10-K 1 a05-1828_110k.htm 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2004

OR

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

For the transition period from to

Commission File Number 1-9317

HRPT PROPERTIES TRUST

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

400 Centre Street, Newton, Massachusetts 02458

617-332-3990

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
9 7/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest		New York Stock Exchange
8 3/4% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest		New York Stock Exchange

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

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 an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ý No o

The aggregate market value of the voting common shares of the registrant held by non-affiliates was $1.7 billion based on the $10.01 closing price per common share for such stock on the New York Stock Exchange on June 30, 2004. For purposes of this calculation, 1,000,000 common shares of beneficial interest, $0.01 par value, held by Senior Housing Properties Trust and an aggregate of 1,857,975 common shares held directly or by affiliates of the trustees and officers of the registrant have been included in the number of common shares held by affiliates.

Number of the registrant’s common shares outstanding as of March 7, 2005: 177,316,525.

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.

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 from our definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 10, 2005, or our definitive Proxy Statement.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS THAT ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS ANNUAL REPORT ON FORM 10-K AND INCLUDE STATEMENTS REGARDING

• THE SECURITY OF OUR RENTAL INCOME AND OUR LEASES,

• THE CREDIT QUALITY OF OUR TENANTS,

• THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT, RENEW LEASES, SIGN NEW LEASES OR BE AFFECTED BY CYCLICAL ECONOMIC CONDITIONS,

• OUR ACQUISITION OF PROPERTIES,

• OUR ABILITY TO COMPETE EFFECTIVELY,

• OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT, INCLUDING CURRENTLY INTENDED PREPAYMENTS, AND MAKE DISTRIBUTIONS,

• OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS,

• REPAYMENT OF, AND FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,

• OUR RECEIPT OF DIVIDENDS FROM OUR FORMER SUBSIDIARIES,

• OUR ABILITY TO SELL OUR SHARES OF OUR FORMER SUBSIDIARIES,

• OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST,

• OUR ABILITY TO RAISE CAPITAL,

AND OTHER MATTERS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS.

ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION,

• CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS,

• COMPETITION WITHIN THE REAL ESTATE INDUSTRY OR THOSE INDUSTRIES IN WHICH OUR TENANTS AND FORMER SUBSIDIARIES OPERATE, AND

• CHANGES IN FEDERAL, STATE AND LOCAL LEGISLATION.

FOR EXAMPLE:

• SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN THE HISTORICAL OCCUPANCY RATES OF OUR PROPERTIES,

• RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE,

• OUR TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS,

• THE DIVIDENDS WE RECEIVE FROM OUR FORMER SUBSIDIARIES MAY DECLINE OR WE MAY BE UNABLE TO SELL OUR SHARES IN OUR FORMER SUBSIDIARIES FOR AMOUNTS EQUAL TO OUR CARRYING VALUES OF THOSE SHARES,

• CHANGES IN CIRCUMSTANCES COULD CAUSE THE CLOSING OF OUR ACQUISITION OF THE CAMPBELL LANDS NOT TO OCCUR OR BE DELAYED. THIS RESULT COULD OCCUR DUE TO VARIOUS CIRCUMSTANCES WHICH ARE BEYOND OUR CONTROL. FOR EXAMPLE WE WILL REQUIRE UPDATES OF VARIOUS DILIGENCE ITEMS IF THIS CLOSING IS DELAYED FOR MORE THAN A SHORT PERIOD, AND THOSE UPDATES MAY CAUSE THE TRANSACTION TO FAIL TO CLOSE, AND

• WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICH WE WANT TO BUY OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES.

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. SIMILARLY, OUR IMPLEMENTATION OF FAS 141 HAS REQUIRED US TO MAKE JUDGMENTS ABOUT THE ALLOCATION OF THE PURCHASE PRICES OF OUR PROPERTIES WHICH AFFECT OUR FINANCIAL STATEMENTS, INCLUDING FUTURE INCOME; THESE JUDGMENTS ARE BASED UPON OUR ESTIMATES, BELIEFS AND EXPECTATIONS ABOUT VACANT BUILDING VALUES AND RENTAL RATES, BUT SUCH ESTIMATES, BELIEFS AND EXPECTATIONS MAY PROVE TO BE INACCURATE. THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K IDENTIFY OTHER IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE DO NOT INTEND TO IMPLY THAT WE WILL RELEASE PUBLICLY THE RESULT OF ANY REVISION TO THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT TO REFLECT THE FUTURE OCCURRENCE OF PRESENTLY UNANTICIPATED EVENTS.

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 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.

HRPT PROPERTIES TRUST

2004 FORM 10-K ANNUAL REPORT

Table of Contents

Part I

Item 1.	Business	1
Item 2.	Properties	23
Item 3.	Legal Proceedings	34
Item 4.	Submission of Matters to a Vote of Security Holders	34

Part II

Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	34
Item 6.	Selected Financial Data	35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	50

Part III

Item 10.	Directors and Executive Officers of the Registrant	51
Item 11.	Executive Compensation	*
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	51
Item 13.	Certain Relationships and Related Transactions	*
Item 14.	Principal Accountant Fees and Services	*

Part IV

Item 15.	Exhibits and Financial Statement Schedules	52

* Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 10, 2005, to be filed pursuant to Regulation 14A.

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.

As of December 31, 2004, we own 375 properties for a total investment of $4.7 billion at cost, and a depreciated book value of $4.2 billion. Our portfolio includes 278 office properties with 28.3 million square feet of space and 97 industrial properties with 15.8 million square feet of space. Our 97 industrial properties include 12 parcels of land with 9.7 million square feet of developed industrial lands in Oahu, Hawaii which we acquired in December 2003. In addition, we own minority equity positions in two former subsidiary REITs which are now separately listed on the New York Stock Exchange: Senior Housing Properties Trust and Hospitality Properties Trust.

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

Investment Policies. 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. We may not achieve some or all of our objectives. Our investment goals are current income for distribution to shareholders and capital growth from appreciation in the value of properties and other investments. Our income is derived primarily from rent.

In evaluating potential investments and asset sales, we consider factors such as: the historical and projected rents received and likely to be received from the property; the historic and expected operating expenses, including real estate taxes, incurred and expected to be incurred at the properties; the growth, tax and regulatory environments of the market in which the property is located; the quality, experience, and credit worthiness of the property’s tenants; occupancy and demand for similar properties in the same or nearby markets; the construction quality, physical condition and design of the property; the geographic area and type of property; and the pricing of comparable properties as evidenced by recent arm’s length market sales.

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 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 time. However, we may undertake such considerations in the future. A principal goal of any such transaction will be to diversify our revenue 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:

• the proposed sale price;

• the strategic fit of the property or investment with the rest of our portfolio; and

• the existence of alternative sources, uses or needs for capital.

Financing Policies. We currently have a revolving credit facility (which is guaranteed by most of our subsidiaries) that we use for acquisition funding on an interim basis until equity or long term debt is raised and for working capital and general business purposes. At December 31, 2004, $175 million was outstanding under our revolving credit facility. In January 2005, we amended this credit facility to increase the available borrowing amount from $560 million to $750 million and to extend the maturity date from April 2006 to April 2009, with an option to extend the maturity by one additional year. The annual interest payable for amounts drawn under the facility was reduced from LIBOR plus 0.80% to LIBOR plus 0.65%. In certain circumstances, the amount of unsecured borrowings available under this facility may be increased to $1.5 billion. Certain financial and other covenants in this facility were also amended to reflect current market conditions.

Our credit facility, our term loan agreement and our senior note indenture and its supplements contain financial covenants which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and 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. Eighty three of our properties are encumbered by mortgages. To the extent that the 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, and may seek to obtain other lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares of beneficial interest and debt securities, either of which may be convertible into common shares or be accompanied by warrants to purchase common shares, or to engage in transactions which may involve a sale or other conveyance of properties to subsidiaries or to unaffiliated entities. We may finance acquisitions through an exchange of properties or through the issuance of additional common shares or other 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% (greater than 55% prior to January 2005). 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 economic conditions, relative availability and costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors and 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 opportunities to our board of trustees. RMR also provides property management services to us. RMR is a Delaware limited liability company beneficially owned by Barry M. Portnoy and Gerard M. Martin, who are our managing trustees. RMR has a principal place of business at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 928-1300. 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 Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The executive officers of RMR are David J. Hegarty, President and Secretary; John G. Murray, Executive Vice President; Evrett W. Benton, Vice President; Ethan S. Bornstein, Vice President; Jennifer B. Clark, Vice President and Assistant Secretary; John R. Hoadley, Vice President; Mark L. Kleifges, Vice President; David M. Lepore, Vice President; Bruce J. Mackey Jr., Vice President; John A. Mannix, Vice President; Thomas M. O’Brien, Vice President; John C. Popeo, Vice President and Treasurer and Adam D. Portnoy, Vice President. Messrs. Mannix, Popeo, Adam Portnoy and Lepore and Ms. Clark are also our officers.

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 March 7, 2005, RMR had approximately 400 full time employees.

Competition. Investing in and operating office buildings and other real estate is a very competitive business. We compete against other REITs, numerous financial institutions, numerous 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 management 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.

Environmental Matters. Under various laws, owners of real estate may be required to investigate and clean up or remove hazardous substances present at a property, 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 the government for damages and costs it incurs in connection with such hazardous substances. We reviewed environmental surveys of the properties we own prior to their purchase. Based upon those surveys we do not believe that there are environmental conditions at any of our properties that have a material adverse effect on us. However, no assurances can be given that such conditions are not present in our properties or that costs we incur 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 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, through 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 such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such forms are electronically filed with the SEC. Any shareholder or other interested party who desires to communicate with our non-management 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.

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 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:

• a bank, life insurance company, regulated investment company, or other financial institution;

• a broker or dealer in securities or foreign currency;

• a person who has a functional currency other than the U.S. dollar;

• a person who acquires our shares in connection with employment or other performance of services;

• a person subject to alternative minimum tax;

• a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction, or conversion transaction; or

• except as specifically described in the following summary, a tax-exempt entity or a foreign person.

The Internal Revenue Code sections that govern federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. The American Jobs Creation Act of 2004, or the 2004 Act, which President Bush signed into law in October of 2004, made a number of significant changes to these provisions, some of which have retroactive effect; we have summarized these changes in more detail below. 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 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. 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 which are in effect as of the date of this 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:

• a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;

• an entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations;

• an estate the income of which is subject to federal income taxation regardless of its source; or

• a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996, to the extent provided in Treasury regulations;

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.

Taxation as a REIT

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, 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 are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code 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, 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.

Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1987 through 2004 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 Internal Revenue Code. Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the Internal Revenue Code 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:

• We will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including our undistributed net capital gains.

• If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference.

• If we have net income from the disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, currently 35%.

• If we have net income from prohibited transactions, including dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate.

• If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.

• If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed.

• If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this 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 pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation’s basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain we recognize in the disposition.

• If we acquire a corporation, to preserve our status as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, not later than the end of the taxable year of the acquisition. However, if we fail to do so, relief provisions would allow us to maintain our status

as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution.

• As summarized below, REITs are permitted within limits to own stock and securities of a “taxable REIT subsidiary.” A taxable REIT subsidiary is separately taxed on its net income as a C corporation, and is subject to limitations on the deductibility of interest expense paid to its REIT parent. In addition, its REIT parent is subject to a 100% tax on the difference between amounts charged and redetermined rents and deductions, including excess interest.

• If and to the extent we invest in properties in foreign jurisdictions, our income from those properties will generally be subject to tax in those jurisdictions. If we continue to operate as we do, then we will distribute our taxable income to our shareholders each year and we will generally not pay federal income tax. As a result, we cannot recover the cost of foreign income taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our shareholders any foreign tax credits.

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 Internal Revenue Code. In that event, distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the 15% income tax rate discussed below in “Taxation of U.S. Shareholders” and, subject to limitations in the Internal Revenue Code, 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. For our 2005 taxable year and beyond, the 2004 Act provides certain relief provision 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.

REIT Qualification Requirements

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

(1) that is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

(3) that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as a C corporation;

(4) that is not a financial institution or an insurance company subject to special provisions of the Internal Revenue Code;

(5) the beneficial ownership of which is held by 100 or more persons;

(6) that is not “closely held” as defined under the personal holding company stock ownership test, as described below; and

(7) that meets other tests regarding income, assets and distributions, all as described below.

Section 856(b) of the Internal Revenue Code 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 Internal Revenue Code 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 December 31, 2004, 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 restricts 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, 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 2004 Act provides that, for our 2005 taxable year and beyond, 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.

Our Wholly-Owned Subsidiaries and Our Investments through Partnerships. Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the Internal Revenue Code 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 Internal Revenue Code, 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 Internal Revenue Code. 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 Internal Revenue Code 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 Internal Revenue Code.

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 Internal Revenue Code, provided that no more than 20% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. Among other requirements, a taxable REIT subsidiary must:

(1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares;

(2) join with us in making a taxable REIT subsidiary election;

(3) not directly or indirectly operate or manage a lodging facility or a health care facility; and

(4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility.

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 subsidiary status during all times each subsidiary’s taxable REIT subsidiary election remains 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 Internal Revenue Code:

• At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including “rents from real property” as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test.

• At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% test described above, dividends, interest, gains from the sale or disposition of stock, securities, or real property or, for our 2004 and earlier taxable years, certain payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. The 95% income test has been modified for our taxable years beginning after 2004 so that gross income, except as may be provided in Treasury regulations, no longer includes income from a “hedging transaction” as defined under clauses (ii) and (iii) of Section 1221(b)(2)(A) of the Internal Revenue Code, but only to the extent that the transaction hedges indebtedness we incur to acquire or carry real estate assets. This modification to the 95% income test only applies to hedging transactions that are “clearly identified,” meaning that the transaction must be identified as a hedging transaction before the end of the day on which it is entered and the risks being hedged must be identified generally within 35 days after the date the transaction is entered.

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 which 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 Internal Revenue Code, several requirements must be met:

• The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales.

• Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party’s ownership directly or by attribution of 10% or more by value of our shares, as well as 10% or more by vote or value of the stock of one of our tenants, would result in that tenant’s rents not qualifying as rents from real property. Our declaration of trust disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our REIT status under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent our REIT status from being jeopardized under the 10% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code’s attribution rules.

• There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary’s rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants.

• In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the Internal Revenue Code. In addition, a de minimis amount of noncustomary services will not disqualify income as “rents from real property” so long as the value of the impermissible services does not exceed 1% of the gross income from the property.

• If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property”; if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property was determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented. For our 2001 taxable year and thereafter, the ratio is determined by reference to fair market values rather than tax bases.

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 Internal Revenue Code.

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.

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:

• own our assets for investment with a view to long-term income production and capital appreciation;

• engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and

• make occasional dispositions of our assets consistent with our long-term investment objectives.

For our 2004 and prior taxable years, if we failed to satisfy one or both of the 75% or 95% gross income tests, we may nevertheless qualify 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 report 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.

We have in the past attached and for our 2004 taxable year will continue to attach 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 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.

The 2004 Act has modified this relief provision for failures to satisfy either or both of the 75% or the 95% gross income tests in the case of failures for our 2005 taxable year or later. Specifically, if we fail to satisfy either or both of the gross income tests for a taxable year after 2004, we may nevertheless qualify as a REIT for that year if our failure to meet the test is due to reasonable cause and not due to willful neglect and, after we identify the failure, we file a schedule describing each item of our gross income included in the 75% or 95% gross income tests for that taxable year. It is impossible to state whether in all circumstances we would be entitled to the benefit of this revised 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, 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:

• At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and stock or debt instruments purchased with proceeds of a stock offering or an offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds.

• Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.

• Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’s securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer’s outstanding voting securities. For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer’s outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are “straight debt” securities or otherwise excepted as discussed below.

• For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests. However, no more than 20% of our total assets may be represented by stock or securities of taxable REIT subsidiaries.

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. In addition, for our 2005 taxable year and thereafter, the 2004 Act provides that 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, 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 the 5% value and 10% vote and value asset tests.

The 2004 Act clarifies and expands, on a retroactive basis so as to be effective for our 2001 taxable year forward, 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. We continue to own a minority of Senior Housing shares, and we believe that Senior Housing has qualified and will continue to qualify as a REIT under the Internal Revenue Code. For any of our taxable years in which Senior Housing qualifies as a REIT, our investment in Senior Housing will count favorably toward the REIT asset tests and our gains and dividends from Senior Housing shares will count as qualifying income under both REIT gross income tests. However, because we do not and cannot 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 Internal Revenue Code, effective January 1, 2001, and we have reaffirmed this protective election every January 1 since then. Pursuant to this protective taxable REIT subsidiary election, we believe that if Senior Housing were 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 jeopardize our own qualification as a REIT.

Annual Distribution Requirements. In order to qualify for taxation as a REIT under the Internal Revenue Code, 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:

(A) the sum of 90% of our “real estate investment trust taxable income,” as defined in Section 857 of the Internal Revenue Code, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 90% of our net income after tax, if any, from property received in foreclosure, over

(B) the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges.

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 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% 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. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above.

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 Publicly Traded Partnership. On July 16, 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 Internal Revenue Code, 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 Internal Revenue Code. Thus, after the July 16, 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 12 years. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions.

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.

Taxation of U.S. Shareholders

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual federal income tax rate for long-term capital gains generally to 15% (for gains properly taken into account during the period beginning May 6, 2003, and ending for taxable years that begin after December 31, 2008) and for most corporate dividends generally to 15% (for taxable years that begin in the years 2003 through 2008). 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 the new 15% tax rate on dividends. As a result, our ordinary dividends continue to be taxed at the higher federal income tax rates applicable to ordinary income. However, the 15% federal income tax rate for long-term capital gains and dividends generally applies to:

(1) your long-term capital gains, if any, recognized on the disposition of our shares;

(2) our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a 25% federal income tax rate);

(3) our dividends attributable to dividends, if any, received by us from non-REIT corporations such as taxable REIT subsidiaries; and

(4) our dividends to the extent attributable to income upon which we have paid federal corporate income tax.

As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders 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 Internal Revenue Code.

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

(1) we will be taxed at regular corporate capital gains tax rates on retained amounts;

(2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend;

(3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay;

(4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay; and

(5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.

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% 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% 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%. 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 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 recognize gain or loss equal to the difference between the amount realized and the shareholder’s adjusted basis in our shares which 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.

The 2004 Act imposes a penalty, effective for federal tax returns with due dates after October 22, 2004, 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 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 Internal Revenue Code, 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, unless the shareholder has financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the Internal Revenue Code.

Tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, 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:

(1) the pension-held REIT’s gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to

(2) the pension-held REIT’s gross income from all sources, less direct expenses related to that income,

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:

• the REIT is “predominantly held” by tax-exempt pension trusts; and

• the REIT would fail to satisfy the “closely held” ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries.

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 ownership concentration restrictions in our declaration of trust, 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 Internal Revenue Code, 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. 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 Internal Revenue Code, 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. 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.

Except as discussed below with respect to certain capital gains dividends in taxable years after 2004, 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 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; the 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 corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Internal Revenue Code in respect of these amounts. We will be required to withhold from distributions to 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. 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. 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 by us 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 on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 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.

If our shares are not “United States real property interests” within the meaning of Section 897 of the Internal Revenue Code, a non-U.S. shareholder’s gain on sale of these 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 will 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 are and will be 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 will be 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 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. 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 Internal Revenue Code. 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.

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,” as defined by applicable Treasury regulations, on an established securities market like the NYSE and (2) the foreign shareholder does not own more than 5% of that class of shares at any time during the taxable year in which the capital gain dividends are received. As such, qualifying non-U.S. shareholders will no longer 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 no longer be required to file United States federal income tax returns or pay branch profits tax in respect of these capital gain dividends. These recharacterized dividends will still be subject to United States federal income tax and withholding as ordinary dividends, currently at a 30% tax rate as reduced by applicable treaty.

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%. 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.

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:

• provides the U.S. shareholder’s correct taxpayer identification number; and

• certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding.

If the U.S. shareholder has not 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 capital gain distributions 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 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, 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.

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, or ERISA, must consider whether:

• their investment in our shares satisfies the diversification requirements of ERISA;

• the investment is prudent in light of possible limitations on the marketability of our shares;

• they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and

• the investment is otherwise consistent with their fiduciary responsibilities.

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. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria.

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 Internal Revenue Code 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 Internal Revenue Code 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. Fiduciary shareholders should consult their own legal advisors as to whether the ownership of our shares 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, 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 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:

• any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;

• any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence;

• any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and

• any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer.

We believe that the restrictions imposed under our declaration of trust 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 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.

Item 2. Properties

General. At December 31, 2004, approximately 96% of our total investments included office and industrial buildings and leased industrial land, 2% was represented by our equity investment in Senior Housing and 2% was represented by our equity investment in Hospitality Properties. At December 31, 2004, we had real estate investments totaling $4.7 billion at cost, in 375 properties that were leased to over 1,700 tenants. Our properties are located in Central Business District, or CBD, and suburban areas and are categorized into eight major markets areas: Metro Philadelphia, PA; Metro Washington, DC; Metro Boston, MA; Oahu, HI; Southern California; Metro Atlanta, GA; Metro Austin, TX; and Other Markets, which includes properties that are located throughout the United States.

The following discussion and tables summarize additional information about our properties as of December 31, 2004.

Occupancy for all properties owned on December 31, 2004 and 2003, was 93.0% and 93.5%, respectively. These results reflect average occupancy of approximately 95% at properties that we acquired during 2003 and 2004, and decreases in occupancy at comparable properties, or properties we owned continuously during 2004 and 2003. Occupancy at properties we owned continuously since October 1, 2003, decreased by 0.5 percentage points and occupancy at properties we owned continuously since January 1, 2003, decreased by 0.4 percentage points. Summarized occupancy data is as follows (square feet in thousands):

	All Properties				Comparable Properties (1)				Comparable Properties (2)
	As of the Year Ended December 31,				As of the Quarter Ended December 31,				As of the Year Ended December 31,
	2004		2003		2004		2003		2004		2003
Total properties	375		238		224		224		211		211
Total square feet	44,154		35,895		25,776		25,776		23,227		23,227
Percent leased (3)	93.0	%	93.5	%	90.9	%	91.4	%	90.3	%	90.7	%

(1)Based on properties owned continuously since October 1, 2003.

(2)Based on properties owned continuously since January 1, 2003.

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

Results of operations and other operating data by property type for all properties is as follows (dollars and square feet in thousands):

	As of and For the Quarter Ended December 31,		As of and For the Year Ended December 31,
	2004	2003	2004	2003
Number of properties:
Office	278	212	278	212
Industrial	97	26	97	26
Total	375	238	375	238

CBD	50	48	50	48
Suburban	325	190	325	190
Total	375	238	375	238

Square feet:
Office	28,329	23,171	28,329	23,171
Industrial	15,825	12,724	15,825	12,724
Total	44,154	35,895	44,154	35,895

CBD	10,889	10,416	10,889	10,416
Suburban	33,265	25,479	33,265	25,479
Total	44,154	35,895	44,154	35,895

	As of and For the Quarter Ended December 31,						As of and For the Year Ended December 31,
	2004			2003			2004			2003
Percent leased (1):
Office	91.0		%	91.0		%	91.0		%	91.0		%
Industrial	96.5		%	98.2		%	96.5		%	98.2		%
Total	93.0		%	93.5		%	93.0		%	93.5		%

CBD	92.9		%	93.8		%	92.9		%	93.8		%
Suburban	93.0		%	93.4		%	93.0		%	93.4		%
Total	93.0		%	93.5		%	93.0		%	93.5		%

Rental income (2):
Office	$	143,460		$	120,030		$	518,828		$	470,161
Industrial	24,091			10,649			84,401			30,155
Total	$	167,551		$	130,679		$	603,229		$	500,316

CBD	$	68,497		$	64,982		$	268,879		$	262,819
Suburban	99,054			65,697			334,350			237,497
Total	$	167,551		$	130,679		$	603,229		$	500,316

Net operating income (NOI) (3):
Office	$	86,140		$	73,490		$	314,938		$	290,348
Industrial	16,362			6,121			60,438			17,155
Total	$	102,502		$	79,611		$	375,376		$	307,503

CBD	$	38,983		$	38,067		$	156,602		$	156,513
Suburban	63,519			41,544			218,774			150,990
Total	$	102,502		$	79,611		$	375,376		$	307,503

NOI margin (4):
Office	60.0		%	61.2		%	60.7		%	61.8		%
Industrial	67.9		%	57.5		%	71.6		%	56.9		%
Total	61.2		%	60.9		%	62.2		%	61.5		%

CBD	56.9		%	58.6		%	58.2		%	59.6		%
Suburban	64.1		%	63.2		%	65.4		%	63.6		%
Total	61.2		%	60.9		%	62.2		%	61.5		%

(1) Includes space being fitted out for occupancy pursuant to signed leases and space which is leased but is not occupied or is being offered for sublease by tenants.

(2) Includes triple net lease rental income.

(3) NOI is defined as property rental income less property operating expenses.

(4) NOI margin is defined as NOI as a percentage of rental income.

Results of operations and other operating data by major market for all properties is as follows (dollars and square feet in thousands):

	As of and For the Quarter Ended December 31,						As of and For the Year Ended December 31,
	2004			2003			2004			2003
Number of properties:
Metro Philadelphia, PA	21			21			21			21
Metro Washington, DC	20			16			20			16
Metro Boston, MA	39			36			39			36
Oahu, HI	12			11			12			11
Southern California	24			18			24			18
Metro Atlanta, GA	36			—			36			—
Metro Austin, TX	26			26			26			26
Other markets	197			110			197			110
Total	375			238			375			238

Square feet:
Metro Philadelphia, PA	5,452			5,452			5,452			5,452
Metro Washington, DC	2,645			2,214			2,645			2,214
Metro Boston, MA	2,979			2,574			2,979			2,574
Oahu, HI	9,699			9,755			9,699			9,755
Southern California	1,444			1,265			1,444			1,265
Metro Atlanta, GA	1,845			—			1,845			—
Metro Austin, TX	2,809			2,809			2,809			2,809
Other markets	17,281			11,826			17,281			11,826
Total	44,154			35,895			44,154			35,895

Percent leased (1):
Metro Philadelphia, PA	91.6		%	95.5		%	91.6		%	95.5		%
Metro Washington, DC	94.6		%	92.4		%	94.6		%	92.4		%
Metro Boston, MA	92.4		%	89.2		%	92.4		%	89.2		%
Oahu, HI	99.4		%	98.8		%	99.4		%	98.8		%
Southern California	97.0		%	94.9		%	97.0		%	94.9		%
Metro Atlanta, GA	92.6		%	—			92.6		%	—
Metro Austin, TX	80.2		%	77.4		%	80.2		%	77.4		%
Other markets	91.4		%	92.9		%	91.4		%	92.9		%
Total	93.0		%	93.5		%	93.0		%	93.5		%

Rental income (2):
Metro Philadelphia, PA	$	30,794		$	34,034		$	131,469		$	139,647
Metro Washington, DC	18,626			15,118			66,234			61,399
Metro Boston, MA	15,166			12,230			54,630			43,018
Oahu, HI	10,748			2,944			42,205			2,944
Southern California	11,968			9,681			42,622			38,593
Metro Atlanta, GA	8,442			—			14,813			—
Metro Austin, TX	9,032			10,633			38,317			42,675
Other markets	62,775			46,039			212,939			172,040
Total	$	167,551		$	130,679		$	603,229		$	500,316

Net operating income (NOI) (3):
Metro Philadelphia, PA	$	15,148		$	19,045		$	71,676		$	80,374
Metro Washington, DC	11,987			9,823			42,752			40,484
Metro Boston, MA	10,588			7,902			39,635			29,689
Oahu, HI	8,712			2,495			34,582			2,495
Southern California	8,087			6,422			27,823			25,937
Metro Atlanta, GA	5,229			—			9,404			—
Metro Austin, TX	4,571			5,685			18,173			21,873
Other markets	38,180			28,239			131,331			106,651
Total	$	102,502		$	79,611		$	375,376		$	307,503

	As of and For the Quarter Ended December 31,				As of and For the Year Ended December 31,
	2004		2003		2004		2003
NOI margin (4):
Metro Philadelphia, PA	49.2	%	56.0	%	54.5	%	57.6	%
Metro Washington, DC	64.4	%	65.0	%	64.5	%	65.9	%
Metro Boston, MA	69.8	%	64.6	%	72.6	%	69.0	%
Oahu, HI	81.1	%	84.7	%	81.9	%	84.7	%
Southern California	67.6	%	66.3	%	65.3	%	67.2	%
Metro Atlanta, GA	61.9	%	—		63.5	%	—
Metro Austin, TX	50.6	%	53.5	%	47.4	%	51.3	%
Other markets	60.8	%	61.3	%	61.7	%	62.0	%
Total	61.2	%	60.9	%	62.2	%	61.5	%

(1) Includes space being fitted out for occupancy pursuant to signed leases and space which is leased but is not occupied or is being offered for sublease by tenants.

(2) Includes triple net lease rental income.

(3) NOI is defined as property rental income less property operating expenses.

(4) NOI margin is defined as NOI as a percentage of rental income.

Results of operations and other operating data by property type for comparable properties is as follows (dollars and square feet in thousands):

	As of and For the Quarter Ended December 31, (1)						As of and For the Year Ended December 31, (2)
	2004			2003			2004			2003
Office:
Properties	210			210			198			198
Total square feet	23,043			23,043			21,160			21,160
Percent leased (3)	90.6		%	90.9		%	90.1		%	90.4		%
Rental income (4)	$	118,622		$	119,603		$	439,471		$	448,354
Net operating income (NOI) (5)	$	70,481		$	73,204		$	263,947		$	275,966
NOI margin (6)	59.4		%	61.2		%	60.1		%	61.6		%

Industrial:
Properties	14			14			13			13
Total square feet	2,733			2,733			2,067			2,067
Percent leased (3)	93.6		%	95.8		%	91.6		%	94.4		%
Rental income (4)	$	7,206		$	7,654		$	23,498		$	22,961
Net operating income (NOI) (5)	$	4,106		$	3,584		$	13,173		$	11,232
NOI margin (6)	57.0		%	46.8		%	56.1		%	48.9		%

CBD:
Properties	47			47			46			46
Total square feet	10,263			10,263			9,711			9,711
Percent leased (3)	92.5		%	93.7		%	92.5		%	93.6		%
Rental income (4)	$	65,427		$	64,911		$	250,263		$	251,683
Net operating income (NOI) (5)	$	37,035		$	38,009		$	145,894		$	150,206
NOI margin (6)	56.6		%	58.6		%	58.3		%	59.7		%

Suburban:
Properties	177			177			165			165
Total square feet	15,513			15,513			13,516			13,516
Percent leased (3)	89.9		%	89.9		%	88.7		%	88.7		%
Rental income (4)	$	60,401		$	62,346		$	212,706		$	219,632
Net operating income (NOI) (5)	$	37,552		$	38,779		$	131,226		$	136,992
NOI margin (6)	62.2		%	62.2		%	61.7		%	62.4		%

	As of and For the Quarter Ended December 31, (1)						As of and For the Year Ended December 31, (2)
	2004			2003			2004			2003
Total:
Properties	224			224			211			211
Total square feet	25,776			25,776			23,227			23,227
Percent leased (3)	90.9		%	91.4		%	90.3		%	90.7		%
Rental income (4)	$	125,828		$	127,257		$	462,969		$	471,315
Net operating income (NOI) (5)	$	74,587		$	76,788		$	277,120		$	287,198
NOI margin (6)	59.3		%	60.3		%	59.9		%	60.9		%

(1) Based on properties owned continuously since October 1, 2003.

(2) Based on properties owned continuously since January 1, 2003.

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

(4) Includes triple net lease rental income.

(5) NOI is defined as property rental income less property operating expenses.

(6) NOI margin is defined as NOI as a percentage of rental income.

Results of operations and other operating data by major market for comparable properties is as follows (dollars and square feet in thousands):

	As of and For the Quarter Ended December 31, (1)						As of and For the Year Ended December 31, (2)
	2004			2003			2004			2003
Metro Philadelphia, PA:
Properties	21			21			21			21
Total square feet	5,452			5,452			5,452			5,452
Percent leased (3)	91.6		%	95.5		%	91.6		%	95.5		%
Rental income (4)	$	30,794		$	34,034		$	131,469		$	139,647
Net operating income (NOI) (5)	$	15,148		$	19,045		$	71,676		$	80,374
NOI margin (6)	49.2		%	56.0		%	54.5		%	57.6		%

Metro Washington, DC:
Properties	16			16			16			16
Total square feet	2,215			2,215			2,215			2,215
Percent leased (3)	93.9		%	92.4		%	93.9		%	92.4		%
Rental income (4)	$	15,623		$	15,118		$	60,786		$	61,399
Net operating income (NOI) (5)	$	9,761		$	9,822		$	38,686		$	40,483
NOI margin (6)	62.5		%	65.0		%	63.6		%	65.9		%

Metro Boston, MA:
Properties	36			36			30			30
Total square feet	2,577			2,577			1,792			1,792
Percent leased (3)	91.4		%	89.2		%	89.4		%	86.4		%
Rental income (4)	$	12,902		$	12,230		$	38,790		$	36,395
Net operating income (NOI) (5)	$	9,241		$	7,901		$	28,217		$	24,359
NOI margin (6)	71.6		%	64.6		%	72.7		%	66.9		%

	As of and For the Quarter Ended December 31, (1)						As of and For the Year Ended December 31, (2)
	2004			2003			2004			2003
Southern California:
Properties	17			17			17			17
Total square feet	1,198			1,198			1,198			1,198
Percent leased (3)	98.1		%	94.6		%	98.1		%	94.6		%
Rental income (4)	$	10,728		$	9,468		$	39,651		$	38,380
Net operating income (NOI) (5)	$	7,307		$	6,279		$	25,953		$	25,794
NOI margin (6)	68.1		%	66.3		%	65.5		%	67.2		%

Metro Austin, TX:
Properties	26			26			26			26
Total square feet	2,809			2,809			2,809			2,809
Percent leased (3)	80.2		%	77.4		%	80.2		%	77.4		%
Rental income (4)	$	9,032		$	10,633		$	38,317		$	42,675
Net operating income (NOI) (5)	$	4,571		$	5,685		$	18,173		$	21,873
NOI margin (6)	50.6		%	53.5		%	47.4		%	51.3		%

Other Markets:
Properties	108			108			101			101
Total square feet	11,525			11,525			9,761			9,761
Percent leased (3)	91.8		%	92.7		%	90.8		%	91.8		%
Rental income (4)	$	46,749		$	45,774		$	153,956		$	152,819
Net operating income (NOI) (5)	$	28,559		$	28,056		$	94,415		$	94,315
NOI margin (6)	61.1		%	61.3		%	61.3		%	61.7		%

Total:
Properties	224			224			211			211
Total square feet	25,776			25,776			23,227			23,227
Percent leased (3)	90.9		%	91.4		%	90.3		%	90.7		%
Rental income (4)	$	125,828		$	127,257		$	462,969		$	471,315
Net operating income (NOI) (5)	$	74,587		$	76,788		$	277,120		$	287,198
NOI margin (6)	59.3		%	60.3		%	59.9		%	60.9		%

(1) Based on properties owned continuously since October 1, 2003.

(2) Based on properties owned continuously since January 1, 2003.

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

(4) Includes triple net lease rental income.

(5) NOI is defined as property rental income less property operating expenses.

(6) NOI margin is defined as NOI as a percentage of rental income.

Properties acquired during the year ended December 31, 2004, were as follows (square feet and dollars in thousands):

Acquired	Location	Office/ Industrial	Number of Properties	Square Feet	Purchase Price (1)		Cap Rate (2)		Average Remaining Lease Term (3)	Percent Leased (4)		Major Tenant
Feb-04	Arnold, MO	Office	1	65	$	8,300	10.6	%	5.6	100.0	%	Convergys Customer Management Group, Inc.
Feb-04	Quincy, MA	Office	1	46	7,685		11.9	%	4.4	100.0	%	American Express Company
Q1 2004 subtotal / weighted average			2	111	15,985		11.2	%	5.1	100.0	%

Apr-04	Memphis, TN	Office	1	125	21,000		9.4	%	6.9	100.0	%	Sparks Corporation, LLC
Jun-04	St. Paul, MN	Industrial	1	423	12,950		10.0	%	4.8	98.7	%	The Sportman’s Guide, Inc.
Jun-04	Virginia Beach, VA	Office	1	75	6,750		10.6	%	4.7	88.1	%	Hayes Seay Mattern & Mattern, Inc.
Q2 2004 subtotal / weighted average			3	623	40,700		9.8	%	5.2	97.7	%

Jul-04	Hallwood (5)	Office/ Industrial	113	5,156	430,000		10.0	%	4.7	86.0	%	U.S. Government, Ford Motor Company and Manufacturers & Traders Trust Company
Jul-04	Rockville, MD	Office	3	283	75,300		9.6	%	7.9	100.0	%	Manugistics, Inc.
Jul-04	Memphis, TN	Office	1	131	11,925		9.9	%	2.8	89.6	%	U.S. Postal Service
Aug-04	Atlanta, GA	Office	1	177	24,488		11.0	%	6.0	97.8	%	Affiliated Computer Services, Inc.
Sep-04	Atlanta, GA	Office	1	90	9,460		11.6	%	4.3	98.9	%	Practice Works System
Sep-04	Monroeville, PA	Office	1	480	64,693		11.2	%	6.3	100.0	%	Westinghouse Electric Corporation
Sep-04	Quincy, MA	Office	2	356	61,450		9.6	%	6.6	99.5	%	CitiStreet & Boston Financial Data
Q3 2004 subtotal / weighted average			122	6,673	677,316		10.1	%	5.0	88.9	%

Oct-04	Longmont, CO	Industrial	1	547	38,500		11.5	%	8.2	90.2	%	Intrado, Inc.
Nov-04	Rochester, NY	Office	8	345	45,750		9.6	%	6.6	96.4	%	Performance Technologies, Inc.
Q4 2004 subtotal / weighted average			9	892	84,250		10.5	%	7.6	92.6	%

Total / weighted average			136	8,299	$	818,251	10.1	%	5.5	90.1	%

(1) Represents the gross purchase price and excludes closing costs and purchase price allocations relating to FAS 141.

(2) Represents estimated current GAAP based annual net operating income, or NOI, which is defined as property rental income less property operating expenses, divided by the purchase price.

(3) Average remaining lease term based on rental income as of the date acquired.

(4) Percent leased as of the date acquired.

(5) Represents our acquisition of Hallwood Realty Partners, L.P., which included properties located in Atlanta, GA, Dearborn, MI, Baltimore and Rockville, MD, Bellevue, Kent and Tukwila (Seattle), WA, Solon (Cleveland), OH, and Sacramento and San Diego, CA.

We signed new leases for 563,000 square feet and lease renewals for 869,000 square feet during the quarter ended December 31, 2004, for weighted average rental rates that were 1% above prior rents. We signed new leases for 1,658,000 square feet and lease renewals for 2,794,000 square feet during the year ended December 31, 2004, at weighted average rental rates that were 3% below prior rents. Average lease terms for leases signed during the quarter and year ended December 31, 2004, were 8.9 years and 8.7 years, respectively. Commitments for tenant improvement and leasing commission costs for leases signed during the quarter and year ended December 31, 2004, totaled $30.82 per square foot and $28.31 per square foot, respectively, on a weighted average basis. Rental rates at which available space may be relet in the future will depend on prevailing market conditions at that time. Approximately 21% of our leased square feet are under leases scheduled to expire through December 31, 2007. Lease expirations by property type as of December 31, 2004, are as follows (in thousands):

	Total			2005			2006			2007			2008 and After
Office:
Total square feet	28,329
Leased square feet (1)	25,781			2,444			1,968			2,734			18,635
Percent	100.0		%	9.5		%	7.6		%	10.6		%	72.3		%
Annualized rent (2)	$	575,940		$	57,206		$	44,492		$	62,559		$	411,683
Percent	100.0		%	9.9		%	7.7		%	10.9		%	71.5		%
Industrial:
Total square feet	15,825
Leased square feet (1)	15,267			361			498			706			13,702
Percent	100.0		%	2.4		%	3.3		%	4.6		%	89.7		%
Annualized rent (2)	$	96,500		$	3,456		$	3,175		$	7,540		$	82,329
Percent	100.0		%	3.6		%	3.3		%	7.8		%	85.3		%

CBD:
Total square feet	10,889
Leased square feet (1)	10,111			706			625			875			7,905
Percent	100.0		%	7.0		%	6.2		%	8.7		%	78.1		%
Annualized rent (2)	$	268,301		$	22,005		$	18,846		$	25,045		$	202,405
Percent	100.0		%	8.2		%	7.0		%	9.3		%	75.5		%
Suburban:
Total square feet	33,265
Leased square feet (1)	30,937			2,099			1,841			2,565			24,432
Percent	100.0		%	6.8		%	6.0		%	8.3		%	78.9		%
Annualized rent (2)	$	404,139		$	38,657		$	28,821		$	45,054		$	291,607
Percent	100.0		%	9.6		%	7.1		%	11.1		%	72.2		%

Total:
Total square feet	44,154
Leased square feet (1)	41,048			2,805			2,466			3,440			32,337
Percent	100.0		%	6.8		%	6.0		%	8.4		%	78.8		%
Annualized rent (2)	$	672,440		$	60,662		$	47,667		$	70,099		$	494,012
Percent	100.0		%	9.0		%	7.1		%	10.4		%	73.5		%

(1) Square feet is pursuant to signed leases as of December 31, 2004, 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.

(2) Annualized rent is rents pursuant to signed leases as of December 31, 2004, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

Lease expirations by major market area as of December 31, 2004, are as follows (in thousands):

	Total			2005			2006			2007			2008 and After
Metro Philadelphia, PA:
Total square feet	5,452
Leased square feet (1)	4,994			373			145			287			4,189
Percent	100.0		%	7.5		%	2.9		%	5.7		%	83.9		%
Annualized rent (2)	$	124,264		$	9,467		$	5,455		$	5,268		$	104,074
Percent	100.0		%	7.6		%	4.4		%	4.2		%	83.8		%
Metro Washington, DC:
Total square feet	2,645
Leased square feet (1)	2,503			295			167			242			1,799
Percent	100.0		%	11.8		%	6.7		%	9.7		%	71.8		%
Annualized rent (2)	$	74,717		$	7,613		$	5,090		$	7,001		$	55,013
Percent	100.0		%	10.2		%	6.8		%	9.4		%	73.6		%
Metro Boston, MA:
Total square feet	2,979
Leased square feet (1)	2,752			197			205			642			1,708
Percent	100.0		%	7.2		%	7.4		%	23.3		%	62.1		%
Annualized rent (2)	$	59,463		$	7,363		$	4,254		$	13,900		$	33,946
Percent	100.0		%	12.4		%	7.2		%	23.4		%	57.0		%
Oahu, HI:
Total square feet	9,699
Leased square feet (1)	9,642			9			—			—			9,633
Percent	100.0		%	0.1		%	—			—			99.9		%
Annualized rent (2)	$	43,093		$	85		$	—		$	—		$	43,008
Percent	100.0		%	0.2		%	—			—			99.8		%
Southern California:
Total square feet	1,444
Leased square feet (1)	1,401			88			142			281			890
Percent	100.0		%	6.3		%	10.1		%	20.1		%	63.5		%
Annualized rent (2)	$	45,361		$	3,694		$	5,038		$	8,802		$	27,827
Percent	100.0		%	8.1		%	11.1		%	19.4		%	61.4		%
Metro Atlanta, GA:
Total square feet	1,845
Leased square feet (1)	1,710			261			69			131			1,249
Percent	100.0		%	15.3		%	4.0		%	7.7		%	73.0		%
Annualized rent (2)	$	33,761		$	4,818		$	1,196		$	2,634		$	25,113
Percent	100.0		%	14.3		%	3.5		%	7.8		%	74.4		%
Metro Austin, TX:
Total square feet	2,809
Leased square feet (1)	2,253			199			52			579			1,423
Percent	100.0		%	8.8		%	2.3		%	25.7		%	63.2		%
Annualized rent (2)	$	38,218		$	4,844		$	1,150		$	9,595		$	22,629
Percent	100.0		%	12.7		%	3.0		%	25.1		%	59.2		%
Other markets:
Total square feet	17,281
Leased square feet (1)	15,793			1,383			1,686			1,278			11,446
Percent	100.0		%	8.8		%	10.7		%	8.1		%	72.4		%
Annualized rent (2)	$	253,563		$	22,778		$	25,484		$	22,899		$	182,402
Percent	100.0		%	9.0		%	10.1		%	9.0		%	71.9		%
Total:
Total square feet	44,154
Leased square feet (1)	41,048			2,805			2,466			3,440			32,337
Percent	100.0		%	6.8		%	6.0		%	8.4		%	78.8		%
Annualized rent (2)	$	672,440		$	60,662		$	47,667		$	70,099		$	494,012
Percent	100.0		%	9.0		%	7.1		%	10.4		%	73.5		%

(2) Annualized rent is rents pursuant to signed leases as of December 31, 2004, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

Our principal source of funds is rents from tenants at our properties. Rents are generally received from our non-government tenants monthly in advance, and from our government tenants monthly in arrears. As of December 31, 2004, tenants responsible for 1% or more of our total annualized rent were as follows (square feet in thousands):

Tenant	Square Feet (1)	% of Total Square Feet		% of Annualized Rent (2)		Expiration
1 U. S. Government	5,115	11.6	%	15.8	%	2005 to 2020
2 GlaxoSmithKline plc	605	1.4	%	2.2	%	2013
3 PNC Financial Services Group	488	1.1	%	1.7	%	2011
4 Towers, Perrin, Forster & Crosby, Inc.	476	1.1	%	1.7	%	2005, 2008, 2011
5 Tyco International Ltd	660	1.5	%	1.4	%	2007, 2011
6 Motorola, Inc.	770	1.7	%	1.3	%	2006, 2010
7 Solectron Corporation	765	1.7	%	1.3	%	2014
8 Manugistics, Inc.	283	0.6	%	1.3	%	2012
9 Ballard Spahr Andrews & Ingersoll, LLP	230	0.5	%	1.2	%	2015
10 Westinghouse Electric Corporation	534	1.2	%	1.2	%	2005, 2010
11 Mellon Bank, N.A.	234	0.5	%	1.1	%	2012, 2015
12 Fallon Health Clinics	444	1.0	%	1.1	%	2019
Total	10,604	23.9	%	31.3	%

(2) Annualized rent is rents pursuant to signed leases as of December 31, 2004, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

As of December 31, 2004, a summary of our portfolio and a breakdown of our tenants based on annualized rent were as follows (dollars and square feet in thousands):

	Office			Industrial			Total			Percent
Square feet (1):
CBD	10,731			158			10,889			24.7	%
Suburban	17,598			15,667			33,265			75.3	%
Total	28,329			15,825			44,154			100.0	%
Percent	64.2		%	35.8		%	100.0		%

U.S. Government and other government tenants	5,453			—			5,453			12.3	%
Medical related tenants	5,220			151			5,371			12.2	%
Industrial land leases (Oahu, HI)	—			9,642			9,642			21.8	%
Other investment grade tenants (2)	6,730			1,338			8,068			18.3	%
Other tenants	8,378			4,136			12,514			28.4	%
Vacant	2,548			558			3,106			7.0	%
Total (1)	28,329			15,825			44,154			100.0	%
Percent	64.2		%	35.8		%	100.0		%

Annualized rent (3):
U.S. Government and other government tenants	$	114,566		$	—		$	114,566		17.0	%
Medical related tenants	123,271			788			124,059			18.4	%
Industrial land leases (Oahu, HI)	—			43,097			43,097			6.4	%
Other investment grade tenants (2)	141,419			17,620			159,039			23.7	%
Other tenants	196,684			34,995			231,679			34.5	%
Total	$	575,940		$	96,500		$	672,440		100.0	%
Percent	85.6		%	14.4		%	100.0		%

(1) Includes leased square feet pursuant to signed leases as of December 31, 2004, including (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.

(2) Excludes investment grade tenants included in other tenant categories above.

(3) Annualized rent is rents pursuant to signed leases as of December 31, 2004, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

The states in which we owned real estate at December 31, 2004, were as follows (dollars in thousands):

Location	Number of Properties	Investment Amount		Net Book Value		Annualized Rent (1)
Alaska	1	$	1,032	$	869	$	336
Arizona	10	123,007		110,577		17,872
California	46	391,393		342,301		57,646
Colorado	10	129,395		119,656		21,461
Connecticut	4	35,817		32,783		5,348
Delaware	2	68,404		59,957		5,904
District of Columbia	5	243,863		206,794		33,733
Florida	4	11,913		9,988		1,435
Georgia	37	203,224		200,830		34,254
Hawaii	12	483,387		483,102		43,097
Kansas	1	7,312		5,876		1,949
Kentucky	1	11,527		11,160		2,334
Maryland	14	354,094		322,723		55,319
Massachusetts	38	349,094		306,960		56,968
Michigan	18	60,692		60,085		14,449
Minnesota	15	135,053		118,166		17,265
Missouri	3	26,407		24,649		3,850
New Hampshire	1	22,170		19,363		2,501
New Jersey	4	36,524		30,488		5,242
New Mexico	16	109,648		101,909		19,510
New York	18	213,193		188,125		33,205
Ohio	15	42,015		39,488		5,896
Oklahoma	5	46,636		40,048		4,546
Pennsylvania	28	901,559		794,719		138,654
Rhode Island	1	8,010		6,558		1,065
Tennessee	3	55,262		51,059		8,464
Texas	31	425,398		371,427		50,107
Virginia	10	100,932		89,292		17,492
Washington	20	72,725		68,749		10,518
West Virginia	1	4,969		4,190		673
Wyoming	1	10,414		8,767		1,347
Total real estate	375	$	4,685,069	$	4,230,658	$	672,440

(1) Annualized rent is rents pursuant to signed leases as of December 31, 2004, plus expense reimbursements; includes some triple net lease rents and excludes lease value amortization.

At December 31, 2004, 20 office complexes we owned comprised of 83 properties with an aggregate cost of $928.7 million were secured by mortgage notes payable aggregating $443.1 million, or $440.4 million net of unamortized discounts and premiums.

At December 31, 2004, the carrying book values of our equity ownership of Senior Housing and Hospitality Properties were $108.7 million and $99.1 million, respectively, and the market values of these equity positions were $164.0 million and $184.0 million, respectively. During 2004 we sold 4.1 million of our Senior Housing shares and Senior Housing completed public offerings of common shares that reduced our ownership percentage to 12.6%. At December 31, 2004, Senior Housing owned 181 senior housing properties and Hospitality Properties owned 285 hotels.

As of December 31, 2004, we had an outstanding agreement to purchase 8.2 million square feet of industrial lands in Oahu, HI from the estate of James Campbell and affiliates. During February 2005 we completed diligence and committed to the acquisition of these lands for $115.5 million, plus closing costs. The closing of this acquisition is expected to occur some time between June and December of 2005.

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 material 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.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder 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 in the NYSE composite transactions reports:

	High		Low

2003

First Quarter	$	8.90	$	8.08
Second Quarter	9.67		8.54
Third Quarter	9.50		8.50
Fourth Quarter	10.35		9.10

2004

First Quarter	11.37		9.76
Second Quarter	11.39		8.25
Third Quarter	11.07		9.86
Fourth Quarter	12.99		10.96

The closing price of our common shares on the NYSE on March 7, 2005, was $13.05 per share.

As of March 7, 2005, there were 3,433 shareholders of record, and we estimate that as of such date there were in excess of 86,000 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
	2003		2004

First Quarter	$	0.20	$	0.20
Second Quarter	0.20		0.20
Third Quarter	0.20		0.21
Fourth Quarter	0.20		0.21
Total	$	0.80	$	0.82

All common share distributions shown in the table above have been paid. We currently intend to continue to declare and pay future common share distributions on a quarterly basis.

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 that our board of trustees deems relevant.

Item 6. Selected Financial Data

Set forth below is 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.

Income Statement Data

	Year Ended December 31,
	2004		2003		2002		2001		2000
Total revenues (1)	$	603,229	$	500,316	$	414,073	$	387,806	$	401,389
Income before gain on sale of properties	162,829		114,446		106,763		82,804		117,697
Net income (2)	162,829		114,446		106,763		82,804		142,272
Net income available for common shareholders (2) (3)	116,829		68,446		79,138		65,962		142,272
Common distributions declared (4)	147,156		118,348		103,056		113,135		121,385

Weighted average common shares outstanding	176,157		136,270		128,817		130,253		131,937

Per Common Share:
Income before gain on sale of properties	$	0.66	$	0.50	$	0.61	$	0.51	$	0.89
Net income available for common shareholders (3)	0.66		0.50		0.61		0.51		1.08
Common distributions declared (4)	0.83		0.80		0.80		0.87		0.92

Balance Sheet Data

	December 31,
	2004		2003		2002		2001		2000
Real estate properties, at cost (5)	$	4,685,069	$	3,891,966	$	3,074,656	$	2,592,487	$	2,546,023
Real estate mortgages receivable, net	—		—		—		—		6,449
Equity investments	207,804		260,208		264,087		273,442		314,099
Total assets	4,813,330		4,013,244		3,221,652		2,805,426		2,900,143
Total indebtedness, net	2,355,031		1,876,821		1,215,977		1,097,217		1,302,950
Total shareholders’ equity	2,307,194		2,011,651		1,926,273		1,656,500		1,529,212

(1) Reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.

(2) Changes in net income and net income available for common shareholders reflect property acquisitions during all periods presented; 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 shares; dividends on $500 million of preferred shares issued by us during September 2002 and February 2001; the $19.3 million loss on equity transactions of equity investments in 2001; and the $18.7 million decrease in equity in earnings of equity investments during 2001.

(3) Net income available for common shareholders is net income reduced by preferred distributions.

(4) Includes non recurring distributions of common shares of Five Star Quality Care, Inc. in 2001. Cash distributions declared with respect to 2001 were $103,783, or $0.80 per common share.

(5) Excludes value of acquired real estate leases pursuant to FAS 141.

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 included in this Annual Report on Form 10-K.

OVERVIEW

We primarily own office buildings located throughout the United States. We also own approximately 10 million square feet of leased commercial and industrial lands located in Oahu, Hawaii and have minority holdings in shares of our former subsidiaries, Senior Housing and Hospitality Properties.

Property Operations

As of December 31, 2004, 93.0% of our total square feet was leased, compared to 93.5% leased as of December 31, 2003. These results reflect average occupancy of approximately 95% at properties we acquired during 2003 and 2004, a 0.5 percentage decrease in occupancy at properties we owned continuously since October 1, 2003, and a 0.4 percentage decrease in occupancy at properties we owned continuously since January 1, 2003. During the year ended December 31, 2004, we signed new leases for 1.7 million square feet and lease renewals for 2.8 million square feet, at weighted average rental rates that were 3% below prior rents. Average lease terms for leases signed during 2004 were 8.7 years. Commitments for tenant improvement and leasing commission costs for leases signed during 2004 totaled $28.31 per square foot on a weighted average basis.

During the second half of 2004, the rate of decline in occupancies at some of our continuously owned buildings seems to have slowed. Also, quoted office rent rates in most of the areas where our properties are located seem to have stabilized. However, we continue to experience strong competition to retain and attract office tenants in the form of landlord funded tenant build outs and increased leasing commissions payable to tenant brokers. These build out costs and leasing commissions are generally amortized as a reduction of our income during the terms of the affected leases. We expect that present leasing market conditions may continue until an increase in office employment causes office occupancies to increase in the respective market areas. We do not know how long it may take the present market conditions affecting our properties to change. At this time, however, we believe that modest declines in occupancies and in effective rents will continue to depress the financial results at some of our currently owned office buildings for at least one year. There are too many variables for us to reasonably project what the financial impact of these market conditions will be on our results for future periods.

Investment Activities

During 2004 we acquired 136 properties with 8.3 million square feet for aggregate gross purchase prices totaling $818.3 million, including 66 office properties with 5.1 million square feet for $674.4 million and 70 industrial properties with 3.2 million square feet for $143.9 million. At the time of acquisition, these properties were approximately 90% leased and projected to yield approximately 10% 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. During 2004, we sold 4.1 million common shares of Senior Housing. After this sale, we owned 8.7 million Senior Housing common shares, or 12.6% of Senior Housing outstanding common shares at December 31, 2004.

Financing Activities

During 2004 we issued 34.5 million common shares in a public offering, raising net proceeds of $323.6 million, issued $400 million 6.25% unsecured senior notes due 2016 and entered into an unsecured $350 million term loan which bears interest at LIBOR plus a premium and matures in 2009. Proceeds from these financing activities were used to repay amounts outstanding under our revolving credit facility and for general business purposes. In 2004 we also redeemed our $143 million 8.50% unsecured senior notes due 2013, at par, using cash on hand and borrowings under our revolving credit facility.

RESULTS OF OPERATIONS

Year Ended December 31, 2004, Compared to Year Ended December 31, 2003

	Year Ended December 31,
	2004			2003			$ Change			% Change
	(in thousands, except per share data)
Revenues:
Rental income	$	603,229		$	500,316		$	102,913		20.6	%
Total revenues	603,229			500,316			102,913			20.6	%

Expenses:
Operating expenses	227,853			192,813			35,040			18.2	%
Depreciation and amortization	112,380			93,273			19,107			20.5	%
General and administrative	25,170			19,338			5,832			30.2	%
Total expenses	365,403			305,424			59,979			19.6	%

Operating income	237,826			194,892			42,934			22.0	%

Interest income	638			411			227			55.2	%
Interest expense	(118,212		)	(101,144		)	(17,068		)	(16.9	)%
Loss on early extinguishment of debt	(2,866		)	(3,238		)	372			11.5	%
Equity in earnings of equity investments	15,457			23,525			(8,068		)	(34.3	)%
Gain on sale of shares of equity investments	21,550			—			21,550			—
Gain on issuance of shares by equity investees	8,436			—			8,436			—
Net income	162,829			114,446			48,383			42.3	%
Preferred distributions	(46,000		)	(46,000		)	—			—
Net income available for common shareholders	$	116,829		$	68,446		$	48,383		70.7	%

Weighted average common shares outstanding	176,157			136,270			39,887			29.3	%

Net income available for common shareholders per share	$	0.66		$	0.50		$	0.16		32.0	%

Total revenues. Total revenues increased for the year ended December 31, 2004, compared to the same period in 2003, primarily due to our acquisition of 136 properties in 2004 and 27 properties in 2003, partially offset by a decline in rents at some of our properties. Occupancy, which includes space being prepared for occupancy pursuant to signed leases and space which is being offered for sublease by tenants, at properties we owned continuously since January 1, 2003, was 90.3% at December 31, 2004, compared to 90.7% at December 31, 2003. Rental income includes non cash straight line rent adjustments totaling $22.3 million in 2004 and $16.6 million in 2003 and amortization of acquired real estate leases and obligations totaling ($3.0) million in 2004 and $1.1 million in 2003. Rental income also includes lease termination fees totaling $3.7 million in 2004 and $3.3 million in 2003.

Total expenses. Total expenses for the year ended December 31, 2004, increased from the year ended December 31, 2003, due to increases in operating expenses, depreciation and amortization and general and administrative expenses related to the acquisition of properties in 2004 and 2003.

Interest expense. Interest expense increased for the year ended December 31, 2004, compared to the year ended December 31, 2003, reflecting an increase in total debt outstanding which was used primarily to finance acquisitions in 2004 and 2003. In 2004 we issued $400 million unsecured 6.25% senior notes due 2016; entered into an unsecured $350 million term loan bearing interest at LIBOR plus a premium; and assumed $112.3 million of debt in connection with two acquisitions completed in 2004. The weighted average interest rate on all of our outstanding debt at December 31, 2004 and 2003, was 5.7%.

Loss on early extinguishment of debt. The loss on early extinguishment of debt in 2004 represents the write off of deferred financing fees associated with the repayment of $143 million of our senior notes due 2013. The loss on early extinguishment of debt in 2003 represents similar losses associated with the repayment of $90 million of senior notes due 2009 and $65 million of senior notes due 2011.

Equity in earnings of equity investments. Equity in earnings of equity investments decreased during the year ended December 31, 2004, from the year ended December 31, 2003, due to lower earnings recognized from our investments in Senior Housing and Hospitality Properties. The decrease in earnings from Senior Housing is due primarily to our sale of 4.1 million Senior Housing common shares we owned in 2004. The decrease in earnings from Hospitality Properties reflects our pro rata share, totaling $6.9 million, of income from lease terminations recognized by Hospitality Properties in 2003.

Gain on sale of shares of equity investments. The 2004 gain on sale of shares of equity investments reflects the sale of 4.1 million Senior Housing common shares we owned.

Gain on issuance of shares by equity investees. The 2004 gain on issuance of shares by equity investees reflects the issuance of common shares during 2004 by both Senior Housing and Hospitality Properties at prices above our per share carrying value.

Net income and net income available for common shareholders. The increase in net income and net income available for common shareholders for the year ended December 31, 2004, from the year ended December 31, 2003, is due primarily to the gain on sale of Senior Housing shares, the gain on issuance of shares by equity investees and property acquisitions in 2004 and 2003, offset by a decrease in earnings from equity investments and an increase in interest expense from the issuance of additional debt. Net income available for common shareholders is net income reduced by preferred distributions.

Year Ended December 31, 2003, Compared to Year Ended December 31, 2002

	Year Ended December 31,
	2003			2002			$ Change			% Change
	(in thousands, except per share data)
Revenues:
Rental income	$	500,316		$	414,073		$	86,243		20.8	%
Total revenues	500,316			414,073			86,243			20.8	%

Expenses:
Operating expenses	192,813			152,614			40,199			26.3	%
Depreciation and amortization	93,273			68,750			24,523			35.7	%
General and administrative	19,338			16,815			2,523			15.0	%
Total expenses	305,424			238,179			67,245			28.2	%

Operating income	194,892			175,894			18,998			10.8	%

Interest income	411			858			(447		)	(52.1	)%
Other income	—			2,035			(2,035		)	(100.0	)%
Interest expense	(101,144		)	(86,360		)	(14,784		)	(17.1	)%
Loss on early extinguishment of debt	(3,238		)	(3,504		)	266			7.6	%
Equity in earnings of equity investments	23,525			19,261			4,264			22.1	%
Loss on issuance of shares by equity investees	—			(1,421		)	1,421			100.0	%
Net income	114,446			106,763			7,683			7.2	%
Preferred distributions	(46,000		)	(27,625		)	(18,375		)	(66.5	)%
Net income available for common shareholders	$	68,446		$	79,138		$	(10,692	)	(13.5	)%

Weighted average common shares outstanding	136,270			128,817			7,453			5.8	%

Net income available for common shareholders per share	$	0.50		$	0.61		$	(0.11	)	(18.0	)%

Total revenues. Total revenues increased for the year ended December 31, 2003, compared to the same period in 2002, primarily due to our acquisition of 27 properties in 2003 and 23 properties in 2002, partially offset by a decline in rents resulting from a decrease in occupancy at some of our properties. Average occupied space, which includes space being prepared for occupancy pursuant to signed leases and space which is being offered for sublease by tenants, was 91.8% for the year ended December 31, 2003, and 92.5% for the year ended December 31, 2002. Rental income includes non cash straight line rent adjustments totaling $16.6 million in 2003 and $10.8 million in 2002 and amortization of acquired real estate leases and obligations totaling $1.1 million in 2003. Rental income also includes lease termination fees of $3.3 million in 2003 and $1.6 million in 2002.

Total expenses. Total expenses for the year ended December 31, 2003, increased from the year ended December 31, 2002, due to increases in operating expenses, depreciation and amortization and general and administrative expenses related to the acquisition of properties in 2003 and 2002.

Other income. Other income for the year ended December 31, 2002, represents dividend income and a gain from the sale of securities we owned prior to 2002.

Interest expense. Interest expense increased for the year ended December 31, 2003, compared to the year ended December 31, 2002, reflecting an increase in our weighted average interest rate and an increase in total debt outstanding which was used primarily to finance acquisitions in 2003 and 2002. In 2003 we issued unsecured senior notes aggregating $450 million in two separate public offerings. The notes bear interest at 6.40% and 5.75% and mature in 2015 and 2014, respectively. The weighted average interest rate on all of our outstanding debt at December 31, 2003 and 2002, was 5.7% and 7.1%, respectively.

Loss on early extinguishment of debt. In 2003 we repaid $90 million of senior notes due 2009 and $65 million of senior notes due 2011 and recognized a loss of $3.2 million representing the write off of deferred financing fees. We repaid $160 million of senior notes in 2002 for a loss of $3.5 million.

Equity in earnings of equity investments. Equity in earnings of equity investments increased during the year ended December 31, 2003, from the year ended December 31, 2002, due primarily to our pro rata share, totaling $6.9 million, of income from lease terminations recognized by Hospitality Properties in 2003.

Loss on issuance of shares by equity investees. The loss on issuance of shares by equity investees in 2002 reflects the issuance of common shares by Senior Housing at a price below our per share carrying value.

Net income. The increase in net income for the year ended December 31, 2003 from the year ended December 31, 2002, is due primarily to property acquisitions in 2003 and 2002, higher equity in earnings from Hospitality Properties and the loss recognized in 2002 from the issuance of common shares by Senior Housing, offset by a decline in rents resulting from a decrease in occupancy at some of our properties, lower dividend income and gains from the sale of securities, and an increase in interest expense during 2003 from the issuance of debt.

Net income available for common shareholders. Net income available for common shareholders decreased for the year ended December 31, 2003, compared to the same period in 2002, reflecting distributions during 2003 on our series B preferred shares which were issued in September 2002. Net income available for common shareholders is net income reduced by preferred distributions.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

Our principal sources of funds for current expenses and distributions to shareholders are rents from our properties and distributions received from our equity investments. Rents are generally received from our non-government tenants monthly in advance, and from our government tenants monthly in arrears. This flow of funds has historically been sufficient for us to pay our operating expenses, debt service and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service and distribution payments for the foreseeable future. Our future cash flows from operating activities will depend primarily upon four factors:

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

• our ability to restrain operating cost increases at our continuously owned properties;

• our continuing receipt of cash distributions from our equity investments; and

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

As discussed above, we believe that present leasing market conditions in areas where our properties are located may result in modest declines in occupancies and rents for our continuously owned buildings for at least the next year. Recent rises in fuel prices may cause our future operating costs to increase; however, the impact of these increases is expected to be partially offset by pass through operating cost increases to our tenants pursuant to lease terms. We expect Hospitality Properties and Senior Housing to continue to pay dividends at current rates or with modest increases for the foreseeable future. We generally do not engage in development activities (except on a build to suit basis for an existing tenant), and we generally do not purchase turn around properties or properties which do not generate positive cash flows. Our future purchases of properties which generate positive cash flows can not be accurately projected because such purchases depend entirely upon available opportunities which come to our attention.

Cash flows provided by (used for) operating, investing and financing activities were $209.2 million, ($682.7) million and $483.9 million, respectively, for the year ended December 31, 2004, and $200.5 million, ($826.4) million and $625.1 million, respectively, for the year ended December 31, 2003. Changes in all three categories between 2004 and 2003 are primarily related to our sale of 4.1 million Senior Housing common shares in 2004, our purchase of properties, our repayments and issuances of debt obligations and our issuance of common shares in 2004 and 2003.

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 expenses, we maintain an unsecured revolving credit facility with a group of commercial banks. At December 31, 2004, there was $175 million outstanding and $385 million available on our revolving credit facility, and we had cash and cash equivalents of $22 million. In January 2005, we amended this credit facility to increase the available borrowing amount from $560 million to $750 million and to extend the maturity date from April 2006 to April 2009, with an option to extend the maturity by one additional year. The annual interest payable for amounts drawn under the facility was reduced from LIBOR plus 0.80% to LIBOR plus 0.65%. In certain circumstances, the amount of unsecured borrowings available under this facility may be increased to $1.5 billion. Certain financial and other covenants in this facility were also amended to reflect current market conditions. We expect to use cash balances, borrowings under our credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions.

A summary of our outstanding debt as of December 31, 2004, is as follows (dollars in thousands):

	Coupon Rate		Interest Rate (1)		Principal Balance		Maturity Date	Due at Maturity		Years to Maturity
Secured debt:

See notes (2)(3)	8.700	%	4.750	%	$	76,039	10/11/20	$	9,036	15.8
Executive Park, Atlanta, GA, excluding buildings 3, 5 and 12 (4)	8.500	%	5.070	%	29,750		4/11/28	4,937		23.3
2665 Long Lake Road, Minneapolis, MN	7.020	%	7.020	%	16,589		2/1/08	15,724		3.1
4545 Seton Center Parkway, Austin, TX	8.400	%	8.400	%	10,044		4/1/07	9,433		2.2
2420 and 2430 Stevens Center, Richland, WA	8.000	%	8.000	%	6,546		11/15/08	1,004		3.9
138 Delaware Avenue, Buffalo, NY	5.170	%	5.170	%	5,944		1/1/09	134		4.0
One Franklin Plaza, Philadelphia, PA (5)	6.794	%	7.383	%	43,407		1/1/29	2,478		24.0
See note (6)	6.814	%	7.842	%	249,219		1/31/11	225,547		6.1
179 and 183 Sully’s Trail, Rochester, NY	6.000	%	6.000	%	5,580		10/11/12	4,507		7.8
Total / weighted average secured debt	7.278	%			$	443,118		$	272,800	10.4

Unsecured debt:

Unsecured floating rate debt:
Revolving credit facility (LIBOR +80 basis points) (7)	2.400	%	2.400	%	$	175,000	4/28/06	$	175,000	1.3
Term loan (LIBOR + 80 basis points)	2.300	%	2.300	%	350,000		8/24/09	350,000		4.6
Total / weighted average unsecured floating rate debt	2.333	%			$	525,000		$	525,000	3.5

Unsecured fixed rate debt:
Senior notes due 2005 (8)	6.700	%	6.824	%	$	100,000	2/23/05	$	100,000	0.1
Senior notes due 2010	8.875	%	9.000	%	30,000		8/1/10	30,000		5.6
Senior notes due 2010	8.625	%	8.770	%	20,000		10/1/10	20,000		5.8
Senior notes due 2012	6.950	%	7.179	%	200,000		4/1/12	200,000		7.3
Senior notes due 2013	6.500	%	6.693	%	200,000		1/15/13	200,000		8.0
Senior notes due 2014	5.750	%	5.828	%	250,000		2/15/14	250,000		9.1
Senior notes due 2015	6.400	%	6.601	%	200,000		2/15/15	200,000		10.1
Senior notes due 2016	6.250	%	6.470	%	400,000		8/15/16	400,000		11.6
Total / weighted average unsecured fixed rate debt	6.440	%			$	1,400,000		$	1,400,000	8.8

Total / weighted average unsecured debt	5.320	%			$	1,925,000		$	1,925,000	7.4

Total / weighted average secured debt	7.278	%			$	443,118		$	272,800	10.4
Total / weighted average unsecured floating rate debt	2.333	%			525,000			525,000		3.5
Total / weighted average unsecured fixed rate debt	6.440	%			1,400,000			1,400,000		8.8
Total / weighted average debt	5.686	%			$	2,368,118		$	2,197,800	7.9

(1) Includes the effect of interest rate protection, mark-to-market accounting for certain assumed mortgages, and discounts on certain mortgages and unsecured notes. Excludes effects of offering and transaction costs and fees.

(2) Airport Plaza, San Diego, CA, Bellevue Corporate Plaza, Bellevue (Seattle), WA, Montrose Office Center, Rockville, MD, 6 buildings at Corporate Square, Atlanta, GA, Parklane Towers, Dearborn, MI, 10 buildings at Fairlane Commerce Park, Dearborn, MI and Raintree Industrial Park, Solon (Cleveland), OH.

(3) The loan becomes prepayable on 7/11/05. On 10/11/05, the interest rate increases to at least 13.7% and the loan becomes subject to accelerated amortization. We currently intend to prepay this loan in 2005.

(4) The loan becomes prepayable on 1/11/08. On 4/11/08, the interest rate increases to at least 13.5% and the loan becomes subject to accelerated amortization. We currently intend to prepay this loan in 2008.

(5) The loan becomes prepayable on 1/31/11. On 1/31/11, the interest rate increases to 8.794% and the loan becomes subject to accelerated amortization. We currently intend to prepay this loan in 2011.

(6) Bridgepoint Square, Austin, TX, Lakewood on the Park, Austin, TX, 1600 Market Street, Philadelphia, PA, Cedars-Sinai Medical Office Towers, Los Angeles, CA, 1250 H Street NW, Washington, DC and 625 Indiana Avenue, Washington, DC.

(7) In January 2005, we amended this unsecured revolving credit facility. Among other changes, this amendment extended the maturity of this facility to 4/28/09 and lowered the interest payable on amounts drawn under this facility to LIBOR plus 65 basis points.

(8) Our 2005 senior notes were repaid as scheduled on February 23, 2005.

Our outstanding debt maturities and weighted average interest rates as of December 31, 2004, are as follows (dollars in thousands):

	Scheduled Principal Payments During Period
Year of Maturity	Secured Debt		Unsecured Floating Rate Debt			Unsecured Fixed Rate Debt			Total		Weighted Average Coupon Rate
2005	$	9,761	$	—		$	100,000	(2)	$	109,761	6.8	%
2006	10,520		175,000		(1)	—			185,520		2.7	%
2007	20,483		—			—			20,483		7.8	%
2008	27,251		—			—			27,251		7.1	%
2009	8,894		350,000			—			358,894		2.5	%
2010	9,453		—			50,000			59,453		8.6	%
2011	231,203		—			—			231,203		6.8	%
2012	10,177		—			200,000			210,177		7.0	%
2013	6,056		—			200,000			206,056		6.6	%
2014 and thereafter	109,320		—			850,000			959,320		6.4	%
	$	443,118	$	525,000		$	1,400,000		$	2,368,118	5.7	%

(1) In January 2005, the maturity of this revolving credit facility was extended to 2009.

(2) Represents $100 million of 6.70% senior notes paid in February 2005.

When amounts are outstanding on our revolving credit facility and as the maturity dates of our revolving credit facility and term debts approach, we explore alternatives for the repayment of amounts due. Such alternatives usually include incurring additional term debt and issuing new equity securities. On June 28, 2004, our shelf registration statement to increase securities available for issuance to $2.7 billion became effective, and as of December 31, 2004, $2.3 billion was available. An effective shelf registration statement allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. Although there can be no assurance that we will consummate any debt or equity offerings or other financings, we believe we will have access to various types of financing, including debt or equity offerings, with which to finance future acquisitions and to pay our debt and other obligations.

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

During 2004 we purchased 136 properties for $824.7 million, including closing costs, and funded improvements to our owned properties totaling $60.3 million. We allocated $99.1 million of our total 2004 acquisition costs to acquired real estate leases and $12.4 million to acquired real estate lease obligations. Included in these acquisitions is the purchase of Hallwood Realty Partners, L.P., or Hallwood, on July 16, 2004, for an aggregate net purchase price of $434.7 million, including closing costs. Hallwood, formerly a publicly traded limited partnership, owned a portfolio of 113 office and industrial properties that contain 5.2 million square feet of space and are located in seven metropolitan areas. At the time of acquisition, the Hallwood properties were leased to approximately 500 tenants under leases expiring between 2004 and 2020. We assumed approximately $207 million of Hallwood’s outstanding mortgage debt and we repaid approximately $100 million of this mortgage debt simultaneously with the purchase closing. The balance of this mortgage debt is prepayable in 2005 and 2008. We funded all our 2004 acquisitions with cash on hand and by borrowing under our revolving credit facility. As of December 31, 2004, we had an outstanding agreement to purchase 8.2 million square feet of industrial lands in Oahu, HI from the estate of James Campbell and affiliates. During February 2005 we completed diligence and committed to the acquisition of these lands for $115.5 million, plus closing costs. While the closing of this acquisition is expected to occur some time between June and December of 2005, there can be no assurance that it will close or that the closing will not be delayed.

During the year ended December 31, 2004 and 2003, cash expenditures made and capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows (in thousands):

	Year Ended December 31,
	2004		2003
Tenant improvements	$	31,380	$	26,932
Leasing costs	24,947		9,975
Building improvements	21,294		11,318
Development and redevelopment activities	7,647		6,721

Commitments made for expenditures in connection with leasing space during the year ended December 31, 2004, are as follows (in thousands, except as noted):

	Total		Renewals		New Leases
Square feet leased during the year	4,452		2,794		1,658
Total commitments for tenant improvements and leasing costs	$	126,035	$	55,766	$	70,269
Leasing costs per square foot (whole dollars)	$	28.31	$	19.96	$	42.38
Average lease term (years)	8.7		8.1		9.6
Leasing costs per square foot per year (whole dollars)	$	3.25	$	2.38	$	2.46

At December 31, 2004, we owned 8.7 million, or 12.6%, of the common shares of beneficial interest of Senior Housing with a carrying value of $108.7 million and a market value, based on quoted market prices, of $164.0 million, and 4.0 million, or 6.0%, of the common shares of beneficial interest of Hospitality Properties with a carrying value of $99.1 million and a market value, based on quoted market prices, of $184.0 million. During the year ended December 31, 2004, we received cash distributions totaling $13.1 million from Senior Housing and $11.5 million from Hospitality Properties. We use the income statement method to account for the issuance of common shares 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 and Hospitality Properties are recognized in our income statement. In 2004 Senior Housing completed public offerings of 10 million common shares and in connection with these public offerings we sold 4.1 million Senior Housing common shares we owned. As a result of these transactions, our ownership percentage in Senior Housing was reduced from 21.9% to 12.6%, and we recognized gains aggregating $25.9 million. We expect cash distributions received by us from Senior Housing calculated at their current rate to decrease from $13.1 million to approximately $11.1 million per year. In 2004 Hospitality Properties completed a public offering of common shares that reduced our ownership percentage from 6.4% to 6.0%. As a result of this transaction, we recognized a gain of $4.1 million. On March 7, 2005, the market values of our Senior Housing and Hospitality Properties shares were $158.9 million and $170.1 million, respectively. In the future we may decide to sell some or all of our remaining Hospitality Properties or Senior Housing shares, based upon several factors including available alternative uses for the sale proceeds and the prices at which sales may be accomplished.

In January 2004 we issued 34.5 million common shares in a public offering at $9.89 per share, raising gross proceeds of $341.2 million. Net proceeds of this offering totaling $323.6 million, were used to reduce amounts outstanding under our revolving credit facility.

In February 2004 we entered into a new five year $250 million unsecured term loan with a group of banks. Terms of the new loan include interest at LIBOR plus an 80 basis point spread, which averaged a total of 2.3% from February to December 2004. In August 2004 we increased this term loan by $100 million and amended the term loan to extend the maturity date by six months to August 24, 2009. The term loan, as amended, permits prepayment of the loan without penalty beginning in February 2006. In August 2004 we issued $400 million unsecured senior notes in a public offering, raising net proceeds of $392.2 million. The notes bear interest at 6.25%, require semi-annual interest payments and mature in August 2016. Net proceeds from these financing transactions were used to repay amounts outstanding under our revolving credit facility and for general business purposes. In February 2004 we redeemed at par, our $143 million 8.50% senior notes due in November 2013. We funded this redemption by borrowing under our revolving credit facility. In connection with this redemption, we recognized a loss of $2.9 million from the write off of deferred financing fees.

As of December 31, 2004, 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	$	2,368,118	$	109,761	$	206,003	$	386,145	$	1,666,209
Tenant Related Obligations (1)	94,410		74,290		20,120		—		—
Purchase Obligations (2)	115,500		115,500		—		—		—
Projected Interest Expense (3)	1,094,317		125,006		246,086		235,664		483,561
Total	$	3,673,345	$	425,557	$	472,209	$	621,809	$	2,149,770

(1) Committed tenant related obligations are based on leases executed as of December 31, 2004.

(2) Represents the purchase price to acquire 8.2 million square feet of industrial lands in Oahu, HI as agreed to in February 2005.

(3) 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.

As of December 31, 2004, we have no commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or off balance sheet arrangements. 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, 2004, were our unsecured revolving credit facility, our unsecured $350 million term loan and our $1.4 billion of publicly issued term debt. Our publicly issued debt is governed by an indenture. This indenture and related supplements, our revolving credit facility agreement and our term loan 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 ratios. At December 31, 2004, we were in compliance with all of our covenants under our indenture and related supplements, our term loan agreement and our revolving credit facility agreement.

In addition to our unsecured debt obligations, we have $443.1 million of mortgage notes outstanding at December 31, 2004.

None of our indenture and related supplements, our revolving credit facility, our term loan agreement or our mortgage notes contain provisions for acceleration which could be triggered by our debt ratings. However, our senior debt rating is used to determine the interest rate payable under our revolving credit facility and our term loan agreement, 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, a default on our public debt indenture would be a default under our revolving credit and term loan facilities.

Related Party Transactions

We have agreements with RMR to originate and present investment opportunities to our board of trustees, and provide property management and administrative services to us. RMR is beneficially owned by Barry M. Portnoy and Gerard M. Martin, each a managing trustee and member of our board of trustees. Each of our executive officers are also officers of RMR. Our independent trustees, including all of our trustees other than Messrs. Portnoy and Martin, review our contracts with RMR at least annually and make determinations regarding renewals. Any termination of our contract with RMR would cause a default under our revolving credit facility, if not approved by a majority of lenders. Our current contract with RMR expires on December 31, 2005. 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, plus property management fees equal to 3.0% of gross rents and construction management fees equal to 5.0% of construction costs. The incentive fee to RMR is paid in our common shares.

In October 2003 we entered an agreement with Senior Housing pursuant to which Senior Housing agreed to file a registration statement with respect to the Senior Housing shares we own and use reasonable efforts to effect the registration of those shares. We paid the expenses of this registration. The registration statement became effective October 24, 2003. In 2004 Senior Housing completed two public offerings of five million each of its common shares. Simultaneously with these offerings, we sold a total of 4,148,500 of the Senior Housing shares we owned. We and Senior Housing were parties to underwriting agreements in connection with these offerings. Senior Housing did not receive any proceeds from our sale of its shares and we paid our pro rata share of the expenses of these offerings.

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 and our equity investments. These policies affect our:

• allocation of purchase prices between various asset categories and the related impact on the recognition of rental income and depreciation and amortization expense;

• assessment of the carrying values and impairments of long lived assets;

• classification of leases; and

• investments in Senior Housing and Hospitality Properties.

We have historically allocated the purchase prices of properties to land, 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 estimates and, under some circumstances, studies commissioned from independent real estate appraisal firms.

Purchase price allocations to land, building and improvements are 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. Purchase price allocations to above market and below market leases are 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. Purchase price allocations to in place leases and tenant relationships are determined as 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. 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 are material in the future, those amounts will be separately allocated and amortized 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. Capitalized above market lease values (included in acquired real estate leases in the accompanying consolidated balance sheet) are amortized as a reduction to rental income over the remaining non-cancelable terms of the respective leases. Capitalized below market lease values (presented as acquired real estate lease obligations in the accompanying consolidated balance sheet) are amortized as an increase to rental income over the remaining initial terms of the respective leases. The value of in place leases exclusive of the value of above market and below market in place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease is 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 indicators. These 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.

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.

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. Recent declines in our occupancy percentages at some of our properties reflect current economic conditions and competition. Competition, economic conditions and other factors may cause additional 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.

Our investments in Senior Housing and Hospitality Properties are accounted for using the equity method of accounting. Under the equity method we record our percentage share of net earnings from Senior Housing and Hospitality Properties in our consolidated statement of income. Under the equity method, accounting policy judgments made by Senior Housing and Hospitality Properties could have a material effect on our net income. Also, if we determine that there is an other than temporary decline in the fair value of these investments, their cost basis would be written down to fair value and the amount of the write down would be included in our earnings. In evaluating the fair value of these investments, we have considered, among other things, the quoted prices, the financial condition and near term prospects of each investee, earnings trends, asset quality, asset valuation models, and the financial condition and prospects for their respective industries generally.

IMPACT OF INFLATION

Inflation might have both positive and negative impacts upon us. Inflation might cause the value of our real estate investments 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. 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. 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.

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, 2003. 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, 2004, our total outstanding fixed rate term debt consisted of the following fixed rate notes:

Amount		Coupon		Maturity
Unsecured senior notes:

$	100.0 million	6.700	%	2005
$	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
$	400.0 million	6.250	%	2016

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

Secured notes:

$	10.0 million	8.400	%	2007
$	16.6 million	7.020	%	2008
$	6.5 million	8.000	%	2008
$	5.9 million	5.170	%	2009
$	249.2 million	6.814	%	2011
$	5.6 million	6.000	%	2012
$	76.0 million	8.700	%	2020
$	29.8 million	8.500	%	2028
$	43.4 million	6.794	%	2029

The secured notes are secured by 83 of our office properties located in 20 office complexes 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, 2004, 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 $12.2 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 rates increase the value of our fixed rate debt. Based on the balances outstanding at December 31, 2004, 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 $60 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 makewhole 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. For example, in February 2004, we redeemed at par, our $143 million 8.50% senior notes due in November 2013. We funded this redemption with cash on hand and borrowings under our revolving credit facility.

At December 31, 2004, we had $175 million outstanding and $385 million available for drawing under our unsecured revolving credit facility and $350 million outstanding on our unsecured term loan. Our term loan matures in August 2009. In January 2005 we amended our revolving credit facility to extend the maturity date from April 2006 to April 2009, and to increase the available borrowing amount from $560 million to $750 million. Repayments under our revolving credit facility may be made at any time without penalty. Repayments under our term loan may be made without penalty beginning in February 2006. We borrow in U.S. dollars and borrowings under our revolving credit facility and our term loan 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 average interest rate payable on our revolver and term loan was 2.3% during 2004. 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, 2004 (dollars in thousands):

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

At December 31, 2004	2.3	%	$	525,000	$	12,075
10% reduction	2.1	%	$	525,000	$	11,025
10% increase	2.5	%	$	525,000	$	13,125

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 changes in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount of our 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 and Chief Operating Officer and Treasurer and 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 evaluation, our managing trustees, President and Chief Operating Officer and Treasurer and 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, 2004 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, 2004. 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, 2004, our internal control over financial reporting is effective.

Ernst & Young LLP, the independent registered public accounting firm that audited our 2004 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our assessment of our internal control over financial reporting. Its report appears elsewhere herein.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

In March 2004 we 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 shareholder who requests a copy. 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 controller (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 Shareholder 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, our independent trustees receive 1,500 shares per year each as part of their annual compensation for serving as our trustees. The terms of grants made under the Award Plan are determined by our trustees at the time of the grant. The following table is as of December 31, 2004.

	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	None.	None.	6,383,378

Total	None.	None.	6,383,378

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 Party 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.

Item 13. Certain Relationships and Related Transactions

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.

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:

Reports of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheet as of December 31, 2004 and 2003	F-3
Consolidated Statement of Income for each of the three years in the period ended December 31, 2004	F-4
Consolidated Statement of Shareholders’ Equity for each of the three years in the period ended December 31, 2004	F-5
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2004	F-6
Notes to Consolidated Financial Statements	F-8
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.

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 Current Report on Form 8-K, dated January 7, 2004)

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 February 16, 2001, to Third Amendment and Restatement of Declaration of Trust, dated July 1, 1994, creating the Series A Cumulative Redeemable Preferred Shares. (incorporated by reference to the Company’s Current Report on Form 8-K, dated February 16, 2001)

3.7		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)

3.8		Articles Supplementary, dated June 16, 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)

3.9		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)

3.10		Composite copy of Amended and Restated By-laws of the Company dated March 20, 2003, as amended to date. (incorporated by reference to the Company’s Current Report on Form 8-K, dated March 10, 2004)

4.1		Form of Common Share Certificate. (incorporated by reference to the Company’s Current Report on Form 8-K, dated March 11, 1999)

4.2		Form of Temporary 9 7/8% Series A Cumulative Redeemable Preferred Share Certificate. (incorporated by reference to the Company’s Current Report on Form 8-K, dated February 16, 2001)

4.3		Form of Temporary 8 3/4% Series B Cumulative Redeemable Preferred Share Certificate. (incorporated by reference to the Company’s Current Report on Form 8-K, dated September 6, 2002)

4.4		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)

4.5		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)

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

4.7		Supplemental Indenture No. 3, dated as of February 23, 1998, by and between the Company and State Street, relating to the Company’s 6.7% Senior Notes due 2005, including form thereof. (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 (“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 1/4% Senior Notes due 2016, including form thereof. (incorporated by reference to the Company’s Current Report on Form 8-K, dated July 27, 2004)

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. (“RMR, 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 RMR, 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 RMR LLC. (+) (incorporated by reference to the Company’s Current Report on Form 8-K, dated March 10, 2004)

10.4		Master Management Agreement, dated as of January 1, 1998, by and between the Company and RMR, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K, dated February 27, 1998)

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. (+) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)

10.7		Representative Indemnification Agreement. (+) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)

10.8		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)

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

10.10		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)

10.11		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. (“Fairbanks”) and for the benefit of Merrill. (incorporated by reference to the Company’s Current Report on Form 8-K, dated December 15, 2000)

10.12		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)

10.13		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. (“Lawyers Title”) for the benefit of Merrill. (incorporated by reference to the Company’s Current Report on Form 8-K, dated December 15, 2000)

10.14		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)

10.15		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)

10.16		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)

10.17		Exceptions to Non-Recourse Guaranty, dated December 15, 2000, entered into by Hub Realty College Park I, LLC (“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)

10.18		Loan and Security Agreement, dated December 15, 2000, entered into by and between Franklin Plaza Property Trust (“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)

10.19		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)

10.20		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)

10.21		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)

10.22		Term Loan Agreement, dated as of February 25, 2004, by and among the Company, each of the financial institutions a signatory thereto; Wachovia Bank, National Association, as Administrative Agent; and other agents. (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003)

10.23		First Amendment to Term Loan Agreement, dated as of August 20, 2004, by and among the Company, each of the financial institutions a signatory thereto; Wachovia Bank, National Association, as Administrative Agent; and other agents. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

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		Purchase and Sale Agreement, dated as of November 6, 2003, by and between the Trustees Under the Will and of the Estate of Samuel Damon, Deceased, as seller, and the Company, as purchaser. (incorporated by reference to the Company’s Current Report on Form 8-K, dated December 5, 2003)

10.26		First Amendment to Purchase and Sale Agreement, dated as of December 4, 2003, between the Trustees Under the Will and of the Estate of Samuel Damon, Deceased, as seller, and the Company, as purchaser. (incorporated by reference to the Company’s Current Report on Form 8-K, dated December 5, 2003)

10.27		Agreement and Plan of Merger, dated as of April 16, 2004, by and among the Company, HWP LP Acquisition LLC (“HWP”), Hallwood Realty, LLC (“Hallwood LLC”) and Hallwood Realty Partners, L.P. (“Hallwood”). (incorporated by reference to Exhibit 1 to the filing on Schedule 13D by the Company, Reit Management & Research LLC (“RMR LLC”) and Reit Management & Research Trust (“RMR Trust”) relating to units of limited partner interest of Hallwood)

10.28		First Amendment to Agreement and Plan of Merger, dated as of May 11, 2004, by and among the Company, HWP, Hallwood LLC and Hallwood. (incorporated by reference to the Company’s Current Report on Form 8-K, dated May 11, 2004)

10.29		Purchase Agreement, dated as of April 16, 2004, by and among the Company, HRP GP, LLC (“HRP GP”), Hallwood LLC, Hallwood Commercial Real Estate, LLC (“Hallwood Commercial”), HWG, LLC (“HWG”), HWG Realty Investors, LLC, HWG 98 Advisors, Inc. (“HWG 98”), HWG 95 Advisors, Inc. (“HWG 95”) and The Hallwood Group Incorporated (the “Hallwood Group”). (incorporated by reference to Exhibit 2 to the filing on Schedule 13D by the Company, RMR LLC and RMR Trust relating to units of limited partner interest of Hallwood)

10.30		First Amendment to Purchase Agreement, dated as of May 11, 2004, by and among the Company, HRP GP, Hallwood LLC, Hallwood Commercial, HWG, HWG Realty, HWG 98, HWG 95 and the Hallwood Group. (incorporated by reference to the Company’s Current Report on Form 8-K, dated May 11, 2004)

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)

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

31.1		Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

31.2		Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

31.3		Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

31.4		Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)

99.1		Amended and Restated Charter of the Compensation Committee, adopted on January 10, 2005. (furnished herewith)

99.2		Composite Copy of Governance Guidelines, effective January 10, 2005. (furnished herewith)

(+)

Management contract or compensatory plan or arrangement.

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, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 auditing 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 and the report of other auditors 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, 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), the effectiveness of HRPT Properties Trust’s internal control over financial reporting as of December 31, 2004, based on criteria established by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP



Boston, Massachusetts
March 10, 2005

F-1

Report of Independent Registered Public Accounting Firm

To the Trustees and Shareholders of HRPT Properties Trust

We have audited management’s assessment, included in the accompanying Management Report on Assessment of Internal Control Over Financial Reporting, that HRPT Properties Trust maintained effective internal control over financial reporting as of December 31, 2004, 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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 for 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, management’s assessment that HRPT Properties Trust maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, HRPT Properties Trust maintained, in material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of HRPT Properties Trust and our report dated March 10, 2005 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP



Boston, Massachusetts
March 10, 2005

F-2

HRPT PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except per share data)

	December 31,
	2004			2003
ASSETS
Real estate properties, at cost:
Land	$	928,106		$	852,983
Buildings and improvements	3,756,963			3,038,983
	4,685,069			3,891,966
Accumulated depreciation	(454,411		)	(363,015		)
	4,230,658			3,528,951
Acquired real estate leases	149,063			68,983
Equity investments in former subsidiaries	207,804			260,208
Cash and cash equivalents	21,961			11,526
Restricted cash	22,257			10,674
Rents receivable, net of allowance for doubtful accounts of $4,594 and $4,568, respectively	113,504			83,973
Other assets, net	68,083			48,929
Total assets	$	4,813,330		$	4,013,244

LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility	$	175,000		$	412,000
Senior unsecured debt, net	1,739,624			1,136,311
Mortgage notes payable, net	440,407			328,510
Accounts payable and accrued expenses	67,716			60,541
Acquired real estate lease obligations	39,843			33,206
Rent collected in advance	15,208			13,135
Security deposits	11,920			9,520
Due to affiliates	16,418			8,370
Total liabilities	2,506,136			2,001,593

Commitments and contingencies

Shareholders’ equity:
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized;
Series A preferred shares; 9 7/8% cumulative redeemable at par on February 22, 2006; 8,000,000 shares issued and outstanding, aggregate liquidation preference $200,000	193,086			193,086
Series B preferred shares; 8 ¾% cumulative redeemable at par on September 12, 2007; 12,000,000 shares issued and outstanding, aggregate liquidation preference $300,000	289,849			289,849
Common shares of beneficial interest, $0.01 par value: 200,000,000 shares authorized; 177,316,525 and 142,773,925 shares issued and outstanding, respectively	1,773			1,428
Additional paid in capital	2,394,946			2,071,203
Cumulative net income	1,287,790			1,124,961
Cumulative common distributions	(1,729,587		)	(1,584,213		)
Cumulative preferred distributions	(130,663		)	(84,663		)
Total shareholders’ equity	2,307,194			2,011,651
Total liabilities and shareholders’ equity	$	4,813,330		$	4,013,244

See accompanying notes

F-3

HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share data)

	Year Ended December 31,
	2004			2003			2002
Rental income	$	603,229		$	500,316		$	414,073

Expenses:
Operating expenses	227,853			192,813			152,614
Depreciation and amortization	112,380			93,273			68,750
General and administrative	25,170			19,338			16,815
Total expenses	365,403			305,424			238,179

Operating income	237,826			194,892			175,894

Interest income	638			411			858
Other income	—			—			2,035
Interest expense (including amortization of note discounts and premiums and deferred financing fees of $4,341, $5,975 and $5,276, respectively)	(118,212		)	(101,144		)	(86,360		)
Loss on early extinguishment of debt	(2,866		)	(3,238		)	(3,504		)
Equity in earnings of equity investments	15,457			23,525			19,261
Gain on sale of shares of equity investments	21,550			—			—
Gain (loss) on issuance of shares by equity investees	8,436			—			(1,421		)
Net income	162,829			114,446			106,763
Preferred distributions	(46,000		)	(46,000		)	(27,625		)
Net income available for common shareholders	$	116,829		$	68,446		$	79,138

Weighted average common shares outstanding	176,157			136,270			128,817

Basic and diluted earnings per common share:
Net income available for common shareholders	$	0.66		$	0.50		$	0.61

See accompanying notes

F-4

HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share data)

	Preferred Shares									Common Shares									Cumulative Net Income		Accumulated Other Comprehensive Income (Loss)			Total
	Series A			Series B			Cumulative Preferred Distributions							Cumulative Common Distributions			Additional Paid in Capital
	Number of Shares	Preferred Shares		Number of Shares	Preferred Shares					Number of Shares		Common Shares
Balance at December 31, 2001	8,000,000	$	193,086	—	$	—	$	(14,319	)	128,808,747		$	1,288	$	(1,372,503	)	$	1,945,610	$	903,752	$	(414	)	$	1,656,500
Issuance of shares, net	—	—		12,000,000	289,849		—			—		—		—			—		—		—			289,849
Stock grants	—	—		—	—		—			16,500		—		—			143		—		—			143
Comprehensive income:
Net income	—	—		—	—		—			—		—		—			—		106,763		—			106,763
Unrealized holding gains on investments	—	—		—	—		—			—		—		—			—		—		1,713			1,713
Reclassification adjustment for gains realized in net income	—	—		—	—		—			—		—		—			—		—		(1,299		)	(1,299		)
Total comprehensive income	—	—		—	—		—			—		—		—			—		106,763		414			107,177
Distributions	—	—		—	—		(24,344		)	—		—		(103,052		)	—		—		—			(127,396		)
Balance at December 31, 2002	8,000,000	193,086		12,000,000	289,849		(38,663		)	128,825,247		1,288		(1,475,555		)	1,945,753		1,010,515		—			1,926,273
Issuance of shares, net	—	—		—	—		—			13,835,100		139		—			124,479		—		—			124,618
Stock grants	—	—		—	—		—			114,330		1		—			971		—		—			972
Cancellation of shares	—	—		—	—		—			(752	)	—		—			—		—		—			—
Comprehensive income:
Net income	—	—		—	—		—			—		—		—			—		114,446		—			114,446
Total comprehensive income	—	—		—	—		—			—		—		—			—		114,446		—			114,446
Distributions	—	—		—	—		(46,000		)	—		—		(108,658		)	—		—		—			(154,658		)
Balance at December 31, 2003	8,000,000	193,086		12,000,000	289,849		(84,663		)	142,773,925		1,428		(1,584,213		)	2,071,203		1,124,961		—			2,011,651
Issuance of shares, net	—	—		—	—		—			34,500,000		345		—			323,294		—		—			323,639
Stock grants	—	—		—	—		—			42,600		—		—			449		—		—			449
Comprehensive income:
Net income	—	—		—	—		—			—		—		—			—		162,829		—			162,829
Total comprehensive income	—	—		—	—		—			—		—		—			—		162,829		—			162,829
Distributions	—	—		—	—		(46,000		)	—		—		(145,374		)	—		—		—			(191,374		)
Balance at December 31, 2004	8,000,000	$	193,086	12,000,000	$	289,849	$	(130,663	)	177,316,525		$	1,773	$	(1,729,587	)	$	2,394,946	$	1,287,790	$	—		$	2,307,194

See accompanying notes

F-5

HRPT PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	162,829		$	114,446		$	106,763
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	95,977			79,661			65,489
Amortization of note discounts and premiums and deferred financing fees	4,341			5,975			5,276
Amortization of acquired real estate leases	13,271			6,954			—
Other amortization	6,139			5,563			3,261
Loss on early extinguishment of debt	2,866			3,238			177
Equity in earnings of equity investments	(15,457		)	(23,525		)	(19,261		)
Gain on sale of shares of equity investments	(21,550		)	—			—
(Gain) loss on issuance of shares by equity investees	(8,436		)	—			1,421
Distributions of earnings from equity investments	15,457			21,383			19,261
Change in assets and liabilities:
(Increase) decrease in restricted cash	(11,583		)	1,858			(1,195		)
Increase in rents receivable and other assets	(54,346		)	(32,346		)	(15,563		)
Increase in accounts payable and accrued expenses	7,175			11,139			5,514
Increase in rent collected in advance	2,073			2,200			3,011
Increase in security deposits	2,400			1,076			1,110
Increase in due to affiliates	8,048			2,834			2,746
Cash provided by operating activities	209,204			200,456			178,010

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and improvements	(765,091		)	(832,826		)	(500,581		)
Distributions in excess of earnings from equity investments	9,115			6,021			7,934
Proceeds from sale of common shares of equity investment	73,275			—			—
Proceeds from sale of real estate	—			385			740
Cash used for investing activities	(682,701		)	(826,420		)	(491,907		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred shares, net	—			—			289,849
Proceeds from issuance of common shares, net	323,639			124,618			—
Proceeds from borrowings	1,660,436			1,223,454			1,041,282
Payments on borrowings	(1,302,580		)	(564,989		)	(924,200		)
Deferred financing fees	(6,189		)	(3,319		)	(3,809		)
Distributions to common shareholders	(145,374		)	(108,658		)	(103,052		)
Distributions to preferred shareholders	(46,000		)	(46,000		)	(24,344		)
Cash provided by financing activities	483,932			625,106			275,726

Increase (decrease) in cash and cash equivalents	10,435			(858		)	(38,171		)
Cash and cash equivalents at beginning of period	11,526			12,384			50,555
Cash and cash equivalents at end of period	$	21,961		$	11,526		$	12,384

See accompanying notes

F-6

	Year Ended December 31,
	2004			2003		2002

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (including capitalized interest paid of $3,057 in 2002)	$	101,255		$	82,771	$	83,954

NON-CASH INVESTING ACTIVITIES:
Real estate acquisitions	$	(119,958	)	$	—	$	—

NON-CASH FINANCING ACTIVITIES:
Issuance of common shares	$	449		$	972	$	143
Assumption of mortgage notes payable	119,958			—		—

See accompanying notes

F-7

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, 2004, we had investments in 375 properties and owned 12.6% and 6.0% of the common shares of Senior Housing Properties Trust, or Senior Housing, and Hospitality Properties Trust, or Hospitality Properties, respectively.

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 can exercise influence, but do not control, are accounted for using the equity method of accounting. All intercompany transactions have been eliminated. Significant influence is present through common representation on the board of trustees. Our two managing trustees are also managing trustees of Senior Housing and Hospitality Properties, and owners of Reit Management & Research LLC, or RMR, which is the investment manager to us, Senior Housing and Hospitality Properties. We use 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 are recognized in our income statement.

Real Estate Property. 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 have historically allocated the purchase prices of properties to land, building and improvements, and each component generally has a different useful life. For properties acquired subsequent to June 1, 2001, the effective date of Financial Accounting Standard No. 141, “Business Combinations”, or 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 management’s estimates and, under some circumstances, studies commissioned from independent real estate appraisal firms.

Purchase price allocations to land, building and improvements are based on management’s determination of the relative fair values of these assets assuming the property is vacant. Management determines the fair value of a property using methods similar to those used by independent appraisers. Purchase price allocations to above market and below market leases are based on 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. Purchase price allocations to in place leases and tenant relationships are determined as 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. This aggregate value is allocated between in place lease values and tenant relationships based on management’s 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 are material in the future, those amounts will be separately allocated and amortized over the estimated life of the relationships.

Capitalized above market lease values (included in acquired real estate leases in the accompanying consolidated balance sheet) are amortized as a reduction to rental income over the remaining non-cancelable terms of the respective leases. Capitalized below market lease values (presented as acquired real estate lease obligations in the accompanying consolidated balance sheet) are amortized as an increase to rental income over the non-cancelable periods of the respective leases. Such amortization resulted in changes to rental income of ($3.0) million and $1.1 million during the years ended December 31, 2004 and 2003, respectively. The value of in place leases exclusive of the value of above market and below market in place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. Such amortization amounted to $10.3 million and $8.0 million during

F-8

the years ended December 31, 2004 and 2003, 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 2004 totaled $99.1 million and $12.4 million, respectively. Intangible lease assets and liabilities recorded by us in 2003 totaled $48.6 million and $23.5 million, respectively. Accumulated amortization of capitalized above and below market lease values was $2.7 million and $1.1 million at December 31, 2004, and 2003, respectively. Accumulated amortization of the value of in place leases exclusive of the value of above and below market in place leases was $17.4 million and $8.0 million at December 31, 2004 and 2003, 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, 2004, are approximately $21.7 million in 2005, $18.9 million in 2006, $16.1 million in 2007, $14.5 million in 2008, $12.3 million in 2009 and $25.7 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.

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.

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 over the terms of the respective loans. At December 31, 2004 and 2003, deferred financing fees totaled $27.2 million and $25.3 million, respectively, and accumulated amortization for deferred financing fees totaled $12.2 million and $9.8 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 $56.4 million and $34.3 million at December 31, 2004 and 2003, respectively, and accumulated amortization for deferred leasing costs totaled $14.1 million and $10.7 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, 2004, are approximately $10.0 million in 2005, $8.6 million in 2006, $7.5 million in 2007, $6.7 million in 2008, $5.5 million in 2009 and $19.0 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 of our tenants to make payments required under their leases. The computation of the allowance is based on the tenant’s payment history and current credit profile, as well as other considerations.

Earnings Per Common Share. Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. We have no common share equivalents, instruments convertible into common shares or other dilutive instruments.

Reclassifications. Reclassifications have been made to the prior years’ financial statements, including our selected quarterly financial data, 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. Accordingly, we expect not to be subject to federal income taxes if we continue to distribute our taxable income and meet other requirements for qualifying as a real estate investment trust. However, we are subject to some state and local taxes on our income and property. The characterization of our distributions paid in 2004, 2003 and 2002 was 66.5%, 69.1% and 76.6% ordinary income, respectively, and 32.9%, 30.9% and 23.4% return of capital, respectively, and 0.6% capital gain for 2004.

Use of Estimates. Preparation of these financial statements in conformity with U.S. generally accepted accounting principles in the United States 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.

F-9

Note 3. Real Estate Properties

In July 2004 we purchased Hallwood Realty Partners, L.P., or Hallwood, for an aggregate net purchase price of $434.7 million, including closing costs. Hallwood, formerly a publicly traded limited partnership, owned a portfolio of 113 office and industrial properties that contain 5.2 million square feet of space located in seven metropolitan areas. At the time of acquisition, the Hallwood properties were leased to approximately 500 tenants with lease expirations between 2004 and 2020. We assumed approximately $207 million of Hallwood’s outstanding mortgage debt and we repaid approximately $100 million of this mortgage debt simultaneously with the purchase closing. The balance of this mortgage debt is prepayable in 2005 and 2008. During 2004 we acquired an additional 23 properties for $390.1 million, including closing costs, and funded $60.3 million of improvements to our owned properties. We funded all of these transactions with cash on hand and by borrowing under our revolving credit facility. We allocated $99.1 million of our total 2004 acquisition costs to acquired real estate leases and $12.4 million to acquired real estate lease obligations.

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 2005 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 $126 million for expenditures related to 4.5 million square feet of leases executed during 2004. Committed tenant related obligations based on executed leases as of December 31, 2004 were $94.4 million.

The future minimum lease payments to be received by us during the current terms of our leases as of December 31, 2004, are approximately $533.5 million in 2005, $506.3 million in 2006, $454.8 million in 2007, $401.7 million in 2008, $367.2 million in 2009 and $1.8 billion thereafter.

Note 4. Equity Investments

At December 31, 2004 and 2003, we had the following equity investments (dollars in thousands):

	Ownership Percentage		Equity in Earnings				Equity Investments
	December 31,		Year Ended December 31,				December 31,
	2004	2003	2004		2003		2004		2003
Senior Housing	12.6%	21.9%	$	8,583	$	9,863	$	108,668	$	160,500
Hospitality Properties	6.0	6.4	6,874		13,662		99,136		99,708
			$	15,457	$	23,525	$	207,804	$	260,208

At December 31, 2004, we owned 8,660,738 common shares of beneficial interest of Senior Housing with a carrying value of $108.7 million and a market value, based on quoted market prices, of $164.0 million. Senior Housing is a real estate investment trust that invests principally in senior housing real estate. At December 31, 2004, Senior Housing owned 181 senior housing properties.

In January 2004 Senior Housing issued 5,000,000 common shares in a public offering for $18.20 per common share, raising net proceeds of $86.1 million. Our ownership percentage in Senior Housing was reduced from 21.9% prior to this transaction to 20.2% after this transaction, and we recognized a gain of $966,000. Simultaneously with this offering, in January and February 2004, we sold 3,148,500 common shares we owned of Senior Housing for $18.20 per common share, for gross proceeds of $57.3 million (net $54.4 million) and we recognized a gain of $14.8 million. Our ownership percentage in Senior Housing was reduced from 20.2% prior to this transaction to 15.2% after this transaction. In December 2004 Senior Housing issued another 5,000,000 common shares in a public offering for $19.86 per common share, raising net proceeds of $94.1 million. Our ownership percentage in Senior Housing was reduced from 15.2% prior to this transaction to 14.1% after this transaction, and we recognized a gain of $3.4 million. Simultaneously with this offering, we sold 1,000,000 common shares we owned of Senior Housing for $19.86 per common share, for gross proceeds of $19.9 million (net $18.9 million) and we recognized a gain of $6.7 million. Our ownership percentage in Senior Housing was reduced from 14.1% prior to this transaction to 12.6% after this transaction.

F-10

During 2002 Senior Housing issued 15,000,000 common shares in a public offering for $13.72 per common share, raising net proceeds of $195.2 million. As a result of this transaction, our ownership percentage in Senior Housing was reduced from 29.5% prior to this transaction to 21.9% after this transaction, and we recognized a loss of $1.4 million in 2002.

Summarized financial data of Senior Housing is as follows (in thousands, except per share data):

	December 31,
	2004			2003
Real estate properties, net	$	1,401,720		$		1,257,815
Cash and cash equivalents	3,409			3,530
Other assets	42,601			42,755
	$	1,447,730		$	1,304,100

Unsecured revolving bank credit facility	$		37,000	$	102,000
Senior unsecured notes due 2012 and 2015, net of discount	393,775			393,612
Other liabilities	126,288			80,582
Shareholders’ equity	890,667			727,906
	$		1,447,730	$	1,304,100

	Year Ended December 31,
	2004		2003			2002
Revenues	$	148,523	$	131,148		$	122,297
Expenses	93,000		84,114			70,284
Income from continuing operations	55,523		47,034			52,013
Loss from discontinued operations	—		—			(1,829		)
Gain (loss) on sale of properties	1,219		(1,160		)	—
Net income	$	56,742	$	45,874		$	50,184

Weighted average shares outstanding	63,406		58,445			56,416

Basic and diluted earnings per share:
Income from continuing operations	$	0.88	$	0.80		$	0.92
Gain (loss) from sale of properties or discontinued operations	0.01		(0.02		)	(0.03		)
Net income	$	.89	$	0.78		$	0.89

At December 31, 2004, we owned 4,000,000 common shares of beneficial interest of Hospitality Properties with a carrying value of $99.1 million and a market value, based on quoted market prices, of $184.0 million. Hospitality Properties is a real estate investment trust that owns hotels. At December 31, 2004, Hospitality Properties owned 285 hotels.

In 2004 Hospitality Properties issued 4,600,000 common shares in a public offering for $43.93 per common share, raising net proceeds of $192.7 million. Our ownership percentage in Hospitality Properties was reduced from 6.4% prior to this transaction to 6.0% after this transaction, and we recognized a gain of $4.1 million.

F-11

Summarized financial data of Hospitality Properties is as follows (in thousands, except per share data):

	December 31,
	2004			2003
Real estate properties, net	$		2,624,473	$	2,685,208
Other assets	64,952			76,393
	$		2,689,425	$	2,761,601

Revolving credit facility	$		72,000	$	201,000
Senior notes, net of discounts	621,679			621,245
Security and other deposits	175,304			175,304
Other liabilities	134,569			118,524
Shareholders’ equity	1,685,873			1,645,528
	$	2,689,425		$		2,761,601

	Year Ended December 31,
	2004			2003			2002
Revenues	$	645,368		$	552,801		$	348,706
Expenses	518,480			314,588			206,504
Income before gain on sale of real estate	126,888			238,213			142,202
Gain on sale of real estate	203			—			—
Net income	127,091			238,213			142,202
Preferred distributions	(9,674		)	(14,780		)	(7,572		)
Excess of liquidation preference over carrying value of preferred shares	(2,793		)	—			—
Net income available for common shareholders	$	114,624		$	223,433		$	134,630

Weighted average common shares outstanding	66,503			62,576			62,538

Basic and diluted earnings per common share:
Net income available for common shareholders	$	1.72		$	3.57		$	2.15

Note 5. Shareholders’ Equity

We have reserved 6,445,978 of our common shares under the terms of our 2003 Incentive Share Award Plan, or the Award Plan. Shares were awarded prior to July 2003 pursuant to our 1992 Incentive Share Award Plan. During the years ended December 31, 2004, 2003 and 2002, 38,100 common shares with an aggregate market value of $409,000, 19,500 common shares with an aggregate market value of $181,000 and 15,000 common shares with an aggregate market value of $130,000, respectively, were awarded to our officers and employees of RMR pursuant to these plans. In addition, our independent trustees were each awarded 1,500 common shares in 2004 and 500 common shares in 2003 and in 2002 as part of their annual fees. The market values of the common shares awarded to the independent trustees were $40,000, $18,000 and $13,000 for the years ended December 31, 2004, 2003 and 2002, respectively. A portion of the shares awarded to the officers and employees of RMR vested immediately and the balance will vest over a two year period. The shares awarded to our independent trustees vested immediately. We include the value of awarded common shares in general and administrative expenses. At December 31, 2004, 6,383,378 of our common shares remain reserved for issuance under the Award Plan.

Cash distributions per common share paid by us in 2004, 2003 and 2002, were $0.82, $0.80 and $0.80 per year, respectively. We declared a distribution of $0.21 per common share to be paid on or about February 23, 2005, to shareholders of record on January 21, 2005. Our credit facility and term loan agreements contain a number of financial and other covenants, including a covenant which limits the amount of aggregate distributions on common shares to 90% of operating cash flow available for shareholder distributions as defined in the agreements.

Our 8,000,000 series A cumulative redeemable preferred shares carry dividends of $2.46875 per annum per share, payable in equal quarterly payments and have a liquidation preference of $25.00 per share. The series A preferred shares are redeemable, at our option, for $25.00 each plus accrued and unpaid dividends at any time on or after February 22, 2006. Our 12,000,000 series B cumulative redeemable preferred shares carry dividends of $2.1875 per annum, payable in equal quarterly payments. Each series B preferred share has a liquidation preference

F-12

of $25.00 and is redeemable, at our option, for $25.00 each plus accrued and unpaid dividends at any time on or after September 12, 2007.

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.

Note 6. Transactions with Affiliates

We have agreements with RMR to originate and present investment opportunities to our board of trustees, and to provide property management and administrative services to us. These agreements are subject to the annual review and approval of our independent trustees. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as our managing trustees. RMR is compensated at an annual rate equal to 0.7% of our real estate investments up to $250 million and 0.5% of investments thereafter, plus property management fees equal to 3.0% of gross rents and construction management fees equal to 5.0% of certain construction costs. RMR is also entitled to an incentive fee which is paid in restricted shares of our common stock based on a formula. Incentive fees earned for the year ended December 31, 2002, were approximately $773,000. No incentive fees were earned for the years ended December 31, 2004 and 2003. At December 31, 2004, affiliates of RMR owned 1,343,126 of our common shares. RMR also leases approximately 19,200 square feet of office space from us at rental rates which we believe to be commercially reasonable.

Amounts resulting from transactions with affiliates are as follows (dollars in thousands):

	Year Ended December 31,
	2004		2003		2002
Investment and administration related fees, incentive fees and internal audit costs paid to RMR	$	22,534	$	16,904	$	15,060
Distributions paid to beneficial owners of RMR and their affiliates	1,101		1,056		1,000
Rental income received from RMR	401		362		293
Management fees paid to RMR	19,337		15,663		12,685

F-13

Note 7. Indebtedness

At December 31, 2004 and 2003, our outstanding indebtedness included the following (dollars in thousands):

	December 31,
	2004		2003
Unsecured revolving credit facility, due April 2006, at LIBOR plus a premium	$	175,000	$	412,000
Term Loan, due August 2009, at LIBOR plus a premium	350,000		—
Senior Notes, due 2005 at 6.70%	100,000		100,000
Senior Notes, due 2010 at 8.875%	30,000		30,000
Senior Notes, due 2010 at 8.625%	20,000		20,000
Senior Notes, due 2012 at 6.95%	200,000		200,000
Senior Notes, due 2013 at 6.50%	200,000		200,000
Senior Notes, due 2014 at 5.75%	250,000		250,000
Senior Notes, due 2015 at 6.40%	200,000		200,000
Senior Notes, due 2016 at 6.25%	400,000		—
Monthly Income Senior Notes, due 2013 at 8.50%	—		143,000
Mortgage Notes Payable, due 2007 at 8.40%	10,044		10,291
Mortgage Notes Payable, due 2008 at 7.02%	16,589		16,835
Mortgage Notes Payable, due 2008 at 8.00%	6,546		7,869
Mortgage Notes Payable, due 2009 at 5.17%	5,944		7,203
Mortgage Notes Payable, due 2011 at 6.814%	249,219		252,210
Mortgage Notes Payable, due 2012 at 6.0%	5,580		—
Mortgage Notes Payable, due 2020 at 8.70%	76,039		—
Mortgage Notes Payable, due 2028 at 8.50%	29,750		—
Mortgage Notes Payable, due 2029 at 6.794%	43,407		44,000
	2,368,118		1,893,408
Less unamortized net premiums and discounts	13,087		16,587
	$	2,355,031	$	1,876,821

In 2004 we issued $400 million of our unsecured senior notes in a public offering, raising net proceeds of $392.2 million. The notes bear interest at 6.25%, require semiannual interest payments and mature in August 2016. Net proceeds from this offering were used to repay amounts outstanding under our revolving credit facility and for general business purposes.

In 2004 we entered into a new $250 million five year unsecured term loan with a group of banks. Terms of the new loan include interest at a spread above LIBOR, which averaged 2.3% from February to December 2004. In August 2004, we exercised our option to increase this term loan by $100 million and amended the term loan to extend its maturity by six months to August 24, 2009. The term loan, as amended, permits prepayment of the loans without penalty beginning in February 2006. Net proceeds of the term loan were used to repay amounts outstanding under our revolving credit facility and for general business purposes.

During 2004 we redeemed all of our $143 million 8.50% senior notes due in November 2013, at par. This redemption was funded with cash on hand and borrowings under our revolving credit facility. We recognized a loss of $2.9 million from the write off of deferred financing fees associated with this redemption.

We have an unsecured revolving credit facility that we use for acquisitions, working capital and general business purposes. In January 2005, we amended this credit facility to increase the available borrowing amount from $560 million to $750 million and to extend the maturity date from April 2006 to April 2009, with an option to extend the maturity by one additional year. The annual interest payable for amounts drawn under the facility was reduced from LIBOR plus 0.80 % to LIBOR plus 0.65%. In certain circumstances, the amount of unsecured borrowings available under this facility may be increased to $1.5 billion. Certain financial and other covenants in this facility were also amended to reflect current market conditions. The average interest rate on amounts outstanding under our credit facility during 2004 was 2.4%.

Our public debt indentures and credit facility and term loan agreements contain a number of financial and other covenants, including a credit facility and term loan covenant which limits the amount of aggregate distributions on common shares to 90% of operating cash flow available for shareholder distributions as defined in the credit facility and term loan agreements.

F-14

As part of our acquisition of Hallwood in 2004, we assumed $106.7 million of secured debt which was recorded at its fair value of $114.4 million. The related premium on this debt is being amortized to interest expense through the date on which the debt becomes prepayable.

At December 31, 2004, 20 office complexes comprised of 83 properties costing $928.7 million with an aggregate net book value of $821.1 million were secured by mortgage notes totaling $443.1 million maturing from 2007 through 2029 which, net of unamortized premiums and discounts, amounted to $440.4 million.

The required principal payments due during the next five years under all debt outstanding at December 31, 2004, are $109.8 million in 2005, $185.5 million in 2006, $20.5 million in 2007, $27.3 million in 2008, $358.9 million in 2009 and $1.7 billion thereafter.

Note 8. Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, rents receivable, equity investments, senior notes, mortgage notes payable, accounts payable and other accrued expenses and security deposits. At December 31, 2004 and 2003, the fair values of our financial instruments were not materially different from their carrying values, except as follows (dollars in thousands):

	2004				2003
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Equity investments	$	207,804	$	348,034	$	260,208	$	385,823
Senior notes and mortgage notes payable	1,830,031		1,986,637		1,464,821		1,613,336

The fair value of the equity investments are based on quoted per share prices for Hospitality Properties of $46.00 and $41.28 at December 31, 2004 and 2003, respectively, and quoted per share prices for Senior Housing of $18.94 and $17.23 at December 31, 2004 and 2003, respectively. The fair values of the senior notes and mortgage notes payable are based on estimates using discounted cash flow analysis and current interest rates ranging from 3.1% to 5.4%.

Note 9. Segment Information

Our primary business is the ownership and operation of office properties. We also own and operate industrial properties, including leased industrial land in Oahu, Hawaii. Beginning in 2004, we changed the composition of our reportable segments to account for our office and industrial properties in eight geographic operating segments for financial reporting purposes based on our method of internal reporting. Prior to 2004, we reported only one segment, owning and operating office and industrial properties. Our segments by geographic area include Metro Philadelphia, PA, Metro Washington DC, Metro Boston, MA, Southern California, Oahu, HI, Metro Atlanta, GA, Metro Austin, TX and Other Markets, which includes properties that are located throughout the United States.

The following items are accounted for on a corporate level and are not allocated among our segments: depreciation and amortization expense, general and administrative expense, interest income and expense, loss on early extinguishment of debt, and equity in earnings and gains from ownership of common shares of Senior Housing and Hospitality Properties. The accounting policies of our segments are the same as the accounting policies described in our summary of significant accounting policies.

Property level net operating income is property level revenues reduced by property level operating expenses. Property level net operating income is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate property level net operating income in the same manner. We consider property level net operating income to be an appropriate supplemental measure to net income because it helps both investors and management to understand the operations of our properties.

As of December 31, 2004, we owned 278 office properties and 97 industrial properties. Property level information by geographic area and property type is as follows (dollars in thousands):

F-15

For the year ended December 31, 2004:

	Office Properties			Industrial Properties		Totals
Property level revenue:
Metro Philadelphia, PA	$		131,469	$	—	$	131,469
Metro Washington DC	66,234			—		66,234
Metro Boston, MA	52,157			2,473		54,630
Oahu, HI	—			42,205		42,205
Southern California	42,622			—		42,622
Metro Atlanta, GA	14,813			—		14,813
Metro Austin, TX	21,577			16,740		38,317
Other Markets	189,956			22,983		212,939
Totals	$	518,828		$	84,401	$	603,229

Property level net operating income:
Metro Philadelphia, PA	$	71,676		$	—	$	71,676
Metro Washington DC	42,752			—		42,752
Metro Boston, MA	37,724			1,911		39,635
Oahu, HI	—			34,582		34,582
Southern California	27,823			—		27,823
Metro Atlanta, GA	9,404			—		9,404
Metro Austin, TX	10,011			8,162		18,173
Other Markets	115,548			15,783		131,331
Totals	$	314,938		$	60,438	$	375,376

As of December 31, 2004, our investments in office and industrial properties, net of accumulated depreciation, was $3,437,904 and $792,754, respectively.

For the year ended December 31, 2003:

	Office Properties			Industrial Properties			Totals
Property level revenue:
Metro Philadelphia, PA	$		139,647	$	—		$	139,647
Metro Washington DC	61,399			—			61,399
Metro Boston, MA	41,497			1,521			43,018
Oahu, HI	—			2,944			2,944
Southern California	38,593			—			38,593
Metro Atlanta, GA	—			—			—
Metro Austin, TX	25,448			17,227			42,675
Other Markets	163,577			8,463			172,040
Totals	$	470,161		$	30,155		$	500,316

Property level net operating income (loss):
Metro Philadelphia, PA	$	80,374		$	—		$	80,374
Metro Washington DC	40,484			—			40,484
Metro Boston, MA	30,552			(863		)	29,689
Oahu, HI	—			2,495			2,495
Southern California	25,937			—			25,937
Metro Atlanta, GA	—			—			—
Metro Austin, TX	12,873			9,000			21,873
Other Markets	100,128			6,523			106,651
Totals	$	290,348		$	17,155		$	307,503

As of December 31, 2003, our investments in office and industrial properties, net of accumulated depreciation, was $2,862,041 and $666,910, respectively.

F-16

For the year ended December 31, 2002:

	Office Properties			Industrial Properties		Totals
Property level revenue:
Metro Philadelphia, PA	$		103,081	$	—	$	103,081
Metro Washington DC	54,233			—		54,233
Metro Boston, MA	32,008			1,497		33,505
Oahu, HI	—			—		—
Southern California	39,297			—		39,297
Metro Atlanta, GA	—			—		—
Metro Austin, TX	31,705			17,415		49,120
Other Markets	132,928			1,909		134,837
Totals	$	393,252		$	20,821	$	414,073

Property level net operating income:
Metro Philadelphia, PA	$	61,220		$	—	$	61,220
Metro Washington DC	36,030			—		36,030
Metro Boston, MA	24,378			1,012		25,390
Oahu, HI	—			—		—
Southern California	27,276			—		27,276
Metro Atlanta, GA	—			—		—
Metro Austin, TX	17,846			9,190		27,036
Other Markets	83,284			1,223		84,507
Totals	$	250,034		$	11,425	$	261,459

The following table reconciles our reported segment information to our consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

	2004				2003			2002
Property level net operating income	$		375,376		$	307,503		$	261,459
Depreciation and amortization	(112,380			)	(93,273		)	(68,750		)
General and administrative	(25,170			)	(19,338		)	(16,815		)
Operating income	237,826				194,892			175,894

Interest income	638				411			858
Other income	—				—			2,035
Interest expense	(118,212			)	(101,144		)	(86,360		)
Loss on early extinguishment of debt	(2,866			)	(3,238		)	(3,504		)
Equity in earnings of equity investments	15,457				23,525			19,261
Gain on sale of shares of equity investments	21,550				—			—
Gain (loss) on issuance of shares by equity investees	8,436				—			(1,421		)
Net income	162,829				114,446			106,763
Preferred distributions	(46,000			)	(46,000		)	(27,625		)
Net income available for common shareholders	$	116,829			$	68,446		$	79,138

The United States Government is our only tenant which is responsible for more than five percent of our revenues. For the years ended December 31, 2004, 2003 and 2002, office segment revenues from the United States Government were $96.7 million, $88.9 million and $71.1 million, respectively.

F-17

Note 10. Selected Quarterly Financial Data (Unaudited)

The following is a summary of our unaudited quarterly results of operations for 2004 and 2003 (dollars in thousands, except per share amounts):

	2004
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total revenues	$	136,458	$	138,801	$	160,419	$	167,551
Net income available for common shareholders	37,875		23,560		24,901		30,493
Per common share data:
Net income available for common shareholders	0.22		0.13		0.14		0.17

	2003
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total revenues	$	120,590	$	121,613	$	127,434	$	130,679
Net income available for common shareholders	15,792		15,871		13,119		23,664
Per common share data:
Net income available for common shareholders	0.12		0.12		0.09		0.17

Note 11. Pro Forma Information (unaudited)

We purchased 136 properties for $824.7 million in 2004, including closing costs, and 27 properties including 9.7 million square feet of leased industrial land in 2003 for $798.9 million, including closing costs. The following table presents our pro forma results of operations as if our 2003 and 2004 acquisitions and financings were completed on January 1, 2003. This pro forma data is not necessarily indicative of what actual results of operations would have been for the years presented, nor does it represent the results of operations for any future period. Differences could result from, but are not limited to, additional property sales or investments, changes in interest rates and changes in our debt or equity structure. Amounts are in thousands, except per share data.

	Year Ended December 31,
	2004		2003
Total revenues	$	674,890	$	677,043
Net income available for common shareholders	$	124,687	$	112,386
Per common share data:
Net income available for common shareholders	$	0.70	$	0.63

Note 12. Subsequent Events

In February 2005 we repaid our $100 million 6.70% senior notes due in February 2005. We funded this payment by drawing on our revolving credit facility.

During February 2005 we completed diligence and committed to the acquisition of 8.2 million square feet of industrial lands in Oahu, HI from the estate of James Campbell and affiliates, for $115.5 million, plus closing costs. The closing of this acquisition is expected to occur some time between June and December of 2005.

In January 2005 we amended our $560 million unsecured revolving credit facility to increase the available borrowing amount from $560 million to $750 million and to extend the maturity date from April 2006 to April 2009, with an option to extend the maturity by one additional year. The annual interest payable for amounts drawn under the facility was reduced from LIBOR plus 0.80% to LIBOR plus 0.65%. In certain circumstances, the amount of unsecured borrowings available under this facility may be increased to $1.5 billion. Certain financial and other covenants in the facility were also amended to reflect current market conditions.

F-18

HRPT PROPERTIES TRUST

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

December 31, 2004

(dollars in thousands)

Description	Balance at Beginning of Period		Charged to Costs and Expenses		Deductions			Balance at End of Period

Year Ended December 31, 2002:
Allowance for doubtful accounts	$	5,008	$	1,229	$	(1,260	)	$	4,977	(1)

Year Ended December 31, 2003:
Allowance for doubtful accounts	$	4,977	$	2,410	$	(2,319	)	$	5,068	(1)

Year Ended December 31, 2004:
Allowance for doubtful accounts	$	5,068	$	2,021	$	(2,495	)	$	4,594

(1) Includes allowances for real estate mortgages receivable of $500 and $1,432 as of December 31, 2003 and 2002, respectively.

S-1

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

				Initial Cost to Company							Cost Amount Carried at Close of Period
Location	State	Encumbrances						Costs Capitalized Subsequent to Acquisition									Accumulated Depreciation(2)		Date Acquired	Original Construction Date
						Buildings and Equipment							Buildings and Equipment
				Land							Land				Total(1)

Petersburg	AK	$	—	$	189	$	811	$	32		$	189	$	843	$	1,032	$	163	3/31/97	1983
Tucson	AZ	—		765		3,280		162			779		3,428		4,207		685		3/31/97	1993
Safford	AZ	—		635		2,729		126			647		2,843		3,490		544		3/31/97	1992
Phoenix	AZ	—		2,687		11,532		707			2,729		12,197		14,926		2,280		5/15/97	1997
Tempe	AZ	—		1,125		10,122		2,326			1,125		12,448		13,573		2,512		6/30/99	1987
Phoenix	AZ	—		1,828		16,453		(1		)	1,828		16,452		18,280		2,245		7/30/99	1982
Phoenix	AZ	—		1,899		14,872		100			1,899		14,972		16,871		1,078		2/1/02	1999
Phoenix	AZ	—		1,041		8,023		417			1,041		8,440		9,481		701		2/1/02	1987
Tucson	AZ	—		3,261		26,357		2,096			3,261		28,453		31,714		2,145		2/27/02	1986
Tolleson	AZ	—		1,257		9,210		(2		)	1,257		9,208		10,465		240		12/19/03	1990
San Diego	CA	—		992		9,040		290			992		9,330		10,322		1,936		12/5/96	1985
San Diego	CA	—		1,228		11,199		360			1,228		11,559		12,787		2,516		12/5/96	1985
San Diego	CA	—		1,985		18,096		581			1,985		18,677		20,662		3,658		12/5/96	1985
San Diego	CA	—		502		4,526		657			502		5,183		5,685		980		12/31/96	1984
San Diego	CA	—		294		2,650		385			294		3,035		3,329		574		12/31/96	1984
San Diego	CA	—		313		2,820		409			313		3,229		3,542		611		12/31/96	1984
San Diego	CA	—		316		2,846		413			316		3,259		3,575		616		12/31/96	1984
Kearney Mesa	CA	—		2,916		12,456		666			2,969		13,069		16,038		2,522		3/31/97	1994
San Diego	CA	—		4,269		18,316		475			4,347		18,713		23,060		3,631		3/31/97	1996
San Diego	CA	—		2,984		12,859		2,234			3,038		15,039		18,077		2,929		3/31/97	1981
Los Angeles	CA	34,956		5,076		49,884		3,035			5,071		52,924		57,995		10,540		5/15/97	1979
Los Angeles	CA	34,853		5,055		49,685		3,085			5,060		52,765		57,825		10,529		5/15/97	1979
Los Angeles	CA	—		1,921		8,242		350			1,955		8,558		10,513		1,623		7/11/97	1996
Anaheim	CA	—		691		6,223		2			692		6,224		6,916		1,168		12/5/97	1992
San Diego	CA	—		461		3,830		1			461		3,831		4,292		243		6/24/02	1986
San Diego	CA	—		685		5,530		—			685		5,530		6,215		351		6/24/02	1986
San Diego	CA	—		475		4,264		750			474		5,015		5,489		290		6/24/02	1986
Fresno	CA	—		7,276		61,118		8			7,277		61,125		68,402		3,629		8/29/02	1971
Santa Ana	CA	—		1,363		10,158		(270		)	1,363		9,888		11,251		280		11/10/03	2000
Sacramento	CA	—		134		720		20			134		740		874		8		7/16/04	1977
Sacramento	CA	—		116		1,032		—			116		1,032		1,148		12		7/16/04	1977
Sacramento	CA	—		67		393		—			67		393		460		4		7/16/04	1977
Sacramento	CA	—		116		952		—			116		952		1,068		11		7/16/04	1977

S-2

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company			Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition				Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment			Buildings and Equipment
			Land	Buildings and Equipment		Land	Buildings and Equipment	Total(1)

Sacramento	CA	—	67	361	—	67	361	428	4	7/16/04	1977
Sacramento	CA	—	134	676	—	134	676	810	8	7/16/04	1977
Sacramento	CA	—	116	1,017	—	116	1,017	1,133	12	7/16/04	1977
Sacramento	CA	—	116	720	—	116	720	836	8	7/16/04	1977
Rancho Cordova	CA	—	116	1,048	—	116	1,048	1,164	12	7/16/04	1977
Sacramento	CA	—	60	349	11	60	360	420	4	7/16/04	1977
Rancho Cordova	CA	—	116	1,072	—	116	1,072	1,188	12	7/16/04	1977
San Diego	CA	—	284	2,992	216	284	3,208	3,492	38	7/16/04	1980
Sacramento	CA	—	60	333	—	60	333	393	4	7/16/04	1977
Sacramento	CA	—	116	936	—	116	936	1,052	11	7/16/04	1977
Sacramento	CA	—	116	976	—	116	976	1,092	11	7/16/04	1977
Sacramento	CA	—	134	1,186	4	134	1,190	1,324	14	7/16/04	1977
Sacramento	CA	—	91	819	—	91	819	910	9	7/16/04	1977
Sacramento	CA	—	74	574	8	74	582	656	7	7/16/04	1977
San Diego	CA	3,216	654	5,467	79	654	5,546	6,200	64	7/16/04	1982
San Diego	CA	—	280	2,421	8	280	2,429	2,709	28	7/16/04	1980
San Diego	CA	—	286	2,512	99	286	2,611	2,897	29	7/16/04	1980
Sacramento	CA	—	402	4,056	—	402	4,056	4,458	46	7/16/04	1977
San Diego	CA	—	330	2,843	—	330	2,843	3,173	33	7/16/04	1978
Rancho Cordova	CA	—	89	822	—	89	822	911	9	7/16/04	1977
San Diego	CA	—	387	3,339	—	387	3,339	3,726	38	7/16/04	1978
Sacramento	CA	—	80	623	17	80	640	720	7	7/16/04	1977
Sacramento	CA	—	206	1,970	—	206	1,970	2,176	23	7/16/04	1977
Golden	CO	—	494	152	5,970	495	6,121	6,616	1,030	3/31/97	1997
Aurora	CO	—	1,152	13,272	—	1,152	13,272	14,424	2,485	11/14/97	1993
Lakewood	CO	—	1,855	16,691	366	1,856	17,056	18,912	2,156	11/22/99	1980
Lakewood	CO	—	787	7,085	160	788	7,244	8,032	915	11/22/99	1980
Englewood	CO	—	1,708	14,616	346	1,707	14,963	16,670	1,178	11/2/01	1984
Lakewood	CO	—	936	9,160	89	936	9,249	10,185	512	10/11/02	1981
Lakewood	CO	—	915	9,106	84	916	9,189	10,105	509	10/11/02	1981
Lakewood	CO	—	1,035	9,271	152	1,036	9,422	10,458	523	10/11/02	1981
Englewood	CO	—	649	5,232	1	646	5,236	5,882	267	12/19/02	1984
Longmont	CO	—	3,714	24,397	—	3,714	24,397	28,111	164	10/26/04	1982

S-3

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Wallingford	CT	—	640	10,017	1,137		640	11,154	11,794	1,785	6/1/98	1986
Wallingford	CT	—	367	3,301	800		366	4,102	4,468	639	12/22/98	1988
Meriden	CT	—	768	6,164	4		768	6,168	6,936	225	7/24/03	1982
Windsor	CT	—	1,376	11,212	31		1,376	11,243	12,619	385	8/29/03	1988
Washington	DC	—	2,485	22,696	5,449		2,485	28,145	30,630	6,116	9/13/96	1976
Washington	DC	—	12,008	51,528	28,940		12,227	80,249	92,476	12,051	3/31/97	1996
Washington	DC	22,258	6,979	29,949	1,372		7,107	31,193	38,300	6,194	3/31/97	1989
Washington	DC	—	1,851	16,511	2,057		1,887	18,532	20,419	3,582	12/19/97	1966
Washington	DC	30,729	5,975	53,778	2,285		5,975	56,063	62,038	9,126	6/23/98	1991
Wilmington	DE	—	4,409	39,681	9,020		4,413	48,697	53,110	6,585	7/23/98	1986
Wilmington	DE	—	1,478	13,306	510		1,477	13,817	15,294	1,862	7/13/99	1984
Orlando	FL	—	—	362	1		36	327	363	49	2/19/98	1997
Orlando	FL	—	722	6,499	(59	)	716	6,446	7,162	1,109	2/19/98	1997
Orlando	FL	—	256	2,308	64		263	2,365	2,628	407	2/19/98	1997
Miami	FL	—	144	1,297	319		144	1,616	1,760	360	3/19/98	1987
Savannah	GA	—	544	2,330	339		553	2,660	3,213	481	3/31/97	1990
Atlanta	GA	471	197	1,757	20		197	1,777	1,974	20	7/16/04	1972
Atlanta	GA	717	265	2,382	357		265	2,739	3,004	27	7/16/04	1972
Atlanta	GA	425	202	1,580	—		202	1,580	1,782	18	7/16/04	1972
Atlanta	GA	701	280	2,657	—		280	2,657	2,937	30	7/16/04	1972
Atlanta	GA	2,391	1,070	8,930	22		1,070	8,952	10,022	102	7/16/04	1972
Atlanta	GA	409	157	1,505	51		157	1,556	1,713	17	7/16/04	1972
Atlanta	GA	604	223	2,006	303		223	2,309	2,532	23	7/16/04	1972
Atlanta	GA	484	199	1,811	17		199	1,828	2,027	21	7/16/04	1972
Atlanta	GA	509	212	1,921	—		212	1,921	2,133	22	7/16/04	1972
Atlanta	GA	462	192	1,746	—		192	1,746	1,938	20	7/16/04	1972
Atlanta	GA	—	1,521	11,826	—		1,521	11,826	13,347	135	7/16/04	1972
Atlanta	GA	475	210	1,779	—		210	1,779	1,989	20	7/16/04	1972
Atlanta	GA	499	206	1,875	9		206	1,884	2,090	22	7/16/04	1972
Atlanta	GA	2,834	1,209	9,747	920		1,209	10,667	11,876	112	7/16/04	1972
Atlanta	GA	1,922	1,126	6,930	—		1,126	6,930	8,056	79	7/16/04	1972
Atlanta	GA	541	245	2,006	18		245	2,024	2,269	23	7/16/04	1972
Atlanta	GA	774	346	2,899	—		346	2,899	3,245	33	7/16/04	1967

S-4

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Atlanta	GA	1,147	480	4,328	—		480	4,328	4,808	50	7/16/04	1967
Atlanta	GA	—	1,713	7,649	11		1,713	7,660	9,373	88	7/16/04	1967
Atlanta	GA	642	289	2,403	—		289	2,403	2,692	27	7/16/04	1967
Atlanta	GA	—	372	3,600	—		372	3,600	3,972	41	7/16/04	1967
Atlanta	GA	—	364	3,527	—		364	3,527	3,891	40	7/16/04	1967
Atlanta	GA	1,085	425	4,119	—		425	4,119	4,544	47	7/16/04	1967
Atlanta	GA	—	1,122	10,867	—		1,122	10,867	11,989	124	7/16/04	1967
Atlanta	GA	3,667	1,620	13,661	88		1,620	13,749	15,369	157	7/16/04	1967
Atlanta	GA	128	52	483	—		52	483	535	6	7/16/04	1967
Atlanta	GA	569	257	2,119	10		257	2,129	2,386	24	7/16/04	1972
Atlanta	GA	642	268	2,380	44		268	2,424	2,692	27	7/16/04	1972
Atlanta	GA	1,556	685	5,837	—		685	5,837	6,522	67	7/16/04	1972
Atlanta	GA	2,226	939	8,387	5		939	8,392	9,331	96	7/16/04	1972
Atlanta	GA	2,292	1,154	8,454	—		1,154	8,454	9,608	97	7/16/04	1972
Atlanta	GA	691	303	2,595	—		303	2,595	2,898	30	7/16/04	1972
Atlanta	GA	513	235	1,906	8		235	1,914	2,149	22	7/16/04	1972
Atlanta	GA	—	917	—	—		917	—	917	—	7/16/04	1972
Atlanta	GA	374	156	1,400	13		156	1,413	1,569	16	7/16/04	1972
Atlanta	GA	—	2,197	—	—		2,197	—	2,197	—	7/16/04	1972
Atlanta	GA	—	2,459	18,549	23		2,462	18,569	21,031	174	8/24/04	1985
Atlanta	GA	—	952	7,643	9		952	7,652	8,604	56	9/9/04	1983
Oahu	HI	—	156,939	4,320	(42	)	156,768	4,449	161,217	127	12/5/03	—
Oahu	HI	—	93,821	—	(94	)	93,727	—	93,727	—	12/5/03	—
Oahu	HI	—	78,842	4,789	(95	)	78,752	4,784	83,536	121	12/5/03	—
Oahu	HI	—	7,982	—	(10	)	7,972	—	7,972	—	12/5/03	—
Oahu	HI	—	66,253	—	(84	)	66,169	—	66,169	—	12/5/03	—
Oahu	HI	—	718	—	(1	)	717	—	717	—	12/5/03	—
Oahu	HI	—	43,419	223	1,401		33,736	11,307	45,043	26	12/5/03	—
Oahu	HI	—	11,450	—	(13	)	11,437	—	11,437	—	12/5/03	—
Oahu	HI	—	9,671	—	(11	)	9,660	—	9,660	—	12/5/03	—
Oahu	HI	—	2,114	456	(3	)	2,112	455	2,567	11	12/5/03	—
Oahu	HI	—	1,343	—	(1	)	1,342	—	1,342	—	12/5/03	—
Kansas City	KS	—	1,042	4,469	1,801		1,061	6,251	7,312	1,436	3/31/97	1990

S-5

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Erlanger	KY	—	2,022	9,545	(40	)	2,020	9,507	11,527	367	6/30/03	1999
Boston	MA	—	3,378	30,397	3,474		3,378	33,871	37,249	8,378	9/28/95	1915
Boston	MA	—	1,447	13,028	163		1,448	13,190	14,638	3,041	9/28/95	1993
Boston	MA	—	1,500	13,500	4,434		1,500	17,934	19,434	6,681	12/18/95	1875
Westwood	MA	—	303	2,740	663		304	3,402	3,706	843	11/26/96	1980
Westwood	MA	—	537	4,960	204		548	5,153	5,701	998	1/8/97	1977
Charlton	MA	—	141	1,269	8		141	1,277	1,418	243	5/15/97	1988
Worcester	MA	—	354	3,189	14		354	3,203	3,557	610	5/15/97	1985
Worcester	MA	—	895	8,052	41		895	8,093	8,988	1,542	5/15/97	1990
Westborough	MA	—	42	381	5		42	386	428	73	5/15/97	1900
Westborough	MA	—	396	3,562	15		396	3,577	3,973	682	5/15/97	1986
Webster	MA	—	315	2,834	14		315	2,848	3,163	543	5/15/97	1995
Grafton	MA	—	37	336	4		37	340	377	65	5/15/97	1930
Worcester	MA	—	111	1,000	292		397	1,006	1,403	192	5/15/97	1986
Sturbridge	MA	—	83	751	6		83	757	840	144	5/15/97	1986
Millbury	MA	—	34	309	4		34	313	347	60	5/15/97	1950
Fitchburg	MA	—	223	2,004	10		223	2,014	2,237	384	5/15/97	1994
Northbridge	MA	—	32	290	5		32	295	327	56	5/15/97	1962
Worcester	MA	—	265	2,385	12		265	2,397	2,662	457	5/15/97	1972
Worcester	MA	—	158	1,417	7		157	1,425	1,582	272	5/15/97	1992
Milford	MA	—	144	1,297	266		401	1,306	1,707	249	5/15/97	1989
Worcester	MA	—	1,132	10,186	38		1,132	10,224	11,356	1,949	5/15/97	1989
Spencer	MA	—	211	1,902	11		211	1,913	2,124	364	5/15/97	1992
Lexington	MA	—	1,054	9,487	547		1,054	10,034	11,088	1,668	1/30/98	1968
Quincy	MA	—	1,668	11,097	2,679		1,668	13,776	15,444	3,087	4/3/98	1988
Quincy	MA	—	2,477	16,645	3,174		2,477	19,819	22,296	3,019	4/3/98	1988
Westwood	MA	—	500	4,562	76		500	4,638	5,138	752	6/8/98	1990
Leominster	MA	—	778	7,003	26		781	7,026	7,807	885	12/27/99	1966
Auburn	MA	—	647	5,827	22		650	5,846	6,496	737	12/27/99	1977
Stoneham	MA	—	931	8,062	489		931	8,551	9,482	672	9/28/01	1945
Foxborough	MA	—	3,021	25,721	8		3,021	25,729	28,750	1,206	2/13/03	1989
Mansfield	MA	—	1,550	13,908	81		1,550	13,989	15,539	479	8/1/03	1981
Mansfield	MA	—	1,358	11,658	(7	)	1,357	11,652	13,009	401	8/1/03	2002

S-6

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Mansfield	MA	—	1,183	9,749	(2	)	1,182	9,748	10,930	335	8/1/03	1978
Mansfield	MA	—	1,033	—	—		1,033	—	1,033	—	8/1/03	—
Mansfield	MA	—	1,262	11,103	38		1,261	11,142	12,403	359	9/5/03	1988
Mansfield	MA	—	1,023	8,954	42		1,023	8,996	10,019	289	9/5/03	1988
Quincy	MA	—	774	5,815	46		779	5,856	6,635	130	2/24/04	1999
Quincy	MA	—	2,586	16,493	—		2,586	16,493	19,079	120	9/21/04	1980
Quincy	MA	—	3,585	23,144	—		3,585	23,144	26,729	169	9/21/04	1981
Oxon Hill	MD	—	3,181	13,653	574		3,131	14,277	17,408	2,751	3/31/97	1992
Germantown	MD	—	2,305	9,890	304		2,347	10,152	12,499	2,036	3/31/97	1995
Gaithersburg	MD	—	4,381	18,798	1,104		4,461	19,822	24,283	3,823	3/31/97	1995
Riverdale	MD	—	9,423	40,433	2,501		9,595	42,762	52,357	8,076	3/31/97	1994
Baltimore	MD	—	—	12,430	2,361		—	14,791	14,791	3,281	11/18/97	1988
Rockville	MD	—	3,251	29,258	1,490		3,248	30,751	33,999	5,291	2/2/98	1986
Baltimore	MD	—	900	8,097	339		901	8,435	9,336	1,283	10/15/98	1989
Pikesville	MD	—	589	5,305	359		590	5,663	6,253	843	8/11/99	1987
Baltimore	MD	—	6,328	54,645	621		6,328	55,266	61,594	2,746	1/28/03	1990
Baltimore	MD	—	2,830	22,996	—		2,830	22,996	25,826	263	7/16/04	1972
Rockville	MD	13,242	2,751	22,741	37		2,751	22,778	25,529	261	7/16/04	1980
Rockville	MD	—	1,961	16,064	2		1,961	16,066	18,027	184	7/20/04	2002
Rockville	MD	—	2,145	17,571	2		2,145	17,573	19,718	201	7/20/04	2002
Rockville	MD	—	3,532	28,937	5		3,533	28,941	32,474	332	7/20/04	2002
Dearborn	MI	879	163	1,388	143		163	1,531	1,694	16	7/16/04	1973
Dearborn	MI	1,253	227	2,108	80		227	2,188	2,415	24	7/16/04	1973
Dearborn	MI	845	163	1,466	—		163	1,466	1,629	17	7/16/04	1973
Dearborn	MI	769	163	1,320	—		163	1,320	1,483	14	7/16/04	1973
Dearborn	MI	1,087	210	1,885	—		210	1,885	2,095	22	7/16/04	1973
Dearborn	MI	765	153	1,321	—		153	1,321	1,474	16	7/16/04	1973
Dearborn	MI	334	92	551	—		92	551	643	6	7/16/04	1973
Dearborn	MI	—	118	1,049	22		118	1,071	1,189	12	7/16/04	1973
Dearborn	MI	19,895	4,158	33,184	1,013		4,158	34,197	38,355	383	7/16/04	1973
Dearborn	MI	—	179	1,352	—		179	1,352	1,531	18	7/16/04	1992
Dearborn	MI	—	223	1,059	—		223	1,059	1,282	12	7/16/04	1992
Dearborn	MI	—	179	1,473	—		179	1,473	1,652	17	7/16/04	1992

S-7

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Dearborn	MI	—	52	479	—		52	479	531	5	7/16/04	1992
Dearborn	MI	—	51	439	—		51	439	490	5	7/16/04	1992
Dearborn	MI	717	153	1,230	—		153	1,230	1,383	11	7/16/04	1973
Dearborn	MI	935	221	1,582	—		221	1,582	1,803	18	7/16/04	1973
Dearborn	MI	541	104	939	—		104	939	1,043	11	7/16/04	1973
Mendota Heights	MN	—	533	4,795	—		533	4,795	5,328	814	3/19/98	1995
Eagan	MN	—	1,424	12,822	1		1,425	12,822	14,247	2,177	3/19/98	1986
Bloomington	MN	—	1,898	17,081	2,258		1,898	19,339	21,237	3,947	3/19/98	1957
Plymouth	MN	—	563	5,064	572		563	5,636	6,199	758	8/3/99	1987
St. Paul	MN	—	696	6,263	1,345		695	7,609	8,304	909	8/3/99	1987
Minneapolis	MN	—	870	7,831	1,456		870	9,287	10,157	1,362	8/3/99	1987
Minneapolis	MN	—	695	6,254	1,163		695	7,417	8,112	1,030	8/3/99	1986
Minneapolis	MN	—	1,891	17,021	1,451		1,893	18,470	20,363	2,474	9/30/99	1980
Roseville	MN	4,125	672	6,045	581		672	6,626	7,298	773	12/1/99	1987
Roseville	MN	1,722	295	2,658	94		295	2,752	3,047	335	12/1/99	1987
Roseville	MN	1,260	185	1,661	383		185	2,044	2,229	293	12/1/99	1987
Roseville	MN	6,169	979	8,814	1,122		978	9,937	10,915	1,209	12/1/99	1987
Roseville	MN	3,313	586	5,278	(1	)	586	5,277	5,863	665	12/1/99	1987
St. Paul	MN	—	1,303	10,451	—		1,303	10,451	11,754	141	6/2/04	1970
Kansas City	MO	—	1,443	6,193	2,082		1,470	8,248	9,718	1,383	3/31/97	1995
St. Louis	MO	—	903	7,602	1		903	7,603	8,506	214	11/7/03	1998
Arnold	MO	—	834	7,302	47		839	7,344	8,183	161	2/11/04	1999
Manchester	NH	—	2,201	19,957	12		2,210	19,960	22,170	2,807	5/10/99	1979
Vorhees	NJ	—	673	4,232	705		589	5,021	5,610	922	5/26/98	1990
Vorhees	NJ	—	445	2,798	239		584	2,898	3,482	496	5/26/98	1990
Vorhees	NJ	—	1,053	6,625	694		998	7,374	8,372	1,164	5/26/98	1990
Florham Park	NJ	—	1,412	12,709	4,939		1,412	17,648	19,060	3,454	7/31/98	1979
Albuquerque	NM	—	493	2,119	126		503	2,235	2,738	430	3/31/97	1984
Sante Fe	NM	—	1,551	6,650	585		1,578	7,208	8,786	1,352	3/31/97	1987
Albuquerque	NM	—	173	1,553	66		172	1,620	1,792	250	8/31/99	1984
Albuquerque	NM	—	422	3,797	72		422	3,869	4,291	515	8/31/99	1984
Albuquerque	NM	—	877	7,895	138		876	8,034	8,910	1,070	8/31/99	1984
Albuquerque	NM	—	441	3,970	146		441	4,116	4,557	553	8/31/99	1984

S-8

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company			Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition				Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment			Buildings and Equipment
			Land	Buildings and Equipment		Land	Buildings and Equipment	Total(1)

Albuquerque	NM	—	40	141	35	40	176	216	12	2/12/02	1985
Albuquerque	NM	—	129	1,217	65	129	1,282	1,411	91	2/12/02	1985
Albuquerque	NM	—	39	351	8	39	359	398	26	2/12/02	1985
Albuquerque	NM	—	1,778	14,407	533	1,778	14,940	16,718	1,159	2/12/02	1985
Albuquerque	NM	—	444	3,890	59	444	3,949	4,393	281	2/12/02	1987
Albuquerque	NM	—	152	1,526	229	152	1,755	1,907	146	2/12/02	1985
Albuquerque	NM	—	1,968	17,210	265	1,967	17,476	19,443	883	12/6/02	1974
Albuquerque	NM	—	794	5,568	—	794	5,568	6,362	180	9/17/03	1975
Albuquerque	NM	—	3,235	24,490	1	3,235	24,491	27,726	791	9/17/03	1975
White Plains	NY	—	1,200	10,870	870	1,200	11,740	12,940	2,543	2/6/96	1952
Brooklyn	NY	—	775	7,054	143	775	7,197	7,972	1,514	6/6/96	1971
Buffalo	NY	5,944	4,405	18,899	1,223	4,485	20,042	24,527	3,820	3/31/97	1994
Irondoquoit	NY	—	1,910	17,189	914	1,910	18,103	20,013	2,906	6/30/98	1986
Minneola	NY	—	3,419	30,774	1,744	3,416	32,521	35,937	4,812	6/11/99	1971
Islandia	NY	—	813	7,319	825	809	8,148	8,957	1,140	6/11/99	1987
Syracuse	NY	—	1,788	16,096	2,293	1,789	18,388	20,177	2,723	6/29/99	1972
Melville	NY	—	3,155	28,395	444	3,155	28,839	31,994	3,919	7/22/99	1985
Syracuse	NY	—	466	4,196	1,198	467	5,393	5,860	953	9/24/99	1990
DeWitt	NY	—	454	4,086	539	457	4,622	5,079	615	12/28/99	1987
Pittsford	NY	—	530	4,109	—	530	4,109	4,639	14	11/30/04	1998
Pittsford	NY	—	683	4,889	—	683	4,889	5,572	18	11/30/04	1999
Pittsford	NY	—	1,018	7,618	—	1,018	7,618	8,636	27	11/30/04	2000
Pittsford	NY	—	526	3,755	—	526	3,755	4,281	14	11/30/04	2003
Pittsford	NY	4,702	662	4,993	—	662	4,993	5,655	18	11/30/04	2002
Pittsford	NY	878	119	937	—	119	937	1,056	3	11/30/04	2002
Pittsford	NY	—	307	2,083	150	307	2,233	2,540	8	11/30/04	2004
Rochester	NY	—	761	6,597	—	761	6,597	7,358	21	11/30/04	2002
Mason	OH	—	1,528	13,748	13	1,528	13,761	15,289	2,252	6/10/98	1994
Solon	OH	898	161	1,570	—	161	1,570	1,731	18	7/16/04	1975
Solon	OH	338	66	586	—	66	586	652	7	7/16/04	1975
Solon	OH	440	82	717	49	82	766	848	8	7/16/04	1975
Solon	OH	421	77	693	42	77	735	812	8	7/16/04	1975
Solon	OH	597	116	1,035	—	116	1,035	1,151	12	7/16/04	1975

S-9

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company			Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition				Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment			Buildings and Equipment
			Land	Buildings and Equipment		Land	Buildings and Equipment	Total(1)

Solon	OH	2,364	400	4,157	—	400	4,157	4,557	48	7/16/04	1975
Solon	OH	640	122	1,111	—	122	1,111	1,233	13	7/16/04	1975
Solon	OH	780	146	1,352	6	146	1,358	1,504	15	7/16/04	1975
Solon	OH	2,788	514	4,856	6	514	4,862	5,376	56	7/16/04	1975
Solon	OH	490	96	843	5	96	848	944	10	7/16/04	1975
Solon	OH	513	100	889	—	100	889	989	10	7/16/04	1975
Solon	OH	1,873	344	3,144	122	344	3,266	3,610	36	7/16/04	1975
Solon	OH	602	122	1,018	21	122	1,039	1,161	12	7/16/04	1975
Solon	OH	1,119	206	1,950	2	206	1,952	2,158	22	7/16/04	1975
Oklahoma City	OK	—	4,596	19,721	1,082	4,680	20,719	25,399	4,021	3/31/97	1992
Oklahoma City	OK	—	1,426	12,826	156	1,441	12,967	14,408	1,742	8/13/99	1993
Oklahoma City	OK	—	203	1,828	23	205	1,849	2,054	248	8/13/99	1993
Midwest City	OK	—	246	2,213	28	249	2,238	2,487	301	8/13/99	1993
Edmund	OK	—	226	2,036	26	229	2,059	2,288	276	8/13/99	1993
FT. Washington	PA	—	1,872	8,816	623	1,872	9,439	11,311	1,639	9/22/97	1960
King of Prussia	PA	—	634	3,251	304	634	3,555	4,189	611	9/22/97	1964
FT. Washington	PA	—	1,184	5,559	94	1,184	5,653	6,837	1,014	9/22/97	1967
FT. Washington	PA	—	683	3,198	594	680	3,795	4,475	645	9/22/97	1970
Horsham	PA	—	741	3,611	164	741	3,775	4,516	668	9/22/97	1983
Philadelphia	PA	43,407	7,884	71,002	2,528	7,883	73,531	81,414	13,507	11/13/97	1980
FT. Washington	PA	—	1,154	7,722	279	1,154	8,001	9,155	1,349	1/15/98	1996
Plymouth Meeting	PA	—	1,412	7,415	2,236	1,413	9,650	11,063	1,564	1/15/98	1996
King of Prussia	PA	—	354	3,183	724	354	3,907	4,261	658	2/2/98	1968
King of Prussia	PA	—	552	2,893	119	552	3,012	3,564	505	2/2/98	1996
Pittsburgh	PA	—	720	9,589	1,336	720	10,925	11,645	1,994	2/27/98	1991
Philadelphia	PA	60,616	3,462	111,946	17,895	3,462	129,841	133,303	21,985	3/30/98	1983
Greensburg	PA	—	780	7,026	395	780	7,421	8,201	1,150	6/3/98	1997
Philadelphia	PA	—	24,753	222,775	15,416	24,747	238,197	262,944	38,616	6/30/98	1990
Moon Township	PA	—	1,663	14,966	611	1,663	15,577	17,240	2,470	9/14/98	1994
FT. Washington	PA	—	631	5,698	329	634	6,024	6,658	1,029	12/1/98	1998
Philadelphia	PA	—	931	8,377	1,007	930	9,385	10,315	1,488	6/11/99	1987
Moon Township	PA	—	202	1,814	391	202	2,205	2,407	276	8/23/99	1992
Moon Township	PA	—	555	4,995	993	555	5,988	6,543	860	8/23/99	1991

S-10

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company				Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition					Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment				Buildings and Equipment
			Land	Buildings and Equipment			Land	Buildings and Equipment	Total(1)

Moon Township	PA	—	502	4,519	448		502	4,967	5,469	727	8/23/99	1987
Moon Township	PA	—	410	3,688	403		410	4,091	4,501	575	8/23/99	1988
Moon Township	PA	—	489	4,403	388		490	4,790	5,280	788	8/23/99	1989
Moon Township	PA	—	612	5,507	111		612	5,618	6,230	776	8/23/99	1990
Moon Township	PA	—	6,936	—	822		7,758	—	7,758	—	8/23/99	—
Blue Bell	PA	—	268	2,414	129		268	2,543	2,811	328	9/14/99	1988
Blue Bell	PA	—	723	6,507	669		723	7,176	7,899	885	9/14/99	1988
Blue Bell	PA	—	709	6,382	683		709	7,065	7,774	901	9/14/99	1988
Philadelphia	PA	—	18,758	167,487	9,160		18,758	176,647	195,405	9,454	10/10/02	1974
Monroeville	PA	—	6,558	51,775	58		6,564	51,827	58,391	378	9/16/04	1971
Lincoln	RI	—	320	7,690	—		320	7,690	8,010	1,452	11/13/97	1997
Memphis	TN	—	2,206	19,856	1,697		2,212	21,547	23,759	3,767	8/31/98	1985
Memphis	TN	—	2,113	18,201	14		2,114	18,214	20,328	322	4/28/04	2000
Memphis	TN	—	1,201	9,973	1		1,201	9,974	11,175	114	7/29/04	1983
Austin	TX	6,979	1,218	11,040	727		1,218	11,767	12,985	2,238	12/5/97	1986
Austin	TX	6,653	1,226	11,126	24		1,226	11,150	12,376	2,085	12/5/97	1997
Austin	TX	12,568	2,317	21,037	26		2,317	21,063	23,380	3,943	12/5/97	1996
Austin	TX	9,167	1,621	14,594	838		1,621	15,432	17,053	3,220	12/5/97	1997
Austin	TX	8,095	1,402	12,729	929		1,402	13,658	15,060	2,513	12/5/97	1997
Waco	TX	—	2,030	8,708	183		2,060	8,861	10,921	1,557	12/23/97	1997
Austin	TX	—	466	4,191	1,133		850	4,940	5,790	819	1/27/98	1980
Irving	TX	—	846	7,616	3,089		846	10,705	11,551	1,751	3/19/98	1995
Irving	TX	—	542	4,879	—		542	4,879	5,421	829	3/19/98	1995
Austin	TX	—	1,439	6,137	6,367		1,439	12,504	13,943	2,553	3/24/98	1975
Austin	TX	—	1,529	13,760	226		1,529	13,986	15,515	2,273	7/16/98	1993
Austin	TX	—	1,436	12,927	(7	)	1,436	12,920	14,356	2,006	10/7/98	1998
Austin	TX	—	4,878	43,903	1,164		4,875	45,070	49,945	6,966	10/7/98	1968
Austin	TX	—	9,085	—	6,549		11,640	3,994	15,634	—	10/7/98	—
Austin	TX	3,658	562	5,054	1,368		562	6,422	6,984	785	10/20/98	1998
Austin	TX	10,956	2,072	18,650	195		2,072	18,845	20,917	2,945	10/20/98	1998
Austin	TX	7,731	1,476	13,286	(1	)	1,476	13,285	14,761	2,062	10/20/98	1998
Austin	TX	—	688	6,192	946		697	7,129	7,826	1,001	6/3/99	1985
Austin	TX	—	539	4,849	560		538	5,410	5,948	671	6/16/99	1999

S-11

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

			Initial Cost to Company			Cost Amount Carried at Close of Period
Location	State	Encumbrances			Costs Capitalized Subsequent to Acquisition				Accumulated Depreciation(2)	Date Acquired	Original Construction Date
				Buildings and Equipment			Buildings and Equipment
			Land	Buildings and Equipment		Land	Buildings and Equipment	Total(1)

Austin	TX	—	906	8,158	1,322	902	9,484	10,386	1,126	6/16/99	1999
Austin	TX	—	1,731	14,921	1,703	1,731	16,624	18,355	2,326	6/30/99	1975
San Antonio	TX	—	259	2,331	648	264	2,974	3,238	393	8/3/99	1986
Austin	TX	—	1,574	14,168	1,396	1,573	15,565	17,138	2,084	8/3/99	1982
Austin	TX	—	626	5,636	1,161	621	6,802	7,423	1,034	8/18/99	1987
Austin	TX	—	2,028	18,251	91	2,027	18,343	20,370	2,399	10/8/99	1985
Austin	TX	10,044	2,038	18,338	466	2,037	18,805	20,842	2,527	10/8/99	1997
Austin	TX	—	460	3,345	4	460	3,349	3,809	295	6/15/01	2001
Ft. Worth	TX	—	4,793	38,530	148	4,785	38,686	43,471	1,570	5/23/03	1996
Fairfax	VA	—	569	5,122	471	569	5,593	6,162	1,172	12/4/96	1990
Falls Church	VA	—	3,456	14,828	1,273	3,519	16,038	19,557	3,105	3/31/97	1993
Arlington	VA	—	810	7,289	780	811	8,068	8,879	1,366	8/26/98	1987
Alexandria	VA	—	2,109	18,982	727	2,109	19,709	21,818	3,040	12/30/98	1987
Fairfax	VA	—	780	7,022	4	781	7,025	7,806	929	9/29/99	1988
Fairfax	VA	—	594	5,347	3	594	5,350	5,944	708	9/29/99	1988
Norfolk	VA	—	591	4,048	255	592	4,302	4,894	359	10/25/02	1999
Norfolk	VA	—	1,273	11,083	1,914	1,273	12,997	14,270	620	10/25/02	1987
Norfolk	VA	—	559	4,535	358	559	4,893	5,452	280	10/25/02	1986
Virginia Beach	VA	—	682	5,431	37	685	5,465	6,150	61	6/4/04	1991
Richland	WA	6,546	3,970	17,035	547	4,042	17,510	21,552	3,449	3/31/97	1995
Tukwila	WA	—	82	681	—	82	681	763	8	7/16/04	1975
Kent	WA	—	137	993	16	137	1,009	1,146	11	7/16/04	1978
Tukwila	WA	—	91	778	—	91	778	869	9	7/16/04	1975
Tukwila	WA	—	82	582	58	82	640	722	7	7/16/04	1975
Tukwila	WA	—	137	1,250	—	137	1,250	1,387	14	7/16/04	1975
Tukwila	WA	—	108	923	—	108	923	1,031	11	7/16/04	1975
Tukwila	WA	—	77	674	7	77	681	758	8	7/16/04	1975
Tukwila	WA	—	96	841	—	96	841	937	10	7/16/04	1975
Tukwila	WA	—	101	1,000	—	101	1,000	1,101	11	7/16/04	1975
Tukwila	WA	—	93	844	—	93	844	937	10	7/16/04	1975
Tukwila	WA	—	92	827	—	92	827	919	9	7/16/04	1975
Tukwila	WA	—	105	938	—	105	938	1,043	11	7/16/04	1975
Bellevue	WA	17,698	3,555	30,244	319	3,555	30,563	34,118	352	7/16/04	1980

S-12

HRPT PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(dollars in thousands)

				Initial Cost to Company						Cost Amount Carried at Close of Period
Location	State	Encumbrances						Costs Capitalized Subsequent to Acquisition								Accumulated Depreciation(2)		Date Acquired	Original Construction Date
						Buildings and Equipment						Buildings and Equipment
				Land						Land				Total(1)

Tukwila	WA	—		76		625		—		76		625		701		7		7/16/04	1975
Tukwila	WA	—		75		676		—		75		676		751		8		7/16/04	1975
Tukwila	WA	—		109		967		5		109		972		1,081		11		7/16/04	1975
Kent	WA	—		258		1,797		—		258		1,797		2,055		21		7/16/04	1978
Kent	WA	—		101		753		—		101		753		854		9		7/16/04	1978
Falling Waters	WV	—		906		3,886		177		922		4,047		4,969		779		3/31/97	1993
Cheyenne	WY	—		1,915		8,217		282		1,950		8,464		10,414		1,647		3/31/97	1995
Grand Total		$	443,118	$	932,478	$	3,508,191	$	244,400	$	928,106	$	3,756,963	$	4,685,069	$	454,411

S-13

Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation at the beginning of the period:

	Real Estate and Equipment			Accumulated Depreciation
Balance at January 1, 2002	$	2,592,487		$	219,140
Additions	482,876			65,489
Disposals	(707		)	(81		)
Balance at December 31, 2002	3,074,656			284,548
Additions	818,800			79,661
Disposals	(1,490		)	(1,194		)
Balance at December 31, 2003	3,891,966			363,015
Additions	798,335			95,977
Disposals	(5,232		)	(4,581		)
Balance at December 31, 2004	$	4,685,069		$	454,411

(1) Excludes value of acquired real estate leases pursuant to FAS 141. Aggregate cost for federal income tax purposes is approximately $4,688,224.

(2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years.

S-14

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HRPT PROPERTIES TRUST

	By:	/s/ John A. Mannix
		John A. Mannix
		President and Chief Operating Officer
		Dated: March 11, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, in the capacities and on the dates indicated.

Signature	Title	Date

/s/ John A. Mannix	President and Chief Operating Officer	March 11, 2005
John A. Mannix


/s/ John C. Popeo	Treasurer, Chief Financial Officer and Secretary	March 11, 2005
John C. Popeo


/s/ Frederick N. Zeytoonjian	Trustee	March 11, 2005
Frederick N. Zeytoonjian


/s/ Patrick F. Donelan	Trustee	March 11, 2005
Patrick F. Donelan


/s/ Gerard M. Martin	Trustee	March 11, 2005
Gerard M. Martin


/s/ Barry M. Portnoy	Trustee	March 11, 2005
Barry M. Portnoy