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| HRP > SEC Filings for HRP > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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, 2007, and in our Current Report on Form 8-K dated October 21, 2008.
OVERVIEW
We primarily own office buildings located throughout the United States. We also own approximately 17 million square feet of leased industrial and commercial lands located in Oahu, Hawaii.
Property Operations
As of September 30, 2008, 90.6% of our total square feet was leased, compared to 92.6% leased as of September 30, 2007. These results exclude properties under contract for sale and primarily reflect the 2.1 percentage point decrease in occupancy at properties we owned continuously since January 1, 2007. Occupancy data for 2008 and 2007 is as follows (square feet in thousands):
All Properties (1) Comparable Properties (1)(2)
As of September 30, As of September 30,
2008 2007 2008 2007
Total properties 533 480 455 455
Total square feet 66,087 61,645 57,467 57,467
Percent leased (3) 90.6 % 92.6 % 90.2 % 92.3 %
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During the three months ended September 30, 2008, we signed lease renewals for 559,000 square feet and new leases for 395,000 square feet, at weighted average rental rates that were 16% above rents previously charged for the same space. Average lease terms for leases signed during the three months ended September 30, 2008 were 5.6 years. Commitments for tenant improvement and leasing costs for leases signed during the three months ended September 30, 2008 totaled $9.4 million, or $9.82 per square foot (approximately $1.75/sq. ft. per year of the lease term).
During the past twelve months, leasing market conditions in the majority of our markets have begun to show some weakness. 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 increased, 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 remained unchanged over the past twelve months, but are starting to increase in certain markets in the third quarter 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.
Approximately 9.0% of our leased square feet and 11.2% of our rents are included in leases scheduled to expire through December 31, 2009. 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, 2008, are as follows (square feet and dollars in thousands):
Cumulative
% of % of
Cumulative Annualized Annualized Annualized
% of % of Rental Rental Rental
Square Feet Square Feet Square Feet Income Income Income
Year Expiring (1) Expiring Expiring Expiring (2) Expiring Expiring
2008 1,641 2.7 % 2.7 % $ 23,734 2.8 % 2.8 %
2009 3,758 6.3 % 9.0 % 72,001 8.4 % 11.2 %
2010 6,661 11.1 % 20.1 % 102,264 11.9 % 23.1 %
2011 5,997 10.0 % 30.1 % 104,243 12.1 % 35.2 %
2012 5,427 9.1 % 39.2 % 105,161 12.2 % 47.4 %
2013 5,101 8.5 % 47.7 % 89,130 10.4 % 57.8 %
2014 2,985 5.0 % 52.7 % 52,047 6.1 % 63.9 %
2015 3,797 6.3 % 59.0 % 69,221 8.1 % 72.0 %
2016 2,726 4.6 % 63.6 % 45,136 5.2 % 77.2 %
2017 1,948 3.3 % 66.9 % 39,369 4.6 % 81.8 %
2018 and thereafter 19,846 33.1 % 100.0 % 156,340 18.2 % 100.0 %
59,887 100.0 % $ 858,646 100.0 %
Weighted average
remaining lease
term (in years): 8.4 6.0
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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 September 30, 2008, tenants responsible for 1% or more of our total rent were as follows (square feet in thousands):
Square % of Total % of
Tenant Feet (1) Square Feet (1) Rent (2) Expiration
1. U. S. Government 4,665 7.8 % 12.7 % 2008 to 2020
2. GlaxoSmithKline plc 608 1.0 % 1.7 % 2013
3. PNC Financial Services Group 460 0.8 % 1.4 % 2011, 2021
4. Jones Day 407 0.7 % 1.3 % 2012, 2019
5. Flextronics International Ltd. 894 1.5 % 1.2 % 2014
6. JDA Software Group, Inc. 283 0.5 % 1.1 % 2012
7. ING 410 0.7 % 1.1 % 2011, 2018
8. Ballard, Spahr Andrews &
Ingersoll, LLP 235 0.4 % 1.0 % 2009, 2015
Total 7,962 13.4 % 21.5 %
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Investment Activities
During the nine months ended September 30, 2008, we acquired 47 office and industrial properties with 3,899,000 square feet of space for $336.9 million, excluding closing costs and allocated intangibles. At the time of acquisition, these properties were 92.2% 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 rental income less property operating expenses on the date of closing. During the nine months ended September 30, 2008, we sold 28 office properties containing 1,121,000 square feet of space subject to $10.8 million of mortgage debt for $232.7 million and recognized gains totaling $97.6 million.
Financing Activities
In January 2008, we prepaid, at par, $28.6 million of 8.50% mortgage debt due in 2028, using cash on hand and borrowings under our revolving credit facility. In addition, the buyer of two of our properties sold in July 2008 assumed $4.5 million of 6.5% mortgage debt due in 2013 and $6.3 million of 7.5% mortgage debt due in 2022. In June 2008, we assumed $30.6 million of secured mortgage debt in connection with an acquisition. This mortgage debt bears interest at 7.435%, requires monthly principal and interest payments and matures in 2011. In July 2008, we assumed $8.9 million of secured mortgage debt in connection with another acquisition. This mortgage debt bears interest at 5.76%, requires monthly principal and interest payments and matures in 2016.
HRPT PROPERTIES TRUST
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008, Compared to Three Months Ended
September 30, 2007
Three Months Ended September 30,
$ %
2008 2007 Change Change
(in thousands, except per share data)
Rental income $ 211,689 $ 196,999 $ 14,690 7.5 %
Expenses:
Operating expenses 89,074 78,999 10,075 12.8 %
Depreciation and amortization 46,584 42,892 3,692 8.6 %
General and administrative 9,184 8,439 745 8.8 %
Total expenses 144,842 130,330 14,512 11.1 %
Operating income 66,847 66,669 178 0.3 %
Interest income 485 416 69 16.6 %
Interest expense (45,154 ) (43,904 ) (1,250 ) (2.8 )%
Income from continuing operations
before income tax expense 22,178 23,181 (1,003 ) (4.3 )%
Income tax expense (451 ) - (451 ) (100.0 )%
Income from continuing operations 21,727 23,181 (1,454 ) (6.3 )%
Discontinued operations:
Income from discontinued operations 6,339 6,565 (226 ) (3.4 )%
Gain on sale of properties 57,658 2,408 55,250 2,294.4 %
Net income 85,724 32,154 53,570 166.6 %
Preferred distributions (12,667 ) (15,402 ) 2,735 17.8 %
Net income available for common
shareholders $ 73,057 $ 16,752 $ 56,305 336.1 %
Weighted average common shares
outstanding - basic 227,251 212,078 15,173 7.2 %
Weighted average common shares
outstanding - diluted 256,444 241,271 15,173 6.3 %
Earnings per common share:
Income from continuing operations
available for common shareholders -
basic and diluted $ 0.04 $ 0.04 $ - - %
Income from discontinued operations -
basic and diluted $ 0.28 $ 0.04 $ 0.24 600.0 %
Net income available for common
shareholders - basic and diluted $ 0.32 $ 0.08 $ 0.24 300.0 %
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Rental income. Rental income increased for the three months ended September 30, 2008, compared to the same period in 2007, primarily due to an increase in rental income from our Other Markets segment, as described in the segment information footnote to our consolidated financial statements. Rental income from our Other Markets segment increased $15.7 million, or 16%, primarily because of our acquisition of 56 properties since June 2007. Rental income includes non-cash straight line rent adjustments totaling $6.8 million in 2008 and $5.7 million in 2007 and amortization of acquired real estate leases and obligations totaling ($2.3) million in 2008 and ($2.2) million in 2007. Rental income also includes lease termination fees totaling $108,000 in 2008 and $569,000 in 2007.
Total expenses. The increase in total expenses primarily reflects our acquisition of properties since June 2007. The increase in depreciation and amortization expense also reflects building and tenant improvement costs incurred throughout our portfolio since June 2007.
Interest expense. The increase in interest expense in 2008 reflects an increase in average total debt outstanding which was used primarily to finance acquisitions in 2008 and 2007, partially offset by a decrease in floating interest rates.
Income from continuing operations. The decrease in income from continuing operations is due primarily to the increase in depreciation and amortization expense and a decrease in occupancy, partially offset by income from acquisitions in 2008 and 2007.
Income from discontinued operations. Income from discontinued operations represents operating results from 28 office properties sold during the nine months ended September 30, 2008, 21 properties under contract to be sold and one office property sold in 2007.
Gain on sale of properties. We recognized gains totaling $57.7 million from the sale of 23 office properties for $149.0 million, excluding closing costs, during the three months ended September 30, 2008.
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 properties recognized in 2008 and income from acquisitions in 2008 and 2007, offset by an increase in depreciation and amortization expense and a decrease in occupancy. Net income available for common shareholders is net income reduced by preferred distributions. The decrease in preferred distributions reflects the partial redemption of our 8 ¾% series B preferred shares in November 2007.
HRPT PROPERTIES TRUST
Nine Months Ended September 30, 2008, Compared to Nine Months Ended
September 30, 2007
Nine Months Ended September 30,
$ %
2008 2007 Change Change
(in thousands, except per share data)
Rental income $ 617,134 $ 584,196 $ 32,938 5.6 %
Expenses:
Operating expenses 254,038 233,533 20,505 8.8 %
Depreciation and amortization 136,625 126,103 10,522 8.3 %
General and administrative 27,037 25,163 1,874 7.4 %
Total expenses 417,700 384,799 32,901 8.6 %
Operating income 199,434 199,397 37 - %
Interest income 903 1,441 (538 ) (37.3 )%
Interest expense (134,577 ) (126,212 ) (8,365 ) (6.6 )%
Loss on early extinguishment of debt - (711 ) 711 100.0 %
Income from continuing operations
before income tax expense 65,760 73,915 (8,155 ) (11.0 )%
Income tax expense (611 ) - (611 ) 100.0 %
Income from continuing operations 65,149 73,915 (8,766 ) (11.9 )%
Discontinued operations:
Income from discontinued operations 18,408 20,453 (2,045 ) (10.0 )%
Gain on sale of properties 97,625 2,408 95,217 3,954.2 %
Net income 181,182 96,776 84,406 87.2 %
Preferred distributions (38,001 ) (46,204 ) 8,203 17.8 %
Net income available for common
shareholders $ 143,181 $ 50,572 $ 92,609 183.1 %
Weighted average common shares
outstanding - basic 226,052 211,475 14,577 6.9 %
Weighted average common shares
outstanding - diluted 255,245 240,668 14,577 6.1 %
Earnings per common share:
Income from continuing operations
available for common shareholders -
basic and diluted $ 0.12 $ 0.13 $ (0.01 ) (7.7 )%
Income from discontinued operations -
basic and diluted $ 0.51 $ 0.11 $ 0.40 363.6 %
Net income available for common
shareholders - basic and diluted $ 0.63 $ 0.24 $ 0.39 162.5 %
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Rental income. Rental income increased for the nine months ended September 30, 2008, compared to the same period in 2007, primarily due to increases in rental income from our Oahu, HI and Other Markets segments, offset by a decrease in rental income from our Metro Boston, MA segment, as described in the segment information footnote to our consolidated financial statements. Rental income from our Oahu, HI market increased by $1.9 million, or 4%, due to an increase in weighted average rental rates for new leases and lease renewals signed during 2007 and 2008. Rental income from our Other Markets segment increased $32.3 million, or 11%, primarily because of the acquisition of 74 properties since December 2006. Rental income from our Metro Boston, MA market decreased $2.7 million, or 7%, primarily due to the decrease in occupancy in 2008, partially offset by rental income from property acquisitions since December 2006. Rental income includes non-cash straight line rent adjustments totaling $11.7 million in 2008 and $12.8 million in 2007 and amortization of acquired real estate leases and obligations totaling ($7.0) million in 2008 and ($7.3) million in 2007. Rental income also includes lease termination fees totaling $2.3 million in 2008 and $925,000 in 2007.
Total expenses. The increase in total expenses primarily reflects our acquisition of properties since December 2006. The increase in depreciation and amortization expense also reflects building and tenant improvement costs incurred throughout our portfolio since December 2006.
Interest expense. The increase in interest expense in 2008 reflects an increase in average total debt outstanding which was used primarily to finance acquisitions in 2008 and 2007, partially offset by a decrease in floating interest rates.
Loss on early extinguishment of debt. The loss on early extinguishment of debt in 2007 relates to the write-off of deferred financing fees associated with the repayment of $200 million of our floating rate senior notes in June 2007.
Income from continuing operations. The decrease in income from continuing operations is due primarily to the increase in depreciation and amortization expense and a decrease in occupancy, partially offset by income from acquisitions in 2008 and 2007.
Income from discontinued operations. Income from discontinued operations represents operating results from 28 office properties sold during the nine months ended September 30, 2008, 21 properties under contract to be sold and one office property sold in 2007.
Gain on sale of properties. We recognized gains totaling $97.6 million on the sale of 28 office properties during the nine months ended September 30, 2008 for $232.7 million, excluding closing costs.
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 properties recognized in 2008 and income from acquisitions in 2008 and 2007, offset by an increase in depreciation and amortization expense and a decrease in occupancy. Net income available for common shareholders is net income reduced by preferred distributions. The decrease in preferred distributions reflects the partial redemption of our 8 ¾% series B preferred shares in November 2007.
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 rental rates at our properties;
† our ability to restrain operating cost increases at our properties; and † our ability to purchase new properties which produce positive cash |
We believe that present leasing market conditions in the majority of areas where our properties are located may result in decreases in occupancies and effective rents, or gross rents less amortization of landlord funded tenant improvements and leasing costs. The continued volatility in energy costs may cause our future operating costs to increase; however, the impact of these increases is expected to be partially offset by the pass-through of operating cost increases to our tenants pursuant to lease terms. We generally do not purchase turnaround properties or properties which do not generate positive cash flows. Our future purchases of properties which generate positive cash flows can not be accurately projected because such purchases depend upon available opportunities which come to our attention.
Cash flows provided by (used for) operating, investing and financing activities were $240.5 million, ($182.2) million and ($53.3) million, respectively, for the nine months ended September 30, 2008, and $198.1 million, ($305.4) million and $115.2 million, respectively, for the nine months ended September 30, 2007. Changes in all three categories between 2008 and 2007 are primarily related to property acquisitions and sales in 2008 and 2007, and repayments and issuances of debt obligations.
Our Investment and Financing Liquidity and Resources
In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain an unsecured revolving credit facility with a group of institutional lenders. At September 30, 2008, there was $303 million outstanding and $447 million available under our revolving credit facility, and we had cash and cash equivalents of $24.9 million. We expect to use cash balances, borrowings under our credit facility, proceeds from the sale of properties and net proceeds of offerings of equity or debt securities to fund our continuing operations and future property acquisitions.
HRPT PROPERTIES TRUST
Our outstanding debt maturities and weighted average interest rates as of
September 30, 2008, were as follows (dollars in thousands):
Scheduled Principal Payments During Period
Secured Unsecured Unsecured Weighted
Fixed Rate Floating Fixed Average
Year Debt Rate Debt Rate Debt Total (1) Interest Rate
2008 $ 3,271 $ - $ - $ 3,271 7.0 %
2009 7,874 - - 7,874 6.8 %
2010 8,288 303,000 50,000 361,288 4.2 %
2011 258,741 200,000 - 458,741 5.6 %
2012 30,475 - 200,000 230,475 7.0 %
2013 3,097 - 200,000 203,097 6.5 %
2014 15,011 - 250,000 265,011 5.7 %
2015 3,175 - 450,000 453,175 6.0 %
2016 18,265 - 400,000 418,265 6.3 %
2017 2,477 - 250,000 252,477 6.3 %
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