust did not constitute "unrelated business taxable income," even though the REIT may have financed some its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to U.S. shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, unless the U.S. shareholder 13
has financed its acquisition of our shares with "acquisition indebtedness" within the meaning of the Internal Revenue Code, or our shares are otherwise used in an unrelated trade or business conducted by the U.S. shareholder. Special rules apply to tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a "pension-held REIT" at any time during a taxable year. The pension trust may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of (1) the pension-held REIT's gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to (2) the pension-held REIT's gross income from all sources, less direct expenses related to that income, except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if (a) the REIT is "predominantly held" by tax-exempt pension trusts, and (b) the REIT would otherwise fail to satisfy the "closely held" ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries. A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT's stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT's stock or beneficial interests, own in the aggregate more than 50% by value of the REIT's stock or beneficial interests. Because of the restrictions in our declaration of trust regarding the ownership concentration of our shares, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT. Taxation of Non-U.S. Shareholders The rules governing the federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, you should consult with your own tax advisor to determine the impact of federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares. In general, a non-U.S. shareholder will be subject to regular federal income tax in the same manner as our U.S. shareholders with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder's conduct of a trade or business in the United States. In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Tax Code, which is payable in addition to regular federal corporate income tax. The balance of this discussion on the federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States. A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange by us of a United States real property interest and that is not designated by us as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution of this type will generally be subject to federal income tax and withholding at the rate of 30%, or the lower rate that may be specified by a tax treaty if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of our taxable year, withholding at the rate of 30% or applicable lower treaty rate will be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder's adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of our shares, as discussed below. A non-U.S. shareholder may seek a refund of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits, provided that the required information is furnished to the IRS. 14
For any year in which we qualify as a REIT, our distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals; the non-U.S. shareholder would be required to file a United States federal income tax return reporting these amounts, even if applicable withholding were imposed as described below; and corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Tax Code in respect of these amounts. We will be required to withhold from distributions to non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated by us as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder's federal income tax liability, and any amount of tax withheld in excess of that tax liability may be refunded provided that an appropriate claim for refund is filed with the IRS. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of our shares will on a percentage basis equal the ratio of (1) the amount of the total dividends paid or made available for the year to the holders of that class of shares, to (2) the total dividends paid or made available for the year to holders of all classes of our shares. Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% generally applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT. If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder's federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. In this regard, note that the 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 20% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Generally effective with respect to distributions paid after December 31, 1999, new Treasury regulations alter the information reporting and backup withholding rules applicable to non-U.S. shareholders and provide presumptions under which a non-U.S. shareholder is subject to backup withholding and information reporting until we receive certification from the shareholder of its non-U.S. shareholder status. The new Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. If our shares are not "United States real property interests" within the meaning of Section 897 of the Tax Code, a non-U.S. shareholder's gain on sale of our shares generally will not be subject to federal income taxation, except that a nonresident alien individual who was present in the United States for 183 days or more during the taxable year will be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we are and will be a domestically controlled REIT and thus that a non-U.S. shareholder's gain on sale of our shares will not be subject to federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be subject to federal income taxation as a sale of a United States real property interest, if (1) our shares are "regularly traded," as defined by applicable Treasury regulations, on an established securities market such as the New York Stock Exchange, and (2) the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of our shares. If the gain on the sale of our shares were subject to federal income taxation, the non-U.S. shareholder would generally be subject to the same treatment as a U.S. shareholder with respect to its gain, would be required to file a United States federal income tax return reporting that gain, and in the case of corporate non-U.S. shareholders might owe branch profits tax under Section 884 of the Tax Code. In any event, a purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, the purchaser of our shares may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS. 15
Backup Withholding and Information Reporting Requirements We will report to our U.S. shareholders and to the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any. Under the backup withholding rules, a U.S. shareholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless the U.S. shareholder (1) is a corporation or comes within other exempt categories and when required demonstrates that fact or (2) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding rules and otherwise complies with applicable requirements of the backup withholding rules. A U.S. shareholder who does not provide us with his correct taxpayer identification number may be subject to penalties imposed by the IRS. In addition, we may be required to withhold a portion of capital gain distributions to any U.S. shareholder who fails to certify his non-foreign status to us. We will report to our non-U.S. shareholders and to the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any. These information reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. As discussed above, withholding rates of 30% and 35% may apply to distributions to non-U.S. shareholders, and new Treasury regulations will when effective alter the information reporting and withholding rules applicable to non-U.S. shareholders. The payment of the proceeds from the disposition of our shares to or through the United States office of a broker will generally be subject to information reporting and backup withholding at a rate of 31% unless under penalties of perjury you certify your status as a non-U.S. shareholder or otherwise establish an exemption. The payment of the proceeds from the disposition of our shares to or through a non-United States office of a broker generally will not be subject to backup withholding and information reporting. Any amounts required to be withheld from payments to you will be collected by us or other applicable withholding agents for remittance to the IRS. Amounts withheld are generally not an additional tax and may be refunded or credited against your federal income tax liability, provided that you furnish the required information to the IRS. In addition, the absence or existence of applicable withholding does not necessarily excuse you from filing applicable United States federal income tax returns. Other Tax Considerations You should recognize that our and our shareholders' present federal income tax treatment may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes as well as promulgation of new regulations, revisions to existing regulations, and revised interpretations of established concepts occur frequently. No prediction can be made as to the likelihood of passage of any new tax legislation or other provisions either directly or indirectly affecting us or our shareholders. Revisions in federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares. We and our shareholders may also be subject to state or local taxation in various state or local jurisdictions, including those in which we or our shareholders transact business or reside. State and local tax treatment may not conform to the federal income tax consequences discussed above. We thus urge you to consult your own tax advisor regarding the specific federal, state, local, foreign and other tax consequences to you of the acquisition, ownership, and disposition of our shares. ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS General Fiduciary Obligations Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") must consider the following: - whether their investment in our shares satisfies the diversification requirements of ERISA; - whether the investment is prudent in light of possible limitations on the marketability of our shares; - whether they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and 16
- whether the investment is otherwise consistent with their fiduciary responsibilities. Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any Individual Retirement Account, "Keogh Plan" or other qualified retirement plan not subject to Title I of ERISA should consider that an IRA or such a plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria. Prohibited Transactions Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should also consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. Sales and other transactions between an ERISA plan, an IRA, or certain types of non-ERISA plans such as Keogh plans ("Non-ERISA Plans") and persons related to it are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA plan, IRA, or other Non-ERISA Plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA Plans, may also result in the imposition of an excise tax under the Internal Revenue Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan or IRA. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained or his beneficiary, the IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction but no excise tax will be imposed. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is a prohibited transaction. Special Fiduciary and Prohibited Transactions Considerations The Department of Labor, which has administrative responsibility over ERISA plans as well as over IRAs and other Non-ERISA Plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and that security is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA plan's or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. Each class of our shares--that is, our common shares and any class of preferred shares that may be outstanding--must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is "widely held," "freely transferable" and either part of a class of securities registered under the Securities Exchange Act of 1934, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our shares has been registered under the Securities Exchange Act of 1934. The regulation provides that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. Our common shares have been widely held and we expect our common shares to continue to be widely held. We expect the same to be true of any class of preferred stock that we issue, but we can give no assurance in that regard. The regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: - any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order; 17
- any requirement that advance notice of a transfer or assignment be given to us and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence; - any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and - any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. We believe that the restrictions imposed under the declaration of trust on the transfer of shares do not result in the failure of our shares to be "freely transferable." Furthermore, we believe that at present there exist no other facts or circumstances limiting the transferability of our common or preferred shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. Assuming that each class of our shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of our shares, we have received an opinion of counsel that such shares will not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation the shares are publicly offered securities and our assets will not be deemed to be "plan assets" of any ERISA plan, IRA or Non-ERISA Plan that invests in our shares. If our assets are deemed to be plan assets under ERISA, then - the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to investments made by us; - the person or persons having investment discretion over the assets of ERISA plans which invest in us would be liable under Part 4 of Title I of ERISA for investments made by us which do not conform to the ERISA standards, unless the investment decision was made by an advisor that has registered as an investment adviser under the Investment Advisers Act of 1940 and other applicable conditions are satisfied, in which case the registered advisor would potentially have such liability; - transactions that we might enter into in the ordinary course of its business and operation might constitute "prohibited transactions" under ERISA and the Internal Revenue Code. 18
Item 2. Properties General. At December 31, 1998, approximately 29% of our total investments were in senior housing properties, 67% were in office buildings and 4% were in hotels through our equity investment in HPT. We believe that the physical plant of each of the facilities in which we have invested is suitable and adequate for our present and any currently proposed uses. At December 31, 1998, we had real estate investments totaling $3.0 billion (at cost) in 256 properties that were leased to or operated by over approximately 700 tenants or mortgagors, plus an investment of approximately $110.6 million (carrying value) in approximately 8.8% of the common shares of HPT, which has investments in 170 hotel properties. At December 31, 1998, three properties with an aggregate cost of $45.1 million were secured by two mortgages aggregating $24.8 million. 19
The following table summarizes some information about our properties as of December 31, 1998. All dollar figures are in thousands. <TABLE> <CAPTION> REAL ESTATE OWNED: Number of Number of Investment Minimum Location Facilities Beds/Units Amount Rent/Interest (1) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Senior Housing Properties: Arizona 6 801 $42,861 $4,152 California 8 1,344 53,879 7,575 Colorado 8 1,011 34,348 4,747 Connecticut 9 1,527 95,566 11,961 Florida 5 1,527 131,990 10,787 Georgia 4 401 12,308 1,354 Illinois 2 704 98,742 7,933 Iowa 7 375 8,207 986 Kansas 1 59 1,320 164 Maryland 1 351 33,080 4,387 Massachusetts 5 762 82,059 10,044 Missouri 2 215 3,788 591 Nebraska 1 80 1,934 230 New Hampshire 1 108 3,754 437 New Jersey 1 150 13,007 1,444 New York 1 103 10,700 1,070 North Carolina 3 309 6,389 1,087 Ohio 2 400 9,872 1,356 Pennsylvania 1 120 15,598 1,951 South Dakota 3 361 7,589 982 Texas 1 145 12,410 1,302 Vermont 8 808 29,766 3,316 Virginia 3 848 57,666 6,284 Washington 2 303 19,542 2,093 Wisconsin 8 1,145 33,021 5,490 Wyoming 3 243 7,246 849 ------------------- ------------------ ------------------- ---------------------- Subtotal 96 14,200 826,642 92,572 ------------------- ------------------ ------------------- ---------------------- Office Properties: Alaska 1 -- 1,000 441 Arizona 3 -- 21,995 2,873 California 18 -- 253,771 33,014 Colorado 2 -- 21,806 2,717 Connecticut 2 -- 14,325 2,394 Delaware 1 -- 44,090 4,160 District of Columbia 5 -- 207,521 28,448 Florida 4 -- 11,588 1,066 Georgia 1 -- 2,978 553 Kansas 1 -- 5,949 1,772 Maryland 7 -- 158,084 21,429 Massachusetts 29 -- 169,476 27,765 Minnesota 3 -- 40,704 4,117 Missouri 1 -- 7,776 940 New Jersey 4 -- 29,947 3,637 New Mexico 2 -- 11,021 1,298 New York 5 -- 174,525 32,994 Ohio 1 -- 15,276 2,151 Oklahoma 1 -- 24,762 3,084 Pennsylvania 16 -- 538,399 80,897 Rhode Island 1 -- 8,010 836 Tennessee 1 -- 22,173 2,965 Texas 17 -- 254,187 40,639 Virginia 4 -- 53,874 7,160 Washington 2 -- 21,388 2,426 West Virginia 1 -- 4,898 874 Wyoming 1 -- 10,317 1,288 ------------------- ------------------ ------------------- ---------------------- Subtotal 134 -- 2,129,840 311,938 =================== ================== =================== ====================== Total Real Estate 230 14,200 $2,956,482 $404,510 =================== ================== =================== ====================== 20
<CAPTION> MORTGAGE AND NOTE INVESTMENTS: Number of Number of Investment Minimum Location Facilities Beds/Units Amount Rent/Interest (1) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Senior Housing Properties: California 4 688 $14,643 $1,851 Connecticut -- -- 1,000 109 Florida 1 248 5,000 525 Kansas 2 122 1,208 174 Louisiana 1 118 18,992 2,293 Michigan 2 342 9,181 1,146 Nebraska 9 610 8,770 1,007 North Carolina 2 174 2,803 300 Ohio* 1 100 1,782 223 Texas 4 390 4,844 460 Wisconsin -- -- 883 121 ------------------- ------------------ ------------------ ---------------------- Subtotal 26 2,792 69,106 8,209 ------------------- ------------------ ------------------ ---------------------- Office Properties: California* -- -- 122 10 ------------------- ------------------ ------------------ ---------------------- Subtotal -- -- 122 10 =================== ================== ================== ====================== Total Mortgages and Notes 26 2,792 $69,228 $8,219 =================== ================== ================== ====================== <FN> * Amounts represent or include notes receivable related to improvements to real estate owned. (1) Amounts represent obligations due to us for properties owned during the 12 months ended December 31, 1998 and annualized obligations due to us for properties acquired during 1998, at December 31, 1998. </FN> </TABLE> Item 3. Legal Proceedings As previously disclosed, in early 1995 we commenced an action in Florida state court to collect on a secured indemnity agreement from a former tenant and mortgagor, together with certain related parties (collectively, the "Former Tenant"). In May 1995 the Former Tenant filed a counterclaim and third-party complaint against HRP and others including Messrs. Martin and Portnoy, HRPT Advisors, Inc. and Sullivan & Worcester LLP, seeking, among other things, to set aside the indemnity agreement and to recover substantial damages. After a Massachusetts state court ordered the dispute to arbitration and a Florida court stayed further proceedings pending arbitration, the Former Tenant brought a separate action against HRP in the United States District Court for the District of Massachusetts and realleged many of the same allegations made in the counterclaims and third-party complaints previously brought by them in response to HRP's original action, and adding allegations of violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violations of 18 U.S.C ss. 1962 (RICO). In September 1996, the United States District Court for the District of Massachusetts ordered the case brought by the Former Tenant dismissed and all disputes between the Former Tenant and HRP referred to arbitration. The arbitration is proceeding, and although the amount of damages claimed by the Former Tenant is material, all claims of the Former Tenant against HRP were dismissed in January of this year, except a basic claim for common law fraud, which is scheduled for trial before the arbitrators in October 1999. The arbitrators' ruling, dismissing all but one claim against HRP, both narrows substantially the scope of claims pending against HRP and diminishes greatly the risk of the Former Tenant being able to hold HRP liable for (i) attorneys fees and costs, or (ii) multiple damages, should the Former Tenant prevail on its sole remaining claim against HRP. We continue to pursue our indemnity claims in the arbitration. As we have previously disclosed, certain related cases have also been filed by creditors or assignees of the Former Tenant. The amounts of damages claimed by the creditors or assignees of the Former Tenant are material. We will defend the claims of the creditors or assignees of the Former Tenant in these related proceedings, currently pending in Massachusetts Superior Court. The outcome of the arbitration and the related pending claims and proceedings cannot be predicted. The Declaration of Trust provides that our Trustees shall be indemnified in certain circumstances by HRP in connection with claims asserted against them by reason of their status, subject to various limitations contained in the Declaration of Trust. Were Messrs. Martin and Portnoy to be held liable in the proceedings described above, they may have a claim for indemnification from HRP. 21
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Our Shares are traded on the New York Stock Exchange (symbol: HRP). The following table sets forth for the periods indicated the high and low sale prices for the Shares as reported in the New York Stock Exchange Composite Transactions reports. High Low 1997 First Quarter $20 5/8 $18 Second Quarter 19 17 3/4 Third Quarter 19 1/8 17 5/8 Fourth Quarter 20 5/16 18 9/16 1998 First Quarter 20 15/16 19 5/8 Second Quarter 20 1/4 17 7/8 Third Quarter 18 13/16 15 5/8 Fourth Quarter 17 1/8 14 The closing price of the Shares on the New York Stock Exchange on March 29, 1999 was $13 3/4. As of March 5, 1999, there were approximately 5,951 holders of record of the Shares, and we estimate that as of such date there were in excess of 145,000 beneficial owners of the Shares. Dividends declared with respect to each period for the two most recent fiscal years and the amount of such dividends and the respective annualized rates are set forth in the following table. Dividend Annualized Per Share Dividend Rate 1997 First Quarter $.36 $1.44 Second Quarter .36 1.44 Third Quarter .37 1.48 Fourth Quarter .37 1.48 1998 First Quarter .38 1.52 Second Quarter .38 1.52 Third Quarter .38 1.52 Fourth Quarter .38 1.52 All dividends declared have been paid. We intend to continue to declare and pay future dividends on a quarterly basis. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to shareholders which annually will be at least 95% of our taxable income. All distributions will be made by us at the discretion of the Trustees and will depend on our earnings, our cash flow available for distribution, our financial condition and other factors that the Trustees deem relevant. We have in the past distributed, and intend to continue to distribute, substantially all of our "real estate investment trust taxable income" to our shareholders. As previously reported, in 1997 we entered into an Agreement of Merger (the "Merger Agreement") with Government Property Investors, Inc. ("GPI") pursuant to which we agreed to acquire up to 30 office buildings 22
containing approximately 3.4 million square feet, substantially all of which is leased to various agencies of the United States government. The Merger Agreement provided for us to acquire these properties in a series of closings in exchange for our Shares. As of May 1998, the final closing under the Merger Agreement had occurred, and we had issued 4,271,428 Shares to GPI and its successors and assigns; however, the final number of Shares issuable in connection with the Merger Agreement had not been determined. In February, 1999, we issued an additional 256,246 Shares to GPI pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. Item 6. Selected Financial Data Set forth below is selected financial data for the periods and dates indicated. This data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and accompanying notes included in Item 7 of our Current Report on Form 8-K dated March 5, 1999. Amounts are in thousands, except per Share information. <TABLE> <CAPTION> Income Statement Data: Year Ended December 31, ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> <C> Total revenues $356,554 $208,863 $120,183 $113,322 $86,683 Income before gain (loss) on sale of properties and extraordinary item 146,656 112,204 77,164 61,760 57,878 Income before extraordinary item 146,656 115,102 77,164 64,236 51,872 Net income 144,516 114,000 73,254 64,236 49,919 Funds from operations - basic (1) 211,715 146,312 99,106 84,638 71,851 Funds from operations - diluted (1) 227,904 162,738 103,253 84,638 71,851 Dividends declared (2) 190,341 144,271 94,299 83,954 76,317 Per basic common share amounts: Income before gain (loss) on sale of properties and extraordinary item 1.22 1.22 1.16 1.04 1.10 Income before extraordinary item 1.22 1.25 1.16 1.08 .98 Net income 1.21 1.24 1.11 1.08 .95 Funds from operations - basic (1) 1.77 1.59 1.50 1.43 1.36 Funds from operations - diluted (1) 1.74 1.57 1.49 1.43 1.36 Dividends declared (2) 1.52 1.46 1.42 1.38 1.33 Weighted average shares outstanding 119,867 92,168 66,255 59,227 52,738 <CAPTION> Balance Sheet Data: At December 31, ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> <C> Real estate properties, at cost $2,956,482 $1,969,023 $1,005,739 $778,211 $673,083 Real estate mortgages and notes 69,228 104,288 150,205 141,307 133,477 Investment in HPT 110,554 111,134 103,062 99,959 -- Total assets 3,064,057 2,135,963 1,229,522 999,677 840,206 Total indebtedness 1,132,081 787,879 492,175 269,759 216,513 Total shareholders' equity 1,827,793 1,266,260 708,048 685,592 602,039 <FN> (1) Our Funds From Operations ("FFO") represents net income (computed in accordance with generally accepted accounting principles ("GAAP")), before gain or loss on sale of properties and extraordinary items, depreciation and other non-cash items and includes HRP's pro rata share of HPT's FFO. Management considers FFO to be a measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs. FFO does not represent cash flow from operating activities (as determined in accordance with GAAP) and should not be considered as an alternative to net income, as an indicator of our financial performance or to cash flows as a measure of liquidity. (2) Amounts represent dividends declared with respect to the periods shown. Distributions in excess of net income generally constitute a return of capital. </FN> </TABLE> 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 5 of our Current Report on Form 8-K dated March 5, 1999. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to risks associated with interest rate changes. We manage our exposure to this market risk through our monitoring of available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 1997. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how such exposure is managed in the near future. At December 31, 1998, our total outstanding debt for fixed rate notes consisted of the following: Amount Coupon Maturity Unsecured senior notes: $40.0 million 7.25% 2001 $160.0 million 6.875% 2002 $150.0 million 6.75% 2002 $164.9 million 7.50% 2003 $100.0 million 6.7% 2005 $143.0 million 8.5% 2013 Secured notes: $13.1 million 8.00% 2008 $11.7 million 7.66% 2009 No principal repayments are due under the unsecured senior notes until maturity. If, at maturity, the unsecured senior notes were to be refinanced at interest rates which are 1/2 percentage point higher than shown above, our per annum interest cost would increase by approximately $3.8 million. The secured notes are secured by three of our office properties and require principal and interest payments through maturity. As of December 31, 1998, we had two series of senior unsecured notes that were subject to floating interest rates; a $500.0 million bank credit facility and another series of unsecured senior notes totaling $250.0 million. Our bank credit facility bears interest at floating rates and matures in 2002. At December 31, 1998, $400.0 million was available for drawing under our line of credit and $100.0 million was outstanding. Our line of credit is available to finance our acquisition commitments. As of December 31, 1998, our acquisition commitments required approximately $21.7 million (plus closing costs) of cash. Assuming these commitments were all funded with borrowings under our bank credit facility, and assuming interest rates increased 1/2 percentage point, our annualized interest cost would increase by approximately $108,500. Our unsecured senior notes totaling $250.0 million bear interest at floating rates and mature in 2007. Assuming interest rates increase 1/2 percentage point, our annualized interest costs would increase by approximately $1.3 million. Each of our obligations for borrowed money has provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and in other cases we are allowed to make prepayments only at a premium to face value. In any event, these prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates, by refinancing at lower rates prior to maturity. From time to time, we may enter into contracts to hedge our interest rate risk. As of December 31, 1998, we have not entered into any of these contracts. The market prices, if any, of each of our fixed rate obligations as of December 31, 1998 are sensitive to changes in interest rates. Typically, if market rates of interest increase, the current market price of a fixed rate obligation will decrease. Conversely, if market rates of interest decrease, the current market price of a fixed rate obligation typically will increase. Based on the balances outstanding at December 31, 1998, a hypothetical immediate one percentage point change in interest rates would change the fair value of our fixed rate debt obligations by approximately $36.5 million (based on discounted cash flow analysis). 24
Item 8. Financial Statements and Supplementary Data The information required by this item is incorporated herein by reference to the consolidated financial statements of HRPT Properties Trust included in Item 7 of our Current Report on Form 8-K dated March 5, 1999. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable PART III The information in Part III (Items, 10, 11, 12 and 13) is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Index to Financial Statements and Financial Statement Schedules <TABLE> <CAPTION> HRPT PROPERTIES TRUST Page <S> <C> 1) The following consolidated financial statements of HRPT Properties Trust are incorporated by reference to our Current Report on Form 8-K dated March 5, 1999. Page references are to such Current Report: Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3 Consolidated Statements of Income for each of the three years in the periods ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Shareholders' Equity for each of the three years in the periods ended December 31, 1998, 1997, and 1996 F-5 Consolidated Statements of Cash Flows for each of the three years in the periods ended December 31, 1998, 1997, and 1996 F-6 Notes to Consolidated Financial Statements F-8 2) The following schedules are filed herewith: III - Real Estate and Accumulated Depreciation S-1 IV - Mortgage Loans on Real Estate S-9 </TABLE> All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K During the fourth quarter of 1998, we filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K dated November 12, 1998, relating to unaudited pro forma consolidated financial statements (Item 7). (ii) Current Report on Form 8-K dated November 24, 1998, filing as exhibits: (1) Purchase Agreement dated as of November 24, 1998 by and among the Company and the several underwriters named therein pertaining to $130,000,000 in aggregate principal amount of 8 1/2% Monthly Income Senior Notes due 2013, (2) Form of Supplemental Indenture dated as of November 30, 1998 by and between the Company and State Street Bank and Trust Company pertaining to $130,000,000 in aggregate principal amount of 8 1/2% Monthly Income Senior Notes due 2013, (3) Consent of Sullivan & Worcester LLP, and (4) Opinion of Sullivan & Worcester LLP relating to tax matters (Item 7). 25
(iii) Current Report on Form 8-K dated December 23, 1998, relating to a financing plan for senior housing and healthcare real estate investments which would include a public offering of common shares of a subsidiary, and a distribution to shareholders of common shares of that subsidiary (Item 5). (c) Exhibits 3.1 Composite copy of Third Amendment and Restatement of Declaration of Trust of the Company dated July 1, 1994, as amended to date. (incorporated by reference to the Company's Current Report on Form 8-K, dated July 1, 1998) 3.2 Articles Supplementary dated November 4, 1994 to Third Amendment and Restatement of Declaration of Trust dated July 1, 1994 creating the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998) 3.3 Articles Supplementary dated May 13, 1997 to Third Amendment and Restatement of Declaration of Trust dated July 1, 1994 increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998) 3.4 Articles Supplementary dated May 22, 1998 to Third Amendment and Restatement of Declaration of Trust dated July 1, 1994 increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K dated May 27, 1998) 3.5 By-laws of the Company, as amended to date. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998) 4.1 Form of Common Share Certificate. (incorporated by reference to the Company's Current Report on Form 8-K dated March 11, 1999) 4.2 Rights Agreement dated October 17, 1994 between the Company and State Street Bank and Trust Company, as Rights Agent (including the form of Articles Supplementary relating to the Junior Participating Preferred Shares annexed as an exhibit thereto). (incorporated by reference to the Company's Registration Statement on Form 8-A dated October 24, 1994) 4.3 Indenture, dated as of September 20, 1996, between the Company and Fleet National Bank ("Fleet"), as trustee. (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333- 02863) 4.4 First Supplemental Indenture, dated as of October 7, 1996, between the Company and Fleet, as trustee, relating to the Company's 7.5% Convertible Subordinated Debentures due 2003, Series A, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K dated October 7, 1996) 4.5 Second Supplemental Indenture, dated as of October 7, 1996, between the Company and Fleet, as trustee, relating to the Company's 7.5% Convertible Subordinated Debentures due 2003, Series B, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K dated October 7, 1996) 4.6 Third Supplemental Indenture, dated as of October 7, 1996, between the Company and Fleet, as trustee, relating to the Company's 7.25% Convertible Subordinated Debentures due 2001, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K dated October 7, 1996) 4.7 Indenture, dated as of July 9, 1997, by and between the Company and State Street Bank and Trust Company, as Trustee. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.8 Supplemental Indenture, dated July 9, 1997, by and between the Company and State Street Bank and Trust Company, as Trustee, relating to the Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 26
4.9 Supplemental Indenture No. 2 dated as of February 23, 1998 between the Company and State Street Bank and Trust Company, relating to $50,000,000 in principal amount of Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.10 Form of Global Note relating to the Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Current Report on Form 8-K dated July 2, 1997) 4.11 Supplemental Indenture No. 3 dated as of February 23, 1998 between the Company and State Street Bank and Trust Company, relating to the Company's 6.7% Senior Notes due 2005, including form thereof. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.12 Supplemental Indenture No. 4 dated as of August 26, 1998 by and between the Company and State Street Bank and Trust Company, relating to $160,000,000 in aggregate principal amount of 6 7/8% Senior Notes due 2002, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 4.13 Supplemental Indenture No. 5 dated as of November 30, 1998 by and between the Company and State Street Bank and Trust Company, relating to $130,000,000 in aggregate principal amount of 8 1/2% Monthly Income Senior Notes due 2013, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K dated March 11, 1999) 4.14 Supplemental Indenture No. 6 dated as of March 24, 1999 by and between the Company and State Street Bank and Trust Company, relating to $90,000,000 in aggregate principal amount of 7 7/8% Monthly Income Senior Notes due 2009, including form thereof. (filed herewith) 4.15 Indenture dated as of December 18, 1997 by and between the Company and State Street Bank and Trust Company, as Trustee. (incorporated by reference to the Company's Current Report on Form 8-K dated December 5, 1997) 4.16 Supplemental Indenture dated as of December 18, 1997 by and between the Company and State Street Bank and Trust Company, as Trustee, relating to the Company's 6 3/4% Senior Notes due 2002, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K dated December 5, 1997) 4.17 Registration Rights Agreement dated as of December 18, 1997 by and between the Company and Merrill Lynch & Co. (incorporated by reference to the Company's Current Report on Form 8-K dated December 5, 1997) 8.1 Opinion of Sullivan & Worcester, LLP as to certain tax matters. (filed herewith) 9.1 Amended and Restated AMS Voting Trust Agreement. (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-55684, dated December 23, 1992, and amendments thereto) 10.1 Advisory Agreement by and between the Company and HRPT Advisors, Inc., as amended.(+) (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 3-16799, dated August 27, 1987, and amendments thereto) 10.2 Second Amendment to the Advisory Agreement by and between the Company and HRPT Advisors, Inc.(+) (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.3 Third Amendment to Advisory Agreement by and between the Company and HRPT Advisors, Inc., dated June 26, 1997.(+) (incorporated by reference to the Company's Current Report on Form 8-K, dated July 2, 1997) 27
10.4 Advisory Agreement by and between REIT Management & Research, Inc. and the Company dated as of January 1, 1998.(+) (incorporated by reference to the Company's Current Report on Form 8-K, dated February 11, 1998) 10.5 Agreement (for Property Management and Leasing Agent) between M&P Partners Limited Partnership and various subsidiaries of the Company, effective as of March 25, 1997, relating to properties leased to Agencies of the United States Government. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997) 10.6 Master Management Agreement by and among M&P Partners Limited Partnership and the parties named therein dated as of December 31, 1997. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 11, 1998) 10.7 Master Management Agreement by and between the Company and REIT Management & Research, Inc., dated as of January 1, 1998. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 27, 1998) 10.8 Parking Operation Management Agreement by and between HUB Properties Trust, a subsidiary of the Company, and REIT Management & Research, Inc., dated as of January 1, 1998. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 27, 1998) 10.9 Incentive Share Award Plan.(+) (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-55684, dated December 23, 1992, and amendments thereto) 10.10 AMS Properties Security Agreement. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.11 AMS Subordination Agreement. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.12 AMS Guaranty. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.13 AMS Pledge Agreement. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.14 AMS Holding Co. Pledge Agreement. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.15 Amended and Restated Renovation Funding Agreement dated as of January 13, 1992 between AMS Properties, Inc. and the Company. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.16 Amendment to AMS Transaction Documents. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.17 GCI Master Lease Document. (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-55684, dated December 23, 1992, and amendments thereto) 10.18 Amended and Restated HRP Shares Pledge Agreement. (incorporated by reference to the Company's Registration Statement on Form S-11, File no. 33-55684, dated December 23, 1992, and amendments thereto) 10.19 Guaranty Cross-Default and Cross-Collateralization Agreement. (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-55684, dated December 23, 1992, and amendments thereto) 10.20 Connecticut Subacute Corporation II Lease Document Waterbury. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 28
10.21 Connecticut Subacute Corporation II Lease Document Cheshire. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.22 Connecticut Subacute Corporation II Lease Document New Haven. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.23 Vermont Subacute/New Hampshire Subacute Corporation Master Lease Agreement (Chapple). (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.24 Amended and Restated Agreement and Plan of Reorganization (Chapple). (incorporated by reference to the Company's Annual report on Form 10-K for the year ended December 31, 1995) 10.25 Amended and Restated Promissory Note, dated July 29, 1996, from Connecticut Subacute Corporation to the Company. (incorporated by reference to the Company's Current Report on Form 8-K dated October 1, 1996) 10.26 Note Modification Agreement, dated as of June 30, 1998, by and between Connecticut Subacute Corporation and the Company. (incorporated by reference to the Company's Current Report on Form 8-K dated March 11, 1999) 10.27 Second Amendment to Master Lease Agreement General Terms and Conditions and Leases Entered Into Pursuant Thereto, dated as of October 5, 1998, by and between the Company and Connecticut Subacute Corporation. (incorporated by reference to the Company's Current Report on Form 8-K dated March 11, 1999) 10.28 Merger Agreement dated February 17, 1997 between the Company and Government Property Investors, Inc. (including forms of Escrow Agreement, Investment and Registration Rights Agreement, Voting Agreement, Information Access Agreement, Indemnification Agreement, Service Contract, Non-Solicitation Agreement and Second Closing Escrow Agreement). (incorporated by reference to the Company's Current Report on Form 8-K, dated February 17, 1997) 10.29 Amendment No. 1 to Agreement of Merger dated March 25, 1997 between the Company and Government Property Investors, Inc. (incorporated by reference to the Company's Registration Statement on Form S-3 (File No. 333-29675) filed with the Commission on June 20, 1997) 10.30 Remarketing Agreement (including form of Remarketing Underwriting Agreement) relating to the Remarketed Reset Notes due July 9, 2007 by and between the Company and Merrill Lynch & Co., dated as of July 2, 1997. (incorporated by reference to the Company's Current Report on Form 8-K, dated July 2, 1997) 10.31 Fourth Amended and Restated Revolving Credit Agreement, dated as of April 2, 1998, among the Company, as borrower, the lenders named therein, Dresdner Kleinwort Benson North America LLC, as agent, and Fleet National Bank, as administrative agent. (incorporated by reference to the Company's Current Report on Form 8-K, dated April 14, 1998) 12.1 Statement regarding computation of ratio of earning to fixed charges. (filed herewith) 21.1 Subsidiaries of the Registrant. (filed herewith) 23.1 Consent of Ernst & Young LLP. (filed herewith) 23.2 Consent of Arthur Andersen LLP. (filed herewith) 23.3 Consent of Sullivan & Worcester LLP (included as part of Exhibit 8.1 hereto) 99.1 Current Report on Form 8-K dated March 5, 1999 (filed herewith) (+) Management contract or compensatory plan or arrangement. 29
<TABLE> <CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ Senior Housing Propertiess: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> La Mesa AZ $1,480 $13,320 $-- $1,480 $13,320 $14,800 $680 12/27/96 1985 Phoenix AZ 655 2,525 5 655 2,530 3,185 471 6/30/92 1963 Scottsdale AZ 979 8,807 140 990 8,936 9,926 1,033 5/16/94 1990 Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 1,218 6/17/94 1990 Yuma AZ 103 604 1 103 605 708 112 6/30/92 1984 Yuma AZ 223 2,100 3 223 2,103 2,326 386 6/30/92 1984 Fresno CA 738 2,577 188 738 2,765 3,503 646 12/28/90 1963 Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791 3,072 9/9/94 1975 Lancaster CA 601 1,859 1,028 601 2,887 3,488 610 12/28/90 1969 Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 592 12/28/90 1962 Stockton CA 382 2,750 4 382 2,754 3,136 507 6/30/92 1968 Tarzana CA 1,277 977 806 1,278 1,782 3,060 403 12/28/90 1969 Thousand Oaks CA 622 2,522 310 622 2,832 3,454 639 12/28/90 1965 Van Nuys CA 716 378 225 718 601 1,319 154 12/28/90 1969 Canon City CO 292 6,228 -- 292 6,228 6,520 201 9/26/97 1970 Colorado Springs CO 245 5,236 -- 245 5,236 5,481 169 9/26/97 1972 Delta CO 167 3,570 -- 167 3,570 3,737 115 9/26/97 1963 Grand Junction CO 204 3,875 329 204 4,204 4,408 650 12/30/93 1968 Grand Junction CO 6 2,583 1,316 136 3,769 3,905 513 12/30/93 1978 Lakewood CO 232 3,766 723 232 4,489 4,721 970 12/28/90 1972 Littleton CO 185 5,043 348 185 5,391 5,576 1,224 12/28/90 1965 Cheshire CT 520 7,380 1,559 520 8,939 9,459 2,626 11/1/87 1963 Forestville CT 465 9,235 3,477 478 12,699 13,177 3,782 12/23/86 1972 Killingly CT 240 5,360 460 240 5,820 6,060 1,970 5/15/87 1972 New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870 3,423 5/11/92 1971 Wallingford CT 557 11,043 2,925 557 13,968 14,525 4,338 12/23/86 1974 Waterbury CT 1,003 9,023 915 1,003 9,938 10,941 2,097 5/11/92 1974 Waterbury CT 514 10,186 3,402 630 13,472 14,102 3,980 12/23/86 1971 Waterford CT 86 4,714 453 86 5,167 5,253 1,814 5/15/87 1965 Willimantic CT 134 3,566 479 166 4,013 4,179 1,307 5/15/87 1965 Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836 4,664 5/20/94 1994 Deerfield Beach FL 1,664 14,972 299 1,690 15,245 16,935 1,762 5/16/94 1986 Fort Myers FL 2,349 21,137 419 2,385 21,520 23,905 2,354 8/16/94 1984 Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863 3,523 5/16/94 1992 Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 1,295 5/20/94 1993 College Park GA 300 2,702 23 300 2,725 3,025 220 5/15/96 1985 S-1
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Dublin GA 442 3,982 80 442 4,062 4,504 312 5/15/96 1968 Glenwood GA 174 1,564 4 174 1,568 1,742 116 5/15/96 1972 Marietta GA 300 2,702 35 300 2,737 3,037 211 5/15/96 1967 Clarinda IA 77 1,453 293 77 1,746 1,823 254 12/30/93 1968 Council Bluffs IA 225 893 99 225 992 1,217 164 4/1/95 1963 Mediapolis IA 94 1,776 251 94 2,027 2,121 303 12/30/93 1973 Pacific Junction IA 32 306 5 32 311 343 32 4/1/95 1978 Winterset IA 111 2,099 493 111 2,592 2,703 375 12/30/93 1973 Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742 3,550 9/9/94 1986 Chicago IL 6,200 55,800 -- 6,200 55,800 62,000 2,848 12/27/96 1990 Ellinwood KS 130 1,137 53 130 1,190 1,320 126 4/1/95 1972 Boston MA 2,164 20,836 1,978 2,164 22,814 24,978 6,788 5/1/89 1968 Hyannis MA 829 7,463 -- 829 7,463 8,292 1,677 5/11/92 1972 Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523 3,501 5/1/88 1970 North Andover MA 1,448 11,049 -- 1,448 11,049 12,497 2,483 5/11/92 1985 Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769 5,522 5/1/88 1970 Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 3,319 7/25/94 1992 St. Joseph MO 111 1,027 195 111 1,222 1,333 154 6/4/93 1976 Tarkio MO 102 1,938 415 102 2,353 2,455 336 12/30/93 1970 Concord NC 90 2,126 -- 90 2,126 2,216 483 9/10/98 1990 Wilson NC 27 2,375 -- 27 2,375 2,402 538 9/10/98 1990 Winston-Salem NC 75 1,696 -- 75 1,696 1,771 381 9/10/98 1990 Grand Island NE 119 1,446 369 119 1,815 1,934 150 4/1/95 1963 Rochester NH 466 3,219 69 466 3,288 3,754 320 1/30/95 1972 Burlington NJ 1,300 11,700 7 1,300 11,707 13,007 952 9/29/95 1994 Rochester NY 1,070 9,630 -- 1,070 9,630 10,700 492 12/27/96 1988 Akron OH 330 5,370 727 330 6,097 6,427 2,200 5/15/87 1971 Grove City OH 332 3,081 32 332 3,113 3,445 430 6/4/93 1965 Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 3,622 3/1/91 1985 Huron SD 45 968 1 45 969 1,014 177 6/30/92 1968 Huron SD 144 3,108 4 144 3,112 3,256 567 6/30/92 1968 Sioux Falls SD 253 3,062 4 253 3,066 3,319 561 6/30/92 1960 Bellaire TX 1,223 11,010 177 1,238 11,172 12,410 1,291 5/16/94 1991 Arlington VA 1,859 16,734 296 1,885 17,004 18,889 1,895 7/25/94 1992 Charlottesville VA 2,936 26,422 471 2,976 26,853 29,829 3,048 6/17/94 1991 Virginia Beach VA 881 7,926 141 893 8,055 8,948 931 5/16/94 1990 S-2
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Barre VT 129 3,825 4 129 3,829 3,958 379 1/30/95 1972 Barre VT 261 4,530 133 389 4,535 4,924 449 1/30/95 1979 Bennington VT 160 4,385 5 160 4,390 4,550 434 1/30/95 1971 Burlington VT 791 5,985 410 872 6,314 7,186 621 1/30/95 1968 Springfield VT 50 747 1 50 748 798 74 1/30/95 1976 Springfield VT 89 3,724 157 242 3,728 3,970 369 1/30/95 1971 St. Johnsbury VT 95 3,416 4 95 3,420 3,515 338 1/30/95 1978 St. Albans VT 154 710 1 154 711 865 70 1/30/95 1900 Seattle WA 256 4,869 67 256 4,936 5,192 785 11/1/93 1964 Spokane WA 1,035 13,315 -- 1,035 13,315 14,350 581 5/7/97 1993 Brookfield WI 834 3,849 8,014 834 11,863 12,697 1,928 12/28/90 1964 Clintonville WI 14 1,695 38 14 1,733 1,747 389 12/28/90 1960 Clintonville WI 49 1,625 87 30 1,731 1,761 387 12/28/90 1965 Madison WI 144 1,633 110 144 1,743 1,887 390 12/28/90 1920 Milwaukee WI 232 1,368 1 232 1,369 1,601 281 9/10/98 1970 Milwaukee WI 277 3,883 -- 277 3,883 4,160 769 3/27/92 1969 Pewaukee WI 984 2,432 -- 984 2,432 3,416 518 9/10/98 1963 Waukesha WI 68 3,452 2,232 68 5,684 5,752 1,036 12/28/90 1958 Laramie WY 191 3,632 199 191 3,831 4,022 595 12/30/93 1964 Worland WY 132 2,503 589 132 3,092 3,224 432 12/30/93 1970 -------------------------------------------------------------------------------- Subtotal 74,539 705,504 46,599 75,673 750,969 826,642 114,454 -------------------------------------------------------------------------------- Office Buildings: Petersburg AK 189 811 -- 189 811 1,000 36 3/31/97 1983 Phoenix AZ 2,687 11,532 231 2,729 11,721 14,450 472 5/15/97 1997 Safford AZ 635 2,729 61 647 2,778 3,425 123 3/31/97 1992 Tuscon AZ 765 3,280 75 779 3,341 4,120 148 3/31/97 1993 Anaheim CA 691 6,223 -- 691 6,223 6,914 234 12/5/97 1992 Anaheim CA 82 735 -- 82 735 817 28 12/5/97 1970 Anaheim CA 133 1,201 -- 133 1,201 1,334 45 12/5/97 1970 Kearney Mesa CA 2,916 12,456 337 2,969 12,740 15,709 565 3/31/97 1994 Los Angeles CA 5,076 49,884 768 5,076 50,652 55,728 2,090 5/15/97 1979 Los Angeles CA 5,055 49,685 765 5,055 50,450 55,505 2,081 5/15/97 1979 Los Angeles CA 1,921 8,242 190 1,955 8,398 10,353 304 7/11/97 1996 Newport Beach CA 1,220 3,307 -- 1,220 3,307 4,527 52 5/26/98 1984 Sacramento CA 644 3,206 77 644 3,283 3,927 359 8/30/94 1984 San Diego CA 294 2,650 201 294 2,851 3,145 161 12/31/96 1984 S-3
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> San Diego CA 2,984 12,859 2,197 3,038 15,002 18,040 616 3/31/97 1996 San Diego CA 502 4,526 342 502 4,868 5,370 276 12/31/96 1984 San Diego CA 4,269 18,316 413 4,347 18,651 22,998 827 3/31/97 1996 San Diego CA 316 2,846 215 316 3,061 3,377 173 12/31/96 1984 San Diego CA 1,228 11,199 41 1,228 11,240 12,468 574 12/5/96 1985 San Diego CA 992 9,040 33 992 9,073 10,065 463 12/5/96 1985 San Diego CA 1,985 18,096 67 1,985 18,163 20,148 927 12/5/96 1985 San Diego CA 313 2,820 213 313 3,033 3,346 172 12/31/96 1984 Aurora CO 1,152 13,272 -- 1,152 13,272 14,424 494 11/14/97 1993 Golden CO 494 152 6,736 495 6,887 7,382 122 3/31/97 1997 Wallingford CT 367 3,301 -- 367 3,301 3,668 3 12/22/98 1988 Wallingford CT 640 10,017 -- 640 10,017 10,657 136 6/1/98 1986 Washington DC 5,975 53,778 223 5,975 54,001 59,976 733 6/23/98 1991 Washington DC 1,851 16,511 197 1,851 16,708 18,559 636 12/19/97 1966 Washington DC 6,979 29,949 871 7,107 30,692 37,799 1,373 3/31/97 1989 Washington DC 12,008 51,528 1,282 12,227 52,591 64,818 2,330 3/31/97 1996 Washington DC 2,485 22,696 1,188 2,485 23,884 26,369 1,405 9/13/96 1976 Wilmington DE 4,409 39,681 -- 4,409 39,681 44,090 455 7/23/98 1986 Miami FL 144 1,297 -- 144 1,297 1,441 27 3/19/98 1987 Orlando FL 256 2,308 -- 256 2,308 2,564 52 2/19/98 1997 Orlando FL 722 6,499 -- 722 6,499 7,221 142 2/19/98 1997 Orlando FL -- 362 -- -- 362 362 -- 2/19/98 1997 Savannah GA 544 2,330 104 553 2,425 2,978 105 3/31/97 1990 Kansas City KS 1,042 4,469 438 1,061 4,888 5,949 239 3/31/97 1990 Boston MA 1,500 13,500 262 1,500 13,762 15,262 1,061 12/18/95 1988 Boston MA 1,447 13,028 45 1,448 13,072 14,520 1,075 9/28/95 1993 Boston MA 3,378 30,397 1,694 3,378 32,091 35,469 2,851 9/28/95 1988 Charlton MA 141 1,269 8 141 1,277 1,418 52 5/15/97 1988 Fitchburg MA 223 2,004 10 223 2,014 2,237 82 5/15/97 1994 Grafton MA 37 336 4 37 340 377 14 5/15/97 1930 Lexington MA 1,054 9,487 -- 1,054 9,487 10,541 228 1/30/98 1994 Milford MA 144 1,297 9 144 1,306 1,450 53 5/15/97 1989 Millbury MA 34 309 4 34 313 347 13 5/15/97 1950 Northbridge MA 32 290 5 32 295 327 12 5/15/97 1962 Paxton MA 24 212 4 24 216 240 9 5/15/97 1984 Quincy MA 2,487 16,645 19 2,487 16,664 19,151 296 4/3/98 1988 S-4
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Quincy MA 1,658 11,097 13 1,658 11,110 12,768 198 4/3/98 1988 Spencer MA 211 1,902 11 211 1,913 2,124 78 5/15/97 1992 Sturbridge MA 83 751 6 83 757 840 31 5/15/97 1986 Webster MA 315 2,834 14 315 2,848 3,163 116 5/15/97 1995 Westborough MA 42 381 5 42 386 428 16 5/15/97 1900 Westborough MA 24 216 4 24 220 244 9 5/15/97 1953 Westborough MA 166 1,498 8 166 1,506 1,672 61 5/15/97 1977 Westborough MA 396 3,562 15 396 3,577 3,973 145 5/15/97 1986 Westwood MA 537 4,960 1 538 4,960 5,498 244 1/8/97 1977 Westwood MA 500 4,562 1 500 4,563 5,063 61 6/8/98 1990 Westwood MA 303 2,740 59 304 2,798 3,102 148 11/26/96 1980 Worcester MA 354 3,189 14 354 3,203 3,557 130 5/15/97 1985 Worcester MA 111 1,000 6 111 1,006 1,117 41 5/15/97 1986 Worcester MA 265 2,385 12 265 2,397 2,662 97 5/15/97 1972 Worcester MA 1,132 10,186 38 1,132 10,224 11,356 415 5/15/97 1989 Worcester MA 158 1,417 7 157 1,425 1,582 58 5/15/97 1992 Worcester MA 895 8,052 41 895 8,093 8,988 328 5/15/97 1990 Baltimore MD 900 8,097 -- 900 8,097 8,997 42 10/15/98 1989 Baltimore MD -- 12,430 73 -- 12,503 12,503 520 11/18/97 1988 College Park MD 9,423 40,433 934 9,595 41,195 50,790 1,830 3/31/97 1994 Gaithersburg MD 4,381 18,798 464 4,461 19,182 23,643 858 3/31/97 1995 Germantown MD 2,305 9,890 263 2,347 10,111 12,458 452 3/31/97 1995 Oxon Hill MD 3,181 13,653 323 3,240 13,917 17,157 619 3/31/97 1992 Rockville MD 3,251 29,258 27 3,251 29,285 32,536 640 2/2/98 1986 Bloomington MN 1,898 17,081 2,150 1,898 19,231 21,129 338 3/19/98 1995 Eagan MN 1,424 12,822 1 1,425 12,822 14,247 254 3/19/98 1986 Mendota Heights MN 533 4,795 -- 533 4,795 5,328 95 3/19/98 1995 Kansas City MO 1,443 6,193 140 1,470 6,306 7,776 280 3/31/97 1995 Florham Park NJ 1,412 12,709 -- 1,412 12,709 14,121 145 7/31/98 1979 Vorhees NJ 1,053 6,625 -- 1,053 6,625 7,678 104 5/26/98 1990 Vorhees NJ 445 2,798 -- 445 2,798 3,243 44 5/26/98 1990 Vorhees NJ 673 4,232 -- 673 4,232 4,905 66 5/26/98 1990 Albequerque NM 493 2,119 58 503 2,167 2,670 96 3/31/97 1984 Sante Fe NM 1,551 6,650 150 1,578 6,773 8,351 300 3/31/97 1987 Brooklyn NY 775 7,054 2 775 7,056 7,831 448 6/6/96 1971 Buffalo NY 4,405 18,899 426 4,485 19,245 23,730 853 3/31/97 1994 S-5
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Irondoquoit NY 1,910 17,189 21 1,910 17,210 19,120 234 6/30/98 1986 New York NY 44,000 66,976 -- 44,000 66,976 110,976 2,080 10/1/97 1989 White Plains NY 1,200 10,870 798 1,200 11,668 12,868 790 2/6/96 1952 Mason OH 1,528 13,748 -- 1,528 13,748 15,276 186 6/10/98 1994 Oklahoma City OK 4,596 19,721 445 4,680 20,082 24,762 890 3/31/97 1992 Fort Washington PA 1,154 7,722 -- 1,154 7,722 8,876 169 1/15/98 1996 FT. Washington PA 1,184 5,559 -- 1,184 5,559 6,743 180 9/22/97 1967 FT. Washington PA 683 3,198 -- 683 3,198 3,881 104 9/22/97 1970 FT. Washington PA 1,872 8,816 -- 1,872 8,816 10,688 286 9/22/97 1960 Greensburg PA 780 7,026 -- 780 7,026 7,806 95 6/3/98 1997 Horsham PA 741 3,611 7 741 3,618 4,359 117 9/22/97 1983 King of Prussia PA 634 3,251 -- 634 3,251 3,885 108 9/22/97 1964 King of Prussia PA 552 2,893 -- 552 2,893 3,445 64 2/2/98 1996 King of Prussia PA 354 3,183 -- 354 3,183 3,537 70 2/2/98 1997 Philadelphia PA 24,753 222,775 103 14,364 233,267 247,631 3,028 6/30/98 1990 Philadelphia PA 7,884 71,002 101 7,884 71,103 78,987 2,675 11/13/97 1987 Philadelphia PA 13,849 101,559 152 13,849 101,711 115,560 2,010 3/30/98 1983 Pittsburg PA 1,663 14,966 8 1,663 14,974 16,637 109 9/14/98 1994 Pittsburg PA 720 9,589 -- 720 9,589 10,309 211 2/27/98 1991 Plymouth PA 1,412 7,415 899 1,412 8,314 9,726 181 1/15/98 1996 Washington PA 631 5,698 -- 631 5,698 6,329 6 12/1/98 1998 Lincoln RI 320 7,690 -- 320 7,690 8,010 287 11/13/97 1997 Memphis TN 2,206 19,856 111 2,206 19,967 22,173 188 8/31/98 1989 Austin TX 2,317 21,037 -- 2,317 21,037 23,354 787 12/5/97 1996 Austin TX 1,529 13,760 -- 1,529 13,760 15,289 157 7/16/98 1993 Austin TX 2,072 18,650 5 2,072 18,655 20,727 97 10/20/98 1997 Austin TX 562 5,054 -- 562 5,054 5,616 26 10/20/98 1997 Austin TX 18,440 -- 21 18,440 21 18,461 0 10/7/98 1968 Austin TX 1,476 13,286 -- 1,476 13,286 14,762 69 10/20/98 1997 Austin TX 1,436 12,927 -- 1,436 12,927 14,363 67 10/7/98 1998 Austin TX 4,878 43,903 34 4,878 43,937 48,815 229 10/7/98 1968 Austin TX 1,226 11,126 -- 1,226 11,126 12,352 416 12/5/97 1997 Austin TX 1,402 12,729 2 1,402 12,731 14,133 476 12/5/97 1997 Austin TX 1,621 14,594 653 1,621 15,247 16,868 609 12/5/97 1997 Austin TX 1,218 11,040 103 1,218 11,143 12,361 420 12/5/97 1986 Austin TX 1,439 6,137 30 1,439 6,167 7,606 121 3/24/98 1975 S-6
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/98 ----------------------- -------------------------------- Costs Original Capitalized Accumulated Constr- Buildings and Subsequent Buildings and Depreciation Date uction Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Austin TX 466 4,191 42 466 4,233 4,699 101 1/27/98 1980 Irving TX 542 4,879 -- 542 4,879 5,421 97 3/19/98 1995 Irving TX 846 7,616 -- 846 7,616 8,462 151 3/19/98 1995 Waco TX 2,030 8,708 160 2,060 8,838 10,898 229 12/23/97 1997 Alexandria VA 2,109 18,982 -- 2,109 18,982 21,091 20 12/30/98 1987 Arlington VA 810 7,289 -- 810 7,289 8,099 68 8/26/98 1987 Fairfax VA 569 5,122 84 569 5,206 5,775 275 12/4/96 1990 Falls Church VA 3,456 14,828 625 3,519 15,390 18,909 674 3/31/97 1993 Richland WA 3,970 17,035 383 4,042 17,346 21,388 769 3/31/97 1995 Falling Waters WV 906 3,886 106 922 3,976 4,898 176 3/31/97 1993 Cheyenne WY 1,915 8,217 185 1,950 8,367 10,317 371 3/31/97 1995 ---------------------------------------------------------------------------------- Subtotal 303,023 1,797,144 29,673 294,097 1,835,743 2,129,840 55,357 ---------------------------------------------------------------------------------- Grand Total $377,562 $2,502,648 $76,272 $369,770 $2,586,712 $2,956,482 $169,811 ================================================================================== <FN> (1) Aggregate cost for federal income tax purposes is approximately $2,882,104. (2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years. </FN> </TABLE> S-7
HRPT PROPERTIES TRUST Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands) Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation at the beginning of the period: Real Estate and Accumulated Equipment Depreciation -------------------- ---------------- Balance at January 1, 1996 $778,211 $55,855 Additions 227,528 21,066 -------------------- ---------------- Balance at December 31, 1996 1,005,739 76,921 Additions 998,579 37,619 Disposals (35,295) (2,871) -------------------- ---------------- Balance at December 31, 1997 1,969,023 111,669 Additions 1,004,523 58,837 Disposals (17,064) (695) -------------------- ---------------- Balance at December 31, 1998 $2,956,482 $169,811 ==================== ================ S-8
<TABLE> <CAPTION> HRPT PROPERTIES TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1998 (Dollars in thousands) (1) Principal Amount of Final Face Carrying Loans Subject to Interest Maturity Value of Value of Delinquent Principal Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest - ----------------- --------- ----------- --------------------------------------------- --------------- --------- -------------------- <S> <C> <C> <C> <C> <C> <C> Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,200 $4,200 $-- arrears. $3.8 million due at maturity. Jacksonville, FL 10.50% 3/31/06 Interest only, payable monthly in arrears. 5,000 5,000 -- $5.0 million due at maturity. Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 4,981 4,981 -- arrears. $4.5 million due at maturity. Ainsworth, NE 10.64% 12/31/16 Principal and interest, payable monthly in 5,154 5,154 -- Ashland, NE arrears. $2.8 million due at maturity. Blue Hill, NE Gretna, NE Sutherland, NE Waverly, NE Ainsworth, NE 11.00% 12/31/16 Principal and interest, payable monthly in 2,052 2,052 -- Ashland, NE arrears. $1.1 million due at maturity. Blue Hill, NE Edgar, NE Gretna, NE Sutherland, NE Waverly, NE Lyons, NE Milford, NE Torrance, CA 12.50% 12/31/02 Principal and interest, payable monthly in 12,233 12,233 232 Torrance, CA arrears. $11.8 million due at maturity. Anaheim, CA Arleta, CA 9.96% 9/30/01 Interest only, payable monthly in arrears. 2,410 2,410 79 $2.4 million due at maturity. S-9
<CAPTION> HRPT PROPERTIES TRUST SCHEDULE IV- continued MORTGAGE LOANS ON REAL ESTATE December 31, 1998 (Dollars in thousands) (1) Principal Amount of Final Face Carrying Loans Subject to Interest Maturity Value of Value of Delinquent Principal Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest - ----------------- --------- ----------- --------------------------------------------- --------------- --------- -------------------- <S> <C> <C> <C> <C> <C> <C> Spencer, NC 8.125% 2/1/99 Principal and interest, payable monthly in 2,973 2,803 -- arrears. $3.0 million due at maturity. Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 18,992 18,992 -- arrears. $13.9 million due at maturity. 8 Mortgages 7.87% - 8/99-12/16 Interest only or principal and interest, 11,109 10,269 -- 13.75% payable monthly in arrears. - ----------------- --------- ----------- --------------------------------------------- --------------- --------- -------------------- $69,104 $68,094 $311 =============== ========= ==================== <FN> (1) Also represents cost for federal income tax purposes. </FN> </TABLE> S-10
<TABLE> <CAPTION> HRPT PROPERTIES TRUST SCHEDULE IV-continued MORTGAGE LOANS ON REAL ESTATE December 31, 1998 (Dollars in thousands) Reconciliation of the carrying amount of mortgage loans at the beginning of the period: <S> <C> Balance at January 1, 1996 $139,248 New mortgage loans 5,918 Collections of principal, net of discounts (7,921) ---------------- Balance at December 31, 1996 137,245 New mortgage loans 1,520 Collections of principal, net of discounts (37,263) ---------------- Balance at December 31, 1997 101,502 Collections of principal, net of discounts (33,408) ---------------- Balance at December 31, 1998 $68,094 ================ </TABLE> S-11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HRPT PROPERTIES TRUST By: /s/ David J. Hegarty David J. Hegarty President and Chief Operating Officer Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date <S> <C> <C> /s/ David J. Hegarty President and Chief Operating Officer March 31, 1999 - ------------------------------------ David J. Hegarty /s/ Ajay Saini Treasurer and Chief Financial Officer March 31, 1999 - ------------------------------------ Ajay Saini /s/ Bruce M. Gans, M.D. Trustee March 31, 1999 - ------------------------------------ Bruce M. Gans, M.D. /s/ Patrick F. Donelan Trustee March 31, 1999 - ------------------------------------ Patrick F. Donelan /s/ Justinian Manning, C.P. Trustee March 31, 1999 - ------------------------------------ Rev. Justinian Manning, C.P. /s/ Gerard M. Martin Trustee March 31, 1999 - ------------------------------------ Gerard M. Martin /s/ Barry M. Portnoy Trustee March 31, 1999 - ------------------------------------ Barry M. Portnoy </TABLE>