UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2009 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-9317
(Exact Name of Registrant as Specified in Its Charter)
Maryland |
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04-6558834 |
(State or Other Jurisdiction of Incorporation or |
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(IRS Employer Identification No.) |
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)
617-332-3990
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
Accelerated filer o |
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Non-accelerated filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 registrants common shares of beneficial interest, $0.01 par value per share, outstanding as of August 7, 2009: 223,708,241
HRPT PROPERTIES TRUST
FORM 10-Q
JUNE 30, 2009
References in this Form 10-Q to we, us and our refers to HRPT Properties Trust and its consolidated subsidiaries, unless otherwise noted.
HRPT PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands, except share data)
(unaudited)
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June 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Real estate properties: |
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Land |
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$ |
1,200,934 |
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$ |
1,220,554 |
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Buildings and improvements |
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4,768,406 |
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5,021,703 |
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5,969,340 |
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6,242,257 |
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Accumulated depreciation |
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(823,527 |
) |
(862,958 |
) |
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5,145,813 |
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5,379,299 |
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Properties held for sale |
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105,234 |
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145,849 |
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Acquired real estate leases, net |
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157,428 |
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164,308 |
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Equity investments |
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158,053 |
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Cash and cash equivalents |
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38,138 |
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15,518 |
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Restricted cash |
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8,993 |
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10,837 |
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Rents receivable, net of allowance for doubtful accounts of $8,351 and $8,492, respectively |
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188,512 |
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196,839 |
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Other assets, net |
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123,919 |
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103,449 |
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Total assets |
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$ |
5,926,090 |
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$ |
6,016,099 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Revolving credit facility |
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$ |
201,000 |
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$ |
201,000 |
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Senior unsecured debt, net |
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2,132,795 |
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2,241,225 |
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Mortgage notes payable, net |
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443,908 |
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447,693 |
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Other liabilities related to properties held for sale |
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2,987 |
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3,400 |
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Accounts payable and accrued expenses |
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101,886 |
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99,285 |
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Acquired real estate lease obligations, net |
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46,989 |
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47,839 |
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Rent collected in advance |
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27,486 |
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26,537 |
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Security deposits |
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21,375 |
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17,935 |
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Due to affiliates |
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17,705 |
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10,073 |
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Total liabilities |
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2,996,131 |
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3,094,987 |
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Shareholders equity: |
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Preferred shares of beneficial interest, $0.01 par value: |
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50,000,000 shares authorized; |
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Series B preferred shares; 8 3/4% cumulative redeemable at par on or after September 12, 2007; 7,000,000 shares issued and outstanding, aggregate liquidation preference $175,000 |
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169,079 |
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169,079 |
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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 |
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145,015 |
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145,015 |
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Series D preferred shares; 6 1/2% cumulative convertible; 15,180,000 shares issued and outstanding, aggregate liquidation preference $379,500 |
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368,270 |
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368,270 |
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Common shares of beneficial interest, $0.01 par value: |
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350,000,000 shares authorized; 223,708,241 and 227,731,938 shares issued and outstanding, respectively |
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2,237 |
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2,277 |
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Additional paid in capital |
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2,923,649 |
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2,937,986 |
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Cumulative net income |
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2,174,982 |
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2,072,254 |
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Cumulative common distributions |
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(2,496,011 |
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(2,441,841 |
) |
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Cumulative preferred distributions |
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(357,262 |
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(331,928 |
) |
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Total shareholders equity |
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2,929,959 |
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2,921,112 |
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Total liabilities and shareholders equity |
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$ |
5,926,090 |
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$ |
6,016,099 |
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See accompanying notes
1
HRPT PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(amounts in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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2009 |
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2008 |
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2009 |
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2008 |
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Rental income |
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$ |
212,729 |
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$ |
204,273 |
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$ |
429,652 |
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$ |
405,445 |
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Expenses: |
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Operating expenses |
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86,686 |
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83,747 |
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178,425 |
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164,964 |
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Depreciation and amortization |
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49,604 |
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45,228 |
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97,994 |
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90,041 |
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General and administrative |
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9,792 |
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8,991 |
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19,279 |
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17,853 |
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Acquisition costs |
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489 |
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748 |
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Total expenses |
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146,571 |
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137,966 |
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296,446 |
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272,858 |
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Operating income |
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66,158 |
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66,307 |
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133,206 |
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132,587 |
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Interest income |
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363 |
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89 |
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508 |
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418 |
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Interest expense (including amortization of debt discounts, premiums and deferred financing fees of $1,886, $1,431, $3,528 and $2,526, respectively) |
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(44,267 |
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(44,383 |
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(88,126 |
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(89,423 |
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Gain on early extinguishment of debt |
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13,173 |
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20,686 |
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Equity in earnings of equity investments |
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861 |
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861 |
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Income from continuing operations before income tax expense |
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36,288 |
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22,013 |
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67,135 |
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43,582 |
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Income tax (expense) benefit |
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(190 |
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4 |
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(342 |
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(160 |
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Income from continuing operations |
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36,098 |
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22,017 |
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66,793 |
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43,422 |
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Discontinued operations: |
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Income from discontinued operations |
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3,212 |
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6,068 |
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6,884 |
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12,069 |
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Gain on sale of properties |
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20,306 |
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39,967 |
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29,051 |
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39,967 |
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Net income |
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59,616 |
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68,052 |
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102,728 |
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95,458 |
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Preferred distributions |
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(12,667 |
) |
(12,667 |
) |
(25,334 |
) |
(25,334 |
) |
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Net income available for common shareholders |
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$ |
46,949 |
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$ |
55,385 |
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$ |
77,394 |
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$ |
70,124 |
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Weighted average common shares outstanding basic |
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223,697 |
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225,449 |
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224,653 |
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225,447 |
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Weighted average common shares outstanding diluted |
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252,890 |
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254,642 |
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253,846 |
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254,640 |
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Earnings per common share: |
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Income from continuing operations available for common shareholders basic and diluted |
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$ |
0.10 |
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$ |
0.04 |
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$ |
0.18 |
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$ |
0.08 |
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Income from discontinued operations basic and diluted |
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$ |
0.11 |
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$ |
0.20 |
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$ |
0.16 |
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$ |
0.23 |
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Net income available for common shareholders basic and diluted |
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$ |
0.21 |
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$ |
0.25 |
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$ |
0.34 |
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$ |
0.31 |
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See accompanying notes
2
HRPT PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
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Six Months Ended 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income |
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$ |
102,728 |
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$ |
95,458 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation |
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78,452 |
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78,906 |
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Amortization of debt discounts, premiums and deferred financing fees |
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3,528 |
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2,505 |
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Amortization of acquired real estate leases |
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17,029 |
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15,008 |
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Other amortization |
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7,274 |
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8,123 |
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Gain on early extinguishment of debt |
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(20,686 |
) |
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Equity in earnings of equity investments |
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(861 |
) |
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Gain on sale of properties |
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(29,051 |
) |
(39,967 |
) |
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Change in assets and liabilities: |
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Decrease in restricted cash |
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1,844 |
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5,522 |
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Increase in rents receivable and other assets |
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(1,207 |
) |
(11,805 |
) |
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Increase in accounts payable and accrued expenses |
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3,635 |
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8,723 |
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Increase (decrease) in rent collected in advance |
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884 |
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(201 |
) |
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Increase in security deposits |
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3,440 |
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981 |
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Increase in due to affiliates |
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7,632 |
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2,420 |
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Cash provided by operating activities |
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174,641 |
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165,673 |
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Cash flows from investing activities: |
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Real estate acquisitions and improvements |
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(266,319 |
) |
(159,655 |
) |
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Investment in marketable pass through certificates |
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(6,760 |
) |
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Proceeds from sale of properties |
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69,730 |
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81,813 |
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Investment in Affiliates Insurance Company |
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(5,074 |
) |
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Increase in restricted cash |
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(81,813 |
) |
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Cash used in investing activities |
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(208,423 |
) |
(159,655 |
) |
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Cash flows from financing activities: |
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Repurchase and retirement of common shares |
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(14,486 |
) |
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Repurchase and retirement of outstanding debt securities |
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(88,251 |
) |
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Proceeds from borrowings |
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500,000 |
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240,000 |
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Payments on borrowings |
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(254,531 |
) |
(112,594 |
) |
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Deferred financing fees |
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(6,826 |
) |
(6 |
) |
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Distributions to common shareholders |
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(54,170 |
) |
(94,686 |
) |
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Distributions to preferred shareholders |
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(25,334 |
) |
(25,334 |
) |
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Cash provided by financing activities |
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56,402 |
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7,380 |
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Increase in cash and cash equivalents |
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22,620 |
|
13,398 |
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Cash and cash equivalents at beginning of period |
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15,518 |
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19,879 |
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Cash and cash equivalents at end of period |
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$ |
38,138 |
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$ |
33,277 |
|
See accompanying notes
3
HRPT PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
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Six Months Ended June 30, |
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2009 |
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2008 |
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Supplemental cash flow information: |
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Interest paid |
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$ |
86,368 |
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$ |
84,628 |
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Non-cash investing activities: |
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Real estate acquisitions |
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$ |
(9 |
) |
$ |
(30,639 |
) |
Net assets transferred to Government Properties Income Trust |
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395,317 |
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Non-cash financing activities: |
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Issuance of common shares |
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$ |
109 |
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$ |
157 |
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Assumption of mortgage notes payable |
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30,639 |
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Secured credit facility and related deferred financing fees transferred to Government Properties Income Trust |
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(243,199 |
) |
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See accompanying notes
4
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars 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, or GAAP, 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, 2008. 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 years presentation. In preparing these condensed consolidated financial statements, we evaluated events that occurred through August 10, 2009, the date of issuance of these condensed consolidated financial statements, for potential recognition or disclosure.
The accompanying consolidated financial statements include our investments in 100% owned subsidiaries. Our investments in 50% or less owned companies over which we can exercise influence, but do not control, are accounted for using the equity method of accounting. All intercompany transactions have been eliminated. We account for our investment in Government Properties Income Trust, or GOV, and Affiliates Insurance Company, or AIC, using the equity method of accounting. Significant influence is present through common representation on the boards of trustees or directors of us and each of GOV and AIC. Our two Managing Trustees are also Managing Trustees of GOV and owners of Reit Management & Research LLC, or RMR, which is the manager of us, GOV and AIC, and each of our trustees is a director of AIC.
In December 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. We adopted SFAS No. 141(R) on January 1, 2009.
Effective June 30, 2009, we adopted Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS 168. SFAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect this standard will result in any change to our current accounting practices.
Effective June 30, 2009, we adopted FASB Staff Position No. 107-1 and APB Opinion No. 28-1, or FSP 107-1, that requires disclosures about the fair value of our financial instruments. See Note 6, Fair Value of Financial Instruments for the relevant disclosures.
5
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
In March 2009, we purchased $8,000 of marketable commercial mortgage pass through certificates, or certificates, which are backed by our mortgage notes payable due January 2011, for $6,760. We classify these certificates as investments held to maturity rather than available for sale or trading because we have the intent and ability to hold these certificates until maturity. These certificates are included in other assets in our condensed consolidated balance sheet as of June 30, 2009. These certificates had an estimated fair market value of $6,483 as of June 30, 2009. We follow the amortized cost method of accounting for these certificates. Under this method, we amortize the difference between the face value of the certificates and its purchase price to income using the interest method over the expected remaining term of the certificates.
Note 3. Real Estate Properties
During the six months ended June 30, 2009, we funded $21,889 of improvements to our owned properties and we acquired five office properties for $191,750 and one industrial property for $34,000, excluding closing costs, using cash on hand and borrowings under our revolving credit facility.
In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing Properties Trust, or SNH, for an aggregate purchase price of approximately $565,000. As of August 10, 2009, we have sold 43 of these properties containing 1,951,000 square feet of space for approximately $532,434, excluding closing costs, and recognized gains totaling approximately $206,500. One of the buildings originally included in these agreements with an allocated value of $3,000 is no longer subject to the agreement for sale. We expect the closings of the remaining four buildings to occur by 2010. We and SNH may mutually agree to accelerate the closings of these acquisitions. In addition, SNH acquired rights of first refusal to purchase from us any of 45 additional buildings (containing approximately 4,598,000 square feet of rental space) that are leased to tenants in medical related businesses which we will continue to own after these transactions.
In June 2008, we also agreed to sell one additional property to a third party for $15,000, excluding closing costs. We expect the closing of this sale to occur in 2010.
Our obligations to complete the uncompleted sales are subject to various conditions typical of commercial real estate transactions. We can provide no assurance that we will sell any or all of these buildings or that the remaining sales will be completed in 2010 or sooner.
All properties under contract for sale as of June 30, 2009 are classified as held for sale on our condensed consolidated balance sheet. Results of operations for properties under contract for sale, or sold, as of June 30, 2009 are included in discontinued operations in our condensed consolidated statements of income. Summarized balance sheet and income statement information for properties under contract for sale, or sold, as of June 30, 2009 is as follows:
Balance Sheet:
|
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As of |
|
As of |
|
||
Real estate properties |
|
$ |
91,999 |
|
$ |
128,968 |
|
Acquired real estate leases |
|
|
|
221 |
|
||
Rents receivable |
|
10,801 |
|
13,075 |
|
||
Other assets, net |
|
2,434 |
|
3,585 |
|
||
Properties held for sale |
|
$ |
105,234 |
|
$ |
145,849 |
|
|
|
|
|
|
|
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Rent collected in advance |
|
$ |
795 |
|
$ |
860 |
|
Security deposits |
|
2,192 |
|
2,540 |
|
||
Other liabilities related to properties held for sale |
|
$ |
2,987 |
|
$ |
3,400 |
|
6
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Income Statement:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Rental income |
|
$ |
4,424 |
|
$ |
13,875 |
|
$ |
9,606 |
|
$ |
27,867 |
|
Operating expenses |
|
(1,051 |
) |
(3,667 |
) |
(2,353 |
) |
(7,412 |
) |
||||
Depreciation and amortization |
|
11 |
|
(3,454 |
) |
|
|
(7,004 |
) |
||||
General and administrative |
|
(172 |
) |
(505 |
) |
(369 |
) |
(1,020 |
) |
||||
Operating income |
|
3,212 |
|
6,249 |
|
6,884 |
|
12,431 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
|
1 |
|
|
|
4 |
|
||||
Interest expense |
|
|
|
(182 |
) |
|
|
(366 |
) |
||||
Income from discontinued operations |
|
$ |
3,212 |
|
$ |
6,068 |
|
$ |
6,884 |
|
$ |
12,069 |
|
During April 2009, we transferred 29 properties with 3,304,000 square feet of space to our wholly owned subsidiary, GOV, a real estate investment trust that owns properties that are majority leased to government tenants. In June 2009, GOV completed an initial public offering, or IPO, of 11,500,000 GOV common shares (including exercise of an over-allotment option) and became a separate public company. In connection with this transaction, we and GOV entered into a transaction agreement which governs our separation and relationship with GOV. Among other terms, under this agreement GOV acquired rights of first refusal to purchase from us any of 18 additional buildings (containing approximately 2,200,000 square feet of rental space) that are majority leased to government tenants which we continue to own after the GOV IPO. At June 30, 2009, we owned 9,950,000, or 46.4%, of the common shares of beneficial interest of GOV with a carrying value of $153,088 and a market value based on quoted market prices, of $204,274 ($20.53 per share).
Since GOVs IPO, our investment in it has been accounted for using the equity method. Under the equity method, we record our percentage share of net earnings of GOV in our consolidated statements of income. Our percentage share of earnings from GOV totaled $970 for the period ended June 30, 2009. Prior to its IPO, the operating results and investments of GOV were included in our results of operations and financial position. If we determine there is an other than temporary decline in the fair value of this investment, we would record a charge to earnings.
The following summarized financial data of GOV includes results of operations prior to June 8, 2009 (the date GOV became a separate public company), which are included in our consolidated results of operations when GOV was our wholly owned subsidiary:
|
|
June 30, |
|
December 31, |
|
||
Real estate properties, net |
|
$ |
384,832 |
|
$ |
390,441 |
|
Acquired real estate leases, net |
|
9,252 |
|
10,071 |
|
||
Cash and cash equivalents |
|
451 |
|
97 |
|
||
Rents receivable |
|
6,872 |
|
14,593 |
|
||
Other assets, net |
|
10,616 |
|
4,572 |
|
||
Total assets |
|
$ |
412,023 |
|
$ |
419,774 |
|
|
|
|
|
|
|
||
Secured credit facility |
|
$ |
43,875 |
|
$ |
|
|
Acquired real estate lease obligations, net |
|
2,750 |
|
3,151 |
|
||
Other liabilities |
|
5,795 |
|
3,170 |
|
||
Shareholders equity |
|
359,603 |
|
413,453 |
|
||
Total liabilities and shareholders equity |
|
$ |
412,023 |
|
$ |
419,774 |
|
7
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Rental income |
|
$ |
19,405 |
|
$ |
18,862 |
|
$ |
38,648 |
|
$ |
37,519 |
|
Operating expenses |
|
(6,548 |
) |
(6,222 |
) |
(12,974 |
) |
(12,521 |
) |
||||
Depreciation and amortization |
|
(3,797 |
) |
(3,520 |
) |
(7,361 |
) |
(7,018 |
) |
||||
General and administrative |
|
(873 |
) |
(746 |
) |
(1,613 |
) |
(1,492 |
) |
||||
Operating income |
|
8,187 |
|
8,374 |
|
16,700 |
|
16,488 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
42 |
|
12 |
|
44 |
|
25 |
|
||||
Interest expense |
|
(2,360 |
) |
(46 |
) |
(2,360 |
) |
(102 |
) |
||||
Net income |
|
$ |
5,869 |
|
$ |
8,340 |
|
$ |
14,384 |
|
$ |
16,411 |
|
As of June 30, 2009, we have invested $5,074 in AIC, an insurance company that is owned by RMR and other companies to which RMR provides management services. We own 16.67% of the common shares of AIC with a current carrying value of $4,965. Our investment in AIC is accounted for using the equity method of accounting. We expect to procure some of our insurance from AIC. Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of income. Our percentage share of earnings (loss) from AIC totaled ($109) for the period ended June 30, 2009. If we determine there is an other than temporary decline in the fair value of this investment, we would record a charge to earnings. In evaluating the fair value of this investment, we have considered, among other things, the individual assets and liabilities held by AIC, AICs overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally. Subsequent to June 30, 2009, we invested an additional $35 in order to fund our share of certain formation and licensing costs.
During the six months ended June 30, 2009, we repurchased and retired $31,781 of our floating rate senior notes due 2011 for $24,207, $49,320 of our 6.95% senior notes due 2012 for $41,495, $9,020 of our 6.50% senior notes due 2013 for $7,261, $5,345 of our 5.75% senior notes due 2014 for $4,278, and $14,000 of our 6.40% senior notes due 2015 for $11,010 using cash on hand and borrowings under our revolving credit facility. In connection with these transactions, we recognized gains on early extinguishment of debt totaling $20,686, net of unamortized deferred financing fees and note discounts.
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 1.0% and 3.5% per annum for the six months ended June 30, 2009 and 2008, respectively. As of June 30, 2009, we had $201,000 outstanding and $549,000 available under our revolving credit facility.
In April 2009, GOV entered into a new $250,000 secured credit facility with a group of commercial banks when it was a wholly owned subsidiary of ours. The $250,000 proceeds of this credit facility were distributed to us and used to repay amounts outstanding under our existing unsecured revolving credit facility. This secured credit facility was transferred to GOV when its IPO was completed in June 2009 and is no longer our obligation.
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. At June 30, 2009, we believe that we are in compliance with these financial and other covenants.
8
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 6. Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, rents receivable, equity investments, marketable pass through certificates, restricted cash, senior notes, mortgage notes payable, accounts payable and other accrued expenses and security deposits. At June 30, 2009 and December 31, 2008, the fair values of our financial instruments were not materially different from their carrying values, except as follows (dollars in thousands):
|
|
June 30, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
||||
Senior notes and mortgage notes payable |
|
$ |
2,408,484 |
|
$ |
2,103,059 |
|
$ |
2,488,918 |
|
$ |
1,695,824 |
|
Equity investment in GOV |
|
$ |
153,088 |
|
$ |
204,274 |
|
$ |
|
|
$ |
|
|
Marketable pass through certificates |
|
$ |
6,953 |
|
$ |
6,483 |
|
$ |
|
|
$ |
|
|
The fair values of our senior notes and mortgage notes payable are based on estimates using discounted cash flow analyses and currently prevailing market rates. At June 30, 2009, the fair values of our equity investment in GOV and marketable pass through certificates are based on quoted per share prices of $20.53 and $81.04, respectively.
During the six months ended June 30, 2009, we repurchased 4,050,000 of our common shares for $14,486, including transaction costs, using cash on hand.
The effect of our convertible preferred shares on income from continuing operations available for common shareholders per share is anti-dilutive for the periods presented.
9
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
As of June 30, 2009, we owned 327 office properties and 185 industrial and other properties, excluding properties classified as held for sale. We account for all of these 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, excluding properties held for sale or sold, as of and for the three and six months ended June 30, 2009 and 2008, is as follows:
|
|
As of June 30, 2009 |
|
As of June 30, 2008 |
|
||||||||
|
|
Office |
|
Industrial |
|
Totals |
|
Office |
|
Industrial |
|
|
|
Property square feet (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Metro Philadelphia, PA |
|
5,285 |
|
|
|
5,285 |
|
5,274 |
|
|
|
5,274 |
|
Oahu, HI |
|
|
|
17,914 |
|
17,914 |
|
|
|
17,914 |
|
17,914 |
|
Metro Washington, DC |
|
1,628 |
|
|
|
1,628 |
|
2,401 |
|
|
|
2,401 |
|
Metro Boston, MA |
|
2,599 |
|
|
|
2,599 |
|
2,599 |
|
|
|
2,599 |
|
Southern California |
|
888 |
|
|
|
888 |
|
1,174 |
|
|
|
1,174 |
|
Other Markets |
|
23,735 |
|
13,244 |
|
36,979 |
|
22,878 |
|
11,198 |
|
34,076 |
|
Totals |
|
34,135 |
|
31,158 |
|
65,293 |
|
34,326 |
|
29,112 |
|
63,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central business district, or CBD |
|
12,354 |
|
158 |
|
12,512 |
|
11,999 |
|
158 |
|
12,157 |
|
Suburban |
|
21,781 |
|
31,000 |
|
52,781 |
|
22,327 |
|
28,954 |
|
51,281 |
|
Total |
|
34,135 |
|
31,158 |
|
65,293 |
|
34,326 |
|
29,112 |
|
63,438 |
|
10
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
|
|
Three Months Ended June 30, 2009 |
|
Three Months Ended June 30, 2008 |
|
||||||||||||||
|
|
Office |
|
Industrial |
|
Totals |
|
Office |
|
Industrial |
|
Totals |
|
||||||
Property rental income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Metro Philadelphia, PA |
|
$ |
30,423 |
|
$ |
|
|
$ |
30,423 |
|
$ |
29,652 |
|
$ |
|
|
$ |
29,652 |
|
Oahu, HI |
|
|
|
17,532 |
|
17,532 |
|
|
|
16,755 |
|
16,755 |
|
||||||
Metro Washington, DC |
|
16,213 |
|
|
|
16,213 |
|
18,174 |
|
|
|
18,174 |
|
||||||
Metro Boston, MA |
|
13,263 |
|
|
|
13,263 |
|
12,099 |
|
|
|
12,099 |
|
||||||
Southern California |
|
9,189 |
|
|
|
9,189 |
|
9,529 |
|
|
|
9,529 |
|
||||||
Other Markets |
|
106,630 |
|
19,479 |
|
126,109 |
|
98,668 |
|
19,396 |
|
118,064 |
|
||||||
Totals |
|
$ |
175,718 |
|
$ |
37,011 |
|
$ |
212,729 |
|
$ |
168,122 |
|
$ |
36,151 |
|
$ |
204,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CBD |
|
$ |
76,604 |
|
$ |
540 |
|
$ |
77,144 |
|
$ |
72,823 |
|
$ |
313 |
|
$ |
73,136 |
|
Suburban |
|
99,114 |
|
36,471 |
|
135,585 |
|
95,299 |
|
35,838 |
|
131,137 |
|
||||||
Total |
|
$ |
175,718 |
|
$ |
37,011 |
|
$ |
212,729 |
|
$ |
168,122 |
|
$ |
36,151 |
|
$ |
204,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Property net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Metro Philadelphia, PA |
|
$ |
15,996 |
|
$ |
|
|
$ |
15,996 |
|
$ |
14,829 |
|
$ |
|
|
$ |
14,829 |
|
Oahu, HI |
|
|
|
13,515 |
|
13,515 |
|
|
|
12,706 |
|
12,706 |
|
||||||
Metro Washington, DC |
|
10,097 |
|
|
|
10,097 |
|
11,367 |
|
|
|
11,367 |
|
||||||
Metro Boston, MA |
|
7,803 |
|
|
|
7,803 |
|
7,009 |
|
|
|
7,009 |
|
||||||
Southern California |
|
6,027 |
|
|
|
6,027 |
|
6,493 |
|
|
|
6,493 |
|
||||||
Other Markets |
|
59,443 |
|
13,162 |
|
72,605 |
|
54,199 |
|
13,923 |
|
68,122 |
|
||||||
Totals |
|
$ |
99,366 |
|
$ |
26,677 |
|
$ |
126,043 |
|
$ |
93,897 |
|
$ |
26,629 |
|
$ |
120,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CBD |
|
$ |
41,548 |
|
$ |
426 |
|
$ |
41,974 |
|
$ |
38,182 |
|
$ |
211 |
|
$ |
38,393 |
|
Suburban |
|
57,818 |
|
26,251 |
|
84,069 |
|
55,715 |
|
26,418 |
|
82,133 |
|
||||||
Total |
|
$ |
99,366 |
|
$ |
26,677 |
|
$ |
126,043 |
|
$ |
93,897 |
|
$ |
26,629 |
|
$ |
120,526 |
|
11
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
|
|
Six Months Ended |
|
Six Months Ended |
|
||||||||||||||
|
|
Office |
|
Industrial |
|
Totals |
|
Office |
|
Industrial |
|
Totals |
|
||||||
Property rental income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Metro Philadelphia, PA |
|
$ |
61,219 |
|
$ |
|
|
$ |
61,219 |
|
$ |
61,300 |
|
$ |
|
|
$ |
61,300 |
|
Oahu, HI |
|
|
|
35,750 |
|
35,750 |
|
|
|
33,618 |
|
33,618 |
|
||||||
Metro Washington, DC |
|
34,637 |
|
|
|
34,637 |
|
35,825 |
|
|
|
35,825 |
|
||||||
Metro Boston, MA |
|
25,745 |
|
|
|
25,745 |
|
24,005 |
|
|
|
24,005 |
|
||||||
Southern California |
|
19,033 |
|
|
|
19,033 |
|
19,009 |
|
|
|
19,009 |
|
||||||
Other Markets |
|
214,610 |
|
38,658 |
|
253,268 |
|
193,381 |
|
38,307 |
|
231,688 |
|
||||||
Totals |
|
$ |
355,244 |
|
$ |
74,408 |
|
$ |
429,652 |
|
$ |
333,520 |
|
$ |
71,925 |
|
$ |
405,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CBD |
|
$ |
154,099 |
|
$ |
1,086 |
|
$ |
155,185 |
|
$ |
142,843 |
|
$ |
628 |
|
$ |
143,471 |
|
Suburban |
|
201,145 |
|
73,322 |
|
274,467 |
|
190,677 |
|
71,297 |
|
261,974 |
|
||||||
Total |
|
$ |
355,244 |
|
$ |
74,408 |
|
$ |
429,652 |
|
$ |
333,520 |
|
$ |
71,925 |
|
$ |
405,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Property net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Metro Philadelphia, PA |
|
$ |
31,304 |
|
$ |
|
|
$ |
31,304 |
|
$ |
31,625 |
|
$ |
|
|
$ |
31,625 |
|
Oahu, HI |
|
|
|
27,869 |
|
27,869 |
|
|
|
25,865 |
|
25,865 |
|
||||||
Metro Washington, DC |
|
21,586 |
|
|
|
21,586 |
|
22,273 |
|
|
|
22,273 |
|
||||||
Metro Boston, MA |
|
14,329 |
|
|
|
14,329 |
|
13,661 |
|
|
|
13,661 |
|
||||||
Southern California |
|
12,794 |
|
|
|
12,794 |
|
13,120 |
|
|
|
13,120 |
|
||||||
Other Markets |
|
117,958 |
|
25,387 |
|
143,345 |
|
106,972 |
|
26,965 |
|
133,937 |
|
||||||
Totals |
|
$ |
197,971 |
|
$ |
53,256 |
|
$ |
251,227 |
|
$ |
187,651 |
|
$ |
52,830 |
|
$ |
240,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CBD |
|
$ |
81,787 |
|
$ |
860 |
|
$ |
82,647 |
|
$ |
76,316 |
|
$ |
425 |
|
$ |
76,741 |
|
Suburban |
|
116,184 |
|
52,396 |
|
168,580 |
|
111,335 |
|
52,405 |
|
163,740 |
|
||||||
Total |
|
$ |
197,971 |
|
$ |
53,256 |
|
$ |
251,227 |
|
$ |
187,651 |
|
$ |
52,830 |
|
$ |
240,481 |
|
12
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The table below reconciles our calculation of property net operating income, or NOI, to net income, the most directly comparable financial measure under GAAP reported in our consolidated financial statements for the three and six months ended June 30, 2009 and 2008. We consider NOI to be appropriate supplemental information to net income 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 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 for the three and six months ended June 30, 2009 and 2008, is as follows:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Rental income |
|
$ |
212,729 |
|
$ |
204,273 |
|
$ |
429,652 |
|
$ |
405,445 |
|
Operating expenses |
|
(86,686 |
) |
(83,747 |
) |
(178,425 |
) |
(164,964 |
) |
||||
Property net operating income (NOI) |
|
$ |
126,043 |
|
$ |
120,526 |
|
$ |
251,227 |
|
$ |
240,481 |
|
|
|
|
|
|
|
|
|
|
|
||||
Property net operating income |
|
$ |
126,043 |
|
$ |
120,526 |
|
$ |
251,227 |
|
$ |
240,481 |
|
Depreciation and amortization |
|
(49,604 |
) |
(45,228 |
) |
(97,994 |
) |
(90,041 |
) |
||||
General and administrative |
|
(9,792 |
) |
(8,991 |
) |
(19,279 |
) |
(17,853 |
) |
||||
Acquisition costs |
|
(489 |
) |
|
|
(748 |
) |
|
|
||||
Operating income |
|
66,158 |
|
66,307 |
|
133,206 |
|
132,587 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
363 |
|
89 |
|
508 |
|
418 |
|
||||
Interest expense |
|
(44,267 |
) |
(44,383 |
) |
(88,126 |
) |
(89,423 |
) |
||||
Gain on early extinguishment of debt |
|
13,173 |
|
|
|
20,686 |
|
|
|
||||
Equity in earnings of equity investments |
|
861 |
|
|
|
861 |
|
|
|
||||
Income from continuing operations before income tax expense |
|
36,288 |
|
22,013 |
|
67,135 |
|
43,582 |
|
||||
Income tax (expense) benefit |
|
(190 |
) |
4 |
|
(342 |
) |
(160 |
) |
||||
Income from continuing operations |
|
36,098 |
|
22,017 |
|
66,793 |
|
43,422 |
|
||||
Income from discontinued operations |
|
3,212 |
|
6,068 |
|
6,884 |
|
12,069 |
|
||||
Gain on sale of properties |
|
20,306 |
|
39,967 |
|
29,051 |
|
39,967 |
|
||||
Net income |
|
$ |
59,616 |
|
$ |
68,052 |
|
$ |
102,728 |
|
$ |
95,458 |
|
13
HRPT PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
For information about our related person transactions, including our transactions with GOV, sales of properties to SNH, our management contracts with RMR, our investment in AIC and the risks which may arise from these related person transactions, please see our Annual Report on Form 10-K for the year ended December 31, 2008 and our other filings made with the SEC, and in particular, the section entitled Risk Factors in the Annual Report, the sections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations Related Person Transactions in the Annual Report and this Quarterly Report on Form 10-Q, and the section entitled Related Person Transactions and Company Review of Such Transactions in our Proxy Statement relating to our 2009 Annual Shareholders Meeting, which are available at the SEC website: www.sec.gov.
In July 2009, we declared a distribution of $0.12 per common share, or approximately $26,800, to be paid on or about August 24, 2009 to shareholders of record on July 24, 2009. We also announced a distribution on our series B preferred shares of $0.5469 per share, or $3,828, 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 per share, or $6,167, which we expect to pay on or about August 15, 2009 to our preferred shareholders of record as of August 1, 2009.
As of August 10, 2009, we have an agreement to acquire one property with approximately 521,000 square feet of space for a total purchase price of $145,500, 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 this property.
14
HRPT PROPERTIES TRUST
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, 2008.
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 June 30, 2009, 89.1% of our total square feet was leased, compared to 90.9% leased as of June 30, 2008. These results reflect a 1.6 percentage point decrease in occupancy at properties we owned continuously since January 1, 2008. Occupancy data for 2009 and 2008 is as follows (square feet in thousands):
|
|
All Properties (1) |
|
Comparable Properties (2) |
|
||||
|
|
As of June 30, |
|
As of June 30, |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Total properties |
|
512 |
|
489 |
|
452 |
|
452 |
|
Total square feet |
|
65,293 |
|
63,438 |
|
58,747 |
|
58,747 |
|
Percent leased (3) |
|
89.1% |
|
90.9% |
|
88.9% |
|
90.5% |
|
(1) |
Excludes properties sold or under contract for sale as of June 30, 2009. |
(2) |
Based on properties owned continuously since January 1, 2008, and excludes properties sold or under contract for sale as of June 30, 2009. |
(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 June 30, 2009, we signed lease renewals for 992,000 square feet and new leases for 650,000 square feet, at weighted average rental rates that were 2% below rents previously charged for the same space. Average lease terms for leases signed during the three months ended June 30, 2009 were 7.7 years. Commitments for tenant improvement and leasing costs for leases signed during the three months ended June 30, 2009 totaled $21.8 million, or $13.25 per square foot (approximately $1.72/sq. ft. per year of the lease term).
During the past twelve months, leasing market conditions in the majority of our markets have continued to weaken. The pace of new leasing activity and the leasing of currently vacant space within our portfolio has slowed and completion of newly constructed office properties in certain markets has continued, causing our occupancy to decline. Required landlord funded tenant build outs and leasing commissions payable to tenant brokers for new leases and lease renewals have generally started to increase in certain markets since the second half of 2008. These build out costs and leasing commissions are generally amortized as a reduction of our income during the terms of the affected leases. Also, some tenants and prospective tenants have demonstrated reluctance to enter lease renewals or new leases for extended terms. We believe that some decreases in occupancy and effective rents may further reduce 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.
15
Approximately 16.1% of our leased square feet and 17.3% of our rents are included in leases scheduled to expire through December 31, 2010. 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 June 30, 2009, are as follows (square feet and dollars in thousands):
|
|
Square |
|
% of |
|
Cumulative |
|
Annualized |
|
% of |
|
Cumulative |
|
|
Year |
|
Expiring (1) |
|
Expiring |
|
Expiring |
|
Expiring (2) |
|
Expiring |
|
Expiring |
|
|
2009 |
|
2,465 |
|
4.2% |
|
4.2% |
|
$ |
40,662 |
|
4.9% |
|
4.9% |
|
2010 |
|
6,943 |
|
11.9% |
|
16.1% |
|
103,338 |
|
12.4% |
|
17.3% |
|
|
2011 |
|
5,439 |
|
9.3% |
|
25.4% |
|
95,067 |
|
11.4% |
|
28.7% |
|
|
2012 |
|
5,369 |
|
9.2% |
|
34.6% |
|
96,541 |
|
11.6% |
|
40.3% |
|
|
2013 |
|
5,492 |
|
9.4% |
|
44.0% |
|
97,680 |
|
11.8% |
|
52.1% |
|
|
2014 |
|
3,488 |
|
6.0% |
|
50.0% |
|
65,033 |
|
7.8% |
|
59.9% |
|
|
2015 |
|
3,520 |
|
6.0% |
|
56.0% |
|
67,051 |
|
8.1% |
|
68.0% |
|
|
2016 |
|
2,662 |
|
4.6% |
|
60.6% |
|
43,226 |
|
5.2% |
|
73.2% |
|
|
2017 |
|
2,095 |
|
3.6% |
|
64.2% |
|
45,047 |
|
5.4% |
|
78.6% |
|
|
2018 |
|
1,717 |
|
3.0% |
|
67.2% |
|
31,130 |
|
3.7% |
|
82.3% |
|
|
2019 and thereafter |
|
19,018 |
|
32.8% |
|
100.0% |
|
146,078 |
|
17.7% |
|
100.0% |
|
|
|
|
58,208 |
|
100.0% |
|
|
|
$ |
830,853 |
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years): |
|
8.2 |
|
|
|
|
|
5.9 |
|
|
|
|
|
(1) |
Square feet is pursuant to signed leases as of June 30, 2009, 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. Excludes properties classified in discontinued operations. |
(2) |
Rents are pursuant to signed leases as of June 30, 2009, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization. Excludes properties classified in discontinued operations. |
16
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 June 30, 2009, tenants responsible for 1% or more of our total rent were as follows (square feet in thousands):
Tenant |
|
Square |
|
% of Total |
|
% of |
|
Expiration |
|
|
1. |
U. S. Government (3) |
|
1,847 |
|
3.2% |
|
5.5% |
|
2009 to 2024 |
|
2. |
PNC Financial Services Group |
|
668 |
|
1.1% |
|
2.0% |
|
2011 to 2021 |
|
3. |
GlaxoSmithKline plc |
|
608 |
|
1.0% |
|
1.8% |
|
2013 |
|
4. |
Jones Day |
|
407 |
|
0.7% |
|
1.4% |
|
2012, 2019 |
|
5. |
Wells Fargo Bank |
|
393 |
|
0.7% |
|
1.2% |
|
2009 to 2017 |
|
6. |
Flextronics International Ltd. |
|
894 |
|
1.5% |
|
1.2% |
|
2014 |
|
7. |
Ballard Spahr Andrews & Ingersoll, LLP |
|
269 |
|
0.5% |
|
1.2% |
|
2009, 2012, 2015 |
|
8. |
ING |
|
410 |
|
0.7% |
|
1.2% |
|
2011, 2018 |
|
9. |
JDA Software Group, Inc. |
|
283 |
|
0.5% |
|
1.1% |
|
2012 |
|
10. |
The Bank of New York Mellon Corp. |
|
350 |
|
0.6% |
|
1.1% |
|
2011, 2012, 2015 |
|
|
Total |
|
6,129 |
|
10.5% |
|
17.7% |
|
|
|
(1) |
Square feet is pursuant to signed leases as of June 30, 2009, 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. Excludes properties classified in discontinued operations. |
(2) |
Rent is pursuant to signed leases as of June 30, 2009, plus estimated expense reimbursements; includes some triple net lease rents and excludes lease value amortization. Excludes properties classified in discontinued operations. |
(3) |
Including our 46.4% pro-rata ownership share of GOV; our square feet leased to the U.S. Government was 3,205,000, representing 5.2% of total square feet and our percentage of total rent from the U.S. Government was 8.5%. |
Investment Activities
During the six months ended June 30, 2009, we acquired five office properties with 1,062,000 square feet of space for $191.8 million, and one industrial property with 645,000 square feet of space for $34.0 million, excluding closing costs. At the time of acquisition, these properties were 97.4% leased and yielded approximately 10.1% of the aggregate gross purchase price, based on estimated annual net operating income, or NOI, which we define as property GAAP rental income less property operating expenses on the date of closing.
In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to SNH for an aggregate purchase price of approximately $565.0 million. As of August 10, 2009, we have sold 43 of these properties containing 1,951,000 square feet of space for $532.4 million, excluding closing costs, and recognized gains totaling approximately $206.5 million. One of the buildings originally included in these agreements with an allocated value of $3.0 million is no longer subject to the agreement for sale. We expect the closings of the remaining four buildings to occur by 2010. We and SNH may mutually agree to accelerate the closings of these acquisitions.
In June 2008, we also agreed to sell one additional property to a third party for $15.0 million, excluding closing costs. We expect the closing of this sale to occur in 2010.
17
Our obligations to complete the uncompleted sales are subject to various conditions typical of commercial real estate transactions. We can provide no assurance that we will sell any or all of these buildings or that the remaining sales will be completed in 2010 or sooner.
During the six months ended June 30, 2009, we have invested $5.1 million in AIC, an insurance company that is owned by RMR and other companies to which RMR provides management services. We own 16.67% of the common shares of AIC which has a current carrying value of $5.0 million.
In March 2009, we purchased $8.0 million of marketable certificates which are backed by our mortgage notes payable due January 2011, for $6.8 million. We classify these certificates as investments held to maturity rather than available for sale or trading because we have the intent and ability to hold these certificates until maturity. These certificates are included in other assets in our condensed consolidated balance sheet as of June 30, 2009. These certificates had an estimated fair market value of $6.5 million as of June 30, 2009.
Financing Activities
During the six months ended June 30, 2009, we repurchased 4,050,000 of our common shares for $14.5 million, including transaction costs, using cash on hand.
During the six months ended June 30, 2009, we repurchased and retired $31.8 million of our floating rate senior notes due 2011 for $24.2 million, $49.3 million of our 6.95% senior notes due 2012 for $41.5 million, $9.0 million of our 6.50% senior notes due 2013 for $7.3 million, $5.3 million of our 5.75% senior notes due 2014 for $4.3 million, and $14.0 million of our 6.40% senior notes due 2015 for $11.0 million using cash on hand and borrowings under our revolving credit facility. In connection with these transactions, we recognized gains totaling $20.7 million, net of unamortized deferred financing fees and note discounts.
During April 2009, we transferred 29 properties with 3,304,000 square feet of space to our wholly owned subsidiary, GOV, a real estate investment trust that owns properties that are majority leased to government tenants. Also in April 2009, GOV entered into a new $250 million secured credit facility with a group of commercial banks. The $250 million proceeds of this credit facility were distributed to us and used to repay amounts outstanding under our revolving credit facility.
In June 2009, GOV completed an IPO of 11,500,000 GOV common shares (including exercise of an over-allotment option) and became a separate public company. Simultaneous with the closing of the GOV IPO, the $250 million secured credit facility was transferred to GOV and is no longer our obligation. At June 30, 2009, we owned 9,950,000, or 46.4%, of the common shares of beneficial interest of GOV with a carrying value of $153.1 million and a market value based on quoted market prices, of $204.3 million ($20.53 per share).
18
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, |
|
|||||||||
|
|
2009 |
|
2008 |
|
$ |
|
% |
|
|||
|
|
(in thousands, except per share data) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
212,729 |
|
$ |
204,273 |
|
$ |
8,456 |
|
4.1% |
|
|
|
|
|
|
|
|
|
|
|
|||
Expenses: |
|
|
|
|
|
|
|
|
|
|||
Operating expenses |
|
86,686 |
|
83,747 |
|
2,939 |
|
3.5% |
|
|||
Depreciation and amortization |
|
49,604 |
|
45,228 |
|
4,376 |
|
9.7% |
|
|||
General and administrative |
|
9,792 |
|
8,991 |
|
801 |
|
8.9% |
|
|||
Acquisition costs |
|
489 |
|
|
|
489 |
|
100.0% |
|
|||
Total expenses |
|
146,571 |
|
137,966 |
|
8,605 |
|
6.2% |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Operating income |
|
66,158 |
|
66,307 |
|
(149 |
) |
(0.2% |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
Interest income |
|
363 |
|
89 |
|
274 |
|
307.9% |
|
|||
Interest expense |
|
(44,267 |
) |
(44,383 |
) |
116 |
|
0.3% |
|
|||
Gain on early extinguishment of debt |
|
13,173 |
|
|
|
13,173 |
|
100.0% |
|
|||
Equity in earnings of equity investments |
|
861 |
|
|
|
861 |
|
100.0% |
|
|||
Income from continuing operations before income tax expense |
|
36,288 |
|
22,013 |
|
14,275 |
|
64.8% |
|
|||
Income tax (expense) benefit |
|
(190 |
) |
4 |
|
(194 |
) |
(4,850.0% |
) |
|||
Income from continuing operations |
|
36,098 |
|
22,017 |
|
14,081 |
|
64.0% |
|
|||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
Income from discontinued operations |
|
3,212 |
|
6,068 |
|
(2,856 |
) |
(47.1% |
) |
|||
Gain on sale of properties |
|
20,306 |
|
39,967 |
|
(19,661 |
) |
(49.2% |
) |
|||
Net income |
|
59,616 |
|
68,052 |
|
(8,436 |
) |
(12.4% |
) |
|||
Preferred distributions |
|
(12,667 |
) |
(12,667 |
) |
|
|
% |
|
|||
Net income available for common shareholders |
|
$ |
46,949 |
|
$ |
55,385 |
|
$ |
(8,436 |
) |
(15.2% |
) |
|
|
|
|
|
|
|
|
|
|
|||
Weighted average common shares outstanding basic |
|
223,697 |
|
225,449 |
|
(1,752 |
) |
(0.8% |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
Weighted average common shares outstanding diluted |
|
252,890 |
|
254,642 |
|
(1,752 |
) |
(0.7% |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|||
Income from continuing operations available for common shareholders basic and diluted |
|
$ |
0.10 |
|
$ |
0.04 |
|
$ |
0.06 |
|
150.0% |
|
Income from discontinued operations basic and diluted |
|
$ |
0.11 |
|
$ |
0.20 |
|
$ |
(0.09 |
) |
(45.0% |
) |
Net income available for common shareholders basic and diluted |
|
$ |
0.21 |
|
$ |
0.25 |
|
$ |
(0.04 |
) |
(16.0% |
) |
19
Rental income. Rental income increased for the three months ended June 30, 2009, compared to the same period in 2008, primarily due to increases in rental income from our Other Markets segment, as described in the segment information footnote to our condensed consolidated financial statements. Rental income from our Other Markets segment increased $8.0 million, or 7%, primarily because of the acquisition of six properties during 2009 and 51 properties during 2008, partially offset by a decrease in rental income from 29 properties transferred primarily from our Washington DC, Southern California and Other Markets segments to GOV. Rental income includes non-cash straight line rent adjustments totaling $439,000 in 2009 and $3.3 million in 2008 and amortization of acquired real estate leases and obligations totaling ($1.6) million in 2009 and ($2.4) million in 2008. Rental income also includes lease termination fees totaling $309,000 in 2009 and $1.2 million in 2008.
Total expenses. The increase in total expenses primarily reflects our acquisition of properties since April 1, 2008. The increase in depreciation and amortization expense also reflects building and tenant improvement costs incurred throughout our portfolio since April 1, 2008. The increase in general and administrative costs reflects our acquisitions of properties plus state franchise tax refunds received in the prior year. Acquisition costs include certain costs related to property acquisitions that we now expense since our adoption of SFAS No. 141(R) in January 2009.
Gain on early extinguishment of debt. The gain on early extinguishment of debt in 2009 relates to the repurchase and retirement of $49.3 million of our 6.95% senior notes due 2012 for $41.5 million, $9.0 million of our 6.50% senior notes due 2013 for $7.3 million, $5.3 million of our 5.75% senior notes due 2014 for $4.3 million, and $14.0 million of our 6.40% senior notes due 2015 for $11.0 million, net of unamortized deferred financing fees and note discounts.
Equity in earnings of equity investments. Equity in earnings of equity investments represents our proportionate share of earnings (loss) from AIC and from GOV since its IPO in June 2009.
Income from continuing operations. The increase in income from continuing operations is due primarily to the gain on early extinguishment of debt and income from acquisitions during 2009 and 2008, offset by an increase in depreciation and amortization and a decrease in rents from 29 properties transferred to GOV.
Income from discontinued operations. Income from discontinued operations reflects operating results from three office properties sold in 2009, 37 office properties sold during 2008 and properties classified as held for sale as of June 30, 2009.
Gain on sale of properties. Net sales proceeds and gain from the sale of three office properties in 2009 were $50.5 million and $20.3 million, respectively. Net sales proceeds and gain from the sale of five office properties in 2008 were $81.8 million and $40.0 million, respectively.
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 decrease in gain on sale of properties, an increase in depreciation and amortization expense, a decrease in rents from properties sold during 2009 and 2008 and a decrease in rents from 29 properties transferred to GOV, offset by the gain on early extinguishment of debt and income from acquisitions in 2009 and 2008. Net income available for common shareholders is net income reduced by preferred distributions.
20
RESULTS OF OPERATIONS
Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008
|
|
Six Months Ended June 30, |
|
|||||||||
|
|
2009 |
|
2008 |
|
$ |
|
% |
|
|||
|
|
(in thousands, except per share data) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
429,652 |
|
$ |
405,445 |
|
$ |
24,207 |
|
6.0% |
|
|
|
|
|
|
|
|
|
|
|
|||
Expenses: |
|
|
|
|
|
|
|
|