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 September 30, 2006

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

Maryland

 

04-6558834

(State of Organization)

 

(IRS Employer Identification No.)

 

400 Centre Street, Newton, Massachusetts 02458

617-332-3990

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

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

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

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

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of November 6, 2006:  210,036,590

 




HRPT PROPERTIES TRUST

FORM 10-Q

SEPTEMBER 30, 2006

INDEX

 

 

 

Page

 

 

 

 

 

PART I

 

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet – September 30, 2006 and December 31, 2005

 

1

 

 

 

 

 

 

 

Consolidated Statement of Income – Three and Nine Months Ended September 30, 2006 and 2005

 

2

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2006 and 2005

 

3

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

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

 

11

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

23

 

 

 

 

 

 

 

Forward Looking Statements

 

24

 

 

 

 

 

 

 

Statement Concerning Limited Liability

 

25

 

 

 

 

 

PART II

 

Other Information

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

25

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

29

 

 

 

 

 

 

 

Signatures

 

30

 

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




PART I          Financial Information

Item 1.  Financial Statements

HRPT PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(amounts in thousands, except share data)

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

1,112,035

 

$

1,080,563

 

Buildings and improvements

 

4,472,412

 

4,144,011

 

 

 

5,584,447

 

5,224,574

 

Accumulated depreciation

 

(639,132

)

(548,460

)

 

 

4,945,315

 

4,676,114

 

Properties held for sale

 

2,725

 

10,779

 

Acquired real estate leases

 

164,155

 

161,787

 

Equity investments in former subsidiaries

 

 

194,297

 

Cash and cash equivalents

 

33,458

 

19,445

 

Restricted cash

 

22,775

 

18,348

 

Rents receivable, net of allowance for doubtful accounts of $3,696 and $3,767, respectively

 

165,691

 

145,385

 

Other assets, net

 

120,659

 

101,012

 

Total assets

 

$

5,454,778

 

$

5,327,167

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Revolving credit facility

 

$

310,000

 

$

256,000

 

Senior unsecured debt, net

 

1,940,878

 

1,889,991

 

Mortgage notes payable, net

 

388,743

 

374,165

 

Accounts payable and accrued expenses

 

75,796

 

80,125

 

Acquired real estate lease obligations

 

42,472

 

38,987

 

Rent collected in advance

 

20,211

 

17,858

 

Security deposits

 

15,154

 

13,679

 

Due to affiliates

 

19,643

 

10,876

 

Total liabilities

 

2,812,897

 

2,681,681

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized;

 

 

 

 

 

Series A preferred shares; 9 7/8% cumulative redeemable at par on February 22, 2006; zero and 8,000,000 shares issued and outstanding, respectively, aggregate liquidation preference $200,000

 

 

193,086

 

Series B preferred shares; 8 ¾% cumulative redeemable at par on September 12, 2007; 12,000,000 shares issued and outstanding, aggregate liquidation preference $300,000

 

289,849

 

289,849

 

Series C preferred shares; 7 1/8% cumulative redeemable at par on February 15, 2011; 6,000,000 and zero shares issued and outstanding, respectively, aggregate liquidation preference $150,000

 

145,015

 

 

Common shares of beneficial interest, $0.01 par value:
250,000,000 shares authorized; 210,036,590 and 209,860,625 shares issued and outstanding, respectively

 

2,100

 

2,099

 

Additional paid in capital

 

2,774,270

 

2,779,159

 

Cumulative net income

 

1,665,477

 

1,452,774

 

Cumulative common distributions

 

(2,027,081

)

(1,894,818

)

Cumulative preferred distributions

 

(207,749

)

(176,663

)

Total shareholders’ equity

 

2,641,881

 

2,645,486

 

Total liabilities and shareholders’ equity

 

$

5,454,778

 

$

5,327,167

 

 

See accompanying notes

1




HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

202,542

 

$

182,894

 

$

590,058

 

$

523,262

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses

 

80,219

 

69,173

 

227,981

 

196,014

 

Depreciation and amortization

 

41,064

 

34,490

 

119,109

 

100,417

 

General and administrative

 

8,513

 

9,102

 

24,926

 

23,430

 

Total expenses

 

129,796

 

112,765

 

372,016

 

319,861

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

72,746

 

70,129

 

218,042

 

203,401

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

573

 

408

 

2,118

 

1,289

 

Interest expense (including amortization of note discounts and premiums and deferred financing fees of $1,105, $392, $3,348 and $1,725, respectively)

 

(43,169

)

(35,628

)

(126,317

)

(105,967

)

Loss on early extinguishment of debt

 

 

(168

)

(1,659

)

(168

)

Equity in earnings of equity investments

 

 

3,494

 

3,136

 

9,940

 

Gain on sale of equity investments

 

 

 

116,287

 

 

Gain on issuance of shares by equity investees

 

 

 

 

4,708

 

Income from continuing operations

 

30,150

 

38,235

 

211,607

 

113,203

 

Income (loss) from discontinued operations

 

32

 

62

 

(76

)

483

 

Gain on sale of properties

 

1,172

 

 

1,172

 

7,592

 

Net income

 

31,354

 

38,297

 

212,703

 

121,278

 

Preferred distributions

 

(9,234

)

(11,500

)

(29,976

)

(34,500

)

Excess redemption price paid over carrying value of preferred shares

 

 

 

(6,914

)

 

Net income available for common shareholders

 

$

22,120

 

$

26,797

 

$

175,813

 

$

86,778

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

209,992

 

201,459

 

209,941

 

193,778

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.10

 

$

0.13

 

$

0.83

 

$

0.41

 

Income (loss) from discontinued operations

 

$

 

$

 

$

 

$

 

Net income available for commonshareholders

 

$

0.11

 

$

0.13

 

$

0.84

 

$

0.45

 

 

See accompanying notes

2




HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

212,703

 

$

121,278

 

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

 

 

 

 

 

Depreciation

 

96,452

 

82,806

 

Amortization of note discounts and premiums and deferred financing fees

 

3,348

 

1,725

 

Amortization of acquired real estate leases

 

22,495

 

16,625

 

Other amortization

 

8,191

 

6,484

 

Loss on early extinguishment of debt

 

1,659

 

 

Equity in earnings of equity investments

 

(3,136

)

(9,940

)

Gain on sale of equity investments

 

(116,287

)

 

Gain on issuance of shares by equity investees

 

 

(4,708

)

Distributions of earnings from equity investments

 

3,136

 

9,940

 

Gain on sale of properties

 

(1,172

)

(7,592

)

Change in assets and liabilities:

 

 

 

 

 

(Increase) decrease in restricted cash

 

(4,427

)

5,162

 

Increase in rents receivable and other assets

 

(44,349

)

(54,518

)

Decrease in accounts payable and accrued expenses

 

(4,329

)

(2,715

)

Increase in rent collected in advance

 

2,353

 

4,852

 

Increase in security deposits

 

1,475

 

1,759

 

Increase in due to affiliates

 

8,767

 

9,396

 

Cash provided by operating activities

 

186,879

 

180,554

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Real estate acquisitions and improvements

 

(366,370

)

(411,277

)

Distributions in excess of earnings from equity investments

 

2,251

 

7,014

 

Proceeds from sale of properties

 

6,231

 

20,078

 

Proceeds from sale of equity investments

 

308,333

 

 

Cash used for investing activities

 

(49,555

)

(384,185

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of preferred shares, net

 

145,015

 

 

Redemption of preferred shares

 

(200,000

)

 

Proceeds from issuance of common shares, net

 

 

383,974

 

Proceeds from borrowings

 

1,044,000

 

622,000

 

Payments on borrowings

 

(945,950

)

(642,248

)

Deferred financing fees

 

(3,027

)

(4,881

)

Distributions to common shareholders

 

(132,263

)

(121,161

)

Distributions to preferred shareholders

 

(31,086

)

(34,500

)

Cash (used for) provided by financing activities

 

(123,311

)

203,184

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

14,013

 

(447

)

Cash and cash equivalents at beginning of period

 

19,445

 

21,961

 

Cash and cash equivalents at end of period

 

$

33,458

 

$

21,514

 

 

See accompanying notes

3




HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

131,809

 

$

120,666

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Real estate acquisitions

 

$

(20,585

)

$

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Issuance of common shares

 

$

2,026

 

$

565

 

Assumption of mortgage notes payable

 

20,585

 

 

 

See accompanying notes

4




HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data)

Note 1.  Basis of Presentation

The accompanying consolidated financial statements of HRPT Properties Trust and its subsidiaries have been prepared without audit.  Certain information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2005.  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.

Note 2.  Real Estate Properties

During the nine months ended September 30, 2006, we acquired 46 office properties and one industrial property for $306,856, excluding closing costs, and funded $75,946 of improvements to our owned properties using cash on hand, borrowings under our revolving credit facility and the assumption of $20,585 of mortgage debt.  We also sold four office properties for gross proceeds of $9,200 ($6,231 after closing costs and deposits required to defease related mortgages) and recognized a gain of $1,172 during the nine months ended September 30, 2006.

As of September 30, 2006, we had outstanding agreements to purchase 15 properties containing approximately 1,652 square feet of space for $120,475, plus closing costs.  These properties were acquired in October 2006.

Note 3.  Indebtedness

In March 2006 we issued $400,000 of unsecured floating rate senior notes in a public offering, raising net proceeds of approximately $398,700.  The notes bear interest at LIBOR plus a premium (6.0% at September 30, 2006), require quarterly interest payments and mature in March 2011.  Net proceeds from this offering were used to reduce amounts outstanding under our revolving credit facility and for general business purposes.  In March 2006 we also repaid our $350,000 term loan that was scheduled to mature in August 2009.  We recognized a loss of $1,659 from the write off of deferred financing fees in connection with this repayment.

We have an unsecured revolving credit facility with a borrowing capacity of $750,000 that we use for acquisitions, working capital and general business purposes.  In August 2006, we amended and extended the maturity of this credit facility from April 2009 to August 2010, with an option to extend the facility an additional year.  Interest paid on drawings under this facility was reduced from LIBOR plus 65 basis points to LIBOR plus 55 basis points.  Certain covenants were also amended to reflect current market conditions.  The interest rate on this facility averaged 5.6% and 3.8% per annum, for the nine months ended September 30, 2006 and 2005, respectively.  As of September 30, 2006, we had $310,000 outstanding and $440,000 available under our revolving credit facility.  Our public debt indentures and credit facility agreement contain a number of financial and other covenants, including a credit facility covenant which limits the amount of aggregate distributions on common shares to 90% of operating cash flow available for shareholder distributions as defined in the credit facility agreement.

Note 4.  Shareholders’ Equity

In February 2006 we issued 6,000,000 series C cumulative redeemable preferred shares in a public offering, raising net proceeds of $145,015.  Each series C preferred share has a liquidation preference of $25.00 and requires dividends of $1.78125, 7 1/8% of the liquidation preference per annum, payable in equal quarterly payments.  Our series C preferred shares are redeemable, at our option, for $25.00 each plus accrued and unpaid dividends at any time on or after February 15, 2011.  Net proceeds from this offering were used to reduce amounts outstanding under our revolving credit facility.  In March 2006 we redeemed all $200,000 of our 9.875% series A preferred shares by borrowing under our revolving credit facility.  In connection with this redemption, the $6,914 excess of the liquidation preference of the redeemed shares over their carrying amount was deducted from net income to determine net income available for common shareholders for the first quarter of 2006.

5




On April 10, 2006, we issued 113,665 common shares to our manager, Reit Management & Research LLC, or RMR, in payment of an incentive fee of $1,298 for services rendered during 2005 based upon a per common share price of $11.42, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day.  On May 23, 2006, we issued 11,250 common shares to our trustees as part of their annual compensation based upon a per common share price of $10.87, the closing price of our common shares on the NYSE on that day, and on September 20, 2006, we granted 51,050 common shares pursuant to our Incentive Share Award Plan to our officers and certain employees of RMR, based upon a per common share price of $11.88, the closing price of our common shares on the NYSE on that day.

Note 5.  Equity Investments

At September 30, 2006, and December 31, 2005, we had the following equity investments in Senior Housing Properties Trust, or Senior Housing, and Hospitality Properties Trust, or Hospitality Properties:

 

 

Equity Investments

 

Equity in Earnings

 

 

 

September 30,

 

December 31,

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Senior Housing

 

$

 

$

94,952

 

$

 

$

1,770

 

$

1,512

 

$

5,425

 

Hospitality Properties

 

 

99,345

 

 

1,724

 

1,624

 

4,515

 

 

 

$

 

$

194,297

 

$

 

$

3,494

 

$

3,136

 

$

9,940

 

 

In March 2006 we sold all 7,710,738 Senior Housing common shares we owned for $17.60 per common share, raising gross proceeds of $135,709 (net $133,064) and realizing a gain of $39,066, and we sold all 4,000,000 Hospitality Properties common shares we owned for $44.75 per common share, raising gross proceeds of $179,000 (net $175,269) and realizing a gain of $77,221.

Note 6.  Segment Information

As of September 30, 2006, we owned 348 office properties and 139 industrial properties, excluding properties under contract for sale.  We account for our office and industrial properties in geographic operating segments for financial reporting purposes based on our method of internal reporting.  We define these individual geographic segments as those which currently, or during either of the last two quarters, represent or generate 5% or more of our total square feet, revenues or property net operating income.  Property level information by geographic segment and property type as of and for the three and nine months ended September 30, 2006 and 2005, is as follows:

6




 

 

 

As of September 30, 2006

 

As of September 30, 2005

 

 

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Property square feet:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro Philadelphia, PA

 

5,453

 

 

5,453

 

5,454

 

 

5,454

 

Oahu, HI

 

 

17,929

 

17,929

 

 

17,879

 

17,879

 

Metro Washington, DC

 

2,645

 

 

2,645

 

2,645

 

 

2,645

 

Metro Boston, MA

 

2,740

 

 

2,740

 

2,738

 

 

2,738

 

Southern California

 

1,444

 

 

1,444

 

1,444

 

 

1,444

 

Metro Austin, TX

 

1,492

 

1,316

 

2,808

 

1,490

 

1,316

 

2,806

 

Other Markets

 

20,170

 

4,881

 

25,051

 

16,491

 

4,573

 

21,064

 

Totals

 

33,944

 

24,126

 

58,070

 

30,262

 

23,768

 

54,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Central business district, or CBD

 

11,335

 

158

 

11,493

 

11,331

 

158

 

11,489

 

Suburban

 

22,609

 

23,968

 

46,577

 

18,931

 

23,610

 

42,541

 

Total

 

33,944

 

24,126

 

58,070

 

30,262

 

23,768

 

54,030

 

 

 

 

Three Months Ended
September 30, 2006

 

Three Months Ended
September 30, 2005

 

 

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Property rental income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro Philadelphia, PA

 

$

31,784

 

$

 

$

31,784

 

$

33,761

 

$

 

$

33,761

 

Oahu, HI

 

 

16,369

 

16,369

 

 

14,462

 

14,462

 

Metro Washington, DC

 

19,972

 

 

19,972

 

19,741

 

 

19,741

 

Metro Boston, MA

 

15,517

 

 

15,517

 

15,093

 

 

15,093

 

Southern California

 

12,323

 

 

12,323

 

12,457

 

 

12,457

 

Metro Austin, TX

 

7,298

 

3,454

 

10,752

 

5,749

 

3,888

 

9,637

 

Other Markets

 

85,775

 

10,050

 

95,825

 

68,179

 

9,564

 

77,743

 

Totals

 

$

172,669

 

$

29,873

 

$

202,542

 

$

154,980

 

$

27,914

 

$

182,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CBD

 

$

72,382

 

$

291

 

$

72,673

 

$

72,537

 

$

279

 

$

72,816

 

Suburban

 

100,287

 

29,582

 

129,869

 

82,443

 

27,635

 

110,078

 

Total

 

$

172,669

 

$

29,873

 

$

202,542

 

$

154,980

 

$

27,914

 

$

182,894

 

 

 

 

Three Months Ended
September 30, 2006

 

Three Months Ended
September 30, 2005

 

 

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Property net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro Philadelphia, PA

 

$

17,025

 

$

 

$

17,025

 

$

18,641

 

$

 

$

18,641

 

Oahu, HI

 

 

13,274

 

13,274

 

 

11,568

 

11,568

 

Metro Washington, DC

 

12,333

 

 

12,333

 

12,651

 

 

12,651

 

Metro Boston, MA

 

9,917

 

 

9,917

 

10,074

 

 

10,074

 

Southern California

 

8,522

 

 

8,522

 

8,630

 

 

8,630

 

Metro Austin, TX

 

3,334

 

1,863

 

5,197

 

2,384

 

1,968

 

4,352

 

Other Markets

 

49,258

 

6,797

 

56,055

 

41,591

 

6,214

 

47,805

 

Totals

 

$

100,389

 

$

21,934

 

$

122,323

 

$

93,971

 

$

19,750

 

$

113,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CBD

 

$

40,136

 

$

214

 

$

40,350

 

$

41,209

 

$

215

 

$

41,424

 

Suburban

 

60,253

 

21,720

 

81,973

 

52,762

 

19,535

 

72,297

 

Total

 

$

100,389

 

$

21,934

 

$

122,323

 

$

93,971

 

$

19,750

 

$

113,721

 

 

7




 

 

 

Nine Months Ended
September 30, 2006

 

Nine Months Ended
September 30, 2005

 

 

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Property rental income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro Philadelphia, PA

 

$

95,277

 

$

 

$

95,277

 

$

100,490

 

$

 

$

100,490

 

Oahu, HI

 

 

45,580

 

45,580

 

 

36,724

 

36,724

 

Metro Washington, DC

 

59,182

 

 

59,182

 

57,461

 

 

57,461

 

Metro Boston, MA

 

45,545

 

 

45,545

 

43,157

 

 

43,157

 

Southern California

 

36,128

 

 

36,128

 

35,525

 

 

35,525

 

Metro Austin, TX

 

21,157

 

10,548

 

31,705

 

16,830

 

12,279

 

29,109

 

Other Markets

 

247,069

 

29,572

 

276,641

 

192,237

 

28,559

 

220,796

 

Totals

 

$

504,358

 

$

85,700

 

$

590,058

 

$

445,700

 

$

77,562

 

$

523,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CBD

 

$

214,960

 

$

850

 

$

215,810

 

$

208,049

 

$

811

 

$

208,860

 

Suburban

 

289,398

 

84,850

 

374,248

 

237,651

 

76,751

 

314,402

 

Total

 

$

504,358

 

$

85,700

 

$

590,058

 

$

445,700

 

$

77,562

 

$

523,262

 

 

 

 

Nine Months Ended
September 30, 2006

 

Nine Months Ended
September 30, 2005

 

 

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Office
Properties

 

Industrial
Properties

 

Totals

 

Property net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro Philadelphia, PA

 

$

51,096

 

$

 

$

51,096

 

$

55,509

 

$

 

$

55,509

 

Oahu, HI

 

 

37,033

 

37,033

 

 

29,431

 

29,431

 

Metro Washington, DC

 

37,068

 

 

37,068

 

37,298

 

 

37,298

 

Metro Boston, MA

 

29,920

 

 

29,920

 

29,268

 

 

29,268

 

Southern California

 

25,084

 

 

25,084

 

24,093

 

 

24,093

 

Metro Austin, TX

 

10,028

 

5,779

 

15,807

 

7,794

 

5,861

 

13,655

 

Other Markets

 

146,284

 

19,785

 

166,069

 

118,825

 

19,169

 

137,994

 

Totals

 

$

299,480

 

$

62,597

 

$

362,077

 

$

272,787

 

$

54,461

 

$

327,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CBD

 

$

120,211

 

$

644

 

$

120,855

 

$

119,304

 

$

646

 

$

119,950

 

Suburban

 

179,269

 

61,953

 

241,222

 

153,483

 

53,815

 

207,298

 

Total

 

$

299,480

 

$

62,597

 

$

362,077

 

$

272,787

 

$

54,461

 

$

327,248

 

 

8




The table below reconciles our calculation of property net operating income, or NOI, to net income available for common shareholders, the most directly comparable financial measure under generally accepted accounting principles, or GAAP, reported in our consolidated financial statements for the three and nine months ended September 30, 2006 and 2005.  We consider NOI to be appropriate supplemental information to net income available for common shareholders because it helps both investors and management to understand the operations of our properties.  We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level.  Our management also uses NOI to evaluate individual, regional and company wide property level performance.  NOI excludes certain components from net income available for common shareholders in order to provide results that are more closely related to our properties’ results of operations.  NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance. 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Rental income

 

$

202,542

 

$

182,894

 

$

590,058

 

$

523,262

 

Operating expenses

 

(80,219

)

(69,173

)

(227,981

)

(196,014

)

Property net operating income (NOI)

 

$

122,323

 

$

113,721

 

$

362,077

 

$

327,248

 

 

 

 

 

 

 

 

 

 

 

Property net operating income

 

$

122,323

 

$

113,721

 

$

362,077

 

$

327,248

 

Depreciation and amortization

 

(41,064

)

(34,490

)

(119,109

)

(100,417

)

General and administrative

 

(8,513

)

(9,102

)

(24,926

)

(23,430

)

Operating income

 

72,746

 

70,129

 

218,042

 

203,401

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

573

 

408

 

2,118

 

1,289

 

Interest expense

 

(43,169

)

(35,628

)

(126,317

)

(105,967

)

Loss on early extinguishment of debt

 

 

(168

)

(1,659

)

(168

)

Equity in earnings of equity investments

 

 

3,494

 

3,136

 

9,940

 

Gain on sale of equity investments

 

 

 

116,287

 

 

Gain on issuance of shares by equity investees

 

 

 

 

4,708

 

Income from continuing operations

 

30,150

 

38,235

 

211,607

 

113,203

 

Income (loss) from discontinued operations

 

32

 

62

 

(76

)

483

 

Gain on sale of properties

 

1,172

 

 

1,172

 

7,592

 

Net income

 

31,354

 

38,297

 

212,703

 

121,278

 

Preferred distributions

 

(9,234

)

(11,500

)

(29,976

)

(34,500

)

Excess redemption price paid over carrying value of preferred shares

 

 

 

(6,914

)

 

Net income available for common shareholders

 

$

22,120

 

$

26,797

 

$

175,813

 

$

86,778

 

 

Note 7.  Subsequent Events

In October 2006, we declared a distribution of $0.21 per common share, or approximately $44,000, to be paid on or about November 22, 2006, to shareholders of record on October 23, 2006.  We also announced a distribution on our series B preferred shares of $0.5469 per share, or $6,563, and a distribution on our series C preferred shares of $0.4453 per share, or $2,672, which will be paid on or about November 15, 2006, to our series B and C preferred shareholders of record as of November 1, 2006.

In October 2006, we purchased 15 properties with a total of approximately 1,652 square feet of space for $120,475, plus closing costs, using cash on hand, borrowings under our revolving credit facility and the assumption of debt.  As of November 6, 2006, we have executed purchase agreements for two additional properties with an aggregate of 167 square feet of space and an aggregate purchase price of $29,200.  In addition, we have an executed purchase agreement for the sale of one property with approximately 33 square feet of space at a sale price of $4,500.  This property is classified as held for sale on our consolidated balance sheet and its operating results are included in discontinued operations in our consolidated statement of income.  We currently expect to close the sale of this property in the fourth quarter of 2006.  These potential purchase and sale transactions are subject to completion of due diligence and customary closing contingencies, and because of these contingencies we can provide no assurances that we will purchase or sell these properties.

9




In October 2006, we issued an aggregate of 15,180,000 series D cumulative convertible preferred shares, including 1,980,000 shares issued to cover over-allotments, in a public offering for net proceeds of approximately $368,300.  Each series D preferred share has a liquidation preference of $25.00 and requires dividends of $1.625, 6 ½%, per annum, payable in equal quarterly payments.  Our series D preferred shares are convertible, at the holder’s option, into our common shares at an initial conversion rate of 1.9231 common shares per series D preferred share, which is equivalent to an initial conversion price of $13.00 per common share.   On or after November 20, 2011, if our common shares trade at or above the then applicable conversion price, we may, at our option, convert some or all of the series D preferred shares into common shares at the then applicable conversion rate.  Net proceeds from this offering were used to reduce amounts outstanding on our revolving credit facility and for general business purposes, including acquisitions.

10




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 2005 Annual Report on Form 10-K for the year ended December 31, 2005.

OVERVIEW

We primarily own office buildings located throughout the United States.  We also own approximately 18 million square feet of leased industrial and commercial lands in Oahu, Hawaii.

Property Operations

As of September 30, 2006, 93.4% of our total square feet was leased, compared to 93.9% leased as of September 30, 2005.  The decrease reflects property acquisitions and a decrease in occupancy of 0.4% at properties we owned continuously since July 1, 2005.  Occupancy data is as follows (square feet in thousands):

 

All Properties (1)

 

Comparable Properties (2)

 

 

 

As of September 30,

 

As of September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Total properties

 

487

 

429

 

410

 

410

 

Total square feet

 

58,070

 

54,030

 

52,750

 

52,750

 

Percent leased (3)

 

93.4

%

93.9

%

93.8

%

94.2

%

 


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

(2)    Based on properties owned continuously since July 1, 2005, and excludes properties under contract for sale.

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

11




During the third quarter of 2006 we signed new leases for 642,000 square feet and lease renewals for 766,000 square feet, at weighted average rental rates that were 9% above rents previously charged for the same space.  Average lease terms for leases signed during the quarter ended September 30, 2006, were 6.3 years.  Commitments for tenant improvement and leasing costs for leases signed during the quarter ended September 30, 2006, totaled $25.7 million, or $18.24 per square foot (approximately $2.89/sq. ft. per year of the lease term).

During the past twelve months, the leasing market conditions in some of our markets have been improving.  The occupancies at some of our continuously owned properties have stabilized and quoted rental rates in most of the areas where our properties are located seem to have increased modestly.  Although required landlord funded tenant build outs and leasing commissions payable to tenant brokers for new leases and lease renewals rose to $18.24 per square foot during the current quarter, these costs have generally stabilized or declined modestly over the past twelve months.  These build out costs and leasing commissions are generally amortized as a reduction of our income during the terms of the affected leases.  We believe that modest increases in effective rents will improve the financial results at some of our currently owned properties during the remainder of 2006.  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 beyond 2006.

Approximately 22% of our leased square feet are under leases scheduled to expire through December 31, 2008.  Lease renewals and rental rates at which available space may be relet in the future will depend on prevailing market conditions at that time.  Lease expirations by year, as of September 30, 2006, are as follows (in thousands):

Year

 

Sq. Ft.
Expiring (1)

 

% of Sq. Ft.
Expiring

 

Annualized
Rental Income
Expiring (2)

 

% of
Annualized
Rental
Income
Expiring

 

Cumulative
% of
Annualized
Rental
Income
Expiring

 

2006

 

1,476

 

2.7

%

$

30,589

 

3.8

%

3.8

%

2007

 

3,890

 

7.2

%

69,245

 

8.5

%

12.3

%

2008

 

4,602

 

8.5

%

80,247

 

9.9

%

22.2

%

2009

 

3,658

 

6.7

%

65,468

 

8.1

%

30.3

%

2010

 

5,166

 

9.5

%

91,899

 

11.3

%

41.6

%

2011

 

4,957

 

9.1

%

87,948

 

10.8

%

52.4

%

2012

 

3,748

 

6.9

%

74,273

 

9.2

%

61.6

%

2013

 

2,210

 

4.1

%

41,673

 

5.1

%

66.7

%

2014

 

2,440

 

4.5

%

43,222

 

5.3

%

72.0

%

2015

 

2,405

 

4.4

%

52,087

 

6.4

%

78.4

%

2016 and thereafter

 

19,700

 

36.4

%

174,765

 

21.6

%

100.0

%

 

 

54,252

 

100.0

%

$

811,416

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term (in years):

 

9.5

 

 

 

6.5

 

 

 

 

 

 


(1)         Square feet is pursuant to signed leases as of September 30, 2006, 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 square feet from properties classified in discontinued operations.

(2)         Rents are pursuant to signed leases as of September 30, 2006, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization and rents from properties classified in discontinued operations.

12




Our principal source of funds for our operations is rents from tenants at our properties.  Rents are generally received from our non-government tenants monthly in advance, and from our government tenants monthly in arrears.  As of September 30, 2006, tenants responsible for 1% or more of our total rent were as follows (square feet in thousands):

Tenant

 


Square Feet (1)

 


% of Total Square Feet (1)

 


% of
Rent (2)

 


Expiration

 

1.    U. S. Government

 

4,943

 

9.1

%

13.4

%

2006 to 2020

 

2.    GlaxoSmithKline plc

 

608

 

1.1

%

1.8

%

2013

 

3.    PNC Financial Services Group

 

460

 

0.8

%

1.4

%

2011, 2021

 

4.    Comcast Corporation

 

400

 

0.7

%

1.2

%

2006, 2008

 

5.    Solectron Corporation

 

765

 

1.4

%

1.1

%

2014

 

6.    Motorola, Inc.

 

766

 

1.4

%

1.1

%

2006, 2008, 2010

 

7.    JDA Software Group, Inc.

 

283

 

0.5

%

1.1

%

2012

 

8.    The Scripps Research Institute

 

164

 

0.3

%

1.1

%

2019

 

9.    Tyco International Ltd

 

660

 

1.2

%

1.1

%

2007, 2017

 

10.   Ballard Spahr Andrews & Ingersoll, LLP

 

231

 

0.4

%

1.0

%

2008, 2015

 

11.   Westinghouse Electric Corporation

 

534

 

1.0

%

1.0

%

2010, 2011

 

        Total

 

9,814

 

17.9

%

25.3

%

 

 

 


(1)         Square feet is pursuant to signed leases as of September 30, 2006, 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 square feet from properties classified in discontinued operations.

(2)         Rents are pursuant to signed leases as of September 30, 2006, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization and rents from properties classified in discontinued operations.

Investing Activities

During the nine months ended September 30, 2006, we acquired 46 office properties and one industrial property for $306.9 million, excluding closing costs, and funded $75.9 million of improvements to our owned properties using cash on hand, borrowings under our revolving credit facility and the assumption of $20.6 million of mortgage debt.  We also sold four office properties with a total of approximately 68,000 square feet of space for gross proceeds of $9.2 million ($6.2 million after closing costs and deposits required to defease related mortgages).  In addition, we have an executed purchase agreement for the sale of one property with approximately 33,000 square feet of space at a sale price of $4.5 million.  We currently expect to close the sale of this property in the fourth quarter of 2006.  This potential sale transaction is subject to closing contingencies, and because of these contingencies we can provide no assurances that we will sell this property.  This property is classified as held for sale on our consolidated balance sheet and its operating results are included in discontinued operations in our consolidated statement of income.

13




Financing Activities

In February 2006 we issued six million series C cumulative redeemable preferred shares in a public offering, raising net proceeds of $145.0 million.  In March 2006 we issued $400 million of unsecured floating rate senior notes in a public offering, raising net proceeds of approximately $398.7 million.  Net proceeds from these offerings were used to reduce amounts outstanding under our revolving credit facility and for general business purposes.  In March 2006 we redeemed all $200 million of our series A preferred shares and repaid our $350 million term loan by borrowing under our revolving credit facility.  In October 2006, we issued 15.2 million series D cumulative convertible preferred shares, including 2.0 million shares issued to cover over-allotments, in a public offering for net proceeds of approximately $368.3 million.  Each series D preferred share has a liquidation preference of $25.00 and requires dividends of $1.625, 6 ½%, per annum, payable in equal quarterly payments.  Our series D preferred shares are convertible, at the holder’s option, into our common shares at an initial conversion rate of 1.9231 common shares per series D preferred share, which is equivalent to an initial conversion price of $13.00 per common share.   On or after November 20, 2011, if our common shares trade at or above the then applicable conversion price, we may, at our option, convert some or all of the series D preferred shares into common shares at the then applicable conversion rate.  Net proceeds from this offering were used to reduce amounts outstanding on our revolving credit facility and for general business purposes, including acquisitions.

14




RESULTS OF OPERATIONS

Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005

 

 

Three Months Ended September 30,

 

 

 

2006

 

2005

 

Change

 

% Change

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

202,542

 

$

182,894

 

$

19,648

 

10.7

%

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses

 

80,219

 

69,173

 

11,046

 

16.0

%

Depreciation and amortization

 

41,064

 

34,490

 

6,574

 

19.1

%

General and administrative

 

8,513

 

9,102

 

(589

)

(6.5

)%

Total expenses

 

129,796

 

112,765

 

17,031

 

15.1

%

 

 

 

 

 

 

 

 

 

 

Operating income

 

72,746

 

70,129

 

2,617

 

3.7

%

 

 

 

 

 

 

 

 

 

 

Interest income

 

573

 

408

 

165

 

40.4

%

Interest expense

 

(43,169

)

(35,628

)

(7,541

)

(21.2

)%

Loss on early extinguishment of debt

 

 

(168

)

168

 

100.0

%

Equity in earnings of equity investments

 

 

3,494

 

(3,494

)

(100.0

)%

Income from continuing operations

 

30,150

 

38,235

 

(8,085

)

(21.1

)%

Income (loss) from discontinued operations

 

32

 

62

 

(30

)

(48.4

)%

Gain on sale of properties

 

1,172

 

 

1,172

 

100.0

%

Net income

 

31,354

 

38,297

 

(6,943

)

(18.1

)%

Preferred distributions

 

(9,234

)

(11,500

)

2,266

 

19.7

%

Net income available for common shareholders

 

$

22,120

 

$

26,797

 

$

(4,677

)

(17.5

)%

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

209,992

 

201,459

 

8,533

 

4.2

%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

$

0.10

 

$

0.13

 

$

(0.03

)

(23.1

)%

Income (loss) from discontinued operations per share

 

$

 

$

 

$

 

%

Net income available for common shareholders per share

 

$

0.11

 

$

0.13

 

$

(0.02

)

(15.4

)%

 

15




Rental income.  Rental income increased for the three months ended September 30, 2006, compared to the same period in 2005, primarily due to increases in rental income from our Oahu, HI, Austin, TX and Other Markets segments, offset by the decrease in rental income from our Philadelphia segment, all as described in Note 6 to our consolidated financial statements.  Rental income for the Oahu, HI segment increased $1.9 million, or 13%, primarily because of increases in weighted average rental rates for new leases and lease renewals signed during 2005 and 2006.  Rental income for the Austin, TX segment increased $1.1 million, or 12%, primarily due to an increase in occupancy in 2006.  Rental income for the Other Markets segment increased $18.1 million, or 23%, primarily because of the acquisition of 74 properties since June 2005, partially offset by approximately $3 million of lease termination fees received during 2005.  Rental income for the Metro Philadelphia, PA segment decreased $2.0 million, or 6%, primarily due to a decline in occupancy during 2006.  Rental income includes non cash straight line rent adjustments totaling $7.8 million in 2006 and $9.0 million in 2005 and amortization of acquired real estate leases and obligations totaling ($2.4 million) in 2006 and ($1.5 million) in 2005.  Rental income also includes lease termination fees totaling $50,000 in 2006 and $3.1 million in 2005.

Total expenses.  Total expenses increased for the three months ended September 30, 2006, compared to the same period in 2005, due to increases in operating expenses and depreciation and amortization expenses primarily related to the acquisition of properties in 2005 and 2006.

Interest expense.  Interest expense increased for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, reflecting an increase in average total debt outstanding which was used primarily to finance acquisitions in 2006 and 2005, and the increase in weighted average interest rates on our floating rate debt from 4.2% during the three months ended September 30, 2005, to 5.9% during the three months ended September 30, 2006.

Equity in earnings of equity investments.  Equity in earnings of equity investments decreased in 2006 due to the sale of all of the common shares we owned in Senior Housing and Hospitality Properties in March 2006.

Gain on sale of properties.  The gain on sale of properties in 2006 reflects the sale of four office properties located in Atlanta, GA for $9.2 million.

Income from continuing operations.  The decrease in income from continuing operations is due primarily to our sale of equity investments during the first quarter of 2006, and an increase during 2006 in interest expense due to the increase in average total debt outstanding and the increase in floating interest rates, offset by the acquisition of properties since June 2005.

Net income and net income available for common shareholders.  The decrease in net income and net income available for common shareholders is due primarily to the sale of Senior Housing and Hospitality Properties common shares in 2006, and an increase during 2006 in interest expense due to an increase in average total debt outstanding, offset by property acquisitions since June 2005.  Net income available for common shareholders is net income reduced by preferred distributions.

16




Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005

 

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

Change

 

% Change

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

590,058

 

$

523,262

 

$

66,796

 

12.8

%

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses

 

227,981

 

196,014

 

31,967

 

16.3

%

Depreciation and amortization

 

119,109

 

100,417

 

18,692

 

18.6

%

General and administrative

 

24,926

 

23,430

 

1,496

 

6.4

%

Total expenses

 

372,016

 

319,861

 

52,155

 

16.3

%

 

 

 

 

 

 

 

 

 

 

Operating income

 

218,042

 

203,401

 

14,641

 

7.2

%

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,118

 

1,289

 

829

 

64.3

%

Interest expense

 

(126,317

)

(105,967

)

(20,350

)

(19.2

)%

Loss on early extinguishment of debt

 

(1,659

)

(168

)

(1,491

)

(887.5

)%

Equity in earnings of equity investments

 

3,136

 

9,940

 

(6,804

)

(68.5

)%

Gain on sale of equity investments

 

116,287

 

 

116,287

 

100.0

%

Gain on issuance of shares by equity investees

 

 

4,708

 

(4,708

)

(100.0

)%

Income from continuing operations

 

211,607

 

113,203

 

98,404

 

86.9

%

(Loss) income from discontinued operations

 

(76

)

483

 

(559

)

(115.7

)%

Gain on sale of properties

 

1,172

 

7,592

 

(6,420

)

(84.6

)%

Net income

 

212,703

 

121,278

 

91,425

 

75.4

%

Preferred distributions

 

(29,976

)

(34,500

)

4,524

 

13.1

%

Excess redemption price paid over carrying value of preferred shares

 

(6,914

)

 

(6,914

)

(100.0

)%

Net income available for common shareholders

 

$

175,813

 

$

86,778

 

$

89,035

 

102.6

%

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

209,941

 

193,778

 

16,163

 

8.3

%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

$

0.83

 

$

0.41

 

$

0.42

 

102.4

%

(Loss) income from discontinued operations per share

 

$

 

$

 

$

 

%

Net income available for common shareholders per share

 

$

0.84

 

$

0.45

 

$

0.39

 

86.7

%

 

17




Rental income.  Rental income increased for the nine months ended September 30, 2006, compared to the same period in 2005, primarily due to increases in rental income from our Oahu, HI and Other Markets segments, offset by the decrease in rental income from the Metro Philadelphia, PA market, as described in Note 6 to our consolidated financial statements.  Rental income for the Oahu, HI segment increased $8.9 million, or 24%, primarily because of the acquisition of 44 properties in June 2005, and increases in weighted average rental rates for new leases and lease renewals signed during 2005 and 2006.  Rental income for the Other Markets segment increased $55.8 million, or 25%, primarily because of the acquisition of 76 properties since December 2004, partially offset by approximately $3 million of lease termination fees received during 2005.  Rental income for the Metro Philadelphia, PA segment decreased $5.2 million, or 5%, primarily because of non-recurring rent recovery income received during 2005 and a decline in occupancy during 2006.  Rental income includes non cash straight line rent adjustments totaling $17.9 million in 2006 and $21.3 million in 2005 and amortization of acquired real estate leases and obligations totaling ($7.9 million) in 2006 and ($5.0 million) in 2005.  Rental income also includes lease termination fees totaling $550,000 in 2006 and $3.5 million in 2005.

Total expenses.  Total expenses increased for the nine months ended September 30, 2006, compared to the same period in 2005, due to increases in operating expenses, depreciation and amortization and general and administrative expenses primarily related to the acquisition of properties in 2005 and 2006.

Interest expense.  Interest expense increased for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, reflecting an increase in average total debt outstanding which was used primarily to finance acquisitions in 2006 and 2005, and the increase in weighted average interest rates on our floating rate debt from 3.8% during the nine months ended September 30, 2005, to 5.7% during the nine months ended September 30, 2006.

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

Equity in earnings of equity investments.  Equity in earnings of equity investments decreased in 2006 due to our sale of all of the common shares we owned in Senior Housing and Hospitality Properties in March 2006.

Gain on sale of equity investments.  The gain on sale of equity investments reflects the sale in March 2006 of all of the common shares we owned in Senior Housing and Hospitality Properties.

Gain on issuance of shares by equity investees.  The gain on issuance of shares by equity investees reflects the issuance of common shares during 2005 by Hospitality Properties at prices above our per share carrying value.

Gain on sale of properties.  The gain on sale of properties in 2006 reflects the sale of four office properties located in Atlanta, GA for $9.2 million.  The gain on sale of properties in the prior year reflects the sale of 237,000 square feet of industrial property located in the Metro Boston, MA area for $20.5 million during the second quarter of 2005.

Income from continuing operations.  The increase in income from continuing operations is due primarily to the gain on sale of the common shares we owned in Senior Housing and Hospitality Properties in 2006 and income from properties acquired since December 2004, offset by an increase during 2006 in interest expense due to the increase in average total debt outstanding and the increase in floating interest rates.

Net income and net income available for common shareholders.  The increase in net income and net income available for common shareholders is due primarily to the gain on sale of Senior Housing and Hospitality Properties common shares in 2006 and property acquisitions since December 2004, offset by an increase in interest expense due to the increase in average total debt outstanding and the increase in floating interest rates.  Net income available for common shareholders is net income reduced by preferred distributions and the excess of the redemption price paid over the carrying value of our 9.875% series A preferred shares that we redeemed in March 2006.

18




LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

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

·                  our ability to maintain or improve occupancies and effective rent rates at our continuously owned properties;

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

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

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

Cash flows provided by (used for) operating, investing and financing activities were $186.9 million, ($49.6) million and ($123.3) million, respectively, for the nine months ended September 30, 2006, and $180.6 million, ($384.2) million and $203.2 million, respectively, for the nine months ended September 30, 2005.  Changes in all three categories between 2006 and 2005 are primarily related to property acquisitions and sales in 2006 and 2005, our sale of all of our Senior Housing and Hospitality Properties common shares in 2006, our repayments and issuances of debt obligations and redemption and issuance of preferred shares, and our issuance of common shares in 2005.

Our Investment and Financing Liquidity and Resources

In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain an unsecured revolving credit facility with a group of commercial banks.  At September 30, 2006, there was $310 million outstanding and $440 million available on our revolving credit facility, and we had cash and cash equivalents of $33.5 million.  We expect to use cash balances, borrowings under our credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions.  In August 2006, we amended and extended the maturity of our revolving credit facility from April 2009 to August 2010, with an option to extend the facility an additional year, and we reduced the interest rate on borrowings from LIBOR plus 65 basis points to LIBOR plus 55 basis points.  Certain covenants in the facility were also amended to reflect current market conditions.

19




Our outstanding debt maturities and weighted average interest rates as of September 30, 2006, are as follows (dollars in thousands):

 

 

Scheduled Principal Payments During Period

 

 

 

 

 

Secured

 

Unsecured

 

Unsecured

 

 

 

Weighted

 

 

 

Fixed Rate

 

Floating

 

Fixed

 

 

 

Average

 

Year

 

Debt

 

Rate Debt

 

Rate Debt

 

Total (1)

 

Interest Rate

 

2006

 

$

2,659

 

$

 

$

 

$

2,659

 

7.0

%

2007

 

9,402

 

 

 

9,402

 

6.9

%

2008

 

25,507

 

 

 

25,507

 

7.0

%

2009

 

6,957

 

 

 

6,957

 

6.9

%

2010

 

7,319

 

310,000

 

50,000

 

367,319

 

6.0

%

2011

 

228,854

 

400,000

 

 

628,854

 

6.1

%

2012

 

29,990

 

 

200,000

 

229,990

 

7.0

%

2013

 

2,603

 

 

200,000

 

202,603

 

6.5

%

2014

 

14,505

 

 

250,000

 

264,505

 

5.7

%

2015

 

2,658

 

 

450,000

 

452,658

 

6.0

%

2016 and thereafter

 

59,642

 

 

400,000

 

459,642

 

6.4

%

 

 

$

390,096

 

$

710,000

 

$

1,550,000

 

$

2,650,096

 

6.2

%

 


(1)  Total debt outstanding as of September 30, 2006, net of unamortized premiums and discounts, is $2,639,621.

 

When amounts are outstanding on our revolving credit facility and as the maturity dates of our revolving credit facility and term debts approach, we explore alternatives for the repayment of amounts due.  Such alternatives usually include incurring additional term debt and issuing new equity securities.  In 2006 we filed a shelf registration statement that allows for an indeterminate amount of securities to be issued by us.  This shelf registration statement is effective for three years.  An effective shelf registration statement allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.  Although there can be no assurance that we will consummate any debt or equity offerings or other financings, we believe we will have access to various types of financing, including debt or equity offerings, with which to finance future acquisitions and to pay our debt and other obligations.

The completion and the costs of our future debt transactions will depend primarily upon market conditions and our credit ratings.  We have no control over market conditions, but we expect the recent volatility in both short and long term debt costs to moderate for the next few months.  Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings, to space our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipatable adverse changes.  We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities.

During the first nine months of 2006 we purchased 46 office properties and one industrial property for $306.9 million, excluding closing costs, and funded improvements to our owned properties totaling $75.9 million.  We funded all our 2006 acquisitions and improvements to our owned properties with cash on hand, by borrowing under our revolving credit facility and assuming $20.6 million of mortgage debt.  We sold four office properties with a total of approximately 68,000 square feet of space for gross proceeds of $9.2 million ($6.2 million after closing costs and deposits required to defease related mortgages).  As of November 6, 2006, we have executed purchase agreements for two additional properties with an aggregate of 167,000 square feet of space and an aggregate purchase price of $29.2 million.  In addition, we have an executed purchase agreement for the sale of one property with approximately 33,000 square feet of space at a sale price of $4.5 million.  The acquisitions and sale of these properties are subject to various closing conditions customary in real estate transactions and no assurances can be given as to when or if we will purchase or sell these properties.

20




As of September 30, 2006, we had outstanding agreements to purchase 15 properties containing approximately 1,652,000 square feet of space