UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to _____
Commission File Number 1-9317
HEALTH AND RETIREMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
400 Centre Street, Newton, Massachusetts 02158
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares of Beneficial Interest New York Stock Exchange
Floating Rate Senior Notes,
Series A, Due 1999 New York Stock Exchange
Floating Rate Senior Notes,
Series B, Due 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant
held by non-affiliates was $823,402,873 based on the $14.875
closing price per share for such stock on the New York Stock
Exchange on March 29, 1994. For purposes of this calculation,
1,013,651 shares held by HRPT Advisors, Inc. (the "Advisor"), a
total of 2,777,768 shares held by the Advisor solely in its
capacity as voting trustee under certain voting trust agreements,
and an aggregate of 33,935 shares 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 15, 1995:
59,162,768 .
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated
herein by reference from the Company's definitive Proxy Statement
for the annual meeting of shareholders currently scheduled to be
held on May 16, 1995.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED OCTOBER
9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO
(THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST"
REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY,
FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS
DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS
OF THE TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY
OBLIGATION.
HEALTH AND RETIREMENT PROPERTIES TRUST
1994 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Page
Item 1. Business. . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . 26
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters . . 26
Item 6. Selected Financial Data . . . . . . . . . . . 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . 28
Item 8. Financial Statements and Supplementary Data. 34
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . 35
PART III
To be incorporated by reference from the Company's definitive
Proxy Statement for the annual meeting of shareholders
currently scheduled to be held on May 16, 1995, which will be filed not
later than 120 days after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . 35
FINANCIAL STATEMENTS AND SCHEDULES . . . . . . . . . . . F-1
PART I
Item 1. Business.
The Company. Health and Retirement Properties Trust (the
"Company") was organized on October 9, 1986 as a Maryland real estate
investment trust. The Company primarily invests in nursing homes,
retirement complexes and other income producing health care related real
estate. The Company's investments, to date, have been principally in
nursing homes and other long-term care facilities, assisted living
facilities, retirement complexes and facilities that provide subacute
services. In March 1995, in a one time transaction, the Company
invested $179.4 million in 21 hotel properties managed by an affiliate
of Marriott International, Inc. (Marriott). See "Developments since
January 1, 1994". The facilities in which the Company has made
investments by mortgage, purchase lease or merger transactions shall
hereinafter be referred to individually as a "Property" and collectively
as "Properties".
As of December 31, 1994, the Company owned 80 Properties acquired
for an aggregate of $673.1 million and had mortgage investments in 61
Properties aggregating $133.5 million, for total real estate investments
of approximately $806.6 million in 141 Properties located in 27 states.
The Properties are described in "Business -- Developments Since January
1, 1994" and "Properties".
Number of Total Investment
State Properties at December 31, 1994
(in thousands)
Arizona............. 5 $ 28,062
California.......... 17 80,005
Colorado............ 11 34,551
Connecticut......... 9 85,036
Florida............. 6 132,951
Georgia............. 5 8,167
Illinois............ 2 39,453
Iowa................ 10 14,729
Kansas.............. 4 8,738
Kentucky............ 2 8,733
Louisiana........... 1 24,376
Maryland............ 1 33,080
Massachusetts....... 5 82,058
Michigan............ 2 9,400
Missouri............ 2 3,235
Nebraska............ 12 17,700
North Carolina...... 9 16,359
Ohio................ 7 25,125
Pennsylvania........ 2 18,409
South Carolina...... 1 901
South Dakota........ 3 7,589
Tennessee........... 1 1,013
Texas............... 7 17,166
Virginia............ 3 57,662
Washington.......... 1 5,193
Wisconsin........... 9 38,672
Wyoming............. 4 8,197
--- --------
Total.......... 141 $806,560
The Company's principal executive offices are located at 400 Centre
Street, Newton, Massachusetts 02158, and its telephone number is (617)
332-3990.
Investment Policy and Method of Operation. The Company's investment
goals are current income for distribution to shareholders, capital
growth resulting from appreciation in the residual value of owned
Properties, and preservation and protection of shareholders' capital.
The Company's income is derived primarily from minimum rent and minimum
interest payments under its leases and mortgages and from additional
rent and additional interest payments based upon revenue increases at
the leased and mortgaged Properties.
The Company's day-to-day operations are conducted by HRPT Advisors,
Inc., the Company's investment advisor (the "Advisor"). The Advisor
originates and presents investment opportunities to the Company's Board
of Trustees (the "Trustees"). In evaluating potential investments, the
Company considers such factors as: the adequacy of current and
anticipated cash flow from the property to meet operational needs and
financing obligations and to provide a competitive market return on
investment to the Company; the growth, tax and regulatory environments
of the community in which the property is located; the quality,
experience, and credit worthiness of the property's operator; an
appraisal of the property, if available; occupancy and demand for
similar facilities in the same or nearby communities; the mix of private
and government sponsored patients; the mix of cost-based and
charge-based revenues; the construction quality, condition and design of
the property; and the geographic area and type of property.
The Trustees have established a policy that the Company will not
purchase or mortgage finance a facility for an amount which exceeds the
appraised value of such facility. Prior to investing in properties, the
Company obtains title commitments or policies of title insurance
insuring that the Company holds title to or has mortgage interests in
such properties, free of material liens and encumbrances.
The Company's investments may be structured using leases with minimum
and additional rent and escalator provisions, loans with fixed or
floating rates, joint ventures and partnerships with affiliated or
unaffiliated parties, commitments or options to purchase interests in
real estate, mergers or any combination of the foregoing that will best
suit the particular investment.
In connection with its revolving credit facility, the Company has
agreed to obtain bank approval before exceeding certain investment
concentrations. Among these are that no more than 40% of its properties
be operated by any single tenant or mortgagor, that investment in
rehabilitation treatment, acute care and United Kingdom properties not
exceed 40%, 15% and 10%, respectively, of total investments and that no
new psychiatric care or hotel investments be made. In addition to these
restrictions, the Trustees may establish limitations as they deem
appropriate from time to time. No limits have been set on the number of
properties in which the Company will seek to invest, or on the
concentration of investments involving any one facility or geographical
area; however, the Trustees consider concentration of investments in
determining whether to make new or increase existing investments. The
Company's Declaration of Trust (the "Declaration") and operating
policies provide that any investment in facilities owned or operated by
the Advisor, persons expressly permitted under the Declaration to own
more than 8.5% of the Company's shares, or any company affiliated with
any of the foregoing must, however, be approved by a majority of the
Trustees not affiliated with any of the foregoing (the "Independent
Trustees").
The Company has in the past and may in the future consider, from time
to time, the acquisition of or merger with other companies engaged in
the same business as the Company; however, the Company has no present
agreements or understandings concerning any such acquisition or merger.
The Company has no intention of investing in the securities of others
for the purpose of exercising control.
Borrowing Policy. In addition to the use of equity, the Company
utilizes short-term and long-term borrowings to finance investments.
During 1994, the Company obtained investment grade ratings on its long
term debt from Moody's Investor Services ("Moody's"), Standard and
Poor's Corporation ("S&P") and Fitch Investor Services, Inc. ("Fitch")
in connection with the issuance of $200 million of floating rate notes.
The notes were issued in two series. The Series A notes may be called,
at the Company's option, beginning in April 1995. The Series B notes,
which were issued at a discount, may be called, at the Companys option,
beginning in July 1996. The notes bear interest at a spread over LIBOR
and mature in July 1999. At December 31, 1994, the Company had a
revolving credit facility available to it totalling $170 million.
Availability under this revolver was increased to $200 million effective
March 15, 1995. As of March 15, 1995, $10 million of this amount was
outstanding, and $190 million was available to be drawn. All but $17.6
million of outstanding indebtedness is at variable interest rates
determined by formulae based upon the London Interbank Offered Rate
("LIBOR"), prime or some other generally recognized interest rate
standard. Fluctuations in interest rates on $200 million of variable
rate outstanding term indebtedness have been limited by hedging
arrangements so that the maximum average rates payable on the $200
million of indebtedness is 6.85% per annum. The maturities of the hedge
agreements range from 1995 through 1998.
The Company's borrowing guidelines established by its Trustees and
covenants in various debt agreements prohibit the Company from
maintaining a debt to equity ratio of greater than 1 to 1. At December
31, 1994, the Company's debt to equity ratio was .36 to 1. The
Declaration prohibits the Company from incurring secured and unsecured
indebtedness which in the aggregate exceeds 300% of the net assets of
the Company, unless approved by a majority of the Independent Trustees.
There can be no assurance that debt capital will in the future be
available at reasonable rates to fund the Company's operations or
growth.
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Developments Since January 1, 1994.
Horizon/Greenery Merger. In February 1994, the merger transaction
(the "Horizon/Greenery Merger") between Horizon Healthcare Corporation
("Horizon") and Greenery Rehabilitation Group, Inc. ("Greenery") was
consummated. In connection with this merger, the Company sold to
Horizon for $28.4 million three facilities that had been leased to
Greenery. The Company realized a gain of approximately $4.0 million on
the sale of these properties. In addition, Horizon leased seven
facilities previously leased to Greenery, on substantially similar terms
except the leases were extended through 2005. The Company has also
granted Horizon a ten year option to buy the seven leased facilities, at
the rate of no more than one facility per consecutive twelve months.
Also, the Company leased the three remaining Greenery facilities to a
newly formed corporation, Connecticut Subacute Corporation, II ("CSC
II"), an affiliate of the Advisor. These facilities are being managed
by and the lease payments are guaranteed by Horizon for a term of up to
five years. The terms of these lease arrangements are substantially
similar to the original lease arrangements with Greenery.
On February 11, 1994, in connection with the Horizon-Greenery merger,
the Company provided Horizon with $9.4 million first mortgage financing
for two facilities. One of the facilities previously was owned by the
Company and leased to Greenery. The mortgage notes bear interest at
11.5% per annum and mature December 31, 2000.
In January 1995, Horizon exercised its option and purchased one of the
seven leased properties from the Company for $24.5 million resulting in
a gain of $2.5 million. The Company provided Horizon a 16 year $19.5
million mortgage in connection with this sale in 1995.
New Revolving Credit Facility. During 1994 and early 1995, the
Company amended its revolving credit facility from a syndicate of banks
(the "Credit Facility"). The Credit Facility which allows borrowing of
up to $200 million, will mature in 1998, unless extended by the parties.
Borrowings on the Credit Facility will bear interest, at the Company's
option, at prime or a spread over or LIBOR.
May Share Offering. During the second quarter of 1994, the Company
sold 12,650,000 Shares in a public offering and received net proceeds of
approximately $174 million. The proceeds were used, in part, to prepay
$73 million in outstanding indebtedness and, in part, to fund the
transactions described below.
July Floating Rate Note Offering. In July 1994, the Company issued
$200 million floating rate notes in a public offering and received net
proceeds after financing costs of approximately $197 million. The notes
were issued in two series; Series A issued at par and Series B issued at
a discount. The Series A and B notes mature in July 1999, but may be
called, at the Company's option, beginning in April 1995 and July 1996,
respectively. The notes bear interest at a spread over the three month
LIBOR. The proceeds of the note offering were used, in part, to fund the
Marriott retirement communities transaction described below.
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Marriott Retirement Communities Transaction. On September 9, 1994,
the Company completed its previously announced transaction with Host
Marriott Corporation ("Host Marriott") to acquire 14 retirement
communities containing 3,952 residences or beds for $320 million. These
communities are triple net leased through December 31, 2013 to a wholly
owned subsidiary of Marriott. The leases provide for fixed rent and
additional rentals equal to a percentage of annual revenues from
operations in excess of base amounts determined on a facility by
facility basis. All of the leases are subject to cross default
provisions and are guaranteed by Marriott. This transaction was funded
from cash on hand, the proceeds of the equity offering discussed above,
drawings under the Company's Credit Facility, assumption of $17.6
million of existing debt bearing interest at 7.75% and a portion of the
proceeds from a floating rate note offering described above.
1995 Commitments; Hotel Transaction. Since January 1, 1995, the
Company has made or committed to make real estate investments in four
separate transactions involving 41 healthcare facilities totalling
approximately $109 million. Of this amount, approximately $14 million
represents mortgage financings and $95 million represents acquisitions
of healthcare facilities.
In addition, the Company entered into a purchase and lease agreement
with a subsidiary of Host Marriott for 21 Courtyard by Marriott hotel
properties for approximately $179.4 million, subject to adjustment. The
properties have been leased for an initial term of 12 years, with
renewal options of an additional 37 years to a subsidiary of Host
Marriott, and are being managed by a subsidiary of Marriott
International. An amount equal to one year's rent was withheld from the
purchase price to secure the tenant's obligations to the Company. The
transaction closed in March 1995.
Although the Company's investments are no longer exclusively in
healthcare, retirement and related properties, the Company's investment
in hotel properties does not represent a change in the Company's
strategy of focusing on investments in long term care and retirement
facilities. Rather, this investment, structured as a triple net lease,
will represent only approximately 15% of the Company's portfolio,
including the commitments noted above as of March 24, 1995. The
facilities are new, having been constructed within the last five years,
and occupancy and cash flow coverage are strong. Following the
announcement of this investment, Moody's downgraded the Company's debt
rating and S&P and Fitch maintained their ratings. The Company
believes, despite the negative reaction by Moody's, that this
transaction will enhance the security and growth potential of its funds
from operations.
The Advisor. The Advisor is wholly owned by Gerard M. Martin and
Barry M. Portnoy. Messrs. Martin, Portnoy and Mark J. Finkelstein are
the directors of the Advisor, Mr. Finkelstein is the President and Chief
Executive Officer, David J. Hegarty is the Executive Vice President,
Chief Financial Officer and Secretary and John G. Murray is the
Treasurer of the Company. Effective April 1, 1995, Mr. Finkelstein will
resign to pursue his interests in operating nursing homes and will
become president of Subacute Management Corporation of America, Inc.
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The Company's Board of Trustees has elected David J. Hegarty President,
Chief Operating Officer and Secretary, John G. Murray, Executive Vice
President and Chief Financial Officer and Ajay Saini, Treasurer. These
officers of the Advisor are also officers of the Company. The Advisor
provides management services and investment advice to the Company. The
Advisor's principal executive offices are located at 400 Centre Street,
Newton, Massachusetts 02158, and its telephone number is (617) 332-3990.
Employees. As of March 14, 1995, the Company had no employees. The
Advisor, which administers the day-to-day operations of the Company, has
9 full-time employees and two active directors.
Regulation and Reimbursement; Competition. Compliance with federal,
state and local statutes and regulations governing health care
facilities is a prerequisite to continuation of health care operations
at the Properties. In addition, 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.
Certificate of Need and Licensure. Most states in which the Company
has or may invest require certificates of need ("CONs") prior to
expansion of beds or services, certain capital expenditures, and in some
states, a change in ownership. CON requirements are not uniform
throughout the United States. Changes in CON requirements may affect
competition, profitability of the Properties and the Company's
opportunities for investment in health care facilities.
State licensure requirements, including regulations providing that
commonly controlled facilities are subject to delicensure if one such
facility is delicensed, also affect facilities in which the Company
invests. The Company believes that each facility in which it has
invested is appropriately licensed. Although each of the facilities may
from time to time receive notices of non-compliance with certain
standards, and certain facilities in Connecticut and Massachusetts are
subject to provisional or probationary licenses, the Company believes
that such actions have not, in fiscal year 1994 and through the date
hereof, had any material adverse effect on the operations of the
Company. Horizon's licenses to operate the Massachusetts facilities
leased to it are probationary subject to certain conditions.
An increasing number of legislative proposals have been introduced in
Congress that would effect major reforms of the health care system.
Such proposals include universal health coverage, employer mandated
insurance, and a single government health insurance plan. Following the
failure of the Clinton administration's proposed Health Security Act or
other major health care reform legislation to become law in 1994,
legislative proposals for more incremental reforms have also been
introduced, such as group health insurance plans for small businesses,
health insurance industry reforms, health care anti-fraud legislation,
and Medicare and Medicaid reforms and cost containment measures. The
Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have
on the business of the lessees, the mortgagors or the Company. New
regulations adopted by the Health Care Finance Administration governing
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Medicare and Medicaid nursing facility surveys, certification, and
enforcement, are scheduled to be effective on July 1, 1995. The
regulations require the states to implement a wide range of enforcement
remedies, and penalties for noncompliance with Medicare/Medicaid
standards may increase in the future. An adverse determination
concerning licensure or eligibility for government reimbursement of any
operator could materially adversely affect that operator, its affiliates
and the Company. In addition, federal and state civil and criminal
anti-fraud and anti-kickback laws and regulations govern financial
activities of health care providers and enforcement proceedings have
increased. If any operator of the Company's Properties were to fail to
comply with such laws or regulations, it, and therefore the Company,
could be materially adversely affected unless and until any such
property of properties were returned to compliance or the Company were
able to re-lease or sell the affected Property or Properties on
favorable terms.
Reimbursement. Reimbursement for health care services derives
principally form the following sources: Medicare, a federal health
insurance program for the aged and certain chronically disabled
individuals; Medicaid, a medical assistance program for indigent persons
operated by individual states with the financial participation of the
federal government; health and other insurance plans, including health
maintenance organizations; and private funds. These reimbursement
sources are generally contingent upon compliance with state CON and
licensure regulations and with extensive federal requirements for
Medicare and Medicaid participation.
Medicaid programs provide significant current revenues of nursing
facilities. Medicare is not presently a major source of revenue for the
Company's lessees and mortgagors. The Medicaid program is subject to
change and affected by state and federal budget shortfalls and funding
restrictions which may materially decrease rates of payment or delay
payment. There is no assurance that Medicaid or Medicare payments will
remain constant or be sufficient to cover costs allocable to Medicare
and Medicaid patients. The operators of the Properties appeal
reimbursement rates from time to time. The Company cannot predict
whether such appeals, if decided adversely, would have any material
effect upon the respective financial positions of the operators.
Other. Federal law limits Medicare and Medicaid reimbursement for
capital costs related to increases in the valuation of capital assets
solely as a result of a change of ownership of nursing facilities, and
numerous states use more restrictive standards to limit Medicaid
reimbursement of capital costs. Effective in October of 1993, Medicare
eliminated reimbursement of return on equity capital for Medicare
skilled nursing homes. Some state Medicaid programs also do not provide
for return on equity capital. In addition, a seller is liable to the
Medicare program, and in certain states may also be liable to the
Medicaid program, for recaptured depreciation. Such limitations may
adversely affect the resale value of some Properties owned or financed
by the Company.
Effective in October of 1992, DHHS issued final regulations which
limit the amount of Medicare reimbursement available to a facility for
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rental or lease expenses paid after a purchase lease transaction to that
amount which would have been reimbursed as capital costs had the
provider retained legal title to the facility. Limitations on rental
expenses contained in the regulations may adversely affect the financial
feasibility of future purchase lease transactions by denying Medicare
and Medicaid reimbursement for additional rental expenses.
It is not possible to predict the content, scope or impact of future
legislation, regulations or changes in reimbursement or insurance
coverage policies which might affect the health care industry.
Competition. The Company is one of several REITs currently investing
primarily in health care related real estate. The REITs compete with
one another in that each is continually seeking attractive investment
opportunities in health care facilities. The Company also competes with
banks, non-bank finance companies, leasing companies and insurance
companies.
In addition, the Company competes with the operators of its Properties
in connection with the expansion of their businesses. Although each of
the operators may offer investment opportunities to the Company, each of
the operators or its affiliates will, in fact, compete with the Company
(as well as with others) for investment opportunities. The operators
may own facilities that are not mortgaged or leased to the Company. An
operator, or an affiliate thereof, could preferentially place patients
or operate special service programs in facilities other than those
included among the Properties. Such preferential treatment and/or new
programs could adversely affect the revenues derived by the Company
under its mortgages and leases.
Federal Income Tax Considerations. The Company believes that it is
and it intends to be and remain qualified as a real estate investment
trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"). These Code provisions are highly
technical and complex. Each shareholder therefore is urged to consult
his own tax advisor with respect to the federal income tax and other tax
consequences of the purchase, holding and sale of shares of beneficial
interest of the Company.
The Company has obtained legal opinions that the Company has been
organized in conformity with the requirements for qualification as a
REIT, has qualified as a REIT for its 1987, 1988, 1989, 1990, 1991,
1992, 1993 and 1994 taxable years, and that its current and anticipated
investments and its plan of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the
Code. Actual qualification of the Company as a REIT, however, will
depend upon the Company's continued ability to meet, and its meeting,
through actual annual operating results, the various qualification tests
imposed under the Code. No assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy
such requirements.
Taxation of the Company. If the Company qualifies for taxation as a
REIT and distributes to its shareholders at least 95% of its "real
estate investment trust taxable income", it generally will not be
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subject to federal corporate income taxes on the amount distributed.
However, a REIT is subject to special taxes on the net income derived
from "prohibited transactions." In addition, property acquired by the
Company as the result of a default or imminent default on a lease or
mortgage is classified as "foreclosure property". Certain net income
from foreclosure property held by the Company for sale is taxable to it
at the highest corporate marginal tax rate then prevailing.
Section 856(a) of the Code defines a REIT as a corporation, trust or
association: (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (3) which
would be taxable, but for Sections 856 through 859 of the Code, as a
domestic corporation; (4) which is neither a financial institution nor
an insurance company subject to certain provisions of the Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6) which
is not closely held as determined under the personal holding company
stock ownership test (as applied with one modification); and (7) which
meets certain other tests, described below. Section 856(b) of the 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 proportionate part
of a taxable year of less than 12 months. By reason of condition (6)
above, the Company will fail to qualify as a REIT for a taxable year if
at any time during the last half of such year more than 50% in value of
its outstanding Shares are owned directly or indirectly by five or fewer
individuals. To help maintain conformity with condition (6), the
Company's Declaration of Trust (the "Declaration") contains certain
provisions restricting share transfers and giving the Board of Trustees
power to redeem shares involuntarily.
It is the expectation of the Company that it will have at least 100
shareholders during the requisite period for each of its taxable years.
There can, however, be no assurance in this connection and, if the
Company has fewer than 100 shareholders during the requisite period,
condition (5) described above will not be satisfied, and the Company
would not qualify as a REIT during such taxable year.
For taxable years beginning after 1993, the rule that an entity will
fail to qualify as a REIT for a taxable year if at any time during the
last half of such year more than 50% in value of its outstanding shares
is owned directly or indirectly by five or fewer individuals has been
liberalized in the case of a qualified pension trust owning shares in a
REIT. Under the new rule, the requirement is applied by treating shares
in a REIT held by such a pension trust as held directly by its
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 its qualification
as a REIT. However, if a REIT is a "pension-held REIT" as defined in
the new law, each pension trust holding more than 10% of its shares (by
value) generally will be taxable on a portion of the dividends it
receives from the REIT, based on the ratio of the REIT's gross income
for the year which would be unrelated trade or business income if the
REIT were a qualified pension trust to the total gross income of the
REIT for the year. A "pension-held REIT" is one in which at least one
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qualified pension trust holds more than 25% (by value) of the interests
by value, or a combination of qualified pension trusts each of which
owns more than 10% by value of the REIT together holds more than 50% of
the REIT interests by value.
To qualify as a REIT for a taxable year under the Code, the Company
must elect to be so treated and must meet other requirements, certain of
which are summarized below, including percentage tests relating to the
sources of its gross income, the nature of the Company's assets, and the
distribution of its income to shareholders. The Company has made such
election for 1987 (its first full year of operations) and such election,
assuming continuing compliance with the qualification tests discussed
herein, continues in effect for subsequent years.
There are three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from certain sales of
property held primarily for sale) must be derived directly or indirectly
from investments relating to real property (including "rents from real
property") or mortgages on real property. When the Company receives new
capital in exchange for its shares (other than dividend reinvestment
amounts) or in a public offering of five-year or longer debt
instruments, income attributable to the temporary investment of such new
capital in stock or a debt instrument, if received or accrued within one
year of the Company's receipt of the new capital, is qualifying income
under the 75% test. Second, at least 95% of the Company's gross income
(excluding gross income from certain sales of property held primarily
for sale) must be derived from such real property investments,
dividends, interest, certain payments under interest rate swap or cap
agreements, and gain from the sale or disposition of stock, securities,
or real property or from any combination of the foregoing. Third,
short-term gain from the sale or other disposition of stock or
securities, including, without limitation, stock in other REITs,
dispositions of interest rate swap or cap agreements, and gain from
certain prohibited transactions or other dispositions of real property
held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the
Company's gross income. (This rule does not apply for a year in which
the REIT is completely liquidated, as to dispositions occurring after
the adoption of a plan of complete liquidation.) For purposes of these
rules, income derived from a "shared appreciation provision" is treated
as gain recognized on the sale of the property to which it relates.
Even though the Company's present mortgages do not contain shared
appreciation provisions, the Company may make mortgage loans which
include such provisions.
The Company temporarily invests working capital in short-term
investments, including shares in other REITs. Although the Company will
use its best efforts to ensure that its income generated by these
investments will be of a type which satisfies the 75% and 95% gross
income tests, there can be no assurance in this regard (see discussion
above of the "new capital" rule under the 75% test). Moreover, the
Company may realize short-term capital gain upon sale or exchange of
such investments, and such short-term capital gain would be subject to
the limitations imposed by the 30% gross income test.
-10-
In order to qualify as "rents from real property," the amount of rent
received generally must not be determined from the income or profits of
any person, but may be based on receipts or sales. The Code also
provides that rents will not qualify as "rents from real property," in
satisfying the gross income tests, if the REIT owns 10% or more of the
tenant, whether directly or under certain attribution rules. The
Company intends not to lease property to any party if rents from such
property would not so qualify. Application of the 10% ownership rule
is, however, dependent upon complex attribution rules provided in the
Code and circumstances beyond the control of the Company. Ownership,
directly or by attribution, by an unaffiliated third party of more than
10% of the Company's shares and more than 10% of the stock of a lessee
would result in lessee rents not qualifying as "rents from real
property". The Declaration provides that transfers or purported
acquisitions, directly or by attribution, of shares that could result in
disqualification of the Company as a REIT are null and void and permits
the Trustees to repurchase shares to the extent necessary to maintain
the Company's status as a REIT. Nevertheless, there can be no assurance
such provisions in the Declaration will be effective to prevent the
Company's REIT status from being jeopardized under the 10% rule.
Furthermore, there can be no assurance that the Company will be able to
monitor and enforce such restrictions, nor will shareholders necessarily
be aware of share holdings attributed to them under the attribution
rules.
In addition, the Company must not manage the property or furnish or
render services to the tenants of such property, except through an
independent contractor from whom the company derives no income. There
is an exception to this rule permitting a REIT to perform certain
customary tenant services of the sort which a tax-exempt organization
could perform without being considered in receipt of "unrelated business
taxable income."
If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." The portion of
rental income treated as attributable to personal property is determined
according to the ratio of the tax basis of the personal property to the
total tax basis of the property which is rented. If rent payments do
not qualify, for the reasons discussed above, as rents from real
property for the purposes of Section 856 of the Code, it will be more
difficult for the Company to meet the 95% or 75% gross income tests and
to qualify as a REIT. Finally, 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
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.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if its failure to meet such test was due to reasonable
-11-
cause and not due to willful neglect, it attaches a schedule of the
sources of its income to its return, and any incorrect information on
the schedule was not due to fraud with intent to evade tax. It is not
possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. If these
relief provisions apply, a special tax generally equal to 100% is
imposed upon the greater of the amount by which the Company failed the
75% test or the 95% test, less an amount which generally reflects the
expenses attributable to earning the non-qualified income.
At the close of each quarter of the Company's taxable year, it must
also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must consist of
real estate assets (including its allocable share of real estate assets
held by joint ventures or partnerships in which the Company
participates), cash, cash items and government securities. Second, not
more than 25% of the Company's total assets may be represented by
securities (other than those includable in the 75% asset class).
Finally, of the investments included in the 25% asset class, the value
of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets, and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
Where a failure to satisfy the 25% asset test results from an
acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient non-qualifying assets
within 30 days after the close of such quarter. The Company intends to
maintain adequate records of the value of its assets to maintain
compliance with the 25% asset test, and to take such action as may be
required to cure any failure to satisfy the test within 30 days after
the close of any quarter.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an
amount equal to or greater than the excess of (A) the sum of (i) 95% of
the Company's "real estate investment trust taxable income" (computed
without regard to the dividends paid deduction and the Company's net
capital gain) and (ii) 95% of the net income, if any, (after tax) from
foreclosure property, over (B) the sum of certain non-cash income (from
certain imputed rental income and income from transactions inadvertently
failing to qualify as like-king exchanges). These requirements may be
waived by the IRS if the REIT establishes that it failed to meet them by
reason of distributions previously made to meet the requirements of the
4% excise tax discussed below. To the extent that the Company does not
distribute all of its net long-term capital gain and all of its "real
estate investment trust taxable income", it will be subject to tax
thereon. In addition, the Company will be subject to a 4% excise tax to
the extent it fails within a calendar year to make "required
distributions" to its shareholders of 85% of its ordinary income and 95%
of its capital gain net income plus the excess, if any, of the "grossed
up required distribution" for the preceding calendar year over the
amount treated as distributed for such preceding calendar year. For
this purpose, the term "grossed up required distribution" for any
-12-
calendar year is the sum of the taxable income of the Company 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. Dividends declared in October,
November, or December and paid during the following January will be
treated as having been paid and received on December 31.
It is possible but highly unlikely, that the Company, from time to
time, may not have sufficient cash or other liquid assets to meet the
95% distribution requirements, due to timing differences between the
actual receipt of income and actual payment of deductible expenses or
dividends on the one hand and the inclusion of such income and deduction
of such expenses or dividends in arriving at "real estate investment
trust taxable income" of the Company on the other hand. The problem of
inadequate cash to make required distributions could also occur as a
result of the repayment in cash of principal amounts due on the
Company's outstanding debt, particularly in the case of "balloon"
repayments or as a result of capital losses on short-term investments of
working capital. Therefore, the Company might find it necessary to
arrange for short-term, or possibly long-term, borrowing, or new equity
financing. If the Company were unable to arrange such borrowing or
financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying
"deficiency dividends" to shareholders in a later year, which may be
included in the Company's deduction for dividends paid for the earlier
year. The Company may be able to avoid being taxed on amounts
distributed as deficiency dividends; however, the Company may in certain
circumstances remain liable for the 4% excise tax discussed above.
The Company is also required to request annually from record holders
of certain significant percentages of its shares certain information
regarding the ownership of such shares. Under the Declaration,
shareholders are required to respond to such requests for information.
Federal Income Tax Treatment of Leases. The availability to the
Company of, among other things, depreciation deductions with respect to
the facilities owned and leased by the Company will depend upon the
treatment of the Company as the owner of the facilities and the
classification of the leases of the facilities as true leases, rather
than as sales or financing arrangements, for Federal income tax
purposes. As to the approximately 5% of the leased facilities which
constitutes personal property, it is less clear that the Company will be
treated as the owner of such personal property and that the leases will
be treated as true leases with respect to such property. The Company
plans to insure its compliance with the 95% distribution requirement
(and the "required distribution" requirement) by making distributions on
the assumption that it is not entitled to depreciation deductions for
the 5% of the leased facilities which constitute personal property, but
to report the amount of income taxable to its shareholders by taking
into account such depreciation.
-13-
Other Issues. In the case of certain sale-leaseback arrangements, the
IRS could assert that the Company realized prepaid rental income in the
year of purchase to the extent that the value of a leased property
exceeds the purchase price paid by the Company for that property. In
litigated cases involving sale-leasebacks which have considered this
issue, courts have concluded that buyers have realized prepaid rent
where both parties acknowledged that the purported purchase price for
the property was substantially less than fair market value and the
purported rents were substantially less than the fair market rentals.
Because of the lack of clear precedent, complete assurance cannot be
given that the IRS could not successfully assert the existence of
prepaid rental income.
Additionally, it should be noted that Code Section 467 (concerning
leases with increasing rents) would apply to the leases because many of
the leases provide for rents that increase from one period to the next.
Section 467 provides that in the case of a so-called "disqualified
leaseback agreement," rental income must be accrued at a constant rate.
If such constant rent accrual were required, the Company would recognize
rental income in excess of cash rents and, as a result, may fail to meet
the 95% dividend 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. Because Section 467 directs the Treasury to issue
regulations providing that rents will not be treated as increasing for
tax avoidance purposes where the increases are based upon a fixed
percentage of lessee receipts, the additional rent provisions of the
leases should not cause the leases to be "disqualified leaseback
agreements". In addition, the legislative history of Section 467
indicates that the Treasury should issue regulations under which leases
providing for fluctuations in rents by no more than a reasonable
percentage from the average rent payable over the term of the lease will
be deemed not motivated by tax avoidance; this legislative history
indicated that a standard allowing a 10% fluctuation in rents may be too
restrictive for real estate leases.
Depreciation of Properties. For tax purposes, the Company's real
property generally is depreciated on a straight-line basis over 40 years
and personal property owned by the Company generally is depreciated over
12 years.
Failure to Qualify. If the Company fails to qualify for taxation as a
REIT in any taxable year, and the relief provisions do not apply, the
Company will be subject to tax on its taxable income at regular
corporate rates (plus any applicable minimum tax). Distributions to
shareholders in any year in which the Company fails to qualify will not
be deductible by the Company nor will they be required to be made. In
such event, to the extent of current and accumulated earnings and
profits, all distributions to shareholders will be taxable as ordinary
income and, subject to certain limitations in the Code, eligible for the
70% dividends received deduction for corporations. Unless entitled to
relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the following four taxable
years. It is not possible to state whether in all circumstances the
Company would be entitled to statutory relief from such
-14-
disqualification. Failure to qualify for even one year could result in
the Company's incurring substantial indebtedness (to the extent
borrowings are feasible) or liquidating substantial investments in order
to pay the resulting taxes.
Taxation of United States Shareholders--Generally. As long as the
Company qualifies as a REIT, distributions (including reinvestments
pursuant to the Company's dividend reinvestment plan) made to the
Company's shareholders out of current or accumulated earnings and
profits will be taken into account by them as ordinary income (which
will not be eligible for the 70% dividends received deduction for
corporations). Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains to the extent they do
not exceed the Company's actual net capital gain for the taxable year
although corporate shareholders may be required to treat up to 20% of
any such capital gain dividend as ordinary income pursuant to Section
291 of the Code. For purposes of computing the Company's earnings and
profits, depreciation on real estate is computed on a straight-line
basis (over 40 years for property acquired after 1986). Distributions
in excess of current or accumulated earnings and profits will not be
taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares, but will reduce the basis of
the shareholder's shares. To the extent that such distributions exceed
the adjusted basis of a shareholder's shares they will be included in
income as long-term capital gain (or short-term capital gain if the
shares have been held for not more than one year) assuming the shares
are a capital asset in the hands of the shareholder. Shareholders may
not include in their individual income tax returns any net operating
losses or capital losses of the Company.
Dividends declared by the Company in October, November or December of
a taxable year to shareholders of record on a date in such month, will
be deemed to have been received by such shareholders on December 31,
provided the Company actually pays such dividends during the following
January. The Company has, however, generally declared dividends for the
quarter ended December 31 in January of the following year and paid
these dividends in the following February. As a result, for tax
purposes, the dividend for any calendar year will generally include the
dividends for the first three quarters of that year plus the dividend
for the fourth quarter of the prior year. For tax purposes, dividends
paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994 aggregated
$1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29 and $1.32 respectively,
of which $.289, $.065, $.332, $.267, $.104, $.218, $.335 and $.081,
respectively, represented a return of capital.
A sale of a share will result in recognition of gain or loss to the
holder in an amount equal to the difference between the amount realized
and its adjusted basis. Such a gain or loss will be capital gain or
loss, provided the share is a capital asset in the hands of the seller.
In general, any loss upon a sale or exchange of shares by a shareholder
who has held such shares for not more than one year (after applying
certain rules), will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
shareholders as long-term capital gain.
-15-
Investors (other than certain corporations) who borrow funds to
finance their acquisition of Shares in the Company could be limited in
the amount of deductions allowed for the interest paid on the
indebtedness incurred in such an arrangement. Under Code Section
163(d), 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 taxpayer's net investment income.
An investor's net investment income will include the dividend and
capital gain dividend distributions he receives from the Company;
however, distributions treated as a nontaxable return of the
shareholder's basis will not enter into the computation of net
investment income.
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
real estate investment trust to a tax-exempt employee's pension trust
did not constitute "unrelated business taxable income". Revenue rulings
are interpretive in nature and subject to revocation or modification by
the IRS. However, based upon Revenue Ruling 66-106 and the analysis
therein, the Company has received an opinion of counsel that
distributions by the Company to qualified pension plans (including
individual retirement accounts) and other tax-exempt entities should not
constitute "unrelated business taxable income," except as explained
above in the case of a pension trust which holds more than 10% by value
of a "pension-held REIT". This Revenue Ruling may not apply if a
shareholder has borrowed money to acquire shares.
Under Section 469 of the Code, taxpayers (other than certain
corporations) generally will not be entitled to deduct losses from
so-called passive activities except to the extent of their income from
passive activities. For purposes of these rules, distributions received
by a shareholder from the Company will not be treated as income from a
passive activity and thus will not be available to offset a
shareholder's passive activity losses.
Tax preference and other items which are treated differently for
regular and alternative minimum tax purposes are to be allocated between
a REIT and its shareholders under regulations which are to be
prescribed. It is likely that these regulations would require tax
preference items to be allocated to the Company's shareholders with
respect to any accelerated depreciation claimed by the Company, but the
Company has not claimed accelerated depreciation with respect to its
existing Properties.
Special Tax Considerations for Foreign Shareholders
The rules governing United States income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Shareholders") are complex,
and the following discussion is intended only as a summary of such
rules. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of Federal, state, and local income
-16-
tax laws on an investment in the Company, including any reporting
requirements.
In general, a Non-U.S. Shareholder will be subject to regular United
States income tax with respect to its investment in the Company if such
investment is "effectively connected" with the Non-U.S. Shareholder's
conduct of a trade or business in the United States, or if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year. A corporate
Non-U.S. Shareholder that receives income that is (or is treated as)
effectively connected with a U.S. trade or business may also be subject
to the branch profits tax under Section 884 of the Code, which is
payable in addition to regular United States corporate income tax. The
following discussion will apply to Non-U.S. Shareholders whose
investment in the Company is not so effectively connected.
A distribution by the Company that is not attributable to gain from
the sale or exchange by the Company of a United States real property
interest and that is not designated by the Company 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.
Generally, unless the dividend is effectively connected with the Non-
U.S. Shareholder's conduct of a trade or business, such a dividend will
be subject to a United States withholding tax equal to 30% of the gross
amount of the dividend unless such withholding is reduced by an
applicable tax treaty. A distribution of cash in excess of the
Company's earnings and profits will be treated first as a nontaxable
return of capital that will reduce a Non-U.S. Shareholder's basis in its
shares (but not below zero) and then as gain from the disposition of
such shares, the tax treatment of which is described under the rules
discussed below with respect to disposition of shares. A distribution
in excess of the Company's earnings and profits may be subject to 30%
dividend withholding if at the time of the distribution it cannot be
determined whether the distribution will be in an amount in excess of
the Company's current and accumulated earnings and profits. If its
subsequently determined that such distribution is, in fact, in excess of
current and accumulated earnings and profits, the Non-U.S. Shareholder
may seek a refund from the IRS. The Company expects to withhold United
States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower tax
treaty applies and the required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder
files IRS Form 4224 with the Company claiming that the distribution is
"effectively connected" income.
For any year in which the Company qualifies as a REIT, distributions
by the Company that are attributable to gain from the sale or exchange
of a United States real property interest will be taxed to a Non-U.S.
Shareholder in accordance with the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed
to a Non-U.S. Shareholder as if such distributions were gains
"effectively connected" with a United States trade or business.
Accordingly, a Non-U.S. Shareholder will be taxed at the normal capital
gain rates applicable to a U.S. Shareholder (subject to any applicable
alternative minimum tax and a special alternative minimum tax in the
-17-
case of non-resident alien individuals). Distributions subject to
FIRPTA may also be subject to a 30% branch profits tax in the hands of a
foreign corporate shareholder that is not entitled to treaty exemption.
The Company will be required to withhold from distributions to Non-U.S.
Shareholders, and remit to the IRS, 35% of the amount of any
distribution that could be designated as capital gain dividends.
Tax treaties may reduce the Company's withholding obligations. If the
amount of tax withheld by the Company with respect to a distribution to
a Non-U.S. Shareholder exceeds the shareholder's United States liability
with respect to such distribution, the Non-U.S. Shareholder may file for
a refund of such excess from the IRS. It should be noted that the 35%
withholding tax rate on capital gain dividends corresponds to the
maximum income tax rate applicable to corporations but is higher than
the 28% maximum rate on capital gains of individuals.
If the Shares fail to constitute a "United States real property
interest" within the meaning of FIRPTA, a sale of the Shares by a Non-
U.S. Shareholder generally will not be subject to United States taxation
unless (i) investment in the Shares is effectively connected with the
Non-U.S. Shareholder's United States trade or business, in which case,
as discussed above, the Non-U.S. Shareholder would be subject to the
same treatment as U.S. Shareholders on such gain or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year, in which
case the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains.
The Shares will not constitute a United States real property interest
if the Company is a "domestically controlled REIT". A domestically
controlled REIT is a REIT in which at all times during a specified
testing period less than 50% in value of its shares is held directly or
indirectly by Non-U.S. Shareholders. It is currently anticipated that
the Company will be a domestically controlled REIT, and therefore that
the sale of Shares will not be subject to taxation under FIRPTA.
However, because the Shares will be publicly traded, no assurance can be
given that the Company will continue to be a domestically controlled
REIT. If the Company did not constitute a domestically controlled REIT,
whether a Non-U.S. Shareholder's sale of Shares would be subject to tax
under FIRPTA as a sale of a United States real property interest would
depend on whether the Shares were "regularly traded" (as defined by
applicable Treasury Regulations) on an established securities market
(e.g., the New York Stock Exchange, on which the Shares are listed) and
on the size of the selling shareholder's interest in the Company. If
the gain on the sale of the Shares were subject to taxation under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment
as a U.S. Shareholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). In any event, a purchaser of
Shares from a Non-U.S. Shareholder will not be required under FIRPTA to
withhold on the purchase price if the purchased Shares are "regularly
traded" on an established securities market or if the Company is a
domestically controlled REIT. Otherwise, under FIRPTA, the purchaser of
Shares may be required to withhold 10% of the purchase price and to
remit such amount to the IRS.
-18-
Federal Estate Tax
Shares owned or treated as owned by an individual who is not a citizen
or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includible in the
individual's gross estate for United States federal estate tax purposes
unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting Requirements
The Company must report annually to the IRS and to each Non-U.S.
Shareholder the amount of dividends paid to and the tax withheld with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to
the tax authorities in the country in which the Non-U.S. Shareholder
resides. United States backup withholding tax (which generally is a
withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish the information required under the United
States information reporting requirements) will generally not apply to
dividends paid on Shares to a Non-U.S. Shareholder at an address outside
the United States.
The payment of the proceeds from the disposition of Shares to or
through the United States office of a broker will be subject to
information reporting and backup withholding at a rate of 31% unless the
owner, under penalties of perjury, certifies, among other things, its
status as a Non-U.S. Shareholder, or otherwise establishes an exemption.
The payment of the proceeds from the disposition of Shares to or through
a non-U.S. office of a broker generally will not be subject to backup
withholding and information reporting. In the case of proceeds from a
disposition of Shares paid to or through a non-U.S. office of a U.S.
broker or paid to or through a non-U.S. office of a non-U.S. broker that
is (i) a "controlled foreign corporation" for United States federal
income tax purposes or (ii) a person 50% or more of whose gross income
from all sources for a certain three-year period was effectively
connected with a United States trade or business, (a) backup withholding
will not apply unless the broker has actual knowledge that the owner is
not a Non-U.S. Shareholder, and (b) information reporting will not apply
if the broker has documentary evidence in its files that the owner is a
Non-U.S. Shareholder (unless the broker has actual knowledge to the
contrary).
Any amounts withheld under the backup withholding rules from a payment
to a Non-U.S. Shareholder will be refunded (or credited against the Non-
U.S. Shareholder's United States federal income tax liability, if any),
provided that the required information is furnished to the IRS.
Other Tax Consequences. The Company and its shareholders may be
subject to state or local taxation in various state or local
jurisdictions, including those in which it or they transact business or
reside.
-19-
There may be other Federal, state, local or foreign income, or estate
and gift, tax considerations applicable to the circumstances of a
particular investor. Shareholders should consult their own tax advisors
with respect to such matters.
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") ("ERISA Plan")
must consider whether their investment in the Company's shares satisfies
the diversification requirements of ERISA, whether the investment is
prudent in light of possible limitations on the marketability of the
shares, whether such fiduciaries have authority to acquire such shares
under the appropriate governing instrument and Title I of ERISA, and
whether such investment is otherwise consistent with their fiduciary
responsibilities. Any ERISA Plan fiduciary should also consider ERISA's
prohibition on improper delegation of control over or responsibility for
"plan assets." 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, such
fiduciaries may be subject to a civil penalty of up to 20% of any amount
recovered by the plan on account of such a violation (the "Fiduciary
Penalty"). Also, fiduciaries of any Individual Retirement Account
("IRA"), Keogh Plan or other qualified retirement plan not subject to
Title I of ERISA because it does not cover common law employees
("Non-ERISA Plan") should consider that such an IRA or non-ERISA Plan
may only make investments that are authorized by the appropriate
governing instrument. Fiduciary shareholders should consult their own
legal advisers if they have any concern as to whether the investment is
inconsistent with any of the foregoing criteria.
Prohibited Transactions. Fiduciaries of ERISA Plans and persons
making the investment decision for an IRA or other Non-ERISA Plan should
also consider the application of the prohibited transaction provisions
of ERISA and the Code in making their investment decision. Sales and
certain other transactions between an ERISA Plan, IRA, or other
Non-ERISA Plan and certain persons related to it are prohibited
transactions. The particular facts concerning the sponsorship,
operations and other investments of an ERISA Plan, IRA, or other
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 Code or a penalty under ERISA upon
the disqualified person or party in interest with respect to the ERISA
or Non-ERISA Plan or IRA. If the disqualified person who engages in the
transaction is the individual on behalf of whom an IRA is maintained (or
his beneficiary), the IRA may lose its tax-exempt status and its assets
may be deemed to have been distributed to such individual in a taxable
distribution (and no excise tax will be imposed) on account of the
prohibited transaction. Fiduciary shareholders should consult their own
legal advisers if they have any concern as to whether the investment is
a prohibited transaction.
-20-
Special Fiduciary and Prohibited Transactions Considerations. On
November 13, 1986 the Department of Labor ("DOL"), which has certain
administrative responsibility over ERISA Plans as well as over IRAs and
other Non-ERISA Plans, issued a final regulation defining "plan assets."
The regulation generally provides that when an ERISA or non-ERISA Plan
or IRA 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 or Non-ERISA Plan's or IRA'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.
The regulation defines a publicly offered security as a security that
is "widely held," "freely transferable" and either part of a class of
securities registered under the Securities Exchange Act of 1934, or sold
pursuant to 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). The Company's
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.
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, certain restrictions ordinarily will not, alone or
in combination, affect a finding that such securities are freely
transferable. The restrictions on transfer enumerated in the regulation
as not affecting that finding include: any restriction on or prohibition
against any transfer or assignment which would result in a termination
or reclassification of the Company for Federal or state tax purposes, or
would otherwise violate any state or Federal law or court order; any
requirement that advance notice of a transfer or assignment be given to
the Company 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; any
administrative procedure which establishes an effective date, or an
event prior to which a transfer or assignment will not be effective; and
any limitation or restriction on transfer or assignment which is not
imposed by the issuer or a person acting on behalf of the issuer. The
Company believes that the restrictions imposed under the Declaration on
the transfer of shares do not result in the failure of the shares to be
"freely transferable." Furthermore, the Company believes that at
-21-
present there exist no other facts or circumstances limiting the
transferability of the shares which are not included among those
enumerated as not affecting their free transferability under the
regulation, and the Company does not expect or intend to impose in the
future (or to permit any person to impose on its behalf) any limitations
or restrictions on transfer which would not be among the enumerated
permissible limitations or restrictions. However, the final regulation
only establishes a presumption in favor of a finding of free
transferability, and no guarantee can be given that the DOL or the
Treasury Department will not reach a contrary conclusion.
Assuming that the shares will be "widely held" and that no other facts
and circumstances exist which restrict transferability of the shares,
the Company has received an opinion of counsel that the shares should
not fail to be "freely transferable" for purposes of the regulation due
to the restrictions on transfer of the shares under the Declaration and
that under the regulation the shares are publicly offered securities and
the assets of the Company will not be deemed to be "plan assets" of any
ERISA Plan, IRA or other Non-ERISA Plan that invests in the shares.
If the assets of the Company are deemed to be plan assets under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of
ERISA would be applicable to investments made by the Company; (ii) the
person or persons having investment discretion over the assets of ERISA
Plans which invest in the Company would be liable under the
aforementioned Part 4 of Title I of ERISA for investments made by the
Company which do not conform to such ERISA standards unless the Advisor
registers as an investment adviser under the Investment Advisers Act of
1940 and certain other conditions are satisfied; and (iii) certain
transactions that the Company might enter into in the ordinary course of
its business and operation might constitute "prohibited transactions"
under ERISA and the Code.
Item 2. Properties.
General. Approximately 77% of the Company's total investments are in
nursing homes retirement centers and assisted living centers providing
long-term care, 21% of the Company's total investments are in nursing
homes with subacute and other specialty rehabilitation services and 2%
are in other healthcare facilities. The Company believes that the
physical plant of each of the facilities in which it has invested is
suitable and adequate for its present and any currently proposed uses.
At December 31, 1994, the Company had total real estate investments of
approximately $807 million in 141 properties located in 27 states and
with approximately 27 different lessees and mortgagors.
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The following table summarizes certain information about the
Properties as of December 31, 1994. All dollar figures are in
thousands.
REAL ESTATE OWNED:
No. of No. of Investment Minimum
Location Facilities Beds/Units Amount
Rent/Interest
Nursing Homes with Subacute Services
Connecticut 4 660 $44,805 $5,709
Louisiana 1 118 24,376 3,065
Massachusetts 5 762 82,058 10,044
Pennsylvania 1 120 15,598 1,951
Long-Term Care and Retirement Facilities
Arizona 5 616 28,062 2,404
California 10 1,542 58,874 6,597
Colorado 6 756 20,532 2,570
Connecticut 5 867 40,231 4,803
Florida 5 1,522 131,991 9,986
Illinois 2 593 39,453 2,018
Iowa 10 676 14,678 1,709
Kansas 1 83 2,270 252
Maryland 1 351 33,080 4,054
Missouri 2 215 3,235 498
Ohio 2 400 9,872 1,183
South Dakota 3 381 7,589 914
Texas 1 145 12,411 1,213
Virginia 3 848 57,662 5,817
Washington 1 143 5,193 611
Wisconsin 7 1,026 28,989 3,192
Wyoming 4 295 8,197 920
Other HealthCare Facilities
California 1 0 3,927 503
-- ------- --------- -------
Total Real Estate: 80 12,119 $673,083 $70,013
== ====== ======== =======
MORTGAGE INVESTMENTS:
Long-Term Care and Retirement Facilities
California 6 1,011 $17,204 $1,934
Colorado 5 389 14,019 1,564
Florida 1 58 960 124
Georgia 5 650 8,167 921
Iowa * * 51 207
Kansas 3 346 6,468 686
Kentucky 1 90 1,365 180
Michigan 2 342 9,400 1,081
Nebraska 12 834 17,700 1,835
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North Carolina 8 759 13,780 1,613
Ohio* 5 719 15,253 1,667
Pennsylvania 1 120 2,811 313
South Carolina 1 102 901 101
Tennessee 1 78 1,013 123
Texas 6 556 4,755 599
Wisconsin 2 366 9,683 2,005
Other Healthcare Facilities
Kentucky 1 94 7,368 2,645
North Carolina 1 64 2,579 882
-- ----- ------ ------
Total Mortgages 61 6,578 $133,477 $18,480
== ===== ======== =======
* Amounts represent or include notes receivable related to improvements
to owned property, above.
-24-
Item 3. Legal Proceedings.
The Company may be subject to routine litigation in the ordinary
course of business. It is not presently subject to any legal
proceedings which would result in material losses to the Company. The
Company knows of no proceedings contemplated by governmental authorities
relating to the Company.
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 Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's Shares are traded on the New York Stock Exchange
(symbol: HRP). The following table sets forth for the periods indicated
the high and low sale prices for the Shares as reported in the New York
Stock Exchange Composite Transactions reports.
High Low
1993
First Quarter........... 15 11 3/8
Second Quarter.......... 14 12
Third Quarter........... 15 1/8 12 1/2
Fourth Quarter.......... 16 3/4 14
1994
First Quarter........... 16 3/8 14 3/8
Second Quarter.......... 15 3/8 14
Third Quarter........... 15 3/4 14 1/4
Fourth Quarter.......... 14 7/8 13
The closing price of the Shares on the New York Stock Exchange on
March 3, 1995 was $14.50.
As of March 3, 1995, there were 3,815 holders of record of the Shares
and the Company estimates that as of such date there were in excess of
60,000 beneficial owners of the Shares.
Dividends declared with respect to each period for the two most recent
fiscal years and the amount of such dividends and the respective
annualized rates are set forth in the following table.
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Annualized
Dividend Dividend
Per Share Rate
1993
First Quarter...... $.32 $1.28
Second Quarter..... .32 1.28
Third Quarter...... .33 1.32
Fourth Quarter..... .33 1.32
1994
First Quarter...... .33 1.32
Second Quarter..... .33 1.32
Third Quarter...... .33 1.32
Fourth Quarter..... .34 1.36
All dividends declared have been paid. The Company intends to
continue to declare and pay future dividends on a quarterly basis.
In order to qualify for the beneficial tax treatment accorded to
REITs by Sections 856 through 860 of the Code, the Company is required
to make distributions to shareholders which annually will be at least
95% of the Company's "real estate investment trust taxable income" (as
defined in the Code). All distributions will be made by the Company at
the discretion of the Board of Trustees and will depend on the earnings
of the Company, funds from operations, the financial condition of the
Company and such other factors as the Board of Trustees deems relevant.
The Company has in the past distributed, and intends to continue to
distribute, substantially all of its "real estate investment trust
taxable income" to its shareholders.
-26-
Item 6. Selected Financial Data.
Set forth below are selected financial data for the Company for the
periods and dates indicated. This data should be read in conjunction
with, and is qualified in its entirety by reference to, the financial
statements and accompanying notes included elsewhere in this Form 10-K.
Amounts are in thousands, except per Share information.
Year Ended December 31,
1990 1991 1992 1993 1994
Operating Statement Data:
Total revenues........ $32,872 $43,835 $48,735 $56,485 $86,683
Income before gain (loss)
on sale of properties and
extraordinary items 14,280 22,079 27,243 37,738 57,878
Income before extraordinary
items 14,280 22,079 27,243 37,738 51,872
Net income............ 14,280 22,079 27,243 33,417 49,919
Funds from operations(1) 19,467 30,059 36,853 47,578 73,846
Dividends declared.... 18,927 27,179 33,079 44,869 76,317
Per Share:
Income before gain (loss)
on sale of proeprties and
extraordinary items .89 1.01 1.02 1.10 1.10
Income before extraordinary
items .89 1.01 1.02 1.10 .98
Net income.......... .89 1.01 1.02 .97 .95
Funds from operations(1) 1.21 1.38 1.38 1.38 1.40
Dividends declared.. 1.17 1.23 1.26 1.30 1.33
Average Shares
Outstanding......... 16,088 21,834 26,760 34,407 52,738
Balance Sheet Data:
Real estate properties
at cost $200,839 $281,766 $337,076 $384,881 $673,083
Real estate mortgages 87,061 31,760 47,173 157,281 133,477
Total assets 290,099 340,718 374,468 527,662 840,206
Total indebtedness 125,500 103,000 138,500 73,000 216,513
Total shareholders' equity 147,760 234,427 228,301 441,135 602,039
(1) Funds from operations does not equal cash flow from operating
activities as defined by generally accepted accounting principles and
should not be considered an alternative to net income as an indication
of the Company's performance or to cash as a measure of liquidity.
Funds from operations means income before gain (loss) on sale of
properties and extraordinary items plus depreciation and other non-cash
items. Dividends in excess of net income generally constitute a return
of capital.
Item 7. Management's Discussion and Analysis of Financial
-27-
Condition and Results of Operations.
Results of Operations
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Total revenues for the year ended December 31, 1994 were $86.7
million, an increase of $30.2 million or 53% over the year ended
December 31, 1993. Rental income increased to $63.9 million from $46.1
million and interest income increased to $22.8 million from $10.4
million. Rental income increased as a result of new purchase and lease
investments, primarily a $33.4 million transaction in December 1993 and
the $320 million retirement community transaction with Marriott
International, Inc. (Marriott) in 1994. The growth in interest income
is primarily the result of the full year impact of three loan pool
acquisitions in 1993 and a mortgage transaction of $26.6 million in
December 1993.
Total expenses for 1994 increased to $28.8 million, from $18.7
million, in the comparable 1993 period. The increase of $10.1 million
was due primarily to increases in interest of $2.7 million, advisory
fees of $1.5 million, and depreciation and amortization of $5.6 million.
The increases in advisory fees and depreciation and amortization are
directly related to the Company's increased investments whereas interest
increased due to both higher interest rates during the second half of
1994 and the issuance of $200 million senior notes in July 1994 in
connection with the Marriott transaction.
Income before gain (loss) on sale of properties and extraordinary
items for 1994 increased to $57.9 million, or $1.10 per share, from
$37.7 million, or $1.10 per share, in 1993. Per share amounts remained
flat reflecting the issuance of nine million new shares of the Company's
stock in December 1993 and 13.3 million new shares in 1994, as well as
negative interest arbitrage resulting from unusually high cash balances
caused by timing differences between receipt of proceeds from the note
offering and the investment of those proceeds in real estate.
Income before extraordinary items and net income in 1994 was $51.9
million ($.98 per share) and $49.9 million ($.95 per share),
respectively, versus $37.7 million ($1.10 per share) and $33.4 million
($.97 per share), respectively, in 1993. On a per share basis, income
before extraordinary items and net income decreased during 1994
primarily as a result of the new share issuances noted above and
negative arbitrage noted above and the $10 million provision for the
potential loss on the sale of two psychiatric hospitals. These two
hospitals are HRP's only investments in the psychiatric industry and the
loss is due to the general decline in value of such property.
The Company's business plan is to maximize funds from operations
rather than net income. The Company's Board of Trustees considers funds
from operations, among other factors, when determining dividends to be
paid to shareholders. Funds from operations means net income excluding
gains or losses from debt restructuring and sales of property, plus
depreciation. Cash flow provided by operating activities may not
necessarily equal funds from operations as the cash flow of the Company
-28-
is affected by other factors not included in the funds from operations
calculation such as changes in assets and liabilities. Funds from
operations for the year ended December 31, 1994, was $73.9 million, or
$1.40 per share, versus $47.6 million, or $1.38 per share, in 1993.
Funds from operations for 1994 increased $26.3 million or 55% over the
prior year. However, funds from operations per share increased only
slightly as a result of nine million new shares of the Company's stock
issued in December 1993 and 13.3 million new shares issued in 1994 and
the negative arbitrage from large cash balances previously discussed.
Dividends declared for the years ended December 31, 1994 and 1993 were
$1.33 per share and $1.30 per share, respectively. Dividends in excess
of net income constitute a return of capital. For 1994, the return of
capital portion reported was 6.1% of dividends and 12.6% of dividends
was considered a long term capital gain.
Cash flow provided by (used for) operating, investing and financing
activities were $78.3 million, ($261.8 million) and $229.4 million,
respectively, for the year ended December 31, 1994 and $47.2 million,
($175.4 million) and $128.0 million, respectively in 1993.
Year Ended December 31, 1993 compared to Year Ended
December 31, 1992
Total revenues for the year ended December 31, 1993 were
$56.5 million, an increase of $7.8 million or 16% over the year ended
December 31, 1992. Rental income increased to $46.1 million from $43.0
million and interest income increased to $10.4 million from $5.7
million. Rental income increased as a result of new purchase lease
investments, increases in additional rent, and improvement financings
during 1993. The growth in interest income is primarily the result of
the acquisition since December 1, 1992, of four pools of performing
mortgage loans for $133.7 million with a principal balance at the time
of acquisition of approximately $148.2 million.
Net income for 1993 increased to $33.4 million, or $.97 per share,
from $27.2 million, or $1.02 per share in the comparable 1992 period.
The increase in net income of $6.2 million or 23% during the 1993 period
was primarily the result of new investments discussed above and a
decrease in total expenses of $2.7 million. On a per share basis, net
income decreased slightly during 1993 primarily as a result of non-
recurring charges related to the early extinguishment of debt. Debt was
retired with the proceeds from the issuance of 10.35 million and nine
million new shares of the Company's stock during the first and fourth
quarters, respectively, of 1993. Total expenses for 1993 were $18.7
million, a decrease of 13% from $21.5 million for the comparable 1992
period. Interest expense decreased $3.2 million as a result of lower
average bank borrowings and lower interest rates during the comparable
periods. Depreciation and amortization expense remained flat reflecting
the fact that the new mortgage investments occurred throughout the year
and the significant purchase lease investments occurred near year end.
-29-
The Company's funds from operations for the years ended December
31, 1993, and 1992 was $47.6 million ($1.38 per share) and $36.9 million
($1.38 per share), respectively. Total funds from operations for 1993
increased $10.7 million or 29% over the prior year. However, on a per
share basis, funds from operations remained unchanged, primarily as a
result of the 19.4 million new shares of the Company's stock issued in
1993. Dividends declared for the years ended December 31, 1993 and 1992
were $1.30 per share and $1.26 per share, respectively. Dividends in
excess of net income constitute a return of capital. For 1993, the
return of capital portion was 26% of the dividends.
Cash flow provided by (used for) operations, investing and
financing activities were $47.2 million, ($175.4 million) and $128.0
million, respectively, for the year ended December 31, 1993, and $42.0
million, ($71.9 million) and $1.9 million, respectively, for the year
ended December 31, 1992.
Liquidity and Capital Resources
Assets increased to $840.2 million as of December 31, 1994, from
$527.7 million as of December 31, 1993. The increase of $312.5 million
or 59% is primarily attributable to the increases in real estate
properties, net, and cash and cash equivalents of $283.7 million and
$45.9 million, respectively, net of a decrease in real estate mortgages
and notes, net, of $23.8 million. The increase in real estate
properties is the net result of the acquisition of 14 retirement
communities in connection with the Marriott transaction, and the sale of
three properties in connection with the February 11, 1994 merger of
Greenery Rehabilitation Group, Inc. (Greenery) into Horizon Healthcare
Corporation (Horizon). Cash increased as a result of mortgage
prepayments and excess proceeds from the July debt offering. Real
estate mortgages and notes, net, decreased principally due to the
prepayment of mortgage investments totalling $48.7 million, net of new
mortgage financings of $14.5 million.
On February 11, 1994, in connection with the Horizon-Greenery
merger, the Company sold to Horizon for $28.4 million three facilities
that had been leased to Greenery. The Company realized a capital gain
of approximately $4.0 million on the sale of these properties. In
addition, Horizon has leased seven facilities previously leased to
Greenery, on substantially similar terms except the leases were extended
through 2005. The Company has granted Horizon a ten year option to buy
the seven leased facilities, at the rate of no more than one facility
per consecutive twelve months. The Company leased the three remaining
Greenery facilities to a newly formed corporation, Connecticut Subacute
Corporation, II (CSC II), an affiliate of HRPT Advisors, Inc. (Advisor).
These facilities are being managed by and the lease payments are
guaranteed by Horizon for a term of up to five years. The terms of
these lease arrangements are substantially similar to the original lease
arrangements with Greenery.
In January 1995 Horizon exercised its option and purchased one of
the seven leased properties from the Company for $24.5 million resulting
in a capital gain of $2.5 million. The Company provided Horizon a 16
year $19.5 million mortgage in connection with this sale in 1995.
-30-
On February 11, 1994, in connection with the Horizon-Greenery
merger, the Company provided Horizon with $9.4 million first mortgage
financing for two facilities. One of the facilities previously was
owned by the Company and leased to Greenery. The mortgage notes bear
interest at 11.5% per annum and mature December 31, 2000.
During 1994 the Company received net proceeds of approximately
$182.4 million from the public offering of 13,251,500 shares of
beneficial interest (including the underwriter's over-allotment). A
portion of the proceeds were used to repay the outstanding balance of
$73 million on the Company's revolving credit facility and the remainder
was used to fund part of the Marriott transaction.
On September 9, 1994, the Company completed its acquisition of 14
retirement communities containing 3,952 residencies or beds for $320
million. These communities are triple net leased through December 31,
2013 to a wholly owned subsidiary of Marriott International Inc. The
leases provide for fixed rent and additional rentals equal to a
percentage of annual revenues from operations in excess of base amounts
determined on a facility by facility basis. All of the leases are
subject to cross default provisions and are guaranteed by Marriott.
This transaction was funded from cash on hand, the proceeds of an equity
offering discussed above, drawings under the Company's revolving credit
facility, assumption of $17.6 million of existing debt bearing interest
at 7.75% and a portion of the proceeds from a note offering described
below.
On July 13, 1994, the Company received net proceeds of $197.3
million from the offering of $200 million floating rate senior notes due
in 1999. The notes were issued in two series, A and B, which may be
called by the Company beginning April 13, 1995 and July 13, 1996,
respectively. The weighted average interest rate is LIBOR plus 84 basis
points. A portion of these proceeds were used to fund part of the
Marriott transaction and to repay $56 million in borrowings under the
Company's revolving credit facility. The Company retained the balance
to fund future real estate acquisitions. The Company has interest rate
cap agreements which provide for maximum weighted average interest rates
of approximately 6.85% on its variable rate debt.
This senior note offering was drawn under a shelf registration
statement for the offering of up to $345 million of debt securities,
preferred shares of beneficial interest, common shares of beneficial
interest and common share warrants. An additional $145 million of
securities may be issued under this registration statement.
At December 31, 1994, the Company had $59.8 million of cash and
cash equivalents. The Company's $170 million revolving credit facility
was undrawn at December 31, 1994. The facility matures in 1997 and
bears interest at a spread over LIBOR.
As of December 31, 1994, the Company had extended commitments to
provide financing totalling approximately $58.1 million. In addition to
completing certain of these committed transactions in early 1995 as
described below, the Company also entered into several additional
commitments.
-31-
On January 24, 1995, the Company provided first mortgage financing
of $11.5 million due in 2007, secured by four assisted living properties
and operated by a newly created health care operating company. The
borrower has provided a $1 million cash security deposit, to guarantee
its obligations to the Company.
On January 31, 1995, the Company acquired nine nursing facilities
for approximately $32 million. The facilities have been leased to two
newly formed corporations which are affiliates of the Company. The
purchase price paid was approximately $8.1 million in cash and 1.8
million shares of the Company's common stock.
The Company entered into a commitment to purchase and lease 11
nursing properties for $18 million and provide first mortgage financing
of $2 million secured by three nursing properties, to a subsidiary of an
existing tenant, on terms substantially similar to the Company's
existing lease and mortgage agreements with that tenant. The
acquisition is expected to close in April 1995.
The Company entered into an commitment to purchase and lease 14
nursing properties for approximately $45 million subject to adjustment,
located in the United Kingdom, on terms substantially similar to the
Company's existing lease agreements. The Company expects to fund this
investment by borrowing in British sterling and has recently amended its
bank credit facility to permit such borrowings. By borrowing in the
same currency as it invests in, the Company believes it can reduce the
impact of fluctuations in relative currency values. The acquisition is
expected to close in installments beginning in April 1995 with the
entire transaction being completed by December 1995.
The Company entered into a purchase and lease agreement with Host
Marriott Corporation (Host Marriott) for 21 Courtyard by Marriott hotel
properties for approximately $179.4 million, subject to adjustment. The
properties are leased for an initial term of 12 years, with renewal
options of an additional 37 years to a subsidiary of Host Marriott and
are managed by a subsidiary of Marriott International. An amount equal
to one year's rent was withheld from the purchase price to secure the
tenant's obligations to the Company. The transaction closed in March
1995.
The Company funded and intends to fund these commitments with a
combination of cash on hand, amounts available under its existing credit
facilities, proceeds of mortgage prepayments, if any, and/or proceeds of
other financings such as the possible issuance of additional securities
in connection with the shelf registration statement described above.
The Company's investment in hotel properties does not represent a
change in the Company's strategy of focusing on investments in long term
care and retirement facilities. Rather, this investment, structured as
a triple net lease, will represent only approximately 15% of the
portfolio upon closing. The facilities are new, having been constructed
within the last five years, and occupancy and cash flow coverage are
strong. Following the announcement of this investment, Moody's
downgraded the Company's debt rating and S&P and Fitch maintained their
-32-
ratings. The Company believes, despite the negative reaction by
Moody's, that this transaction will enhance the security and growth
potential of its funds from operations.
The Company continues to seek new investments to expand and
diversify its portfolio of leased and mortgaged health care, retirement
and related real estate. The Company believes that the transactions
described above improve the security of its future cash flow and
dividends. The Company intends to balance the use of debt and equity in
such a manner that the long term cost of funds borrowed to acquire or
mortgage finance facilities is appropriately matched, to the extent
practicable, with the terms of the investments made with such borrowed
funds. As of December 31, 1994, the Company's debt as a percentage of
total capitalization was approximately 26%.
Impact of Inflation
Management believes that the Company is not adversely affected by
inflation. In the real estate market, inflation tends to increase the
value of the Company's underlying real estate which may be realized at
the end of the lessees' fixed terms. In the health care and hotel
industries, inflation increases the lessees' and mortgagors' revenues,
thereby increasing the Company's additional rent or interest. At
December 31, 1994, increases in interest rates on all of the Company's
outstanding debt were capped by the use of interest rate cap agreements.
The Company has interest rate cap agreements which provide for maximum
weighted average interest rates of approximately 6.85% on its variable
rate debt.
Item 8. Financial Statements and Supplementary Data
The financial statements and related notes and report of
independent auditors for the Company are included following Part IV,
beginning on page F-1, and identified in the index appearing at Item
14(a). The financial statements for Marriott are incorporated by
reference to Marriott's Annual Report on Form 10-K for the year ended
December 30, 1994, Commission File No. 1-12188. The financial statements
and financial statement schedules for Horizon are incorporated by
reference to Horizon's Annual Report on Form 10-K for the year ended May
31, 1994, Commission File No. 1-9369 and Horizon's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1994, Commission File No.
1-9369. The financial statements and financial statement schedules for
Grancare are incorporated by reference to Grancare's Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No. 0-
19571.
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure
Not applicable
PART III
-33-
The information in Part III (Items, 10, 11, 12 and 13) is incorporated
by reference to the Company's definitive Proxy Statement, which will be
filed not later than 120 days after the end of the Company's fiscal
year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) Index to Financial Statements and Financial Statement Schedules
HEALTH AND RETIREMENT PROPERTIES TRUST
Page
Report of Ernst & Young LLP, Independent Auditors F-1
Balance Sheets as of December 31, 1993 and 1994 F-2
Statements of Income for the years ended
December 31, 1992, 1993 and 1994 F-3
Statements of Shareholders' Equity for the years
ended December 31, 1992, 1993 and 1994 F-4
Statements of Cash Flows for the years ended
December 31, 1992, 1993 and 1994 F-5
Notes to Financial Statements F-6
The following financial schedules are included:
III -- Real Estate and Accumulated Depreciation F-16
IV -- Mortgage Loans on Real Estate F-18
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.
Exhibits:
3.1 - July 1994 Amended and Restated Declaration of Trust (3)
3.2 - Amended and Restated By-Laws (1)
4.1 - Form of Series A Note (2)
4.2 - Form of Series B Note (2)
4.3 - Shawmut Bank, N.A. Indenture dated as of June 1, 1994 (2)
4.4 - Supplemental Shawmut Bank, N.A., Indenture dated as of
June 29, 1994 (2)
9.1 - AMS Voting Trust Agreement (9)
9.2 - Amended and Restated AMS Voting Trust Agreement (4)
10.1 - Advisory Agreement, as amended (10)(+)
10.2 - Second Amendment to Advisory Agreement (5)(+)
10.3 - Incentive Share Award Plan (6)(+)
10.4 - Master Lease Document (8)
10.5 - HRPT Shares Pledge Agreement (8)
10.6 - AMS Properties Security Agreement (8)
10.7 - AMS Subordination Agreement (8)
-34-
10.8 - AMS Guaranty (8)
10.9 - AMS Pledge Agreement (pledging shares of AMSP) (8)
10.10 - AMS Holding Co. Pledge Agreement (pledging shares of AMS)
(7)
10.11 - Amended and Restated Renovation Funding Agreement (7)
10.12 - Amendment to AMS Transaction Documents (7)
10.13 - GCI Master Lease Document (6)
10.14 - Amended and Restated HRP Shares Pledge Agreement (6)
10.15 - Guaranty, Cross-Default and Cross-Collateralization
Agreement (6)
10.16 - CSC $8,000,000 Working Capital Promissory Note (6)
10.17 - Marriott Senior Living Services Purchase and Sale
Agreement (5)
10.18 - Connecticut Subacute Corporation II Lease Document
Waterbury (1)
10.19 - Connecticut Subacute Corporation II Lease Document
- Cheshire (1)
10.20 - Connecticut Subacute Corporation II Lease Document
- New Haven (1)
10.21 - Vermont Subacute/New Hampshire Subacute Corporation
Master Lease Agreement (Chapple) (1)
10.22 - Amended and Restated Agreement and Plan of Reorganization
(Chapple) (1)
10.23 - March 1995 Second Amended and Restated Revolving Loan
Agreement (1)
10.24 - Purchase Option Agreement (1)
12.1 - Earnings to Fixed Charges (1)
21.1 - Subsidiaries of the Registrant (1)
23.1 - Consent of Ernst & Young (1)
23.2 - Consent of Arthur Andersen LLP (Horizon) (1)
25.1 - Powers of Attorney (1)
27.1 - Financial Data Schedule (1)
(+) Management contract or compensatory plan or arrangement
(1) Filed herewith.
(2) Incorporated by reference to the Company's Registration Statement
on Form 8-A dated July 11, 1994.
(3) Incorporated by reference to the Company's Current Report on Form
8-K dated July 1, 1994 and amendments thereto.
(4) Incorporated by reference to the Company's Registration Statement
on Form S-3 dated June 2, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1993.
(6) Incorporated by reference to the Company's Registration Statement
No. 33-55684 on Form S-11 dated December 23, 1992 and amendments
thereto.
-35-
(7) Incorporated by reference to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1991.
(8) Incorporated by reference to the Company's Current Report on Form
8-K dated December 28, 1990 and amendments thereto.
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1990 and amendments
thereto.
(10) Incorporated by reference to the Company's Registration Statement
No. 33-16799 on Form S-11 dated August 27, 1987 and amendments
thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
-36-
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders
Health and Retirement Properties Trust
We have audited the accompanying balance sheets of Health and Retirement
Properties Trust as of December 31, 1994 and 1993, and the related
statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Health and
Retirement Properties Trust at December 31, 1994 and 1993, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. 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.
ERNST & YOUNG LLP
Boston, Massachusetts
February 9, 1995
F-1
HEALTH AND RETIREMENT PROPERTIES TRUST
BALANCE SHEETS
(Dollars in thousands, except share amounts)
December 31,
1993 1994
ASSETS
Real estate properties, at cost
(including properties leased to
affiliates with a cost of
$217,947 and $69,545 respectively):
Land $ 33,450 $ 63,186
Buildings and improvements 351,361 609,897
-------- --------
384,811 673,083
Less accumulated depreciation 34,969 39,570
------- -------
349,842 633,513
Real estate mortgages and notes, net 157,281 133,477
Cash and cash equivalents 13,887 59,766
Interest and rents receivable 3,039 4,712
Deferred interest and finance costs,
net, and other assets 3,613 8,738
-------- --------
$527,662 $840,206
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 73,000 $ -
Notes and bonds payable, net - 216,513
Accounts payable and accrued expenses 4,518 16,346
Security deposits 8,300 3,800
Due to affiliate 709 1,508
Commitments
Shareholders' equity:
Preferred shares of beneficial interest,
$.01 par value; 50,000,000 shares
authorized, none issued - -
Common shares of beneficial interest,
$.01 par value; 100,000,000 shares
authorized, 44,121,000 shares and
57,385,000 shares issued and
outstanding, respectively 441 574
Additional paid-in capital 470,572 652,989
Cumulative net income 118,889 168,808
Dividends (148,767) (220,332)
--------- ---------
F-2
Total shareholders' equity 441,135 602,039
-------- --------
$527,662 $840,206
======== ========
See accompanying notes
F-3
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
1992 1993 1994
Revenues:
Rental income $43,029 $46,069 $63,856
Interest income 5,706 10,416 22,827
------- ------- -------
Total revenues 48,735 56,485 86,683
------- ------- -------
Expenses:
Interest 9,466 6,217 8,965
Depreciation and amortization 9,076 9,087 14,724
General, administrative and advisory 2,950 3,443 5,116
------- ------- ------
Total expenses 21,492 18,747 28,805
------- ------- ------
Income before gain (loss) on sale of
properties and extraordinary items 27,243 37,738 57,878
Provision for loss on sale of properties - - (10,000)
Gain on sale of properties - - 3,994
------ ------ -------
Income before extraordinary items 27,243 37,738 51,872
Extraordinary items - early
extinguishment of debt - (4,321) (1,953)
------- ------- -------
Net income $27,243 $33,417 $49,919
======= ======= =======
Weighted average shares
outstanding 26,760 34,407 52,738
====== ======= =======
Per share amounts:
Income before gain (loss) on sale of
properties and extraordinary items $ 1.02 $ 1.10 $ 1.10
======= ======= =======
Income before extraordinary items $ 1.02 $ 1.10 $ .98
======= ======= =======
Net income $ 1.02 $ .97 $ .95
======= ======= =======
See accompanying notes
F-4
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Additional Cumulative
Number of Common Paid-in Net
Shares Shares Capital Income Dividends
Total
Balance at December 31,
1991 26,755,000 $268 $246,378 $58,229 $(70,448) $234,427
Expenses related to the
issuance of common shares
of beneficial interest - - (15) - - (15)
Exercise of stock
options 1,000 - 8 - - 8
Stock grants 7,500 - 88 - - 88
Net income - - - 27,243 - 27,243
Dividends($1.26
per share) - - - - ( 33,450) ( 33,450)
---------- ------ --------- -------- -------- --------
Balance at December 31,
1992 26,763,500 268 246,459 85,472 (103,898) 228,301
Redemption of common
shares of beneficial
interest (2,000,000) (20) ( 20,580) -
- (20,600)
Issuance of common
shares of beneficial
beneficial interest 19,350,000 193 244,599 - - 244,792
Stock grants 7,500 - 94 - - 94
Net income - - - 33,417 - 33,417
Dividends ($1.29
per share) - - - - (44,869) (44,869)
---------- ------ --------- -------- -------- --------
Balance at December 31,
1993 44,121,000 441 470,572 118,889 (148,767) 441,135
Issuance of common
shares of beneficial
interest 13,251,500 133 182,233 - - 182,366
Stock grants 12,500 - 184 - - 184
Net income - - - 49,919 - 49,919
Dividends ($1.32
per share) - - - - (71,565) ( 71,565)
---------- ------ --------- -------- -------- --------
Balance at December 31,
F-5
1994 57,385,000 $574 $652,989 $168,808
$(220,332) $602,039
========== ====== ========= ======== ========= ========
See accompanying notes
F-6
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
1992 1993 1994
Cash flows from operating activities:
Net income $ 27,243 $ 33,417 $ 49,919
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of properties - - (3,994)
Extraordinary items - 4,321 1,953
Depreciation and amortization 9,076 9,087 14,724
Provision for loss on real estate - - 10,000
Amortization of deferred interest costs 534 700 864
Increase (decrease) in security deposits 4,500 3,800 (4,500)
Change in assets and liabilities:
(Increase) decrease in interest and rents
receivable and other assets 735 (6,156) (3,259)
Increase in accounts payable and
accrued expenses 1,219 1,554 11,828
Increase (decrease) in due to affiliate (1,343) 506 799
-------- -------- ---------
Cash provided by operating activities 41,964 47,229 78,334
-------- -------- ---------
Cash flows from investing activities:
Real estate acquisitions (52,287) (47,735) (324,554)
Investments in mortgage loans (22,049) (143,935) (9,372)
Proceeds from repayment of mortgage loans 2,476 16,227 48,762
Proceeds from sale of real estate - - 23,318
-------- -------- ---------
Cash used for investing activities (71,860) (175,443) (261,846)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from (cost of) issuance of
common shares (7) 244,792 182,366
Proceeds from borrowings 35,500 98,700 333,770
Payments on borrowings - (164,200) (208,000)
Deferred finance costs (126) (583) (7,180)
Termination costs of debt and interest
rate hedging arrangements - (2,843) -
Payment related to stock surrender - (3,000) -
Dividends paid (33,450) (44,869) (71,565)
-------- -------- ---------
Cash provided by financing activities 1,917 127,997 229,391
-------- -------- ---------
Increase (decrease) in cash (27,979) (217) 45,879
Cash and cash equivalents at beginning of period 42,083 14,104 13,887
-------- -------- ---------
Cash and cash equivalents at end of period $ 14,104 $ 13,887 $ 59,766
======== ======== =========
F-7
Supplemental cash flow information:
Interest paid $ 7,330 $ 6,522 $ 5,677
======= ======== =========
Non-cash investing and financing activities:
Exchange of real estate mortgages $ 4,160 $ 17,600 $ -
Investment in real estate mortgages - - (5,100)
Exchange of common shares - (17,600) -
Assumption of bonds payable - - 17,620
Real estate acquisitions (38,160) - (17,620)
Sale of real estate - - 5,100
Real estate exchanged 34,000 - -
Restricted stock grants 24 53 141
See accompanying notes
F-8
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Note 1. Organization
Health and Retirement Properties Trust (formerly known as Health and
Rehabilitation Properties Trust), a Maryland real estate investment
trust (the Company), was organized on October 9, 1986. The Company
invests in income-producing real estate, primarily health care related
properties.
Note 2. Summary of Significant Accounting Policies
Real estate properties and mortgages. Real estate properties and
mortgages are recorded at cost. Depreciation is provided for on a
straight-line basis over the estimated useful lives ranging up to 40
years. If the estimated net realizable value of an investment is less
than the carrying value, an allowance for possible investment loss is
established. The determination of net realizable value includes
consideration of many factors including income to be earned from the
investment, holding costs, estimated selling prices, and prevailing
economic conditions.
Cash and cash equivalents. Cash, over-night repurchase agreements
and short-term investments with maturities of three months or less at
date of purchase are carried at cost plus accrued interest.
Deferred interest and finance costs. Costs incurred to secure
certain borrowings are capitalized and amortized over the terms of their
respective loans.
Interest rate hedging arrangements. The Company enters into
interest rate hedging arrangements to limit the exposure to increasing
interest rates with respect to its bank borrowings and notes payable.
Their cost is included in interest expense ratably over the terms of the
respective agreements. Amounts receivable from hedging arrangements are
accrued as an adjustment to interest expense. The unamortized cost of
these agreements is included in other assets.
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. Additional rent and interest revenue is
recognized as earned.
Net income per share. Net income per share is computed using the
weighted average number of shares outstanding during the period.
Supplemental earnings per share for the years ended December 31, 1993
and 1994, was $.91 and $.93, respectively, based on the assumption that
the issuance of shares in the Company's public offerings during 1993 and
1994, and the related repayment of outstanding bank borrowings, took
place at the beginning of each year.
F-9
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Reclassifications. Certain reclassifications have been made to the
prior year financial statements to conform with the current year's
presentation.
Federal income taxes. The Company is a real estate investment trust
under the Internal Revenue Code of 1986, as amended. Accordingly, the
Company expects not to be subject to federal income taxes on amounts
distributed to shareholders provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other
requirements for qualifying as a real estate investment trust.
Note 3. Real estate properties.
The Company's real estate properties are leased pursuant to
noncancellable, fixed term operating leases expiring from 1996 to 2013.
The leases generally provide for renewal terms at existing rates
followed by several market rate renewal terms. Each lease is a triple
net lease and generally requires the lessee to pay minimum rent,
additional rent based upon increases in net patient revenues and all
operating costs associated with the leased property. Additional rent and
interest for the years ended December 31, 1992, 1993 and 1994 were
$1,809, $2,312, and $2,768, respectively.
During 1994, the Company acquired 14 retirement communities, two
nursing properties and a medical laboratory building for an aggregate
purchase price of approximately $326,350. The 14 retirement communities
are leased to a subsidiary of Marriott International, Inc. (together
with its subsidiaries, "Marriott") and the lease obligation is
guaranteed by Marriott through the year 2013.
The obligations of Marriott are cross defaulted, cross guaranteed
and cross secured. In the event Marriott's debt rating decreases to
below "investment grade", Marriott is required to provide the Company a
cash security deposit of approximately $6,911.
In addition, during 1994 the Company terminated the leases on
thirteen properties. Seven of these properties have been leased to
Horizon Healthcare Corporation (Horizon) on substantially similar terms,
with the leases extended through 2005, and the Company has granted
Horizon a ten year option to buy the seven properties, at the rate of no
more than one property per consecutive twelve month period. Three of
the properties have been leased to a newly formed corporation, an
affiliate of HRPT Advisors, Inc. ("Advisor"), on substantially similar
terms. These three properties are being managed by, and the lease
payments are guaranteed by, Horizon for a term of up to five years. The
three remaining properties were sold for approximately $28,400. The
Company realized a gain of approximately $3,994 on the sale. In
January, 1995, Horizon purchased one of the seven leased properties from
F-10
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
the Company for $24,500 and the Company realized a gain of
approximately $2,476. The Company provided Horizon a $19,500 mortgage
with a maturity of 2010 in connection with the sale of the property.
The various leases and mortgages with another lessee, GranCare, Inc.
(together with its subsidiaries, "GranCare") are secured by the pledge
to the Company of 1,000,000 shares of the Company's common stock held by
Grancare and substantially all the assets of the special operating
subsidiaries. All obligations of GranCare are cross defaulted, cross
guaranteed and cross secured.
The leases, mortgages and note due to the Company by Community Care
of America ("CCA") and its subsidiaries are secured by a $3,800 cash
security deposit, by a pledge of substantially all the assets of certain
of the operating CCA subsidiaries and by a guarantee from the parent
corporation. Substantially all of the CCA obligations are cross
defaulted, cross guaranteed and cross secured.
The future minimum lease payments to be received by the Company
during the current terms of the leases as of December 31, 1994, are
approximately $70,422 in 1995, $70,397 in 1996, $65,305 in 1997, $65,046
in 1998, $60,640 in 1999 and $636,377 thereafter.
Note 4. Real Estate Mortgages and Notes, net
December 31,
1993 1994
Mortgage notes receivable, net of
discounts of $11,951 and $5,817,
respectively, due July 1995
through December 2016 $124,367 $ 92,560
Mortgage note receivable due
December 2016 13,600 13,600
Amount due on investment held for sale,
net of reserve of $10,000 - 9,947
Mortgage note receivable due
December 2000 10,283 9,683
Secured note due December 2016 7,000 7,000
Other secured notes receivable 816 687
Loan to an affiliate 1,215 -
$157,281 $133,477
At December 31, 1994, the interest rates on the mortgages range from
6.6% to 13.75%.
During 1994, the Company provided two mortgage loans secured by two
properties for $9,400. One of these properties was previously owned by
the Company. In addition, 23 mortgage loans, secured by 19 properties,
F-11
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
with outstanding principal balances aggregating approximately $48,667
were repaid.
In the fourth quarter of 1994, the Company agreed to sell its two
psychiatric properties to the current operator, with a financial effect
of September 1, 1994 ("Sale Date"). The sales price is being determined
by a judicially supervised appraisal process and payments made to the
Company, subsequent to Sale Date, on this investment, are being
classified as interest and principal. Accordingly, at December 31,
1994, the Company has classified these properties as a mortgage
receivable and has made a provision for a loss on this investment of
approximately $10,000.
Note 5. Shareholders' Equity
During January 1994 and May 1994, the Company issued 601,500 and
12,650,000 common shares of beneficial interest, respectively, and
received net proceeds of approximately $8,301 and $174,065,
respectively.
In October, 1994, the Company adopted a Shareholders Rights Plan
("Plan") and declared a dividend of one right for each outstanding
common share of beneficial interest ("Right"). Each Right entitles the
holder to purchase one one-hundredth of a preferred share of beneficial
interest, $.01 par value, or in certain circumstances, to receive cash,
property, common shares or other securities of the Company, at a
purchase price of $50 per one-hundredth of a preferred share, subject to
adjustment. Upon the occurrence of certain events the holder of the
Right will be entitled to acquire common shares at 50% of the then
current market value of the shares. The Rights expire on October 17,
2004 and are redeemable at the Company's option at any time at $.01 per
Right.
The Company has reserved 1,000,000 shares of the Company's stock,
under the terms of the 1992 Incentive Share Award Plan ("Award Plan").
The Award Plan provides for the grant of the Company's stock to selected
officers, Trustees and others rendering valuable services to the
Company. During 1992, 1993 and 1994, 6,000, 6,000 and 11,000 shares,
respectively, were granted to officers of the Company and certain
employees of Advisors and 500 shares, annually, were granted to each of
the three Independent Trustees, as part of their annual fee. The shares
granted to the Trustees vest immediately. The shares granted to others
vest over a three year period. At December 31, 1994, 972,500 shares of
the Company remain reserved for issuance under the Award Plan.
Note 6. Financing Commitments
At December 31, 1994, the Company had total commitments aggregating
$58,148, of which $8,603 is committed to finance improvements to certain
F-12
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
properties leased or mortgaged by the Company. During 1994, the Company
funded approximately $11,088 of such improvements.
Note 7. Transactions With Affiliates
The Company has an agreement with the Advisor whereby the Advisor
provides investment, management and administrative services to the
Company. The Advisor is owned by Gerard M. Martin and Barry M. Portnoy.
Messrs. Martin and Portnoy are directors of Horizon, shareholders of
Connecticut Subacute Corporation ("CSC") and Connecticut Subacute
Corporation II ("CSCII"), lessees of the Company, and are Managing-
Trustees of the Company. The Company has extended a $4,000 line of
credit to CSC until June 30, 1995. At December 31, 1994, there were no
amounts outstanding under this agreement. Mr. Portnoy is a partner in
the law firm which provides legal services to the Company and was a
minority shareholder of the owner of Continuing Health Care Corporation,
a company which formerly leased or mortgaged properties from the
Company. Mr. Martin, until February 1994, was the majority shareholder
of Greenery Rehabilitation Group, Inc. ("Greenery"), one of the
Company's original sponsors and major tenant.
The Advisor is compensated at an annual rate equal to .7% of the
Company's real estate investments up to $250 million and .5% of such
investments thereafter. The Advisor is entitled to an incentive fee
comprised of restricted shares of the Company's common stock based on a
formula. Advisory fees for the years ended December 31, 1992, 1993 and
1994 were $2,231, $2,591 and $3,839, respectively. Incentive fees for
1994 were $239 which represents approximately 17,869 common shares. At
December 31, 1994, the Advisor owned 996,250 common shares.
Amounts resulting from transactions with affiliates included in the
accompanying statements of income, shareholders' equity and cash flows
are as follows:
F-13
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Year Ended December 31,
1992 1993 1994
Dividends paid to the Advisor $ 1,245 $ 1,285 $1,315
Dividends paid to Continuing
Health and affiliates 2,500 - -
Rent from Greenery 17,531 22,527 2,689
Rent and interest income from CSC 929 4,483 4,835
Rent from CSC II - - 3,646
Rent and interest income from
Continuing Health and affiliates 10,218 - -
Interest expense paid to Greenery 31 270 -
Note 8. Indebtedness December 31,
1993 1994
Term loan payable, repaid in February 1994 $ 33,000 $ -
$40,000 revolving line of credit, repaid
in February 1994 40,000 -
$170,000 unsecured revolving credit facility,
due August 1998, interest based on LIBOR - -
Senior Notes, Series A due July 1999
at LIBOR plus 1.05% - 75,000
Senior Notes, Series B, due July 1999
at LIBOR plus .72% - 125,000
Revenue Refunding Bonds, Series 1991A, due
August 2010 at 7.75% - 13,950
Revenue Refunding Bonds, Series 1991B, due
August 2009 at 7.75% - 3,670
-------- ---------
73,000 217,620
Less unamortized discount - (1,107)
-------- ---------
$ 73,000 $216,513
======== =========
During 1994, the Company entered into a new revolving credit
arrangement, aggregating $170,000, and repaid borrowings then
outstanding. In connection with the prepayments, the Company terminated
certain interest rate hedge arrangements, wrote off certain deferred
costs related to the prepayment and recorded an extraordinary charge of
approximately $1,953. In addition, the Company received net proceeds
F-14
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
after financing costs of $197,270 from the issuance of $200,000 Series A
and Series B Senior Notes, issued at par and at a discount,
respectively. The Series A notes may be called, at the Company's
option, beginning in April 1995. The Series B notes may be called, at
the Company's option, beginning in July 1996.
In association with the purchase of the Marriott properties, the
Company assumed bonds payable of $17,620. These notes are secured by
first mortgage liens on two retirement communities having an aggregate
net book value of $67,997 at December 31, 1994, and by a $17,802 letter
of credit.
At December 31, 1994, the Company had interest rate hedge agreements
which cap interest rates on up to $200,000 of borrowings. The maximum
average rates payable on such borrowings under these arrangements is
6.85% per annum over the terms of the agreements. The maturities of the
hedge agreements range from 1995 through 1998.
The required principal payments for the next five years of $200,000
are due in 1999.
Note 9. Concentration of credit risk
Substantially all of the Company's assets are invested in income
producing health care related real estate. At December 31, 1994, the
Company's significant lessees and mortgagors are as follows:
Notes,
Mortgages and 1994
Real Estate Rent and Mortgage
Properties, Net Interest Revenue
%of %of
Amount Total Amount Total
Marriott $321,199 42% $14,762 18%
Horizon 123,740 16 15,386 18
GranCare 86,064 11 14,483 17
Other 235,987 31 39,139 47
-------- --- ------- ---
$766,990 100% $83,770 100%
======== === ======= ===
Note 10. Fair value of financial instruments.
F-15
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
At December 31, 1994, the carrying amounts and fair values of
the Company's financial instruments are as follows:
Carrying Amount Fair Value
Real estate mortgages and notes $ 133,477 $ 133,850
Cash and cash equivalents 59,766 59,766
Interest rate hedging agreements 3,548 8,381
Notes and bonds payable 216,513 216,045
Security deposits 3,800 3,800
Financing commitments - 58,148
Off-Balance-Sheet item:
Letter of credit - 267
Cash and cash equivalents, security deposits and financing
commitments approximate fair values. Interest rate hedging agreements
are based on quoted market prices. The fair values of notes and bonds
payable are based on estimates using discounted cash flow analysis and
currently prevailing rates. The fair value of the letter of credit is
based on fees currently charged to enter into similar agreements taking
into account the remaining term and the counter party's credit standing.
F-16
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Note 11. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly
results of operations of the Company for 1993 and 1994.
1993
First Second Third
Fourth
Quarter Quarter Quarter
Quarter
Revenues $12,650 $13,763 $14,727
$15,345
Income before gain (loss)
on sale of property and
extraordinary items 8,409 9,536 9,739 10,054
Income before extraordinary items 8,409 9,536 9,739
10,054
Extraordinary items (3,392) - -
(929)
Net income 5,017 9,536 9,739 9,125
Per share data:
Income before gain (loss)
on sale of property and
extraordinary items .27 .27 .28 .28
Income before extraordinary items .27 .27 .28
.28
Net income .16 .27 .28 .26
1994
First Second Third
Fourth
Quarter Quarter Quarter
Quarter
Revenues $17,547 $19,916 $23,816
$25,404
Income before gain (loss)
on sale of property and
extraordinary items 12,650 14,334 15,588 15,306
Income before extraordinary items 16,644 14,334 15,588
5,306
F-17
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Extraordinary items - (1,953) -
-
Net income 16,644 12,381 15,588 5,306
Per share data:
Income before gain (loss)
on sale of property and
extraordinary items .28 .28 .27 .27
Income before extraordinary items .37 .28 .27
.09
Net income .37 .24 .27 .09
Note 12. Subsequent Events and Pro Forma Information (Unaudited)
On January 24, 1995, the Company provided first mortgage
financing of $11,500, due in 2007, secured by four assisted living
properties and operated by a newly created health care operating
company. The borrower has provided a $1,000 cash security deposit to
guarantee its obligations to the Company.
In addition, on January 31, 1995, the Company acquired nine
nursing facilities for approximately $32,000. The facilities have been
leased to a newly formed corporation which is an affiliate of the
Company. The purchase price paid was approximately $8,132 in cash and
1,777,768 shares of the Company's common stock.
The Company entered into a commitment to purchase and lease
11 nursing properties for $18,000 and provide first mortgage financing
of $2,045, secured by three nursing properties, to a subsidiary of an
existing tenant, on terms substantially similar to the Company's
existing lease and mortgage agreements. The acquisition is expected to
close on or about April 1, 1995.
The Company has entered into a commitment of approximately
$45,000, subject to adjustment, to purchase and lease 14 nursing
properties located in the United Kingdom, on terms substantially similar
to the Company's existing lease agreements. This investment will be
funded in British Sterling. The acquisition is expected to close in
installments beginning in April 1995 with the entire transaction
completed by December 31, 1995.
The Company entered into a purchase and lease agreement with
a subsidiary of Host Marriott Corporation ("Host Marriott") for 21
Courtyard by Marriott hotel properties for approximately $179,400,
subject to adjustment. The properties will be leased for an initial
term of 12 years, with renewal options of an additional 37 years to a
subsidiary of Host Marriott, and will be managed by a subsidiary of
F-18
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Marriott International. A portion of the purchase price equal to one
year's rent will be withheld by the Company to guarantee the rent
obligations to the Company. The acquisition is expected to close in
March 1995.
The following summarized Pro Forma Statements of Income
assume that the 1994 transactions described in Notes 3 and 4, the
issuance of the Company's common shares and senior notes during 1994 and
the transactions described above had occurred on January 1, 1993, and
give effect to the Company's borrowing rates throughout the periods
indicated.
The summarized Pro Forma Balance Sheet is intended to
present the financial position of the Company as if the transactions
described in Note 14 had occurred on December 31, 1994.
These pro forma statements are not necessarily indicative of
the expected results of operations or the Company's financial position
for any future period. Differences could result from, but are not
F-19
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
limited to, additional property investments, changes in interest rates
and changes in the debt and/or equity structure of the Company.
Year Ended December 31,
Pro Forma Statements of Income 1993 1994
(Unaudited)
Total revenues $105,888 $123,903
Total expenses 42,276 54,308
-------- --------
Net income $ 63,612 $ 69,595
======== ========
Weighted average shares
outstanding (in thousands) 59,163 59,163
======== ========
Net income per share $ 1.08 $ 1.18
======== ========
December 31,
Pro Forma Balance Sheet 1994
(Unaudited)
Real estate properties, net $ 885,802
Real estate mortgages and notes, net 156,575
Other assets 17,686
----------
Total assets $1,060,063
==========
Indebtednes $ 391,513
Other liabilities 40,254
Shareholders' equity 628,296
----------
Total liabilities and
shareholders' equity $1,060,603
==========
F-20
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(Dollars in thousands)
Costs
Capatilized Gross Amount at
Subsequent Which Carried at
Original
Initial Cost to Company to Close of Period Accum. Date
Construction
Location State Land Building Equipment Acquisition Land Building Equipment
Total (1) Deprn (2) Acquired Date
YUMA AZ 223 1,984 116 4 223 1,988 116 2,327 148 6/30/92 1984
PHOENIX AZ 655 2,366 159 5 655 2,371 159 3,185 181 6/30/92 1963
YUMA AZ 103 569 35 1 103 570 35 708 43 6/30/92 1984
SCOTTSDALE AZ 979 8,807 0 140 990 8,936 0 9,926 174 5/16/94 1990
SUN CITY AZ 1,174 10,569 0 173 1,189 10,727 0 11,916 173 6/17/94 1990
NEWPORT BEACH CA 1,176 1,584 145 1,223 1,176 2,785 167 4,128 256 12/28/90 1962
SAN DIEGO CA 1,114 964 109 480 1,114 1,402 151 2,667 177 12/28/90 1969
LANCASTER CA 601 1,736 123 1,009 601 2,667 201 3,469 267 12/28/90 1963
FRESNO CA 738 2,411 166 188 738 2,554 211 3,503 320 12/28/90 1968
PALM SPRINGS CA 103 1,196 68 982 103 2,147 99 2,349 183 12/28/90 1969
TARZANA CA 1,277 864 113 806 1,278 1,648 134 3,060 193 12/28/90 1969
THOUSAND OAKS CA 622 2,365 157 310 622 2,647 185 3,454 312 12/28/90 1965
VAN NUYS CA 716 322 56 225 718 503 98 1,319 72 12/28/90 1969
STOCKTON CA 382 2,593 157 4 382 2,597 157 3,136 195 6/30/92 1968
LAGUNA HILLS CA 3,132 28,184 0 473 3,172 28,617 0 31,789 251 9/9/94 1975
COLORADO SPRINGS CO 23 777 0 114 26 888 0 914 7 11/1/94 1960
GRAND JUNCTION CO 136 2,311 272 67 136 2,378 272 2,786 84 12/30/93 1978
GRAND JUNCTION CO 204 3,467 408 135 204 3,602 408 4,214 127 12/30/93 1968
PAONIA CO 115 1,950 229 25 115 1,975 229 2,319 71 12/30/93 1981
LAKEWOOD CO 232 3,566 200 724 232 4,285 205 4,722 473 12/28/90 1972
LITTLETON CO 185 4,782 261 349 185 5,051 341 5,577 606 12/28/90 1965
NEW HAVEN CT 1,681 14,201 752 94 1,681 14,295 752 16,728 1,097 5/11/92 1971
CHESHIRE CT 520 7,110 270 111 520 7,221 270 8,011 1,453 11/1/87 1963
WILLIMANTIC CT 134 3,316 250 479 166 3,763 250 4,179 847 5/15/87 1965
WATERFORD CT 86 4,214 500 453 87 4,667 499 5,253 1,181 5/15/87 1965
KILLINGLY CT 240 4,910 450 460 240 5,371 449 6,060 1,283 5/15/87 1972
BOCA RATON FL 4,404 39,633 0 797 4,474 40,360 0 44,834 754 5/20/94 1994
Ft. MYERS FL 2,349 21,137 0 419 2,385 21,520 0 23,905 233 8/16/94 1984
DEERFIELD BEACH FL 1,664 14,972 0 298 1,690 15,244 0 16,934 287 5/16/94 1986
F-21
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
PALM HARBOR FL 3,327 29,945 0 595 3,379 30,488 0 33,867 544 5/16/94 1992
PORT ST. LUCIE FL 1,223 11,009 0 219 1,242 11,209 0 12,451 221 5/20/94 1993
CLARINDA IA 77 1,300 153 57 77 1,357 153 1,587 47 12/30/93 1968
MEDIAPOLIS IA 94 1,589 187 69 94 1,658 187 1,939 58 12/30/93 1973
MUSCATINE IA 246 4,190 493 170 245 4,362 492 5,099 153 12/30/93 1964
TOLEDO IA 153 2,601 306 131 153 2,732 306 3,191 95 12/30/93 1975
WINTERSET IA 111 1,878 221 103 111 1,981 221 2,313 69 12/30/93 1973
COUNCIL BLUFFS IA 50 467 0 32 50 499 0 549 19 6/4/93 1970
NASHVILLE IL 75 2,424 132 80 75 2,458 178 2,711 301 12/28/90 1964
ARLINTON HEIGHTS IL 3,621 32,587 0 534 3,665 33,077 0 36,742 286 9/9/94 1986
SMITH CENTER KS 111 1,878 221 60 111 1,938 221 2,270 69 12/30/93 1971
SILVER SPRING MD 3,229 29,065 0 786 3,301 29,779 0 33,080 386 7/25/94 1992
TARKIO MO 102 1,734 204 25 102 1,759 204 2,065 63 12/30/93 1970
St. JOSEPH MO 111 1,027 0 32 111 1,059 0 1,170 40 6/4/93 1976
AKRON OH 330 4,970 400 727 330 5,697 400 6,427 1,302 5/15/87 1971
GROVE CITY OH 332 3,081 0 32 332 3,113 0 3,445 119 6/4/93 1965
HURON SD 144 2,945 163 4 144 2,949 163 3,256 218 6/30/92 1968
HURON SD 45 917 51 1 44 919 51 1,014 68 6/30/92 1968
SIOUX FALLS SD 253 2,896 166 4 253 2,900 166 3,319 215 6/30/92 1960
BELLAIRE TX 1,223 11,010 0 178 1,238 11,173 0 12,411 200 5/16/94 1991
CHARLOTTESVILLE VA 2,936 26,422 0 472 2,976 26,854 0 29,830 418 6/17/94 1991
ARLINTON VA 1,859 16,734 0 295 1,885 17,003 0 18,888 249 7/25/94 1992
VIRGINIA BEACH VA 881 7,926 0 137 893 8,051 0 8,944 146 5/16/94 1990
SEATTLE WA 256 4,356 513 68 256 4,424 513 5,193 172 11/1/93 1972
MILWAUKEE WI 277 3,594 289 0 277 3,594 289 4,160 313 3/27/92 1969
CLINTONVILLE WI 49 1,542 83 88 30 1,640 92 1,762 193 12/28/90 1965
MILWAUKEE WI 116 3,260 178 123 116 3,379 182 3,677 397 12/28/90 1960
CLINTONVILLE WI 14 1,610 85 37 14 1,640 92 1,746 195 12/28/90 1960
MADISON WI 144 1,544 89 109 144 1,651 91 1,886 195 12/28/90 1920
WAUKESHA WI 68 3,276 176 1,912 68 5,185 179 5,432 427 12/28/90 1958
BROOKFIELD WI 834 3,615 234 5,643 834 9,258 234 10,326 560 12/28/90 1954
LARAMIE WY 191 3,250 382 76 191 3,326 382 3,899 116 12/30/93 1964
SARATOGA WY 13 1,487 0 126 14 1,612 0 1,626 17 11/1/94 1974
WORLAND WY 132 2,239 264 37 132 2,276 264 2,672 79 12/30/93 1970
Total Long-term Care
and Retirement 47,595421,228 9,986 23,510 48,092 443,779 10,448 502,319 19,398
WALLINGFORD CT 557 10,649 394 1,023 557 11,672 394 12,623 2,405 12/23/86 1974
WATERBURY CT 514 9,822 364 523 514 10,345 364 11,223 2,216 12/23/86 1971
FORESTVILLE CT 465 8,905 330 1,233 465 10,138 330 10,933 2,034 12/23/86 1972
WATERBURY CT 1,003 8,522 501 0 1,003 8,522 501 10,026 669 5/11/92 1974
SLIDELL LA 2,323 19,745 1,161 1,147 2,353 20,847 1,176 24,376 2,352 3/1/91 1984
BOSTON MA 2,164 19,836 1,000 1,977 2,163 21,814 1,000 24,977 3,440 5/1/89 1968
WORCESTER MA 1,829 14,186 885 1,869 1,829 16,055 885 18,769 2,991 5/1/88 1970
F-22
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
HYANNIS MA 829 7,048 415 0 829 7,048 415 8,292 553 5/11/92 1972
MIDDLEBORO MA 1,771 14,961 791 0 1,771 14,961 791 17,523 1,154 5/11/92 1975
NORTH ANDOVER MA 1,448 10,435 614 0 1,448 10,435 614 12,497 820 5/11/92 1985
CANONSBURG PA 1,499 12,743 750 606 1,518 13,320 760 15,598 1,508 3/1/91 1985
Total
Rehabilitation
Hospitals 14,402 136,852 7,205 8,378 14,450145,157 7,230166,837 20,142
SACRAMENTO CA 644 3,206 0 77 644 3,283 0 3,927 30 8/30/94 1984
Total Other 644 3,206 0 77 644 3,283 0 3,927 30
Total
Real Estate $62,641$561,286$17,191 $31,965 $63,186$592,219 $17,678$673,083 $39,570
(1) Aggregate cost for federal income tax purposes is approximately $636,427.
(2) Depreciation is provided for on buildings and improvements over 40 years, equipment over 12 years.
Real Estate and Accumulated
Equipment Depreciation
Balance at January 1, 1992 $281,766 $19,209
Additions 56,447 8,122
Adjustments to exchange contract (1,137) (1,137)
Balance at December 31, 1992 337,076 26,194
Additions 47,735 8,775
Balance at December 31, 1993 384,811 34,969
Additions 341,610 13,594
Disposals (53,338) (8,993)
Balance at December 31, 1994 $673,083 $39,570
F-23
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
(Dollars in thousands)
Principal
Amount of
Loans Subject
Final (1) to Delinquent
Interest Maturity Periodic Payment Face Value Carry Value Principal
Location Rate Date Terms of Mortgage of Mortgage or Interest
- - - ------------------ -------- --------- ----------------- ----------- ----------- -------------
OMAHA, NE 9.000% 11/1/97 Principal & Interest payable 4,163 3,904 -
monthly in arrears. $3.9 million
due at maturity
FARMINGTON, MI 11.500% 12/31/00 Interest only payable monthly 4,300 4,300 -
in arrears. $4.1 million due
at maturity
TORRANCE, CA 10.460% 1/1/97 Principal & Interest payable 5,087 5,087 294
monthly in arrears. $5.0 million
due at maturity
HOWELL, MI 11.500% 12/31/00 Interest only payable monthly 5,100 5,100 -
in arrears. $4.8 million due
at maturity
CARROLLTON, GA } 9.500% 8/10/95 Principal & Interest payable 5,224 5,152 -
CUMMING, GA } monthly in arrears. $5.2 million
CEDARTOWN, GA } due at maturity
AINSWORTH, NE }
ASHLAND, NE }
BLUE HILL, NE } 9.000% 12/31/16 Interest only payable monthly 6,796 6,796
CENTRAL CITY, NE } in arrears. $2.0 million due
GRETNA, NE } at maturity
SUTHERLAND, NE }
WAVERLY, NE }
MEDINA, OH 6.625% 2/1/98 Principal & Interest payable 6,012 5,633 -
monthly in arrears. $6.5 million
F-24
due at maturity
MILWAUKEE, WI } 13.750% 12/28/00 Principal & Interest payable 8,800 8,800 -
PEWAUKEE, WI } monthly in advance. $4.9 million
due at maturity
CANON CITY, CO } 11.500% 12/31/16 Interest only payable monthly 14,019 14,019 -
DELTA, CO } in arrears. $5.4 million due
COLORADO SPRINGS,CO } at maturity
HICKORY, NC } 9.500% 1995 Principal & Interest payable 19,947 9,947
LOUISVILLE, KY } monthly in arrears (2)
32 MORTGAGES 7.187%-11.25% 3/95-3/01 N/A 62,163 57,053 373
----------------------------------------
TOTAL $141,611 $125,791 $667
========================================
<FN>
(1) Also represents cost for federal income tax purposes.
(2) Amounts due on two real estate facilities sold effective 9/1/94. The sale price is being determined by
a judicially supervised appraisal process. The write down is due to the general decline in the value of
such types of property.
Reconciliation of the carrying amount of mortgage loans at the beginning of the period.
Balance at January 1, 1992 $ 31,760
New Mortgage Loans 19,573
Collections of Principal (4,160)
--------
Balance at December 31, 1992 47,173
New Mortgage Loans 133,939
Amortization of Discount 965
Collections of Principal (33,827)
--------
Balance at December 31, 1993 148,250
New Mortgage Loans 11,772
Reclassification of real estate investment 9,947
Amortization of Discount 4,597
Collections of Principal (48,775)
--------
Balance at December 31, 1994 $125,791
F-25
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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.
HEALTH AND RETIREMENT PROPERTIES TRUST
By:/S/ David J. Hegarty
David J. Hegarty
Executive Vice President and
Chief Financial Officer
Dated: March 30, 1995
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/ Mark J. Finkelstein* President and Chief March 30, 1995
Mark J. Finkelstein Executive Officer
/s/ David J. Hegarty* Executive Vice March 30, 1995
David J. Hegarty President and Chief
Financial Officer
/s/ John L. Harrington* Trustee March 30, 1995
John L. Harrington
/s/ Arthur G. Koumantzelis* Trustee March 30, 1995
Arthur G. Koumantzelis
/s/ Justinian Manning, C.P.* Trustee March 30, 1995
Rev. Justinian Manning,
C.P.
/s/ Gerard M. Martin* Trustee March 30, 1995
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 30, 1995
F-26
Barry M. Portnoy
*By: /s/ Barry M. Portnoy
Barry M. Portnoy
Attorney-in-fact
/TABLE
POWER OF ATTORNEY
The undersigned Officers and Trustees of Health and Retirement
Properties Trust hereby severally constitue Mark J. Finkelstein, David
J. Hegarty, Gerard M. Martin and Barry M. Portnoy, and each of them, to
sign for us and in our names in the capacities indicated below, the
Annual Report on Form 10-K herewith filed with the Securities and
Exchange Commission, and any and all amendments thereto, hereby
ratifying and confirming our signatures as they may be signed by our
said attorneys to the Annual Report on Form 10-K and any and all
amendments to the Annual Report on Form 10-K.
Witness our hands and seals on the dates set forth below.
Signature Title Date
/s/ MARK J. FINKELSTEIN President and Chief March 30, 1995
Mark J. Finkelstein Executive Officer
/s/ DAVID J. HEGARTY Executive Vice March 30, 1995
David J. Hegarty President and Chief
Financial Officer
/s/ JOHN L. HARRINGTON Trustee March 30, 1995
John L. Harrington
/s/ ARTHUR G. KOUMANTZELIS Trustee March 30, 1995
Arthur G. Koumantzelis
/s/ REV. JUSTINIAN MANNING Trustee March 30, 1995
Rev. Justinian Manning,
C.P.
/s/ GERARD M. MARTIN Trustee March 30, 1995
Gerard M. Martin
/s/ BARRY M. PORTNOY Trustee March 30, 1995
Barry M. Portnoy
F-28