UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 (IRS Employer jurisdiction 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 November 5, 2001: 128,940,747 shares of beneficial interest, $0.01 par value.
<TABLE> <CAPTION> HRPT PROPERTIES TRUST FORM 10-Q SEPTEMBER 30, 2001 INDEX Page <S> <C> <C> PART I Financial Information Item 1. Financial Statements (unaudited) Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000 2 Consolidated Statements of Cash Flows - Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K 13 Certain Important Factors 14 Signatures 15 </TABLE>
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share amounts) September 30, December 31, 2001 2000 ---------------- -------------- (unaudited) (note 1) <S> <C> <C> ASSETS Real estate properties, at cost: Land $ 300,718 $ 300,548 Buildings and improvements 2,266,470 2,245,475 ----------- ----------- 2,567,188 2,546,023 Less accumulated depreciation 204,026 160,015 ----------- ----------- 2,363,162 2,386,008 Real estate mortgages receivable, net -- 6,449 Equity investments 299,125 314,099 Cash and cash equivalents 73,871 92,681 Restricted cash 6,868 23,126 Rents receivable, net 42,819 38,335 Other assets, net 55,734 39,445 ----------- ----------- $ 2,841,579 $ 2,900,143 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes payable, net $ 757,457 $ 757,314 Mortgage notes payable, net 340,905 343,089 Convertible subordinated debentures -- 202,547 Accounts payable and accrued expenses 30,459 40,611 Deferred rents 5,965 6,059 Security deposits 6,901 6,611 Due to affiliates 10,011 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 September 30, 2001, and December 31, 2000, respectively 193,086 -- Common shares of beneficial interest, $0.01 par value: 150,000,000 shares authorized, 129,480,247 shares and 131,948,847 shares issued and outstanding at September 30, 2001, and December 31, 2000, respectively 1,295 1,319 Additional paid-in capital 1,951,032 1,971,679 Cumulative net income 892,223 820,948 Cumulative common distributions (1,337,342) (1,258,739) Cumulative preferred distributions (9,382) -- Unrealized holding losses on investments (1,031) (5,995) ----------- ----------- Total shareholders' equity 1,689,881 1,529,212 ----------- ----------- $ 2,841,579 $ 2,900,143 =========== =========== </TABLE> See accompanying notes 1
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------- ----------- ----------- <S> <C> <C> <C> <C> Revenues: Rental income $ 95,589 $ 101,755 $ 289,395 $ 301,499 Interest and other income 1,195 1,420 5,865 2,975 --------- --------- --------- --------- Total revenues 96,784 103,175 295,260 304,474 --------- --------- --------- --------- Expenses: Operating expenses 34,247 34,907 104,424 102,972 Interest 21,036 25,441 66,164 75,849 Depreciation and amortization 16,471 15,885 48,853 47,799 General and administrative 4,061 4,482 11,794 13,511 Impairment of assets -- -- (3,955) -- --------- --------- --------- --------- Total expenses 75,815 80,715 227,280 240,131 --------- --------- --------- --------- Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item 20,969 22,460 67,980 64,343 Equity in earnings of equity investments 4,430 4,091 11,080 15,385 Loss on equity transactions of equity investments (5,636) -- (5,636) -- --------- --------- --------- --------- Income before gain on sale of properties and extraordinary item 19,763 26,551 73,424 79,728 Gain on sale of properties, net -- 4,620 -- 6,598 --------- --------- --------- --------- Income before extraordinary item 19,763 31,171 73,424 86,326 Extraordinary item - early extinguishment of debt -- (1,210) (2,149) (1,210) --------- --------- --------- --------- Net income 19,763 29,961 71,275 85,116 Preferred distributions (4,938) -- (11,905) -- --------- --------- --------- --------- Net income available for common shareholders $ 14,825 $ 29,961 $ 59,370 $ 85,116 ========= ========= ========= ========= Weighted average common shares outstanding 129,937 131,944 130,710 131,934 ========= ========= ========= ========= Basic and diluted earnings per common share: Income before gain on sale of properties and extraordinary item $ 0.11 $ 0.20 $ 0.47 $ 0.60 ========= ========= ========= ========= Income before extraordinary item $ 0.11 $ 0.24 $ 0.47 $ 0.66 Extraordinary item - early extinguishment of debt -- (0.01) (0.02) (0.01) --------- --------- --------- --------- Net income $ 0.11 $ 0.23 $ 0.45 $ 0.65 ========= ========= ========= ========= </TABLE> See accompanying notes 2
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, -------------------------------- 2001 2000 --------------- ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 71,275 $ 85,116 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 44,405 44,607 Amortization 4,448 3,192 Amortization of bond discounts 1,107 115 Impairment of assets (3,955) -- Equity in earnings of equity investments (11,080) (15,385) Loss on equity transactions of equity investments 5,636 -- Distributions from equity investments 19,968 23,651 Gain on sale of properties, net -- (6,598) Extraordinary item 2,149 1,210 Change in assets and liabilities: Increase in rents receivable and other assets (15,630) (12,880) Decrease in accounts payable and accrued expenses (10,178) (6,549) Decrease in deferred rents (94) (938) Increase (decrease) in security deposits 290 (271) (Decrease) increase in due to affiliates (4,689) 2,223 --------- --------- Cash provided by operating activities 103,652 117,493 --------- --------- Cash flows from investing activities: Real estate acquisitions and improvements (31,438) (12,600) Proceeds from repayment of real estate mortgages receivable 10,404 3,517 Proceeds from sale of real estate 10,444 11,777 Decrease (increase) in restricted cash 16,258 (52) --------- --------- Cash provided by investing activities 5,668 2,642 --------- --------- Cash flows from financing activities: Repurchase of common shares (20,803) -- Proceeds from issuance of preferred shares 193,086 -- Proceeds from borrowings -- 373,565 Payments on borrowings (205,691) (356,376) Deferred finance costs incurred (6,737) (184) Distributions to common shareholders (78,603) (110,816) Distributions to preferred shareholders (9,382) -- --------- --------- Cash used for financing activities (128,130) (93,811) --------- --------- (Decrease) increase in cash and cash equivalents (18,810) 26,324 Cash and cash equivalents at beginning of period 92,681 13,206 --------- --------- Cash and cash equivalents at end of period $ 73,871 $ 39,530 ========= ========= </TABLE> See accompanying notes 3
<TABLE> <CAPTION> HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (dollars in thousands) (unaudited) Nine Months Ended September 30, -------------------------------- 2001 2000 --------------- ------------ <S> <C> <C> Supplemental cash flow information: Interest paid (excluding capitalized interest of $603 and $1,330, respectively) $70,640 $82,303 Non-cash investing activities: Real estate acquired by foreclosure $-- $2,410 Investment in real estate mortgages receivable -- 1,300 Non-cash financing activities: Issuance of common shares $132 $313 </TABLE> See accompanying notes 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 nine months ended September 30, 2001 and 2000: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ---------------------------- 2001 2000 2001 2000 --------------- -------------- ------------ ------------ <S> <C> <C> <C> <C> Net income $ 19,763 $ 29,961 $ 71,275 $ 85,116 Other comprehensive income: Unrealized holding (losses) gains on investments (95) 1,722 4,964 772 -------- -------- -------- -------- Comprehensive income $ 19,668 $ 31,683 $ 76,239 $ 85,888 ======== ======== ======== ======== </TABLE> At September 30, 2001, the Company's investments in marketable equity securities were included in other assets and had a fair value of $10,308 and unrealized holding losses of $1,031. At November 5, 2001, these investments had a fair value of $11,780 and unrealized holding gains of $441. Note 3. Equity Investments The Company's financial statements include the following equity investments: <TABLE> <CAPTION> Equity in Earnings Equity Investments --------------------------------------------------------- ------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ---------------------------- September 30, December 31, 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> SNH $ 2,343 $ 2,062 $ 4,890 $ 9,372 $196,101 $208,062 HPT 2,087 2,029 6,190 6,013 103,024 106,037 -------- -------- -------- -------- -------- -------- $ 4,430 $ 4,091 $ 11,080 $ 15,385 $299,125 $314,099 ======== ======== ======== ======== ======== ======== </TABLE> 5
HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands, except per share amounts) At September 30, 2001, the Company owned 12,809,238 common shares or 43.6% of Senior Housing Properties Trust ("SNH") with a carrying value of $196,101 and a fair value based on quoted market prices of $172,284. In July 2001 SNH completed a public stock offering of common shares and the Company's ownership percentage in SNH decreased from 49.4% to 43.6%. In October 2001 SNH completed another public stock offering of common shares that further reduced the Company's ownership percentage in SNH to 29.5%. At September 30, 2001, the Company owned 4,000,000 common shares or 6.4% of Hospitality Properties Trust ("HPT") with a carrying value of $103,024 and a fair value based on quoted market prices of $96,320. In August 2001 HPT completed a public stock offering of common shares and the Company's ownership percentage in HPT decreased 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 recognized a loss of $5,636 in the third quarter of 2001. The Company will record an additional loss of approximately $14,000 in the fourth quarter of 2001 resulting from the offering of common shares by SNH in October 2001. On September 21, 2001, one of SNH's subsidiaries, Five Star Quality Care, Inc. ("Five Star"), filed a registration statement for its common shares with the Securities and Exchange Commission. Five Star filed this registration statement in anticipation of SNH's distributing substantially all of its share ownership of Five Star to SNH's shareholders, including the Company, resulting in Five Star becoming a separately listed public company ("the Spin-off"). The Company intends to immediately distribute to its shareholders all of the Five Star common shares it receives in the Spin-off. After the Spin-off, Five Star, which will not be a REIT, is expected to lease 56 facilities currently owned by SNH and operated for its own account. The Spin-off is subject to Five Star's registration statement being declared effective by the SEC and customary third party approvals. However, SNH expects the Spin-off to occur in December 2001 and a record date for both SNH's and the Company's distributions will be announced after the SEC declares the registration statement to be effective. Note 4. Real Estate Properties and Mortgages Receivable, net During the nine months ended September 30, 2001, the Company sold three properties for net cash proceeds of $10,444, purchased one property for $9,261 and funded $22,177 of improvements to its existing properties. In addition, the Company received $10,404 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. In July 2001 restricted cash of $15,000 was released to the Company from one of its mortgage lenders. 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. 6
HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands, except per share amounts) 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 $193,086. 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 October 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 November 15, 2001, to shareholders of record as of November 1, 2001. On October 4, 2001, the Company declared a distribution on its common shares with respect to the quarter ended September 30, 2001, of $0.20 per common share, or approximately $25,800, which will be distributed on or about November 21, 2001, to shareholders of record on October 22, 2001. The Board of Trustees has authorized the Company to repurchase up to 14 million common shares. During the nine months ended September 30, 2001, the Company repurchased 2,482,600 common shares for $20,803, including transaction costs. Subsequent to September 30, 2001, through November 5, 2001, the Company repurchased an additional 539,500 common shares for $4,358, including transaction costs. On July 10, 2001, 12,500 common shares were awarded to officers of the Company and other employees of REIT Management & Research LLC ("RMR"), the Company's investment manager, pursuant to the 1992 Incentive Share Award Plan. On May 8, 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 September 30, 2001, Compared to Three Months Ended September 30, 2000 Total revenues for the three months ended September 30, 2001, decreased to $96.8 million from $103.2 million for the three months ended September 30, 2000. Rental income decreased in 2001 by $6.2 million and interest and other income decreased in 2001 by $225,000, compared to the prior period. Rental income decreased primarily because of the sale of three properties in 2001 and three properties during 2000 and a decline in property occupancy from 97% at September 30, 2000, to 94% at September 30, 2001. Interest and other income decreased primarily as a result of the repayment of real estate mortgages received during 2001. Total expenses for the three months ended September 30, 2001, decreased to $75.8 million from $80.7 million for the three months ended September 30, 2000. Operating expenses decreased by $660,000 primarily from the sale of properties during 2000 and 2001, offset by higher utility costs and real estate taxes. 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 $586,000 and general and administrative expenses decreased by $421,000. The increase in depreciation and amortization is due primarily to the amortization of deferred financing fees incurred on our mortgages and senior note financings during 2000, and depreciation of improvements made to existing properties. The decrease in general and administrative expenses is due primarily to lower legal and professional fees. Equity in earnings of equity investments increased by $339,000 for the three months ended September 30, 2001, compared to the same period in 2000. A loss on equity transactions of equity investments of $5.6 million was also recognized from the issuance of common shares by both SNH and HPT during July and August 2001. Net income before preferred distributions decreased to $19.8 million, or $0.15 per common share, for the 2001 period, from $30.0 million, or $0.23 per common share, for the 2000 period. The decrease is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy and the loss recognized from the issuance of common shares by our equity investments, offset by the decrease in interest expense from the repayment of debt in 2001. 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 September 30, 2001, was $39.9 million compared to $46.4 million for the 2000 period. The decrease in FFO is due primarily to assets sold during 2000 and 2001, the decrease in property occupancy, and the distributions on series A preferred shares, offset by the decrease in interest expense from the repayment of debt in 2001. A reconciliation of net income to FFO for the three months ended September 30, 2001 and 2000, is as follows: <TABLE> <CAPTION> Three Months Ended September 30, -------------------------------- 2001 2000 ------------ ----------- <S> <C> <C> Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item $ 20,969 $ 22,460 Depreciation 14,842 14,838 FFO from equity investments 8,743 8,870 Non-cash expenses 285 204 Preferred distributions (4,938) -- -------- -------- FFO $ 39,901 $ 46,372 ======== ======== </TABLE> Nine Months Ended September 30, 2001, Compared to Nine Months Ended September 30, 2000 Total revenues for the nine months ended September 30, 2001, decreased to $295.3 million from $304.5 million for the nine months ended September 30, 2000. Rental income decreased in 2001 by $12.1 million and interest and other income increased in 2001 by $2.9 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 97% at September 30, 2000, to 94% at September 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 nine months ended September 30, 2001, decreased to $227.3 million from $240.1 million for the nine months ended September 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 $1.5 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 $9.7 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 $1.1 million and general and administrative expenses decreased by $1.7 million. The increase in depreciation and amortization is due primarily to the amortization of deferred financing fees incurred on our mortgages and senior note financings during 2000, and depreciation of improvements made to existing properties. The decrease in general and administrative expenses is due primarily to lower legal and professional fees. Equity in earnings of equity investments decreased by $4.3 million for the nine months ended September 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. A loss on equity transactions of equity investments of $5.6 million was also recognized from the issuance of common shares by both SNH and HPT during July and August 2001. Net income before preferred distributions decreased to $71.3 million, or $0.55 per common share, for the 2001 period, from $85.1 million, or $0.65 per common share, for the 2000 period. The decrease 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, the decrease in equity in earnings of SNH and the loss recognized from the issuance of common shares by both SNH and HPT during July and August 2001, 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 nine months ended September 30, 2001, was $124.2 million compared to $139.1 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 nine months ended September 30, 2001 and 2000, is as follows: <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------------- 2001 2000 ------------ ----------- <S> <C> <C> Income before equity in earnings of equity investments, gain on sale of properties and extraordinary item $ 67,980 $ 64,343 Depreciation 44,405 44,607 Impairment of assets reversal (3,955) -- FFO from equity investments 26,912 29,545 Non-cash expenses 769 620 Preferred distributions (11,905) -- --------- --------- FFO $ 124,206 $ 139,115 </TABLE> LIQUIDITY AND CAPITAL RESOURCES Total assets were $2.8 billion at September 30, 2001, compared to $2.9 billion at December 31, 2000. During the nine months ended September 30, 2001, we sold three properties for net cash proceeds of $10.4 million, purchased one property for $9.3 million, funded $22.2 million of improvements to our existing properties and received $10.4 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 September 30, 2001, we owned 12.8 million, or 43.6%, of the common shares of beneficial interest of SNH with a carrying value of $196.1 million and a market value of $172.3 million, and 4.0 million, or 6.4%, of the common shares of beneficial interest of HPT with a carrying value of $103.0 million and a market value of $96.3 million. In July 2001 SNH completed a public stock offering of common shares. As a result, our percentage ownership in SNH decreased from 49.4% to 43.6%. In August 2001 HPT completed a public stock offering of common shares. As a result, our ownership percentage in HPT decreased from 7.1% to 6.4%. As a result of these public stock offerings, we recognized a loss of $5.6 million in the third quarter of 2001. In October 2001 SNH completed another public stock offering of common shares that further reduced our ownership percentage in SNH to 29.5%. As a result of this transaction, we will record an additional loss of approximately $14.0 million in the fourth quarter of 2001. On September 21, 2001, one of SNH's subsidiaries, Five Star Quality Care, Inc. ("Five Star"), filed a registration statement for its common shares with the Securities and Exchange Commission. Five Star filed this registration statement in anticipation of SNH's distributing substantially all of its share ownership of Five Star to SNH's shareholders, including us, resulting in Five Star becoming a separately listed public company ("the Spin-off"). We intend to immediately distribute to our shareholders all of the Five Star common shares we receive in the Spin-off. After the Spin-off, Five Star, which will not be a REIT, is expected to lease 56 facilities currently owned by SNH and operated for its own account. The Spin-off is subject to Five Star's registration statement being declared effective by the SEC and customary third party approvals. However, SNH expects the Spin-off to occur in December 2001 and a record date for both SNH's and our distributions will be announced after the SEC declares the registration statement to be effective. 10
HRPT PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued 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 October 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 November 15, 2001, to shareholders of record as of November 1, 2001. Our Board of Trustees has authorized the repurchase of up to 14 million common shares. During the nine months ended September 30, 2001, we repurchased 2,482,600 common shares for $20.8 million, including transaction costs. Subsequent to September 30, 2001, and through November 5, 2001, we repurchased 539,500 common shares for $4.4 million, including transaction costs. At September 30, 2001, we had $73.9 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 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 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 September 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 September 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 17.3 million 7.02% 2008 10.8 million 8.00% 2008 9.4 million 7.66% 2009 258.3 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 September 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 September 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 $58.2 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 facility replaced our $500 million unsecured revolving credit facility which would have matured in April 2002. This new facility had zero outstanding at September 30, 2001. 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 September 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 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 investment manager, REIT Management & Research LLC, 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 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 September 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, THE POSSIBLE SPIN-OFF OF FIVE STAR QUALITY CARE, INC. AND OTHER MATTERS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR CURRENT BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED AND THEY MAY NOT OCCUR. FOR EXAMPLE, WE MAY BE UNABLE TO BUY OR SELL PROPERTIES AT ACCEPTABLE PRICES OR TO CONCLUDE DEBT FINANCINGS ON ACCEPTABLE TERMS, AND WE AND SENIOR HOUSING PROPERTIES TRUST MAY BE UNABLE TO COMPLETE THE SPIN-OFF OF FIVE STAR QUALITY CARE, INC. 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: November 8, 2001 By: /s/ John C. Popeo John C. Popeo Treasurer and Chief Financial Officer Dated: November 8, 2001 15