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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
- --------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
- --------- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 1-11852
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HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
MARYLAND 62-1507028
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value per share New York Stock Exchange
8 7/8% Series A Voting Cumulative Preferred Stock, New York Stock Exchange
$.01 par value per share
10 1/2% Convertible Subordinated Debentures due 2002 New York Stock Exchange
6.55% Convertible Subordinated Debentures due 2002 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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.
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The aggregate market value of the shares of Common Stock and Preferred
Stock (based upon the closing prices of these shares on the New York Stock
Exchange, Inc. on March 8, 2000) of the Registrant held by non-affiliates on
March 8, 2000, were approximately $626,350,554 and $46,125,000, respectively.
As of March 8, 2000, 40,123,071 shares of the Registrant's Common
Stock and 3,000,000 shares of the Registrant's Preferred Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into
which the document is incorporated:
Portions of the Registrant's 1999 Annual Report to Shareholders are
incorporated into Part II of this Report.
Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 16, 2000 are incorporated into
Part III of this Report.
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TABLE OF CONTENTS
Page
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Item 1. Business............................................................4
The Company......................................................4
Property Acquisitions............................................7
Property Dispositions............................................7
Commitments......................................................7
Mortgage Portfolio...............................................7
Competition......................................................7
Government Regulation............................................8
Environmental Matters............................................9
Insurance.......................................................10
Employees.......................................................10
Federal Income Tax Information..................................11
ERISA Considerations............................................23
Cautionary Statements...........................................25
Item 2. Properties.........................................................29
Executive Offices...............................................29
Item 3. Legal Proceedings..................................................34
Item 4. Submission of Matters to a Vote of Securityholders.................34
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................35
Item 6. Selected Financial Data............................................35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........35
Item 8. Financial Statements and Supplementary Data........................35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................35
Item 10. Directors and Executive Officers of the Registrant.................36
Directors.......................................................36
Executive Officers..............................................36
Item 11. Executive Compensation.............................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management.....36
Item 13. Certain Relationships and Related Transactions.....................37
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....37
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PART I
ITEM 1. BUSINESS
THE COMPANY
Healthcare Realty Trust Incorporated ("Healthcare Realty" or the
"Company") is a self-managed and self-administered real estate investment trust
("REIT") that integrates owning, acquiring, managing and developing
income-producing real estate properties and mortgages associated with the
delivery of healthcare services throughout the United States.
On October 15, 1998, Healthcare Realty completed its acquisition of
Capstone Capital Corporation, a Maryland corporation ("Capstone"), through the
merger of HR Acquisition I Corporation, a wholly owned subsidiary of the
Company, into Capstone. The acquisition is accounted for as a tax-free
reorganization for federal income tax purposes and as a purchase for financial
reporting purposes. The following table sets forth the assets acquired in the
transaction:
Property Type No. of Facilities Amount Invested (Millions)
------------- ----------------- --------------------------
Ancillary Hospital Facilities 19 $215.3
Assisted Living Facilities 35 174.8
Physician Clinics 18 106.4
Inpatient Rehabilitation Facilities 6 93.0
Comprehensive Ambulatory Care Centers 12 79.9
Skilled Nursing Facilities 11 74.2
Ambulatory Surgery Centers 6 34.6
Other Facilities 4 26.0
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TOTAL 111 $804.2
The Company also acquired $211.6 million in mortgage notes receivable, secured
by mortgages on 45 assisted living facilities, 25 senior nursing facilities and
5 other facility types.
From the commencement of its operations in June 1993 through December
31, 1999, the Company has invested or committed to invest, directly and
indirectly, over $1.7 billion in 285 income-producing real estate properties and
mortgages associated with the delivery of healthcare services. As of December
31, 1999, the Company's real estate portfolio, containing over 8.9 million
square feet, was comprised of eight facility types and was operated pursuant to
contractual arrangements with 46 healthcare providers. Also, the Company's
mortgage portfolio was comprised of four facility types and was operated by 34
healthcare providers. At December 31, 1999, the Company provided property
management services for 282 healthcare-related properties nationwide, totaling
over 8.5 million square feet, and third-party asset management services for 274
properties nationwide, totaling over 1.6 million square feet. The Company
intends to maintain a portfolio of properties that are focused predominantly on
the outpatient services segment of the healthcare industry and are diversified
by tenant, geographic location and facility type.
Healthcare Realty believes that it has a competitive advantage in the
healthcare real estate industry as a result of its use of innovative transaction
structures, the strength of its management expertise and its extensive
experience and client relationships with healthcare providers. Management
believes that the Company is the largest fully integrated real estate company
focused on income-producing real estate properties related to the delivery of
healthcare services. The Company believes that its experience and client
relationships with a diverse group of healthcare providers and its access to the
various capital markets make it one of a limited number of companies that can
acquire, manage and develop income-producing real estate related to healthcare
services on a national scale. Unlike other healthcare REITs, the Company seeks
to generate internal growth by
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actively managing the properties within its portfolio and by controlling and
minimizing operating expenses with respect to its properties, and providing
management services for properties owned by healthcare provider clients.
Healthcare Realty's strategy is to be a full service provider of
integrated real estate solutions to quality healthcare providers. Consistent
with this strategy, the Company seeks to provide a spectrum of services needed
to own, acquire, manage and develop healthcare properties, including:
- leasing;
- development;
- management;
- market research;
- budgeting;
- accounting;
- collection;
- construction;
- management;
- tenant coordination; and
- financial services.
The Company's development activities are primarily accomplished through
pre-leased build-to-suit projects.
Healthcare Realty was formed as an independent, unaffiliated healthcare
REIT. The Company acquires income-producing real estate properties associated
with a diverse group of quality healthcare provider clients in markets where the
respective healthcare provider maintains a strong presence. Management believes
that the Company has a strategic advantage in providing its services to a more
diverse group of healthcare providers because the Company is not affiliated with
any of its clients and does not expect to be affiliated with potential clients.
Management believes that client diversification reduces the Company's
potential exposure to unsuccessful healthcare service strategies and to a
concentration of credit with any one healthcare provider. Approximately 66% of
the Company's real estate investments including mortgages, at cost, are in
properties associated with publicly-traded companies or private companies with
an investment grade credit rating. The following table sets forth the Company's
five largest healthcare provider clients:
Client Percent of Investments
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HealthSouth Corporation 17.9%
Columbia/HCA Healthcare Corporation 13.0%
Tenet Healthcare Corporation 6.7%
Life Care Centers of America 6.0%
Balanced Care Corporation 4.4%
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Healthcare Realty focuses predominantly on outpatient healthcare
facilities, which are designed to provide medical services outside of
traditional inpatient hospital or nursing home settings. Management believes the
outpatient services segment of healthcare provides the most cost-effective
delivery setting and, because of increasing cost pressures, this segment of the
healthcare related real estate market offers the greatest potential for future
growth. Company assets that are in categories outside of the Company's
outpatient healthcare focus, such as its senior living assets, are under
continuing management analysis with a view toward possible disposition through
cash, like-kind exchange or securities transactions.
The Company acquires existing healthcare facilities, provides property
management, leasing and build-to-suit development services, and capital for the
construction of build-to-suit developments for qualified healthcare operators.
The Company owns a diversified portfolio of healthcare properties, most of which
are subject to long-term leases or financial support arrangements to ensure the
continuity of revenues and coverage of costs and expenses relating to the
properties by the tenants and the related healthcare operators.
Development funding arrangements require the Company to provide funding
to enable healthcare operators to build facilities on property owned or leased
by the Company. Prior to making any funding advance for a development, the
Company enters into a contract to acquire or ground lease the real estate and
enters into a long-term net lease with a healthcare operator or guarantee of the
return on the Company's investment in the property or similar financial support
agreement in favor of the Company. In most development transactions, the Company
either acts as developer, or employs the healthcare operator to act as the
developer of the property, and has approval authority with regard to plans,
specifications, budgets and time schedules for the completion of the development
of the property. Under its customary development funding format, the Company
receives funding fees (the economic equivalent of construction period interest)
on all funds advanced. Timely completion of the development in compliance with
the plans, specifications, budgets and time schedules is the contractual
responsibility of third parties, and construction costs are guaranteed by the
healthcare operator or developer, or both. All construction and service
contracts relating to the development are collaterally assigned to the Company.
During the term of the development of a facility, funds are advanced pursuant to
requests made by the developer in accordance with the terms and conditions of
the applicable funding agreement based on costs incurred prior to the date of
such requests.
Approximately 97.9% of the Company's investments in properties consist
of properties currently leased to unaffiliated lessees pursuant to long-term net
lease agreements or subject to financial support agreements with the healthcare
operators that provide guarantees of the return on the Company's investment in
the properties. Most of the current property agreements were entered into upon
the conveyance to the Company of the facilities, and have initial terms of ten
to 20 years with, in some cases, one or more renewal terms exercisable by the
healthcare provider of five years each. Most of the agreements are subject to
earlier termination upon the occurrence of certain contingencies. Certain of the
agreements also have an option to repurchase the property at specified times
during the term of the agreements for a price approximately equal to the greater
of the fair market value of such property or the Company's investment in such
property. Base rent or support payments vary by agreement taking into
consideration various factors, including the credit of the property lessee, the
healthcare operator, and the operating performance, location, and physical
condition of the property. Many of the property agreements contain provisions
for additional rent or support payment increases. The existence and nature of
provisions for additional payments in any given agreement relate to, among other
factors, the financial strength of the respective property lessee, the
healthcare operator, or both, as well as other lease terms.
The Company operates so as to qualify as a REIT for federal income tax
purposes. If so qualified, with limited exceptions, the Company will not be
subject to corporate federal income tax with respect to net income distributed
to its shareholders. See "Federal Income Tax Information" below.
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PROPERTY ACQUISITIONS
During the fourth quarter of 1999, the Company acquired a 25,000
square-foot ambulatory surgery center in Boca Raton, Florida for approximately
$6.1 million.
PROPERTY DISPOSITIONS
During the fourth quarter of 1999, the Company sold an ancillary
hospital facility in Dallas, Texas for approximately $4.3 million in net
proceeds, sold a physician clinic in Los Angeles, California for approximately
$700,000 in net proceeds; sold two ancillary hospital facilities in Savannah,
Georgia for approximately $12.8 million in net proceeds; and, four mortgage note
receivables were repaid for approximately $16.6 million in net proceeds.
COMMITMENTS
As of December 31, 1999, the Company had a net investment of
approximately $20.0 million in six build-to-suit developments in progress, which
have a total remaining funding commitment of approximately $37.6 million.
Further, the Company has commitments to purchase or provide funding for the
construction of other properties totaling $12.4 million at December 31, 1999.
The Company also has six mortgages under development at December 31, 1999, which
have a total remaining funding commitment of approximately $1.9 million.
As part of the Capstone merger, agreements were entered into with three
individuals affiliated with Capstone that restrict competitive practices and
which the Company believes will protect and enhance the value of the real estate
properties acquired from Capstone. These agreements provide for the issuance of
150,000 shares per year of common stock of the Company to the individuals on
October 15 of the years 1999, 2000, 2001, and 2002, provided all terms of the
agreements are met. The shares will be recorded on the Company's books at the
value of $28.0714 per share, the value of the shares issued in the Capstone
merger. The Company issued 150,000 shares during 1999 pursuant to these
agreements.
MORTGAGE PORTFOLIO
Mortgage notes receivable, substantially all of which were acquired in
the Capstone merger, were recorded at their fair value at the date of
acquisition. Approximately 48% of the mortgage notes receivable are secured by
assisted living facilities and 37% are secured by skilled nursing facilities.
The 83 mortgages in the portfolio at December 31, 1999 represent 34 operators.
Six of these mortgages, representing $21.7 million, or 8.5%, of the balance at
December 31, 1999, are secured by properties under development. The remaining
loan commitment at December 31, 1999 on these mortgages totals $1.9 million.
The weighted average maturity of the mortgage portfolio is
approximately 5.9 years, with maturity dates ranging from February 2001 to
October 2010. Interest rates, which range from 8% to 13%, are generally
adjustable each year to reflect increases in the Consumer Price Index.
Substantially all mortgages are subject to a prepayment penalty.
COMPETITION
The Company competes for property acquisitions with, among others:
- Investors;
- Healthcare providers;
- Other healthcare related REITs;
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- Real estate partnerships; and
- Financial institutions.
From 1992 until late 1998, the REIT industry was in an expansion mode,
and capital was readily available to REITs. By the end of 1998, however, market
valuations of REIT shares (including the Company's shares) had declined
substantially with the result that the Company presently has limited access to
capital from the equity market. The Company may not be able to obtain additional
equity or debt capital or dispose of assets at the time it requires additional
capital. Moreover, the Company may not be able to obtain capital on terms that
will enable it to acquire healthcare properties on a competitive basis.
The financial performance of all of the Company's properties is subject
to competition from similar properties. Certain operators of other properties
may have capital resources in excess of those of the operators of the Company's
properties. In addition, the extent to which the Company's properties are
utilized depends upon several factors, including the number of physicians using
the healthcare facilities or referring patients there, competitive systems of
healthcare delivery, and the area population, size and composition. Private,
federal and state payment programs and other laws and regulations may also have
a significant effect on the utilization of the properties. Virtually all of the
Company's properties operate in a competitive environment, and patients and
referral sources, including physicians, may change their preferences for a
healthcare facility from time to time.
The business of providing services relating to the day-to-day
management and leasing of multi-tenanted healthcare properties and to the
supervision of the development of new healthcare facilities is highly
competitive and is subject to price, personnel cost and other competitive
pressures upon its profitability. The Company will compete for management
contracts and development agreements with respect to properties owned or to be
developed by the Company, as well as with respect to properties that are owned
by third parties.
GOVERNMENT REGULATION
The investments made by the Company are with active participants in the
healthcare industry. The healthcare industry is undergoing substantial changes
due to rising costs in the delivery of healthcare services, rising competition
for patients, and reduction of reimbursement by private and governmental payors.
Further, the healthcare industry is faced with increased scrutiny by federal and
state legislative and administrative authorities, thus presenting the industry
and its individual participants with significant uncertainty. The Company
believes that these changes and uncertainties present significant opportunities
for the Company to assist in providing solutions to some of these pressures;
however, these various changes can affect the economic performance of some or
all of its tenants and clients. The Company cannot predict the degree to which
these changes may affect the economic performance of the Company, positively or
negatively.
The facilities leased by the Company are affected by changes in the
reimbursement, licensing and certification policies of federal, state and local
governments for healthcare related facilities. Facilities may also be affected
by changes in accreditation standards or procedures of accrediting agencies that
are recognized by governments in the certification process. In addition,
expansion (including the addition of new beds or services or acquisition of
medical equipment) and occasionally the discontinuation of services of
healthcare facilities are generally subjected to state regulatory approval
through certificate of need programs.
A significant portion of the revenue of healthcare operators is derived
from government reimbursement programs, such as Medicare and Medicaid. Although
lease payments to the Company are not directly affected by the level of
government reimbursement, to the extent that changes in these programs adversely
affect healthcare operators, such changes could have an impact
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on their ability to make lease payments to the Company. The Medicare program is
highly regulated and subject to frequent and substantial changes. In recent
years, fundamental changes in the Medicare program (including the implementation
of a prospective payment system in which facilities are reimbursed generally a
flat amount based on a patient's diagnosis and not based on the facilities' cost
for inpatient services at medical surgical hospitals) have resulted in reduced
levels of payment for a substantial portion of healthcare services.
Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, governmental
budgetary concerns may significantly reduce future payments made to healthcare
operators as a result of government financed programs. It is possible that
future payment rates will not be sufficient to cover cost increases in providing
services to patients. Reductions in payments pursuant to government healthcare
programs could have an adverse impact on a healthcare operator's financial
condition and, therefore, could adversely affect the ability of such operator to
make rental payments.
Loss by a facility of its ability to participate in government
sponsored programs because of licensing, certification or accreditation
deficiencies or because of program exclusion resulting from violations of law
would have material adverse effects on facility revenues.
Legislative Developments
A number of legislative proposals have been introduced or proposed in
Congress and in some state legislatures that would effect major changes in the
healthcare system, either nationally or at the state level. Among the proposals
under consideration are cost controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance coverage to their
employees and the creation of a single government health insurance plan that
would cover all citizens. There can be no assurance whether any proposals will
be adopted or, if adopted, what effect, if any, such proposals would have on the
Company's business.
In recent years Congress and various state legislatures have considered
various proposals that would have prohibited or severely limited the ability of
physicians and other referral sources to refer Medicare or Medicaid patients to
ventures with which the referral source has a financial relationship. The
Company's leases require the lessees to covenant that they will comply with all
applicable laws.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, an owner of real property (such as the Company) may be liable
for the costs of removal or remediation of certain hazardous or toxic substances
at, under or disposed of in connection with such property, as well as certain
other potential costs relating to hazardous or toxic substances (including
government fines and injuries to persons and adjacent property). Most, if not
all, of these laws, ordinances and regulations contain stringent enforcement
provisions including, but not limited to, the authority to impose substantial
administrative, civil and criminal fines and penalties upon violators. Such laws
often impose liability without regard to whether the owner knew of, or was
responsible therefor, the presence or disposal of such substances and may be
imposed on the owner in connection with the activities of an operator of the
property. The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefor could exceed the value of
the property and/or the aggregate assets of the owner. In addition, the presence
of such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or lease such
property or to borrow using such property as collateral.
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A property can also be negatively impacted either through physical
contamination or by virtue of an adverse effect on value, from contamination
that has or may have emanated from other properties. Certain of the properties
owned by the Company or managed or developed by its property management
subsidiary are adjacent to or near properties that contain underground storage
tanks or that have released petroleum products or other hazardous or toxic
materials into the soils or groundwater.
Operations of the properties owned, developed or managed by the Company
are and will continue to be subject to numerous federal, state, and local
environmental laws, ordinances and regulations, including those relating to the
generation, segregation, handling, packaging and disposal of medical wastes as
well as facility siting, construction, occupational training and safety,
disposal of non-medical wastes, underground storage tanks and ash emissions from
incinerators. Certain properties owned, developed or managed by the Company
contain, and others may contain or at one time may have contained, underground
storage tanks that are or were used to store waste oils, petroleum products or
other hazardous substances. Such underground storage tanks can be the source of
releases of hazardous or toxic materials. Operations of nuclear medicine
departments at some of such properties also involve the use and handling, and
subsequent disposal of, radioactive isotopes and similar materials, activities
which are closely regulated by the Nuclear Regulatory Commission and state
regulatory agencies. In addition, several of the properties were built during
the period asbestos was commonly used in building construction and other such
facilities may be acquired by the Company in the future. Certain of the
properties contain non-friable asbestos-containing materials, and other
facilities acquired in the future may contain friable and non-friable
asbestos-containing materials. The presence of such materials could result in
significant costs in the event that any friable asbestos-containing materials
requiring immediate removal and/or encapsulation are located in or on any of
such facilities or in the event of any future renovation activities.
The Company has had environmental assessments conducted on
substantially all of the properties currently owned. The Company is not aware of
any environmental condition or liability that management believes would have a
material adverse effect on the Company's earnings, expenditures or continuing
operations. While it is the Company's policy to seek indemnification relating to
environmental liabilities or conditions, even where sale and purchase agreements
do contain such provisions there can be no assurances that the seller will be
able to fulfill its indemnification obligations. In addition, the terms of the
Company's leases or financial support agreements do not give the Company control
over the operational activities of its lessees or health care operators, nor
will the Company monitor the lessees or healthcare operators with respect to
environmental matters.
INSURANCE
The Company maintains appropriate liability and casualty insurance on
its assets and operations. The Company has also obtained title insurance with
respect to each of the properties it owns in amounts equal to their respective
purchase prices, insuring that the Company holds title to each of the properties
free and clear of all liens and encumbrances except those approved by the
Company. Under their leases or financial support agreements, the healthcare
operators are required to maintain, at their expense, certain insurance
coverages relating to their operations at the leased facilities. In the opinion
of management of the Company, each of the properties owned by the Company is
adequately covered by hazard, liability and rent insurance.
EMPLOYEES
As of March 8, 2000, the Company employed 227 people. None of the
employees is a member of a labor union, and the Company considers its relations
with its employees to be excellent.
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FEDERAL INCOME TAX INFORMATION
The Company is and intends to remain qualified as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company's
net income which is distributed as dividends to shareholders will be exempt from
federal taxation. Distributions to the Company's shareholders generally will be
includable in their income; however, dividends distributed which are in excess
of current and/or accumulated earnings and profits will be treated for tax
purposes as a return of capital to the extent of a shareholder's basis and will
reduce the basis of shareholders' shares.
Introduction
The Company believes that it has qualified and intends to remain
qualified to be taxed as a REIT for federal income tax purposes under Sections
856 through 860 of the Code. The following discussion addresses the material tax
considerations relevant to the taxation of the Company and summarizes certain
federal income tax consequences that may be relevant to certain shareholders.
However, the actual tax consequences of holding particular securities issued by
the Company may vary in light of a prospective securities holder's particular
facts and circumstances. Certain holders, such as tax-exempt entities, insurance
companies and financial institutions, are generally subject to special rules. In
addition, the following discussion does not address issues under any foreign,
state or local tax laws. The tax treatment of a holder of any of the securities
issued by the Company will vary depending upon the terms of the specific
securities acquired by such holder, as well as his particular situation, and
this discussion does not attempt to address aspects of federal income taxation
relating to holders of particular securities of the Company. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof. The Code, rules, regulations, and administrative and
judicial interpretations are all subject to change (possibly on a retroactive
basis).
The Company believes that it is organized and is operating in
conformity with the requirements for qualification and taxation as a REIT and
that its method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT under the Code. The Company's
qualification and taxation as a REIT depend upon its ability to meet, through
actual annual operating results, the various income, asset, distribution, stock
ownership and other tests discussed below. Accordingly, the Company can not
guarantee that the actual results of operations for any one taxable year will
satisfy such requirements.
If the Company were to cease to qualify as a REIT, and the relief
provisions were found not to apply, the Company's income that it distributed to
shareholders would be subject to the "double taxation" on earnings (once at the
corporate level and again at the shareholder level) that generally results from
investment in a corporation. Failure to maintain qualification as a REIT would
force the Company to significantly reduce its distributions and possibly incur
substantial indebtedness or liquidate substantial investments in order to pay
the resulting corporate taxes. In addition, the Company, once having obtained
REIT status and having thereafter lost such status, would not be eligible to
re-elect REIT status for the four subsequent taxable years, unless its failure
to maintain its qualification was due to reasonable cause and not willful
neglect and certain other requirements were satisfied. In order to elect again
to be taxed as a REIT, just as with its original election, the Company would be
required to distribute all of its earnings and profits accumulated in any
non-REIT taxable year.
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Taxation of the Company
As long as the Company remains qualified to be taxed as a REIT, it
generally will not be subject to federal income taxes on that portion of its
ordinary income or capital gain that is currently distributed to shareholders.
However, the Company will be subject to federal income tax as follows:
first, the Company will be taxed at regular corporate rates on any undistributed
"real estate investment trust taxable income," including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference, if any. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business, or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax on such income at the highest corporate
rate. Fourth, any net income that the Company has from prohibited transactions
(which are, in general, certain sales or other dispositions of property other
than foreclosure property held primarily for sale to customers in the ordinary
course of business) will be subject to a 100% tax. Fifth, if the Company should
fail to satisfy either the 75% or 95% gross income test (as discussed below),
and has nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company fails to distribute during each
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from preceding periods, then the Company will be
subject to a four percent excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, to the extent that the Company
recognizes gain from the disposition of an asset with respect to which there
existed "built-in gain" upon its acquisition by the Company from a C corporation
in a carry-over basis transaction and such disposition occurs within a ten-year
recognition period beginning on the date on which it was acquired by the
Company, the Company will be subject to federal income tax at the highest
regular corporate rate on the amount of its "net recognized built-in gain."
Requirements for Qualification as a REIT
To qualify as a REIT for a taxable year under the Code, the Company
must have no earnings and profits accumulated in any non-REIT year. The Company
also must elect or have in effect an election to be taxed as a REIT and must
meet other requirements, some of which are summarized below, including
percentage tests relating to the sources of its gross income, the nature of the
Company's assets and the distribution of its income to shareholders. Such
election, if properly made and assuming continuing compliance with the
qualification tests described herein, will continue in effect for subsequent
years.
Organizational Requirements and Share Ownership Tests
Section 856(a) of the Code defines a REIT as a corporation, trust or
association: (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable,
but for Sections 856 through 860 of the Code, as a domestic corporation; (4)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (5) the beneficial ownership of which is held by
100 or more persons, determined without reference to any rules of attribution
(the "share ownership test"); (6) that during the last half of each taxable year
not more than 50% in value of the outstanding stock of which is owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) (the "five or fewer test"); and (7) which meets certain other
tests, described below, regarding the nature of its income and assets.
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Section 856(b) of the Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of fewer than 12 months. The "five or fewer
test" and the share ownership test do not apply to the first taxable year for
which an election is made to be treated as a REIT.
The Company has issued sufficient shares to a sufficient number of
people to allow it to satisfy the share ownership test and the five or fewer
test. In addition, to assist in complying with the five or fewer test, the
Company's Articles of Incorporation contain provisions restricting share
transfers where the transferee (other than specified individuals involved in the
formation of the Company, members of their families and certain affiliates, and
certain other exceptions) would, after such transfer, own (a) more than 9.9%
either in number or value of the outstanding common stock of the Company or (b)
more than 9.9% either in number or value of the outstanding preferred stock of
the Company. Pension plans and certain other tax-exempt entities have different
restrictions on ownership. If, despite this prohibition, stock is acquired
increasing a transferee's ownership to over 9.9% in value of either the
outstanding common stock of the Company or preferred stock of the Company, the
stock in excess of this 9.9% in value is deemed to be held in trust for transfer
at a price which does not exceed what the purported transferee paid for the
stock and, while held in trust, the stock is not entitled to receive dividends
or to vote. In addition, under these circumstances, the Company also has the
right to redeem such stock.
For purposes of determining whether the "five or fewer test" (but not
the "share ownership test") is met, any stock held by a qualified trust
(generally, pension plans, profit-sharing plans and other employee retirement
trusts) is, generally, treated as held directly by the trust's beneficiaries in
proportion to their actuarial interests in the trust, and not as held by the
trust.
Income Tests
In order to maintain qualification as a REIT, two gross income
requirements must be satisfied annually. First, at least 75% of the Company's
gross income (excluding gross income from certain sales of property held
primarily for sale) must be derived directly or indirectly from investments
relating to real property (including "rents from real property") or mortgages on
real property. When the Company receives new capital in exchange for its shares
(other than dividend reinvestment amounts) or in a public offering of debt
instruments with maturities of five years or longer, income attributable to the
temporary investment of such new capital, if received or accrued within one year
of the Company's receipt of the new capital, is qualifying income under the 75%
test. Second, at least 95% of the Company's gross income (excluding gross income
from certain sales of property held primarily for sale) must be derived from
such real property investments, dividends, interest, certain payments under
interest rate swap or cap agreements, and gain from the sale or other
disposition of stock, securities not held for sale in the ordinary course of
business or from any combination of the foregoing.
The Company may temporarily invest its working capital in short-term
investments. Although the Company will use its best efforts to ensure that its
income generated by these investments will be of a type which satisfies the 75%
and 95% gross income tests, there can be no assurance in this regard (see the
discussion above of the "new capital" rule under the 75% gross income test). The
Company has analyzed its gross income through December 31, 1999, and has
determined that it has met and expects to meet in the future the 75% and 95%
gross income tests through the rental of the property it has or acquires.
In order to qualify as "rents from real property," the amount of rent
received must not be based on the income or profits of any person, but may be
based on a fixed percentage or percentages of receipts or sales. The Code also
provides that the rents will not qualify as "rents from real property," in
satisfying the gross income tests, if the REIT owns ten percent or more of the
tenant,
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whether directly or under certain attribution rules. The Company leases and
intends to lease property only under circumstances such that substantially all,
if not all, rents from such property qualify as "rents from real property."
Although it is possible that a tenant could sublease space to a sublessee in
which the Company is deemed to own directly or indirectly ten percent or more of
the tenant, the Company believes that as a result of the provisions of the
Company's Articles of Incorporation which limit ownership to 9.9%, such
occurrence would be unlikely. Application of the ten percent ownership rule is,
however, dependent upon complex attribution rules provided in the Code and
circumstances beyond the control of the Company. Ownership, directly or by
attribution, by an unaffiliated third party of more than ten percent of the
Company's stock and more than ten percent of the stock of any tenant or
subtenant would result in a violation of the rule.
In order to qualify as "interest on obligations secured by mortgages on
real property," the amount of interest received must not be based on the income
or profits of any person, but may be based on a fixed percentage or percentages
of receipts or sales.
In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income unless (i) the Company is
performing services which are usually or customarily furnished or rendered in
connection with the rental of space for occupancy only and the services are of
the sort which a tax-exempt organization could perform without being considered
in receipt of unrelated business taxable income or (ii) the income earned by the
Company for other services furnished or rendered by the Company to tenants of a
property or for the management or operation of the property does not exceed a de
minimis threshold generally equal to 1% of the income from such property. The
Company self-manages some of its properties, but does not believe it provides
services to tenants which are outside the exception.
If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Generally, this 15% test is applied
separately to each lease. The portion of rental income treated as attributable
to personal property is determined according to the ratio of the adjusted tax
basis of the personal property to the total adjusted tax basis of the property
which is rented. The determination of what fixtures and other property
constitute personal property for federal tax purposes is difficult and
imprecise. Based upon allocations of value as found in the purchase agreements
and/or upon review by employees of the Company, the Company currently does not
have and does not believe that it is likely in the future to have 15% by value
of any of its properties classified as personal property. If, however, rent
payments do not qualify, for reasons discussed above, as rents from real
property for purposes of Section 856 of the Code, it will be more difficult for
the Company to meet the 95% and 75% gross income tests and continue to qualify
as a REIT.
The Company is and expects to continue performing third-party
management and development services. If the gross income to the Company from
this or any other activity producing disqualified income for purposes of the 95%
or 75% gross tests approaches a level which could potentially cause the Company
to fail to satisfy these tests, the Company intends to take such corrective
action as may be necessary to avoid failing to satisfy the 95% or 75% gross
income tests.
If the Company were to fail to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions would generally be available if the Company's failure to
meet such test or tests was due to reasonable cause and not to willful neglect,
if the Company attaches a schedule of the sources of its income to its return,
and if any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to know whether the Company
would be entitled to the benefit of these relief provisions since the
application of the relief provisions is dependent on future facts and
circumstances. If these
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provisions were to apply, the Company would be subjected to tax equal to 100% of
the net income attributable to the greater of the amount by which the Company
failed either the 75% or the 95% gross income test.
Asset Tests
At the close of each quarter of its taxable year, the Company must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must consist of real estate assets
(including interests in real property and interests in mortgages on real
property as well as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates), cash, cash items
and government securities. Second, not more than 25% of the Company's total
assets may be represented by securities other than those includable in the 75%
asset class. Finally, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed five
percent of the value of the Company's total assets, and the Company may not own
more than ten percent of any one issuer's outstanding voting securities. The
Company, however, may own 100% of the stock of a corporation, which is called a
"qualified REIT subsidiary". Under that circumstance, the qualified REIT
subsidiary is ignored and its assets, income, gain, loss and other attributes
are treated as being owned or generated by the Company for federal income tax
purposes. The Company currently has 49 qualified REIT subsidiaries and other
affiliates which it employs in the conduct of its business.
If the Company meets the 25% requirement at the close of any quarter,
it will not lose its status as a REIT because of a change in value of its assets
unless the discrepancy exists immediately after the acquisition of any security
or other property which is wholly or partly the result of an acquisition during
such quarter. Where a failure to satisfy the 25% asset test results from an
acquisition of securities or other property during a quarter, the failure can be
cured by disposition of sufficient nonqualifying assets within 30 days after the
close of such quarter. The Company maintains and intends to continue to maintain
adequate records of the value of its assets to maintain compliance with the 25%
asset test and to take such action as may be required to cure any failure to
satisfy the test within 30 days after the close of any quarter.
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
equal to or greater than the excess of (A) the sum of (i) 95% of the Company's
"real estate investment trust taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) and (ii) 95% of the
net income, if any, (after tax) from foreclosure property, over (B) the sum of
certain non-cash income (from certain imputed rental income and income from
transactions inadvertently failing to qualify as like-kind exchanges). These
requirements may be waived by the IRS if the REIT establishes that it failed to
meet them by reason of distributions previously made to meet the requirements of
the four percent excise tax described below. To the extent that the Company does
not distribute all of its net long-term capital gain and all of its "real estate
investment trust taxable income," it will be subject to tax thereon. In
addition, the Company will be subject to a four percent excise tax to the extent
it fails within a calendar year to make "required distributions" to its
shareholders of 85% of its ordinary income and 95% of its capital gain net
income plus the excess, if any, of the "grossed up required distribution" for
the preceding calendar year over the amount treated as distributed for such
preceding calendar year. For this purpose, the term "grossed up required
distribution" for any calendar year is the sum of the taxable income of the
Company for the taxable year (without regard to the deduction for dividends
paid) and all amounts from earlier years that are not treated as having been
distributed under the provision. Dividends declared in the last quarter of the
year and paid during the following January will be treated as having been paid
and received on December 31 of such earlier year. The Company's distributions
for 1999 were adequate to satisfy its distribution requirement.
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It is possible that the Company, from time to time, may have
insufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing differences between the actual receipt of income and
the actual payment of deductible expenses or dividends on the one hand and the
inclusion of such income and deduction of such expenses or dividends in arriving
at "real estate investment trust taxable income" on the other hand. The problem
of not having adequate cash to make required distributions could also occur as a
result of the repayment in cash of principal amounts due on the Company's
outstanding debt, particularly in the case of "balloon" repayments or as a
result of capital losses on short-term investments of working capital.
Therefore, the Company might find it necessary to arrange for short-term, or
possibly long-term, borrowing or new equity financing. If the Company were
unable to arrange such borrowing or financing as might be necessary to provide
funds for required distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company may in certain circumstances remain liable for the four
percent excise tax described above.
The Company is also required to request annually (within 30 days after
the close of its taxable year) from record holders of specified percentages of
its shares written information regarding the ownership of such shares. A list of
shareholders failing to fully comply with the demand for the written statements
is required to be maintained as part of the Company's records required under the
Code. Rather than responding to the Company, the Code allows the shareholder to
submit such statement to the IRS with the shareholder's tax return.
Nonqualified REIT Subsidiary
The Company participated in the organization of certain corporations
affiliated with the Company which are not qualified REIT subsidiaries
("Specified Affiliates") to enhance its management flexibility. Current tax law
in effect through the year 2000 restricts the ability of REITs to engage in
certain activities, such as certain third party management activities, but these
restrictions do not apply to the activities of a company that is not a REIT,
such as these Specified Affiliates, whose income is subject to federal income
tax.
In order to permit the Company to participate in the income of its
third party management business and maintain its status as a REIT, portions of
the Company's business will be conducted by the Specified Affiliates. The
Company owns 100% of the nonvoting preferred stock and approximately 1% of the
voting common stock, and senior executives of the Company own 99% of the voting
common stock of the Specified Affiliates. The nonvoting preferred stock of the
Specified Affiliates represents substantially all of the equity interest in the
Specified Affiliates, but does not enable the Company to elect directors of the
Specified Affiliates who are elected by the senior executives of the Company as
the holders of 99% of the voting common stock of the Specified Affiliates. The
voting common stock held by the senior executives of the Company in the
Specified Affiliates is subject to agreements that are designed to ensure that
such stock will be held by officers of the Company.
Effective January 1, 2001, the ownership and use of nonqualified REIT
subsidiaries such as the Specified Affiliates will be governed by new rules
enacted by the Ticket to Work and Work Incentives Improvement Act of 1999. These
rules are discussed in more detail under "Ticket to Work and Work Incentives
Improvement Act of 1999 - Significant REIT Provisions - Taxable REIT
Subsidiaries."
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Federal Income Tax Treatment of Leases
The availability to the Company of, among other things, depreciation
deductions with respect to the facilities owned and leased by the Company
depends upon the treatment of the Company as the owner of the facilities and the
classification of the leases of the facilities as true leases, rather than as
sales or financing arrangements, for federal income tax purposes. The Company
has not requested nor has it received an opinion that it will be treated as the
owner of the portion of the facilities constituting real property and that the
leases will be treated as true leases of such real property for federal income
tax purposes. Based on the conclusions of the Company and its senior management
as to the values of its personalty, the Company has met and plans to meet in the
future its compliance with the 95% distribution requirement (and the required
distribution requirement) by making distributions on the assumption that it is
not entitled to depreciation deductions for that portion of the leased
facilities which it believes constitutes personal property, but to report the
amount of income taxable to its shareholders by taking into account such
depreciation. The value of real and personal property and whether certain
fixtures are real or personal property are factual evaluations that cannot be
determined with absolute certainty under current IRS regulations.
Other Issues
With respect to property acquired from and leased back to the same or
an affiliated party, the IRS could assert that the Company realized prepaid
rental income in the year of purchase to the extent that the value of the leased
property exceeds the purchase price paid by the Company for that property. In
litigated cases involving sale-leasebacks which have considered this issue,
courts have concluded that buyers have realized prepaid rent where both parties
acknowledged that the purported purchase price for the property was
substantially less than fair market value and the purported rents were
substantially less than the fair market rentals. Because of the lack of clear
precedent and the inherently factual nature of the inquiry, the Company cannot
give complete assurance that the IRS could not successfully assert the existence
of prepaid rental income in such circumstances. The value of property and the
fair market rent for properties involved in sale-leasebacks are inherently
factual matters and always subject to challenge.
Additionally, it should be noted that Section 467 of the Code
(concerning leases with increasing rents) may apply to those leases of the
Company which provide for rents that increase from one period to the next.
Section 467 provides that in the case of a so-called "disqualified leaseback
agreement," rental income must be accrued at a constant rate. If such constant
rent accrual is required, the Company would recognize rental income in excess of
cash rents and as a result, may fail to have adequate funds available to meet
the 95% dividend distribution requirement. "Disqualified leaseback agreements"
include leaseback transactions where a principal purpose of providing increasing
rent under the agreement is the avoidance of federal income tax. Since the
Section 467 regulations provide that rents will not be treated as increasing for
tax avoidance purposes where the increases are based upon a fixed percentage of
lessee receipts, additional rent provisions of leases containing such clauses
should not result in these leases being disqualified leaseback agreements. In
addition, the Section 467 regulations provide that leases providing for
fluctuations in rents by no more than a reasonable percentage, 15% for long-term
real property leases, from the average rent payable over the term of the lease
will be deemed to not be motivated by tax avoidance. The Company, based on its
evaluation of the value of the property and the terms of the leases, does not
believe it has rent subject to the provisions of Section 467.
Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for at least four years, gain from sales of property held for
sale to customers in the ordinary course of business is subject to a 100% tax.
The simultaneous exercise of options to acquire leased property that may be
granted to certain tenants or other events could result in sales of properties
by the Company that exceed this safe
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harbor. However, the Company believes that in such event, it will not have held
such properties for sale to customers in the ordinary course of business.
Depreciation of Properties
For tax purposes, the Company's real property is being and will
continue to be depreciated over 31.5, 39 or 40 years using the straight-line
method of depreciation and its personal property over various periods utilizing
accelerated and straight-line methods of depreciation.
Failure to Qualify as a REIT
If the Company were to fail to qualify for federal income tax purposes
as a REIT in any taxable year, and the relief provisions were found not to
apply, the Company would be subject to tax on its taxable income at regular
corporate rates (plus any applicable alternative minimum tax). Distributions to
shareholders in any year in which the Company failed to qualify would not be
deductible by the Company nor would they be required to be made. In such event,
to the extent of current and/or accumulated earnings and profits, all
distributions to shareholders would be taxable as ordinary income and, subject
to certain limitations in the Code, eligible for the 70% dividends received
deductions for corporate shareholders. Unless entitled to relief under specific
statutory provisions, the Company would also be disqualified from taxation as a
REIT for the following four taxable years. It is not possible to state whether
in all circumstances the Company would be entitled to statutory relief from such
disqualification. Failure to qualify for even one year could result in the
Company's incurring substantial indebtedness (to the extent borrowings were
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
"unrelated business taxable income," even though the REIT may have financed
certain of its activities with acquisition indebtedness. Although revenue
rulings are interpretive in nature and are subject to revocation or modification
by the IRS, based upon the revenue ruling and the analysis therein,
distributions made by the Company to a U.S. shareholder that is a tax-exempt
entity (such as an individual retirement account ("IRA") or a 401(k) plan)
should not constitute unrelated business taxable income unless such tax-exempt
U.S. shareholder has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code, or the shares are otherwise used
in an unrelated trade or business conducted by such U.S. shareholder.
Special rules apply to certain tax-exempt pension funds (including
401(k) plans but excluding IRAs or government pension plans) that own more than
10% (measured by value) of a "pension-held REIT" at any time during a taxable
year beginning after December 31, 1993. Such a pension fund may be required to
treat a certain percentage of all dividends received from the REIT during the
year as unrelated business taxable income. The percentage is equal to the ratio
of the REIT's gross income (less direct expenses related thereto) derived from
the conduct of unrelated trades or businesses determined as if the REIT were a
tax-exempt pension fund, to the REIT's gross income (less direct expenses
related thereto) from all sources. The special rules will not apply to require a
pension fund to recharacterize a portion of its dividends as unrelated business
taxable income unless the percentage computed is at least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would otherwise
fail to satisfy the "five or fewer test" discussed above, if the stock or
beneficial interests of the REIT held by such tax-exempt pension funds were not
treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25%
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(measured by value) of the REIT's stock or beneficial interests, or if one or
more tax-exempt pension funds (each of which owns more than 10% (measured by
value) of the REIT's stock or beneficial interests) own in the aggregate more
than 50% (measured by value) of the REIT's stock or beneficial interests. The
Company believes that it will not be treated as a pension-held REIT. However,
because the shares of the Company will be publicly traded, no assurance can be
given that the Company is not or will not become a pension-held REIT.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created in the United States or under the laws of the United States
or of any state thereof, (iii) an estate whose income is includable in income
for U.S. federal income tax purposes regardless of its source or (iv) a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust ("Non-U.S.
Shareholders") are highly complex, and the following discussion is intended only
as a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of United States federal,
state, and local income tax laws on investment in stock of the Company,
including any reporting requirements.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in stock of the Company in the same
manner as a U.S. shareholder if such investment is "effectively connected" with
the Non-U.S. Shareholder's conduct of a trade or business in the United States.
A corporate Non-U.S. Shareholder that receives income with respect to its
investment in stock of the Company that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also may
be subject to the 30% branch profits tax imposed by the Code, which is payable
in addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Shareholders
whose investment in stock of the Company is not effectively connected with the
conduct of a trade or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain
from the sale or exchange by the Company of United States real property
interests and that are not designated by the Company as capital gain dividends
will be treated as ordinary income dividends to the extent made out of current
or accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate of
30% on the gross amount of the dividend paid unless reduced or eliminated by an
applicable United States income tax treaty. The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends paid to a Non-U.S. Shareholder unless a lower treaty rate applies and
the Non-U.S. Shareholder has filed an IRS Form 1001 with the Company, certifying
the Non-U.S. Shareholder's entitlement to treaty benefits.
Non-Dividend Distributions
Distributions made by the Company in excess of its current and
accumulated earnings and profits to a Non-U.S. Shareholder who holds 5% or less
of the stock of the Company (after application of certain ownership rules) will
not be subject to U.S. income or withholding tax. If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of the Company's current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to a dividend
distribution. However, the Non-U.S. Shareholder may seek a refund from the IRS
of any amount withheld if it is subsequently determined that such
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distribution was, in fact, in excess of the Company's then current and
accumulated earnings and profits.
Capital Gain Dividends
As long as the Company continues to qualify as a REIT, distributions
made by the Company that are attributable to gain from the sale or exchange by
the Company of any United States real property interests ("USRPI") will be taxed
to a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax Act
of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Shareholder as if such distributions were gains "effectively connected" with the
conduct of a trade or business in the United States. Accordingly, a Non-U.S.
Shareholder will be taxed on such distributions at the same capital gain rates
applicable to U.S. Shareholders (subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of non-resident alien
individuals). Distributions subject to FIRPTA also may be subject to the 30%
branch profits tax in the case of a corporate Non-U.S. Shareholder that is not
entitled to treaty relief or exemption. The Company will be required to withhold
tax from any distribution to a Non-U.S. Shareholder that could be designated by
the Company as a USRPI capital gain dividend in an amount equal to 35% of the
gross distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the
Non-U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Disposition of Stock of the Company
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
stock of the Company generally will not be subject to United States taxation
unless such stock constitutes a USRPI within the meaning of FIRPTA. The stock of
the Company will not constitute a USRPI so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock or beneficial interests are held directly or indirectly by Non-U.S.
Shareholders. The Company believes that it will be a "domestically controlled
REIT," and therefore that the sale of stock of the Company will not be subject
to taxation under FIRPTA. However, because the stock of the Company is publicly
traded, no assurance can be given that the Company is or will continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of stock of the Company that is not otherwise subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically controlled REIT,"
gain arising from the sale or exchange by a Non-U.S. Shareholder of stock of the
Company would be subject to United States taxation under FIRPTA as a sale of a
USRPI unless (i) the stock of the Company is "regularly traded" (as defined in
the applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder's
interest (after application of certain constructive ownership rules) in the
Company is 5% or less at all times during the five years preceding the sale or
exchange. If gain on the sale or exchange of the stock of the Company were
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
regular United States income tax with respect to such gain in the same manner as
a U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock of the Company (including the
Company) would be required to withhold and remit to the IRS 10% of the
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purchase price. Additionally, in such case, distributions on the stock of the
Company to the extent they represent a return of capital or capital gain from
the sale of the stock of the Company, rather than dividends, would be subject to
a 10% withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases: (i) if the Non-U.S.
Shareholder's investment in the stock of the Company is effectively connected
with a U.S. trade or business conducted by such Non-U.S. Shareholder, the
Non-U.S. Shareholder will be subject to the same treatment as a U.S. shareholder
with respect to such gain, or (ii) if the Non-U.S. Shareholder is a nonresident
alien individual who was present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States, the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gain.
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. shareholders and to the IRS the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
U.S. shareholder may be subject to backup withholding, at the rate of 31% on
dividends paid unless such U.S. shareholder (i) is a corporation or falls within
certain other exempt categories and, when required, can demonstrate this fact,
or (ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. shareholder who does not
provide the Company with his correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the U.S. shareholder's federal income tax liability.
In addition, the Company may be required to withhold a portion of any capital
gain distributions made to U.S. shareholders who fail to certify their
non-foreign status to the Company.
Additional issues may arise pertaining to information reporting and
backup withholding with respect to Non-U.S. Shareholders, and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
State and Local Taxes
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective holders should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the stock of the Company.
Ticket to Work and Work Incentives Improvement Act of 1999--Significant REIT
Provisions
The Ticket to Work and Work Incentives Improvement Act of 1999 (the
"Act"), which includes several provisions pertinent to REITs, was enacted on
December 17, 1999 and will generally be effective for the Company beginning in
2001. The provisions of the Act that are pertinent to the Company are as
follows:
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Taxable REIT Subsidiaries ("TRS")
A REIT will be allowed to own up to 100% of the stock of TRS, which
will be allowed to provide services to the REIT's tenants and others without
disqualifying the rents that the REIT receives from its tenants. The scope of
the activities of all such TRS in comparison to that of the REIT's overall
business of real estate ownership and operation has been limited under the Act
by requiring that the securities of all TRS may not exceed 20% of the value of
the REIT's assets. The dividends of TRS will not constitute qualified income for
purposes of the 75% income test. In addition, TRS will generally not be allowed
to operate health care or lodging facilities. A health care facility is
generally defined to be a hospital, nursing facility, assisted living facility,
congregate care facility or other licensed facility extending medical, nursing
or ancillary services to patients.
TRS will be, as implied by the name, subject to federal corporate
income tax in much the same manner as other, non-REIT C corporations, with the
exceptions that the deductions for debt and rental payments made by TRS to the
REIT will be limited and a 100% excise tax will be imposed on transactions
between a TRS and the affiliated REIT or that REIT's tenants that are not
conducted on an arm's length basis. TRS are corporations in which a REIT owns
stock, directly or indirectly, and for which both the REIT and the corporations
have made TRS elections.
Subject to transition rules that exempt existing arrangements to the
extent that the third party subsidiary does not engage in a substantial new line
of business or acquire any substantial asset or that the REIT does not acquire
any securities of the subsidiary, a REIT will not be allowed to own more than
10% of the vote or value of the securities (other than certain debt securities)
of a non-REIT C corporation other than TRS. Existing third-party subsidiaries
will be allowed to convert into a TRS on a tax-free basis.
Health Care Properties
The hiring of an independent contractor to manage a qualified health
care property will not cause the property to cease to be foreclosure property
solely because the REIT receives rental income from the contractor with respect
to one or more properties. A REIT will also be able to make a foreclosure
property election with respect to qualified health care properties acquired as
the result of the termination of the lease of such property.
Distribution Requirement
A REIT will be required to distribute only 90% of its taxable income,
as compared to the current law's 95% level.
Personal Property Rents
Rents received by a REIT attributable to personal property leased with
real property will be treated as qualified income to the extent that the fair
market value of the personal property does not exceed 15% of the fair market
value of the total rented property. The law currently in effect makes this
determination based upon the relative adjusted tax basis of the personal
property compared to that of the total rented property.
Other Changes
The Act also relaxes the requirements for testing whether an entity
qualifies as an independent contractor, extends the deficiency procedure to
assist REITs with distributing non-REIT earnings and profits and further
restricts the estimated tax payment rules applicable to the owners of a closely
held REIT. In changes not directly aimed at REITs, but nonetheless potentially
affecting
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them, the Act limits the availability of the installment method of accounting
and extends through 2001 the availability of a deduction for certain
environmental remediation expenditures.
Effect on the Company
The TRS rules will afford the Company the opportunity to offer services
to its tenants that are prohibited or require undue administrative complexity
under current law. In addition, the liberalization of the foreclosure property
rules for qualified health care properties will offer the Company more
flexibility in the event that the Company finds it necessary to operate any of
its properties through an independent contractor due to foreclosure or lease
termination. The Company is otherwise unable to anticipate the specific impact
of these or any other of the Act's changes.
Real Estate Investment Trust Tax Proposals
The President's Fiscal Year 2001 Budget Proposal (the "Proposal")
includes several provisions potentially affecting REITs. One notable provision
would increase the percentage of a REIT's ordinary and capital gain income for a
particular taxable year that the REIT must generally distribute within that year
(in order to avoid the four percent excise tax on the undistributed portion) to
98%. This provision would be effective for taxable years beginning in 2001 and
would largely eliminate the effect of the Taxpayer Relief Extension Act's
reduction in a REIT's taxable income distribution requirement to 90%. Although
the Company generally distributes in excess of 98% of its ordinary and capital
gain income within the year in which it was earned, this provision would make it
more difficult for the Company to consistently escape the four percent excise
tax as it has done in the past. The Proposal also includes provisions affecting
certain closely held REITs, limiting the dividend treatment of "fast-pay"
preferred stock dividends by non-traded REITs, and permanently extending the
deductibility of remediation expenditures for qualified contaminated sites. The
Proposal is subject to significant contingencies, including the differing views
of the President and Congress regarding the broader issues of tax and spending
policy. The Company is unable to anticipate the resolution of these
contingencies or, except as noted, the impact upon the Company should any or all
of these provisions be enacted.
Investors must recognize that the present federal income tax treatment
of the Company may be modified by future legislative, judicial or administrative
actions or decisions at any time, which may be retroactive in effect, and, as a
result, any such action or decision may affect investments and commitments
previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS in
the Treasury Department, resulting in statutory changes as well as promulgation
of new, or revisions to existing, regulations and revised interpretations of
established concepts. No prediction can be made as to the likelihood as to
passage of any new tax legislation or other provisions either directly or
indirectly affecting the Company or its shareholders.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
ERISA and the prohibited transaction provisions of Section 4975 of the Code that
may be relevant to a holder of stock of the Company. This discussion does not
propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the
extent not preempted, state law that may be relevant to particular employee
benefit plan shareholders (including plans subject to Title I of ERISA, other
employee benefit plans and IRAs subject to the prohibited transaction provisions
of Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to state
law requirements) in light of their particular circumstances.
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A fiduciary making the decision to invest in stock of the Company on
behalf of a prospective purchaser which is an ERISA plan, a tax-qualified
retirement plan, an IRA or other employee benefit plan is advised to consult its
own legal advisor regarding the specific considerations arising under ERISA,
Section 4975 of the Code, and (to the extent not preempted) state law with
respect to the purchase, ownership or sale of stock by such plan or IRA.
Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs
Each fiduciary of an employee benefit plan subject to Title I of ERISA
(an "ERISA Plan") should carefully consider whether an investment in stock of
the Company is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i)
an ERISA Plan's investments to be prudent and in the best interests of the ERISA
Plan, its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in stock of the
Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
ERISA Plan, taking into consideration the risk of loss and opportunity for gain
(or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described below under "Cautionary Statements".
The fiduciary of an IRA or of an employee benefit plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
Status of the Company under ERISA
A prohibited transaction may occur if the assets of the Company are
deemed to be assets of the investing Plans and "parties in interest" or
"disqualified persons" as defined in ERISA and Section 4975 of the Code,
respectively deal with such assets. In certain circumstances where a Plan holds
an interest in an entity, the assets of the entity are deemed to be Plan assets
(the "look-through rule"). Under such circumstances, any person that exercises
authority or control with respect to the management or disposition of such
assets is a Plan fiduciary. Plan assets are not defined in ERISA or the Code,
but the United States Department of Labor issued regulations in 1987 (the
"Regulations") that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity
interest" in an entity, such as common stock or common shares of beneficial
interest of a REIT. However, the Regulations provide an exception to the
look-through rule for equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that
is (i) freely transferable, (ii) part of a class of securities that is
widely-held and (iii) either (a) part of a class of securities that is
registered under section 12(b) or 12(g) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), or (b) sold to a Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of
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which such security is a part is registered under the Exchange Act within 120
days (or such longer period allowed by the Securities and Exchange Commission)
after the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. Whether a security is considered "freely
transferable" depends on the facts and circumstances of each case. Generally, if
the security is part of an offering in which the minimum investment is $10,000
or less, any restriction on or prohibition against any transfer or assignment of
such security for the purposes of preventing a termination or reclassification
of the entity for federal or state tax purposes will not of itself prevent the
security from being considered freely transferable. A class of securities is
considered "widely-held" if it is a class of securities that is owned by 100 or
more investors independent of the issuer and of one another.
The Company believes that the stock of the Company will meet the
criteria of the publicly-offered securities exception to the look-through rule
in that the stock of the Company is freely transferable, the minimum investment
is less than $10,000 and the only restrictions upon its transfer are those
required under federal income tax laws to maintain the Company's status as a
REIT. Second, stock of the Company is held by 100 or more investors and at least
100 or more of these investors are independent of the Company and of one
another. Third, the stock of the Company has been and will be part of offerings
of securities to the public pursuant to an effective registration statement
under the Securities Act and will be registered under the Exchange Act within
120 days after the end of the fiscal year of the Company during which an
offering of such securities to the public occurs. Accordingly, the Company
believes that if a Plan purchases stock of the Company, the Company's assets
should not be deemed to be Plan assets and, therefore, that any person who
exercises authority or control with respect to the Company's assets should not
be treated as a Plan fiduciary for purposes of the prohibited transaction rules
of ERISA and Section 4975 of the Code.
CAUTIONARY STATEMENTS
From time to time the Company may make forward-looking statements that
reflect its current opinion about future events and financial performance.
Readers should understand that the following important factors, among others,
could affect the Company's actual results. These factors could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The Company has discussed many
of these factors in prior filings with the Securities and Exchange Commission.
RISKS RELATED TO THE COMPANY'S GENERAL GROWTH STRATEGY
The Company follows a general growth strategy of providing integrated
real estate services to the healthcare industry, including the following:
- Asset management and strategic planning for real estate;
- Property administration, management and leasing services;
- Build-to-suit development of healthcare properties;
- The acquisition of existing healthcare properties; and
- Equity co-investment in healthcare provider acquisition
transactions.
By providing these services, the Company believes it can differentiate
its market position, acquire needed capital, expand its asset base and increase
revenue. The Company believes, however, that there are various risks inherent in
this growth strategy. The following factors, among others, could affect the
Company's ability to grow, and investors should consider them carefully.
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THERE IS CONSIDERABLE COMPETITION IN THE COMPANY'S MARKET.
The Company competes for property management, development and new
purchases with, among others:
- Investors;
- Healthcare providers;
- Other healthcare related real estate investment trusts;
- Real estate partnerships; and
- Financial institutions.
Competition for attractive investments results in investment pressure
on the Company. The Company intends to adhere to its established acquisition
standards; however, increased competition for such assets from other REITs and
traditional and non-traditional equity and debt capital sources may affect the
growth and financial return of the Company. The Company's properties are also
subject to competition from the properties of other healthcare providers, some
of which have greater capital resources than the providers leasing the Company's
facilities. All of the Company's properties operate in a competitive environment
and patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time.
THE COMPANY PRESENTLY HAS LIMITED ACCESS TO CAPITAL WHICH WILL SLOW THE
COMPANY'S GROWTH.
A REIT is required to make dividend distributions and retains little
capital for growth. As a result, a REIT is required to grow through the steady
investment of new capital in real estate assets. From 1992 until late 1998, the
REIT industry was in an expansion mode, and capital was readily available to
REITs. By the end of 1999, however, market valuations of REIT shares (including
the Company's shares) had declined substantially with the result that the
Company presently has limited access to capital from the equity market.
Virtually all of the Company's available capital in 2000 will be used to meet
existing commitments and to reduce debt. The Company will require additional
capital to acquire healthcare properties. The Company may not be able to obtain
additional equity or debt capital or dispose of assets at the time it requires
additional capital. Moreover, the Company may not be able to obtain capital on
terms that will permit it to acquire healthcare properties on a competitive
basis.
THE COMPANY MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL OR DISPOSE OF
ASSETS AT THE TIME IT REQUIRES THE FUNDS TO PAY ITS OBLIGATIONS.
The Company currently has substantial bank and institutional
indebtedness with significant payments due in 2000. The Company may also be
required to borrow money and mortgage its properties to fund any shortfall of
cash necessary to meet cash distribution requirements necessary to maintain its
REIT status. The Company anticipates that it will be able to obtain such
financing, as needed; however, if the Company is unable to obtain sufficient
funds within the necessary time periods, it will default on its obligations.
FAILURE OF THE COMPANY TO MAINTAIN OR INCREASE ITS DIVIDEND COULD
REDUCE THE MARKET PRICE OF THE COMPANY'S STOCK WHICH COULD MAKE IT DIFFICULT FOR
THE COMPANY TO RAISE ADDITIONAL EQUITY CAPITAL ON FAVORABLE TERMS, IF AT ALL.
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The Company has raised its quarterly dividend each consecutive quarter
since the Company's initial public offering. The ability to maintain or raise
its dividend is dependent, to a large part, on growth of funds from operations.
This growth in turn depends upon increased revenues from additional investments,
rental increases and income from administrative and management services.
DEVELOPMENT FUNDING INVOLVES GREATER RISKS THAN ARE ASSOCIATED WITH THE
PURCHASE AND LEASE-BACK OF OPERATING PROPERTIES.
Development funding arrangements require the Company to provide the
funding to enable healthcare operators to build facilities on property owned or
leased by the Company. If the developer or contractor fails to complete the
project under the terms of the development agreement, the Company would be
forced to become involved in the development to ensure completion or the Company
would lose the property.
TRANSFERS OF OPERATIONS OF HEALTHCARE FACILITIES ARE SUBJECT TO
REGULATORY APPROVALS NOT REQUIRED FOR TRANSFERS OF OTHER TYPES OF COMMERCIAL
OPERATIONS AND REAL ESTATE.
Many of the Company's properties are special-purpose facilities that
may not be easily adaptable to uses unrelated to healthcare.
RISKS RELATED GROWTH OF REVENUE AND FUNDS FROM OPERATIONS
The Company's general growth strategy requires continuing growth in the
Company's funds from operations which could be negatively affected by the
following factors:
OPERATORS OF SENIOR LIVING ASSETS HAVE COME UNDER INCREASED FINANCIAL
PRESSURE WHICH MAY AFFECT THEIR ABILITY TO MEET THEIR OBLIGATIONS TO THE
COMPANY.
Due to increased competition in the senior living assets sector,
operators of senior living facilities have come under increased financial
pressure; additionally, the implementation of the "prospective payment system"
for Medicare reimbursements had added pressure on operators. As a result of the
Capstone merger, the Company's portfolio of senior living facilities increased
substantially. Since the Capstone merger, three operators in this sector have
declared bankruptcy; however, the Company has sold, leased or is in the process
of leasing these properties. The Company cannot be certain that additional
operator failures in this sector will not occur.
THE INVESTMENT RETURNS AVAILABLE FROM EQUITY INVESTMENTS IN REAL ESTATE
DEPEND LARGELY ON THE AMOUNT OF INCOME EARNED AND CAPITAL APPRECIATION GENERATED
BY THE RELATED PROPERTIES, AS WELL AS THE EXPENSES INCURRED.
Real property investments are generally subject to varying degrees of
risk. To offset the threat of insufficient revenue to meet operating expenses,
debt service, capital expenditures and dividend payments, the Company requires
net master leases or similar financial support with primary term periods for
most of its investments. Nevertheless, the Company's properties are subject to
all of the normal risks associated with real estate investments.
ADVERSE TRENDS IN HEALTHCARE PROVIDER OPERATIONS CAN NEGATIVELY AFFECT
THE LEASE REVENUES AND VALUES OF THE COMPANY'S INVESTMENTS.
The healthcare service industry continues to be a profitable, growing
segment of the economy, supported by fundamentals that ensure continued growth.
However, the industry is currently experiencing:
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- Substantial changes in the method of delivery of healthcare
services;
- Rising competition among healthcare providers for patients;
- Continuing pressure by private and governmental payors; and
- Increased scrutiny by federal and state authorities.
The changes can affect the economic performance of some or all of the tenants
and sponsors who provide financial support to the Company's investments and, in
turn, the lease revenues and the value of the Company's property investments.
THE COMPANY'S CONCENTRATION ON A FEW HEALTHCARE PROVIDERS WOULD MAGNIFY
THE NEGATIVE EFFECT ON THE COMPANY IF A LARGER PROVIDER WERE TO SUFFER FINANCIAL
HARDSHIPS.
Currently, 48% of the Company's real estate portfolio, including
mortgages, is leased to, or supported by its five largest healthcare provider
clients. To varying degrees, these providers have experienced the pressures
listed above. Any financial problems experienced by these providers would
negatively impact the support arrangements that the Company has with these
providers and require the Company to rely solely upon rental revenue from
occupant tenants. If the Company is required to rely solely upon tenant
occupants with respect to one or more properties, it will experience the typical
risks associated with real estate investments enjoying no supplemental credit
support, including competition for individual tenants and the renewal or
roll-over of existing leases.
IF THE INPATIENT OCCUPANCY RATE AT A HOSPITAL NEAR A COMPANY FACILITY
DETERIORATED TO A LEVEL AT WHICH OPERATING CASH FLOWS WOULD BE INSUFFICIENT TO
COVER THE PAYMENTS TO THE COMPANY, THE COMPANY WOULD HAVE TO RELY UPON THE
GENERAL CREDIT OF THE PROVIDER OR THE RELATED GUARANTOR, IF ANY.
Most of the hospitals adjacent to or associated with the Company's
current properties and those to be acquired by the Company are substantially
less than fully occupied on an inpatient basis. Despite such occupancy rates,
however, the operating cash flow produced by such hospitals adequately covers
related payments to the Company.
IF A PROVIDER LOST ITS LICENSURE OR CERTIFICATION, THE COMPANY WOULD
HAVE TO OBTAIN ANOTHER PROVIDER FOR THE AFFECTED FACILITY.
Healthcare providers are subject to federal and state laws and
regulations which govern financial and other arrangements between healthcare
operators. If the Company could not attract another healthcare provider on a
timely basis or on acceptable terms, the Company's revenues would suffer.
A FAILURE OF THE COMPANY TO REINVEST THE PROCEEDS FROM SECURITIES
OFFERINGS AND PROPERTY DISPOSITIONS COULD HAVE AN ADVERSE EFFECT ON THE
COMPANY'S FUTURE REVENUES.
From time to time, the Company will have cash available from (1) the
proceeds of sales of shares of its securities, (2) the sale of its properties,
including non-elective dispositions, under the terms of master leases or similar
financial support arrangements, and (3) principal payments on its mortgage
investments. These arrangements require, among other items, a disposition of
properties in the event of a healthcare provider's default, and upon the
healthcare provider's exercise of an option to repurchase these properties. The
Company must re-invest these proceeds, on a timely basis, in another healthcare
investment or in a qualified short-term investment. While the Company has been
able to do so in the past, the Company may not be able to invest proceeds on a
timely basis or on acceptable terms in the future.
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Delays in acquiring properties will negatively impact revenues and may
have the potential to adversely effect the Company's ability to increase its
distributions to shareholders.
TERMINATION OF PROPERTY MANAGEMENT ENGAGEMENTS CAN RESULT IN LOST
INCOME.
The Company is engaged on its own behalf, and for the benefit of
third-party property owners, in the following activities:
- Asset and property management;
- Day-to-day property management;
- Leasing of multi-tenanted healthcare properties; and
- Supervision of the development of new healthcare properties.
The terms of these service engagements can vary in duration from month-to-month
to 15 years. Additionally, the Company regularly terminates engagements as a
result of completion of the engagement assignment or the sale of managed
properties by the Company or third-party owners. Termination of engagements
results in lost future income stream. In addition, unamortized capital costs
incurred in obtaining engagements must be charged against current revenues or
established reserves. The Company has experienced significant fluctuation in the
number of engagements in effect at any given time. This fluctuation generates
uncertainty as to the predictability of net revenues. The Company is also
subject to significant uncertainties because of the dynamic nature of the
healthcare service industry, and increased competition from other real estate
management companies entering the healthcare services industry. The Company may
not be able to continue to be able to market or cross-sell its property
management services successfully.
RISKS RELATED TO THE COMPANY'S STATUS AS A REIT
FAILURE TO MAINTAIN ITS STATUS AS A REIT, EVEN IN ONE TAXABLE YEAR,
COULD CAUSE THE COMPANY TO REDUCE ITS DIVIDENDS DRAMATICALLY.
The Company intends to qualify at all times as a REIT under the Code.
If in any taxable year the Company does not qualify as a REIT, it would be taxed
as a corporation. As a result, the Company could not deduct its distributions to
the shareholders in computing its taxable income. Depending upon the
circumstances, a REIT that loses its qualification in one year may not be
eligible to re-qualify during the four succeeding years. Further, certain
transactions or other events could lead to the Company being taxed at rates
ranging from four to 100 percent on certain income or gains.
ITEM 2. PROPERTIES
EXECUTIVE OFFICES
The Company's headquarters, located in offices at 3310 West End Avenue
in Nashville, Tennessee, are leased from an unrelated third party. The lease
agreement, covering approximately 22,551 square feet of rented space, expires on
October 31, 2003, with two five-year renewal options. Annual rental is
approximately $421,000.
PROPERTY OPERATIONS
The following table sets forth information regarding the Company's
properties as of December 31, 1999.
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FACILITY FACILITY TOTAL DATE
TYPE (4) LOCATION INVESTMENT ENCUMBRANCES ACQUIRED
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AHF AL $ 4,697,059 1998
AHF AL 6,899,236 1998
AHF AL 14,091,201 1998
AHF AL 8,507,164 1998
AHF AL 2,353,118 1998
AHF AL 6,416,670 1998
AHF AZ 5,273,993 1993
AHF CA 4,792,781 1995
AHF CA 5,749,332 1994
AHF CA 5,287,476 1994
AHF CA 9,324,345 1994
AHF CA 9,189,080 1994
AHF CA 15,698,415 1997
AHF CA 16,068,467 1998
AHF CA 7,538,204 1993
AHF CA 5,327,777 1993
AHF FL 11,215,993 1994
AHF FL 7,756,400 1998
AHF FL 5,292,400 1994
AHF FL 4,981,848 1994
AHF FL 4,995,230 1994
AHF FL 3,302,941 1998
AHF FL 19,453,635 1998
AHF FL 4,556,668 1994
AHF FL 5,084,512 1996
AHF FL 20,063,164 $ 8,642,547 1998
AHF FL 1,620,558 1995
AHF FL 8,467,651 1994
AHF GA 6,388,548 1993
AHF GA 11,069,865 1994
AHF KS 10,612,306 1995
AHF NV 6,881,494 1998
AHF NV 42,758,366 22,612,354 1998
AHF PA (2) 1,266,252 1999
AHF PA 4,775,583 1998
AHF TN 9,354,010 1997
AHF TN (2) 209,369 1999
AHF TN 10,713,633 4,398,886 1998
AHF TN 3,138,889 1994
AHF TX 1,905,817 1993
AHF TX 10,699,488 1998
AHF TX 9,262,657 1998
AHF TX 842,093 1996
AHF TX 1,737,128 1993
AHF TX 18,485,079 1993
AHF TX 5,252,820 1994
AHF TX 3,194,800 1998
AHF TX 14,301,748 1993
AHF TX 3,236,289 1998
AHF TX 3,107,422 1996
AHF VA 3,771,668 1994
AHF VA 4,593,463 1994
AHF VA 8,773,577 1994
AHF VA 5,855,716 1994
AHF VA 27,608,960 1996
AHF VA 1,433,579 1996
AHF VA 14,683,388 1998
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FACILITY FACILITY TOTAL DATE
TYPE (4) LOCATION INVESTMENT ENCUMBRANCES ACQUIRED
- --------------------------------------------------------------------------
AHF VA 3,082,977 1998
AHF VA 9,551,370 1999
AHF WY (2) 879,544 1999
ALF CT 11,924,642 1998
ALF FL 1,764,000 1998
ALF FL 9,572,814 1998
ALF FL (2) 8,791,535 1998
ALF GA 5,894,100 1998
ALF MO 1,528,562 1998
ALF MO 1,528,561 1998
ALF MO 1,528,562 1998
ALF MO 1,528,562 1998
ALF NC 3,669,603 1998
ALF NJ 8,719,597 1998
ALF NJ 8,982,861 1998
ALF OH 4,337,865 1998
ALF PA 4,117,404 1998
ALF PA 4,544,157 1998
ALF PA 4,100,876 1998
ALF PA 3,886,033 1998
ALF PA 2,698,505 1998
ALF PA 8,245,717 1998
ALF PA 2,805,932 1998
ALF SC 3,004,764 1998
ALF TX 9,941,467 1998
ALF TX 10,318,933 1998
ALF TX 5,842,697 1998
ALF TX 6,912,461 1998
ALF TX 7,525,955 1998
ALF TX 7,986,831 1998
ALF TX 10,840,056 1998
ALF TX 11,455,702 1998
ALF VA 5,930,081 1998
ALF VA 5,228,517 1998
ALF VA 5,576,337 1998
ASC CA 1,046,229 1993
ASC FL 6,144,037 1999
ASC GA 1,560,659 1998
ASC IL 1,453,447 1998
ASC MO 5,307,122 1998
ASC NV 3,800,571 1994
ASC TX 2,039,563 1993
CAC AZ 10,492,408 1998
CAC CA 28,747,108 1998
CAC FL 11,182,027 4,648,093 1998
CAC FL 5,801,741 3,268,190 1998
CAC FL 3,199,810 1998
CAC FL 3,872,469 1998
CAC FL 3,187,566 1998
CAC FL (3) (2) 11,985,876 1996
CAC MO 9,449,685 1998
CAC MO 11,982,707 1998
CAC TN 3,126,397 1998
CAC TX 12,053,222 1993
CAC TX 9,666,769 1994
IRF AL 17,721,800 1998
IRF FL 11,703,036 1998
31
32
FACILITY FACILITY TOTAL DATE
TYPE (4) LOCATION INVESTMENT ENCUMBRANCES ACQUIRED
- --------------------------------------------------------------------------
IRF PA 19,895,520 1998
IRF PA 20,891,771 1998
IRF PA 14,391,440 1998
IRF PA 19,616,487 1998
IRF PA 17,835,429 1998
IRF PA 19,616,574 1998
IRF TX 12,916,201 1998
PC AL 2,639,646 1998
PC AL 8,368,389 1998
PC CA 8,055,943 1998
PC FL 6,745,314 1998
PC FL 10,305,181 1993
PC FL 2,199,246 1998
PC FL 3,893,612 1998
PC FL 5,213,956 1994
PC FL 13,509,657 1998
PC FL 8,332,183 1998
PC FL 1,556,229 1998
PC FL 3,604,186 1994
PC FL 856,377 1998
PC GA 2,624,880 1998
PC GA 2,673,880 1994
PC IL 11,680,200 1998
PC MA 2,564,171 1998
PC MA 7,634,926 1998
PC MA 9,209,268 1998
PC MA 3,963,588 1998
PC MA 7,414,137 1998
PC MO 5,333,435 1998
PC MO 4,032,033 1998
PC TN 2,554,651 1998
PC TN 1,889,836 1998
PC TN 2,057,416 1998
PC TN 1,981,966 1998
PC TN 2,186,828 1998
PC TX 16,938,177 1998
PC TX 4,458,322 1993
PC VA 1,362,983 1996
PC VA 901,107 1996
PC VA 337,915 1996
PC VA 182,269 1996
PC VA 350,203 1996
PC VA 674,806 1996
SNF AZ 2,873,661 1997
SNF CA 12,687,699 1994
SNF CO 6,230,515 1994
SNF CO 12,417,625 1997
SNF CO 7,759,595 1996
SNF FL 10,205,696 1995
SNF IN 3,640,140 1993
SNF KS 7,592,661 1996
SNF MI 3,540,494 1993
SNF MI 3,284,185 1993
SNF MI 3,143,156 1993
SNF MI 1,049,352 1993
SNF MI 1,697,049 1993
SNF NC (1) 6,175,865 1998
32
33
FACILITY FACILITY TOTAL DATE
TYPE (4) LOCATION INVESTMENT ENCUMBRANCES ACQUIRED
- --------------------------------------------------------------------------
SNF OK 606,100 1999
SNF PA 2,936,955 1998
SNF PA 5,011,011 1998
SNF PA 12,669,190 1998
SNF TN 5,046,153 1997
SNF TN 3,289,203 1997
SNF TX 9,445,015 1995
SNF TX 10,020,503 1995
SNF VA (1) 6,952,798 16,204,372 1998
SNF VA (1) 5,296,037 1998
SNF VA (1) 4,733,910 1998
SNF VA (1) 3,458,764 1998
SNF VA (1) 3,207,675 1998
OTH AL 8,789,812 1993
OTH AR 2,988,896 1998
OTH AZ 3,533,540 1998
OTH FL 3,336,907 1998
OTH FL 1,417,038 1998
OTH MI 13,558,158 1998
OTH MO 10,896,833 1998
OTH MS 4,290,408 1993
OTH PA (2) 3,355,172 1999
OTH TX 8,601,386 1993
OTH TX 5,891,916 1998
OTH TX 1,976,372 1994
OTH VA 6,885,358 1996
OTH VA 5,121,498 1996
OTH VA 926,023 1993
OTH VA 12,760,711 1998
OTH VA 1,015,117 1993
OTH VA 2,119,232 1998
-------------- ----------------
Total Real Estate $ 1,395,576,876 $ 59,774,442
Corporate 3,568,771 --
--------------- ----------------
Total Property $ 1,399,145,647 $ 59,774,442
=============== ================
(1) All six of the properties are encumbered by one mortgage with a 12/31/99
balance of $16,204,372.
(2) Development at 12/31/99.
(3) Consists of three buildings, with one building being an MOB that is in
construction as of 12/31/99.
(4) Facility Types:
AHF Ancillary Hospital Facilities
ALF Assisted Living Facilities
ASC Ambulatory Surgery Centers
CAC Comprehensive Ambulatory Care Centers
IRH Inpatient Rehabilitation Facilities
PC Physician Clinics
SNF Skilled Nursing Facilities
OTH Other
33
34
ITEM 3. LEGAL PROCEEDINGS
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of two million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation. Attempts at mediation
have not resulted in a settlement of the disputes. The Company's prosecution of
its claims and defense of the counterclaims will be vigorous. While the Company
cannot predict the range of possible loss or outcome, the Company believes that,
even though the asserted cross claims seek substantial monetary damages, the
allegations made by Medistar and Medix are not factually or legally meritorious,
are subject to sustainable defenses and are, to a significant extent, covered by
liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matter was submitted to a vote of shareholders during the fourth
quarter of 1999.
34
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the Company's Common Stock, set forth on page
36 of the Company's 1999 Annual Report to Shareholders under the caption "Common
Stock," is incorporated herein by reference.
On October 15, 1999, the Company issued an aggregate of 150,000 shares
of its Common Stock to three former executive officers of Capstone Capital
Corporation pursuant to Consulting Agreements with such individuals. Such sales
were exempt under the registration requirements of the Securities Act of 1933 in
reliance on the exemption contained in Section 4(2) of such Act. The Company
made no other private sales of equity securities during 1999.
ITEM 6. SELECTED FINANCIAL DATA
The Company's selected financial data, set forth on page 9 of its 1999
Annual Report to Shareholders under the caption "Selected Financial
Information," is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's information relating to management's discussion and
analysis of financial condition, set forth on pages 10 through 16 of the
Company's 1999 Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," set forth on page 16 of the Company's 1999
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the related notes, together with
the report of Ernst & Young LLP thereon, set forth on pages 17 through 34 of the
Company's 1999 Annual Report to Shareholders, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to directors, set forth on pages one through
three of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 16, 2000 under the caption "Election of
Directors," is incorporated herein by reference.
EXECUTIVE OFFICERS
The executive officers of the Company are:
Name Age Position
- ---- --- --------
David R. Emery................ 55 Chairman of the Board, Chief Executive Officer &
President
Timothy G. Wallace............ 41 Executive Vice President & Chief Financial Officer
Roger O. West................. 55 Executive Vice President & General Counsel
Mr. Emery formed the Company and has held his current positions since
May 1992. Prior to 1992, Mr. Emery was engaged in the development and management
of commercial real estate in Nashville, Tennessee. Mr. Emery has been active in
the real estate industry for 30 years.
Mr. Wallace has held executive positions with the Company since January
1993. Prior to joining the Company, he was a Senior Manager with responsibility
for healthcare and real estate in the Nashville, Tennessee office of Ernst &
Young LLP from June 1989 to January 1993.
Mr. West has held executive positions with the Company since May 1994.
Prior to joining the Company, he was a senior partner in the law firm of Geary,
Porter and West, P.C. in Dallas, Texas from July 1992 to May 1994. Mr. West has
extensive experience in the areas of corporate, tax and real estate law.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth on pages 8
through 14 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 16, 2000 under the caption "Executive
Compensation," is incorporated herein by reference. The Comparative Performance
Graph and the Compensation Committee Report on Executive Compensation also
included in the Proxy Statement are expressly not incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security ownership of management and
certain beneficial owners, set forth on pages 6 through 7 of the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 16,
2000 under the caption "Security Ownership of Certain Beneficial Owners and
Management," is incorporated herein by reference.
36
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions,
set forth on page 16 of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 16, 2000 under the caption "Certain
Relationships and Related Transactions," is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Pro Forma and Historical Financial Statements, Financial
Statement Schedules and Exhibits
(1) FINANCIAL STATEMENTS:
The following financial statements of Healthcare Realty Trust
Incorporated are incorporated by reference in Item 8 from the 1999
Annual Report to Shareholders:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- Independent Auditors' Report.
- Consolidated Balance Sheets - December 31, 1999 and 1998.
- Consolidated Statements of Income for the years ended December
31, 1999, December 31, 1998 and December 31, 1997.
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, December 31, 1997 and December 31,
1997.
- Consolidated Statements of Cash Flows for the years ended
December 31, 1999, December 31, 1998 and December 31, 1997.
- Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts at December 31,
1999...............................................................S-1
Schedule III -- Real Estate and Accumulated Depreciation at December
31, 1999...........................................................S-2
Schedule IV - Mortgage Loans on Real Estate at December 31,
1999...............................................................S-3
All other schedules are omitted because they are not applicable or not
required or because the information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits:
Exhibit
Number Description of Exhibits
- ------ -----------------------
3.1 -- Second Articles of Amendment and Restatement of the Registrant.(1)
3.2 -- Amended and Restated Bylaws of the Registrant.(7)
4 -- Specimen stock certificate.(1)
10.1 -- 1993 Employees Stock Incentive Plan of Healthcare Realty Trust Incorporated.(1)
10.2 -- 1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(4)
10.3 -- Executive Retirement Plan, as amended. (filed herewith)
37
38
10.4 -- Retirement Plan for Outside Directors.(1)
10.5 -- Non-Qualified Deferred Compensation Plan. (filed herewith)
10.6 -- Executive Variable Incentive Compensation Plan. (filed herewith)
10.7 -- 2000 Employee Stock Purchase Plan. (filed herewith)
10.8 -- Dividend Reinvestment Plan.(2)
10.9 -- Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty
Trust Incorporated. (filed herewith)
10.10 -- Amended and Restated Employment Agreement by and between Roger O. West and Healthcare Realty
Trust Incorporated. (filed herewith)
10.11 -- Amended and Restated Employment Agreement by and between Timothy G. Wallace and Healthcare
Realty Trust Incorporated. (filed herewith)
10.12 -- Revolving Credit Agreement, dated as of October 15, 1998, among Healthcare Realty Trust
Incorporated, NationsBank, N.A., First Union National Bank, Societe Generale, and Bank Austria
Creditanstalt Corporate Finance, Inc. (6)
10.13 -- Term Credit Agreement, dated as of October 15, 1998, among Healthcare Realty Trust Incorporated,
Capstone Capital Corporation, NationsBank, N.A., and the other lending banks.(6)
10.14 -- Amendment No. 1 to Term Credit Agreement. (7)
10.15 -- Amendment No. 2 to Term Credit Agreement. (filed herewith)
10.16 -- Form of Note Purchase Agreement, dated as of September 1, 1995, pertaining to $90,000,000
aggregate principal amount of 7.41% Senior Notes due September 1, 2002.(3)
11 -- Statement re computation of per share earnings (contained in Note 9 to the Notes to the
Consolidated Financial Statement in the Annual Report to Shareholders for the year ended
December 31, 1999 filed herewith as Exhibit 13).
13 -- Annual Report to Shareholders for the year ended December 31, 1999 (filed herewith).
21 -- Subsidiaries of the Registrant (filed herewith).
23 -- Consent of Ernst & Young LLP, independent auditors (filed herewith).
27 -- Financial Data Schedule (For SEC Use Only)
- ---------------
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-11 (Registration No. 33-60506) previously filed pursuant to the
Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-11 (Registration No. 33-72860) previously filed pursuant to the
Securities Act of 1933 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1995 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1995 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1996 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1998 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1999 and hereby incorporated by reference.
38
39
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
1. 1993 Employees Stock Incentive Plan of Healthcare Realty Trust
Incorporated (filed as Exhibit 10.1)
2. 1995 Restricted Stock Plan for Non-Employee Directors of
Healthcare Realty Trust Incorporated (filed as Exhibit 10.2)
3. Executive Retirement Plan, as amended (filed as Exhibit 10.3)
4. Retirement Plan for Outside Directors (filed as Exhibit 10.4)
5. Non-Qualified Deferred Compensation Plan (filed as Exhibit
10.5)
6. Executive Variable Incentive Compensation Plan (filed as
Exhibit 10.6)
7. 2000 Employee Stock Purchase Plan (filed as Exhibit 10.7)
8. Amended and Restated Employment Agreement by and between David
R. Emery and Healthcare Realty Trust Incorporated (filed as
Exhibit 10.8)
9. Amended and Restated Employment Agreement by and between Roger
O. West and Healthcare Realty Trust Incorporated (filed as
Exhibit 10.9)
10. Amended and Restated Employment Agreement by and between
Timothy G. Wallace and Healthcare Realty Trust Incorporated
(filed as Exhibit 10.10)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1999.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)(3).
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)(2).
39
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on March 14, 2000.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ David R. Emery
--------------------------------------
David R. Emery
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ David R. Emery Chairman, President and March 14, 2000
- ------------------------------------ Chief Executive Officer (Principal
David R. Emery Executive Officer)
/s/ Timothy G. Wallace Executive Vice President March 14, 2000
- ------------------------------------ and Chief Financial Officer
Timothy G. Wallace (Principal Financial Officer)
/s/ Fredrick M. Langreck Senior Vice President March 14, 2000
- ------------------------------------ and Treasurer
Fredrick M. Langreck
/s/ Scott W. Holmes Senior Vice President - March 14, 2000
- ------------------------------------ Financial Reporting
Scott W. Holmes
/s/ Errol L. Biggs, Ph.D. Director March 14, 2000
- ------------------------------------
Errol L. Biggs, Ph.D.
/s/ Thompson S. Dent Director March 14, 2000
- ------------------------------------
Thompson S. Dent
40
41
/s/ Charles Raymond Fernandez, M.D. Director March 14, 2000
- ------------------------------------
Charles Raymond Fernandez, M.D.
/s/ Batey M. Gresham, Jr. Director March 14, 2000
- ------------------------------------
Batey M. Gresham, Jr.
/s/ Marliese E. Mooney Director March 14, 2000
- ------------------------------------
Marliese E. Mooney
/s/ Edwin B. Morris, III Director March 14, 2000
- ------------------------------------
Edwin B. Morris, III
/s/ John Knox Singleton Director March 14, 2000
- ------------------------------------
John Knox Singleton
41
42
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AT DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
ADDITIONS
----------------------------------------
Balance at Charged to Charged to Assumed from
Beginning costs and other Capstone Balance at
Description of Period expenses accounts Capital Corp. Deductions(1) End of Period
- -------------------------------------------------------------------------------------------------------------------------------
1999
Mortgage notes receivable allowance $3,000 $ -- $ -- $ -- $ 717 $2,283
Accounts receivable allowance 419 576 -- -- -- 995
------------------------------------------------------------------------------------
3,419 576 -- -- 717 3,278
------------------------------------------------------------------------------------
1998
Mortgage notes receivable allowance -- -- -- 3,000 -- 3,000
Accounts receivable allowance 15 73 -- 346 15 419
------------------------------------------------------------------------------------
15 73 -- 3,346 15 3,419
------------------------------------------------------------------------------------
1997
Mortgage notes receivable allowance -- -- -- -- -- --
Accounts receivable allowance 20 15 -- -- 20 15
------------------------------------------------------------------------------------
$ 20 $ 15 $ -- $ -- $ 20 $ 15
------------------------------------------------------------------------------------
(1) Write-off or collection of the related receivable accounts.
42
43
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Land Buildings, Improvements, and CIP
----------------------------------- -----------------------------------------
Costs Costs
Capitalized Capitalized
Initial Subsequent to Initial Subsequent to Personal
Facility Type State Investment Acquisition Total Investment Acquisition Total Property
- ----------------------------------------------------------------------------------------------------------------------------------
Ancillary Hospital Facilities
AL 1,194,515 136,087 1,330,602 3,366,457 0 3,366,457 0
AL 1,018,666 112,325 1,130,991 5,768,245 0 5,768,245 0
AL 2,710,081 151,076 2,861,157 11,230,044 0 11,230,044 0
AL 60,030 83,455 143,485 8,363,679 0 8,363,679 0
AL 109,811 29,650 139,461 2,213,657 0 2,213,657 0
AL 120,060 65,885 185,945 6,230,725 0 6,230,725 0
AZ 308,070 0 308,070 4,965,923 0 4,965,923 0
CA 1,337,483 0 1,337,483 3,122,980 332,318 3,455,297 0
CA 2,218,847 0 2,218,847 3,319,804 210,680 3,530,484 0
CA 2,059,953 0 2,059,953 3,068,881 158,642 3,227,523 0
CA 3,149,515 0 3,149,515 5,666,654 505,588 6,172,242 2,587
CA 3,160,865 0 3,160,865 5,859,967 165,865 6,025,832 2,383
CA 0 0 0 15,342,398 355,075 15,697,473 941
CA 3,190,439 16,030 3,206,469 12,861,998 0 12,861,998 0
CA 1,720,127 0 1,720,127 5,797,840 0 5,797,840 20,237
CA 1,522,222 0 1,522,222 3,787,288 0 3,787,288 18,267
FL 0 0 0 5,072,041 220,359 5,292,400 0
FL 45,216 0 45,216 4,936,632 0 4,936,632 0
FL 0 0 0 4,843,314 151,915 4,995,230 0
FL 0 0 0 19,928,451 129,087 20,057,538 5,626
FL 0 0 0 8,042,864 424,788 8,467,651 0
FL 0 0 0 1,620,558 0 1,620,558 0
FL 2,201,396 110,437 2,311,833 991,108 0 991,108 0
FL 1,071,287 50,061 1,121,348 18,332,287 0 18,332,287 0
FL 0 4,470 4,470 4,278,351 1,227,385 5,505,737 115,656
FL 0 0 0 3,830,316 185,000 4,015,316 0
FL 532,112 0 532,112 10,677,707 5,454 10,683,162 719
FL 2,026,672 0 2,026,672 5,729,728 0 5,729,728 0
GA 696,248 0 696,248 4,834,104 819,788 5,653,892 38,409
GA 1,268,962 0 1,268,962 8,604,603 1,182,151 9,786,754 14,150
KS 0 0 0 10,460,566 142,961 10,603,527 8,779
NV 0 0 0 41,736,845 1,021,521 42,758,366 0
NV 2,127,851 165,073 2,292,924 4,588,570 0 4,588,570 0
PA 282,295 0 282,295 983,957 0 983,957 0
PA 330,877 0 330,877 4,444,707 0 4,444,707 0
TN 0 0 0 209,369 0 209,369 0
TN 3,212,188 24,550 3,236,738 6,117,271 0 6,117,271 0
TN 395,056 0 395,056 2,643,834 100,000 2,743,834 0
TN 1,733,202 576 1,733,778 8,968,458 6,000 8,974,458 5,397
TX 125,471 0 125,471 1,767,800 0 1,767,800 12,547
TX 2,349,321 0 2,349,321 6,882,712 30,624 6,913,336 0
TX 999,193 0 999,193 17,445,918 0 17,445,918 39,968
TX 682,867 0 682,867 4,569,953 0 4,569,953 0
TX 3,833,077 0 3,833,077 10,295,139 0 10,295,139 173,532
TX 124,000 0 124,000 3,112,289 0 3,112,289 0
TX 0 0 0 10,613,689 47,802 10,661,491 37,997
(1)
Total Accum. Date Dated
Facility Type State Assets Depreciation Encumbrances Acquired Constructed
- --------------------------------------------------------------------------------------------------------------
Ancillary Hospital Facilities
AL 4,697,059 132,541 1998 1992, 1993
AL 6,899,236 219,383 1998 1981
AL 14,091,201 422,792 1998 1991
AL 8,507,164 313,022 1998 1993
AL 2,353,118 83,332 1998 1977
AL 6,416,670 233,430 1994 1991
AZ 5,273,993 1,031,343 1993 1988
CA 4,792,781 398,620 1994 1973
CA 5,749,332 451,511 1994 1975
CA 5,287,476 416,674 1994 1981
CA 9,324,345 778,219 1994 1984
CA 9,189,080 796,813 1997 1997
CA 15,698,415 982,050 1993 1988
CA 16,068,467 523,702 1998 1994
CA 7,538,204 1,222,912 1993 1981
CA 5,327,777 803,523 1993 1961, 1968, 1984-85
FL 5,292,400 713,661 1994 1994
FL 4,981,848 648,748 1994 1994
FL 4,995,230 627,575 1994 1994
FL 20,063,164 735,102 8,642,547 1998 1995
FL 8,467,651 1,081,894 1994 1994
FL 1,620,558 199,107 1995 1977
FL 3,302,941 43,517 1998 1970, 1980
FL 19,453,635 677,628 1998 1973, 1989-1990
FL 5,625,863 710,221 1994 1994
FL 4,015,316 327,355 1998 1994
FL 11,215,993 1,563,151 1995 1984
FL 7,756,400 211,642 1998 1994
GA 6,388,548 833,878 1993 1983
GA 11,069,865 1,323,658 1994 1975
KS 10,612,306 810,011 1995 1996
NV 42,758,366 1,561,274 22,612,354 1998 1996
NV 6,881,494 179,347 1998 1974
PA 1,266,252 0 1999 under const.(3)
PA 4,775,584 124,757 1998 1982
TN 209,369 0 1999 under const.(3)
TN 9,354,010 207,224 1997 1998
TN 3,138,889 392,540 1994 1991
TN 10,713,633 330,296 4,398,886 1998 1992
TX 1,905,817 378,795 1993 1989
TX 9,262,657 255,603 1998 1995
TX 18,485,079 3,660,355 1993 1992
TX 5,252,820 659,148 1994 1982
TX 14,301,748 2,299,263 1993 1985
TX 3,236,289 422,287 1998 1995
TX 10,699,488 398,130 1998 1995
43
44
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Land Buildings, Improvements, and CIP
----------------------------------- -----------------------------------------
Costs Costs
Capitalized Capitalized
Initial Subsequent to Initial Subsequent to Personal
Facility Type State Investment Acquisition Total Investment Acquisition Total Property
- ----------------------------------------------------------------------------------------------------------------------------------
TX 159,384 0 159,384 598,293 84,416 682,709 0
TX 497,982 0 497,982 2,040,742 568,697 2,609,439 0
TX 0 0 0 3,194,800 0 3,194,800 0
TX 217,941 0 217,941 1,507,164 0 1,507,164 12,023
VA 0 0 0 3,771,668 0 3,771,668 0
VA 874,497 0 874,497 3,718,966 0 3,718,966 0
VA 1,912,645 0 1,912,645 6,860,932 0 6,860,932 0
VA 0 0 0 4,729,002 1,126,714 5,855,716 0
VA 7,507,301 291,752 7,799,053 6,884,335 0 6,884,335 0
VA 330,953 50,705 381,658 2,701,319 0 2,701,319 0
VA 1,366,860 0 1,366,860 8,179,867 0 8,179,867 4,642
VA 1,455,813 3,136 1,458,949 26,061,170 0 26,061,170 88,841
VA 38,604 0 38,604 1,394,974 0 1,394,974 0
WY 0 0 0 879,544 0 879,544 0
----------------------------------------------------------------------------------------------
Ancillary Hospital Facilities 62,279,955 1,295,268 63,575,223 410,052,457 9,202,830 419,255,288 602,701
----------------------------------------------------------------------------------------------
Assisted Living Facilities
CT 441,212 0 441,212 11,483,429 0 11,483,429 0
FL 281,064 0 281,064 1,482,936 0 1,482,936 0
FL 0 0 0 8,791,535 0 8,791,535 0
FL 890,000 0 890,000 8,682,814 0 8,682,814 0
GA 0 0 0 5,894,100 0 5,894,100 0
MO 53,578 0 53,578 1,474,983 0 1,474,983 0
MO 12,893 0 12,893 1,515,669 0 1,515,669 0
MO 85,955 0 85,955 1,442,607 0 1,442,607 0
MO 53,279 0 53,279 1,475,283 0 1,475,283 0
NC 368,835 0 368,835 3,300,768 0 3,300,768 0
NJ 931,764 0 931,764 7,787,833 0 7,787,833 0
NJ 877,175 0 877,175 8,105,687 0 8,105,687 0
OH 173,615 0 173,615 4,164,250 0 4,164,250 0
PA 98,260 0 98,260 4,019,144 0 4,019,144 0
PA 288,029 0 288,029 3,812,847 0 3,812,847 0
PA 66,577 0 66,577 3,819,456 0 3,819,456 0
PA 48,398 0 48,398 2,650,107 0 2,650,107 0
PA 471,207 0 471,207 7,774,511 0 7,774,511 0
PA 467,244 0 467,244 4,076,913 0 4,076,913 0
PA 50,759 0 50,759 2,755,173 0 2,755,173 0
SC 106,050 0 106,050 2,898,714 0 2,898,714 0
TX 0 0 0 9,941,467 0 9,941,467 0
TX 0 0 0 10,318,933 0 10,318,933 0
TX 0 0 0 10,840,056 0 10,840,056 0
TX 0 0 0 10,629,211 826,491 11,455,702 0
TX 0 0 0 7,525,955 0 7,525,955 0
TX 0 0 0 5,842,697 0 5,842,697 0
TX 0 0 0 6,912,461 0 6,912,461 0
TX 0 0 0 7,986,831 0 7,986,831 0
VA 375,509 0 375,509 5,554,572 0 5,554,572 0
(1)
Total Accum. Date Dated
Facility Type State Assets Depreciation Encumbrances Acquired Constructed
- --------------------------------------------------------------------------------------------------------------
TX 842,093 48,678 1996 1990
TX 3,107,422 188,840 1996 1990
TX 3,194,800 118,482 1996 1984
TX 1,737,128 244,645 1998 1988
VA 3,771,668 956,984 1994 1972-80
VA 4,593,463 91,385 1994 1994
VA 8,773,577 1,685,288 1994 1993,1994
VA 5,855,716 82,561 1994 1993, 1994
VA 14,683,388 274,990 1998 1977
VA 3,082,977 100,066 1998 1992
VA 9,551,370 86,727 1999 1975, 1984
VA 27,608,960 2,142,558 1996 1981
VA 1,433,579 113,267 1996 1994
WY 879,544 0 1999 under const.(3)
-----------------------------------------------
Ancillary Hospital Facilities 483,433,216 36,320,505 35,653,787
-----------------------------------------------
Assisted Living Facilities
CT 11,924,642 340,605 1998 1999
FL 1,764,000 54,908 1998 1976
FL 8,791,535 0 1998 under const.(3)
FL 9,572,814 23,094 1998 1999
GA 5,894,100 218,588 1998 1997
MO 1,528,561 54,613 1998 1996
MO 1,528,562 56,120 1998 1996
MO 1,528,562 53,415 1998 1993-94
MO 1,528,562 54,625 1998 1995
NC 3,669,603 139,638 1998 1999
NJ 8,719,597 218,108 1998 1999
NJ 8,982,861 258,584 1998 1999
OH 4,337,865 154,188 1998 1998
PA 4,117,404 148,815 1998 1996
PA 4,100,876 141,176 1998 1992, 1994
PA 3,886,033 141,421 1998 1989, 1993
PA 2,698,505 98,124 1998 1990
PA 8,245,717 208,761 1998 1999
PA 4,544,157 150,954 1998 1998
PA 2,805,932 102,014 1998 1993
SC 3,004,764 107,329 1998 1993, 1995
TX 9,941,467 368,688 1998 1986
TX 10,318,933 382,686 1998 1997
TX 10,840,056 402,013 1998 1997
TX 11,455,702 402,593 1998 1997
TX 7,525,955 278,660 1998 1997
TX 5,842,697 216,335 1998 1997
TX 6,912,461 255,944 1998 1997
TX 7,986,831 295,725 1998 1997
VA 5,930,081 204,872 1998 1998
44
45
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Land Buildings, Improvements, and CIP
----------------------------------- -----------------------------------------
Costs Costs
Capitalized Capitalized
Initial Subsequent to Initial Subsequent to Personal
Facility Type State Investment Acquisition Total Investment Acquisition Total Property
- -----------------------------------------------------------------------------------------------------------------------------------
VA 234,122 0 234,122 4,994,395 0 4,994,395 0
VA 279,751 0 279,751 5,296,586 0 5,296,586 0
----------------------------------------------------------------------------------------------
Assisted Living Facilities 6,655,276 0 6,655,276 183,251,923 826,491 184,078,414 0
----------------------------------------------------------------------------------------------
Ambulatory Surgery Centers
CA 209,246 0 209,246 828,613 0 828,613 8,370
FL 2,200,000 0 2,200,000 3,944,037 0 3,944,037 0
GA 0 65,091 65,091 1,495,568 0 1,495,568 0
IL 223,490 60,062 283,552 1,169,895 0 1,169,895 0
MO 1,685,945 0 1,685,945 3,621,177 0 3,621,177 0
NV 940,000 0 940,000 2,860,571 0 2,860,571 0
TX 509,891 0 509,891 1,514,376 0 1,514,376 15,297
----------------------------------------------------------------------------------------------
Ambulatory Surgery Centers 5,768,572 125,153 5,893,725 15,434,237 0 15,434,237 23,667
----------------------------------------------------------------------------------------------
Comprehensive Ambulatory Care Centers
AZ 2,094,965 0 2,094,965 8,391,032 1,994 8,393,026 4,418
CA 3,375,281 0 3,375,281 25,329,559 42,269 25,371,827 0
FL 0 0 0 3,187,566 0 3,187,566 0
FL 976,145 0 976,145 2,223,665 0 2,223,665 0
FL 584,544 0 584,544 3,287,925 0 3,287,925 0
FL 0 0 0 11,179,400 2,627 11,182,027 0
FL 0 0 0 5,794,753 6,988 5,801,741 0
FL(2) 1,032,261 0 1,032,261 10,953,616 0 10,953,616 0
MO 1,471,792 0 1,471,792 7,975,420 0 7,975,420 2,473
MO 1,676,402 577,655 2,254,057 9,728,650 0 9,728,650 0
TN 0 0 0 3,126,397 0 3,126,397 0
TX 601,475 0 601,475 11,169,134 213,206 11,382,339 69,408
TX 1,041,298 0 1,041,298 8,518,528 106,943 8,625,471 0
----------------------------------------------------------------------------------------------
Comprehensive Ambulatory
Care Centers 12,854,163 577,655 13,431,818 110,865,645 374,027 111,239,670 76,299
----------------------------------------------------------------------------------------------
Inpatient Rehabilitation Facilities
AL 0 0 0 17,721,800 0 17,721,800 0
FL 0 0 0 11,703,036 0 11,703,036 0
PA 0 0 0 20,891,771 0 20,891,771 0
PA 1,330,054 0 1,330,054 18,565,466 0 18,565,466 0
PA 982,859 0 982,859 13,408,581 0 13,408,581 0
PA 1,191,530 0 1,191,530 18,424,957 0 18,424,957 0
PA 1,213,750 0 1,213,750 18,402,824 0 18,402,824 0
PA 0 0 0 17,835,429 0 17,835,429 0
TX 1,116,455 0 1,116,455 11,799,746 0 11,799,746 0
----------------------------------------------------------------------------------------------
Inpatient Rehabilitation
Facilities 5,834,648 0 5,834,648 148,753,610 0 148,753,610 0
----------------------------------------------------------------------------------------------
(1)
Total Accum. Date Dated
Facility Type State Assets Depreciation Encumbrances Acquired Constructed
- ------------------------------------------------------------------------------------------------------------
VA 5,228,517 185,259 1998 1998
VA 5,576,337 195,780 1998 1998
---------------------------------------------
Assisted Living Facilities 190,733,689 5,913,635 0
---------------------------------------------
Ambulatory Surgery Centers
CA 1,046,229 179,862 1993 1985
FL 6,144,037 8,419 1999 1992
GA 1,560,659 59,197 1998 1993
IL 1,453,447 46,941 1998 1960's, 1988
MO 5,307,122 132,324 1998 1988
NV 3,800,571 400,352 1994 1994
TX 2,039,563 328,717 1993 1985
---------------------------------------------
Ambulatory Surgery Centers 21,351,628 1,155,812 0
---------------------------------------------
Comprehensive Ambulatory Care Centers
AZ 10,492,408 148,833 1998 1999
CA 28,747,108 905,550 1998 1997
FL 3,187,566 134,289 1998 1997
FL 3,199,810 117,361 1998 1999
FL 3,872,469 129,739 1998 1996
FL 11,182,027 411,299 4,648,093 1998 1995
FL 5,801,741 213,216 3,268,190 1998 1995
FL(2) 11,985,877 430,824 1996 1995(3)
MO 9,449,685 172,543 1998 1999
MO 11,982,707 395,657 1998 1993
TN 3,126,397 123,325 1998 1997
TX 12,053,222 2,396,647 1993 1991
TX 9,666,769 954,929 1994 1995
---------------------------------------------
Comprehensive Ambulatory
Care Centers 124,747,786 6,534,212 7,916,283
---------------------------------------------
Inpatient Rehabilitation Facilities
AL 17,721,800 562,697 1998 1987
FL 11,703,036 371,590 1998 1986
PA 20,891,771 771,690 1998 1986
PA 19,895,520 685,762 1998 1986
PA 14,391,440 495,280 1998 1987
PA 19,616,487 584,669 1998 1983
PA 19,616,574 583,957 1998 1983
PA 17,835,429 658,796 1998 1987
TX 12,916,201 435,850 1998 1991
---------------------------------------------
Inpatient Rehabilitation
Facilities 154,588,258 5,150,291 0
---------------------------------------------
45
46
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Land Buildings, Improvements, and CIP
----------------------------------- -----------------------------------------
Costs Costs
Capitalized Capitalized
Initial Subsequent to Initial Subsequent to Personal
Facility Type State Investment Acquisition Total Investment Acquisition Total Property
- ----------------------------------------------------------------------------------------------------------------------------------
Physician Clinics
AL 636,763 0 636,763 2,002,883 0 2,002,883 0
AL 1,664,923 126,257 1,791,180 6,577,209 0 6,577,209 0
CA 0 0 0 8,055,943 0 8,055,943 0
FL 0 0 0 1,556,229 0 1,556,229 0
FL 468,544 0 468,544 3,135,642 0 3,135,642 0
FL 963,285 0 963,285 5,782,029 0 5,782,029 0
FL 132,499 39,058 171,557 684,820 0 684,820 0
FL 856,732 0 856,732 1,342,514 0 1,342,514 0
FL 1,047,865 0 1,047,865 2,845,747 0 2,845,747 0
FL 4,713,071 0 4,713,071 8,796,586 0 8,796,586 0
FL 948,912 0 948,912 7,383,271 0 7,383,271 0
FL 2,183,572 0 2,183,572 8,070,829 0 8,070,829 50,781
FL 906,829 0 906,829 3,589,796 717,332 4,307,127 0
GA 422,156 0 422,156 2,202,724 0 2,202,724 0
GA 586,435 0 586,435 2,087,444 0 2,087,444 0
IL 207,491 0 207,491 11,472,709 0 11,472,709 0
MA 1,148,714 0 1,148,714 6,486,212 0 6,486,212 0
MA 1,147,752 0 1,147,752 2,815,836 0 2,815,836 0
MA 478,135 0 478,135 6,936,002 0 6,936,002 0
MA 38,341 0 38,341 2,525,830 0 2,525,830 0
MA 1,471,333 0 1,471,333 7,737,935 0 7,737,935 0
MO 0 0 0 4,032,033 0 4,032,033 0
MO 1,030,216 0 1,030,216 4,273,487 28,735 4,302,222 997
TN 499,993 141,807 641,800 1,912,851 0 1,912,851 0
TN 773,898 0 773,898 1,394,700 18,230 1,412,930 0
TN 468,627 0 468,627 1,540,396 48,393 1,588,790 0
TN 460,988 0 460,988 1,409,173 19,674 1,428,848 0
TN 596,917 0 596,917 1,311,313 73,735 1,385,049 0
TX 5,134,313 0 5,134,313 11,803,864 0 11,803,864 0
TX 661,287 0 661,287 3,776,918 0 3,776,918 20,117
VA 92,159 0 92,159 258,044 0 258,044 0
VA 150,526 0 150,526 524,280 0 524,280 0
VA 33,280 0 33,280 148,990 0 148,990 0
VA 182,522 0 182,522 969,461 211,000 1,180,461 0
VA 78,437 0 78,437 259,478 0 259,478 0
VA 83,967 0 83,967 817,140 0 817,140 0
----------------------------------------------------------------------------------------------
Physician Clinics 30,270,482 307,122 30,577,604 136,520,318 1,117,099 137,637,419 71,895
----------------------------------------------------------------------------------------------
Skilled Nursing Facilities
AZ 266,596 0 266,596 2,521,319 85,746 2,607,065 0
CA 1,361,951 0 1,361,951 11,325,745 0 11,325,747 0
CO 1,651,477 0 1,651,477 4,579,039 0 4,579,039 0
(1)
Total Accum. Date Dated
Facility Type State Assets Depreciation Encumbrances Acquired Constructed
- -----------------------------------------------------------------------------------------------------------
Physician Clinics
AL 2,639,646 73,982 1998 1997
AL 8,368,389 250,970 1998 1991
CA 8,055,943 320,219 1998 1999
FL 1,556,229 57,483 1998 1998
FL 3,604,186 452,270 1994 1984
FL 6,745,314 213,574 1998 1991
FL 856,377 27,809 1998 1973
FL 2,199,246 49,589 1998 1978
FL 3,893,612 105,115 1998 1978
FL 13,509,657 324,924 1998 1990
FL 8,332,183 272,720 1998 1986
FL 10,305,181 1,723,339 1993 1969,1973
FL 5,213,956 589,531 1994 1991
GA 2,624,880 81,363 1998 1991
GA 2,673,880 309,996 1994 1991
IL 11,680,200 422,072 1998 1973, 1984, 1989
MA 7,634,926 239,585 1998 1982
MA 3,963,588 104,010 1998 1963
MA 7,414,137 256,199 1998 1985
MA 2,564,171 93,298 1998 1987
MA 9,209,268 285,820 1998 1968
MO 4,032,033 149,531 1998 1994
MO 5,333,435 158,608 1998 1996
TN 2,554,651 79,711 1998 1955
TN 2,186,828 65,078 1998 1982
TN 2,057,416 72,900 1998 1992
TN 1,889,836 65,928 1998 1992
TN 1,981,966 63,107 1998 1982
TX 16,938,177 434,255 1998 1997
TX 4,458,322 803,087 1993 1961,1968
VA 350,203 20,952 1996 1984
VA 674,806 42,570 1996 1995
VA 182,269 12,097 1996 1973
VA 1,362,983 81,422 1996 1905
VA 337,915 21,069 1996 1986
VA 901,107 66,349 1996 1992
--------------------------------------------
Physician Clinics 168,286,916 8,390,532 0
--------------------------------------------
Skilled Nursing Facilities
AZ 2,873,661 188,669 1997 1972
CA 12,687,698 1,560,975 1994 1989
CO 6,230,515 631,106 1994 1994
46
47
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Land Buildings, Improvements, and CIP
----------------------------------- -----------------------------------------
Costs Costs
Capitalized Capitalized
Initial Subsequent to Initial Subsequent to Personal
Facility Type State Investment Acquisition Total Investment Acquisition Total Property
- ----------------------------------------------------------------------------------------------------------------------------------
CO 901,650 0 901,650 11,411,187 104,788 11,515,975 0
CO 332,149 0 332,149 7,389,813 37,633 7,427,446 0
FL 1,349,775 0 1,349,775 8,855,920 0 8,855,920 0
IN 96,059 0 96,059 3,511,749 0 3,511,749 32,332
KS 1,013,423 0 1,013,423 6,477,785 101,455 6,579,238 0
MI 40,463 0 40,463 3,467,687 0 3,467,687 32,345
MI 6,984 0 6,984 3,241,786 0 3,241,786 35,415
MI 62,326 0 62,326 1,187,348 1,844,691 3,032,039 48,791
MI 52,468 0 52,468 963,336 0 963,336 33,548
MI 30,855 0 30,855 1,633,306 0 1,633,306 32,886
NC 417,527 0 417,527 5,758,338 0 5,758,338 0
OK 120,000 0 120,000 486,100 0 486,100 0
PA 27,150 0 27,150 2,909,805 0 2,909,805 0
PA 146,314 0 146,314 4,864,697 0 4,864,697 0
PA 266,993 38,819 305,812 12,363,378 0 12,363,378 0
TN 82,945 0 82,945 4,963,209 0 4,963,209 0
TN 145,402 0 145,402 3,143,801 0 3,143,801 0
TX 605,036 0 605,036 8,772,078 67,901 8,839,979 0
TX 1,190,364 0 1,190,364 8,738,144 91,995 8,830,139 0
VA 261,490 0 261,490 6,691,308 0 6,691,308 0
VA 487,092 0 487,092 2,971,672 0 2,971,672 0
VA 94,135 0 94,135 4,639,775 0 4,639,775 0
VA 82,244 0 82,244 3,125,431 0 3,125,431 0
VA 134,817 0 134,817 5,161,220 0 5,161,220 0
----------------------------------------------------------------------------------------------
Skilled Nursing Facilities 11,227,685 38,819 11,266,504 141,154,976 2,334,209 143,489,185 215,317
----------------------------------------------------------------------------------------------
Other
AL 180,633 0 180,633 8,601,151 0 8,601,151 8,028
AR 478,532 169,031 647,563 2,341,333 0 2,341,333 0
AZ 582,249 0 582,249 2,951,291 0 2,951,291 0
FL 0 0 0 1,417,039 0 1,417,039 0
FL 833,869 77,117 910,986 2,425,921 0 2,425,921 0
MI 4,404,681 0 4,404,681 9,153,477 0 9,153,477 0
MO 1,810,263 229,955 2,040,218 8,856,615 0 8,856,615 0
MS 537,660 0 537,660 3,723,087 0 3,723,087 29,660
PA 0 0 0 3,355,172 0 3,355,172 0
TX 356,212 150,063 506,275 5,385,641 0 5,385,641 0
TX 992,738 2,318 995,056 6,865,237 299,403 7,164,640 441,689
TX 166,123 0 166,123 1,810,249 0 1,810,249 0
VA 43,126 0 43,126 839,285 0 839,285 43,611
VA 64,347 0 64,347 867,590 0 867,590 83,179
VA 1,066,739 0 1,066,739 5,665,960 150,239 5,816,198 2,420
VA 752,629 0 752,629 4,367,295 1,575 4,368,870 0
VA 0 65,319 65,319 2,053,914 0 2,053,914 0
VA 392,402 0 392,402 12,368,309 0 12,368,309 0
----------------------------------------------------------------------------------------------
Other 12,662,203 693,803 13,356,006 83,048,566 451,217 83,499,782 608,587
----------------------------------------------------------------------------------------------
Total Real Estate 147,552,984 3,037,820 150,590,804 1,229,081,732 14,305,873 1,243,387,605 1,598,466
----------------------------------------------------------------------------------------------
Corporate Property 0 0 0 2,165 0 2,165 3,566,607
Total Property 147,552,984 3,037,820 150,590,804 1,229,083,897 14,305,873 1,243,389,770 5,165,073
----------------------------------------------------------------------------------------------
(1)
Total Accum. Date Dated
Facility Type State Assets Depreciation Encumbrances Acquired Constructed
- ----------------------------------------------------------------------------------------------------------
CO 12,417,625 528,149 1997 1998
CO 7,759,595 502,462 1996 1998
FL 10,205,696 765,489 1995 1996
IN 3,640,140 759,358 1993 1987
KS 7,592,661 508,035 1996 1997
MI 3,540,494 750,228 1993 1968
MI 3,284,185 706,155 1993 1971,1977
MI 3,143,156 449,229 1993 1968
MI 1,049,352 231,223 1993 1967
MI 1,697,047 369,752 1993 1964,1974
NC 6,175,865 213,211 (4) 1998 1991
OK 606,100 5,079 1999 1974
PA 2,936,955 107,740 1998 1992
PA 5,011,011 180,123 1998 1995
PA 12,669,190 460,204 1998 1976
TN 5,046,153 328,760 1997 1981
TN 3,289,203 208,243 1997 1991
TX 9,445,015 705,131 1995 1996
TX 10,020,503 635,042 1995 1997
VA 6,952,798 247,756 16,204,372(4) 1998 1971, 1977
VA 3,458,764 110,031 (4) 1998 1966
VA 4,733,910 171,795 (4) 1998 1991
VA 3,207,675 115,724 (4) 1998 1991
VA 5,296,037 191,057 (4) 1998 1989
-------------------------------------------
Skilled Nursing Facilities 154,971,004 11,630,726 16,204,372
-------------------------------------------
Other
AL 8,789,812 1,793,778 1993 1906,1986
AR 2,988,896 97,066 1998 1991
AZ 3,533,540 95,742 1998 1999
FL 1,417,039 52,342 1998 1998
FL 3,336,907 94,315 1998 1960, 1986
MI 13,558,158 342,180 1998 1983
MO 10,896,833 342,839 1998 1966, 1975
MS 4,290,408 618,210 1993 1986,1991
PA 3,355,172 0 1999 under const.(3)
TX 5,891,916 211,153 1998 1983
TX 8,601,385 1,454,091 1993 1993
TX 1,976,372 248,256 1994 1994
VA 926,023 214,805 1993 1988
VA 1,015,117 257,428 1993 1989
VA 6,885,358 465,412 1996 1995
VA 5,121,498 354,720 1996 1990
VA 2,119,233 79,863 1998 1993
VA 12,760,711 458,689 1998 late 1950's, 1970
-------------------------------------------
Other 97,464,378 7,180,889 0
-------------------------------------------
Total Real Estate 1,395,576,875 82,276,602 59,774,442
-------------------------------------------
Corporate Property 3,568,772 1,719,200 0
Total Property 1,399,145,647 83,995,802 59,774,442
-------------------------------------------
(1) Depreciation is provided on buildings and improvements over 31.5 or
39.0 years and personal property over 3.0 to 7.0 years.
(2) Consists of three buildings, with one building being an MOB that is
under construction as of 12/31/99.
(3) Development at 12/31/99.
(4) All 6 of the properties are encumbered by one mortgage with a 12/31/99
balance of $16,204,372.
(5) Total assets at 12/31/99 have an estimated aggregate total cost of
$1,245,602,980.38 for Federal Income Tax purposes.
(6) Reconciliation of Total Property and Accumulated Depreciation for the
twelve months ended December 31, 1999, 1998 and 1997:
47
48
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AT DECEMBER 31, 1999
Year to Date Ending 12/31/99 Year to Date Ending 12/31/98 Year to Date Ending 12/31/97
------------------------------ ----------------------------- ---------------------------
Total Accumulated Total Accumulated Total Accumulated
Property Depreciation Property Depreciation Property Depreciation
------------------------------ ----------------------------- ---------------------------
Beginning Balance 1,387,554,751 50,116,154 505,698,610 34,718,380 439,177,928 23,143,511
Retirements/dispositions:
Real Estate (46,839,974) (4,027,489) (11,410,200) (423,339) (71,148) (32,343)
Corporate Property 0 0 0 0 0 0
Additions during the period:
Real Estate 24,633,438 37,686,289 847,262,872 15,507,502 59,822,598 11,035,703
Corporate Property 286,651 220,848 119,603 313,611 1,467,143 571,509
Construction in Progress 33,510,781 0 45,883,866 0 5,302,089 0
------------------------------ ----------------------------- ---------------------------
Ending Balance 1,399,145,647 83,995,802 1,387,554,751 50,116,154 505,698,610 34,718,380
============================== ============================= ===========================
48
49
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 1999
(dollars in thousands)
PERIODIC ORIGINAL
INTEREST MATURITY PAYMENT FACE CARRYING BALLOON
DESCRIPTION RATE DATE TERMS AMOUNT AMOUNT(9) PAYMENT
INDIVIDUAL MORTGAGES IN EXCESS OF 3% OF THE TOTAL CARRYING AMOUNT:
CONSTRUCTION LOANS:
5 Years after
One assisted living facility located in Illinois 10.00% Conversion (2) $ 7,620 $ 7,769 (3)
PERMANENT LOANS:
Specialty hospital located in Arizona 9.31% 11/1/04 (1) 17,800 17,993 16,409(4)
Skilled nursing facility located in Maryland 10.15% 2/15/02 (1) 8,800 8,921 8,498(6)
Skilled nursing facility located in Michigan 11.14% 2/15/07 (1) 9,600 9,592 8,463(6)
Skilled nursing facility located in Tennessee 10.09% 10/27/13 (10) 12,380 12,781 12,380(5)
Ancillary hospital facility located in Florida 10.25% 10/5/10 (1) 9,400 9,563 8,006(7)
Acute care hospital located in California 11.99% 8/10/09 (1) 8,000 7,974 6,979(8)
OTHER MORTGAGES:
Twenty three skilled nursing facilities located in the From From
states of Alabama, California, Florida, Massachusetts, 8.02% Nov-01
Maryland, Michigan, Ohio, Oklahoma, South Carolina, to to
Tennessee, and Virginia; with face amounts ranging 13.00% Aug-09 62,557
from $.350 to $6.3 million
Forty nine assisted living facilities located in the states of
Alabama, Arizona, California, Florida, Georgia, Iowa,
Indiana, Mississippi, Montana, North Carolina, Nebraska, From From
New Mexico, Ohio, Oregon, Pennsylvania, Tennessee, 8.23% Oct-01
Texas, and Washington; with face amounts to to
ranging from $ .350 to $6.8 million 13.00% Dec-09 94,259
One ancillary hospital facility located in Texas with
an original face amount of $2.4 million 11.50% Feb-01 2,560
Three construction loans for assisted living facilities Earlier of 11/00
located in California, Mississippi, and Wyoming 10.00% or tenant lease 19,490
dates/5 Years
after conversion
--------
TOTAL MORTGAGE NOTES RECEIVABLE $253,459
========
Notes:
(1) Paid in monthly installments of principal and interest. Principal
payable in full at maturity date. Amortized over 300 months.
(2) Interest only while in development. Then identical to (1).
(3) No prepayment penalty. Balloon payment amount is undeterminable until
the final loan amount is known.
(4) No prepayment penalty until 4th year, then 3% penalty scaling down 1%
annually.
(5) Prepayment penalty cannont be determined because future interest rate
fluctuations are based on future Consumer Price Index.
(6) Yield Maintenance Amount is defined generally as % of the Principal
Amount Being Prepaid x [(Present Value of the principal and Interest
payments remaining to maturity at a discount rate) - (Principal Amount
outstanding at the time of prepayment)].
(7) No prepayment until 5th anniversary, then 5% penalty scaling down 1%
per year.
(8) No prepayment before December 2001, then 3% penalty until August 2002,
then scales down 1% per year.
(9) Generally includes purchase accounting adjustment resulting from
Capstone merger.
(10) Interest only until maturity. Then principal is payable in full.
Years Ended December 31,
------------------------------------
1999 1998 1997
--------- --------- ------
Balance at beginning of period $ 237,617 $ 4,708 $ --
Additions during period:
New or acquired mortgages 0 221,929 0
Commitments assumed in the Capstone merger 16,734 0 0
Construction fundings 21,804 19,864 4,488
Other 407 121 220
--------- --------- ------
38,945 241,914 4,708
Deductions during period:
Collections of principal (1,931) (164) 0
Cost of mortgages sold (20,249) (8,646) 0
Amortization of premium (923) (195) 0
--------- --------- ------
(23,103) (9,005) 0
--------- --------- ------
Balance at end of period $ 253,459 $ 237,617 $4,708
========= ========= ======
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