Edgar Filing: HRPT PROPERTIES TRUST

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9317

HRPT PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland		04-6558834
(State or other Jurisdiction of Incorporation or Organization)		(IRS Employer 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of November 7, 2007: 225,430,637

HRPT PROPERTIES TRUST

FORM 10-Q

SEPTEMBER 30, 2007

INDEX

PART I		Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheet – September 30, 2007 and December 31, 2006

		Consolidated Statement of Income – Three and Nine Months Ended September 30, 2007 and 2006

		Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2007 and 2006

		Notes to Consolidated Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

		Warning Concerning Forward Looking Statements

		Statement Concerning Limited Liability

PART II		Other Information

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.		Exhibits

		Signatures

References in this Form 10-Q to “we”, “us” and “our” refers to HRPT Properties Trust and its consolidated subsidiaries, unless otherwise noted.

PART I Financial Information

Item 1. Financial Statements

HRPT PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(amounts in thousands, except share data)

	September 30,			December 31,
	2007			2006
	(unaudited)
ASSETS
Real estate properties:
Land	$	1,175,940		$	1,143,109
Buildings and improvements	4,873,816			4,619,164
	6,049,756			5,762,273
Accumulated depreciation	(770,839		)	(668,460		)
	5,278,917			5,093,813
Acquired real estate leases	156,743			167,879
Cash and cash equivalents	25,639			17,783
Restricted cash	17,410			21,635
Rents receivable, net of allowance for doubtful accounts of $5,810 and $4,737, respectively	191,591			172,566
Other assets, net	130,212			102,273
Total assets	$	5,800,512		$	5,575,949

LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility	$	38,000		$	40,000
Senior unsecured debt, net	2,239,424			1,941,173
Mortgage notes payable, net	397,435			416,058
Accounts payable and accrued expenses	88,122			93,734
Dividends payable	—			44,111
Acquired real estate lease obligations	39,612			41,833
Rent collected in advance	20,124			19,592
Security deposits	16,031			15,972
Due to affiliates	23,228			12,708
Total liabilities	2,861,976			2,625,181

Shareholders’ equity:
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized;
Series B preferred shares; 8 ¾% cumulative redeemable at par on or after September 12, 2007; 12,000,000 shares issued and outstanding, aggregate liquidation preference $300,000	289,849			289,849
Series C preferred shares; 7 1/8% cumulative redeemable at par on or after February 15, 2011; 6,000,000 shares issued and outstanding, aggregate liquidation preference $150,000	145,015			145,015
Series D preferred shares; 6 1/2% cumulative convertible; 15,180,000 shares issued and outstanding, aggregate liquidation preference $379,500	368,270			368,270
Common shares of beneficial interest, $0.01 par value: 300,000,000 shares authorized; 212,457,190 and 210,051,590 shares issued and outstanding, respectively	2,125			2,101
Additional paid in capital	2,802,869			2,774,461
Cumulative net income	1,800,130			1,703,354
Cumulative common distributions	(2,204,198		)	(2,115,299		)
Cumulative preferred distributions	(265,524		)	(216,983		)
Total shareholders’ equity	2,938,536			2,950,768
Total liabilities and shareholders’ equity	$	5,800,512		$	5,575,949

See accompanying notes

CONSOLIDATED STATEMENT OF INCOME

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Rental income	$	211,217		$	202,542		$	626,262		$	590,058

Expenses:
Operating expenses	82,768			80,219			243,935			227,981
Depreciation and amortization	46,116			41,064			135,413			119,109
General and administrative	8,947			8,513			26,650			24,926
Total expenses	137,831			129,796			405,998			372,016

Operating income	73,386			72,746			220,264			218,042

Interest income	415			573			1,442			2,118
Interest expense (including amortization of debt discounts, premiums and deferred financing fees of $1,085, $1,105, $3,207 and $3,348, respectively)	(44,055		)	(43,169		)	(126,627		)	(126,317		)
Loss on early extinguishment of debt	—			—			(711		)	(1,659		)
Equity in earnings of equity investments	—			—			—			3,136
Gain on sale of equity investments	—			—			—			116,287
Income from continuing operations	29,746			30,150			94,368			211,607
Income (loss) from discontinued operations	—			32			—			(76		)
Gain on sale of properties	2,408			1,172			2,408			1,172
Net income	32,154			31,354			96,776			212,703
Preferred distributions	(15,402		)	(9,234		)	(46,204		)	(29,976		)
Excess redemption price paid over carrying value of preferred shares	—			—			—			(6,914		)
Net income available for common shareholders	$	16,752		$	22,120		$	50,572		$	175,813

Weighted average common shares outstanding – basic	212,078			209,992			211,475			209,941

Weighted average common shares outstanding – diluted	241,271			209,992			240,668			209,941

Earnings per common share:
Income from continuing operations available for common shareholders – basic and diluted	$	0.07		$	0.10		$	0.23		$	0.83
Income (loss) from discontinued operations – basic and diluted	$	0.01		$	0.01		$	0.01		$	0.01
Net income available for common shareholders – basic and diluted	$	0.08		$	0.11		$	0.24		$	0.84

See accompanying notes

CONSOLIDATED STATEMENT OF CASH FLOWS

(amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	96,776		$	212,703
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	108,877			96,452
Amortization of debt discounts, premiums and deferred financing fees	3,207			3,348
Amortization of acquired real estate leases	23,574			22,495
Other amortization	10,612			8,191
Loss on early extinguishment of debt	711			1,659
Equity in earnings of equity investments	—			(3,136		)
Gain on sale of equity investments	—			(116,287		)
Gain on sale of properties	(2,408		)	(1,172		)
Distributions of earnings from equity investments	—			3,136
Change in assets and liabilities:
Decrease (increase) in restricted cash	4,225			(4,427		)
Increase in rents receivable and other assets	(51,591		)	(45,741		)
Decrease in accounts payable and accrued expenses	(7,028		)	(4,329		)
Increase in rent collected in advance	532			2,353
Increase in security deposits	59			1,475
Increase in due to affiliates	10,520			8,767
Cash provided by operating activities	198,066			185,487

Cash flows from investing activities:
Real estate acquisitions and improvements	(309,196		)	(364,978		)
Distributions in excess of earnings from equity investments	—			2,251
Proceeds from sale of properties	3,748			6,231
Proceeds from sale of equity investments	—			308,333
Cash used for investing activities	(305,448		)	(48,163		)

Cash flows from financing activities:
Proceeds from issuance of preferred shares, net	—			145,015
Redemption of preferred shares	—			(200,000		)
Proceeds from issuance of common shares, net	28,151			—
Proceeds from borrowings	1,065,340			1,044,000
Payments on borrowings	(792,986		)	(945,950		)
Deferred financing fees	(3,716		)	(3,027		)
Distributions to common shareholders	(133,010		)	(132,263		)
Distributions to preferred shareholders	(48,541		)	(31,086		)
Cash provided by (used for) financing activities	115,238			(123,311		)

Increase in cash and cash equivalents	7,856			14,013
Cash and cash equivalents at beginning of period	17,783			19,445
Cash and cash equivalents at end of period	$	25,639		$	33,458

See accompanying notes

	Nine Months Ended September 30,
	2007			2006
Supplemental cash flow information:
Interest paid (including capitalized interest paid of $489 in 2007)	$	128,492		$	131,809

Non-cash investing activities:
Real estate acquisitions	$	(4,545	)	$	(20,585	)

Non-cash financing activities:
Issuance of common shares	$	280		$	2,026
Assumption of mortgage notes payable	4,545			20,585

See accompanying notes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying consolidated financial statements of HRPT Properties Trust and its subsidiaries have been prepared without audit. Certain information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between HRPT Properties Trust and its subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. We are subject to U.S federal income tax as well as income tax of multiple state and local jurisdictions but, as a REIT, we generally are not subject to income tax on our net income distributed as dividends to our shareholders. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48. Tax returns filed for the 2003 through 2006 tax years are subject to examination by taxing authorities.

Note 2. Real Estate Properties

During the nine months ended September 30, 2007, we acquired 11 office properties, including one hotel which is adjacent to owned office properties that are scheduled for redevelopment, for $108,164, excluding closing costs, 14 industrial properties for $125,475, excluding closing costs, and we funded $74,777 of improvements to our owned properties using cash on hand, borrowings under our revolving credit facility and the assumption of $4,545 of mortgage debt. During the nine months ended September 30, 2007, we sold three land parcels for $3,925 and recognized gains of $2,408.

Note 3. Indebtedness

In June 2007, we repaid $200,000 of our unsecured floating rate senior notes by drawing on our revolving credit facility. We recognized a loss of $711 from the write off of deferred financing fees in connection with this repayment. We subsequently issued $250,000 of unsecured senior notes in a public offering in June, raising net proceeds of approximately $247,400. These notes bear interest at 6.25%, require semi-annual interest payments and mature in June 2017. In September 2007, we issued $250,000 of unsecured senior notes in a public offering, raising net proceeds of approximately $245,800. These notes bear interest at 6.65%, require semi-annual interest payments and mature in January 2018. Net proceeds from these offerings were used to reduce amounts outstanding under our revolving credit facility. In September 2007, we prepaid at par, $15,853 of 7.02% mortgage debt due in 2008, using cash on hand and borrowings under our revolving credit facility.

We have a $750,000 unsecured revolving credit facility that we use for acquisitions, working capital and general business purposes. The interest rate on this facility averaged 5.9% and 5.6% per annum, for the nine months ended September 30, 2007 and 2006, respectively. As of September 30, 2007, we had $38,000 outstanding and $712,000 available under our revolving credit facility. Our public debt indentures and credit facility agreement contain a number of financial and other covenants, including a credit facility covenant which limits the amount of aggregate distributions on common shares to 90% of operating cash flow available for shareholder distributions as defined in the credit facility agreement. We believe that we are in compliance with these financial and other covenants.

Note 4. Shareholders’ Equity

During the nine months ended September 30, 2007, we sold 2,338 of our common shares for net proceeds of $28,151 pursuant to a sales agreement with a securities broker dealer, which allows us to sell our common shares from time to time in a controlled equity offering program.

Note 5. Earnings per Common Share

Earnings per common share, or EPS, is computed pursuant to the provisions of Statement of Financial Accounting Standards No. 128. The effect of our convertible preferred shares on income from continuing operations and net income available for common shareholders per share is anti-dilutive for the periods presented. The following table provides a reconciliation of both net income and the number of common shares used in the computations of basic and diluted EPS:

	2007
	Three Months Ended September 30,						Nine Months Ended September 30,
	Income			Shares	Per Share		Income			Shares	Per Share
Income from continuing operations	$	29,746					$	94,368
Gain on sale of properties	2,408						2,408
Preferred distributions	(15,402		)				(46,204		)
Amounts used to calculate basic EPS	$	16,752		212,078	$	0.08	$	50,572		211,475	$	0.24

	2006
	Three Months Ended September 30,						Nine Months Ended September 30,
	Income			Shares	Per Share		Income			Shares	Per Share
Income from continuing operations	$	30,150					$	211,607
Income (loss) from discontinued operations	32						(76		)
Gain on sale of properties	1,172						1,172
Preferred distributions	(9,234		)				(29,976		)
Excess redemption price paid over carrying value of preferred shares	—						(6,914		)
Amounts used to calculate basic EPS	$	22,120		209,992	$	0.11	$	175,813		209,941	$	0.84

Note 6. Segment Information

As of September 30, 2007, we owned 367 office properties and 163 industrial properties. We account for our office and industrial properties in geographic operating segments for financial reporting purposes based on our method of internal reporting. We define these individual geographic segments as those which currently, or during either of the last two quarters, represent or generate 5% or more of our total square feet, revenues or property net operating income. Property level information by geographic segment and property type as of and for the three and nine months ended September 30, 2007 and 2006, is as follows:

	As of September 30, 2007			As of September 30, 2006
	Office Properties	Industrial Properties	Totals	Office Properties	Industrial Properties	Totals
Property square feet:
Metro Philadelphia, PA	5,445	—	5,445	5,453	—	5,453
Oahu, HI	—	17,914	17,914	—	17,929	17,929
Metro Washington, DC	2,658	—	2,658	2,645	—	2,645
Metro Boston, MA	3,100	—	3,100	2,740	—	2,740
Southern California	1,444	—	1,444	1,444	—	1,444
Metro Austin, TX	1,491	1,236	2,727	1,492	1,316	2,808
Other Markets	21,230	9,410	30,640	20,326	4,725	25,051
Totals	35,368	28,560	63,928	34,100	23,970	58,070

Central business district, or CBD	11,325	158	11,483	11,335	158	11,493
Suburban	24,043	28,402	52,445	22,765	23,812	46,577
Total	35,368	28,560	63,928	34,100	23,970	58,070

	Three Months Ended September 30, 2007						Three Months Ended September 30, 2006
	Office Properties		Industrial Properties		Totals		Office Properties		Industrial Properties		Totals
Property rental income:
Metro Philadelphia, PA	$	31,455	$	—	$	31,455	$	31,784	$	—	$	31,784
Oahu, HI	—		16,786		16,786		—		16,369		16,369
Metro Washington, DC	19,982		—		19,982		19,972		—		19,972
Metro Boston, MA	16,279		—		16,279		15,517		—		15,517
Southern California	12,709		—		12,709		12,323		—		12,323
Metro Austin, TX	7,527		3,545		11,072		7,298		3,454		10,752
Other Markets	88,428		14,506		102,934		86,354		9,471		95,825
Totals	$	176,380	$	34,837	$	211,217	$	173,248	$	29,294	$	202,542

CBD	$	71,520	$	313	$	71,833	$	72,382	$	292	$	72,674
Suburban	104,860		34,524		139,384		100,866		29,002		129,868
Total	$	176,380	$	34,837	$	211,217	$	173,248	$	29,294	$	202,542

	Three Months Ended September 30, 2007						Three Months Ended September 30, 2006
	Office Properties		Industrial Properties		Totals		Office Properties		Industrial Properties		Totals
Property net operating income:
Metro Philadelphia, PA	$	16,414	$	—	$	16,414	$	17,025	$	—	$	17,025
Oahu, HI	—		12,937		12,937		—		13,274		13,274
Metro Washington, DC	12,237		—		12,237		12,333		—		12,333
Metro Boston, MA	10,673		—		10,673		9,917		—		9,917
Southern California	8,876		—		8,876		8,522		—		8,522
Metro Austin, TX	3,661		2,123		5,784		3,334		1,863		5,197
Other Markets	50,677		10,851		61,528		49,774		6,281		56,055
Totals	$	102,538	$	25,911	$	128,449	$	100,905	$	21,418	$	122,323

CBD	$	39,307	$	213	$	39,520	$	40,136	$	214	$	40,350
Suburban	63,231		25,698		88,929		60,769		21,204		81,973
Total	$	102,538	$	25,911	$	128,449	$	100,905	$	21,418	$	122,323

	Nine Months Ended September 30, 2007						Nine Months Ended September 30, 2006
	Office Properties		Industrial Properties		Totals		Office Properties		Industrial Properties		Totals
Property rental income:
Metro Philadelphia, PA	$	93,967	$	—	$	93,967	$	95,277	$	—	$	95,277
Oahu, HI	—		48,281		48,281		—		45,580		45,580
Metro Washington, DC	59,309		—		59,309		59,182		—		59,182
Metro Boston, MA	47,768		—		47,768		45,545		—		45,545
Southern California	37,707		—		37,707		36,128		—		36,128
Metro Austin, TX	22,931		9,915		32,846		21,157		10,548		31,705
Other Markets	265,157		41,227		306,384		249,245		27,396		276,641
Totals	$	526,839	$	99,423	$	626,262	$	506,534	$	83,524	$	590,058

CBD	$	212,901	$	896	$	213,797	$	214,960	$	850	$	215,810
Suburban	313,938		98,527		412,465		291,574		82,674		374,248
Total	$	526,839	$	99,423	$	626,262	$	506,534	$	83,524	$	590,058

Property net operating income:
Metro Philadelphia, PA	$	48,700	$	—	$	48,700	$	51,096	$	—	$	51,096
Oahu, HI	—		38,060		38,060		—		37,033		37,033
Metro Washington, DC	36,974		—		36,974		37,068		—		37,068
Metro Boston, MA	31,312		—		31,312		29,920		—		29,920
Southern California	27,151		—		27,151		25,084		—		25,084
Metro Austin, TX	11,283		5,440		16,723		10,028		5,779		15,807
Other Markets	153,317		30,090		183,407		147,853		18,216		166,069
Totals	$	308,737	$	73,590	$	382,327	$	301,049	$	61,028	$	362,077

CBD	$	117,906	$	642	$	118,548	$	120,211	$	644	$	120,855
Suburban	190,831		72,948		263,779		180,838		60,384		241,222
Total	$	308,737	$	73,590	$	382,327	$	301,049	$	61,028	$	362,077

The table below reconciles our calculation of property net operating income, or NOI, to net income available for common shareholders, the most directly comparable financial measure under generally accepted accounting principles, or GAAP, reported in our consolidated financial statements for the three and nine months ended September 30, 2007 and 2006. We consider NOI to be appropriate supplemental information to net income available for common shareholders because it helps both investors and management to understand the operations of our properties. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level. Our management also uses NOI to evaluate individual, regional and company wide property level performance. NOI excludes certain components from net income available for common shareholders in order to provide results that are more closely related to our properties’ results of operations. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance. A reconciliation of NOI to net income available for common shareholders for the three and nine months ended September 30, 2007 and 2006, is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Rental income	$	211,217		$	202,542		$	626,262		$	590,058
Operating expenses	(82,768		)	(80,219		)	(243,935		)	(227,981		)
Property net operating income (NOI)	$	128,449		$	122,323		$	382,327		$	362,077

Property net operating income	$	128,449		$	122,323		$	382,327		$	362,077
Depreciation and amortization	(46,116		)	(41,064		)	(135,413		)	(119,109		)
General and administrative	(8,947		)	(8,513		)	(26,650		)	(24,926		)
Operating income	73,386			72,746			220,264			218,042

Interest income	415			573			1,442			2,118
Interest expense	(44,055		)	(43,169		)	(126,627		)	(126,317		)
Loss on early extinguishment of debt	—			—			(711		)	(1,659		)
Equity in earnings of equity investments	—			—			—			3,136
Gain on sale of equity investments	—			—			—			116,287
Income from continuing operations	29,746			30,150			94,368			211,607
Income (loss) from discontinued operations	—			32			—			(76		)
Gain on sale of properties	2,408			1,172			2,408			1,172
Net income	32,154			31,354			96,776			212,703
Preferred distributions	(15,402		)	(9,234		)	(46,204		)	(29,976		)
Excess redemption price paid over carrying value of preferred shares	—			—			—			(6,914		)
Net income available for common shareholders	$	16,752		$	22,120		$	50,572		$	175,813

Note 7. Subsequent Events

In October 2007, we declared a distribution of $0.21 per common share, or approximately $44,700, to be paid on or about November 21, 2007, to shareholders of record on October 23, 2007. We also announced a distribution on our series B preferred shares of $0.5469 per share, or $6,563, a distribution on our series C preferred shares of $0.4453 per share, or $2,672, and a distribution on our series D preferred shares of $0.4063, or $6,167, which will be paid on or about November 15, 2007, to our preferred shareholders of record as of November 1, 2007.

In October 2007, we issued 12,797 common shares in a public offering, raising net proceeds of approximately $123,000. We subsequently announced the partial redemption of 5,000 of our 12,000 outstanding 8 ¾% series B cumulative redeemable preferred shares at the stated liquidation preference price of $25.00 per share plus accrued and unpaid dividends. This redemption is expected to occur on or about November 26, 2007. Also in October 2007, we sold an additional 177 of our common shares for net proceeds of $1,736 pursuant to a sales agreement with a securities broker dealer, which allows us to sell our common shares from time to time in a controlled equity offering program. Net proceeds were used to reduce amounts outstanding on our revolving credit facility and for general business purposes, including property acquisitions.

In October 2007, we purchased six properties for $73,750, excluding closing costs, using cash on hand and borrowings under our revolving credit facility. As of November 7, 2007, we have an executed purchase agreement for two additional properties with an aggregate of approximately 262 square feet of space for a total purchase price of $23,150, excluding closing costs. This potential purchase transaction is subject to completion of diligence and other customary conditions; because of these contingencies we can provide no assurances that we will purchase these properties.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and tables should be read in conjunction with our consolidated financial statements and notes thereto included in this quarterly report and our Annual Report on Form 10-K for the year ended December 31, 2006.

OVERVIEW

We primarily own office and industrial buildings located throughout the United States. We also own approximately 17 million square feet of leased industrial and commercial lands located in Oahu, Hawaii.

Property Operations

As of September 30, 2007, 92.8% of our total square feet was leased, compared to 93.4% leased as of September 30, 2006. These results primarily reflect the 1.1 percentage point decrease in occupancy at properties we owned continuously since January 1, 2006. Occupancy data for 2007 and 2006 is as follows (square feet in thousands):

	All Properties (1)		Comparable Properties (2)
	As of the Nine Months Ended September 30,		As of the Nine Months Ended September 30,
	2007	2006	2007	2006
Total properties	530	487	437	437
Total square feet	63,928	58,070	54,832	54,832
Percent leased (3)	92.8%	93.4%	92.4%	93.5%

(1)Excludes properties sold or under contract for sale.

(2)Based on properties owned continuously since January 1, 2006, and excludes properties under contract for sale.

(3)Percent leased includes (i) space being fitted out for occupancy pursuant to signed leases and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.

During the three months ended September 30, 2007, we signed new leases for 248,000 square feet and lease renewals for 1,235,000 square feet, at weighted average rental rates that were 9% above rents previously charged for the same space. Average lease terms for leases signed during this period were 7.7 years. Commitments for tenant improvement and leasing costs for leases signed during this period totaled $17.6 million, or $11.88 per square foot (approximately $1.54/sq. ft. per year of the lease term).

During the past twelve months, the leasing market conditions in some of our markets have stabilized. The quoted rental rates in some of the areas where our properties are located seem to have increased modestly. Required landlord funded tenant build outs and leasing commissions payable to tenant brokers for new leases and lease renewals have also generally stabilized over the past twelve months. These build out costs and leasing commissions are generally amortized as a reduction of our income during the terms of the affected leases. However, these modest improvements in rent rates and reduced tenant inducement costs have been offset by a modest decline in space requirements from tenants and increased construction of office properties in certain markets, as reflected in the decline in occupancy we have experienced during this period. We believe that modest increases in effective rents may improve the financial results at some of our currently owned properties. However, there are too many variables for us to reasonably project what the financial impact of market conditions will be on our results for future periods.

Approximately 10.5% of our leased square feet and 12.0% of our rents are included in leases scheduled to expire through December 31, 2008. Lease renewals and rental rates at which available space may be relet in the future will depend on prevailing market conditions at that time. Lease expirations by year, as of September 30, 2007, are as follows (square feet and dollars in thousands):

	Square Feet	% of Square Feet		Annualized Rental Income		% of Annualized Rental Income		Cumulative % of Annualized Rental Income
Year	Expiring (1)	Expiring		Expiring (2)		Expiring		Expiring
2007	1,662	2.8	%	$	25,201	2.9	%	2.9	%
2008	4,550	7.7	%	78,009		9.1	%	12.0	%
2009	3,728	6.3	%	66,747		7.8	%	19.8	%
2010	6,381	10.8	%	99,767		11.6	%	31.4	%
2011	5,411	9.1	%	95,947		11.2	%	42.6	%
2012	5,158	8.7	%	101,639		11.8	%	54.4	%
2013	3,074	5.2	%	52,329		6.1	%	60.5	%
2014	2,881	4.9	%	48,844		5.7	%	66.2	%
2015	3,355	5.6	%	59,633		6.9	%	73.1	%
2016	2,494	4.2	%	42,512		5.0	%	78.1	%
2017 and thereafter	20,616	34.7	%	188,005		21.9	%	100.0	%
	59,310	100.0	%	$	858,633	100.0	%

Weighted average remaining lease term (in years):	8.9			6.5

(1)	Square feet is pursuant to signed leases as of September 30, 2007, and includes (i) space being fitted out for occupancy and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.
(2)	Rents are pursuant to signed leases as of September 30, 2007, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

Our principal source of funds for our operations is rents from tenants at our properties. Rents are generally received from our non-government tenants monthly in advance, and from our government tenants monthly in arrears. As of September 30, 2007, tenants responsible for 1% or more of our total rent were as follows (square feet in thousands):

Tenant		Square Feet (1)	% of Total Square Feet (1)		% of Rent (2)		Expiration
1.	U. S. Government	4,826	8.1	%	12.6	%	2007 to 2020
2.	GlaxoSmithKline plc	608	1.0	%	1.7	%	2013
3.	PNC Financial Services Group	460	0.8	%	1.4	%	2011, 2021
4.	Solectron Corporation	894	1.5	%	1.1	%	2014
5.	JDA Software Group, Inc.	283	0.5	%	1.1	%	2012
6.	The Scripps Research Institute	164	0.3	%	1.1	%	2019
7.	Ballard Spahr Andrews & Ingersoll, LLP	235	0.4	%	1.0	%	2008, 2015
	Total	7,470	12.6	%	20.0	%

(1)	Square feet is pursuant to signed leases as of September 30, 2007, and includes (i) space being fitted out for occupancy and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.
(2)	Rent is pursuant to signed leases as of September 30, 2007, plus estimated expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

Investment Activities

During the nine months ended September 30, 2007, we acquired 11 office properties, including one hotel which is adjacent to owned office properties that are scheduled for redevelopment, with 806,000 square feet for $108.2 million, and 14 industrial properties with 3,294,000 square feet for $125.5 million. At the time of acquisition, these properties were over 99% leased and projected to yield approximately 9.0% of the aggregate gross purchase price, based on estimated current annual net operating income, or NOI, which we define as GAAP based property rental income less property operating expenses.

Financing Activities

In June 2007, we repaid $200 million of our unsecured floating rate senior notes by drawing on our revolving credit facility. We recognized a loss of $711,000 from the write off of deferred financing fees in connection with this repayment. We subsequently issued $250 million of unsecured senior notes in a public offering in June, raising net proceeds of approximately $247.4 million. These notes bear interest at 6.25%, require semi-annual interest payments and mature in June 2017. In September 2007, we issued $250 million of unsecured senior notes in a public offering, raising net proceeds of approximately $245.8 million. These notes bear interest at 6.65%, require semi-annual interest payments and mature in January 2018. Net proceeds from these offerings were used to reduce amounts outstanding under our revolving credit facility. In September 2007, we prepaid at par, $15.9 million of 7.02% mortgage debt due in 2008, using cash on hand and borrowings under our revolving credit facility.

During the nine months ended September 30, 2007, we sold 2.3 million of our common shares for net proceeds of $28.2 million pursuant to a sales agreement with a securities broker dealer, which allows us to sell our common shares from time to time in a controlled equity offering program.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006

	Three Months Ended September 30,
	2007			2006			$ Change			% Change
	(in thousands, except per share data)

Rental income	$	211,217		$	202,542		$	8,675		4.3%

Expenses:
Operating expenses	82,768			80,219			2,549			3.2%
Depreciation and amortization	46,116			41,064			5,052			12.3%
General and administrative	8,947			8,513			434			5.1%
Total expenses	137,831			129,796			8,035			6.2%

Operating income	73,386			72,746			640			0.9%

Interest income	415			573			(158		)	(27.6%	)
Interest expense	(44,055		)	(43,169		)	(886		)	(2.1%	)
Income from continuing operations	29,746			30,150			(404		)	(1.3%	)
Income from discontinued operations	—			32			(32		)	(100.0%	)
Gain on sale of properties	2,408			1,172			1,236			105.5%
Net income	32,154			31,354			800			2.6%
Preferred distributions	(15,402		)	(9,234		)	(6,168		)	(66.8%	)
Net income available for common shareholders	$	16,752		$	22,120		$	(5,368	)	(24.3%	)

Weighted average common shares outstanding – basic	212,078			209,992			2,086			1.0%

Weighted average common shares outstanding – diluted	241,271			209,992			31,279			14.9%

Earnings per common share:
Income from continuing operations available for common shareholders – basic and diluted	$	0.07		$	0.10		$	(0.03	)	(30.0%	)
Income from discontinued operations – basic and diluted	$	0.01		$	0.01		$	—		—
Net income available for common shareholders – basic and diluted	$	0.08		$	0.11		$	(0.03	)	(27.3%	)

Rental income. Rental income increased for the three months ended September 30, 2007, compared to the same period in 2006, primarily due to increases in rental income from our Other Markets segment, as described in the segment information footnote to our consolidated financial statements. Rental income for our Other Markets segment increased $7.1 million, or 7.4%, primarily because of the acquisition of 39 properties since June 2006. Rental income includes non-cash straight line rent adjustments totaling $6.2 million in 2007 and $7.8 million in 2006 and amortization of acquired real estate leases and obligations totaling ($2.3) million in 2007 and ($2.4) million in 2006. Rental income also includes lease termination fees totaling $569,000 in 2007 and $50,000 in 2006.

Total expenses. The increase in total expenses reflects increases in operating expenses and general and administrative expenses primarily related to our acquisition of properties since June 2006. The increase in depreciation and amortization expense reflects acquisitions made since June 2006 and building and tenant improvement costs incurred throughout our portfolio during the same period.

Gain on sale of properties. Net sales proceeds and gains from the sale of three land parcels in 2007 were $3.9 million and $2.4 million, respectively. Net sales proceeds and gains from the sale of four office properties in 2006 were $9.2 million and $1.2 million, respectively.

Net income and net income available for common shareholders. The decrease in net income available for common shareholders reflects the increase in depreciation and amortization primarily related to properties acquired since June 2006 and building and tenant improvement costs incurred throughout our portfolio during the same period. Net income available for common shareholders is net income reduced by preferred distributions. The increase in preferred distributions reflects the issuance of our series D preferred shares in October 2006, which are convertible into 29.2 million common shares. Proceeds from this issuance were used to reduce amounts outstanding on our revolving credit facility and general business purposes, including property acquisitions.

Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006

	Nine Months Ended September 30,
	2007			2006			$ Change			% Change
	(in thousands, except per share data)

Rental income	$	626,262		$	590,058		$	36,204		6.1%

Expenses:
Operating expenses	243,935			227,981			15,954			7.0%
Depreciation and amortization	135,413			119,109			16,304			13.7%
General and administrative	26,650			24,926			1,724			6.9%
Total expenses	405,998			372,016			33,982			9.1%

Operating income	220,264			218,042			2,222			1.0%

Interest income	1,442			2,118			(676		)	(31.9%	)
Interest expense	(126,627		)	(126,317		)	(310		)	(0.2%	)
Loss on early extinguishment of debt	(711		)	(1,659		)	948			57.1%
Equity in earnings of equity investments	—			3,136			(3,136		)	(100.0%	)
Gain on sale of equity investments	—			116,287			(116,287		)	(100.0%	)
Income from continuing operations	94,368			211,607			(117,239		)	(55.4%	)
Loss from discontinued operations	—			(76		)	76			100.0%
Gain on sale of properties	2,408			1,172			1,236			105.5%
Net income	96,776			212,703			(115,927		)	(54.5%	)
Preferred distributions	(46,204		)	(29,976		)	(16,228		)	(54.1%	)
Excess redemption price paid over carrying value of preferred shares	—			(6,914		)	6,914			100.0%
Net income available for common shareholders	$	50,572		$	175,813		$	(125,241	)	(71.2%	)

Weighted average common shares outstanding – basic	211,475			209,941			1,534			0.7%

Weighted average common shares outstanding – diluted	240,668			209,941			30,727			14.6%

Earnings per common share:
Income from continuing operations available for common shareholders – basic and diluted	$	0.23		$	0.83		$	(0.60	)	(72.3%	)
Income from discontinued operations – basic and diluted	$	0.01		$	0.01		$	—		—
Net income available for common shareholders – basic and diluted	$	0.24		$	0.84		$	(0.60	)	(71.4%	)

Rental income. Rental income increased for the nine months ended September 30, 2007, compared to the same period in 2006, primarily due to increases in rental income from our Other Markets segment, as described in the segment information footnote to our consolidated financial statements. Rental income for our Other Markets segment increased $29.7 million, or 10.8%, primarily because of the acquisition of 86 properties since December 2005. Rental income includes non-cash straight line rent adjustments totaling $14.8 million in 2007 and $17.9 million in 2006 and amortization of acquired real estate leases and obligations totaling ($7.7) million in 2007 and ($7.9) million in 2006. Rental income also includes lease termination fees totaling $925,000 in 2007 and $550,000 in 2006.

Total expenses. The increase in total expenses reflects increases in operating expenses and general and administrative expenses primarily related to our acquisition of properties since December 2005. The increase in depreciation and amortization expense reflects acquisitions made since December 2005 and building and tenant improvement costs incurred throughout our portfolio during the same period.

Loss on early extinguishment of debt. The loss on early extinguishment of debt in 2007 relates to the write off of deferred financing fees associated with the repayment of $200 million of our floating rate senior notes in June 2007. The loss on early extinguishment of debt in 2006 relates to the write off of deferred financing fees associated with the repayment of our $350 million term loan in March 2006.

Equity in earnings of equity investments. The decrease in equity in earnings of equity investments in 2007 reflects our sale of all 7.7 million common shares we owned in Senior Housing Properties Trust, or Senior Housing, and all 4.0 million common shares we owned in Hospitality Properties Trust, or Hospitality Properties, in March 2006.

Gain on sale of equity investments. The gain on sale of equity investments reflects the sale in March 2006 of all of the common shares we owned in Senior Housing and Hospitality Properties for aggregate net proceeds of $308.3 million.

Income from continuing operations. The decrease in income from continuing operations is due primarily to the gain on the sale of the common shares we owned in Senior Housing and Hospitality Properties in 2006.

Net income and net income available for common shareholders. The decrease in net income and net income available for common shareholders is due primarily to the sale of Senior Housing and Hospitality Properties common shares in 2006. Net income available for common shareholders is net income reduced by preferred distributions and the excess of the redemption price paid over the carrying value of our 9.875% series A preferred shares that we redeemed in March 2006. The increase in preferred distributions reflects the issuance of our series D preferred shares in October 2006, which are convertible into 29.2 million common shares. Proceeds from this issuance were used to reduce amounts outstanding on our revolving credit facility and general business purposes, including property acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

Our principal sources of funds for current expenses and distributions to shareholders are rents from our properties. This flow of funds has been historically sufficient for us to pay our operating expenses, debt service and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service and distribution payments for the foreseeable future. Our future cash flows from operating activities will depend primarily upon the following factors:

• our ability to maintain or improve occupancies and effective rent rates at our properties;

• our ability to restrain operating cost increases at our properties; and

• our ability to purchase new properties which produce positive cash flows from operations.

As discussed above, we believe that present leasing market conditions in some areas where our properties are located may result in modest increases in effective rents. Recent rises in fuel prices may cause our future operating costs to increase; however, the impact of these increases is expected to be partially offset by pass through operating cost increases to our tenants pursuant to lease terms. We generally do not purchase turn around properties or properties which do not generate positive cash flows. Our future purchases of properties which generate positive cash flows can not be accurately projected because such purchases depend upon available opportunities which come to our attention.

Cash flows provided by (used for) operating, investing and financing activities were $198.1 million, ($305.4) million and $115.2 million, respectively, for the nine months ended September 30, 2007, and $185.5 million, ($48.2) million and ($123.3) million, respectively, for the nine months ended September 30, 2006. Changes in all three categories between 2007 and 2006 are primarily related to property acquisitions, repayments and issuances of debt obligations, issuance and redemption of preferred shares, and our sale of all our Senior Housing and Hospitality Properties common shares in 2006.

Our Investment and Financing Liquidity and Resources

In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain an unsecured revolving credit facility with a group of institutional lenders. At September 30, 2007, there was $38 million outstanding and $712 million available on our revolving credit facility, and we had cash and cash equivalents of $25.6 million. We expect to use cash balances, borrowings under our credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions.

Our outstanding debt maturities and weighted average interest rates as of September 30, 2007, were as follows (dollars in thousands):

	Scheduled Principal Payments During Period
	Secured		Unsecured		Unsecured				Weighted
	Fixed Rate		Floating		Fixed				Average
Year	Debt		Rate Debt		Rate Debt		Total (1)		Interest Rate
2007	$	3,016	$	—	$	—	$	3,016	7.0%
2008	10,687		—		—		10,687		6.8%
2009	7,951		—		—		7,951		6.9%
2010	8,381		38,000		50,000		96,381		7.5%
2011	229,988		200,000		—		429,988		6.4%
2012	31,201		—		200,000		231,201		7.0%
2013	7,941		—