UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-9317 HRPT PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-6558834 (State or other jurisdiction (IRS Employer 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) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of Common Shares outstanding at August 9, 2001: 130,179,547 shares of beneficial interest, $0.01 par value.
HRPT PROPERTIES TRUST FORM 10-Q JUNE 30, 2001 INDEX PART I Financial Information Page Item 1. Financial Statements (unaudited) Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 1 Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 2 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II Other Information Item 2. Changes in Securities and Use of Proceeds 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Certain Important Factors 14 Signatures 15
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share amounts) June 30, December 31, 2001 2000 -------------- ------------ (unaudited) (note 1) <S> <C> <C> ASSETS Real estate properties, at cost: Land $ 299,712 $ 300,548 Buildings and improvements 2,253,602 2,245,475 ----------- ----------- 2,553,314 2,546,023 Less accumulated depreciation 189,207 160,015 ----------- ----------- 2,364,107 2,386,008 Real estate mortgages receivable, net 1,000 6,449 Equity investments 307,163 314,099 Cash and cash equivalents 69,405 92,681 Restricted cash 20,198 23,126 Rents receivable, net 39,970 38,335 Other assets, net 52,648 39,445 ----------- ----------- $ 2,854,491 $ 2,900,143 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes payable, net $ 757,409 $ 757,314 Mortgage notes payable, net 341,501 343,089 Convertible subordinated debentures -- 202,547 Accounts payable and accrued expenses 28,473 40,611 Deferred rents 5,504 6,059 Security deposits 6,899 6,611 Due to affiliates 5,977 14,700 Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized, 8,000,000 shares and zero shares issued and outstanding at June 30, 2001, and December 31, 2000, respectively 193,113 -- Common shares of beneficial interest, $0.01 par value: 150,000,000 shares authorized, 130,351,347 shares and 131,948,847 shares issued and outstanding at June 30, 2001, and December 31, 2000, respectively 1,304 1,319 Additional paid-in capital 1,958,527 1,971,679 Cumulative net income 872,460 820,948 Cumulative common distributions (1,311,296) (1,258,739) Cumulative preferred distributions (4,444) -- Unrealized holding losses on investments (936) (5,995) ----------- ----------- Total shareholders' equity 1,708,728 1,529,212 ----------- ----------- $ 2,854,491 $ 2,900,143 =========== =========== See accompanying notes </TABLE> 1
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share amounts) (unaudited) Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues: Rental income $ 97,092 $ 100,349 $ 193,806 $ 199,744 Interest and other income 1,554 696 4,670 1,555 --------- --------- --------- --------- Total revenues 98,646 101,045 198,476 201,299 --------- --------- --------- --------- Expenses: Operating expenses 35,142 34,238 70,177 68,065 Interest 20,929 25,310 45,128 50,408 Depreciation and amortization 16,225 16,040 32,382 31,914 General and administrative 3,640 4,332 7,733 9,029 Impairment of assets -- -- (3,955) -- --------- --------- --------- --------- Total expenses 75,936 79,920 151,465 159,416 --------- --------- --------- --------- Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item 22,710 21,125 47,011 41,883 Equity in earnings of equity investments 3,338 5,602 6,650 11,294 --------- --------- --------- --------- Income before gain on sale of properties and extraordinary item 26,048 26,727 53,661 53,177 Gain on sale of properties, net -- 1,978 -- 1,978 --------- --------- --------- --------- Income before extraordinary item 26,048 28,705 53,661 55,155 Extraordinary item - early extinguishment of debt (332) -- (2,149) -- --------- --------- --------- --------- Net income 25,716 28,705 51,512 55,155 Preferred distributions (4,937) -- (6,967) -- --------- --------- --------- --------- Net income available for common shareholders $ 20,779 $ 28,705 $ 44,545 $ 55,155 ========= ========= ========= ========= Weighted average common shares outstanding 130,619 131,935 131,103 131,928 ========= ========= ========= ========= Basic and diluted earnings per common share: Income before gain on sale of properties and extraordinary item $ 0.16 $ 0.20 $ 0.36 $ 0.40 ========= ========= ========= ========= Income before extraordinary item $ 0.16 $ 0.22 $ 0.36 $ 0.42 Extraordinary item - early extinguishment of debt -- -- (.02) -- --------- --------- --------- --------- Net income $ 0.16 $ 0.22 $ 0.34 $ 0.42 ========= ========= ========= ========= See accompanying notes </TABLE> 2
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, ---------------------------------- 2001 2000 ----------- --------- <S> <C> <C> Cash flows from operating activities: Net income $ 51,512 $ 55,155 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 29,563 29,769 Amortization 2,819 2,145 Amortization of bond discounts 738 74 Impairment of assets (3,955) -- Equity in earnings of equity investments (6,650) (11,294) Distributions from equity investments 13,286 17,048 Gain on sale of properties, net -- (1,978) Extraordinary item 2,149 -- Change in assets and liabilities: Increase in rents receivable and other assets (8,295) (9,715) Decrease in accounts payable and accrued expenses (12,164) (6,776) Decrease in deferred rents (555) (637) Increase in security deposits 288 155 Decrease in due to affiliates (8,723) (205) --------- --------- Cash provided by operating activities 60,013 73,741 --------- --------- Cash flows from investing activities: Real estate acquisitions and improvements (17,541) (7,602) Proceeds from repayment of real estate mortgages receivable 9,404 3,512 Proceeds from sale of real estate 10,444 2,857 Decrease (increase) in restricted cash 2,928 (34) --------- --------- Cash provided by (used for) investing activities 5,235 (1,267) --------- --------- Cash flows from financing activities: Repurchase of common shares (13,179) -- Proceeds from issuance of preferred shares 193,113 -- Proceeds from borrowings -- 85,000 Payments on borrowings (204,774) (76,572) Deferred finance costs incurred (6,683) (5) Distributions to common shareholders (52,557) (84,429) Distributions to preferred shareholders (4,444) -- --------- --------- Cash used for financing activities (88,524) (76,006) --------- --------- Decrease in cash and cash equivalents (23,276) (3,532) Cash and cash equivalents at beginning of period 92,681 13,206 --------- --------- Cash and cash equivalents at end of period $ 69,405 $ 9,674 ========= ========= See accompanying notes </TABLE> 3
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (dollars in thousands) (unaudited) Six Months Ended June 30, ---------------------------------- 2001 2000 ----------- --------- <S> <C> <C> Supplemental cash flow information: Interest paid (excluding capitalized interest of $523 and $919, respectively) $ 47,726 $ 51,479 Non-cash investing activities: Investment in real estate mortgages receivable $-- $ 1,300 Non-cash financing activities: Issuance of common shares $ 12 $ 227 See accompanying notes </TABLE> 4
HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) Note 1. Basis of Presentation The unaudited quarterly financial statements of HRPT Properties Trust and its subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The balance sheet at December 31, 2000, has been derived from the December 31, 2000, audited financial statements but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. Note 2. Comprehensive Income The following is a reconciliation of net income to comprehensive income for the three and six months ended June 30, 2001 and 2000: <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 --------- --------- -------- -------- <S> <C> <C> <C> <C> Net income $ 25,716 $ 28,705 $ 51,512 $ 55,155 Other comprehensive income: Unrealized holding gains (losses) on investments 2,328 (119) 5,059 (950) -------- -------- -------- -------- Comprehensive income $ 28,044 $ 28,586 $ 56,571 $ 54,205 ======== ======== ======== ======== </TABLE> At June 30, 2001, the Company's investments in marketable equity securities were included in other assets and had a fair value of $10,403 and unrealized holding losses of $936. At August 9, 2001, these investments had a fair value of $11,134 and unrealized holding losses of $205. Note 3. Equity Investments The Company's financial statements include the following equity investments: <TABLE> <CAPTION> Equity in Earnings Equity Investments ------------------------------------------------------------ ------------------------ Three Months Ended June 30, Six Months Ended June 30, June 30, December 31, --------------------------- ------------------------- ------------------------ 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> SNH $ 1,239 $ 3,583 $ 2,547 $ 7,310 $202,923 $208,062 HPT 2,099 2,019 4,103 3,984 104,240 106,037 -------- -------- -------- -------- -------- -------- $ 3,338 $ 5,602 $ 6,650 $ 11,294 $307,163 $314,099 </TABLE> At June 30, 2001, the Company owned 12,809,238 common shares or 49.4% of Senior Housing Properties Trust ("SNH") with a carrying value of $202,923 and a fair value based on quoted market prices of $166,520. In July 2001 SNH completed a public stock offering of common shares. As a result of this transaction, the Company's ownership percentage in SNH will decrease from 49.4% to 43.6%. 5
HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands, except per share amounts) At June 30, 2001, the Company owned 4,000,000 common shares or 7.1% of Hospitality Properties Trust ("HPT") with a carrying value of $104,240 and a fair value based on quoted market prices of $114,000. In August 2001 HPT completed a public stock offering of common shares. As a result of this transaction, the Company's ownership percentage in HPT will decrease from 7.1% to 6.4%. As a result of the public stock offering of common shares by SNH in July 2001 and HPT in August 2001, the Company will realize a loss of approximately $6,000 in the third quarter of 2001. Note 4. Real Estate Properties and Mortgages Receivable, net During the six months ended June 30, 2001, the Company sold three properties for net cash proceeds of $10,444 and funded $17,541 of improvements to its existing properties. In addition, the Company received $9,404 from the repayment of real estate mortgages, including the full repayment of a real estate mortgage that was secured by two properties. In connection with this repayment, the Company reversed impairment loss reserves recorded during 1999 totaling $3,955. Note 5. Indebtedness During February 2001 the Company redeemed at par all $40,000 of its 7.25% convertible subordinated debentures due October 2001. In March 2001 the Company redeemed at par all $162,000 of its outstanding 7.50% convertible subordinated debentures due October 2003. The redemptions were funded using cash on hand and proceeds from the preferred share offering discussed in Note 6. In connection with these redemptions, the Company recognized an extraordinary loss of $1,817 from the write-off of deferred financing fees. In April 2001 the Company entered into a new $425,000 unsecured revolving credit facility (the "New Credit Facility"). The New Credit Facility bears interest at LIBOR plus a premium and matures in April 2005. The New Credit Facility includes an accordian feature which allows it to be expanded, in certain circumstances, by up to $200,000. The Company's $500,000 unsecured revolving credit facility which was scheduled to mature in 2002, was terminated by the Company in April 2001. In connection with this termination, the Company recognized an extraordinary loss of $332 from the write-off of deferred financing fees. Note 6. Shareholders' Equity In February 2001 the Company issued 8,000,000 series A cumulative redeemable preferred shares in a public offering for net proceeds of $193,113. Each series A preferred share requires dividends of $2.46875 per annum, payable in equal quarterly payments. Each series A preferred share has a liquidation preference of $25.00 and is redeemable, at the Company's option, for $25.00 plus accrued and unpaid dividends at any time on or after February 22, 2006. On July 9, 2001, the Company announced a distribution on these series A cumulative redeemable preferred shares of $0.6172 per share which will be paid on or about August 15, 2001, to shareholders of record as of August 1, 2001. On July 6, 2001, the Company declared a distribution on its common shares with respect to the quarter ended June 30, 2001, of $0.20 per common share, or approximately $26,000, which will be distributed on or about August 24, 2001, to shareholders of record on July 26, 2001. The Board of Trustees has authorized the Company to repurchase up to 14 million common shares. During the six months ended June 30, 2001, the Company repurchased 1,599,000 common shares for $13,179, including transaction costs. Subsequent to June 30, 2001, through August 9, 2001, the Company repurchased an additional 258,800 common shares for $2,284, including transaction costs. 6
HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands, except per share amounts) In July 2001, 12,500 common shares were awarded to officers of the Company and other employees of REIT Management & Research, Inc. ("RMR"), the Company's investment manager and affiliate, pursuant to the 1992 Incentive Share Award Plan. In May 2001 the Company's three independent trustees were each awarded 500 common shares under this plan as part of their annual fees. A portion of the shares awarded to the officers of the Company and other employees of RMR vest immediately and the balance vests over a two-year period. The shares awarded to the trustees vest immediately. 7
HRPT PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion includes references to Funds from Operations ("FFO"). FFO, as defined in the White Paper on Funds From Operations which was approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 and as clarified from time to time, is "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis." We consider FFO to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, financing activities and investing activities, because it provides investors with an indication of an equity REIT's ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. We compute FFO in accordance with the standards established by NAREIT including adjustments for our pro rata share of FFO of Hospitality Properties Trust ("HPT") and Senior Housing Properties Trust ("SNH"), but excluding unusual and non-recurring items, certain non-cash items, and gains on sales of undepreciated properties, which may not be comparable to FFO reported by other REITs that define the term differently. FFO does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of financial performance or the cash flow from operating activities, determined in accordance with GAAP, or as a measure of liquidity. RESULTS OF OPERATIONS Three Months Ended June 30, 2001, Compared to Three Months Ended June 30, 2000 Total revenues for the three months ended June 30, 2001, decreased to $98.6 million from $101.0 million for the three months ended June 30, 2000. Rental income decreased in 2001 by $3.3 million and interest and other income increased in 2001 by $858,000, compared to the prior period. Rental income decreased primarily because of the sale of three properties in 2001 and four properties during 2000 and a decline in property occupancy from 98% at June 30, 2000, to 94% at June 30, 2001, partially offset by an early lease termination fee received in June 2001 totaling $1.6 million. Interest and other income increased primarily as a result of higher cash balances invested in 2001 compared to 2000. Total expenses for the three months ended June 30, 2001, decreased to $75.9 million from $79.9 million for the three months ended June 30, 2000. Operating expenses increased by $904,000 primarily as a result of higher utility costs and real estate taxes, offset by a decrease in operating expenses from the sale of properties during 2000 and 2001. Interest expense decreased by $4.4 million during 2001 compared to the prior year period, primarily as a result of the repayment of debt during February and March of 2001. Depreciation and amortization increased by $185,000 and general and administrative expenses decreased by $692,000. The decrease in general and administrative expenses is due primarily to lower legal and professional fees. Equity in earnings of equity investments decreased by $2.3 million for the three months ended June 30, 2001, compared to the same period in 2000. The decrease is due to lower earnings from SNH resulting from its settlement of tenant bankruptcies and its sale of properties in 2000. Net income before preferred distributions decreased to $25.7 million, or $0.20 per common share, for the 2001 period, from $28.7 million, or $0.22 per common share, for the 2000 period. The change is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy and the decrease in equity in earnings of SNH, offset by the decrease in interest expense from the repayment of debt in 2001 and the increase in interest earned on cash balances. 8
HRPT PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued FFO for the three months ended June 30, 2001, was $42.0 million compared to $46.6 million for the 2000 period. The decrease in FFO is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy, the decrease in equity in earnings of SNH and distributions on series A preferred shares, offset by the decrease in interest expense from the repayment of debt in 2001 and the increase in interest earned on cash balances. A reconciliation of net income to FFO for the three months ended June 30, 2001 and 2000, is as follows: <TABLE> <CAPTION> Three Months Ended June 30, ----------------------------- 2001 2000 ----------- -------- <S> <C> <C> Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item $ 22,710 $ 21,125 Depreciation 14,760 14,914 FFO from equity investments 9,221 10,377 Non-cash expenses 249 208 Preferred distributions (4,937) -- -------- -------- FFO $ 42,003 $ 46,624 ======== ======== </TABLE> Six Months Ended June 30, 2001, Compared to Six Months Ended June 30, 2000 Total revenues for the six months ended June 30, 2001, decreased to $198.5 million from $201.3 million for the six months ended June 30, 2000. Rental income decreased in 2001 by $5.9 million and interest and other income increased in 2001 by $3.1 million, compared to the prior period. Rental income decreased primarily because of the sale of three properties in 2001 and four properties during 2000 and a decline in property occupancy from 98% at June 30, 2000, to 94% at June 30, 2001. Interest and other income increased primarily as a result of higher cash balances invested in 2001 compared to 2000, resulting primarily from a preferred share offering completed in February 2001 and a debt financing completed in December 2000. Total expenses for the six months ended June 30, 2001, decreased to $151.5 million from $159.4 million for the six months ended June 30, 2000. Included in total expenses for the 2001 period is the reversal of an impairment loss reserve recorded during 1999 totaling $4.0 million. Operating expenses increased by $2.1 million primarily as a result of higher utility costs and real estate taxes, offset by a decrease in operating expenses from the sale of properties during 2000 and 2001. Interest expense decreased by $5.3 million during 2001 compared to the prior year period, primarily as a result of the repayment of debt in 2001. Depreciation and amortization increased by $468,000 and general and administrative expenses decreased by $1.3 million. The decrease in general and administrative expenses is due primarily to lower legal and professional fees. Equity in earnings of equity investments decreased by $4.6 million for the six months ended June 30, 2001, compared to the same period in 2000. The decrease is due to lower earnings from SNH resulting from its settlement of tenant bankruptcies and its sale of properties in 2000. Net income before preferred distributions decreased to $51.5 million, or $0.39 per common share, for the 2001 period, from $55.2 million, or $0.42 per common share, for the 2000 period. The change is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy, the write-off of deferred financing fees associated with debt that was repaid during 2001 and the decrease in equity in earnings of SNH, offset by the reversal of an impairment loss reserve in 2001, the decrease in interest expense from the repayment of debt in 2001 and the increase in interest earned on financing proceeds received in December 2000 and interest earned on proceeds of the series A preferred shares issued during February 2001. 9
HRPT PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued FFO for the six months ended June 30, 2001, was $84.3 million compared to $92.7 million for the 2000 period. The decrease in FFO is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy, the decrease in equity in earnings of SNH and distributions on series A preferred shares, offset by the decrease in interest expense from the repayment of debt in 2001 and the increase in interest earned on larger cash balances. A reconciliation of net income to FFO for the six months ended June 30, 2001 and 2000, is as follows: <TABLE> <CAPTION> Six Months Ended June 30, ----------------------------- 2001 2000 ----------- -------- <S> <C> <C> Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item $ 47,011 $ 41,883 Depreciation 29,563 29,769 Impairment of assets (3,955) -- FFO from equity investments 18,169 20,675 Non-cash expenses 484 416 Preferred distributions (6,967) -- -------- -------- FFO $ 84,305 $ 92,743 ======== ======== </TABLE> LIQUIDITY AND CAPITAL RESOURCES Total assets were $2.9 billion at June 30, 2001, and December 31, 2000. During the six months ended June 30, 2001, we sold three properties for net cash proceeds of $10.4 million. We also funded $17.5 million of improvements to our existing properties and received $9.4 million from the repayment of real estate mortgages, including the full repayment of a real estate mortgage that was secured by two properties. In connection with this repayment, we reversed an impairment loss reserve recorded during 1999 of $4.0 million. At June 30, 2001, we owned 12.8 million, or 49.4%, of the common shares of beneficial interest of SNH with a carrying value of $202.9 million and a market value of $166.5 million, and 4.0 million, or 7.1%, of the common shares of beneficial interest of HPT with a carrying value of $104.2 million and a market value of $114.0 million. In July 2001 SNH completed a public stock offering of common shares. As a result, our percentage ownership in SNH will decrease from 49.4% to 43.6%. In August 2001 HPT completed a public stock offering of common shares. As a result of this transaction, our ownership percentage in HPT will decrease from 7.1% to 6.4%. As a result of these public stock offerings, we will realize a loss of approximately $6.0 million in the third quarter of 2001. During February 2001 we redeemed at par all $40 million of our 7.25% convertible subordinated debentures due October 2001. In March 2001 we redeemed at par all $162 million of our outstanding 7.50% convertible subordinated debentures due October 2003. We funded these redemptions using cash on hand and proceeds from the preferred share offering discussed below. In connection with these redemptions, we recognized an extraordinary loss of $1.8 million from the write-off of deferred financing fees. In February 2001 we completed a $200 million public offering of 9 7/8% series A cumulative redeemable preferred shares raising net proceeds of $193.1 million. Approximately half of the net proceeds were used to redeem all of our outstanding convertible subordinated debentures. The remaining proceeds are available to repurchase some of our common shares and for general business purposes, including the repayment of additional debt. On July 9, 2001, we announced a distribution on our series A cumulative redeemable preferred shares of $0.6172 per share which will be distributed on or about August 15, 2001, to shareholders of record as of August 1, 2001. Our Board of Trustees has authorized the repurchase of up to 14 million common shares. During the six months ended June 30, 2001, we repurchased 1,599,000 common shares for $13.2 million, including transaction costs. Subsequent to June 30, 2001, and through August 9, 2001, we repurchased 258,800 common shares for $2.3 million, including transaction costs. 10
HRPT PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued At June 30, 2001, we had $69.4 million of cash and cash equivalents, zero outstanding on our unsecured revolving credit facility and $2.3 billion available on our $3 billion effective shelf registration statement. Cash and cash equivalents increased in 2001 primarily due to excess proceeds received from a debt financing during December 2000 and the preferred share offering described above. A portion of these proceeds was used to redeem all of our convertible subordinated debentures and to repurchase some of our common shares. We expect to use the remaining proceeds to repurchase additional common shares or for general business purposes, including the possible repayment of additional debt and property acquisitions. In April 2001 we entered into a new $425 million unsecured revolving credit facility (the "New Credit Facility"). The New Credit Facility bears interest at LIBOR plus a premium and matures in April 2005. This New Credit Facility replaces our $500 million unsecured revolving credit facility which was scheduled to mature in 2002. The New Credit Facility includes an accordian feature which allows it to be expanded, in certain circumstances, by up to $200 million. Our credit facility is available for property acquisitions, working capital and for general business purposes. In connection with the termination of our $500 million unsecured revolving credit facility we recognized an extraordinary loss of $332,000 from the write-off of deferred financing fees. There can be no assurances that debt or equity financing will be available to fund future business activities, but we do expect that financing will be available. As of June 30, 2001, our debt as a percentage of total book capitalization was approximately 39%. 11
HRPT PROPERTIES TRUST Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk through our monitoring of available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2000. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. At June 30, 2001, our total outstanding debt of $1.1 billion consisted of the following fixed rate notes: Amount Coupon Maturity Unsecured senior notes: $160.0 million 6.875% 2002 150.0 million 6.75% 2002 100.0 million 6.70% 2005 90.0 million 7.875% 2009 30.0 million 8.875% 2010 20.0 million 8.625% 2010 65.0 million 8.375% 2011 143.0 million 8.50% 2013 Secured notes: $3.5 million 9.12% 2004 10.8 million 8.40% 2007 17.4 million 7.02% 2008 10.8 million 8.00% 2008 9.6 million 7.66% 2009 258.9 million 6.814% 2011 44.0 million 6.794% 2029 No principal repayments are due on the unsecured senior notes until maturity. If all of the unsecured senior notes and secured notes were to be refinanced at interest rates which are one percentage point higher than shown above, our per annum interest cost would increase by approximately $11.1 million. The secured notes are secured by 25 of our office properties located in 12 office complexes and require principal and interest payments through maturity. The market prices, if any, of each of our fixed rate obligations as of June 30, 2001, are sensitive to changes in interest rates. Typically, if market rates of interest increase, the current market price of a fixed rate obligation will decrease. Conversely, if market rates of interest decrease, the current market price of a fixed rate obligation will typically increase. Based on the balances outstanding at June 30, 2001, and discounted cash flow analyses, a hypothetical immediate one percentage point change in interest rates would change the fair value of our fixed rate debt obligations by approximately $55.4 million. Each of our obligations for borrowed money has provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and in other cases we are allowed to make prepayments only at a premium to face value. In any event, these prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing at lower rates prior to maturity. In April 2001 we entered into a new $425 million unsecured revolving credit facility which will expire in April 2005. This new revolving credit facility had zero outstanding at June 30, 2001, and replaced our $500 million unsecured revolving credit facility which would have matured in April 2002. We borrow in U.S. dollars and borrowings under the new facility are subject to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. 12
HRPT PROPERTIES TRUST Item 3. Quantitative and Qualitative Disclosures About Market Risk - continued During the past year, short-term U.S. dollar based interest rates have fluctuated. We are unable to predict the direction or amount of interest rate changes during the next year. As of June 30, 2001, we had zero outstanding under our revolving credit facility and we did not have any interest rate cap or other hedge agreements to protect against future rate increases, but we may enter such agreements in the future. Also, we may incur additional debt at floating or fixed rates, which would increase our exposure to market changes in interest rates. Part II Other Information Item 2. Changes in Securities and Use of Proceeds In May 2001 pursuant to the Company's Incentive Share Award Plan, each of the Company's three independent trustees received a grant of 500 common shares valued at $8.48 per common share, the closing price of the common shares on the New York Stock Exchange on May 8, 2001. The grants were made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. On July 10, 2001, the Company granted 12,500 common shares pursuant to the Company's Incentive Share Award Plan to officers and certain key employees of the Company's advisor, REIT Management & Research, Inc., valued at $9.50 per common share, the closing price of the common shares on the New York Stock Exchange on July 10, 2001. The grants were made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Shareholders Meeting on May 8, 2001, Patrick F. Donelan was re-elected to serve as trustee for a term of three years. There were 120,455,077 shares voted in favor of and 1,686,276 shares withheld from voting for the re-election of Mr. Donelan. Barry M. Portnoy, Gerard M. Martin, Reverend Justinian Manning and Frederick N. Zeytoonjian continue to serve as trustees for terms ending in 2002, 2003, 2003 and 2002, respectively. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the three months ended June 30, 2001. 13
HRPT PROPERTIES TRUST CERTAIN IMPORTANT FACTORS THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-Q AND INCLUDE REFERENCES TO PROPERTY ACQUISITIONS AND SALES, DEBT FINANCING POSSIBILITIES, INCLUDING THE REPAYMENT OF ADDITIONAL DEBT, POSSIBLE ADDITIONAL SHARE REPURCHASES AND OTHER MATTERS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR CURRENT BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED AND THEY MAY NOT OCCUR. FOR EXAMPLE, WE MAY BE UNABLE TO CONCLUDE DEBT FINANCINGS ON ACCEPTABLE TERMS. SIMILARLY WE MAY DECIDE TO REPURCHASE SHARES AT ANY TIME OR WE MAY DECIDE NOT TO DO SO. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HRPT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 14
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HRPT PROPERTIES TRUST By: /s/ John A. Mannix John A. Mannix President and Chief Operating Officer Dated: August 10, 2001 By: /s/ John C. Popeo John C. Popeo Treasurer and Chief Financial Officer Dated: August 10, 2001 15