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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2010

OR

Commission File Number 1-9317

COMMONWEALTH REIT

(Exact Name of Registrant as Specified in Its Charter)

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices)  (Zip Code)

617-332-3990

(Registrant’s Telephone Number, Including Area Code)

HRPT Properties Trust

(Former Name or Former Address, if Changed Since Last Report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

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

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of August 2, 2010: 64,596,310

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COMMONWEALTH REIT

FORM 10-Q

June 30, 2010

INDEX

References in this Form 10-Q to “we”, “us” and “our” refers to CommonWealth REIT and its consolidated subsidiaries, unless otherwise noted.  All share amounts in this Form 10-Q give effect to the reverse stock split that resulted in a one for four combination of our common shares effective July 1, 2010.

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PART I          Financial Information

Item 1.  Financial Statements

COMMONWEALTH REIT

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

See accompanying notes

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COMMONWEALTH REIT

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

See accompanying notes

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COMMONWEALTH REIT

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

See accompanying notes

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COMMONWEALTH REIT

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)

See accompanying notes

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of CommonWealth REIT, or CWH, we or us, and its subsidiaries have been prepared without audit.  Certain information and footnote disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2009, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.  All intercompany transactions and balances with our 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.  New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board, or the FASB, issued an accounting standards update requiring additional disclosures regarding fair value measurements.  The update requires entities to disclose additional information regarding assets and liabilities that are transferred between levels within the fair value hierarchy.  The update also clarifies the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair values.  The update is effective for interim and annual reporting periods beginning after December 15, 2009 except for the requirement to separately disclose purchases, sales, issuances and settlements in the Level 3 roll forward that becomes effective for fiscal periods beginning after December 15, 2010.

In February 2010, the FASB issued an update to the disclosure requirements relating to subsequent events to exclude the requirement to disclose the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or available to be issued.

The adoption of these updates does not, and is not expected to, cause any material changes to the disclosures in our condensed consolidated financial statements.

Note 3.  Securities Held to Maturity

We have $8,000 of marketable commercial mortgage pass through certificates, or certificates, which are backed by our mortgage notes payable due January 2011, that were purchased in 2009 for $6,760.  We classify these certificates as investments held to maturity rather than available for sale or trading because we have the intent and ability to hold these certificates until maturity.  As of June 30, 2010 and December 31, 2009, these certificates had a carrying value of $7,609 and $7,267, respectively, and were included in other assets in our consolidated balance sheets.  These certificates had an estimated fair market value of $8,003 and $7,443 as of June 30, 2010 and December 31, 2009, respectively.  We follow the amortized cost method of accounting for these certificates.  Under this method, we amortize the difference between the face value of the certificates and their purchase price to income using the interest method over the expected remaining term of the certificates.  As discussed in Note 6, we prepaid the mortgage notes payable that back these certificates in August 2010.  In connection with this prepayment, we received $8,000 from our investment in these certificates, and we expect to record approximately $400 of unamortized interest income during the third quarter of 2010.

Note 4.  Real Estate Properties

Since January 1, 2010, we acquired eight properties and entered agreements to acquire 11 additional properties for aggregate purchase prices of $359,525, excluding closing costs; we have also entered agreements to sell 15 properties for aggregate sales prices of $231,000, excluding closing costs.

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

In April 2010, we acquired an office property located in Denver, CO with 248,493 square feet.  The purchase price was $75,000, excluding closing costs.  We allocated $4,720 to land, $58,890 to buildings and improvements and $11,390 to acquired real estate leases.

In April 2010, we acquired an office property located in Colorado Springs, CO with 77,411 square feet.  The purchase price was $10,800, excluding closing costs.  We allocated $1,250 to land, $7,982 to buildings and improvements, $1,576 to acquired real estate leases and $8 to acquired real estate lease obligations.

In June 2010, we acquired two office properties located in Ann Arbor, MI with 410,410 square feet.  The purchase price was $65,200, excluding closing costs.  We allocated $6,760 to land, $46,988 to buildings and improvements, $11,875 to acquired real estate leases and $423 to acquired real estate lease obligations.

In June 2010, we acquired two office properties located in Carson, CA with 212,000 square feet.  The purchase price was $27,925, excluding closing costs.  We allocated $7,460 to land, $18,033 to buildings and improvements, $3,415 to acquired real estate leases and $983 to acquired real estate lease obligations.

In July 2010, we acquired two office properties located in Stafford, VA with 117,949 square feet.  The purchase price was $18,750, excluding closing costs.

In May 2010, we entered an agreement to acquire MacarthurCook Industrial Property Fund, an Australian listed property trust with units publicly traded on the Australian Securities Exchange under the symbol “MIF”.  MIF currently owns 10 industrial properties with approximately 1,400,000 square feet which are approximately 90% leased to 16 tenants for a weighted (by rents) average lease term of approximately five years.  Based on current exchange rates, the total consideration is estimated to be approximately $80,600, excluding closing costs, and closing is expected during the second half of 2010.  Our acquisition of MIF is conditioned upon approval of MIF’s unitholders and other customary conditions, including certain conditions applicable to cross border transactions such as various tax rulings; accordingly, these conditions may not be satisfied, the required approvals may not be obtained and this transaction may not close.

In July 2010, we entered a purchase and sale agreement to acquire one office property located in Milwaukee, WI with 432,092 square feet.  The purchase price is $81,250, excluding closing costs.  We expect to acquire this property during the third quarter of 2010; however, this acquisition is subject to customary closing conditions and no assurance can be given that this acquisition will be consummated in that time period or at all.

In June 2010, we entered agreements to sell 15 properties to our former subsidiary, Government Properties Income Trust, or GOV, that contain approximately 1,900,000 square feet for an aggregate sales price of $231,000, excluding closing costs.  In June 2010, we sold three of these properties with 306,374 square feet for $40,380, excluding closing costs, and recognized gains of $11,504, exclusive of gains of $5,342 attributable to our 31.8% ownership interest in GOV.  In July 2010, we sold five of these properties with 441,284 square feet for $48,339, excluding closing costs, and we expect to recognize gains on these sales of approximately $5,700, exclusive of gains attributable to our 31.8% ownership interest in GOV, and before closing and other costs.  Seven properties with 1,124,206 square feet remain subject to sale agreements for $142,281, excluding closing costs.  The net book value for four of these seven properties exceeded their sales prices and we recorded impairment charges of $21,491 during the second quarter of 2010.  The remaining sales are expected to generate gains of approximately $20,400, exclusive of gains attributable to our current 31.8% ownership interest in GOV, and before closing and other costs.  These seven remaining sales are expected to close prior to March 31, 2011 and are subject to various contractual contingencies typical of large commercial property transactions; accordingly, we can provide no assurances that we will sell these properties.

During the six months ended June 30, 2010, we funded $24,936 of improvements to our owned properties.

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

As of June 30, 2010 and December 31, 2009, we had 13 office properties and one office property classified as held for sale in our consolidated balance sheets, respectively.  As discussed above, as of June 30, 2010, 12 of these properties were under contract for sale to GOV.  The other property was under contract for sale since June 2008; however, the purchase contract expired and we recognized the $750 nonrefundable deposit previously paid by the buyer in other income when the buyer was unable to meet its obligation to close on January 26, 2010.  We continue to actively market this property for sale.

We classify all properties actively marketed, under contract, in active negotiations or otherwise probable for sale within one year as held for sale in our consolidated balance sheets.  Results of operations for properties sold or held for sale are included in discontinued operations in our consolidated statements of income, except for properties sold or under contract for sale to GOV.  Properties held for sale or sold to GOV are not considered discontinued operations under GAAP because of our retained equity interest in this former subsidiary.  Summarized balance sheet information for all properties classified as held for sale and income statement information for properties sold or held for sale, except for properties sold or held for sale to GOV, is as follows:

Balance Sheets:

Income Statements:

Note 5.  Equity Investments

At June 30, 2010 and December 31, 2009, we had the following equity investments in GOV and Affiliates Insurance Company, or AIC:

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

At June 30, 2010, we owned 9,950,000, or approximately 31.8% of the common shares of beneficial interest of GOV, with a carrying value of $161,634 and a market value, based on quoted market prices, of $253,924 ($25.52 per share).  GOV is a real estate investment trust, or REIT, which owns properties that are majority leased to government tenants and was our wholly owned subsidiary until its initial public offering, or IPO, in June 2009 when it became a separate public entity.  In January 2010, GOV issued 9,775,000 common shares in a public offering for $21.50 per common share, raising net proceeds of approximately $199,300.  As a result of this transaction, our ownership percentage in GOV was reduced from 46.3% prior to this transaction to 31.8% after this transaction, and we recognized a gain of $16,418.

In connection with GOV’s IPO, we and GOV entered into a transaction agreement in which, among other things, we granted GOV the right of first refusal to acquire any property owned by us that we determine to divest, if the property is then majority leased to a government tenant, including the 15 properties we agreed to sell to GOV in June 2010.  The sale agreements for these 15 properties were negotiated by special committees of our and GOV’s boards of trustees composed solely of independent trustees who are not also trustees of the other party.

Since GOV’s IPO, our investment in it has been accounted for using the equity method.  Under the equity method, we record our percentage share of net earnings of GOV in our consolidated statements of income.  Prior to its IPO, the operating results and assets of GOV were included in our results of operations and balance sheet.  If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings.

The following summarized financial data of GOV, as reported in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, includes results of operations prior to June 8, 2009 (the date GOV became a separate public company), which are included in our consolidated results of operations when GOV was our wholly owned subsidiary.  References in these financial statements to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 for GOV are included as textual references only, and the information in GOV’s Quarterly Report for the quarterly period ended June 30, 2010 is not incorporated by reference into these financial statements.

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

As of June 30, 2010, we have invested $5,177 in AIC, an insurance company that is owned by Reit Management & Research LLC, or RMR, and companies to which RMR provides management services.  All of our trustees are currently serving on the board of directors of AIC.  As of June 30, 2010, we owned approximately 14.3% of the common shares of AIC with a carrying value of $4,992.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because each of our trustees is a director of AIC.  Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of income.  If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings.  In evaluating the fair value of this investment, we have considered, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition, and the financial condition and prospects for the insurance industry generally.

In June 2010, we, RMR and other companies to which RMR provides management services purchased property insurance pursuant to an insurance program arranged by AIC.  Our annual premiums for this property insurance are expected to be approximately $5,328.  We are currently investigating the possibility of expanding our insurance relationships with AIC to include other types of insurance.

Note 6.  Indebtedness

We have a $750,000 unsecured revolving credit facility that we use for acquisitions, working capital and general business purposes.  The interest rate on this facility averaged 0.8% and 1.0% per annum for the six months ended June 30, 2010 and 2009, respectively.  Our unsecured revolving credit facility matures on August 22, 2010, and we are currently in negotiations with lenders regarding a new unsecured revolving credit facility prior to the maturity date of our existing facility.  If we do not enter a new facility by August 22, 2010, we intend to exercise our option to extend the maturity date of our existing facility for one year to August 22, 2011.  As of June 30, 2010, we had zero outstanding and $750,000 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.  At June 30, 2010, we believe that we are in compliance with these financial and other covenants.

At June 30, 2010, 29 properties costing $1,167,385 with an aggregate net book value of $896,954 were secured by $620,137 of mortgage debt maturing from 2011 through 2029.

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

In August 2010, we repaid at maturity, all $30,000 of our 8.875% senior notes due 2010.  We also prepaid at par, approximately $267,000 of mortgage debt that was scheduled to mature in 2011 and 2029.  This mortgage debt was secured by 14 properties with an aggregate net book value of $400,860 at June 30, 2010.  In connection with the prepayment of this mortgage debt, we expect to record a loss of approximately $1,200 from the write off of unamortized premiums and deferred financing fees during the third quarter of 2010.  We funded these payments with borrowings under our revolving credit facility.

Note 7.  Shareholders’ Equity

In March 2010, we issued 8,625,000 common shares in a public offering, raising net proceeds of $239,095.

Other comprehensive income includes unrealized gains or losses on the fair value of our interest rate swap agreements.  These interest rate swap agreements qualify as cash flow hedges and convert the floating rate on a $175,000 mortgage note payable to a fixed rate.  The following is a reconciliation of net income to total comprehensive income for the three and six months ended June 30, 2010 and 2009:

On April 14, 2010, we issued 1,250 common shares, valued at $32.44 per share, the closing price of our common shares on the New York Stock Exchange on that day, to each of our five trustees as part of their annual compensation.

On June 14, 2010, our board of trustees approved a reverse stock split that resulted in a one for four combination of our common shares of beneficial interest, $0.01 par value per share, effective July 1, 2010.  The reverse stock split reduced the number of our issued and outstanding common shares from 258,385,241 to 64,596,310.  The number of our authorized common shares did not change.  As required, common share amounts presented for all periods have been restated to reflect the reverse stock split.  As a result of the reverse stock split, the conversion rate of our 15,180,000 outstanding series D cumulative convertible preferred shares, or series D preferred shares, automatically changed from 1.9231 common shares per series D preferred share to 0.480775 common share per series D preferred share (the equivalent of a change in conversion price from $13.00 per common share to $52.00 per common share).

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

Note 8.  Fair Value of Financial Instruments

The table below presents certain of our assets and liabilities measured at fair value at June 30, 2010, categorized by the level of inputs used in the valuation of each asset and liability:

(1)       Properties held for sale are reported at the lower of carrying value or fair value less costs to sell and consist of properties under contract for sale or properties that we expect to sell within one year.  We used agreed upon sales prices or our estimate of fair value less estimated closing costs, to determine the fair value of these properties (level 2 inputs).  Four of these properties included in our Metro Washington, DC and Other Markets segments with a carrying amount of $84,397 were written down to their estimated fair value of $62,906, resulting in an impairment charge of $21,491 recorded during the six months ended June 30, 2010.

(2)       The fair value of our interest rate swap contracts is determined using the net discounted cash flows of the expected cash flows of each derivative based on the market based interest rate curve (level 2 inputs) and adjusted for our credit spread and the actual and estimated credit spreads of the counterparties (level 3 inputs).  Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties.  As of June 30, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified as level 2 inputs in the fair value hierarchy.

We are exposed to certain risks relating to our ongoing business operations.  The primary risk managed by using our derivative instruments is interest rate risk.  We enter into interest rate swaps to manage interest rate risk associated with our floating rate borrowings.  We have interest rate swap agreements to manage our interest rate risk exposure on $175,000 of mortgage notes due 2019, which require interest at a spread over LIBOR.  The interest rate swap agreements utilized by us qualify as cash flow hedges and effectively modify our exposure to interest rate risk by converting our floating rate debt to a fixed rate basis for this loan through December 1, 2016, thus reducing the impact of interest rate changes on future interest expense.  These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amount.  The fair value of our derivative instruments decreased by $7,941 and $10,815 during the three and six months ended June 30, 2010, respectively, based primarily on changes in market interest rates.  As of June 30, 2010, the fair value of these derivative instruments included in accounts payable and accrued expenses and accumulated other comprehensive income (loss) in our consolidated balance sheet totaled ($8,268).  As of December 31, 2009, the fair value of these derivative instruments included in other assets and accumulated other comprehensive income (loss) in our consolidated balance sheet totaled $2,547.

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

In addition to the assets and liabilities described in the above table, our financial instruments include our cash and cash equivalents, rents receivable, equity investments, marketable pass through certificates, restricted cash, revolving credit facility, senior notes and mortgage notes payable, accounts payable and other accrued expenses, rent collected in advance, security deposits and amounts due to affiliates.  At June 30, 2010 and December 31, 2009, the fair values of these additional financial instruments were not materially different from their carrying values, except as follows:

At June 30, 2010 and December 31, 2009, the fair values of our equity investment in GOV are based on quoted market prices of $25.52 and $22.98, respectively.  At June 30, 2010 and December 31, 2009, the fair values of our marketable pass through certificates are based on quoted market prices of $100.03 and $93.04, respectively.  The fair values of our senior notes and mortgage notes payable are based on estimates using discounted cash flow analyses and currently prevailing interest rates adjusted by credit risk spreads.

Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, none of our tenants are responsible for more than 2% of our total rents except the U.S. Government.

Note 9.  Earnings Per Common Share

The effect of our convertible preferred shares on income from continuing operations available for common shareholders per share is anti-dilutive for the periods presented.

Note 10.  Segment Information

As of June 30, 2010, we owned 291 suburban office properties, 44 central business district, or CBD, office properties and 186 industrial & other properties, excluding one property classified as held for sale and included in discontinued operations.  We account for all of these properties in geographic operating segments for financial reporting purposes based on our method of internal reporting.  We account for our properties by property type (i.e. suburban office, CBD office and industrial & other) and by geographic regions.  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, or NOI, which we define as rental income less property level operating expenses.  Prior periods have been restated to reflect one office property reclassified from discontinued operations during the fourth quarter of 2009.  Property level information by property type locations and geographic segments, as of and for the three and six months ended June 30, 2010 and 2009, excluding discontinued operations, is as follows:

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COMMONWEALTH REIT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)