HEALTH AND RETIREMENT PROPERTIES TRUST
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-9317
HEALTH AND RETIREMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
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 exchange on
Title of each class which registered
- -----------------------------------------------------------------------------------------------------
Common Shares of Beneficial Interest New York Stock Exchange
7.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange
7.5% Convertible Subordinated Debentures due 2003, Series A New York Stock Exchange
Remarketed Reset Notes 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]
HEALTH AND RETIREMENT PROPERTIES TRUST
The aggregate market value of the voting stock of the registrant held
by non-affiliates was $1.9 billion based on the $19.6875 closing price per share
for such stock on the New York Stock Exchange on March 5, 1998. For purposes of
this calculation, 3,912,138 shares held by HRPT Advisors, Inc. (the "Advisor"),
including a total of 2,777,766 shares held by Advisor solely in its capacity as
voting Trustee under certain voting Trust agreements, 4,019,429 shares held by
Government Properties Investors, Inc. subject to certain voting agreements with
the Company and an aggregate of 30,550 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 1, 1998: 104,467,050.
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 12, 1998. The financial
statements and financial statement schedules for Marriott International, Inc.
("Marriott") are incorporated herein by reference to Marriott's Annual Report on
Form 10-K for the year ended January 2, 1998, Commission file No. 1-12188.
CERTAIN IMPORTANT FACTORS
The Company's Annual Report on Form 10-K contains statements which
constitute forward looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Those statements appear in a number of places in
this Form 10-K and include statements regarding the intent, belief or
expectations of the Company, its Trustees or its officers with respect to
expansion of the Company's portfolio, its ability to pay dividends, its tax
status as a real estate investment trust and the Company's access to debt or
equity capital markets or to other sources of funds and statements of
assumptions underlying such statements as to intent, belief or expectations.
Readers are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties and that
actual results may differ materially from those contained in the forward looking
statements as a result of various factors. Such factors include the status of
the economy, compliance with and changes to regulations and payment and
reimbursement policies within the health care industry, competition within the
health care industry, and changes to federal, state and local legislation. The
accompanying information contained or incorporated by reference in this Annual
Report on Form 10-K, including under the heading "Business" and in the Company's
Current Report on Form 8-K dated February 27, 1998, under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies other important factors that could cause such
differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED JULY 1,
1994, 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 COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY,
JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL
PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF
THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
HEALTH AND RETIREMENT PROPERTIES TRUST
1997 FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Page
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 20
Item 3. Legal Proceedings............................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............................. 23
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters....... 23
Item 6. Selected Financial Data......................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 25
Item 8. Financial Statements and Supplementary Data..................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 26
Part III
Item 10. Directors and Executive Officers of the Registrant.............................. *
Item 11. Executive Compensation.......................................................... *
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. *
Item 13. Certain Relationships and Related Transactions.................................. *
* Incorporated by reference from the Company's Proxy
Statement for the Annual Meeting of Shareholders currently
scheduled to be held on May 12, 1998, to be filed pursuant
to Regulation 14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 26
References in this Annual Report on Form 10-K to the "Company" or "HRP"
include consolidated subsidiaries, unless the context indicates otherwise.
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 invests in income producing real estate, including retirement
communities, assisted living centers, long-term care facilities, medical office
and other office buildings and office buildings leased to various agencies of
the United States Government. The facilities in which the Company has made
investments by mortgage, purchase/lease or merger transactions are hereinafter
referred to individually as a "Property" and collectively as "Properties".
As of December 31, 1997, the Company directly owned 183 Properties
representing an aggregate investment of $2.0 billion (at cost), had mortgage
investments in 34 Properties aggregating $104.3 million and had a 10.3% equity
investment in Hospitality Properties Trust ("HPT") of approximately $111.1
million (carrying value), for total real estate investments of approximately
$2.2 billion. The Properties are described in -"Business Developments Since
January 1, 1997" and "Properties".
Number of Total Investment
State Properties at December 31, 1997
- ----- ---------- --------------------
(in thousands)
Alaska ................................... 1 $ 1,000
Arizona .................................. 9 64,490
California ............................... 31 318,861
Colorado ................................. 11 52,434
Connecticut .............................. 9 96,476
District of Columbia ..................... 4 145,124
Florida .................................. 6 136,989
Georgia .................................. 5 15,181
Illinois ................................. 3 101,454
Iowa ..................................... 7 8,205
Kansas ................................... 4 7,544
Louisiana ................................ 1 19,185
Maryland ................................. 6 147,661
Massachusetts ............................ 30 203,016
Michigan ................................. 2 9,267
Missouri ................................. 3 11,424
Nebraska ................................. 10 10,733
New Hampshire ............................ 1 3,689
New Jersey ............................... 1 13,007
New Mexico ............................... 2 10,813
New York ................................. 5 164,848
North Carolina ........................... 6 15,944
Ohio ..................................... 4 17,712
Oklahoma ................................. 1 24,426
Pennsylvania ............................. 8 127,287
Rhode Island ............................. 1 8,100
South Dakota ............................. 3 7,589
Texas .................................... 12 112,635
Vermont .................................. 8 29,766
Virginia ................................. 5 81,703
Washington ............................... 4 40,548
West Virginia ............................ 1 4,792
Wisconsin ................................ 9 44,029
Wyoming................................... 4 17,379
----- ---------
Total..................................... 217 2,073,311
===
Investment in HPT......................... 111,134
---------
Total Investments......................... $2,184,445
==========
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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 rent and interest payments under its leases and
mortgages.
The Company's day to day operations are conducted by REIT Management
and Research, Inc. ("RMR"), the Company's investment manager. RMR provides
investment, management, property management and administrative services to the
Company. RMR 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 historical and projected rents received
and likely to be received from the property to meet operational needs and
financing obligations and to provide a competitive market return on investment
to the Company; the historic and expected operating expenses, including real
estate taxes, incurred and expected to be incurred at the properties; the
growth, tax and regulatory environments of the market in which the property is
located; the quality, experience, and credit worthiness of the property's
operator and tenants; an appraisal of the property, if available; occupancy and
demand for similar properties in the same or nearby markets; the construction
quality, physical condition and design of the property; the geographic area and
type of property; and the pricing of comparable properties as evidenced by
recent arms length market sales.
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 are structured using leases with minimum
and/or additional rent and escalation 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 current bank credit facility (the "Credit
Facility"), the Company has agreed to obtain lender approval before exceeding
investment concentrations based on certain criteria (see - "Borrowing Policy").
Among these are that no more than 40% of its investments be operated by any
single tenant or mortgagor, that investments in a) rehabilitation treatment, b)
acute care, c) medical office and clinic buildings, and d) investments in
government office properties not exceed 40%, 15%, 55% and 40%, respectively, of
total investments and that no new psychiatric care or hotel investments be made.
The Company is currently in discussions with its lenders to modify these
restrictions. In addition to these restrictions, the Trustees may establish
limitations as they deem appropriate from time to time. No limits, other than
those in connection with the Credit Facility, 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 RMR,
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 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
present 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. The Company
has a Credit Facility for an aggregate amount of $450 million. The Company is
currently in discussion with the lenders under the Credit Facility to amend the
Credit Facility, to modify certain covenants of the Company and to increase the
maximum principal amount that may be outstanding. No assurances can be given at
this time that the Company and such lenders will reach a final agreement as to
such changes. The Credit Facility (which is guaranteed by certain of the
Company's subsidiaries) is used for acquisition
2
funding on an interim basis until equity or long term debt is raised, working
capital and general business purposes. Outstanding borrowings under the Credit
Facility at December 31, 1997 were $200 million.
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, 1997, the Company's
debt to equity ratio was .62 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.
Business Developments Since January 1, 1997
Investments
In February 1997, the Company entered into an agreement to acquire 30
office buildings containing 3.4 million square feet (the "Government Office
Properties"), substantially all of which are leased to various agencies of the
United States Government. As of December 31, 1997, the Company acquired 29
properties, one of which is under construction, and elected not to acquire one
property. Subsequent to December 31, 1997, one of the 29 properties was sold.
The Company's aggregate purchase price for the 29 properties (3.3 million square
feet) was approximately $439 million. The total purchase price for the
Government Office Properties was paid by the issuance of $77 million in shares,
the assumption of approximately $27 million of debt by subsidiaries of the
Company secured by mortgages on three acquired properties, and a net cash
payment of approximately $335 million, which was used in part to retire other
debt of the seller assumed by the Company as part of the acquisition transaction
and to pay closing costs.
During 1997, the Company purchased 42 medical and other office and
clinic buildings for an aggregate purchase price of approximately $525 million.
Acquisitions of facilities or buildings with a purchase price of at least $25
million included the following: (a) a first class office building in midtown
Manhattan containing approximately 420,368 square feet purchased in October 1997
for approximately $110 million (this building is 100% occupied under long term
leases to three tenants, with the majority of the building being leased to
Health Insurance Plan of Greater New York, a large not-for-profit health
maintenance organization); (b) two first class buildings containing
approximately 330,715 square feet plus two parking structures for approximately
1,700 cars located in West Los Angeles purchased in May 1997 for approximately
$109 million (these buildings are known as the Cedars Sinai Medical Towers and
Garages and are located adjacent to the Cedars Sinai Medical Center, an
investment grade rated not-for-profit hospital which is also the largest tenant
in these buildings); (c) an office complex in Austin, Texas containing five
commercial office properties, with approximately 441,145 square feet purchased
in December 1997 for $79 million; (d) a first class 25 story office tower
located in Philadelphia containing approximately 608,161 square feet purchased
in November 1997 for approximately $79 million (approximately 98% of this
building is leased on a long-term basis to SmithKline Beecham Corporation, an
investment grade rated international pharmaceutical manufacturer and
distributor); and (e) 20 medical office and clinic buildings containing
approximately 373,500 square feet located in central Massachusetts purchased in
May 1997 for approximately $47 million (these buildings are triple net leased on
a long term basis to a regional health maintenance organization that is
partially owned by Tenet Healthcare Corporation). Certain of these properties
are gross leased and the net operating income which the Company realizes from
these investments will depend upon the efficiency with which the Company is able
to operate these buildings.
In May 1997, the Company purchased for $14 million a 200-unit
retirement housing property located in Spokane, Washington. This property and
three other retirement housing properties (629 units) purchased for $87.5
million in December 1996 are all net leased to Brookdale Living Communities,
Inc. ("BLCI") for an initial term of 23 years plus renewal options totaling an
additional 50 years. During 1997, BLCI was recapitalized by two public offerings
of equity and as of December 31, 1997 had an equity market capitalization of
over $124 million.
During the period January 1, 1998 through March 5, 1998, the Company
acquired 11 medical and other office buildings for $91.7 million. This
acquisition was funded in part with borrowings under the Company's bank credit
facility.
During the period January 1, 1997 through March 5, 1998, the Company
received $69.6 million of regularly scheduled principal payments and prepayments
of mortgage loans.
3
Financing
In October 1996, the Company sold three tranches of convertible
subordinated debentures totaling $240 million. All of these debentures are
convertible into common shares at a rate of $18 per share and are callable at
par by the Company at any time on or after October 1, 1999. During 1997, the
trading price of the Company's shares has averaged above $18 per share. Through
March 5, 1998, approximately $29.2 million of these debentures have been
converted into approximately 1.6 million common shares.
In March 1997, the Company issued 27,025,000 common shares in a public
offering. The gross proceeds of the offering were $510.1 million ($18.875 per
share), and the net proceeds to the Company were $483.2 million. Such net
proceeds were used to acquire the Government Office Properties. During February
1998, the Company issued an aggregate of 5,495,776 common shares in public
offerings and received net proceeds of $104.4 million, which were used to repay
amounts outstanding under the Company's Credit Facility, for acquisitions and
general business purposes.
In July 1997, the Company issued $200 million of Remarketed Reset Notes
due July 9, 2007 ("Reset Notes"). The net proceeds of that issuance
(approximately $199 million) were used to prepay other indebtedness of the
Company then due in 1999 ($125 million) and to reduce amounts outstanding under
the Company's Credit Facility. In February 1998, the Company issued an
additional $50 million aggregate principal amount of Reset Notes (the
"Additional Reset Notes"). Net proceeds from the offering of the Additional
Reset Notes were used to reduce amounts outstanding under the Company's bank
credit facility and for general business purposes. The Reset Notes currently
bear interest at a floating rate equal to three month LIBOR plus a spread of
.45% per annum. In July 1998, the Company will have the option to prepay the
Reset Notes or to have the Reset Notes remarketed and the interest rate reset on
either a floating or fixed rate basis.
In July 1997, the Company's $250 million unsecured revolving credit
facility with a syndicate of banks was increased to $450 million, and in March
1997, the term of the Credit Facility was extended to 2001. (See "--Borrowing
Policy" above.)
In December 1997, the Company issued $150 million of 6 3/4% Senior
Notes due 2002 (the "6 3/4% Notes") in a private placement to institutional
investors. The net proceeds from the offering (approximately $149 million) were
used to reduce amounts then outstanding under the Company's Credit Facility. The
Company has agreed with the initial purchasers of the 6 3/4% Notes to use its
best efforts to consummate an offer to exchange the 6 3/4% Notes for new notes
with terms substantially identical in all material respects to the 6 3/4% Notes,
which would be registered pursuant to the Securities Act.
Other Developments
Horizon/CMS Healthcare Corporation; HEALTHSOUTH Corporation; and
Integrated Health Services, Inc. As of December 31, 1997, the Company had
invested approximately $168 million, at cost, in properties that had been leased
by, mortgaged to or managed by Horizon/CMS Healthcare Corporation ("HHC"). In
October 1997, HHC merged into HEALTHSOUTH Corporation ("HEALTHSOUTH"). In return
for the Company's consent to this merger, HEALTHSOUTH agreed to guarantee
unconditionally all of the lease, mortgage and management obligations of HHC due
to the Company and to extend the terms of the management contracts of three
properties that were scheduled to expire during 1998 until 2001. In December
1997, HRP consented to the release of HEALTHSOUTH from the guarantee and to the
assignment of certain leases and mortgages from HEALTHSOUTH and its predecessor,
HHC, to Integrated Health Services, Inc. ("IHS") as part of a $1.2 billion
transaction between HEALTHSOUTH and IHS for nursing homes, specialty hospitals
and pharmacy services. In connection with this consent, IHS guaranteed leases,
mortgages and management obligations to HRP affecting the former HHC properties,
and the maturities of these leases, mortgages and management obligations, which
were previously scheduled for 2000, 2001 and 2005, were extended to 2006.
GranCare, Inc.; Living Centers of America, Inc.; and Paragon Health
Network, Inc. As of December 31, 1997, the Company had invested approximately
$98 million, at cost, in properties that had been leased to, or mortgaged by,
GranCare, Inc. ("GC"). In February 1997, GC distributed to its shareholders all
of its nursing home operations and merged its pharmacy business into Vitalink,
Inc. ("Vitalink"), another public company. Under the terms of the GC Vitalink
agreement, the GC nursing home operations became a new public company ("New
GC"), and certain subsidiaries of New GC remained tenants of and mortgagors to
the Company (the "Tenant
4
Subsidiaries"). The Company consented to this GC Vitalink transaction on certain
terms and conditions, including: (i) all of the leases and mortgages between the
Company and the Tenant Subsidiaries being cross defaulted, cross collateralized,
cross secured and unconditionally guaranteed by New GC; (ii) Vitalink providing
a $15 million unconditional guarantee of the obligations due to the Company; and
(iii) GC paying an amendment fee to the Company. In October 1997, New GC merged
into Living Centers of America, Inc. ("LCA"), another public company. As part of
the New GC LCA transaction a large number of LCA and New GC shares were
repurchased, LCA was recapitalized by new investors, the combined New GC LCA
enterprise changed its name to Paragon Health Network, Inc. ("Paragon"), and
Paragon solicited the Company to release Vitalink from its guaranty obligations
to the Company. The Company consented to the New GC LCA Paragon transaction and
released Vitalink from its guaranty on certain terms and conditions, including:
(a) certain mortgage obligations totaling approximately $11.5 million due to the
Company being prepaid in full; (b) certain properties owned by the Company and
leased to the Tenant Subsidiaries being exchanged for other properties formerly
owned by LCA or the Tenant Subsidiaries, which properties were to be leased to
the Tenant Subsidiaries; (c) the term of certain leases being extended and all
renewal options for properties leased to the Tenant Subsidiaries being renewable
only on an all or none basis; (d) the rent payable to the Company being
increased; (e) all obligations with respect to all properties leased or financed
with the Tenant Subsidiaries being guaranteed by Paragon and the guaranty being
secured by a cash deposit of $15 million; (f) all obligations of the Tenant
Subsidiaries being subject to cross default and cross collateralization, and
guaranteed by New GC (now a subsidiary of Paragon); and (g) payment to the
Company of an amendment fee.
Community Care of America, Inc. and Integrated Health Services, Inc. As
of December 31, 1997, the Company had invested approximately $112 million, at
cost, in properties that had been operated by Community Care of America, Inc.
("CCA"). In September 1997, CCA was acquired by IHS. The Company consented to
IHS's acquisition of CCA on certain terms and conditions including: (i)
mortgages due to the Company totaling approximately $12.2 million being prepaid
in full; (ii) certain properties formerly leased to CCA being purchased from the
Company at their historical cost of approximately $33.5 million; (iii) the
extension of terms of certain remaining leases and mortgages; (iv) the remaining
leases and mortgages being subject to cross default and cross collateralization,
and unconditionally guaranteed by IHS; and (v) payment to the Company of an
amendment fee.
Marriott Spin Off and Merger. As of December 31, 1997, the Company had
invested approximately $326 million, at cost, in properties leased to a
subsidiary of Marriott International, Inc. ("Marriott"). In October 1997,
Marriott announced a plan to dividend to its shareholders a new company which
will own and operate Marriott's lodging and senior living businesses and to
merge the remaining company with Sodexho S.A. As a result of this spin off and
merger the Company's current guarantor was expected to have a negative net worth
and its obligations were not expected to be rated investment grade. Upon
learning of this planned transaction, the Company commenced negotiations with
Marriott and, as a result of those negotiations, an agreement has been entered
into that will be effective upon consummation of the Marriott spin off and
merger transaction. This agreement requires that the spin off entity created by
Marriott assume the guarantee obligations to the Company. The new spin off
entity is expected to be investment grade rated.
In May 1997, the Company filed a $1.0 billion Shelf Registration
Statement on Form S-3 (the "Shelf") that has been declared effective by the
Securities and Exchange Commission. At March 1, 1998, $539.7 million was
available to be drawn on the Shelf.
The Investment Manager
RMR is a Delaware corporation owned by Gerard M. Martin and Barry M.
Portnoy. RMR's principal executive offices are located at 400 Centre Street,
Newton, Massachusetts 02158, and its telephone number is (617) 332-3990. As of
January 1, 1998, the Company entered into separate investment advisor and
property management agreements with RMR. RMR provides investment, management,
property management services for some of the recently acquired Government
Properties and medical and other office buildings and administrative services to
the Company. In addition, an affiliate of RMR also provides garage management
services to the Company. During the three years ended December 31, 1997, such
services were provided by Advisor, and M&P Partners Limited Partnership ("M&P")
on similar terms. RMR also acts as the investment manager to HPT and has other
business interests. The Directors of RMR are Gerard M. Martin, Barry M. Portnoy
and David J. Hegarty. The officers of RMR are David J. Hegarty, President and
Secretary, John G. Murray, Executive Vice President, John Popeo, Treasurer, and
Ajay Saini, John A. Mannix, David Lepore and Thomas M. O'Brien, Vice Presidents.
Gerard M. Martin and Barry M. Portnoy are Managing Trustees of the Company and
David J. Hegarty and Ajay Saini are
5
officers of the Company. The beneficial ownership of Advisor (which is the
General Partner of M&P) and M&P is the same as that of RMR and immediately prior
to January 1, 1998, the directors and officers of Advisor were the same as those
who currently hold positions with RMR.
Employees
As of March 5, 1998, the Company had no employees. RMR, which
administers the day-to-day operations of the Company, has 111 full-time
employees and three active directors.
Regulation and Reimbursement
Compliance with federal, state and local statutes and regulations
governing health care facilities is a prerequisite to continuation of the
Company's business. 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.
Certificates of Need. Certain of the Company's investments are in healthcare
properties which 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.
Federal Regulation. The Company's healthcare properties are affected by a number
of federal and state statutes and regulations including those related to
reimbursement under Medicare and Medicaid programs. Such laws, among other
things, limit reimbursement for capital costs and in some circumstances for
rental or lease expenses. Such laws also include federal and state anti-fraud
and anti-kickback statutes and regulations. The Balanced Budget Act of 1997
(Public Law 105-33) (the "BBA") directs the federal Department of Health and
Human Services ("HHS") to adopt a Medicare prospective payment system for
skilled nursing facilities which will include capital-related costs and which
will be phased in over four years beginning July 1, 1998. The BBA also increases
states' flexibility in establishing Medicaid rates for nursing facility
services, and strengthens the ability of HHS and the states to exclude providers
for health care-related offenses. An adverse determination concerning any
operator's licensure or eligibility for government reimbursement or its
compliance with applicable federal or state statutes on regulations could
materially and adversely affect such operator and its affiliates.
A number of legislative proposals that would affect major reforms of
the health care system have been introduced in Congress. 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, and additional Medicare and Medicaid reforms
and cost containment measures, including proposals that Medicaid be administered
through block grants to the states and per capita limits on state Medicaid
spending. The Company cannot predict whether any such legislative proposals will
be adopted or, if adopted, what effect, if any, such proposals would have on the
business of the Company or its lessees or mortgagors.
Competition.
The Company competes with other real estate investment trusts in that
each is continually seeking attractive investment opportunities in health care
facilities and other types of real estate. The Company also competes with banks,
non-bank finance companies, leasing companies and insurance companies.
6
FEDERAL INCOME TAX CONSIDERATIONS
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended and in effect from time to time (the "Code"), commencing with its
taxable year ending December 31, 1987. The Company believes it has been
organized and has operated in a manner that qualifies it to be taxed under the
Code as a REIT commencing with that taxable year, and the Company intends to
continue to operate in a manner to so qualify. No assurance can be given,
however, that the manner in which the Company has operated or will operate
qualified or will qualify the Company to be taxed as a REIT.
The Company has obtained legal opinions from its counsel Sullivan &
Worcester LLP 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, 1994, 1995, 1996 and 1997 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. These opinions are conditioned upon the assumption that
the leases, the Declaration and the Company's Bylaws, and all other legal
documents to which the Company is or has been a party have been and will be
complied with by all parties thereto, upon the accuracy and completeness of the
factual matters described in this Annual Report, and upon representations made
by the Company as to certain factual matters relating to the Company's
organization and operations and its expected manner of operation. In addition,
such opinions are based on the law then existing and in effect on the date
thereof. Opinions of counsel are not binding on the Internal Revenue Service
("IRS") or a court and there can be no assurance that the IRS or a court will
not take a position different from that expressed by counsel.
The Company's actual qualification and taxation as a REIT will depend
upon the Company's ability to meet on a continuing basis, through actual
operating results, asset composition, distribution levels, and diversity of
stock ownership, the various REIT qualification tests imposed under the Code,
discussed below. While the Company has represented that it has operated and will
operate in a manner so as to satisfy on a continuing basis the various REIT
qualification tests, Sullivan & Worcester LLP has not reviewed and will not
review compliance with these tests on a continuing basis, and no assurance can
be given that the Company has satisfied or will satisfy such tests on a
continuing basis. If the Company fails to qualify as a REIT in any year, it will
be subject to federal income taxation as if it were a domestic corporation, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In such an event, the Company could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
The following summary is based on existing law, is limited to investors
who will hold the Shares as "capital assets" within the meaning of Section 1221
of the Code (generally, property held for investment), is not exhaustive of all
possible tax considerations, and does not discuss any state, local, or foreign
tax considerations. Additionally, the following summary does not discuss the
particular tax consequences that might be relevant to holders of Shares who may
be subject to special rules under the federal income tax law, such as life
insurance companies, regulated investment companies, financial institutions,
brokers or dealers in securities or foreign currency, persons that have a
functional currency other than the U.S. dollar, persons who acquired Shares or
options to acquire Shares in connection with their employment or other
performance of services, persons subject to alternative minimum tax, persons who
hold Shares as part of a straddle, hedging transaction, or conversion
transaction or, except as specifically described herein, tax-exempt entities and
foreign persons. The sections of the Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are highly technical
and complex. The following summary is thus qualified in its entirety by the
applicable Code provisions, the rules and regulations promulgated thereunder,
and the administrative and judicial interpretations thereof, all of which are
subject to change, possibly with retroactive effect. Thus, no assurance can be
given that future legislative, judicial, or administrative actions or decisions
will not affect the accuracy of any statements in this summary. In addition, no
ruling has been or is expected to be sought from the IRS with respect to any
matter discussed herein, and there can be no assurance that the IRS or a court
will agree with the statements made herein. Accordingly, each shareholder 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.
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" (determined by excluding any net capital gain
and before taking into account any dividends paid deduction), it generally will
not be subject to federal corporate income taxes on the amount distributed. This
deduction for dividends paid to shareholders substantially
7
eliminates the federal "double taxation" on earnings (once at the corporate
level and again at the shareholder level) that generally results from an
investment in a corporation.
However, even if the Company qualifies for federal income taxation as a
REIT, it may be subject to federal tax in certain circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
corporate "alternative minimum tax" on its items of tax preference, if any.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" (generally, property acquired by the Company through
foreclosure or otherwise after a default on a loan secured by the property or on
a lease of the property) that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, then the Company will be subject to tax on such income at the highest
regular corporate rate (currently 35%). Fourth, if the Company has net income
from prohibited transactions (generally, certain sales or other dispositions of
inventory or property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property), such income will be
subject to tax at a 100% rate. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (discussed below), but
nonetheless maintains its qualification as a REIT because certain other
requirements are met, the Company will be subject to tax at a 100% rate on the
greater of the amount by which the Company fails the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability. Sixth,
if the Company should fail to distribute for any calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
Seventh, if the Company acquires any asset from a C corporation (generally, a
corporation subject to full corporate level tax) in a transaction in which the
basis of the asset in the Company's hands is determined by reference to the
basis of the asset in the hands of the C corporation, and if the Company
subsequently recognizes gain on the disposition of such asset during the
ten-year period beginning on the date on which the asset was acquired by the
Company, then the Company will pay tax at the highest regular corporate tax rate
(currently 35%) on the lesser of (i) the excess of the fair market value of the
asset over the Company's basis in the asset on the date acquired by the Company
and (ii) the gain recognized by the Company.
If the Company should invest in properties in foreign countries, the
Company's profits from such investments will generally be subject to tax in the
countries where such properties are located. The nature and amount of any such
taxation will depend on the laws of the countries where the properties are
located. If the Company satisfies the annual distribution requirements for
federal income tax qualification as a REIT and is therefore not subject to
federal corporate income tax on that portion of its ordinary income and capital
gain that is currently distributed to its shareholders, the Company will
generally not be able to recover the cost of any foreign tax imposed on profits
from its foreign investments by claiming foreign tax credits against its federal
income tax liability on such profits. Moreover, a REIT is not able to pass
through to its shareholders any foreign tax credits.
The Company's Wholly-Owned Subsidiaries. Section 856(i) of the Code
provides that a corporation that is a qualified REIT subsidiary (defined as any
corporation 100% of whose stock is held by the REIT at all times during the
period the corporation is in existence) shall not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a qualified REIT subsidiary shall be treated as assets, liabilities
and items of income, deduction, and credit of the REIT. (For the Company's
taxable years commencing on or after January 1, 1998, a wholly-owned corporation
qualifies as a qualified REIT subsidiary even though there was a period of time
during which the Company did not own 100% of its stock; such corporation will be
treated for federal income tax purposes as though liquidated into the Company at
the time the Company acquired 100% ownership, and then reincorporated by the
Company as a qualified REIT subsidiary.) The Company believes that each of its
direct and indirect wholly-owned subsidiaries qualifies either as a qualified
REIT subsidiary within the meaning of Section 856(i) of the Code, or as a
noncorporate entity that for federal income tax purposes is not treated as
separate from its owner pursuant to Treasury Regulations under Section 7701 of
the Code. Thus, in applying all the federal income tax REIT qualification
requirements discussed herein, the Company's direct and indirect wholly-owned
subsidiaries are ignored, and all assets, liabilities, and items of income,
deduction and credit of those subsidiaries are treated as assets, liabilities
and items of income, deduction and credit of the Company.
The Company's Investments through Partnerships. The Company has
invested, and in the future may invest, in real estate through one or more
limited or general partnerships or limited liability companies that is treated
as a partnership for federal income tax purposes. In the case of a REIT that is
a partner in a partnership, Treasury Regulations provide that for purposes of
the REIT qualification requirements regarding income and assets discussed
8
below, the REIT is deemed to own its proportionate share of the assets of the
partnership corresponding to the REIT's proportionate capital interest in such
partnership and is deemed to be entitled to the income of the partnership
attributable to such proportionate share. In addition, for these purposes, the
character of the assets and gross income of the partnership generally retain the
same character in the hands of the REIT. Accordingly, the Company's
proportionate share of the assets, liabilities, and items of income of each
partnership in which it is a partner are treated as assets, liabilities, and
items of income of the Company for purposes of the income tests and asset tests
discussed below. However, for purposes of the REIT's distribution requirement
discussed below, a REIT must take into account as a partner its distributive
share of the partnership's income as determined under the general federal income
tax rules governing partners and partnerships under Sections 701 et seq. of the
Code.
REIT Qualification Requirements--Generally. 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 modifications); and (7) which meets certain other tests
regarding income, assets, and distributions, as 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. It is the Company's belief and expectation that it
has had and will have at least 100 shareholders during the requisite period for
each of its taxable years since its election to be taxed as a REIT. 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.
By reason of the "closely held" 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 is owned directly
or indirectly by five or fewer individuals. To help maintain conformity with
condition (6), the Declaration contains certain provisions restricting transfers
of Shares and giving the Trustees the power to redeem Shares involuntarily. For
its taxable years commencing on or after January 1, 1998, if the Company
complies with Treasury Regulations for ascertaining the ownership of its
outstanding Shares and does not know or, exercising reasonable diligence would
not have known, whether it failed condition (6), then the Company will be
treated as satisfying condition (6). Also, for its taxable years commencing on
or after January 1, 1998, the Company's failure to comply with the Treasury
Regulations for ascertaining ownership of its outstanding Shares may result in a
penalty of $25,000 ($50,000 for intentional violations). Accordingly, the
Company will, pursuant to the Treasury Regulations, 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.
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 is relaxed in the case of certain pension trusts owning shares in a
REIT. Shares in a REIT held by such a pension trust are treated 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 federal income tax qualification
as a REIT. However, as discussed below, if the REIT is a "pension- held REIT,"
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 REIT's total
gross income for the year.
To qualify as a REIT 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 its assets, and the distribution of its income to shareholders. The
Company made such an election for 1987 (its first full year of operations), and
such election, assuming continuing compliance with the federal income tax
qualification tests discussed herein, continues in effect for subsequent years.
Income Tests. There are three gross income requirements, only two of
which apply to the Company for its taxable years commencing on or after January
1, 1998. First, at least 75% of the Company's gross income
9
(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"), mortgages on real property, or
shares in other REITs. 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 for the Company's taxable years commencing on or after January 1, 1998,
certain payments under options, futures contracts, forward rate agreements, or
similar financial instruments), and gain from the sale or disposition of stock,
securities, or real property, or from any combination of the foregoing. Third,
for the Company's taxable years ending on or before December 31, 1997,
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 have represented
less than 30% of the Company's gross income. For purposes of these three gross
income rules, income derived from a "shared appreciation provision" in a
mortgage loan is generally treated as gain recognized on the sale of the
property to which it relates. Even though the Company does not own mortgage
loans that contain shared appreciation provisions, the Company may in the future
make such mortgage loans. 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 the income generated by its investments
will be of a type which satisfies the 75% and 95% gross income tests, there can
be no assurance in this regard.
In order to qualify as "rents from real property," several requirements
must be met. First, 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.
Second, the Code 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 and upon circumstances beyond the control of the
Company. Ownership, directly or by attribution, by an unaffiliated third party
of more than 10% of the 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% lessee
affiliate 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 shareholdings attributed to them under the attribution rules. Third,
in order for its rents to qualify as "rents from real property," 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." For the Company's taxable years commencing on or after
January 1, 1998, a de minimis amount of noncustomary services will not
disqualify income as rents from real property so long as the value of the
impermissible services does not exceed 1% of the gross income of the property.
Fourth, 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. Substantially all of the gross income of the Company has been and is
expected to be attributable to rental income. The Company believes that all or
substantially all such rents have qualified and will continue to qualify as
"rents from real property" for purposes of Section 856 of the Code, but if for
some reason a significant amount of such rents do not so qualify, it may be
difficult or impossible for the Company to meet the 95% or 75% gross income
tests and to qualify as a REIT for federal income tax purposes.
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
10
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.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business will be treated as income from a prohibited transaction that
is subject to a penalty tax at a 100% rate. This prohibited transaction income
also may have an adverse effect upon the Company's ability to satisfy the 75%
and 95% gross income tests for federal income tax qualification as a REIT. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. The Company intends to hold its real estate assets for investment
with a view to long-term appreciation, to engage in the business of developing,
owning and operating its existing real estate assets and acquiring, developing,
owning and operating other real estate assets, and to make occasional
dispositions of real estate assets as is consistent with the Company's
investment objectives. There can be no assurance, however, that the IRS might
not contend that one or more dispositions is subject to the 100% penalty tax.
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 (i) the Company's failure to meet such test was due to reasonable
cause and not due to willful neglect, (ii) the Company reported the nature and
amount of each item of its income included in the 75% or 95% gross income tests
(as the case may be) for such taxable year on a schedule attached to its return,
and (iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. No similar provision provides relief if the Company failed
the 30% gross income test for the taxable years such test was applicable, and it
is not possible to state whether in all circumstances the Company would be
entitled to the benefit of the relief provisions for the 75% and 95% gross
income tests. As discussed above, even if these relief provisions do apply, a
special tax equal to 100% is imposed upon the greater of the amount by which the
Company failed the 75% test or the 95% test, multiplied by a fraction intended
to reflect the Company's profitability.
Asset Tests. At the close of each quarter of the Company's taxable
year, it must also satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must consist of
real estate assets (which for this purpose includes stock or debt instruments
held for not more than one year purchased with proceeds of a stock offering or a
long-term (at least five years) debt offering of the Company), cash, cash items,
shares in other REITs, 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 foregoing 75% asset class). Third, of the investments included
in the foregoing 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. President Clinton has proposed legislation that would expand this
last prohibition so that the Company would not be permitted to own more than
10%, either by vote or by value, of any one issuer's outstanding securities.
Where a failure to satisfy the foregoing asset tests results from an
acquisition of securities or other property during a quarter, the failure can be
cured by disposition of sufficient nonqualifying assets within 30 days after the
close of such quarter. The Company intends to maintain adequate records of the
value of its assets to maintain compliance with the foregoing asset tests, and
to take such action as may be required to cure any failure to satisfy the tests
within 30 days after the close of any quarter.
Annual Distribution Requirements. In order to qualify as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its shareholders each year in an amount at least equal to 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 net capital
gain) and (ii) 95% of the net income (after tax), if any, from foreclosure
property, over (B) the sum of certain noncash income (e.g., certain imputed
rental income or certain income from transactions inadvertently failing to
qualify as like-kind exchanges). Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Company timely files its tax return for such earlier taxable year and if
paid on or before the first regular dividend payment after such declaration.
Also, 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. A distribution which is not pro rata within a class of beneficial interest
in the Company entitled to a dividend, or which is not consistent with the
rights to distributions between classes of beneficial interests in the Company,
is a preferential dividend that is not taken into consideration for purposes of
the distribution requirement, and accordingly the payment of a preferential
dividend could affect the Company's ability to meet the distribution
requirement. Taking into account the Company's distribution policies
11
(including its dividend reinvestment plan), the Company believes that it has not
made and expects that it will not make any such preferential dividend. The
distribution 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 capital gain and all of its "real
estate investment trust taxable income," as adjusted, 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 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.
It is possible 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 (i) the actual receipt of income and actual
payment of deductible expenses or distributions and (ii) the inclusion of such
income and deduction of such expenses or distributions in arriving at "real
estate investment trust taxable income" of the Company. 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 for new equity financing, to provide funds for required
distributions, or else its REIT status for federal income tax purposes could be
jeopardized. There can be no assurance that such borrowing or financing would be
available on favorable terms.
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, although an
interest charge would be imposed upon the Company for the delay in distribution.
Although the Company may thus be able to avoid being taxed on amounts
distributed as deficiency dividends, the Company may in certain circumstances
remain liable for the 4% excise tax discussed above.
For its taxable years ending on or before December 31, 1997, the
Company was required to request annually from record holders of certain
significant percentages of its Shares certain information regarding the
ownership of such Shares, in order to qualify for the deduction for dividends
paid to its shareholders. As discussed above, for taxable years commencing on or
after January 1, 1998, the Company will continue to request such information in
order to comply with the REIT qualification requirement regarding ownership
concentration of its Shares.
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 2% of the Company's leased
facilities which constitutes personal property, it is not entirely 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
excise tax "required distribution" requirement) by making distributions on the
assumption that it is not entitled to depreciation deductions for the 2% of the
leased facilities which constitute personal property, but to perform all its tax
reporting by taking into account such depreciation.
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.
12
Additionally, it should be noted that Section 467 of the Code
(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 of the Code 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 could 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 of the
Code 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, and because regulations proposed to
be effective for "disqualified leaseback agreements" entered into after June 3,
1996 adopt this rule, the additional rent provisions of the leases generally
should not cause the leases to be "disqualified leaseback agreements." In
addition, the legislative history of Section 467 of the Code 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, and
the proposed regulations permit a 10% fluctuation.
Depreciation of Properties. For federal income tax purposes, the
Company generally depreciates its real property on a straight-line basis over 40
years and its personal property over 12 years.
Failure to Qualify. If the Company fails to qualify for federal income
taxation as a REIT in any taxable year, and any potentially applicable 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 the Company's current and accumulated earnings and
profits, all distributions to shareholders will be taxable as ordinary income,
and subject to certain limitations in the Code will be eligible for the
dividends received deduction for corporations. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
federal income taxation as a REIT for the following four taxable years. It is
not possible to state whether in all circumstances the Company would be entitled
to statutory relief from such disqualification. Failure to qualify for even one
year could result in the Company's incurring substantial indebtedness (to the
extent borrowings are feasible) or liquidating substantial investments in order
to pay the resulting taxes.
Taxation of U.S. Shareholders--Generally. As used herein, the term
"U.S. Shareholder" means a beneficial holder of Shares that is for federal
income tax purposes (i) a citizen or resident of the United States, (ii) a
corporation or partnership (or other entity treated as a corporation or
partnership for federal income tax purposes) created or organized in or under
the laws of the United States or of any political subdivision thereof (unless
otherwise provided by Treasury Regulations), (iii) an estate the income of which
is subject to federal income taxation regardless of its source, or (iv) a trust
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust (or certain electing
trusts in existence on August 20, 1996 to the extent provided in Treasury
Regulations). As used herein, the term "Non-U.S. Shareholder" means a beneficial
holder of Shares that is not a U.S. Shareholder.
As long as the Company qualifies as a REIT for federal income tax
purposes, distributions (including reinvestments pursuant to the Company's
dividend reinvestment plan) made to the Company's U.S. Shareholders out of
current or accumulated earnings and profits will be taken into account by them
as ordinary income (but will not be eligible for the dividends received
deduction for corporations). Distributions that are properly designated by the
Company as capital gain dividends will be taxed as long-term capital gains (as
discussed below) to the extent they do not exceed the Company's actual net
capital gain for the taxable year, although corporate U.S. 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 the Company's taxable years commencing
on or after January 1, 1998, the Company may elect to retain amounts
representing its net capital gain income. In that case, the Company will be
taxed at regular corporate capital gains tax rates on such amounts, each U.S.
Shareholder will be taxed on its proportionate share of the net capital gains
retained by the Company as though such amount were distributed and designated a
capital gain dividend, and each such U.S. Shareholder will receive a credit for
a proportionate share of the tax paid by the Company. Additionally, each U.S.
Shareholder will increase the adjusted basis in its Shares by the excess of the
amount of its proportionate share of these net capital gains over its
proportionate share of the tax paid by the Company, and both the Company and its
corporate U.S. Shareholders will make commensurate adjustments in their
13
respective earnings and profits for federal income tax purposes. If the Company
should elect to retain its net capital gain in this fashion, it will notify each
U.S. Shareholder of the relevant tax information within 60 days after the close
of the Company's taxable year.
For certain noncorporate U.S. Shareholders, long-term capital gains
taken into account after May 7, 1997 are taxed at varying maximum rates of 20%,
25%, or 28%, depending upon the type of property disposed of and the holding
period in such property at the time of disposition. If the Company designates a
dividend as a capital gain dividend for any taxable year of the Company ending
after May 7, 1997 (or elects to retain a portion of its net capital gain and
have such amount treated as a distributed and designated capital gain dividend
in the manner described above), the Company may also designate the portion of
such capital gain dividend which is taxed to certain noncorporate U.S.
Shareholders at the varying maximum rates of 20%, 25%, or 28%, based upon the
type and holding period of the property disposed of by the Company. If the
Company does not make such a designation, the entire capital gain dividend will
be treated as long-term capital gain subject to the maximum 28% rate to the
noncorporate U.S. Shareholders (without regard to the period for which the U.S.
Shareholder held its Shares).
For purposes of computing the Company's earnings and profits,
depreciation on real estate is generally computed on a straight-line basis over
40 years. Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. Shareholder to the extent that they do not exceed
the adjusted basis of the U.S. Shareholder's Shares, but will reduce the U.S.
Shareholder's basis in such Shares. To the extent that such distributions exceed
the adjusted basis of a U.S. 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), with such long-term gain taxed to certain
noncorporate U.S. Shareholders at varying maximum rates of 20% or 28% depending
upon the U.S. Shareholder's holding period in the Shares. U.S. Shareholders may
not include in their respective 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. For tax purposes, the
Company's dividends paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994,
1995, 1996 and 1997 aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29,
$1.32, $1.37, $1.41 and $1.45 respectively, of which $.289, $.065, $.332, $.267,
$.104, $.218, $.335, $.081, $.161, $.350 and $.252, respectively, represented a
return of capital.
The sale or exchange of Shares will result in recognition of gain or
loss to the U.S. Shareholder in an amount equal to the difference between the
amount realized and its adjusted basis in the Shares sold or exchanged. Such a
gain or loss will be capital gain or loss, and will be long-term capital gain or
loss if the U.S. Shareholder's holding period in the Shares exceeded one year.
Long-term capital gains may be taxed to certain noncorporate U.S. Shareholders
at varying maximum rates of 20% or 28% depending upon the U.S. Shareholder's
holding period in the Shares. In addition, any loss upon a sale or exchange of
Shares by a U.S. Shareholder who has held such Shares for not more than six
months (after applying certain rules), will generally be treated as a long-term
capital loss to the extent of distributions from the Company required to be
treated by such U.S. Shareholders as long-term capital gain (including, for this
purpose, amounts constructively distributed as long-term capital gain by the
Company electing to retain its net capital gain in the manner described above).
U.S. Shareholders (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 Section 163(d) of the Code, interest paid or
accrued on indebtedness incurred or continued to purchase or carry property held
for investment is generally deductible only to the extent of the investor's net
investment income. A U.S. Shareholder's net investment income will include
dividend distributions and, if an appropriate election is made, capital gain
dividend distributions it receives from the Company; however, distributions
treated as a nontaxable return of the U.S. Shareholder's basis will not enter
into the computation of net investment income. Under Section 469 of the Code,
U.S. Shareholders (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 U.S. Shareholder from the Company will not be
treated as income from a passive activity and thus will not be available to
offset a U.S. 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
14
possible 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; however, the Company has not claimed
accelerated depreciation with respect to its existing properties.
Taxation of Certain Tax-Exempt U.S. Shareholders. In Revenue Ruling
66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt
employees' pension trust did not constitute "unrelated business taxable income,"
even though the REIT may have financed certain of its activities with
acquisition indebtedness. Although Revenue Rulings are interpretive in nature
and subject to revocation or modification by the IRS, based upon Revenue Ruling
66-106 and the analysis therein, distributions made by the Company to U.S.
Shareholders that are qualified pension plans (including individual retirement
accounts) or certain other tax-exempt entities should not constitute unrelated
business taxable income, unless such U.S. Shareholder has financed the
acquisition of its Shares with "acquisition indebtedness" within the meaning of
the Code, or the Shares are otherwise used in an unrelated trade or business
conducted by the U.S. Shareholder.
Special rules apply to certain tax-exempt pension trusts (including
so-called 401(k) plans but excluding individual retirement accounts or
government pension plans) that own more than 10% by value of a "pension-held
REIT" at any time during a taxable year commencing after December 31, 1993. Such
a pension trust may be required to treat a certain percentage of all dividends
received from the pension-held REIT during the year as unrelated business
taxable income. Such percentage is equal to the ratio of the pension-held REIT's
gross income (less direct expenses related thereto) derived from the conduct of
unrelated trades or businesses (determined as if the pension-held REIT were a
tax-exempt pension fund), to the pension-held REIT's gross income (less direct
expenses related thereto) from all sources, except that such percentage shall be
deemed to be zero unless it would otherwise equal or exceed 5%. A REIT will be
treated as a pension-held REIT only if (i) the REIT is "predominantly held" by
tax-exempt pension trusts, and (ii) the REIT would otherwise fail to satisfy the
"closely held" ownership conditiondiscussed above if the stock or beneficial
interests in the REIT held by such tax-exempt pension trusts were viewed as held
by such tax-exempt pension trusts rather than their respective beneficiaries. A
REIT is predominantly held by tax-exempt pension trusts if at least one
tax-exempt pension trust holds more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts (each owning
more than 10% by value of the REIT's stock or beneficial interests) own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Given the restrictions in its Declaration regarding ownership of its Shares, the
Company believes that it has not been, and expects that it will not be, a
pension-held REIT. However, because the Shares of the Company will be publicly
traded, no assurance can be given that the Company will not become a
pension-held REIT.
Taxation of Non-U.S. Shareholders. The rules governing the federal
income taxation of Non-U.S. Shareholders (generally, nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates) are highly complex, and the following discussion is intended only as a
summary of such rules. Non- U.S. Shareholders should consult with their own tax
advisors to determine the impact of federal, state, local, and foreign tax laws,
including any reporting requirements, with respect to their investment in the
Company. In general, a Non-U.S. Shareholder will be subject to regular federal
income tax in the same manner as a U.S. Shareholder with respect to its
investment in Shares if such investment is "effectively connected" with the
Non-U.S. Shareholder's conduct of a trade or business in the United States. In
addition, a corporate Non-U.S. Shareholder that receives income that is (or is
deemed) effectively connected with a trade or business in the United States may
also be subject to the 30% branch profits tax under Section 884 of the Code,
which is payable in addition to regular federal corporate income tax. The
following discussion addresses only Non-U.S. Shareholders whose investment in
Shares is not effectively connected with the conduct of a trade or business in
the United States.
A distribution by the Company to a Non-U.S. Shareholder 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, such a
dividend will be subject to federal income withholding tax on the gross amount
thereof at the rate of 30%, or such lower rate that may be specified by treaty
if the Non-U.S. Shareholder has in the manner prescribed by the IRS demonstrated
to the Company its entitlement to treaty benefits. 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 discussed below. A distribution in excess
of the Company's earnings and profits may be subject to 30% (or lower treaty
rate) 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
15
accumulated earnings and profits. If it is 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 federal income withholding tax at the rate of 30% on the
gross amount of any distributions on Shares made to a Non-U.S. Shareholder
unless a lower tax treaty applies and the required IRS form evidencing
eligibility for that reduced rate is filed with the Company.
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 are taxed to a Non-U.S. Shareholder as if such
distributions were gains "effectively connected" with a trade or business in the
United States conducted by the Non-U.S. Shareholder. Accordingly, a Non-U.S.
Shareholder will be taxed on such amounts 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 case of nonresident alien
individuals). Such distributions may also be subject to a 30% branch profits tax
under Section 884 of the Code in the hands of a corporate Non-U.S. Shareholder
that is not entitled to treaty relief or exemption. The Company will be required
to withhold from distributions to Non-U.S. Shareholders, and remit to the IRS,
35% of the maximum amount of any distribution that could be designated as a
capital gain dividend. In addition, for purposes of this withholding rule, if
the Company designates prior distributions as capital gain distributions, then
subsequent distributions, up to the amount of such prior distributions, will be
treated as capital gain dividends. The amount of any tax withheld is creditable
against the Non-U.S. Shareholder's federal income tax liability, and any amount
of tax withheld in excess of that tax liability may be refunded provided that an
appropriate claim for refund is filed with the IRS.
Tax treaties may reduce the Company's withholding obligations. Under
certain treaties, however, rates below 30% generally applicable to dividends
from United States corporations may not apply to dividends from a REIT. If the
amount of tax withheld by the Company with respect to a distribution to a
Non-U.S. Shareholder exceeds such shareholder's federal income tax liability
with respect to such distribution, the Non-U.S. Shareholder may file for a
refund of such excess from the IRS. In this regard, it should be noted that the
35% withholding tax rate on capital gain dividends corresponds to the maximum
income tax rate applicable to corporate Non-U.S. Shareholders but is higher than
the 20%, 25%, and 28% maximum rates on capital gains generally applicable to
noncorporate Non-U.S. Shareholders. Treasury Regulations issued on October 6,
1997 (the "New Regulations") alter the withholding rules on dividends paid to a
Non-U.S. Shareholder, generally effective with respect to dividends paid after
December 31, 1998. Under the New Regulations, to obtain a reduced rate of
withholding under an income tax treaty, a Non-U.S. Shareholder generally will be
required to provide an Internal Revenue Service Form W-8 certifying such
Non-U.S. Shareholder's entitlement to benefits under the treaty. The New
Regulations also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty, dividends paid to a Non-U.S.
Shareholder that is an entity should be treated as paid to the entity or to
those holding an interest in that entity, and whether such entity or such
holders in the entity are entitled to benefits under the tax treaty. The New
Regulations also alter the information reporting and backup withholding rules
applicable to Non- U.S. Shareholders and, among other things, provide certain
presumptions under which a Non-U.S. Shareholder is subject to backup withholding
and information reporting until the Company receives certification from such
shareholder of its Non-U.S. Shareholder status.
If the Shares fail to constitute a "United States real property
interest" within the meaning of Section 897 of the Code, gain on sale of the
Shares by a Non-U.S. Shareholder generally will not be subject to federal income
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 such gain.
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 the preceding five-year period less
than 50% in value of its shares is held directly or indirectly by foreign
persons. It is believed that the Company has been and will continue to be a
domestically controlled REIT, and therefore that the sale of Shares by a
Non-U.S. Shareholder will not be subject to federal income taxation. However,
because the Shares are publicly traded, no assurance can be given that the
Company has been and will continue to be a domestically controlled REIT. If the
Company is not a domestically controlled REIT, whether a Non-U.S. Shareholder's
gain on sale of Shares would be subject to federal income tax as a sale of a
United States real property interest would depend upon whether the Shares were
"regularly traded" (as defined by applicable Treasury Regulations) on an
established
16
securities market (e.g., the New York Stock Exchange, on which the Shares are
listed) and upon the size of the selling Non-U.S. Shareholder's interest in the
Company. If the gain on the sale of the Shares were subject to federal income
taxation, 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 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, the purchaser of
Shares may be required to withhold 10% of the purchase price paid to the
Non-U.S. Shareholder and to remit such amount to the IRS.
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 includable 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
will report to its U.S. Shareholders and to the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. Under the
backup withholding rules, a U.S. Shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless the U.S.
Shareholder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates that fact or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding rules and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Shareholder that does not provide the Company
with its correct taxpayer identification number may be subject to penalties
imposed by the IRS. In addition, the Company may be required to withhold a
portion of capital gain distributions to any U.S. Shareholder that fails to
certify its non-foreign status to the Company. Any amounts withheld under the
foregoing rules will be creditable against the U.S. Shareholder's federal income
tax liability provided that the required information is furnished to the IRS.
The Company will report to its Non-U.S. Shareholders and to the IRS the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any. 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. As discussed above,
withholding tax rates of 30% and 35% may apply to distributions on Shares to
Non-U.S. Shareholders, and the New Regulations will when effective alter the
information reporting and withholding rules applicable to Non-U.S. Shareholders.
Among other things, the New Regulations provide certain presumptions under which
a Non-U.S. Shareholder would be subject to backup withholding and information
reporting until the Company receives certification from such shareholder of its
Non-U.S. Shareholder status. As noted, the New Regulations are generally
effective with respect to dividends paid after December 31, 1998.
The payment of the proceeds from the disposition of Shares to or
through the United States office of a broker will generally 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-United States 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-United States office of a United States broker or paid to or
through a non-United States office of a non-United States broker that is (i) a
"controlled foreign corporation" for 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 beneficial owner is a Non-U.S. Shareholder unless the broker has actual
knowledge to the contrary. Under the New Regulations (generally effective for
payments made after December 31, 1998), in the case of proceeds from a
disposition of Shares paid to or though a non-United States office of a United
States broker or paid to or through a non-United States office of a non-United
States broker that is (i) a "controlled foreign corporation" for federal income
tax purposes, (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, (iii) a foreign partnership with one or more partners who are
United States persons and who in the aggregate hold more than 50% of the income
or capital interest in the partnership, or (iv) a foreign partnership engaged in
the conduct of a trade or business in the United States, (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
Non-U.S. Shareholder certifies its status as a Non-
17
U.S. Shareholder and further certifies that it has not been, and at the time the
certificate is furnished reasonably expects not to be, present in the United
States for a period aggregating 183 days or more during each calendar year to
which the certification pertains.
Any amounts withheld from a payment to a Non-U.S. Shareholder will
generally 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 Considerations. Holders of Shares should recognize that the
present federal income tax treatment of the Company may be modified by future
legislative, judicial, or administrative actions at any time, which may be
retroactive in effect, and, as a result, any such action or decision may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the Treasury Department, resulting in
statutory changes as well as promulgation of new regulations, revisions to
existing regulations, and revised interpretations of established concepts. No
prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions either directly or indirectly affecting the
Company or its shareholders. Revisions in federal income tax laws and
interpretations thereof could adversely affect the tax consequences of
investment in the Shares.
The Company and its shareholders may also be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, holders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Shares.
THE FOREGOING IS A SUMMARY DESCRIPTION OF CERTAIN MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE TAXATION OF THE COMPANY AND ITS SHAREHOLDERS,
WITHOUT CONSIDERATION OF THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
PARTICULAR SHAREHOLDER. IN PARTICULAR, IT DOES NOT ADDRESS THE STATE, LOCAL OR
FOREIGN TAX ASPECTS OF THE TAXATION OF THE COMPANY AND ITS SHAREHOLDERS. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE
COULD AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE COMPANY AND ITS
SHAREHOLDERS MAY ALSO BE SUBJECT TO STATE OR LOCAL TAXATION IN VARIOUS STATE OR
LOCAL JURISDICTIONS, INCLUDING THOSE IN WHICH IT OR THEY TRANSACT BUSINESS OR
RESIDE. EACH HOLDER OF SHARES OF THE COMPANY SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE TAXATION OF THE COMPANY AND
ITS SHAREHOLDERS, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS.
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"). 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.
18
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.
Special Fiduciary and Prohibited Transactions Considerations. The
Department of Labor ("DOL"), which has certain administrative responsibility
over ERISA Plans as well as over IRAs and other Non-ERISA Plans, has issued a
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 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 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 transferwhich 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.
19
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. At December 31, 1997, approximately 14% of the Company's total
investments were in long-term care facilities, 32% were in medical and other
office buildings and clinics, 20% were in government office buildings, 21% were
in retirement and assisted living communities, 8% were in nursing homes with
subacute services and 5% were in hotels through the Company's equity investment
in HPT. 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, 1997, the Company had real estate
investments totaling $2.1 billion (at cost) in 217 properties that were leased
to or operated by over approximately 350 tenants or mortgagors, plus a 10.3%
investment of approximately $111.1 million (carrying value) through HPT in 119
additional properties.
20
The following table summarizes certain information about the Properties as of
December 31, 1997. All dollar figures are in thousands.
REAL ESTATE OWNED:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent/Interest (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Retirement and Assisted Living Facilities:
Arizona 3 481 $ 36,642 $ 3,061
California 1 402 31,791 3,319
Florida 5 1,527 131,989 9,986
Illinois 2 704 98,743 7,490
Maryland 1 351 33,080 4,054
New York 1 103 10,700 1,017
South Dakota 1 59 1,014 127
Texas 1 145 12,411 1,213
Virginia 3 848 57,662 5,817
Washington 1 200 14,350 1,363
Long-Term Care Facilities:
Arizona 3 320 6,220 821
California 9 1,140 27,105 4,716
Colorado 9 1,011 34,351 4,561
Connecticut 5 867 42,821 5,184
Georgia 4 401 12,307 1,352
Illinois 1 230 2,711 452
Iowa 7 375 8,205 941
Kansas 1 59 1,320 157
Missouri 2 215 3,788 572
Nebraska 1 80 1,934 229
New Hampshire 1 108 3,689 430
New Jersey 1 150 13,007 1,418
Ohio 2 400 9,872 1,283
South Dakota 2 302 6,575 855
Vermont 8 808 29,766 3,316
Washington 1 143 5,193 642
Wisconsin 7 920 31,680 5,118
Wyoming 3 243 7,247 825
Long-Term Care Facilities with Subacute Services:
Connecticut 4 660 51,290 6,470
Massachusetts 5 762 82,059 10,044
Pennsylvania 1 120 15,598 1,951
Medical and Other Office Buildings and Clinics:
California 13 -- 179,949 20,324
Colorado 1 -- 14,403 1,435
District of Columbia 2 -- 44,530 6,949
Maryland 1 -- 12,517 2,875
Massachusetts 25 -- 120,957 14,446
New York 3 -- 130,831 14,306
Pennsylvania 6 -- 108,799 13,740
Rhode Island 1 -- 8,100 750
Texas 5 -- 78,562 9,242
Virginia 1 -- 5,757 997
Government Office Buildings:
Alaska 1 -- 1,000 490
Arizona 3 -- 21,628 2,692
California 4 -- 65,141 8,480
Colorado 1 -- 3,680 1,361
District of Columbia 2 -- 100,594 13,959
21
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent/Interest (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Georgia 1 -- 2,874 447
Kansas 1 -- 5,701 1,432
Maryland 4 -- 102,064 13,052
Missouri 1 -- 7,636 934
New Mexico 2 -- 10,813 1,255
New York 1 -- 23,317 2,684
Oklahoma 1 -- 24,426 3,062
Texas 2 -- 16,411 3,500
Virginia 1 -- 18,284 2,118
Washington 2 -- 21,005 2,421
West Virginia 1 -- 4,792 624
Wyoming 1 -- 10,132 1,250
---------------------------------------------------------------------------
Total Real Estate 183 14,134 $1,969,023 $233,609
---------------------------------------------------------------------------
MORTGAGE AND NOTE INVESTMENTS:
Retirement and Assisted Living Facilities:
California 3 389 $ 8,408 $ 978
Florida 1 248 5,000 525
North Carolina 3 345 11,472 1,381
Long-Term Care Facilities:
California 1 299 6,242 821
Kansas 2 177 523 166
Michigan 1 153 4,239 524
Nebraska 9 610 8,799 871
North Carolina 3 294 4,472 489
Ohio* 2 338 7,840 1,095
Pennsylvania 1 120 2,890 358
Texas 4 390 5,251 480
Wisconsin 2 339 12,349 1,480
Long-Term Care Facilities with Subacute Services:
Connecticut -- -- 2,365 224
Louisiana 1 118 19,185 2,293
Michigan 1 189 5,028 622
Medical Office Buildings:
California* -- -- 225 19
---------------------------------------------------------------------------
Total Mortgages and Notes 34 4,009 $104,288 $ 12,326
---------------------------------------------------------------------------
<FN>
* Amounts represent or include notes receivable related to improvements to real estate owned.
(1) Amounts represent obligations due to the Company for properties owned during the 12 months ended December 31, 1997 and
annualized obligations due to the Company for properties acquired during 1997, at December 31, 1997.
</FN>
Item 3. Legal Proceedings
As previously disclosed, in early 1995 the Company commenced an action
in Florida state court to collect on a secured indemnity agreement from a former
tenant and mortgagor, together with certain related parties (collectively,
the "Former Tenant"). In May 1995 the Former Tenant filed a counterclaim and
third-party complaint against the Company and others including Messrs. Martin
and Portnoy, Advisor and Sullivan & Worcester LLP, seeking, among other things,
to set aside the indemnity agreement and to recover substantial damages. After a
Massachusetts state court ordered the dispute to arbitration and a Florida court
stayed further proceedings pending arbitration, the Former Tenant brought a
separate action against the Company in the Federal District Court in
Massachusetts and realleged many of the same allegations made in the
counterclaims and third-party complaints
22
previously brought by them in response to the Company's original action, and
adding allegations of violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violations of 18
U.S.C ss. 1962 (RICO). In September 1996, the Federal Court in Massachusetts
ordered the case brought by the Former Tenant dismissed and all disputes between
the Former Tenant and the Company referred to arbitration. The arbitration is
proceeding. The amounts of damages claimed by the Former Tenant and creditors or
assignees of the former Tenant are material. The Company is pursuing its
indemnity claims against the Former Tenant and is defending the claims of the
Former Tenant in the arbitration proceedings. The Company intends to defend
itself in related actions brought and which may be brought, to attempt to
consolidate these cases in the pending arbitration proceeding or otherwise to
pursue such claims and rights which it may have. The outcome of these pending
claims and proceedings cannot be predicted.
The Declaration of Trust provides that Trustees, officers, employees
and agents of the Company shall be indemnified by the Company against any
losses, judgments, liabilities, expenses and amounts paid in settlement of any
claims asserted against them by reason of their status, provided that such
claims were not the result of willful misfeasance, bad faith, gross negligence
or reckless disregard of duty. Were Messrs. Martin and Portnoy to be held liable
in the proceedings described above, they may therefore have a claim for
indemnification from 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 Annual Report on Form 10-K.
PART II
Item 5. Market for Registrant's Common Stock 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
---- ---
1996
First Quarter $ 17 3/8 16
Second Quarter 17 7/8 16 3/8
Third Quarter 18 1/8 16 3/8
Fourth Quarter 19 1/4 17 3/4
1997
First Quarter 20 5/8 18
Second Quarter 19 17 3/4
Third Quarter 19 1/8 17 5/8
Fourth Quarter 20 5/16 18 9/16
The closing price of the Shares on the New York Stock Exchange on March
5, 1998 was $19.6875.
As of January 22, 1998, there were approximately 5,711 holders of record of the
Shares and the Company estimates that as of such date there were in excess of
120,000 beneficial owners of the Shares.
23
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.
Dividend Annualized
Per Share Dividend Rate
--------- -------------
1996
First Quarter $.35 $1.40
Second Quarter .35 1.40
Third Quarter .36 1.44
Fourth Quarter .36 1.44
1997
First Quarter .36 1.44
Second Quarter .36 1.44
Third Quarter .37 1.48
Fourth Quarter .37 1.48
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
Trustees and will depend on the earnings of the Company, the cash flow available
for distribution, the financial condition of the Company and such other factors
as the 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.
24
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 in Item 7 of the Company's Current Report on Form
8-K dated February 27, 1998. Amounts are in thousands, except per Share
information.
Income Statement Data: Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
Total revenues $208,863 $120,183 $113,322 $ 86,683 $ 56,485
Income before gain (loss) on sale of
properties and extraordinary items 112,204 77,164 61,760 57,878 37,738
Income before extraordinary items 115,102 77,164 64,236 51,872 37,738
Net income 114,000 73,254 64,236 49,919 33,417
Funds from operations (1) 146,312 99,106 84,638 71,851 46,566
Dividends declared (2) 144,271 94,299 83,954 76,317 44,869
Basic earnings per common share amounts:
Income before gain (loss) on sale of
properties and extraordinary items 1.22 1.16 1.04 1.10 1.10
Income before extraordinary items 1.25 1.16 1.08 .98 1.10
Net income 1.24 1.11 1.08 .95 .97
Funds from operations (1) 1.59 1.50 1.43 1.36 1.35
Dividends declared (2) 1.46 1.42 1.38 1.33 1.30
Weighted average shares outstanding 92,168 66,255 59,227 52,738 34,407
Balance Sheet Data: At December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
Real estate properties, at cost $1,969,023 $1,005,739 $ 778,211 $ 673,083 $ 384,811
Real estate mortgages and notes 104,288 150,205 141,307 133,477 157,281
Investment in HPT 111,134 103,062 99,959 -- --
Total assets 2,135,963 1,229,522 999,677 840,206 527,662
Total indebtedness 787,879 492,175 269,759 216,513 73,000
Total shareholders' equity 1,266,260 708,048 685,592 602,039 441,135
<FN>
(1) The Company's Funds From Operations ("FFO") represents net income (computed in accordance with generally accepted
accounting principals ("GAAP")), before gain or loss on sale of properties and extraordinary items, depreciation and other
non-cash items and includes HRP's pro rata share of HPT's FFO. Management considers FFO to be a measure of the financial
performance of an equity REIT that provides a relevant basis for comparison among REITs. FFO does not represent cash flow
from operating activities (as determined in accordance with GAAP) and should not be considered as an alternative to net
income as an indicator of the Company's financial performance or to cash flows as a measure of liquidity.
(2) Amounts represent dividends declared with respect to the periods shown. Distributions in excess of net income generally
constitute a return of capital.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 5 of the Company's
Current Report on Form 8-K dated February 27, 1998.
25
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference to the "consolidated financial statements of Health and Retirement
Properties Trust included in Item 7 of the Company's Current Report on Form 8-K
dated February 27, 1998. The financial statements and financial statement
schedules for Marriott are incorporated by reference to Marriott's Annual Report
on Form 10-K for the year ended January 2, 1998, Commission File No. 1-12188.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
The information in Part III (Items, 10, 11, 12 and 13) is incorporated by
reference to 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
1) The following consolidated financial statements of Health and Retirement
Properties Trust are incorporated by reference to the Company's Current
Report on Form 8-K dated February 27, 1998, page references are to such
Current Report:
Report of Ernst & Young LLP, Independent Auditors F-1
Report of Arthur Andersen LLP, Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996,
and 1995 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-6
Notes to Consolidated Financial Statements F-8
2) The following schedules are filed herewith:
III - Real Estate and Accumulated Depreciation S-1
IV - Mortgage Loans on Real Estate S-8
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.
3) Exhibits:
3.1 Conformed copy of Amended and Restated Declaration of Trust as
amended by the amendment approved by the shareholders June 28,
1996 and filed with the Maryland Department of Assessments and
Taxation on July 9, 1996. (incorporated by reference to the
Company's Current Report on Form 8-K, dated July 10, 1996)
3.2 Amendment, effective March 3, 1997, to the Company's Amended and
Restated Declaration of Trust providing for an increase in the
authorized common shares of beneficial interest, $.01 par value
per share, from 100,000,000 to 125,000,000. (incorporated by
reference to the Company's Current Report on Form 8-K, dated March
3, 1997)
26
3.3 Articles Supplementary to the Company's Amended and Restated
Declaration of Trust, as further amended, relating to the
Company's junior Participating Preferred Shares effective May 14,
1997. (incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997)
3.4 Amended and Restated Bylaws. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
4.1 Rights Agreement dated October 17, 1994 between the Company and
State Street Bank and Trust Company, as Rights Agent (including
the form of Articles Supplementary relating to the Junior
Participating Preferred Shares annexed as an exhibit thereto).
(incorporated by reference to the Company's Registration Statement
on Form 8-A dated October 24, 1994)
4.2 Form of Series B Note. (incorporated by reference to the Company's
Registration Statement on Form 8- A dated July 11, 1994)
4.3 Indenture, dated as of June 1, 1994, between the Company and
Shawmut Bank, N.A. (incorporated by reference to the Company's
Registration Statement on Form 8-A dated July 11, 1994)
4.4 Supplemental Indenture, dated as of June 29, 1994, between the
Company and Shawmut Bank, N.A. (incorporated by reference to the
Company's Registration Statement on Form 8-A dated July 11, 1994)
4.5 Indenture, dated as of September 20, 1996, between the Company and
Fleet National Bank ("Fleet"), as trustee. (incorporated by
reference to the Company's Registration Statement on Form S-3,
File No. 333- 02863)
4.6 First Supplemental Indenture, dated as of October 7, 1996, between
the Company and Fleet, as trustee, relating to the Company's 7.5%
Convertible Subordinated Debentures, due 2003, Series A, including
form thereof. (incorporated by reference to the Company's Current
Report on Form 8-K dated October 7, 1996)
4.7 Second Supplemental Indenture, dated as of October 7, 1996,
between the Company and Fleet, as trustee, relating to the
Company's 7.5% Convertible Subordinated Debentures, due 2003,
Series B, including form thereof. (incorporated by reference to
the Company's Current Report on Form 8-K dated October 7, 1996)
4.8 Third Supplemental Indenture, dated as of October 7, 1996, between
the Company and Fleet, as trustee, relating to the Company's 7.25%
Convertible Subordinated Debentures, due 2001, including form
thereof. (incorporated by reference to the Company's Current
Report on Form 8-K dated October 7, 1996)
4.9 Form of Global Note relating to the Remarketed Reset Notes due
July 9, 2007. (incorporated by reference to the Company's Current
Report on Form 8-K dated July 2, 1997)
4.10 Indenture, dated as of July 9, 1997, by and between the Company
and State Street Bank and Trust Company as Trustee. (filed
herewith)
4.11 Supplemental Indenture, dated July 9, 1997, by and between the
Company and State Street Bank and Trust Company as Trustee,
relating to the Remarketed Reset Notes due July 9, 2007. (filed
herewith)
4.12 Supplemental Indenture No. 2 dated as of February 23, 1998 between
the Company and State Street Bank and Trust Company pertaining to
$50,000,000 in principal amount of Remarketed Reset Notes Due July
9, 2007. (filed herewith)
4.13 Indenture dated as of December 18, 1997 by and between the Company
and State Street Bank and Trust Company, as Trustee. (incorporated
by reference to the Company's Current Report on Form 8-K dated
December 5, 1997)
27
4.14 Supplemental Indenture dated as of December 18, 1997 by and
between the Company and State Street Bank and Trust Company, as
Trustee relating to the Company's 6 3/4% Senior Notes due 2002.
(incorporated by reference to the Company's Current Report on Form
8-K dated December 5, 1997)
4.15 Registration Rights Agreement dated as of December 18, 1997 by and
between the Company and Merrill Lynch & Co. (incorporated by
reference to the Company's Current Report on Form 8-K dated
December 5, 1997)
4.16 Supplemental Indenture No. 3 dated as of February 23, 1998 between
the Company and State Street Bank and Trust Company pertaining to
the Company's 6.7% Senior Notes due 2005. (filed herewith)
8.1 Opinion of Sullivan & Worcester, LLP as to certain tax matters.
(filed herewith)
9.1 Amended and Restated AMS Voting Trust Agreement. (incorporated by
reference to the Company's Registration Statement on Form S-11,
File No. 33-55684, dated December 23, 1992, and amendments
thereto)
10.1 Advisory Agreement, as amended.(+) (incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
33-16799, dated August 27, 1987, and amendments thereto)
10.2 Second Amendment to the Advisory Agreement.(+) (incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.3 Third Amendment to Advisory Agreement by and between the Company
and the Advisor, dated June 26, 1997. (+) (incorporated by
reference to the Company's Current Report on Form 8-K, dated July
2, 1997)
10.4 Advisory Agreement by and between REIT Management and Research,
Inc. and the Company dated as of January 1, 1998. (+)
(incorporated by reference to the Company's Current Report on Form
8-K, dated February 11, 1998)
10.5 Agreement (for Property Management and Leasing Agent) between M&P
Partners Limited Partnership and various subsidiaries of the
Company, effective as of March 25, 1997, relating to properties
leased to Agencies of the United States Government. (incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997)
10.6 Master Management Agreement by and among M&P Partners Limited
Partnership and the parties named therein dated as of December 31,
1997. (incorporated by reference to the Company's Current Report
on Form 8-K, dated February 11, 1998)
10.7 Master Management Agreement by and between various subsidiaries of
the Company and REIT Management and Research, Inc., dated as of
January 1, 1998. (incorporated by reference to the Company's
Current Report on Form 8-K, dated February 27, 1998)
10.8 Parking Operation Management Agreement by and between HUB
Properties Trust, a subsidiary of the Company, and REIT Management
and Research, Inc., dated as of January 1, 1998. (incorporated by
reference to the Company's Current Report on Form 8-K, dated
February 27, 1998)
10.9 Incentive Share Award Plan.(+) (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-55684,
dated December 23, 1992, and amendments thereto)
10.10 Master Lease Document. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991)
10.11 AMS Properties Security Agreement. (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
28
10.12 AMS Subordination Agreement. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1991)
10.13 AMS Guaranty. (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991)
10.14 AMS Pledge Agreement. (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991)
10.15 AMS Holding Co. Pledge Agreement. (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.16 Amended and Restated Renovation Funding Agreement dated as of
January 13, 1992 between AMS Properties, Inc. and the Company.
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1991)
10.17 Amendment to AMS Transaction Documents. (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991)
10.18 GCI Master Lease Document. (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-55684,
dated December 23, 1992, and amendments thereto)
10.19 Amended and Restated HRP Shares Pledge Agreement. (incorporated by
reference to the Company's Registration Statement on Form S-11,
File no. 33-55684, dated December 23, 1992, and amendments
thereto)
10.20 Guaranty Cross-Default and Cross-Collateralization Agreement.
(incorporated by reference to the Company's Registration Statement
on Form S-11, File No. 33-55684, dated December 23, 1992, and
amendments thereto)
10.21 Connecticut Subacute Corporation II Lease Document Waterbury.
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10.22 Connecticut Subacute Corporation II Lease Document Cheshire.
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10.23 Connecticut Subacute Corporation II Lease Document New Haven.
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10.24 Vermont Subacute/New Hampshire Subacute Master Lease Agreement
(Chapple). (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.25 Amended and Restated Agreement and Plan of Reorganization
(Chapple). (incorporated by reference to the Company's Annual
report on Form 10-K for the year ended December 31, 1995)
10.26 Purchase Option Agreement. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995)
10.27 Amended and Restated Promissory Note, dated July 29, 1996, from
Connecticut Subacute Corporation to the Company. (incorporated by
reference to the Company's Current Report on Form 8-K dated
October 1, 1996)
10.28 Third Amended and Restated Revolving Loan Agreement, dated as of
March 15, 1996, among Health and Retirement Properties Trust, as
borrower, the lenders named therein, Kleinwort Benson Limited, as
agent, Wells Fargo Bank, National Association, as administrative
agent, Natwest Bank, N.A., as co- agent, et al. (incorporated by
reference to the Company's Current Report on Form 8-K, dated
February 17, 1997)
29
10.29 Letter Agreement, dated as of October 21, 1996, among Health and
Retirement Properties Trust, as borrower, Kleinwort Benson
Limited, as agent, and the Majority Lenders. (incorporated by
reference to the Company's Current Report on Form 8-K, dated
February 17, 1997)
10.30 First Amendment, dated as of December 15, 1996, to Third Amended
and Restated Revolving Loan Agreement, dated as of March 15, 1996,
among Health and Retirement Properties Trust, as borrower,
Kleinwort Benson Limited, as agent, Wells Fargo Bank, National
Association, as administrative agent, Natwest Bank, N.A., as
co-agent, et al. (incorporated by reference to the Company's
Current Report on Form 8-K, dated February 17, 1997)
10.31 Second Amendment and Waiver, dated as of March 19, 1997, to Third
Amended and Restated Revolving Loan Agreement, dated as of March
15, 1996, among Health and Retirement Properties Trust, as
borrower, the lenders named therein, Dresdner Kleinwort Benson
North America LLC (as successor to Kleinwort Benson Limited), as
agent, Wells Fargo Bank, National Association, as administrative
agent, Fleet National Bank (as successor to Fleet Bank of
Massachusetts), as co-agent, et al. (incorporated by reference to
the Company's Current Report on Form 8-K dated March 20, 1997)
10.32 Third Amendment dated as of July 30, 1997 to the Third Amended and
Restated Revolving Loan Agreement by and among the Company, as
borrower, the lenders named therein, Kleinwort Benson North
America LLC (as successor to Kleinwort Benson Limited), as agent,
Wells Fargo Bank, National Association, as administrative agent,
and Fleet National Bank (as successor to NatWest Bank), as co-
agent. (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997)
10.33 Fourth Amendment dated as of November 14, 1997 to the Third
Amendment and Restated Revolving Loan Agreement by and among the
Company, as borrower, the lenders named therein, Dresdner
Kleinwort Benson North America LLC, as agent, and Fleet National
Bank, as administrative agent. (filed herewith)
10.34 Merger Agreement dated February 17, 1997 between Health and
Retirement Properties Trust and Government Property Investors,
Inc. including forms to Escrow Agreement, Investment and
Registration Rights Agreement, Voting Agreement, Information
Access Agreement, Indemnification Agreement, Service Contract,
Non-Solicitation Agreement and Second Closing Escrow Agreement.
(incorporated by reference to the Company's Current Report on Form
8-K, dated February 17, 1997)
10.35 Amendment No. 1 to Agreement of Merger dated March 25, 1997
between the Company and Government Property Investors, Inc.
(incorporated by reference to the Company's Registration Statement
on Form S-3 (File No. 333-29675) filed with the Commission on June
20, 1997)
10.36 Remarketing Agreement (including form of Remarketing Underwriting
Agreement) relating to the Remarketed Reset Notes due July 9, 2007
by and between the Company and Merrill Lynch & Co., dated as of
July 2, 1997. (incorporated by reference to the Company's Current
Report on Form 8-K, dated July 2, 1997)
10.37 Purchase and Sale Agreement dated September 25, 1997 by and
between 7 West Associates LLC, as seller, and the Company, as
purchaser. (incorporated by reference to the Company's Current
Report on Form 8-K, dated October 1, 1997)
10.38 Contribution Agreement (and Escrow Instructions) with respect to
the acquisition of the Cedars-Sinai Medical Office Towers dated as
of April 20, 1997 by and between Medical Office Buildings, Ltd.,
as seller, and the Company, as buyer. (incorporated by reference
to the Company's Current Report on Form 8-K, dated October 1,
1997)
10.39 Purchase and Sale Agreement dated October 23, 1997 by and between
Franklin Office Associates, as seller, and the Company, as
purchaser. (incorporated by reference to the Company's Current
Report on Form 8-K, dated November 13, 1997)
10.40 Purchase and Sale Agreement dated November 24, 1997 by and between
Investors Life Insurance Company of North America and Family Life
Insurance Company, as seller and the Company, as purchaser.
(incorporated by reference to the Company's Current Report on Form
8-K, dated December 5, 1997)
30
12.1 Statement regarding computation of ratio of earning to fixed
charges. (filed herewith)
21.1 Subsidiaries of the Registrant. (filed herewith)
23.1 Consent of Ernst & Young LLP. (filed herewith)
23.2 Consent of Arthur Andersen LLP. (filed herewith)
23.3 Consent of Sullivan & Worcester LLP. (included as part of Exhibit
8.1 hereto)
99.1 Current Report on Form 8-K dated February 27, 1998. (filed
herewith)
(+) Management contract or compensatory plan or arrangement.
(b) During the fourth quarter of 1997, the Company filed the following
Current Reports on Form 8-K:
(i) Current Report on Form 8-K dated October 1, 1997 relating to the
purchase of a 420,368 square foot office building located at 7
West 34th Street in New York City, New York from 7 West Associates
LLC, a wholly owned subsidiary of Orchard Properties, Inc., for
$110 million (Items 2 and 7), as amended by an Amendment dated
December 12, 1997.
(ii) Current Report on Form 8-K dated November 13, 1997 relating to the
purchase of an office building with approximately 608,161 square
foot located at One Franklin Plaza, in Philadelphia, Pennsylvania
from Franklin Office Associates for $75.5 million plus closing
costs in a negotiated arms-length transaction (Items 2 and 7), as
amended by an Amendment dated January 12, 1998.
(iii) CurrentReport on Form 8-K dated December 5, 1997 relating to (i)
the purchase of Bridgepoint Square, an office complex containing
five commercial office properties with approximately 441,145
square foot located in Austin, Texas, from Investors Life
Insurance Company of North America and Family Life Insurance
Company for $78 million plus closing costs in a negotiated
arms-length transaction and (ii) the completion of a private
placement of $150 million of 6 3/4% Senior Notes due 2002. (Items
2, 5 and 7), as amended by an Amendment dated January 23, 1998.
31
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Retirement and Assisted Living Communities:
Scottsdale AZ $ 979 $ 8,807 $ 140 $ 990 $ 8,936 $ 9,926 $ 809 5/16/94 1990
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 949 6/17/94 1990
Mesa AZ 1,480 13,320 -- 1,480 13,320 14,800 347 12/27/96 1985
Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791 2,356 9/9/94 1975
Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836 3,655 5/20/94 1994
Deerfield Beach FL 1,664 14,972 298 1,690 15,244 16,934 1,381 5/16/94 1986
Ft. Myers FL 2,349 21,137 419 2,385 21,520 23,905 1,816 8/16/94 1984
Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863 2,761 5/16/94 1992
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 1,015 5/20/94 1993
Chicago IL 6,200 55,800 -- 6,200 55,800 62,000 1,453 12/27/96 1990
Arlington Heights IL 3,621 32,587 535 3,665 33,078 36,743 2,724 9/9/94 1986
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 2,574 7/25/94 1992
Rochester NY 1,070 9,630 -- 1,070 9,630 10,700 251 12/27/96 1988
Huron SD 45 968 1 44 970 1,014 149 6/30/92 1968
Bellaire TX 1,223 11,010 178 1,238 11,173 12,411 1,012 5/16/94 1991
Arlington VA 1,859 16,734 295 1,885 17,003 18,888 1,470 7/25/94 1992
Charlottesville VA 2,936 26,422 472 2,976 26,854 29,830 2,377 6/17/94 1991
Virginia Beach VA 881 7,926 137 890 8,054 8,944 729 5/16/94 1990
Spokane WA 1,035 13,315 -- 1,035 13,315 14,350 224 5/7/97 1993
-------------------- -------- ------------------------------- ---------
Subtotal 41,831 381,033 5,518 42,305 386,077 428,382 28,052
-------------------- -------- ------------------------------- ---------
Long-Term Care Facilities:
Phoenix AZ 655 2,525 5 655 2,530 3,185 399 6/30/92 1963
Yuma AZ 223 2,100 4 223 2,104 2,327 326 6/30/92 1984
Yuma AZ 103 604 1 103 605 708 94 6/30/92 1984
Fresno CA 738 2,577 188 738 2,765 3,503 564 12/28/90 1968
Lancaster CA 601 1,859 1,029 601 2,888 3,489 524 12/28/90 1963
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 508 12/28/90 1962
Palm Springs CA 103 1,264 982 103 2,246 2,349 369 12/28/90 1969
San Diego CA 1,114 1,073 480 1,114 1,553 2,667 320 12/28/90 1969
Stockton CA 382 2,750 4 382 2,754 3,136 429 6/30/92 1968
Tarzana CA 1,277 977 806 1,278 1,782 3,060 351 12/28/90 1969
Thousand Oaks CA 622 2,522 310 622 2,832 3,454 557 12/28/90 1965
Van Nuys CA 716 378 225 718 601 1,319 134 12/28/90 1969
S-1
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Care Facilities - continued:
Cannon City CO 292 6,228 -- 292 6,228 6,520 45 9/22/97 1970
Colorado Springs CO 246 5,236 -- 246 5,236 5,482 38 9/22/97 1972
Delta CO 167 3,570 -- 167 3,570 3,737 26 9/22/97 1963
Grand Junction CO 6 2,583 1,316 136 3,769 3,905 402 12/30/93 1978
Grand Junction CO 204 3,875 329 204 4,204 4,408 518 12/30/93 1968
Lakewood CO 232 3,766 724 232 4,490 4,722 846 12/28/90 1972
Littleton CO 185 5,043 349 185 5,392 5,577 1,069 12/28/90 1965
Cheshire CT 520 7,380 1,559 520 8,939 9,459 2,315 11/1/87 1963
Killingly CT 240 5,360 460 240 5,820 6,060 1,799 5/15/87 1972
New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870 2,825 5/11/92 1971
Waterford CT 86 4,714 453 86 5,167 5,253 1,656 5/15/87 1965
Willimantic CT 134 3,566 479 166 4,013 4,179 1,192 5/15/87 1965
College Park GA 300 2,702 23 300 2,725 3,025 136 5/15/96 1985
Glenwood GA 174 1,564 3 174 1,567 1,741 72 5/15/96 1972
Dublin GA 442 3,982 80 442 4,062 4,504 193 5/15/96 1968
Marrietta GA 300 2,702 35 300 2,737 3,037 130 5/15/96 1969
Clarinda IA 77 1,453 293 77 1,746 1,823 200 12/30/93 1968
Council Bluffs IA 225 2,125 (1,133) 225 992 1,217 139 4/1/95 1963
Mediapolis IA 94 1,776 250 94 2,026 2,120 241 12/30/93 1973
Pacific Junction IA 32 368 (57) 32 311 343 25 4/1/95 1978
Winterset IA 111 2,099 492 111 2,591 2,702 296 12/30/93 1973
Nashville IL 75 2,556 80 75 2,636 2,711 530 12/28/90 1964
Ellinwood KS 130 1,420 (230) 130 1,190 1,320 96 4/1/95 1972
St. Joseph MO 111 1,027 195 111 1,222 1,333 124 6/4/93 1976
Tarkio MO 102 1,938 415 102 2,353 2,455 264 12/30/93 1970
Grand Island NE 119 1,331 484 119 1,815 1,934 105 4/1/95 1963
Rochester NH 466 3,219 4 466 3,223 3,689 238 1/30/95 1972
Burlington NJ 1,300 11,700 7 1,300 11,707 13,007 660 9/28/95 1994
Akron OH 330 5,370 727 330 6,097 6,427 1,966 5/15/87 1971
Grove City OH 332 3,081 32 332 3,113 3,445 352 6/4/93 1965
Huron SD 144 3,108 4 144 3,112 3,256 480 6/30/92 1968
Sioux Falls SD 253 3,062 4 253 3,066 3,319 475 6/30/92 1960
Barre VT 261 4,530 133 389 4,535 4,924 335 1/30/95 1979
S-2
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Care Facilities - continued:
Barre VT 129 3,825 4 129 3,829 3,958 283 1/30/95 1972
Bennington VT 160 4,385 5 160 4,390 4,550 325 1/30/95 1971
Burlington VT 791 5,985 410 872 6,314 7,186 464 1/30/95 1968
Springfield VT 50 747 1 50 748 798 55 1/30/95 1976
Springfield VT 89 3,724 157 242 3,728 3,970 276 1/30/95 1971
St. Albans VT 154 710 1 154 711 865 53 1/30/95 1900
St. Johnsbury VT 95 3,416 4 95 3,420 3,515 253 1/30/95 1978
Seattle WA 256 4,869 68 256 4,937 5,193 632 11/1/93 1972
Brookfield WI 834 3,849 8,014 834 11,863 12,697 1,580 12/28/90 1954
Clintonville WI 49 1,625 88 30 1,732 1,762 339 12/28/90 1965
Clintonville WI 14 1,695 37 14 1,732 1,746 340 12/28/90 1960
Madison WI 144 1,633 109 144 1,742 1,886 341 12/28/90 1920
Milwaukee WI 277 3,883 -- 277 3,883 4,160 655 3/27/92 1969
Milwaukee WI 116 3,438 123 116 3,561 3,677 697 12/28/90 1960
Waukesha WI 68 3,452 2,232 68 5,684 5,752 883 12/28/90 1958
Laramie WY 191 3,632 200 191 3,832 4,023 475 12/30/93 1964
Worland WY 132 2,503 589 132 3,092 3,224 339 12/30/93 1970
-------------------- -------- ------------------------------- ---------
Subtotal 20,630 201,116 26,045 21,138 226,653 247,791 32,353
-------------------- -------- ------------------------------- ---------
Long-Term Care Facilities with Subacute Services:
Wallingford CT 557 11,043 2,374 557 13,417 13,974 3,894 12/23/86 1974
Waterbury CT 514 10,186 2,893 630 12,963 13,593 3,548 12/23/86 1971
Forestville CT 465 9,235 3,083 478 12,305 12,783 3,371 12/23/86 1972
Waterbury CT 1,003 9,023 914 1,003 9,937 10,940 1,727 5/11/92 1974
Boston MA 2,164 20,836 1,978 2,164 22,814 24,978 5,955 5/1/89 1968
Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769 4,888 5/1/88 1970
Hyannis MA 829 7,463 -- 829 7,463 8,292 1,396 5/11/92 1972
Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523 2,914 5/11/92 1975
North Andover MA 1,448 11,049 -- 1,448 11,049 12,497 2,067 5/11/92 1985
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 3,094 3/1/91 1985
-------------------- -------- ------------------------------- ---------
Subtotal 12,079 123,151 13,717 12,227 136,720 148,947 32,854
-------------------- -------- ------------------------------- ---------
S-3
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Medical and Other Office Buildings and Clinics:
Anaheim CA 695 6,257 -- 695 6,257 6,952 78 12/5/97 1992
Anaheim CA 134 1,204 -- 134 1,204 1,338 15 12/5/97 1970
Anaheim CA 82 736 -- 82 736 818 9 12/5/97 1970
Los Angeles CA 10,131 99,569 -- 10,131 99,569 109,700 1,590 5/15/97 1979
San Diego CA 1,425 12,842 362 1,425 13,204 14,629 384 12/31/96 1985
San Diego CA 4,205 38,335 45 4,205 38,380 42,585 999 12/5/96 1985
Sacramento CA 644 3,206 77 644 3,283 3,927 277 12/18/95 1988
Aurora CO 1,440 12,963 -- 1,440 12,963 14,403 162 11/14/97 1993
Washington DC 2,485 22,696 773 2,485 23,469 25,954 764 9/3/96 1976
Washington DC 1,873 16,703 -- 1,873 16,703 18,576 211 12/19/97 1966
Boston MA 3,378 30,397 750 3,378 31,147 34,525 1,803 9/28/95 1985
Boston MA 1,447 13,028 39 1,447 13,067 14,514 748 9/28/95 1993
Boston MA 1,500 13,500 236 1,500 13,736 15,236 699 12/18/95 1988
Charlton MA 141 1,269 8 141 1,277 1,418 20 5/15/97 1988
Fitchburg MA 223 2,004 10 223 2,014 2,237 31 5/15/97 1994
Grafton MA 37 336 5 37 341 378 5 5/15/97 1930
Millbury MA 34 309 4 34 313 347 5 5/15/97 1950
Milford MA 144 1,297 9 144 1,306 1,450 20 5/15/97 1989
Northbridge MA 32 290 5 32 295 327 5 5/15/97 1962
Paxton MA 24 212 4 24 216 240 3 5/15/97 1984
Spencer MA 211 1,902 11 211 1,913 2,124 30 5/15/97 1992
Sturbridge MA 83 751 7 83 758 841 12 5/15/97 1986
Webster MA 315 2,834 14 315 2,848 3,163 44 5/15/97 1995
Westborough MA 166 1,498 8 166 1,506 1,672 23 5/15/97 1977
Westborough MA 396 3,562 15 396 3,577 3,973 56 5/15/97 1986
Westborough MA 42 381 5 42 386 428 6 5/15/97 1900
Westborough MA 24 216 4 24 220 244 3 5/15/97 1953
Westwood MA 303 2,740 50 303 2,790 3,093 78 11/26/96 1980
Westwood MA 537 4,960 -- 537 4,960 5,497 120 1/8/97 1977
Worcester MA 111 1,000 6 111 1,006 1,117 16 5/15/97 1986
Worcester MA 1,132 10,186 38 1,132 10,224 11,356 159 5/15/97 1989
Worcester MA 895 8,052 30 895 8,082 8,977 126 5/15/97 1990
Worcester MA 354 3,189 14 354 3,203 3,557 50 5/15/97 1985
Worcester MA 265 2,385 11 265 2,396 2,661 37 5/15/97 1972
S-4
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Medical and Other Office Buildings and Clinics - continued:
Worcester MA 158 1,417 7 158 1,424 1,582 22 5/15/97 1992
Baltimore MD -- 12,517 -- -- 12,517 12,517 156 11/18/97 1988
Brooklyn NY 775 7,054 2 775 7,056 7,831 272 6/6/96 1982
New York NY 44,000 66,928 -- 44,000 66,928 110,928 414 10/1/97 1989
White Plains NY 1,200 10,870 2 1,200 10,872 12,072 509 2/6/96 1995
Fort Washington PA 1,189 5,605 -- 1,189 5,605 6,794 41 9/22/97 1967
Fort Washington PA 1,877 8,869 -- 1,877 8,869 10,746 65 9/22/97 1960
Fort Washington PA 689 3,248 -- 689 3,248 3,937 24 9/22/97 1970
Horsham PA 747 3,664 -- 747 3,664 4,411 26 9/22/97 1983
King of Prussia PA 690 3,254 -- 690 3,254 3,944 27 9/22/97 1964
Philadelphia PA 7,897 71,070 -- 7,897 71,070 78,967 888 11/13/97 1987
Lincoln RI 810 7,290 -- 810 7,290 8,100 91 11/13/97 1997
Austin TX 2,319 20,869 -- 2,319 20,869 23,188 261 12/5/97 1996
Austin TX 1,642 14,654 -- 1,642 14,654 16,296 185 12/5/97 1997
Austin TX 1,403 12,626 -- 1,403 12,626 14,029 158 12/5/97 1997
Austin TX 1,226 11,035 -- 1,226 11,035 12,261 138 12/5/97 1997
Austin TX 1,220 11,568 -- 1,220 11,568 12,788 137 12/5/97 1986
Fairfax VA 569 5,122 66 569 5,188 5,757 134 12/3/96 1990
-------------------- -------- ------------------------------- ---------
Subtotal 103,319 598,469 2,617 103,319 601,086 704,405 12,136
-------------------- -------- ------------------------------- ---------
Government Office Buildings:
Petersburg AK 728 272 -- 728 272 1,000 60 3/25/97 1983
Phoenix AZ 2,657 11,562 -- 2,657 11,562 14,219 219 5/15/97 1997
Safford AZ 604 2,760 -- 604 2,760 3,364 50 3/25/97 1992
Tuscon AZ 727 3,318 -- 727 3,318 4,045 60 3/25/97 1993
Los Angeles CA 1,014 9,149 -- 1,014 9,149 10,163 108 7/11/97 1996
San Diego CA 4,058 18,527 -- 4,058 18,527 22,585 334 3/25/97 1996
San Diego CA 2,836 13,007 1,120 2,836 14,127 16,963 233 3/25/97 1996
San Diego CA 2,772 12,658 -- 2,772 12,658 15,430 228 3/25/97 1994
Golden CO 527 -- 3,153 527 3,153 3,680 -- 3/25/97 1997
Washington DC 11,414 52,185 60 11,414 52,245 63,659 939 3/25/97 1996
Washington DC 6,634 30,202 99 6,634 30,301 36,935 546 3/25/97 1989
Savannah GA 517 2,357 -- 517 2,357 2,874 42 3/25/97 1990
Kansas City KS 990 4,521 190 990 4,711 5,701 81 3/25/97 1990
College Park MD 8,957 40,899 -- 8,957 40,899 49,856 737 3/25/97 1994
S-5
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Initial Cost to Gross Amount Carried at Close of
Company Period 12/31/97
------------------ -------------------------
Costs Capitalized
Subsequent
Buildings to Buildings Accumulated Original
& Acquisi- & Depreciation Date Construction
Location State Land Equipment tion Land Equipment Total(1) (2) Acquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
Government Office Buildings - continued:
Gaithersburg MD 4,164 19,015 -- 4,164 19,015 23,179 342 3/25/97 1995
Germantown MD 2,191 10,004 -- 2,191 10,004 12,195 180 3/25/97 1995
Oxon Hill MD 3,024 13,810 -- 3,024 13,810 16,834 249 3/25/97 1992
Kansas City MO 1,372 6,264 -- 1,372 6,264 7,636 113 3/25/97 1995
Albuquerque NM 469 2,143 -- 469 2,143 2,612 39 3/25/97 1984
Sante Fe NM 1,474 6,727 -- 1,474 6,727 8,201 121 3/25/97 1987
Buffalo NY 4,187 19,117 13 4,187 19,130 23,317 344 3/25/97 1994
Oklahoma City OK 4,369 20,057 -- 4,369 20,057 24,426 359 3/25/97 1992
Houston TX 1,087 4,573 -- 1,087 4,573 5,660 89 3/25/97 1993
Waco TX 1,081 9,657 13 1,081 9,670 10,751 -- 12/23/97 1997
Falls Church VA 3,285 14,999 -- 3,285 14,999 18,284 270 3/25/97 1993
Richland WA 3,774 17,231 -- 3,774 17,231 21,005 310 3/25/97 1995
Falling Waters WV 861 3,931 -- 861 3,931 4,792 71 3/25/97 1993
Cheyenne WY 1,820 8,312 -- 1,820 8,312 10,132 150 3/25/97 1995
-------------------- -------- ------------------------------- ---------
Subtotal 77,593 357,257 4,648 77,593 361,905 439,498 6,274
-------------------- -------- ------------------------------- ---------
Total Real Estate $255,452 $1,661,026 $52,545 $256,582 $1,712,441 $1,969,023 $111,669
==================== ======== =============================== =========
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $1,876,981.
(2) Depreciation is provided for on buildings and improvements for periods
ranging up to 40 years and on equipment up to 12 years.
</FN>
S-6
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III - continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(Dollars in thousands)
Real Estate and Accumulated
Equipment Depreciation
--------------- ---------------
Balance at January 1, 1995 $ 673,083 $ 39,570
Additions 309,853 21,047
Disposals (24,376) (2,352)
Real estate investments of Hospitality Properties Trust (180,349) (2,410)
--------------- ---------------
Balance at December 31, 1995 778,211 55,855
Additions 227,528 21,066
--------------- ---------------
Balance at December 31, 1996 1,005,739 76,921
Additions 998,579 37,619
Disposals (35,295) (2,871)
--------------- ---------------
Balance at December 31, 1997 $ 1,969,023 $ 111,669
=============== ===============
S-7
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
(Dollars in thousands)
Principal Amount of
(1) Loans Subject to
Face Carrying Delinquent
Final Value of Value Principal
Location Interest Rate Maturity Date Periodic Payment Terms Mortgage of Mortgage or Interest
- ------------------------------------------------------------------------------------------------------------------------------------
Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,239 $4,239 $ --
arrears. $3.8 million due at maturity.
Jacksonville, FL 10.50% 3/31/06 Interest only, payable monthly in arrears. 5,000 5,000 --
$5.0 million due at maturity.
Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 5,028 5,028 --
arrears. $4.5 million due at maturity.
Medina, OH 8.50% 2/1/98 Principal and interest, payable monthly in 5,760 5,725 --
arrears. $5.8 million due at maturity.
Ainsworth, NE 9.00% 12/31/16 Interest only, payable monthly in arrears; 5,171 5,171 --
Ashland, NE principal and interest starting 1998.
Blue Hill, NE $2.8 million due at maturity.
Gretna, NE
Sutherland, NE
Waverly, NE
Aberdeen, NC 11.35% 4/30/07 Interest only, payable monthly in arrears; 11,472 11,472 --
King, NC $11.5 million repaid in January 1998.
New Bern, NC
Milwaukee, WI 11.50% 1/31/13 Principal and interest, payable monthly in 11,466 11,466 --
Pewaukee, WI arrears. $9.6 million due at maturity.
Torrance, CA 12.50% 12/31/02 Principal and interest, payable monthly in 12,240 12,240 --
Torrance, CA arrears. $11.7 million due at maturity.
Anaheim, CA
S-8
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
(Dollars in thousands)
Principal Amount of
(1) Loans Subject to
Face Carrying Delinquent
Final Value of Value Principal
Location Interest Rate Maturity Date Periodic Payment Terms Mortgage of Mortgage or Interest
- ------------------------------------------------------------------------------------------------------------------------------------
Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 19,185 19,185 --
arrears. $13.9 million due at maturity.
15 Mortgages 8.02% - 13.75% 2/99-12/16 Interest only or principal and interest, 23,077 21,976 --
payable monthly in arrears.
----------------------------------------
$ 102,638 $ 101,502 $ --
========================================
<FN>
(1) Also represents cost for federal income tax purposes.
</FN>
S-9
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV-continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
(Dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the beginning of the period:
Balance at January 1, 1995 $ 125,791
New mortgage loans 40,064
Collections of principal, net of discounts (26,607)
-------------
Balance at December 31, 1995 139,248
New mortgage loans 5,918
Collections of principal, net of discounts (7,921)
-------------
Balance at December 31, 1996 137,245
New mortgage loans 1,520
Collections of principal, net of discounts (37,263)
-------------
Balance at December 31, 1997 $ 101,502
=============
S-10
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
President and Chief Operating Officer
Dated: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, or by their
attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date
/s/ David J. Hegarty President and Chief Operating Officer March 11, 1998
- ------------------------------------
David J. Hegarty
/s/ Ajay Saini Treasurer and Chief Financial Officer March 11, 1998
- ------------------------------------
Ajay Saini
/s/ Bruce M. Gans, M.D. Trustee March 11, 1998
- ------------------------------------
Bruce M. Gans, M.D.
/s/ Ralph J. Watts Trustee March 11, 1998
- ------------------------------------
Ralph J. Watts
/s/ Justinian Manning, C.P. Trustee March 11, 1998
- ------------------------------------
Rev. Justinian Manning, C.P.
/s/ Gerard M. Martin Trustee March 11, 1998
- ------------------------------------
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 11, 1998
- ------------------------------------
Barry M. Portnoy