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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-9317

HRPT PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)

Maryland
(State of Organization)
  04-6558834
(IRS Employer Identification No.)

400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: 617-332-3990

Securities registered pursuant to Section 12(b) of the Act:

Title Of Each Class   Name of Each Exchange On Which Registered
Common Shares of Beneficial Interest   New York Stock Exchange
83/4% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest   New York Stock Exchange
71/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest   New York Stock Exchange
61/2% Series D Cumulative Convertible Preferred Shares of Beneficial Interest   New York Stock Exchange

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company 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 ý

         The aggregate market value of the voting common shares of the registrant held by non-affiliates was $1.5 billion based on the $6.77 closing price per common share for such stock on the New York Stock Exchange on June 30, 2008. For purposes of this calculation, an aggregate of 1,030,200 common shares of beneficial interest, $0.01 par value, held directly or by affiliates of the trustees and the officers of the registrant, plus 1,000,000 common shares held by Senior Housing Properties Trust, have been included in the number of common shares held by affiliates.

         Number of the registrant's common shares outstanding as of February 25, 2009: 224,433,241.


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        References in this Annual Report on Form 10-K to the "Company", "HRP", "we", "us" or "our" include consolidated subsidiaries, unless the context indicates otherwise.

        This report includes references to a registration statement filed by our subsidiary, Government Properties Income Trust, or GOV, for an offering of common shares. That registration statement has been filed with the Securities and Exchange Commission but has not yet become effective. GOV's common shares may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This report shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of GOV's common shares in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain Information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated herein by reference to our to be filed definitive Proxy Statement for the 2009 Annual Meeting of Shareholders scheduled to be held on May 13, 2009, or our definitive Proxy Statement.



WARNING CONCERNING FORWARD LOOKING STATEMENTS

        THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. WHENEVER WE USE WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN", "ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

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        OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

FOR EXAMPLE:

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        THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH, SUCH AS CHANGES IN OUR TENANTS' FINANCIAL CONDITIONS OR NEEDS FOR LEASED SPACE, OR CHANGES IN THE CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL. THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K IDENTIFY OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS.

        YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

        EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

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STATEMENT CONCERNING LIMITED LIABILITY

        THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING HRPT PROPERTIES TRUST, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME "HRPT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST, AS SO AMENDED AND SUPPLEMENTED, COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRPT PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRPT PROPERTIES TRUST. ALL PERSONS DEALING WITH HRPT PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRPT PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

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HRPT PROPERTIES TRUST
2008 FORM 10-K ANNUAL REPORT

Table of Contents

 
   
  Page

Part I

Item 1.

 

Business

 
1

Item 1A.

 

Risk Factors

  31

Item 1B.

 

Unresolved Staff Comments

  38

Item 2.

 

Properties

  39

Item 3.

 

Legal Proceedings

  40

Item 4.

 

Submission of Matters to a Vote of Security Holders

  40

Part II

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 
41

Item 6.

 

Selected Financial Data

  42

Item 7.

 

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

  43

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  64

Item 8.

 

Financial Statements and Supplementary Data

  65

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  65

Item 9A.

 

Controls and Procedures

  65

Item 9B.

 

Other Information

  66

Part III

Item 10.

 

Directors, Executive Officers and Corporate Governance

 
69

Item 11.

 

Executive Compensation

  69

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  69

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  70

Item 14.

 

Principal Accountant Fees and Services

  70

Part IV

Item 15.

 

Exhibits and Financial Statement Schedules

 
71

 

Signatures

   

*
Incorporated by reference to our Proxy Statement for the 2009 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

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PART I

Item 1.    Business

        The Company.    We are a real estate investment trust, or REIT, formed in 1986 under the laws of the State of Maryland. Our primary business is the ownership and operation of real estate, including office and industrial buildings and leased industrial land. For a discussion and information regarding our operating segments, see our financial statements beginning on page F-1.

        As of December 31, 2008, we owned 537 properties for a total investment of $6.2 billion at cost, and a depreciated book value of $5.4 billion, excluding properties classified as held for sale. Our portfolio includes 353 office properties with 36.4 million square feet of space and 184 industrial and other properties with 30.5 million square feet of space. Our 184 industrial and other properties include approximately 17 million square feet of leased industrial and commercial lands in Oahu, Hawaii.

        Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 332-3990.

        Our investment, financing and disposition policies are established by our board of trustees and may be changed by our board of trustees at any time without shareholder approval. Our investment goals are current income for distribution to shareholders and capital growth from appreciation in the value of properties. Our income is derived primarily from rent.

        Investment Policies.    In evaluating potential investments and asset sales, we consider various factors including the following:

        We attempt to acquire properties which will enhance the diversity of our portfolio with respect to tenants and locations. However, we have no policies which specifically limit the percentage of our assets which may be invested in any individual property, in any one type of property, in properties in one geographic area, in properties leased to any one tenant or in properties leased to an affiliated group of tenants.

        We prefer wholly owned investments in fee interests. However, circumstances may arise in which we may invest in leaseholds, joint ventures, mortgages and other real estate interests. We may invest in real estate joint ventures if we conclude that by doing so we may benefit from the participation of co-venturers or that our opportunity to participate in the investment is contingent on the use of a joint venture structure. We may invest in participating, convertible or other types of mortgages if we conclude that by doing so we may benefit from the cash flow or appreciation in the value of a property which is not available for purchase.

        In the past, we have considered the possibility of entering mergers or strategic combinations with other companies. No such mergers or strategic combinations are under active consideration at this

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time. However, we may undertake such considerations in the future. A principal goal of any such transaction will be to increase our revenues and profits and diversify their sources.

        Disposition Policies.    From time to time we consider the sale of properties or investments. Disposition decisions are made based on a number of factors including, but not limited to, the following:

        Financing Policies.    We currently have a revolving credit facility with a borrowing capacity of $750 million (which is guaranteed by most of our subsidiaries) that we use for working capital and general business purposes and for acquisition funding on an interim basis until we refinance with equity or long term debt. This credit facility matures in August 2010, and we have an option to extend the facility an additional year for a fee. The annual interest payable for amounts drawn under the facility is LIBOR plus 0.55%. At December 31, 2008, $201 million was outstanding under our revolving credit facility.

        Our credit facility agreement and our senior note indenture and its supplements contain financial covenants that, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and a minimum net worth. Our board of trustees may determine to replace our current credit facility or to seek additional capital through equity offerings, debt financings, retention of cash flows in excess of distributions to shareholders or a combination of these methods. Some of our properties are encumbered by mortgages. To the extent that our board of trustees decides to obtain additional debt financing: we may do so on an unsecured basis or a secured basis, subject to limitations present in existing financing or other arrangements; we may seek to obtain other lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares or debt securities which may be convertible into common shares or be accompanied by warrants to purchase common shares; or we may engage in transactions which involve a sale or other conveyance of properties to subsidiaries or to unaffiliated entities. We may finance acquisitions by an exchange of properties by borrowing under our credit facility or by the issuance of additional equity or debt securities. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties.

        The borrowing guidelines established by our board of trustees and covenants in various debt agreements prohibit us from maintaining a debt to total asset value, as defined, of greater than 60%. Our declaration of trust also limits our borrowings. We may from time to time re-evaluate and modify our financing policies in light of then current market conditions, relative availability and costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors, and we may increase or decrease our ratio of debt to total capitalization accordingly.

        Manager.    Our day to day operations are conducted by Reit Management & Research LLC, or RMR. RMR originates and presents investment and divestment opportunities to our board of trustees and provides management and administrative services to us. RMR is a Delaware limited liability company beneficially owned by Barry M. Portnoy and Adam D. Portnoy, our managing trustees. RMR has a principal place of business at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 332-3990. RMR also acts as the manager to Hospitality Properties Trust, or Hospitality Properties, and Senior Housing Properties Trust, or Senior Housing, and has other business interests. The directors of RMR are David J. Hegarty, Gerard M. Martin, formerly one of our managing trustees, Adam D. Portnoy and Barry M. Portnoy. The executive officers of RMR are: Adam D. Portnoy, President

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and Chief Executive Officer; Jennifer B. Clark, Executive Vice President and General Counsel; David J. Hegarty, Executive Vice President and Secretary; Mark L. Kleifges, Executive Vice President; John G. Murray, Executive Vice President; Thomas M. O'Brien, Executive Vice President; John C. Popeo, Executive Vice President, Treasurer and Chief Financial Officer; David M. Blackman, Senior Vice President; Ethan S. Bornstein, Senior Vice President; Richard A. Doyle, Jr., Senior Vice President; David M. Lepore, Senior Vice President; Bruce J. Mackey Jr., Senior Vice President; John A. Mannix, Senior Vice President; Francis R. Murphy III, Senior Vice President; and Andrew J. Rebholz, Senior Vice President. Messrs. Mannix, Popeo and Lepore are also our officers. Other officers of RMR also serve as officers of other companies to which RMR provides management services.

        Employees.    We have no employees. Services which would otherwise be provided by employees are provided by RMR and by our managing trustees and officers. As of February 25, 2009, RMR had approximately 585 full time employees.

        Government Properties Income Trust.    On February 20, 2009, our wholly owned subsidiary, Government Properties Income Trust, or GOV, filed a registration statement with the Securities and Exchange Commission, or SEC, for the initial public offering of 10 million common shares of beneficial interest, or common shares. If the GOV registration statement becomes effective and the initial public offering is completed, we expect to own 49.9%, or 9,950,000 common shares of GOV after the completion of the offering (46.4% if the underwriters' over allotment option is exercised in full). We intend to transfer 29 properties, 25 of which are leased primarily to the U.S. Government and four of which are leased to the States of California, Maryland, Minnesota and South Carolina, respectively, to GOV. These properties contain approximately 3.3 million rentable square feet and are located in 14 states and the District of Columbia. GOV is currently negotiating a $250 million secured credit facility with a group of commercial banks. If GOV is successful in obtaining that credit facility, we expect that the initial proceeds of this credit facility will be distributed to us, and we expect to use these proceeds to repay amounts outstanding under our unsecured revolving credit facility or other outstanding debt. If the GOV registration statement becomes effective and the initial public offering is completed, GOV expects to use the net proceeds from the offering to reduce amounts outstanding under its secured credit facility.

        In order to govern the separation of GOV from us, we intend to enter into a transaction agreement with GOV. We expect that the transaction agreement will provide that:

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        The above restrictions will not prohibit us from leasing our current and future properties to government tenants.

        We have no present intention to sell any of our retained government leased properties or to engage in any transaction which might cause GOV's right to purchase those properties to become exercisable; however, we will have the right to change our intention regarding these properties at any time in our discretion.

        Our investment in GOV and any other 50% or less owned companies, over which we can exercise influence, but do not control, will be accounted for using the equity method of accounting. Significant influence will be present through common representation on the board of trustees. Our two managing trustees will also be managing trustees of GOV. Our two managing trustees are the beneficial owners of RMR. RMR provides management services to us and will provide management services to GOV. We will use the income statement method to account for issuance of common shares. Under this method, gains and losses reflecting changes in the value of our investments at the date of issuance of additional common shares by GOV will be recognized in our income statement.

        We expect GOV to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or the IRC; the proposed tax consequences to us from the formation of GOV and its issuance of shares is described below, in "Federal Income Tax Considerations".

        As of the date of this Report, GOV has not received a commitment for the secured credit facility described above; its negotiations to obtain the facility on terms acceptable to GOV and us may not be successful and we expect that any commitment will be subject to various conditions. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the secured credit facility. Accordingly, there can be no assurance that the secured credit facility will be available to GOV.

        In addition, GOV's registration statement for its offering of common shares is subject to review and comment by the SEC and the offering will not occur unless, among other things, definitive documentation relating to the formation of GOV has been agreed upon, executed and delivered, the SEC has declared the registration statement to be effective, and underwriters have agreed to purchase and distribute the shares proposed to be offered by GOV. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the offering. Accordingly, there can be no assurance that the offering will occur. In such event, we intend that GOV would remain our wholly owned subsidiary. We do not currently intend to proceed with the offering of GOV's common shares described above unless GOV's secured credit facility has been obtained.

        Competition.    Investing in and operating office buildings and other real estate is a very competitive business. We compete against other REITs, numerous financial institutions, individuals and public and private companies who are actively engaged in this business. We do not believe we have a dominant position in any of the geographic markets in which we operate, but some of our competitors are dominant in selected markets. Many of our competitors have greater financial and other resources than we have. We believe the geographic diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength of many of our tenants affords us some competitive advantages which have and will allow us to operate our business successfully despite the competitive nature of our business.

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        Environmental Matters.    Under various laws, owners of real estate may be required to investigate and clean up or remove hazardous substances present at properties they own, and may be held liable for property damage or personal injuries that result from such hazardous substances. These laws also expose us to the possibility that we may become liable to reimburse governments for damages and costs they incur in connection with such hazardous substances. We estimate the cost to remove hazardous substances at some of our properties based in part on environmental surveys of the properties we own prior to their purchase and we considered those costs when determining an acceptable purchase price. Estimated liabilities related to hazardous substances at properties we own are reflected in our consolidated balance sheet and included in the cost of the real estate acquired. Some of our industrial lands in Oahu, HI have been historically used for environmentally dangerous purposes; and we may have to engage in potentially expensive environmental clean up at these properties in the future, especially if we change the use of these properties. Certain of our buildings contain asbestos. We believe any asbestos in our buildings is contained in accordance with current regulations, and we have no current plans to remove it. If we removed the asbestos or demolished these properties, certain environmental regulations govern the manner in which the asbestos must be handled and removed. We do not believe that there are other environmental conditions at any of our properties that have had or will have a material adverse effect on us. However, no assurances can be given that conditions are not present at our properties or that costs we may be required to incur in the future to remediate contamination will not have a material adverse effect on our business or financial condition.

        Internet Website.    Our internet website address is www.hrpreit.com. Copies of our governance guidelines, code of business conduct and ethics and the charters of our audit, compensation and nominating and governance committees may be obtained free of charge by writing to our Secretary, HRPT Properties Trust, 400 Centre Street, Newton, MA 02458 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. Any shareholder or other interested party who desires to communicate with our independent trustees, individually or as a group, may do so by filling out a report on our website. Our board also provides a process for security holders to send communications to the entire board. Information about the process for sending communications to our board can be found on our website. Our website address is included several times in this Annual Report on Form 10-K as a textual reference only and the information in the website is not incorporated by reference into this Annual Report on Form 10-K.

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FEDERAL INCOME TAX CONSIDERATIONS

        The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss all of the particular tax consequences that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:

        The IRC sections that govern federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable IRC provisions, related rules and regulations, and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could also affect the accuracy of statements made in this summary. We have not received a ruling from the Internal Revenue Service, or IRS, with respect to any matter described in this summary, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. The IRS or a court could, for example, take a different position, which could result in significant tax liabilities for applicable parties, from that described in this summary with respect to our acquisitions, operations, restructurings or any other matters described in this summary. In addition, this summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.

        Your federal income tax consequences may differ depending on whether or not you are a "U.S. shareholder." For purposes of this summary, a "U.S. shareholder" for federal income tax purposes is:

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whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares who is not a U.S. shareholder. If a partnership (including any entity treated as a partnership for federal income tax purposes) is a beneficial owner of our shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A beneficial owner that is a partnership and partners in such a partnership should consult their tax advisors about the federal income tax consequences of the acquisition, ownership and disposition of our shares.

Taxation as a REIT

        We have elected to be taxed as a REIT under Sections 856 through 860 of the IRC, commencing with our taxable year ending December 31, 1987. Our REIT election, assuming continuing compliance with the then applicable qualification tests, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified and will continue to qualify us to be taxed under the IRC as a REIT.

        As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in their income as dividends to the extent of our current or accumulated earnings and profits. Our dividends are not generally entitled to the favorable 15% rate on qualified dividend income (scheduled to increase to ordinary income rates for taxable years beginning after December 31, 2010), but a portion of our dividends may be treated as capital gain dividends, all as explained below. No portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally are treated for federal income tax purposes as return of capital to the extent of a recipient shareholder's basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, and thereafter to distributions made on our common shares. For all these purposes, our distributions include both cash distributions and any in kind distributions of property that we might make.

        The conversion formula of our series D cumulative convertible preferred shares may be adjusted under a number of circumstances; adjustments may include changes in the type or amount of consideration a shareholder receives upon conversion. Section 305 of the IRC treats some of these adjustments as constructive distributions, in which case they would be taxable in a similar manner to actual distributions. In general, a shareholder that holds our series D cumulative convertible preferred shares would be deemed to receive a constructive distribution if the conversion price is adjusted for a taxable distribution to the holders of common shares. Such a shareholder's adjusted tax basis in series D cumulative convertible preferred shares would be increased by constructive distributions that are taxable as dividends or gain, and would be unaffected by constructive distributions that are nontaxable returns of capital. Conversely, a failure to appropriately adjust the conversion price of the series D cumulative convertible preferred shares could result in a constructive distribution to shareholders that hold our common shares, which would be taxable to them in a similar manner as actual distributions. A shareholder may also receive a constructive distribution if a conversion of its series D cumulative convertible preferred shares is accompanied by a change in the conversion formula.

        If a shareholder actually or constructively owns none or a small percentage of our common shares, and such shareholder surrenders its preferred shares to us to be repurchased for cash only, then the repurchase of the preferred shares is likely to qualify for sale or exchange treatment because the repurchase would not be "essentially equivalent to a dividend" as defined by the IRC. More

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specifically, a cash repurchase of preferred shares will be treated under Section 302 of the IRC as a distribution, and hence taxable as a dividend to the extent of our allocable current or accumulated earnings and profits, as discussed above, unless the repurchase satisfies one of the tests set forth in Section 302(b) of the IRC and is therefore treated as a sale or exchange of the repurchased shares. The repurchase will be treated as a sale or exchange if it (1) is "substantially disproportionate" with respect to the surrendering shareholder's ownership in us, (2) results in a "complete termination" of the surrendering shareholder's common and preferred share interest in us, or (3) is "not essentially equivalent to a dividend" with respect to the surrendering shareholder, all within the meaning of Section 302(b) of the IRC. In determining whether any of these tests have been met, a shareholder must generally take into account our common and preferred shares considered to be owned by such shareholder by reason of constructive ownership rules set forth in the IRC, as well as our common and preferred shares actually owned by such shareholder. In addition, if a repurchase is treated as a distribution under the preceding tests, then a shareholder's tax basis in the repurchased preferred shares will be transferred to the shareholder's remaining shares of our common or preferred shares, if any, and if such shareholder owns no other shares of our common or preferred shares, such basis may be transferred to a related person or may be lost entirely. Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that the preferred shares are repurchased, we encourage you to consult your own tax advisor to determine your particular tax treatment.

        Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the IRC for our 1987 through 2008 taxable years, and that our current investments and plan of operation enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the IRC and summarized below. While we believe that we will satisfy these tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis. If we fail to qualify as a REIT, we will be subject to federal income taxation as if we were a C corporation and our shareholders will be taxed like shareholders of C corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated.

        If we qualify as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders. However, even if we qualify as a REIT, we may be subject to federal tax in the following circumstances:

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        If we fail to qualify or elect not to qualify as a REIT, we will be subject to federal income tax in the same manner as a C corporation. Distributions to our shareholders if we do not qualify as a REIT will not be deductible by us nor will distributions be required under the IRC. In that event, distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the 15% income tax rate (scheduled to increase to ordinary income rates for taxable years beginning after December 31, 2010) discussed below in "Taxation of U.S. Shareholders" and, subject to limitations in the IRC, will be eligible for the dividends received deduction for corporate shareholders. Also, we will generally be disqualified from qualification as a REIT for the four taxable years following disqualification. If we do not qualify as a REIT for even one year, this could result in reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. The IRC provides certain relief provisions under which we might avoid automatically ceasing to be a REIT for failure to meet certain REIT requirements, all as discussed in more detail below.

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REIT Qualification Requirements

        General Requirements.    Section 856(a) of the IRC defines a REIT as a corporation, trust or association:

Section 856(b) of the IRC provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the IRC provides that neither condition (5) nor (6) need be met for our first taxable year as a REIT. We believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before our most recently completed taxable year, and that we can continue to meet these conditions in future taxable years. There can, however, be no assurance in this regard.

        By reason of condition (6), we will fail to qualify as a REIT for a taxable year if at any time during the last half of a year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust and bylaws restrict transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust and bylaws, our shareholders are required to respond to these requests for information.

        For purposes of condition (6), REIT shares held by a pension trust are treated as held directly by the pension trust's beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity's federal income tax qualification as a REIT. However, as discussed below, if a REIT is a "pension-held REIT," each pension trust owning more than 10% of the REIT's shares by value generally may be taxed on a portion of the dividends it receives from the REIT.

        The IRC provides that we will not automatically fail to be a REIT if we do not meet conditions (1) through (6), provided we can establish reasonable cause for any such failure. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision. This relief provision applies to any failure of the applicable conditions, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.

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        Our Wholly Owned Subsidiaries and Our Investments through Partnerships.    Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the IRC provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT's. We believe that each of our direct and indirect wholly owned subsidiaries, other than the taxable REIT subsidiaries discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the IRC, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the IRC. Thus, except for the taxable REIT subsidiaries discussed below, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly owned subsidiaries are treated as ours.

        We have invested and may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the IRC provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT's proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the IRC.

        Taxable REIT Subsidiaries.    We are permitted to own any or all of the securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the IRC, provided that no more than 25% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. (For our 2001 through 2008 taxable years, no more than 20% of our assets, at the close of each quarter, was permitted to be comprised of our investments in the stock or securities of our taxable REIT subsidiaries; before the introduction of taxable REIT subsidiaries in 2001, our ability to own separately taxable corporate subsidiaries was more limited.) Among other requirements, a taxable REIT subsidiary must:

        In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries have complied with, and will continue to comply with, the requirements for taxable REIT

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subsidiary status at all times during which we intend for a subsidiary's taxable REIT subsidiary election to be in effect, and we believe that the same will be true for any taxable REIT subsidiary that we later form or acquire.

        Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% or 95% gross income tests discussed below. Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not generally imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, taxable REIT subsidiaries can generally undertake third-party management and development activities and activities not related to real estate.

        Restrictions are imposed on taxable REIT subsidiaries to ensure that they will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year's 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm's length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm's length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions.

        Income Tests.    There are two gross income requirements for qualification as a REIT under the IRC:

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For purposes of the 75% and 95% gross income tests outlined above, income derived from a "shared appreciation provision" in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type that satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard.

        In order to qualify as "rents from real property" under Section 856 of the IRC, several requirements must be met:

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We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the IRC.

        In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan.

        Absent the "foreclosure property" rules of Section 856(e) of the IRC, a REIT's receipt of business operating income from a property would not qualify under the 75% and 95% gross income tests. But as foreclosure property, gross income from such a business operation would so qualify. In the case of property leased by a REIT to a tenant, foreclosure property is defined under applicable Treasury regulations to include generally the real property and incidental personal property that the REIT reduces to possession upon a default or imminent default under the lease by the tenant, and as to which a foreclosure property election is made by attaching an appropriate statement to the REIT's federal income tax return.

        Any gain that a REIT recognizes on the sale of foreclosure property, plus any income it receives from foreclosure property that would not qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to income tax at the maximum corporate rate, currently 35%, under the foreclosure property income tax rules of Section 857(b)(4) of the IRC. Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as "rents from real property" as described above, then that rental income is not subject to the foreclosure property income tax.

        Other than sales of foreclosure property, any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we have made or that we might make in the future will not be subject to the 100% penalty tax, because we intend to:

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        If we fail to satisfy one or both of the 75% or the 95% gross income tests in any taxable year, we may nevertheless qualify as a REIT for that year if we satisfy the following requirements after October 22, 2004:

It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. This relief provision applies to any failure of the applicable income tests, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.

        Under prior law, if we failed to satisfy one or both of the 75% or 95% gross income tests, we nevertheless would have qualified as a REIT for that year if: our failure to meet the test was due to reasonable cause and not due to willful neglect; we reported the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and any incorrect information on the schedule was not due to fraud with intent to evade tax. For our 2004 and prior taxable years, we attached a schedule of gross income to our federal income tax returns, but it is impossible to state whether in all circumstances we would be entitled to the benefit of this prior relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.

        Asset Tests.    At the close of each quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify as a REIT for federal income tax purposes:

        When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter.

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        In addition, if we fail the 5% value test or the 10% vote or value tests at the close of any quarter and do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value and 10% vote and value asset tests. For purposes of this relief provision, the failure will be "de minimis" if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (i) $50,000 or (ii) the highest rate of corporate tax imposed (currently 35%) on the net income generated by the assets causing the failure during the period of the failure, and (d) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests. These relief provisions apply to any failure of the applicable asset tests, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.

        The IRC also provides, for our 2001 taxable year and thereafter, an excepted securities safe harbor to the 10% value test that includes among other items (a) "straight debt" securities, (b) certain rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.

        We intend to maintain records of the value of our assets to document our compliance with the above asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter.

        Our Investment in Senior Housing.    For several years, we owned a significant minority, in excess of 10%, of Senior Housing shares, and we believe that Senior Housing during these years qualified as a REIT under the IRC. We sold all our Senior Housing shares in 2006, and no longer own any material stake in that company. For any of our taxable years in which Senior Housing qualified as a REIT, our investment in Senior Housing counted favorably toward the REIT asset tests and our gains and dividends from Senior Housing shares counted as qualifying income under both REIT gross income tests. However, because we did not and could not control Senior Housing's compliance with the federal income tax requirements for REIT qualification, we joined with Senior Housing in filing a protective taxable REIT subsidiary election under Section 856(l) of the IRC, effective January 1, 2001, and we reaffirmed this protective election every January 1 since then through January 1, 2006. Pursuant to this protective taxable REIT subsidiary election, we believe that if Senior Housing was not a REIT, it would instead be considered one of our taxable REIT subsidiaries. As one of our taxable REIT subsidiaries, we believe that Senior Housing's failure to qualify as a REIT would not have jeopardized our own qualification as a REIT even though we owned more than 10% of it.

        Our Possible Government Properties Income Trust Transaction.    We have proposed the formation of GOV as our wholly owned subsidiary that owns properties leased to government tenants, potentially followed by GOV's issuance of its common shares to the public in an initial public offering, or IPO. The proposed GOV transaction may change or may not occur. While GOV remains our wholly owned subsidiary, it will be our disregarded entity pursuant to Section 856(i) of the IRC or regulations issued under Section 7701 of the IRC, as discussed above.

If and when it occurs, we expect GOV's IPO to result in (a) GOV becoming a separately regarded corporation that intends to satisfy the requirements for qualification and taxation as a REIT under the IRC, and (b) GOV's wholly owned subsidiaries, if any, becoming disregarded entities of the newly

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separate GOV. Although there can be no assurance in this regard, particularly because the final contours of the GOV transaction have yet to be determined, we expect the GOV IPO to impact our own REIT qualification and taxation under the IRC in the following manner:

        Annual Distribution Requirements.    In order to qualify for taxation as a REIT under the IRC, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of:

The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November, or December to shareholders of record during one of those months, and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all

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of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts.

        In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the "grossed up required distribution" for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.

        If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, we may find it necessary and desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our REIT status. We can provide no assurance that financing would be available for these purposes on favorable terms.

        We may be able to rectify a failure to pay sufficient dividends for any year by paying "deficiency dividends" to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution.

        In addition to the other distribution requirements above, to preserve our status as a REIT we are required to timely distribute C corporation earnings and profits that we inherit from acquired corporations.

Acquisition of C Corporations

        On July 17, 2008, we acquired a C corporation in a transaction where the C corporation was ultimately merged into our disregarded entity under Treasury regulations issued under Section 7701 of the IRC, all as described in Section 381(a) of the IRC. Thus, after the acquisition, all assets, liabilities and items of income, deduction and credit of the acquired corporation, and a proportionate share of the assets, liabilities and items of income, deduction and credit of the partnership in which the acquired corporation was a partner, are treated as ours for purposes of the various REIT qualification tests described above. In addition, we generally were treated as the successor to the acquired corporate entity's federal income tax attributes, such as the entity's adjusted tax bases in its assets and its depreciation schedules; we were also treated as the successor to the acquired corporate entity's earnings and profits for federal income tax purposes.

        Built-in Gains from C Corporations.    As described above, notwithstanding our qualification and taxation as a REIT, we may still be subject to corporate taxation in particular circumstances. Specifically, if we acquire an asset from a corporation in a transaction in which our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of that asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of that asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will generally pay tax at the highest regular corporate tax rate, currently 35%, on the lesser of (1) the excess, if any, of the asset's fair market value over its adjusted tax basis, each determined as of the time the asset ceased to be owned by the C corporation, or (2) our gain recognized in the disposition. Accordingly, any taxable disposition of an asset so acquired during the applicable ten-year period could be subject to tax under these rules. However, we have not disposed, and have no present plan or intent to dispose, of any material assets acquired in such transactions.

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        To the extent of our gains in a taxable year that are subject to the built in gains tax described above, net of any taxes paid on such gains with respect to that taxable year, our taxable dividends paid to you in the following year will be eligible for treatment as qualified dividends that are taxed to our noncorporate shareholders at the maximum capital gain rate of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010).

        Earnings and Profits.    A REIT may not have any undistributed C corporation earnings and profits at the end of any taxable year. Upon the closing of the July 17, 2008 transaction, we succeeded to the undistributed earnings and profits, if any, of the acquired corporate entity. Thus, we needed to distribute any such earnings and profits no later than the end of the applicable tax year. If we failed to do so, we would not qualify to be taxed as a REIT for that year and a number of years thereafter, unless we are able to rely on the relief provision described below.

        Although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as the amount of undistributed earnings and profits, we retained accountants to compute the amount of undistributed earnings and profits that we inherited in the July 17, 2008 transaction. Based on these calculations, we believe that we did not inherit any undistributed earnings and profits that remained undistributed at the end of the applicable tax year. However, there can be no assurance that the IRS would not, upon subsequent examination, propose adjustments to our calculation of the undistributed earnings and profits that we inherited, including adjustments that might be deemed necessary by the IRS as a result of its examination of the companies we acquired. In any such examination, the IRS might consider all taxable years of the acquired subsidiaries as open for review for purposes of its proposed adjustments. If it is subsequently determined that we had undistributed earnings and profits as of the end of the applicable tax year, we may be eligible for a relief provision similar to the "deficiency dividends" procedure described above. To utilize this relief provision, we would have to pay an interest charge for the delay in distributing the undistributed earnings and profits; in addition, we would be required to distribute to our shareholders, in addition to our other REIT distribution requirements, the amount of the undistributed earnings and profits less the interest charge paid.

Acquisition of Publicly Traded Partnership

        In 2004, we acquired all of the limited partnership interests and the general partnership interest of a publicly traded partnership as well as certain of the partnership's affiliated entities. Prior to our acquisition of the publicly traded partnership and its affiliates, the acquired entities directly or indirectly owned substantially all of the outstanding equity interests in various noncorporate subsidiaries and four C corporations. However, before our acquisition of these entities, all four C corporation subsidiaries were converted into disregarded entities under Treasury regulations issued under Section 7701 of the IRC, and thus considered liquidated for federal income tax purposes. Upon our acquisition, the publicly traded partnership itself and its affiliates and subsidiaries became disregarded entities of ours under Treasury regulations issued under Section 7701 of the IRC. Thus, after the 2004 acquisition, all assets, liabilities and items of income, deduction and credit of these acquired entities have been treated as ours for purposes of the various REIT qualification tests described above. Our initial tax basis in the acquired assets is our cost for acquiring them, and we believe that we did not succeed to any C corporation earnings and profits in this acquisition.

Depreciation and Federal Income Tax Treatment of Leases

        Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over the applicable shorter periods. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions.

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        We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions.

Like-Kind Exchanges

        In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing. Most of these agreements closed during 2008; one closed in 2009; and a few are scheduled to close in 2010. Senior Housing's obligations to complete these purchases were and are subject to various conditions typical of commercial real estate purchases. On advice of counsel, we believe that each of these agreements should be viewed as a separate transaction for federal income tax purposes. Accordingly, we believe each agreement may, in our discretion, be the subject of a separate cash sale or like-kind exchange under Section 1031 of the IRC. We therefore entered into like-kind exchanges for some, but not all, of the disposed properties and reported those exchanges as dispositions and exchanges separate from each other and from any cash sales.

        If, contrary to our view, the IRS recharacterizes these agreements as a composite transaction, then some or all of our realized gain on the several dispositions that were intended to be like-kind exchanges may, contrary to our expectation of nonrecognition, be recognized in full. In that event, we will not have distributed all of our capital gain for 2008, and possibly also for 2009 or 2010. In such case, we may owe federal income tax on the undistributed capital gain unless we elect to pay deficiency dividends to our shareholders. As discussed above, deficiency dividends may be included in our deduction for dividends paid for the year in which such gain is recognized, but an interest charge would be imposed upon us for the delay in distribution.

Taxation of U.S. Shareholders

        The maximum individual federal income tax rate for long-term capital gains is generally 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) and for most corporate dividends is generally also 15% (scheduled to increase to ordinary income rates for taxable years beginning after December 31, 2010). However, because we are not generally subject to federal income tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, dividends on our shares generally are not eligible for such 15% tax rate on dividends while that rate is in effect. As a result, our ordinary dividends continue to be taxed at the higher federal income tax rates applicable to ordinary income. However, the favorable federal income tax rates for long-term capital gains, and while in effect, for dividends, generally apply to:

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        As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders (including any constructive distributions on our common shares or on our series D cumulative convertible preferred shares) that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.

        In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case:

If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year.

        As discussed above, for noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate capital gain dividends for U.S. shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) or 25% so that the designations will be proportionate among all classes of our shares.

        Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder's adjusted tax basis in the shareholder's shares, but will reduce the shareholder's basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder's shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010). No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses.

        Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the

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following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim.

        A U.S. shareholder will generally recognize gain or loss equal to the difference between the amount realized and the shareholder's adjusted basis in our shares that are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder's holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period.

        In contrast to the typical redemption of preferred shares for cash only, discussed above, if a U.S. shareholder receives a number of our common shares as a result of a conversion or repurchase of series D cumulative convertible preferred shares, then the transaction will be treated as a recapitalization. As such, the shareholder would recognize income or gain only to the extent of the lesser of (1) the excess, if any, of the value of the cash and common shares received over such shareholder's adjusted tax basis in its series D cumulative convertible preferred shares surrendered or (2) the cash received. Any cash a shareholder receives, up to the amount of income or gain recognized, would generally be characterized as a dividend to the extent that a surrender of series D cumulative convertible preferred shares to us for cash only would be taxable as a dividend, taking into account the surrendering shareholder's continuing actual or constructive ownership interest in our shares, if any, as discussed above, and the balance of the recognized amount, if any, will be gain. A U.S. shareholder's basis in its common shares received would be equal to the basis for the series D cumulative convertible preferred shares surrendered less any cash received plus any income or gain recognized. A U.S. shareholder's holding period in the common shares received would be the same as the holding period for the series D cumulative convertible preferred shares surrendered. If, in addition to common shares, upon conversion or repurchase a U.S. shareholder receives rights or warrants to acquire our common shares or other of our securities, then the receipt of the rights or warrants may be taxable, and we encourage you to consult your tax advisor as to the consequences of the receipt of rights or warrants upon conversion or repurchase.

        A U.S. shareholder generally will not recognize any income, gain or loss upon conversion of series D cumulative convertible preferred shares into common shares except with respect to cash, if any, received in lieu of a fractional common share. A U.S. shareholder's basis in its common shares received would be equal to the basis for the series D cumulative convertible preferred shares surrendered less any basis allocable to any fractional share exchanged for cash. A U.S. shareholder's holding period in the common shares received would be the same as the holding period for the series D cumulative convertible preferred shares surrendered. Any cash received in lieu of a fractional common share upon conversion will be treated as a payment in exchange for the fractional common share. Accordingly, receipt of cash in lieu of a fractional share generally will result in capital gain or loss, measured by the difference between the cash received for the fractional share and the adjusted tax basis attributable to the fractional share. If, in addition to common shares, upon conversion a U.S. shareholder receives rights or warrants to acquire our common shares or other of our securities, then the receipt of the rights or warrants may be taxable, and we encourage you to consult your tax advisor as to the consequences of the receipt of rights or warrants upon conversion.

        Effective for federal tax returns with due dates after October 22, 2004, the IRC imposes a penalty for the failure to properly disclose a "reportable transaction." A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (i) $10 million in any single year or $20 million in any combination of years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (ii) $2 million in any

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single year or $4 million in any combination of years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS's Office of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.

        Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the IRC, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor's net investment income. A U.S. shareholder's net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder's basis will not enter into the computation of net investment income.

Taxation of Tax-Exempt Shareholders

        In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust did not constitute "unrelated business taxable income," even though the REIT may have financed some of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, provided that the shareholder has not financed its acquisition of our shares with "acquisition indebtedness" within the meaning of the IRC, and provided further that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit.

        Tax-exempt pension trusts that own more than 10% by value of a "pension-held REIT" at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of:

except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if:

A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT's stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT's stock or beneficial interests, own in the aggregate more than 50% by value of the REIT's stock or beneficial interests. Because of the share

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ownership concentration restrictions in our declaration of trust and bylaws, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT.

        Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the IRC, respectively, are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions from a REIT as unrelated business taxable income. In addition, these prospective investors should consult their own tax advisors concerning any "set aside" or reserve requirements applicable to them.

Taxation of Non-U.S. Shareholders

        The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares.

        In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder's conduct of a trade or business in the United States (and, if provided by an applicable income tax treaty, is attributable to a permanent establishment or fixed base the non-U.S. shareholder maintains in the United States). In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the IRC, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States.

        A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution of this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or at a lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. shareholder would otherwise receive, and the non-U.S. shareholder may bear brokerage or other costs for this withholding procedure. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder's adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below. A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits.

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        From time to time, some of our distributions may be attributable to the sale or exchange of United States real property interests. However, capital gain dividends that are received by a non-U.S. shareholder, including dividends attributable to our sales of United States real property interests, and that are deductible by us in respect of our 2005 taxable year and thereafter will be subject to the taxation and withholding regime applicable to ordinary income dividends and the branch profits tax will not apply, provided that (1) the capital gain dividends are received with respect to a class of shares that is "regularly traded" on a domestic "established securities market" such as the New York Stock Exchange, or the NYSE, both as defined by applicable Treasury regulations, and (2) the non-U.S. shareholder does not own more than 5% of that class of shares at any time during the one-year period ending on the date of distribution of the capital gain dividends. If both of these provisions are satisfied, qualifying non-U.S. shareholders will not be subject to withholding on capital gain dividends as though those amounts were effectively connected with a United States trade or business, and qualifying non-U.S. shareholders will not be required to file United States federal income tax returns or pay branch profits tax in respect of these capital gain dividends. Instead, these dividends will be subject to United States federal income tax and withholding as ordinary dividends, currently at a 30% tax rate unless reduced by applicable treaty, as discussed below. Although there can be no assurance in this regard, we believe that our common shares and each class of our preferred shares have been and will remain "regularly traded" on a domestic "established securities market" within the meaning of applicable Treasury regulations; however, we can provide no assurance that our shares will continue to be "regularly traded" on a domestic "established securities market" in future taxable years.

        Except as discussed above, for any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder that does not qualify for the special rule above will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; such a non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and such a non-U.S. shareholder that is also a corporation may owe the 30% branch profits tax under Section 884 of the IRC in respect of these amounts. We or other applicable withholding agents will be required to withhold from distributions to such non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder's United States federal income tax liability, and the non-U.S. shareholder may file for a refund from the IRS of any amount of withheld tax in excess of that tax liability.

        Effective generally from and after 2006, a special "wash sale" rule applies to a non-U.S. shareholder who owns any class of our shares if (1) the shareholder owns more than 5% of that class of shares at any time during the one-year period ending on the date of the distribution described below, or (2) that class of our shares is not, within the meaning of applicable Treasury regulations, "regularly traded" on a domestic "established securities market" such as the NYSE. Although there can be no assurance in this regard, we believe that our common shares and each class of our preferred shares have been and will remain "regularly traded" on a domestic "established securities market" within the meaning of applicable Treasury regulations, all as discussed above; however, we can provide no assurance that our shares will continue to be "regularly traded" on a domestic "established securities market" in future taxable years. We thus anticipate this wash sale rule to apply, if at all, only to a non-U.S. shareholder that owns more than 5% of either our common shares or any class of our preferred shares. Such a non-U.S. shareholder will be treated as having made a "wash sale" of our

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shares if it (1) disposes of an interest in our shares during the 30 days preceding the ex-dividend date of a distribution by us that, but for such disposition, would have been treated by the non-U.S. shareholder in whole or in part as gain from the sale or exchange of a United States real property interest, and then (2) acquires or enters into a contract to acquire a substantially identical interest in our shares, either actually or constructively through a related party, during the 61-day period beginning 30 days prior to the ex-dividend date. In the event of such a wash sale, the non-U.S. shareholder will have gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution that, but for the wash sale, would have been a gain from the sale or exchange of a United States real property interest. As discussed above, a non-U.S. shareholder's gain from the sale or exchange of a United States real property interest can trigger increased United States taxes, such as the branch profits tax applicable to non-U.S. corporations, and increased United States tax filing requirements.

        If for any taxable year we designate capital gain dividends for our shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares.

        Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets certain additional conditions. You must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld with respect to a distribution to a non-U.S. shareholder exceeds the shareholder's United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. The 35% withholding tax rate discussed above on some capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the current 15% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will have to collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. shareholder would otherwise receive, and the non-U.S. shareholder may bear brokerage or other costs for this withholding procedure.

        If our shares are not "United States real property interests" within the meaning of Section 897 of the IRC, then a non-U.S. shareholder's gain on sale of these shares (including a conversion of our series D cumulative convertible preferred shares into common shares) generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was in the United States for 183 days or more during the taxable year may be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we have been and will remain a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we have been or will remain a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is "regularly traded," as defined by

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applicable Treasury regulations, on an established securities market like the NYSE, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares. In this regard, because the shares of others may be redeemed, and in the case of the series D cumulative convertible preferred shares, are convertible, a non-U.S. shareholder's percentage interest in a class of our shares may increase even if it acquires no additional shares in that class. If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and a corporate non-U.S. shareholder might owe branch profits tax under Section 884 of the IRC. A purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.

Backup Withholding and Information Reporting

        Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. The backup withholding rate is currently 28% and is scheduled to increase to 31% after 2010. Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the REIT shareholder's federal income tax liability. In the case of any in kind distributions of property by us to a shareholder, we or other applicable withholding agents will have to collect any applicable backup withholding by reducing to cash for remittance to the IRS a sufficient portion of the property that our shareholder would otherwise receive, and the shareholder may bear brokerage or other costs for this withholding procedure.

        A U.S. shareholder will be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:

If the U.S. shareholder has not provided and does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS, and the REIT or other withholding agent may have to withhold a portion of any distributions or proceeds paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.

        Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above. Similarly,

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information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker's foreign office.

Other Tax Consequences

        Our tax treatment and that of our shareholders may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently. Likewise, the rules regarding taxes other than federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our shareholders. Revisions to tax laws and interpretations of these laws could adversely affect the tax or other consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the federal income tax consequences discussed above.

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ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS

General Fiduciary Obligations

        Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, must consider whether:

        Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as "non-ERISA plans," should consider that a plan may only make investments that are authorized by the appropriate governing instrument.

        Fiduciaries considering an investment in our securities should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria or is otherwise appropriate. The sale of our securities to a plan is in no respect a representation by us or any underwriter of the securities that the investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that the investment is appropriate for plans generally or any particular plan.

Prohibited Transactions

        Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the IRC in making their investment decision. Sales and other transactions between an ERISA or non-ERISA plan, and persons related to it, are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA plan or non-ERISA plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed. Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a prohibited transaction.

"Plan Assets" Considerations

        The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or non-ERISA plan acquires a security that is an equity interest in an entity and that security is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the ERISA plan's or non-ERISA plan's assets include both the equity interest and an undivided interest in each of the underlying assets

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of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

        Each class of our shares (that is, our common shares and any class of preferred shares that we have issued or may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is "widely held," "freely transferable" and either part of a class of securities registered under the Exchange Act, or sold under an effective registration statement under the Securities Act of 1933, as amended, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding shares has been registered under the Exchange Act.

        The regulation provides that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. Our common shares and our preferred shares have been widely held and we expect our common shares and our preferred shares to continue to be widely held. We expect the same to be true of any additional class of preferred stock that we may issue, but we can give no assurance in that regard.

        The regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include:

        We believe that the restrictions imposed under our declaration of trust and bylaws on the transfer of shares do not result in the failure of our shares to be "freely transferable." Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions.

        Assuming that each class of our shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of our counsel, Sullivan & Worcester LLP, that our shares will not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and bylaws and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be "plan assets" of any ERISA plan or non-ERISA plan that invests in our shares.

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Item 1A.    Risk Factors

        Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer and the trading price of our debt or equity securities could decline. Investors and prospective investors should consider the following risks and the information contained under the heading "Warning Concerning Forward Looking Statements" before deciding whether to invest in our securities.

The financial markets are currently in a period of disruption and recession, and we do not expect these conditions to improve in the near future.

        The financial markets are currently experiencing very difficult conditions and volatility. These market conditions have resulted in a decrease in availability of corporate credit and have led to the insolvency, closure or acquisition of a number of financial institutions. A continued recession or a depression could adversely affect the financial condition and results of operations of our tenants, which would impact the ability of our tenants to pay rent to us.

We may be unable to access the capital necessary to repay our debts or to grow.

        To retain our status as a REIT, we are required to distribute at least 90% of our taxable income to shareholders and we generally cannot retain sufficient income from operations to repay our debts, to invest in our properties or fund our acquisitions. Accordingly, our business and growth strategies depend, in part, upon our ability to raise additional capital at reasonable costs to repay our debts and to fund new investments. We believe we will be able to raise additional debt and equity capital at reasonable costs to refinance our debts at or prior to their maturities, to maintain our properties and to invest at yields that exceed our cost of capital. However, at present there is a significant contraction in financial liquidity globally. In these circumstances, our ability to raise reasonably priced capital is not assured; we may be unable to raise reasonably priced capital because of reasons related to our business or for reasons beyond our control, such as market conditions. Our business and growth strategy is not assured and may fail.

If the current recession continues or worsens, the occupancy and rents at our properties may decline.

        The U.S. economy is currently in recession. There are several indications that general economic conditions may continue to worsen before they begin to improve. We do not know when economic conditions will improve. If the current recession worsens or continues for a prolonged period the demand to lease commercial and industrial space will decline. Reductions in tenant demand to lease space are likely to result in reduced occupancy and rents at our properties. Many of our operating costs, such as utilities, real estate taxes, insurance, certain management fees, etc. are fixed. If our rents decline our income and cash flow available for distribution will decline and we may become unable to maintain our current rate of distributions to shareholders.

We are currently dependent upon economic conditions in our five core markets: Metro Philadelphia, Pennsylvania; Oahu, Hawaii; Metro Washington, DC; Metro Boston, Massachusetts and Southern California.

        Approximately 42% of our revenues in fiscal year 2008 were derived from properties located in our five core markets: Metro Philadelphia, PA; Oahu, HI; Metro Washington, DC; Metro Boston, MA and Southern California. A downturn in economic conditions in these markets could result in reduced demand from tenants for our properties. A significant economic downturn in one or more of these areas could adversely affect our results of operations.

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We face significant competition.

        All of our properties face competition for tenants. Some competing properties may be newer, better located and more attractive to tenants. Many competing properties may have lower occupancy than our properties, which may result in their owners being willing to lease available space at lower prices than we offer space for rent at our properties. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge.

        In addition, we face competition for acquisition opportunities from other investors and this competition may subject us to the following risks:

Increasing interest rates may adversely affect us and the value of your investment in our shares.

        On December 31, 2008, we had approximately $401 million of debt outstanding at variable interest rates. If interest rates increase, so will our interest costs, which could adversely affect our cash flow and our ability to pay principal and interest on our debt, our cost to refinance existing debt when it becomes due and our ability to pay distributions to you. In addition, an increase in interest rates could decrease the amount buyers may be willing to pay for our properties, thereby limiting our ability to sell properties to raise capital or realize gains or obtain mortgage financing secured by our properties. We pay regular distributions to our common and preferred shareholders; when interest rates available to investors rise, the market prices of dividend paying securities often decline. Accordingly, if interest rates rise, the market price of your ownership of our shares may decline.

Changes in the government's requirements for leased space may adversely affect us.

        Approximately 14% of our total rents pursuant to signed leases as of December 31, 2008 come from government tenants. If the proposed sale of securities by our subsidiary, GOV, is completed on currently proposed terms, approximately 10% of our pro forma total rents received in 2008 would be directly or indirectly from governments, including rents from properties which we continue to own and our 49.9% indirect ownership of GOV. Many of our leases with government agencies allow the tenants to vacate the leased premises before the stated term expires with little or no liability. Historically, our government tenants have only rarely exercised lease termination rights and have regularly renewed leases. Nonetheless, for fiscal policy reasons, security concerns or otherwise some or all of our government tenants may decide to vacate our properties. If a significant number of such terminations occur, our income and cash flow may materially decline and our ability to pay regular distributions to shareholders may be jeopardized.

Ownership limitations and anti-takeover provisions in our declaration of trust, bylaws and rights agreement, as well as certain provisions of Maryland law, may prevent you from receiving a takeover premium for your shares or prevent you from implementing beneficial changes.

        Our declaration of trust or bylaws prohibit any shareholder, other than RMR and its affiliates, from owning more than 9.8% of any class or series of our outstanding shares. This provision of the declaration of trust is intended to assist with our REIT compliance under the IRC. However, this provision will also inhibit acquisitions of a significant stake in us and may prevent a change in our control. Additionally, many provisions contained in our declaration of trust and bylaws and under

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Maryland law may further deter persons from attempting to acquire control of us and implement changes, including, for example, provisions relating to:

        We have a rights agreement whereby, in the event a person or group of persons acquires 10% or more of our outstanding common shares, our shareholders, other than such person or group, will be entitled to purchase additional shares or other securities or property at a discount. In addition, certain provisions of Maryland law may have an anti-takeover effect. For all of these reasons, our shareholders may be unable to realize a change of control premium for shares they own.

The loss of our tax status as a REIT or tax authority challenges could have significant adverse consequences to us and reduce the market price of our securities.

        As a REIT, we generally do not pay federal and state income taxes. However, our continued qualification as a REIT is dependent upon our compliance with complex provisions of the IRC, for which there are available only limited judicial or administrative interpretations. We believe we have operated, and are operating, as a REIT in compliance with the IRC. However, we cannot assure that, upon review or audit, the IRS will agree with this conclusion. If we cease to be a REIT, we would violate a covenant in our credit facility, our ability to raise capital would be adversely affected, we may be subject to material amounts of federal and state income taxes and the value of our securities would likely decline.

Acquisitions that we make may not be successful.

        Our business strategy contemplates additional acquisitions. We cannot assure you that acquisitions we make will prove to be successful. We might encounter unanticipated difficulties and expenditures relating to any acquired properties. Newly acquired properties might require significant management

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attention that would otherwise be devoted to our ongoing business. We might never realize the anticipated benefits of our acquisitions.

Real estate ownership creates risks and liabilities.

        Our business is subject to risks associated with real estate ownership, including:

Our business dealings with our managing trustees and related persons may create conflicts of interest.

        We have no employees. Personnel and services which we require are provided to us under contract by RMR. RMR is authorized to follow broad operating and investment guidelines and, therefore, has great latitude in determining the types of properties that are proper investments for us, as well as the individual investment decisions. Our board of trustees periodically reviews our operating and investment guidelines and our properties but does not review or approve each decision made by RMR on our behalf. In addition, in conducting periodic reviews, our board of trustees relies primarily on information provided to it by RMR. RMR is beneficially owned by our managing trustees, Barry Portnoy and Adam Portnoy. Barry Portnoy is Chairman and Adam Portnoy is President, Chief Executive Officer and a director of RMR. All of the members of our board of trustees, including our independent trustees, are members of one or more boards of trustees or directors of various companies to which RMR provides management services. All of our executive officers are also executive officers of RMR. The foregoing individuals may hold equity in or positions with other companies to which RMR provides management services. Such equity ownership and positions by our trustees and officers could create, or appear to create, conflicts of interest with respect to matters involving us, RMR and its affiliates. We cannot assure you that the provisions in our declaration of trust or bylaws adequately address potential conflicts of interest or that such actual or potential conflicts of interest will be resolved in our favor.

        We pay RMR fees based in part upon the historical cost of our investments, the gross rents we collect from tenants and the costs of construction we incur at our properties which are supervised by RMR, plus an incentive fee based upon increases in our funds from operations (as defined in our business management agreement). Our fee arrangements with RMR could encourage RMR to advocate acquisitions of properties and discourage sales of properties by us or to undertake unnecessary construction activities. RMR also acts as the manager for two other publicly traded REITs: Senior Housing, which owns senior living and healthcare properties; and Hospitality Properties, which owns hotels and travel centers. RMR also provides management services to other public and private companies, including: Five Star Quality Care, Inc., or Five Star, which operates senior living

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communities, including independent living and congregate care communities, assisted living communities, nursing homes and hospitals; and TravelCenters of America LLC, or TravelCenters, which operates and franchises travel centers. During 2008 we entered agreements to sell certain medical office buildings to Senior Housing. If and when our subsidiary, GOV, becomes majority owned by public investors, we expect GOV to enter into management agreements with RMR. These multiple responsibilities to public companies and other businesses could create competition for the time and efforts of RMR and Messrs. Barry Portnoy and Adam Portnoy. A termination of our business management agreement with RMR is a default under our revolving credit facility unless approved by a majority of our lenders. The quality and depth of management available to us by contracting with RMR may not be able to be duplicated by our being a self managed company or by our contracting with unrelated third parties, without considerable cost increases. For these reasons, our business management and property management agreements with RMR may discourage a change of control of us, including a change of control which might result in payment of a premium for your securities.

        In the past, in particular following periods of volatility in the overall market and the market price of a company's securities, shareholder litigation, dissident trustee nominations and dissident proposals have often been instituted against companies alleging conflicts of interest in business dealings with trustees, related persons and entities. Our relationship with RMR, with Messrs. Barry Portnoy and Adam Portnoy and with RMR affiliates may precipitate such activities. These activities, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.

We have substantial debt obligations and may incur additional debt.

        At December 31, 2008, we had $2.9 billion in debt outstanding, which was approximately 50% of our total book capitalization. Our note indenture and revolving credit facility permit us and our subsidiaries to incur additional debt, including secured debt. If we default in paying any debts or honoring our debt covenants, it may create one or more cross-defaults, these debts may be accelerated and we could be forced to liquidate our assets for less than the values we would receive in a more orderly process.

Any notes we may issue will be effectively subordinated to the debts of our subsidiaries and to our secured debt.

        We conduct substantially all of our business through, and substantially all of our properties are owned by, subsidiaries. Consequently, our ability to pay debt service on our outstanding notes and any notes we issue in the future will be dependent upon the cash flow of our subsidiaries and payments by those subsidiaries to us as dividends or otherwise. Our subsidiaries are separate legal entities and may have their own liabilities. Payments due on our outstanding notes, and any notes we may issue, are, or will be, effectively subordinated to liabilities of our subsidiaries, including guaranty liabilities. Substantially all of our subsidiaries have guaranteed our revolving credit facility; none of our subsidiaries guaranty our outstanding notes. In addition, at December 31, 2008, our subsidiaries had $447.7 million of secured debt. Our outstanding notes are, and any notes we may issue will be, also effectively subordinated to our secured debt.

Our notes may permit redemption before maturity, and our noteholders may be unable to reinvest proceeds at the same or a higher rate.

        The terms of our notes may permit us to redeem all or a portion of our outstanding notes or notes we may issue in the future after a certain amount of time. Generally, the redemption price will equal the principal amount being redeemed, plus accrued interest to the redemption date, plus any applicable premium. If a redemption occurs, our noteholders may be unable to reinvest the money they receive

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from the redemption at a rate that is equal to or higher than the rate of return we previously paid on the redeemed notes.

There may be no public market for notes we may issue and one may not develop.

        Generally, any notes we may issue will be a new issue for which no trading market exists. We may not list our notes on any securities exchange or seek approval for quotation through any automated quotation system. We can give no assurance that an active trading market for any of our notes will exist in the future. Even if a market does develop, the liquidity of the trading market for any of our notes and the market price quoted for any such notes may be adversely affected by changes in the overall market for fixed income securities, by changes in our financial performance or prospects, or by changes in the prospects for REITs or for the real estate industry generally.

Conversion of our series D preferred shares will dilute the ownership interests of existing shareholders.

        The conversion of some or all of our series D preferred shares, including a conversion upon exercise of a "fundamental change" (as such term is defined in the applicable articles supplementary) will dilute the ownership interests of existing shareholders. Any sales in the public market of the common shares issuable upon such conversion could adversely affect prevailing market prices of our common shares. In addition, the existence of the series D preferred shares may encourage short selling by market participants because the conversion of the series D preferred shares could depress the price of our common shares or for other reasons.

We may change our operational and investment policies without shareholder approval.

        Our board of trustees determines our operational and investment policies and may amend or revise our policies, including our policies with respect to our intention to qualify for taxation as a REIT, acquisitions, dispositions, growth, operations, indebtedness, capitalization and distributions, or approve transactions that deviate from these policies, without a vote of, or notice to, our shareholders. Policy changes could adversely affect market value of our common and preferred shares and our ability to make distributions to you.

We are dependent upon RMR to manage our business and implement our growth strategy.

        Our ability to achieve our business objectives depends on RMR and its ability to manage our properties, source and complete new acquisitions for us on favorable terms and to execute our financing strategy on favorable terms. Because we are externally managed, our business is dependent upon RMR's business contacts, its ability to successfully hire, train, supervise and manage its personnel and its ability to maintain its operating systems. If we lose the services provided by RMR or its key personnel, our business and growth prospects may decline. We may be unable to duplicate the quality and depth of management available to us by becoming a self managed company or by hiring another manager. Also, in the event RMR is unwilling or unable to continue to provide management services to us, our cost of obtaining substitute services may be greater than the management fees we pay RMR, and as a result our earnings and cash flows may decline.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited.

        Our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland

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law, our trustees and officers will not have any liability to us and our shareholders for money damages other than liability resulting from:

        Our declaration of trust requires us to indemnify our trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. We have similar obligations under individual indemnification agreements with each of our trustees and executive officers. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former trustees and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former trustees and officers than might otherwise exist absent the current provisions in our declaration of trust or that might exist with other companies, which could limit your recourse in the event of actions not in your best interest.

Provisions in RMR's management agreements with us and with other entities managed by RMR and in transaction agreements between us and certain of those entities may restrict our investing activities and create conflicts of interest.

        RMR's management agreements with us and with other entities managed by RMR, in effect, restrict our ability to make investments in properties that are within the investment focus of another business now or in the future managed by RMR. RMR will have discretion to determine whether a particular investment opportunity is within our investment focus or that of another business managed by RMR. In addition, our transaction agreement with Senior Housing has, and we expect the transaction agreement which we may enter into with GOV if its offering occurs to have, restrictions on our right to make investments in properties that are within the investment focus of the other business. As a result of these contractual provisions, we have limited ability to invest in properties that are within the investment focus of other businesses managed by RMR. These agreements do not restrict our ability, or the ability of other businesses managed by RMR, to lease owned properties to any particular tenant and, as a result, we may compete with other businesses managed by RMR for tenants. Our management agreements afford RMR discretion to determine which leasing opportunities to present to us or to other businesses managed by RMR. Accordingly, we may compete with other businesses managed by RMR for investments in properties that are not within the investment focus of us or another business managed by RMR and for tenants. There is no assurance that any conflicts of interest created by such competition will be resolved in our favor.

There is no assurance that we will make distributions in the future.

        We intend to continue to pay quarterly distributions to our shareholders. However, our ability to pay distributions may be adversely affected by the risks described herein, including the current U.S. recession and constraints in the U.S. capital markets and their impact on our business. Our payment of distributions is subject to compliance with restrictions contained in our revolving credit facility and our debt indenture. All our distributions are made at the discretion of our board of trustees and the timing and amount of our future distributions will depend upon our earnings, our cash flows, our anticipated cash flows, our financial condition, maintenance of our REIT tax status, our ability to access capital and such other factors as our board of trustees may deem relevant from time to time. Recent IRS rulings have expanded the ability of REITs to pay distributions in shares. There are no assurances of our ability to pay distributions or regarding the form of distributions in the future. In addition, our distributions in the past have included, and may in the future include, a return of capital.

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Rating agency downgrades may increase our cost of capital.

        Both our senior notes and our preferred stock are rated by Moody's Investors' Service and Standard & Poor's Ratings Services. These rating agencies may elect to downgrade their ratings on our senior notes and our preferred stock at any time. Such downgrades may negatively affect our access to the capital markets and increase our cost of capital.

Item 1B.    Unresolved Staff Comments

        None.

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Item 2.    Properties

        General.    At December 31, 2008, we had real estate investments totaling approximately $6.2 billion in 537 properties, excluding properties classified as held for sale, that were leased to over 2,100 tenants. Our properties are located in both central business district, or CBD, and suburban areas. We have concentrations of properties in five major geographic segments: Metro Philadelphia, PA; Oahu, HI; Metro Washington, DC; Metro Boston, MA and Southern California. For further information by geographic segment, see footnote 10 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K.

        The states in which we owned real estate at December 31, 2008, excluding properties held for sale, were as follows (dollars in thousands):

Location
  Number of
Properties
  Investment
Amount (1)
  Net Book Value (1)   Rent (2)  

Alabama

    2   $ 34,916   $ 33,627   $ 4,166  

Arizona

    10     126,355     102,413     21,314  

Arkansas

    1     11,876     11,412      

California

    44     392,802     323,142     57,973  

Colorado

    10     136,565     113,655     21,515  

Connecticut

    19     153,818     141,133     19,212  

Delaware

    2     69,817     53,836     5,790  

District of Columbia

    3     196,195     147,293     29,347  

Florida

    2     46,729     46,208     7,422  

Georgia

    49     310,209     282,964     44,903  

Hawaii

    57     645,135     640,362     68,157  

Illinois

    7     141,712     132,753     20,190  

Indiana

    4     95,124     87,903     13,672  

Iowa

    2     21,477     21,063     2,163  

Kansas

    42     125,326     122,162     20,777  

Kentucky

    1     11,980     10,563     1,717  

Maryland

    13     381,055     316,243     56,411  

Massachusetts

    18     320,882     269,494     49,509  

Michigan

    18     66,342     58,691     12,622  

Minnesota

    15     147,317     114,367     18,075  

Missouri

    9     67,078     60,756     11,571  

New Hampshire

    1     22,170     17,367     2,501  

New Jersey

    4     34,097     25,797     4,507  

New Mexico

    16     118,163     99,303     19,683  

New York

    50     393,862     341,097     57,621  

North Carolina

    1     9,432     9,126     848  

Ohio

    22     190,129     179,192     29,225  

Oklahoma

    1     25,393     19,093     1,649  

Pennsylvania

    36     1,075,286     866,247     155,528  

South Carolina

    15     93,143     88,461     11,978  

Tennessee

    4     75,718     66,307     10,035  

Texas

    29     427,760     339,234     52,684  

Virginia

    8     106,899     86,986     15,737  

Washington

    18     84,052     72,839     12,769  

West Virginia

    1     5,080     3,798     1,014  

Wisconsin

    2     67,400     66,072     10,943  

Wyoming

    1     10,963     8,340     1,459  
                   
 

Total real estate

    537   $ 6,242,257   $ 5,379,299   $ 874,687  
                   

(1)
Excludes purchase price allocations for acquired real estate leases and properties classified as held for sale.

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(2)
Rent is pursuant to signed leases as of December 31, 2008, plus estimated expense reimbursements; includes some triple net lease rents and excludes lease value amortization. Excludes properties classified in discontinued operations.

        At December 31, 2008, 28 properties with an aggregate cost of $881.5 million were encumbered by mortgage notes payable totaling $447.7 million.

Item 3.    Legal Proceedings

        In the ordinary course of business we are involved in litigation incidental to our business; however, we are not aware of any pending legal proceeding affecting us or any of our properties for which we might become liable or the outcome of which we expect to have a material impact on us.

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common shares are traded on the NYSE (symbol: HRP). The following table sets forth for the periods indicated the high and low sale prices for our common shares as reported by the NYSE composite transactions reports:

 
  High   Low  

2007

             
 

First Quarter

  $ 13.67   $ 12.04  
 

Second Quarter

    12.72     10.13  
 

Third Quarter

    10.90     9.06  
 

Fourth Quarter

    10.49     7.40  

2008

             
 

First Quarter

  $ 8.56   $ 6.58  
 

Second Quarter

    8.00     6.75  
 

Third Quarter

    8.33     6.43  
 

Fourth Quarter

    6.98     1.57  

        The closing price of our common shares on the NYSE on February 25, 2009, was $3.66 per share.

        As of February 25, 2009, there were 2,774 shareholders of record, and we estimate that as of such date there were in excess of 84,000 beneficial owners of our common shares.

        Information about distributions paid to common shareholders is summarized in the table below. Common share distributions are generally paid in the quarter following the quarter to which they relate.

 
  Cash
Distributions
Per Common
Share
 
 
  2007   2008  

First Quarter

  $ 0.21   $ 0.21  

Second Quarter

    0.21     0.21  

Third Quarter

    0.21     0.21  

Fourth Quarter

    0.21     0.21  
           
 

Total

  $ 0.84   $ 0.84  
           

        All common share distributions shown in the table above have been paid. In January 2009 we announced a new quarterly common share dividend rate of $0.12 per share ($0.48 per share per year). We currently intend to continue to declare and pay common share distributions on a quarterly basis. However, distributions are made at the discretion of our board of trustees and depend on our earnings, cash available for distribution, financial condition, capital market conditions, growth prospects and other factors which our board of trustees deems relevant. Therefore, there can be no assurance that we will continue to pay distributions in the future or that the amount of any distributions we do pay will not decrease.

        Issuances of unregistered shares during the fourth quarter were as follows: On December 11, 2008, pursuant to our incentive share award plan, certain employees of our manager, RMR, received grants totaling 36,000 common shares of beneficial interest, par value $0.01 per share, valued at $2.44 per share, the closing price of our common shares on the NYSE on that day. These grants were made pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

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        In January 2009, we announced that our board of trustees authorized a common share repurchase program for up to $100 million from time to time during the following 12 months. During January through February 25, 2009, we repurchased 3,300,000 of our common shares for $11.8 million, including transaction costs, using cash on hand.

Item 6.    Selected Financial Data

        The following table sets forth selected financial data for the periods and dates indicated. This data should be read in conjunction with, and is qualified in its entirety by reference to, management's discussion and analysis of financial condition and results of operations and the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. Amounts are in thousands, except per share data.

 
  Year Ended December 31,  
Income Statement Data
  2008   2007   2006   2005   2004  

Total revenues

  $ 835,540   $ 783,266   $ 744,008   $ 655,315   $ 554,248  

Income from continuing operations

    83,306     94,320     221,910     127,213     138,942  

Net income (1)

    244,645     124,255     250,580     164,984     162,829  

Net income available for common shareholders (2)

    193,977     59,453     198,974     118,984     116,829  

Common distributions declared

    190,302     136,239     220,481     172,065     147,156  

Weighted average common shares outstanding—basic

   
226,468
   
214,361
   
209,965
   
197,831
   
176,157
 

Weighted average common shares outstanding—diluted

    255,661     243,554     216,524     197,831     176,157  

Earnings per common share:

                               
 

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

  $ 0.14   $ 0.14   $ 0.81   $ 0.41   $ 0.53  
 

Net income available for common shareholders—basic (2)

    0.86     0.28     0.95     0.60     0.66  
 

Net income available for common shareholders—diluted (2)

    0.86     0.28     0.94     0.60     0.66  

Common distributions declared

   
0.84
   
0.63
   
1.05
   
0.84
   
0.83
 

 

 
  December 31,  
Balance Sheet Data
  2008   2007   2006   2005   2004  

Real estate properties (3)

  $ 6,242,257   $ 6,156,294   $ 5,762,273   $ 5,224,574   $ 4,659,098  

Equity investments

                194,297     207,804  

Total assets

    6,016,099     5,859,332     5,575,949     5,327,167     4,813,330  

Total indebtedness, net

    2,889,918     2,774,160     2,397,231     2,520,156     2,355,031  

Total shareholders' equity

    2,921,112     2,902,883     2,950,768     2,645,486     2,307,194  

(1)
Changes in net income include income from property acquisitions during all periods presented; gains of $137.2 million recognized in 2008 from the sale of properties, gains of $116.3 million recognized in 2006 from the sale of all 7.7 million Senior Housing common shares and 4.0 million Hospitality Properties common shares we owned; gains of $11.8 million recognized in 2005 from equity transactions of equity investments and the sale of 950,000 of our Senior Housing common shares and gains of $30.0 million recognized in 2004 from equity transactions of equity investments and the sale of 4.1 million of our Senior Housing common shares.

(2)
Net income available for common shareholders is net income reduced by preferred distributions and the excess redemption price paid over the carrying value of preferred shares.

(3)
Excludes value of acquired real estate leases.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following information should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

        We primarily own office and industrial buildings located throughout the United States. We also own approximately 17 million square feet of leased industrial and commercial lands located in Oahu, Hawaii.

Property Operations

        As of December 31, 2008, 90.4% of our total square feet was leased, compared to 92.7% leased as of December 31, 2007. These results reflect a 2.2 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(2)  
 
  As of the
Year Ended
December 31,
  As of the
Year Ended
December 31,
 
 
  2008   2007   2008   2007  

Total properties

    537     486     452     452  

Total square feet

    66,872     62,198     57,423     57,423  

Percent leased(3)

    90.4 %   92.7 %   90.2 %   92.4 %

(1)
Excludes properties sold or under contract for sale as of December 31, 2008.

(2)
Based on properties owned continuously since January 1, 2007, and excludes properties sold or under contract for sale as of December 31, 2008.

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

        During the year ended December 31, 2008, we signed new leases for 1.3 million square feet and lease renewals for 3.1 million 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 2008 were 5.6 years. Commitments for tenant improvement and leasing costs for leases signed during 2008 totaled $41.2 million, or $9.52 per square foot (approximately $1.70/sq. ft. per year of the lease term).

        During the past twelve months, leasing market conditions in the majority of our markets have continued to weaken. The pace of new leasing activity and the leasing of currently vacant space within our portfolio has slowed and completion of newly constructed office properties in certain markets has 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 started to increase in certain markets during the second half of 2008. These build out costs and leasing commissions are generally amortized as a reduction of our income during the terms of the affected leases. Also, some tenants and prospective tenants have demonstrated reluctance to enter lease renewals or new leases for extended terms. We believe that some decreases in occupancy and effective rents may further reduce the financial results at some of our currently owned properties. However, there are too many variables for us to reasonably project what the financial impact of market conditions will be on our results for future periods.

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        Approximately 18.6% of our leased square feet and 20.9% of our rents are included in leases scheduled to expire through December 31, 2010. Lease renewals and rental rates at which available space may be relet in the future will depend on prevailing market conditions at that time. Lease expirations by year, as of December 31, 2008, are as follows (square feet and dollars in thousands):

Year
  Square Feet
Expiring (1)
  % of
Square Feet
Expiring
  Annualized
Rental Income
Expiring (2)
  % of
Annualized
Rental Income
Expiring
  Cumulative
% of
Annualized
Rental Income
Expiring
 

2009

    4,513     7.5 % $ 80,766     9.2 %   9.2 %

2010

    6,697     11.1 %   102,567     11.7 %   20.9 %

2011

    6,115     10.1 %   106,497     12.2 %   33.1 %

2012

    5,627     9.3 %   109,112     12.5 %   45.6 %

2013

    5,657     9.3 %   99,134     11.3 %   56.9 %

2014

    3,205     5.3 %   56,797     6.5 %   63.4 %

2015

    3,806     6.3 %   69,753     8.0 %   71.4 %

2016

    2,739     4.5 %   45,420     5.2 %   76.6 %

2017

    2,103     3.5 %   43,530     5.0 %   81.6 %

2018

    1,735     2.9 %   31,287     3.6 %   85.2 %

2019 and thereafter

    18,262     30.2 %   129,824     14.8 %   100.0 %
                         

    60,459     100.0 % $ 874,687     100.0 %      
                         

Weighted average remaining lease term (in years):

   
8.2
         
5.9
             
                             

(1)
Square feet is pursuant to signed leases as of December 31, 2008, and includes (i) space being fitted out for occupancy and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants. Excludes properties classified in discontinued operations.

(2)
Rents are pursuant to signed leases as of December 31, 2008, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization. Excludes properties classified in discontinued operations.

        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

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tenants monthly in arrears. As of December 31, 2008, 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

    4,650     7.7 %   12.5 % 2009 to 2024

2. GlaxoSmithKline plc

    608     1.0 %   1.7 % 2013

3. PNC Financial Services Group

    460     0.8 %   1.3 % 2011, 2021

4. Jones Day

    407     0.7 %   1.3 % 2012, 2019

5. Wells Fargo Bank

    393     0.7 %   1.2 % 2009 to 2017

6. Flextronics International Ltd. 

    894     1.5 %   1.2 % 2014

7. ING

    410     0.7 %   1.1 % 2011, 2018

8. JDA Software Group, Inc. 

    283     0.5 %   1.0 % 2012
                 
 

Total

    8,105     13.6 %   21.3 %  
                 

(1)
Square feet is pursuant to signed leases as of December 31, 2008, and includes (i) space being fitted out for occupancy and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants. Excludes properties classified in discontinued operations.

(2)
Rent is pursuant to signed leases as of December 31, 2008, plus estimated expense reimbursements; includes some triple net lease rents and excludes lease value amortization. Excludes properties classified in discontinued operations.

Investment Activities

        During 2008, we acquired 54 office and industrial properties with 4,729,000 square feet of space for $473.1 million, excluding closing costs. At the time of acquisition, these properties were 93.3% leased and yielded approximately 9.9% 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.

        In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing Properties Trust, or Senior Housing, for an aggregate purchase price of approximately $565.0 million. Between June and December 31, 2008, we sold 37 of these properties containing 1,545,000 square feet of space for approximately $346.8 million, excluding closing costs, and recognized gains totaling $137.2 million. In January 2009, we sold one additional property for approximately $19.3 million, excluding closing costs, and we expect the closings of the remaining 10 sales to occur in 2010. We and Senior Housing may mutually agree to accelerate the closings of these acquisitions. In addition, because a third party consent was not received, one of the agreements was amended so that one of the remaining buildings with an allocated value of $3.0 million is no longer subject to being sold; in the event that we receive third party consent we may nonetheless sell that building. In June 2008, we also agreed to sell one additional property to a third party for approximately $15 million, excluding closing costs, but this sale has not yet closed.

        Our obligations to complete the uncompleted sales are subject to various conditions typical of commercial real estate purchases. We can provide no assurance that we will sell all of these buildings or that the remaining sales will be completed in 2010 or sooner. In addition, Senior Housing acquired rights of first refusal from us to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) that are leased to tenants in medical related businesses which we will continue to own after these transactions. Senior Housing was formerly our subsidiary, and both we and Senior Housing are managed by Reit Management & Research LLC, or RMR. Because we and Senior Housing are both managed by RMR, the terms of these transactions were negotiated by special

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committees of our and Senior Housing's boards of trustees composed solely of independent trustees of each company who were not also trustees of both companies.

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, Senior Housing assumed $4.5 million of 6.5% mortgage debt due in 2013 and $6.3 million of 7.5% mortgage debt due in 2022 when it acquired two properties from us in July 2008. In 2008, we assumed $111.4 million of secured mortgage debt in connection with property acquisitions. These mortgage debts bear interest at rates ranging from 5.76% to 7.435%, require monthly principal and interest payments and mature from 2011 to 2027.

        On February 20, 2009, our wholly owned subsidiary, Government Properties Income Trust, or GOV, filed a registration statement with the Securities and Exchange Commission, or SEC, for the initial public offering of 10 million common shares of beneficial interest, or common shares. If the GOV registration statement becomes effective and the initial public offering is completed, we expect to own 49.9%, or 9,950,000 common shares of GOV after the completion of the offering (46.4% if the underwriters' over allotment option is exercised in full). We intend to transfer 29 properties, 25 of which are leased primarily to the U.S. Government and four of which are leased to the States of California, Maryland, Minnesota and South Carolina, respectively, to GOV. These properties contain approximately 3.3 million rentable square feet and are located in 14 states and the District of Columbia. GOV is currently negotiating a $250 million secured credit facility with a group of commercial banks. If GOV is successful in obtaining that credit facility, we expect that the initial proceeds of this credit facility will be distributed to us, and we expect to use these proceeds to repay amounts outstanding under our unsecured revolving credit facility or other outstanding debt. If the GOV registration statement becomes effective and the initial public offering is completed, GOV expects to use the net proceeds from the offering to reduce amounts outstanding under its secured credit facility.

        In order to govern the separation of GOV from us, we intend to enter into a transaction agreement with GOV. We expect that the transaction agreement will provide that:

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        The above restrictions will not prohibit us from leasing our current and future properties to government tenants.

        We have no present intention to sell any of our retained government leased properties or to engage in any transaction which might cause GOV's right to purchase those properties to become exercisable; however, we will have the right to change our intention regarding these properties at any time in our discretion.

        As of the date of this Annual Report on Form 10-K, GOV has not received a commitment for the secured credit facility described above; its negotiations to obtain the facility on terms acceptable to GOV and us may not be successful and we expect that any commitment will be subject to various conditions. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the secured credit facility. Accordingly, there can be no assurance that the secured credit facility will be available to GOV.

        In addition, GOV's registration statement for its offering of common shares is subject to review and comment by the SEC, and the offering will not occur unless, among other things, definitive documentation relating to the formation of GOV has been agreed upon, executed and delivered, the SEC has declared the registration statement to be effective, and underwriters have agreed to purchase and distribute the shares proposed to be offered by GOV. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the offering. Accordingly, there can be no assurance that the offering will occur. In such event, we intend that GOV would remain our wholly owned subsidiary. We do not currently intend to proceed with the offering of GOV's common shares described above unless GOV's secured credit facility has been obtained.

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RESULTS OF OPERATIONS

Year Ended December 31, 2008, Compared to Year Ended December 31, 2007

 
  Year Ended December 31,  
 
  2008   2007   $
Change
  %
Change
 
 
  (in thousands, except per share data)
   
 

Rental income

  $ 835,540   $ 783,266   $ 52,274     6.7 %
                   

Expenses:

                         
   

Operating expenses

    347,958     315,131     32,827     10.4 %
   

Depreciation and amortization

    185,657     170,321     15,336     9.0 %
   

General and administrative

    36,812     33,711     3,101     9.2 %
                   
     

Total expenses

    570,427     519,163     51,264     9.9 %
                   

Operating income

   
265,113
   
264,103
   
1,010
   
0.4

%

Interest income

   
1,442
   
2,293
   
(851

)
 
(37.1

)%

Interest expense

    (180,193 )   (170,970 )   (9,223 )   (5.4 )%

Loss on asset impairment

    (2,283 )       (2,283 )   (100.0 )%

Loss on early extinguishment of debt

        (711 )   711     100.0 %
                   

Income from continuing operations before income tax expense

    84,079     94,715     (10,636 )   (11.2 )%

Income tax expense

    (773 )   (395 )   (378 )   (95.7 )%
                   

Income from continuing operations

    83,306     94,320     (11,014 )   (11.7 )%

Discontinued operations:

                         
   

Income from discontinued operations

    24,165     27,714     (3,549 )   (12.8 )%
   

Gain on sale of properties

    137,174     2,221     134,953     (6076.2 )%
                   

Net income

    244,645     124,255     120,390     96.9 %

Preferred distributions

    (50,668 )   (60,572 )   9,904     16.4 %

Excess redemption price paid over carrying value of preferred shares

        (4,230 )   4,230     100.0 %
                   

Net income available for common shareholders

  $ 193,977   $ 59,453   $ 134,524     226.3 %
                   

Weighted average common shares outstanding—basic

   
226,468
   
214,361
   
12,107
   
5.6

%
                   

Weighted average common shares outstanding—diluted

   
255,661
   
243,554
   
12,107
   
5.0

%
                   

Earnings per common share:

                         
 

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

  $ 0.14   $ 0.14   $     %
                   
 

Income from discontinued operations—basic and diluted

  $ 0.71   $ 0.14   $ 0.57     407.1 %
                   
 

Net income available for common shareholders—basic and diluted

  $ 0.86   $ 0.28   $ 0.58     207.1 %
                   

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        Rental income.    Rental income increased for the year ended December 31, 2008, compared to the same period in 2007, primarily due to increases in rental income from our Other Markets and Oahu, HI 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 Other Markets segment increased $54.0 million, or 12%, primarily because of the acquisition of 54 properties during 2008 and 27 properties during 2007. Rental income from our Oahu, HI market increased by $2.2 million, or 3%, due to an increase in weighted average rental rates for new leases and lease renewals signed during 2007 and 2008. Rental income from our Metro Boston, MA market decreased $4.5 million, or 8%, primarily due to the decrease in occupancy in 2008, partially offset by rental income from three property acquisitions during 2007. Rental income includes non-cash straight line rent adjustments totaling $18.1 million in 2008 and $20.0 million in 2007 and amortization of acquired real estate leases and obligations totaling ($8.6) million in 2008 and ($9.4) million in 2007. Rental income also includes lease termination fees totaling $2.8 million in 2008 and $1.2 million 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 asset impairment.    The loss on asset impairment in 2008 reflects the write-off of the net book value of three industrial properties located in our Other Markets segment, that were taken out of service in December 2008.

        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, a decrease in occupancy and the loss on asset impairment recognized in 2008, partially offset by income from acquisitions in 2008 and 2007.

        Income from discontinued operations.    Income from discontinued operations reflects operating results from 37 office properties sold throughout the year ended December 31, 2008, 12 properties classified as held for sale and one office property sold in 2007.

        Gain on sale of properties.    Net sales proceeds and gains from the sale of 37 office properties in 2008 were $333.6 million and $137.2 million, respectively. Net sales proceeds and gains from the sale of one office property and three land parcels in 2007 were $4.4 million and $2.2 million, respectively.

        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, a decrease in occupancy and the loss on asset impairment recognized in 2008. 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 8.75% series B preferred shares that we partially redeemed in November 2007.

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Year Ended December 31, 2007, Compared to Year Ended December 31, 2006

 
  Year Ended December 31,  
 
  2007   2006   $
Change
  %
Change
 
 
  (in thousands, except per share data)
   
 

Rental income

  $ 783,266   $ 744,008   $ 39,258     5.3 %
                   

Expenses:

                         
   

Operating expenses

    315,131     297,736     17,395     5.8 %
   

Depreciation and amortization

    170,321     149,072     21,249     14.3 %
   

General and administrative

    33,711     30,222     3,489     11.5 %
                   
     

Total expenses

    519,163     477,030     42,133     8.8 %
                   

Operating income

   
264,103
   
266,978
   
(2,875

)
 
(1.1

)%

Interest income

   
2,293
   
2,736
   
(443

)
 
(16.2

)%

Interest expense

    (170,970 )   (165,568 )   (5,402 )   (3.3 )%

Loss on early extinguishment of debt

    (711 )   (1,659 )   948     57.1 %

Equity in earnings of equity investments

        3,136     (3,136 )   (100.0 )%

Gain on sale of equity investments

        116,287     (116,287 )   (100.0 )%
                   

Income from continuing operations before income tax expense

    94,715     221,910     (127,195 )   (57.3 )%

Income tax expense

    (395 )       (395 )   (100.0 )%
                   

Income from continuing operations

    94,320     221,910     (127,590 )   (57.5 )%

Discontinued operations:

                         
   

Income from discontinued operations

    27,714     25,753     1,961     7.6 %
   

Gain on sale of properties

    2,221     2,917     (696 )   (23.9 )%
                   

Net income

    124,255     250,580     (126,325 )   (50.4 )%

Preferred distributions

    (60,572 )   (44,692 )   (15,880 )   (35.5 )%

Excess redemption price paid over carrying value of preferred shares

    (4,230 )   (6,914 )   2,684     38.8 %
                   

Net income available for common shareholders

  $ 59,453   $ 198,974   $ (139,521 )   (70.1 )%
                   

Weighted average common shares outstanding—basic

   
214,361
   
209,965
   
4,396
   
2.1

%
                   

Weighted average common shares outstanding—diluted

   
243,554
   
216,524
   
27,030
   
12.5

%
                   

Earnings per common share:

                         
 

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

  $ 0.14   $ 0.81   $ (0.67 )   (82.7 )%
                   
 

Income from discontinued operations—basic and diluted

  $ 0.14   $ 0.14   $     %
                   
 

Net income available for common shareholders—basic

  $ 0.28   $ 0.95   $ (0.67 )   (70.5 )%
                   
 

Net income available for common shareholders—diluted

  $ 0.28   $ 0.94   $ (0.66 )   (70.2 )%
                   

        Rental income.    Rental income increased for the year ended December 31, 2007, compared to the same period in 2006, primarily due to increases in rental income from our Oahu, HI, Metro Boston, MA and our Other Markets segments, as described in the segment information footnote to our consolidated financial statements. Rental income from our Oahu, HI market increased $3.6 million, or

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6%, primarily due to an increase in weighted average rental rates for new leases and lease renewals signed during 2007 and 2006. Rental income from our Metro Boston, MA market increased $2.2 million, or 4%, primarily due to the acquisition of three properties in 2007. Rental income from our Other Markets segment increased $35.7 million, or 9%, primarily because of the acquisition of 90 properties since December 2005. Rental income includes non-cash straight line rent adjustments totaling $20.0 million in 2007 and $22.5 million in 2006, amortization of acquired real estate leases and obligations totaling ($9.4) million in 2007 and ($10.0) million in 2006 and lease termination fees totaling $1.2 million in 2007 and $608,000 in 2006.

        Total expenses.    The increase in total expenses reflects our acquisition of properties since December 2005. In addition, the increase in depreciation and amortization expense reflects building and tenant improvement costs incurred throughout our portfolio since December 2005. The increase in general and administrative expenses also reflects the reimbursement of professional fees and other costs during 2006.

        Interest expense.    The increase in interest expense in 2007 reflects an increase in average total debt outstanding which was used primarily to finance acquisitions in 2007 and 2006.

        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. 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 2006.

        Equity in earnings of equity investments.    The decrease in equity in earnings of equity investments in 2007 reflects our sale of all 7.7 million common shares we owned in Senior Housing and all 4.0 million common shares we owned in Hospitality Properties Trust, or Hospitality Properties, in March 2006.

        Gain on sale of equity investments.    In March 2006 we sold all of the common shares we owned in Senior Housing and Hospitality Properties for aggregate net proceeds of $308.3 million and gains of $116.3 million.

        Income from continuing operations.    The decrease in income from continuing operations is due primarily to the gain we recognized in 2006 on the sale of the common shares we owned in Senior Housing and Hospitality Properties.

        Income from discontinued operations.    The 2007 and 2006 income from discontinued operations includes operating results from 37 office properties sold in 2008, 12 office properties classified as held for sale as of December 31, 2008, one office property sold in 2007 and five office properties sold in 2006. The increase in income from discontinued operations reflects rent increases at certain properties during 2007 and 2006, plus the reduction in operating expenses from four vacant properties sold during 2006.

        Gain on sale of properties.    Net sales proceeds and gains from the sale of one office property and three land parcels in 2007 were $4.4 million and $2.2 million, respectively. Net sales proceeds and gains from the sale of five office properties in 2006 were $10.6 million and $2.9 million, respectively.

        Net income and net income available for common shareholders.    The decrease in net income and net income available for common shareholders is due primarily to the sale of Senior Housing and Hospitality Properties common shares in 2006. 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 8.75% series B preferred shares that we partially redeemed in November 2007 and our 9.875% series A preferred shares that we redeemed in March 2006. The increase in preferred

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distributions reflects the issuance of our series D preferred shares in October 2006, which are convertible into 29.2 million common shares.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

        Our principal source of funds to meet operating expenses and pay planned distributions on our common and preferred shares is rental income from our properties. This flow of funds has historically been sufficient to pay 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 our ability to:

        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 fluctuate; however, the impact of these fluctuations is expected to be partially offset by the pass-through of operating costs 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.

        On January 9, 2009, we announced a new quarterly common share dividend rate of $0.12 per share ($0.48 per share per year), which was paid on February 23, 2009, to shareholders of record on January 20, 2009.

        Cash flows provided by (used in) operating, investing and financing activities were $298.4 million, ($82.8) million and ($220.0) million, respectively, for the year ended December 31, 2008, and $271.6 million, ($419.1) million and $150.7 million, respectively, for the year ended December 31, 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 December 31, 2008, there was $201 million outstanding and $549 million available under our revolving credit facility, and we had cash and cash equivalents of $15.5 million. In January 2009, our board of trustees authorized a common share repurchase program for up to $100 million, from time to time during the following 12 months. As of February 25, 2009, we repurchased 3,300,000 of our common shares for $11.8 million, including transaction costs, using cash on hand. 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 share repurchase program and continuing operations and future property acquisitions.

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        Our outstanding debt maturities and weighted average interest rates as of December 31, 2008, were as follows (dollars in thousands):

 
  Scheduled Principal Payments During Period    
 
Year
  Secured
Fixed Rate
Debt
  Unsecured
Floating
Rate Debt
  Unsecured
Fixed
Rate Debt
  Total (1)   Weighted
Average
Interest Rate
 

2009

  $ 9,022   $   $   $ 9,022     6.7 %

2010

    9,507     201,000     50,000     260,507     2.7 %

2011

    260,302     200,000         460,302     5.0 %

2012

    32,335         200,000     232,335     7.0 %

2013

    5,080         200,000     205,080     6.5 %

2014

    17,119         250,000     267,119     5.7 %

2015

    5,415         450,000     455,415     6.0 %

2016

    59,219         400,000     459,219     6.2 %

2017

    4,345         250,000     254,345     6.3 %

2018

    4,632         250,000     254,632     6.6 %

2019

    4,938             4,938     6.4 %

2020 and thereafter

    43,981             43,981     6.5 %
                       

  $ 455,895   $ 401,000   $ 2,050,000   $ 2,906,895     5.8 %
                       

(1)
Total debt as of December 31, 2008, net of unamortized premiums and discounts, equals $2,889,918.

        When significant amounts are outstanding under our revolving credit facility or as the maturity dates of our revolving credit facility and term debts approach, we explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt and issuing new equity securities. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

        Recent capital markets conditions have been challenging. The availability and cost of credit have been and may continue to be adversely affected by illiquid capital markets and wide credit spreads, and equity markets have been extremely volatile. While we believe we will have access to various types of financings, including debt or equity offerings, to fund our future acquisitions and to pay our debts and other obligations, there can be no assurance that we will be able to complete any debt or equity offerings or that our cost of any future public or private financings will be reasonable. If current market conditions continue or worsen, one or more lenders under our revolving credit facility may be unable or unwilling to fund advances which we request or we may not be able to access additional capital. Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, credit ratings on our securities, the market price of our common shares, the performance of our tenants, including any restructurings, disruptions or bankruptcies of our tenants, and the perception of our potential future earnings and cash distributions. Impacts such as these might impair our ability to make future acquisitions and make our current growth plans unachievable. Also, the current market conditions have led to materially increased credit spreads which, if they continue, may result in a material increase in our costs when we refinance our debt maturities. These interest cost increases could have a material and adverse impact on our results of operations and financial condition.

        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. 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

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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 year ended December 31, 2008, we funded improvements to our owned properties totaling $76.3 million and we purchased 54 office and industrial properties for $473.1 million, excluding closing costs, using cash on hand, borrowings under our revolving credit facility, the assumption of $111.4 million of secured mortgage debt, and the issuance of 2,153,941 of our common shares.

        As of February 25, 2009, we have an executed purchase agreement for four properties with an aggregate of approximately 392,000 square feet of space for a total purchase price of $57.5 million, excluding closing costs. This potential purchase transaction is subject to completion of diligence and other customary conditions; because of these contingencies we can provide no assurances that we will purchase these properties.

        In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing for an aggregate purchase price of approximately $565.0 million. Between June and December 31, 2008, we sold 37 of these properties containing 1,545,000 square feet of space for approximately $346.8 million, excluding closing costs, and recognized gains totaling $137.2 million. In January 2009, we sold one additional property for approximately $19.3 million, excluding closing costs, and we expect the closings of the remaining 10 sales to occur in 2010. We and Senior Housing may mutually agree to accelerate the closings of these acquisitions. In addition, because a third party consent was not received, one of the agreements was amended so that one of the remaining buildings with an allocated value of $3.0 million is no longer subject to being sold; in the event that we receive third party consent we may nonetheless sell that building. In June 2008, we also agreed to sell one additional property to a third party for approximately $15 million, excluding closing costs, but that sale has not yet closed.

        Our obligations to complete our uncompleted sales are subject to various conditions typical of commercial real estate purchases. We can provide no assurance that we will sell all of these buildings or that the remaining sales will be completed in 2010 or sooner. In addition, Senior Housing acquired rights of first refusal from us to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) that are leased to tenants in medical related businesses which we will continue to own after these transactions. Senior Housing was formerly our subsidiary, and both we and Senior Housing are managed by RMR. Because we and Senior Housing are both managed by RMR, the terms of these transactions were negotiated by special committees of our and Senior Housing's boards of trustees composed solely of independent trustees of each company who are not trustees of both companies.

        On February 20, 2009, our wholly-owned subsidiary, GOV, filed a registration statement with the SEC for the initial public offering of 10 million common shares. If the GOV registration statement becomes effective and the initial public offering is completed, we expect to own 49.9%, or 9,950,000 common shares of GOV after the completion of the offering (46.4% if the underwriters' over allotment option is exercised in full). We intend to transfer 29 properties, 25 of which are leased primarily to the U.S. Government and four of which are leased to the States of California, Maryland, Minnesota and South Carolina, respectively, to GOV. These properties contain approximately 3.3 million rentable square feet and are located in 14 states and the District of Columbia. GOV is currently negotiating a $250 million secured credit facility with a group of commercial banks. If GOV is successful in obtaining that credit facility, we expect that the initial proceeds of this credit facility would be distributed to us, and we expect to use these proceeds to repay amounts outstanding under our unsecured revolving credit facility or other outstanding debt. If the GOV registration statement becomes effective and the

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initial public offering is completed, GOV expects to use the net proceeds from the offering to reduce amounts outstanding under its secured credit facility.

        As of the date of this Annual Report on Form 10-K, GOV has not received a commitment for the secured credit facility described above; its negotiations to obtain the facility on terms acceptable to GOV and us may not be successful and we expect that any commitment will be subject to various conditions. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the secured credit facility. Accordingly, there can be no assurance that the secured credit facility will be available to GOV.

        In addition, GOV's registration statement for its offering of common shares is subject to review and comment by the SEC, and the offering will not occur unless, among other things, definitive documentation relating to the formation of GOV has been agreed upon, executed and delivered, the SEC has declared the registration statement to be effective, and underwriters have agreed to purchase and distribute the shares proposed to be offered by GOV. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the offering. Accordingly, there can be no assurance that the offering will occur. In such event, we intend that GOV would remain our wholly owned subsidiary. We do not currently intend to proceed with the offering of GOV's common shares described above unless GOV's secured credit facility has been obtained.

        During the year ended December 31, 2008 and 2007, cash expenditures made and capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (amounts in thousands):

 
  Year Ended
December 31,
 
 
  2008   2007  

Tenant improvements

  $ 48,243   $ 59,009  

Leasing costs

    16,478     21,452  

Building improvements (1)

    8,088     13,622  

Development and redevelopment activities (2)

    19,966     35,710  

        Commitments made for expenditures in connection with leasing space during the year ended December 31, 2008, are as follows (amounts in thousands, except as noted):

 
  New
Leases (1)
  Renewals (1)   Total  

Square feet leased during the year

    1,268     3,066     4,334  

Total commitments for tenant improvements and leasing costs

  $ 25,257   $ 15,990   $ 41,247  

Leasing costs per square foot (whole dollars)

  $ 19.92   $ 5.22   $ 9.52  

Average lease term (years)

    6.1     5.4     5.6  

Leasing costs per square foot per year (whole dollars)

  $ 3.27   $ 0.97   $ 1.70  

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        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.

        As of December 31, 2008, our contractual obligations were as follows (dollars in thousands):

 
  Payment Due by Period  
 
  Total   Less than
1 Year
  1-3 Years   3-5 Years   More than
5 Years
 

Long term debt obligations

  $ 2,906,895   $ 9,022   $ 720,809   $ 437,415   $ 1,739,649  

Tenant related obligations (1)

    40,007     36,694     2,462     33     818  

Projected interest expense (2)

    981,074     167,771     305,578     233,977     273,748  
                       

Total

  $ 3,927,976   $ 213,487   $ 1,028,849   $ 671,425   $ 2,014,215  
                       

(1)
Committed tenant related obligations include leasing commissions and tenant improvements and are based on leases executed through December 31, 2008.

(2)
Projected interest expense is attributable to only the long term debt obligations listed above at existing rates and is not intended to project future interest costs which may result from debt prepayments, new debt issuances or changes in interest rates.

        Except as otherwise discussed above under "Our Investment and Financing Liquidity and Resources", we have no commercial paper, swaps, hedges, or off balance sheet arrangements as of December 31, 2008. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade.

Debt Covenants

        Our principal debt obligations at December 31, 2008, were our unsecured revolving credit facility and our $2.25 billion of publicly issued unsecured term debt. Our publicly issued debt is governed by an indenture. Our public debt indenture and related supplements and our revolving credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, restrict our ability to make distributions under certain circumstances and require us to maintain other financial ratios. At December 31, 2008, we were in compliance with all of our covenants under our indenture and related supplements and our revolving credit facility agreement.

        In addition to our unsecured debt obligations, we have $447.7 million of mortgage notes outstanding at December 31, 2008.

        None of our indenture and related supplements, our revolving credit facility or our mortgage notes contain provisions for acceleration or require us to provide collateral security which could be triggered by our debt ratings. However, our senior debt rating is used to determine the interest rate and the fees payable under our revolving credit facility.

        Our public debt indenture and related supplements contain cross default provisions to any other debts of $20 million or more. Similarly, our revolving credit facility contains cross default provisions.

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Related Person Transactions

        RMR provides management services to us and also provides management services to other public and private companies, including Senior Housing, Hospitality Properties, Five Star Quality Care, Inc., or Five Star, and TravelCenters of America LLC, or TravelCenters. Our bylaws require that a certain number of our trustees be managing trustees, meaning a trustee who is not an independent trustee and who has been an employee, officer or director of RMR or involved in our day to day activities for at least one year prior to his or her election.

        We have two agreements with RMR to originate and present investment and divestment opportunities to us and to provide management and administrative services to us: a business management agreement and a property management agreement. The business management agreement provides for compensation at an annual rate equal to 0.7% of our average real estate investments, as described in the agreement, up to the first $250.0 million of such investments, and 0.5% thereafter. In addition, RMR receives an incentive fee based upon increases in our funds from operations per share, as defined in the business management agreement. The incentive fee is paid in common shares. The property management agreement provides for management fees equal to 3.0% of gross rents and construction management fees equal to 5.0% of certain construction costs. Renewals or extensions of the business management agreement and the property management agreement are subject to the periodic approval of our independent trustees. Any termination of the business management agreement would cause a default under our revolving credit facility, if not approved by a majority of our lenders. Aggregate fees paid by us to RMR during 2008 were $63.4 million. RMR also provides the internal audit function for us and for other publicly owned companies to which it provides management services. Our audit committee appoints our director of internal audit, and our compensation committee approves his salary and the costs we pay with respect to our internal audit function. Our pro rata share of RMR's costs in providing that function was $209,000 in 2008. RMR also leases approximately 27,100 square feet of office space for nine regional offices. We received approximately $630,000 in rental income from RMR in 2008, which we believe is a commercially reasonable rental rate for such office space. Messrs. Barry M. Portnoy and his son, Adam D. Portnoy, beneficially own RMR and are our managing trustees. Adam Portnoy is the President, Chief Executive Officer and a director of RMR. All transactions between us and RMR are approved by our compensation committee which is composed of independent trustees. For more information about the terms of our management agreement with RMR, please read these agreements, copies of which were filed as exhibits to our Current Reports on Form 8-K, dated February 11, 1998, December 16, 1999, and March 10, 2004, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

        In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing for an aggregate purchase price of approximately $565.0 million. Between June and December 31, 2008, we sold 37 of these properties containing 1,545,000 square feet of space for approximately $346.8 million, excluding closing costs, and recognized gains totaling $137.2 million. In January 2009, we sold one additional property for approximately $19.3 million, excluding closing costs, and we expect the closings of the remaining 10 sales to occur in 2010. We and Senior Housing may mutually agree to accelerate the closings of these acquisitions. In addition, because a third party consent was not received, one of the agreements was amended so that one of the remaining buildings with an allocated value of $3.0 million is no longer subject to being sold; in the event that we receive third party consent we may nonetheless sell that building. Our obligations to complete the remaining sales to Senior Housing are subject to various conditions typical of commercial real estate purchases. We can provide no assurance that we will sell all of these buildings or that the remaining sales will be completed in 2010 or sooner. Senior Housing was formerly our subsidiary; both we and Senior Housing are managed by RMR; Barry Portnoy and Adam Portnoy are managing trustees of both us and Senior Housing; and Frederick N. Zeytoonjian is an independent trustee of both us and Senior Housing.

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        Senior Housing was formerly our 100% owned subsidiary. It was spun off to our shareholders in 1999 and, at the time of this spin off, we and Senior Housing entered into a transaction agreement which, among other things, prohibited Senior Housing from purchasing medical office, clinic and biotech laboratory buildings. Concurrently with the execution and delivery of the purchase agreements described above, we and Senior Housing entered into an amendment to that transaction agreement, or the first amendment agreement, to permit Senior Housing, rather than us, to invest in medical office, clinic and biomedical, pharmaceutical and laboratory buildings. The first amendment agreement is subject, in the case of mixed use buildings, to our retaining the right to invest in any mixed use building for which the rentable square footage is less than 50% medical office, clinic and biomedical, pharmaceutical and laboratory use. Also, concurrently with the execution and delivery of the purchase agreements, we entered into a right of first refusal agreement under which we granted Senior Housing a right of first refusal to purchase up to 45 additional identified other properties (containing approximately 4.6 million square feet of rental space) we own which are leased to tenants in medical related businesses in the event we determine to sell such properties or in the event of an indirect sale as a result of our change of control or a change of control of our subsidiary which owns such properties.

        The terms of our agreements entered in 2008 with Senior Housing were negotiated and approved by special committees of our and Senior Housing's boards composed of independent trustees of each company who are not independent trustees of both. For more information about the terms of the purchase agreements, the first amendment agreement and the right of first refusal agreement between us and Senior Housing, please read these agreements, copies of which are filed as exhibits to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

        On February 20, 2009, our wholly owned subsidiary, GOV, filed a registration statement with the SEC for the initial public offering of 10 million common shares. If the GOV registration statement becomes effective and the initial public offering is completed, we expect to own 49.9%, or 9,950,000 common shares of GOV after the completion of the offering (46.4% if the underwriters' over allotment option is exercised in full). We intend to transfer 29 properties, 25 of which are leased primarily to the U.S. Government and four of which are leased to the States of California, Maryland, Minnesota and South Carolina, respectively, to GOV. These properties contain approximately 3.3 million rentable square feet and are located in 14 states and the District of Columbia. GOV is currently negotiating a $250 million secured credit facility with a group of commercial banks. If GOV is successful in obtaining that credit facility, we expect that the initial proceeds of this credit facility will be distributed to us. If the initial public offering of GOV is successfully completed, GOV will enter management agreements with RMR which are on terms that are substantially similar to our management agreements with RMR; and accordingly, our management fees to RMR may be reduced by the amount of the initial management fees paid to RMR by GOV.

        In order to govern the separation of GOV from us, we intend to enter into a transaction agreement with GOV. We expect that the transaction agreement will provide that:

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        The above restrictions will not prohibit us from leasing our current and future properties to government tenants.

        We have no present intention to sell any of our retained government leased properties or to engage in any transaction which might cause GOV's right to purchase those properties to become exercisable; however, we will have the right to change our intention regarding these properties at any time in our discretion.

        We expect that, if GOV's offering is completed, our two managing trustees will also be managing trustees of GOV and that RMR will provide general business and property management services to GOV as well as to us.

        As of the date of this Annual Report on Form 10-K, GOV has not received a commitment for the secured credit facility described above; its negotiations to obtain the facility on terms acceptable to GOV and us may not be successful and we expect that any commitment will be subject to various conditions. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the secured credit facility. Accordingly, there can be no assurance that the secured credit facility will be available to GOV.

        In addition, GOV's registration statement for its offering of common shares is subject to review and comment by the SEC, and the offering will not occur unless, among other things, definitive documentation relating to the formation of GOV has been agreed upon, executed and delivered, the SEC has declared the registration statement to be effective, and underwriters have agreed to purchase and distribute the shares proposed to be offered by GOV. We may also determine in our discretion, due to market conditions or otherwise, not to proceed with the offering. Accordingly, there can be no assurance that the offering will occur. In such event, we intend that GOV would remain our wholly owned subsidiary. We do not currently intend to proceed with the offering of GOV's common shares described above unless GOV's secured credit facility has been obtained.

        We, RMR and other companies to which RMR provides management services are in the process of forming and licensing an insurance company in the State of Indiana. All of our trustees are currently serving on the board of directors of this insurance company. We expect that RMR, in addition to being a shareholder, will enter a management agreement with this insurance company, pursuant to which RMR will provide the insurance company certain management and administrative services. In addition, it is expected that the insurance company will enter an investment advisory agreement with RMR Advisors, Inc., or Advisors, pursuant to which Advisors will act as the insurance company's investment advisor. The same persons who own and control RMR, including Messrs. Barry Portnoy and Adam Portnoy, our managing trustees, own and control Advisors. We have invested $25,000 to date in the insurance company and are committed to invest another $4,975,000, and we currently own and intend to own approximately 16.67% of this insurance company. We may invest additional amounts in the

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insurance company in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. Over time we expect to transfer some or all of our insurance business to this company. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing insurance expenses and/or by having our pro-rata share of any profits realized by this insurance business. See "Item 9B. Other Information" of this Annual Report on Form 10-K for additional information regarding this insurance company and our participation in that insurance company.

Policies and Procedures Concerning Conflicts of Interest and Related Person Transactions

        Our code of business conduct and ethics, or Code of Conduct, and governance guidelines address review and approval of activities, interests or relationships that interfere with, or appear to interfere with, our interests, including related person transactions. Persons subject to our Code of Conduct and governance guidelines are under a continuing obligation to disclose any such conflicts of interest and may pursue a transaction or relationship which involves such conflicts of interest only if the transaction or relationship has been approved as follows:

        The following is a summary of provisions of our declaration of trust affecting certain transactions with related persons. Because it is a summary of the material terms, it does not contain all the information that may be important to you. If you would like more information, you should read our entire declaration of trust, which has been filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. Under our declaration of trust:

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Critical Accounting Policies

        Our critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our:

        We have historically allocated the purchase prices of properties to land and building and improvements, and each component generally has a different useful life. For properties acquired subsequent to June 1, 2001, the effective date of FAS 141, we allocate the value of real estate acquired among land, building and improvements and identified intangible assets and liabilities, consisting of the value of above market and below market leases, the value of in place leases and the value of tenant relationships. Purchase price allocations and the determination of useful lives are based on our

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estimates. In some circumstances we engage independent real estate appraisal firms to provide market information and evaluations that are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determination of useful lives.

        We allocate the purchase prices to land and building and improvements based on our determination of the relative fair values of these assets assuming the property is vacant. We determine the fair value of a property using methods which we believe are similar to those used by independent appraisers. We allocate purchase prices to above market and below market leases based on the estimated present value (using an interest rate which reflects our assessment of the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in place leases and (ii) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. We allocate the excess of (i) the purchase price paid for a property after adjusting existing in place leases to estimated market rental rates over (ii) the estimated fair value of the property as if vacant to in place leases and tenant relationships. This aggregate value is allocated between in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease; however, the value of tenant relationships has not been separated from in place lease value because such value and related amortization expense is immaterial for acquisitions reflected in our financial statements. Factors we consider in performing these analyses include estimates of carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs. If the value of tenant relationships is material in the future, we will separately allocate those amounts and amortize them over the estimated life of the relationships.

        We compute depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to 12 years for personal property. The allocated cost of land is not depreciated. We allocate capitalized above market lease values (included in acquired real estate leases in the accompanying consolidated balance sheet) as a reduction to rental income over the remaining terms of the respective leases on a straight line basis. We allocate capitalized below market lease values (presented as acquired real estate lease obligations in the accompanying consolidated balance sheet) as an increase to rental income over the remaining terms of the respective leases on a straight line basis. We amortize the value of in place leases exclusive of the value of above market and below market in place leases to expense over the remaining terms of the respective leases on a straight line basis. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Our purchase price allocations require us to make certain assumptions and estimates. Incorrect assumptions and estimates may result in inaccurate depreciation and amortization charges over future periods.

        We periodically evaluate our real estate properties for impairment. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that could permanently reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the related real estate property by comparing it to the expected future undiscounted cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.

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        Some of our real estate properties are leased on a triple net basis, pursuant to non-cancelable, fixed term, leases. Each time we enter a new lease or materially modify an existing lease we evaluate its classification as either a capital lease or operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases and make our stated revenues and income inaccurate.

        These policies involve significant judgments made based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Competition, economic conditions and other factors may cause occupancy declines in the future. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets.

IMPACT OF INFLATION

        Inflation might have both positive and negative impacts upon us. Inflation might cause the value of our real estate to increase. Inflation might also cause our costs of equity and debt capital and other operating costs to increase. An increase in our capital costs or in our operating costs will result in decreased earnings unless it is offset by increased revenues.

        To mitigate the adverse impact of increased costs of debt capital in the event of material inflation, we may enter into interest rate hedge arrangements in the future. The decision to enter into these agreements will be based on the amount of our floating rate debt outstanding, our belief that material interest rate increases are likely to occur and upon requirements of our borrowing arrangements.

        In periods of rapid inflation, our tenants' operating costs may increase faster than revenues and this fact may have an adverse impact upon us if our tenants' operating income becomes insufficient to pay our rent. To mitigate the adverse impact of increased operating costs, we require some of our tenants to provide guarantees or security for our rent.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2007. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

        At December 31, 2008, our total outstanding fixed rate term debt consisted of the following fixed rate notes:

Amount
  Coupon   Maturity  

Unsecured senior notes:

             
 

$30.0 million

   
8.875

%
 
2010
 
 

$20.0 million

    8.625 %   2010  
 

$200.0 million

    6.950 %   2012  
 

$200.0 million

    6.500 %   2013  
 

$250.0 million

    5.750 %   2014  
 

$200.0 million

    6.400 %   2015  
 

$250.0 million

    5.750 %   2015  
 

$400.0 million

    6.250 %   2016  
 

$250.0 million

    6.250 %   2017  
 

$250.0 million

    6.650 %   2018  

No principal repayments are due under the unsecured senior notes until maturity.

 

Secured notes:

             
 

$.1 million

   
5.170

%
 
2009
 
 

$234.8 million

    6.814 %   2011  
 

$30.4 million

    7.435 %   2011  
 

$24.4 million

    8.050 %   2012  
 

$5.1 million

    6.000 %   2012  
 

$13.5 million

    4.950 %   2014  
 

$8.8 million

    5.760 %   2016  
 

$41.6 million

    6.030 %   2016  
 

$13.0 million

    7.360 %   2016  
 

$4.8 million

    6.750 %   2022  
 

$15.9 million

    6.140 %   2023  
 

$9.0 million

    5.710 %   2026  
 

$14.2 million

    6.060 %   2027  
 

$40.3 million

    6.794 %   2029  

        Our secured notes are secured by 28 of our properties and require principal and interest payments through maturity pursuant to amortization schedules.

        Because these notes bear interest at fixed rates, changes in market interest rates during the term of this debt will not affect our operating results. If all of our fixed rate unsecured and secured notes outstanding at December 31, 2008, were to be refinanced at interest rates which are 10% higher or lower than shown above, our per annum interest cost would increase or decrease, respectively, by approximately $16.1 million.

        Changes in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest

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rates increase the value of our fixed rate debt. Based on the balances outstanding at December 31, 2008, and discounted cash flow analyses, a hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations by approximately $100 million.

        Each of our fixed rate unsecured and secured debt arrangements allows us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and in most cases we are allowed to make prepayments only at a premium equal to a make whole amount, as defined, generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing prior to maturity. The majority of our fixed rate senior notes are publicly traded; and we may occasionally take advantage of market opportunities to repurchase notes which will also mitigate future refinancing risks.

        At December 31, 2008, we had $201 million outstanding and $549 million available for drawing under our unsecured revolving credit facility and $200 million outstanding on our floating rate senior notes. Our revolving credit facility and floating rate senior notes mature in August 2010 and March 2011, respectively. Repayments under our revolving credit facility may be made at any time without penalty. Repayments under our floating rate senior notes may also be made without penalty. We borrow in U.S. dollars and borrowings under our revolving credit facility and our floating rate senior notes require interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. For example, the weighted average interest rate payable on our revolver and floating rate senior notes was 3.5% during 2008. A change in interest rates would not affect the value of these floating rate debts but would affect our operating results. The following table presents the impact a 10% change in interest rates would have on our floating rate interest expense as of December 31, 2008 (dollars in thousands):

 
  Impact of Changes in Interest Rates  
 
  Interest Rate
Per Year
  Outstanding
Debt
  Total Interest
Expense
Per Year
 

At December 31, 2008

    3.5 % $ 401,000   $ 14,035  

10% reduction

    3.2 % $ 401,000   $ 12,832  

10% increase

    3.9 % $ 401,000   $ 15,639  

        The foregoing table shows the impact of an immediate change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount of our revolving credit facility or other floating rate debt.

Item 8.    Financial Statements and Supplementary Data

        The information required by this item is included in Item 15 of this Annual Report on Form 10-K.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

        As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our managing trustees, President & Chief Investment Officer and Treasurer & Chief Financial Officer of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that

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evaluation, our managing trustees, President & Chief Investment Officer and Treasurer & Chief Financial Officer concluded that our disclosure controls and procedures are effective.

        There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Assessment of Internal Control Over Financial Reporting

        We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and board of trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

        Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework. Based on our assessment, we believe that, as of December 31, 2008, our internal control over financial reporting is effective.

        Ernst & Young LLP, the independent registered public accounting firm that audited our 2008 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. The report appears elsewhere herein.

Item 9B.    Other Information

Affiliates Insurance Company

        On February 27, 2009, we entered into a shareholders agreement, or the Shareholders Agreement, with Affiliates Insurance Company, a company being formed and licensed as an insurance company in the State of Indiana, or AIC, Five Star, TravelCenters, Hospitality Properties, Senior Housing and RMR. With respect to AIC, we refer to ourselves, RMR, Five Star, TravelCenters, Hospitality Properties and Senior Housing, collectively, as the Shareholders.

        Pursuant to the Shareholders Agreement, each of the Shareholders has purchased from AIC 100 shares of common stock, par value of $10.00 per share, of AIC, or the Shares, at a purchase price of $250.00 per Share and has committed to purchase from AIC an additional 19,900 Shares (such additional share purchase, we refer to as the "Second Subscription") within five business days of a request from AIC at the same purchase price per Share. The Shareholders comprise all the shareholders of AIC and each Shareholder currently owns approximately 16.67% of the outstanding Shares.

        AIC has been formed to provide insurance and risk management services to the Shareholders and their subsidiaries.

Board Representation

        The Shareholders Agreement provides that for so long as a Shareholder (other than RMR) owns not less than 10% of the issued and outstanding Shares, such Shareholder has the right to designate two directors for election to the board of directors of AIC and that so long as RMR owns not less than 10% of the issued and outstanding Shares, RMR has the right to designate three directors for election to the board of directors of AIC, including one director who is a resident of Indiana. The board of directors of AIC is currently composed of 13 directors.

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Transfer Restrictions, Preemptive Rights and Call Options

        Subject to certain exceptions, the Shareholders Agreement prohibits the Shareholders from transferring Shares. Under the Shareholders Agreement, the Shareholders have rights to participate in future securities offerings by AIC in proportion to their Share ownership.

        In addition, under the Shareholders Agreement, if a Shareholder undergoes a change of control (as defined in the Shareholders Agreement), AIC will have, for a specified period of time, a right to repurchase the securities of AIC owned by that Shareholder. Any AIC securities not acquired by AIC may, for a specified period of time, be purchased by the Shareholders which did not undergo a change of control in proportion to their Share ownership.

Special Shareholder Approval Requirements

        The Shareholders Agreement prohibits AIC from taking certain actions unless Shareholders owning 75% of the Shares owned by all Shareholders approve of such action in advance. Those actions include:

Regulatory Matters

        The Shareholders Agreement requires AIC to comply in all material respects with applicable laws governing its business and operations. In addition, if by virtue of a Shareholder's ownership interest in AIC or actions taken by a Shareholder affecting AIC, the Shareholder triggers the application of any requirement or regulation on AIC or any subsidiary of AIC or any of their respective businesses, assets or operations, then the Shareholders Agreement generally requires that Shareholder to promptly take all actions necessary and fully cooperate with AIC to ensure that such requirements and regulations are satisfied without restricting, imposing additional obligations on or in any way limiting the business, assets, operations or prospects of AIC or any subsidiary of AIC. Also, the Shareholders Agreement requires each Shareholder to use best efforts to cause its shareholders, directors (or analogous position), nominees for director (or analogous position), officers, employees and agents to comply with any applicable laws impacting AIC or any of its subsidiaries or their respective businesses, assets or operations.

Termination

        The Shareholders Agreement may be terminated at any time by Shareholders owning at least 75% of the issued and outstanding Shares owned by all Shareholders or upon the dissolution of AIC.

        The foregoing description of the Shareholders Agreement is not complete and is qualified in its entirety by reference to the full text of the Shareholders Agreement, a copy of which is attached as Exhibit 10.63 to this Annual Report on Form 10-K. The Shareholders Agreement is incorporated herein by reference in its entirety.

        In furtherance of AIC's business and operations, AIC also intends to enter a management and administrative services agreement with RMR pursuant to which RMR will provide AIC certain management and administrative services and, as soon as practicable following the receipt by AIC of the amounts for the Second Subscription from the Shareholders, an investment advisory agreement with

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Advisors, who is affiliated with RMR, pursuant to which Advisors will act as AIC's investment adviser. The same persons who own and control RMR, including Messrs. Barry Portnoy and Adam Portnoy, our managing trustees, own and control Advisors.

Information Regarding Certain Relationships and Related Transactions

        Senior Housing was formerly our 100% owned subsidiary and we continue to have relationships with Senior Housing, including the series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing discussed elsewhere in this Annual Report on Form 10-K. RMR provides management services to us. Please see elsewhere in this Annual Report on Form 10-K for a further description of our relationships with Senior Housing and RMR and our definitive proxy statement for the 2009 annual meeting of shareholders, which will be filed with the SEC not later than 120 days after the end of our fiscal year. In addition, RMR also provides management services to Five Star, Senior Housing, Hospitality Properties and TravelCenters and we understand that those entities also have certain relationships with each other, such as lease arrangements for properties. We understand that further information regarding those relationships is provided in the applicable Shareholders' periodic reports filed with the SEC. In addition, our independent trustees also serve as directors or trustees of certain of the other Shareholders and directors and trustees of certain of the Shareholders other than the Company serve as directors or trustees of other Shareholders. Mr. Barry Portnoy serves as a managing director or trustee of each of the Shareholders and Mr. Adam Portnoy serves as a managing trustee of Senior Housing and Hospitality Properties.

Amendment to our Bylaws

        On February 25, 2009, our board of trustees adopted an amendment to our bylaws, effective that same day. The amendment revised the advance notice procedures under our bylaws to require that a shareholder seeking to nominate any person for election as trustee or propose other business for consideration at an applicable meeting of our shareholders must have continuously held at least $2,000 in market value, or 1%, of our shares entitled to vote at the meeting on the election or the proposal of other business, as the case may be, for at least one year from the date the shareholder gives its advance notice and continuously hold those shares through and including the time of the meeting. The amendment provides that this requirement will not apply until April 1, 2010 with respect to a shareholder who continuously holds from and after April 1, 2009 shares entitled to vote at the meeting on such election or proposal of other business, as the case may be. For purposes of determining compliance with the $2,000 market value requirement, the amendment provides that the market value of our shares held by the applicable shareholder shall be determined by multiplying the number of shares such shareholder held continuously for that one year period by the highest selling price of our shares as reported on the principal national securities exchange on which our shares are listed for trading during the 60 calendar days before the date the shareholder's notice was submitted. The amendment also revised the advance notice procedures under our bylaws to require a shareholder seeking to nominate any person for election as trustee or propose other business for consideration at an applicable meeting of our shareholders to hold a certificate for all our shares owned by such shareholder during all times described with regard to a shareholder's qualifications for validly submitting a notice to nominate any person for election as trustee or propose other business for consideration at an applicable meeting of our shareholders, including the time periods referred to above. The amendment also applied the foregoing requirements to the process for shareholders seeking to have a special meeting of our shareholders called or to have our shareholders act by written consent. The amendment also included certain other conforming changes.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        We have adopted a code of business conduct and ethics that applies to all our representatives, including our officers and trustees and employees of RMR. Our code of business conduct and ethics is posted on our website, www.hrpreit.com. A printed copy of our code of business conduct and ethics is also available free of charge to any person who requests a copy by writing to our Secretary, HRPT Properties Trust, 400 Centre Street, Newton, MA 02458. We intend to disclose any amendments or waivers to our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions on our website.

        The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Item 11.    Executive Compensation

        The information required by Item 11 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        Equity Compensation Plan Information.    We may grant common shares to our officers and other employees of RMR, subject to vesting requirements under our 2003 Incentive Share Award Plan, or the Award Plan. In addition, each of our trustees receives 4,000 shares per year as part of their annual compensation for serving as our trustees. The terms of grants made under the Award Plan are determined by our board of trustees or a committee thereof at the time of the grant. The following table is as of December 31, 2008.

Plan Category
  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
  Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
  Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
 

Equity compensation plans approved by security holders

  None.   None.     None.  

Equity compensation plans not approved by security holders (2003 Incentive Share Award Plan)

 

None.

 

None.

   
6,047,538
 

Total

 

None.

 

None.

   
6,047,538
 

        Payments by us to RMR are described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Related Person Transactions".

        The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

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Item 13.    Certain Relationships and Related Transactions, and Director Independence

        The information required by Item 13 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Item 14.    Principal Accountant Fees and Services

        The information required by Item 14 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)   Index to Financial Statements and Financial Statement Schedules

        The following consolidated financial statements and financial statement schedules of HRPT Properties Trust are included on the pages indicated:

 
  Page

Reports of Independent Registered Public Accounting Firm

  F-1

Consolidated Balance Sheet as of December 31, 2008 and 2007

  F-3

Consolidated Statement of Income for each of the three years in the period ended December 31, 2008

  F-4

Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 2008

  F-5

Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2008

  F-6

Notes to Consolidated Financial Statements

  F-7

Schedule II—Valuation and Qualifying Accounts

  S-1

Schedule III—Real Estate and Accumulated Depreciation

  S-2

        All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.

(c)
Exhibits
  3.1   Composite Copy of Third Amendment and Restatement of Declaration of Trust of the Company, dated July 1, 1994, as amended to date. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)

 

3.2

 

Articles Supplementary, dated November 4, 1994, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, creating the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998)

 

3.3

 

Articles Supplementary, dated May 13, 1997, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998)

 

3.4

 

Articles Supplementary, dated May 22, 1998, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated May 27, 1998)

 

3.5

 

Articles Supplementary, dated May 10, 2000, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, electing for the Trust to be subject to certain sections of the Maryland General Corporation Law. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)

 

3.6

 

Articles Supplementary, dated September 6, 2002, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, creating the Series B Cumulative Redeemable Preferred Shares. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002)

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  3.7   Articles Supplementary, dated June 17, 2003, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated January 7, 2004)

 

3.8

 

Articles Supplementary, dated January 7, 2004, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated January 7, 2004)

 

3.9

 

Articles Supplementary, dated March 16, 2005, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated March 16, 2005)

 

3.10

 

Articles Supplementary, dated September 12, 2005, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated September 12, 2005)

 

3.11

 

Articles Supplementary, dated February 3, 2006, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, creating the Series C Cumulative Redeemable Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 2, 2006)

 

3.12

 

Articles Supplementary, dated October 10, 2006, to the Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, creating the 61/2% Series D Cumulative Convertible Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K dated October 10, 2006)

 

3.13

 

Articles Supplementary, dated December 29, 2006, to the Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K dated December 29, 2006)

 

3.14

 

Articles Supplementary, dated October 16, 2007, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, increasing the Junior Participating Preferred Shares. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 16, 2007)

 

3.15

 

Composite copy of Amended and Restated Bylaws of the Company, as amended and restated on February 25, 2009. (filed herewith)

 

3.16

 

Composite Copy of Amended and Restated Bylaws of the Company, as amended and restated on February 25, 2009 (marked). (filed herewith)

 

4.1

 

Form of Common Share Certificate. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

4.2

 

Form of 83/4% Series B Cumulative Redeemable Preferred Share Certificate. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)

 

4.3

 

Form of 71/8% Series C Cumulative Redeemable Preferred Share Certificate. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)

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  4.4   Form of 61/2% Series D Cumulative Convertible Preferred Share Certificate. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)

 

4.5

 

Renewed Rights Agreement, dated as of March 10, 2004, by and between the Company and EquiServe Trust Company, N.A. (incorporated by reference to the Company's Current Report on Form 8-K, dated March 10, 2004)

 

4.6

 

Appointment of Successor Rights Agent, dated as of December 13, 2004, by and between the Company and Wells Fargo Bank, National Association. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 13, 2004)

 

4.7

 

Indenture, dated as of July 9, 1997, by and between the Company and State Street Bank and Trust Company, or State Street, as Trustee. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)

 

4.8

 

Supplemental Indenture No. 8, dated as of July 31, 2000, by and between the Company and State Street, relating to 8.875% Senior Notes due 2010, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000)

 

4.9

 

Supplemental Indenture No. 9, dated as of September 29, 2000, by and between the Company and State Street, relating to 8.625% Senior Notes due 2010, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated September 28, 2000)

 

4.10

 

Supplemental Indenture No. 10, dated as of April 10, 2002, by and between the Company and State Street, relating to 6.95% Senior Notes due 2012, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)

 

4.11

 

Supplemental Indenture No. 11, dated as of December 6, 2002, by and between the Company and State Street, relating to 6.50% Senior Notes due 2013, including form thereof. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2002)

 

4.12

 

Supplemental Indenture No. 12, dated as of January 30, 2003, by and between the Company and U.S. Bank National Association, or U.S. Bank, relating to 6.40% Senior Notes due 2015, including form thereof. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2002)

 

4.13

 

Supplemental Indenture No. 13, dated as of October 30, 2003, by and between the Company and U.S. Bank, relating to 5.75% Senior Notes due 2014, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated January 7, 2004)

 

4.14

 

Supplemental Indenture No. 14, dated as of August 5, 2004, by and between the Company and U.S. Bank, relating to 6.25% Senior Notes due 2016, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated July 27, 2004)

 

4.15

 

Supplemental Indenture No. 15, dated as of October 31, 2005, by and between the Company and U.S. Bank, relating to 5.75% Senior Notes due 2015, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)

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  4.16   Supplemental Indenture No. 16, dated as of March 16, 2006, by and between the Company and U.S. Bank National Association, including the form of Floating Rate Senior Notes due 2011. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2006)

 

4.17

 

Supplemental Indenture No. 17, dated as of June 25, 2007, by and between the Company and U.S. Bank National Association relating to 6.25% Senior Notes due 2017, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)

 

4.18

 

Supplemental Indenture No. 18, dated as of September 18, 2007, by and between the Company and U.S. Bank National Association relating to 6.65% Senior Notes due 2018, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)

 

4.19

 

Registration Rights Agreement, dated as of July 16, 2008, by and between the Company and Six Plus Investment Partnership, L.P. (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-155976)

 

8.1

 

Opinion of Sullivan & Worcester LLP as to certain tax matters. (filed herewith)

 

10.1

 

Advisory Agreement, dated as of January 1, 1998, by and between the Company and REIT Management & Research, Inc. (+) (incorporated by reference to the Company's Current Report on Form 8-K, dated February 11, 1998)

 

10.2

 

Amendment No. 1 to Advisory Agreement, dated as of October 12, 1999, by and between the Company and REIT Management & Research, Inc. (+) (incorporated by reference to the Company's Current Report on Form 8-K, dated December 16, 1999)

 

10.3

 

Amendment No. 2 to Advisory Agreement, dated as of March 10, 2004, by and between the Company and Reit Management & Research LLC (+) (incorporated by reference to the Company's Current Report on Form 8-K, dated March 10, 2004)

 

10.4

 

Amended and Restated Master Management Agreement dated as of January 1, 2006, by and between the Company and Reit Management & Research LLC. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)

 

10.5

 

2003 Incentive Share Award Plan. (+) (incorporated by reference to the Company's Current Report on Form 8-K, dated June 17, 2003)

 

10.6

 

Form of Restricted Share Agreement. (+) (filed herewith)

 

10.7

 

Representative Indemnification Agreement. (+) (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)

 

10.8

 

Summary of Trustee Compensation. (+) (incorporated by reference to the Company's Current Report on Form 8-K, dated June 18, 2008)

 

10.9

 

Transaction Agreement, dated as of September 21, 1999, between Senior Housing Properties Trust and the Company. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 12, 1999)

 

10.10

 

First Amendment to Transaction Agreement, dated as of May 5, 2008, between Senior Housing Properties Trust and the Company. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

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  10.11   Loan and Security Agreement, dated December 15, 2000, by and between Cedars LA LLC, or Cedars, Herald Square LLC, or Herald Square, Indiana Avenue LLC, or Indiana Avenue, Bridgepoint Property Trust, or Bridgepoint, Lakewood Property Trust, or Lakewood, and 1600 Market Street Property Trust, or 1600 Market Street, collectively as Borrowers, and Merrill Lynch Mortgage Lending, Inc., or Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.12

 

Promissory Note in the amount of $260,000,000, dated December 15, 2000, issued by Cedars, Herald Square, Indiana Avenue, Bridgepoint, Lakewood and 1600 Market Street, collectively as Borrowers, to Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.13

 

Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Bridgepoint in favor of William Z. Fairbanks, Jr., or Fairbanks, and for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.14

 

Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Lakewood in favor of Fairbanks and for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.15

 

Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Herald Square to Lawyers Title Realty Services, Inc., or Lawyers Title, for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.16

 

Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Indiana Avenue to Lawyers Title for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.17

 

Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Cedars to Lawyers Title Company for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.18

 

Open-End Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by 1600 Market Street, as Mortgagor, to and for the benefit of Merrill, as Mortgagee. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.19

 

Exceptions to Non-Recourse Guaranty, dated December 15, 2000, entered into by Hub Realty College Park I, LLC, or College Park, as Guarantor, for the benefit of Merrill, as Lender, in reference to the $260,000,000 loan. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.20

 

Loan and Security Agreement, dated December 15, 2000, entered into by and between Franklin Plaza Property Trust, or Franklin Plaza, as Borrower, and Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.21

 

Promissory Note in the amount of $44,000,000, dated December 15, 2000, issued by Franklin Plaza, as Borrower, to Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

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  10.22   Open-End Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Franklin Plaza, as Mortgagor, to and for the benefit of Merrill, as Mortgagee. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.23

 

Exceptions to Non-Recourse Guaranty, dated December 15, 2000, entered by College Park, as Guarantor, for the benefit of Merrill, as Lender, in reference to the $44,000,000 loan. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000)

 

10.24

 

Amended and Restated Credit Agreement, dated as of January 25, 2005, by and among the Company, Wachovia Bank, National Association, as Administrative Agent, and the additional agents, arrangers and financial institutions signatory thereto. (incorporated by reference to the Company's Current Report on Form 8-K, dated January 25, 2005)

 

10.25

 

First Amendment to Amended and Restated Credit Agreement, dated as of August 22, 2006, among the Company, Wachovia Bank, National Association, as Administrative Agent, and the additional agents, arrangers and financial institutions signatory thereto. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated August 22, 2006)

 

10.26

 

Sales Agreement, dated as of December 29, 2006, between the Company and Cantor FitzGerald & Co. relating to the issuance and sale of up to 20,000,000 common shares of beneficial interest. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 29, 2006)

 

10.27

 

Purchase and Sale Agreement, dated as of May 5, 2008, among the Company, Hub Properties Trust and MOB Realty Trust, as Sellers, and Senior Housing Properties Trust, as Purchaser (with respect to 21 properties located in Massachusetts, Pennsylvania, and New York). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.28

 

First Amendment to Purchase and Sale Agreement, dated as of August 7, 2008, among the Company, Hub Properties Trust, MOB Realty Trust, as Seller, and Senior Housing Properties Trust, as Purchaser. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)

 

10.29

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Torrey Pines, 3030-50, Science Park Road, San Diego, California). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.30

 

First Amendment to Purchase Agreement, dated as of December 23, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Torrey Pines, 3030-50, Science Park Road, San Diego, California). (incorporated by reference to the Company's Current Report on Form 8-K, dated December 24, 2008)

 

10.31

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Amelia Building, 855 Kempsville Road, Norfolk, Virginia). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.32

 

First Amendment to Purchase Agreement, dated as of December 23, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Amelia Building, 855 Kempsville Road, Norfolk, Virginia). (incorporated by reference to the Company's Current Report on Form 8-K, dated December 24, 2008)

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  10.33   Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Halifax Building, 6161 Kempsville Circle, Norfolk, Virginia). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.34

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Fair Oaks, 4001 Fair Ridge Drive, Fairfax, Virginia). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.35

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 2141 K Street, NW, Washington, DC). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.36

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 6818 Austin Center Blvd., Austin, Texas). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.37

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 1145 19th Street, NW, Washington, DC). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.38

 

First Amendment to Purchase Agreement, dated as of December 23, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 1145 19th Street, NW, Washington, DC). (incorporated by reference to the Company's Current Report on Form 8-K, dated December 24, 2008)

 

10.39

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Oklahoma Clinics, 8315 So. Walker Ave., 701 NE 10th Street, 200 N. Bryant, 600 National Ave., Oklahoma City, Oklahoma). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.40

 

First Amendment to Purchase Agreement, dated as of December 23, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Oklahoma Clinics, 8315 So. Walker Ave., 701 NE 10th Street, 200 N. Bryant, 600 National Ave., Oklahoma City, Oklahoma). (incorporated by reference to the Company's Current Report on Form 8-K, dated December 24, 2008)

 

10.41

 

Purchase and Sale Agreement, dated as of May 5, 2008, between the Company, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to HIP of White Plains, 15 North Broadway, White Plains, New York). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.42

 

First Amendment to Purchase and Sale Agreement, dated as of January 26, 2009, between the Company, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to HIP of White Plains, 15 North Broadway, White Plains, New York). (filed herewith)

 

10.43

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 4770 Regent Boulevard, Irving, Texas). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

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  10.44   First Amendment to Purchase and Sale Agreement, dated as of June 25, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 4770 Regent Boulevard, Irving, Texas). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.45

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub RI Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 701 George Washington Highway, Lincoln, Rhode Island). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.46

 

First Amendment to Purchase and Sale Agreement, dated as of June 25, 2008, between Hub RI Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 701 George Washington Highway, Lincoln, Rhode Island). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.47

 

Purchase and Sale Agreement, dated as of May 5, 2008, between 4 Maguire Road Realty Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 4 Maguire Road, Lexington, Massachusetts). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.48

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 4000 Old Court Road, Pikesville, Maryland). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.49

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 1825, 1911 and 1925 N. Mills Avenue, Orlando, Florida). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.50

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Bailey Square, 1111 W. 34th Street, Austin, Texas). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.51

 

First Amendment to Purchase and Sale Agreement, dated as of June 25, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Bailey Square, 1111 W. 34th Street, Austin, Texas). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.52

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Brittonfield II and III, Lot 5E-2 and Lot 5E-1, 5008 Brittonfield Parkway, East Syracuse, New York). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.53

 

First Amendment to Purchase and Sale Agreement, dated as of July 9, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Brittonfield II and III, Lot 5E-2 and Lot 5E-1, 5008 Brittonfield Parkway, East Syracuse, New York). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.54

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Centre Commons, 5750 Centre Ave., Pittsburgh, Pennsylvania). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

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  10.55   First Amendment to Purchase and Sale Agreement, dated as of June 11, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Centre Commons, 5750 Centre Ave., Pittsburgh, Pennsylvania). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.56

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 710 North Euclid, Anaheim, California). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.57

 

First Amendment to Purchase and Sale Agreement, dated as of July 9, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 710 North Euclid, Anaheim, California). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.58

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 525 Virginia Drive, Fort Washington, Pennsylvania). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.59

 

First Amendment to Purchase and Sale Agreement, dated as of June 25, 2008, between Hub Properties Trust, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to 525 Virginia Drive, Fort Washington, Pennsylvania). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.60

 

Purchase and Sale Agreement, dated as of May 5, 2008, between Hub Northeast Medical Arts Center LLC, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Northeast Medical Arts Center, 2801 North Decatur Road, Decatur, Georgia). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.61

 

First Amendment to Purchase and Sale Agreement, dated as of July 9, 2008, between Hub Northeast Medical Arts Center LLC, as Seller, and Senior Housing Properties Trust, as Purchaser (with respect to Northeast Medical Arts Center, 2801 North Decatur Road, Decatur, Georgia). (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.62

 

Right of First Refusal Agreement dated as of May 5, 2008 between the Company, Blue Dog Properties Trust, Cedars LA LLC, HRP NOM L.P., HRP NOM 2 L.P., HRPT Medical Buildings Realty Trust, Hub Properties Trust, Lakewood Property Trust, LTMAC Properties LLC, Hub Mid-West LLC, and Rosedale Properties Limited Liability Company, as Grantors, and Senior Housing Properties Trust. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)

 

10.63

 

Shareholders Agreement, dated as of February 27, 2009, by and among the Company, Affiliates Insurance Company, Five Star Quality Care, Inc., Hospitality Properties Trust, Senior Housing Properties Trust, TravelCenters of America LLC and Reit Management & Research LLC. (filed herewith)

 

12.1

 

Computation of ratio of earnings to fixed charges. (filed herewith)

 

12.2

 

Computation of ratio of earnings to combined fixed charges and preferred distributions. (filed herewith)

 

21.1

 

Subsidiaries of the Registrant. (filed herewith)

 

23.1

 

Consent of Ernst & Young LLP. (filed herewith)

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  23.2   Consent of Sullivan & Worcester LLP. (included as part of Exhibit 8.1 hereto)

 

31.1

 

Rule 13a-14(a) Certification. (filed herewith)

 

31.2

 

Rule 13a-14(a) Certification. (filed herewith)

 

31.3

 

Rule 13a-14(a) Certification. (filed herewith)

 

31.4

 

Rule 13a-14(a) Certification. (filed herewith)

 

32.1

 

Section 1350 Certification. (furnished herewith)

(+)
Management contract or compensatory plan or arrangement.

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Report of Independent Registered Public Accounting Firm

To the Trustees and Shareholders of HRPT Properties Trust

        We have audited the accompanying consolidated balance sheets of HRPT Properties Trust as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HRPT Properties Trust at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HRPT Properties Trust's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion thereon.

Boston, Massachusetts
February 25, 2009

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Report of Independent Registered Public Accounting Firm

To the Trustees and Shareholders of HRPT Properties Trust

        We have audited HRPT Properties Trust's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). HRPT Properties Trust's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A of HRPT Properties Trust's Annual Report on Form 10-K under the heading Management Report on Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, HRPT Properties Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2008 consolidated financial statements of HRPT Properties Trust and our report dated February 25, 2009 expressed an unqualified opinion thereon.

Boston, Massachusetts
February 25, 2009

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HRPT PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(amounts in thousands, except share data)

 
  December 31,  
 
  2008   2007  

ASSETS

             

Real estate properties:

             
 

Land

  $ 1,220,554   $ 1,189,684  
 

Buildings and improvements

    5,021,703     4,966,610  
           

    6,242,257     6,156,294  
 

Accumulated depreciation

    (862,958 )   (808,216 )
           

    5,379,299     5,348,078  

Properties held for sale

    145,849      

Acquired real estate leases, net

    164,308     150,672  

Cash and cash equivalents

    15,518     19,879  

Restricted cash

    10,837     18,027  

Rents receivable, net of allowance for doubtful accounts of $8,492 and $6,290, respectively

    196,839     197,967  

Other assets, net

    103,449     124,709  
           

Total assets

  $ 6,016,099   $ 5,859,332  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Revolving credit facility

  $ 201,000   $ 140,000  

Senior unsecured debt, net

    2,241,225     2,239,784  

Mortgage notes payable, net

    447,693     394,376  

Other liabilities related to properties held for sale

    3,400      

Accounts payable and accrued expenses

    99,285     89,441  

Acquired real estate lease obligations, net

    47,839     41,607  

Rent collected in advance

    26,537     24,779  

Security deposits

    17,935     16,063  

Due to affiliates

    10,073     10,399  
           

Total liabilities

    3,094,987     2,956,449  
           

Commitments and contingencies

             

Shareholders' equity:

             
 

Preferred shares of beneficial interest, $0.01 par value:

             
   

50,000,000 shares authorized;

             
     

Series B preferred shares; 83/4% cumulative redeemable at par on or after September 12, 2007; 7,000,000 shares issued and outstanding, aggregate liquidation preference $175,000

    169,079     169,079  
     

Series C preferred shares; 71/8% cumulative redeemable at par on or after February 15, 2011; 6,000,000 shares issued and outstanding, aggregate liquidation preference $150,000

    145,015     145,015  
     

Series D preferred shares; 61/2% cumulative convertible; 15,180,000 shares issued and outstanding, aggregate liquidation preference $379,500

    368,270     368,270  
 

Common shares of beneficial interest, $0.01 par value:

             
   

350,000,000 shares authorized; 227,731,938 and 225,444,497 shares issued and outstanding, respectively

    2,277     2,254  
 

Additional paid in capital

    2,937,986     2,923,455  
 

Cumulative net income

    2,072,254     1,827,609  
 

Cumulative common distributions

    (2,441,841 )   (2,251,539 )
 

Cumulative preferred distributions

    (331,928 )   (281,260 )
           
   

Total shareholders' equity

    2,921,112     2,902,883  
           

Total liabilities and shareholders' equity

  $ 6,016,099   $ 5,859,332  
           

See accompanying notes

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HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(amounts in thousands, except per share data)

 
  Year Ended December 31,  
 
  2008   2007   2006  

Rental income

  $ 835,540   $ 783,266   $ 744,008  
               

Expenses:

                   
 

Operating expenses

    347,958     315,131     297,736  
 

Depreciation and amortization

    185,657     170,321     149,072  
 

General and administrative

    36,812     33,711     30,222  
               
   

Total expenses

    570,427     519,163     477,030  
               

Operating income

    265,113     264,103     266,978  

Interest income

   
1,442
   
2,293
   
2,736
 

Interest expense (including amortization of debt discounts, premiums and deferred financing fees of $5,479, $4,426 and $4,490, respectively)

    (180,193 )   (170,970 )   (165,568 )

Loss on asset impairment

    (2,283 )        

Loss on early extinguishment of debt

        (711 )   (1,659 )

Equity in earnings of equity investments

            3,136  

Gain on sale of equity investments

            116,287  
               

Income from continuing operations before income tax expense

    84,079     94,715     221,910  

Income tax expense

    (773 )   (395 )    
               

Income from continuing operations

    83,306     94,320     221,910  

Discontinued operations:

                   
 

Income from discontinued operations

    24,165     27,714     25,753  
 

Gain on sale of properties

    137,174     2,221     2,917  
               

Net income

    244,645     124,255     250,580  

Preferred distributions

    (50,668 )   (60,572 )   (44,692 )

Excess redemption price paid over carrying value of preferred shares

        (4,230 )   (6,914 )
               

Net income available for common shareholders

  $ 193,977   $ 59,453   $ 198,974  
               

Weighted average common shares outstanding—basic

    226,468     214,361     209,965  
               

Weighted average common shares outstanding—diluted

    255,661     243,554     216,524  
               

Earnings per common share:

                   
 

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

  $ 0.14   $ 0.14   $ 0.81  
               
 

Income from discontinued operations—basic and diluted

  $ 0.71   $ 0.14   $ 0.14  
               
 

Net income available for common shareholders—basic

  $ 0.86   $ 0.28   $ 0.95  
               
 

Net income available for common shareholders—diluted

  $ 0.86   $ 0.28   $ 0.94  
               

See accompanying notes

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HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(amounts in thousands, except share data)

 
  Preferred Shares   Common Shares    
   
   
 
 
  Series A   Series B   Series C   Series D    
   
   
   
   
   
   
 
 
  Number of
Shares
  Preferred
Shares
  Number of
Shares
  Preferred
Shares
  Number of
Shares
  Preferred
Shares
  Number of
Shares
  Preferred
Shares
  Cumulative
Preferred
Distributions
  Number of
Shares
  Common
Shares
  Cumulative
Common
Distributions
  Additional
Paid in
Capital
  Cumulative
Net Income
  Total  

Balance at December 31, 2005

    8,000,000   $ 193,086     12,000,000   $ 289,849       $       $   $ (176,663 )   209,860,625   $ 2,099   $ (1,894,818 ) $ 2,779,159   $ 1,452,774   $ 2,645,486  

Issuance of shares, net

                    6,000,000     145,015     15,180,000     368,270                             513,285  

Redemption of shares

    (8,000,000 )   (193,086 )                                           (6,914 )       (200,000 )

Stock grants

                                        190,965     2         2,216         2,218  

Net income

                                                        250,580     250,580  

Distributions

                                    (40,320 )           (220,481 )           (260,801 )
                                                               

Balance at December 31, 2006

            12,000,000     289,849     6,000,000     145,015     15,180,000     368,270     (216,983 )   210,051,590     2,101     (2,115,299 )   2,774,461     1,703,354     2,950,768  

Issuance of shares, net

                                        15,311,967     152         152,922         153,074  

Redemption of shares

            (5,000,000 )   (120,770 )                                   (4,230 )       (125,000 )

Stock grants

                                        80,940     1         302         303  

Net income

                                                        124,255     124,255  

Distributions

                                    (64,277 )           (136,240 )           (200,517 )
                                                               

Balance at December 31, 2007

            7,000,000     169,079     6,000,000     145,015     15,180,000     368,270     (281,260 )   225,444,497     2,254     (2,251,539 )   2,923,455     1,827,609     2,902,883  

Issuance of shares, net

                                        2,153,941     22         14,151         14,173  

Stock grants

                                        133,500     1         380         381  

Net income

                                                        244,645     244,645  

Distributions

                                    (50,668 )           (190,302 )           (240,970 )
                                                               

Balance at December 31, 2008

      $     7,000,000   $ 169,079     6,000,000   $ 145,015     15,180,000   $ 368,270   $ (331,928 )   227,731,938   $ 2,277   $ (2,441,841 ) $ 2,937,986   $ 2,072,254   $ 2,921,112  
                                                               

See accompanying notes

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HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(amounts in thousands)

 
  Year Ended December 31,  
 
  2008   2007   2006  

CASH FLOWS FROM OPERATING ACTIVITIES:

                   
 

Net income

  $ 244,645   $ 124,255   $ 250,580  
 

Adjustments to reconcile net income to cash

                   
   

provided by operating activities:

                   
     

Depreciation

    155,026     147,550     128,768  
     

Amortization of debt discounts, premiums and deferred financing fees

    5,458     4,377     4,452  
     

Amortization of acquired real estate leases

    29,937     30,966     30,098  
     

Other amortization

    16,440     14,424     11,482  
     

Loss on asset impairment

    2,283          
     

Loss on early extinguishment of debt

        711     1,659  
     

Equity in earnings of equity investments

            (3,136 )
     

Gain on sale of equity investments

            (116,287 )
     

Distributions of earnings from equity investments

            3,136  
     

Gain on sale of properties

    (137,174 )   (2,221 )   (2,917 )
     

Change in assets and liabilities:

                   
       

Decrease (increase) in restricted cash

    7,190     4,691     (3,644 )
       

Increase in rents receivable and other assets

    (46,043 )   (49,319 )   (49,703 )
       

Increase (decrease) in accounts payable and accrued expenses

    12,003     (6,829 )   12,254  
       

Increase in rent collected in advance

    2,618     5,187     1,734  
       

Increase in security deposits

    6,385     91     2,322  
       

(Decrease) increase in due to affiliates

    (326 )   (2,309 )   1,832  
               
     

Cash provided by operating activities

    298,442     271,574     272,630  
               

CASH FLOWS FROM INVESTING ACTIVITIES:

                   
 

Real estate acquisitions and improvements

    (416,461 )   (423,488 )   (514,269 )
 

Distributions in excess of earnings from equity investments

            2,251  
 

Proceeds from sale of properties

    333,614     4,410     10,641  
 

Proceeds from sale of equity investments

            308,333  
               
     

Cash used in investing activities

    (82,847 )   (419,078 )   (193,044 )
               

CASH FLOWS FROM FINANCING ACTIVITIES:

                   
 

Proceeds from issuance of preferred shares, net

            513,285  
 

Redemption of preferred shares

        (125,000 )   (200,000 )
 

Proceeds from issuance of common shares, net

        153,074      
 

Proceeds from borrowings

    406,000     1,220,340     1,112,000  
 

Payments on borrowings

    (384,159 )   (848,979 )   (1,286,688 )
 

Deferred financing fees

    (827 )   (4,124 )   (3,512 )
 

Distributions to common shareholders

    (190,302 )   (180,351 )   (176,370 )
 

Distributions to preferred shareholders

    (50,668 )   (64,277 )   (40,320 )
               
     

Cash (used in) provided by financing activities

    (219,956 )   150,683     (81,605 )
               

(Decrease) increase in cash and cash equivalents

    (4,361 )   3,179     (2,019 )

Cash and cash equivalents at beginning of period

    19,879     16,700     18,719  
               

Cash and cash equivalents at end of period

  $ 15,518   $ 19,879   $ 16,700  
               

SUPPLEMENTAL CASH FLOW INFORMATION:

                   
 

Interest paid (including capitalized interest paid of $0, $489 and $335 in 2008, 2007 and 2006, respectively)

  $ 172,244   $ 162,392   $ 160,553  

NON-CASH INVESTING ACTIVITIES:

                   
 

Real estate acquisitions

  $ (125,569 ) $ (4,545 ) $ (50,655 )
 

Real estate sales

    10,782          

NON-CASH FINANCING ACTIVITIES:

                   
 

Issuance of common shares

  $ 14,554   $ 303   $ 2,218  
 

Assumption of mortgage notes payable

    111,396     4,545     50,655  
 

Mortgage notes related to properties sold

    (10,782 )        

See accompanying notes

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HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

        HRPT Properties Trust is a Maryland real estate investment trust, or REIT, which was organized on October 9, 1986. At December 31, 2008, we had investments in 537 office, industrial and other properties, including approximately 17 million square feet of leased industrial and commercial lands.

Note 2. Summary of Significant Accounting Policies

        Basis of Presentation.    The consolidated financial statements include our investments in 100% owned subsidiaries. Our investments in 50% or less owned companies over which we could exercise influence, but did not control, were accounted for using the equity method of accounting until sold during March 2006. Significant influence was present through common representation on the board of trustees. Our managing trustees are also managing trustees of Senior Housing Properties Trust, or Senior Housing, and Hospitality Properties Trust, or Hospitality Properties, and owners of Reit Management & Research LLC, or RMR, which is the investment manager to us, Senior Housing and Hospitality Properties. Prior to the sale of our investments in Senior Housing and Hospitality Properties in March 2006, we used the income statement method to account for issuance of common shares of beneficial interest by Senior Housing and Hospitality Properties. Under this method, gains and losses reflecting changes in the value of our investments at the date of issuance of additional common shares by Senior Housing or Hospitality Properties were recognized in our income statement. All intercompany transactions have been eliminated.

        Real Estate Properties.    Real estate properties are recorded at cost. Depreciation on real estate investments is provided for on a straight line basis over estimated useful lives ranging up to 40 years.

        We allocate the value of real estate acquired among land, building and improvements and identified intangible assets and liabilities, consisting of the value of above market and below market leases, the value of in place leases and the value of tenant relationships. Purchase price allocations and the determination of useful lives are based on our estimates. In some circumstances we engage independent real estate appraisal firms to provide market information and evaluations that are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determination of useful lives.

        We allocate purchase prices to land and building and improvements based on our determination of the relative fair values of these assets assuming the property is vacant. We determine the fair value of a property using methods similar to those used by independent appraisers. We allocate purchase prices to above market and below market leases at the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in place leases and (ii) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. We allocate the excess of (i) the purchase price paid for a property after adjusting existing in place leases to market rental rates over (ii) the estimated fair value of the property as if vacant to in place leases and tenant relationships. This aggregate value is allocated between in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease; however, the value of tenant relationships has not been separated from in place lease value because such value and related amortization expense is immaterial for acquisitions reflected in our financial statements. Factors we consider in performing these analyses include estimates of carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs to execute similar leases in current market conditions, such as leasing

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HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


commissions, legal and other related costs. If the value of tenant relationships is material in the future, we will separately allocate those amounts and amortize them over the estimated life of the relationships.

        We amortize capitalized above market lease values (included in acquired real estate leases in our consolidated balance sheet) as a reduction of rental income over the remaining terms of the respective leases on a straight line basis. We amortize capitalized below market lease values (presented as acquired real estate lease obligations in our consolidated balance sheet) as an increase to rental income over the remaining terms of the respective leases on a straight line basis. Such amortization resulted in changes to rental income of ($8.6) million, ($9.4) million and ($10.0) million during the years ended December 31, 2008, 2007 and 2006, respectively, and changes to income from discontinued operations of ($235,000), ($479,000) and ($416,000), for the years ended December 31, 2008, 2007 and 2006, respectively. We amortize the value of in place leases exclusive of the value of above market and below market in place leases to expense over the remaining terms of the respective leases on a straight line basis. The amount of such amortization included in depreciation and amortization totaled $21.1 million, $20.9 million and $19.6 million during the years ended December 31, 2008, 2007 and 2006, respectively. The amount of such amortization included in income from discontinued operations totaled $85,000, $108,000 and $85,000 during the years ended December 31, 2008, 2007 and 2006, respectively. If a lease is terminated prior to its stated expiration, the unamortized amount relating to that lease is written off.

        Intangible lease assets and liabilities recorded by us for properties acquired in 2008 totaled $59.0 million and $14.7 million, respectively. Intangible lease assets and liabilities recorded by us for properties acquired in 2007 totaled $21.8 million and $6.0 million, respectively. Accumulated amortization of capitalized above and below market lease values was $38.3 million and $30.6 million at December 31, 2008 and 2007, respectively. Accumulated amortization of the value of in place leases exclusive of the value of above and below market in place leases was $94.3 million and $73.6 million at December 31, 2008 and 2007, respectively. Future amortization of intangible lease assets and liabilities to be recognized by us during the current terms of our leases as of December 31, 2008, are approximately $28.5 million in 2009, $24.1 million in 2010, $16.1 million in 2011, $10.2 million in 2012, $8.3 million in 2013 and $29.5 million thereafter.

        Impairment losses on investments are recognized where indicators of impairment are present and the undiscounted cash flow estimated to be generated by our investments is less than the carrying amount of such investments. The determination of undiscounted cash flow includes consideration of many factors including income to be earned from the investment, holding costs (exclusive of interest), estimated selling prices, and prevailing economic and market conditions. In 2008, we recorded a loss on asset impairment of $2.3 million reflecting the write-off of the net book value of three of our properties taken out of service in December 2008.

        Certain of our real estate assets contain hazardous substances, including asbestos. We believe the asbestos at our properties is contained in accordance with current environmental regulations and we have no current plans to remove it. If these properties were demolished today, certain environmental regulations specify the manner in which the asbestos must be removed. Certain of our industrial lands in Hawaii may require expensive environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change those land uses or to undertake this environmental clean up. We do not believe that there are other environmental conditions at any of our properties that have a material adverse effect on us. However, no assurances can be given that such

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Table of Contents


HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


conditions are not present in our properties or that other costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition.

        Cash and Cash Equivalents.    Cash and short term investments with original maturities of three months or less at the date of purchase are carried at cost plus accrued interest.

        Restricted Cash.    Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by some of our mortgage debts, as well as security deposits paid to us by some of our tenants.

        Other Assets, Net.    Other assets consist principally of deferred financing fees, deferred leasing costs and prepaid property operating expenses. Deferred financing fees include issuance costs related to borrowings and are capitalized and amortized on a straight line basis over the terms of the respective loans. At December 31, 2008 and 2007, deferred financing fees totaled $38.1 million and $37.4 million, respectively, and accumulated amortization for deferred financing fees totaled $23.5 million and $20.0 million, respectively. Deferred leasing costs include brokerage, legal and other fees associated with the successful negotiation of leases and are amortized on a straight line basis over the terms of the respective leases. Deferred leasing costs totaled $121.0 million and $112.6 million at December 31, 2008 and 2007, respectively, and accumulated amortization for deferred leasing costs totaled $45.8 million and $35.5 million, respectively. Future amortization of deferred financing fees and leasing costs to be recognized by us during the current terms of our loans and leases as of December 31, 2008, are approximately $18.9 million in 2009, $15.8 million in 2010, $11.9 million in 2011, $10.0 million in 2012, $8.1 million in 2013 and $25.1 million thereafter.

        Revenue Recognition.    Rental income from operating leases is recognized on a straight line basis over the life of the lease agreements.

        Allowance for Doubtful Accounts.    We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of certain tenants to make payments required under their leases. The computation of the allowance is based on the tenants' payment histories and current credit profiles, as well as other considerations.

        Earnings Per Common Share.    Earnings per common share, or EPS, is computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if our series D convertible preferred shares were converted into our common shares, where such conversion would result in a lower EPS amount.

        Reclassifications.    Reclassifications have been made to the prior years' financial statements and footnotes to conform to the current year's presentation.

        Income Taxes.    We are a real estate investment trust under the Internal Revenue Code of 1986, as amended and, are generally not subject to federal and state income taxes provided we distribute our taxable income to our shareholders and meet other requirements for qualifying as a real estate investment trust. However, we are subject to some state and local taxes most of which are not measured based on our income, and in limited circumstances we are subject to state income tax without regard to our REIT status. The provision for state taxes which is based on our income has been separately stated in our consolidated statement of income.

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HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

        In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized upon settlement. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.

        Use of Estimates.    Preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates.

        New Accounting Pronouncements.    In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurement", or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. As required, we adopted SFAS No. 157 on January 1, 2008 and have concluded that the effect was not material to our consolidated financial statements.

        In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations", or SFAS 141(R). SFAS 141(R) establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We expect the adoption of FAS 141(R) may have an effect on our consolidated financial statements by requiring us to expense certain costs related to property acquisitions when we acquire properties in the future.

Note 3. Real Estate Properties

        During 2008, we purchased 36 office properties for $393.7 million, plus closing costs, and 18 industrial and other properties for $79.4 million, plus closing costs. We also funded $76.3 million of improvements to our owned properties. We funded all of these transactions with cash on hand, by borrowing under our revolving credit facility, the assumption of $111.4 million of secured mortgage debt and the issuance of 2,153,941 of our common shares. We allocated $59.0 million of our total 2008 acquisition costs to acquired real estate leases and $14.7 million to acquired real estate lease obligations.

        In May 2008, we entered into a series of agreements to sell 48 medical office, clinic and biotech laboratory buildings to Senior Housing for an aggregate purchase price of approximately $565.0 million. Between June and December 31, 2008, we sold 37 of these properties containing 1,545,000 square feet of space for approximately $346.8 million, excluding closing costs, and recognized gains totaling

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Table of Contents


HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3. Real Estate Properties (Continued)


$137.2 million. In January 2009, we sold one additional property for approximately $19.3 million, excluding closing costs, and we expect the closings of the remaining 10 sales to occur in 2010. We and Senior Housing may mutually agree to accelerate the closings of these acquisitions. In addition, because a third party consent was not received, one of the agreements was amended so that one of the remaining buildings with an allocated value of $3.0 million is no longer subject to the agreement for sale; in the event that we receive third party consent we may nonetheless sell that building.

        In June 2008, we also agreed to sell one additional property to a third party for approximately $15 million, excluding closing costs, but this sale had not occurred as of December 31, 2008.

        Our obligations to complete the uncompleted sales are subject to various conditions typical of commercial real estate purchases. We can provide no assurance that we will sell all of these buildings or that the remaining sales will be completed in 2010 or sooner. In addition, Senior Housing acquired rights of first refusal from us to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) that are leased to tenants in medical related businesses which we will continue to own after these transactions. Senior Housing was formerly our subsidiary, and both we and Senior Housing are managed by RMR. Because we and Senior Housing are both managed by RMR, the terms of these transactions were negotiated by special committees of our and Senior Housing's boards of trustees composed solely of independent trustees who were not trustees of both companies.

        All properties under contract for sale as of December 31, 2008, are classified as held for sale on our consolidated balance sheet. Results of operations for properties under contract for sale or sold as of December 31, 2008, are included in discontinued operations in our consolidated statements of income. Summarized balance sheet and income statement information for properties under contract for sale or sold as of December 31, 2008, is as follows:

        Balance Sheet:

 
  As of
December 31,
2008
 

Real estate properties

  $ 128,968  

Acquired real estate leases

    221  

Rents receivable

    13,075  

Other assets, net

    3,585  
       
 

Properties held for sale

  $ 145,849  
       

Rent collected in advance

 
$

860
 

Security deposits

    2,540  
       
 

Other liabilities related to properties held for sale

  $ 3,400  
       

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Table of Contents


HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3. Real Estate Properties (Continued)

        Income Statement:

 
  Year Ended December 31,  
 
  2008   2007   2006  

Rental income

  $ 45,935   $ 57,049   $ 52,215  

Operating expenses

    (12,777 )   (14,036 )   (13,340 )

Depreciation and amortization

    (6,948 )   (12,695 )   (10,885 )

General and administrative

    (1,690 )   (2,006 )   (1,911 )
               
 

Operating income

    24,520     28,312     26,079  

Interest income

   
5
   
3
   
 

Interest expense

    (360 )   (601 )   (326 )
               
 

Income from discontinued operations

  $ 24,165   $ 27,714   $ 25,753  
               

        Our real estate properties are generally leased on gross lease, modified gross lease or triple net lease bases pursuant to non-cancelable, fixed term operating leases expiring between 2009 to 2051. The triple net leases generally require the lessee to pay all property operating costs. Our gross leases and modified gross leases require us to pay all or some property operating expenses and to provide all or most property management services. We committed $41.2 million for expenditures related to 4.3 million square feet of leases executed during 2008. Committed but unspent tenant related obligations based on executed leases as of December 31, 2008, were $40.0 million.

        The future minimum lease payments scheduled to be received by us during the current terms of our leases as of December 31, 2008, are approximately $700.4 million in 2009, $649.4 million in 2010, $556.1 million in 2011, $465.6 million in 2012, $370.7 million in 2013 and $1.7 billion thereafter.

Note 4. Equity Investments

        Until March 2006, we held investments in Senior Housing and Hospitality Properties. Senior Housing is a real estate investment trust that owns healthcare properties and was a 100% owned subsidiary of ours until 1999. Hospitality Properties is a real estate investment trust that owns hotels and travel centers and was a 100% owned subsidiary of ours until 1995.

        In March 2006, we sold all 7,710,738 Senior Housing common shares we owned in an underwritten public offering for $17.60 per common share for gross proceeds of $135.7 million (net $133.1 million) and we realized a gain of $39.1 million. In March 2006, we also sold all 4,000,000 Hospitality Properties common shares we owned in an underwritten public offering for $44.75 per common share for gross proceeds of $179.0 million (net $175.3 million) and we realized a gain of $77.2 million.

Note 5. Shareholders' Equity

        We have common shares available for issuance under the terms of our 2003 Incentive Share Award Plan, or the Award Plan. During the years ended December 31, 2008, 2007 and 2006, 113,500 common shares with an aggregate market value of $641,000, 67,200 common shares with an aggregate market value of $637,000 and 66,050 common shares with an aggregate market value of $798,000, respectively, were awarded to our officers and certain employees of RMR pursuant to this plan. All of our trustees were each awarded 4,000 common shares in 2008 with an aggregate market value of $145,600, 3,000

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Table of Contents


HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5. Shareholders' Equity (Continued)


common shares in 2007 with an aggregate market value of $175,500 and 2,250 common shares in 2006 with an aggregate market value of $122,000, as part of their annual fees. The shares awarded to our trustees vested immediately. The shares awarded to our officers and certain employees of RMR vest in five annual installments beginning on the date of grant. We include the value of awarded common shares in general and administrative expenses at the time the awards vest. At December 31, 2008, 6,047,538 of our common shares remain available for issuance under the Award Plan.

        Cash distributions per common share paid by us in 2008, 2007 and 2006, were $0.84 per year. The characterization of our distributions paid in 2008, 2007 and 2006 was 63.33%, 72.2% and 63.5% ordinary income, respectively, 6.92%, 0% and 0% qualified dividend, respectively, 0.0%, 27.8% and 0.0% return of capital, respectively, 9.65%, 0% and 0% section 1250 gain, respectively, and 20.10%, 0% and 36.5% capital gain, respectively. In January 2009, we declared a distribution of $0.12 per common share which was paid on February 23, 2009, to shareholders of record on January 20, 2009. Our credit facility agreement contains a number of financial and other covenants, including a covenant which limits, with certain exceptions, the amount of aggregate distributions on common shares to 90% of operating cash flow available for shareholder distributions as defined in the agreement.

        Our series B cumulative redeemable preferred shares carry dividends of $2.1875, 83/4%, per annum, payable in equal quarterly payments. Each series B preferred share has a liquidation preference of $25.00 and is redeemable, at our option, for $25.00 each plus accrued and unpaid dividends at any time. Our 6,000,000 series C cumulative redeemable preferred shares carry dividends of $1.78125, 71/8%, per annum, payable in equal quarterly payments. Each series C preferred share has a liquidation preference of $25.00 and is redeemable, at our option, for $25.00 each plus accrued and unpaid dividends at any time on or after February 15, 2011.

        Our 15,180,000 series D cumulative convertible preferred shares carry dividends of $1.625, 61/2%, 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, or 29,192,658 additional common shares at December 31, 2008. 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. If a fundamental change occurs, which generally will be deemed to occur upon a change in control or a termination of trading of our common shares (or other equity securities into which our series D preferred shares are then convertible), holders of our series D preferred shares will have a special right to convert their series D preferred shares into a number of our common shares per $25.00 liquidation preference, plus accrued and unpaid distributions, divided by 98% of the market price, as defined, of our common shares, unless we exercise our right to repurchase these series D preferred shares for cash, at a purchase price equal to 100% of their liquidation preference, plus accrued and unpaid distributions.

        We have adopted a Shareholders Rights Plan pursuant to which a right to purchase securities is distributable to shareholders in certain circumstances. Each right entitles the holder to purchase or to receive securities or other assets of ours upon the occurrence of certain events. The rights expire on October 17, 2014, and are redeemable at our option.

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HRPT PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Related Person Transactions

        We have two agreements with RMR to originate and present investment and divestment opportunities to us and to provide property management and administrative services to us: a business management agreement and a property management agreement. Renewals or extensions of the business management agreement and the property management agreement are subject to the periodic approval of our independent trustees. Any termination of the business management agreement with RMR would cause a default under our revolving credit facility, if not approved by a majority of lenders. RMR is beneficially owned by Barry M. Portnoy and Adam D. Portnoy, who are our managing trustees. Each of our executive officers are also officers of RMR. RMR is compensated at an annual rate equal to 0.7% of our average real estate investments, as defined, up to the first $250 million of such investments and 0.5% thereafter, plus an incentive fee based upon increases in funds from operations per common share, as defined in the business management agreement, plus property management fees equal to 3.0% of gross rents and construction management fees equal to 5.0% of certain construction costs. The incentive fee to RMR is paid in our common shares. No incentive fees were earned for the years ended December 31, 2008, 2007 and 2006. RMR also provides the internal audit function for us and for other publicly owned companies to which it provides management services. Our audit committee appoints our director of internal audit, and our compensation committee approves his salary. Our compensation committee also approves the costs which we pay with respect to our internal audit function. Our pro rata share of RMR's costs in providing that function was approximately $209,000, $170,000 and $173,000 in 2008, 2007 and 2006, respectively. RMR and an affiliate also lease approximately 27,100 square feet of office space from us at rental rates which we believe to be commercially reasonable. All transactions between us and RMR and affiliates are approved by our independent trustees. Our audit and compensation committees are composed solely of trustees who are independent of RMR.

        Until March 2006, we held investments in Senior Housing and Hospitality Properties. Senior Housing is a real estate investment trust that owns healthcare properties and was a 100% owned subsidi