UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-9317
HEALTH AND RETIREMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
400 Centre Street, Newton, Massachusetts 02158
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
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 [ ]
Number of Common Shares outstanding at the latest practicable date
April 29, 1998: 106,521,956 shares of beneficial interest, $.01 par value.
HEALTH AND RETIREMENT PROPERTIES TRUST
FORM 10-Q
MARCH 31, 1998
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 1
Consolidated Statements of Income - Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II Other Information
Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
March 31, December 31,
1998 1997
------------- ------------
ASSETS
Real estate properties, at cost (including properties leased to
affiliates with a cost of $113,079 and $112,075, respectively):
Land $ 288,933 $ 256,582
Buildings and improvements 1,958,782 1,712,441
----------- -----------
2,247,715 1,969,023
Less accumulated depreciation 123,652 111,669
----------- -----------
2,124,063 1,857,354
Real estate mortgages and notes, net (including note from an affiliate
of $1,000 and $2,365, respectively) 84,195 104,288
Investment in Hospitality Properties Trust 111,433 111,134
Cash and cash equivalents 21,678 22,355
Interest and rents receivable 20,419 20,455
Deferred interest and finance costs, net, and other assets 27,463 20,377
----------- -----------
$ 2,389,251 $ 2,135,963
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 160,000 $ 200,000
Senior notes payable, net 499,851 349,900
Mortgage notes payable 26,157 26,329
Convertible subordinated debentures 209,818 211,650
Accounts payable and accrued expenses 32,371 27,865
Deferred rents 33,448 30,089
Security deposits 17,818 18,767
Due to affiliates 7,141 5,103
Dividend payable 40,377 --
Shareholders' equity:
Preferred shares of beneficial interest, $.01 par value:
50,000,000 shares authorized, none issued -- --
Common shares of beneficial interest, $.01 par value:
125,000,000 shares authorized, 106,256,403 shares and
98,853,170 shares issued and outstanding, respectively 1,063 988
Additional paid-in capital 1,512,767 1,371,236
Cumulative net income 451,679 420,298
Dividends (603,239) (526,262)
----------- -----------
Total shareholders' equity 1,362,270 1,266,260
----------- -----------
$ 2,389,251 $ 2,135,963
=========== ===========
See accompanying notes
1
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
-------- ---------
Revenues:
Rental income $ 66,894 $ 30,679
Interest and other income 5,058 5,205
-------- --------
Total revenues 71,952 35,884
-------- --------
Expenses:
Operating expenses 13,502 2,067
Interest 13,651 7,848
Depreciation and amortization 12,658 6,955
General and administrative 3,619 1,871
-------- --------
Total expenses 43,430 18,741
-------- --------
Income before equity in earnings of Hospitality Properties Trust 28,522 17,143
Equity in earnings of Hospitality Properties Trust 1,327 2,256
Gain on equity transaction of Hospitality Properties Trust 1,532 --
-------- --------
Net income $ 31,381 $ 19,399
======== ========
Weighted average shares outstanding 101,471 71,905
======== ========
Basic and diluted earnings per common share:
Net income $ 0.31 $ 0.27
======== ========
See accompanying notes
3
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Three Months Ended
March 31,
1998 1997
---------- ---------
Cash flows from operating activities:
Net income $ 31,381 $ 19,399
Adjustments to reconcile net income to cash provided by operating
activities:
Gain on equity transaction of Hospitality Properties Trust (1,532) --
Equity in earnings of Hospitality Properties Trust (1,327) (2,256)
Dividends from Hospitality Properties Trust 2,560 2,360
Depreciation 12,128 6,518
Amortization 530 437
Amortization of deferred interest costs 6 322
Change in assets and liabilities:
(Increase) decrease in interest and rents receivable and other
assets (6,554) 5,194
Increase (decrease) in accounts payable and accrued expenses 4,506 (1,568)
Increase in deferred rents 3,359 9,139
Decrease in security deposits (949) (2,276)
Increase (decrease) in due to affiliates 3,078 (1,068)
--------- ---------
Cash provided by operating activities 47,186 36,201
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (278,647) (6,272)
Acquisition of business, less cash acquired -- (291,935)
Investments in mortgage loans -- (268)
Proceeds from repayment of notes and mortgage loans, net of discounts 18,678 3,915
Net proceeds from sale of real estate 5,565 --
Repayment of loan to affiliate 1,365 --
--------- ---------
Cash used for investing activities (253,039) (294,560)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares 133,073 483,153
Proceeds from borrowings, net 334,945 --
Payments on borrowings (225,172) (140,000)
Deferred finance costs incurred (1,070) (955)
Dividends paid (36,600) (24,396)
--------- ---------
Cash provided by financing activities 205,176 317,802
--------- ---------
(Decrease) increase in cash and cash equivalents (677) 59,443
Cash and cash equivalents at beginning of period 22,355 21,853
--------- ---------
Cash and cash equivalents at end of period $ 21,678 $ 81,296
========= =========
Supplemental cash flow information:
Interest paid $ 13,775 $ 9,070
========= =========
See accompanying notes
3
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Three Months Ended
March 31,
1998 1997
---------- ---------
Non-cash financing activities:
Issuance of shares $ 2,828 $ 16,304
Conversion of convertible subordinated debentures, net (1,788) (15,694)
Non-cash investing activities:
Acquisition of business, less cash acquired:
Real estate acquisitions $ 5,705 $ 391,346
Working capital, other than cash -- 2,051
Liabilities assumed -- (27,588)
Net cash used to acquire business -- (291,935)
--------- ---------
Issuance of shares $ 5,705 $ 73,874
========= =========
See accompanying notes
4
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Basis of Presentation
The financial statements of Health and Retirement Properties Trust (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for interim periods are
not necessarily indicative of the results that may be expected for the full
year. Certain prior year amounts have been reclassified to conform to the
current year's presentation.
In 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 130 "Reporting Comprehensive Income"
("FAS 130") and Statement No. 131 "Disclosure about Segments of an Enterprise
and Related Information" ("FAS 131"). FAS 130 was adopted for the Company's
financial statements in the first quarter of 1998 and had no impact on the
Company's financial condition or results of operations. FAS 131 is effective for
the Company's annual 1998 financial statements. The Company anticipates that FAS
131 will have no impact on the Company's financial condition or results of
operations.
Note 2. Shareholders' Equity
During the three months ended March 31, 1998, the Company issued
6,977,575 common shares in four separate unit investment trusts sponsored by
various investment banks, raising net proceeds of $133,073, issued 286,400
common shares for the purchase of real estate, issued 86,942 common shares due
to the conversion of $1,832 of its convertible subordinated debentures due 2003
and issued 52,316 common shares to HRPT Advisors, Inc., ("Advisors") an
affiliate, as the incentive fee earned for the year ended December 31, 1997. The
net proceeds received from the public offerings were used to repay amounts
outstanding under the Company's bank credit facility, for the purchase of real
estate and for general business purposes.
On March 19, 1998, the Trustees declared a dividend on the Company's
common shares with respect to the quarter ended March 31, 1998 of $.38 per
share, which will be distributed on or about May 20, 1998 to shareholders of
record as of March 31, 1998.
Note 3. Real Estate Properties
During the three months ended March 31, 1998, the Company purchased
twelve commercial office properties and seven medical office properties for
approximately $270,359, from cash on hand and borrowings under the Company's
bank credit facility. In addition, the Company sold one office property for
$5,565 in January 1998; no gain or loss was recognized on the sale of this
property.
At March 31, 1998, 13% of the Company's real estate investments, net,
were in properties leased to Marriott International, Inc. ("Marriott"). The
financial statements of Marriott have been filed as a part of Marriott's
Quarterly Report on Form 10-Q, file number 1-13881, for the quarter ended March
27, 1998.
During the three months ended March 31, 1998, the Company funded $8,288
of improvements to its existing properties. At March 31,1998, the Company had
total outstanding commitments aggregating approximately $490,400 to acquire
properties or to provide financing. The acquisition of these properties is
subject to various closing conditions customary in real estate transactions and
no assurances can be made as to when or if these properties will be acquired.
Subsequent to March 31, 1998, the Company purchased one commercial
office property for approximately $31,650, from cash on hand and by borrowing
$25,000 on the Company's revolving credit facility. The commercial and medical
office properties owned by the Company are managed by REIT Management &
Research, Inc., an affiliate of the Company.
5
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 4. Investment in Hospitality Properties Trust
At March 31, 1998, the Company owned four million shares of the common
stock of Hospitality Properties Trust ("HPT") with a carrying value of $111,433
and a market value of $141,750. The Company's percentage ownership of HPT was
reduced from 10.3% at December 31, 1997 to 9.7% at March 31, 1998 as a result of
public stock offerings completed by HPT during 1998. As a result of these
transactions, the Company recognized a gain of $1,532 in 1998.
Note 5. Real Estate Mortgages and Notes Receivable, net
During the three months ended March 31, 1998, the Company received
regularly scheduled principal payments of $192 and principal repayments of
mortgages secured by three retirement facilities and two nursing facilities
totaling $19,593. In addition, the Company received $1,365 representing the
partial repayment of a loan to an affiliate.
Note 6. Indebtedness
During February 1998, the Company issued $50,000 of Remarketed Reset
Notes due 2007 and unsecured 6.7% Senior Notes due 2005 totaling $100,000. Net
proceeds from these issuances of $148,946 were used to repay amounts outstanding
under the Company's revolving credit facility and for general business purposes.
In April 1998, the Company entered into a new $500,000 unsecured
revolving bank credit facility (the "New Credit Facility"). The New Credit
Facility matures in 2002 and bears interest at LIBOR plus a premium. The Company
will recognize an extraordinary loss on the early extinguishment of debt in the
second quarter of 1998 of approximately $2,100 as a result of the write-off of
deferred financing fees associated with the current bank credit facility.
6
HEALTH AND RETIREMENT PROPERTIES TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Versus 1997
Total revenues for the three months ended March 31, 1998 increased to
$72.0 million from $35.9 million for the three months ended March 31, 1997.
Rental income increased by $36.2 million and interest and other income decreased
by $147,000. Rental income increased because of new real estate investments
subsequent to March 31, 1997 which included investments in "gross leased" real
estate assets as compared to "net leased" assets. As the Company's investment in
such "gross leased" assets increases, the Company anticipates rental income and
the corresponding operating expenses from such leases to increase during
subsequent periods. Interest and other income decreased primarily as a result of
a decrease in mortgage interest income.
Total expenses for the three months ended March 31, 1998 increased to
$43.4 million from $18.7 million for the three months ended March 31, 1997.
Operating expenses increased by $11.4 million as a result of the Company's
increased investment in "gross leased" real estate assets during the 1998 period
as compared to the 1997 period. Interest expense increased by $5.8 million due
to higher borrowings outstanding during the 1998 period. Depreciation and
amortization, and general and administrative expense increased by $5.7 million
and $1.7 million, respectively, primarily as a result of new real estate
investments subsequent to March 31, 1997.
Net income increased to $31.4 million, or $.31 per basic and diluted
common share, for the 1998 period from $19.4 million, or $.27 per common share,
for the 1997 period. Net income increased primarily as a result of new real
estate investments since March 31, 1997.
Funds from operations for the three months ended March 31, 1998 were
$44.3 million, or $.44 per basic common share, and $27.0 million, or $.38 per
basic common share, for the 1997 period. The dividends declared which relate to
the three months ended March 31, 1998 and 1997 were $40.4 million, or $.38 per
basic common share, and $35.5 million, or $.36 per basic common share,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company increased to $2.4 billion at March 31,
1998, from $2.1 billion at December 31, 1997. The increase is primarily
attributable to new real estate acquisitions since December 31, 1997.
During the three months ended March 31, 1998, the Company purchased
twelve commercial office properties and seven medical office properties for
approximately $270.4 million, funded with cash on hand and by borrowings under
the Company's revolving credit facility. In addition, in connection with the
acquisition of the government office properties, the Company issued an
additional 286,400 common shares. In January 1998, the Company sold one of the
government office properties for $5.6 million, no gain or loss was recognized on
the sale of this property.
Subsequent to March 31, 1998, the Company acquired one commercial
office property for approximately $31.7 million, paid for with cash on hand and
by borrowing $25 million under the Company's revolving credit facility.
During the three months ended March 31, 1998, the Company funded $8.3
million of improvements to its existing properties, received $192,000 of
regularly scheduled principal payments and received $19.6 million representing
principal prepayments of mortgages secured by three retirement facilities and
two nursing facilities. In addition, the Company received $1.4 million
representing the partial repayment of a loan to an affiliate.
7
HEALTH AND RETIREMENT PROPERTIES TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At March 31, 1998, the Company owned 4.0 million, or 9.7%, of the
common shares of beneficial interest of HPT with a carrying value of $111.4
million and a market value of $141.8 million. During the three months ended
March 31, 1998, HPT completed public stock offerings of 2.1 million common
shares of beneficial interest for total consideration of approximately $74.8
million. As a result of these transactions, the Company's ownership percentage
decreased from 10.3% at December 31, 1997 to 9.7% at March 31, 1998 and the
Company realized a gain of $1.5 million in 1998.
In February and March 1998, the Company issued 6,977,575 common shares
in four separate unit investment trusts sponsored by various investment banks,
raising net proceeds of approximately $133.1 million. Proceeds from the
offerings were used to repay amounts outstanding under the Company's revolving
bank credit facility, to fund the acquisition of real estate and for general
business purposes. In addition, the Company issued 86,942 common shares due to
the conversion of $1.8 million of its convertible subordinated debentures and
issued 286,400 common shares for the purchase of real estate during the three
months ended March 31, 1998.
At March 31, 1998, the Company had $21.7 million of cash and cash
equivalents, as well as $160.0 million outstanding and $290.0 million available
for borrowing under its bank credit facility.
In April 1998, the Company amended and restated its unsecured revolving
bank credit facility (the "New Credit Facility") and increased its amount to
$500.0 million and extended its expiration. The New Credit Facility matures in
2002 and bears interest at LIBOR plus a premium. The Company will recognize an
extraordinary loss on the early extinguishment of debt in the second quarter of
1998 of approximately $2.1 million as a result of the write-off of deferred
financing fees associated with the current bank credit facility.
During February 1998, the Company issued $50.0 million of Remarketed
Reset Notes due 2007 and unsecured 6.7% Senior Notes due 2005 totaling $100.0
million. Net proceeds of approximately $148.9 million were used to repay amounts
outstanding under the Company's revolving credit facility and for general
business purposes.
At March 31, 1998, the Company had outstanding commitments to purchase
properties or provide financing totaling approximately $490.4 million. The
Company intends to fund these commitments with a combination of cash on hand,
issuance of common shares of the Company, amounts available under its existing
credit facility and/or proceeds of mortgage repayments. The acquisition of these
properties is subject to various closing conditions, customary in real estate
transactions; and no assurances can be made as to when and if these properties
will be acquired.
The Company continues to seek new investments to expand and diversify
its portfolio of leased real estate. The Company intends to balance the use of
debt and equity in such a manner that the long term cost of funds used to
acquire properties is appropriately matched, to the extent practicable, with the
terms of the investments made with such funding. As of March 31, 1998, the
Company's debt as a percentage of total market capitalization was approximately
29%.
8
HEALTH AND RETIREMENT PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
The Company's Quarterly Report on Form 10-Q contains statements which
constitute forward looking statements within the meaning of the Securities
Exchange Act of 1934, as amended. Those statements appear in a number of places
in this Form 10-Q and include statements regarding the intent, belief or
expectations of the Company, its Trustees or its officers with respect to the
declaration or payment of dividends, the consummation of additional
acquisitions, policies and plans of the Company regarding investments,
financings or other matters, the Company's qualification and continued
qualification as a real estate investment trust or trends affecting the
Company's or any property's financial condition or results of operations.
Readers are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contained in the forward looking
statements as a result of various factors. Such factors include without
limitation changes in financing terms, the Company's ability or inability to
complete acquisitions and financing transactions, results of operations of the
Company's properties and general changes in economic conditions not presently
contemplated. The information contained in this Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, including the
information under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations", identifies other factors that could cause
such differences.
The Amended and Restated Declaration of Trust establishing 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.
Part II Other Information
Item 2. Changes in Securities.
In January and March 1998, the Company issued an aggregate of 286,400
common shares of beneficial interest, par value $.01 per share ("Common
Shares"), in connection with the Company's previously disclosed acquisition of
office properties leased to agencies of the United States Federal Government and
in connection with certain post-closing adjustments, in both cases pursuant to
the Merger Agreement dated February 17, 1997 between the Company and Government
Property Investors, Inc., as amended. The issuance of such Common Shares was
made pursuant to the exemption from registration contained in Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
In February 1998, the Company issued 52,316 Common Shares to Advisors,
as an incentive fee of $1.0 million for services rendered during 1997, based
upon a per Common Share price of $19.87. These restricted securities were issued
pursuant to the exemption from registration provided under Section 4(2) of the
Securities Act.
9
HEALTH AND RETIREMENT PROPERTIES TRUST
Item 6. Exhibits and Reports on Form 8-K
aExhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated February 11, 1998 relating
to (a) the Advisory Agreement by and between the Company and
REIT Management & Research, Inc., and (b) the Master
Management Agreement by and among the Company and M&P
Partners Limited Partnership (Items 5 and 7).
2. Current Report on Form 8-K, dated February 12, 1998 relating
to (a) the purchase agreement between the Company and
Prudential Securities Incorporated, and (b) the purchase
agreement between the Company and Smith Barney Inc. (Item
7).
3. Current Report on Form 8-K, dated February 17, 1998 relating
to the consent of KPMG Peat Marwick LLP (Item 7).
4. Current Report on Form 8-K, dated February 18, 1998 relating
to (a) the issuance of an additional $50.0 million of
Remarketed Reset Notes, (b) the issuance of $100.0 million
of 6.7% Senior Notes due 2005, and (c) the issuance of
2,995,776 common shares of beneficial interest (Items 5 and
7).
5. Current Report on Form 8-K, dated February 19, 1998 relating
to the Supplemental Purchase Agreement and the Supplemental
Indenture Agreement for the $50.0 million Remarketed Reset
Notes (Item 7).
6. Current Report on Form 8-K, dated February 27, 1998 relating
to the Company's annual audited consolidated financial
statements and management's and discussion and analysis of
results of operations for the year ended December 31, 1997
(Items 5 and 7).
7. Current Report on Form 8-K, dated March 19, 1998 relating to
pro forma consolidated financial statements of the Company
as of and for the year ended December 31, 1997 (Item 7).
8. Current Report on Form 8-K, dated March 24, 1998 relating to
the purchase agreement between the Company and Wheat First
Securities, Inc. (Item 7).
9. Current Report on Form 8-K, dated March 30, 1998 relating to
the purchase of a commercial office property containing
approximately 825,374 square feet located at 1600 Market
Street, Philadelphia, Pennsylvania from MSA 1600 Associates,
L.P. for $106.4 million plus closing costs and other tenant
reimbursements in a negotiated arms-length transaction
(Items 2 and 7).
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: May 11, 1998
By: /s/ Ajay Saini
Ajay Saini
Treasurer and Chief Financial Officer
Dated: May 11, 1998