UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-15319
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-3445278
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-796-8350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Shares of Beneficial Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held
by non-affiliates was $129.0 million based on the $9 7/8 closing price per share
for such stock on the New York Stock Exchange on March 27, 2000. For purposes of
this calculation, 12,809,237 held by HRPT Properties Trust and an aggregate of
128,458 held by the trustees and executive officers of the registrant have been
included in the number of shares held by affiliates.
Number of the registrant's Common Shares of Beneficial Interest, $.01
par value ("Shares"), outstanding as of March 27, 2000: 26,001,500.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated by
reference from our definitive Proxy Statement for the annual meeting of
shareholders currently scheduled to be held on May 11, 2000.
IMPORTANT FACTORS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of the Securities Litigation
Reform Act of 1995. These statements appear in a number of places in this Form
10-K regarding our intent, belief or expectations with respect to the outcome of
current agreements and negotiations with certain of our tenants which are in
bankruptcy proceedings, our ability to obtain requisite approvals for any
agreements reached, our ability to successfully operate properties which we take
back from financially troubled tenants, possible expansion of our portfolio,
performance of our assets, our ability to make distributions, policies and plans
regarding investments, financings and other matters, the effect of the year 2000
issue, our ability to successfully negotiate with some of our tenants in
bankruptcy, our tax status as a real estate investment trust, our ability to
appropriately balance the use of debt and equity and to access capital markets
or other sources of funds and statements of assumptions underlying such
statements as to intent, belief or expectations. Readers are cautioned that any
such forward looking statements are not guarantees of future performance and
involve risks and uncertainties and that actual results may differ materially
from those contained in the forward looking statements as a result of various
factors. Such factors include without limitation the status of the economy and
the capital markets (including prevailing interest rates), compliance with and
changes to regulations and payment and reimbursement policies within the health
care industry, changes in financing terms, competition within the health care
industry, and changes in federal, state and local legislation. The accompanying
information contained in this Annual Report on Form 10-K, including under the
headings "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," identifies other important factors that
could cause such differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR
HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER
WITH ALL AMENDMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT
OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING
PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER,
SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD
TO ANY PERSONAL LIABILITY FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR
HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES
TRUST SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
SENIOR HOUSING PROPERTIES TRUST
1999 FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Page
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 30
Item 3. Legal Proceedings....................................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders..................................... 33
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................... 34
Item 6. Selected Financial Data................................................................. 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 40
Item 8. Financial Statements and Supplementary Data............................................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 41
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... *
Item 11. Executive Compensation.................................................................. *
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... *
Item 13. Certain Relationships and Related Transactions.......................................... *
* Incorporated by reference from our Proxy Statement for
the Annual Meeting of Shareholders currently scheduled
to be held on May 11, 2000, to be filed pursuant to
Regulation 14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 42
References in this Annual Report on Form 10-K to the "Company" or
"Senior Housing" include consolidated subsidiaries, unless the context indicates
otherwise.
PART I
Item 1. Business
The Company. Senior Housing Properties Trust ("Senior Housing") is a
Maryland real estate investment trust ("REIT") that invests in senior housing
income producing real estate, including senior apartments and assisted living,
congregate care and nursing home properties. Senior Housing was organized on
December 16, 1998 as a 100% owned subsidiary of HRPT Properties Trust ("HRPT"),
a REIT which invests principally in office buildings. On October 12, 1999, HRPT
distributed 13.2 million common shares of Senior Housing to HRPT shareholders to
create Senior Housing as a separate public REIT. Senior Housing's principal
executive offices are located at 400 Centre Street, Newton, Massachusetts 02458,
and its telephone number is (617) 796-8350.
As of December 31, 1999, we owned 81 properties for a total investment
of $708.8 million and had mortgage investments in 12 properties aggregating
$22.9 million, net of loan loss reserve, for total real estate investments of
$731.7 million in 26 states. The properties are described in greater detail in
"Item 2. Properties."
Number of Total Investments
State Properties at December 31, 1999
- - ----- ---------- --------------------
(in thousands)
Arizona 6 $42,861
California 8 53,879
Colorado 8 34,348
Connecticut (1) 6 35,914
Florida 5 131,990
Georgia 4 12,308
Illinois 2 98,742
Iowa 6 8,207
Kansas 1 1,320
Louisiana 1 4,277
Maryland 1 33,080
Massachusetts 4 69,562
Michigan 2 9,086
Missouri 2 3,788
Nebraska 10 10,627
New Jersey 1 13,007
New York 1 10,700
North Carolina 3 6,389
Ohio 1 3,445
Pennsylvania 1 15,598
South Dakota 3 7,589
Texas 1 12,410
Virginia 3 57,666
Washington 2 19,542
Wisconsin 8 28,098
Wyoming 3 7,245
---- --------
Total Investments 93 $731,678
==== ========
(1) Three of these properties were sold after December 31, 1999.
1
We believe that the aging of the United States population will increase
the demand for existing senior apartments, congregate communities, assisting
living properties and nursing homes and encourage development of new properties.
Our basic business plan is to profit from this increasing demand in two ways.
First, we intend to purchase additional properties and lease them at initial
rents that are greater than our costs of acquisition capital. Second, we intend
to structure leases that provide for periodic rental increases based in part on
gross operating revenue increases at our properties. Our current operating
environment, though, is challenging. The long term care industry has been
financially devastated by Medicare payment reductions, increased governmental
regulation, rapid growth of the competing assisting living industry and tight
capital markets. The current difficulties being faced by the healthcare industry
have severely affected some of our tenants.
Our business plan contemplates investment in properties which offer
four types of senior housing accommodations, including some properties that
combine more than one type in a single building or campus.
Senior Apartments. Senior apartments are marketed to residents who are
generally capable of caring for themselves. Residence is generally restricted on
the basis of age. Purpose built properties may have special function rooms,
concierge services, high levels of security and centralized call buttons for
emergency use. Tenants at these properties who need healthcare or assistance
with the activities of daily living are expected to contract independently for
those services with homemakers or home healthcare companies.
Congregate Communities. Congregate communities also provide a high
level of privacy to residents and require residents to be capable of relatively
high degrees of independence. Unlike a senior apartment property, a congregate
community usually bundles several services as part of a regular monthly
charge--for example, one or two meals per day in a central dining room, weekly
maid service or a social director. Additional services are generally available
from staff employees on a fee-for-service charge basis. In some congregate
communities, separate parts of the property are dedicated to assisted living or
nursing services.
Assisted Living Properties. Assisted living properties are typically
comprised of one bedroom suites which include private bathrooms and efficiency
kitchens. Services provided usually include three meals per day in a central
dining room, daily housekeeping, laundry, medical reminders and 24 hour
availability of assistance with the activities of daily living such as dressing
and bathing. Professional nursing and healthcare services are usually available
at the facility on call or at regularly scheduled times. Since the early 1990s
there has been explosive growth in the number of small public companies
developing purpose built assisted living properties. Many of those properties
have recently been completed and are now fully occupied and appropriate
investments for us.
Nursing Homes. Nursing homes generally provide extensive nursing and
healthcare services similar to those available in hospitals, without the high
costs associated with operating theaters, emergency rooms or intensive care
units. A typical purpose built nursing home includes mostly two-bed rooms with a
separate toilet in each room and shared dining and bathing facilities. Some
private rooms are often available for those residents who can afford to pay
higher rates or for patients whose medical conditions require segregation.
Nursing homes are generally staffed by licensed nursing professionals 24 hours
per day.
During the past few years nursing home owners and operators have faced
two significant business challenges. First, the rapid expansion of the assisted
living industry which started in the early 1990s has attracted a number of
residents away from nursing homes. This was especially significant because the
residents who elected assisted living facilities had often previously been the
most profitable residents in the nursing homes--residents who required a lesser
amount of care and who were able to pay higher private rates rather than
government rates.
The second major challenge arose as a result of Medicare and Medicaid
cost containment laws beginning in 1994, particularly 1997 federal legislation
that required the Medicare program to implement a prospective payment program
for various subacute services provided in skilled nursing homes. Implementation
2
of this Medicare prospective payment program began on July 1, 1998. Prior to the
prospective payment program Medicare paid nursing home operators based upon
audited costs for services provided. The prospective payment system sets
Medicare rates based upon government estimated costs of treating specified
medical conditions. Although it is possible that a nursing home may increase its
profit if it is able to provide quality services at below average costs, we
believe that the effect of the new Medicare rate setting methodology will be to
reduce the profitability of Medicare services in nursing homes. This belief is
based on similar Medicare changes that were implemented for hospitals during the
1980s.
Tenants and Leases. Our financial condition depends, in part, on the
financial condition of our tenants. About 46% of our historical rents are
received from Marriott International, Inc. and some of its subsidiaries
("Marriott") and Brookdale Living Communities, Inc. and some of its subsidiaries
("Brookdale"). Our properties leased to these operators predominantly offer
independent and assisted living services; and almost all of the revenues of
these properties are paid by residents from private resources. As previously
announced, our other large tenants, Integrated Health Services, Inc. ("IHS") and
Mariner Post-Acute Network, Inc. ("Mariner"), which on a combined basis
represent about 48% of our historical rents, filed for bankruptcy in early 2000.
More information concerning those tenants is set forth below under "Business
Developments--Tenant Financial Condition." Properties leased to IHS and Mariner
are predominantly nursing homes.
Our leases are so called "triple net" leases which require the tenants
to maintain our properties during the lease terms and to indemnify us for
liability which may arise by reason of our ownership of the properties.
We own 14 congregate care communities and assisted living properties
located in seven states with 3,950 units that are leased to subsidiaries of
Marriott. Marriott is a NYSE listed company whose major businesses are
developing, operating and managing hotels, senior housing properties and time
share resorts. The annual rent under this lease is $30.9 million, which is 34%
of our historical total annual rent, and the lease provides for rent increases
equal to 4.5% of increases in gross revenues of the properties. Marriott has
guaranteed all of these lease obligations. Our historic investment in these
properties is $325.5 million. The current lease expiration is 2013, and Marriott
has four all-or-none renewal options for five years each.
The following table presents summary financial information of Marriott
from its Annual Report on 10-K for the year ended December 31, 1999.
Summary Financial Information of Marriott International, Inc.
(in millions)
As of or for the year ended
----------------------------------------------
January 2, January 1, December 31,
1998 1999 1999
----------- ---------- ------------
Sales.......................... $7,236 $7,968 $8,739
Net income..................... 324 390 400
Total assets................... 5,161 6,233 7,324
Debt........................... 422 1,267 1,676
We own four congregate care communities located in four states with 829
units that are leased to a subsidiary of Brookdale. Brookdale is a Nasdaq listed
company whose principal business is operating senior housing and congregate care
communities. The annual rent under this lease is $11.2 million, which is 12% of
our historical total annual rent, and the lease provides for rent increases
equal to 10% of increases in gross revenues of the properties starting in 1999.
Brookdale has guaranteed all of these lease obligations. Our historic investment
in these properties is $101.9 million. The current lease expiration is 2019, and
Brookdale has two all-or-none renewal options for twenty-five years each.
We own one nursing home with 150 units that is leased to a subsidiary
of Genesis Health Ventures, Inc. ("Genesis"). Genesis is a NYSE listed company
whose major businesses are operating nursing homes,
3
congregate care communities and assisting living properties. The annual rent
under this lease is $1.4 million, which is two percent of our historical total
annual rent, and the lease provides for annual rent increases of $13,000. Our
historic investment in this property is $13.0 million. The current lease
expiration is 2005, and Genesis has two all-or-none renewal options for ten
years each and one for five years.
In addition to the tenants described above, we currently lease three
nursing homes located in three states with 423 units to three separate private
companies. These leases require total annual rent of $1.3 million.
We currently own 27 nursing homes and three senior apartments with
3,205 units located in nine states that are leased to subsidiaries of IHS. In
addition, we have mortgage investments secured by 12 nursing homes with 1,070
units located in three states that are operated by IHS. IHS's major businesses
are operating nursing homes and providing home healthcare services. These 42
properties are divided into two pools, and the obligations under leases and
mortgages within each pool are subject to cross default and collateralization
covenants with all other properties in the same pool. The annual rent under
these leases of $22.8 million and the interest of $4.1 totaled 30% of our
historical total annual rent. IHS has guaranteed all of these leases and
mortgage obligations. IHS and its subsidiaries which are our tenants or
mortgagors are subject to bankruptcy proceedings. See "Business
Developments--Tenant Financial Condition." The current lease expirations are
2006 in the case of one pool and 2010 in the case of the other (in each case
with renewal options), subject to the effect of the bankruptcy proceedings. Our
investment in these properties, after an impairment loss write-down and loan
loss reserve, is $185.2 million.
The following table present summary financial information of IHS for
the latest period available from its Annual Report on Form 10-K for the year
ended December 31, 1998, and Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
Summary Financial Information of Integrated Health Services, Inc.
(in millions)
As of or for the nine
As of or for the year ended months ended
December 31, September 30,
----------------------------- ---------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
Total revenue ............................ $ 1,204 $ 1,403 $ 2,972 $ 2,253 $ 1,904
Earnings (loss) from continuing operations 48 3 137 126 (1,831)
Net earnings (loss) ...................... 46 (34) (68) (79) (1,831)
Total assets ............................. 5,002 5,393 3,596
Debt ..................................... 3,219 3,383 3,536
We currently own 24 nursing homes and two congregate care communities
with 3,482 units located in six states leased to subsidiaries of Mariner.
Mariner's principal business is operating nursing homes. The $16.7 million
annual rent under this lease represents about 18% of our historical total annual
rent. Mariner has guaranteed all of the lease obligations. Our investment in
these properties after an impairment loss write-down is $80.7 million. Mariner
and its subsidiaries which are our tenants are subject to bankruptcy
proceedings. See "Business Developments--Tenant Financial Condition." The
current lease term with Mariner expires in 2013 (with renewal options), subject
to the effect of the bankruptcy proceedings. We have reached an agreement in
principle with Mariner involving, among other things, the termination of the
lease of the properties, our assumption of operating responsibilities for 17 of
the properties and our conveyance of title to the remaining five properties to
Mariner. The remaining four nursing homes are now subleased to two private
companies and we expect to negotiate with these two subtenants for their
continued operations of those properties. Our agreement is contingent upon
approval of Mariner's creditors committee and the bankruptcy court and required
regulatory approvals.
4
Other terms of our leases have included and may in the future generally
include the following:
Cross Default. When we lease more than one property to a single tenant
or a group of affiliated tenants all those leases are cross defaulted.
All or None Renewal Options. When we lease more than one property to a
single tenant or a group of affiliated tenants, lease renewal options may only
be exercised on an all or none basis.
Maintenance and Alterations. Our tenants are required to maintain, at
their expense, the leased properties in good order and repair, including
structural and nonstructural maintenance. Except in the case of properties
leased to Marriott, capital alterations and additions to any leased property
which exceed a threshold amount of aggregate cost may only be made with our
prior consent. Any alterations or improvements made to any leased property
during the terms of the leases become our property, subject to our obligation to
pay to the tenants unamortized costs at lease termination. At the end of the
leases, our tenants are required to surrender their leased properties in
substantially the same condition as existed on the commencement dates of the
leases, subject to any permitted alterations and subject to ordinary wear and
tear.
Assignment. Our consent is generally required for any assignment or
sublease of our properties. In the event of a subletting, the initial tenant
remains liable under the lease and all guarantees and other security remain in
place.
Environmental Matters. Our tenants are required, at their expense, to
remove and dispose of any hazardous substance at the leased properties in
compliance with all applicable environmental laws and regulations and to pay any
costs we incur in connection with removal and disposal. Each tenant has
indemnified us for any claims asserted as a result of the presence of hazardous
substances at any property and from a violation or alleged violation of any
applicable environmental law or regulation.
Indemnification and Insurance. Each tenant has agreed to indemnify us
from all claims arising from our ownership or their use of our properties. Each
tenant is required to maintain insurance on our properties covering:
o comprehensive general liability for damage to property or bodily
injury arising out of the ownership, use, occupancy or maintenance of
the properties;
o commercial property "all risk" liability for damage to improvements,
merchandise, trade fixtures, furnishings, equipment and personal
property;
o workers' compensation liability;
o business interruption loss;
o in some cases, medical malpractice; and
o other losses customarily insured by businesses similar to the business
conducted at our properties.
The leases require that we be named as an additional insured under these
policies.
Damage, Destruction or Condemnation. In the event any of our properties
is damaged by fire, or other casualty or is taken for a public use, we receive
all insurance or taking proceeds and our tenants are required to pay any
difference between the amount of proceeds and the historical investment by us or
HRPT in the affected property. In the event of material destruction or
condemnation, some tenants have a right to purchase the affected property for
amounts at least equal to our or HRPT's historical investment in the property.
5
Events of Default Events of default include:
o the failure of the tenant to pay rent when due;
o the failure of the tenant to perform key terms, covenants or
conditions of its lease and the continuance thereof for a specified
period after written notice;
o the occurrence of events of insolvency with respect to the tenant;
o the failure of the tenant to maintain required insurance coverages; or
o the revocation of any material license necessary for the tenant's
operation of our property.
Remedies. Upon the occurrence of any event of default, we may (subject
to applicable law):
o terminate the affected lease and accelerate the rent;
o terminate the tenant's rights to the affected property, relet the
property and recover from the tenant the difference between the amount
of rent which would have been due under the applicable lease and the
rent received under the reletting; and
o make any payment or perform any act required to be performed by the
tenant under its lease.
The defaulting tenant is obligated to reimburse us for all payments made and all
costs and expenses incurred in connection with any exercise of the foregoing
remedies.
Ground Lease Terms. The land underlying two of our properties is
leased. Our leases require our tenants to pay and perform all obligations
arising under these ground leases. These ground leases terminate on 2086 and
2079. The annual rents payable under the ground leases in 1999 totaled $138,100.
If our tenants fail to pay the applicable ground rent, we may have to do so in
order to protect our investment in these properties.
The following discussion sets forth our policies regarding investments,
dispositions, financings and other activities. The board of trustees has set
these policies and although there is no current intention to do so, the board of
trustees may amend or revise these policies at any time without a vote of
shareholders.
Investment Policies
Acquisitions. Our investment goals are to acquire additional senior
apartments, congregate communities, assisted living properties and nursing
homes, primarily for income and secondarily for their appreciation potential. In
making future acquisitions, we will consider a range of factors including:
o the acquisition price of the proposed property;
o the estimated replacement cost of the proposed property;
o proposed lease terms;
o the financial strength and operating reputation of the proposed
tenant;
o historical and projected cash flows of the property to be acquired;
o the location and competitive market environment of the proposed
property;
6
o the physical condition of the proposed property and its potential for
redevelopment or expansion; and
o the price segment and payment sources in which the proposed property
is operated.
We intend to acquire properties which will enhance the diversity of our
portfolio in respect to tenants, types of services provided and locations. We
have no policies which specifically limit the percentage of our assets which may
be invested in any individual property, in any one type of property, in
properties leased to any one tenant or in properties leased to an affiliated
group of tenants.
Other Investment in Real Estate. We emphasize direct wholly owned
investments in fee interests. However, circumstances may arise in which we may
invest in leaseholds, joint ventures, mortgages and other real estate interests.
We may invest in real estate joint ventures if we conclude that by doing so we
may benefit from the participation of co-venturers or that our opportunity to
participate in the investment is contingent on the use of a joint venture
structure. We may invest in participating, convertible or other types of
mortgages if we conclude that by doing so we may benefit from the cash flow or
appreciation in the value of a property which is not available for purchase.
Disposition Policies
From time to time we may consider the sale of one or more properties.
Future disposition decisions, if any, will be made based on a number of factors
including the following:
o the proposed sale price;
o the strategic fit of the property with the rest of our portfolio;
o potential opportunities to increase revenues by reinvesting sale
proceeds;
o the potential for, or the existence of, any environmental or
regulatory problems affecting a particular property;
o our alternative capital needs; and
o the maintenance of our qualification as a REIT under the Internal
Revenue Code.
We contemplate certain dispositions in connection with our negotiations
with two tenants which are in bankruptcy proceedings. See "Business
Developments--Tenant Financial Condition."
Financing Policies
We have a $350 million bank credit facility. The facility requires
payment of interest only at LIBOR plus a premium prior to maturity on September
15, 2002. Outstanding borrowings under the facility were $200 million at
December 31, 1999. This bank credit facility is secured by first mortgages upon,
and a collateral assignment of leases from, 18 properties. This bank credit
facility has several covenants typically found in revolving loan facilities
including covenants to maintain a minimum net worth and minimum collateral value
and which prohibit us from incurring debt in excess of 60% of its total capital.
We use this bank credit facility to fund acquisitions and for working
capital. Periodically, we expect to repay amounts drawn under the bank credit
facility with proceeds of equity and long term debt offerings. Our
organizational documents do not limit the amount of indebtedness we may incur.
At present we expect to maintain a capital structure in which our debt will not
exceed 60% of our total capital. We will consider future equity offerings when,
in our judgment, doing so will improve our capital structure without materially
adversely
7
affecting the market value of its shares. Unless we achieve an investment grade
rating at some future date, we expect that the least costly debt capital
available to us will be secured debt and that most of our debt will be secured.
In the future, we may modify our current financing policies in light of then
current economic conditions, relative costs of debt and equity capital,
acquisition opportunities and other factors; and our intended ratio of debt to
total capital may change.
Policies with Respect to Other Activities
We operate in a manner that will not subject us to regulation under the
Investment Company Act of 1940. Except for the possible acquisition of other
REITs which are engaged in similar businesses, we do not currently intend to
invest in the securities of other companies for the purpose of exercising
control, to underwrite securities of other companies or to trade actively in
loans or other investments.
We may make investments other than as previously described, although we
do not currently intend to do so. We have authority to repurchase or otherwise
reacquire our shares or other securities we issue and may do so in the future.
In the future, we may issue shares or other securities in exchange for property.
Also, although we have no current intention to do so, we may make loans to third
parties, including to our trustees and officers and to joint ventures in which
we participate.
Business Developments
Spin-Off
In September 1999, our registration statement on Form S-11 was declared
effective by the Securities and Exchange Commission. As a result, on October 12,
1999, a majority ownership of our shares were distributed to HRPT shareholders
through a special distribution (the "Spin-Off"). Subsequently, both companies
trade separately on the New York Stock Exchange.
Tenant Financial Condition
Three of our tenants, The Frontier Group, Inc. ("Frontier"), Mariner
and IHS, have filed for protection under bankruptcy laws. Frontier filed in July
1999, Mariner filed in January 2000 and IHS filed in February 2000. Bankruptcy
laws may allow our tenants relief or discharge them from their financial
obligations to us. For 1999, rental income and mortgage interest related to
Frontier, Mariner and IHS was $2.2 million, $15.4 million and $26.6 million,
respectively. At December 31, 1999, our historical investments, before
impairment loss recognition and net of accumulated depreciation in properties
operated by these three tenants, were $10.0 million, $68.3 million and $136.9
million, respectively. We also had mortgage investments, before loss reserves,
related to properties operated by IHS of $36.6 million at December 31, 1999.
We have concluded that impairment indicators are present with respect
to properties operated by these tenants and have prepared undiscounted cash flow
projections for each of the properties. For purposes of these projections, we
have assumed that rents on some properties may be modified and that some of the
leases may be terminated after which we will operate the properties for a period
of time and, ultimately, sell them. In addition, a third party not in bankruptcy
is responsible for the lease obligations of some of the properties operated by
IHS. We have assumed that the guarantor will honor these lease obligations. The
undiscounted cash flow projections reflect the expected rents to be earned over
the lease term and the expected cash flows earned from operating the properties
for a period of time plus the proceeds from assumed future sales of the
properties. Cash flows during the period in which we may operate the properties
are estimated based on the historical performance of each property, excluding
rent paid to us. Projected sale prices are based on an estimated per bed value
consistent with industry practice and reflect prices that we have observed in
recent transactions. Based on these undiscounted cash flow projections, we have
concluded that some of our real estate and mortgage investments were impaired as
of December 31, 1999. Based on our estimated fair values net of selling costs,
we have written down the carrying value of these real estate investments,
including investments leased to an affiliate,
8
Advisors Healthcare Group, Inc., and operated by IHS, as of December 31, 1999,
by recording an impairment loss write-down in the accompanying consolidated
statement of income of $15.5 million. In addition, we have recorded a loan loss
reserve of $14.5 million related to the mortgage investment we considered
impaired. At December 31, 1999 after impairment losses, loan loss reserves and
net of accumulated depreciation, the net book value of the properties operated
by Frontier, IHS and Mariner were $10.0 million, $147.5 million and $65.2
million, respectively. It is reasonably possible that estimates of future cash
flows could be reduced significantly depending on the outcome of the bankruptcy
proceedings or if the non-bankrupt third party should fail to honor its
obligations. As a result, additional losses could be recognized in future
periods and these amounts could be material.
In February 2000, we sold all of the properties that were leased to
Frontier for $13.0 million. We are continuing pursuing claims against Frontier
and other parties for breach of its leases and for rental arrearages. The amount
of net gain, if any, which may be realized from the sale of the Frontier
properties will depend upon the outcome of these claims. The amount of gain or
loss to be realized as a result of this transaction is not expected to be
material. Because these properties have been sold, we will no longer receive
rental income from these properties.
In March 2000, we reached an agreement in principle with Mariner as
follows:
o Mariner's lease obligations for all 26 properties which we own and
lease to Mariner will be terminated.
o Approximately $24.0 million of cash and securities which we hold to
secure Mariner's obligations will be retained by us.
o We will assume operating responsibilities for 17 of these 26
properties. Title to five of these properties will be transferred to
Mariner which will continue the operations. The remaining four nursing
homes are now subleased to two private companies and we expect to
negotiate with these two subtenants for their continued operations of
those properties.
Our agreement with Mariner is contingent upon approval by Mariner's
creditors committee and the Delaware Bankruptcy Court before which Mariner's
bankruptcy is pending and required regulatory approvals from various states
where affected nursing homes are located. If this agreement is approved we
expect that we may realize gains and that our future earnings and cash flows may
be less than the rent previously earned from the Mariner leases, at least on a
short term basis. This agreement is contingent upon third party approvals beyond
our control. If and when this agreement is implemented it may result in
additional material gains or losses.
We are currently in negotiations with IHS. The current negotiations
include, but are not limited to, the possibilities that we will sell some of the
properties, that lease or mortgage terms may be changed, that new tenants may
begin operations of properties, that properties may be operated by us for our
own account or that mortgage obligations due to us may be released for other
compensation. We may recognize additional gains or losses when these
negotiations are completed and the additional gains or losses may be material.
Investments
There were no new investments made during 1999.
The Investment Manager
REIT Management & Research, Inc. ("REIT Management") is a Delaware
corporation owned by Gerard M. Martin and Barry M. Portnoy. REIT Management's
principal executive offices are located at 400 Centre Street, Newton,
Massachusetts 02458, and its telephone number is (617) 332-3990. Simultaneous
with
9
the Spin-Off, we entered into a new investment advisory agreement with REIT
Management, pursuant to which REIT Management provides investment, management
and administrative services to us. The agreement has been renewed through
December 31, 2000. REIT Management also acts as the investment manager to HRPT
and has other business interests. The Directors of REIT Management are Gerard M.
Martin, Barry M. Portnoy and David J. Hegarty. The officers of REIT Management
are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice
President, John Popeo, Treasurer, and Ajay Saini, John A. Mannix, David M.
Lepore, Thomas M. O'Brien and Jennifer B. Clark, Vice Presidents. Gerard M.
Martin and Barry M. Portnoy are our managing trustees, and David J. Hegarty and
Ajay Saini are our officers.
Employees
As of March 27, 2000, we had no employees. REIT Management, which
administers our day-to-day operations, had about 200 full-time employees.
Regulation and Reimbursement
The tenants and borrowers who operate our properties, including
long-term care facilities, congregate communities, assisted living centers and
senior apartments, must comply with federal, state and local statutes and
regulations in order to operate the properties. The health care industry depends
significantly upon federal and federal/state programs for revenues and, as a
result, is vulnerable to the budgetary policies of both the federal and state
governments.
Government Regulations and Rate Setting
Senior Apartments. Generally, government programs do not pay for
housing in senior apartments. Rents are paid from the residents' private
resources. Accordingly, the government regulations that apply to these types of
properties are generally limited to zoning, building and fire codes, Americans
with Disabilities Act requirements and other life safety type regulations
applicable to residential real estate. Government rent subsidies and government
assisted development financing for low income senior housing are exceptions to
these general statements. The development and operation of subsidized senior
housing properties are subject to numerous governmental regulations. While it is
possible that we may purchase and lease some subsidized senior apartment
properties, we do not expect these investments to be a major part of our future
business, and today we own no properties where rent subsidies are applicable.
Congregate Communities. We understand that generally government
benefits are not available to congregate communities and the resident charges in
these properties are paid from private resources. However, a number of Federal
Supplemental Security Income program benefits pay housing costs for elderly or
disabled residents to live in these types of residential facilities. The Social
Security Act requires states to certify that they will establish and enforce
standards for any category of group living arrangement in which a significant
number of supplemental security income residents reside or are likely to reside.
Categories of living arrangements which may be subject to these state standards
include congregate facilities and assisted living properties. Because congregate
communities usually offer common dining facilities, in many locations they are
required to obtain licenses applicable to food service establishments in
addition to complying with land use and life safety requirements. In many
states, congregate communities are licensed by state health departments, social
service agencies, or offices on aging with jurisdiction over group residential
facilities for seniors. To the extent that congregate communities maintain units
in which assisted living or nursing services are provided, these units are
subject to applicable state regulations. In some states, insurance or consumer
protection agencies regulate congregate communities in which residents pay
entrance fees or prepay other costs.
Assisted Living. According to the National Academy for State Health
Policy, 39 states provide Medicaid payments for residents in some assisted
living properties under waivers granted by the Health Care Finance
Administration of the U.S. Department of Health and Human Services or under
Medicaid state plans and three other states are planning to do so. Because rates
paid to assisted living property operators are lower
10
than rates paid to nursing home operators some states use this waiver program as
a means of lowering the cost of services for residents who may not need the
higher intensity of medical care provided in nursing homes. States that
administer Medicaid programs for assisted living facilities are responsible for
monitoring the services at and physical conditions of the participating
properties. Different states apply different standards in these matters, but
generally we believe these monitoring processes are similar to the concerned
states' inspection processes for nursing homes.
Because of the large number of states using Medicaid to purchase
services at assisted living properties, it is not surprising that a majority of
states have adopted licensing standards applicable to assisted living
facilities. The National Academy for State Health Policy reported in November of
1999 that 29 states had implemented licensing standards specifically for
assisted living, rules were being drafted in another three states and another 11
states were currently studying the regulation of assisted living facilities.
State regulatory models vary; there is no national consensus on a definition of
assisted living, and no uniform approach by the states to regulating assisted
living facilities. Some state licensing standards apply to assisted living
facilities whether or not they accept Medicaid funding. Moreover, a 1998 study
by the National Academy for State Health Policy found that several states
require certificates of need from state health planning authorities before new
assisted living properties may be developed, and three states have adopted
moratoria on the development of new assisted living facilities. Based on our
analysis of current economic and regulatory trends, we believe that assisted
living properties that become dependent upon Medicaid payments for a majority of
their revenues will decline in value because Medicaid rates will fail to keep up
with increasing costs. For the same reason, we also believe that assisted living
properties located in states that adopt certificate of need requirements or
otherwise restrict the development of new assisted living properties will
increase in value because these limitations upon development will help ensure
higher occupancy and higher non-governmental rates. Accordingly, we intend to
focus new investments in assisted living properties that are not overly
dependent upon governmental revenues and that are in areas where there are
barriers to competition created by certificate of need laws or otherwise.
Two federal government studies were recently completed to provide
background information and make recommendations regarding the regulation of, and
the possibility of increased governmental funding for, the assisted living
industry. In April 1999, the General Accounting Office issued a report to the
Senate Special Committee on Aging and the Committee held hearings on consumer
protection and quality of care issues in assisted living facilities. The GAO
studied assisted living facilities in four states and found a variety of
residential settings serving a wide range of resident health and care needs. The
GAO found that providers often give consumers insufficient information to
determine whether a particular facility can meet their needs and that state
licensing and oversight approaches vary widely. The GAO anticipates that as the
states increase the use of Medicaid to pay for assisted living, federal
financing will likewise grow, and these trends will focus more public attention
on the place of assisted living in the continuum of long-term care and upon
state standards and compliance approaches. The second study, a national survey
of assisted living facilities, was funded by the Department of Health and Human
Services' Assistant Secretary for Planning and Evaluation and is expected to
result in additional reports which will touch upon all aspects of the assisted
living industry including quality of care and financing. The 1998 National
Academy for State Health Policy study referenced above and an April 1999 report
on the national survey of assisted living facilities are part of this second
study. We cannot predict whether these studies will result in governmental
policy changes or new legislation, or what impact any changes may have. Based
upon our analysis of current economic and regulatory trends, we do not believe
that the federal government is likely to have a material impact upon the current
regulatory environment in which the assisted living industry operates unless it
also undertakes expanded funding obligations; and we do not believe a materially
increased financial commitment from the federal government is presently likely.
However, we do anticipate that assisted living facilities will increasingly be
licensed and regulated by the various states, and that with the absence of
federal standards, the states' policies will continue to vary widely.
Nursing Homes. About 67% of all nursing home revenues in 1997 came from
government Medicare and Medicaid programs. Nursing homes are also among the most
highly regulated businesses in the country. The federal and state governments
regularly monitor the quality of care provided at nursing homes and regularly
inspect the physical condition of nursing home properties. These periodic
inspections and occasional changes in
11
life safety and physical plant requirements sometimes require nursing home
owners to spend money for capital improvements. These mandated capital
improvements have in the past usually resulted in Medicare and Medicaid rate
adjustments, albeit on the basis of amortization of expenditures over extended
useful lives of the improvements. However, under the new Medicare prospective
payment system, which began being phased in over three years starting in 1998,
capital costs are part of the prospective rate and will not be facility
specific. Other recent legislative and regulatory actions with respect to state
Medicaid rates and the Medicare prospective payment system are limiting the
reimbursement levels for some nursing home and other eldercare services. At the
same time federal enforcement and oversight of nursing homes is increasing,
thereby making licensing and certification of these facilities more rigorous.
These actions have adversely affected the revenues and increased the expenses of
many nursing home operators, including several of our tenants.
The federal Health Care Financing Administration, HCFA, has begun to
implement an initiative to increase the effectiveness of Medicare/Medicaid
nursing facility survey and enforcement activities. HCFA's initiative follows
its July 1998 report to Congress on the effectiveness of the survey and
enforcement system, several March 1999 reports by HCFA's Office of Inspector
General concerning quality of care in nursing homes, a July 1998 General
Accounting Office investigation which found inadequate care in a significant
proportion of California nursing homes, and a March 1999 GAO report which
recommended that HCFA and the states strengthen their compliance and enforcement
practices to better ensure that nursing homes provide adequate care. In 1998 and
1999, the Senate Special Committee on Aging held hearings on these issues. HCFA
is taking steps to focus survey and enforcement efforts at nursing homes with
repeat violations of Medicare/Medicaid standards, including chain-operated
facilities with patterns of noncompliance. HCFA also is requiring state agencies
to use enforcement sanctions and remedies more promptly and effectively when
substandard care is identified. HCFA is increasing its oversight of state survey
agencies. In addition HCFA has adopted new regulations expanding federal and
state authority to impose civil money penalties in instances of noncompliance.
Medicare/Medicaid survey results for each nursing home are being posted on the
internet. Federal efforts to target fraud and abuse by Medicare and Medicaid
providers have also increased. An adverse determination concerning any tenant's
license or eligibility for Medicare or Medicaid reimbursement or its compliance
with applicable federal or state regulation may adversely affect such operator
and its affiliates and may restrict its ability to pay rent and mortgage
interest.
Most states also limit the number of nursing homes by requiring
developers to obtain certificates of need before new facilities may be built.
Even in those states such as California and Texas that have eliminated
certificate of need laws, the state health authorities usually have retained
other means of limiting new nursing home development. Examples of these other
means are the use of moratoria, licensing laws or limitations upon participation
in the state Medicaid program. We believe that these governmental limitations
generally make nursing home properties more valuable by extending their useful
lives and limiting competition.
A number of legislative proposals that would affect major reforms of
the health care system have been introduced in Congress, such as additional
Medicare and Medicaid reforms and cost containment measures. We cannot predict
whether any of these legislative proposals will be adopted or, if adopted, what
effect, if any, these proposals would have on our business, lessees or
mortgagors.
Competition.
We compete with other real estate investment trusts which regularly
seek attractive investment opportunities in senior housing facilities. We also
compete with banks, non-bank finance companies, leasing companies and insurance
companies which invest in this type of real estate. Some of these competitors
have resources that are greater than ours and have lower costs of capital.
12
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of federal income tax and ERISA consequences is
based on existing law, and is limited to investors who own our shares as
investment assets rather than as inventory or as property used in a trade or
business. The summary does not discuss the particular tax consequences that
might be relevant to you if you are subject to special rules under the federal
income tax law, for example if you are:
o a bank, life insurance company, regulated investment company, or other
financial institution,
o a broker or dealer in securities or foreign currency,
o a person who has a functional currency other than the U.S. dollar,
o a person who acquires our shares in connection with employment or
other performance of services,
o a person subject to alternative minimum tax,
o a person who owns our shares as part of a straddle, hedging
transaction, constructive sale transaction, or conversion transaction,
or
o except as specifically described in the following summary, a
tax-exempt entity or a foreign person.
The sections of the Internal Revenue Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are complex. This
presentation is a summary of applicable Internal Revenue Code provisions,
related rules and regulations and administrative and judicial interpretations,
all of which are subject to change, possibly with retroactive effect. Future
legislative, judicial, or administrative actions or decisions could affect the
accuracy of statements made in this summary. We have not sought a ruling from
the IRS with respect to any matter described in this summary, and we cannot
assure you that the IRS or a court will agree with the statements made in this
summary. In addition, the following summary is not exhaustive of all possible
tax consequences, and does not discuss any estate, gift, state, local, or
foreign tax consequences. For all these reasons, we urge you and any prospective
acquiror of our shares to consult with a tax advisor about the federal income
tax and other tax consequences of the acquisition, ownership and disposition of
our shares.
Federal income tax consequences may differ depending on whether or not
you are a "U.S. shareholder." For purposes of this summary, a U.S. shareholder
for federal income tax purposes is:
o a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the substantial presence residency test under the federal income
tax laws,
o a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or
organized in or under the laws of the United States, any state thereof
or the District of Columbia, unless otherwise provided by Treasury
regulations,
o an estate the income of which is subject to federal income taxation
regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or electing trusts in existence on
August 20, 1996 to the extent provided in Treasury regulations,
whose status as a U.S. shareholder is not overridden by an applicable tax
treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares
who is not a U.S. shareholder.
13
Taxation as a REIT
We will elect to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code commencing with our 1999 taxable year. Our 1999
taxable year began when we ceased to be wholly-owned by HRPT in October 1999 and
ended on December 31, 1999. Our REIT election, assuming continuing compliance
with the federal income tax qualification tests summarized below, continues in
effect for subsequent taxable years. Although no assurance can be given, we
believe that we are organized, have operated, and will continue to operate in a
manner that qualifies us to be taxed under the Internal Revenue Code as a REIT.
As a REIT, we generally will not be subject to federal income tax on
our net income distributed as dividends to our shareholders. Distributions to
our shareholders generally will be includable in their income as dividends to
the extent of our current or accumulated earnings and profits. A portion of
these dividends may be treated as capital gain dividends, as explained below. No
portion of any dividends will be eligible for the dividends received deduction
for corporate shareholders. Distributions in excess of current or accumulated
earnings and profits generally will be treated for federal income tax purposes
as a return of capital to the extent of a recipient shareholder's basis in our
shares, and will reduce this basis. Our current or accumulated earnings and
profits will generally be allocated first to distributions on our outstanding
preferred shares, if any, and thereafter to distributions on our common shares.
Our counsel, Sullivan & Worcester LLP, has opined that we have been
organized and have qualified as a REIT under the Internal Revenue Code for our
1999 taxable year, and that our current investments and plan of operation will
enable us to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code. Our actual qualification and taxation as a REIT
will depend upon our ability to meet the various REIT qualification tests
imposed under the Internal Revenue Code and summarized below. While we believe
that we will operate in a manner to satisfy the various REIT qualification
tests, our counsel has not reviewed and will not review compliance with these
tests on a continuing basis. If we fail to qualify as a REIT in any year, we
will be subject to federal income taxation as if we were a domestic corporation,
and our shareholders will be taxed like shareholders of ordinary corporations.
In this event, we could be subject to significant tax liabilities, and the
amount of cash available for distribution to our shareholders may be reduced or
eliminated.
If we qualify for taxation as a REIT and meet the annual distribution
tests described below, we generally will not be subject to federal corporate
income taxes on the amount distributed. However, even if we qualify for federal
income taxation as a REIT, we may be subject to federal tax in the following
circumstances:
o We will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including our undistributed
net capital gains.
o If our alternative minimum taxable income exceeds our taxable income,
we may be subject to the corporate alternative minimum tax on our
items of tax preference.
o If we have net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other nonqualifying income from
foreclosure property, we will be subject to tax on this net income
from foreclosure property at the highest regular corporate rate, which
is currently 35%. REITs may elect to operate foreclosure property
which is, in general, property acquired or reduced to possession after
a default or imminent default on a loan secured by the property or on
a lease of the property. We anticipate operating several facilities as
foreclosure property in the manner prescribed by applicable Internal
Revenue Code provisions.
o If we have net income from prohibited transactions, including sales or
other dispositions of inventory or property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property, we will be subject to tax on this income at a 100% rate.
14
o If we fail to satisfy the 75% gross income test or the 95% gross
income test discussed below, but nonetheless maintain our
qualification as a REIT, we will be subject to tax at a 100% rate on
the greater of the amount by which we fail the 75% or the 95% test,
multiplied by a fraction intended to reflect our profitability.
o If we fail to distribute for any calendar year at least the sum of 85%
of our REIT ordinary income for that year, 95% of our REIT capital
gain net income for that year, and any undistributed taxable income
from prior periods, we will be subject to a 4% excise tax on the
excess of the required distribution over the amounts actually
distributed.
o If we acquire an asset from a corporation in a transaction in which
our basis in the asset is determined by reference to the basis of the
asset in the hands of a present or former C corporation, and if we
subsequently recognize gain on the disposition of this asset during
the ten-year period beginning on the date on which the asset ceased to
be owned by the C corporation, then we will pay tax at the highest
regular corporate tax rate, which is currently 35%, on the lesser of
the excess of the fair market value of the asset over the C
corporation's basis in the asset on the date the asset ceased to be
owned by the C corporation, or the gain recognized in the disposition.
If we invest in properties in foreign countries, our profits from those
investments will generally be subject to tax in the countries where those
properties are located. The nature and amount of this taxation will depend on
the laws of the countries where the properties are located. If we operate as we
currently intend, then we will distribute our taxable income to our shareholders
and we will not pay federal income tax, and thus we generally cannot recover the
cost of foreign taxes imposed on our foreign investments by claiming foreign tax
credits against our federal income tax liability. Also, we cannot pass through
to our shareholders any foreign tax credits.
If we fail to qualify for federal income taxation as a REIT in any
taxable year, then we will be subject to federal tax in the same manner as an
ordinary corporation. Distributions to our shareholders in any year in which we
fail to qualify as a REIT will not be deductible, nor will these distributions
be required to be made. In that event, to the extent of our current and
accumulated earnings and profits, all distributions to our shareholders will be
taxable as ordinary dividend income and, subject to limitations in the Internal
Revenue Code, will be eligible for the dividends received deduction for
corporate recipients. Also in that event, we will generally be disqualified from
federal income taxation as a REIT for the four taxable years following
disqualification. Failure to qualify for federal income taxation as a REIT for
even one year could result in our incurring substantial indebtedness or
liquidating substantial investments in order to pay the resulting
corporate-level taxes.
REIT Qualification Requirements
General Requirements. Section 856(a) of the Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the
Internal Revenue Code, as an ordinary domestic corporation;
(4) that is not a financial institution or an insurance company subject
to special provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
15
(6) that is not "closely held" as defined under the personal holding
company stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and distributions,
all as described below.
Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the
Internal Revenue Code provides that conditions (5) and (6) need not be met for
our first taxable year as a REIT. We believe that we have satisfied conditions
(1) to (6), inclusive, during each of the requisite periods ending on or before
December 31, 1999, and that we will continue to satisfy those conditions in
future taxable years. There can, however, be no assurance in this regard.
By reason of condition (6) above, we will fail to qualify as a REIT for
a taxable year if at any time during the last half of the year more than 50% in
value of our outstanding shares is owned directly or indirectly by five or fewer
individuals. To help comply with condition (6), our declaration of trust
contains provisions restricting transfers of our shares. In addition, if we
comply with applicable Treasury regulations for ascertaining the ownership of
our outstanding shares and do not know, or by exercising reasonable diligence
would not have known, that we failed condition (6), then we will be treated as
satisfying condition (6). Also, our failure to comply with these applicable
Treasury regulations for ascertaining ownership of our outstanding shares may
result in a penalty of $25,000, or $50,000 for intentional violations.
Accordingly, we intend to comply with these Treasury regulations, and to request
annually from record holders of significant percentages of our shares
information regarding the ownership of our shares. Under our declaration of
trust, our shareholders are required to respond to these requests for
information.
For purposes of condition (6) above, shares in a REIT held by a pension
trust are treated as held directly by the pension trust's beneficiaries in
proportion to their actuarial interests in the pension trust. Consequently, five
or fewer pension trusts could own more than 50% of the interests in an entity
without jeopardizing that entity's federal income tax qualification as a REIT.
However, as discussed below, if a REIT is a "pension-held REIT," each pension
trust owning more than 10% of the REIT's shares by value generally will be taxed
on a portion of the dividends received from the REIT, based on the ratio of:
(1) the REIT's gross income for the year that would be unrelated trade
or business income if the REIT were a qualified pension trust, to
(2) the REIT's total gross income for the year.
Our Wholly-Owned Subsidiaries and Our Investments through Partnerships.
Section 856(i) of the Internal Revenue Code provides that any corporation 100%
of whose stock is held by a REIT is a qualified REIT subsidiary and shall not be
treated as a separate corporation. The assets, liabilities and items of income,
deduction and credit of a qualified REIT subsidiary are treated as the REIT's.
We believe that each of our direct and indirect wholly-owned subsidiaries will
either be a qualified REIT subsidiary within the meaning of Section 856(i) of
the Internal Revenue Code, or a noncorporate entity that for federal income tax
purposes is not treated as separate from its owner under regulations issued
under Section 7701 of the Internal Revenue Code. Thus, in applying all the
federal income tax REIT qualification requirements described in this summary,
all assets, liabilities and items of income, deduction and credit of our direct
and indirect wholly-owned subsidiaries are treated as ours.
We may invest in real estate through one or more limited or general
partnerships or limited liability companies that are treated as partnerships for
federal income tax purposes. In the case of a REIT that is a partner in a
partnership, regulations under the Internal Revenue Code provide that, for
purposes of the REIT qualification requirements regarding income and assets
discussed below, the REIT is deemed to own its proportionate share of the assets
of the partnership corresponding to the REIT's proportionate capital interest in
16
the partnership and is deemed to be entitled to the income of the partnership
attributable to this proportionate share. In addition, for these purposes, the
character of the assets and gross income of the partnership generally retain the
same character in the hands of the REIT. Accordingly, our proportionate share of
the assets, liabilities, and items of income of each partnership in which we are
a partner is treated as ours for purposes of the income tests and asset tests
discussed below. In contrast, for purposes of the distribution requirement
discussed below, we must take into account as a partner our distributive share
of the partnership's income as determined under the general federal income tax
rules governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
Income Tests. There are two gross income requirements for qualification
as a REIT under the Internal Revenue Code:
o At least 75% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be
derived from investments relating to real property, including "rents
from real property" as defined under Section 856 of the Internal
Revenue Code, mortgages on real property, or shares in other REITs.
When we receive new capital in exchange for our shares or in a public
offering of five-year or longer debt instruments, income attributable
to the temporary investment of this new capital in stock or a debt
instrument, if received or accrued within one year of our receipt of
the new capital, is generally also qualifying income under the 75%
test.
o At least 95% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be
derived from a combination of items of real property income that
satisfy the 75% test described above, dividends, interest, payments
under interest rate swap or cap agreements, options, futures
contracts, forward rate agreements, or similar financial instruments,
and gains from the sale or disposition of stock, securities, or real
property.
For purposes of these two requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although we will use
our best efforts to ensure that the income generated by our investments will be
of a type which satisfies both the 75% and 95% gross income tests, there can be
no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of
the Internal Revenue Code, several requirements must be met:
o The amount of rent received generally must not be based on the income
or profits of any person, but may be based on receipts or sales.
o Rents do not qualify if the REIT owns 10% or more by vote or value of
the tenant, whether directly or after application of attribution
rules. While we intend not to lease property to any party if rents
from that property would not qualify as rents from real property,
application of the 10% ownership rule is dependent upon complex
attribution rules and circumstances that may be beyond our control.
For example, an unaffiliated third party's ownership directly or by
attribution of 10% or more by value of our shares, or 10% or more by
value of HRPT Properties Trust's shares for so long as HRPT Properties
Trust owns 10% or more by value of us, as well as 10% or more by vote
or value of the stock of one of our lessees, would result in that
lessee's rents not qualifying as rents from real property. Our
declaration of trust disallows transfers or purported acquisitions,
directly or by attribution, of our shares that could result in
disqualification as a REIT under the Internal Revenue Code and permits
our trustees to repurchase the shares to the extent necessary to
maintain our status as a REIT under the Internal Revenue Code.
Nevertheless, there can be no assurance that these provisions in our
declaration of trust will be effective to prevent REIT status under
the Internal Revenue Code from being jeopardized under the 10% lessee
affiliate rule. Furthermore, there can be no assurance that we will be
able to monitor and enforce these restrictions, nor will our
17
shareholders necessarily be aware of ownership of shares attributed to
them under the Internal Revenue Code's attribution rules.
o In order for rents to qualify, we generally must not manage the
property or furnish or render services to the tenants of the property,
except through an independent contractor from whom we derive no
income. There is an exception to this rule permitting a REIT to
perform customary tenant services of the sort which a tax-exempt
organization could perform without being considered in receipt of
"unrelated business taxable income" as defined in Section 512(b)(3) of
the Internal Revenue Code. In addition, a de minimis amount of
noncustomary services will not disqualify income as "rents from real
property" so long as the value of the impermissible services does not
exceed 1% of the gross income from the property.
o If rent attributable to personal property leased in connection with a
lease of real property is 15% or less of the total rent received under
the lease, then the rent attributable to personal property will
qualify as rents from real property; if this 15% threshold is
exceeded, the rent attributable to personal property will not so
qualify. 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 real and
personal property which is rented. For taxable years after 2000, the
ratio will be determined by reference to fair market values rather
than tax bases.
We believe that all or substantially all our rents have qualified and will
qualify as rents from real property for purposes of Section 856 of the Internal
Revenue Code.
In order to qualify as mortgage interest on real property for purposes
of the 75% test, interest must derive from a mortgage loan secured by real
property with a fair market value, at the time the loan is made, at least equal
to the amount of the loan. If the amount of the loan exceeds the fair market
value of the real property, the interest will be treated as interest on a
mortgage loan in a ratio equal to the ratio of the fair market value of the real
property to the total amount of the mortgage loan.
Other than sales of foreclosure property, any gain we realize on the
sale of property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a penalty tax at a 100% rate. This
prohibited transaction income also may have an adverse effect upon our ability
to satisfy the 75% and 95% gross income tests for federal income tax
qualification as a REIT. We cannot provide assurances as to whether or not the
IRS might successfully assert that one or more of our dispositions is subject to
the 100% penalty tax. However, we believe that dispositions of assets that we
might make will not be subject to the 100% penalty tax, because we intend to:
o own our assets for investment with a view to long-term income
production and capital appreciation;
o engage in the business of developing, owning and operating our
existing properties and acquiring, developing, owning and operating
new properties; and
o make occasional dispositions of our assets consistent with our
long-term investment objectives.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for that year if:
o our failure to meet the test was due to reasonable cause and not due
to willful neglect;
o we report the nature and amount of each item of our income included in
the 75% or 95% gross income tests for that taxable year on a schedule
attached to our tax return; and
o any incorrect information on the schedule was not due to fraud with
intent to evade tax.
18
It is impossible to state whether in all circumstances we would be entitled to
the benefit of this relief provision for the 75% and 95% gross income tests.
Even if this relief provision did apply, a special tax equal to 100% is imposed
upon the greater of the amount by which we failed the 75% test or the 95% test,
multiplied by a fraction intended to reflect our profitability.
Asset Tests. At the close of each quarter of each taxable year, we must
also satisfy three percentage tests relating to the nature of our assets:
o At least 75% of our total assets must consist of real estate assets,
cash and cash items, shares in other REITs, government securities, and
stock or debt instruments purchased with proceeds of a stock offering
or an offering of our debt with a term of at least five years, but
only for the one-year period commencing with our receipt of the
offering proceeds.
o Not more than 25% of our total assets may be represented by securities
other than those securities that count favorably toward the preceding
75% asset test.
o Of the investments included in the preceding 25% asset class, the
value of any one issuer's securities that we own may not exceed 5% of
the value of our total assets, and we may not own more than 10% of any
one non-REIT issuer's outstanding voting securities. For taxable years
after 2000, we may not own more than 10% of the vote or value of any
one non-REIT issuer's outstanding securities, unless that issuer is
our taxable REIT subsidiary or the securities are straight debt
securities.
When a failure to satisfy the above asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. We intend to maintain records of the value of our assets to
document our compliance with the above three asset tests, and to take actions as
may be required to cure any failure to satisfy the tests within 30 days after
the close of any quarter.
Annual Distribution Requirements. In order to qualify for taxation as a
REIT under the Internal Revenue Code, we are required to make annual
distributions other than capital gain dividends to our shareholders in an amount
at least equal to the excess of:
(A) the sum of 95% of our "real estate investment trust taxable
income," as defined in Section 857 of the Internal Revenue Code, computed by
excluding any net capital gain and before taking into account any dividends paid
deduction for which we are eligible, and 95% of our net income after tax, if
any, from property received in foreclosure, over
(B) the sum of our qualifying noncash income, e.g., imputed rental
income or income from transactions inadvertently failing to qualify as like-kind
exchanges.
For our taxable years after 2000, the preceding 95% percentages are reduced to
90%. The distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before we timely file our tax return
for the earlier taxable year and if paid on or before the first regular
distribution payment after that declaration. Dividends declared in October,
November, or December and paid during the following January will be treated as
having been both paid and received on December 31 of the prior taxable year. A
distribution which is not pro rata within a class of our beneficial interests
entitled to a distribution, or which is not consistent with the rights to
distributions among our classes of beneficial interests, is a preferential
distribution that is not taken into consideration for purposes of the
distribution requirements, and accordingly the payment of a preferential
distribution could affect our ability to meet the distribution requirements.
Taking into account our distribution policies, including the dividend
reinvestment plan we have adopted, we expect that we will not make any
preferential distributions. The distribution requirements may be waived by the
IRS if a REIT establishes that it failed to meet them by reason of distributions
previously made to meet the requirements of the
19
4% excise tax discussed below. To the extent that we do not distribute all of
our net capital gain and all of our real estate investment trust taxable income,
as adjusted, we will be subject to tax on undistributed amounts.
In addition, we will be subject to a 4% excise tax to the extent we
fail within a calendar year to make required distributions to our shareholders
of 85% of our ordinary income and 95% of our capital gain net income plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the amount treated as distributed for that preceding calendar
year. For this purpose, the term "grossed up required distribution" for any
calendar year is the sum of our taxable income for the calendar year without
regard to the deduction for dividends paid and all amounts from earlier years
that are not treated as having been distributed under the provision.
If we do not have enough cash or other liquid assets to meet the 95%
distribution requirements, we may find it necessary to arrange for new debt or
equity financing to provide funds for required distributions, or else our REIT
status for federal income tax purposes could be jeopardized. We can provide no
assurance that financing would be available for these purposes on favorable
terms.
If we fail to distribute sufficient dividends for any year, we may be
able to rectify this failure by paying "deficiency dividends" to shareholders in
a later year. These deficiency dividends may be included in our deduction for
dividends paid for the earlier year, but an interest charge would be imposed
upon us for the delay in distribution. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we will remain liable for
the 4% excise tax discussed above.
Recent Federal Taxation Changes. The Tax Relief Extension Act of 1999
was enacted late in 1999 and is effective for taxable years after 2000. This
legislation contained several tax provisions regarding REITs, including a
reduction of the annual distribution requirement for real estate investment
trust taxable income from 95% to 90%, as mentioned above. The Act also changed
the 10% voting securities test under current law to a 10% vote or value test.
Thus, subject to exceptions, a REIT will no longer be allowed to own more that
10% by vote or value of the outstanding securities of any issuer, other than a
qualified REIT subsidiary or another REIT. Another exception to this new test,
which is also an exception to the 5% asset test under current law, allows a REIT
to own any or all of the securities of an electing "taxable REIT subsidiary,"
provided that no more than 20% of the REIT's assets is represented by the stock
or securities of taxable REIT subsidiaries. A taxable REIT subsidiary can
perform noncustomary services for tenants of a REIT without disqualifying rents
received from the tenants for purposes of the REIT's gross income tests and can
also undertake third-party management and development activities and activities
that are not related to real estate. A taxable REIT subsidiary cannot directly
or indirectly operate or manage a health care facility. A taxable REIT
subsidiary will be taxed as a subchapter C corporation but will be subject to
earnings stripping limitations on the deductibility of interest paid to the
REIT. In addition, a REIT will be subject to a 100% excise tax on certain excess
amounts to ensure that:
o tenants who pay a taxable REIT subsidiary for services are charged an
arm's length amount by the taxable REIT subsidiary for these services;
o shared expenses of a REIT and its taxable REIT subsidiary are
allocated fairly between the two; and
o interest paid by a taxable REIT subsidiary to the REIT that owns it is
commercially reasonable.
In connection with foreclosure actions, we anticipate operating health
care properties through taxable subsidiaries in which we own less than 10% of
the vote but most of the value, all in accordance with current laws. For taxable
years after 2000, we will restructure our affairs as appropriate to comply with
the requirements of applicable law.
20
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be our acquisition
cost. We will generally depreciate our real property on a straight-line basis
over 40 years and our personal property over 12 years. These depreciation
schedules may vary for properties that we acquire through tax-free or carryover
basis acquisitions.
The initial tax bases and depreciation schedules for our assets we held
immediately after we ceased to be wholly-owned by HRPT Properties Trust depends
upon whether the deemed exchange that resulted from the spin-off was an exchange
under Section 351(a) of the Internal Revenue Code. We believe that Section
351(a) treatment was appropriate, and we carried over HRPT Properties Trust's
tax basis and depreciation schedule in each of the assets, and to the extent
that HRPT Properties Trust recognized gain on an asset in the deemed exchange,
we have additional tax basis in that asset which we depreciate in the same
manner as we depreciate newly purchased assets. In contrast, if Section 351(a)
treatment was not appropriate for the deemed exchange, then we will be treated
as though we acquired all our assets at the time of the spin-off in a fully
taxable acquisition, thereby acquiring aggregate tax bases in these assets equal
to the aggregate amount realized by HRPT Properties Trust in the deemed
exchange, and we will depreciate these tax bases in the same manner as we
depreciate newly purchased assets. We believe, and Sullivan & Worcester LLP has
opined, that it is likely that the deemed exchange was an exchange under Section
351(a), and we will perform all our tax reporting accordingly. We may be
required to amend these tax reports, including those sent to our shareholders,
if the IRS successfully challenges our position that the deemed exchange is an
exchange under Section 351(a). We intend to comply with the annual REIT
distribution requirements regardless of whether the deemed exchange was an
exchange under Section 351(a).
We will be entitled to depreciation deductions from our facilities only
if we are treated for federal income tax purposes as the owner of the
facilities. This means that the leases of the facilities must be classified for
federal income tax purposes as true leases, rather than as sales or financing
arrangements, and we believe this to be the case. In the case of sale-leaseback
arrangements, the IRS could assert that we realized prepaid rental income in the
year of purchase to the extent that the value of a leased property, at the time
of purchase, exceeded the purchase price for that property. While we believe
that the value of leased property at the time of purchase did not exceed
purchase prices, because of the lack of clear precedent we cannot provide
assurances as to whether the IRS might successfully assert the existence of
prepaid rental income in any of our sale-leaseback transactions.
Additionally, Section 467 of the Internal Revenue Code, which concerns
leases with increasing rents, may apply to those of our leases which provide for
rents that increase from one period to the next. Section 467 of the Internal
Revenue Code provides that in the case of a so-called "disqualified leaseback
agreement" rental income must be accrued at a constant rate. Where constant rent
accrual is required, we could recognize rental income from a lease in excess of
cash rents and, as a result, encounter difficulty in meeting the annual
distribution requirement. Disqualified leaseback agreements include leaseback
transactions where a principal purpose for providing increasing rent under the
agreement is the avoidance of federal income tax. Recently issued Treasury
regulations provide that rents will not be treated as increasing for tax
avoidance purposes where the increases are based upon a fixed percentage of
lessee receipts. Therefore, the additional rent provisions in our leases that
are based on a fixed percentage of lessee receipts generally should not cause
the leases to be disqualified leaseback agreements under Section 467.
Taxation of U.S. Shareholders
As long as we qualify as a REIT for federal income tax purposes, a
distribution to our U.S. shareholders that we do not designate as a capital gain
dividend will be treated as an ordinary income dividend to the extent that it is
made out of current or accumulated earnings and profits. Distributions made out
of our current or accumulated earnings and profits that we properly designate as
capital gain dividends will be taxed as long-term capital gains, as discussed
below, to the extent they do not exceed our actual net capital gain for the
taxable
21
year. However, corporate shareholders may be required to treat up to 20% of any
capital gain dividend as ordinary income under Section 291 of the Internal
Revenue Code.
In addition, we may elect to retain net capital gain income and treat
it as constructively distributed. In that case:
(1) we will be taxed at regular corporate capital gains tax rates on
retained amounts,
(2) each U.S. shareholder will be taxed on its designated proportionate
share of our retained net capital gains as though that amount were distributed
and designated a capital gain dividend,
(3) each U.S. shareholder will receive a credit for its designated
proportionate share of the tax that we pay,
(4) each U.S. shareholder will increase its adjusted basis in our
shares by the excess of the amount of its proportionate share of these retained
net capital gains over its proportionate share of this tax that we pay, and
(5) both we and our corporate shareholders will make commensurate
adjustments in our respective earnings and profits for federal income tax
purposes.
If we elect to retain our net capital gains in this fashion, we will notify our
U.S. shareholders of the relevant tax information within 60 days after the close
of the affected taxable year.
For noncorporate U.S. shareholders, long-term capital gains are
generally taxed at maximum rates of 20% or 25%, depending upon the type of
property disposed of and the previously claimed depreciation with respect to
this property. If for any taxable year we designate as capital gain dividends
any portion of the dividends paid or made available for the year to our U.S.
shareholders, including our retained capital gains treated as capital gain
dividends, then the portion of the capital gain dividends so designated that
will be allocated to the holders of a particular class of shares will on a
percentage basis equal the ratio of the amount of the total dividends paid or
made available for the year to the holders of that class of shares to the total
dividends paid or made available for the year to holders of all classes of our
shares. We will similarly designate the portion of any capital gain dividend
that is to be taxed to noncorporate U.S. shareholders at the maximum rates of
20% or 25% so that the designations will be proportional among all classes of
our shares.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that they do not exceed
the shareholder's adjusted basis in the shareholder's shares, but will reduce
the shareholder's basis in those shares. To the extent that these excess
distributions exceed the adjusted basis of a U.S. shareholder's shares, they
will be included in income as capital gain, with long-term gain generally taxed
to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder
may include on his federal income tax return any of our net operating losses or
any of our capital losses.
Dividends that we declare in October, November or December of a taxable
year to U.S. shareholders of record on a date in those months will be deemed to
have been received by shareholders on December 31 of that taxable year, provided
we actually pay these dividends during the following January. Also, items that
are treated differently for regular and alternative minimum tax purposes are to
be allocated between a REIT and its shareholders under Treasury regulations
which are to be prescribed. It is possible that these Treasury regulations will
require tax preference items to be allocated to our shareholders with respect to
any accelerated depreciation or other tax preference items that we claim.
A U.S. shareholder's sale or exchange of our shares will result in
recognition of gain or loss in an amount equal to the difference between the
amount realized and the shareholder's adjusted basis in the shares sold or
exchanged. This gain or loss will be capital gain or loss, and will be long-term
capital gain or loss if the
22
shareholder's holding period in the shares exceeds one year. In addition, any
loss upon a sale or exchange of our shares held for six months or less will
generally be treated as a long-term capital loss to the extent of our long-term
capital gain dividends during the holding period.
Noncorporate U.S. shareholders who borrow funds to finance their
acquisition of our shares could be limited in the amount of deductions allowed
for the interest paid on the indebtedness incurred. Under Section 163(d) of the
Internal Revenue Code, interest paid or accrued on indebtedness incurred or
continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A U.S.
shareholder's net investment income will include ordinary income dividend
distributions received from us and, if an appropriate election is made by the
shareholder, capital gain dividend distributions received from us; however,
distributions treated as a nontaxable return of the shareholder's basis will not
enter into the computation of net investment income.
Taxation of Tax-Exempt Shareholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
REIT to a tax-exempt employees' pension trust did not constitute "unrelated
business taxable income," even though the REIT may have financed some its
activities with acquisition indebtedness. Although revenue rulings are
interpretive in nature and subject to revocation or modification by the IRS,
based upon the analysis and conclusion of Revenue Ruling 66-106, our
distributions made to shareholders that are tax-exempt pension plans, individual
retirement accounts, or other qualifying tax-exempt entities should not
constitute unrelated business taxable income, unless the shareholder has
financed its acquisition of our shares with "acquisition indebtedness" within
the meaning of the Internal Revenue Code.
Special rules apply to tax-exempt pension trusts, including so-called
401(k) plans but excluding individual retirement accounts or government pension
plans, that own more than 10% by value of a "pension-held REIT" at any time
during a taxable year. The pension trust may be required to treat a percentage
of all dividends received from the pension-held REIT during the year as
unrelated business taxable income. This percentage is equal to the ratio of:
(1) the pension-held REIT's gross income derived from the conduct of
unrelated trades or businesses, determined as if the pension-held REIT were a
tax-exempt pension fund, less direct expenses related to that income, to
(2) the pension-held REIT's gross income from all sources, less direct
expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if:
o the REIT is "predominantly held" by tax-exempt pension trusts, and
o the REIT would otherwise fail to satisfy the "closely held" ownership
requirement discussed above if the stock or beneficial interests in
the REIT held by tax-exempt pension trusts were viewed as held by
tax-exempt pension trusts rather than by their respective
beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least one
tax-exempt pension trust owns more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts, each owning
more than 10% by value of the REIT's stock or beneficial interests, own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Because of the restrictions in our declaration of trust regarding the ownership
concentration of our shares, we believe that we are not and will not be a
pension-held REIT. However, because our shares are publicly traded, we cannot
completely control whether or not we are or will become a pension-held REIT.
23
Taxation of Non-U.S. Shareholders
The rules governing the United States federal income taxation of
non-U.S. shareholders are complex, and the following discussion is intended only
as a summary of these rules. If you are a non-U.S. shareholder, we urge you to
consult with your own tax advisor to determine the impact of United States
federal, state, local, and foreign tax laws, including any tax return filing and
other reporting requirements, with respect to your investment in our shares.
In general, a non-U.S. shareholder will be subject to regular United
States federal income tax in the same manner as a U.S. shareholder with respect
to its investment in our shares if that investment is effectively connected with
the non-U.S. shareholder's conduct of a trade or business in the United States.
In addition, a corporate non-U.S. shareholder that receives income that is or is
deemed effectively connected with a trade or business in the United States may
also be subject to the 30% branch profits tax under Section 884 of the Internal
Revenue Code, which is payable in addition to regular United States federal
corporate income tax. The balance of this discussion on the United States
federal income taxation of non-U.S. shareholders addresses only those non-U.S.
shareholders whose investment in our shares is not effectively connected with
the conduct of a trade or business in the United States.
A distribution by us to a non-U.S. shareholder that is not attributable
to gain from the sale or exchange of a United States real property interest and
that is not designated as a capital gain dividend will be treated as an ordinary
income dividend to the extent that it is made out of current or accumulated
earnings and profits. A distribution of this type will generally be subject to
United States federal income tax and withholding at the rate of 30%, or the
lower rate that may be specified by a tax treaty if the non-U.S. shareholder has
in the manner prescribed by the IRS demonstrated its entitlement to benefits
under a tax treaty. Because we cannot determine our current and accumulated
earnings and profits until the end of the taxable year, withholding at the rate
of 30% or applicable lower treaty rate will be imposed on the gross amount of
any distribution to a non-U.S. shareholder that we make and do not designate a
capital gain dividend. Notwithstanding this withholding on distributions in
excess of our current and accumulated earnings and profits, these distributions
are a nontaxable return of capital to the extent that they do not exceed the
non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return
of capital will reduce the adjusted basis in these shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the non-U.S. shareholder's adjusted basis in our shares, the distributions will
give rise to tax liability if the non-U.S. shareholder would otherwise be
subject to tax on any gain from the sale or exchange of these shares, as
discussed below. A non-U.S. shareholder may seek a refund from the IRS of
amounts withheld on distributions to him in excess of our current and
accumulated earnings and profits.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from the sale or exchange of a United States real property
interest are taxed to a non-U.S. shareholder as if these distributions were
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will
be taxed on these amounts at the normal capital gain rates applicable to a U.S.
shareholder, subject to any applicable alternative minimum tax and to a special
alternative minimum tax in the case of nonresident alien individuals; the
non-U.S. shareholder will be required to file a United States federal income tax
return reporting these amounts, even if applicable withholding is imposed as
described below; and corporate non-U.S. shareholders may owe the 30% branch
profits tax under Section 884 of the Internal Revenue Code in respect of these
amounts. We will be required to withhold from distributions to non-U.S.
shareholders, and remit to the IRS, 35% of the maximum amount of any
distribution that could be designated as a capital gain dividend. In addition,
for purposes of this withholding rule, if we designate prior distributions as
capital gain dividends, then subsequent distributions up to the amount of the
designated prior distributions will be treated as capital gain dividends. The
amount of any tax withheld is creditable against the non-U.S. shareholder's
United States federal income tax liability, and any amount of tax withheld in
excess of that tax liability may be refunded provided that an appropriate claim
for refund is filed with the IRS. If for any taxable year we designate as
capital gain dividends any portion of the dividends paid or made available for
the year to our shareholders, including our retained capital gains treated as
capital gain
24
dividends, then the portion of the capital gain dividends so designated that
will be allocated to the holders of a particular class of shares will on a
percentage basis equal the ratio of the amount of the total dividends paid or
made available for the year to the holders of that class of shares to the total
dividends paid or made available for the year to holders of all classes of our
shares.
Tax treaties may reduce the withholding obligations on our
distributions. Under some treaties, however, rates below 30% generally
applicable to ordinary income dividends from United States corporations may not
apply to ordinary income dividends from a REIT. If the amount of tax withheld by
us with respect to a distribution to a non-U.S. shareholder exceeds the
shareholder's United States federal income tax liability with respect to the
distribution, the non-U.S. shareholder may file for a refund of the excess from
the IRS. In this regard, note that the 35% withholding tax rate on capital gain
dividends corresponds to the maximum income tax rate applicable to corporate
non-U.S. shareholders but is higher than the 20% and 25% maximum rates on
capital gains generally applicable to noncorporate non-U.S. shareholders.
Generally effective with respect to distributions paid after December 31, 2000,
new Treasury regulations alter the information reporting and backup withholding
rules applicable to non-U.S. shareholders and provide presumptions under which a
non-U.S. shareholder is subject to backup withholding and information reporting
until we or the applicable withholding agent receives certification from the
shareholder of its non-U.S. shareholder status. In some instances, these
certification requirements are more burdensome than those applicable under
current Treasury regulations. These new Treasury regulations also provide
special rules to determine whether, for purposes of determining the
applicability of a tax treaty, our distributions to a non-U.S. shareholder that
is an entity should be treated as paid to the entity or to those owning an
interest in that entity, and whether the entity or its owners are entitled to
benefits under the tax treaty. These new Treasury regulations encourage non-U.S.
shareholders and withholding agents to use the new IRS Forms W-8 series, rather
than the predecessor IRS Forms W-8, 1001, and 4224, and require use of the IRS
Forms W-8 series for payments made after December 31, 2000.
If our shares are not "United States real property interests" within
the meaning of Section 897 of the Internal Revenue Code, a non-U.S.
shareholder's gain on sale of these shares generally will not be subject to
United States federal income taxation, except that a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year will be subject to a 30% tax on this gain. Our shares will not
constitute a United States real property interest if we are a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which at all times
during the preceding five-year period less than 50% in value of its shares is
held directly or indirectly by foreign persons. We believe that we are and will
be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale
of our shares will not be subject to United States federal income taxation.
However, because our shares are publicly traded, we can provide no assurance
that we will be a domestically controlled REIT. If we are not a domestically
controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be
subject to United States federal income taxation as a sale of a United States
real property interest, if that class of shares is "regularly traded," as
defined by applicable Treasury regulations, on an established securities market
like the New York Stock Exchange, and the non-U.S. shareholder has at all times
during the preceding five years owned 5% or less by value of that class of
shares. If the gain on the sale of our shares were subject to United States
federal income taxation, the non-U.S. shareholder will generally be subject to
the same treatment as a U.S. shareholder with respect to its gain, will be
required to file a United States federal income tax return reporting that gain,
and in the case of corporate non-U.S. shareholders might owe branch profits tax
under Section 884 of the Internal Revenue Code. A purchaser of our shares from a
non-U.S. shareholder will not be required to withhold on the purchase price if
the purchased shares are regularly traded on an established securities market or
if we are a domestically controlled REIT. Otherwise, a purchaser of our shares
from a non-U.S. shareholder may be required to withhold 10% of the purchase
price paid to the non-U.S. shareholder and to remit the withheld amount to the
IRS.
Backup Withholding and Information Reporting
Information reporting and backup withholding may apply to distributions
or proceeds paid to our shareholders under the circumstances discussed below.
Amounts withheld under backup withholding are
25
generally not an additional tax and may be refunded or credited against the REIT
shareholder's federal income tax liability.
A U.S. shareholder will be subject to backup withholding at a 31% rate
when it receives distributions on our shares or proceeds upon the sale,
exchange, redemption, retirement or other disposition of our shares, unless the
U.S. shareholder properly executes under penalties of perjury an IRS Form W-9 or
substantially similar form that:
o provides the U.S. shareholder's correct taxpayer identification
number; and
o certifies that the U.S. shareholder is exempt from backup withholding
because it is a corporation or comes within another exempt category,
it has not been notified by the IRS that it is subject to backup
withholding, or it has been notified by the IRS that it is no longer
subject to backup withholding.
If the U.S. shareholder does not provide its correct taxpayer identification
number on the IRS Form W-9 or substantially similar form, it may be subject to
penalties imposed by the IRS and the REIT or other applicable withholding agent
may also have to withhold a portion of any capital gain distributions paid to
it. Unless the U.S. shareholder has established on a properly executed IRS Form
W-9 or substantially similar form that it is a corporation or comes within
another exempt category, distributions on our shares paid to it during the
calendar year, and the amount of tax withheld if any, will be reported to it and
to the IRS.
Distributions on our shares to a non-U.S. shareholder during each
calendar year and the amount of tax withheld, if any, will generally be reported
to the non-U.S. shareholder and to the IRS. This information reporting
requirement applies regardless of whether the non-U.S. shareholder is subject to
withholding on distributions on our shares or whether the withholding was
reduced or eliminated by an applicable tax treaty. Also, distributions paid to a
non-U.S. shareholder on our shares may be subject to backup withholding at a 31%
rate, unless the non-U.S. shareholder properly certifies its non-U.S.
shareholder status on an IRS Form W-8 or substantially similar form in the
manner described above. Similarly, information reporting and 31% backup
withholding will not apply to proceeds a non-U.S. shareholder receives upon the
sale, exchange, redemption, retirement or other disposition of our shares, if
the non-U.S. shareholder properly certifies its non-U.S. shareholder status on
an IRS Form W-8 or substantially similar form. Even without having executed an
IRS Form W-8 or substantially similar form, however, in some cases information
reporting and 31% backup withholding will not apply to proceeds that a non-U.S.
shareholder receives upon the sale, exchange, redemption, retirement or other
disposition of our shares if the non-U.S. shareholder receives those proceeds
through a broker's foreign office. As described above, new Treasury regulations
alter the information reporting and backup withholding rules applicable to
non-U.S. shareholders for payments made after December 31, 2000, and in general
these new Treasury Regulations replace IRS Forms W-8, 1001, and 4224 with the
new IRS Forms W-8 series. For a non-U.S. shareholder whose income and gain on
our shares is effectively connected to the conduct of a United States trade or
business, a slightly different rule may apply to proceeds received upon the
sale, exchange, redemption, retirement or other disposition of our shares. Until
the non-U.S. shareholder complies with the new Treasury regulations, information
reporting and 31% backup withholding may apply in the same manner as to a U.S.
shareholder, and thus the non-U.S. shareholder may have to execute an IRS Form
W-9 or substantially similar form to prevent the backup withholding.
Other Tax Consequences
You should recognize that our and our shareholders' federal income tax
treatment may be modified by legislative, judicial, or administrative actions at
any time, which actions may be retroactive in effect. The rules dealing with
federal income taxation are constantly under review by the Congress, the IRS and
the Treasury Department, and statutory changes as well as promulgation of new
regulations, revisions to existing regulations, and revised interpretations of
established concepts occur frequently. No prediction can be made as to the
likelihood of passage of new tax legislation or other provisions either directly
or indirectly affecting us and our
26
shareholders. Revisions in federal income tax laws and interpretations of these
laws could adversely affect the tax consequences of an investment in our shares.
We and our shareholders may also be subject to state or local taxation in
various state or local jurisdictions, including those in which we or our
shareholders transact business or reside. State and local tax consequences may
not be comparable to the federal income tax consequences discussed above.
27
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to Title I of the Employee Retirement Income Security Act of 1974,
ERISA, must consider whether:
o their investment in our shares satisfies the diversification
requirements of ERISA;
o the investment is prudent in light of possible limitations on the
marketability of our shares;
o they have authority to acquire our shares under the applicable
governing instrument and Title I of ERISA; and
o the investment is otherwise consistent with their fiduciary
responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, these fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of a
violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA, referred to as "non-ERISA
plans," should consider that a plan may only make investments that are
authorized by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is consistent with the foregoing criteria.
Prohibited Transactions
Fiduciaries of ERISA plans and persons making the investment decision
for an IRA or other non-ERISA plan should consider the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code in
making their investment decision. Sales and other transactions between an ERISA
plan or a non-ERISA plan, and persons related to it are prohibited transactions.
The particular facts concerning the sponsorship, operations and other
investments of an ERISA plan or non-ERISA plan may cause a wide range of other
persons to be treated as disqualified persons or parties in interest with
respect to it. A prohibited transaction, in addition to imposing potential
personal liability upon fiduciaries of ERISA plans, may also result in the
imposition of an excise tax under the Internal Revenue Code or a penalty under
ERISA upon the disqualified person or party in interest with respect to the
plan. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA or Roth IRA is maintained or his
beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets
may be deemed to have been distributed to the individual in a taxable
distribution on account of the prohibited transaction, but no excise tax will be
imposed. Fiduciary shareholders should consult their own legal advisors as to
whether the ownership of our shares involves a prohibited transaction.
Special Fiduciary and Prohibited Transactions Consequences
The Department of Labor, which has administrative responsibility over
ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan
assets." The regulation generally provides that when an ERISA or non-ERISA plan
acquires a security that is an equity interest in an entity and that security is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the ERISA plan's or
non-ERISA plan's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an operating company or that equity
participation in the entity by benefit plan investors is not significant.
Each class of our shares that is, our common shares and any class of
preferred shares that we may issue must be analyzed separately to ascertain
whether it is a publicly offered security. The regulation defines a
28
publicly offered security as a security that is "widely held," "freely
transferable" and either part of a class of securities registered under the
Securities Exchange Act of 1934, or sold under an effective registration
statement under the Securities Act of 1933, provided the securities are
registered under the Securities Exchange Act of 1934 within 120 days after the
end of the fiscal year of the issuer during which the offering occurred. All our
outstanding shares have been registered under the Securities Exchange Act of
1934.
The regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. Our common shares have been widely held and we expect our
common shares to continue to be widely held. We expect the same to be true of
any class of preferred stock that we may issue, but we can give no assurance in
that regard.
The regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The regulation further provides that, where a
security is part of an offering in which the minimum investment is $10,000 or
less, some restrictions on transfer ordinarily will not, alone or in
combination, affect a finding that these securities are freely transferable. The
restrictions on transfer enumerated in the regulation as not affecting that
finding include:
o any restriction on or prohibition against any transfer or assignment
which would result in a termination or reclassification for federal or
state tax purposes, or would otherwise violate any state or federal
law or court order;
o any requirement that advance notice of a transfer or assignment be
given to the issuer and any requirement that either the transferor or
transferee, or both, execute documentation setting forth
representations as to compliance with any restrictions on transfer
which are among those enumerated in the regulation as not affecting
free transferability, including those described in the preceding
clause of this sentence;
o any administrative procedure which establishes an effective date, or
an event prior to which a transfer or assignment will not be
effective; and
o any limitation or restriction on transfer or assignment which is not
imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our declaration of trust
on the transfer of shares do not result in the failure of our shares to be
"freely transferable." Furthermore, we believe that at present there exist no
other facts or circumstances limiting the transferability of our shares which
are not included among those enumerated as not affecting their free
transferability under the regulation, and we do not expect or intend to impose
in the future, or to permit any person to impose on our behalf, any limitations
or restrictions on transfer which would not be among the enumerated permissible
limitations or restrictions.
Assuming that each class of our shares will be "widely held" and that
no other facts and circumstances exist which restrict transferability of these
shares, we have received an opinion of our counsel Sullivan & Worcester LLP that
our shares will not fail to be "freely transferable" for purposes of the
regulation due to the restrictions on transfer of the shares under our
declaration of trust and that under the regulation the shares are publicly
offered securities and our assets will not be deemed to be "plan assets" of any
ERISA plan or non-ERISA plan that invests in our shares.
29
Item 2. Properties
At December 31, 1999, we had real estate investments totaling $731.7
million, at cost, after an impairment loss write-down and loan loss reserve, in
93 properties that were leased to or operated by nine tenants or mortgagors. We
believe that the physical plant of the facilities in which we have invested is
suitable and adequate for our present and any proposed uses. At December 31,
1999, 18 properties with an aggregate cost of $427.4 million were mortgaged to
secure our bank credit facility.
The following table summarizes some information about our properties as
of December 31, 1999. All dollar figures are in thousands. Certain tenants'
obligations to pay the rents or interest stated below may be affected by
bankruptcy proceedings affecting those tenants. See "Item 1. Business--Business
Developments--Tenant Financial Condition."
Built/
Location Property Type Renovated(1) Units/Beds(2) Investment (3)
- - --------------------------------------- ---------------------- ---------------- ---------------- --------------
(000s)
Marriott International, Inc.
Scottsdale, AZ Assisted Living 1990 148 $9,926
Sun City, AZ Assisted Living 1990 148 11,916
Laguna Hills, CA Congregate Care 1991 402 31,791
Boca Raton, FL Congregate Care 1999 347 44,836
Deerfield Beach, FL Congregate Care 1986 288 16,935
Fort Myers, FL Congregate Care 1987 463 23,905
Palm Harbor, FL Congregate Care 1992 319 33,863
Port St. Lucie, FL Assisted Living 1993 128 12,451
Arlington Heights, IL Congregate Care 1986 363 36,742
Silver Spring, MD Congregate Care 1992 351 33,080
Bellaire, TX Assisted Living 1991 145 12,410
Arlington, VA Congregate Care 1992 419 18,889
Charlottesville, VA Congregate Care 1991 315 29,829
Virginia Beach, VA Assisted Living 1990 114 8,948
---------------- --------------
3,950 325,521
Brookdale Living Communities, Inc.
Mesa, AZ Congregate Care 1985 185 14,800
Chicago, IL Congregate Care 1990 341 62,000
Brighton, NY Congregate Care 1988 103 10,700
Spokane, WA Congregate Care 1993 200 14,350
---------------- --------------
829 101,850
Mariner Post-Acute Network, Inc. (4)
Phoenix, AZ Nursing Home 1984 127 3,185
Yuma, AZ Nursing Home 1984 128 2,326
Yuma, AZ Congregate Care 1984 65 708
Fresno, CA Nursing Home 1985 180 3,503
Lancaster, CA Nursing Home 1994 99 3,488
Newport Beach, CA Nursing Home 1994 167 4,128
Stockton, CA Nursing Home 1991 122 3,136
Tarzana, CA Nursing Home 1969 192 3,060
Thousand Oaks, CA Nursing Home 1970 124 3,454
Van Nuys, CA Nursing Home 1984 58 1,319
Lakewood, CO Nursing Home 1985 175 4,721
Littleton, CO Nursing Home 1965 230 5,576
30
Built/
Location Property Type Renovated(1) Units/Beds(2) Investment (3)
- - --------------------------------------- ---------------------- ---------------- ---------------- --------------
(000s)
Concord, NC Nursing Home 1990 110 $2,216
Wilson, NC Nursing Home 1990 119 2,402
Winston-Salem, NC Nursing Home 1990 80 1,771
Huron, SD Nursing Home 1977 163 3,256
Huron, SD Congregate Care 1968 59 1,014
Sioux Falls, SD Nursing Home 1979 139 3,319
Brookfield, WI Nursing Home 1995 226 6,891
Clintonville, WI Nursing Home 1965 78 1,761
Clintonville, WI Nursing Home 1969 109 1,747
Madison, WI Nursing Home 1987 73 1,887
Milwaukee, WI Nursing Home 1983 215 5,043
Milwaukee, WI Nursing Home 1997 102 1,601
Pewaukee, WI Nursing Home 1969 237 3,416
Waukesha, WI Nursing Home 1995 105 5,752
---------------- --------------
3,482 80,680
Integrated Health Services, Inc. (Lease No. 1) (4)
Canon City, CO (5) Nursing Home/ Senior
Apartments 1984 157 6,520
Colorado Springs, CO Nursing Home 1996 132 5,481
Delta, CO Nursing Home 1978 100 3,737
Grand Junction, CO Nursing Home 1986 120 4,408
Grand Junction, CO Nursing Home 1995 82 3,905
College Park, GA Nursing Home 1985 100 3,025
Dublin, GA Nursing Home 1968 130 4,504
Glenwood, GA Nursing Home 1972 62 1,742
Marietta, GA Nursing Home 1973 109 3,037
Clarinda, IA Nursing Home 1968 117 1,823
Council Bluffs, IA Nursing Home 1963 62 1,217
Mediapolis, IA Nursing Home 1973 62 2,121
Pacific Junction, IA Nursing Home 1978 12 343
Winterset, IA (5) Nursing Home/ Senior
Apartments 1995 118 2,703
Ellinwood, KS Nursing Home 1972 59 1,320
Tarkio, MO Nursing Home 1996 95 2,455
Ainsworth, NE (6) Nursing Home 1995 50 445
Ashland, NE (6) Nursing Home 1996 101 1,851
Blue Hill, NE (6) Nursing Home 1996 81 1,119
Edgar, NE (6) Nursing Home 1995 54 139
Grand Island, NE Nursing Home 1996 80 1,934
Gretna, NE (6) Nursing Home 1995 62 940
Lyons, NE (6) Nursing Home 1974 84 810
Milford, NE (6) Nursing Home 1970 66 904
Sutherland, NE (6) Nursing Home 1995 62 1,270
Waverly, NE (6) Nursing Home 1995 50 1,215
Laramie, WY Nursing Home 1986 144 4,022
Worland, WY (5) Nursing Home/ Senior
Apartments 1996 99 3,223
---------------- --------------
2,450 66,213
31
Built/
Location Property Type Renovated(1) Units/Beds(2) Investment(3)
- - --------------------------------------- ---------------------- ---------------- ---------------- --------------
(000s)
Integrated Health Services, Inc. (Lease No. 2) (4)
Cheshire, CT (7) Nursing Home 1971 210 $9,459
Waterbury, CT (7) Nursing Home 1974 180 5,247
New Haven, CT (7) Nursing Home 1971 195 5,716
Slidell, LA (6) Nursing Home 1989 118 4,277
Middleboro, MA Nursing Home 1987 124 17,523
Worcester, MA Nursing Home 1990 173 18,769
Boston, MA Nursing Home 1985 201 24,978
Hyannis, MA Nursing Home 1982 142 8,292
Howell, MI (6) Nursing Home 1985 189 4,930
Farmington, MI (6) Nursing Home 1991 153 4,156
Canonsburg, PA Nursing Home 1990 140 15,598
---------------- --------------
Burlington, NJ Nursing Home 1994 150 13,007
---------------- --------------
150 13,007
Private Company Tenants
St. Joseph, MO Nursing Home 1976 120 1,333
Seattle, WA Nursing Home 1964 103 5,192
Waterford, CT (8) Nursing Home 1989 148 5,253
Killingly, CT (8) Nursing Home 1989 190 6,060
Willimantic, CT (8) Nursing Home 1989 124 4,179
Grove City, OH Nursing Home 1965 200 3,445
---------------- --------------
885 25,462
---------------- --------------
Total Portfolio 13,571 $731,678
================ ==============
<FN>
(1) The dates presented are the later of the date of original construction or the date of substantial renovation as evidenced by
capital expenditures in excess of 20% of HRPT's historical investment.
(2) Units/beds are a customary measure of property values used in the senior housing industry.
(3) Represents HRPT's carryforward historical costs before depreciation and, in some cases is net of impairment loss write-down and
loan loss reserve.
(4) Tenant or mortgagors subject to bankruptcy proceedings.
(5) Two properties are located at each of these locations.
(6) These properties are mortgage investments.
(7) These three properties are managed by IHS. Under this management agreement, IHS has guaranteed the rent for these properties.
(8) These properties were sold in February 2000.
</FN>
32
Item 3. Legal Proceedings
Although in the ordinary course of business we are or may become
involved in legal proceedings, we have a limited operating history and are not
aware of any material pending legal proceedings affecting any of our properties
for which we might become liable. However, as discussed above in "Item 1.
Business--Business Developments--Tenant Financial Condition," several of our
tenants have filed for bankruptcy, and we are pursuing claims and negotiations
in those bankruptcy proceedings. The amounts at stake in these tenant bankruptcy
proceedings are material.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
33
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Our Shares began trading on the New York Stock Exchange (symbol: SNH)
on October 12, 1999. The following table sets forth for the period indicated the
high and low closing sale prices for the Shares as reported in the New York
Stock Exchange Composite Transactions reports.
High Low
---- ---
Fourth Quarter 1999 (since October 12, 1999) $16 5/16 $11 1/16
The closing price of the Shares on the New York Stock Exchange on March
27, 2000 was $9 7/8.
As of March 27, 2000, there were approximately 5,229 holders of record
of the Shares, and we estimate that as of such date there were in excess of
100,000 beneficial owners of the Shares.
The following table sets forth the amount of distributions paid in 1999
and the respective annualized rates.
Distribution Annualized
Per Share Distribution Rate
--------- -----------------
November 22, 1999 $0.60 $2.40
All distributions have been paid and 100% of the 1999 distribution was
classified as ordinary income and there was no return of capital. As previously
discussed, two of our largest tenants, IHS and Mariner have experienced
significant operating losses in 1999. Earlier this year they both filed for
bankruptcy. These two tenants are responsible for approximately 48% of our
revenues. We have reached a tentative agreement with Mariner, which is
contingent upon third party approvals and we continue to negotiate with IHS
regarding our future business relationships. A smaller tenant, Frontier Group,
Inc., which represents 2% of our revenues filed for bankruptcy during 1999 and,
in February 2000 we sold these three properties for $13.0 million. See "Item 1.
Business--Business Developments--Tenant Financial Condition." The level of
distributions to be made by us will depend, in part, on the final outcome of the
negotiations with these tenants.
In order to qualify for the beneficial tax treatment accorded to REITs
by Sections 856 through 860 of the Internal Revenue Code, we are required to
make distributions to shareholders which annually will be at least 95% of our
taxable income. All distributions will be made by us at the discretion of the
Trustees and will depend on our earnings, our cash flow available for
distribution, our financial condition and other factors that the Trustees deem
relevant. We have in the past distributed, and intend to continue to distribute,
substantially all of our real estate investment trust taxable income to our
shareholders.
In October 1999, pursuant to our Incentive Share Award Plan, our two
independent trustees at the time of our Spin-Off from HRPT each received a grant
of 500 Shares valued at $16.50 per Share, the average price of the Shares on the
NYSE on October 12, 1999 and our third independent trustee, who was subsequently
elected to the fill the vacancy on our Board of Trustees, received a grant of
500 Shares valued at $12.75 per Share, the closing price of the Shares on the
NYSE on October 21, 1999. The grants were made pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
34
Item 6. Selected Financial Data
Prior to October 12, 1999, we and our properties were owned by HRPT.
The following data is presented as if we were a separate entity from HRPT. Set
forth below is selected financial data for the periods and dates indicated. This
financial data has been derived from HRPT's historical financial statements for
periods prior to October 12, 1999. Per share data has been presented as if the
shares were outstanding for all periods prior to October 12, 1999. The following
table includes pro rata allocations of interest expense and general and
administrative expenses for periods prior to October 12, 1999. In the opinion of
our management, the methods used for allocating interest and general and
administrative expenses are reasonable. However, it is impossible to estimate
all operating costs that we would have incurred as a separate public company
from HRPT. Accordingly, the net income and funds from operations shown are not
necessarily indicative of results that we may realize as a separate company.
Additionally, year to year comparisions are impacted by property acquisitions
during historical periods. This data should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated financial statements
and accompanying notes included herein in Item 14 of this Annual Report on Form
10-K. Amounts are in thousands, except per share information.
Income Statement Data: Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------
Total revenues $ 90,790 $ 88,306 $ 84,171 $ 70,442 $ 66,604
Net income(1) 14,834 46,236 44,723 36,441 31,062
Funds from operations (2) 67,091 64,533 62,549 51,824 45,810
Distributions 15,601 -- -- -- --
Weighted average shares
outstanding 26,000 26,000 26,000 26,000 26,000
Per share:
Net income(1) $ 0.57 $ 1.78 $ 1.72 $ 1.40 $ 1.19
Funds from operations (2) 2.58 2.48 2.41 1.99 1.76
Distributions 0.60 -- -- -- --
Balance Sheet Data: At December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------
Real estate properties, at cost $708,739 $732,393 $720,987 $692,034 $586,940
Real estate mortgages, net 22,939 37,826 38,134 38,270 37,798
Total assets 654,000 686,296 692,586 679,201 587,701
Total indebtedness 200,000 -- -- -- --
Total shareholders' equity 409,406 642,069 646,938 664,492 573,793
<FN>
(1) Includes an impairment loss write-down and loan loss reserve totaling
$30.0 million ($1.15 per share) for 1999.
(2) Funds from operations or "FFO," as defined in the white paper on funds from operations
which was approved by the Board of Governors of NAREIT in March 1995, is net income
computed in accordance with GAAP, before gains or losses from sales of properties and
extraordinary items, plus depreciation and amortization and after adjustment for
unconsolidated partnerships and joint ventures. Senior Housing considers FFO to be an
appropriate measure of performance for an equity REIT, along with cash flow from
operating activities, financing activities and investing activities, because it
provides investors with an indication of an equity REIT's ability to incur and service
debt, make capital expenditures, pay distributions and fund other cash needs. Senior
Housing computes FFO in accordance with the standards established by NAREIT which may
not be comparable to FFO reported by other REITs that do not define the term in
35
accordance with the current NAREIT definition or that interpret the current NAREIT
definition differently. FFO does not represent cash generated by operating activities
in accordance with GAAP and should not be considered as an alternative to net income,
determined in accordance with GAAP, as an indication of financial performance or the
cash flow from operating activities, determined in accordance with GAAP, as a measure
of liquidity.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information is provided in connection with, and should be
read in conjunction with, the Consolidated Financial Statements included herein
as Item 14 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Year Ended December 31, 1999, Compared to 1998
For the year ended December 31, 1999, compared to the year ended
December 31, 1998, total revenues increased by $2.5 million, total expenses
increased by $33.9 million and net income decreased by $31.4 million. Total
revenues increased due to the full year impact of the rent generated from five
properties acquired during 1998. Total expenses increased primarily due to a
$30.0 million charge to income consisting of a write-down for the impairment of
assets and a loan loss reserve. In addition, depreciation expense increased by
$4.0 million, due to a change in the estimated useful lives of some real estate
properties and the full year impact of five properties acquired during 1998. Net
income was $14.8 million, or $0.57 per share, for the period ending December 31,
1999. During the period ending December 31, 1998, net income was $46.2 million,
and on a pro forma 26.0 million average shares outstanding net income was $1.78
per share.
As previously announced, three of our tenants, Frontier, Mariner and
IHS have filed for protection under the bankruptcy laws. Frontier filed in July
1999, Mariner filed in January 2000 and IHS filed in February 2000. Bankruptcy
laws may allow our tenants relief or discharge them from their financial
obligations to us. For 1999, rental and mortgage interest income related to
Frontier, Mariner and IHS was $2.2 million, $15.4 million and $26.6 million,
respectively. At December 31, 1999 real estate investments, before impairment
loss recognition and net of accumulated depreciation, for these three tenants
were $10.0 million, $68.3 million and $136.9 million, respectively. We also had
mortgage investments, before loss reserves, related to IHS of $36.6 million at
December 31, 1999. Based on estimates of future cash flows from properties
leased to Mariner and IHS, we recognized an impairment in the carrying value of
properties totaling $30.0 million.
In February 2000, all of the properties that were leased to Frontier
were sold for $13.0 million. In March 2000, we repaid $12.0 million on our bank
credit facility.
In March 2000, we reached a conditional agreement with Mariner as
follows:
o Mariner's lease obligations for all 26 properties which we own and
lease to Mariner will be terminated.
o Approximately $24.0 million of cash and securities which we hold to
secure Mariner's obligations will be retained by us.
o We will assume operating responsibilities for 17 of these 26
properties. Title to five of these properties will be transferred to
Mariner which will continue the operations. The remaining four nursing
homes are now subleased to two private companies and we expect to
negotiate with these two subtenants for their continued operations of
those properties.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Our agreement with Mariner is contingent upon approval by Mariner's creditors
committee and the Delaware Bankruptcy Court before which Mariner's bankruptcy is
pending and required regulatory approvals from various states where affected
nursing homes are located.
The three Frontier properties which have been sold and the five Mariner
properties which may be transferred for retention of the security deposits which
we hold have been owned by us and our predecessor, HRPT since 1987 and 1990,
respectively. Because of previously recorded depreciation and other accounting
requirements we expect to realize accounting and tax gains as a result of these
transactions during the first half of 2000. At the same time, future interest
savings from the repayment of our bank credit facility with the proceeds from
the sale of the Frontier properties and operating earnings from the former
Mariner properties is expected to be less than the rent which we previously
received from Mariner and Frontier, at least until the operations of the Mariner
properties which are assumed by us are stabilized and those properties are sold
or re-leased. Because we are still pursuing claims for breach of lease and
rental arrearages for the former Frontier properties and because the Mariner
agreement is contingent and subject to possible changes, the amount of gains or
reduced cash flow which we will realize cannot be accurately estimated at this
time.
We are currently in negotiations with IHS. The current negotiations
include, but are not limited to, the possibilities that we will sell the
properties now leased to IHS, that lease terms may be changed, that new tenants
may begin operations of these properties, that properties may be operated by us
for our own account or mortgage obligations due to us may be released for other
compensation. No assurances can be made as to if, when and how these
negotiations will be concluded. We may recognize additional gains or losses when
these negotiations are completed.
Funds from operations for the year ended December 31, 1999, were $67.1
million, or $2.58 per share, compared to $64.5 million, or $2.48 per share, in
1998. The increase is due to the full year impact of income from five properties
acquired during 1998. Non-recurring and non-cash losses excluded from the 1999
calculation of funds from operations aggregated $30.0 million. Distributions for
the year ended December 31, 1999, were $15.6 million or $0.60 per share. Cash
flow provided by operating activities and cash available for distribution may
not necessarily equal funds from operations as cash flow is affected by other
factors not included in the funds from operations calculation, such as changes
in assets and liabilities.
Year Ended December 31, 1998, Compared to 1997
For the year ended December 31, 1998, compared to the year ended
December 31, 1997, total revenues increased by $4.1 million, total expenses
increased by $2.6 million and net income increased by $1.5 million. Total
revenues increased due to rent generated from the acquisition of five properties
during 1998 and the full year impact of the rent generated from five properties
acquired during 1997. Total expenses increased primarily because of higher
allocated interest expense of $2.3 million, which resulted from increased
borrowings. Net income was $46.2 million and $44.7 million for the year ended
December 31, 1998 and 1997, respectively. There were no shares outstanding
during these periods. On a pro forma 26.0 million average shares outstanding,
net income per share would have been $1.78 and $1.72 for the year ended December
31, 1998 and 1997, respectively.
Funds from operations increased by $2.0 million for the year ended
December 31, 1998, compared to the prior period due to income from five
properties acquired during 1998 and the full year impact of income from five
properties acquired during 1997.
37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, our registration statement on Form S-11, relating to
the distribution of 13.2 million of our common shares to HRPT's shareholders
(the "Spin-Off") was declared effective by the Securities and Exchange
Commission. Prior to the Spin-Off, we had 26.0 million common shares
outstanding, all of which were owned by HRPT. On October 12, 1999, HRPT
distributed 13.2 million of our common shares to HRPT's shareholders of record
on October 8, 1999.
At December 31, 1999, we had cash and cash equivalents of $17.1
million. For the years ended December 31, 1999 and 1998, cash flows from
operating activities were $64.1 million and $60.2 million, respectively, cash
flows from investing activities were $387,000 and $306,000, respectively, and
cash used for financing activities was $47.5 million and $60.4 million,
respectively. We expect that our current cash, cash equivalents, future cash
flows from operating and financing activities will be sufficient to meet our
short-term and long-term working capital requirements.
Total assets decreased by $32.3 million from $686.3 million as of
December 31, 1998, to $654.0 million as of December 31, 1999. The decrease was
primarily due to the write-down resulting from impairment of assets, a loan loss
reserve provision and depreciation.
On September 1, 1999, we agreed to pay HRPT $200 million (the
"Formation Debt") in connection with the transfer to us of HRPT's 100% ownership
in one of the subsidiaries that own some of our properties. The Formation Debt
bore interest at HRPT's weighted average cost of debt, (7.1%), and was paid to
HRPT on October 13, 1999.
In September 1999, we entered into an agreement for a $350 million,
three-year, interest only bank credit facility secured by first mortgages on 18
properties. The interest rate is LIBOR plus 2.0% per annum and will increase by
0.25% if our debt to total capital, as defined, exceeds 50%. The bank credit
facility is available for acquisitions, working capital and for general business
purposes. We have the ability to repay and redraw amounts under this bank credit
facility until its maturity in 2002. Our bank credit facility documentation has
customary representations, warranties, covenants and event of default
provisions. The material restrictive financial covenants require us to:
o limit debt to no more than 60% of total capital, as defined;
o maintain a ratio of net income plus interest expense and depreciation
to interest expense of at least 1.5; and
o maintain a tangible net worth, as defined, of $450 million, subject to
increases based on equity issuances.
After the Spin-Off, we borrowed $200 million under this bank credit
facility which we used to pay the Formation Debt to HRPT. At December 31, 1999,
we had $150 million available under the bank credit facility. In March 2000, we
used $12 million of proceeds from the sale of the three former Frontier
properties to reduce amounts outstanding under the bank credit facility to $188
million, leaving $162 million available to be borrowed.
In the short-term, we expect to use the bank credit facility to fund
our working capital needs for operations of the Mariner properties which we will
assume if the Mariner agreement described above is approved.
38
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
In both the short-term and the long-term, we intend to acquire
additional senior housing properties. These purchases will be initially funded
with excess working capital, if any, and proceeds of borrowings under the bank
credit facility. We expect to repay bank credit facility borrowings periodically
with long-term debt or equity capital. We believe that we will have sufficient
access to capital markets to meet our working capital needs, our growth
objectives and refinance our debt as needed. However, access to capital will
depend upon numerous factors, including some beyond our control. We can provide
no assurance that we will be able to raise additional capital in sufficient
amounts, or at appropriate costs, to meet our working capital needs, to fund
growth or to repay debt in both the short-term and the long-term.
Impact of Inflation
Inflation might have both positive and negative impact upon our
business. Inflation might cause the value of our real estate investments to
increase. Similarly, in an inflationary environment, the percentage rents which
we receive based upon CPI increases or as a percentage of our tenants' revenues
should increase. Also, rent yields we could charge for new investments would
likely increase. Offsetting these benefits, inflation might cause the costs of
equity and debt capital to increase. To mitigate the adverse impact of increased
costs of debt capital in the event of material inflation we may purchase
interest rate cap agreements. The decision to enter into these agreements will
be based on the amount of floating rate debt outstanding and our belief that
material interest rate increases are likely to occur. We do not believe
inflation in the U.S. economy during the next few years will have any material
effect on our business.
Year 2000
We experienced no disruptions in our information and non-information
technology systems and incurred no costs with respect to year 2000 issues. We
are not aware of any material problems resulting from year 2000 issues by our
systems or the systems of our tenants or their material vendors and our material
vendors, but will continue to monitor these systems throughout the year to
ensure that any late year 2000 issues that may arise are addressed promptly.
Certain Considerations
The discussion and analysis of our financial condition and results of
operations requires us to make estimates and assumptions and contains statements
of our beliefs, intent or expectation concerning projections, plans, future
events and performance. The estimates, assumptions and statements, such as those
relating to the approval of the Mariner agreement, our ability to operate and
stabilize operations at the Mariner properties, our ability to successfully
negotiate with Mariner's subtenants, our ability to successfully negotiate with
IHS, our ability to expand our portfolio, performance of our assets, the ability
to make distributions, our tax status as a "real estate investment trust," the
ability to appropriately balance the use of debt and equity and to access
capital markets, depend upon various factors over which we and/or our lessees
have or may have limited or no control. Those factors include, without
limitation, the status of the economy, status of the capital markets (including
prevailing interest rates), compliance with the changes to regulations within
the healthcare industry, competition, changes to federal, state, and local
legislation and other factors. We cannot predict the impact of these factors, if
any. However, these factors could cause our actual results for subsequent
periods to be different from those stated, estimated or assumed in this
discussion and analysis of our financial condition and results of operations. We
believe that our estimates and assumptions are reasonable and prudent at this
time.
39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. Because interest on
all our outstanding debt is at a floating rate, changes in interest rates will
not affect the value of our outstanding debt instruments. However, changes in
interest rates will affect our operating results. For example, the interest rate
payable on our outstanding indebtedness of $200 million at December 31, 1999, is
8.17% per annum. An immediate 10% change in that interest rate or 81.7 basis
points, would increase or decrease our costs by $1.6 million, or $0.06 per share
per year:
Impact of Changes in Interest Rates
(dollars in thousands)
Total Interest
Interest Rate Outstanding Expense
Per Year Debt Per Year
-------------- ----------- -----------
At December 31, 1999 8.17% $200,000 $ 16,340
10% reduction 7.35% 200,000 14,700
10% increase 8.99% 200,000 17,980
The foregoing table presents a so-called "shock" analysis, which
assumes that the interest rate change by 10%, or 81.7 basis points, is in effect
for a whole year. If interest rates were to change gradually over one year, the
impact would be less.
We borrow in U.S. dollars and all of our current borrowings are subject
to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes
in U.S. dollar based short-term rates, specifically LIBOR.
During the past few months, short-term U.S. dollar based interest rates
have tended to rise. We are unable to predict the direction or amount of
interest rate changes during the next year. We purchased an interest rate cap
agreement on our current debt to protect against rate increases above 8%.
However, we may incur additional debt at floating or fixed rates in the future,
which would increase our exposure to market changes in interest rates.
We currently own real estate mortgages receivable inclusive of a loan
loss reserve with a carrying value of $22.9 million. When comparable term market
interest rates decline, the value of these receivables increases; when
comparable term market interest rates rise, the value of these receivables
declines. Using discounted cash flow analyses at a weighted average estimated
per year market rate for December 31, 1999 of 10.75%, the estimated fair value
of our mortgages receivable was $23.7 million.
An immediate 10% change in the market rate of interest, or 108 basis
points, applicable to our real estate mortgages receivable at December 31,1999,
would affect the fair value of those receivables as follows:
Carrying Value of
Real Estate
Interest Rate Mortgages Estimated Fair
Per Year Receivable Value
------------- ----------------- --------------
(dollars in thousands)
Estimated market 10.75% $22,939 $23,722
10% reduction 9.67% 22,939 25,256
10% increase 11.83% 22,939 22,328
40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - continued
If the market rate changes occurred gradually over time, the effect of
these changes would be realized gradually. Because our real estate mortgages
receivable are fixed rate instruments, changes in market interest rates will
have no effect on our operating results unless these receivables are sold. At
this time, we expect to hold our existing mortgages to their maturity and not to
realize any profit or loss from trading these mortgages. Also, we do not
presently expect to expand our mortgage investments.
The interest rate changes that affect the valuations of our mortgages
are U.S. dollar long-term rates for corporate obligations of companies with
ratings similar to our mortgagors.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included herein in Item 14 of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
The information in Part III (Items 10 11, 12 and 13) is incorporated by
reference to our definitive Proxy Statement, which will be filed not later than
120 days after the end of our fiscal year.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index to Financial Statements and Financial Statement Schedules
SENIOR HOUSING PROPERTIES TRUST
Page
The following consolidated financial statements and financial statement schedules of Senior
Housing Properties Trust are included herein on the pages indicated:
Report of Ernst and Young LLP, Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Income for each of the three years in the periods ended
December 31, 1999 F-3
Consolidated Statements of Shareholders' Equity for each of the three years in the periods
ended December 31, 1999 F-4
Consolidated Statements of Cash Flows for each of the three years in the periods ended
December 31, 1999 F-5
Notes to Consolidated Financial Statements F-6
Schedule III - Real Estate and Accumulated Depreciation S-1
Schedule IV - Mortgage Loans on Real Estate S-5
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, or are inapplicable, and therefore have
been omitted.
(b) Reports on Form 8-K
During the fourth quarter of 1999, we filed the following Current
Reports on Form 8-K:
(i) Current Report on Form 8-K dated October 21, 1999, relating to the
election of a new trustee (Item 5).
(c) Exhibits
2.1 Transaction Agreement, dated September 21, 1999, between HRPT
Properties Trust and the Company. (Incorporated by reference
to the Current Report on Form 8-K filed on October 26, 1999 by
HRPT Properties Trust.)
3.1 Amended and Restated Declaration of Trust. (Filed herewith.)
3.2 Amended and Restated Bylaws, as amended to date. (Filed
herewith.)
4.1 Form of temporary common share certificate. (Incorporated by
reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters.
(Filed herewith.)
10.1 Advisory Agreement, dated as of October 12, 1999, between the
Company and REIT Management & Research, Inc. (+) (Filed
herewith.)
42
10.2 1999 Incentive Share Award Plan. (+) (Incorporated by
reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.3 Promissory Note, dated September 1, 1999, from the Company and
SPTMRT Properties Trust, as makers, to HRPT Properties Trust,
as holder. (Incorporated by reference to the Current Report on
Form 8-K filed on October 26, 1999 by HRPT Properties Trust.)
10.4 Revolving Loan Agreement, dated as of September 15, 1999,
among the Company, Dresdner Bank AG, the Other Lenders Party
Thereto, SPTMRT Properties Trust and SPTBrook Properties
Trust, together with Exhibits and Form of Mortgage, Form of
Deed of Trust and Form of Pledge Agreement. (Incorporated by
reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.5 Master Lease Agreement, dated as of December 27, 1996, between
Health and Retirement Properties Trust and BLC Property, Inc.
(Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.6 Guaranty Agreement, dated as of December 27, 1996, by
Brookdale Living Communities, Inc., Brookdale Living
Communities of Illinois, Inc., Brookdale Living Communities of
New York, Inc., and Brookdale Living Communities of Arizona,
Inc. in favor of Health and Retirement Properties Trust.
(Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.7 First Amendment to Master Lease Agreement and Incidental
Documents, dated as of May 7, 1997, by and among Health and
Retirement Properties Trust, BLC Property, Inc., Brookdale
Living Communities of Washington, Inc., Brookdale Living
Communities of Arizona, Inc., Brookdale Living Communities of
Illinois, Inc., Brookdale Living Communities of New York,
Inc., Brookdale Living Communities, Inc, The Prime Group,
Inc., Prime International, Inc., PGLP, Inc., Prime Group
Limited Partnership, and Prime Group II, L.P. (Incorporated by
reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.8 Representative Lease for properties leased to subsidiaries of
Marriott International, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.9 Representative Guaranty of Tenant Obligations, dated as of
October 8, 1993, by Marriott International, Inc. in favor of
HMC Retirement Properties, Inc. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.10 Representative First Amendment to Lease for properties leased
to subsidiaries of Marriott International, Inc. (Incorporated
by reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.11 Representative Assignment and Assumption of Leases, Guarantees
and Permits for properties leased to subsidiaries of Marriott
International, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.12 Representative Second Amendment of Lease for properties leased
to subsidiaries of Marriott International, Inc. (Incorporated
by reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
43
10.13 Representative First Amendment of Guaranty by Marriott
International, Inc., dated as of May 16, 1994, in favor of HMC
Retirement Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.14 Assignment of Lease, dated as of June 16, 1994, by HMC
Retirement Properties, Inc. in favor of Health and
Rehabilitation Properties Trust. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.15 Third Amendment to Facilities Lease, dated as of June 30,
1994, between HMC Retirement Properties, Inc. and Marriott
Senior Living Services, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.16 Third Amendment to Facilities Lease, dated as of June 30,
1994, between HMC Retirement Properties, Inc. and Marriott
Senior Living Services, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.17 Consent and Modification Agreement, dated as of October 10,
1997, between Marriott International, Inc., Marriott Senior
Living Services, Inc., New Marriott MI, Inc., Health and
Retirement Properties Trust, and Church Creek Corporation.
(Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.18 Master Lease Document, General Terms and Conditions dated as
of December 28, 1990, between Health and Rehabilitation
Properties Trust and AMS Properties, Inc. (Incorporated by
reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.19 Representative Lease for properties leased to Mariner
Post-Acute Network, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.20 Lease dated as of March 27, 1992, between Health and
Rehabilitation Properties Trust and AMS Properties, Inc.
(Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.21 Amendment to Master Lease Document dated as of December 29,
1993 between Health and Rehabilitation Properties Trust and
AMS Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.22 Amendment to AMS Properties, Inc. Facility Leases dated as of
October 1, 1994 between Health and Retirement Properties Trust
and AMS Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.23 Amendment to AMS Properties, Inc. Facility Leases dated
October 31, 1997 between Health and Retirement Properties
Trust and AMS Properties, Inc. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.24 Representative Lease for properties leased to Mariner
Post-Acute Network, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.25 Master Lease Agreement dated as of June 30, 1992 by and
between Health and Rehabilitation Properties Trust and GCI
Health Care Centers, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
44
10.26 Amended and Restated HRP Shares Pledge Agreement, dated as of
June 30, 1992, between Health and Retirement Properties Trust
and AMS Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.27 Amended and Restated Voting Trust Agreement, dated as of June
30, 1992 from AMS Properties, Inc. to HRPT Advisors, Inc., as
voting trustee. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.28 Representative Lease for properties leased to Mariner
Post-Acute Network, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.29 Representative Lease for properties leased to Mariner
Post-Acute Network, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.30 Amendment to Master Lease Document dated as of December 29,
1993 between Health and Rehabilitation Properties Trust and
GCI Health Care Centers, Inc. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.31 Amendment to GCI Health Care Centers, Inc., Master Lease
Document and Facility Leases dated as of October 1, 1994
between Health and Retirement Properties Trust and GCI Health
Care Centers, Inc. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.32 Amendment to GCI Health Care Centers, Inc. Facility Leases
dated October 31, 1997 between Health and Retirement
Properties Trust and GCI Health Care Centers, Inc.
(Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.33 Guaranty, Cross Default and Cross Collateralization Agreement,
dated as of June 30, 1992, by and among AMS Properties, Inc.,
CGI Health Care Centers, Inc. and Health and Rehabilitation
Properties Trust. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.34 Guaranty, dated as of October 31, 1997, by Grancare Inc. in
favor of Health and Retirement Properties Trust. (Incorporated
by reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.35 Guaranty, dated as of October 31, 1997, by Paragon Health
Network, Inc. in favor of Health and Retirement Properties
Trust. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.36 Amended, Restated and Consolidated Master Lease Document,
dated as of September 24, 1997, between Health and Retirement
Properties Trust and ECA Holdings, Inc., Marietta/SCC, Inc.,
Glenwood/SCC, Inc., Dublin/SCC, Inc., and College Park/SCC,
Inc. (Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.37 Guaranty By Integrated Health Services, Inc., dated as of
September 24, 1997, by Integrated Health Services, Inc., in
favor of Health and Retirement Properties Trust (Incorporated
by reference to the Company's Registration Statement on Form
S-11, File No. 333-69703.)
10.38 Representative Lease Agreement for properties leased to
Integrated Health Services, Inc. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
45
10.39 Representative Lease Agreement for properties leased to
Integrated Health Services, Inc. (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.40 Guaranty, dated as of February 11 1994, by Horizon Healthcare
Corporation in favor of Health and Rehabilitation Properties
Trust. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.41 Consent, Assumption and Guaranty Agreement, dated as of
December 31, 1997, by and among Integrated Health Services,
Inc., IHS Acquisition No. 108, Inc., IHS Acquisition No. 112,
Inc., IHS Acquisition No. 113, Inc., IHS Acquisition No. 135,
Inc., IHS Acquisition No. 148, Inc., IHS Acquisition No. 152,
Inc., IHS Acquisition No. 153, Inc., IHS Acquisition No. 154,
Inc., IHS Acquisition No. 155, Inc., IHS Acquisition No. 175,
Inc., Healthsouth Corporation, Horizon Healthcare Corporation,
Health and Retirement Properties Trust, and Indemnity
Collection Corporation. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
12.1 Statement regarding computation of ratio of earnings to fixed
charges. (Filed herewith.)
21.1 List of Subsidiaries. (Filed herewith.)
23.1 Consent of Sullivan & Worcester LLP. (Contained In Exhibit
8.1.)
27.1 Financial Data Schedule. (Filed herewith.)
----------------------
(+) Management contract or compensatory plan or arrangement.
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of Senior Housing Properties Trust
We have audited the accompanying consolidated balance sheets of Senior Housing
Properties Trust as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statements and schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Senior Housing Properties Trust
and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 17, 2000
F-1
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
---------------------------------------
1999 1998
----------------- ----------------
ASSETS
Real estate properties, at cost, (including properties leased to affiliates
with a cost of $20,422 in 1999 and $38,270 in 1998):
Land $69,673 $69,673
Buildings and improvements 639,066 662,720
----------------- ----------------
708,739 732,393
Accumulated depreciation (108,709) (94,616)
----------------- ----------------
600,030 637,777
Real estate mortgages receivable, net of loan loss reserve of $14,500
in 1999 22,939 37,826
Cash and cash equivalents 17,091 139
Other assets 13,940 10,554
----------------- ----------------
$654,000 $686,296
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $200,000 $--
Deferred rents and other deferred revenues 26,715 28,266
Security deposits 15,235 15,235
Other liabilities 2,317 726
Due to affiliate 327 --
Commitments and contingencies -- --
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, 26,001,500 shares and 26,374,760
shares issued and outstanding, respectively 260 264
Additional paid-in capital 444,511 --
Cumulative net loss (19,764) --
Distributions (15,601) --
Ownership interest of HRPT Properties Trust -- 641,805
----------------- ----------------
Total shareholders' equity 409,406 642,069
----------------- ----------------
$654,000 $686,296
================= ================
See accompanying notes
F-2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Revenues:
Rental income $84,881 $82,542 $78,463
Interest and other income 5,909 5,764 5,708
----------------- ----------------- -----------------
Total revenues 90,790 88,306 84,171
----------------- ----------------- -----------------
Expenses:
Interest 18,768 19,293 16,958
Depreciation 22,247 18,297 17,826
General and administrative 4,941 4,480 4,664
Loan loss reserve 14,500 -- --
Impairment of assets 15,500 -- --
----------------- ----------------- -----------------
Total expenses 75,956 42,070 39,448
----------------- ----------------- -----------------
Net income $14,834 $46,236 $44,723
================= ================= =================
Weighted average shares outstanding (note 2) 26,000 26,000 26,000
================= ================= =================
Basic and diluted earnings per share data:
Net income $0.57 $1.78 $1.72
================= ================= =================
See accompanying notes
F-3
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Ownership
Interest of
Additional HRPT
Number of Common Paid-in Cumulative Properties
Shares Shares Capital Net Loss Distributions Trust Total
------------ ----------- ------------ ------------- --------------- ------------- ------------
Balance at
December 31, 1996 -- $-- $-- $-- $-- $664,492 $664,492
Net income -- -- -- -- -- 44,723 44,723
Owner distribution, net -- -- -- -- -- (62,277) (62,277)
------------ ----------- ------------ ------------- --------------- ------------- ------------
Balance at
December 31, 1997 -- -- -- -- -- 646,938 646,938
Net income -- -- -- -- -- 46,236 46,236
Owner distribution, net -- -- -- -- -- (51,369) (51,369)
Issuance of shares 26,374,760 264 -- -- -- -- 264
------------ ----------- ------------ ------------- --------------- ------------- ------------
Balance at
December 31, 1998 26,374,760 264 -- -- -- 641,805 642,069
Net income (January 1 to
October 11) -- -- -- -- -- 34,598 34,598
Owner distribution, net -- -- -- -- -- (31,919) (31,919)
Cancellation of shares (374,760) (4) -- -- -- 4 --
Distribution of shares to
HRPT shareholders -- -- 444,488 -- -- (644,488) (200,000)
Net loss (October 12 to
December 31) -- -- -- (19,764) -- -- (19,764)
Distributions -- -- -- -- (15,601) -- (15,601)
Issuance of shares 1,500 -- 23 -- -- -- 23
------------ ----------- ------------ ------------- --------------- ------------- ------------
Balance at
December 31, 1999 26,001,500 $260 $444,511 $(19,764) $(15,601) $-- $409,406
============ =========== ============ ============= =============== ============= ============
See accompanying notes
F-4
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
---------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $14,834 $46,236 $44,723
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 22,247 18,297 17,826
Impairment of assets and loan loss reserve 30,000 -- --
Changes in assets and liabilities:
Other assets (3,363) (2,876) (2,394)
Deferred rents and other deferred revenues (1,551) (1,455) 22,087
Security deposits -- -- 8,815
Other liabilities 1,591 34 37
Due to affiliate 327 -- --
---------------- -------------- --------------
Cash provided by operating activities 64,085 60,236 91,094
---------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and improvements -- (2) (19,799)
Investments in mortgage loans -- -- (124)
Repayments of mortgage loans 387 308 260
---------------- -------------- --------------
Cash provided by (used for) investing activities 387 306 (19,663)
---------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Owner's net distribution (31,919) (60,403) (71,431)
Distributions (15,601) -- --
Proceeds from borrowing 200,000 -- --
Repayment of Formation Debt due to HRPT
Properties Trust (200,000) -- --
---------------- -------------- --------------
Cash used for financing activities (47,520) (60,403) (71,431)
---------------- -------------- --------------
Increase in cash and cash equivalents 16,952 139 --
Cash and cash equivalents at beginning of period 139 -- --
---------------- -------------- --------------
Cash and cash equivalents at end of period $17,091 $139 $--
================ ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $2,446 $-- $--
NON-CASH INVESTING ACTIVITIES:
Real estate acquisitions -- (9,298) (9,154)
NON-CASH FINANCING ACTIVITIES:
Formation Debt due to HRPT Properties Trust 200,000 -- --
Owner's contribution -- 9,298 9,154
Issuance of common shares 23 -- --
See accompanying notes
F-5
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The consolidated financial statements of Senior Housing Properties
Trust include the accounts of 81 properties and 12 mortgages receivable (the
"Properties") and of Senior Housing Properties Trust ("Senior Housing Trust").
The Properties and Senior Housing Trust are collectively referred to as "Senior
Housing". These consolidated financial statements are presented as if Senior
Housing was a legal entity separate from HRPT Properties Trust ("HRPT");
although no such entity existed until October 12, 1999. Senior Housing operates
in a single segment.
HRPT organized Senior Housing Trust, a 100% owned subsidiary through
October 11, 1999, as a Maryland real estate investment trust on December 16,
1998. At the time of its organization, Senior Housing Trust issued 26.4 million
shares to HRPT for consideration of $263,748. Subsequently, 0.4 million shares
were cancelled and 26.0 million shares are currently issued and outstanding.
For a substantial part of the periods presented, the Properties were
owned by HRPT. On or about June 30, 1999, the Properties were transferred by
HRPT to several of its 100% owned subsidiaries. Effective as of September 1,
1999, HRPT transferred 100% ownership of the several subsidiaries, which own the
Properties, to Senior Housing Trust. On October 12, 1999, HRPT distributed 13.2
million shares of its 26.0 million Senior Housing Trust shares to HRPT
shareholders (the "Spin-Off").
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. Prior to the Spin-Off, all of Senior Housing was owned by
HRPT, and transactions have been presented at HRPT's historical basis. Prior to
the Spin-Off substantially all the rental income and mortgage interest income
received by HRPT from the tenants and mortgagors of Senior Housing was deposited
in and commingled with HRPT's general funds. Funds for capital investments and
other cash required by Senior Housing was provided by HRPT. Prior to September
1, 1999, interest expense was allocated based on HRPT's historical interest
expense as a percentage of HRPT's average historical costs of real estate
investments. General and administrative costs of HRPT for the periods prior to
the Spin-Off were allocated to Senior Housing based on HRPT's investment
advisory agreement formula and other costs were allocated based on historical
costs as a percentage of HRPT's average historical costs of real estate
investments. In the opinion of management, the methods for allocating interest
and general and administrative expenses were reasonable. It was not practicable
to estimate additional costs that would have been incurred by Senior Housing as
a separate entity.
REAL ESTATE PROPERTIES AND MORTGAGE INVESTMENTS. Depreciation on real estate
properties is expensed on a straight-line basis over estimated useful lives of
up to 40 years for buildings and improvements and up to 12 years for personal
property. During 1999, the estimated useful lives of certain real estate
properties were changed. The effect reduced net income and earnings per share,
for the period ending December 31, 1999, $3.8 million and $0.15 per share,
respectively. Impairment losses on properties are recognized when indicators of
impairment are present and the estimated, undiscounted cash flows to be
generated by the properties are less than the carrying amount of concerned
properties.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consisting of overnight
repurchase agreements and short-term investments with original maturities of
three months or less at the date of purchase are carried at cost plus accrued
interest which approximates market.
INTEREST RATE CAP AGREEMENTS. Senior Housing has entered into an interest rate
cap agreement to limit exposure to the risk of rising interest rates. This
arrangement, which expires in December 2001, has a notional amount of $200
million. Senior Housing will be entitled to receive payments by a counterparty
should LIBOR increase above a threshold amount.
F-6
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION. Rental income from operating leases is recognized on a
straight-line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Percentage
rent and supplemental mortgage interest income are recognized as earned. For
interim periods, percentage rent and supplemental mortgage interest income are
accrued prior to achievement of specified targets when the achievement of the
targets is probable. For the years ended December 31, 1999, 1998 and 1997,
percentage rent and supplemental mortgage interest income aggregated $4.0
million, $2.9 million and $2.9 million, respectively.
EARNINGS PER COMMON SHARE. Because Senior Housing's operations were included in
the consolidated financial statements of HRPT prior to the Spin-Off, there are
no shareholder equity accounts for Senior Housing prior to 1999. Common shares
outstanding of 26.0 million at October 12, 1999 have been included in the
earnings per share calculation as if the shares were outstanding for all periods
prior to October 12, 1999. Earnings per common share are computed using the
weighted average number of shares outstanding during the period. Senior Housing
has no common share equivalents, instruments convertible into common shares or
other dilutive instruments.
USE OF ESTIMATES. Preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the amounts reported in these financial
statements and related notes. The actual results could differ from these
estimates.
INCOME TAXES. Prior to the Spin-Off, Senior Housing's operations were included
in HRPT's income tax returns. Senior Housing and HRPT qualify as real estate
investment trusts under the Internal Revenue Code of 1986, as amended.
Accordingly, they are not expected to be subject to federal income taxes
provided they distribute their taxable income and continue to meet the other
requirements for qualifying as a real estate investment trust. However, they are
subject to state and local taxes on their income and property.
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133") in 1998, which was further amended by Statement No. 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB Statement No. 133" in 1999. FAS 133 must be adopted for the 2001
financial statements. Senior Housing believes adoption of FAS 133 is not
expected to have a significant impact on its reported financial condition or
results of operations.
Note 3. Report of Tenants' Financial Condition
Three of Senior Housing's tenants, The Frontier Group, Inc.
("Frontier"), Mariner Post-Acute Network, Inc. ("Mariner") and Integrated Health
Services, Inc. ("IHS") have filed for protection under bankruptcy laws. Frontier
filed in July 1999, Mariner filed in January 2000 and IHS filed in February
2000. For 1999, rental income and mortgage interest related to Frontier, Mariner
and IHS was $2.2 million, $15.4 million and $26.6 million, respectively. At
December 31, 1999 real estate investments, before impairment loss recognition
and net of accumulated depreciation, for these three tenants were $10.0 million,
$68.3 million and $136.9 million, respectively. Senior Housing also had mortgage
investments, before loss reserves, related to IHS of $36.6 million at December
31, 1999.
Senior Housing has concluded that impairment indicators are present
with respect to properties operated by these tenants and has prepared
undiscounted cash flow projections for each of the properties. For purposes of
these projections, Senior Housing has assumed that rents on some properties may
be modified and that some of the leases may be terminated after which Senior
Housing will operate the properties for a period of time and, ultimately, sell
them. In addition, a third party not in bankruptcy has guaranteed the lease
obligations of some of the properties operated by one of the tenants. Senior
Housing has assumed that the guarantor will honor the lease obligations. The
undiscounted cash flow projections reflect the expected rents to be earned over
the lease term and the expected cash flows earned from operating the properties
for a period of time plus the proceeds
F-7
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from assumed future sales of the properties. Cash flows during the period in
which Senior Housing may operate the properties are estimated based on the
historical performance of each property, excluding rent paid to Senior Housing.
Projected sale prices are based on an estimated per bed value consistent with
industry practice and reflect prices that Senior Housing has observed in recent
transactions. Based on these undiscounted cash flow projections, Senior Housing
has concluded that certain of its real estate and mortgage investments are
impaired as of December 31, 1999. Based on its estimates of fair values net of
selling costs, Senior Housing has written down the carrying value of these real
estate investments, including investments leased to an affiliate, Advisors
Healthcare Group, Inc. ("Advisors Health"), as of December 31, 1999 by recording
an impairment loss write-down in the accompanying consolidated statement of
income of $15.5 million. In addition, Senior Housing has recorded a loan loss
reserve of $14.5 million related to the mortgage investment it considered
impaired. It is reasonably possible that estimates of future cash flows could be
reduced significantly depending on the outcome of the bankruptcy proceedings or
if the third party should fail to honor its guarantee. As a result, additional
losses could be recognized in future periods and the amounts could be material.
In February 2000, Senior Housing sold all of the properties that were
leased to Frontier for $13.0 million. Senior Housing is continuing to pursue
claims against Frontier and other parties for breach of its leases and for
rental arrearages. The amount of net gain, if any, which may be realized from
the sale of the Frontier properties will depend upon the outcome of these
claims. The amount of gain or loss to be realized as a result of this
transaction is not expected to be material. Because these properties have been
sold, Senior Housing will no longer receive rental income from these properties.
In March 2000, Senior Housing reached an agreement in principle with
Mariner whereby Mariner may be released from its lease obligations, certain
security deposits held by Senior Housing may be retained by Senior Housing,
certain properties now operated by Mariner will in the future be operated by
Senior Housing, and other properties now owned by Senior Housing will be
conveyed to Mariner. If this agreement is approved Senior Housing expects that
it may realize gains and that its future earnings and cash flows may be less
than the rent previously earned from the Mariner leases, at least on a short
term basis. This agreement is contingent upon third party approvals beyond
Senior Housing's control. If and when this agreement is implemented it may
result in additional material gains or losses.
Senior Housing is currently in negotiations with IHS. The current
negotiations include, but are not limited to, the possibilities that Senior
Housing will sell some of the properties, that lease or mortgage terms may be
changed, that new tenants may begin operations of properties, that properties
may be operated by Senior Housing for its own account or that mortgage
obligations due to Senior Housing may be released for other compensation. Senior
Housing may recognize additional gains or losses when these negotiations are
completed and the additional gains or losses may be material.
Note 4. Real Estate Properties
The owned Properties are generally leased on a triple net basis,
pursuant to noncancellable, fixed term operating leases expiring between 2001 to
2019. Generally, the leases to a single tenant or group of affiliated tenants
are cross-defaulted and cross-guaranteed, and provide for all or none tenant
renewal options at existing rates followed by several market rate renewal terms.
These triple net leases generally require the lessee to pay all property
operating costs.
The future minimum lease payments to be received during the current
terms of the leases, as of December 31, 1999, were approximately $78.3 million
in 2000, $78.0 million in 2001, $79.4 million in 2002, $79.6 million in 2003,
$79.4 million in 2004 and $602.7 million thereafter. These future payments
include minimum lease payments from IHS and Mariner of $36.3 million in 2000,
$36.5 million in 2001, $36.6 million in 2002, $36.8 million in 2003, $36.9
million in 2004, and $179.9 million thereafter.
F-8
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Real Estate Mortgages Receivable
December 31,
------------------------------------
1999 1998
----------------- ---------------
(dollars in thousands)
Mortgage notes receivable due December 2016 $8,693 $8,769
Mortgage note receivable due January 2013 883 883
Mortgage note receivable due December 2010 18,777 18,992
Mortgage note receivable due January 2006 9,086 9,182
----------------- ---------------
37,439 37,826
Loan loss reserve (14,500) --
----------------- ---------------
$22,939 $37,826
================= ===============
At December 31, 1999, the interest rates on these notes receivable
ranged from 10.3% to 13.75% per annum. In 1999 Senior Housing established an
allowance of $14.5 million for the impairment of a real estate mortgage loan
with a face value of $18.8 million.
Note 6. Shareholders' Equity
Senior Housing has reserved 1,300,000 shares of Senior Housing's
common shares under the terms of the 1999 Incentive Share Award Plan (the "Award
Plan"). During 1999, the three Independent Trustees, as part of their annual
fee, were each granted 500 common shares from this plan. The shares granted to
the Trustees vest immediately. At December 31, 1999, 1,298,500 of Senior
Housing's common shares remain reserved for issuance under the Award Plan.
In January 2000, Senior Housing declared a distribution of $0.60 per
share which was distributed on February 24, 2000. Distributions per share paid
by Senior Housing for 1999 were $0.60 per share, or approximately $15.6 million.
Note 7. Commitments and Contingencies
At December 31, 1999 and 1998, Senior Housing had total commitments
aggregating $3.7 million to fund or finance improvements to the Properties.
Note 8. Transactions with Affiliates
Senior Housing has entered into an agreement with REIT Management &
Research, Inc. ("REIT Management") to provide investment, management and
administrative services. Gerard M. Martin and Barry M. Portnoy, who serve as
managing trustees of Senior Housing and HRPT, own REIT Management. REIT
Management is paid by Senior Housing based on a formula amount of gross invested
assets in the properties. Investment advisory fees for 1999, 1998 and 1997 with
respect to Senior Housing's invested assets were $3.9 million, $3.8 million and
$3.7 million, respectively. Beginning with the year ending December 31, 2000,
REIT Management will also be entitled to an incentive fee, paid in restricted
shares, based on a formula.
Messrs. Martin and Portnoy are principal shareholders of Advisors
Health (formerly known as Connecticut Subacute Corporation II), which is a
lessee of Senior Housing. The lease with Advisors Health is based on market
terms and is generally similar to Senior Housing's leases with unaffiliated
companies. These properties are managed by IHS. Senior Housing recorded rental
income of $4.5 million as a result of this lease during each of the years ending
December 31, 1999, 1998 and 1997.
F-9
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Indebtedness
In September 1999, Senior Housing entered into an agreement for a $350
million, three-year, interest only, bank credit facility. The bank credit
facility is secured by 18 properties, with a net book value of $380.2 million at
December 31, 1999, and matures in 2002. The interest rate is LIBOR plus a
premium (8.17% at December 31, 1999) and will increase if Senior Housing's debt
to total capital, as defined, meets or exceeds 50%. The bank credit facility is
available for acquisitions, working capital and for general business purposes.
On October 13, 1999, $200 million, used to pay the formation debt due to HRPT,
was outstanding under the bank credit facility.
Note 10. Fair Value of Financial Instruments and Commitments
The financial statements presented include mortgage investments, rents
receivable, other liabilities and security deposits. Except as follows, the fair
values of the financial instruments and commitments to fund improvements were
not materially different from their carrying values at December 31, 1999 and
1998:
1999 1998
-------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------- ------------- -------------- -------------
(dollars in thousands) (dollars in thousands)
Real estate mortgages receivable, net $22,939 $23,722 $37,826 $40,525
Commitments to fund improvements -- 3,707 -- 3,707
Interest rate cap agreement -- 341 -- --
The fair values of the real estate mortgages and interest rate cap
agreement are based on estimates using discounted cash flow analyses and
currently prevailing market rates. The fair value of the commitments represent
the actual amounts committed.
F-10
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Concentration of Credit Risk
The assets included in these financial statements are primarily income
producing senior housing real estate located throughout the United States. The
following is a summary of the significant lessees and mortgagors as of and for
the years ended December 31, 1999 and 1998:
Year Ending
December 31, 1999 December 31, 1999
------------------------------- -----------------------------
% of % of
Investment Total Revenue Total
--------------- ------------ ------------- ------------
(dollars in thousands) (dollars in thousands)
Marriott International, Inc. $325,521 45% $30,893 35%
Integrated Health Services, Inc. 185,158 25 26,615 30
Brookdale Living Communities, Inc. 101,850 14 11,174 13
Mariner Post-Acute Network, Inc. 80,680 11 15,449 17
Frontier Group, Inc. 15,492 2 2,160 2
All others 22,977 3 2,786 3
--------------- ------------ ------------- ------------
$731,678 100% $89,077 100%
=============== ============ ============= ============
Year Ending
December 31, 1998 December 31, 1998
--------------- -- ------------ ------------- -- ------------
% of % of
Investment Total Revenue Total
--------------- ------------ ------------- ------------
(dollars in thousands) (dollars in thousands)
Marriott International, Inc. $325,521 42% $30,270 35%
Integrated Health Services, Inc. 217,893 29 26,841 31
Brookdale Living Communities, Inc. 101,850 13 11,074 13
Mariner Post-Acute Network, Inc. 86,486 11 13,620 16
Frontier Group, Inc. 15,492 2 2,160 2
All others 22,977 3 2,792 3
--------------- ------------ ------------- ------------
$770,219 100% $86,757 100%
=============== ============ ============= ============
F-11
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Selected Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations of
Senior Housing for 1999 and 1998. The dollars are in thousands except per share
amounts.
1999
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ --------------- ------------
Revenues $22,668 $22,622 $22,621 $22,879
Net income (loss) (1) 10,971 10,861 11,176 (18,174)
Per share data:
Net income (loss) 0.42 0.42 0.43 (0.70)
1998
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ --------------- ------------
Revenues $21,496 $21,714 $21,711 $23,385
Net income 11,134 11,537 11,012 12,553
Per share data:
Net income 0.43 0.44 0.42 0.48
(1) Reflects an impairment loss, as described in note 3, during the Fourth
Quarter
F-12
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
Initial Cost Gross Amount Carried at Close
to Company of Period 12/31/99
---------------- ---------------------------
Buildings Costs Capitalized Buildings Original
and Subsequent to and Accumulated Date Construction
Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date
- - ------------------------------------------------------------------------------------------------------------------------------------
Yuma AZ $103 $604 $1 $-- $103 $605 $708 $129 06/30/92 1984
Phoenix AZ 655 2,525 5 -- 655 2,530 3,185 544 06/30/92 1963
Yuma AZ 223 2,100 3 -- 223 2,103 2,326 445 06/30/92 1984
Scottsdale AZ 979 8,807 140 -- 990 8,936 9,926 1,256 05/16/94 1990
Sun City AZ 1,174 10,569 173 -- 1,189 10,727 11,916 1,486 06/17/94 1990
Mesa AZ 1,480 13,320 - -- 1,480 13,320 14,800 1,013 12/27/96 1985
Newport Beach CA 1,176 1,729 1,223 -- 1,176 2,952 4,128 676 12/28/90 1962
Fresno CA 738 2,577 188 -- 738 2,765 3,503 727 12/28/90 1963
Van Nuys CA 716 378 225 -- 718 601 1,319 175 12/28/90 1969
Thousand Oaks CA 622 2,522 310 -- 622 2,832 3,454 721 12/28/90 1965
Tarzana CA 1,277 977 806 -- 1,278 1,782 3,060 456 12/28/90 1969
Lancaster CA 601 1,859 1,028 -- 601 2,887 3,488 695 12/28/90 1969
Stockton CA 382 2,750 4 -- 382 2,754 3,136 585 06/30/92 1968
Laguna Hills CA 3,132 28,184 475 -- 3,172 28,619 31,791 3,788 09/09/94 1975
Littleton CO 185 5,043 348 -- 185 5,391 5,576 1,378 12/28/90 1965
Lakewood CO 232 3,766 723 -- 232 4,489 4,721 1,094 12/28/90 1972
Grand Junction CO 204 3,875 329 -- 204 4,204 4,408 781 12/30/93 1968
Grand Junction CO 6 2,583 1,316 -- 136 3,769 3,905 624 12/30/93 1978
Colorado Springs CO 245 5,236 - -- 245 5,236 5,481 300 09/26/97 1972
Delta CO 167 3,570 - -- 167 3,570 3,737 204 09/26/97 1963
Canon City CO 292 6,228 - -- 292 6,228 6,520 357 09/26/97 1970
Killingly CT 240 5,360 460 -- 240 5,820 6,060 2,123 05/15/87 1972
Willimantic CT 134 3,566 479 -- 166 4,013 4,179 1,411 05/15/87 1965
Waterford CT 86 4,714 453 -- 86 5,167 5,253 1,952 05/15/87 1965
Cheshire CT 520 7,380 1,559 -- 520 8,939 9,459 3,204 11/01/87 1963
Waterbury CT 1,003 9,023 915 (5,694) 1,003 4,244 5,247 445 05/11/92 1974
New Haven CT 1,681 14,953 1,236 (12,154) 1,681 4,035 5,716 667 05/11/92 1971
Deerfield Beach FL 1,664 14,972 299 -- 1,690 15,245 16,935 2,143 05/16/94 1986
Palm Harbor FL 3,327 29,945 591 -- 3,379 30,484 33,863 4,285 05/16/94 1992
Boca Raton FL 4,404 39,633 799 -- 4,474 40,362 44,836 5,673 05/20/94 1994
Port St. Lucie FL 1,223 11,009 219 -- 1,242 11,209 12,451 1,575 05/20/94 1993
Fort Myers FL 2,349 21,137 419 -- 2,385 21,520 23,905 2,892 08/16/94 1984
S-1
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
Initial Cost Gross Amount Carried at Close
to Company of Period 12/31/99
---------------- ---------------------------
Buildings Costs Capitalized Buildings Original
and Subsequent to and Accumulated Date Construction
Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date
- - ------------------------------------------------------------------------------------------------------------------------------------
Marietta GA 300 2,702 35 -- 300 2,737 3,037 292 05/15/96 1967
Dublin GA 442 3,982 80 -- 442 4,062 4,504 432 05/15/96 1968
Glenwood GA 174 1,564 4 -- 174 1,568 1,742 160 05/15/96 1972
College Park GA 300 2,702 23 -- 300 2,725 3,025 304 05/15/96 1985
Mediapolis IA 94 1,776 251 -- 94 2,027 2,121 366 12/30/93 1973
Winterset IA 111 2,099 493 -- 111 2,592 2,703 454 12/30/93 1973
Clarinda IA 77 1,453 293 -- 77 1,746 1,823 308 12/30/93 1968
Pacific Junction IA 32 306 5 -- 32 311 343 40 04/01/95 1978
Council Bluffs IA 225 893 99 -- 225 992 1,217 189 04/01/95 1963
Arlington Heights IL 3,621 32,587 534 -- 3,665 33,077 36,742 4,377 09/09/94 1986
Chicago IL 6,200 55,800 - -- 6,200 55,800 62,000 4,243 12/27/96 1990
Ellinwood KS 130 1,137 53 -- 130 1,190 1,320 155 04/01/95 1972
Middleboro MA 1,771 15,752 - -- 1,771 15,752 17,523 4,676 05/01/88 1970
Worcester MA 1,829 15,071 1,869 -- 1,829 16,940 18,769 6,608 05/01/88 1970
Boston MA 2,164 20,836 1,978 -- 2,164 22,814 24,978 8,345 05/01/89 1968
Hyannis MA 829 7,463 - -- 829 7,463 8,292 2,240 05/11/92 1972
Silver Spring MD 3,229 29,065 786 -- 3,301 29,779 33,080 4,063 07/25/94 1992
St. Joseph MO 111 1,027 195 -- 111 1,222 1,333 185 06/04/93 1976
Tarkio MO 102 1,938 415 -- 102 2,353 2,455 408 12/30/93 1970
Concord NC 90 2,126 - -- 90 2,126 2,216 544 09/10/98 1990
Wilson NC 27 2,375 - -- 27 2,375 2,402 606 09/10/98 1990
Winston-Salem NC 75 1,696 - -- 75 1,696 1,771 429 09/10/98 1990
Grand Island NE 119 1,446 369 -- 119 1,815 1,934 195 04/01/95 1963
Burlington NJ 1,300 11,700 7 -- 1,300 11,707 13,007 1,245 09/29/95 1994
Brighton NY 1,070 9,630 - -- 1,070 9,630 10,700 732 12/27/96 1988
Grove City OH 332 3,081 32 -- 332 3,113 3,445 508 06/04/93 1965
Canonsburg PA 1,499 13,493 606 -- 1,518 14,080 15,598 4,675 03/01/91 1985
Huron SD 45 968 1 -- 45 969 1,014 204 06/30/92 1968
Sioux Falls SD 253 3,062 4 -- 253 3,066 3,319 647 06/30/92 1960
Huron SD 144 3,108 4 -- 144 3,112 3,256 654 06/30/92 1968
S-2
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
Initial Cost Gross Amount Carried at Close
to Company of Period 12/31/99
---------------- ---------------------------
Buildings Costs Capitalized Buildings Original
and Subsequent to and Accumulated Date Construction
Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date
- - ------------------------------------------------------------------------------------------------------------------------------------
Bellaire TX 1,223 11,010 177 -- 1,238 11,172 12,410 1,570 05/16/94 1991
Virginia Beach VA 881 7,926 141 -- 893 8,055 8,948 1,132 05/16/94 1990
Charlottesville VA 2,936 26,422 471 -- 2,976 26,853 29,829 3,719 06/17/94 1991
Arlington VA 1,859 16,734 296 -- 1,885 17,004 18,889 2,320 07/25/94 1992
Seattle WA 256 4,869 67 -- 256 4,936 5,192 938 11/01/93 1964
Spokane WA 1,035 13,315 - -- 1,035 13,315 14,350 938 05/07/97 1993
Brookfield WI 834 3,849 8,014 (5,806) 834 6,057 6,891 470 12/28/90 1964
Clintonville WI 49 1,625 87 -- 30 1,731 1,761 436 12/28/90 1965
Clintonville WI 14 1,695 38 -- 14 1,733 1,747 438 12/28/90 1960
Madison WI 144 1,633 110 -- 144 1,743 1,887 439 12/28/90 1920
Waukesha WI 68 3,452 2,232 -- 68 5,684 5,752 1,189 12/28/90 1958
Milwaukee WI 277 3,883 - -- 277 3,883 4,160 883 03/27/92 1969
Milwaukee WI 232 1,368 1 -- 232 1,369 1,601 319 09/10/98 1970
Pewaukee WI 984 2,432 - -- 984 2,432 3,416 589 09/10/98 1963
Worland WY 132 2,503 588 -- 132 3,091 3,223 526 12/30/93 1970
Laramie WY 191 3,632 199 -- 191 3,831 4,022 715 12/30/93 1964
-------- --------- -------- ---------- -------- --------- --------- ---------
Grand Total $69,030 $628,080 $35,283 ($23,654) $69,673 $639,066 $708,739 $108,709
======== ========= ======== ========== ======== ========= ========= =========
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $770,860.
(2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years.
(3) Represents acquisition dates of HRPT Properties Trust.
</FN>
S-3
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
Initial Cost Gross Amount Carried at Close
to Company of Period 12/31/99
---------------- ---------------------------
Buildings Costs Capitalized Buildings Original
and Subsequent to and Accumulated Date Construction
Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date
- - ------------------------------------------------------------------------------------------------------------------------------------
Reconciliation of the carrying amount of real estate and
equipment and accumulated depreciation at the beginning of the
period:
Real Estate and Accumulated
Equipment Depreciation
-------------------- ----------------
Balance at January 1, 1997 $692,034 $56,387
Additions 28,953 17,826
-------------------- ----------------
Balance at December 31, 1997 720,987 74,213
Additions 11,406 20,403
-------------------- ----------------
Balance at December 31, 1998 732,393 94,616
Additions - 22,247
Impairment (23,654) (8,154)
-------------------- ----------------
Balance at December 31, 1999 $708,739 $108,709
==================== ================
S-4
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
(Dollars in thousands)
Principal Amount of
Loans Subject to
Carrying Delinquent
Final Face Value of Value of Principal
Location Interest Rate Maturity Date Periodic Payment Terms Mortgage (1) Mortgage or Interest
- - ------------------------------------------------------------------------------------------------------------------------------------
Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,156 $4,156 $--
arrears. $3.8 million due at maturity.
Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 4,930 4,930 --
arrears. $4.5 million due at maturity.
Lyons, NE 10.30% 12/31/16 Principal and interest, payable monthly in 1,549 1,549
Milford, NE arrears. $926 due at maturity.
Ainsworth, NE 10.86% 12/31/16 Principal and interest, payable monthly in 5,109 5,109 --
Ashland, NE arrears. $3.1 million due at maturity.
Blue Hill, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Ainsworth, NE 11.23% 12/31/16 Principal and interest, payable monthly in 2,035 2,035 --
Ashland, NE arrears. $1.3 million due at maturity.
Blue Hill, NE
Edgar, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Lyons, NE
Milford, NE
Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 18,777 4,277 --
arrears. $13.9 million due at maturity.
Milwaukee, WI 13.75% 1/31/13 Interest only, payable monthly in advance. 883 883 --
$883 due at maturity.
-------------- ------------- ----------
$37,439 $22,939 $--
============== ============= ==========
<FN>
(1) Also represents cost for federal income tax purposes.
</FN>
S-5
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE IV-continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
(Dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the
beginning of the period:
Balance at January 1, 1997 $38,270
New mortgage loans 124
Collections of principal (260)
----------------
Balance at December 31, 1997 38,134
Collections of principal (308)
----------------
Balance at December 31, 1998 37,826
Collections of principal (387)
Loan loss reserve (14,500)
----------------
Balance at December 31, 1999 $22,939
================
S-6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SENIOR HOUSING PROPERTIES TRUST
By: /s/ David J. Hegarty
David J. Hegarty
President and Chief Operating Officer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, or by their
attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date
/s/ David J. Hegarty President and Chief Operating Officer March 30, 2000
David J. Hegarty
/s/ Ajay Saini Treasurer and Chief Financial Officer March 30, 2000
Ajay Saini
/s/ Bruce M. Gans, M.D. Trustee March 30, 2000
Bruce M. Gans, M.D.
/s/ Arthur G. Koumantzelis Trustee March 30, 2000
Arthur G. Koumantzelis
/s/ John L. Harrington Trustee March 30, 2000
John L. Harrington
/s/ Gerard M. Martin Trustee March 30, 2000
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 30, 2000
Barry M. Portnoy