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

 

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

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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

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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

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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

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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

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		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

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		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

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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.

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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.

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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.

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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.

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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, 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.

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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.

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