10-K405 1 0001.txt HRPT PROPERTIES TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-9317 HRPT PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-6558834 (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 (Address of principal executive offices) (Zip Code) 617-332-3990 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) ofthe Act:

Name of exchange on Title of each class which registered ----------------------------------------------------------------------------------------- Common Shares of Beneficial Interest New York Stock Exchange 7.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange 7.50% Convertible Subordinated Debentures due 2003, Series A New York Stock Exchange 9 7/8% Series A Cumulative Redeemable Preferred Shares 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 [X] No [ ] 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. [X] The aggregate market value of the voting common stock of the registrant held by non-affiliates was $1.1 billion based on the $8.16 closing price per common share for such stock on the New York Stock Exchange on March 26, 2001. For purposes of this calculation, 1,000,000 shares held by Senior Housing Properties Trust, and an aggregate of 1,275,150 shares held directly or by affiliates of the Trustees and executive officers of the registrant, have been included in the number of common shares held by affiliates. Number of the registrant's Common Shares of Beneficial Interest, $0.01 par value ("Shares"), outstanding as of March 30, 2001: 130,965,147. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is to be incorporated by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 8, 2001. CERTAIN IMPORTANT FACTORS This Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K regarding our intent, belief or expectations with respect to possible sales of properties, possible joint ventures, possible share buy-backs, expansion of our portfolio, our ability to pay distributions, policies and plans regarding investments, financings, our tax status as a real estate investment trust and our access to debt or equity capital markets or to other sources of funds. Readers are cautioned that any such forward looking statements are not guarantees of future events and involve risks and uncertainties and that actual events and results may differ materially from those contained in the forward looking statements as a result of various factors. Such factors include the status of the economy, property market conditions, competition, and changes in federal, state and local legislation. The accompanying information contained in this Annual Report on Form 10-K, including under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING HRPT PROPERTIES TRUST, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE 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 2000 FORM 10-K ANNUAL REPORT Table of Contents Part I Page Item 1. Business........................................................................ 1 Item 2. Properties...................................................................... 18 Item 3. Legal Proceedings............................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders............................. 19 Part II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters............ 19 Item 6. Selected Financial Data......................................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 28 Item 8. Financial Statements and Supplementary Data..................................... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 29 Part III Item 10. Directors and Executive Officers of the Registrant.............................. * Item 11. Executive Compensation.......................................................... * Item 12. Security Ownership of Certain Beneficial Owners and Management.................. * Item 13. Certain Relationships and Related Transactions.................................. * * Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 8, 2001, to be filed pursuant to Regulation 14A. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 29

References in this Annual Report on Form 10-K to the "Company", "HRP", "we" or "our" include consolidated subsidiaries, unless the context indicates otherwise. PART I Item 1. Business The Company. HRPT Properties Trust ("HRP", the "Company", "we" or "our") was organized on October 9, 1986, as a Maryland real estate investment trust ("REIT"). We invest in office buildings. As of December 31, 2000, we owned 191 office properties for a total investment of $2.5 billion at cost and a depreciated book value of $2.4 billion. In addition, we own minority equity positions in two former subsidiary REITs which are now separately listed on the New York Stock Exchange; Hospitality Properties Trust ("HPT") and Senior Housing Properties Trust ("SNH"). At December 31, 2000, the carrying book values of our equity ownership of HPT and SNH was $106.0 million and $208.1 million, respectively, and the market value of these equity positions was $90.5 million and $119.3 million, respectively. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 332-3990. Investment Policy and Method of Operation. Our investment goals are current income for distribution to shareholders, capital growth from appreciation in the residual value of owned properties, and preservation and protection of shareholders' capital. Our income is derived primarily from rent. Our day to day operations are conducted by REIT Management & Research, Inc. ("RMR"), our investment manager. RMR provides investment advice, property management and administrative services to us. RMR originates and presents investment and sales opportunities to our Board of Trustees. 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; an appraisal of the property, if available; 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 arms length market sales. Our investments are generally structured as purchases. However, we have in the past and may in the future structure some acquisitions as mergers or partnerships. In connection with our current revolving bank credit facility, we have agreed to obtain lender approval before exceeding investment concentrations based on certain criteria. No limits, other than those imposed by our revolving bank credit facility, have been set on the number of properties in which we may invest, or on the concentration of investments involving any one property or geographical area; however, our Board of Trustees consider concentration of investments in determining whether to make new investments. We have in the past considered and may in the future consider, from time to time, the acquisition of or merger with other companies; however, we have no present agreements or understandings concerning any such acquisition or merger. Borrowing Policy. In addition to the use of equity, we utilize short-term and long-term borrowings to finance investments. We currently have a revolving bank credit facility of $500 million. The revolving bank credit facility (which is guaranteed by most of our subsidiaries) is used for acquisition funding on an interim basis until equity or long-term debt is raised and for working capital and general business purposes. No amounts were outstanding at December 31, 2000, under our revolving bank credit facility. The borrowing guidelines established by our Board of Trustees and covenants in various debt agreements prohibit us from maintaining a debt to equity ratio of greater than 1 to 1. At December 31, 2000, our debt to equity ratio was .85 to 1. Covenants in our various debt obligations and our Declaration of Trust also limit our ability to borrow. We are currently in the process of negotiating a new revolving bank credit facility. In March 2001 we accepted an underwriting commitment from First Union National Bank of Charlotte, North Carolina ("First Union") for a new $400 million unsecured revolving bank credit facility which will expire in April 2005. This revolving 1 bank credit facility includes an accordion feature which allows it to be expanded, in certain circumstances, by up to $200 million. This revolving bank credit facility will replace our existing unsecured revolving bank credit facility of $500 million which matures in April 2002. We regularly try to limit our short-term maturities and we currently believe that market conditions are appropriate to arrange a new revolving bank credit facility at this time. We also expect the accordion feature of the new revolving bank credit facility may allow us to achieve greater financial flexibility at a lesser cost than our existing revolving bank credit facility. The First Union underwriting commitment is subject to various conditions and contingencies, including mutually acceptable documentation. We understand that First Union is now in the process of arranging syndication of this revolving bank credit facility. The final terms of this revolving bank credit facility and the identity of participating banks will be announced when this new revolving bank credit facility closes, which is expected to be in April 2001. Business Developments Since January 1, 2000 Investments We did not acquire any new properties during 2000. Financing We issued $30 million of 8.875% senior notes due 2010 in July 2000 and $20 million of 8.625% senior notes due 2010 in September 2000, raising aggregate net proceeds of $49.6 million. We also issued $304 million of mortgage notes secured by seven office complexes in December 2000. These mortgage notes have an effective interest rate of 7.5% and mature in 2011 and 2029. Net proceeds from the unsecured senior notes and the secured mortgage notes payable were used to repay amounts then outstanding under our revolving bank credit facility and for general business purposes. In April 2000 we retired $27.5 million of Remarketed Reset Notes (the "Reset Notes"), and in July 2000 we completed our optional redemption of the remaining $222.5 million of Reset Notes, which bore interest at a rate subject to periodic resets, at a spread over LIBOR. The effective interest rate immediately prior to the redemption dates was 7.52% per annum. The redemption prices were 100% of the principal amount of the Reset Notes redeemed, plus accrued and unpaid interest to the redemption dates. The redemptions were funded by drawings under our revolving bank credit facility. In connection with the final redemption, we recognized an extraordinary loss of $1.2 million from the write-off of deferred financing fees. During 2000 we repurchased $2.3 million of our convertible subordinated debentures due 2003 for $2.2 million and recognized an extraordinary gain of $116,000. In February 2001 we called for redemption all of our then outstanding convertible subordinated debentures. Forty million dollars of 7.25% convertible subordinated debentures due in October 2001 were redeemed at par in February 2001. The remaining $162 million of these convertible subordinated debentures due in October 2003 are expected to be redeemed in late March 2001. To fund these redemptions, we expect to use cash on hand and a portion of the net proceeds from our preferred share offering discussed below. In February 2001 we issued 8,000,000 shares of series A cumulative redeemable preferred shares. The sales price was $25.00 per share and the dividend yield is 9 7/8% per annum ($2.46875 per share per year) payable quarterly in equal installments on February 15, May 15, August 15 and November 15 of each year. Net proceeds from this offering have been used, or are expected to be used about half to redeem our outstanding convertible subordinated debentures which have been called at par and about half to repurchase some of our outstanding common shares. Common share repurchases are expected to be done, or have been done in market transactions or in privately negotiated transactions, but we are unsure what quantity of our common shares will be available at acceptable prices. Our Board of Trustees recently renewed its authorization to repurchase up to 14 million common shares. To the extent that proceeds of this offering are not used to repurchase our common shares they may be used for general business purposes, including repayment of other debt. We have not disclosed what price we consider acceptable to repurchase our common shares and that price may vary over time. No time period for the repurchase of our common shares has been established. Our series A cumulative redeemable preferred shares are listed on the New York Stock Exchange. During February and March 2001 we repurchased 983,700 of our common shares for $7.8 million, including transaction costs. 2 Other Developments During 2000 we sold four office properties and three land parcels for net cash proceeds of $152.3 million and recognized gains of $24.6 million. In connection with these sales, we provided a $1.3 million mortgage loan secured by one parcel of land. This real estate mortgage bears interest at 10.0% payable quarterly in arrears and matures in May 2001. We also sold one property acquired during 2000 through foreclosure of a $2.4 million mortgage loan. This property was sold to SNH at its appraised value of approximately $2.3 million, and no gain or loss was recognized on this sale since the carrying value of this defaulted mortgage loan had previously been partially reserved. Our Investment Manager RMR is a Delaware corporation owned by Gerard M. Martin and Barry M. Portnoy, our Managing Trustees. RMR's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 928-1300. RMR provides investment advice, property management services and administrative services to us. In addition, an affiliate of RMR also provides garage management services to one of our properties. RMR also acts as the investment manager to HPT and SNH and has other business interests. The Directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of RMR are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice President, John C. Popeo, Treasurer, and John A. Mannix, David M. Lepore, Thomas M. O'Brien, Jennifer B. Clark and Evrett W. Benton, Vice Presidents. Gerard M. Martin and Barry M. Portnoy are our Managing Trustees and John A. Mannix, John C. Popeo, David M. Lepore and Jennifer B. Clark are our officers. Employees As of March 26, 2001, we had no employees; RMR, which administers our day-to-day operations, had approximately 200 full-time employees. Competition. Investing in and operating office buildings is a very competitive business. We compete against other REITs, numerous financial institutions and 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 this business. FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax consequences 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 the federal income tax law, for example if you are: o a bank, life insurance company, regulated investment company, or other financial institution, o a broker or dealer in securities or foreign currency, o a person who has a functional currency other than the U.S. dollar, o a person who acquires our shares in connection with employment or other performance of services, o a person subject to alternative minimum tax, o a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, or conversion transaction, or o except as specifically described in the following summary, a tax-exempt entity or a foreign person. 3 The sections of the Internal Revenue Code that govern the 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. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. We have not sought 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, the following 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 acquirer 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. 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: o 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, o a corporation, partnership or other 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, o an estate the income of which is subject to federal income taxation regardless of its source, or o 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 qualification tests summarized below, 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 will not be subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally will be includable in their income as dividends to the extent of our current or accumulated earnings and profits. A portion of these dividends may be treated as capital gain dividends, as explained below. No portion of any dividends will be eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally will be treated for federal income tax purposes as a 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 will generally be 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 2000 taxable years, and that our current investments and plan of operation will enable us to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. Our actual qualification and taxation as a REIT will depend upon our ability to meet the various qualification tests imposed under the Internal Revenue Code and summarized below. While we believe that we will operate in a manner to satisfy the various REIT qualification 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 in any year, we will be subject to federal income taxation as if we were a domestic corporation, and our shareholders will be taxed like shareholders of ordinary 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. 4 If we qualify for taxation as a REIT and meet the annual distribution tests described below, we generally will not be subject to federal income taxes on the amount distributed. However, even if we qualify for federal income taxation as a REIT, we may be subject to federal tax in the following circumstances: o We will be taxed at regular corporate rates on any undistributed "real estate investment trust taxable income," including our undistributed net capital gains. o 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. o If we have net income from the sale or other 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 net income from foreclosure property at the highest regular corporate rate, which is currently 35%. o If we have net income from prohibited transactions, including sales or other 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. o 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, multiplied by a fraction intended to reflect our profitability. o 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. o 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 recognized in the disposition. o As explained below, effective for our taxable year 2001 and thereafter, we are permitted within limits to own stock and securities of a "taxable REIT subsidiary." A taxable REIT subsidiary of ours will be taxed on its net income as a C corporation that is separate from us, and will be subject to limitations on the deductibility of interest expense paid to us. If it is determined that transactions between and among us, our tenants, and our taxable REIT subsidiaries are not at arm's length we will be subject to a 100% tax on redetermined rents, deductions and excess interest expense. If we invest in properties in foreign countries, our profits from those investments will generally be subject to tax in the countries where those properties are located. The nature and amount of this taxation will depend on the laws of the countries where the properties are located. If we operate as we currently intend, then we will distribute our taxable income to our shareholders and we will generally not pay federal income tax except to the extent of taxes due on "taxable REIT subsidiary" income if any, and thus we generally cannot recover the cost of foreign 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 in any taxable year, then we will be subject to federal tax in the same manner as an ordinary corporation. Any distributions to our shareholders in a year in which we fail to qualify as a REIT will not be deductible by us, nor will these distributions be required under the Internal Revenue Code. In that event, to the extent of our current and accumulated earnings and profits, any distributions to our shareholders will be taxable as ordinary dividend income and, subject to limitations in the Internal Revenue Code, will be eligible for the dividends received deduction for corporate recipients. Also, we will generally be disqualified from federal income taxation as a REIT for the four taxable years following disqualification. Failure to qualify for federal income taxation as a REIT for even one year 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. 5 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 an ordinary domestic 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) to (4), inclusive, 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 satisfied conditions (1) to (6), inclusive, during each of the requisite periods ending on or before December 31, 2000, and that we will continue to satisfy those conditions in future taxable years. There can, however, be no assurance in this regard. By reason of condition (6) above, we will fail to qualify as a REIT for a taxable year if at any time during the last half of the 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 satisfying 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) above, 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 received from the REIT. 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 for federal tax purposes. 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. 6 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. Effective for taxable year 2001 and thereafter, 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 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, if any, have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary status, 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% gross income test or the 95% gross income test. 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 imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, taxable REIT subsidiaries can undertake third-party management and development activities and activities not related to real estate. Restrictions are imposed on taxable REIT subsidiaries so as 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 payments made 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: 7 o 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. o 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, payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and gains from the sale or disposition of stock, securities, or real property. For purposes of these two requirements, 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: o 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. o 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 that could result in disqualification as a REIT under the Internal Revenue Code and permits our trustees to repurchase the shares to the extent necessary to maintain our status as a REIT under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent REIT status under the Internal Revenue Code 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. o For our 2001 taxable year and thereafter, 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. o 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. o 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 8 property is 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 will be 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. 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 might make will not be subject to the 100% penalty tax, because we intend to: o own our assets for investment with a view to long-term income production and capital appreciation; o engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and o make occasional dispositions of our assets consistent with our long-term investment objectives. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year under certain relief provisions. Even if these relief provisions did apply, a special tax equal to 100% 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 these asset percentage tests in order to qualify as a REIT for federal income tax purposes: o 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. o 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. o Of the investments included in the preceding 25% asset class, the value of any one 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. o 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. 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. 9 Our Investment in Senior Housing Properties Trust. We continue to own a minority of SNH shares, and we expect SNH to qualify as a REIT under the Internal Revenue Code. For any of our taxable years in which SNH qualifies as a REIT, our investment in SNH will count favorably toward the REIT asset tests and the dividends we receive from SNH will count as qualifying income under both REIT gross income tests. However, because we do not and cannot control SNH's compliance with the federal income tax requirements for REIT qualification, we intend to annually join with SNH in filing a protective taxable REIT subsidiary election under Section 856(l) of the Internal Revenue Code, effective January 1 of each year. A protective taxable REIT subsidiary election has already been filed with respect to our 2001 taxable year, effective January 1, 2001. Pursuant to these annual, protective taxable REIT subsidiary elections, we believe that SNH would, if it were not a REIT, be considered one of our taxable REIT subsidiaries. As one of our taxable REIT subsidiaries, we believe that SNH'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. Prior to our 2001 taxable year, the preceding 90% percentages were 95%. 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 if the dividend 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. If we do not have enough cash or other liquid assets to meet the 95% or 90% distribution requirements, we may find it necessary to arrange for new debt or equity financing or sell properties to provide funds for required distributions, or else our REIT status for federal income tax purposes could be jeopardized. We can provide no assurance that financing would be available for these purposes on favorable terms. If we fail to distribute sufficient dividends for any year, we may be able to rectify this failure 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. 10 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 will be 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. Additionally, Section 467 of the Internal Revenue Code, which concerns leases with increasing rents, may apply to those of our leases which provide for rents that increase from one period to the next. Section 467 of the Internal Revenue Code provides that in the case of a so-called "disqualified leaseback agreement" rental income must be accrued at a constant rate. Where constant rent accrual is required, we could recognize rental income from a lease in excess of cash rents and, as a result, encounter difficulty in meeting the annual distribution requirement. Disqualified leaseback agreements include leaseback transactions where a principal purpose for providing increasing rent under the agreement is the avoidance of federal income tax. Treasury regulations provide that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts. Therefore, the additional rent provisions in our leases that are based on a fixed percentage of lessee receipts generally should not cause the leases to be disqualified leaseback agreements under Section 467. Taxation of U.S. Shareholders 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 that it is made out of 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. For noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 20% 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 as capital gain dividends any portion of the dividends paid or made available for the year to our U.S. shareholders, including our retained capital gains treated as capital gain dividends, 11 then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal 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 20% or 25% so that the designations will be proportional 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 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 20%. 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's sale or exchange of our shares will result in recognition of gain or loss in an amount equal to the difference between the amount realized and the shareholder's adjusted basis in the shares 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. 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. Special rules apply to 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. The pension trust 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: 12 o the REIT is "predominantly held" by tax-exempt pension trusts, and o the REIT would otherwise 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 restrictions in our declaration of trust regarding the ownership concentration of our shares, 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. 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 the lower rate that may be specified by a tax treaty 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. 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 any amount of tax withheld in excess of that tax liability may be refunded provided that an appropriate claim for refund is filed with the IRS. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made 13 available for the year to our shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal 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% generally applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT. 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. In this regard, note that 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 20% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Generally effective with respect to distributions paid after December 31, 2000, new Treasury regulations alter the information reporting and backup withholding rules applicable to non-U.S. shareholders and provide presumptions under which a non-U.S. shareholder is subject to backup withholding and information reporting until we or the applicable withholding agent receives certification from the shareholder of its non-U.S. shareholder status. In some instances, these certification requirements are more burdensome than those applicable under prior Treasury regulations. These new 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. These new Treasury regulations encouraged non-U.S. shareholders and withholding agents to use the new IRS Forms W-8 series, rather than the predecessor IRS Forms W-8, 1001, and 4224, and require use of the IRS Forms W-8 series for payments made after December 31, 2000. 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 present 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 New York Stock Exchange, 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 in the case of corporate non-U.S. shareholders 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. 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. Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against the REIT shareholder's federal income tax liability. A U.S. shareholder will be subject to backup withholding at a 31% rate 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 under penalties of perjury an IRS Form W-9 or substantially similar form that: o provides the U.S. shareholder's correct taxpayer identification number; and 14 o 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 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 at a 31% rate, 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 31% 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 31% 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. As described above, new Treasury regulations alter the information reporting and backup withholding rules applicable to non-U.S. shareholders for payments made after December 31, 2000, and in general these new Treasury Regulations replace IRS Forms W-8, 1001, and 4224 with the new IRS Forms W-8 series. Other Tax Consequences You should recognize that our and our shareholders' federal income tax treatment 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. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions either directly or indirectly affecting us and our shareholders. Revisions in federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares. We and our shareholders may also be subject to state or local taxation in various state or local jurisdictions, including those in which we or our shareholders transact business or reside. State and local tax consequences may not be comparable to the federal income tax consequences discussed above. For example, if a state has not updated its REIT taxation provisions to permit taxable REIT subsidiaries, then our use of a taxable REIT subsidiary may disqualify us from favorable taxation as a REIT in that state. 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, ERISA, must consider whether: o their investment in our shares satisfies the diversification requirements of ERISA; o the investment is prudent in light of possible limitations on the marketability of our shares; o they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and o 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, 15 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 plan or a 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. Special Fiduciary and Prohibited Transactions Consequences 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 Securities Exchange Act of 1934, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year of the issuer during which the offering occurred. All our outstanding shares have been registered under the Securities Exchange Act of 1934. 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: o 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; o 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; 16 o any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and o 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 at present 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 the shares are publicly offered securities and our assets will not be deemed to be "plan assets" of any ERISA plan or non-ERISA plan that invests in our shares. 17 Item 2. Properties General. At December 31, 2000, approximately 89% of our total investments were in office buildings, 4% were in hotels through our equity investment in HPT and 7% were in senior housing properties through our equity investment in SNH. We believe that the physical plant of each of the properties in which we have invested is suitable and adequate for our present and any currently proposed uses. At December 31, 2000, we had real estate investments totaling $2.5 billion at cost in 191 office properties that were leased to or operated by approximately 900 tenants, plus equity investments of approximately $106.0 million (carrying value) and $208.1 million (carrying value) in approximately 7.1% and 49.4% of the common shares of HPT and SNH, respectively. At December 31, 2000, HPT owned 222 hotel properties and SNH owned 86 senior housing properties. At December 31, 2000, 12 office complexes we owned comprised of 25 properties with an aggregate cost of $627.9 million were secured by mortgage notes payable aggregating $357.3 million which, net of unamortized discounts, amounted to $343.1 million. The following table summarizes some information about our properties as of December 31, 2000. All dollar amounts are in thousands.

REAL ESTATE OWNED AT DECEMBER 31, 2000: Number of Investment Location Properties Amount Net Book Value Rent (1) -------------------------------------------------------------------------------------------------------------------- Office Properties: Alaska 1 $1,003 $926 $458 Arizona 6 51,790 49,156 6,795 California 15 246,479 225,490 36,321 Colorado 4 47,422 45,173 7,115 Connecticut 2 14,426 13,604 2,446 Delaware 2 58,978 56,052 7,506 District of Columbia 5 209,100 193,335 27,814 Florida 4 11,619 10,874 1,223 Georgia 1 2,992 2,765 473 Kansas 1 6,269 5,727 1,661 Maryland 8 164,571 152,566 23,134 Massachusetts 31 188,181 171,605 28,667 Minnesota 14 115,840 111,000 19,430 Missouri 1 7,786 7,191 892 New Hampshire 1 22,161 21,351 2,501 New Jersey 4 29,980 28,301 4,264 New Mexico 6 30,292 28,852 5,284 New York 10 166,405 157,909 27,571 Ohio 1 15,279 14,404 2,215 Oklahoma 6 46,304 43,743 4,478 Pennsylvania 26 606,368 570,167 93,886 Rhode Island 1 8,010 7,335 807 Tennessee 1 22,841 21,571 3,200 Texas 30 366,843 348,513 61,203 Virginia 6 68,378 64,503 10,328 Washington 2 21,431 19,786 2,530 West Virginia 1 4,933 4,557 699 Wyoming 1 10,342 9,552 1,303 ------------------------------------------------------------------------------ Total Real Estate 191 $2,546,023 $2,386,008 $384,204 ============================================================================== (1) Amounts represent income from properties owned for the full 12 months ended December 31, 2000.

18 Item 3. Legal Proceedings As previously disclosed, in early 1995 we commenced an action in a Florida state court to collect on a secured indemnity agreement from a former tenant and mortgagor (the "Former Tenant"). In May 1995 the Former Tenant filed a counterclaim and third-party complaint against us and others, including our Managing Trustees, Messrs. Martin and Portnoy, seeking, among other things, to set aside the indemnity agreement and to recover substantial damages. After a Massachusetts state court ordered the dispute to arbitration and the Florida court stayed further proceedings pending arbitration, the Former Tenant brought a separate action against us in the United States District Court for the District of Massachusetts and realleged many of the same charges made in the counterclaims and third-party complaints and added allegations of violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5 promulgated thereunder and violations of 18 U.S.C. ss. 1962 (RICO). In September 1996 the United States District Court for the District of Massachusetts ordered all disputes between the Former Tenant and us referred to arbitration. During the arbitration all claims of the Former Tenant against us were dismissed without trial, except for one claim for common law fraud. In 2000 this claim was tried to conclusion and a final judgment was entered in the arbitration and by the United States District Court for Massachusetts. In this judgment all claims against us and against Messrs. Martin and Portnoy were dismissed and the Former Tenant was ordered to pay us $3.2 million. In July 2000 we accepted an immediate cash payment of $2.5 million in final settlement of this judgment. During the pendency of this case the Former Tenant sought and achieved publicity for his unproven claims and two creditors of the Former Tenant brought separate actions against us in the Massachusetts State courts which alleged that our actions with the Former Tenant had damaged them. During 2000 one of these state court cases was dismissed pre-trial without any award against us. In January 2001 we paid $375,000 to settle the second state court action, which amount we believe would have been approximately equal to our additional costs to try this case to a successful conclusion. There are no further actions pending against us or against Messrs. Martin and Portnoy by this Former Tenant, his creditors or anyone claiming through them. In the ordinary course of our business we are occasionally involved in litigation. At this time we know of no pending or threatened litigation, the result of which is likely to have a material impact upon us. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K. PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters Our common shares are traded on the New York Stock Exchange (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 New York Stock Exchange Composite Transactions reports. Common share prices on or before October 13, 1999, have not been restated to reflect the spin-off of SNH. High Low ---- --- 1999 First Quarter $15.00 $13.00 Second Quarter 15.56 13.31 Third Quarter 15.13 11.25 Fourth Quarter 12.13 7.44 2000 First Quarter 10.44 7.63 Second Quarter 8.69 6.50 Third Quarter 7.19 6.44 Fourth Quarter 7.94 6.19 The closing price of our common shares on the New York Stock Exchange on March 26, 2001, was $8.16. As of March 26, 2001, there were 4,650 holders of record of our common shares, and we estimate that as of that date there were in excess of 97,000 beneficial owners of our common shares. 19 Common share distributions declared with respect to each period for the two most recent fiscal years are set forth in the following table. Distributions are generally paid in the quarter following the quarter to which they relate. Distribution Per Share ------------ 1999 First Quarter $0.38 Second Quarter 0.38 Third Quarter 0.32 Fourth Quarter 0.32 2000 First Quarter 0.32 Second Quarter 0.20 Third Quarter 0.20 Fourth Quarter 0.20 All common share distributions declared have been paid. We intend to continue to declare and pay future distributions on a quarterly basis. In addition to the distributions shown above, a non-cash distribution of one-tenth share of SNH was made with respect to each of our common shares during the fourth quarter of 1999 to effect the spin-off of a majority of our ownership in SNH. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to shareholders which annually are equal to at least 95% (90% after January 1, 2001) of our taxable income. All distributions made by us are at the discretion of the Trustees and depend on our earnings, our cash flow available for distribution, our financial condition and other factors that the Trustees deem relevant. 20 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, the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. Amounts are in thousands, except per share information.

Income Statement Data: Year Ended December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------ Total revenues $405,006 $427,541 $356,554 $208,863 $120,183 Income before gain on sale of properties and extraordinary item 118,791 105,555 146,656 112,204 77,164 Income before extraordinary item 143,366 113,862 146,656 115,102 77,164 Net income 142,272 113,862 144,516 114,000 73,254 Funds from operations - basic (1) 183,947 224,816 211,715 146,312 99,106 Funds from operations - diluted (1) 200,098 240,975 227,904 162,738 103,253 Distributions declared (2) 121,385 410,152 190,341 144,271 94,299 Weighted average shares outstanding 131,937 131,843 119,867 92,168 66,255 Per basic common share amounts: Income before gain on sale of properties and extraordinary item $0.90 $0.80 $1.22 $1.22 $1.16 Income before extraordinary item 1.09 0.86 1.22 1.25 1.16 Net income 1.08 0.86 1.21 1.24 1.11 Funds from operations - basic (1) 1.39 1.71 1.77 1.59 1.50 Funds from operations - diluted (1) 1.39 1.68 1.74 1.57 1.49 Distributions declared (2) 0.92 3.05 1.52 1.46 1.42

Balance Sheet Data: At December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------ Real estate properties, at cost $2,546,023 $2,656,344 $2,956,482 $1,969,023 $1,005,739 Real estate mortgages receivable, net 6,449 10,373 69,228 104,288 150,205 Equity investments 314,099 311,113 113,234 113,654 105,422 Total assets 2,900,143 2,953,308 3,064,057 2,135,963 1,229,522 Total indebtedness 1,302,950 1,349,890 1,132,081 787,879 492,175 Total shareholders' equity 1,529,212 1,522,467 1,827,793 1,266,260 708,048 (1) Funds From Operations ("FFO") as defined in the White Paper on Funds From Operations which was approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 and as clarified from time to time, is "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis." We consider FFO to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, financing activities and investing activities, because it provides investors with an indication of an equity REIT's ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. We compute FFO in accordance with the standards established by NAREIT including adjustments for our pro rata share of FFO of HPT and SNH, but excluding unusual and non-recurring items, certain non-cash items, and gains on sales of undepreciated properties, which may not be comparable to FFO reported by other REITs that define the term differently. FFO does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of financial performance or the cash flow from operating activities, determined in accordance with GAAP, or as a measure of liquidity. (2) Includes a non-recurring distribution of shares of SNH in 1999. Regular cash distributions declared with respect to 1999 were $184,665, or $1.40 per share.

21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information is provided in connection with, and should be read in conjunction with, the consolidated financial statements included in this Annual Report on Form 10-K. This discussion includes references to Funds from Operations ("FFO"). FFO, as defined in the White Paper on Funds From Operations which was approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 and as clarified from time to time, is "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis." We consider FFO to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, financing activities and investing activities, because it provides investors with an indication of an equity REIT's ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. We compute FFO in accordance with the standards established by NAREIT including adjustments for our pro rata share of FFO of Hospitality Properties Trust ("HPT") and Senior Housing Properties Trust ("SNH"), but excluding unusual and non-recurring items, certain non-cash items, and gains on sales of undepreciated properties, which may not be comparable to FFO reported by other REITs that define the term differently. FFO does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of financial performance or the cash flow from operating activities, determined in accordance with GAAP, or as a measure of liquidity. RESULTS OF OPERATIONS Year Ended December 31, 2000, Compared to Year Ended December 31, 1999 Total revenues for the year ended December 31, 2000, decreased to $405.0 million from $427.5 million for the year ended December 31, 1999. Rental income decreased by $15.2 million and interest and other income decreased by $7.3 million. Rental income decreased due to the spin-off of SNH in October 1999, offset by an increase from acquisitions made during 1999. Interest and other income decreased primarily as a result of the spin-off of SNH in 1999. Revenues from our office segment increased $53.8 million and revenues from our senior housing segment decreased $76.2 million. The increase in revenues from our office segment is due to office building acquisitions made during 1999. The decrease in revenues from our senior housing segment is due to the spin-off of SNH and the sale of some properties in 1999. Total expenses for the year ended December 31, 2000, increased to $320.1 million from $319.7 million for the year ended December 31, 1999. Operating expenses increased by $22.6 million primarily as a result of our increased investment in "gross leased" office buildings during 1999. Interest expense increased to $100.1 million for the year ended December 31, 2000, from $87.5 million for the year ended December 31, 1999, mainly due to greater borrowings outstanding during 2000 compared to 1999, and to a lesser extent an increase in interest rates on our floating rate debt. Depreciation and amortization and general and administrative expenses decreased in 2000 from 1999 as a result of the spin-off of SNH in 1999 and some property sales in 2000, offset by acquisitions made during 1999. Included in total expenses for 1999 are unusual and non-recurring items aggregating $23.7 million: $16.7 million represents SNH transaction costs, and $7.0 million represents the write-down to net realizable value of the carrying value of two real estate mortgages receivable retained by us after the spin-off and the carrying value of other assets. On October 12, 1999, we spun-off 50.7% of our 100% owned subsidiary, SNH, by distributing 13.2 million common shares of SNH to our shareholders of record on October 8, 1999. SNH is a real estate investment trust with approximately 26 million common shares outstanding that owns senior housing real estate. At December 31, 2000, SNH had investments in 86 assisted living, congregate care and nursing home properties. Since the spin-off, our investment in SNH has been accounted for using the equity method. Prior to the spin-off, the operating results and investments of SNH were included in our results of operations and total assets. At December 31, 2000, we owned 12.8 million, or 49.4%, of the common shares of beneficial interest of SNH with a carrying value of $208.1 million and a market value of $119.3 million. Equity in earnings of equity investments increased in 2000 by $35.5 million primarily as a result of the spin-off of SNH. For the year ended December 31, 2000, our equity in earnings from SNH included $300,000 representing our share of net gain recognized by SNH from the settlement of tenant bankruptcies, $13.5 million representing our share of gain recognized by SNH on the sale of properties during 2000 and $1.7 million representing our share of non-recurring general and administrative expenses arising from tenant 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued bankruptcies and foreclosures. The 1999 period includes a loss of $14.8 million representing our share of impairment losses recognized by SNH. During the year ended December 31, 2000, we recognized gains on the sale of four office properties and three land parcels totaling $24.6 million. During 1999 we recognized gains on the sale of 14 properties totaling $8.3 million. During 2000 we also incurred a $1.1 million extraordinary loss from the write-off of deferred financing fees in connection with the redemption of all of our Remarketed Reset Notes (the "Reset Notes") and the repurchase of some of our convertible subordinated debentures due 2003. Net income increased to $142.3 million, or $1.08 per basic and diluted share for the 2000 period, from $113.9 million, or $0.86 per basic and diluted share, for the 1999 period. The increase in net income is due primarily to the increase in equity in earnings of SNH, the gain from 2000 property sales and office building acquisitions made during 1999, offset by the spin-off of SNH in 1999 and unusual and non-recurring items recognized in 1999. Funds from operations for the year ended December 31, 2000, were $200.1 million, or $1.39 per diluted share, compared to $241.0 million, or $1.68 per diluted share, in 1999. The decrease is primarily the result of the spin-off of SNH, offset by office building acquisitions made during 1999. Funds from operations for 1999 excludes spin-off transaction costs of $16.7 million and the write-down in the carrying value of nursing home mortgages and other assets of $7.0 million. Cash distributions declared for the years ended December 31, 2000 and 1999 were $121.4 million, or $0.92 per share, and $184.7 million, or $1.40 per share, respectively. Distributions paid in the first quarter of the year generally pertain to the prior year. Cash flows provided by (used for) operating, investing and financing activities were $154.5 million, $115.3 million and ($190.3) million, respectively, for the year ended December 31, 2000, and $223.9 million, ($214.1) million and ($12.3) million, respectively, for the year ended December 31, 1999. Changes in all three categories between 2000 and 1999 are primarily related to asset sales in 2000, the spin-off of SNH and office building acquisitions in 1999. Cash flow provided by operating activities and cash available for distribution may not necessarily equal funds from operations as cash flow is affected by other factors not included in the funds from operations calculation, such as changes in assets and liabilities. Year Ended December 31, 1999, Compared to Year Ended December 31, 1998 Total revenues for the year ended December 31, 1999, increased to $427.5 million from $356.6 million for the year ended December 31, 1998. Revenues from our office segment increased $102.5 million and revenues from our senior housing segment decreased $32.5 million. The increase in revenues from our office segment is due to our increased real estate investments in office buildings. The decrease in revenues from our senior housing segment is due primarily to the spin-off of our subsidiary, SNH discussed above, and the sale of some senior housing properties. Rental income increased by $75.3 million and interest and other income decreased by $4.4 million. Rental income increased because of real estate investments made in 1999 and 1998, offset by the spin-off of SNH and the sale of some senior housing properties. Interest and other income decreased as a result of the spin-off and the repayment of many of our mortgage loan investments. Total expenses for the year ended December 31, 1999, increased to $319.7 million from $219.8 million for the year ended December 31, 1998. Included in total expenses for 1999 are unusual and non-recurring items aggregating $23.7 million: approximately $16.7 million represents SNH transaction costs, and $7.0 million represents the write-down to net realizable value of the carrying value of two real estate mortgages receivable retained by us after the spin-off, and the carrying value of other assets. Operating expenses increased by $38.8 million primarily as a result of our increased investment in "gross leased" real estate assets during 1999 and 1998. Interest expense increased to $87.5 million for the year ended December 31, 1999, from $64.3 million for the year ended December 31, 1998, mainly due to higher borrowings outstanding during 1999 compared to 1998. Similarly, depreciation and amortization and general and administrative expenses increased from 1998 to 1999 as a result of new real estate investments during 1999 and 1998. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Net income decreased to $113.9 million, or $0.86 per basic and diluted share for the 1999 period, from $144.5 million, or $1.21 per basic and diluted share, for the 1998 period. The decrease in net income is due primarily to the spin-off of SNH and the unusual and non-recurring items discussed above, offset by new real estate investments in 1999 and 1998. Also, our equity in earnings of equity investments reflects a non-recurring loss recognized by SNH in December 1999, discussed below. On October 12, 1999, we spun-off 50.7% of our previously 100% owned subsidiary, SNH, by distributing 13.2 million common shares of SNH to our shareholders of record on October 8, 1999. In connection with the spin-off, we received $200 million from SNH that was used to repay amounts outstanding under our revolving bank credit facility. At December 31, 1999, SNH had investments in 93 assisted living, congregate care and nursing home properties. Since the spin-off, our investment in SNH has been accounted for using the equity method. Prior to the spin-off, the operating results and investments of SNH were included in our results of operations and total assets. At December 31, 1999, we owned 12.8 million, or 49.3%, of the common shares of beneficial interest of SNH with a carrying value of $201.8 million and a market value of $158.5 million. We agreed to pay all costs relating to the spin-off of SNH. Through December 31, 1999, these costs totaled $16.7 million, which included costs of distributing SNH shares to shareholders, legal and accounting fees, Securities and Exchange Commission filing fees, New York Stock Exchange listing fees and the up-front costs of establishing SNH's bank credit facility. Funds from operations for the year ended December 31, 1999, were $241.0 million, or $1.68 per diluted share, compared to $227.9 million, or $1.74 per diluted share, in 1998. The increase is primarily the result of new investments in 1999 and 1998, offset by the spin-off of SNH. Extraordinary, unusual and non-recurring losses excluded from the 1999 calculation aggregated $23.7 million. The decrease in FFO per diluted share is due primarily to the issuance of additional shares in 1998 and the spin-off of SNH in 1999. Cash distributions declared for the years ended December 31, 1999 and 1998, were $184.7 million, or $1.40 per share, and $190.3 million, or $1.52 per share, respectively. In addition, shares of SNH were distributed on October 12, 1999, to complete the spin-off discussed above. Distributions paid in the first quarter of the year generally pertain to the prior year. Distributions in excess of net income constitute return of capital. For 1999, the return of capital was 39.8% of distributions. Cash flows provided by (used for) operating, investing and financing activities were $223.9 million, ($214.1) million and ($12.3) million, respectively, for the year ended December 31, 1999, and $194.1 million, ($947.2) million and $746.3 million, respectively, for the year ended December 31, 1998. Changes between 1999 and 1998 are primarily related to new office property investments, the sale of senior housing investments and the spin-off of SNH. Cash flow provided by operating activities and cash available for distribution may not necessarily equal funds from operations as cash flow is affected by other factors not included in the funds from operations calculation, such as changes in assets and liabilities. Liquidity and Capital Resources Total assets were $2.9 billion at December 31, 2000, compared to $3.0 billion as of December 31, 1999. During 2000 we sold four office properties, three land parcels and one property acquired during 2000 through foreclosure of a $2.4 million real estate mortgage, for net proceeds of $154.6 million and recognized gains of $24.6 million. We also funded $21.5 million of improvements to our existing properties and collected $3.5 million from regularly scheduled principal payments on mortgages and the prepayment of a real estate mortgage secured by one property. In connection with one of the land sales, we provided a $1.3 million real estate mortgage secured by the land which is due in May 2001. This real estate mortgage bears interest at 10.0% and is payable quarterly in arrears. Also, the property acquired through foreclosure was subsequently sold to SNH at its appraised value of approximately $2.3 million. No gain or loss was recognized on this sale since this defaulted mortgage loan was previously partially reserved. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued At December 31, 2000, we owned 12.8 million, or 49.4%, of the common shares of beneficial interest of SNH with a carrying value of $208.1 million and a market value of $119.3 million, and 4.0 million, or 7.1%, of the common shares of beneficial interest of HPT with a carrying value of $106.0 million and a market value of $90.5 million. On March 26, 2001, the market values of our SNH and HPT shares were $133.9 million and $106.9 million, respectively. In 1999 and 2000, four of SNH's tenants accounting for approximately 50% of SNH's previous revenues filed for bankruptcy. During 2000 settlement agreements between SNH and two of these tenants accounting for approximately 48% of SNH's previous revenues were approved. In accordance with these agreements, SNH assumed operations for over 50 nursing homes formerly leased to these tenants effective July 1, 2000. As a result, SNH recognized gain on foreclosures and lease terminations of $7.1 million and paid non-recurring general and administrative expenses of $3.5 million. Three properties leased to one bankrupt tenant previously accounting for approximately 2% of SNH's revenues were sold by SNH in 2000 for no material gain or loss. SNH's fourth bankrupt tenant which leases only one property from SNH continues to pay its contractual rent. In addition, SNH sold four senior housing properties in 2000 and recognized a gain of $27.4 million. We generally recognize 49.4% of SNH's net income in equity in earnings of equity investments. SNH's $7.1 million gain on foreclosures and lease terminations included approximately $6.5 million of value represented by shares of ours which were pledged to secure a bankrupt tenant's obligations to SNH and which were surrendered to SNH. Our equity in the earnings of SNH excludes any portion of the gain attributable to these shares. During 2000 equity in earnings of equity investments included our share of SNH's gain on foreclosures and lease terminations, net of gain on our equity, of $300,000. Our equity in earnings of equity investments also includes our share of SNH's non-recurring general and administrative expenses of $1.7 million, and $13.5 million representing our share of SNH's gain on the sale of properties. In 1999 SNH's expenses included a loss from the impairment in the carrying value of certain loans and properties totaling $30.0 million that, at the time, was based on estimates of future cash flows from the properties leased to two of these bankrupt tenants. As a result, we recognized $14.8 million of this impairment loss in 1999 through our percentage ownership interest in SNH. In April 2000 SNH reduced its distribution rate due to its tenant bankruptcies, causing a reduction by over $15 million per year in the distributions that we received from SNH. In July 2000 we announced our new distribution rate of $0.20 per share ($0.80 per share per year). In April 2000 we retired $27.5 million of our Reset Notes at their par value and in July 2000 we completed our optional redemption of the remaining $222.5 million of outstanding Reset Notes which bore interest at a rate subject to periodic resets, at a spread over LIBOR (effective rate of 7.52% per annum immediately prior to the redemption date). The redemption prices were 100% of the principal amount of the Reset Notes redeemed, plus accrued and unpaid interest to the redemption dates. The redemptions were funded with drawings at an effective interest rate of 7.38% under our $500 million revolving bank credit facility. In connection with the final redemption of our Reset Notes, we recognized an extraordinary loss of $1.2 million from the write-off of deferred financing fees. During the fourth quarter we purchased $2.3 million of our convertible subordinated debentures due 2003 for $2.2 million and recognized an extraordinary gain of $116,000. In July and September 2000 we issued unsecured senior notes totaling $50 million due 2010 at interest rates ranging from 8.625% to 8.875%. Net proceeds totaled $49.6 million. In December 2000 certain of our subsidiaries issued $304 million of mortgage notes secured by seven office complexes. These mortgage notes bear interest at rates ranging from 6.794% to 6.814% and mature from 2011 to 2029. Including the amortization of an interest rate lock agreement, the effective interest rate on these mortgage notes is 7.5%. At December 31, 2000, restricted cash included a $15.0 million security deposit to be released to us by the mortgage lender upon the fulfillment of certain conditions, and escrows for real estate taxes and capital expenditures required under these mortgage notes. Net proceeds from both the unsecured senior notes and the mortgage notes were used to fully repay amounts then outstanding on our revolving bank credit facility. At December 31, 2000, we had $92.7 million of cash and cash equivalents, $500 million available on our revolving bank credit facility and $2.5 billion available under our $3 billion shelf registration statement. Cash and cash equivalents increased in 2000 from 1999 primarily due to excess proceeds received from the secured debt financing described above. We expect to use these excess proceeds to retire additional debt and for general business purposes. 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued In February 2001 we completed a $200 million offering of 9 7/8% series A cumulative redeemable preferred shares. Net proceeds of $193.3 million are expected to be used approximately half to repay our outstanding subordinated convertible debentures described in the following paragraph, and about half to repurchase some of our outstanding common shares or for general business purposes, including the possible repayment of additional debt. During February 2001 we redeemed at par all $40 million of our 7.25% subordinated convertible debentures due October 2001. We also called for redemption at par all of our outstanding 7.50% subordinated convertible debentures due in October 2003. Approximately $41 million was redeemed on March 26, 2001, and approximately $121 million is expected to be redeemed on or about March 30, 2001. We expect to use proceeds from our preferred offering and cash on hand to accomplish these redemptions. In March 2001 we accepted an underwriting commitment from First Union National Bank of Charlotte, North Carolina ("First Union") for a new $400 million unsecured revolving credit facility which will expire in April 2005. This credit facility includes an accordion feature which allows it to be expanded, in certain circumstances, by up to $200 million. This revolving credit facility will replace our existing unsecured credit facility for $500 million which matures in April 2002. The First Union underwriting commitment is subject to various conditions and contingencies, including mutually acceptable documentation. This new credit facility is expected to close in April 2001. In December 1999 we announced our intention to sell approximately $150-$160 million of properties during 2000. During 2000 we sold properties for gross sales prices totaling $161.8 million and in March 2001 we sold one property for a gross sales price of $9.4 million. In December 1999 we also announced that we were exploring creating joint venture investments pursuant to which we might receive net proceeds of $200 million or more from the sale of partial interests in some of our properties. Throughout 2000 we had discussions with several investors concerning joint ventures but we were not able to conclude any mutually acceptable arrangements. In December 1999 we announced that our Board of Trustees had authorized share repurchases for up to 14 million common shares. In July 2000 we announced that our priority use of cash proceeds from property sales or new financing would be to pay debts which mature within the next few years. Accordingly, we did not repurchase any shares during 2000. In February 2001 our Board renewed its authorization for the repurchase of common shares. During February and March 2001 we repurchased 983,700 of our common shares for $7.8 million, including transaction costs. There can be no assurances that debt or equity financing will be available to fund our future business activities, but we do expect that financing will be available. As of December 31, 2000, our debt as a percentage of total book capitalization was approximately 46%. Impact of Inflation We do not believe that the inflation which may occur in the United States economy during the next few years will have a material effect on our business. In the real estate market, inflation tends to increase the values that may be realized when properties are sold. Similarly, rents we can charge would most likely increase with inflation. Conversely, inflation might cause our operating expenses or our cost of new acquisitions and of debt capital to increase. To mitigate the potential impact of inflation on our cost of debt capital, we may purchase interest rate cap contracts when we believe material interest rate increases are likely to occur. 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Certain Considerations The discussion and analysis of our financial condition and results of operations requires us to make estimates and assumptions and contains statements of our beliefs, intent or expectations concerning projections, plans, future events and performance. The estimates, assumptions and statements, such as those relating to our ability to sell assets at estimated prices or at any price, our ability to successfully conclude joint ventures, our ability to repurchase shares at favorable prices or at any price, our ability to buy assets, the performance of our assets, our ability to pay distributions, our tax status as a "real estate investment trust" and our ability to access capital markets depends upon various factors over which we and our tenants have or may have limited or no control. Those factors include, without limitation, the status of the economy, capital markets (including prevailing interest rates), competition, changes in federal, state and local legislation and other factors. We cannot predict the impact of these factors. These factors could cause our actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of our financial condition and results of operations. We believe that our estimates and assumptions are reasonable at this time. However, investors are cautioned not to place undue reliance upon our estimates, assumptions or other forward looking statements. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market changes in interest rates. We manage our exposure to this market risk through our monitoring of available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 1999. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how this exposure is managed in the near future. At December 31, 2000, our total outstanding debt of $1.3 billion consisted of the following fixed rate notes: Amount Coupon Maturity Unsecured senior notes: $40.0 million 7.25% 2001 160.0 million 6.875% 2002 150.0 million 6.75% 2002 162.5 million 7.50% 2003 100.0 million 6.70% 2005 90.0 million 7.875% 2009 30.0 million 8.875% 2010 20.0 million 8.625% 2010 65.0 million 8.375% 2011 143.0 million 8.50% 2013 Secured notes: $3.5 million 9.12% 2004 10.9 million 8.40% 2007 17.5 million 7.02% 2008 11.3 million 8.00% 2008 10.1 million 7.66% 2009 260.0 million 6.814% 2011 44.0 million 6.794% 2029 No principal repayments are due under the unsecured senior notes until maturity. If, at maturity, the unsecured senior notes were to be refinanced at interest rates which are one percentage point higher than shown above, our per annum interest cost would increase by approximately $9.6 million. The secured notes are secured by 25 of our office properties located in 12 office complexes and require principal and interest payments through maturity. The market prices, if any, of each of our fixed rate obligations as of December 31, 2000, are sensitive to changes in interest rates. Typically, if market rates of interest increase, the current market price of a fixed rate obligation will decrease. Conversely, if market rates of interest decrease, the current market price of a fixed rate obligation will typically increase. Based on the balances outstanding at December 31, 2000, and discounted cash flow analyses, a hypothetical immediate one percentage point change in interest rates would change the fair value of our fixed rate debt obligations by approximately $39.3 million. Each of our obligations for borrowed money has provisions that allow 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 other cases we are allowed to make prepayments only at a premium to face value. In any event, these prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing at lower rates prior to maturity. Our unsecured revolving bank credit facility bears interest at floating rates and matures in 2002. At December 31, 2000, there was zero outstanding and $500 million available for borrowing under our revolving bank credit facility. We borrow in U.S. dollars and borrowings under our bank credit facility are subject to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. In March 2001 we announced that we have accepted an underwriting commitment from First Union National Bank of Charlotte, North Carolina for a new $400 million unsecured revolving credit facility which will expire in April 2005. This credit facility will replace our existing unsecured credit facility. This new credit facility is expected to close in April 2001. Interest payable under the new credit facility will also be variable with changes in LIBOR. 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk - continued During the past year, short-term U.S. dollar based interest rates have fluctuated. We are unable to predict the direction or amount of interest rate changes during the next year. As of December 31, 2000, we had zero outstanding under our revolving bank credit facility and we did not have any interest rate cap or other hedge agreements to protect against future rate increases, but we may enter such agreements in the future. Also, we may incur additional debt at floating or fixed rates, which would increase our exposure to market changes in interest rates. Item 8. Financial Statements and Supplementary Data The information required by this item is included in Item 14 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III The information in Part III (Items 10, 11, 12 and 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. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Index to Financial Statements and Financial Statement Schedules

HRPT PROPERTIES TRUST The following consolidated financial statements and financial statement schedules of HRPT Properties Trust are included on the pages indicated: Page Report of Independent Auditors F-1 Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 2000 F-4 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2000 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000 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 Schedule IV - Mortgage Loans Receivable on Real Estate S-8

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K During the fourth quarter of 2000, the Company did not file any Current Reports on Form 8-K. (c) Exhibits 3.1 Composite Copy of Third Amendment and Restatement of Declaration of Trust of the Company, dated July 1, 1994, as amended to date. (incorporated by reference to the Company's Current Report on Form 8-K, dated July 1, 1998) 29 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, 1997, 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 Amended and Restated By-laws of the Company. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 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 Rights Agreement, dated October 17, 1994, between the Company and State Street Bank and Trust Company, as Rights Agent (including the form of Articles Supplementary relating to the Junior Participating Preferred Shares annexed as an exhibit thereto). (incorporated by reference to the Company's Current Report on Form 8-K, dated October 24, 1994) 4.4 Indenture, dated as of September 20, 1996, between the Company and Fleet National Bank ("Fleet"), as Trustee. (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-02863) 4.5 First Supplemental Indenture, dated as of October 7, 1996, between the Company and Fleet, as Trustee, relating to the Company's 7.5% Convertible Subordinated Debentures due 2003, Series A, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 7, 1996) 4.6 Second Supplemental Indenture, dated October 7, 1996, between the Company and Fleet, as Trustee, relating to the Company's 7.5% Convertible Subordinated Debentures due 2003, Series B, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 7, 1996) 4.7 Third Supplemental Indenture, dated as of October 7, 1996, between the Company and Fleet, as Trustee, relating to the Company's 7.25% Convertible Subordinated Debentures due 2001, including form thereof. (incorporated by reference to the Company's Current Report on Form 10-K, dated October 7, 1996) 4.8 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) 30 4.9 Supplemental Indenture, dated July 9, 1997, by and between the Company and State Street, as Trustee, relating to the Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.10 Supplemental Indenture No. 2, dated as of February 23, 1998, between the Company and State Street, relating to $50,000,000 in principal amount of Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.11 Form of Global Note relating to the Remarketed Reset Notes due July 9, 2007. (incorporated by reference to the Company's Current Report on Form 8-K, dated July 2, 1997) 4.12 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) 4.13 Supplemental Indenture No. 4, dated as of August 26, 1998, by and between the Company and State Street, relating to $160,000,000 in aggregate principal amount of 6 7/8% Senior Notes due 2002, including form thereof. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 4.14 Supplemental Indenture No. 5, dated as of November 30, 1998, by and between the Company and State Street, relating to $130,000,000 in aggregate principal amount of 8 1/2% Monthly Income Senior Notes due 2013, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated March 11, 1999) 4.15 Supplemental Indenture No. 6, dated as of March 24, 1999, by and between the Company and State Street, relating to $90,000,000 in aggregate principal amount of 7 7/8% Monthly Income Senior Notes due 2009, including form thereof. (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998) 4.16 Supplemental Indenture No. 7, dated as of June 17, 1999, by and between the Company and State Street, relating to $65,000,000 in aggregate principal amount of 8 3/8% Monthly Income Senior Notes due 2011, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated June 14, 1999) 4.17 Supplemental Indenture No. 8, dated as of July 31, 2000, between the Company and State Street, relating to $30,000,000 in aggregate principal amount of 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) 4.18 Supplemental Indenture No. 9, dated as of September 29, 2000, between the Company and State Street, relating to $20,000,000 in aggregate principal amount of 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) 4.19 Indenture, dated as of December 18, 1997, by and between the Company and State Street, as Trustee. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 5, 1997) 4.20 Supplemental Indenture, dated as of December 18, 1997, by and between the Company and State Street, as Trustee, relating to the Company's 6 3/4% Senior Notes due 2002, including form thereof. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 5, 1997) 4.21 Registration Rights Agreement, dated as of December 18, 1997, by and between the Company and Merrill Lynch & Co. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 5, 1997) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (filed herewith) 31 10.1 Advisory Agreement by and between REIT Management & Research, Inc. and the Company, dated as of January 1, 1998.(+) (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 between the Company and REIT Management & Research, Inc., dated as of October 12, 1999.(+) (incorporated by reference to the Company's Current Report on Form 8-K, dated December 16, 1999) 10.3 Master Management Agreement by and between the Company and REIT Management & Research, Inc., dated as of December 31, 1997. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 27, 1998) 10.4 Parking Operation Management Agreement by and between HUB Properties Trust, a subsidiary of the Company, and Garage Management, Inc., dated as of January 1, 1998. (incorporated by reference to the Company's Current Report on Form 8-K, dated February 27, 1998) 10.5 Incentive Share Award Plan.(+) (incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-55684, dated December 23, 1992) 10.6 Fourth Amended and Restated Revolving Credit Agreement, dated as of April 2, 1998, among the Company, as borrower, the lenders named therein, Dresdner Kleinwort Benson North America LLC, as agent, and Fleet, as administrative agent. (incorporated by reference to the Company's Current Report on Form 8-K, dated April 14, 1998) 10.7 Second Amendment to Loan Agreement, dated as of October 25, 2000, among the Company, the financial institutions listed on the signature pages thereof, Dresdner Kleinwort Benson North America LLC, as agent, and Fleet, as administrative agent. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) 10.8 Transaction Agreement between Senior Housing Properties Trust and the Company, dated as of September 21, 1999. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 12, 1999) 10.9 Promissory Note from SPTMRT Properties Trust and Senior Housing Properties Trust, as makers, to the Company, dated September 1, 1999. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 12, 1999) 10.10 Loan and Security Agreement, dated December 15, 2000, by and between Cedars LA LLC, Herald Square LLC, Indiana Avenue LLC, Bridgepoint Property Trust, Lakewood Property Trust and 1600 Market Street Property Trust, 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) 10.11 Promissory Note in the amount of $260,000,000, dated December 15, 2000, issued by Cedars LA LLC, Herald Square LLC, Indiana Avenue LLC, Bridgepoint Property Trust, Lakewood Property Trust and 1600 Market Street Property Trust, collectively as Borrowers, to Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000) 10.12 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Bridgepoint Property Trust in favor of William Z. Fairbanks, Jr. 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 Lakewood Property Trust in favor of William Z. Fairbanks, Jr. and 32 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 Herald Square LLC to Lawyers Title Realty Services, Inc. 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 Indiana Avenue to Lawyers Title Realty Services, Inc. for the benefit of Merrill. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000) 10.16 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Cedars LA LLC 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) 10.17 Open-End Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by 1600 Market Street Property Trust, 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) 10.18 Exceptions to Non-Recourse Guaranty, dated December 15, 2000, entered into by Hub Realty College Park I, LLC, 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) 10.19 Loan and Security Agreement, dated December 15, 2000, entered into by and between Franklin Plaza Property Trust, as Borrower, and Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000) 10.20 Promissory Note in the amount of $44,000,000, dated December 15, 2000, issued by Franklin Plaza Property Trust, as Borrower, to Merrill, as Lender. (incorporated by reference to the Company's Current Report on Form 8-K, dated December 15, 2000) 10.21 Open-End Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated December 15, 2000, made by Franklin Plaza Property Trust, 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) 10.22 Exceptions to Non-Recourse Guaranty, dated December 15, 2000, entered by Hub Realty College Park I, LLC, 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) 12.1 Statement regarding computation of ratio of earnings to fixed charges. (filed herewith) 21.1 Subsidiaries of the Registrant. (filed herewith) 23.1 Consent of Ernst & Young LLP. (filed herewith) 23.2 Consent of Arthur Andersen LLP. (filed herewith) 23.3 Consent of Sullivan & Worcester LLP. (included as part of Exhibit 8.1 hereto) (+) Management contract or compensatory plan or arrangement. 33 Report of Independent Auditors 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(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. The financial statements of Hospitality Properties Trust (a real estate investment trust in which the Company has a 7.1% interest as of December 31, 2000 and 1999, respectively) have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to data included for Hospitality Properties Trust, it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the 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, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HRPT Properties Trust at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts March 23, 2001 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited the consolidated balance sheet of Hospitality Properties Trust and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows (not presented herein) for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Properties Trust and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Vienna, Virginia January 12, 2001 F-2

HRPT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, --------------------------- 2000 1999 --------------------------- ASSETS Real estate properties, at cost: Land $ 300,548 $ 354,173 Buildings and improvements 2,245,475 2,302,171 -------------------------- 2,546,023 2,656,344 Less accumulated depreciation 160,015 106,859 -------------------------- 2,386,008 2,549,485 Real estate mortgages receivable, net 6,449 10,373 Equity investments 314,099 311,113 Cash and cash equivalents 92,681 13,206 Restricted cash 23,126 1,824 Interest and rents receivable, net 38,335 35,974 Other assets, net 39,445 31,333 -------------------------- $ 2,900,143 $ 2,953,308 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $-- $ 132,000 Senior notes payable, net 757,314 957,586 Mortgage notes payable, net 343,089 55,441 Convertible subordinated debentures 202,547 204,863 Accounts payable and accrued expenses 40,611 53,851 Deferred rents 6,059 9,005 Security deposits 6,611 7,041 Due to affiliates 14,700 11,054 Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized, none issued -- -- Common shares of beneficial interest, $0.01 par value: 150,000,000 shares authorized, 131,948,847 shares and 131,908,126 shares issued and outstanding at December 31, 2000 and 1999, respectively 1,319 1,319 Additional paid-in capital 1,971,679 1,971,366 Cumulative net income 820,948 678,676 Cumulative distributions (1,258,739) (1,121,533) Unrealized holding losses on investments (5,995) (7,361) -------------------------- Total shareholders' equity 1,529,212 1,522,467 -------------------------- $ 2,900,143 $ 2,953,308 ==========================

See accompanying notes F-3

HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ----------------------------------- 2000 1999 1998 ----------------------------------- Revenues: Rental income $ 400,976 $ 416,198 $ 340,851 Interest and other income 4,030 11,343 15,703 ----------------------------------- Total revenues 405,006 427,541 356,554 ----------------------------------- Expenses: Operating expenses 138,937 116,365 77,536 Interest 100,074 87,470 64,326 Depreciation and amortization 63,813 73,382 60,764 General and administrative 17,271 18,704 17,172 Impairment of assets -- 7,000 -- Spin-off transaction costs -- 16,739 -- ----------------------------------- Total expenses 320,095 319,660 219,798 ----------------------------------- Income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item 84,911 107,881 136,756 Equity in earnings (loss) of equity investments 33,880 (1,615) 7,687 (Loss) gain on equity transaction of equity investments -- (711) 2,213 ----------------------------------- Income before gain on sale of properties and extraordinary item 118,791 105,555 146,656 Gain on sale of properties, net 24,575 8,307 -- ----------------------------------- Income before extraordinary item 143,366 113,862 146,656 Extraordinary item - early extinguishment of debt (1,094) -- (2,140) ----------------------------------- Net income $ 142,272 $ 113,862 $ 144,516 =================================== Weighted average shares outstanding 131,937 131,843 119,867 =================================== Basic and diluted earnings per common share: Income before gain on sale of properties and extraordinary item $ 0.90 $ 0.80 $ 1.22 =================================== Income before extraordinary item $ 1.09 $ 0.86 $ 1.22 =================================== Net income $ 1.08 $ 0.86 $ 1.21 ===================================

See accompanying notes F-4

HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) Accumulated Additional Cumulative Other Number of Common Paid-in Net Cumulative Comprehensive Shares Shares Capital Income Distributions Income (Loss) Total ----------------------------------------------------------------------------------------------- Balance at December 31, 1997 98,853,170 $ 988 $ 1,371,236 $ 420,298 $ (526,262) $-- $ 1,266,260 Issuance of shares to acquire real estate 286,400 3 5,702 -- -- -- 5,705 Issuance of shares 31,977,575 320 579,986 -- -- -- 580,306 Conversion of convertible subordinated debentures, net 362,217 3 6,626 -- -- -- 6,629 Stock grants 67,816 1 1,328 -- -- -- 1,329 Net income -- -- -- 144,516 -- -- 144,516 Distributions -- -- -- -- (176,952) -- (176,952) ----------------------------------------------------------------------------------------------- Balance at December 31, 1998 131,547,178 1,315 1,964,878 564,814 (703,214) -- 1,827,793 Issuance of shares to acquire real estate 256,246 3 4,956 -- -- -- 4,959 Stock grants 104,702 1 1,532 -- -- -- 1,533 Comprehensive income (loss): Net income -- -- -- 113,862 -- -- 113,862 Other comprehensive loss: Unrealized holding losses on investments -- -- -- -- -- (7,361) (7,361) ----------------------------------------------------------------------------------------------- Total comprehensive income (loss) -- -- -- 113,862 -- (7,361) 106,501 ----------------------------------------------------------------------------------------------- Distribution of Senior Housing Properties Trust shares -- -- -- -- (225,487) -- (225,487) Distributions -- -- -- -- (192,832) -- (192,832) ----------------------------------------------------------------------------------------------- Balance at December 31, 1999 131,908,126 1,319 1,971,366 678,676 (1,121,533) (7,361) 1,522,467 Stock grants 40,721 -- 313 -- -- -- 313 Comprehensive income: Net income -- -- -- 142,272 -- -- 142,272 Other comprehensive gain: Unrealized holding gains on investments -- -- -- -- -- 1,366 1,366 ----------------------------------------------------------------------------------------------- Total comprehensive income -- -- -- 142,272 -- 1,366 143,638 ----------------------------------------------------------------------------------------------- Distributions -- -- -- -- (137,206) -- (137,206) ----------------------------------------------------------------------------------------------- Balance at December 31, 2000 131,948,847 $ 1,319 $ 1,971,679 $ 820,948 $(1,258,739) $ (5,995) $ 1,529,212 ===============================================================================================

See accompanying notes F-5

HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ------------------------------------------ 2000 1999 1998 ------------------------------------------ Cash flows from operating activities: Net income $ 142,272 $ 113,862 $ 144,516 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 59,423 70,080 58,837 Amortization 4,390 3,302 1,927 Amortization of bond discounts 217 147 72 Impairment of assets -- 7,000 -- Equity in (earnings) loss of equity investments (33,880) 1,615 (7,687) Loss (gain) on equity transaction of equity investments -- 711 (2,213) Distributions from equity investments 30,294 18,606 10,320 Gain on sale of properties, net (24,575) (8,307) -- Extraordinary item 1,094 -- 2,140 Change in assets and liabilities: Increase in interest and rents receivable and other assets (12,985) (8,355) (37,181) (Decrease) increase in accounts payable and accrued expenses (12,237) 13,321 16,581 (Decrease) increase in deferred rents (2,946) 2,892 4,073 (Decrease) increase in security deposits (430) 3,893 (384) Increase in due to affiliates 3,861 5,175 3,129 ----------------------------------------- Cash provided by operating activities 154,498 223,942 194,130 ----------------------------------------- Cash flows from investing activities: Real estate acquisitions and improvements (21,506) (493,809) (761,414) Investment in real estate mortgages receivable -- -- (226,000) Proceeds from repayment of real estate mortgages and notes receivable 3,522 75,598 33,095 Proceeds from sale of real estate 154,600 22,177 5,565 (Increase) decrease in restricted cash (21,302) (322) 214 Proceeds from repayment of loans to affiliate -- 1,000 1,365 Proceeds from loan to Senior Housing Properties Trust -- 200,000 -- Contribution to Senior Housing Properties Trust -- (18,727) -- ----------------------------------------- Cash provided by (used for) investing activities 115,314 (214,083) (947,175) ----------------------------------------- Cash flows from financing activities: Proceeds from issuance of common shares -- -- 580,306 Proceeds from borrowings 688,340 618,500 1,520,967 Payments on borrowings (735,352) (433,206) (1,170,050) Deferred finance costs incurred (6,119) (4,758) (7,938) Distributions (137,206) (192,832) (176,952) ----------------------------------------- Cash (used for) provided by financing activities (190,337) (12,296) 746,333 ----------------------------------------- Increase (decrease) in cash and cash equivalents 79,475 (2,437) (6,712) Cash and cash equivalents at beginning of period 13,206 15,643 22,355 ----------------------------------------- Cash and cash equivalents at end of period $ 92,681 $ 13,206 $ 15,643 ========================================= See accompanying notes

F-6

HRPT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, -------------------------------------------- 2000 1999 1998 -------------------------------------------- Supplemental cash flow information: Interest paid (excluding capitalized interest of $1,680, $1,488 and $447, respectively) $ 103,695 $ 88,315 $ 57,626 ============================================ Non-cash investing activities: Real estate acquisitions $-- $ (32,368) $(237,404) Real estate acquired by foreclosure 2,300 -- -- Disposition of real estate -- -- 11,404 Investments in real estate mortgages receivable 1,300 60,000 226,000 Investment in Senior Housing Properties Trust -- 219,261 -- Issuance of shares -- 4,959 5,705 Non-cash financing activities: Assumption of mortgage notes payable $-- $ 32,368 $-- Issuance of common shares 313 1,533 7,958 Conversion of convertible subordinated debentures, net -- -- (6,629)

See accompanying notes F-7 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization HRPT Properties Trust, a Maryland real estate investment trust (the "Company"), was organized on October 9, 1986. As of December 31, 2000, the Company had investments in 191 office properties and equity investments in Senior Housing Properties Trust ("SNH") and Hospitality Properties Trust ("HPT") of 49.4% and 7.1%, respectively. At December 31, 2000, SNH owned 86 senior housing properties and HPT owned 222 hotels. Note 2. Summary of Significant Accounting Policies Basis of Presentation. The consolidated financial statements include the Company's investment in 100% owned subsidiaries. The Company's investments in 50% or less owned companies over which it can exercise influence, but does not control, are accounted for using the equity method of accounting. All inter-company transactions have been eliminated. The Company uses the income statement method to account for issuance of common shares of beneficial interest by SNH and HPT. Under this method, gains and losses reflecting changes in the value of the Company's ownership stake on issuance of stock by SNH or HPT are recognized in the Company's income statement. Real Estate Property and Mortgage Investments. Real estate properties and mortgages 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. Impairment losses on investments are recognized where indicators of impairment are present and the undiscounted cash flow estimated to be generated by the Company's 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, over-night repurchase agreements 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 withheld by a mortgage lender pending satisfaction of certain conditions and amounts escrowed for future real estate taxes and capital expenditures. Other Assets, Net. Other assets consist principally of deferred finance costs, investments in marketable equity securities and prepaid property operating expenses. Deferred finance costs include issuance costs related to borrowings and are capitalized and amortized over the terms of the respective loans. At December 31, 2000 and 1999, accumulated amortization for deferred finance costs was $7.3 million and $5.3 million, respectively. Marketable equity securities are classified as available for sale and are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. At December 31, 2000 and 1999, the Company's investments in marketable equity securities were included in other assets and had a fair value of $5.3 million and $4.3 million, respectively, and unrealized holding losses of $6.0 million and $7.4 million, respectively. At March 16, 2001, these investments had a fair value of $7.9 million and unrealized holding losses of $3.4 million. Revenue Recognition. Rental income from operating leases is recognized on a straight-line basis over the life of the lease agreements. Interest income is recognized as earned over the terms of the real estate mortgages. Percentage rent and additional mortgage interest revenue is recognized as earned. Earnings Per Common Share. Basic earnings per common share is computed using the weighted average number of shares outstanding during the period. At December 31, 2000 and 1999, $202.5 million and $204.9 million of convertible securities were convertible into 11.3 million and 11.4 million shares, respectively, of the Company. Basic earnings per share equals diluted earnings per share, as the effect of these convertible securities is anti-dilutive. Reclassifications. Reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. Income Taxes. The Company is a real estate investment trust under the Internal Revenue Code of 1986, as amended. Accordingly, the Company expects not to be subject to federal income taxes provided it distributes its taxable income and meets other requirements for qualifying as a real estate investment trust. However, it is subject to some state and local taxes on its income and property. F-8 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates. Preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates. New Accounting Pronouncements. The Financial Accounting Standards Board issued Financial Accounting Standards Board Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") in 1998. FAS 133 must be adopted for the Company's 2001 financial statements. The Company anticipates that FAS 133 will not have a significant impact on the Company's reported financial condition or results of operations. Note 3. Real Estate Properties During the year ended December 31, 2000, the Company sold four office properties and three land parcels to unaffiliated third parties for net cash proceeds of $152.3 million and recognized gains of $24.6 million. In connection with these sales, the Company provided a $1.3 million mortgage loan secured by one parcel of land. The Company also sold one property acquired during 2000 through foreclosure of a $2.4 million mortgage loan. This property was sold to SNH at its appraised value of approximately $2.3 million and no gain or loss was recognized on the sale since the carrying value of this defaulted mortgage loan had previously been partially reserved. During 2000 the Company also funded improvements to its existing properties of $21.5 million. The Company's real estate properties are leased on gross lease, modified gross lease or triple net lease bases pursuant to noncancelable, fixed term operating leases expiring from 2001 to 2020. The triple net leases generally require the lessee to provide all property management services. The Company's gross leases and modified gross leases require the Company to provide property management services. The office properties owned by the Company are managed by REIT Management & Research, Inc. ("RMR"), an affiliate of the Company. The future minimum lease payments to be received by the Company during the current terms of its leases as of December 31, 2000, are approximately $291.6 million in 2001, $264.9 million in 2002, $236.9 million in 2003, $201.2 million in 2004, $168.6 million in 2005 and $846.2 million thereafter. Note 4. Equity Investments At December 31, 2000 and 1999, the Company had the following equity investments (dollars in thousands):

Equity in Earnings (Loss) ----------------------------------------------- Income Before Ownership Gain on Sale Gain on Sale of Equity Percentage of Properties Properties Total Investments ------------ -------------- ------------------------- ------------ 2000: SNH 49.4% $ 11,902 $ 13,543 $ 25,445 $208,062 HPT 7.1 8,435 -- 8,435 106,037 -------- -------- -------- -------- $ 20,337 $ 13,543 $ 33,880 $314,099 ======== ======== ======== ======== 1999: SNH 49.3% $ (9,744) $-- $ (9,744) $201,831 HPT 7.1 8,129 -- 8,129 109,282 -------- -------- -------- -------- $ (1,615) $-- $ (1,615) $311,113 ======== ======== ======== ========

F-9 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2000, the Company owned 12,809,237 common shares of beneficial interest of SNH with a carrying value of $208.1 million and a market value, based on quoted market prices, of $119.3 million. SNH is a real estate investment trust that invests principally in senior housing real estate and was a 100% owned subsidiary of the Company until October 12, 1999, at which time the Company spun-off 50.7% of the common shares of SNH to the Company's shareholders (the "Spin-Off"). Since the Spin-Off, the Company's investment in SNH is accounted for using the equity method of accounting. Prior to the Spin-Off, the operating results of SNH were included in the Company's results of operations. The following summarized financial data of SNH includes results of operations prior to the Spin-Off that are also included in the Company's results of operations (amounts in thousands, except per share amounts):

December 31, Year Ended December 31, ------------------------- ------------------------------------ 2000 1999 2000 1999 1998 ------------ ------------ ------------------------------------ Real estate properties, net $486,714 $600,030 Revenues $75,522 $90,790 $88,306 Real estate mortgages Expenses 44,500 75,956 42,070 receivable, net -- 22,939 Income before ----------------------------------- Other assets 43,859 31,031 gain on sale ------------------------ of properties 31,022 14,834 46,236 $530,573 $654,000 Gain on sale of ======================== properties 27,415 -- -- ----------------------------------- Net income $58,437 $14,834 $46,236 Bank notes payable $97,000 $200,000 =================================== Deferred rents 56 26,715 Security deposits 235 15,235 Average shares 25,958 26,000 26,000 Other liabilities 10,972 2,644 =================================== Shareholders' equity 422,310 409,406 Income before gain ------------------------ on sale of $530,573 $654,000 properties per ======================== share $1.20 $0.57 $1.78 =================================== Net income per share $2.25 $0.57 $1.78 ===================================

In 1999 and 2000, four of SNH's tenants accounting for approximately 50% of SNH's previous revenues filed for bankruptcy. During 2000 settlement agreements between SNH and two of these tenants accounting for approximately 48% of SNH's previous revenues were approved. In accordance with these agreements, SNH assumed operations for over 50 nursing homes formerly leased to these tenants effective July 1, 2000. As a result, SNH recognized gain on foreclosures and lease terminations of $7.1 million and paid non-recurring general and administrative expenses of $3.5 million. Three properties leased to one bankrupt tenant previously accounting for approximately 2% of SNH's revenues were sold by SNH in 2000 for no material gain or loss. SNH's fourth bankrupt tenant which leases only one property from SNH continues to pay its contractual rent. In addition, SNH sold four senior housing properties in 2000 and recognized a gain of $27.4 million. The Company generally recognizes 49.4% of SNH's net income in equity in earnings of equity investments. SNH's $7.1 million gain on foreclosures and lease terminations included approximately $6.5 million of value represented by shares of the Company which were pledged to secure a bankrupt tenant's obligations to SNH and which were surrendered to SNH. The Company's equity in the earnings of SNH excludes any portion of the gain attributable to these shares. During 2000 equity in earnings of equity investments included the Company's share of SNH's gain on foreclosures and lease terminations, net of gain on the Company's equity, of $300,000. The Company's equity in earnings of equity investments also includes its share of SNH's non-recurring general and administrative expenses of $1.7 million, and $13.5 million representing the Company's share of SNH's gain on the sale of properties. In 1999 SNH's expenses included a loss from the impairment in the carrying value of certain loans and properties totaling $30.0 million that, at the time, was based on estimates of future cash flows from the properties leased to two of these bankrupt tenants. As a result, the Company recognized $14.8 million of this impairment loss in 1999 through its percentage ownership interest in SNH. F-10 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2000, the Company owned 4,000,000 common shares of beneficial interest of HPT with a carrying value of $106.0 million and a market value, based on quoted market prices, of $90.5 million. HPT is a real estate investment trust that owns hotels. Summarized financial data of HPT is as follows (amounts in thousands, except per share amounts):

December 31, Year Ended December 31, --------------------------- -------------------------------------- 2000 1999 2000 1999 1998 --------------------------- -------------------------------------- Real estate properties, net $2,157,487 $2,082,999 Revenues $263,023 $237,218 $174,961 Expenses 136,752 125,289 86,979 Other assets, net 63,422 111,853 Income before -------------------------------------- --------------------------- extraordinary item 126,271 111,929 87,982 $2,220,909 $2,194,852 Extraordinary item -- -- (6,641) =========================== -------------------------------------- Net income 126,271 111,929 81,341 Security and Preferred distributions (7,125) (5,106) -- other deposits $257,377 $246,242 Net income available Other liabilities 480,592 428,895 for common -------------------------------------- Shareholders' equity 1,482,940 1,519,715 shareholders $119,146 $106,823 $81,341 --------------------------- ====================================== $2,220,909 $2,194,852 =========================== Average shares 56,466 52,566 42,317 Income before ====================================== extraordinary item per share $2.24 $2.13 $2.08 ====================================== Net income per share $2.24 $2.13 $1.92 ====================================== Net income available for common shareholders per share $2.11 $2.03 $1.92 ======================================

Note 5. Real Estate Mortgages Receivable, Net December 31, ---------------------- 2000 1999 ---------------------- (dollars in thousands) Mortgage notes receivable, due March 2001 through December 2006 $11,842 $16,474 Less allowance 5,393 6,101 --------------------- $6,449 $10,373 ===================== During 2000 the Company received regularly scheduled principal payments and prepayment of a real estate mortgage secured by one property aggregating $3.5 million. The Company also extended the maturity of a $9.1 million real estate mortgage from December 31, 2000, to March 31, 2001. In addition, the Company provided a $1.3 million real estate mortgage in connection with one land sale discussed in Note 3. This real estate mortgage bears interest at 10.0% payable quarterly in arrears and matures on May 5, 2001. Also as discussed in Note 3, during 2000 the Company foreclosed on a $2.4 million real estate mortgage that had previously been partially reserved. At December 31, 2000, interest rates on real estate mortgages receivable ranged from 10.0% to 12.5% per annum. Note 6. Shareholders' Equity The Company originally reserved 1,000,000 shares of the Company's common shares under the terms of the 1992 Incentive Share Award Plan (the "Award Plan"). During each of the years ended December 31, 2000, 1999 and 1998, 13,000 common shares were awarded to officers of the Company and certain employees of RMR pursuant F-11 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to this plan. In addition, the Independent Trustees were each awarded 500 common shares annually as part of their annual fees. The shares awarded to the Trustees vest immediately. The shares awarded to the officers and certain employees of RMR vest over a three-year period. At December 31, 2000, 643,705 shares of the Company's common shares remain reserved for issuance under the Award Plan. A distribution of $0.20 per share was paid on February 23, 2001, to shareholders of record on January 24, 2001. Cash distributions per share paid by the Company in 2000, 1999 and 1998 were $1.04, $1.46 and $1.51, respectively. In February 2001 the Company issued 8,000,000 series A cumulative redeemable preferred shares in a public offering for net proceeds of $193.3 million. Each Series A preferred share carries dividends of $2.46875 per annum, payable in equal quarterly payments. Each Series A preferred share has a liquidation preference of $25.00. Series A preferred shares are redeemable, at the Company's option, for $25.00 each plus accrued and unpaid dividends at any time on or after February 22, 2006. The Board of Trustees has authorized the Company to repurchase up to 14 million common shares. During February and March 2001 the Company repurchased 983,700 of its common shares for $7.8 million, including transaction costs. The Company has adopted a Shareholders Rights Plan ("Right"). Each Right entitles the holder to purchase or to receive securities or other assets of the Company upon the occurrence of certain events. The Rights expire on October 17, 2004, and are redeemable at the Company's option at any time. Note 7. Commitments and Contingencies In 1995 the Company brought a foreclosure action to enforce an indemnity claim against a former tenant. The former tenant defended the Company's foreclosure action by raising lender liability type defenses. The former tenant also sought affirmative relief against the Company, its Managing Trustees, attorneys and others for substantial damages. This dispute was ordered to arbitration. In 2000 this arbitration was tried to conclusion and a final judgment was entered by the United States District Court for Massachusetts. All claims against the Company and its Managing Trustees were dismissed. The former tenant was ordered to pay the Company $3.2 million. In July 2000 the Company accepted an immediate cash payment of $2.5 million in final settlement of this judgment. Creditors of the former tenant brought two separate actions against the Company in the Massachusetts State courts which alleged that the Company's actions with the former tenant had damaged them. During 2000 one of these state court cases was dismissed pre-trial without any award against the Company. In January 2001 the Company paid $375,000 to settle the second state court action which amount the Company believes would have been approximately equal to its additional costs to try this case to a successful conclusion. In the ordinary course of its business the Company is periodically involved in disputes, some of which result in litigation. The Company does not believe that any currently pending or threatened litigation by or against it will have a material impact upon its business or financial results. Note 8. Transactions with Affiliates The Company has an agreement with RMR to provide investment advice, property management and administrative services to the Company. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as Managing Trustees of the Company. RMR is compensated at an annual rate equal to 0.7% of the Company's real estate investments up to $250 million and 0.5% of investments thereafter, plus property management fees equal to three percent of gross rents. RMR is also entitled to an incentive fee which is paid in restricted shares of the Company's common stock based on a formula. Incentive fees for the years ended December 31, 2000, 1999 and 1998 were $0, $215,000 and $1.4 million, respectively. In 2000 and 1999 the Company issued 26,221 and 89,702 common shares, respectively, in satisfaction of the 1999 and 1998 incentive fees. During December 2000, all of the shares previously owned by RMR and Messrs. Martin and Portnoy were transferred to affiliates of RMR. At December 31, 2000, affiliates of RMR owned 1,250,296 common shares of the Company. RMR also leases approximately 13,000 square feet of office space from the Company at rental rates which the Company believes to be commercially reasonable. Prior to the spin-off of SNH in 1999 the Company leased 15 senior housing properties to four affiliated entities (collectively, the "Affiliated Entities"). The Company sold 12 of these senior housing properties to an unaffiliated F-12 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS party in March 1999 and transferred the remaining three senior housing properties to SNH as part of the Spin-Off. Messrs. Martin and Portnoy are shareholders of the Affiliated Entities. The 12 properties sold in 1999 and the Affiliated Entities' businesses conducted at these properties were sold on a combined basis and the Company received the combined sales proceeds of approximately $74.6 million. Based upon an accounting of the assets sold and proceeds received undertaken by the Company's Independent Trustees, it was determined that approximately $8.8 million of the sales proceeds belongs to the Affiliated Entities, and this amount, plus accrued interest, is included as due to affiliates on the Company's consolidated balance sheet. This amount is expected to be paid in 2001. Amounts resulting from transactions with affiliates are as follows (dollars in thousands): Year Ended December 31, ---------------------------------- 2000 1999 1998 ---------------------------------- Advisory fees $13,761 $15,404 $13,592 Distributions 1,292 3,807 1,694 Rent and interest income 266 6,071 13,861 Management fees 11,436 9,779 6,703 Note 9. Indebtedness At December 31, 2000 and 1999, the Company's outstanding indebtedness included the following:

December 31, ----------------------------- 2000 1999 ----------------------------- (dollars in thousands) $500,000 unsecured revolving bank credit facility, due April 2002, at LIBOR plus a premium (average interest rate for 2000 was 7.3%) $-- $132,000 Senior Notes, due 2002 at 6.875% 160,000 160,000 Senior Notes, due 2002 at 6.75% 150,000 150,000 Senior Notes, due 2005 at 6.70% 100,000 100,000 Remarketed Reset Notes, due 2007 at LIBOR plus 1.25% -- 250,000 Senior Notes, due 2010 at 8.875% 30,000 -- Senior Notes, due 2010 at 8.625% 20,000 -- Monthly Income Senior Notes, due 2009 at 7.875% 90,000 90,000 Monthly Income Senior Notes, due 2011 at 8.375% 65,000 65,000 Monthly Income Senior Notes, due 2013 at 8.50% 143,000 143,000 Mortgage Notes Payable, due 2004 at 9.12% 3,503 3,533 Mortgage Notes Payable, due 2007 at 8.40% 10,918 11,095 Mortgage Notes Payable, due 2008 at 7.02% 17,487 17,672 Mortgage Notes Payable, due 2008 at 8.00% 11,270 12,237 Mortgage Notes Payable, due 2009 at 7.66% 10,082 10,904 Mortgage Notes Payable, due 2011 at 6.814% 260,000 -- Mortgage Notes Payable, due 2029 at 6.794% 44,000 -- Convertible Subordinated Debentures, due 2003 at 7.50% 162,547 164,863 Convertible Subordinated Debentures, due 2001 at 7.25% 40,000 40,000 ---------------------------- 1,317,807 1,350,304 Less unamortized discounts 14,857 414 ---------------------------- $1,302,950 $1,349,890 ============================

During 2000 the Company issued unsecured senior notes totaling $50 million, raising net proceeds of $49.6 million. In addition, certain subsidiaries of the Company issued $304 million of mortgage notes payable secured by 14 properties in seven office complexes. Net proceeds from the unsecured senior notes and the secured mortgage notes were used to repay amounts then outstanding on the Company's revolving bank credit facility and for general business purposes. In connection with the secured mortgage notes issued in 2000, the Company entered into an interest rate lock agreement in October 2000 that effectively fixed the interest rate at 7.5%. This agreement was terminated when the mortgages were closed in December 2000 requiring the payment of a $14.2 million termination fee. This fee is classified with unamortized discounts in the table above. F-13 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 2000 the Company retired $27.5 million of Remarketed Reset Notes (the "Reset Notes") and, in July 2000 completed its optional redemption of the remaining $222.5 million of Reset Notes, which bore interest at a rate subject to periodic resets, at a spread over LIBOR (effective rate of 7.52% per annum immediately prior to the redemption dates). The redemption prices were 100% of the principal amount of the Reset Notes redeemed, plus accrued and unpaid interest to the redemption dates. The redemptions were funded by drawings under the Company's revolving bank credit facility. In connection with the final redemption, the Company recognized an extraordinary loss of $1.2 million ($0.01 per share) from the write-off of deferred financing fees. The Company's convertible subordinated debentures were callable in October 1999 and are convertible at any time into common shares of the Company at $18 per share. During 2000 the Company repurchased $2.3 million of its convertible subordinated debentures due 2003 for $2.2 million and recognized an extraordinary gain of $116,000. During February 2001 the Company redeemed at par all $40 million of the Company's 7.25% subordinated convertible debentures due October 2001. The Company also called for redemption at par all of the Company's outstanding 7.50% subordinated convertible debentures due in October 2003. Approximately $41 million was redeemed on March 26, 2001, and approximately $121 million is expected to be redeemed on or about March 30, 2001. The Company expects to use proceeds from the Company's preferred offering and cash on hand to accomplish these redemptions. At December 31, 2000, 12 office complexes comprised of 25 properties costing $627.9 million with an aggregate net book value of $584.1 million were secured by mortgage notes totaling $357.3 million maturing during 2004 through 2029 which, net of unamortized discounts, amounted to $343.1 million. The required principal payments due during the next five years under all debt outstanding at December 31, 2000, are $44.6 million in 2001, $315.2 million in 2002, $168.1 million in 2003, $9.9 million in 2004, $107.1 million in 2005 and $672.8 million thereafter. Note 10. Fair Value of Financial Instruments The Company's financial instruments include cash and cash equivalents, real estate mortgages receivable, rents receivable, equity investments, senior notes, mortgage notes payable, convertible subordinated debentures, accounts payable and other accrued expenses and security deposits. Except as follows, the fair values of the financial instruments were not materially different from their carrying values (dollars in thousands):

2000 1999 --------------------------- -------------------------- Carrying Carrying Amount Fair Value Amount Fair Value --------------------------- -------------------------- Real estate mortgages receivable $6,449 $7,926 $10,373 $11,556 Equity investments 314,099 209,786 311,113 234,764 Senior notes, mortgage notes payable and convertible debentures 1,302,950 1,302,344 1,217,890 1,186,863

The fair values of the real estate mortgages receivable, senior notes, mortgage notes payable and convertible debentures are based on estimates using discounted cash flow analysis and currently prevailing rates. The fair value of the equity investments are based on quoted per share prices for HPT of $22.625 and $19.0625 at December 31, 2000 and 1999, respectively, and quoted per share prices for SNH of $9.3125 and $12.375 at December 31, 2000 and 1999, respectively. Note 11. Segment Information Prior to the spin-off of SNH in 1999, the Company owned senior housing and office properties that were reported in two segments. As discussed in Note 4, the Company spun-off 50.7% of its previously 100% owned subsidiary, SNH. SNH owned substantially all of the Company's senior housing properties that were included in the senior housing segment. Since the Spin-Off, the Company's primary business is the ownership and operation of office properties. The Company evaluates its segments based on net operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. F-14 HRPT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the Company's reportable segments as of and for the years ended December 31, 2000, 1999 and 1998. Information presented for 2000 is shown for comparative purposes (dollars in thousands):

Year Ended December 31, 2000 -------------------------------------------------- Senior Housing Office Total -------------------------------------------------- Revenues $1,355 $402,273 $403,628 Operating expenses -- 138,937 138,937 Depreciation -- 59,423 59,423 -------------------------------------------------- Net operating income $1,355 $203,913 $205,268 ================================================== Real estate investments $5,149 $2,547,323 $2,552,472 Real estate acquired during the year -- 21,506 21,506

Year Ended December 31, 1999 -------------------------------------------------- Senior Housing Office Total -------------------------------------------------- Revenues $77,579 $348,497 $426,076 Operating expenses -- 116,365 116,365 Depreciation 18,578 51,502 70,080 Impairment of assets 5,000 2,000 7,000 ------------------------------------------------- Net operating income $54,001 $178,630 $232,631 ================================================= Real estate investments $10,373 $2,656,344 $2,666,717 Real estate acquired during the year -- 526,177 526,177

Year Ended December 31, 1998 -------------------------------------------------- Senior Housing Office Total -------------------------------------------------- Revenues $110,096 $245,955 $356,051 Operating expenses -- 77,536 77,536 Depreciation 21,798 37,039 58,837 ------------------------------------------------- Net operating income $88,298 $131,380 $219,678 ================================================= Real estate investments $895,748 $2,129,962 $3,025,710 Real estate acquired during the year 12,924 985,894 998,818

The following tables reconcile the reported segment information to the consolidated financial statements for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):

Year Ended December 31, ------------------------------------- 2000 1999 1998 ------------------------------------- Revenues: Total reportable segments $ 403,628 $ 426,076 $ 356,051 Unallocated other income 1,378 1,465 503 ----------------------------------- Total revenues $ 405,006 $ 427,541 $ 356,554 =================================== Net operating income: Total reportable segments $ 205,268 $ 232,631 $ 219,678 Unallocated amounts: Other income 1,378 1,465 503 Interest expense (100,074) (87,470) (64,326) Amortization expense (4,390) (3,302) (1,927) General and administrative expenses (17,271) (18,704) (17,172) Spin-off transaction costs -- (16,739) -- ----------------------------------- Total income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item $ 84,911 $ 107,881 $ 136,756 ===================================

F-15 For the years ended December 31, 2000, 1999 and 1998, office segment revenues from the United States Government were $59.6 million, $59.6 million and $60.3 million, respectively. For the years ended December 31, 1999 and 1998, senior housing segment revenues from Marriott International, Inc. were $24.2 million and $31.9 million, respectively. For the same periods, senior housing segment revenues from Integrated Health Services, Inc. were $21.2 million and $28.4 million, respectively. Note 12. Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations of the Company for 2000 and 1999 (dollars in thousands, except per share amounts):

2000 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter (1) ------------------------------------------------- Revenues $ 100,254 $ 101,045 $ 103,175 $ 100,532 Income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item 20,758 21,125 22,460 20,568 Equity in earnings (loss) of equity investments 5,692 5,602 4,091 18,495 Loss on equity transaction of equity investments -- -- -- -- Income before gain on sale of properties and extraordinary item 26,450 26,727 26,551 39,063 Gain on sale of properties, net -- 1,978 4,620 17,977 Income before extraordinary item 26,450 28,705 31,171 57,040 Extraordinary item - early extinguishment of debt -- -- (1,210) 116 Net income 26,450 28,705 29,961 57,156 Per share data: Income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item 0.16 0.16 0.17 0.16 Income before gain on sale of properties and extraordinary item 0.20 0.20 0.20 0.30 Income before extraordinary item 0.20 0.22 0.24 0.43 Net income 0.20 0.22 0.23 0.43

1999 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter (1) ------------------------------------------------- Revenues $ 104,403 $ 106,551 $ 114,805 $ 101,782 Income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item 37,288 36,430 13,501 20,662 Equity in earnings (loss) of equity investments 2,008 2,021 2,023 (7,667) Loss on equity transaction of equity investments -- (711) -- -- Income before gain on sale of properties and extraordinary item 39,296 37,740 15,524 12,995 Gain on sale of properties, net 8,307 -- -- -- Income before extraordinary item 47,603 37,740 15,524 12,995 Extraordinary item - early extinguishment of debt -- -- -- -- Net income 47,603 37,740 15,524 12,995 Per share data: Income before equity in earnings (loss) of equity investments, gain on sale of properties and extraordinary item 0.28 0.28 0.10 0.16 Income before gain on sale of properties and extraordinary item 0.30 0.29 0.12 0.10 Income before extraordinary item 0.36 0.29 0.12 0.10 Net income 0.36 0.29 0.12 0.10 (1) Included in equity in earnings (loss) of equity investments for the 2000 fourth quarter are the Company's share of SNH's net gain on foreclosures and lease terminations of $300,000, gain on the sale of properties of $13.5 million and $1.7 million of non-recurring general and administrative expenses arising from tenant bankruptcies and foreclosures, as described in Note 4. F-16 (2) Included in total expenses for the 1999 third quarter are unusual and non-recurring items aggregating $23.7 million: approximately $16.7 million represents spin-off transaction costs, and $7.0 million represents the write-down to net realizable value of the carrying value of two real estate mortgages receivable and other assets. (3) On October 12, 1999, the Company spun-off 50.7% of its then 100% owned subsidiary, SNH. Also in the 1999 fourth quarter, the Company recognized $14.8 million of an asset impairment loss from SNH as described in Note 4.

Note 13. Pro Forma Information (Unaudited) On October 12, 1999, the Company spun-off 50.7% of its previously 100% owned subsidiary, SNH, by distributing 13,190,763 common shares of SNH to the Company's shareholders. The following unaudited condensed Pro Forma Statements of Income assume the spin-off of SNH had occurred on January 1, 1998. These pro forma statements of income are not necessarily indicative of what the actual results of operations would have been for the years presented, nor do they purport to 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 the debt and equity structure of the Company. Condensed Pro Forma Statements of Income (unaudited) (dollars in thousands, except per share amounts) Year Ended December 31, ------------------------ 1999 1998 ------------------------ Total revenues $356,711 $268,248 Income before extraordinary item 92,058 117,850 Net income 92,058 115,710 Income before extraordinary item per basic share 0.70 0.98 Net income per basic share 0.70 0.97 F-17

HRPT PROPERTIES TRUST SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS December 31, 2000 (Dollars in thousands) Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions (1) Period -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998: Allowance for real estate mortgages receivable $927 $600 $(517) $1,010 ======================================================================== Year Ended December 31, 1999: Allowance for real estate mortgages receivable $1,010 $5,600 $(509) $6,101 ======================================================================== Year Ended December 31, 2000: Allowance for real estate mortgages receivable $6,101 $-- $(708) $5,393 ======================================================================== (1) Represents uncollectable receivables charged against the allowance.

S-1

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ Office Buildings: Petersburg AK $-- $189 $811 $3 $-- $189 $814 $1,003 $77 3/31/97 1983 Tucson AZ -- 765 3,280 102 -- 779 3,368 4,147 318 3/31/97 1993 Safford AZ -- 635 2,729 67 -- 647 2,784 3,431 262 3/31/97 1992 Phoenix AZ -- 2,687 11,532 462 -- 2,729 11,952 14,681 1,064 5/15/97 1997 Tempe AZ -- 1,125 10,122 4 -- 1,125 10,126 11,251 390 6/30/99 1987 Phoenix AZ -- 1,828 16,453 (1) -- 1,828 16,452 18,280 600 7/30/99 1982 San Diego CA -- 992 9,040 238 -- 992 9,278 10,270 971 12/5/96 1985 San Diego CA -- 1,228 11,199 293 -- 1,228 11,492 12,720 1,203 12/5/96 1985 San Diego CA -- 1,985 18,096 475 -- 1,985 18,571 20,556 1,945 12/5/96 1985 San Diego CA -- 316 2,846 182 -- 316 3,028 3,344 341 12/31/96 1984 San Diego CA -- 502 4,526 290 -- 502 4,816 5,318 542 12/31/96 1984 San Diego CA -- 294 2,650 170 -- 294 2,820 3,114 318 12/31/96 1984 San Diego CA -- 313 2,820 180 -- 313 3,000 3,313 338 12/31/96 1984 San Diego CA -- 4,269 18,316 419 -- 4,347 18,657 23,004 1,760 3/31/97 1996 Kearney Mesa CA -- 2,916 12,456 345 -- 2,969 12,748 15,717 1,202 3/31/97 1994 San Diego CA -- 2,984 12,859 2,070 -- 3,038 14,875 17,913 1,383 3/31/97 1981 Los Angeles CA 36,581 5,076 49,884 1,952 -- 5,071 51,841 56,912 4,891 5/15/97 1979 Los Angeles CA 36,248 5,055 49,685 1,653 -- 5,060 51,333 56,393 4,825 5/15/97 1979 Los Angeles CA -- 1,921 8,242 191 -- 1,955 8,399 10,354 724 7/11/97 1996 Anaheim CA -- 691 6,223 11 -- 692 6,233 6,925 546 12/5/97 1992 Anaheim CA -- 133 1,201 -- (708) 133 493 626 -- 12/5/97 1970 Golden CO -- 494 152 5,870 -- 495 6,021 6,516 422 3/31/97 1997 Aurora CO -- 1,152 13,272 -- -- 1,152 13,272 14,424 1,158 11/14/97 1993 Lakewood CO -- 1,855 16,691 40 -- 1,856 16,730 18,586 470 11/22/99 1980 Lakewood CO -- 787 7,085 24 -- 787 7,109 7,896 199 11/22/99 1980 Wallingford CT -- 640 10,017 12 -- 640 10,029 10,669 636 6/1/98 1986 Wallingford CT -- 367 3,301 89 -- 366 3,391 3,757 186 12/22/98 1988 Washington DC -- 2,485 22,696 2,100 -- 2,485 24,796 27,281 2,801 9/13/96 1976 Washington DC 23,221 6,979 29,949 930 -- 7,107 30,751 37,858 2,973 3/31/97 1989 Washington DC -- 12,008 51,528 1,220 -- 12,227 52,529 64,756 4,955 3/31/97 1996 Washington DC -- 1,851 16,511 739 -- 1,878 17,223 19,101 1,523 12/19/97 1966 Washington DC 32,058 5,975 53,778 351 -- 5,975 54,129 60,104 3,513 6/23/98 1991 Wilmington DE -- 4,409 39,681 36 -- 4,413 39,713 44,126 2,441 7/23/98 1986 Wilmington DE -- 1,478 13,306 68 -- 1,478 13,374 14,852 485 7/13/99 1984 S-2

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ Orlando FL -- 722 6,499 (59) -- 716 6,446 7,162 465 2/19/98 1997 Orlando FL -- -- 362 2 -- 36 328 364 16 2/19/98 1997 Orlando FL -- 256 2,308 64 -- 263 2,365 2,628 171 2/19/98 1997 Miami FL -- 144 1,297 24 -- 144 1,321 1,465 93 3/19/98 1987 Savannah GA -- 544 2,330 118 -- 553 2,439 2,992 227 3/31/97 1990 Kansas City KS -- 1,042 4,469 758 -- 1,061 5,208 6,269 542 3/31/97 1990 Boston MA -- 3,378 30,397 1,823 -- 3,378 32,220 35,598 5,101 9/28/95 1915 Boston MA -- 1,447 13,028 128 -- 1,448 13,155 14,603 1,729 9/28/95 1993 Boston MA -- 1,500 13,500 3,713 -- 1,500 17,213 18,713 1,848 12/18/95 1875 Westwood MA -- 303 2,740 498 -- 304 3,237 3,541 354 11/26/96 1980 Westwood MA -- 537 4,960 -- -- 537 4,960 5,497 492 1/8/97 1977 Worcester MA -- 158 1,417 8 -- 158 1,425 1,583 129 5/15/97 1992 Charlton MA -- 141 1,269 8 -- 141 1,277 1,418 116 5/15/97 1988 Milford MA -- 144 1,297 265 -- 401 1,305 1,706 119 5/15/97 1989 Westborough MA -- 42 381 5 -- 42 386 428 35 5/15/97 1900 Westborough MA -- 24 216 4 (97) 24 123 147 -- 5/15/97 1953 Worcester MA -- 895 8,052 41 -- 895 8,093 8,988 733 5/15/97 1990 Worcester MA -- 354 3,189 14 -- 354 3,203 3,557 290 5/15/97 1985 Worcester MA -- 111 1,000 291 -- 397 1,005 1,402 92 5/15/97 1986 Worcester MA -- 265 2,385 12 -- 265 2,397 2,662 217 5/15/97 1972 Worcester MA -- 1,132 10,186 38 -- 1,132 10,224 11,356 926 5/15/97 1989 Grafton MA -- 37 336 5 -- 37 341 378 30 5/15/97 1930 Northbridge MA -- 32 290 5 -- 32 295 327 27 5/15/97 1962 Fitchburg MA -- 223 2,004 10 -- 223 2,014 2,237 183 5/15/97 1994 Millbury MA -- 34 309 4 -- 34 313 347 28 5/15/97 1950 Paxton MA -- 24 212 4 -- 24 216 240 20 5/15/97 1984 Spencer MA -- 211 1,902 11 -- 211 1,913 2,124 173 5/15/97 1992 Sturbridge MA -- 83 751 7 -- 83 758 841 69 5/15/97 1986 Webster MA -- 315 2,834 14 -- 315 2,848 3,163 258 5/15/97 1995 Westborough MA -- 166 1,498 7 (668) 166 837 1,003 -- 5/15/97 1977 Westborough MA -- 396 3,562 15 -- 396 3,577 3,973 324 5/15/97 1986 Lexington MA -- 1,054 9,487 16 -- 1,054 9,503 10,557 703 1/30/98 1968 Quincy MA -- 2,477 16,645 18 -- 2,478 16,662 19,140 1,130 4/3/98 1988 Quincy MA -- 1,668 11,097 474 -- 1,668 11,571 13,239 824 4/3/98 1988 Westwood MA -- 500 4,562 49 -- 500 4,611 5,111 291 6/8/98 1990 S-3

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ Auburn MA -- 647 5,827 21 -- 649 5,846 6,495 152 12/27/99 1977 Leominster MA -- 778 7,003 26 -- 781 7,026 7,807 183 12/27/99 1966 Gaithersburg MD -- 4,381 18,798 521 -- 4,461 19,239 23,700 1,846 3/31/97 1995 Riverdale MD -- 9,423 40,433 972 -- 9,595 41,233 50,828 3,904 3/31/97 1994 Germantown MD -- 2,305 9,890 263 -- 2,347 10,111 12,458 982 3/31/97 1995 Oxon Hill MD -- 3,181 13,653 357 -- 3,240 13,951 17,191 1,333 3/31/97 1992 Baltimore MD -- -- 12,430 185 -- -- 12,615 12,615 1,172 11/18/97 1988 Rockville MD -- 3,251 29,258 136 -- 3,248 29,397 32,645 2,113 2/2/98 1986 Baltimore MD -- 900 8,097 183 -- 901 8,279 9,180 469 10/15/98 1989 Pikesville MD -- 589 5,305 60 -- 590 5,364 5,954 186 8/11/99 1987 Eagan MN -- 1,424 12,822 -- -- 1,424 12,822 14,246 895 3/19/98 1986 Bloomington MN -- 1,898 17,081 2,258 -- 1,898 19,339 21,237 1,516 3/19/98 1957 Mendota Heights MN -- 533 4,795 -- -- 533 4,795 5,328 335 3/19/98 1995 St. Paul MN -- 696 6,263 32 -- 695 6,296 6,991 221 8/3/99 1987 Plymouth MN -- 563 5,064 189 -- 563 5,253 5,816 177 8/3/99 1987 Minneapolis MN -- 870 7,831 244 -- 870 8,075 8,945 276 8/3/99 1987 Minneapolis MN -- 695 6,254 143 -- 695 6,397 7,092 223 8/3/99 1986 Minnespolis MN -- 1,891 17,021 82 -- 1,893 17,101 18,994 558 9/30/99 1980 Roseville MN 1,898 295 2,658 (2) -- 295 2,656 2,951 69 12/1/99 1987 Roseville MN 3,769 586 5,278 (4) -- 586 5,274 5,860 138 12/1/99 1987 Roseville MN 6,305 979 8,814 11 -- 979 8,825 9,804 230 12/1/99 1987 Roseville MN 4,319 672 6,045 (1) -- 672 6,044 6,716 158 12/1/99 1987 Roseville MN 1,196 185 1,661 14 -- 185 1,675 1,860 44 12/1/99 1987 Kansas City MO -- 1,443 6,193 150 -- 1,470 6,316 7,786 595 3/31/97 1995 Manchester NH -- 2,201 19,957 3 -- 2,201 19,960 22,161 810 5/10/99 1979 Vorhees NJ -- 1,053 6,625 1 -- 998 6,681 7,679 438 5/26/98 1990 Vorhees NJ -- 445 2,798 31 -- 584 2,690 3,274 177 5/26/98 1990 Vorhees NJ -- 673 4,232 1 -- 589 4,317 4,906 283 5/26/98 1990 Florham Park NJ -- 1,412 12,709 -- -- 1,412 12,709 14,121 781 7/31/98 1979 Sante Fe NM -- 1,551 6,650 228 -- 1,578 6,851 8,429 640 3/31/97 1987 Albequerque NM -- 493 2,119 119 -- 503 2,228 2,731 207 3/31/97 1984 Albequerque NM -- 422 3,797 -- -- 422 3,797 4,219 130 8/31/99 1984 Albequerque NM -- 441 3,970 11 -- 441 3,981 4,422 137 8/31/99 1984 Albequerque NM -- 173 1,553 (3) -- 172 1,551 1,723 53 8/31/99 1984 Albequerque NM -- 877 7,895 (4) -- 876 7,892 8,768 273 8/31/99 1984 S-4

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ White Plains NY -- 1,200 10,870 815 -- 1,200 11,685 12,885 1,374 2/6/96 1952 Brooklyn NY -- 775 7,054 2 -- 775 7,056 7,831 801 6/6/96 1971 Buffalo NY 10,082 4,405 18,899 577 -- 4,485 19,396 23,881 1,820 3/31/97 1994 Irondoquoit NY -- 1,910 17,189 69 -- 1,910 17,258 19,168 1,097 6/30/98 1986 Islandia NY -- 813 7,319 145 -- 809 7,468 8,277 285 6/11/99 1987 Mineola NY -- 3,419 30,774 357 -- 3,416 31,134 34,550 1,191 6/11/99 1971 Syracuse NY -- 1,788 16,096 443 -- 1,788 16,539 18,327 627 6/29/99 1972 Melville NY -- 3,155 28,395 369 -- 3,155 28,764 31,919 1,041 7/22/99 1985 Syracuse NY -- 466 4,196 285 -- 467 4,480 4,947 153 9/24/99 1990 DeWitt NY -- 454 4,086 80 -- 457 4,163 4,620 107 12/28/99 1987 Mason OH -- 1,528 13,748 3 -- 1,528 13,751 15,279 875 6/10/98 1994 Oklahoma City OK -- 4,596 19,721 445 -- 4,680 20,082 24,762 1,895 3/31/97 1992 Oklahoma City OK -- 151 1,361 1 -- 151 1,362 1,513 48 8/13/99 1993 Oklahoma City OK -- 1,449 13,035 3 -- 1,449 13,038 14,487 446 8/13/99 1993 Elk City OK -- 53 479 -- -- 53 479 532 18 8/13/99 1993 Edmund OK -- 251 2,254 -- -- 251 2,254 2,505 77 8/13/99 1993 Midwest City OK -- 250 2,253 2 -- 250 2,255 2,505 77 8/13/99 1993 King of Prussia PA -- 634 3,251 22 -- 634 3,273 3,907 271 9/22/97 1964 FT. Washington PA -- 1,872 8,816 3 -- 1,872 8,819 10,691 727 9/22/97 1960 FT. Washington PA -- 1,184 5,559 -- -- 1,184 5,559 6,743 458 9/22/97 1967 FT. Washington PA -- 683 3,198 (21) -- 680 3,180 3,860 264 9/22/97 1970 Horsham PA -- 741 3,611 54 -- 741 3,665 4,406 298 9/22/97 1983 Philadelphia PA 44,000 7,884 71,002 1,129 -- 7,883 72,132 80,015 6,248 11/13/97 1980 Plymouth Meeting PA -- 1,412 7,415 1,717 -- 1,413 9,131 10,544 632 1/15/98 1996 FT. Washington PA -- 1,154 7,722 84 -- 1,154 7,806 8,960 556 1/15/98 1996 King of Prussia PA -- 552 2,893 17 -- 552 2,910 3,462 210 2/2/98 1996 King of Prussia PA -- 354 3,183 195 -- 354 3,378 3,732 234 2/2/98 1968 Pittsburgh PA -- 720 9,589 91 -- 720 9,680 10,400 693 2/27/98 1991 Philadelphia PA 63,238 3,462 111,946 1,471 -- 3,462 113,417 116,879 7,932 3/30/98 1983 Greensburg PA -- 780 7,026 -- -- 780 7,026 7,806 446 6/3/98 1997 Philadelphia PA -- 24,753 222,775 2,001 -- 24,747 224,782 249,529 14,312 6/30/98 1990 Moon Township PA -- 1,663 14,966 5 -- 1,663 14,971 16,634 858 9/14/98 1994 FT. Washington PA -- 631 5,698 175 -- 634 5,870 6,504 301 12/1/98 1998 Philadelphia PA -- 931 8,377 157 -- 930 8,535 9,465 342 6/11/99 1987 Moon Township PA -- 555 4,995 4 -- 555 4,999 5,554 177 8/23/99 1991 S-5

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ Moon Township PA -- 6,936 -- 695 -- 7,631 -- 7,631 -- 8/23/99 1987 Moon Township PA -- 202 1,814 1 -- 202 1,815 2,017 64 8/23/99 1992 Moon Township PA -- 502 4,519 57 -- 502 4,576 5,078 179 8/23/99 1987 Moon Township PA -- 410 3,688 81 -- 410 3,769 4,179 131 8/23/99 1988 Moon Township PA -- 489 4,403 216 -- 490 4,618 5,108 174 8/23/99 1989 Moon Township PA -- 612 5,507 19 -- 612 5,526 6,138 197 8/23/99 1990 Blue Bell PA -- 723 6,507 4 -- 723 6,511 7,234 210 9/14/99 1988 Blue Bell PA -- 709 6,382 73 -- 709 6,455 7,164 209 9/14/99 1988 Blue Bell PA -- 268 2,414 46 -- 268 2,460 2,728 78 9/14/99 1988 Lincoln RI -- 320 7,690 -- -- 320 7,690 8,010 675 11/13/97 1997 Memphis TN -- 2,206 19,856 779 -- 2,208 20,633 22,841 1,270 8/31/98 1985 Austin TX 13,330 2,317 21,037 7 -- 2,317 21,044 23,361 1,839 12/5/97 1996 Austin TX 7,048 1,226 11,126 (1) -- 1,226 11,125 12,351 974 12/5/97 1997 Austin TX 8,064 1,402 12,729 2 -- 1,402 12,731 14,133 1,113 12/5/97 1997 Austin TX 9,621 1,621 14,594 646 -- 1,621 15,240 16,861 1,534 12/5/97 1997 Austin TX 7,279 1,218 11,040 499 -- 1,218 11,539 12,757 1,046 12/5/97 1986 Waco TX -- 2,030 8,708 160 -- 2,060 8,838 10,898 671 12/23/97 1997 Austin TX -- 466 4,191 299 -- 558 4,398 4,956 331 1/27/98 1980 Irving TX -- 846 7,616 -- -- 846 7,616 8,462 532 3/19/98 1995 Irving TX -- 542 4,879 -- -- 542 4,879 5,421 341 3/19/98 1995 Austin TX -- 1,439 6,137 2,912 -- 1,439 9,049 10,488 432 3/24/98 1975 Austin TX -- 1,529 13,760 24 -- 1,529 13,784 15,313 847 7/16/98 1993 Austin TX -- 4,878 43,903 876 -- 4,875 44,782 49,657 2,436 10/7/98 1968 Austin TX -- 1,436 12,927 (7) -- 1,436 12,920 14,356 714 10/7/98 1998 Austin TX -- 9,085 -- 4,754 -- 11,553 2,286 13,839 -- 10/7/98 1968 Austin TX 3,186 562 5,054 5 -- 562 5,059 5,621 279 10/20/98 1998 Austin TX 11,759 2,072 18,650 22 -- 2,072 18,672 20,744 1,029 10/20/98 1998 Austin TX 8,367 1,476 13,286 (3) -- 1,476 13,283 14,759 733 10/20/98 1998 Austin TX -- 688 6,192 135 -- 697 6,318 7,015 243 6/3/99 1985 Austin TX -- 906 8,158 (40) -- 902 8,122 9,024 314 6/16/99 1999 Austin TX -- 539 4,849 (3) -- 539 4,846 5,385 187 6/16/99 1999 Austin TX -- 1,731 14,921 233 -- 1,731 15,154 16,885 575 6/30/99 1975 San Antonio TX -- 259 2,331 61 -- 263 2,388 2,651 81 8/3/99 1986 Austin TX -- 1,574 14,168 151 -- 1,573 14,320 15,893 490 8/3/99 1982 San Antonio TX -- 905 8,149 -- -- 905 8,149 9,054 280 8/3/99 1989 S-6

HRPT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/00 -------------------- ------------------------------- Costs Capitalized Original Buildings Subsequent Buildings Accumulated Constr- Encum- and to Acqu- and Deprecia- Date uction Location State brances Land Equipment isition Impairment Land Equipment Total (1) tion (2) Acquired Date ------------------------------------------------------------------------------------------------------------------------------------ Austin TX 3,503 626 5,636 53 -- 621 5,694 6,315 204 8/18/99 1987 Austin TX -- 2,028 18,251 (4) -- 2,027 18,248 20,275 551 10/8/99 1985 Austin TX 10,918 2,038 18,338 (7) -- 2,037 18,332 20,369 554 10/8/99 1997 Fairfax VA -- 569 5,122 178 -- 569 5,300 5,869 567 12/4/96 1990 Falls Church VA -- 3,456 14,828 869 -- 3,519 15,634 19,153 1,474 3/31/97 1993 Arlington VA -- 810 7,289 335 -- 811 7,623 8,434 451 8/26/98 1987 Alexandria VA -- 2,109 18,982 81 -- 2,109 19,063 21,172 984 12/30/98 1987 Fairfax VA -- 780 7,022 4 -- 781 7,025 7,806 227 9/29/99 1988 Fairfax VA -- 594 5,347 3 -- 594 5,350 5,944 172 9/29/99 1988 Richland WA 11,270 3,970 17,035 426 -- 4,042 17,389 21,431 1,645 3/31/97 1995 Falling Waters WV -- 906 3,886 141 -- 922 4,011 4,933 376 3/31/97 1993 Cheyenne WY -- 1,915 8,217 210 -- 1,950 8,392 10,342 790 3/31/97 1995 ----------------------------------------------------------------------------------------------- Totals $357,260 $295,222 $2,191,376 $60,898 $(1,473) $300,548 $2,245,475 $2,546,023 $160,015 ===============================================================================================

Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation at the beginning of the period: Real Estate and Accumulated Equipment Depreciation -------------------- ---------------- Balance at January 1, 1998 $1,969,023 $111,669 Additions 1,004,523 58,837 Disposals (17,064) (695) -------------------- ---------------- Balance at December 31, 1998 2,956,482 169,811 Additions 526,502 70,080 Disposals (94,247) (20,977) Spin-off of SNH (732,393) (112,055) -------------------- ---------------- Balance at December 31, 1999 2,656,344 106,859 Additions 23,806 59,423 Disposals (134,127) (6,267) -------------------- ---------------- Balance at December 31, 2000 $2,546,023 $160,015 ==================== ================ (1) Aggregate cost for federal income tax purposes is approximately $2,446,679. (2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years. S-7

HRPT PROPERTIES TRUST SCHEDULE IV MORTGAGE LOANS RECEIVABLE ON REAL ESTATE December 31, 2000 (Dollars in thousands) Principal Amount of Loans Subject to (1) to Delinquent Final Face Value of Carrying Value Principal Location Interest Rate Maturity Date Periodic Payment Terms Mortgage of Mortgage or Interest ------------------------------------------------------------------------------------------------------------------------------------ Torrance, CA 12.50% 3/31/01 Interest only, payable monthly in arrears. $9,099 $4,807 $-- Torrance, CA $9.1 million due at maturity. Wichita, KS 10.00% 11/09/02 Principal and interest, payable monthly in 943 224 -- arrears. $900 due at maturity. Florence, KS 11.58% 12/31/06 Interest only, payable monthly in arrears. 500 118 -- $500 due at maturity. Austin, TX 10.00% 5/5/01 Interest only, payable quarterly in arrears 1,300 1,300 -- $1.3 million due at maturity. ------------------------------------------- $11,842 $6,449 $-- ===========================================

Reconciliation of the carrying amount of mortgage loans at the beginning of the period: Balance at January 1, 1998 $101,502 Collections of principal, net of discounts (33,408) ------------------- Balance at December 31, 1998 68,094 New mortgage loans 60,000 Collections of principal, net of discounts (75,188) Impairment of mortgage loans (5,000) Spin-off of SNH (37,533) ------------------- Balance at December 31, 1999 10,373 New mortgage loans 1,300 Mortgage foreclosures, net of reserve (1,702) Collections of principal (3,522) ------------------- Balance at December 31, 2000 $6,449 =================== (1) Also represents cost for federal income tax purposes. S-8 SIGNATURES Pursuant to the requirements 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 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ John A. Mannix President and Chief March 30, 2001 John A. Mannix Operating Officer /s/ John C. Popeo Treasurer, Chief Financial March 30, 2001 John C. Popeo Officer and Secretary /s/ Frederick N. Zeytoonjian Trustee March 30, 2001 Frederick N. Zeytoonjian /s/ Patrick F. Donelan Trustee March 30, 2001 Patrick F. Donelan /s/ Justinian Manning, C.P. Trustee March 30, 2001 Rev. Justinian Manning, C.P. /s/ Gerard M. Martin Trustee March 30, 2001 Gerard M. Martin /s/ Barry M. Portnoy Trustee March 30, 2001 Barry M. Portnoy