TOP CONTRIBUTORS

J.D. Thornton

Thomas Gaffney

HRP AT A GLANCE

P/E ► 13.3 AVG EV/EBITDA ► 19.8 AVG ROA ► 6.3% AVG ROE ► 6.9% AVG Debt to Equity ► 1.02 AVG Interest Coverage Ratio ► 1.38 AVG

 

 

 

 

 

 

HRPT Properties is a Newton, Massachusetts based Real estate investment trust or REIT that acquires and manages office buildings, industrial buildings, and leased industrial land. HRP owns over 500 properties and 64 million sq. ft. of space, and has holdings in 34 states and the District of Columbia. The company's top five markets (Philadelphia, Washington DC, Oahu (Hawaii), Boston, and Southern California) account for 50% of net rents, and the U.S. government and the medical sector represent a third of the company's revenues. HRP's traditionally conservative business model comes with risks, however, as it does not opportunistically redevelop and sell its properties, a practice that has netted big returns for its competitors.

HRP also differs from most other REIT's in that it does not manage its own properties. Instead, it outsources property management to an external advisory group, Reit Management and Research LLC (RMR), which is owned by HRP's managing trustees. RMR is paid a percentage of total real estate under management, meaning the more properties the company manages, the more it gets paid. This creates a potential conflict of interest, as RMR may be more concerned with increasing quantity of assets rather than returns on existing properties.

While much of HRP's worth is tied up in its top five markets, which are dense urban business centers, lately its growth strategy has been focused on suburban locations. Its most recent acquisitions, for example, were properties in Maryland and South Carolina. Major challenges for HRP in these areas include relatively lax commercial zoning laws and plenty of available land. This leads to low barriers to entry, which allows for new construction and can slow the growth of the rental market. This competition may make it difficult for HRP to build revenues in suburban locations, especially in times of recession when there is slower growth and little demand for new office space.

Business Overview

HRPT Properties divides its properties into 2 categories, "security" and "growth," each comprising about half of HRP's total portfolio. Security properties are characterized as "Properties leased to U.S. and other government tenants and medical related tenants, and Hawaii land leases." HRP believes the tenants of these properties are less affected by U.S. Economic Cycles and also tend to sign longer term leases. Growth Properties are "office and industrial properties with strong...appreciation potential" but presumably in less attractive locations and rented to less creditworthy tenants.^[1] HRP generally does not seek properties that require extensive repairs or development, preferring "well located, high quality properties" instead. ^[2]

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HRP continued to make moves in 2007 to create value for shareholders. It cashed out its equity investments in Senior Housing Properties Trust (SNH) and Hospitality Properties Trust (HPT) while spending $400 million in net new acquisitions, including properties in South Carolina and Maryland.

Trends and Forces

• The liquidity crunch resulting from the Subprime lending crisis could inhibit HRP's ability to finance expansion. REITs like HRP are especially sensitive to credit availability because Federal tax requirements stipulate that they must return at least 90% of earnings to shareholders. As a result, HRP cannot use cash generated from its operations to fund expansion, rather it must obtain financing from the credit markets. HRP has a light debt load since "the large majority of [its] properties are owned unencumbered by mortgages." Also, when taking on new debt, HRP designs the maturity dates of its debt to be spread out, so that the effects of temporary market conditions that could make refinancing that debt difficult is limited.^[5] These measures have largely protected HRP from the credit shortage hurting other REITs.

• Any potential liquidity crunch resulting from the Subprime lending crisis could directly affect the business of HRP's tenants. While the liquidity crisis most directly affects the Financial Services industry, a tight credit market could eventually cause slower growth or even recession within the wider economy. An economic slowdown would negatively affect nearly all of HRP's tenants, likely reducing their demand for office space. However, HRP appears to be better insulated than many of its competitors from these broader economic changes since a large portion of its properties are leased to various levels of Government and healthcare providers, two sectors less influenced by economic variations.

• HRP's tremendous geographical division has advantages and disadvantages. HRP owns properties in more that twenty five states all across America. While this diversification might be useful in preventing over-reliance on any one regional economy, one wonders whether HRP's management can thoroughly understand business conditions in such diverse areas. Furthermore, in many of the suburban areas where HRP owns properties, there are low barriers to entry that allow for plenty of competition and drive rent prices down. On the other hand, these are the areas of the country where growth is most rapid, presenting a big upside for HRP.

• Competitive commercial real estate markets make profitable acquisition difficult. During 2007 there was a strong demand for commercial and industrial real estate throughout the United States. This has resulted in higher values for properties, making attractive acquisition more difficult. In addition, HRP's properties are fully leased upon purchase, meaning that when previously unoccupied space is filled the company does not profit. As such, HRP focuses solely on acquisitions, rather than developing existing properties, as a means for growth. Nevertheless, HRP has remained confident in its ability to seek out attractively valued properties. To this end, during 2006 it acquired 64 new properties that contained 4.9 million sq. ft. of space. Other REITs such as Boston Properties (BXP) have elected to avoid these competitive real estate markets, and instead seek better returns on investment through development.^[6]

MarketShare

Market share is listed by 2007 revenues.^[7] In 2007, HRPT held 8% of total U.S. office REIT market share and was the fourth largest office REIT, by revenues. There are 14 U.S. exchange traded REITs focusing on office properties.^[8] Of those, the top three Boston Properties (BXP), Brookfield Properties (BPO) and SL Green Realty (SLG) accounted for just over half of Market Share by 2007 revenus.

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• Boston Properties (BXP): BXP owns 138 properties in just five areas of the United States: Midtown Manhattan, Boston, Washington D.C., San Francisco, and Princeton, N.J. The company operates high end class A buildings and its largest tenants are the legal and financial service Industry. BXP also owns two hotels, an industrial center, and a land bank in the Northeast with 10 million square feet of space for development.^[10] As of May 21, 2008 BPO had a market cap of $11.85B.^[11]

• Brookfield Properties (BPO) BPO develops, owns and manages U.S. commercial office properties and develops residential land. The company's commercial property portfolio consists of interests in 109 properties totaling 73 million square feet, primarily located in New York, Boston, Washington D.C., Houston, L.A. and Toronto where its buildings can lease to a tenant base of government, energy and financial companies. As of May 21, 2008 BPO had a market cap of $8.25B.^[12]

• SL Green Realty (SLG) SLG owns and leases office space to corporations in Manhattan. The company owns more than 30 New York City office properties totaling over 22 million square feet.^[13] In 2007, SL Green cemented its position as the Big Apple's largest landlord when it acquired Reckson Associates Realty Corp. The transaction added a total of 9 million square feet to its portfolio, including over 5 million square feet of suburban offices and 4 million additional square feet of prime Manhattan office space.^[14] SLG faces a particular risk from the subprime crisis. By weakening the financial sector, the heart of the New York economy, it threatens to crimp demand for office space in the company's core market. As of May 21, 2008 SLG had a market cap of $5.71B.^[15]

Competition

The companies listed below focus almost entirely on office properties. While HRP owns many office properties, its holdings are more diverse and also include many healthcare facilities and industrial properties. Additionally, HRP owns real estate all across the United States, whereas these competitors focus on a select region or group of metropolitan markets. Both differences should be kept in mind while reviewing this chart.

Another crucial difference is HRP's focus on acquisitions, rather than development of existing properties. HRP's unusual structure of outsourcing management of its properties to RMR creates a high cost of capital for the firm, as it must constantly finance new acquisitions in order to drive profits. HRP does not get the additional revenues that competitors such as Boston Properties (BXP) earn when they buy property and hold it until it matures and can be sold at a significant profit, managing the property and collecting rents while they wait for the value to appreciate.

References

1. ↑ http://www.hrpreit.com/strategy/index.aspx
2. ↑ HRP Business Strategy Page
3. ↑ 2006 HRP annual reports. Accessible at www.hrpreit.com
4. ↑ 2006 HRP annual reports. Accessible at www.hrpreit.com
5. ↑ HRP Business Strategy Page
6. ↑ 2006 HRP annual reports. Accessible at www.hrpreit.com
7. ↑ Google Finance
8. ↑ InvestinREITs.com
9. ↑ All Taken From Google Finance
10. ↑ BXP's Investor Relations Website
11. ↑ Google Finance
12. ↑ Google Finance
13. ↑ http://slgreen.com/about/ SL Green- About Us
14. ↑ http://slgreen.com/about/company-history/ SL Green- Company History
15. ↑ Google Finance
16. ↑ All data from third quarter reports of companies and yahoofinance.