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)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
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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 700
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
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None None
Securities registered pursuant Common Stock, $.01 par value per share
------------------------------------------
to Section 12 (g) of the Act: 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 11,
1998) of the Registrant held by non-affiliates on March 11, 1998, was
approximately $561,177,113.
As of March 11, 1998, 20,663,064 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 1997 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 11, 1998 are incorporated into
Part III of this Report.
(2)
TABLE OF CONTENTS
Page
Item 1. Business 5
The Company 5
Property Acquisition Activity 8
Continuing Property Development Activity 8
Investment Policy 9
Competition 10
Government Regulation 11
Environmental Matters 12
Insurance 14
Employees 14
Federal Income Tax Information 14
ERISA Considerations 32
Cautionary Statements 34
Item 2. Properties 40
Executive Offices 40
Property Operations 40
Item 3. Legal Proceedings 43
Item 4. Submission of Matters to a Vote of Securityholders 43
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 44
Item 6. Selected Financial Data 44
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 44
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44
Item 10. Directors and Executive Officers of the Registrant 45
Directors 45
Executive Officers 45
Item 11. Executive Compensation 45
(3)
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
(4)
PART I
Item 1. Business
The Company
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Healthcare Realty Trust Incorporated ("Healthcare Realty" or the "Company")
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.
From the commencement of its operations in June 1993 through January 31, 1998,
the Company has invested or committed to invest, directly and indirectly, over
$525 million in 87 income-producing real estate properties related to the
delivery of healthcare services, containing over 4.4 million square feet. As of
January 31, 1998, the Company's portfolio was comprised of seven facility types,
located in 44 markets nationwide, and operated pursuant to contractual
arrangements with 18 healthcare providers. At January 31, 1998, the Company
provided property management services for 130 healthcare-related properties
nationwide, totaling over 3.9 million square feet, and third-party asset
management services for 251 properties nationwide, totaling over 1.3 million
square feet. 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 that 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,
(5)
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 has a strategic
advantage in providing its services to a more diverse group of healthcare
providers.
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
66.4% 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
Healthcare Corporation, accounting for approximately 23.0% 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
enters into a contract to acquire or ground lease the real estate and enters
into a long-term net lease with a healthcare operator 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 either acts as developer, or
employs the healthcare operator to act as the developer of the property, and has
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
(6)
funding agreements, the Company receives 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 is the contractual responsibility of third parties and construction
costs are guaranteed by the healthcare operator. All construction and service
contracts relating to the development are collaterally assigned to the Company.
During the term of the development of a facility, funds are 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 provide guarantees of 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, provides 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.
Generally, most agreements 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 does not include the healthcare operator's operating licenses. Most
of 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 into
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. See "Federal Income Tax Information" below.
(7)
Property Acquisition Activity
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During the fourth quarter of 1997, the Company completed a $12.5 million
acquisition of an 80,000 square foot ancillary hospital facility under
development and additional building sites located adjacent to the 251-bed
Bradley County Memorial Hospital in Cleveland, Tennessee. Upon completion of the
development, which is expected to occur in June 1998, the ancillary hospital
facility is expected to be occupied by physician practices and affiliated
hospital services and support functions, including diagnostic imaging,
laboratory services and an ambulatory surgery center. The development is
situated on 8.5 acres that contain two additional sites for further development.
Continuing Property Development Activity
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At December 31, 1997, the Company had continuing commitments for the
following properties under development:
Development of Long-Term Care Facility in Greeley, Colorado. As of
December 31, 1997, the Company continued to fund the development of Life Care of
Greeley, a long-term care facility to be operated by Life Care Centers of
America. The Company's investment in Life Care of Greeley, at completion, will
be approximately $11.9 million of which approximately $9.0 million had been
funded at December 31, 1997.
Development of Long-Term Care Facility in Columbia, Tennessee. As of
December 31, 1997, the Company continued to fund the development of Life Care of
Columbia, a long-term care facility to be operated by Life Care Centers of
America. The Company's investment in Life Care of Columbia, at completion, will
be approximately $12.7 million of which approximately $4.9 million had been
funded at December 31, 1997.
Expansion of Comprehensive Ambulatory Care Center in Venice, Florida. As of
December 31, 1997, the Company continued to fund the expansion of the St.
Andrews Surgery Center and Center for Sight, a $6.6 million comprehensive
ambulatory care center which the Company acquired in 1996. The expansion is
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. The
Company's investment in St. Andrews Surgery Center and Center for Sight, at
completion, will be approximately $4.5 million of which approximately $2.4
million had been funded at December 31, 1997.
Development of Ancillary Hospital Facility in Cleveland, Tennessee. As of
December 31, 1997, the Company continued to fund the development of an ancillary
hospital facility to be operated by Bradley County Memorial Hospital. The
Company's investment in Bradley County Memorial Hospital Medical Office
Building, at completion, will be approximately $9.4 million of which
approximately
(8)
$2.9 million had been funded at December 31, 1997. The development is situated
on an 8.5 acre parcel of land that contains two additional sites for further
development.
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.
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) the potential 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
(9)
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
guaranteeing 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. A significant challenge facing the Company is the
expansion of the real estate investment trust industry. REITs have had an
increasingly ready access to the capital markets, with the result that there has
been an acceleration in growth of the number of real estate investment trusts
and the amount of funds real estate investment trusts have available for
investment. The expansion of available capital to the REIT industry has resulted
in significant investment pressure from other REITs for properties which meet
the Company's investment standards.
The operation of all of the Company's properties is 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.
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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1997 Annual Report to Shareholders which
is incorporated by reference herein.
(10)
Government Regulation
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The investments made by the Company are with active participants in the
healthcare industry. The healthcare industry is undergoing substantial changes
due to rising costs in the delivery of healthcare services, rising competition
for patients, and reduction of reimbursement by private and governmental payors.
Further, the healthcare industry is faced with increased scrutiny by federal and
state legislative and administrative authorities, thus presenting the industry
and its individual participants with significant uncertainty. The Company
believes that these changes and uncertainties present significant opportunities
for the Company to assist in providing solutions to some of these pressures;
however, these various changes can affect the economic performance of some or
all of its tenants and sponsors. The degree to which these changes may affect
the economic performance of the Company, positively or negatively, cannot be
predicted.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1997 Annual Report to Shareholders which
is incorporated by reference herein.
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
(11)
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.
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
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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 therefor, 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
(12)
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 by the Company or managed or developed by its property management
subsidiary 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.
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
(13)
activities of its lessees or health care operators, nor will the Company monitor
the lessees or healthcare operators with respect to environmental matters.
Insurance
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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
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As of March 11, 1998, the Company employed 133 people. None of the
employees is a member of a labor union and the Company considers its relations
with its employees to be excellent.
Federal Income Tax Information
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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.
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
(14)
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. 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 that 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.
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 it 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
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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" upon its acquisition by the Company from a C corporation in a carry-over
basis transaction and such disposition occurs within a ten-year recognition
period beginning on the date on which it was acquired by the Company, 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."
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 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
(16)
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.
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
(17)
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, for taxable years prior to 1998, 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. 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 have been subject to
the limitations imposed by the 30% gross income test for taxable years prior to
1998. The Company has analyzed its gross income through December 31, 1997, 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 violated the 30% gross income test.
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,
(18)
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 (i) 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 or (ii) for taxable years
beginning after 1997, the income earned by the Company for other services
furnished or rendered by the Company to tenants of a property or for the
management or operation of the property does not exceed a de minimis threshold
generally equal to 1% of the income from such property. 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 allocations 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
personal property. 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.
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.
(19)
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 income tax purposes. The Company currently has nine 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
(20)
action as may be required to cure any failure to satisfy the test within 30 days
after the close of any quarter.
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 1997 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.
(21)
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.
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
(22)
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 its 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.
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 result in these leases being disqualified
leaseback agreements. 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
(23)
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.
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.
(24)
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
"unrelated business taxable income," even though the REIT may have financed
certain of its activities with acquisition indebtedness. Although revenue
rulings are interpretive in nature and are subject to revocation or modification
by the IRS, based upon the revenue ruling and the analysis therein,
distributions made by the Company to a U.S. Shareholder that is a tax-exempt
entity (such as an individual retirement account ("IRA") or a 401(k) plan)
should not constitute unrelated business taxable income unless such tax-exempt
U.S. Shareholder has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code, or the shares are otherwise used
in an unrelated trade or business conducted by such U.S. Shareholder.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension-held REIT" at any time during a taxable year
beginning after December 31, 1993. Such a pension fund may be required to treat
a certain percentage of all dividends received from the REIT during the year as
unrelated business taxable income. The percentage is equal to the ratio of the
REIT's gross income (less direct expenses related thereto) derived from the
conduct of unrelated trades or businesses determined as if the REIT were a
tax-exempt pension fund, to the REIT's gross income (less direct expenses
related thereto) from all sources. The special rules will not apply to require a
pension fund to recharacterize a portion of its dividends as unrelated business
taxable income unless the percentage computed is at least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would otherwise
fail to satisfy the "five or fewer test" discussed above, if the stock or
beneficial interests of the REIT held by such tax-exempt pension funds were not
treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension funds (each of which
owns more than 10% (measured by value) of the REIT's stock or beneficial
interests) own in the aggregate more than 50% (measured by value) of the REIT's
stock or beneficial interests. The Company believes that it will not be treated
as a pension-held REIT. However, because the shares of the Company will be
publicly traded, no assurance can be given that the Company is not or will not
become a pension-held REIT.
(25)
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created in the United States or under the laws of the United States
or of any state thereof, (iii) an estate whose income is includable in income
for U.S. federal income tax purposes regardless of its source or (iv) a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust ("Non-U.S.
Shareholders") are highly complex, and the following discussion is intended only
as a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of United States federal,
state, and local income tax laws on investment in stock of the Company,
including any reporting requirements.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in stock of the Company in the same
manner as a U.S. Shareholder if such investment is "effectively connected" with
the Non-U.S. Shareholder's conduct of a trade or business in the United States.
A corporate Non-U.S. Shareholder that receives income with respect to its
investment in stock of the Company that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also may
be subject to the 30% branch profits tax imposed by the Code, which is payable
in addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Shareholders
whose investment in stock of the Company is not effectively connected with the
conduct of a trade or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain from
the sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be treated
as ordinary income dividends to the extent made out of current or accumulated
earnings and profits of the Company. Generally, such ordinary income dividends
will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividend paid unless reduced or eliminated by an applicable United
States income tax treaty. The Company expects to withhold United States income
tax at the rate of 30% on the gross amount of any such dividends paid to a
Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S.
Shareholder has filed an IRS Form 1001 with the Company, certifying the Non-U.S.
Shareholder's entitlement to treaty benefits.
(26)
Non-Dividend Distributions
Distributions made by the Company in excess of its current and accumulated
earnings and profits to a Non-U.S. Shareholder who holds 5% or less of the stock
of the Company (after application of certain ownership rules) 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 the Company's current and accumulated earnings and profits, the distribution
will be subject to withholding at the rate applicable to a dividend
distribution. However, the Non-U.S. Shareholder may seek a refund from the IRS
of any amount withheld if it is subsequently determined that such distribution
was, in fact, in excess of the Company's then current and accumulated earnings
and profits.
Capital Gain Dividends
As long as the Company continues to qualify as a REIT, distributions made
by the Company that are attributable to gain from the sale or exchange by the
Company of any United States real property interests ("USRPI") will be taxed to
a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Shareholder as if such distributions were gains "effectively connected" with the
conduct of a trade or business in the United States. Accordingly, a Non-U.S.
Shareholder will be taxed on such distributions at the same capital gain rates
applicable to U.S. Shareholders (subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of non-resident alien
individuals). Distributions subject to FIRPTA also may be subject to the 30%
branch profits tax in the case of a corporate Non-U.S. Shareholder that is not
entitled to treaty relief or exemption. The Company will be required to withhold
tax from any distribution to a Non-U.S. Shareholder that could be designated by
the Company as a USRPI capital gain dividend in an amount equal to 35% of the
gross distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the
Non-U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Disposition of Stock of the Company
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
stock of the Company generally will not be subject to United States taxation
unless such stock constitutes a USRPI within the meaning of FIRPTA. The stock of
the Company will not constitute a USRPI so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times
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during a specified testing period less than 50% in value of its stock or
beneficial interests are held directly or indirectly by Non-U.S. Shareholders.
The Company believes that it will be a "domestically controlled REIT," and
therefore that the sale of stock of the Company will not be subject to taxation
under FIRPTA. However, because the stock of the Company is publicly traded, no
assurance can be given that the Company is or will continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of stock of the Company that is not otherwise subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Shareholder of stock of the
Company would be subject to United States taxation under FIRPTA as a sale of a
USRPI unless (i) the stock of the Company is "regularly traded" (as defined in
the applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder's
interest (after application of certain constructive ownership rules) in the
Company is 5% or less at all times during the five years preceding the sale or
exchange. If gain on the sale or exchange of the stock of the Company were
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
regular United States income tax with respect to such gain in the same manner as
a U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock of the Company (including the
Company) would be required to withhold and remit to the IRS 10% of the purchase
price. Additionally, in such case, distributions on the stock of the Company to
the extent they represent a return of capital or capital gain from the sale of
the stock of the Company, rather than dividends, would be subject to a 10%
withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases: (i) if the Non-U.S.
Shareholder's investment in the stock of the Company is effectively connected
with a U.S. trade or business conducted by such Non-U.S. Shareholder, the
Non-U.S. Shareholder will be subject to the same treatment as a U.S. shareholder
with respect to such gain, or (ii) if the Non-U.S. Shareholder 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.
(28)
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. Shareholders and to the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a U.S.
Shareholder may be subject to backup withholding, at the rate of 31% on
dividends paid unless such U.S. Shareholder (i) is a corporation or falls within
certain other exempt categories and, when required, can demonstrate this fact,
or (ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. shareholder who does not
provide the Company with his correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the U.S. Shareholder's federal income tax liability.
In addition, the Company may be required to withhold a portion of any capital
gain distributions made to U.S. Shareholders who fail to certify their
non-foreign status to the Company.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
State and Local Taxes
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the stock of the Company.
Taxpayer Relief Act of 1997-Significant REIT Provisions
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") included various
changes to the tax treatment of REITs effective for taxable years beginning
after August 5, 1997. In the case of the Company, these provisions will be
effective beginning January 1, 1998. Set forth below is a summary of these
changes.
Alternative Penalties for Failure to Ascertain Ownership. Under the 1997
Tax Act, the rule that disqualifies a REIT for any year in which the REIT failed
to comply with regulations to ascertain its ownership has been replaced with an
intermediate penalty of $25,000 ($50,000 for intentional violations) for any
year in which the REIT did not comply with the ownership regulations. In
addition, a REIT that complied with the regulations for ascertaining its
ownership, and which
(29)
did not know, or have reason to know, that it was so closely held as to be
classified as a personal holding company would not be treated as a personal
holding company.
De Minimis Rule for Tenant Service Income. Under the 1997 Tax Act, a REIT
is allowed to render a de minimis amount of impermissible services to tenants,
including managing or operating the property, and still treat amounts received
with respect to that property as rent, as long as the amount received with
respect to the impermissible services or management does not exceed 1% of the
REIT's gross income from the property. These services must not be valued at less
than 150% of the REIT's direct cost of the services.
Attribution Rules. Under the 1997 Tax Act, for purposes of determining (i)
whether a tenant is a "Related Party Tenant" and (ii) whether a party is an
independent contractor, a partner's ownership only is attributed to a
partnership if the partner owns a 25% or greater interest in the capital or
profits of that partnership.
Election to Retain and Pay Tax on Retained Capital Gains. The 1997 Tax Act
permits a REIT to elect to retain and pay income tax on net long-term capital
gains it received during the tax year. If a REIT makes this election, the REIT
shareholders include in their income as long-term capital gains their
proportionate share of the long-term capital gains as designated by the REIT.
Also, the shareholder will be deemed to have paid a proportionate share of the
tax, which could be credited or refunded to the shareholder. The shareholder's
basis in its shares is increased by the amount of the undistributed long-term
capital gains (less the proportionate amount of capital gains tax paid by the
REIT) included in the shareholder's long-term capital gains.
Repeal of 30-Percent Gross Income Requirement. The 1997 Tax Act repeals the
30% gross income test for tax years beginning after 1997.
Treatment of Foreclosure Property. The 1997 Tax Act lengthens the grace
period for foreclosure property to three taxable years following the election
and allows for the possibility of an additional three years extension by filing
a request with the IRS. Additionally, a REIT may revoke an election to treat
property as foreclosure property for any taxable year.
Payments Received under Hedging Instruments. The 1997 Tax Act treats income
and gain from all hedges that reduce the interest rate associated with REIT
liabilities as qualifying income under the 95% gross income test.
Excess Non-Cash Income. The 1997 Tax Act (i) expands the class of excess
noncash items that are not subject to the 95% distribution requirement to
include income from the cancellation of indebtedness, and (ii) extends the
treatment of original issue discount and coupon interest as excess noncash items
to REITs using the accrual method.
(30)
Prohibited Transaction Safe Harbor. The 1997 Tax Act excludes from the
prohibited sales rules any property that was involuntarily converted.
Shared Appreciation Mortgages. The 1997 Tax Act provides that interest
received on a shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the mortgage is sold
within four years of the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor unless the REIT, when it acquired the mortgage,
knew or had reason to know that the property subject to the mortgage would be
sold in a bankruptcy proceeding.
Qualified REIT Subsidiaries. The 1997 Tax Act permits any corporation
wholly owned by a REIT to be treated as a qualified REIT subsidiary, regardless
of whether the corporation has always been owned by the REIT. However, if the
REIT acquires an existing corporation, such corporation is treated as if it had
been liquidated at the time of acquisition by the REIT and then reincorporated,
so that any pre-REIT built-in gains will be taxed. In addition, any pre-REIT
earnings and profits of the subsidiary must be distributed before the end of the
REIT's taxable year.
Proposed Tax Law Changes
Real estate investment trusts are affected by changes in the federal income
tax law. On February 2, 1998, the Clinton Administration released proposals for
changes in tax rules governing the operations of real estate investment trusts.
If enacted, the proposals would, among other items, limit the ability of the
Company to engage indirectly in certain business activities that cannot be
conducted directly by the Company. Further, the proposals would tax the built-in
gains of C corporations electing tax-free reorganizations, thus affecting an
acquisition transaction format employed by the Company in the past. There is no
way to predict the outcome of these proposals or the eventual economic effect of
these proposals on the Company if these proposals are enacted. It should be
recognized that the present federal income tax treatment of the Company may be
modified by future legislative, judicial or administrative actions or decisions
at any time, which may be retroactive in effect, and, as a result, any such
action or decision may affect investments and commitments previously made. The
rules dealing with federal income taxation are constantly under review by
persons involved in the legislative process and by the IRS in the Treasury
Department, resulting in statutory changes as well as promulgation of new, or
revisions to existing, regulations and revised interpretations of established
concepts. No prediction can be made as to the likelihood as to passage of any
new tax legislation or other provisions either directly or indirectly affecting
the Company or its shareholders.
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ERISA Considerations
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The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a holder of stock of the Company. This discussion does not
propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the
extent not preempted, state law that may be relevant to particular employee
benefit plan shareholders (including plans subject to Title I of ERISA, other
employee benefit plans and IRAs subject to the prohibited transaction provisions
of Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to state
law requirements) in light of their particular circumstances.
A fiduciary making the decision to invest in stock of the Company on behalf
of a prospective purchaser which is an ERISA plan, a tax-qualified retirement
plan, an IRA or other employee benefit plan is advised to consult its own legal
advisor regarding the specific considerations arising under ERISA, Section 4975
of the Code, and (to the extent not preempted) state law with respect to the
purchase, ownership or sale of stock by such plan or IRA.
Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in stock of the
Company is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i)
an ERISA Plan's investments to be prudent and in the best interests of the ERISA
Plan, its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in stock of the
Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
ERISA Plan, taking into consideration the risk of loss and opportunity for gain
(or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described under "Cautionary Statements".
(32)
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan") should consider that such an IRA
or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
Status of the Company under ERISA
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and "parties in interest" or "disqualified
persons" as defined in ERISA and Section 4975 of the Code, respectively deal
with such assets. In certain circumstances where a Plan holds an interest in an
entity, the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or control
with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations, effective March 13, 1987 (the
"Regulations"), that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity
interest" in an entity, such as common stock or common shares of beneficial
interest of a REIT. However, the Regulations provide an exception to the
look-through rule for equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-held
and (iii) either (a) part of a class of securities that is registered under
section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), or (b) sold to a Plan as part of an offering of securities
to the public pursuant to an effective registration statement under the
Securities Act and the class of securities of which such security is a part is
registered under the Exchange Act within 120 days (or such longer period allowed
by the Securities and Exchange Commission) after the end of the fiscal year of
the issuer during which the offering of such securities to the public occurred.
Whether a security is considered "freely transferable" depends on the facts and
circumstances of each case. Generally, if the security is part of an offering in
which the minimum investment is $10,000 or less, any restriction on or
prohibition against any transfer or assignment of such security for the purposes
of preventing a termination or reclassification of the entity for federal or
state tax purposes will not of itself prevent the security from being considered
freely transferable. A class of securities is considered "widely-held" if it is
a class of securities that is owned by 100 or more investors independent of the
issuer and of one another.
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The Company believes that the stock of the Company will meet the criteria
of the publicly-offered securities exception to the look-through rule in that
the stock of the Company is freely transferable, the minimum investment is less
than $10,000 and the only restrictions upon its transfer are those required
under federal income tax laws to maintain the Company's status as a REIT.
Second, stock of the Company is held by 100 or more investors and at least 100
or more of these investors are independent of the Company and of one another.
Third, the stock of the Company has been and will be part of offerings of
securities to the public pursuant to an effective registration statement under
the Securities Act and will be registered under the Exchange Act within 120 days
after the end of the fiscal year of the Company during which an offering of such
securities to the public occurs. Accordingly, the Company believes that if a
Plan purchases stock of the Company, the Company's assets should not be deemed
to be Plan assets and, therefore, that any person who exercises authority or
control with respect to the Company's assets should not be treated as a Plan
fiduciary for purposes of the prohibited transaction rules of ERISA and Section
4975 of the Code.
Cautionary Statements
- ---------------------
From time to time the Company may make forward-looking statements which
reflect its current view 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 those
factors have been discussed in the Company's prior filings with the Securities
and Exchange Commission.
All references to the Company within these cautionary statements include
the Company's affiliates, such as its property management subsidiary, Healthcare
Realty Management Incorporated.
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.
(34)
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. A significant challenge facing the Company is the expansion of the
REIT industry. REITs have had increasing access to the capital markets,
resulting in an acceleration in growth of the number of REITs and the amount of
funds REITs have available for investment. A REIT is required to make dividend
distributions and retains little capital for growth; therefore, it is required
to grow through the steady investment of new capital in real estate assets. The
expansion of available capital to the REIT industry has resulted in significant
investment pressure, with the consequence that many transactions undertaken by
competitors of the Company do not meet the standards that it requires of its
investments, in terms of the present and future internal rate of return, credit
and financial support, weighted average cost of capital and real estate
investment fundamentals. The Company intends to adhere to its established
standards and anticipates that it will be able to maintain steady conservative
growth through the acquisition of quality real estate investments; however, the
increased competition for such assets from other REITs and traditional and
non-traditional equity and debt capital sources may affect the growth of the
Company and its financial return.
The Company's properties will also be subject to competition from the
properties of other healthcare providers. Certain of these operators may have
greater capital resources than 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.
Asset Growth
Inability to Complete Acquisitions. The Company's asset growth strategy
would be negatively impacted if it were to be 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 respect to four 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
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development process. There can be no assurance that the current portfolio of
development funding will be completed in 1998 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.
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.
Ability to Invest Proceeds from Offering and Property Dispositions. From
time to time, the Company will have cash available (i) from the proceeds of
sales of shares of its common stock, and (ii) from the disposition of its
properties pursuant to the terms of master leases or similar financial support
arrangements, which provide, among other items, a disposition of properties in
the event of a default on the part of the healthcare provider and upon the
exercise of an option of the healthcare provider to repurchase subject
properties at specified times during the term of the arrangement. The Company
must invest these proceeds, on a timely basis, in another healthcare investment
or in a qualified short-term investment. While the Company has been able to do
so in the past, there is no assurance that the Company could invest proceeds on
a timely basis or on acceptable terms. A failure of the Company to reinvest the
proceeds could have an adverse effect on the Company's future revenues.
Dependence on Healthcare Providers. The healthcare service industry
continues to be a profitable, growing segment of the economy, supported by
fundamentals that ensure continued growth. The industry is undergoing
substantial changes in the method of delivery of healthcare services, rising
competition among healthcare providers for patients, continuing pressure by
private and governmental payors and increased scrutiny by federal and state
authorities. These changes create uncertainties which can present the Company
with the opportunity to assist in providing solutions to the issues created by
these changes. The changes can also affect the economic performance of some or
all of the providers who provide financial support, as tenants and sponsors, to
the Company's investments and, consequently, the lease revenues and the value of
the Company's investments in the property.
(36)
Concentration on Few Healthcare Providers. Currently 23% percent of the
Company's portfolio is leased to Columbia/HCA Healthcare Corporation and 21.7%
percent is leased to Tenet Healthcare Corporation. Negative performance by
either or both of these providers could have an adverse impact to the support
arrangements that the Company has with these providers.
Impact of Reduced Occupancy Rates. Most of the hospitals adjacent to or
associated with the Company's properties owned or to be acquired by the Company
are substantially less than 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.
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. 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 similar financial support with primary term periods with respect to
most of its investments.
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.
Property Management Services. The Company is engaged on its own behalf, and
for the benefit of third-party property owners, in asset and property
management, day-to-day property management and leasing of multi-tenanted
healthcare properties and supervision of the development of new healthcare
properties. The Company has experienced net gains in both the number of, and
square footage subject to, its service engagements. The terms of these
engagements can vary in duration from 15 years to month-to-month. Additionally,
engagements
(37)
are regularly terminated as a result of completion of the engagement assignment
or as a result of the sale of managed properties by the Company or third-party
owners. Termination of engagements results in lost future income stream; and
unamortized capital costs incurred in acquisition of engagements must be charged
against current revenues or established reserves. The Company has experienced
significant fluctuation in the number of engagements in effect at any given
time, thus generating uncertainty as to the predictability of net revenues,
although fluctuations experienced by the Company can be mitigated by the
Company's ownership of some of its managed properties. The Company is also
subject to significant uncertainties because of the dynamic nature of the
healthcare service industry, and increased competition from other real estate
management companies entering the healthcare services industry. There can be no
assurance that the Company will be able to successfully market or cross-sell its
property management services. The degree to which these uncertainties may affect
the economic performance of the Company cannot be predicted at this time.
Change in Accounting Treatment for Internal Costs Relating to Acquisitions.
The Emerging Issues Task Force (EITF) has been considering the accounting for
internal acquisition costs for real estate properties. In the past, the Company
has capitalized certain internal costs incurred in identifying, acquiring and
developing real estate properties and has depreciated the capitalized costs over
the life of the related property. At its March 19, 1998 meeting, the EITF
reached a consensus on Issue No. 97-11, "Accounting for Internal Costs Relating
to Real Estate Property Acquisition," that internal preacquisition costs
relating to the purchase of an operating property should be expensed as
incurred. At a previous meeting, the Task Force concluded that internal
preacquisition costs related to the purchase of nonoperating property could be
capitalized in specified circumstances. Expensing internal preacquisition costs
related to the purchase of operating properties will accelerate the recognition
of these costs, negatively impacting reported earnings and funds from operations
of the Company.
REIT Taxes; REIT Tax Proposals. 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 re-qualify during the four
succeeding years. Further, certain transactions or other events could lead to
the Company being taxed at rates ranging from four to 100 percent on certain
income or gains. On February 2, 1998, the Clinton Administration released
proposals for changes in tax rules governing the operations of real estate
investment trusts. If enacted, the proposals would not materially affect the
Company's current day to day operations. However, if enacted, the proposals
would among other items, limit the Company's future ability to engage indirectly
in certain business activities that
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cannot be conducted directly by the Company and tax the built-in gains of C
corporations prospectively electing tax-free reorganizations, thus affecting an
acquisition format employed by the Company in the past.
Access to Capital
Capital Markets. The Company requires capital for the purchase of, or
investment in, healthcare real estate. Currently, the Company has already
invested all of its equity in the acquisition of healthcare real properties;
however, it retains a significant amount of its available debt commitments.
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 initial public
offering. 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. Also,
impacting the Company's ability to continue to increase its dividends are the
matters described below.
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.
Failure to maintain its status as a REIT, even in one taxable year, could cause
the Company to dramatically reduce its dividends. 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
therein.
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Item 2. Properties
Executive Offices
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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, covering approximately 20,569 square feet of rented space, expires on
October 31, 2003, with two five-year renewal options. Annual rental is
approximately $298,000.
Property Operations
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The following table sets forth information regarding the Company's
properties as of December 31, 1997.
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SCHEDULE 1 - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1997
LAND
Costs
Facility Type/Name Operator Facility Initial Capitalized
Location Investment Subsequent to
Acquisition Total
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic Col/HCA AZ $ 308,070 $ - $ 308,070
2 Eaton Canyon Medical Building Tenet CA 1,337,483 0 1,337,483
3 Fountain Valley - AHF 1 Tenet CA 2,218,847 0 2,218,847
4 Fountain Valley - AHF 2 Tenet CA 2,059,953 0 2,059,953
5 Fountain Valley - AHF 3 Tenet CA 3,149,515 0 3,149,515
6 Fountain Valley - AHF 4 Tenet CA 3,160,865 0 3,160,865
7 Fountain Valley - AHF 5 Tenet CA 0 0 0
8 Valley Presbyterian (15211) Valley Pres CA 1,720,127 0 1,720,127
9 Valley Presbyterian (6840-50) Valley Pres CA 1,522,222 0 1,522,222
10 Deering Medical Plaza Col/HCA FL 0 0 0
11 East Pointe Medical Plaza Col/HCA FL 45,216 0 45,216
12 Gulf Coast Medical Centre Col/HCA FL 0 0 0
13 Southwest Medical Centre Plaza Col/HCA FL 0 0 0
14 Southwest Medical Centre Plaza II Col/HCA FL 0 0 0
15 Coral Gables Medical Plaza Tenet FL 532,112 0 532,112
16 Palm Beach Medical Group Building First PhysiciaFL 0 0 0
17 Palms of Pasadena Medical Plaza Tenet FL 0 0 0
18 Candler Parking Garage Candler GA 0 0 0
19 Candler Professional Office Building Candler GA 0 0 0
20 Candler Regional Heart Center Candler GA 0 0 0
21 North Fulton Medical Arts Plaza Vest Amer GA 696,248 0 696,248
22 Northwest Medical Center Vest Amer GA 1,268,962 0 1,268,962
23 Overland Park Regional Medical Center Col/HCA KS 0 0 0
24 Bradley Medical Building (4) Bradley TN 3,186,325 0 3,186,325
25 Hendersonville Medical Office Building Col/HCA TN 395,056 0 395,056
26 Bayshore Doctors Center Col/HCA TX 125,471 0 125,471
27 Judson Medical Building Methodist TX 159,384 0 159,384
28 Oregon Medical Building Col/HCA TX 999,193 0 999,193
29 Rosewood Professional Building Col/HCA TX 682,867 0 682,867
30 Spring Branch Professional Building Col/HCA TX 3,833,076 0 3,833,076
31 Toepperwein Medical Center Methodist TX 497,982 0 497,982
32 Lake Pointe Medical Plaza Tenet TX 217,941 0 217,941
33 Southwest General Birthing Center Tenet TX 124,000 0 124,000
34 Trinity Valley Birthing Center Tenet TX 73,147 0 73,147
35 Twelve Oaks Medical Plaza Dr. Kramer TX 389,107 0 389,107
36 Chippenham Medical Offices Col/HCA VA 0 0 0
37 Chippenham Medical Offices Col/HCA VA 874,497 0 874,497
38 Johnston-Willis Medical Offices Col/HCA VA 1,912,645 0 1,912,645
39 Johnston-Willis Medical Offices Col/HCA VA 0 0 0
40 Lewis Gale-Clinic, Keagy, Braeburn, Fl Phycor VA 1,414,245 44,705 1,458,949
41 Lewis Gale - Medical Foundation Phycor VA 38,604 0 38,604
42 Trinity West Medical Plaza Tenet TX 0 0 0
- - -
32,943,161 44,705 32,987,866
Ambulatory Surgery Centers
43 Bakersfield Surgery Center Nat'l Surg CtrCA 209,246 0 209,246
44 Valley View Surgery Center Nat'l Surg CtrNV 940,000 0 940,000
45 Physicians Daysurgery Center Col/HCA TX 509,891 0 509,891
------- - -------
1,659,137 0 1,659,137
Comprehensive Ambulatory Care Centers
46 St. Andrews Col/HCA&St. AnFL 1,032,261 0 1,032,261
47 Five Points Medical Building Tenet FL 3,103,275 0 3,103,275
48 Huebner Medical Center Huebner TX 601,475 0 601,475
49 Huebner Medical Center II Huebner TX 1,041,298 0 1,041,298
--------- - ---------
5,778,309 0 5,778,309
Clinical Laboratories
50 Midtown Medical Center Midtown AL 180,633 0 180,633
51 Puckett Laboratory Path Labs MS 537,660 0 537,660
------- - -------
718,293 0 718,293
Long-Term Care Facilities
52 Life Care Center of Globe LCC of Amer. AZ 266,596 0 266,596
53 Fountain Valley - Living Care Center Tenet CA 1,361,952 0 1,361,952
54 Life Care Center of Aurora LCC of Amer. CO 1,651,477 0 1,651,477
55 Life Care Center of Greeley (4) LCC of Amer. CO 0 0 0
56 Life Care Center of Centerville LCC of Amer. TN 82,945 0 82,945
57 Life Care Center of Lynchburg LCC of Amer. TN 145,402 0 145,402
58 Life Care Center of Westminster LCC of Amer. CO 332,149 0 332,149
59 Life Care Center of Orange Park LCC of Amer. FL 1,203,720 146,055 1,349,775
60 New Harmonie Healthcare Center Centennial IN 96,059 0 96,059
61 Life Care Center of Wichita LCC of Amer. KS 1,013,423 0 1,013,423
62 Fenton Extended Care Center Centennial MI 40,463 0 40,463
63 Meadows Nursing Center Centennial MI 6,984 0 6,984
64 Ovid Convalescent Manor Centennial MI 62,326 0 62,326
65 Wayne Convalescent Center Centennial MI 52,468 0 52,468
66 Westgate Manor Nursing Home Centennial MI 30,855 0 30,855
67 Life Care Center of Forth Worth LCC of Amer. TX 690,768 0 690,768
68 Life Care Center of Houston LCC of Amer. TX 1,190,364 0 1,190,364
69 Life Care Center of Columbia (4) LCC of Amer. TN 0 0 0
- - -
8,227,951 146,055 8,374,006
Medical Office Buildings
70 Rowlett Medical Plaza Tenet TX 166,123 0 166,123
71 New River Valley Med. Arts Building Col/HCA VA 43,126 0 43,126
72 Valley Medical Center Col/HCA VA 64,347 0 64,347
73 Lewis Gale-Business & Child Care Center Phycor VA 1,066,739 0 1,066,739
74 Lewis Gale - Valley View Phycor VA 752,629 0 752,629
------- - -------
2,092,964 0 2,092,964
Physician Clinics
75 Clinica Latina Tenet CA 392,785 0 392,785
76 Southwest Florida Orthopedic Center Col/HCA FL 468,544 0 468,544
77 Medical & Surgical Instof Ft.Lauderdale Tenet FL 906,829 0 906,829
78 Doctors' Clinic Phycor FL 2,183,572 0 2,183,572
79 Woodstock Clinic Tenet GA 586,435 0 586,435
80 Durham Medical Center Durham TX 992,738 0 992,738
81 Valley Diagnostic Medical and Surgical Phycor TX 502,919 158,368 661,287
82 Lewis Gale - Bent Mountain Road Clinic Phycor VA 92,159 0 92,159
83 Lewis Gale - Bohnsack Clinic Phycor VA 150,526 0 150,526
84 Lewis Gale - Craig County Clinic Phycor VA 33,280 0 33,280
85 Lewis Gale - Family Practice Center Phycor VA 182,522 0 182,522
86 Lewis Gale - Fincastle Clinic Phycor VA 78,437 0 78,437
87 Lewis Gale - Spartan Drive Phycor VA 83,967 0 83,966
6,654,712 158,368 6,813,080
--------- ------- ---------
Total Real Estate $58,074,527 $349,128 $58,423,654
=========== ======== ===========
Corporate Property 0 0 0
Third Party Developments 0 0 0
Total Property $58,074,527 $349,128 $58,423,654
=========== ======== ===========
BUILDINGS & IMPROVEMENTS & CIP
Costs
Capitalized
Initial Subsequent
Investment to Personal (2)
(Including CIP) Acquisition Total Property Total
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic $ 4,965,923 $ - $ 4,965,923 $ - $ 5,273,993
2 Eaton Canyon Medical Building 3,106,587 211,417 3,318,004 0 4,655,487
3 Fountain Valley - AHF 1 3,297,543 26,186 3,323,730 0 5,542,577
4 Fountain Valley - AHF 2 3,047,816 21,065 3,068,881 0 5,128,834
5 Fountain Valley - AHF 3 5,635,848 30,806 5,666,654 0 8,816,169
6 Fountain Valley - AHF 4 5,828,809 31,157 5,859,967 0 9,020,832
7 Fountain Valley - AHF 5 15,116,634 177,076 15,293,710 0 15,293,710
8 Valley Presbyterian (15211) 5,797,840 0 5,797,840 20,237 7,538,204
9 Valley Presbyterian (6840-50) 3,787,288 0 3,787,288 18,267 5,327,777
10 Deering Medical Plaza 5,072,041 0 5,072,041 0 5,072,041
11 East Pointe Medical Plaza 4,936,632 0 4,936,632 0 4,981,848
12 Gulf Coast Medical Centre 4,843,314 0 4,843,314 0 4,843,314
13 Southwest Medical Centre Plaza 8,042,864 0 8,042,864 0 8,042,864
14 Southwest Medical Centre Plaza II 1,620,558 0 1,620,558 0 1,620,558
15 Coral Gables Medical Plaza 10,676,167 6,995 10,683,162 0 11,215,274
16 Palm Beach Medical Group Building 3,830,316 185,000 4,015,316 0 4,015,316
17 Palms of Pasadena Medical Plaza 4,735,232 808,171 5,543,403 0 5,543,403
18 Candler Parking Garage 4,169,090 0 4,169,090 0 4,169,090
19 Candler Professional Office Building 7,177,853 15,193 7,193,045 0 7,193,045
20 Candler Regional Heart Center 9,033,266 79,184 9,112,450 0 9,112,450
21 North Fulton Medical Arts Plaza 4,814,870 348,856 5,163,726 38,409 5,898,383
22 Northwest Medical Center 8,492,284 475,000 8,967,284 0 10,236,246
23 Overland Park Regional Medical Center 9,914,956 175,673 10,090,630 0 10,090,630
24 Bradley Medical Building (4) 2,838,818 0 2,838,818 0 6,025,143
25 Hendersonville Medical Office Building 2,643,834 100,000 2,743,834 0 3,138,890
26 Bayshore Doctors Center 1,767,800 0 1,767,800 12,547 1,905,818
27 Judson Medical Building 576,569 29,207 605,776 0 765,161
28 Oregon Medical Building 17,445,918 0 17,445,918 39,968 18,485,078
29 Rosewood Professional Building 4,569,953 0 4,569,953 0 5,252,820
30 Spring Branch Professional Building 10,295,139 0 10,295,139 173,532 14,301,747
31 Toepperwein Medical Center 1,983,956 250,229 2,234,184 0 2,732,167
32 Lake Pointe Medical Plaza 1,507,164 0 1,507,164 12,023 1,737,128
33 Southwest General Birthing Center 3,112,289 0 3,112,289 0 3,236,289
34 Trinity Valley Birthing Center 3,598,453 0 3,598,453 0 3,671,600
35 Twelve Oaks Medical Plaza 2,390,851 754,616 3,145,467 21,465 3,556,039
36 Chippenham Medical Offices 3,771,668 0 3,771,668 0 3,771,668
37 Chippenham Medical Offices 3,718,966 0 3,718,966 0 4,593,463
38 Johnston-Willis Medical Offices 6,860,932 0 6,860,932 0 8,773,577
39 Johnston-Willis Medical Offices 4,729,002 1,126,714 5,855,716 0 5,855,716
40 Lewis Gale - Clinic, Keagy, Braeburn, Floyd 26,019,699 41,471 26,061,170 0 27,520,119
41 Lewis Gale - Medical Foundation 1,394,974 0 1,394,974 0 1,433,579
42 Trinity West Medical Plaza 5,135,335 729,997 5,865,332 0 5,865,332
--------- ------- --------- - ---------
242,305,050 5,624,013 247,929,063 336,447 281,253,376
Ambulatory Surgery Centers
43 Bakersfield Surgery Center 828,613 0 828,613 8,370 1,046,229
44 Valley View Surgery Center 2,860,571 0 2,860,571 0 3,800,571
45 Physicians Daysurgery Center 1,514,376 0 1,514,376 15,297 2,039,563
--------- - --------- ------ ---------
5,203,560 0 5,203,560 23,667 6,886,363
Comprehensive Ambulatory Care Centers
46 St. Andrews 7,362,469 0 7,362,469 0 8,394,730
47 Five Points Medical Building 7,652,865 202,833 7,855,699 0 10,958,974
48 Huebner Medical Center 11,067,141 200,000 11,267,141 60,148 11,928,764
49 Huebner Medical Center II 8,517,692 104,898 8,622,590 0 9,663,888
--------- ------- --------- - ---------
34,600,167 507,731 35,107,899 60,148 40,946,355
Clinical Laboratories
50 Midtown Medical Center 8,601,151 0 8,601,151 8,028 8,789,812
51 Puckett Laboratory 3,718,165 0 3,718,165 29,660 4,285,485
--------- - --------- ------ ---------
12,319,316 0 12,319,316 37,688 13,075,297
Long-Term Care Facilities
52 Life Care Center of Globe 2,521,319 85,746 2,607,065 0 2,873,661
53 Fountain Valley - Living Care Center 11,325,746 0 11,325,746 0 12,687,698
54 Life Care Center of Aurora 4,579,039 0 4,579,039 0 6,230,516
55 Life Care Center of Greeley (4) 8,843,475 0 8,843,475 0 8,843,475
56 Life Care Center of Centerville 4,963,209 0 4,963,209 0 5,046,153
57 Life Care Center of Lynchburg 3,143,801 0 3,143,801 0 3,289,203
58 Life Care Center of Westminster 7,389,813 37,633 7,427,446 0 7,759,595
59 Life Care Center of Orange Park 8,855,920 0 8,855,920 0 10,205,696
60 New Harmonie Healthcare Center 3,511,749 0 3,511,749 32,332 3,640,140
61 Life Care Center of Wichita 6,477,785 101,453 6,579,238 0 7,592,661
62 Fenton Extended Care Center 3,467,687 0 3,467,687 32,345 3,540,494
63 Meadows Nursing Center 3,241,786 0 3,241,786 35,415 3,284,186
64 Ovid Convalescent Manor 1,187,348 1,640,204 2,827,552 48,791 2,938,669
65 Wayne Convalescent Center 963,336 0 963,336 33,548 1,049,352
66 Westgate Manor Nursing Home 1,633,306 0 1,633,306 32,887 1,697,048
67 Life Care Center of Forth Worth 8,772,078 67,901 8,839,979 0 9,530,747
68 Life Care Center of Houston 8,738,144 91,995 8,830,139 0 10,020,503
69 Life Care Center of Columbia (4) 4,707,648 0 4,707,648 0 4,707,648
--------- - --------- - ---------
94,323,191 2,024,932 96,348,123 215,317 104,937,446
Medical Office Buildings
70 Rowlett Medical Plaza 1,810,249 0 1,810,249 0 1,976,372
71 New River Valley Med. Arts Building 839,285 0 839,285 43,611 926,022
72 Valley Medical Center 867,590 0 867,590 83,179 1,015,117
73 Lewis Gale - Business & Child Care Centers 5,665,960 31,837 5,697,797 0 6,764,536
74 Lewis Gale - Valley View 4,367,295 1,575 4,368,870 0 5,121,498
--------- ----- --------- - ---------
13,550,379 33,412 13,583,791 126,791 15,803,546
Physician Clinics
75 Clinica Latina 331,685 0 331,685 0 724,470
76 Southwest Florida Orthopedic Center 3,135,642 0 3,135,642 0 3,604,186
77 Medical & Surgical Institute of Ft. Lauderdale 3,589,796 717,332 4,307,127 0 5,213,956
78 Doctors' Clinic 8,070,829 0 8,070,829 50,781 10,305,181
79 Woodstock Clinic 2,087,444 0 2,087,444 0 2,673,879
80 Durham Medical Center 6,865,237 288,566 7,153,802 364,987 8,511,528
81 Valley Diagnostic Medical and Surgical Clinic 3,776,918 0 3,776,918 20,117 4,458,322
82 Lewis Gale - Bent Mountain Road Clinic 258,044 0 258,044 0 350,203
83 Lewis Gale - Bohnsack Clinic 524,280 0 524,280 0 674,806
84 Lewis Gale - Craig County Clinic 148,990 0 148,990 0 182,269
85 Lewis Gale - Family Practice Center 969,461 0 969,461 0 1,151,983
86 Lewis Gale - Fincastle Clinic 259,478 0 259,478 0 337,915
87 Lewis Gale - Spartan Drive 817,140 0 817,140 0 901,105
------- - ------- - -------
30,834,943 1,005,897 31,840,840 435,885 39,089,803
Total Real Estate $433,136,606 $9,195,986 $442,332,592 $1,235,942 $501,992,187
============ ========== ============ ========== ============
Corporate Property 0 0 0 3,255,855 3,255,855
Third Party Developments 450,568 0 450,568 0 450,568
Total Property $433,587,174 $9,195,986 $442,783,159 $4,491,797 $505,698,610
============ ========== ============ ========== ============
(41)
(1) (2)
Accumulated Date Date of
Depreciation Encumbrances Acquired Construction
Ancillary Hospital Facilities
1 Orange Grove Medical Clinic $ 716,047 $ - 1993 1988
2 Eaton Canyon Medical Building 226,162 0 1995 1984
3 Fountain Valley - AHF 1 278,719 0 1994 1973
4 Fountain Valley - AHF 2 257,525 0 1994 1975
5 Fountain Valley - AHF 3 476,096 0 1994 1981
6 Fountain Valley - AHF 4 492,388 0 1994 1984
7 Fountain Valley - AHF 5 189,406 0 1997 1997
8 Valley Presbyterian (15211) 849,013 0 1993 1981
9 Valley Presbyterian (6840-50) 557,841 0 1993 1961, 1968, 1984-85
10 Deering Medical Plaza 449,753 0 1994 1994
11 East Pointe Medical Plaza 395,587 0 1994 1994
12 Gulf Coast Medical Centre 376,420 0 1994 1994
13 Southwest Medical Centre Plaza 661,655 0 1994 1994
14 Southwest Medical Centre Plaza II 116,001 0 1995 1977
15 Coral Gables Medical Plaza 1,015,297 0 1994 1991
16 Palm Beach Medical Group Building 121,441 0 1996 1994
17 Palms of Pasadena Medical Plaza 430,429 0 1994 1994
18 Candler Parking Garage 245,200 0 1994 1995
19 Candler Professional Office Building 636,962 1,000,000 (3) 1994 1981
20 Candler Regional Heart Center 504,345 0 1995 1995
21 North Fulton Medical Arts Plaza 540,974 0 1993 1983
22 Northwest Medical Center 838,997 0 1994 1975
23 Overland Park Regional Medical Center 268,478 0 1995 1996
24 Bradley Medical Building (4) 0 0 1997 Under construction
25 Hendersonville Medical Office Building 251,831 0 1994 1991
26 Bayshore Doctors Center 262,969 0 1993 1989
27 Judson Medical Building 18,779 0 1996 1990
28 Oregon Medical Building 2,541,259 0 1993 1992
29 Rosewood Professional Building 424,791 0 1994 1982
30 Spring Branch Professional Building 1,596,023 0 1993 1985
31 Toepperwein Medical Center 71,207 0 1996 1990
32 Lake Pointe Medical Plaza 163,919 0 1993 1988
33 Southwest General Birthing Center 262,682 0 1993 1994
34 Trinity Valley Birthing Center 217,011 0 1994 1995
35 Twelve Oaks Medical Plaza 345,824 0 1993 1968, 1994
36 Chippenham Medical Offices 332,117 0 1994 1972-80
37 Chippenham Medical Offices 332,117 0 1994 1994
38 Johnston-Willis Medical Offices 550,795 0 1994 1980, 1987-88
39 Johnston-Willis Medical Offices 564,918 0 1994 1993, 1994
40 Lewis Gale - Clinic, Keagy, Braeburn, Floyd 777,795 0 1996 1984
41 Lewis Gale - Medical Foundation 41,730 0 1996 1981
42 Trinity West Medical Plaza 70,414 0 1997 Under construction
------ -
19,470,917 1,000,000
Ambulatory Surgery Centers
43 Bakersfield Surgery Center 124,861 0 1993 1985
44 Valley View Surgery Center 253,656 0 1994 1994
45 Physicians Daysurgery Center 228,196 0 1993 1985
------- -
606,712 0
Comprehensive Ambulatory Care Centers
46 St. Andrews 169,285 0 1996 1995
47 Five Points Medical Building 205,955 0 1995 1996
48 Huebner Medical Center 1,647,498 0 1993 1991
49 Huebner Medical Center II 512,617 0 1994 1995
------- -
2,535,355 0
Clinical Laboratories
50 Midtown Medical Center 1,245,379 0 1993 1906, 1986
51 Puckett Laboratory 419,060 0 1993 1986, 1991
------- -
1,664,439 0
Long-Term Care Facilities
52 Life Care Center of Globe 54,974 0 1997 1972
53 Fountain Valley - Living Care Center 980,165 0 1994 1989
54 Life Care Center of Aurora 396,284 0 1994 1994
55 Life Care Center of Greeley (4) 0 0 1997 Under construction
56 Life Care Center of Centerville 74,236 0 1997 1981
57 Life Care Center of Lynchburg 47,023 0 1997 1991
58 Life Care Center of Westminster 121,567 0 1996 Under construction
59 Life Care Center of Orange Park 311,339 0 1995 1996
60 New Harmonie Healthcare Center 527,153 0 1993 1987
61 Life Care Center of Wichita 170,639 0 1996 1997
62 Fenton Extended Care Center 520,816 0 1993 1968
63 Meadows Nursing Center 490,209 0 1993 1971, 1977
64 Ovid Convalescent Manor 265,739 0 1993 1968
65 Wayne Convalescent Center 160,474 0 1993 1967
66 Westgate Manor Nursing Home 256,653 0 1993 1964, 1974
67 Life Care Center of Forth Worth 251,799 0 1995 1996
68 Life Care Center of Houston 182,215 0 1995 1997
69 Life Care Center of Columbia (4) 0 0 1997 Under construction
- -
4,811,283 0
Medical Office Buildings
70 Rowlett Medical Plaza 155,610 0 1994 1994
71 New River Valley Med. Arts Building 149,057 0 1993 1988
72 Valley Medical Center 178,577 0 1993 1989
73 Lewis Gale - Business & Child Care Centers 172,424 0 1996 1995
74 Lewis Gale - Valley View 131,236 0 1996 1990
------- -
786,904 0
Physician Clinics
75 Clinica Latina 22,325 0 1995 1991
76 Southwest Florida Orthopedic Center 291,467 0 1994 1984
77 Medical & Surgical Institute of Ft. Lauderdale 368,653 0 1994 1991
78 Doctors' Clinic 1,196,397 0 1993 1969, 1973
79 Woodstock Clinic 202,948 0 1994 1991
80 Durham Medical Center 920,244 0 1993 1993
81 Valley Diagnostic Medical and Surgical Clinic 557,535 0 1993 1982
82 Lewis Gale - Bent Mountain Road Clinic 7,719 0 1996 1984
83 Lewis Gale - Bohnsack Clinic 15,684 0 1996 1995
84 Lewis Gale - Craig County Clinic 4,457 0 1996 1973
85 Lewis Gale - Family Practice Center 29,001 0 1996 1905
86 Lewis Gale - Fincastle Clinic 7,762 0 1996 1986
87 Lewis Gale - Spartan Drive 24,444 0 1996 1992
------ -
3,648,636 0
Total Real Estate $33,524,247 $1,000,000
=========== ==========
Corporate Property 1,194,133 0
Third Party Developments 0 0
Total Property $34,718,380 $1,000,000
=========== ==========
(1) Depreciation is provided on buildings and improvements over 31.5 to 39.0
years and personal property over 3.0 to 7.0 years.
(2) Reconciliations of Total Property and Accumulated Depreciation for the
three months and twelve months ended December 31, 1997:
Three Months Ended 12/31/97 Twelve Months Ended 12/31/97
Accumulated Accumulated
Total Property Depreciation Total Property Depreciation
Beginning Balance $491,099,453 $31,510,728 $439,177,928 $23,143,511
Retirements/Dispositions:
Corporate Property 0 0 (71,148) (32,343)
Additions during the period:
Acquisitions/Improvements 5,896,491 2,921,745 59,822,598 11,035,703
Corporate Property 291,581 285,907 1,467,143 571,509
Construction in Progress 8,411,085 0 5,302,089 0
--------- - --------- -
Balance at December 31, 1997 505,698,610 $34,718,380 505,698,610 $34,718,380
=========== =========== =========== ===========
(3) This encumbrance is to protect the lessee's interest in their security
deposit.
(4) Lessee development at December 31, 1997.
(42)
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 1997.
(43)
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 30 of
the Company's 1997 Annual Report to Shareholders under the caption "Common
Stock," is incorporated herein by reference.
On February 4, 1997, a former shareholder of Starr Sanders Johnson, Inc.
exercised a warrant to purchase 4,784 shares of the Company's Common Stock at a
price of $19.50 per share. The warrant was issued in 1993 in connection with the
sale of a property to the Company. The warrant was issued in reliance upon the
exemption from the registration requirements of the Securities Act of 1933
contained in Section 4(2) thereof.
Item 6. Selected Financial Data
- ------
The Company's selected financial data, set forth on page nine of its 1997
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 management's discussion and analysis
of financial condition, set forth on pages ten through 14 of the Company's 1997
Annual Report to Shareholders under the caption "Management's 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 15 through 28 of the
Company's 1997 Annual Report to Shareholders, are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure
None.
(44)
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 11, 1998 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.............. 53 Chairman of the Board, Chief Executive
Officer & President
Timothy G. Wallace.......... 39 Executive Vice President & Chief
Financial Officer
Roger O. West............... 53 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 and management of
commercial real estate in Nashville, Tennessee. Mr. Emery has been active in the
real estate industry for 28 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 11, 1998 under the caption "Executive
Compensation," is incorporated herein by reference. The Comparative Performance
(45)
Graph and the Compensation Committee Report on Executive Compensation also
included in the Proxy Statement are expressly not incorporated herein by
reference.
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 11,
1998 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 11, 1998 under the caption "Certain
Relationships and Related Transactions," is incorporated herein by reference.
(46)
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 inItem 8 from the 1997
Annual Report to Shareholders:
Audited Consolidated Financial Statements
- -----------------------------------------
- Independent Auditors' Report.
- Consolidated Balance Sheets - December 31, 1997 and 1996.
- Consolidated Statements of Income for the years ended December 31,
1997, December 31, 1996 and December 31, 1995.
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995.
- Consolidated Statements of Cash Flows for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995.
- Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
-----------------------------
Schedule III -- Real Estate and Accumulated Depreciation
at December 31, 1997.............................................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.
(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 Employees 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. (8)
(47)
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. (8)
10.8 -- Amended and Restated Employment Agreement by and between Roger O. West and Healthcare Realty Trust Incorporated. (8)
10.9 -- Amended and Restated Employment Agreement by and between Timothy G. Wallace and Healthcare Realty Trust
Incorporated. (8)
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 .(9)
13 -- Annual Report to Shareholders for the year ended December 31, 1997 (filed herewith).
21 -- Subsidiaries of the Registrant (filed herewith).
23 -- Consent of Ernst & Young LLP, independent auditors (filed herewith).
- ---------------
(1) Filed as an exhibit to the 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 the 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 the Company's Form 10-Q for the quarter ended June 30, 1994 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company's 10-Q for the quarter ended September 30, 1995 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1995 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company's Form 8-K for December 26, 1996 and hereby incorporated by reference.
(8) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1996 and hereby incorporated by reference.
(9) Filed as an exhibit to the Company's Form 8-K for February 17, 1997 and hereby incorporated by reference.
(48)
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)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
(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).
(49)
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 27, 1998.
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 March 27, 1998
- ------------------ Chief Executive Officer
David R. Emery (Principal Executive Officer)
/s/ Timothy G. Wallace Executive Vice President March 27, 1998
- ---------------------- and Chief Financial Officer
Timothy G. Wallace (Principal Financial Officer)
/s/ Fredrick M. Langreck Treasurer
(Principal Accounting Officer) March 27, 1998
- ------------------------
Fredrick M. Langreck
/s/ Errol L. Biggs, Ph.D. Director March 27, 1998
- -------------------------
Errol L. Biggs, Ph.D.
/s/ Thompson S. Dent Director March 27, 1998
- --------------------
Thompson S. Dent
(50)
/s/ Charles Raymond Fernandez, M.D. Director March 27, 1998
- -----------------------------------
Charles Raymond Fernandez, M.D.
/s/ Batey B. Gresham, Jr. Director March 27, 1998
- -------------------------
Batey B. Gresham, Jr.
/s/ Marliese E. Mooney Director March 27, 1998
- ----------------------
Marliese E. Mooney
/s/ Edwin B. Morris, III Director March 27, 1998
- ------------------------
Edwin B. Morris, III
/s/ John Knox Singleton Director March 27, 1998
- -----------------------
John Knox Singleton
(51)