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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 1-11852
____________
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 62 - 1507028
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3310 West End Avenue
Suite 400
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
Securities registered pursuant Name of Each Exchange
to Section 12(b) of the Act: Title of Each Class on Which Registered
___________________ _____________________
None None
Securities registered pursuant
to Section 12 (g) of the Act: Common Stock, $.01 par value per share
______________________________________
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports 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.
The aggregate market value of the shares of Common Stock (based upon the
closing price of these shares on the New York Stock Exchange, Inc. on March 15,
1997) of the Registrant held by non-affiliates on March 15, 1997, was
approximately $532,045,076.
As of March 15, 1997, 19,227,803 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into which
the document is incorporated:
Portions of the Registrant's 1996 Annual Report to Shareholders are
incorporated into Part II of this Report.
Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 12, 1997 are incorporated into
Part III of this Report.
(2)
TABLE OF CONTENTS
Page
Item 1. Business..........................................................1
The Company...................................................1
Property Acquisition Activity.................................1
Completed Property Development Activity.......................1
Continuing Property Development Activity......................1
Pending Developments..........................................1
Investment Policy.............................................1
Competition...................................................1
Government Regulation.........................................1
Environmental Matters.........................................1
Insurance.....................................................1
Employees.....................................................1
Tax Information..............................................14
Cautionary Statements........................................26
Item 2. Properties.......................................................30
Executive Offices............................................30
Property Operations..........................................31
Healthcare Provider Clients..................................33
Lease Expiration Schedule....................................34
Item 3. Legal Proceedings................................................35
Item 4. Submission of Matters to a Vote of Securityholders...............35
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................36
Item 6. Selected Financial Data..........................................36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................36
Item 8. Financial Statements and Supplementary Data......................36
(3)
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................36
Item 10. Directors and Executive Officers of the Registrant..............37
Directors....................................................37
Executive Officers...........................................37
Item 11. Executive Compensation..........................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management..38
Item 13. Certain Relationships and Related Transactions..................38
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.39
(4)
PART 1
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ITEM 1. BUSINESS
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THE COMPANY
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Healthcare Realty Trust Incorporated and its subsidiaries (the "Company" or
"Healthcare Realty") is a self-managed and self-administered real estate
investment trust (REIT) that integrates owning, acquiring, managing and
developing income-producing real estate properties related to healthcare
services throughout the United States. Since commencing operations in June 1993
through December 31, 1996, the Company has invested or committed to invest,
directly and indirectly, over $460 million in 80 income-producing real estate
properties related to the delivery of healthcare services, containing over 3.9
million square feet. The Company's portfolio is comprised of seven facility
types, located in 38 markets nationwide, and operated pursuant to contractual
arrangements with 16 healthcare providers. At December 31, 1996, the Company was
managing 83 healthcare-related properties nationwide totaling over 3.2 million
square feet, including 27 which were owned by the Company. The Company intends
to maintain a portfolio of properties that are focused predominantly on the
outpatient services segment of the healthcare industry and are diversified by
tenant, geographic location and facility type.
Healthcare Realty believes that it has a competitive advantage in the
healthcare real estate industry as a result of its use of innovative transaction
structures, the strength of its management expertise and its extensive
experience and client relationships with healthcare providers. Management
believes the Company is the largest fully integrated real estate company focused
on income-producing real estate properties related to the delivery of healthcare
services. The Company believes that its experience and client relationships with
a diverse group of healthcare providers and its access to the various capital
markets make it one of a limited number of companies that can acquire, manage
and develop income-producing real estate related to healthcare services on a
national scale. Unlike other healthcare REITs, the Company seeks to generate
internal growth by actively managing the properties within its portfolio and by
controlling and minimizing operating expenses with respect to its properties,
and providing management services for properties owned by healthcare provider
clients.
Healthcare Realty's strategy is to be a full service provider of integrated
real estate solutions to quality healthcare providers. Consistent with this
strategy, the Company seeks to provide a spectrum of services needed to own,
acquire, manage and develop healthcare properties, including leasing,
development, management, market research, budgeting, accounting, collection,
construction management, tenant coordination and financial services. The
Company's development activities are primarily accomplished through pre-leased
build-to-suit projects.
Healthcare Realty was formed as an independent, unaffiliated healthcare
REIT. The Company acquires income-producing real estate properties associated
with a diverse group of quality healthcare provider clients in markets where the
respective healthcare provider maintains a strong presence. Management believes
that because the Company is not affiliated with any of its clients and does not
expect to be affiliated with potential clients, the Company will have a
strategic advantage in providing its services to a more diverse group of
healthcare providers.
(5)
Management believes that diversification among clients reduces the
Company's potential exposure to unsuccessful healthcare service strategies and
to a concentration of credit with any one healthcare provider. Approximately 68%
of the Company's investments, at cost, are in properties associated with
publicly-traded companies or private companies with an investment grade credit
rating. The Company's largest healthcare provider client is Columbia/HCA,
accounting for approximately 26% of the Company's current investments.
Healthcare Realty focuses predominantly on outpatient healthcare
facilities, which are designed to provide medical services outside of
traditional inpatient hospital or nursing home settings. Management believes the
outpatient services segment of healthcare provides the most cost-effective
delivery setting and, because of increasing cost pressures, this segment of the
healthcare related real estate market offers the greatest potential for future
growth.
The Company acquires existing healthcare facilities, provides property
management, leasing and build-to-suit development services, and capital for the
construction of build-to-suit developments for qualified healthcare operators.
The Company owns a diversified portfolio of healthcare properties, which are
subject to long term leases or financial support arrangements to ensure the
continuity of revenues and coverage of costs and expenses relating to the
properties by the tenants and the related healthcare operators.
Development funding arrangements require the Company to provide funding to
enable healthcare operators to build facilities on property owned or leased by
the Company. Prior to making any funding advance for a development, the Company
will enter into a contract to acquire or ground lease the real estate and will
enter into with a healthcare operator a long-term net lease or guarantee of the
return on the Company's investment in the property or similar financial support
agreement in favor of the Company. The Company will either act as developer, or
employ the healthcare operator to act as the developer of the property, and will
have approval authority with regard to plans, specifications, budgets and time
schedules for the completion of the development of the property. Under the terms
of its development funding agreements, the Company will receive funding fees
(the economic equivalent of construction period interest) on all funds advanced.
Timely completion of the development in compliance with the plans,
specifications, budgets and time schedules will be the contractual
responsibility of third parties and construction costs will be guaranteed by the
healthcare operator. All construction and service contracts relating to the
development will be collaterally assigned to the Company. During the term of the
development of a facility, funds will be advanced pursuant to requests made by
the developer in accordance with the terms and conditions of the applicable
funding agreement based on costs incurred prior to the date of such requests.
The Company's properties are currently leased to unaffiliated lessees
pursuant to long-term net lease agreements or are subject to financial support
agreements with the healthcare operators that generally provide for the return
on the Company's investment in the properties and other terms and conditions in
favor of the Company similar to those contained in the long-term leases. Each
property agreement related to a healthcare facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use in most
cases restricted to the intended healthcare related use and for such other uses
as may be necessary in connection with or incidental to such use.
(6)
Generally, most agreements will require that the healthcare operator use
its best efforts to transfer all licenses, permits and other governmental
authorizations and contracts which may be in the name of the healthcare operator
and necessary or useful in the operation of the facility, although in most
instances this obligation would not include the healthcare operator's operating
licenses. The current property agreements were entered into upon the conveyance
to the Company of the facilities, and have initial terms of ten to 20 years
with, in some cases, one or more renewal terms exercisable by the healthcare
provider of five years each. Most of the agreements are subject to earlier
termination upon the occurrence of certain contingencies. Certain of the
agreements also have an option to repurchase the facilities at specified times
during the term of the agreements for a price approximately equal to the fair
market value of such properties. Base rent or support payments vary by agreement
taking to consideration various factors, including the credit of the property
lessee or the healthcare operator, or both, operating performance of the
property, location type and physical condition of the property. Many of the
property agreements contain provisions for additional rent or support payment
increases. The existence and nature of provisions for additional payments in any
given agreement relate to, among other factors, the financial strength of the
respective property lessee, the healthcare operator, or both, as well as other
lease terms.
The Company operates so as to qualify as a REIT for federal income tax
purposes. If so qualified, with limited exceptions, the Company will not be
subject to corporate federal income tax with respect to net income distributed
to its shareholders.
PROPERTY ACQUISITION ACTIVITY
- -----------------------------
During the fourth quarter of 1996, the Company invested approximately $50.8
million in acquisitions, comprised of the following:
Acquisition of Lewis-Gale Building Corporation in Roanoke, Virginia. On
November 15, 1996, the Company acquired Lewis-Gale Building Corporation,
which included two ancillary hospital facilities located adjacent to the
Lewis-Gale Medical Center, operated by Columbia/HCA, two medical office
buildings and six physician clinics in the Roanoke/Salem, Virginia area.
The buildings are either leased to Lewis-Gale Clinic, L.L.C., a Virginia
limited liability company (the "Clinic"), or are under leases guaranteed by
the Clinic, and are managed by the Company. PhyCor, Inc., a physician
practice management company, owns the related physician practice assets and
has guaranteed the direct lease obligations of the Clinic to the Company.
The Company's investment in these properties, which consists of the
issuance of Common Stock and the assumption of liabilities, is
approximately $44 million
Purchase of Ancillary Hospital Facility in West Palm Beach, Florida. On
October 18, 1996, the Company acquired an ancillary hospital facility
located adjacent to Columbia Hospital, operated by Columbia/HCA, in West
Palm Beach, Florida. The clinic is leased to an affiliate of and is
guaranteed by First Physician Care, Inc., a physician practice management
company. The Company's investment in this ancillary hospital facility is
approximately $3.8 million.
(7)
Purchase of Two Ancillary Hospital Facilities in San Antonio, Texas. On
November 18, 1996, the Company acquired two ancillary hospital facilities
contiguous in Northeast Methodist Hospital in San Antonio, Texas. The
buildings are either leased to or are under leases guaranteed by Methodist
Healthcare System of San Antonio, Ltd., a joint venture of Methodist Health
Care Ministries of South Texas, Inc. and Columbia/HCA, and are managed by
the Company. The Company's investment in these ancillary hospital
facilities is approximately $3.1 million.
In addition, the Company has entered into an agreement to purchase an
ancillary hospital facility in Fountain Valley, California. The facility,
currently under construction and financed by a commercial bank, will be
purchased upon completion. The Company currently owns five other properties
located on the campus of Fountain Valley Regional Medical Center, which is
operated by OrNda Healthcorp (which in February 1997 merged with Tenet
Healthcare Corporation). The Company's investment in this ancillary hospital
facility will be approximately $15 million.
COMPLETED PROPERTY DEVELOPMENT ACTIVITY
- ---------------------------------------
During the fourth quarter of 1996, the Company completed the development of
the following four properties:
Ancillary Hospital Facility in Overland Park, Kansas. On October 18, 1996,
the Company received the Temporary Certificate of Occupancy for Overland
Park Medical Plaza, an ancillary hospital facility located on the campus of
Overland Park Regional Medical Center, which is operated by Columbia/HCA.
The Company's investment in Overland Park Medical Plaza is approximately
$10.1 million.
Completion of Long-Term Care Facility in Wichita, Kansas. On December 6,
1996, the Company received the Certificate of Occupancy for Life Care
Center of Wichita, a long-term care facility operated by Life Care Centers
of America. The Company's investment in Life Care Center of Wichita is
approximately $7.5 million.
Completion of Long-Term Care Facility in Fort Worth, Texas. On November 26,
1996, the Company received the Certificate of Occupancy for Garden Terrace
of Fort Worth, a long-term care facility operated by Life Care Centers of
America. The Company's investment in Garden Terrace of Fort Worth is
approximately $9.5 million.
Completion of Comprehensive Ambulatory Care Center in Coral Gables,
Florida. On December 16, 1996, the Company received the Certificate of
Occupancy for Five Points Medical Plaza, a comprehensive ambulatory care
center operated by OrNda Healthcorp. The Company's investment in Five
Points Medical Plaza is approximately $11.3 million
(8)
Under the Leases, the Company generally begins receiving rent upon receipt
of the Certificate of Occupancy for a property. However, due to timing of
receipt of invoices, finalization of construction draws and other contractual
arrangements, the Company will have remaining obligations to fund development
projects after it receives a Certificate of Occupancy. At December 31, 1996, the
Company had approximately $7.7 million of remaining obligations to fund related
to completed developments. Such amounts have been included in the investments of
each respective property on the table which begin on page 31.
CONTINUING PROPERTY DEVELOPMENT ACTIVITY
- ----------------------------------------
At December 31, 1996, the Company had continuing commitments for the
following properties under development:
Development of Long-Term Care Facility in Houston, Texas. As of
December 31, 1996, the Company continued to fund the development of Garden
Terrace of Houston, a long-term care facility to be operated by Life Care
Centers of America. The Company's investment in Garden Terrace of Houston,
at completion, will be approximately $9.8 million, of which approximately
$8.5 million had been funded as of December 31, 1996.
Development of Long-Term Care Facility in Westminster, Colorado. As of
December 31, 1996, the Company continued to fund the development of Life
Care Center of Westminster, a long-term care facility to be operated by
Life Care Centers of America. The Company's investment in Life Care Center
of Westminster, at completion, will be approximately $7.6 million, of which
approximately $4.5 million had been funded as of December 31, 1996.
PENDING DEVELOPMENTS
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Management of Ancillary Hospital Facilities in Fredericksburg, Virginia.
During the fourth quarter of 1996, Healthcare Realty signed a property
management agreement, effective February 1, 1997, with an affiliate of Mary
Washington Hospital. The agreement provides for management of 15 buildings,
owned by the affiliate, consisting of 688,000 square feet of ancillary and
medical office space located in counties surrounding Fredericksburg, Virginia.
Expansion of Comprehensive Ambulatory Care Center in Venice, Florida. As of
December 31, 1996, the Company had plans for an approximately $4.4 million
expansion of the St. Andrews Surgery Center and Center for Sight, a $6.6 million
comprehensive ambulatory care center which the Company acquired during the third
quarter of 1996. The expansion will be located on an adjacent 2.5 acre parcel of
land acquired by the Company simultaneously with the St. Andrews Surgery Center
and Center for Sight.
INVESTMENT POLICY
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The Company's investment objectives are to (i) generate current cash flow,
(ii) provide the opportunity for additional returns through rent provisions in
the Company's leases, increased support payments through provisions in financial
support agreements (and if the Company acquires mortgages, through participating
interest provisions), (iii) provide the opportunity to realize capital growth
resulting from appreciation, if any, in the residual values of any properties
acquired and (iv) preserve and protect the Company's existing capital.
(9)
The Company intends to invest in real property, principally for the
production of income, although the prospect for capital appreciation is a factor
that will be considered in making such investments. The Company will invest in
healthcare related facilities, including, but not limited to, acute care
hospitals, rehabilitation hospitals, physician clinics, ambulatory surgery
centers, clinical laboratories, ancillary hospital facilities, long-term care
facilities, medical centers, comprehensive ambulatory care centers and office
buildings predominantly occupied by healthcare related companies. The Company,
however, may also consider opportunities in other kinds of income producing real
property. Management has no present intention to invest in properties unrelated
to the healthcare industry.
Management of the Company will conduct market research and analysis for all
potential investments. In evaluating potential investments, the Company will
consider such factors as: (1) the geographic area, type of property and
demographic profile; (2) the location, construction quality, condition and
design of the property; (3) the current and anticipated cash available for
distribution and its adequacy to meet operational needs and lease obligations
and to provide a competitive market return on equity to the Company's investors;
(4) the potential for capital appreciation, if any; (5) the growth, tax and
regulatory environment of the communities in which the properties are located;
(6) the occupancy and demand for similar health facilities in the same or nearby
communities; (7) an adequate mix of private and government sponsored patients;
(8) any potential alternative uses of the facilities; (9) prospects for
liquidity through financing or refinancing; (10) industry segment and operator
diversification; and (11) the suitability of the potential investments in light
of maintaining REIT status.
The Company intends to focus on established, creditworthy healthcare
operators which meet the Company's standards for quality and experience of
management. In order to determine creditworthiness of healthcare operators, the
Company will review historical and prospective financial information of the
healthcare operator, together with appropriate financial information of a
guarantor, if any. Factors considered in connection with such financial review
with respect to the healthcare operator and any guarantor will include the net
worth, profitability and cash flow, debt position, and the ability of the
healthcare operators and any guarantor to provide additional credit
enhancements. The term of any long term-net lease, financial support agreement
generally providing for the return on the investment of the property or similar
obligation in favor of the Company, generally, shall be for a period of not less
than ten years from closing of an acquisition.
COMPETITION
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The Company competes for property acquisitions with, among other investors,
healthcare providers, other healthcare related REITs, real estate partnerships
and financial institutions. The operation of all of the Company's properties
will be subject to competition from similar properties. Certain operators of
other properties may have capital resources in excess of those of the operators
of the Company's properties. In addition, the extent to which the Company's
properties are utilized depends upon several factors, including the number of
physicians using the healthcare facilities or referring patients there,
competitive systems of healthcare delivery, and the area population, size and
composition. Private, federal and state payment programs and other laws and
regulations may also have a significant effect on the utilization of the
properties. Virtually all of the Company's properties operate in a competitive
environment and patients and referral sources, including physicians, may change
their preferences for a healthcare facility from time to time.
(10)
The business of providing services relating to the day-to-day management
and leasing of multi-tenanted healthcare properties and to the supervision of
the development of new healthcare facilities is highly competitive and is
subject to price, personnel cost and other competitive pressures upon its
profitability. The Company will compete for management contracts and development
agreements with respect to properties owned or to be developed by the Company,
as well as with respect to properties that are owned by third parties.
GOVERNMENT REGULATION
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The facilities leased by the Company are affected by changes in the
reimbursement, licensing and certification policies of federal, state and local
governments for healthcare related facilities. Facilities may also be affected
by changes in accreditation standards or procedures of accrediting agencies that
are recognized by governments in the certification process. In addition,
expansion (including the addition of new beds or services or acquisition of
medical equipment) and occasionally the discontinuation of services of
healthcare facilities is generally subjected to state regulatory approval
through certificate of need programs.
A significant portion of the revenue of the healthcare operators is derived
from government reimbursement programs, such as Medicare and Medicaid. Although
lease payments to the Company are not directly affected by the level of
government reimbursement, to the extent that changes in these programs adversely
affect healthcare operators, such changes could have an impact on their ability
to make lease payments to the Company. The Medicare program is highly regulated
and subject to frequent and substantial changes. In recent years, fundamental
changes in the Medicare program (including the implementation of a prospective
payment system in which facilities are reimbursed generally a flat amount based
on a patient's diagnosis and not based on the facilities' cost for inpatient
services at medical surgical hospitals) have resulted in reduced levels of
payment for a substantial portion of healthcare services.
Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, governmental
budgetary concerns may significantly reduce future payments made to healthcare
operators as a result of government financed programs, and there can be no
assurance that future payment rates will be sufficient to cover cost increases
in providing services to patients. Reductions in payments pursuant to government
healthcare programs could have an adverse impact on a healthcare operator's
financial condition and, therefore, could adversely affect the ability of such
operator to make rental payments.
(11)
Loss by a facility of its ability to participate in government sponsored
programs because of licensing, certification or accreditation deficiencies or
because of program exclusion resulting from violations of law would have
material adverse effects on facility revenues.
LEGISLATIVE DEVELOPMENTS
A number of legislative proposals have been introduced or proposed in
Congress and in some state legislatures that would effect major changes in the
healthcare system, either nationally or at the state level. Among the proposals
under consideration are cost controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance coverage to their
employees and the creation of a single government health insurance plan that
would cover all citizens. There can be no assurance whether any proposals will
be adopted or, if adopted, what effect, if any, such proposals would have on the
Company's business.
In recent years Congress and various state legislatures have considered
various proposals that would have prohibited or severely limited the ability of
physicians and other referral sources to refer Medicare or Medicaid patients to
ventures with which the referral source has a financial relationship. The
Company's leases require the lessees to covenant that they will comply with all
applicable laws.
ENVIRONMENTAL MATTERS
- ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property (such as the Company) may be liable for
the costs of removal or remediation of certain hazardous or toxic substances at,
under or disposed of in connection with such property, as well as certain other
potential costs relating to hazardous or toxic substances (including government
fines and injuries to persons and adjacent property). Most, if not all, of these
laws, ordinances and regulations contain stringent enforcement provisions
including, but not limited to, the authority to impose substantial
administrative, civil and criminal fines and penalties upon violators. Such laws
often impose liability without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner in connection with the activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or property
damages and the owner's liability therefor could exceed the value of the
property and/or the aggregate assets of the owner. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or lease such
property or to borrow using such property as collateral.
A property can also be negatively impacted either through physical
contamination or by virtue of an adverse effect on value, from contamination
that has or may have emanated from other properties. Certain of the properties
owned, managed or developed by the Company are adjacent to or near properties
that contain underground storage tanks or that have released petroleum products
or other hazardous or toxic materials into the soils or groundwater.
(12)
Operations of the properties owned, developed or managed by the Company are
and will continue to be subject to numerous federal, state, and local
environmental laws, ordinances and regulations, including those relating to the
generation, segregation, handling, packaging and disposal of medical wastes as
well as facility siting, construction, occupational training and safety,
disposal of non-medical wastes, underground storage tanks and ash emissions from
incinerators. Certain properties owned, developed or managed by the Company
contain, and others may contain or at one time may have contained, underground
storage tanks that are or were used to store waste oils, petroleum products or
other hazardous substances. Such underground storage tanks can be the source of
releases of hazardous or toxic materials. Operations of nuclear medicine
departments at some of such properties also involve the use and handling, and
subsequent disposal of, radioactive isotopes and similar materials, activities
which are closely regulated by the Nuclear Regulatory Commission and state
regulatory agencies. In addition, several of the properties were built during
the period asbestos was commonly used in building construction and other such
facilities may be acquired by the Company in the future. Certain of the
properties contain non-friable asbestos-containing materials, and other
facilities acquired in the future may contain friable and non-friable
asbestos-containing materials. The presence of such materials could result in
significant costs in the event that any friable asbestos-containing materials
requiring immediate removal and/or encapsulation are located in or on any of
such facilities or in the event of any future renovation activities.
The Company has had environmental assessments conducted on all of the
properties currently owned. The Company is not aware of any environmental
condition or liability that management presently believes would have a material
adverse effect on the Company's earnings, expenditures or continuing operations.
While it is the Company's policy to seek indemnification relating to
environmental liabilities or conditions, even where sale and purchase agreements
do contain such provisions there can be no assurances that the seller will be
able to fulfill its indemnification obligations. In addition, the terms of the
Company's leases or financial support agreements do not give the Company control
over the operational activities of its lessees or health care operators, nor
will the Company monitor the lessees or healthcare operators with respect to
environmental matters.
INSURANCE
- ---------
The Company maintains appropriate liability and casualty insurance on its
assets and operations. The Company has also obtained title insurance with
respect to each of the properties it owns in amounts equal to their respective
purchase prices, insuring that the Company holds title to each of the properties
free and clear of all liens and encumbrances except those approved by the
Company. Under their leases or financial support agreements, the healthcare
operators are required to maintain, at their expense, certain insurance
coverages relating to their operations at the leased facilities. In the opinion
of management of the Company, each of the properties owned by the Company are
adequately covered by hazard, liability and rent insurance.
EMPLOYEES
- ---------
As of March 15, 1997, the Company employed 124 people. None of the
employees is a member of a labor union and the Company considers its relations
with its employees to be excellent.
(13)
TAX INFORMATION
- ---------------
FEDERAL INCOME TAX AND ERISA CONSIDERATIONS
The Company is and intends to remain qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company's net
income which is distributed as dividends to shareholders will be exempt from
Federal taxation. Distributions to the Company's shareholders generally will be
includable in their income; however, dividends distributed which are in excess
of current and/or accumulated earnings and profits will be treated for tax
purposes as a return of capital to the extent of a shareholder's basis, and will
reduce the basis of shareholders' shares.
The Company intends to conduct its affairs so that the assets of the
Company will not be deemed to be "plan assets" of any individual retirement
account, employee benefit plan subject to Title I of ERISA, or other qualified
retirement plan subject to Section 4975 of the Code which acquires its shares.
The Company believes that, under present law, its distributions do not create so
called "unrelated business taxable income" to tax-exempt entities such as
pension trusts, subject, however, to certain rules which, generally, apply to a
REIT predominantly owned by pension trusts each holding more than 10% of such
REIT's shares or to a REIT which is at least 25% owned by a single pension
trust. The Company does not believe that these special rules currently apply to
the Company's distributions.
INTRODUCTION
The Company believes that it has qualified and intends to remain qualified
to be taxed as a REIT for federal income tax purposes under Sections 856 through
860 of the Code. The following discussion addresses the material tax
considerations relevant to the taxation of the Company and summarizes certain
federal income tax consequences that may be relevant to certain shareholders.
However, the actual tax consequences of holding particular securities issued by
the Company may vary in light of a prospective securities holder's particular
facts and circumstances. Certain holders, such as tax-exempt entities, insurance
companies and financial institutions, are generally subject to special rules. In
addition, the following discussion does not address issues under any foreign,
state or local tax laws. The tax treatment of a holder of any of the securities
issued by the Company will vary depending upon the terms of the specific
securities acquired by such holder, as well as his particular situation, and
this discussion does not attempt to address aspects of federal income taxation
relating to holders of particular securities of the Company. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof. No rulings have been obtained from the IRS concerning
any of the matters discussed herein. It should be noted that the Code, rules,
regulations, and administrative and judicial interpretations are all subject to
change (possibly on a retroactive basis).
The Company believes that it is organized and is operating in conformity
with the requirements for qualification and taxation as a REIT, and its method
of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. The Company's qualification
and taxation as a REIT depends upon its ability to meet, through actual annual
operating results, the various income, asset, distribution, stock ownership and
other tests discussed below. Accordingly, the Company can not guarantee that the
actual results of operations for any one taxable year will satisfy such
requirements.
(14)
If the Company were to cease to qualify as a REIT, and the relief
provisions were found not to apply, the Company's income that distributed to
shareholders would be subject to the "double taxation" on earnings (once at the
corporate level and again at the shareholder level) that generally results from
investment in a corporation. Failure to maintain qualification as a REIT would
force the Company to significantly reduce its distributions and possibly incur
substantial indebtedness or liquidate substantial investments in order to pay
the resulting corporate taxes. In addition, the Company, once having obtained
REIT status and having thereafter lost such status, would not be eligible to
re-elect REIT status for the four subsequent taxable years, unless its failure
to maintain its qualification was due to reasonable cause and not willful
neglect, and certain other requirements were satisfied. In order to elect again
to be taxed as a REIT, just as with its original election, the Company would be
required to distribute all of its earnings and profits accumulated in any
non-REIT taxable year.
TAXATION OF THE COMPANY
As long as the Company remains qualified to be taxed as a REIT, it
generally will not be subject to federal income taxes on that portion of its
ordinary income or capital gain that is currently distributed to shareholders.
However, the Company will be subject to federal income tax as follows:
first, the Company will be taxed at regular corporate rates on any undistributed
"real estate investment trust taxable income," including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference, if any. Third,
if the Company has (i) 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 (ii) other nonqualifying income from foreclosure
property, it will be subject to tax on such income at the highest corporate
rate. Fourth, any net income that the Company has from prohibited transactions
(which are, in general, certain sales or other dispositions of property other
than foreclosure property held primarily for sale to customers in the ordinary
course of business) will be subject to a 100% tax. Fifth, if the Company should
fail to satisfy either the 75% or 95% gross income test (as discussed below),
and has nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company fails to distribute during each
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from preceding periods, then the Company will be
subject to a four percent excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, to the extent that the Company
recognizes gain from the disposition of an asset with respect to which there
existed "built-in gain" as of January 1, 1994 (or with respect to which there
existed "built-in gain" upon its acquisition by the Company from a C corporation
in a carry-over basis transaction occurring on or after January 1, 1994) and
such disposition occurs within a ten-year recognition period beginning January
1,1994 (or beginning on the date on which it was acquired by the Company from a
C corporation in a carry-over basis transaction occurring on or after January 1,
1994), the Company will be subject to federal income tax at the highest regular
corporate rate on the amount of its "net recognized built-in gain."
(15)
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify as a REIT for a taxable year under the Code, the Company must
have no earnings and profits accumulated in any non-REIT year. The Company also
must elect or have in effect an election to be taxed as a REIT and must meet
other requirements, some of which are summarized below, including percentage
tests relating to the sources of its gross income, the nature of the Company's
assets and the distribution of its income to shareholders. Such election, if
properly made and assuming continuing compliance with the qualification tests
described herein, will continue in effect for subsequent years.
ORGANIZATIONAL REQUIREMENTS AND SHARE OWNERSHIP TESTS
Section 856(a) of the Code defines a REIT as a corporation, trust or
association: (1) which 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) which would be taxable,
but for Sections 856 through 860 of the Code, as an association taxable as a
domestic corporation; (4) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (5) the beneficial
ownership of which is held by 100 or more persons, determined without reference
to any rules of attribution (the "share ownership test"); (6) that during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) (the "five or fewer test");
and (7) which meets certain other tests, described below, regarding the nature
of its income and assets.
Section 856(b) of the Code provides that conditions (1) through (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
proportionate part of a taxable year of fewer than 12 months. The "five or fewer
test" and the share ownership test do not apply to the first taxable year for
which an election is made to be treated as a REIT.
The Company has issued sufficient shares to a sufficient number of people
to allow it to satisfy the share ownership test and the five or fewer test. In
addition, to assist in complying with the five or fewer test, the Company's
Articles of Incorporation contain provisions restricting share transfers where
the transferee (other than specified individuals involved in the formation of
the Company, members of their families and certain affiliates, and certain other
exceptions) would, after such transfer, own (a) more than 9.9% either in number
or value of the outstanding common stock of the Company or (b) more than 9.9%
either in number or value of the outstanding preferred stock of the Company.
Pension plans and certain other tax-exempt entities have different restrictions
on ownership. If, despite this prohibition, stock is acquired increasing a
transferee's ownership to over 9.9% in value of either the outstanding common
stock of the Company or preferred stock of the Company, the stock in excess of
this 9.9% in value is deemed to be held in trust for transfer at a price which
does not exceed what the purported transferee paid for the stock and, while held
in trust, the stock is not entitled to receive dividends or to vote. In
addition, under these circumstances, the Company also has the right to redeem
such stock.
(16)
Under the Revenue Reconciliation Act of 1993, for purposes of determining
whether the "five or fewer test" (but not the share ownership test) is met, any
stock held by a qualified trust (generally, pension plans, profit-sharing plans
and other employee retirement trusts) is, generally, treated as held directly by
the trust's beneficiaries in proportion to their actuarial interests in the
trust, and not as held by the trust.
INCOME TESTS
In order to maintain qualification as a REIT, three gross income
requirements must be satisfied annually. First, at least 75% of the Company's
gross income (excluding gross income from certain sales of property held
primarily for sale) must be derived directly or indirectly from investments
relating to real property (including "rents from real property") or mortgages on
real property. When the Company receives new capital in exchange for its shares
(other than dividend reinvestment amounts) or in a public offering of debt
instruments with maturities of five years or longer, income attributable to the
temporary investment of such new capital, if received or accrued within one year
of the Company's receipt of the new capital, is qualifying income under the 75%
test. Second, at least 95% of the Company's gross income (excluding gross income
from certain sales of property held primarily for sale) must be derived from
such real property investments, dividends, interest, certain payments under
interest rate swap or cap agreements, and gain from the sale or other
disposition of stock, securities not held for sale in the ordinary course of
business or from any combination of the foregoing. Third, short-term gain from
the sale or other disposition of stock or securities, including, without
limitation, dispositions of interest rate swap or cap agreements, and gain from
certain prohibited transactions or from other dispositions of real property and
mortgages on real property held for less than four years (apart from involuntary
conversions and sales of foreclosure property) must represent less than 30% of
the Company's gross income. (This rule does not apply for a year in which a REIT
is completely liquidated, as to dispositions occurring after the adoption of a
plan of complete liquidation.) For purposes of these rules, income derived from
a "shared appreciation provision" in a real estate backed mortgage is treated as
gain recognized on the sale of the property to which it relates.
The Company may temporarily invest its working capital in short-term
investments. Although the Company will use its best efforts to ensure that its
income generated by these investments will be of a type which satisfies the 75%
and 95% gross income tests, there can be no assurance in this regard (see the
discussion above of the "new capital" rule under the 75% gross income test).
Moreover, the Company may realize short-term capital gain upon sale or exchange
of such investments, and such short-term capital gain would be subject to the
limitations imposed by the 30% gross income test. The Company has analyzed its
gross income through June 30,1996 and has determined that it has met and expects
to meet in the future the 75% and 95% gross income tests through the rental of
the property it has and acquires, and by monitoring the sale of assets has not
and does not expect to violate the 30% gross income test.
(17)
In order to qualify as "rents from real property," the amount of rent
received must not be based on the income or profits of any person, but may be
based on a fixed percentage or percentages of receipts or sales. The Code also
provides that the rents will not qualify as "rents from real property," in
satisfying the gross income tests, if the REIT owns ten percent or more of the
tenant, whether directly or under certain attribution rules. The Company leases
and intends to lease property only under circumstances such that substantially
all, if not all, rents from such property qualify as "rents from real property."
Although it is possible that a tenant could sublease space to a sublessee in
which the Company is deemed to own directly or indirectly ten percent or more of
the tenant, the Company believes that as a result of the provisions of the
Company's Articles of Incorporation which limit ownership to 9.9%, such
occurrence would be unlikely. Application of the ten percent ownership rule is,
however, dependent upon complex attribution rules provided in the Code and
circumstances beyond the control of the Company. Ownership, directly or by
attribution, by an unaffiliated third party of more than ten percent of the
Company's stock and more than ten percent of the stock of any tenant or
subtenant would result in a violation of the rule.
In order to qualify as "interest on obligations secured by mortgages on
real property," the amount of interest received must not be based on the income
or profits of any person, but may be based on a fixed percentage or percentages
of receipts or sales.
In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income unless the Company is
performing services which are usually or customarily furnished or rendered in
connection with the rental of space for occupancy only and the services are of
the sort which a tax-exempt organization could perform without being considered
in receipt of unrelated business taxable income. The Company self-manages some
of its properties, but does not believe it provides services to tenants which
are outside the exception.
If rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify
as "rents from real property." Generally, this 15% test is applied separately to
each lease. The portion of rental income treated as attributable to personal
property is determined according to the ratio of the tax basis of the personal
property to the total tax basis of the property which is rented. The
determination of what fixtures and other property constitute personal property
for federal tax purposes is difficult and imprecise. Based upon allocation of
value as found in the purchase agreements and/or upon review by employees of the
Company, the Company currently does not have and does not believe that it is
likely in the future to have 15% by value of any of its properties classified as
personalty. If, however, rent payments do not qualify, for reasons discussed
above, as rents from real property for purposes of Section 856 of the Code, it
will be more difficult for the Company to meet the 95% and 75% gross income
tests and continue to qualify as a REIT.
(18)
The Company is and expects to continue performing third-party management
and development services. If the gross income to the Company from this or any
other activity producing disqualified income for purposes of the 95% or 75%
gross tests approaches a level which could potentially cause the Company to fail
to satisfy these tests, the Company intends to take such corrective action as
may be necessary to avoid failing to satisfy the 95% or 75% gross income tests.
If the Company were to fail to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions would generally be available if the Company's failure to
meet such test or tests was due to reasonable cause and not to willful neglect,
if the Company attaches a schedule of the sources of its income to its return,
and if any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to know whether the Company
would be entitled to the benefit of these relief provisions since the
application of the relief provisions is dependent on future facts and
circumstances. If these provisions were to apply, the Company would be subjected
to tax equal to 100% of the net income attributable to the greater of the amount
by which the Company failed either the 75% or the 95% gross income test.
ASSET TESTS
At the close of each quarter of the Company's taxable year, it must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must consist of real estate assets
(including interests in real property and interests in mortgages on real
property as well as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates), cash, cash items
and government securities. Second, not more than 25% of the Company's total
assets may be represented by securities other than those includable in the 75%
asset class. Finally, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed five
percent of the value of the Company's total assets, and the Company may not own
more than ten percent of any one issuer's outstanding voting securities. The
Company, however, may own 100% of the stock of a corporation if such stock is
held by the Company at all times during such subsidiary's existence. Such a
subsidiary is called a "qualified REIT subsidiary". Under that circumstance, the
qualified REIT subsidiary is ignored and its assets, income, gain, loss and
other attributes are treated as being owned or generated by the Company for
federal tax purposes. The Company currently has eight qualified REIT
subsidiaries which it employs in the conduct of its business.
If the Company meets the 25% requirement at the close of any quarter, it
will not lose its status as a REIT because of the change in value of its assets
unless the discrepancy exists immediately after the acquisition of any security
or other property which is wholly or partly the result of an acquisition during
such quarter. Where a failure to satisfy the 25% asset test 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 such quarter. The Company maintains and intends to continue to maintain
adequate records of the value of its assets to maintain compliance with the 25%
asset test and to take such action as may be required to cure any failure to
satisfy the test within 30 days after the close of any quarter.
(19)
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
equal to or greater than the excess of (A) the sum of (i) 95% of the Company's
"real estate investment trust taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) and (ii) 95% of the
net income, if any, (after tax) from foreclosure property, over (B) the sum of
certain non-cash income (from certain imputed rental income and income from
transactions inadvertently failing to qualify as like-kind exchanges). These
requirements may be waived by the IRS if the REIT establishes that it failed to
meet them by reason of distributions previously made to meet the requirements of
the four percent excise tax described below. To the extent that the Company does
not distribute all of its net long-term capital gain and all of its "real estate
investment trust taxable income," it will be subject to tax thereon. In
addition, the Company will be subject to a four percent excise tax to the extent
it fails within a calendar year to make "required distributions" to its
shareholders of 85% of its ordinary income and 95% of its 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 such
preceding calendar year. For this purpose, the term "grossed up required
distribution" for any calendar year is the sum of the taxable income of the
Company for the taxable 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. Dividends declared in the last quarter of the
year and paid during the following January will be treated as having been paid
and received on December 31. The Company's distributions for 1996 were adequate
to satisfy its distribution requirement.
It is possible that the Company, from time to time, may have insufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between the actual receipt of income and the actual payment
of deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at "real estate
investment trust taxable income" on the other hand. The problem of not having
adequate cash to make required distributions could also occur as a result of the
repayment in cash of principal amounts due on the Company's outstanding debt,
particularly in the case of "balloon" repayments or as a result of capital
losses on short-term investments of working capital. Therefore, the Company
might find it necessary to arrange for short-term, or possibly long-term
borrowing, or new equity financing. If the Company were unable to arrange such
borrowing or financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. The Company may be able to
avoid being taxed on amounts distributed as deficiency dividends; however, the
Company may in certain circumstances remain liable for the four percent excise
tax described above.
The Company is also required to request annually (within 30 days after the
close of its taxable year) from record holders of specified percentages of its
shares written information regarding the ownership of such shares. A list of
shareholders failing to fully comply with the demand for the written statements
is required to be maintained as part of the Company's records required under the
Code. Rather than responding to the Company, the Code allows the shareholder to
submit such statement to the IRS with the shareholder's tax return.
(20)
NONQUALIFIED REIT SUBSIDIARY
The Company participated in the organization of certain corporations
affiliated with the Company which are not qualified REIT subsidiaries
("Specified Affiliates") to enhance its management flexibility. Current tax law
restricts the ability of REITs to engage in certain activities, such as certain
third party management activities, but these restrictions do not apply to the
activities of a company that is not a REIT, such as these Specified Affiliates,
whose income is subject to federal income tax.
In order to permit the Company to participate in the income of its third
party management business and maintain its status as a REIT, portions of the
Company's business will be conducted by the Specified Affiliates. The Company
owns 100% of the nonvoting preferred stock and approximately 1% of the voting
common stock, and senior executives of the Company own 99% of the voting common
stock of the Specified Affiliates. The nonvoting preferred stock of the
Specified Affiliates represents substantially all of the equity interest in the
Specified Affiliates, but does not enable the Company to elect directors of the
Specified Affiliates who are elected by the senior executives of the Company as
the holders of 99% of the voting common stock of the Specified Affiliates. The
voting common stock held by the senior executives of the Company in the
Specified Affiliates is subject to agreements that are designed to ensure that
such stock will be held by officers of the Company.
FEDERAL INCOME TAX TREATMENT OF LEASES
The availability to the Company of, among other things, depreciation
deductions with respect to the facilities owned and leased by the Company
depends upon the treatment of the Company as the owner of the facilities and the
classification of the leases of the facilities as true leases, rather than as
sales or financing arrangements, for federal income tax purposes. The Company
has not requested nor has it received an opinion that it will be treated as the
owner of the portion of the facilities constituting real property and that the
leases will be treated as true leases of such real property for federal income
tax purposes. Based on the conclusions of the Company and its senior management
as to the values of personalty, the Company has met and plans to meet in the
future its compliance with the 95% distribution requirement (and the required
distribution requirement) by making distributions on the assumption that it is
not entitled to depreciation deductions for that portion of the leased
facilities which it believes constitutes personal property, but to report the
amount of income taxable to its shareholders by taking into account such
depreciation. The value of real and personal property and whether certain
fixtures are real or personal property are factual evaluations that cannot be
determined with absolute certainty under current IRS regulations and are,
therefore, somewhat uncertain.
(21)
OTHER ISSUES
With respect to property acquired from and leased back to the same or an
affiliated party, the IRS could assert that the Company realized prepaid rental
income in the year of purchase to the extent that the value of the leased
property exceeds the purchase price paid by the Company for that property. In
litigated cases involving sale leasebacks which have considered this issue,
courts have concluded that buyers have realized prepaid rent where both parties
acknowledged that the purported purchase price for the property was
substantially less than fair market value and the purported rents were
substantially less than the fair market rentals. Because of the lack of clear
precedent and the inherently factual nature of the inquiry, complete assurance
cannot be given that the IRS could not successfully assert the existence of
prepaid rental income in such circumstances. The value of property and the fair
market rent for properties involved in sale-leasebacks are inherently factual
matters and always subject to challenge.
Additionally, it should be noted that Section 467 of the Code (concerning
leases with increasing rents) may apply to those leases of the Company which
provide for rents that increase from one period to the next. Section 467
provides that in the case of a so-called "disqualified leaseback agreement,"
rental income must be accrued at a constant rate. If such constant rent accrual
is required, the Company would recognize rental income in excess of cash rents
and as a result, may fail to have adequate funds available to meet the 95%
dividend distribution requirement. "Disqualified leaseback agreements" include
leaseback transactions where a principal purpose of providing increasing rent
under the agreement is the avoidance of federal income tax. Because Section 467
directs the Treasury to issue regulations providing that rents will not be
treated as increasing for tax avoidance purposes where the increases are based
upon a fixed percentage of lessee receipts, additional rent provisions of leases
containing such clauses should not be "disqualified leaseback agreement." In
addition, the legislative history of Section 467 indicates that the Treasury
should issue regulations under which leases providing for fluctuations in rents
by no more than a reasonable percentage from the average rent payable over the
term of the lease will be deemed to not be motivated by tax avoidance. This
legislative history indicates that a standard allowing a ten percent fluctuation
in rents may be too restrictive for real estate leases. It should be noted,
however, that leases involved in sale-leaseback transactions are subject to
special scrutiny under this Section. The Company, based on its evaluation of the
value of the property and the terms of the leases, does not believe it has or
will have in the future rent subject to the provisions of Section 467.
Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for at least four years, gain from sales of property held for
sale to customers in the ordinary course of business is subject to a 100% tax.
The simultaneous exercise of options to acquire leased property that may be
granted to certain tenants or other events could result in sales of properties
by the Company that exceed this safe harbor. However, the Company believes that
in such event, it will not have held such properties for sale to customers in
the ordinary course of business.
(22)
DEPRECIATION OF PROPERTIES
For tax purposes, the Company's real property is being and will continue to
be depreciated over 31.5 or 39 years using the straight-line method of
depreciation and its personal property over various periods utilizing
accelerated and straight-line methods of depreciation.
FAILURE TO QUALIFY AS A REIT
If the Company were to fail to qualify for federal income tax purposes as a
REIT in any taxable year, and the relief provisions were found not to apply, the
Company would be subject to tax on its taxable income at regular corporate rates
(plus any applicable alternative minimum tax). Distributions to shareholders in
any year in which the Company failed to qualify would not be deductible by the
Company nor would they be required to be made. In such event, to the extent of
current and/or accumulated earnings and profits, all distributions to
shareholders would be taxable as ordinary income and, subject to certain
limitations in the Code, eligible for the 70% dividends received deductions for
corporate shareholders. Unless entitled to relief under specific statutory
provisions, the Company would also be disqualified from taxation as a REIT for
the following four taxable years. It is not possible to state whether in all
circumstances the Company would be entitled to statutory relief from such
disqualification. Failure to qualify for even one year could result in the
Company's incurring substantial indebtedness (to the extent borrowings were
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
TAXATION OF FOREIGN HOLDERS
The following is a discussion of certain anticipated U.S. federal income
tax consequences of the ownership and disposition of Common Stock applicable to
Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any person other than (i)
a citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof or (iii) an estate or trust whose income is includable
in gross income for U.S. federal income tax purposes regardless of its source.
The discussion is based on current law and is for general information only.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder of Common Stock. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The
discussion below is not intended to be a complete discussion of the provisions
of the Proposed Regulations, and investors are urged to consult their tax
advisors with respect to the effect the Proposed Regulations would have if
adopted.
DISTRIBUTIONS FROM THE COMPANY
1. Ordinary Dividends. The portion of dividends received by Non-U.S.
Holders payable out of the Company's earnings and profits that is not
attributable to capital gains of the Company and that is not effectively
connected with a U.S. trade or business of the Non-U.S. Holder will be subject
to U.S. withholding tax at the rate of 30% (unless reduced by treaty). In
general, Non-U.S. Holders will not be considered engaged in a U.S. trade or
business solely as a result of their ownership of stock of the Company. In cases
where the dividend income from a Non-U.S. Holder's investment in stock of the
Company is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends (and may also be subject to the 30%
branch profits tax in the case of a Non-U.S. Holder that is a foreign
corporation).
(23)
Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder would generally be required to provide an
Internal Revenue Service Form W-8 certifying such Non-U.S. Holder is entitled to
benefits under the treaty. The Proposed Regulations would also provide special
rules to determine whether, for purposes of determining the applicability of a
tax treaty, dividends paid to a Non-U.S. Holder that is an entity should be
treated as paid to the entity or those holding an interest in that entity.
2. Non-Dividend Distributions. Distributions by the Company which are not
dividends out of the earnings and profits of the Company will not be subject to
U.S. income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the Internal Revenue Service (the
"Service") if it is subsequently determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of the Company.
3. Capital Gain Dividends. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of United States
Real Property Interests ("USRPIs") such as the properties owned, directly or
beneficially, by the Company ("USRPI Capital Gains"), will be considered
effectively connected with a U.S. trade or business of the Non-U.S. Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals and
corporations, without regard to whether such distribution is designated as a
capital gain dividend. In addition, the Company will be required to withhold tax
equal to 35% of the amount of dividends to the extent such dividends constitute
USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder that is
not entitled to treaty exemption.
DISPOSITION OF STOCK OF THE COMPANY
Unless the Company's stock constitutes a USRPI, a sale of such stock by a
Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The
stock will not constitute a USRPI if the Company is a "domestically controlled
REIT." A domestically controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Holders. The Company believes that it is, and it
expects to continue to be, a domestically controlled REIT, and therefore expects
that the sale of the Company's stock will not be subject to taxation under
FIRPTA. Because the Company's stock is publicly traded, however, no assurance
can be given the Company will continue to be a domestically controlled REIT.
(24)
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Common Stock is listed) and (ii) the
selling Non-U.S. Holder held 5% or less of the Company's outstanding stock at
all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals) and the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the Service.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be
subject to the same treatment as a U.S. stockholder with respect to such gain,
or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and has a "tax
home" in the United States, the nonresident alien individual will be subject to
a 30% tax on the individual's capital gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends (including any capital gain dividends) paid to, and the
tax withheld with respect to, each Non-U.S. Holder. These reporting requirements
apply regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these returns may also be made available under
the provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
stock of the Company to a Non-U.S. Holder at an address outside the United
States.
The payment of the proceeds from the disposition of stock of the Company to
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting.
(25)
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-U.S. Holder would be subject to backup
withholding and information reporting unless the Company receives certification
from the Holder of non-U.S. status.
CAUTIONARY STATEMENTS
- ---------------------
From time to time, the Company may make forward-looking statements which
affect its current views with respect to future events and financial
performance. The Company wishes to caution readers that the following important
factors, among others, could affect the Company's actual results, and could
cause those results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Many of these
factors have been discussed in the Company's prior filings with the Securities
and Exchange Commission.
GENERAL GROWTH STRATEGY
- -----------------------
The Company follows a general growth strategy of providing integrated real
estate services to the healthcare industry, including asset management and
strategic planning for real estate, property administration, management and
leasing services, build-to-suit development, the acquisition of existing
healthcare properties and equity co-investment in healthcare provider
acquisition transactions. By providing these services, the Company believes it
can differentiate its market position, acquire needed capital, expand its asset
base and increase revenue; however, there are various risks inherent in this
growth strategy. The following factors, among others, could affect the Company's
ability to experience growth and investors should consider the following
factors.
ACCESS TO CAPITAL
- -----------------
CAPITAL MARKETS. The Company requires capital for the purchase of, or
investment in, healthcare real estate. There is no assurance that the Company
will be able to obtain additional equity or debt capital at the time it requires
additional capital; nor that the Company can obtain such capital on terms that
will permit the Company to acquire healthcare properties on a basis that is
competitive with other real estate investors.
RISKS OF LEVERAGE AND DEBT. The Company has incurred and may continue to
incur indebtedness and may mortgage its properties in furtherance of its
activities. The Company may be required to borrow money and mortgage its
properties to fund any shortfall of cash necessary to meet cash distribution
requirements necessary to maintain its REIT status.
MAINTENANCE OF THE COMPANY'S DIVIDEND POLICY. The Company has raised its
quarterly dividend each consecutive quarter since the Company's formation.
Failure of the Company to maintain or increase its dividend could make it
difficult for the Company to raise additional equity capital on favorable terms,
if at all. The ability to maintain or raise its dividend is dependent, to a
large part, on growth of funds from operations, which in turn depends upon
increased revenues from investments in the form of additional investment, rental
increases and income from administrative and management services. Impacting the
Company's ability to continue to increase its dividends also include the terms
described below.
(26)
Under the terms of its current debt arrangements, the Company is prohibited
from declaring or paying dividends at any time that the Company fails to make
any payment of principal, interest fees or other amounts when due, and is
further prohibited from declaring or paying dividends (other than as the Company
determines necessary to maintain its status as a REIT for federal income tax
purposes) if, at the time of such action, any other event of default exists.
Repayment of any borrowings, as well as the resulting interest expense and debt
amortization, could negatively affect the Company's cash available for
distribution. If the Company defaults on any loan secured by mortgages on any of
its properties, the lenders may foreclose on such property, and the Company
would lose its investment herein.
REDUCTION IN DIVIDENDS FROM FAILURE TO QUALIFY AS A REIT; REIT TAXES. The
Company intends at all times to operate so as to qualify as a REIT under the
Code. If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a corporation and distributions to the shareholders would not be
deductible by the Company in computing its taxable income. Depending upon the
circumstances, a REIT that loses is qualification in one year may not be
eligible to requalify during the four succeeding years. Failure to so qualify,
even in one taxable year, could cause the Company to dramatically reduce its
dividends. Further, certain transactions or other events could lead to the
Company being taxed at rates ranging from 4 to 100 percent on certain income or
gains.
REVENUE GROWTH
- --------------
The Company's general growth strategy implies continuing growth in the
Company's funds from operations. The Company's funds from operations can be
negatively affected by, among other items, the following factors.
DELAYS IN ACQUIRING PROPERTIES. The purchase of one or more properties may
not be consummated or may be delayed for various reasons. Acquisition delays
will negatively impact revenues and may have the potential to adversely effect
the Company's ability to increase its distributions to shareholders.
OPERATING RISKS. Real property investments are subject to varying degrees
of risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred.
(27)
To offset the threat of insufficient revenue to meet operating expenses,
debt service, capital expenditures and dividend payments, the Company requires
net master leases or equivalent credit support with primary terms.
The terms of certain of the leases or credit support agreements provide an
option for healthcare providers to repurchase the subject properties at
specified times during the term of the agreement. The provider may repurchase
the property for a price equal to the greater of the fair market value purchase
price or the minimum repurchase price. No assurances can be given that the
Company could negotiate with the current healthcare provider should they wish to
repurchase the property or find another provider on a timely basis or on
acceptable terms. A failure of the Company to do so could have an adverse effect
on the Company's future revenues.
DEPENDENCE ON HEALTHCARE PROVIDERS AND POTENTIAL REDUCTION IN REVENUES. The
success of the Company's investment in a particular property will be dependent
upon the success of the business of the healthcare provider and, to the extent
that a provider's performance under the lease or credit arrangement has been
guaranteed, on the guarantor under such arrangement. There is no assurance that
the Company will be able to retain its provider upon the expiration of the
leases or that unfavorable economic, demographic or competitive conditions or
industry reform will not adversely affect the financial condition of providers
and/or guarantors and, consequently, lease revenues and the value of the
Company's investments in the property.
CONCENTRATION ON FEW HEALTHCARE PROVIDERS. Currently 26 percent of the
Company's portfolio is leased to Columbia/HCA Healthcare Corporation and 24
percent is leased or committed to the combined companies of OrNda Healthcorp and
Tenet Healthcare Corporation.
IMPACT OF REDUCED OCCUPANCY RATES. Most of the hospitals adjacent to or
associated with the Company's properties owned or to be acquired are
substantially less that fully occupied on an inpatient basis. Despite such
occupancy rates, however, the operating cash flow produced by such hospitals
available for the related payments to the Company adequately covers such
payments. If the inpatient occupancy rate at such a hospital were to deteriorate
to a level at which operating cash flows would be insufficient to cover the
payments to the Company on a particular ancillary hospital facility, the Company
would have to rely upon the general credit of the provider or the related
guarantor, if any.
POTENTIAL PROVIDER LOSS OF LICENSURE OR CERTIFICATION. Healthcare providers
are subject to federal and state laws and regulations which govern financial and
other arrangements between healthcare operators. A provider's loss of licensure
or certification would result in the Company having to obtain another provider
for the affected facility. No assurances can be given that the Company could
attract another healthcare provider on a timely basis or on acceptable terms.
Failure to do so would have an adverse effect on the Company's revenues.
FAILURE TO SUCCESSFULLY MARKET PROPERTY MANAGEMENT SERVICES. The Company
utilizes its wholly owned subsidiary, Healthcare Realty Management (HRM), in the
day-to-day management and leasing of multi-tenanted healthcare properties and in
the supervision of the development of new healthcare properties. There can be no
assurance that the Company will be able to successfully market or cross-sell
HRMs services. Current revenues from HRM's management agreements may not
significantly affect the Company's 1997 funds from operations. Additionally, HRM
employs 108 individuals nationwide, providing the Company with expanded overhead
expenses and labor liability not previously experienced.
(28)
ASSET GROWTH
- ------------
INABILITY TO COMPLETE ACQUISITIONS. The Company's asset growth strategy
would be negatively impacted if it is unable to find suitable properties and to
purchase those properties on terms which meet the Company's investment
parameters.
PROVIDER DEVELOPMENT ARRANGEMENTS. The Company has entered into development
funding arrangements with three properties that are currently in progress. The
Company believes that development funding is an effective method to acquire new
healthcare facilities that providers have determined are strategic to their
business. The development funding arrangements require the Company to provide
the funding to enable healthcare operators to build facilities on property owned
or leased by the Company. Risks of development funding are greater than those
risks associated with the purchase and lease-back of operating properties
because of the potential for greater Company involvement within the development
process. There can be no assurance that the current portfolio of development
funding will be completed in accordance with the terms of the agreements;
however, the Company believes that it has the requisite access to capital and
development and construction experience to complete a development.
LIMITATIONS ON TRANSFERS AND ALTERNATIVE USES OF FACILITIES. Transfers of
operations of healthcare facilities are subject to regulatory approvals not
required for transfers of other types of commercial operations and other types
of real estate. In addition, many of the properties are special-purpose
facilities that may not be easily adaptable to uses unrelated to healthcare.
MARKET COMPETITION
- ------------------
The Company competes for property management, development and acquisitions
with, among others, investors, healthcare providers, other healthcare related
real estate investment trusts, real estate partnerships and financial
institutions. The Company's properties will be also subject to competition from
the properties of other healthcare providers. Certain of these operators may
have greater capital resources that the provider leasing the Company's
facilities. All of the properties operating in a competitive environment and
patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time.
(29)
ITEM 2. PROPERTIES
- ------
EXECUTIVE OFFICES
- -----------------
The Company's headquarters, located in offices at 3310 West End Avenue in
Nashville, Tennessee, are leased from an unrelated third party. The lease
agreement expired on January 31, 1997. The Company is currently occupying its
quarters on a month-to-month basis and anticipates moving into expanded quarters
in the same location. The Company is negotiating the terms of a lease of
approximately 17,000 square feet for a five-year term with renewal options. Such
space will give the Company room for growth, but it intends to sublease a
portion of such space initially. If a lease on acceptable terms is not signed,
which management does not anticipate, the Company does not believe it will have
any difficulty obtaining alternative space. The Company also maintains executive
offices of approximately 10,800 square feet in Birmingham, Alabama for a term
which will expire on May 31, 2000. Annual rental expense is approximately
$83,505.
(30)
PROPERTY OPERATIONS
- -------------------
The following table sets forth information regarding the Company's
properties as of December 31, 1996:
Property Name City State Facility Type Client/Major Tenant(s) Square Feet Investment
Midtown Medical Center Birmingham AL CL Laboratory Corp. of America 129,294 8,789,812
Orange Grove Medical Clinic Tucson AZ AHF Columbia, affiliated physicians 44,230 5,273,993
Bakersfield Surgery Center Bakersfield CA ASC National Surgery Centers 4,913 1,046,229
Fountain Valley - AHF 1* Fountain Valley CA AHF OrNda, affiliated physicians 51,153 5,516,390
Fountain Valley - AHF 2* Fountain Valley CA AHF OrNda, affiliated physicians 47,380 5,107,769
Fountain Valley - AHF 3* Fountain Valley CA AHF OrNda, affiliated physicians 73,770 8,785,363
Fountain Valley - AHF 4* Fountain Valley CA AHF OrNda, affiliated physicians 72,832 8,989,674
Fountain Valley - Living Care Ctr. Fountain Valley CA LTCF OrNda 63,000 12,687,698
Fountain Valley - AHF 5** Fountain Valley CA AHF OrNda, affiliated physicians 120,000 15,000,000
Clinica Latina Los Angeles CA PC OrNda, affiliated physicians 7,300 724,470
Eaton Canyon* Pasadena CA AHF OrNda, affiliated physicians 33,345 4,444,070
Valley Presbyterian Hospital-15211 Van Nuys CA AHF Valley Pres.affiliated physician 47,042 7,538,204
Valley Presbyterian Hospital-6840 Van Nuys CA AHF Valley Pres.affiliated physician 24,189 5,327,777
Life Care Center of Aurora Aurora CO LTCF Life Care Centers of America 61,200 6,230,516
Life Care Center of Westminister Westminister CO LTCF Life Care Centers of America 57,035 7,566,320
Coral Gables Medical Plaza* Coral Gables FL AHF OrNda, affiliated physicians 57,790 11,208,279
Southwest Florida Orthopaedic Center Fort Myers FL PC Columbia, affiliated physicians 37,674 3,604,186
Southwest Medical Centre Plaza Fort Myers FL AHF Columbia, affiliated physicians 64,780 8,042,863
Gulf Coast Medical Centre Fort Myers FL AHF Columbia, affiliated physicians 35,752 4,791,941
Southwest Medical Center Plaza II Fort Myers FL AHF Columbia, affiliated physicians 14,322 1,620,558
East Pointe Medical Plaza Lehigh Acres FL AHF Columbia, affiliated physicians 34,500 4,981,848
Deering Medical Plaza Miami FL AHF Columbia, affiliated physicians 41,046 5,072,041
Five Points Medical Building* Miami FL CACC OrNda, affiliated physicians 59,516 11,308,884
Life Care Center of Orange Park Orange Park FL LTCF Life Care Centers of America 57,904 9,592,697
Palm Beach Medical Group Building Palm Beach FL MOB First Physicians Care 26,000 3,766,272
Palms of Pasadena Medical Plaza* St. Petersburg FL AHF Tenet, affiliated physicians 49,300 5,483,950
Med.and Surg. Inst.of Ft. Lauderdale Sunrise FL PC OrNda, affiliated physicians 28,861 5,204,476
St. Andrews* Venice FL CACC Columbia, Center For Sight 29,000 6,598,540
Doctor's Clinic Vero Beach FL PC PhyCor 87,404 10,305,181
North Fulton Medical Arts Plaza Atlanta GA AHF Tenet, affiliated physicians 51,586 5,784,500
Northwest Medical Center Atlanta GA AHF Columbia, affiliated physicians 143,660 10,236,246
Candler Professional Office Bldg.* Savannah GA AHF Candler, affiliated physicians 90,000 7,177,853
Candler Parking Garage Savannah GA AHF Candler 175,150 4,169,090
Candler Regional Heart Center* Savannah GA AHF Candler, affiliated physicians 80,825 9,430,299
Woodstock Clinic Woodstock GA PC Tenet, affiliated physicians 47,858 2,673,879
New Harmonie Healthcare Center New Harmony IN LTCF Centennial 29,500 3,640,140
Overland Park Reg. Medical Center Overland Park KS AHF Columbia, affiliated physicians 71,086 10,106,167
Life Care Center of Wichita Wichita KS LTCF Life Care Centers of America 57,035 7,474,565
Fenton Extended Care Center Fenton MI LTCF Centennial 29,103 3,540,495
Meadows Nursing Center Meadows MI LTCF Centennial 43,194 3,284,186
Ovid Convalescent Manor Ovid MI LTCF Centennial 16,500 3,116,710
Westgate Manor Nursing Home St. Louis MI LTCF Centennial 21,567 1,697,049
Wayne Convalescent Center Wayne MI LTCF Centennial 11,308 1,049,353
Puckett Laboratory Hattiesburg MS CL Pathology Labs. 36,951 4,285,486
Valley View Surgery Center Las Vegas NV ASC National Surgery Centers 16,878 3,800,571
(31)
Hendersonville Medical Office Bldg. Hendersonville TN AHF Columbia, affiliated physicians 25,456 3,138,890
Physicians Daysurgery Center Dallas TX ASC Columbia 10,855 2,039,563
Oregon Medical Building El Paso TX AHF Columbia, affiliated physicians 83,718 18,485,078
Life Care Center of Fort Worth Fort Worth TX LTCF Life Care Centers of America 64,265 9,452,336
Valley Diagnostic Med.&Surg.Clinic Harlingen TX PC PhyCor 41,515 4,458,323
Spring Branch Professional Building Houston TX AHF Columbia, affiliated physicians 109,898 14,301,747
Rosewood Professional Building Houston TX AHF Columbia, affiliated physicians 70,494 5,252,820
Durham Medical Center Houston TX PC Humana, Columbia 59,114 8,511,528
Life Care Center of Houston Houston TX LTCF Life Care Centers of America 64,265 9,847,297
Twelve Oaks Medical Plaza Houston TX AHF Tenet, affiliated physicians 38,500 3,772,050
Trinity Valley Birthing Center Palestine TX AHF OrNda, affiliated physicians 15,398 3,671,600
Bayshore Doctors Center Pasadena TX AHF Columbia, affiliated physicians 16,955 1,905,817
Lake Pointe Medical Plaza Rowlett TX AHF OrNda, affiliated physicians 12,788 1,737,129
Rowlett Medical Plaza Rowlett TX MOB OrNda, affiliated physicians 18,978 1,976,372
Huebner Medical Center San Antonio TX CACC Healthsouth,Columbia,MedPartners 90,840 11,928,764
Huebner Medical Center II San Antonio TX CACC Healthsouth,Columbia,MedPartners 63,459 9,144,537
Judson Professional Building San Antonio TX AHF Columbia, affiliated physicians 10,088 712,354
Toepperwein Medical Center San Antonio TX AHF Columbia, affiliated physicians 44,872 2,363,062
Southwest General Birthing Center San Antonio TX AHF OrNda, affiliated physicians 16,264 3,236,289
New River Valley Medical Arts Bldg. Christiansburg VA MOB Columbia, affiliated physicians 5,323 926,022
Valley Medical Center Dublin VA MOB Columbia, affiliated physicians 7,093 1,015,116
Lewis-Gale Family Practice Center New Castle VA PC PhyCor 11,265 1,150,333
Chippenham Medical Offices Richmond VA AHF Columbia, affiliated physicians 44,732 3,771,668
Chippenham Medical Offices Richmond VA AHF Healthcare service providers 53,189 4,593,463
Johnston-Willis Medical Offices Richmond VA AHF Healthcare service providers 78,843 8,773,577
Johnston-Willis Medical Offices Richmond VA AHF Healthcare service providers 36,000 5,855,715
Lewis-Gale Craig County Clinic Roanoke VA PC PhyCor 4,396 182,008
Lewis-Gale Fincastle Clinic Roanoke VA PC PhyCor 4,199 337,431
Lewis-Gale Valley View Mall Roanoke VA MOB PhyCor, Columbia 48,433 5,112,593
Lewis-Gale Business&Child Care Ctrs Salem VA MOB PhyCor, Allstate, U.S.Postal Svc. 6,387 6,723,060
Lewis-Gale Bent Mountain Road Clinic Salem VA PC PhyCor 3,264 349,701
Lewis-Gale Bonsack Clinic Salem VA PC PhyCor 6,283 673,840
Lewis-Gale Clinic Salem VA AHF PhyCor, Columbia 237,244 27,139,690
Lewis-Gale Medical Foundation Bldg. Salem VA AHF PhyCor 16,400 1,431,526
Lewis-Gale Spartan Drive Clinic Salem VA PC PhyCor 8,243 899,816
---------- --------------
All Properties 3,921,749 $460,947,705
========= ============
* Properties owned and managed by Healthcare Realty
** Pending acquisition
Key:
AHF - Ancillary Hospital Facility
LTCF - Long-Term Care Facility
CACC - Comprehensive Ambulatory Care Center
PC - Physician Clinic
MOB - Medical Office Building
CL - Clinical Lab
ASC - Ambulatory Surgery Center
(32)
HEALTHCARE PROVIDER CHARTS
The following table sets forth, by each healthcare provider client, certain
information as of December 31, 1996
Percentage Square
Properties Investment of Investment Footage
Public/Investment Grade Credit Operators:
Columbia/HCA Healthcare Corp. 21 $120,151,613 26.1% 914,946
OrNda HealthCorp 15 99,598,463 21.6% 678,375
Candler Health System 3 20,032,661 4.3% 345,975
PhyCor, Inc. 12 58,763,502 12.7% 585,033
Tenet Healthcare Corporation 2 8,157,829 1.8% 97,158
National Surgery Centers, Inc. 2 4,846,800 1.1% 21,791
------ ---------------- --------------- ------------
55 $311,550,868 67.6% 2,643,278
Other Providers:
Life Care Centers of America 6 $50,163,731 10.9% 361,704
Huebner Medical Center 2 21,073,301 4.6% 154,299
Vest AmeriCare L.C. 3 19,792,796 4.3% 233,746
WelCare International, Inc. 6 16,327,933 3.5% 151,172
Six Operators with Investments Less Than 3% 8 41,294,495 9.0% 377,550
------ ---------------- --------------- ------------
25 $148,652,256 32.2% 3,921,749
====== ================ =============== ============
Totals 80 $460,947,705 99.8% 3,921,749
====== ================ =============== ============
(33)
LEASE EXPIRATION SCHEDULE
The following table sets forth the number of the Company leases that expire
in the indicated years and certain other information associated with such
leases.
Percentage of Percentage of
Number of Annualized Annualized Square Square
Year Leases Revenue Square Footage Footage Footage
0 0 0.0% 0 0.0%
1997 0 0 0.0% 0 0.0%
1998 0 0 0.0% 0 0.0%
1999 0 0 0.0% 0 0.0%
2000 0 0 0.0% 0 0.0%
2001 0 0 0.0% 0 0.0%
2002 0 0 0.0% 0 0.0%
2003 3 $2,788,402 5.8% 181,129 5.0%
2004 7 1,622,760 8.8% 164,756 9.9%
2005 6 1,569,032 6.8% 268,391 9.7%
2006 1 536,529 1.1% 36,951 1.0%
2007 3 962,504 2.0% 75,507 2.0%
2008 12 8,237,489 17.0% 645,027 16.9%
2009 19 14,325,866 25.3% 1,162,134 25.6%
2010 6 1,907,236 8.1% 119,502 6.2%
2011 15 9,105,172 16.2% 759,329 18.3%
2012 1 3,705,024 4.8% 237,851 1.6%
2013 6 1,966,505 4.1% 151,172 4.0%
== ============ ====== ========= ======
Totals 79* $ 46,726,518 100.0% 3,801,749 100.0%
*Excludes Fountain Valley - AHF5, which currently has no lease agreement
(34)
ITEM 3. LEGAL PROCEEDINGS
- ------
The Company is not aware of any material legal action pending
or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
- ------
No matter was submitted to a vote of shareholders during the
fourth quarter of 1996.
(35)
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ MATTERS
Information relating to the Company's Common Stock, set forth
on page 28 of the Company's 1996 Annual Report to Shareholders under the
caption Common Stock, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ------
The Company's selected financial data, set forth on page
9 of its 1996 Annual Report to Shareholders under the caption Selected Financial
Information, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ AND RESULTS OF OPERATIONS
The Company's information relating to the management's
discussion and analysis of financial condition, set forth on pages 10 through 12
of the Company's 1996 Annual Report to Shareholders under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------
The Company's financial statements and the related notes,
together with the report of Ernst & Young LLP thereon, set forth at pages 13
through 17 of the Company's 1996 Annual Report to Shareholders, are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ AND FINANCIAL DISCLOSURE
None.
(36)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
DIRECTORS
- ---------
Information with respect to directors, set forth on pages one
through four of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 12, 1997 under the caption Election of Directors,
is incorporated herein by reference.
EXECUTIVE OFFICERS
- ------------------
The executive officers of the Company are:
Name Age Position
David R. Emery....... 52 Chairman of the Board, Chief Executive Officer &
President
Timothy G. Wallace... 38 Executive Vice President & Chief Financial Officer
Roger O. West......... 52 Executive Vice President & General Counsel
Mr.Emery formed the Company and has held his current positions
since May 1992. Prior to 1992, Mr. Emery was engaged in the development an
management of commercial real estate in Nashville, Tennessee. Mr. Emery has been
active in the real estate industry for 27 years.
Mr.Wallace has held executive positions with the Company since
January 1993. Prior to joining the Company, he was a Senior Manager with
responsibility for healthcare and real estate in the Nashville, Tennessee office
of Ernst & Young LLP from June 1989 to January 1993.
Mr. West has held executive positions with the Company since
May 1994. Prior to joining the Company, he was a senior partner in the law firm
of Geary, Porter and West, P. C. in Dallas, Texas from July 1992 to May 1994.
Mr.West has extensive experience in the areas of corporate, tax and real estate
law.
ITEM 11. EXECUTIVE COMPENSATION
- -------
Information relating to executive compensation, set forth on
pages six through 12 of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 12, 1997 under the caption Executive
Compensation, is incorporated herein by reference. The Comparative Performance
Graph and the Compensation Committee Report on Executive Compensation also
included in the Proxy Statement are expressly not incorporated herein by
reference.
(37)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------
Information relating to the security ownership of management
and certain beneficial owners, set forth on pages four through five of the
Company's Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 12, 1997 under the caption "Security Ownership of Certain
Beneficial Owners and Management," is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
Information relating to certain relationships and related transactions,
set forth on page 13 of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 12, 1997 under the caption Certain
Relationships and Related Transactions, is incorporated herein by reference.
(38)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------
(a) Index to Pro Forma and Historical Financial Statements,
Financial Statement Schedules and Exhibits
(1) FINANCIAL STATEMENTS:
--------------------
The following financial statements of Healthcare
Realty Trust Incorporated are incorporated by reference in
Item 8 from the 1996 Annual Report to Shareholders:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December
31, 1996, December 31, 1995 and December 31, 1994.
Consolidated Statements of Stockholders Equity for the years
ended December 31, 1996, December 31, 1995 and
December 31, 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, December 31, 1995 and December 31,
1994.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES:
-----------------------------
Schedule III -- Real Estate and Accumulated Depreciation
at December 31, 1996..S-1
All other schedules are omitted because they are not
applicable or not required or because the information is
included in the consolidated financial statements or notes
thereto.
(39)
(3) EXHIBITS:
--------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1 Second Articles of Amendment and Restatement of the Registrant.(1)
3.2 Second Amended and Restated Bylaws of the Registrant.(2)
4 Specimen stock certificate.(1)
10.1 1993 employee's Stock Incentive Plan of Healthcare Realty Trust Incorporated.(1)
10.2 1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(6)
10.3 Executive Retirement Plan, as amended (filed herewith).
10.4 Retirement Plan for Outside Directors.(1)
10.5 Deferred Compensation Plan.(1)
10.6 Dividend Reinvestment Plan.(2)
10.7 Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated
(filed herewith).
10.8 Amended and Restated Employment Agreement by and between Roger O. West and Healthcare Realty Trust Incorporated
(filed herewith).
10.9 Amended and Restated Employment Agreement by and between Timothy G. Wallace and Healthcare Realty Trust Incorporated
(filed herewith).
10.10 Modified and Restated Credit Agreement, dated as of December 26, 1996, by and among Healthcare Realty Trust
Incorporated; NationsBank, N.A.; The Sumitomo Bank, Limited; First Tennessee Bank National Association; and AmSouth
Bank of Alabama.(7)
10.11 Form of Note Purchase Agreement, dated as of September 1, 1995, pertaining to $90,000,000 aggregate principal amount
of 7.41% Senior Notes due September 1, 2002.(5)
11 Statement re computation of per share earnings (filed herewith).
13 Annual Report to Shareholders for the year ended December 31, 1996 (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Ernst & Young LLP, independent auditors (filed herewith).
(40)
(1) Filed as an exhibit to Company's Registration Statement on Form S-11
(Registration No. 33-60506) previously filed pursuant to the Securities Act of
1933 and hereby incorporated by reference.
(2) Filed as an exhibit to Company's Registration Statement on Form S-11
(Registration No. 33-72860) previously filed pursuant to the Securities Act of
1933 and hereby incorporated by reference.
(3) Filed as an exhibit to Company's Form 10-Q for the quarter ended June
30, 1994 and hereby incorporated by reference.
(4) Filed as an exhibit to Company's Form 10-K for the year ended December
31, 1994 and hereby incorporated by reference.
(5) Filed as an exhibit to Company's 10-Q for the quarter ended September
30, 1995 and hereby incorporated by reference.
(6) Filed as an exhibit to Company's Form 10-K for the year ended December
31, 1995 and hereby incorporated by reference.
(7) Filed as an exhibit to Company's Form 8-K for December 26, 1996 and
hereby incorporated by reference.
(41)
Executive Compensation Plans and Arrangements
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
1. 1993 Employees Stock Incentive Plan of Healthcare Realty Trust
Incorporated (filed as Exhibit 10.1)
2. 1995 Restricted Stock Plan for Non-Employee Directors of Healthcare
Realty Trust Incorporated (filed as Exhibit 10.2)
3. Executive Retirement Plan, as amended (filed as Exhibit 10.3)
4. Retirement Plan for Outside Directors (filed as Exhibit 10.4)
5. Deferred Compensation Plan (filed as Exhibit 10.5)
6. Amended and Restated Employment Agreement by and between David R. Emery
and Healthcare Realty Trust Incorporated (filed as Exhibit 10.7)
7. Amended and Restated Employment Agreement by and between Roger O. West
and Healthcare Realty Trust Incorporated (filed as Exhibit 10.8)
8. Amended and Restated Employment Agreement by and between Timothy G.
Wallace and Healthcare Realty Trust Incorporated (filed as Exhibit 10.9)
(42)
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
last quarter of 1996.
Date of Earliest Event Reported Items Reported
September 30, 1996 5.Other Events
November 15, 1996 2.Acquisition or Disposition of Assets
7.Financial Statements, Pro Forma Financial Information
and Exhibits
November 15, 1996 (Form 8K/A) 7.Financial Statements, Pro Forma Financial Information
and Exhibits*
November 15, 1996 (Form 8-K/A) 7.Financial Statements, Pro Forma Financial Information
and Exhibits
* Included required financial statements for acquisition reported on in Item
2 of Current Report dated November 15, 1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(3).
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(2).
(43)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on March 24, 1997.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ David R. Emery
David R. Emery
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Signature Title Date
/s/ David R. Emery Chairman, President and Chief March 24, 1997
David R. Emery Executive Officer (Principal
Executive Officer)
/s/ Timothy G. Wallace Executive Vice President and Chief March 24, 1997
Timothy G. Wallace Financial Officer (Principal
Financial Officer)
/s/ Fredrick M. Langreck Treasurer and Controller March 24, 1997
Fredrick M. Langreck
/s/ Errol L. Biggs, Ph.D. Director March 24, 1997
Errol L. Biggs, Ph.D.
/s/ Thompson S. Dent Director March 24, 1997
Thompson S. Dent
/s/ Charles Raymond Fernandez, M.D. Director March 24, 1997
Charles Raymond Fernandez, M.D.
(44)
/s/ Batey B. Gresham, Jr. Director March 24, 1997
Batey B. Gresham, Jr.
/s/ Marliese E. Mooney Director March 24, 1997
Marliese E. Mooney
/s/ Edwin B. Morris, III Director March 24, 1997
Edwin B. Morris, III
/s/ John Knox Singleton Director March 24, 1997
John Knox Singleton
(45)
SCHEDULE 3 - REAL ESTATE AND ACCUMULATED DEPRECIATION
AT DECEMBER 31, 1996
LAND
Costs Capitalized
Facility Type/Name Operator Facility Initial Subsequent to
Location Investment Acquisition Total
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic Col/HCA AZ $ 308,070 0 $ 308,070
2 Eaton Canyon Medical Building OrNda CA 1,337,483 0 1,337,483
3 Fountain Valley - AHF 1 OrNda CA 2,218,847 0 2,218,847
4 Fountain Valley - AHF 2 OrNda CA 2,059,953 0 2,059,953
5 Fountain Valley - AHF 3 OrNda CA 3,149,515 0 3,149,515
6 Fountain Valley - AHF 4 OrNda CA 3,160,865 0 3,160,865
7 Valley Presbyterian (15211) Valley Pres CA 1,720,127 0 1,720,127
8 Valley Presbyterian (6840-50) Valley Pres CA 1,522,222 0 1,522,222
9 Deering Medical Plaza Col/HCA FL 0 0 0
10 East Pointe Medical Plaza Col/HCA FL 45,216 0 45,216
11 Gulf Coast Medical Centre Col/HCA FL 0 0 0
12 Southwest Medical Centre Plaza Col/HCA FL 0 0 0
13 Southwest Medical Centre Plaza II Col/HCA FL 0 0 0
14 Coral Gables Medical Plaza OrNda FL 532,112 0 532,112
15 Palm Beach Medical Group Building First Physician FL 0 0 0
16 Palms of Pasadena Medical Plaza Tenet FL 0 0 0
17 Candler Parking Garage Candler GA 0 0 0
18 Candler Professional Office Building Candler GA 0 0 0
19 Candler Regional Heart Center Candler GA 0 0 0
20 North Fulton Medical Arts Plaza Vest Amer GA 696,248 0 696,248
21 Northwest Medical Center Vest Amer GA 1,268,962 0 1,268,962
22 Overland Park Regional Medical Center Col/HCA KS 0 0 0
23 Hendersonville Medical Office Building Col/HCA TN 395,056 0 395,056
24 Bayshore Doctors Center Col/HCA TX 125,471 0 125,471
25 Judson Medical Building Methodist TX 159,384 0 159,384
26 Oregon Medical Building Col/HCA TX 999,193 0 999,193
27 Rosewood Professional Building Col/HCA TX 682,867 0 682,867
28 Spring Branch Professional Building Col/HCA TX 3,833,076 0 3,833,076
29 Toepperwein Medical Center Methodist TX 497,982 0 497,982
30 Lake Pointe Medical Plaza OrNda TX 217,941 0 217,941
31 Southwest General Birthing Center OrNda TX 124,000 0 124,000
32 Trinity Valley Birthing Center OrNda TX 73,147 0 73,147
33 Twelve Oaks Medical Plaza Vest Amer TX 389,107 0 389,107
34 Chippenham Medical Offices Col/HCA VA 0 0 0
35 Chippenham Medical Offices Col/HCA VA 874,497 0 874,497
36 Johnston-Willis Medical Offices Col/HCA VA 1,912,645 0 1,912,645
37 Johnston-Willis Medical Offices Col/HCA VA 0 0 0
38 Lewis-Gale Clinic,Keagy, Braeburn,Floyd Phycor VA 1,413,423 0 1,413,423
39 Lewis-Gale Medical Foundation Phycor VA 38,604 0 38,604
---------- - ----------
29,756,014 0 29,756,014
---------- - ----------
Ambulatory Surgery Centers
40 Bakersfield Surgery Center Nat'l Surg Ctrs CA 209,246 0 209,246
41 Valley View Surgery Center Nat'l Surg Ctrs NV 940,000 0 940,000
42 Physicians Daysurgery Center Col/HCA TX 509,891 0 509,891
--------- - ---------
1,659,137 0 1,659,137
--------- - ---------
Comprehensive Ambulatory Care Centers
43 St. Andrews Col/HCA&St.Andrews FL 1,032,261 0 1,032,261
44 Five Points Medical Building OrNda FL 3,103,275 0 3,103,275
45 Huebner Medical Center Huebner TX 601,475 0 601,475
46 Huebner Medical Center II Huebner TX 1,041,298 0 1,041,298
--------- - ---------
5,778,309 0 5,778,309
--------- - ---------
Clinical Laboratories
47 Midtown Medical Center Midtown AL 180,633 0 180,633
48 Puckett Laboratory Path Labs MS 537,660 0 537,660
------- - -------
718,293 0 718,293
------- - -------
Long-Term Care Facilities
49 Fountain Valley - Living Care Center OrNda CA 1,361,952 0 1,361,952
50 Life Care Center of Aurora LCC of Amer. CO 1,651,477 0 1,651,477
51 Life Care Center of Westminster (4) LCC of Amer. CO 0 0 0
52 Life Care Center of Orange Park LCC of Amer. FL 1,203,720 0 1,203,720
53 New Harmonie Healthcare Center Centennial IN 96,059 0 96,059
54 Life Care Center of Wichita LCC of Amer. KS 1,013,423 0 1,013,423
55 Fenton Extended Care Center Centennial MI 40,463 0 40,463
56 Meadows Nursing Center Centennial MI 6,984 0 6,984
57 Ovid Convalescent Manor Centennial MI 62,326 0 62,326
58 Wayne Convalescent Center Centennial MI 52,468 0 52,468
59 Westgate Manor Nursing Home Centennial MI 30,855 0 30,855
60 Life Care Center of Forth Worth LCC of Amer. TX 690,768 0 690,768
61 Life Care Center of Houston (4) LCC of Amer. TX 0 0 0
--------- - ---------
6,210,495 0 6,210,495
--------- - ---------
Medical Office Buildings
62 Rowlett Medical Plaza OrNda TX 166,123 0 166,123
63 New River Valley Med. Arts Building Col/HCA VA 43,126 0 43,126
64 Valley Medical Center Col/HCA VA 64,347 0 64,347
65 Lewis-Gale Business & Child Care Centers Phycor VA 1,066,739 0 1,066,739
66 Lewis-Gale Valley View Phycor VA 752,629 0 752,629
--------- - ---------
2,092,964 0 2,092,964
--------- - ---------
Physician Clinics
67 Clinica Latina OrNda CA 392,785 0 392,785
68 Southwest Florida Orthopedic Center Col/HCA FL 468,544 0 468,544
69 Medical & Surgical Inst.Ft. Lauderdale OrNda FL 906,829 0 906,829
70 Doctors Clinic Phycor FL 2,183,572 0 2,183,572
71 Woodstock Clinic Tenet GA 586,435 0 586,435
72 Durham Medical Center Durham TX 992,738 0 992,738
73 Valley Diagnostic Med & Surgical Clinic Phycor TX 502,919 158,368 661,287
74 Lewis-Gale Bent Mountain Road Clinic Phycor VA 92,159 0 92,159
75 Lewis-Gale Bohnsack Clinic Phycor VA 150,526 0 150,526
76 Lewis-Gale Craig County Clinic Phycor VA 33,280 0 33,280
77 Lewis-Gale Family Practice Center Phycor VA 182,522 0 182,522
78 Lewis-Gale Fincastle Clinic Phycor VA 78,437 0 78,437
79 Lewis-Gale Spartan Drive Phycor VA 83,967 0 83,967
--------- ------- ---------
6,654,712 158,368 6,813,080
--------- ------- ---------
Total Real Estate $52,869,925 $158,368 $53,028,292
=========== ======== ===========
Corporate Property 0 0 0
Third Party Developments 0 0 0
Total Property $52,869,925 $158,368 $53,028,292
=========== ======== ===========
SCHEDULE 1
REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1996 (continued)
BUILDINGS & IMPROVEMENTS & CIP
Costs
Initial Capitalized
Investment Subsequent to
(Including CIP) Acquisition Total
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic $ 4,965,923 $ 0 $ 4,965,923
2 Eaton Canyon Medical Building 3,106,587 0 3,106,587
3 Fountain Valley - AHF 1 3,297,543 3,925 3,301,469
4 Fountain Valley - AHF 2 3,047,816 0 3,047,816
5 Fountain Valley - AHF 3 5,635,848 0 5,635,848
6 Fountain Valley - AHF 4 5,828,809 0 5,828,809
7 Valley Presbyterian (15211) 5,797,840 0 5,797,840
8 Valley Presbyterian (6840-50) 3,787,288 0 3,787,288
9 Deering Medical Plaza 5,072,041 0 5,072,041
10 East Pointe Medical Plaza 4,936,632 0 4,936,632
11 Gulf Coast Medical Centre 4,791,942 0 4,791,942
12 Southwest Medical Centre Plaza 8,042,864 0 8,042,864
13 Southwest Medical Centre Plaza II 1,620,558 0 1,620,558
14 Coral Gables Medical Plaza 10,676,167 5,454 10,681,621
15 Palm Beach Medical Group Building 3,830,316 0 3,830,316
16 Palms of Pasadena Medical Plaza 4,723,468 805,113 5,528,581
17 Candler Parking Garage 4,169,090 0 4,169,090
18 Candler Professional Office Building 7,177,853 15,193 7,193,045
19 Candler Regional Heart Center 8,685,718 79,184 8,764,902
20 North Fulton Medical Arts Plaza 4,814,870 234,973 5,049,843
21 Northwest Medical Center 8,492,284 475,000 8,967,284
22 Overland Park Regional Medical Center 8,606,501 0 8,606,501
23 Hendersonville Medical Office Building 2,643,834 100,000 2,743,834
24 Bayshore Doctors Center 1,767,800 0 1,767,800
25 Judson Medical Building 576,569 0 576,569
26 Oregon Medical Building 17,445,918 0 17,445,918
27 Rosewood Professional Building 4,569,953 0 4,569,953
28 Spring Branch Professional Building 10,295,139 0 10,295,139
29 Toepperwein Medical Center 1,983,956 0 1,983,956
30 Lake Pointe Medical Plaza 1,507,164 0 1,507,164
31 Southwest General Birthing Center 3,112,289 0 3,112,289
32 Trinity Valley Birthing Center 3,598,453 0 3,598,453
33 Twelve Oaks Medical Plaza 2,690,851 670,627 3,361,478
34 Chippenham Medical Offices 3,771,668 0 3,771,668
35 Chippenham Medical Offices 3,718,966 0 3,718,966
36 Johnston-Willis Medical Offices 6,860,932 0 6,860,932
37 Johnston-Willis Medical Offices 4,729,002 1,126,714 5,855,716
38 Lewis-Gale Clinic, Keagy, Braeburn, Floyd 26,019,699 0 26,019,699
39 Lewis-Gale Medical Foundation 1,394,974 0 1,394,974
----------- --------- ----------
217,795,124 3,516,183 221,311,306
----------- --------- -----------
Ambulatory Surgery Centers
40 Bakersfield Surgery Center 828,613 0 828,613
41 Valley View Surgery Center 2,860,571 0 2,860,571
42 Physicians Daysurgery Center 1,514,376 0 1,514,376
----------- -------- ---------
5,203,560 0 5,203,560
----------- -------- ---------
Comprehensive Ambulatory Care Centers
43 St.Andrews 5,969,200 0 5,969,200
44 Five Points Medical Building 6,929,636 0 6,929,636
45 Huebner Medical Center 11,067,141 200,000 11,267,141
46 Huebner Medical Center II 8,061,509 78,954 8,140,463
----------- ------- ----------
32,027,485 278,954 32,306,439
----------- ------- ----------
Clinical Laboratories
47 Midtown Medical Center 8,601,151 0 8,601,151
48 Puckett Laboratory 3,718,165 0 3,718,165
----------- --- ----------
12,319,316 0 12,319,316
----------- --- ----------
Long-Term Care Facilities
49 Fountain Valley - Living Care Center 11,325,746 0 11,325,746
50 Life Care Center of Aurora 4,579,039 0 4,579,039
51 Life Care Center of Westminster (4) 4,355,419 0 4,355,419
52 Life Care Center of Orange Park 8,388,977 0 8,388,977
53 New Harmonie Healthcare Center 3,511,749 0 3,511,749
54 Life Care Center of Wichita 5,297,900 0 5,297,900
55 Fenton Extended Care Center 3,467,687 0 3,467,687
56 Meadows Nursing Center 3,241,786 0 3,241,786
57 Ovid Convalescent Manor 982,862 1,844,691 2,827,552
58 Wayne Convalescent Center 963,336 0 963,336
59 Westgate Manor Nursing Home 1,633,306 0 1,633,306
60 Life Care Center of Forth Worth 8,359,126 0 8,359,126
61 Life Care Center of Houston (4) 8,297,775 0 8,297,775
----------- ---------- ----------
64,404,708 1,844,691 66,249,399
----------- ---------- ----------
Medical Office Buildings
62 Rowlett Medical Plaza 1,810,249 0 1,810,249
63 New River Valley Med. Arts Building 839,285 0 839,285
64 Valley Medical Center 867,590 0 867,590
65 Lewis-Gale Business & Child Care Centers 5,665,960 0 5,665,960
66 Lewis-Gale Valley View 4,367,295 0 4,367,295
----------- --- ----------
13,550,379 0 13,550,379
----------- --- ----------
Physician Centers
67 Clinica Latina 331,685 0 331,685
68 Southwest Florida Orthopedic Center 3,135,642 0 3,135,642
69 Medical & Surgical Institute of Ft. Lauderdale 3,580,315 717,332 4,297,647
70 Doctors Clinic 8,070,829 0 8,070,829
71 Woodstock Clinic 2,087,444 0 2,087,444
72 Durham Medical Center 6,865,237 288,566 7,153,802
73 Valley Diagnostic Medical and Surgical Clinic 3,776,918 0 3,776,918
74 Lewis-Gale Bent Mountain Road Clinic 258,044 0 258,044
75 Lewis-Gale Bohnsack Clinic 524,280 0 524,280
76 Lewis-Gale Craig County Clinic 148,990 0 148,990
77 Lewis-Gale Family Practice Center 969,461 0 969,461
78 Lewis-Gale Fincastle Clinic 259,478 0 259,478
79 Lewis-Gale Spartan Drive 817,140 0 817,140
----------- --------- -----------
30,825,462 1,005,897 31,831,359
----------- --------- ----------
Total Real Estate $376,126,034 $6,645,724 $382,771,758
============ ========== ============
Corporate Property 0 0 0
Third Party Developments 278,496 0 278,496
Total Property $376,404,530 $6,645,724 $383,050,254
============ =========== ============
SCHEDULE 1
REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1996 (continued)
(1) (2)
Personal (2) Accumulated Date Date
Property Total Depreciation Encumbrances Acquired Acquired
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic $ 0 $ 5,273,993 $ 558,41 0 1993 1988
2 Eaton Canyon Medical Building 0 4,444,070 149,355 0 1995 1984
3 Fountain Valley - AHF 1 0 5,520,316 200,873 0 1994 1973
4 Fountain Valley - AHF 2 0 5,107,769 185,618 0 1994 1975
5 Fountain Valley - AHF 3 0 8,785,363 343,234 0 1994 1981
6 Fountain Valley - AHF 4 0 8,989,674 354,986 0 1994 1984
7 Valley Presbyterian (15211) 20,237 7,538,204 662,088 730,000 (3) 1993 1981
8 Valley Presbyterian (6840-50) 18,267 5,327,777 435,016 0 1993 1961,1968,1984-85
9 Deering Medical Plaza 0 5,072,041 319,701 0 1994 1994
10 East Pointe Medical Plaza 0 4,981,848 269,007 0 1994 1994
11 Gulf Coast Medical Centre 0 4,791,942 253,557 0 1994 1994
12 Southwest Medical Centre Plaza 0 8,042,864 455,447 0 1994 1994
13 Southwest Medical Centre Plaza II 0 1,620,558 74,449 0 1995 1977
14 Coral Gables Medical Plaza 0 11,213,733 764,285 0 1994 1991
15 Palm Beach Medical Group Building 0 3,830,316 20,461 0 1996 1994
16 Palms of Pasadena Medical Plaza 0 5,528,581 288,460 0 1994 1994
17 Candler Parking Garage 0 4,169,090 139,143 0 1994 1995
18 Candler Professional Office Building 0 7,193,045 452,613 1,000,000 (3) 1994 1981
19 Candler Regional Heart Center 0 8,764,902 272,958 0 1995 1995
20 North Fulton Medical Arts Plaza 38,409 5,784,500 405,030 0 1993 1983
21 Northwest Medical Center 0 10,236,246 608,705 0 1994 1975
22 Overland Park Regional Medical Center 0 8,606,501 33,461 0 1995 1996
23 Hendersonville Medical Office Building 0 3,138,890 190,450 0 1994 1991
24 Bayshore Doctors Center 12,547 1,905,818 205,064 0 1993 1989
25 Judson Medical Building 0 735,954 1,848 0 1996 1990
26 Oregon Medical Building 39,968 18,485,079 1,981,781 0 1993 1992
27 Rosewood Professional Building 0 5,252,820 307,613 0 1994 1982
28 Spring Branch Professional Building 173,532 14,301,747 1,244,451 0 1993 1985
29 Toepperwein Medical Center 0 2,481,938 6,359 0 1996 1990
30 Lake Pointe Medical Plaza 12,023 1,737,128 123,557 0 1993 1988
31 Southwest General Birthing Center 0 3,236,289 182,884 0 1993 1994
32 Trinity Valley Birthing Center 0 3,671,600 126,869 0 1994 1995
33 Twelve Oaks Medical Plaza 21,465 3,772,050 255,729 0 1993 1968,1994
34 Chippenham Medical Offices 0 3,771,668 236,083 0 1994 1972-80
35 Chippenham Medical Offices 0 4,593,463 236,083 0 1994 1994
36 Johnston-Willis Medical Offices 0 8,773,577 426,408 2,855,000 1994 1980, 1987-88
37 Johnston-Willis Medical Offices 0 5,855,716 363,237 0 1994 1993, 1994
38 Lewis-Gale Clinic, Keagy, Braeburn, FLoyd 0 27,433,122 83,396 2,288,000 1996 1984
39 Lewis-Gale Medical Foundation 0 1,433,579 4,471 0 1996 1981
------ ---------- --------- --------- ---- --------------
336,448 251,403,769 13,223,147 6,873,000
------- ----------- ---------- --------- ---- --------------
Ambulatory Surgery Centers
40 Bakersfield Surgery Center 8,370 1,046,229 97,363 0 1993 1985
41 Valley View Surgery Center 0 3,800,571 180,308 0 1994 1994
42 Physicians Daysurgery Center 15,296 2,039,563 177,942 0 1993 1985
------ --------- ------- -- ---- ----
23,666 6,886,363 455,613 0
------ --------- ------- -- ---- ----
Comprehensive Ambulatory Care Centers
43 St. Andrews 0 7,001,461 40,096 0 1996 1995
44 Five Points Medical Building 0 10,032,911 8,921 0 1995 1996
45 Huebner Medical Center 60,148 11,928,764 1,282,486 0 1993 1991
46 Huebner Medical Center II 0 9,181,761 301,231 0 1994 1995
------ ---------- --------- -- ---- ----
60,148 38,144,896 1,632,734 0
------ ---------- --------- -- ---- ----
Clinical Laboratories
47 Midtown Medical Center 8,028 8,789,812 971,214 0 1993 1906, 1986
48 Puckett Laboratory 29,660 4,285,485 319,487 0 1993 1986, 1991
------ ---------- --------- -- ---- ----------
37,688 13,075,297 1,290,701 0
------ ---------- --------- -- ---- ----------
Long-Term Care Facilities
49 Fountain Valley - Living Care Center 0 12,687,698 689,761 0 1994 1989
50 Life Care Center of Aurora 0 6,230,516 278,873 0 1994 1994
51 Life Care Center of Westminster (4) 0 4,355,419 0 0 1996 Under construction
52 Life Care Center of Orange Park 0 9,592,697 85,153 0 1995 1996
53 New Harmonie Healthcare Center 32,331 3,640,139 411,065 0 1993 1987
54 Life Care Center of Wichita 0 6,311,323 6,921 0 1996 Under construction
55 Fenton Extended Care Center 32,345 3,540,494 406,124 0 1993 1968
56 Meadows Nursing Center 35,415 3,284,185 382,250 0 1993 1971, 1977
57 Ovid Convalescent Manor 48,791 2,938,669 179,597 0 1993 1968
58 Wayne Convalescent Center 33,548 1,049,352 125,105 0 1993 1967
59 Westgate Manor Nursing Home 32,887 1,697,048 200,112 0 1993 1964, 1974
60 Life Care Center of Forth Worth 0 9,049,894 28,116 0 1995 1996
61 Life Care Center of Houston (4) 0 8,297,775 0 0 1995 Under construction
------- ---------- --------- -- ---- ------------------
215,317 72,675,211 2,793,076 0
------- ---------- --------- -- ---- ------------------
Medical Office Buildings
62 Rowlett Medical Plaza 0 1,976,372 110,248 0 1994 1994
63 New River Valley Med. Arts Building 43,611 926,022 116,188 0 1993 1988
64 Valley Medical Center 83,179 1,015,116 139,159 0 1993 1989
65 Lewis-Gale Business & Child Care Centers 0 6,732,699 18,160 0 1996 1995
66 Lewis-Gale Valley View 0 5,119,923 13,998 1,575,000 1996 1990
------- ---------- ------- --------- ---- ----
126,790 15,770,133 397,752 1,575,000
------- ---------- ------- --------- ---- ----
Physician Clinics
67 Clinica Latina 0 724,470 13,820 0 1995 1991
68 Southwest Florida Orthopedic Center 0 3,604,186 211,066 0 1994 1984
69 Medical & Surgical Inst. of Ft. Lauderdale 0 5,204,476 259,245 0 1994 1991
70 Doctors Clinic 50,781 10,305,182 932,960 0 1993 1969, 1973
71 Woodstock Clinic 0 2,673,879 149,424 0 1994 1991
72 Durham Medical Center 364,987 8,511,527 684,688 0 1993 1993
73 Valley Diagnostic Med.& Surgical Clinic 20,117 4,458,322 434,775 0 1993 1982
74 Lewis-Gale Bent Mountain Road Clinic 0 350,203 827 0 1996 1984
75 Lewis-Gale Bohnsack Clinic 0 674,806 1,680 0 1996 1995
76 Lewis-Gale Craig County Clinic 0 182,269 478 0 1996 1973
77 Lewis-Gale Family Practice Center 0 1,151,983 3,107 0 1996 1905
78 Lewis-Gale Fincastle Clinic 0 337,915 832 0 1996 1986
79 Lewis-Gale Spartan Drive 0 901,107 2,619 0 1996 1992
------- ---------- --------- -- ---- ----
435,885 39,080,324 2,695,521 0
------- ---------- --------- -- ---- ----
Total Real Estate $1,235,942 $437,035,993 $22,488,543 $8,448,000
========== ============ =========== ========== ==== ====
Corporate Property 1,863,439 1,863,439 654,967 0
Third Party Developments 0 278,496 0 0
---------- ------------ ----------- ---------- ---- ----
Total Property $3,099,382 $439,177,928 $23,143,511 $8,448,000
========== ============ =========== ========== ==== ====
(1) Depreciation is provided on buildings and improvements over 31.5 or 39.0
years and personal property over 3.0, 5.0 or 7.0 years.
(2) Reconciliations of Total Property and Accumulated Depreciation for the
three months and twelve months ended December 31, 1996:
Three Months Ended 12/31/96 Twelve Months Ended 12/31/96
Accumulated Accumulated
Total Property Depreciation Total Property Depreciation
Beginning Balance $377,608,198 $20,731,105 $332,972,982 $14,492,646
Retirements/Dispositions:
Corporate Property 0 0 (5,033) (755)
Additions during the period:
Acquisitions/Improvements 87,367,681 2,326,597 107,249,244 8,304,776
Corporate Property 56,529 85,809 351,617 346,844
Construction in Progress (25,854,480) 0 (1,390,882) 0
============= =========== ============ ============
Balance at December 31, 1996 $439,177,928 $23,143,511 $439,177,928 $23,143,511
============= =========== ============ ============
(3) These two encumbrances are to protect the lessee's interest in their
security deposit.
(4) Lessee development at December 31, 1996.
(46-47)