Table of Contents

 

 

 

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

 

 

For the quarterly period ended June 30, 2009

 

 

OR

 

 

o

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 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

 

 

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

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 August 7, 2009: 223,708,241

 

 

 



Table of Contents

 

HRPT PROPERTIES TRUST

 

FORM 10-Q

 

JUNE 30, 2009

 

INDEX

 

 

 

Page

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheet — June 30, 2009 and December 31, 2008

1

 

 

 

 

Condensed Consolidated Statement of Income — Three and Six Months Ended June 30, 2009 and 2008

2

 

 

 

 

Condensed Consolidated Statement of Cash Flows — Six Months Ended June 30, 2009 and 2008

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

 

Warning Concerning Forward Looking Statements

31

 

 

 

 

Statement Concerning Limited Liability

33

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

34

 

 

 

Item 6.

Exhibits

34

 

 

 

 

Signatures

35

 

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

 



Table of Contents

 

PART I          Financial Information

 

Item 1.  Financial Statements

 

HRPT PROPERTIES TRUST

 

CONDENSED CONSOLIDATED BALANCE SHEET

(amounts in thousands, except share data)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

1,200,934

 

$

1,220,554

 

Buildings and improvements

 

4,768,406

 

5,021,703

 

 

 

5,969,340

 

6,242,257

 

Accumulated depreciation

 

(823,527

)

(862,958

)

 

 

5,145,813

 

5,379,299

 

Properties held for sale

 

105,234

 

145,849

 

Acquired real estate leases, net

 

157,428

 

164,308

 

Equity investments

 

158,053

 

 

Cash and cash equivalents

 

38,138

 

15,518

 

Restricted cash

 

8,993

 

10,837

 

Rents receivable, net of allowance for doubtful accounts of $8,351 and $8,492, respectively

 

188,512

 

196,839

 

Other assets, net

 

123,919

 

103,449

 

Total assets

 

$

5,926,090

 

$

6,016,099

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Revolving credit facility

 

$

201,000

 

$

201,000

 

Senior unsecured debt, net

 

2,132,795

 

2,241,225

 

Mortgage notes payable, net

 

443,908

 

447,693

 

Other liabilities related to properties held for sale

 

2,987

 

3,400

 

Accounts payable and accrued expenses

 

101,886

 

99,285

 

Acquired real estate lease obligations, net

 

46,989

 

47,839

 

Rent collected in advance

 

27,486

 

26,537

 

Security deposits

 

21,375

 

17,935

 

Due to affiliates

 

17,705

 

10,073

 

Total liabilities

 

2,996,131

 

3,094,987

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares of beneficial interest, $0.01 par value:

 

 

 

 

 

50,000,000 shares authorized;

 

 

 

 

 

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

 

169,079

 

169,079

 

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:

 

 

 

 

 

350,000,000 shares authorized; 223,708,241 and 227,731,938 shares issued and outstanding, respectively

 

2,237

 

2,277

 

Additional paid in capital

 

2,923,649

 

2,937,986

 

Cumulative net income

 

2,174,982

 

2,072,254

 

Cumulative common distributions

 

(2,496,011

)

(2,441,841

)

Cumulative preferred distributions

 

(357,262

)

(331,928

)

Total shareholders’ equity

 

2,929,959

 

2,921,112

 

Total liabilities and shareholders’ equity

 

$

5,926,090

 

$

6,016,099

 

 

See accompanying notes

 

1



Table of Contents

 

HRPT PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

212,729

 

$

204,273

 

$

429,652

 

$

405,445

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses

 

86,686

 

83,747

 

178,425

 

164,964

 

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

 

 

Total expenses

 

146,571

 

137,966

 

296,446

 

272,858

 

Operating income

 

66,158

 

66,307

 

133,206

 

132,587

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

363

 

89

 

508

 

418

 

Interest expense (including amortization of debt discounts, premiums and deferred financing fees of $1,886, $1,431, $3,528 and $2,526, respectively)

 

(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

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

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

 

Preferred distributions

 

(12,667

)

(12,667

)

(25,334

)

(25,334

)

Net income available for common shareholders

 

$

46,949

 

$

55,385

 

$

77,394

 

$

70,124

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

223,697

 

225,449

 

224,653

 

225,447

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — diluted

 

252,890

 

254,642

 

253,846

 

254,640

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations available for common shareholders — basic and diluted

 

$

0.10

 

$

0.04

 

$

0.18

 

$

0.08

 

Income from discontinued operations — basic and diluted

 

$

0.11

 

$

0.20

 

$

0.16

 

$

0.23

 

Net income available for common shareholders — basic and diluted

 

$

0.21

 

$

0.25

 

$

0.34

 

$

0.31

 

 

See accompanying notes

 

2



Table of Contents

 

HRPT PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

Six Months Ended 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

102,728

 

$

95,458

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

78,452

 

78,906

 

Amortization of debt discounts, premiums and deferred financing fees

 

3,528

 

2,505

 

Amortization of acquired real estate leases

 

17,029

 

15,008

 

Other amortization

 

7,274

 

8,123

 

Gain on early extinguishment of debt

 

(20,686

)

 

Equity in earnings of equity investments

 

(861

)

 

Gain on sale of properties

 

(29,051

)

(39,967

)

Change in assets and liabilities:

 

 

 

 

 

Decrease in restricted cash

 

1,844

 

5,522

 

Increase in rents receivable and other assets

 

(1,207

)

(11,805

)

Increase in accounts payable and accrued expenses

 

3,635

 

8,723

 

Increase (decrease) in rent collected in advance

 

884

 

(201

)

Increase in security deposits

 

3,440

 

981

 

Increase in due to affiliates

 

7,632

 

2,420

 

Cash provided by operating activities

 

174,641

 

165,673

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Real estate acquisitions and improvements

 

(266,319

)

(159,655

)

Investment in marketable pass through certificates

 

(6,760

)

 

Proceeds from sale of properties

 

69,730

 

81,813

 

Investment in Affiliates Insurance Company

 

(5,074

)

 

Increase in restricted cash

 

 

(81,813

)

Cash used in investing activities

 

(208,423

)

(159,655

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repurchase and retirement of common shares

 

(14,486

)

 

Repurchase and retirement of outstanding debt securities

 

(88,251

)

 

Proceeds from borrowings

 

500,000

 

240,000

 

Payments on borrowings

 

(254,531

)

(112,594

)

Deferred financing fees

 

(6,826

)

(6

)

Distributions to common shareholders

 

(54,170

)

(94,686

)

Distributions to preferred shareholders

 

(25,334

)

(25,334

)

Cash provided by financing activities

 

56,402

 

7,380

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

22,620

 

13,398

 

Cash and cash equivalents at beginning of period

 

15,518

 

19,879

 

Cash and cash equivalents at end of period

 

$

38,138

 

$

33,277

 

 

See accompanying notes

 

3



Table of Contents

 

HRPT PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

86,368

 

$

84,628

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Real estate acquisitions

 

$

(9

)

$

(30,639

)

Net assets transferred to Government Properties Income Trust

 

395,317

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Issuance of common shares

 

$

109

 

$

157

 

Assumption of mortgage notes payable

 

 

30,639

 

Secured credit facility and related deferred financing fees transferred to Government Properties Income Trust

 

(243,199

)

 

 

See accompanying notes

 

4



Table of Contents

 

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 year’s 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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

Note 2.  Securities Held to Maturity

 

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:

 

 

 

As of
June 30,
2009

 

As of
December 31,
2008

 

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

 

 

 

 

 

 

 

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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

Income Statement:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

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

 

 

Note 4.  Equity Investments

 

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 GOV’s 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,
2009

 

December 31,
2008

 

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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

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, AIC’s 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.

 

Note 5.  Indebtedness

 

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.

 

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Table of Contents

 

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
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

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.

 

Note 7.  Shareholders’ Equity

 

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.

 

Note 8.  Earnings per Common Share

 

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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

Note 9.  Segment Information

 

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
Properties

 

Industrial
and Other
Properties

 

Totals

 

Office
Properties

 

Industrial
and Other
Properties

 


Totals

 

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



Table of Contents

 

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
Properties

 

Industrial
and Other
Properties

 

Totals

 

Office
Properties

 

Industrial
and Other
Properties

 

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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

 

 

Six Months Ended
June 30, 2009

 

Six Months Ended
June 30, 2008

 

 

 

Office
Properties

 

Industrial
and Other
Properties

 

Totals

 

Office
Properties

 

Industrial
and Other
Properties

 

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



Table of Contents

 

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



Table of Contents

 

HRPT PROPERTIES TRUST

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

 

Note 10.  Related Person Transactions

 

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 “Management’s 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.

 

Note 11.  Subsequent Events

 

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.

 

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Table of Contents

 

HRPT PROPERTIES TRUST

 

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, 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



Table of Contents

 

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
Feet

 

% of
Square Feet

 

Cumulative
% of Square
Feet

 

Annualized
Rental

Income

 

% of
Annualized
Rental
Income

 

Cumulative
% of
Annualized
Rental

Income

 

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.

 

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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
Feet
(1)

 

% of Total
Square Feet
(1)

 

% of
Rent (2)

 

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.

 

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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).

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008

 

 

 

Three Months Ended June 30,

 

 

 

2009

 

2008

 

$
Change

 

%
Change

 

 

 

(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%

)

 

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Table of Contents

 

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.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

$
Change

 

%
Change

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

429,652

 

$

405,445

 

$

24,207

 

6.0%

 

 

 

 

 

 

 

 

 

 

 

Expenses: